PROTECTING TRADE SECRET AND CONFIDENTIAL INFORMATION

BRENDA L. CLAYTON Kelly, Hart & Hallman, P.C.

301 Congress Avenue, Suite 2000 Austin, Texas 78701

Phone: (512) 495-6409 Fax: (512) 495-6601

E-mail: brenda_clayton@khh.com

RUSSELL D. CAWYER Kelly, Hart & Hallman, P.C.

201 Main, Suite 2800 Fort Worth, Texas 76102

Phone (817) 332-2500 Fax: (817) 878-9280

E-mail: russell_cawyer@khh.com

2004

State Bar of Texas 22ND ANNUAL ADVANCED OIL, GAS

& ENERGY RESOURCES LAW COURSE September 30, 2004 - October 1, 2004

San Antonio

CHAPTER 12

BRENDA L. CLAYTON KELLY, HART & HALLMAN, P.C.

301 Congress Avenue, Suite 2000 Austin, Texas 78701

(512) 495-6409 brenda_clayton@khh.com

As a Director in Kelly, Hart & Hallman’s Austin office, Ms. Clayton’s practice centers on environmental and administrative law, oil, gas, and mineral law, and appellate law. Education:

J.D. with honors, University of Texas Law School, May 1992. B.A. in Economics with honors, University of Texas at Austin, 1980.

Current Practice: Environmental and administrative law. Ms. Clayton’s environmental and administrative law practice includes regulatory matters involving waste and water, such as those arising under the Resource Conservation and Recovery Act (“RCRA”), the Clean Water Act (“CWA”), the Texas Water Code, the Texas Solid Waste Disposal Act, the Texas Asbestos Health Protection Act, and other statutes; water rate, water utility, and water district matters; defending or prosecuting private environmental litigation such as private suits under the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) and the Texas Solid Waste Disposal Act, citizen suits under RCRA and the CWA, and common law tort actions. Ms. Clayton also regularly represents private third parties before the Attorney General in actions in which the third party seeks to protect trade secret or other confidential information from disclosure by a state agency.

Oil, gas, and mineral law. Ms. Clayton’s oil, gas and mineral law practice includes regulatory matters and litigation arising from the exploration and production of oil, gas and other minerals. Appellate law. Ms. Clayton’s appellate practice, which includes both suits for judicial review of agency decisions and appeals from trial court decisions, has involved such projects as serving as counsel in In re Bass, 113 S.W.3d 735 (Tex. 2003) (orig. proceeding), a mandamus action involving the discovery of trade secret information, in which the Texas Supreme Court adopted a new definition of a “trade secret,” held for the first time that seismic data may be entitled to trade secret protection, and held for the first time that a plaintiff must plead a viable claim in order to obtain trade secret data from a defendant in the course of litigation, and Ridge Oil Co. v. Guinn Investments, Inc., 2004 WL 1966096 (Tex. 2004), which held that a partial assignee could release its interest in a lease and take another because he owed no duty to another partial assignee to continue to operate the original lease. Professional Organizations and Activities:

State Bar of Texas: Administrative Law Section Member, Appellate Law Section Member, Oil, Gas and Mineral Law Section Member

Travis County Civil Appellate Law Section, Council Member of the Section, 2003-2005 Travis County Oil, Gas and Mineral Law Section, Vice-Chair of the Section, 2004-2005

RUSSELL D. CAWYER KELLY, HART & HALLMAN, P.C.

201 Main, Suite 2800 Fort Worth, Texas 76102

(817) 332-2500 russell_cawyer@khh.com

As a Director in Kelly, Hart & Hallman’s Fort Worth office, Mr. Cawyer’s practice focuses exclusively on labor and employment-related legal matters, including litigation in federal and state courts, and administrative proceedings before the Equal Employment Opportunity Commission, United States Department of Labor, the Texas Commission on Human Rights, the National Labor Relations Board (including defending both charges of unfair labor practices and representation election proceedings) and proceedings before the Occupational Safety and Health Administration. Additionally, Mr. Cawyer has defended several employers in complex wage, hour and benefit class actions having nearly 20,000 total putative class members. He has also litigated both federal and state court cases involving alleged discrimination, harassment and retaliation; workers’ compensation retaliation, breach of contract, and litigating the enforceability of numerous covenants-not-to-compete, as well as other workplace claims. He also regularly provides advice and counsel to employers on employment issues involving federal and state court cases alleging discrimination and sexual harassment. Mr. Cawyer has tried both jury and non-jury employment cases and has arbitrated cases arising under collective bargaining agreements. In addition to primarily representing employers in administrative and judicial proceeding, Mr. Cawyer is a frequent author and speaker on human resource, employee relations and labor and employment law developments. Mr. Cawyer has been board certified in Labor and Employment Law by the Texas Board of Legal Specialization since 2000. Education:

J.D. with honors, Texas Tech University School of Law, May 1995. Texas Tech Law Review, Note Editor B.S. with honors, University of North Texas, May 1992.

Selected Articles and Publications:

Workplace Technology: Achieving a Symbiotic Relationship Between Business Interests and Employee Privacy, Kelly, Hart & Hallman, P.C. 2001 Labor & Employment Law Conference, 2001 (presentation). The Americans with Disabilities Act, Kelly, Hart & Hallman, P.C. 2001 Labor & Employment Law Conference, 2001 (paper and presentation). Defending Employment Discrimination, Retaliation and Harassment Claims, SOUTHWESTERN LEGAL FOUNDATION'S 45TH ANNUAL INSTITUTE ON LABOR AND EMPLOYMENT LAW, 1998 (paper).

324334-1

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Articles and Publications (continued) Using Alternative Dispute Resolution (ADR)Procedures to Resolve Employment Disputes, Strasburger & Price, L.L.P. 1999 Corpus Christi Client Seminar on Developments in Labor and Employment Law, 1999 (paper and presentation). Batson and its Progeny Prohibit the Use of Preemptory Challenges Based Upon Disability and Religion: A Practitioner's Guide for Requesting a Civil-Batson Hearing, 26 TEX. TECH. L. REV109 (1995).

Bar Admissions: Supreme Court of Texas, 1995 U.S. District Court, Western District of Texas, 1997 U.S. District Court, Southern District of Texas, 1998 U.S. District Court, Northern District of Texas, 1999 U.S. Court of Appeals, Fifth Circuit, 2000 U.S. District Court, Eastern District of Michigan, 2003.

Protecting Trade Secret 12-i And Confidential Information

TABLE OF CONTENTS Page

I. INTRODUCTION....................................................................................................................................... 1

II. TRADE SECRET AND CONFIDENTIAL BUSINESS INFORMATION....................................................... 1 A. Texas Has a New Definition of a Trade Secret - And It Protects Seismic Data.......................................... 1 B. Texas Also Protects Information That Is Not Quite Trade Secret: Confidential Business Information. ........ 2

III. SECURITY BEGINS AT HOME: KEEPING THE TRADE SECRET “SECRET.” ......................................... 2

IV. PROTECTING TRADE SECRETS IN LITIGATION.................................................................................... 3 A. Protecting Trade Secrets From Discovery............................................................................................... 3

1. A Trade Secret is Discoverable Only If It Is “Necessary For a Fair Adjudication of a Claim.” ............ 3 2. Further, A Trade Secret Is Discoverable Only If The Claim To Which The Information Is Relevant Is

Recognized By Law....................................................................................................................... 6 B. Protecting Trade Secrets Produced In Discovery. .................................................................................... 6

1. Documents Not Admitted Into Evidence ......................................................................................... 7 2. Documents Admitted Into Evidence................................................................................................ 7

V. PROTECTING TRADE SECRET AND CONFIDENTIAL BUSINESS INFORMATION SUBMITTED TO A STATE AGENCY ....................................................................................................................................... 7 A. Protection Under The Texas Public Information Act............................................................................... 7

1. Procedures for Protecting Third Party Information........................................................................... 7 2. Exceptions Under The PIA............................................................................................................. 8

a. Information that Would Benefit a Competitor or Bidder - Section 552.104. ................................ 8 b. Confidential Commercial or Financial Information - Section 552.110(b). ................................... 8 c. Trade Secret Information - Section 552.110(a). ........................................................................ 8 d. Geological and Geophysical Information - Section 552.113....................................................... 9

B. Confidential Information Under Statutes Particular to the Geological and Geophysical Information. .......... 9 C. Confidential Information Under Texas’ Homeland Security Act. ............................................................. 9

VI. PROTECTING INFORMATION SUBMITTED TO FEDERAL AGENCIES. .............................................. 10 A. Protecting Information Submitted Under the FOIA Exemptions............................................................. 10

1. Procedure For Protecting Information. .......................................................................................... 10 2. FOIA Exemptions That May Protect Trade Secrets........................................................................ 11

B. Protecting Information Submitted under the Homeland Security Act...................................................... 12 1. The Homeland Security Act Encourages the Voluntary Submission of Critical Infrastructure

Information ................................................................................................................................. 12 2. Information Sharing and Analysis Centers (“ISACs”) .................................................................... 13

C. Extra-FOIA Procedures To Protect Or Obtain Information: FERC’s Regulations Regarding The Submission Of Critical Energy Infrastructure Information. .................................................................... 14

D. A Concern: How Safe is Information in the Government’s Databases?................................................... 15

VII. REMEDIES FOR MISAPPROPRIATION OF A TRADE SECRET............................................................. 16 A. Common Law Remedies for Misappropriating a Trade Secret............................................................... 16

1. Damages. .................................................................................................................................... 16 2. Equitable Remedies. .................................................................................................................... 17

B. State Statutory Remedies..................................................................................................................... 18 1. Civil Remedies............................................................................................................................ 18 2. Criminal Remedies ...................................................................................................................... 18

C. Federal Statutory Remedies................................................................................................................. 18 1. The Trade Secrets Act.................................................................................................................. 18 2. The Economic Espionage Act of 1996 .......................................................................................... 18

VIII. USE AND ENFORCEABILITY OF NON-COMPETITION AGREEMENTS.............................................. 19 A. An “Otherwise Enforceable Agreement.”............................................................................................. 19

