Update to Texas Trade Secrets

1. TEXAS TRADE SECRET UPDATE
BY:
KIRBY DRAKE

2. What Qualifies for Trade Secret
Protection in Texas?

3. Business Plans/Strategies
• CQ Inc. v. TXU Mining Co. LP, 565 F.3d 268
(5th Cir. 2009)
• Can recommendation to focus on cleaning ROM
lignite rather than waste lignite (the “ROM
strategy”) qualify as a trade secret? NO
• ROM Strategy not a “process or device for
continuous use” that offered advantage over its
competitors
• No trade secret misappropriation

4. Customer Lists/Customer Data
• Joe N. Pratt Insurance v. Doane, V-07-07, 2009
U.S. Dist. LEXIS 88314 (S.D. Tex. Sept. 25, 2009)
• Can a customer list be a trade secret? MAYBE
• Factors to assess:
1. What steps, if any, employer takes to maintain
confidentiality of customer list;
2. Whether departing employee acknowledges that
customer list is confidential; and
3. Whether content of customer list is readily
ascertainable

5. Customer Lists/Customer Data
• Joe N. Pratt Insurance v. Doane, C.A. No. V-07-07,
2009 U.S. Dist. LEXIS 88314 (S.D. Tex. Sept. 25,
2009)
• Is customer data protectable as a trade secret? YES
• Court persuaded because defendant took files “under
the cover of darkness and a shroud of secrecy”

6. Customer Lists/Customer Data
• Nova Consulting Group, Inc. v. Engineering
Consulting Services, Ltd., 2008 U.S. App. LEXIS
18323 (5th Cir. 2008)
• Can information on business cards qualify for trade
secret protection? YES
• ECS hires Nova employees who bring business cards
containing Nova potential client information with them
• Taking of business cards sufficient to constitute trade
secret misappropriation

7. Customer Lists/Customer Data
• SP Midtown, Ltd. v. Urban Storage, L.P., 14-07-
00717-CV, 2008 Tex. App. LEXIS 3364 (Tex. App.
Houston [14th Dist.] May 8, 2008)
• Can daily rental logs related to a storage facility be trade
secrets? YES
• Not known outside of plaintiff’s business
• Not disseminated widely within plaintiff’s business
• Subject of efforts to keep the information secret
• Plaintiff derived value from keeping secret

8. Customer Lists/Customer Data
• Parker Barber & Beauty Supply, Inc. v. Wella
Corp., 03-04-00623-CV, 2006 Tex. App. LEXIS
8841 (Tex. App. Austin Oct. 11, 2006)
• Is a customer list at the wholesale user level a trade
secret? NO
• Why not? Easy to identify plaintiff’s customers

9. Recipes/Formulas
• Need proof other than plaintiff’s own self-serving
and conclusory testimony to support recipe as
trade secret
• Global Water Group, Inc. v. Atchley, 244 S.W.3d
924 (Tex. App. – Dallas 2008)
• Formula (ratio) for water purification not trade secret
• No evidence that ratio better than what competitors did
or related to novel features of system

10. Does a Trade Secret Exist?

11. Extent to which trade secret is shared
• Sharing of trade secret information within a
business
• Whether information marked “confidential”
• Whether information available to all employees or just
those with “need to know”
• Whether employees must sign NDAs
• Whether confidentiality or non-disclosure policy is in
employee manual
• Whether security clearances are required to access
information

12. Extent to which trade secret is shared
• Bluebonnet Petroleum, Inc. v. Kolkhorst Petroleum
Co., 2008 Tex. App. LEXIS 7724 (Tex. App.
Houston [14th Dist.] Oct. 9, 2008)
• Trade secret misappropriation claim dismissed
• Plaintiff did not require employee to sign non-compete or
confidentiality agreement
• Did not take measures to protect trade secret

13. Amount of effort or money expended
• Courts may consider whether extensive time or
money has been expended in developing the
information
• Global Water Group, Inc. v. Atchley, 244 S.W.3d
924 (Tex. App. – Dallas 2008)
• No trade secret misappropriation
• No evidence of effort or money expended
to develop claimed trade secret

14. Has a Trade Secret Been
Misappropriated?

15. Whether trade secret acquired by improper
means
• Improper means:
• Theft
• Fraud
• Unauthorized interception of communications
• Inducement of or knowing participation in a breach of
confidence
• Other means either wrongful in themselves or wrongful
under the circumstances of the case
• Joe N. Pratt Insurance v. Doane, V-07-07, 2009
U.S. Dist. LEXIS 88314 (S.D. Tex. Sept. 25, 2009)

