confidential information – Trade Secrets & Non-Compete Law

May 23, 2016 by Shannon Hampton Sutherland

Texas Supreme Court Holds that a Trial Court Must Balance the Parties’ Competing Interests Before Deciding Whether a Corporate Representative Should be Excluded from an Injunction Hearing Involving Trade Secrets under the Texas Uniform Trade Secrets Act

By
Shannon Hampton Sutherland, Co-Chair, Duane Morris Non-Compete and Trade Secrets Practice, http://www.duanemorris.com/attorneys/shannonhamptonsutherland.html, and
Corey M. Weideman, Duane Morris Associate, http://www.duanemorris.com/attorneys/coreymweideman.html

On May 20, 2016, in In re: M-I, LLC, d/b/a M-I Swaco, No. 14-1045, 2016 Tex. LEXIS 389 (Tex. May 20, 2016), the Texas Supreme Court issued its much anticipated first decision involving the Texas Uniform Trade Secrets Act (“TUTSA”). TUTSA, which became effective on September 1, 2013, updated Texas law governing trade secret matters by, among other things, providing an unambiguous definition of a “trade secret”, expanding injunctive relief, and authorizing recovery of attorneys’ fees for willful and malicious activity. TUTSA also includes a specific provision requiring trial courts to protect the secrecy of a trade secret through reasonable means. See TEX. CIV. PRAC. & REM. CODE § 134A.006. This section of TUTSA, and the extent to which a trial court must protect the secrecy of an alleged trade secret during an injunction hearing, was the focus of the Court’s attention in In re: M-I, LLC.

In In re: M-I, LLC, the Texas Supreme Court held that the due-process right of a party to have a designated representative present at an injunction hearing involving alleged trade secrets is not absolute, and the trial court abused its discretion when it summarily concluded – without first balancing the competing interests at stake – that excluding the defendant’s corporate witness from portions of the injunction hearing involving trade secrets would violate due process.

The basic facts of the trade secret case underlying the mandamus proceeding in In re: M-I, LLC are typical: an employee with a signed non-compete and confidentiality agreement left his job to work for one of his former employer’s competitors, and a dispute ensued shortly thereafter. The former employer, M-I, filed suit for trade secret misappropriation and sought injunctive relief against its former employee and his new employer, National Oilwell Varco, L.P. (“NOV”). Relying on Section 134A.006 of TUTSA, M-I requested that NOV’s corporate representative be excluded from the courtroom during a portion of the hearing on M-I’s application for temporary injunction. The trial court summarily denied M-I’s request, however, concluding that the exclusion of NOV’s designated representative would be a “total violation of due process.” Instead, the trial court admonished NOV’s representative not to disclose or use anything he heard in the courtroom. Concerned about disclosing testimony regarding its trade secrets to NOV and placing the secrecy of the alleged trade secrets at risk by doing so, M-I postponed the injunction hearing to file a mandamus request with an intermediate appellate court. The intermediate appellate court denied the mandamus request and M-I filed a new mandamus request to the Texas Supreme Court.

Mandamus relief is available, the Court noted, when the trial court abuses its discretion and no adequate appellate remedy exists. The Court first explained that there is no adequate appellate remedy for an erroneous order to disclose a trade secret before examining whether the trial court abused its discretion.

In conditionally granting M-I’s request for mandamus relief, the Texas Supreme Court held that the trial court abused its discretion by summarily refusing M-I’s request to conduct portions of the temporary injunction hearing outside the presence of the NOV’s designated representative. The Court explained that courts have discretion to exclude parties and their representatives in limited circumstances when “countervailing interests overcome [the] presumption” in favor of participation. Rather than summarily denying M-I’s request, the Court explained, the trial court was required, at a minimum, to balance the parties’ competing interests.

First, the trial court was required to determine the degree of competitive harm M-I would have suffered from the dissemination of its alleged trade secrets to NOV’s corporate representative, including by considering the relative value of the alleged trade secrets and whether the NOV corporate representative was a competitive decision-maker.
Second, the court was required to determine the degree to which NOV’s defense of M-I’s claims would be impaired by the representative’s exclusion at such a preliminary stage of the proceeding.

Importantly, the Court noted that, “[i]f the trial court conducted the required balancing, it may have been within its discretion to decide that due process required NOV’s designated representative to be present.” The trial court’s error was failing to conduct the balancing at all.

In short, TUTSA plaintiffs should not assume that the court will exclude the other side’s representative when alleged trade secrets are disclosed, and TUTSA defendants should not assume that the court will permit their representatives to participate in all phases of a TUTSA case. The trial court must develop a factual record to balance the parties’ countervailing interests before deciding whether to exclude a witness.

April 8, 2016 by Shannon Hampton Sutherland

STRONG NON-COMPETE AND CONFIDENTIALITY AGREEMENTS AND PRACTICES ARE CRITICAL TO ACQUISITION

By: Shannon Hampton Sutherland[1]

Experts predicted that strong M&A activity would continue from 2015 into 2016.[2] So far, that prediction appears to hold true, particularly in the biotech sector. If you want to position your company for potential acquisition under attractive terms, either in 2016 or down the road, are you ready? Locking down the company’s “non-compete” and confidentiality agreements and practices early is mission-critical.