Protecting Trade Secret 12-ii and Confidential Information

B. “Ancillary” to the Otherwise Enforceable Agreement............................................................................ 21 C. Limitations on Time, Geography and Scope of Activity to be Restrained................................................ 21 D. Burden of Proof.................................................................................................................................. 22 E. Damages Recoverable......................................................................................................................... 22 F. Injunctive Relief and Irreparable Harm. ............................................................................................... 22

Protecting Trade Secret 12-1 and Confidential Information

PROTECTING TRADE SECRET AND CONFIDENTIAL INFORMATION I. INTRODUCTION

Recent developments in trade secret law include the Texas Supreme Court’s adoption of a new definition of “trade secret,” its holding that seismic data and interpretations are eligible for trade secret protection, and an increasingly broad rift in the courts of appeals regarding when a restrictive covenant is unenforceable because it is illusory. Also, in the post-September 11 world in which the federal government encourages private industry to share information regarding their vulnerabilities, an additional consideration is how to protect trade secret information from disclosure by the state or federal government either through public information acts or through cyberattacks. Another developing issue is whether irreparable harm must be proven to obtain an injunction under section 15.50 of the Texas Business and Commerce Code. II. TRADE SECRET AND CONFIDENTIAL

BUSINESS INFORMATION. A. Texas Has a New Definition of a Trade Secret -

And It Protects Seismic Data. The Texas Supreme Court, in In re Bass,1 recently

adopted the definition of a trade secret under section 39 of the Restatement (Third) of Unfair Competition. Section 39 defines a trade secret as “any information that can be used in the operation of a business or other enterprise and that is sufficiently valuable and secret to afford an actual or potential economic advantage over others.” Under section 39, no single factor is conclusive to any trade secret analysis, as “[i]t is not possible to state precise criteria for determining the existence of a trade secret. The status of information claimed as a trade secret must be ascertained through a comparative evaluation of all of the relevant factors, including the value, secrecy, and definiteness of the information . . . .”2

Even under section 39 of the Restatement (Third) of Unfair Competition, a court can consider the six factors defining a trade secret under former section 757 of the Restatement (Second) of Torts. Although the court in In re Bass still looked to the former section 757 factors, it held that not all of the six factors must

1 113 S.W.3d 735 (Tex. 2003). 2 RESTATEMENT (THIRD) OF UNFAIR COMPETITION § 39, CMT . D (REPLACING § 757 OF THE RESTATEMENT OF TORTS).

be proven to establish a trade secret.3 Former section 757 defined a trade secret as “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.”4 Under section 757, a trade secret differs from other secret information in a business in that it is not simply information as to single or ephemeral events in the conduct of the business," as the amount or terms of a sealed bid. Instead, it is a "process or device for continuous use in the operation of the business." The six factors of former section 757 provide that a court, in determining what a trade secret is, must consider:

(1) the extent to which the information is known

outside of the holder’s business; (2) the extent to which it is known by employees

and others involved in the holder’s business; (3) the extent of the measures taken by the

holder to guard the secrecy of the information;

(4) the value of the information to the holder and its competitors;

(5) the amount of effort or money expended by the holder in developing the information; and

(6) the ease or difficulty with which the information could be properly acquired or duplicated by others.5

Although the factors of the former Restatement are still used in determining whether a trade secret exists, the new definition brings some changes to Texas trade secret law.

One change is that, under the section 39 definition, the requirement that the information be for the “continuous use” in a business – to the extent that that requirement was ever a part of Texas law6 – is no

3 Section 757 of the Restatement (Second) of Torts has been replaced by section 39 of the Restatement of Unfair Competition. 4 Computer Assoc. Int’l, Inc. v. Altai, Inc., 918 S.W.2d 453, 455 (Tex. 1996). 5 Center for Econ. Justice v. American Ins. Ass’n , 39 S.W.3d 337, 344-345 (Tex. App.–Austin 2001, no pet.). 6 Although Texas cases had cited the Restatement (Second) of Tort’s statement that a trade secret was a “process or device for continuous use in the operation of the business,” see, e.g., Hyde Corp. v. Huffines, 314 S.W.2d 763, 776 (Tex. 1958), no Texas case turned on that distinction. Several courts have held that the “mere fact that a company is not utilizing information at the present time does not prevent that information from being subject to trade-secret protection.” Center for Economic Justice v. American Ins. Ass’n 39 S.W.3d 337, 347 (Tex. App.-Austin

Protecting Trade Secret 12-2 and Confidential Information longer.7 Comment e of § 39 of the Restatement (Third) of Unfair Competition explains that, “Use by the person asserting rights in the information is not a prerequisite to protection under the rule stated in this Section,” in part, because such a “requirement can deny protection during periods of research and development and is particularly burdensome for innovators who do not possess the capability to exploit their innovations.”8 Although no Texas case has discussed this aspect of section 39 of the Restatement, the Seventh Circuit, in Learning Curve Toys, Inc. v. PlayWood Toys, Inc.,9 recently held that a prototypical design that did not function perfectly was protected under six-factor test even though it had in fact never been used in the plaintiff’s business.

Further, under the section 39 definition, negative information – such as knowing that a particular approach would not work, when that information would be of value to one’s competitors, may be trade secret information. 10 Geophysical data showing no prospect exists may fall into this category.

Courts generally make two inquiries in deciding whether a trade secret exists. The first inquiry is whether the information falls into the definition of trade secret, which applies to certain categories of information. 11 The second inquiry is whether the information at issue is in fact trade secret. Even if the information falls generally into a category of trade secret information, the holder of the information may have waived trade secret protection by, for example, not protecting its secrecy.12

In In re Bass, the Texas Supreme Court also held for the first time that seismic data and seismic interpretations can be trade secrets entitled to protection. The court’s decision accorded with that in Amoco Production Co. v. Laird,13 a case in which the

2001, no pet.); Bertotti v. C.E. Shepherd Co ., Inc. 752 S.W.2d 648, 653 (Tex. App.–Houston [14th Dist.] 1988, no writ); Elcor Chem. Corp. v. Agri-Sul, Inc., 494 S.W.2d 204, 213 (Tex. Civ. App.–Dallas 1973, writ ref’d n.r.e.). 7 Linda K. Stevens, Trade Secrets and Inevitable Disclosure, 36 TORT AND INS. LAW J. 917, 920, Summer 2001 [hereinafter “Stevens”]; Note: Looking Back and Forth: The Restatement (Third) of Unfair Competition and Potential Impact on Texas Trade Secret Law, 4 TEX. INTELL . PROP. L. J. 415, 425 (1996). 8 RESTATEMENT (THIRD) OF UNFAIR COMPETITION, CMT E. 9 342 F.3d 714, 727-728 (7th Cir. 2003). 10 Stevens, supra note 7, 917 Tort and Ins. Law J. at 920. 11 See, e.g., Bass , 113 S.W.3d at 739-742. 12 Id. 13 622 N.E.2d 912, 921 (Ind. 1993).

Indiana Supreme Court held that oil reserve data obtained by microwave radar surveys performed at considerable expense are protected trade secrets.

B. Texas Also Protects Information That Is Not

Quite Trade Secret: Confidential Business Information.

The Texas Supreme Court – as have many other courts14 – has recognized a class of “confidential or proprietary information” other than trade secret information. 15 Although confidential business information is not protected as a trade secret, such information can be protected by a covenant not to compete or by a confidentiality agreement. However, as discussed below, the remedies for the breach of an agreement not to use confidential business information may not be as broad as the remedies for the unauthorized use of a trade secret. Also, certain procedural advantages that apply to trade secrets – like, for example, the evidentiary privilege under Texas Rule of Civil Procedure 507, and the additional protection of Texas Rule of Civil Procedure 76a, are only available for information that meets the trade secret definition. III. SECURITY BEGINS AT HOME: KEEPING

THE TRADE SECRET “SECRET.” A trade secret must be secret. Therefore, the

confidentially of the information must be protected both inside the business and outside the business. Typical methods by which to protect the secrecy of trade secret information include:

• Marking documents and materials as

confidential,16 • Using confidentiality and nondisclosure

agreements with employees, prospective investors, contractors, and suppliers;17

14 Robert Unikel, Bridging the “Trade Secret” Gap: Protecting “Confidential Information” Not Rising to the Level of Trade Secrets, 29 LOY. UNIV. OF CHI. L.J. (1998). 15 DeSantis v. Wackenhut Corp ., 793 S.W.2d 670, 682 (Tex. 1990). 16 Car Wash Systems of Texas, Inc. v. Brigance , 856 S.W.2d 853, 856 (Tex. App.–Fort Worth 1993, no writ) (books containing names and locations of customers were marked proprietary and confidential); Weightman v. State, 1996 WL 718465, *10 (Tex. App.–Houston [14th Dist.] 1996, no pet.) (documents sent to appellant were marked with confidentiality statements informing the receiver that the drawings contained confidential and trade secret information). 17 In re Kuntz, 124 S.W.3d 179, 185 (Tex. 2003) (Hecht, J., concurring opinion) (information was trade secret when it was disclosed only to those competitors solicited as potential

Protecting Trade Secret 12-3 and Confidential Information

• Utilizing non-compete agreements with employees;

• Marking confidential information with confidential watermarks or headers and requiring that those documents be shredded;

• Restricting access to physical facilities by locks, alarms, or passcodes, restricting access to sensitive areas, requiring that cubicles be cleared;18

• Limiting access to outsiders by using sign-in procedures, requiring identification badges, using badge-readers and cameras, and requiring escorts for all visitors; 19