16. Whether trade secret acquired by improper
means
• Cudd Pressure Control Inc. v. Roles, 328 Fed. Appx. 961 (5th
Cir. 2009)
• Use = Commercial Use
• Commercial Use = Any misappropriation of trade
secrets, followed by an exercise of control and
domination
• Use = to procure financing and profit from use of the
trade secret

17. Use of trade secret required
• Cudd Pressure Control Inc. v. Roles, 328 Fed.
Appx. 961 (5th Cir. 2009)
• Use = Commercial Use
• Commercial Use = Any misappropriation of trade
secrets, followed by an exercise of control and
domination
• Use = to procure financing and profit from use of the
trade secret

18. Use of trade secret required – develop product
• Triple Tee Golf, Inc. v. Nike, Inc., 485 F.3d 253 (5th
Cir. 2007)
• Claimed trade secret on new design for golf clubs
• Nike granted summary judgment on trade secret
misappropriation claim
• Expert testimony identified ways that Nike used trade
secret that Nike did not have before involvement with
golf-club builder
• Reversal of summary judgment

19. Confidential Relationship – Employee Manual
• Joe N. Pratt Insurance v. Doane, V-07-07, 2009
U.S. Dist. LEXIS 88314 (S.D. Tex. Sept. 25, 2009)
• Employee manual describes information as “trade
secrets”
• Employee manual confirms plaintiff’s desire to have
information kept secret
• Defendant knew or should have known information was
a trade secret

20. What Are the Minimum Filing
Requirements for a Trade Secret
Misappropriation Case?

21. Minimum Filing Requirements
• Grand Time Corporation v. Watch Factory, Inc.,
3:08-CV-1770-K, 2009 U.S. Dist. LEXIS 122512
(N.D. Tex. Dec. 14, 2009)
• Motion to dismiss claim for trade secret misappropriation
(lack of trade secret)
• Court found plaintiff alleged measures taken to
protect trade secrets and alleged misappropriation
• Motion for more definite statement
• Court rejected these allegations – plaintiff met liberal
pleading requirements

22. Minimum Filing Requirements
• Vikon Int’l, Inc. v. SensorLogic, Inc., 3:08-CV-
1942-L, 2009 U.S. Dist. LEXIS 71347 (N.D. Tex.
Aug. 12, 2009)
• Motion to dismiss trade secret misappropriation claim –
not independent of breach of contract claim
• Claims sustained - injury for trade secret
misappropriation deemed to be independent of the injury
alleged for the breach of contract

23. How Are Damages Determined Related to
Trade Secret Misappropriation?

24. Damages – Market Value
• Joe N. Pratt Insurance v. Doane, V-07-07, 2009
U.S. Dist. LEXIS 88314 (S.D. Tex. Sept. 25, 2009)
• Various considerations:
• Prices past purchasers or licensees may have paid
• Value of secret to plaintiff, including plaintiff’s
development costs and importance of the secret

25. Expert Issues in Trade Secret
Misappropriation Cases

26. Experts on Existence or Misappropriation
• Raytheon Co. v. Indigo Systems Corp.,
598 F. Supp. 2d 817 (E.D. Tex. 2009)
• Can expert give legal opinion on Raytheon’s
trade secret misappropriation claim? Can
discuss whether trade secrets could be
obtained through reverse engineering but not
ownership
• Can expert rely on circumstantial evidence?
Opinion of no misappropriation based on
more than single piece of circumstantial
evidence

27. Experts on Existence or Misappropriation
• Raytheon Co. v. Indigo Systems Corp., 598 F.
Supp. 2d 817 (E.D. Tex. 2009)
• Exclude expert opinions when trade secrets allegedly
not described with sufficient detail? Can introduce
evidence that trade secrets differ from common industry
practices
• Exclude expert’s conclusion that development of trade
secrets not properly documented? Lack of
documentation is fact opinion and evidence of value
• Should opinions that certain trade secrets are in public
domain be excluded? Relevant and within sphere of
expertise but some not properly documented to reach
conclusion

28. Experts on Existence or Misappropriation
• MGE UPS Systems, Inc. v. Power Maintenance
International, Inc., 2007 U.S. Dist. LEXIS 95119
(N.D. Tex. 2007)
• Denied motion to strike expert on trade secret
misappropriation - years of expertise and qualified to
opine on steps required to protect trade secrets
• Expert also permitted to opine on trade secret damages

29. Experts on Existence or Misappropriation
• Joe N. Pratt Insurance v. Doane, V-07-07, 2009
U.S. Dist. LEXIS 121518 (S.D. Tex. Dec. 30,
2009)
• Objections to expert testimony on misappropriation –
improper analysis and unhelpful to jury
• Found expert used proper analysis but did not permit
expert to use legal conclusions and phrases
(“misappropriate” and “proprietary information”)

