TRADE SECRETS, TRADE SECRETS, UNFAIR UNFAIR COMPETITION, COMPETITION, EMPLOYEE RAIDS EMPLOYEE RAIDS AND EMPLOYEE AND EMPLOYEE COVENANTSCOVENANTS

Alan N. GreenspanAlan N. Greenspan

Jackson Walker LLPJackson Walker LLP

Assets of Small & Mid-Assets of Small & Mid-Size BusinessesSize Businesses Tangible assetsTangible assets

– Real estateReal estate– EquipmentEquipment– Accounts receivableAccounts receivable

Intangible assetsIntangible assets– Trademarks, patents, and domain Trademarks, patents, and domain

namesnames– Trade secretsTrade secrets– Gray matterGray matter

Protecting Company Protecting Company AssetsAssets Tangible assetsTangible assets

– LocksLocks– Armed guardsArmed guards

Intangible assetsIntangible assets– RegistrationsRegistrations– ProceduresProcedures– ContractsContracts– LawsuitsLawsuits

Trade Secret DefinedTrade Secret Defined

“any formula, pattern, device or compilation of information which is used in one’s business and presents an opportunity to obtain an advantage over competitors who do not know or use it.”

Trade Secret Test: 6 Trade Secret Test: 6 FactorsFactors Extent known outside businessExtent known outside business Extent known within businessExtent known within business Security measures taken to Security measures taken to

protectprotect Value of the informationValue of the information Cost (effort or money) to acquireCost (effort or money) to acquire AvailabilityAvailability

Examples of Trade Examples of Trade SecretsSecrets Customer listsCustomer lists Product formulaeProduct formulae Computer databasesComputer databases Marketing strategyMarketing strategy Pricing structurePricing structure Manufacturing processManufacturing process

Legal Protections for Legal Protections for Trade SecretsTrade Secrets Criminal lawCriminal law Civil lawCivil law ContractsContracts

Criminal Theft of Trade Criminal Theft of Trade Secrets Secrets Theft of a trade secretTheft of a trade secret Copy something containing or Copy something containing or

embodying trade secretsembodying trade secrets Communicate or transmit a trade Communicate or transmit a trade

secretsecret

Civil Theft of Trade Civil Theft of Trade SecretsSecrets Private cause of action for Private cause of action for

violation of the Penal Codeviolation of the Penal Code Actual damagesActual damages Statutory damages up to $1000Statutory damages up to $1000 Attorney’s fees to the prevailing Attorney’s fees to the prevailing

partyparty No injunctionNo injunction

Common Law Common Law MisappropriationMisappropriation Existence of a trade secretExistence of a trade secret Bad conductBad conduct

– Breach of confidential/contractual Breach of confidential/contractual relationship OR relationship OR

– Improper discoveryImproper discovery Use of the trade secretUse of the trade secret Damages & Injunctive ReliefDamages & Injunctive Relief

Summary: Trade Summary: Trade SecretsSecrets Multiple layers of protectionMultiple layers of protection

– Big stick of Penal CodeBig stick of Penal Code Prerequisite procedures have Prerequisite procedures have

business benefitsbusiness benefits No esoteric legal conundrumNo esoteric legal conundrum

Employee Covenant Employee Covenant Not to CompeteNot to Compete Legal Paradigm: Employee non-Legal Paradigm: Employee non-

competes should only be used to competes should only be used to protect trade secretsprotect trade secrets

Legal reality: Non-competes are Legal reality: Non-competes are complex methods of protecting complex methods of protecting trade secretstrade secrets

Harsh reality: Non-competes Harsh reality: Non-competes won’t be permitted just to restrict won’t be permitted just to restrict competitioncompetition

Section 15.50 & Section 15.50 & Debbie LightDebbie Light An “otherwise enforceable” An “otherwise enforceable”

agreementagreement Ancillary covenant not to Ancillary covenant not to

competecompete Made at the time of the ancillary Made at the time of the ancillary

agreementagreement

Enforceable Enforceable agreementagreement Not an “at will” employment Not an “at will” employment

agreementagreement Consideration from employer Consideration from employer

gives rise to employer’s gives rise to employer’s protectible interestprotectible interest

Covenant designed to enforce the Covenant designed to enforce the employee’s return promiseemployee’s return promise

Contemporaneous Contemporaneous exchangeexchange Employer’s consideration: Employer’s consideration:

transfer contemporaneous with transfer contemporaneous with execution of covenantexecution of covenant

Employer’s consideration: Employer’s consideration: enforceable promise enforceable promise contemporaneous with execution contemporaneous with execution of covenantof covenant

Possible Possible LightLight Solution Solution

Promise to deliver ANDPromise to deliver AND Actually deliver contemporaneouslyActually deliver contemporaneously

– Hand trade secrets to the new Hand trade secrets to the new employee upon executionemployee upon execution

– Issue password to computer system Issue password to computer system with trade secretswith trade secrets

– Issue key to file cabinet with trade Issue key to file cabinet with trade secretssecrets

Other Non-Compete Other Non-Compete ConsiderationsConsiderations

Unreasonable terms are reformedUnreasonable terms are reformed No damages recoverableNo damages recoverable Knowing unreasonableness results in Knowing unreasonableness results in

legal fees legal fees againstagainst employer employer

Alternative CovenantsAlternative Covenants

Non-disclosureNon-disclosure Non-recruitmentNon-recruitment Non-solicitationNon-solicitation

ConclusionConclusion

Intangible (intellectual) property Intangible (intellectual) property must be protectedmust be protected

Trade secret audit and protection is Trade secret audit and protection is essentialessential

Protection through procedures, Protection through procedures, systems, employee manuals, and systems, employee manuals, and full panoply of agreements and full panoply of agreements and covenantscovenants

Non-compete is last line of defenseNon-compete is last line of defense