• Securing confidential information within a facility and limiting access to those only with a “need to know;”20

investors, and then subject to confidentiality agreements and other protective measures); Beasley v. Hub City Texas, L.P. , 2003 WL 22254692, *6 -7 (Tex. App.–Houston [1st Dist.] Sept. 29, 2003, no pet.) 18 In re Bass, 113 S.W.3d at 742 (seismic data were kept in secured climate regulated vault accessible only to those who knew the combination); Mabrey v. SandStream, Inc., 124 S.W.3d 302, 311 (Tex. App.–Fort Worth 2003, no pet.) (physical security included industry standard mechanisms such as locks, badge readers, cameras, equipment cages, and fenced-in vital infrastructure, as well as “secure servers,” networks with firewalls, access lists for computers, and coded card keys for access based on job function of employees, and issuing mandatory instructions for clearing cubicles and putting away sensitive information prior to tours of the facility by visitors and kept visitors out of restricted areas); T-N-T Motorsports, Inc. v. Hennessey Motorsports, Inc. 965 S.W.2d 18, 23 (Tex. App.–Houston [1st Dist.] 1998, pet. dism’d) (plaintiff’s property had secured access gate from 6:00 p.m. to 6:00 a.m. that requires a code for entry, and non-employees were allowed in the shop area only after they have checked in with the office). 19 Mabrey, 124 S.W.3d at 311; T-N-T Motorsports, Inc. v. Hennessey Motorsports, Inc., 965 S.W.2d 18, 23 (Tex. App.–Houston [1st Dist.] 1998, pet. dism’d) (plaintiff’s property had secured access gate from 6:00 p.m. to 6:00 a.m. that required a code for entry, and non-employees were allowed in the shop area only after they had checked in with the office). 20 In re Cayman Island Firm of Deloitte & Touche, 2001 WL 1042233, *4 (Tex. App.–San Antonio 2001, no pet.) (affidavit met threshold when it detailed the efforts made by DT Cayman to maintain the secrecy of manual, including that its disclosure is limited internally on a “need to know” basis); Car Wash Systems of Texas, Inc. v. Brigance, 856 S.W.2d 853, 856 (Tex. App.–Fort Worth 1993, no writ) (customer list was used on an “as -needed or need-to-know basis by people filling orders); Murrco Agency, Inc. v. Ryan , 800 S.W.2d 600, 604 (Tex. App.–Dallas 1990, no writ) (customer list was disclosed on need-to-know basis).

• Requiring special passwords to gain access to confidential computerized information and databases;21

• Implementing document return procedures;22 • Conducting employee exit interviews in

which the employee is advised about his or her duty to keep the information confidential and to return any confidential documents.23

One must also take similar steps to protect confidential business information.

IV. PROTECTING TRADE SECRETS IN

LITIGATION. A. Protecting Trade Secrets From Discovery. 1. A Trade Secret is Discoverable Only If It Is

“Necessary For a Fair Adjudication of a Claim.” Texas Rule of Evidence 507 establishes an

evidentiary privilege for trade secret information, providing that:

A person has a privilege, which may be claimed by the person or the person’s agent or employee, to refuse to disclose and to prevent other persons from disclosing a trade secret owned by the person, if the allowance of the privilege will not tend to conceal fraud or otherwise work injustice. When disclosure is directed, the judge shall take such protective measure as the interests of the holder of the privilege and of the parties the furtherance of justice may require.

The Texas Supreme Court analyzed the scope and effect of Rule 507 in In re Continental General Tire, Inc.24 Under In re Continental General Tire, the trial

21 Sweet v. Inkjet Int'l, Ltd., 2003 WL 22254695, *2 (Tex. App.–Dallas 2003, no pet.) (information was maintained with a specific software system which was password-protected and not all employees had the same level of access to the software system); Mabrey, 124 S.W.3d at 311; Beasley v. Hub City Texas, L.P. 2003 WL 22254692, 6-7 (Tex. App.–Houston [1st Dist.] Sept. 29, 2003, no pet.). 22 Computer Assoc. Int'l, Inc. v. Altai, Inc., 918 S.W.2d 453, 457 (Tex. 1996) (plaintiff barred by limitations could have detected defendant’s theft by using document control logs). 23 Schalk v. State, 823 S.W.2d 633, 637 (Tex. Crim. App. 1991) (describing exit interviews with terminating employees to emphasize non-disclosure of confidential information). 24 979 S.W.2d 609 (Tex. 1998).

Protecting Trade Secret 12-4 and Confidential Information court must engage in a burden-shifting analysis to determine when a party has a right to access the other’s trade secret.25 First, the party resisting discovery must establish that the information is a trade secret.26 After this burden has been met, the burden shifts to the party seeking disclosure, who must “establish that the information is necessary for the fair adjudication of its claims.”27 To meet this burden, the party seeking disclosure of a trade secret must display more than “mere relevance . . . or the . . . privilege would be meaningless.”28 Rule 507 “clearly contemplates a heightened burden for obtaining trade secret information.”29 Only after this burden is met can the trial court balance the proven “need” against the harm that would potentially be caused by the disclosure, and require the disclosure of a trade secret–with or without a protective order.30

The question arises then – what does it mean to be “necessary for a fair adjudication” of a claim? In In re Continental Tire, the court did not attempt to state conclusively what would or would not be considered necessary for a fair adjudication of a claim, holding instead that the application of the test would depend on the circumstances presented. In that case, the plaintiffs in a tire failure suit sought Continental Tire’s tire formula – its “skim stock” formula – in order to prove that the tire was defective. But the uncontroverted evidence from the defendant’s expert was that the physical properties of a tire could not be determined from an examination of a compound formula; rather, the finished tire itself must be tested. Therefore, there was no evidence that a defect in skim stock could be proved using the formula for its components. Further, the plaintiffs had no other manufacturer’s formula to compare to the defendant’s formula, so one could not tell from the formula itself whether it was better or worse than any other formula. Finally, the court held, the plaintiffs had offered no evidence to support for their theory that the skim stock formula would show whether sulfur found on the defective tire was a component of the skim stock or had been improperly introduced during manufacture. The court accordingly held that the plaintiffs had failed to show that the skim stock formula was necessary for fair adjudication of its product liability case.

25 Id. at 613. 26 Id. 27 Id. 28 Id. at 611. 29 Id. 30 Id.

In In re Bridgestone/Firestone, Inc.,31 the court was pressed to further define what was “necessary to a fair adjudication” of the claim but concluded once again that it was a fact-specific inquiry. The court rejected Firestone’s argument that the test should preclude discovery of trade secret information unless the requesting party could not prevail without it. However, the court also held that a party seeking trade secret information in discovery cannot merely assert that it would be unfair to proceed without it but must demonstrate with specificity exactly how the lack of the information will impair the presentation of the case on the merits to the point that an unjust result is a real, rather than a merely possible, threat. In In re Bridgestone, the plaintiffs made many of the same arguments that the plaintiffs in In re Continental General Tire had, and fared no better. In addition, their argument showed that plaintiffs had been successful in many defective tire cases even without the skim stock formula, a fact tending to show that the formula was not necessary for the fair adjudication of their claims.

Justice O’Neill’s concurring opinion in In re Bridgestone/Firestone sought to define more particularly the instances in which discovery of a trade secret would be necessary for a fair adjudication of a cause. First, Justice O’Neill stated, trade secret information is generally discoverable when not allowing discovery would “significantly impair” a party’s ability to establish or rebut a material element of a claim or defense. A party’s ability is “significantly impaired” when the information is unavailable from any other source and no adequate alternative means of proof exist. Second, Justice O’Neill stated, discovery is necessary when the party seeking trade secret information could not knowledgeably cross-examine opposing witnesses without it. Finally, in the Justice’s opinion, discovery is necessary when the party’s experts would be unable to formulate opinions supported by an adequate factual foundation. So far, though, no cases have cited Justice O’Neill’s concurring opinion in deciding whether the party had proven that trade secret information was “necessary for a fair adjudication” of its claim or defense.

It appears that the threshold is high: all reported cases citing In re Continental General Tire have either concluded that the trial court abused its discretion in ordering the production of trade secret information, or affirmed the trial court’s denial of access to such data.

Justice Hecht’s concurring opinion in In re Kuntz32 held that even if the plaintiff had properly sought discovery of trade secret documents from their

31 106 S.W.3d 730, 732 (Tex. 2003). 32 124 S.W.3d 179 (Tex. 2003).

Protecting Trade Secret 12-5 and Confidential Information

owner rather than from her former husband, she would not be entitled to production of those documents because she had not established that they were “necessary to the fair adjudication” of her claims. In that case, the Texas Supreme Court considered whether a trial court abused its discretion by issuing an order that required Hal Kuntz to produce documents that he had access to at his place of employment, CLK Company, L.L.C. (“CLK”). CLK, a geological and geophysical consulting company, evaluated oil and gas prospects for McMoRan Oil & Gas, L.L.C. (“MOXY”). The documents sought – referred to as Letters of Recommendation, or LORs – were letters recommending that particular prospects be developed. Over 1,700 letters had been written during the marriage; it was undisputed that MOXY would drill only five to fifteen of the prospects a year.

The underlying suit had been brought by Hal’s ex-wife, Vesta, to enforce a division of property incident to divorce. As part of the division of property, Hal – who was a partner in and board member of CLK – was awarded future assignments of interest in oil and gas property, subject to Vesta’s 25% of all overriding royalty interests. Vesta sought to obtain all Letters of Recommendation Hal had written while the couple was married.

The majority opinion turned on the fact that, under Texas Rule of Civil Procedure 192.3(b), a party must produce only documents within its “possession, custody, or control.” The majority opinion held that mere access to the LORs – which Hal assuredly had as the general manager and a minority owner in CLK – did not amount to possession, custody or control of the documents. But because Vesta could seek production of the LORs from MOXY itself under Texas Rule of Civil Procedure 205, which applies to discovery from nonparties, Justice Hecht further held in his concurring opinion that the LORs were not necessary for a fair adjudication of Vesta’s cause.

First, Vesta argued that producing all the LORs would eliminate future disputes over her right to payment. Justice Hecht disagreed, saying that Vesta must trust Hal to pay her what is due or else monitor MOXY’s recorded assignments to him and inquire whether they have resulted in payments to him. Second, Vesta argued that deferring production of the LORs until wells are drilled gave Hal a financial incentive to lie about the existence of LORs. Justice Hecht wrote that suspicions do not present a “real, rather than a merely possible, threat” to a fair adjudication of Vesta’s rights. Finally, Vesta argued that the LORs could be lost. Justice Hecht rejected that argument as well because Vesta’s claims depend on the LORs themselves rather than extrinsic evidence. Further, even if some evidence could be lost, Vesta had

not shown how that eventuality justified disclosure of a large amount of irrelevant trade secret information.

