What is misappropriation of trade secrets under Texas and federal law?
In Pittsburgh Logistics Sys., Inc. v. Barricks, the Southern District of Texas recently denied summary judgment motions filed by Pittsburgh Logistics Systems (PLS) against a former employee for misappropriation of trade secrets under the federal Defend Trade Secrets Act (18 USC §1836) and The Texas Uniform Trade Secrets Act (§ 134A.001).
PLS hired the defendant employee (Barricks) in part to cultivate and maintain relationships with PLS’ customers, and their employment agreement included a non-solicitation provision and a non-compete clause. When Barricks left PLS and went to work for a competitor, Glen Rose Transportation Management (GRTM), PLS alleged that Barricks took PLS’ customer list and misappropriated it to the benefit of Barricks’ new employer.
The Southern District’s Order denying summary judgment to PLS as to the misappropriation claim (but granting damages as to Barricks’ alleged violation of the non-solicitation agreement) provides a basic overview of Texas law regarding misappropriation of trade secrets and what must be proven to recover damages when a former employee has appropriated customer lists or other trade secrets.
Misappropriation of Trade Secrets in Texas
To recover damages for misappropriation of trade secrets under the Texas Uniform Trade Secrets Act (TUTSA) or the federal Defend Trade Secrets Act (DTSA), a plaintiff must prove 1) that there was a trade secret and 2) that the defendant misappropriated the trade secret.
First, what is a trade secret?
The Existence of a Trade Secret
A “trade secret” is information that:
- The owner has taken reasonable measures to keep secret, and
- “Derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, another person who can obtain economic value from the disclosure or use of the information.”
See Tex. Civ. Prac. & Rem. Code § 134A.002(6); 18 U.S.C. § 1839(3); Miner, Ltd. v. Anguiano, 383 F. Supp. 3d at 702 (noting that definitions in TUTSA are “identical” to those in the DTSA); see also Agency Solutions.Com, LLC v. TriZetto Grp., Inc., 819 F. Supp. 2d 1001, 1021 (E.D. Cal. 2011) (“information is not necessarily a trade secret simply because it is known by one party and not by the other.”).
This could include any “design, pattern, or plan,” or it could include customer lists, as in PLS v. Barricks.
When is a customer list a trade secret?
Not all customer lists are considered trade secrets, and the court must consider three factors when deciding whether a customer list is a trade secret:
- Steps the employer has taken to maintain the confidentiality of the list,
- Whether the departing employee acknowledges that the list is confidential, and
- Whether the content of the list is readily ascertainable.
Barricks apparently emailed himself a customer list that contained 259 names of customers as well as information on sales and profit margins for each customer.
The court found that the customer list was a trade secret where 1) PLS took steps to maintain the list’s confidentiality (PLS had Barricks sign a confidentiality agreement that defined the information as confidential, 2) Barricks partially agreed that the information was confidential (he testified that he did not consider pricing and sales information to be confidential), and 3) at least some of the information in the list is not readily ascertainable because someone must log in to PLS’ network to access the information.
Misappropriation of the Trade Secret
The Court found that Barricks did not misappropriate the trade secret (customer list), however.
Use of a trade secret includes any exploitation of the trade secret that either 1) harms the owner or 2) enriches the defendant, including:
- Marketing goods “that embody the trade secret,”
- Using the trade secret in manufacturing or production,
- Relying on the trade secret for research or development, or
- Soliciting customers using information that is a trade secret.
PLS did not prove that Barricks used the customer list, and Barricks testified that, although he sold to PLS’ former customers while he was employed at GRTM, he did not rely on the PLS customer list and determined pricing by “referencing two public websites and adding a standard markup.”
PLS customers whose phone numbers were saved in Barrick’s phone contacted him and expressed their wish to continue giving him their business at his new company, but answering the phone to PLS customers whose numbers were saved in his phone does not constitute use of PLS’ trade secret information.
Because PLS did not establish that Barricks used the trade secret information, there was no liability for trade secret misappropriation and PLS was not entitled to an injunction.
Non-Solicitation Agreements
The Court did find that PLS was entitled to “expectation damages” for Barrick’s breach of the non-solicitation provision in their employment contract, calculated based on his net profits.
Barrick was ordered to pay his net profits from sales to PLS customers while he was employed at GRTM ($23,613.51) (note that this is only Barrick’s profits which accounted for 12% of GRTM’s net profits from sales to PLS customers).
Please feel free to contact one of our Murray Lobb attorneys for advice on misappropriation of trade secrets, including employee agreements to prevent unfair competition issues and legal action that can be taken to protect your company’s business interests.
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