30. Experts on Existence or Misappropriation
• Kozak v. Medtronic, Inc., 512 F. Supp. 2d 913
(S.D. Tex. 2007)
• Expert not permitted to testify about damages – never
addressed calculation of damages in report
• Plaintiff not permitted to testify about future damages
caused by alleged trade secret misappropriation

31. Statute of Limitations Issues in Trade
Secret
Misappropriation Cases

32. Statute of Limitations
• Texas trade secret misappropriation claim must be
brought within three (3) years of the date of its
accrual (TEX. CIV. PRAC. & REM. CODE §
16.010(a))
• Claim accrues, and the statute begins to run, once
“the misappropriation is discovered or by the
exercise of reasonable diligence should have
been discovered”

33. Statute of Limitations
• Raytheon Co. v. Indigo Systems Corp., 653 F.
Supp. 2d 677 (E.D. Tex. 2009)
• When statute of limitations may be a bar to a trade
secret misappropriation claim
• Preservation of claim against statute of limitations –
discovery rule and fraudulent concealment
• Court disagreed - Raytheon knew or should have
known all of the facts before March 2004
• Discovery rule not applicable

34. Statute of Limitations
• Techsys Chassis, Inc. v. Sullair Corp., 4:08-cv-
203, 2009 U.S. Dist. LEXIS 53087 (E.D. Tex. June
23, 2009)
• Found claim for trade secret misappropriation not
barred by statute of limitations
• Triple Tee Golf, Inc. v. Nike, Inc., 618 F. Supp. 2d
586 (N.D. Tex. 2009)
• Granted motion to dismiss based on statute of
limitations
• No tolling of statute of limitations during pendency of
appeals or based on misnomer

35. Resisting Production Based
on Trade Secrets

36. Resisting Production of Trade Secrets
• Sanchez v. Property & Casualty, Insurance Co. of
Hartford, H-09-1736, 2010 U.S. Dist. LEXIS 1006
(S.D. Tex. Jan. 7, 2010)
• Resist discovery based on trade secret protection:
• Establish information sought is a trade secret
• Demonstrate that disclosure would cause an
identifiable, significant harm

37. Resisting Production of Trade Secrets – No
Production Required
• In re XTO Resources, I, LP, 248 S.W.3d 898 (Tex.
App. – Ft. Worth 2009)
• Breach of contract case related to gas leases
• Plaintiff sought discovery of reserve estimates and
future revenues for all wells governed by the leases
• Defendants alleged information could be obtained
through other sources
• Court found that information sought was trade secret
• Benefit did not outweigh burden of disclosure
• Abuse of discretion in compelling production

38. Resisting Production – Production Required
• De Olivera Dos Santos v. Bell Helicopter Textron,
Inc., 4:06-CV-292-C, 2009 U.S. Dist. LEXIS
104554 (N.D. Tex. Nov. 9, 2009)
• Bell objected to requests for production seeking
disclosure of trade secrets
• Court ordered discovery of requested information but as
confidential in accordance with protective order

39. Resisting Production – No Production Required
• In re Cooper Tire & Rubber Company, 14-09-
00906-CV, 2010 Tex. App. LEXIS 709 (Tex. Ct.
App. – Houston [14th Dist.] Feb. 2, 2010)
• Petition for writ of mandamus concerning order to
produce documents containing trade secrets
• Court found information qualified for trade secret
protection
• Plaintiff did not meet burden to establish that
information required for fair adjudication of claims
• Trial court abused discretion by compelling production

40. Resisting Production – No Production Required
• In re Premcor Refining Group, Inc. et al, 09-09-
00222-CV, 2009 Tex. App. LEXIS 5850 (Tex. App.
– Beaumont [9th Dist.] Jul. 30, 2009)
• Petition for writ of mandamus on an order to produce
documents containing trade secrets
• Court found document requests were overly broad
• Documents not needed for determining market value of
properties at issue

41. Resisting Production – Production Required
• Farouk Systems, Inc. v. Costco Wholesale Corp.,
09-cv-3499, 2010 U.S. Dist. LEXIS 26773 (S.D.
Tex. March 22, 2010)
• Costco sought protective order to prevent Farouk from
learning identities of its suppliers and consumers
• Court found that Costco’s supplier list was a trade
secret
• Farouk met burden to demonstrate information needed
to effectively adjudicate claims and defenses

42. Resisting Production – Production Required
• Sanchez v. Property & Casualty, Insurance Co. of
Hartford, H-09-1736, 2010 U.S. Dist. LEXIS 1006
(S.D. Tex. Jan. 7, 2010)
• Hartford failed to meet burden to show necessity of a
protective order
• Sparse information contained in documents
• No specific harm will flow from allowing use of
documents
• Stereotyped and conclusory statements insufficient to
meet burden to be granted a protective order

43. Questions?