Similar results have occurred in the courts of appeals. In John Paul Mitchell Systems v. Randalls Food Markets, Inc.,33 Paul Mitchell sued Randalls Food Markets, Inc. for selling Paul Mitchell products, which are intended to be sold only through its exclusive distribution system. Jade Drug Company, Inc. (“Jade”), who was Randall’s only supplier of Paul Mitchell products but who was not an authorized Paul Mitchell distributor, intervened. The trial court refused to order Jade to produce its list of suppliers of Paul Mitchell’s products. The Austin Court of Appeals held that the trial court did not abuse its discretion in protecting the list because the trial court could have determined that Paul Mitchell had other methods of tracing products sold by Jade back to certain distributors in its system. Curiously, the basis for the court’s ruling that the information was not necessary to a fair adjudication of the cause – that an alternate means of discovering the information was available – would also tend to show that the information was not “trade secret.”

In re Leviton Mfg. Co., Inc., involved a wrongful death and survival action based upon product liability theories after an individual died while mowing his yard with an electric lawn mower. The plaintiffs sued (among others) Leviton, who manufactured the electrical outlet into which the mower was plugged. The plaintiffs sought production of information regarding and prototypes of two items for which patent applications were pending. Leviton had manufactured the allegedly defective product at issue in the case at least twelve years before it made the items sought in the motion to compel. Further, Leviton’s expert testified that the patent pending items sought in discovery were different products from the item that had allegedly caused the accident.34 The court of appeals therefore held that the trial court abused its discretion in ordering production of the information and prototypes.

In In re Frost35 the plaintiff in a breach of contract suit sought a trade secret customer list.36 The plaintiff argued that it wanted to discuss the defendant’s “custom and trade and usage” with the customers, but presented no evidence to support a finding that the information was necessary for a fair adjudication of the

33 17 S.W.3d 721, 739 (Tex. App.–Austin 2000, pet. denied). 34 1 S.W.3d 898, 903 (Tex. App.–Waco 1999, no pet.). 35 998 S.W.2d 938, 939 (Tex. App.–Waco 1999, no pet.). 36 Id.

Protecting Trade Secret 12-6 and Confidential Information claims.37 Therefore, the court of appeals held that the trial court abused its discretion by ordering the list to be produced.

In re Continental Tire North America, Inc.38 – another products liability case involving a defective tire – the Beaumont Court of Appeals held that the trial court abused its discretion in ordering that the tire company allow the plaintiff to tour its North Carolina plant because the plaintiff did not indicate what facts she expected to discover from touring that plant nor explain how the tour would assist her in prosecuting her cause of action.

2. Further, A Trade Secret Is Discoverable Only

If The Claim To Which The Information Is Relevant Is Recognized By Law. In re Continental Tire held that the party seeking

the trade secret information had to show that the information was necessary for a fair adjudication of its claim. In In re Bass, the court took that one logical step further: not only must the information requested be relevant to the cause of action alleged, but the cause of action alleged must be a viable cause of action before the plaintiff can obtain trade secret information. Although that proposition has enormous logical appeal, it was unprecedented in trade secret law.39 In that case, the plaintiffs had conveyed real property to Bass through a general warranty deed. Bass owned 100% of the surface and 100% of the minerals in the ground, subject to a small nonparticipating royalty that had been reserved by the plaintiff’s parents when they partitioned property left to them by plaintiff’s grandparents. The nonparticipating royalty interest owners (“NPRI’s) who had conveyed the property to Bass sued, claiming that Bass had a duty to develop his property for their benefit, and that he had breached a fiduciary duty by not so developing. In discovery, the NPRIs obtained an order compelling Bass to produce both seismic data obtained by a seismic study of the property, and the interpretations of that seismic data. Bass sought review of that order by mandamus.

The Texas Supreme Court observed that, in order for trade secret information to be material to a litigated

37 Id. 38 74 S.W.3d 884, 886 (Tex. App.–Eastland 2002, no pet.). 39 In Tilton v. Marshall , 925 S.W.2d 672 (Tex. 1996), the Court held that the trial court abused its discretion by not dismissing claims against a defendant that would, in effect, try the defendant’s religious beliefs, and then held that the defendant’s tithing records were not discoverable because the documents were not relevant to any remaining fraud claim.

claim or defense, that claim or defense must exist.40 The court held first that “an implied covenant to develop a mineral estate has never been read into general warranty deeds in Texas because the parties’ intent in transferring a fee simple absolute estate could rarely, if ever, be said to place the grantor in a position to develop the land for the grantee.”41 The court further held that Bass could not have breached a fiduciary duty because he had not leased his land to himself or anyone else. Accordingly, the Bass court conditionally granted Bass’s petition for writ of mandamus, holding that the trial court had abused its discretion in ordering the production of the seismic data and the interpretations of that data because that trade secret information was not necessary to prove a cognizable cause of action.

After In re Bass, Texas is in line with other state courts, such as the highest courts of Alabama and Nevada, which will issue a writ of mandamus directing a trial court to dismiss a cause for failure to state a claim when substantial rights of the defendants – such as the preservation of privileged information – are jeopardized.42 Federal courts have similarly held that facial challenges to the legal sufficiency of a claim or defense, such as a motion to dismiss for failure to state a claim for relief, must be resolved before discovery begins,43 and that the failure to consider and rule on significant pretrial motions before issuing dispositive orders can be an abuse of discretion. 44

B. Protecting Trade Secrets Produced In

Discovery. Further complications arise if the person seeking

trade secret documents clears the hurdle of In re Continental Tire, so that the documents must in fact be produced in a civil proceeding. Texas Rule of Civil Procedure 76a establishes a rigorous procedure to be 40 113. S.W.3d at 743. 41 113 S.W.3d at 743 (quoting Danciger Oil & Ref. Co. v. Powell, 154 S.W.2d 632 (Tex. 1941). 42 State v. Eighth Judicial Dist. Court ex rel. County of Clark , 42 P.3d 233, 237 (Nev. 2002) (granting a petition for writ of mandamus because plaintiffs claims either lacked merit or could not be sustained); Ex parte City of Birmingham, 624 So.2d 1018, 1019-1020 (Ala. 1993) (same). 43 Chudasama v. Mazda Motor Corp ., 123 F.3d 1353, 1367 (11th Cir. 1997). 44 See, e.g., In re School Asbestos Litig., 977 F.2d 764, 792-93 (3rd Cir. 1992) (granting writ of mandamus as remedy for dis trict court’s “arbitrar[y] refus[al] to rule on a summary judgment motion); McDonnell Douglas Corp. v. Polin, 429 F.2d 30, 31 (3rd Cir. 1970) (directing district court to consider and rule on motion to transfer before discovery on the merits of the case).

Protecting Trade Secret 12-7 and Confidential Information

followed in order to protect “court records” from public disclosure. A trial court must determine whether the documents in question are “court records” in order to decide whether a Rule 76a hearing and order are necessary.45 When a party moves for a protective order, the trial court need not consider whether the documents are “court records” unless requested to do so by one of the parties.46 The court may, however, raise the issue on its own motion. 47 The burden of showing the documents are “court records” is on the party seeking to invoke the requirements of Rule 76a.48

1. Documents Not Admitted Into Evidence

Documents that reveal trade secret information and that are produced but not filed in court are protected by Texas Rule of Civil Procedure 76A2.(c), which generally excludes trade secrets from the definition of court records. Therefore, this class of documents can be protected by a protective order without going through the Rule 76a procedures.49

2. Documents Admitted Into Evidence.

However, once a document becomes a “court record” it can be protected only if Rule 76a’s stringent test is met. Once the document is a court record, its trade secret status is only a factor to be considered in applying the sealing standard of Rule 76a. Under that standard, a court record may be sealed upon a showing of (1) a specific, serious and substantial interest which clearly outweighs the presumption of openness and any probable adverse effect that sealing will have upon the general public health or safety, and (2) no less restrictive means than sealing records will adequately and effectively protect the specific interest asserted.

It is unclear what it may take to prove that there is no less restrictive means to protect trade secret documents. In Compaq Computer Corp. v. Lapray,50 the Beaumont Court of Appeals rejected Compaq’s assertion that sealing court records that contain predominantly trade secret information is the only way

45 General Tire, Inc. v. Kepple, 970 S.W.2d 520, 525 (Tex. 1998). 46 Id. 47 Id. 48 Roberts v. West, 123 S.W.3d 436, 440 (Tex. App.–San Antonio 2003, pet. denied); Upjohn v. Freeman, 906 S.W.2d 92, 96 (Tex. App.–Dallas 1995, no writ). 49 Roberts, 123 S.W.3d at 440 (party seeking protection may move for a protective order under Rule 192.6 if the documents are not “court records”). 50 75 S.W.3d 669, 674 (Tex. App.–Beaumont 2002, no pet.).

that “can adequately and effectively protect a party’s interest in its confidential information and trade secrets. According to the Compaq court, that position would totally eliminate the “no less restrictive means” provision from Rule 76a.

Under Rule 76a, court records may be sealed only upon a party’s written motion, stating that a hearing will be held in open court on a motion to seal court records in that specific case, that any person may intervene and be heard concerning the sealing of court records, and identifying the time and place of the hearing. The hearing cannot be held less than 14 days after the notice.51 Any person may intervene as a matter of right at any time to seal or unseal court records.

V. PROTECTING TRADE SECRET AND

CONFIDENTIAL BUSINESS INFORMATION SUBMITTED TO A STATE AGENCY

A. Protection Under The Texas Public Information Act The Public Information Act (“PIA”) contains a

number of exceptions listed at sections 552.101 through 552.142 of the PIA.52 The exceptions most likely to apply to information relating to oil and gas operations are the exceptions that protect information that would benefit a competitor or bidder, trade secrets, confidential business information, and geographical and geological information. 1. Procedures for Protecting Third Party

Information Section 552.305 of the PIA establishes the

procedure that allows an interested person to seek to protect its trade secret or confidential commercial information. Under section 552.305, the agency that received the request for documents must determine if a third party’s privacy rights or property rights would be affected by the release of the documents. If the agency makes that determination, it may decline to produce to the documents until it obtains an Attorney General’s opinion. However, the agency must send copies of the documents for review to the Attorney General by no later than the fifteenth business day after the receipt of the request, along with written comments stating why the exceptions apply, a copy of the request, and evidence of the date of receipt.

