May
20

ACTUAL USAGE OF TRADE SECRETS NOT REQUIRED FOR A TEMPORARY INJUNCTION!

Background

Trade secrets can be extremely valuable business assets and all states have statutes governing the protection of trade secrets.  Even the federal government recognizes the importance of trade secrets to U.S. companies by enacting the Defend Trade Secrets Act in 2016 which allows a federal civil cause of action against a party accused of trade secret theft.

Lawsuits involving allegations of trade secret theft can arise in the context of employment law.  The typical situation is where an employee has left the employ of a company and the former employer commences a lawsuit for trade secret misappropriation against the employee and possibly the employee’s new employer.   The former employer will generally seek a temporary injunction to prevent the employee and new employer from using the trade secrets and associated confidential information.

What if the employee/new employer has not actually used the confidential information?  In the case of Hughes v. AGE Industries, LTD (No. 04-16-00693-CV) decided March 8, 2017, the Texas Fourth Court of Appeals held that a temporary injunction does not require a party alleging trade secret misappropriation to show actual usage by the defendant(s).   Mere possession of the trade secrets/confidential information may well be sufficient for obtaining a temporary injunction.  Even though the case discussed in this blog is a Texas case, the commentator believes that a Florida state court would have come to the same conclusion based on the facts of the case and the Florida statute governing trade secrets.

Court’s Opinion

The case is an interesting one because of Hughes’ arguments presented in his appeal, all of which the Court found to be specious.   Hughes had been a twenty-year employee of Age Industries, LTD (“AI”) prior to resigning from the board of directors as AI’s general partner in May, 2016 and then from his employment by AI in June, 2016.  He went to work for Diamondback Industries, a newly formed company set up to compete with AI in June, 2016, as its operations manager.

AI sought a temporary restraining order from the trial court which was granted and sometime later the temporary injunction hearing was held.  At the hearing, AI presented a third-party contractor’s report which showed that Hughes had downloaded a large quantity of data from his AI computer to a USB drive.  On granting the temporary injunction, the trial court required Hughes to deliver a list describing all documents belonging to AI or containing proprietary information belonging to AI in Hughes’ possession “including but not limited to [AI’s] customer and prospective customer’s lists and contact information, pricing lists, sales journals, financial reports, vendor lists, engineering diagrams, customer presentation materials, specialized pricing programs, business strategies, and specially developed programs for specific customers.”  The order further enjoined Hughes from directly or indirectly disclosing AI’s proprietary or trade secret information.

Hughes attempted to reverse the temporary injunction order on procedural grounds by first arguing that AI’s petition had not been properly verified with an affidavit from AI’s president.  The appellate court disagreed and stated that “[a] verified petition for injunctive relief is not required to grant a temporary injunction, however, when a full evidentiary hearing on evidence independent of the petition has been held.”

Second, Hughes, argued that the trial court erred in granting the temporary injunction because it did not maintain the status quo as per his relationship with AI as a limited partner. He claimed that as a limited partner, he was entitled to receive information about AI under the terms of the partnership agreement.  Yet, at the temporary injunction hearing, Hughes stated that the only information he received as a limited partner was audited financial reports.

Hughes was also an employee of AI and because of AI’s Employee Handbook, his status quo argument failed. The handbook was very clear that all information regarding AI was confidential and should be treated as such and carefully defined what AI considered as confidential information. The appellate court opined that, because of the limited information Hughes received as a limited partner and the extensive information he received as an employee, the trial court had not erred in granting the temporary injunction. In reaching this conclusion, the court cited several Texas cases including two that stated that a fiduciary relationship arises from an employment relationship forbidding an employee from taking trade secrets and confidential or proprietary information in a manner adverse to the employer.  See, e.g., Mabrey v. Sandstream, Inc., 124 S.W. 3d 302, 316 (Tex. App. – Fort Worth 2003).

Hughes made several more arguments to no avail including one that AI did not produce any evidence of a probable, imminent, and irreparable injury.  Here Hughes’ own conduct thwarted his argument.  The court noted that evidence was admitted at the trial court hearing showing that Hughs had downloaded a large amount of data from his computer the month before he resigned.  This was proven by AI’s third-party contractor who had apparently been hired to “scour” Hughes’ company computer.

Further evidence showed that the financial information he maintained for 2015 and 2016 on behalf of AI could not be located after he left AI.  Hughes even admitted to having confidential information belonging to AI on his home computer and may have also had e-mails that contained confidential information on his home computer.  He could not testify under oath that had had never sent e-mails containing this proprietary information to one of the principals at his new company.  Because the evidence showed that Hughes was in a position to use AI’s trade secrets to obtain a market advantage, the trial court did not abuse its discretion in concluding AI established a probable, imminent, irreparable injury.  AI was not required to show actual use of trade secrets/confidential information.  Based on the evidence showing Hughes’ conduct and his possession of confidential information, he was properly enjoined from using or disclosing AI’s information.

The Hughes case is an example of what could become an employer’s worst nightmare.  The facts showed that the former employee had apparently planned out his resignation from AI including deleting all his e-mail in the deleted folder from his company computer and downloading valuable information onto a USB for ready portability.  Technology has certainly made trade secret theft much easier.  From the appellate court’s written opinion, one can conclude that the judges were not particularly enthralled with Hughes’ conduct.

Useful Take-Home Points for Employers

  1. Even small companies should consider having employee handbooks. AI’s employee handbook helped save the day because AI was able to establish that it had taken precautions in protecting its confidential information and alerting employees as to their responsibilities in protecting that information.
  2. Employees should also be required to sign appropriate agreements emphasizing their obligations as related to protecting confidential information. Exit interviews should be conducted in a cordial manner, non-hostile manner.  At that time, the employee can also be reminded of his on-going obligations under the terms of his previously signed employee confidentiality agreement.
  3. When an employee leaves a job, it may be advisable to have the employee’s company computer(s) checked by a third-party expert to determine if the employee downloaded confidential information onto an external device such as a USB, flash drive, smartphone, or external hard drive especially if there are any red flags concerning this employee. During the temporary injunction hearing, AI presented a third-party contractor’s report which showed that Hughes downloaded a large quantity of data from his company computer onto a USB.
  4. After an employee’s departure, an examination of the person’s e-mail account may be worth-while in particular to determine if the person has been forwarding anything of consequence to his own personal e-mail account. E-mail issues were raised in the Hughes case.
  5. Finally, most employees who are departing on good terms will let their employer know about their new place of employment. If the employee is mum as to where he is going, the employer may want to take some proactive steps to ensure that its confidential information has not been compromised by a departing employee.

Contact Troy & Schwartz, LLC to receive a free checklist of steps to take to protect your valuable confidential information and trade secrets. 

 

© 2017 by Troy & Schwartz, LLC

WE THANK YOU FOR READING THIS BLOG.  HOWEVER, THE FOREGOING IS NOT LEGAL ADVICE AND IS PRESENTED FOR INFORMATIONAL PURPOSES ONLY.  IF YOU ARE CONTEMPLATING ANY ACTION THAT MAY HAVE LEGAL CONSEQUENCES, YOU SHOULD CONSIDER CONSULTING WITH AN ATTORNEY OF YOUR CHOOSING.