These agreements (including confidentiality and invention agreements, non-compete agreements, and non-solicit agreements) help the company protect legitimate business interests, like the benefit of its investment in its technology, confidential information, and trade secrets, goodwill with its customers, and training of its employees. If your company doesn’t have strong programs and agreements in place with its employees, independent contractors, and consultants to protect these important assets, it might lose value in the eyes of a potential acquirer.

This lesson holds especially true in industries that are heavily-reliant on sensitive technological innovation or field-based sales organizations. One of your highest priorities should be making sure that the company has strong and enforceable confidentiality and non-compete agreements (if permissible in your jurisdiction) with these individuals and programs in place to protect the company’s interests.

Identify and Address Gaps in the Protection of Confidential Information. The company should work with legal counsel to identify potential gaps in its programs and procedures designed to protect its confidential information. For instance, how strong is the company’s network security? Does the company have strong policies and procedures in place concerning access to data that resides outside of the network? Are the company’s written policies being followed in practice? Does the company only grant access to such information on a need-to-know basis, or is information too readily available or left unprotected? Are sensitive materials identified as such? Does the company take reasonable steps to ensure that departing employees return, and do not retain access to, confidential information? A potential acquirer will want to see strong and consistent policies and procedures in place – and followed – to protect the assets it is acquiring.
Address Agreements With New Employees on the Front-End. Although not required in all jurisdictions, it’s good practice to let a new candidate know that he or she will need to sign a confidentiality or non-compete agreement as a condition of employment (if appropriate for the position and permissible in your jurisdiction). Indeed, some jurisdictions have special rules about whether the employee must receive a copy of the agreement in advance, and when the new employee must sign the agreement. The company can work with HR and legal counsel with expertise in this area to ensure that the company is complying with any necessary requirements for new employees.
Identify and Address Individuals Without Existing Agreements. HR and legal counsel should identify employees (and independent contractors and consultants) who have not signed confidentiality, invention, non-compete, and non-solicit agreements. For individuals who don’t have an agreement, but who have access to the company’s confidential information or goodwill, the company can work closely with legal counsel well-versed in this area to consider whether an agreement is appropriate and craft an agreement that will stand muster for position at issue and in the jurisdictions that might be implicated. For instance, in some jurisdictions, for an agreement signed after the commencement of employment to be enforceable, the company must provide additional consideration to the employee (such as a promotion, payment, or increased compensation).
Consider Assignment and Successor Clauses. The company should consider with legal counsel whether to include provisions providing that the employee expressly consents to the assignment of the restrictive covenants by the company at any time, and that the restrictive covenants are enforceable by the company’s successors and assigns. That type of language isn’t required in all jurisdictions, but, in some jurisdictions, it may bolster a successor company’s or assignee’s ability to enforce the agreements – something a potential acquirer will look for when considering your company for potential acquisition.
Identify and Remediate Potential Holes in Existing Agreements. Experienced legal counsel should also review existing agreements to determine any potential holes in those documents and whether adjustments can or should be made to both meet the company’s business needs and comply with any applicable law. For example, sometimes agreements in the employee’s file pre-date important clarifications in the law that must be addressed. Or, perhaps the existing agreement is written too narrowly so that it doesn’t protect the full extent of the company’s interests or current or planned business model. On the flip side, the agreement may be too heavy-handed or written so broadly that it won’t be enforceable at all under the law of a state that won’t reasonably modify an overly broad agreement. Counsel well-versed in non-competes can help the company identify and suggest ways to remediate these (and other) potential deficiencies before it’s too late.

Bottom line: Early and regular review of the company’s non-compete and confidentiality agreements and practices is an important piece of positioning the company for favorable acquisition. Counsel well-versed in this area can help the company navigate the complex issues that come into play.

Nothing contained in this blog is intended to or does create an attorney-client relationship or provide legal advice.

[1] Shannon Hampton Sutherland is the Co-Chair of the Duane Morris Non-Compete and Trade Secrets practice and a nationally-known non-compete, trade secrets, and litigation attorney. See http://www.duanemorris.com/attorneys/shannonhamptonsutherland.html.

[2] See, e.g., http://www.forbes.com/sites/jeffgolman/2016/01/11/four-reasons-2016-will-be-a-strong-year-for-ma/#27221a634d49 (last accessed Apr. 8, 2016); http://info.kpmg.us/ma-survey/index.html (last accessed Apr. 8, 2016).

December 7, 2015January 5, 2016 by Shannon Hampton Sutherland

New Sixth Circuit Case Imposes Liability For Theft Of Confidential Information That Does Not Qualify For Trade Secrets Protection

Michael R. Gottfried, Shannon Hampton Sutherland, and Gregory S. Bombard

Orthofix, Inc. v. Hunter, —- Fed. Appx. —–, 2015 WL 7252996, at *1 (6th Cir. Nov. 17, 2015).

The Sixth Circuit recently ruled, in an unpublished opinion, that a former employer could recover against a former employee for breach of a confidentiality agreement, even if the information the former employee took, used, or disclosed did not qualify for trade secret protection.

In Orthofix, the plaintiff company was a medical device company that markets bone growth stimulators to health care providers. The defendant employee was a sales person for the plaintiff for twelve years. At the time of his hiring, the defendant employee signed a nondisclosure agreement, which he reviewed with an attorney and on which he specifically underlined the definition of “confidential information.” Continue reading “New Sixth Circuit Case Imposes Liability For Theft Of Confidential Information That Does Not Qualify For Trade Secrets Protection”