51 Roberts v. West, III , 123 S.W.3d 436 (Tex. App.–San Antonio 2003, pet. denied) (trial court erred by holding hearing on motion to unseal records before the 14-day period for public hearing had passed). 52 See TEX. GOV’T CODE ANN. §§ 552.101-.144 (Vernon Supp. 2004).

Protecting Trade Secret 12-8 and Confidential Information

The agency must notify the third party of the request for the information and of its right to comment on whether the information should be released not more than ten business days after the date the agency receives the request. The affected third party must file its comments with the Attorney General’s office within ten business days of receipt of the agency’s letter.

By statute, the Attorney General’s office is required to determine whether the agency must release the information within 45 business days of the day the agency asked for a determination, although it can for cause extend that period by 10 business days.53

If the Attorney General determines that information that an affected party believes is trade secret must be released, that party can sue the Attorney General to prohibit the release of the information.54 In any suit filed under chapter 552, the court may order that the information may be discovered only under a protective order until a final determination is made.55

A number of procedural traps exist: • The agency must first recognize that the

information affects private property interests, or the procedural protections of section 552.305 are not invoked.

• The agency – not the third party – must submit the documents for review to the Attorney General.56

• The agency must submit the documents by the statutory deadline; 57 however, its failure to do so cannot adversely affect the third party’s rights.58

• Although the third party must send the requester with a copy of its brief to the Attorney General,59 the requester is not similarly required to serve its response to the third party.

53 See TEX. GOV’T CODE ANN. § 552.306 (Vernon Supp. 2004) 54 See TEX. GOV’T CODE ANN. § 552.325 (Vernon Supp. 2004). 55 See TEX. GOV’T CODE ANN. § 552.322 (Vernon 1998). 56 See TEX. GOV’T CODE ANN. § 552.303(a) (Vernon Supp. 2004). 57 See TEX. GOV’T CODE ANN. §§ 552.301(e)(2); 552.302 (Vernon Supp. 2004). 58 TEX. ATT’Y GEN. ORD–630 (1994) 59 See TEX. GOV’T CODE ANN. § 552.305(e) (Vernon Supp. 2004).

2. Exceptions Under The PIA. a. Information that Would Benefit a Competitor

or Bidder - Section 552.104. Section 552.104 protects information that would benefit a competitor or bidder. Although section 552.104 is similar to section 552.110(b), and is not expressly limited to governmental entities, the Attorney General has consistently held that only the governmental entity has standing to raise 552.104. (This despite the fact that section 552.305 refers to section 552.104 as a section potentially affecting third party rights). However, the third party whose private rights are also affected by a release of information is at least the incidental beneficiary of the agency’s arguments under section 552.104.

In order to protect a competitive interest under section 552.104 the governmental entity must meet two tests. First, it must demonstrate that it has a specific marketplace interest. Second, the government must demonstrate a specific threat of actual or potential harm to its interests in a particular competitive situation.60

Recently, in Informal Letter Ruling OR2003-8758, the Attorney General held that the GLO had a specific marketplace interest in administering the State Energy Marketing Program. Further, the opinion held, the GLO proved its competitive interests could be harmed by the release of information detailing from which leases gas is being purchased, the total price paid per lease, and the mmbtu or mcf price paid on each lease. Therefore, that information was protected from public disclosure. b. Confidential Commercial or Financial

Information - Section 552.110(b). Section 552.110(b) of the PIA exempts from

disclosure “[c]ommercial or financial information for which it is demonstrated based on specific factual evidence that disclosure would cause substantial competitive harm to the person from whom the information was obtained.” As discussed above, this includes information that might not rise to the level of trade secret information. To prevent disclosure of commercial or financial information, a party must show by specific fact or evidence, not conclusory or generalized allegations, that it actually faces competition and that substantial competitive injury would likely result from disclosure.61

c. Trade Secret Information - Section 552.110(a).

Section 552.110(a) of the PIA exempts trade secrets from disclosure. A trade secret is private

60 TEX. ATT 'Y GEN. ORD–593 (1991). 61 TEX. ATT 'Y GEN. ORD–661 at 5-6 (1999).

Protecting Trade Secret 12-9 and Confidential Information

property protected by the Takings Clause of the Fifth Amendment of the United States Constitution. 62 While the federal Constitution protects a trade secret, state law defines a trade secret. Despite this, the Attorney General has never cited to In re Bass or to the Restatement (Third) of Competition in any of its many opinions or letter rulings interpreting the trade secret exception. In fact, the Attorney General’s office continues to quote the former Restatement (Second)’s requirement of “continuous use”63 – a practice which one of the authors believes is erroneous.64

The Attorney General must accept a claim that information subject to the PIA is excepted from disclosure as a trade secret if a prima facie case for exemption is made and no argument is submitted that rebuts the claim as a matter of law.65 However, the Attorney General cannot conclude that section 552.110(a) is applicable unless the third party shows that the information meets the definition of a trade secret and that the necessary factors have been demonstrated to establish a trade secret claim.66 Because the Attorney General – unlike a court – cannot weigh the six Restatement factors, a third party should still seek to prove all six factors from the section 757 of the Restatement (Second) of Torts, despite the holding of In re Bass.67

In Open Records Decision 669 (2000) the Attorney General held that a digital mapping data contained in Tobin International, Ltd’s Original Texas Land Surveys and Texas Well Header databases were trade secrets excepted from public disclosure under section 552.110, as well as under 552.113.

d. Geological and Geophysical Information -

Section 552.113. Excepted information under section 552.113

includes electric logs confidential under Chapter 91 of the Natural Resources Code, geological or geophysical

62 See Ruckelshaus v. Monsanto Co., 467 U.S. 986, 104 S.Ct. 2862, 81 L.Ed. 815 (1984). 63 See, e.g., Informal Letter Ruling No. OR2004-6981 (August 17, 2004) (“ A trade secret is a process or device for continuous use in the operation of the business. Generally it relates to the production of goods, as for example, a machine or formula for the production of an article.”). 64 The other author expresses no opinion. 65 TEX. ATT 'Y GEN. ORD–552 (1990). 66 TEX. ATT 'Y GEN. ORD–402 (1983). 67 See, e.g ., Op. Tex. Att'y Gen. Nos. JC-0020 (1999) at 2 ("[I]nvestigation and resolution of fact questions . . . cannot be done in the opinion process."); DM-98 (1992) at 3 ("[Q]uestions of fact . . . cannot be resolved in the opinion process.").

information or data (except information filed in connection with an application or proceeding before an agency), and confidential material such as well logs, geological, geophysical, geochemical and other data filed with the General Land Office. However, the confidential material filed with the General Land office is public information on the later of (1) five years from the filing date of the confidential material, or (2) one year from the expiration, termination, or forfeiture of the lease for which the confidential material was filed. Section 552.113 specifically provides that the section is not exclusive, and any person may also claim that the material is excepted as trade secret or commercial information or any exception under law.

The Attorney General has held that section 552.113(2) protects from disclosure only (i) geological and geophysical information regarding the exploration or development of natural resources that is (ii) commercially valuable.68

Interestingly, either the third party submitting the information or the state agency involved can raise section 552.113. In Open Records Decision No. 627, Mobil, the party that had submitted a correlation log in conjunction with a state lease agreement, did not oppose the release of the information. Accordingly, the burden fell on the GLO to explain why the correlation log was commercially valuable.

B. Confidential Information Under Statutes

Particular to the Geological and Geophysical Information. Under sections 52.190 and 53.081 of the Texas

Natural Resources Code, information submitted to the School Land Board in order to apply for a lease is not subject to the Public Information Act until a year after the expiration, termination, or forfeiture of a lease granted pursuant to the section.69 Section 91.553 of the Texas Natural Resources Code establishes various periods of confidentiality for electric logs submitted to the Railroad Commission. After an initial period of one year, the period of confidentiality may be extended once for an additional two-year period.

C. Confidential Information Under Texas’

Homeland Security Act. The Texas Homeland Security Act, codified at

chapters 418 and 421 of the Texas Government Code, provides that certain types of information deemed critical to the security of the state is exempt from disclosure under the PIA. Section 421.001 defines “critical infrastructure” more broadly than do the

68 TEX. ATT’Y GEN. ORD–627 (1994). 69 TEX. NAT . RES. CODE Ann. §§ 52.190, 53.081 (Vernon 2001).

Protecting Trade Secret 12-10 and Confidential Information federal acts: under Texas law, critical infrastructure is “all public or private assets, systems, and functions vital to the security, governance, public health and safety, economy, or morale of the state or the nation.” The following exceptions may be applicable:

Information relating to the construction or assembly of weapons. Section 418.178 provides that information is confidential if it is information collected, assembled, or maintained by or for a governmental entity and (1) is more than likely to assist in the construction or assembly of an explosive weapon or a chemical, biological, radiological, or nuclear weapon of mass destruction; or (2) indicates the specific location of (A) a chemical, biological agent, toxin, or radioactive material that is more than likely to be used in the construction or assembly of such a weapon; or (B) unpublished information relating to a potential vaccine or to a device that detects biological agents or toxins.

Certain information prepared for the United States. Section 418.180 provides that information, other than financial information, in the possession of a governmental entity is confidential if the information is part of a report to an agency of the United States, relates to an act of terrorism or related criminal activity, and is specifically required to be kept confidential under Section 552.101 because of a federal statute or regulation, in order to participate in a state-federal information sharing agreement or in order to obtain federal funding.

Information relating to critical infrastructure. Section 418.181 provides that those documents or portions of documents in the possession of a governmental entity are confidential if they identify the technical details of particular vulnerabilities of critical infrastructure to an act of terrorism.

Information relating to security systems. With certain exceptions, information, including access codes and passwords, in the possession of a governmental entity that relates to the specifications, operating procedures, or location of a security system used to protect public or private property from an act of terrorism or related criminal activity is confidential. But financial information in the possession of a governmental entity that relates to the expenditure of funds by a governmental entity for a security system is public information that is not excepted from required disclosure under Chapter 552. Also, information that relates to the location of a security camera in a private office at a state agency, including an institution of higher education, is public information and is not excepted from required disclosure under Chapter 552 unless the security camera is either located in an individual personal residence for which the state

provides security or is used for surveillance in an active criminal investigation. 70

The question of which documents can be protected under the Homeland Security Act has been considered a few times by the Attorney General’s office. So far, a utility plan, drainage plan and engineering plan for a data processing center for a bank was held to be confidential, while exterior elevations, a landscape plan, and a tree survey for the same facility were not.71 Also, in Informal Letter Ruling No. OR2004-0488, the Attorney General concluded that the City of Irving must release information regarding the location of TXU's underground gas lines, because information of that type had been and remains available to the public, both commercially and from the Railroad Commission.

A caveat: The Attorney General’s office has held that a governmental entity’s failure to submit a request by the statutory deadline in section 552.301(e) waives the governmental entity’s right to withhold the information, even if the entity asserts the information is protected under the Homeland Security Act. Although both by statute and long-standing precedent the presumptive waiver can be overcome by showing a “compelling reason why the information should not be disclosed,” 72 apparently the protection of critical infrastructure is not one of those compelling reasons.73

VI. PROTECTING INFORMATION

SUBMITTED TO FEDERAL AGENCIES. A. Protecting Information Submitted Under the

FOIA Exemptions. 1. Procedure For Protecting Information.

Unlike the state Public Information Act, the Freedom of Information Act does not by statute establish procedures for protecting a third party’s rights. Instead, those rights are protected by executive order. Under Executive Order No. 12,600,74 all executive departments and agencies subject to the FOIA are directed to promulgate specific regulations by which they must afford basic procedural protections

70 Other sections protect information relating to emergency response providers (Section 418.176), and information relating to certain encryption codes and security keys for communications systems (Section 418.179). 71 Informal Letter Ruling No. OR2004-5232 (June 25, 2004). 72 TEX. GOV’T CODE § 552.302 (Vernon Supp. 2004). 73 Informal Letter Ruling No. OR2004-2451 (March 29, 2004). The requestor sought a copy of the current water distribution map and flush valve report. 74 Exec. Order No. 12,600, 52 Fed. Reg. 23781 (1987), codified at C.F.R. 235 (1987 Comp.), and reprinted in 5 U.S.C. § 552 note (2000).

Protecting Trade Secret 12-11 and Confidential Information

to all persons or entities that submit “confidential commercial information” to them. That term is defined in the Order as “records provided to the government by a submitter that arguably contain material exempt from release under Exemption 4 of the [FOIA], because disclosure could reasonably be expected to cause substantial competitive harm.”75 Each agency’s regulations must establish procedures by which business submitters may designate their information as “confidential commercial information” at the time of its submission to the agency. These designations may be deemed to expire after the passage of a time period specified in an agency’s regulations, but post-submission designations also are to be permitted. The head of each executive department or agency must provide the submitter notice whenever the department or agency determines that it may be required to disclose records: (i) designated pursuant to this subsection or (ii) the disclosure of which the department or agency has reason to believe could reasonably be expected to cause substantial competitive harm.

2. FOIA Exemptions That May Protect Trade

Secrets. Several FOIA exemptions may protect trade secret

information, depending on the type of information involved.

Exemption 1 protects the release of secret records related to national defense and foreign policy. 76 It provides that an agency can withhold matters that are “(A) specifically authorized under criteria established by an Executive order to be kept secret in the interest of national defense or foreign policy and (B) are in fact properly classified pursuant to such Executive order.”

Exemption 4 protects the release of trade secrets and similar proprietary commercial or financial information. 77 For purposes of Exemption 4, the Court of Appeals for the District of Columbia Circuit in Public Citizen Health Research Group v. FDA,78 adopted a narrow common law definition of the term “trade secret” that differs from the broad definition used in the Restatement (Second) of Torts. In Public 75 Id. 76 Section 552(b)(1) exempts from FOIA information “(A) specifically authorized under criteria established by an Executive order to be kept secret in the interest of national defense or foreign policy and (B) are in fact properly classified pursuant to such Executive order.” 5 U.S.C. § 552(b)(1). 77 Section 552(b)(4) exempts from FOIA, “trade secrets and commercial or financial information obtained from a person and privileged or confidential.” 5 U.S.C. § 552(b)(4). 78 704 F.2d 1280, 1288-89 (D.C. Cir. 1983).

Citizen, the term “trade secret” was narrowly defined as “a secret, commercially valuable plan, formula, process, or device that is used for the making, preparing, compounding, or processing of trade commodities and that can be said to be the end product of either innovation or substantial effort.” This definition requires that there be a “direct relationship” between the trade secret and the productive process. Because the definition is so narrow, most information falls into the exemption for “commercial or financial information.”

Two cases from the District of Columbia Circuit court define confidential commercial and financial information. National Parks and Conservation Ass’n v. Morton,79 established the following two-part test:

[C]ommercial or financial matter is ‘confidential’ for purposes of the exemption if disclosure of the information is likely to have either of the following effects: (1) to impair the Government’s ability to obtain necessary information in the future; or (2) to cause substantial harm to the competitive position of the person from whom the information was obtain.

Critical Mass Energy Project v. Nuclear Regulatory Commission,80 reaffirmed the two-part test in National Parks but distinguished between information that was submitted to an agency on a voluntary as opposed to a compulsory basis. The court held that “Exemption 4 protects any financial or commercial information provided to the Government on a voluntary basis if it is of a kind that the provider would not customarily release to the public.”

Exemption 9 protects records containing geological data involving wells.81 The protection for “geological data” extends to information regarding water wells as well as to information regarding oil wells.82

In addition, Exemption 2 may protect trade secret or confidential information that is incorporated into agency documents. Exemption 2 protects “records 79 498 F.2d 765 (D.C. Cir. 1974) 80 975 F.2d 871 (D.C. Cir. 1992). 81 Section 552(b)(9) exempts from FOIA “geological and geophysical information and data, including maps, concerning wells.” 82 Starkey v. U.S. Dep’t of Interior, 238 F.Supp.2d 1188, 1196 (S.D. Cal. 2002) (BIA could redact three pages of the fifty-eight page report to exclude information in table and narrative form about ground water inventories, well yield in gallons per minute, and the thickness of the decomposed granite aquifer under exemption (b)(9)).

Protecting Trade Secret 12-12 and Confidential Information related solely to the internal personnel rules and practices of an agency.”83 Even though exemption 2 does not on its face appear to protect information regarding critical infrastructure, the Department of Justice has taken the position that “[a]ny agency assessment of, or statement regarding, the vulnerability of a such a critical asset should be protected pursuant to Exemption 2.”84 However, the viability of such a approach is uncertain, given decisions such as that in Living Rivers, Inc. v. U.S. Bureau of Reclamation,85 which held that inundation maps created by the Bureau of Reclamation could not be withheld under Exemption 2 because the “maps neither provide instructions nor contain rules or practices for BOR personnel.”

Generally, a federal agency has the discretion to release information even if it falls within one of the exemptions. 86 However, because the Trade Secret Act, discussed below, prohibits the release of trade secret information, information that falls into Exemption 4 must not be released.

B. Protecting Information Submitted under the

Homeland Security Act. 1. The Homeland Security Act Encourages the

Voluntary Submission of Critical Infrastructure Information The overwhelming percentage of “critical

infrastructure” – estimated at 85 – 90% of total assets87 – belongs to private entitie s. Under the Homeland Security Act, private entities are asked to voluntarily share information regarding their vulnerabilities with the federal government to facilitate the protection of that infrastructure.

Why would private industry submit information regarding its vulnerabilities to the government? In the government’s eyes, the level of a private entity’s investment in security is determined by (1) what is known about the risk environment, and (2) what is economically justifiable and sustainable in a

83 Section 552(b)(2) exempts from FOIA information “related solely to the internal personnel rules and practices of an agency.” 84 Department of Justice 2001 FOIA Post 19; see also 68 Fed. Reg. 9857, 9871 (March 3, 2003). 85 272 F.Supp.2d 1313, 1318 (D. Utah 2003). 86 Chrysler Corp. v. Brown, 441 U.S. 281, 293, 99 S. Ct. 1705, 60 L. Ed. 208, (1979); Pennzoil Co. v. Federal Power Comm'n, 534 F.2d 627, 630 (5th Cir. 1976) 87 Joseph Summerill, Is it Safe for Your Client to Provide the Government with Homeland Security Data? , 50 FED. LAW. 24 (Jan. 2003).

competitive marketplace.88 After September 11, the federal government anticipates that the private sector will look to the federal government to help inform its security investment decisions.89 Similarly, the private sector will require assistance when the threat exceeds its capability to protect itself beyond a reasonable level of security investment. The federal government promises to “collaborate with public - and private-sector entities to assure the protection of nationally critical infrastructures and assets, provide timely warnings and help assure the protection of infrastructures that are specifically threatened, and promote an environment in which the private sector can better carry out its specific protection responsibilities.” 90

The HSA defines “critical infrastructure” (by reference to the definition in the Patriot Act of 2001) 91 as the “systems and assets, whether physical or virtual, so vital to the United States that the incapacity or destruction of such systems and assets would have a debilitating impact on security, national economic security, national public health or safety, or any combination of those matters.”92

Subtitle B of the Homeland Security Act, beginning at section 211, is known as the “Critical Infrastructure Information Act of 2002,” or “CII Act of 2002,” which is now codified at 6 U.S.C. 131. Information that is not customarily in the public domain qualifies for the protections afforded by the CII Act of 2002, if it relates to:93

• actual, potential, or threatened interference

with critical infrastructure by either physical or computer-based attack or similar conduct that violates federal, state, or local law, harms interstate commerce, or threatens public health or safety; or

• the ability of critical infrastructure to resist such interference, including any planned or past assessment, projection or estimate of the vulnerability of critical infrastructure or a protected system, including security testing,

88 The National Strategy for Physical Protection of Critical Infrastructures and Key Assets, available at http://www.whitehouse.gov/pcipb/physical.html. 89 Id. 90 Id. 91 Pub. L. No. 107-56, 115 Stat. 272 (2001), codified at 42 U.S.C. § 5195(c)(e). 92 Homeland Security Act of 2002, H.R. 5005, 107th Cong. § 2(4) (2002), codified at 6 U.S.C. § 101(4). 93 6 U.S.C. § 131(3) (Supp. 2004).

Protecting Trade Secret 12-13 and Confidential Information

risk evaluation thereto, risk management planning, or risk audit; or

• any planned or past operational problem or solution regarding critical infrastructure including repair, recovery, reconstruction, insurance, or continuity.

“Voluntary,” in the case of the submission of CII to a covered federal agency, “means the submittal thereof in the absence of such agency’s exercise of legal authority to compel access to or submission of such information and may be accomplished by a single entity or an Information Sharing and Analysis Organization on behalf its members.”94 However, a voluntary submission protected under the CII Act of 2002 does not include information submitted to the SEC or filed with federal banking regulators pursuant to the Securities Exchange Act of 1934, or information accompanied by a solicitation of an offer or a sale of securities. Further, a voluntary submission does not include information or statements submitted or relied upon as a basis for making licensing or permitting determinations, or during regulatory proceedings.

To encourage the voluntary submission of information, the CII Act of 2002 provides that such information:

• is exempt from disclosure under FOIA, • is exempt from agency rules regarding ex

parte communications with a decision making official;

• shall not, without the written consent of the person submitting such information, be used directly by such agency or any other federal state or local authority or any third party, in any civil action arising under federal or state law if such information is submitted in good faith;

• shall not, without the written consent of the person or entity submitting such information, be used or disclosed by any officer or employee of the United States for purposes other than the purposes of the Act, except in further or an investigation or prosecution of a criminal act, or to a House of Congress, or the Comptroller General, in the course of the performance of the duties of the General Accounting Office;

• shall not, if provided to a state or local government, be made available under the state or local public information act, otherwise be disclosed or distributed to any party without the written consent, be used for

94 6 U.S.C. § 131(7) (Supp. 2004).

any purpose other than the protection of critical infrastructure, or in furtherance of an investigation of the prosecution or a criminal act, and

• does not constitute a waiver of applicable privilege or protection provide under law, such as trade secret protection.

A written submission of CII must be accompanied by wording substantially similar to the following:

“This information is voluntarily submitted to the Federal Government in expectation of protection from disclosure as provided by the provisions of the Critical Infrastructure Information Act of 2002.”95

An oral submission of information is protected if a similar written statement is submitted without a “reasonable period” following the oral communication.

2. Information Sharing and Analysis Centers

(“ISACs”) Presidential Decision Directive 63, signed by

President Clinton in 1998, encouraged critical infrastructure industries to organize Information Sharing and Analysis Centers (ISACs).96 Existing ISACs include those for the financial services sector, the telecommunications sector, the information technology sector, the railroad sector, the energy sector, the electricity sector, the water supply sector, and the food industry sector. The existence of ISACs is recognized in the Homeland Security Act, which refers to them as “information sharing and analysis organizations.”97

ISACs serve as a mechanism for gathering, analyzing, and disseminating private sector information to their members. ISACS are expected to share important information about vulnerabilities, threats, intrusions, and anomalies.

Companies in the oil, natural gas, and electric power industries are eligible to join the Energy ISAC.98 Relevant energy activities include exploration, production, processing, transmission, distribution, transportation, storage, trading, supervisory control and data acquisition (SCADA), and e-commerce of energy

95 6 U.S.C. § 133(a)(2) (Supp. 2004). 96 Peter Lichetenbaum and Melanie Schneck, The Response to Cyberattacks: Balancing Security and Cost, 36 INT’L LAW 39 (2002) [hereinafter Lichetenbaum]. 97 6 U.S.C. § 131(5) (Supp. 2004). 98 The Energy ISAC’s website is at http://www.energyisac.com/faq.cfm.

Protecting Trade Secret 12-14 and Confidential Information commodities.99 The Energy ISAC – which is funded by the federal government – claims to provide a near-real-time threat and warning capability to the energy industry on a 24/7 basis. As a member of the ISAC, information and physical security professionals can anonymously share in an industry-wide database of electronic security threats, vulnerabilities, incidents, and solutions.100 It provides two-way sharing, so that reported incidents in the sector may be shared with other members in real time. Members voluntarily report information to the database either anonymously or on an attributed basis. The Energy ISAC Board of Trustees must approve the transfer of information from the Energy ISAC to any other entity.

The Energy ISAC claims to provide energy companies with:101

• A wide range of information on threats and

vulnerabilities (physical, cyber-security, and interdependencies).

• Early notification of physical and cyber-threats.

• Possible responses to those threats (e.g., information technology solutions and patches, and physical and information security tips).

• Alert conditions. • Information on best practices.

Although the HSA protects the trade secret status of information directly submitted to the Department of Homeland Security, it is unclear whether the HSA would protect information submitted first to an ISAC and then to the Department of Homeland Security. Further, it is unclear whether information submitted to the ISAC itself would retain its trade secret status, even if not further divulged to the Department of Homeland Security, because it has been divulged to others. The ISAC member agreement should, at the least, provide that the information is confidential, and should be otherwise adequately protected.

C. Extra-FOIA Procedures To Protect Or Obtain

Information: FERC’s Regulations Regarding The Submission Of Critical Energy Infrastructure Information.

FERC has established a procedure for protecting and accessing information that it defines as “critical energy infrastructure information,” or CEII. This is presumably information that would not qualify as CII because it is submitted to FERC in connection with an

99 Id. 100 Id. 101 Id.

application or for some other purpose under FERC’s jurisdiction. This procedure for obtaining CEII is unlike FOIA’s procedure because it allows FERC to consider why the requestor needs the information, and to require that the requestor sign a nondisclosure agreement before it receives the CEII.

In order to qualify for protection as CEII, the information must be useful to terrorists in planning an attack, be exempt from disclosure under the FOIA, and not merely give the location of the infrastructure.102 Under FERC’s regulations, a filing such as a license or certificate application could contain a variety of information falling into one or more of the following categories:103

• public information, • public information that should not be

published on the Internet, • nonpublic Critical Energy Infrastructural

Information, and • other nonpublic privileged information.

FERC prefers that the company or individual filing the application segregate each type of information into separate volumes or appendices, each clearly marked with the appropriate heading, and with a cover letter explaining the treatment each volume/appendix should receive. FERC requests that:

• The public volume/appendix should be marked “Public,” even though the default treatment for unmarked documents is that it is public;

• The non-internet public volume/appendix containing non-CEII location information should be marked “Non-Internet Public”;

• The CEII volume/appendix should be marked “Contains Critical Energy Infrastructure Information--Do Not Release,” in accordance with § 388.112(b); and

• Any other nonpublic privileged volumes/appendices should be marked “Contains Privileged Information--Do Not Release.”104

Further, a filer cannot use the electronic filing process to file non-Internet public, CEII or other privileged information. Instead, any information filed electronically is presumed to be public information that can be published on the Internet.

102 See 68 Fed. Reg. 9857, 9861 (March 3, 2003). 103 Id. 104 See 68 Fed. Reg. 9857, 9862 (March 3, 2003).

Protecting Trade Secret 12-15 and Confidential Information

Electric transmission grid. The electric transmission grid differs from dams and pipelines in that FERC does not have regulatory responsibilities over the siting or licensing of these facilities. Therefore, FERC is not charged with conducting the National Environmental Policy Act (“NEPA”) reviews on these facilities. For that reason, FERC perceived a lesser need for the public as a whole to have unfettered access to location information submitted to the commission regarding the electric grid. Therefore, FERC considers Part 3 transmission system maps and diagrams used by the utility for transmission planning to be CEII.

Proposed Facilities. FERC believes that as long as basic location information is not treated as CEII, protection of other sensitive information about proposed facilities will help protect the infrastructure without interfering with the NEPA process. For example, most NEPA commenters will want to know the location of a proposed pipeline and the footprint of aboveground facilities, but few will need diagrams of valve and piping details, or flow diagrams, or need to know which building will house security and which one will house the computer operations center. Those who do have such a need may file a request for that information using the CEII request procedures in new § 388.113(d) of the Commission’s regulations.

D. A Concern: How Safe is Information in the

Government’s Databases? A concern with the widespread collection of

information, particularly electronic information, is the security of the government’s databases.105 For example, two reports issued by the Government Accounting Office (“GAO”) in 2000 sharply criticized the security of the Environmental Protection Agency’s (“EPA’s”) computer system.106 GAO stated that its review found “serious and pervasive problems that

105 Portions of this section were excerpted from Jeffrey A. Saitas and Brenda L. Clayton, Agency Data in the Information Age, Presentation to the Texas Environmental Superconference, August 5-6, 2004 [hereinafter Saitas & Clayton]. 106 See General Accounting Office, Information Security: Serious and Widespread Weaknesses Persist at Federal Agencies (Sept. 2000) GAO/AIMD00- 295 Federal Information Security (hereinafter GAO’s September 2000 Report); see General Accounting Office, Information Security: Fundamental Weaknesses Place EPA Data and Operations at Risk (July 6, 2000) GAO/AIMD00- 215 EPA Information Security (hereinafter GAO’s July 2000 Report). See also Joseph D. Jacobson, Safeguarding National Security Through Public Release of Environmental Information: Moving the Debate to the Next Level, 9 ENVTL. LAW., February 2003. [hereinafter Jacobson].

essentially rendered EPA’s agency-wide information security program ineffective,” and criticized the agency’s security program planning and management as largely a “paper exercise that has done little to substantively identify, evaluate and mitigate risks to the agency’s data and systems.”107 GAO concluded EPA’s system access controls were ineffective:

Our tests showed that EPA’s access controls were ineffective in adequately reducing the risk of intrusions and misuse. Using widely available software tools, we demonstrated that EPA’s network was highly susceptible to intrusions through the Internet and that user and system administrator passwords could be easily accessed, read, or guessed. In addition, we identified weaknesses in all of EPA’s computer operating systems that made it possible for intruders, as well as EPA employees or contractors, to bypass or disable computer access controls and undertake a wide variety of inappropriate or malicious acts. These acts could include tampering with data; browsing sensitive information; using EPA’s computer resources for inappropriate purposes, such as launching attacks on other organizations, and serious disrupting or disabling computer-supported operations. . . . In short, we identified weaknesses that if exploited, could have allowed us to control individual EPA computer applications and the data used by these applications. As such, we could have copied, changed, deleted, or destroyed information, thus rendering any security controls implemented for software used in specific EPA office networks virtually ineffective.108

GAO also reported that it was able to gain access to EPA’s major computer systems and the applications supported by them. As a result, GAO explained, it “could have browsed, altered, or deleted data associated with these applications or disrupted their operation.” As a result of GAO’s report, EPA was forced to temporarily shut down its website while it addressed the problems.109 107 GAO’s July 2000 Report at 4. 108 GAO’s July 2000 Report at 8-9. 109 Office of the Inspector General, Audit Report, Government Information Security Reform Act, Status of EPA’s Computer Security Program, Report No. 2001-P-00016 (September 7, 2001).

Protecting Trade Secret 12-16 and Confidential Information

Since September 11, 2001, the federal government has also begun to protect information relating to critical infrastructure, including computer systems. On October 16, 2001, President Bush issued an executive order on critical infrastructure protection, which declared:

The information technology revolution has changed the way business is transacted, government operates, and national defense is conducted. Those three functions now depend on an interdependent network of critical information infrastructures. The protection program authorized by this order shall consist of continuous efforts to secure information systems for critical infrastructure, including emergency preparedness communications, and the physical assets that support such systems. Protection of these systems is essential to the telecommunications, energy, financial services, manufacturing, water, transportation, health care, and emergency services sectors.110

Progress has purportedly been made, although new initiatives continue:111 a 2004 report from the Office of Management and Budget (“OMB”) identified fewer problems with the federal government’s computer systems. (But the report also showed that only 3% of FERC’s systems had been assessed for risk or had contingency plans).112 Those who are interested in OMB’s analysis of computer security systems by agency, including the protection of critical infrastructures, may obtain further information via this link: http://www.whitehouse.gov/omb/inforeg/infopoltech.html#cs

VII. REMEDIES FOR MISAPPROPRIATION OF

A TRADE SECRET A. Common Law Remedies for Misappropriating

a Trade Secret 1. Damages.

Under Texas law, trade secret misappropriation is established by showing (i) a trade secret existed, (ii) 110 Exec. Order No. 13231, 66 Fed. Reg. 53,063 (October 18, 2001). 111 See M-04-15, Memorandum of Homeland Security Presidential Directive (HSPD) - 7 Critical Infrastructure Plans to Protect Federal Critical Infrastructure and Key Resources (June 17, 2004). 112 Office of Management and Budget, FY 2003 Report to Congress on Federal Government Information Security Management (March 1, 2004).

the trade secret was acquired through a breach of a confidential relationship or discovered by improper means, and (iii) the trade secret was used without the owner’s authorization.113 One disputed issue is whether it is sufficient to show that the trade secret was disclosed, or whether the plaintiff must show that the defendant used the secret for a commercial purpose.114

Under section 16.010 of the Civil Practice and Remedies Code, a person must bring suit for misappropriation of trade secrets not later than three years after the misappropriation is discovered or by the exercise of reasonable diligence should have been discovered.115 Section 16.010 abrogates the Texas Supreme Court’s decision in Computer Associates Int'l, Inc. v. Altai,116 which had held that the discovery rule did not apply to a cause of action for misappropriation of trade secrets because the misappropriation was not inherently undiscoverable.

In addition, a number of common law remedies could remedy the wrongful use of trade secret or confidential business information, including a suit for breach of either an express or implied contract,117 interference with contractual relationships,118 breach of fiduciary duty,119 fraud and misrepresentation,120

113 Avera v. Clark Moulding, 791 S.W.2d 144, 145 (Tex. App.–Dallas 1990, no writ); Alcatel USA, Inc. v. DGI Tech., Inc., 166 F.3d 772, 784 (5th Cir. 1999); Skinner v. DVL Holdings, L.L.C . 2004 WL 113095, (2004, no pet.) 114 IBP, Inc. v. Klumpe, 101 S.W.3d 461, 476 -477 (Tex. App.–Amarillo 2001, pet denied) 115 See TEX. CIV. PRAC. & REM. CODE § 16.010 (Vernon 2002). 116 918 S.W.2d 453, 458 (Tex. 1996) 117 F.S. New Products, Inc. v. Strong Industries, Inc., 129 S.W.3d 606, 620 (Tex. App.–Houston [1st Dist.] 2004, pet. filed) (plaintiffs presented evidence that defendant breached its duty not to compete or to disclose confidential information to third parties gained through the dealership relationship); Carter v. Steverson & Co., Inc., 106 S.W.3d 161, 165 (Tex. App.–Houston [1st Dist.] 2003, pet. denied) (jury found that former employee violated the non-disclosure, non-solicitation, non-contact, and non-competition provisions of her contract). 118 Champion v. Wright, 740 S.W.2d 848, 853 -854 (Tex. App.–San Antonio 1987, writ denied) 119 Mabrey v. SandStream, Inc., 124 S.W.3d 302, 316 (Tex. App.–Fort Worth 2003, no pet.) (even absent a written contract, a fiduciary relationship arises from an employment relationship forbidding an employee from using trade secrets or confidential or proprietary information in a manner adverse to the employer); Carter v. Steverson & Co., Inc., 106 S.W.3d 161, 165 (Tex. App.–Houston [1st Dist.] 2003, pet. denied) (the jury found that former employee breached her fiduciary duty to employer and violated the non-disclosure, non-solicitation, non-contact, and non-

Protecting Trade Secret 12-17 and Confidential Information

conversion,121 unjust enrichment or constructive trust.122 2. Equitable Remedies.

It is well-settled that the owner of a trade secret may be entitled to injunctive relief as well as to damages.123 A person seeking to protect its trade secrets may seek a temporary injunction to preserve the status quo while litigation is pending, and may seek a permanent injunction once it proves its case. An applicant for a temporary injunction must plead and

competition provisions of her contract, and that defendants knowingly disclosed confidential information and misappropriated trade secrets). 120 F.S. New Products, Inc. v. Strong Industries, Inc., 129 S.W.3d 606 (Tex. App.–Houston [1st Dist.] 2004, pet. filed) (fraud claim brought by manufacturer of dump truck trailing axles against dealer was not the same cause of action as its breach of non-competition contract claim brought against dealer, where manufacturer presented evidence that when dealer signed non-competition contract dealer had no intention of performing contract.); Carter v. Steverson & Co., Inc., 106 S.W.3d 161, 165 (Tex. App.–Houston [1st Dist.] 2003, pet. denied) (jury found that former employee committed fraud against former employer and that new employer benefited from her fraudulent conduct). 121 Levine v. CMP Publications, Inc., 738 F.2d 660, 664 (5th Cir. 1984). But see Procom Cable TV Service, Inc. v. Paragon Communication , 1994 WL 406013, *4 (Tex. App.–Dallas, 1994, no writ) (trial court did not err in sustaining special exceptions because plaintiff cited no authority for the proposition that conversion is a proper cause of action for theft of trade secrets or business forms and procedures). 122 See Unikel , supra note 14, at pages 855-867. 123 K & G Oil Tool & Serv. Co. v. G & G Fishing Tool Serv., 314 S.W.2d 782 at 789 (Tex. 1458) (stating protection of trade secrets is well-recognized objective of equity and injunctive relief); Huffines, 314 S.W.2d at 770 (observing that trade secrets are entitled to protection under the equitable jurisdiction of state courts); Garth v. Staktek Corp ., 876 S.W.2d 545, 550 (Tex. App.–Austin 1994, writ dism’d w.o.j.) (injunction against trade secret violations often necessary to provide meaningful legal protection to owners of intellectual property because monetary compensation not always sufficient to protect creator of new product from unfair competition); Center. for Econ. Justice v. American Ins. Ass’n , 39 S.W.3d 337, 343 (Tex. App.–Austin 2001, no pet.) (holding injunctive relief proper to prevent a party from gaining an unfair market advantage); American. Derringer Corp . v. Bond, 924 S.W.2d 773 (Tex. App.–Waco 1996, no writ) at 778 (“The protection of a trade secret is a well-recognized objective of equity.”); Rugen v. Interactive Bus. Systems, Inc., 864 S.W.2d 548 at 551 (Tex. App.–Dallas 1993, no writ)(“Injunctive relief is recognized as a proper remedy to protect confidential information and trade secrets.”).

prove: (1) a cause of action against the defendant; (2) a probable right to the relief sought; and (3) a probable, imminent, and irreparable injury in the interim.124 A plaintiff is entitled to a permanent injunction if it can plead and prove (1) a wrongful act; (2) imminent harm; (3) irreparable injury; and (4) no adequate remedy at law.125

However, every order granting an injunction – be it temporary or permanent – must be specific in its terms and describe in reasonable detail the act or acts to be restrained.126 In a trade secret case, the injunction must also be narrowly tailored to address only the improper use of confidential or proprietary information. 127 Further, the injunction must not be “framed so broadly as to prohibit the enjoyment of lawful rights.”128 Overreaching may result in no injunction at all. In Southwest Research Institute v. Keraplast Technologies, Ltd., the court of appeals found that the injunction was overly broad, but held that it could not reform the injunction because the plaintiff had asserted a right to all information involving the protein keratin, even though keratin had been the subject of research for years. A trade secret may be protected even if a covenant not to compete is unenforceable. Even without an enforceable contractual restriction “a former employee is precluded from using for his own advantage, and to the detriment of his former employer, confidential information or trade secrets acquired by or imparted to him in the course of his employment.”129

124 Butnaru v. Ford Motor Co., 84 S.W.3d 198, 204 (Tex. 2002). 125 F.S. New Products, Inc. v. Strong Industries, Inc., 129 S.W.3d 606, 631 (Tex. App.–Houston [1st Dist.] 2004, pet. filed); Jordan v. Landry’s Seafood Rest., Inc., 89 S.W.3d 737, 742 (Tex. App.–Houston [1st Dist.] 2002, pet. denied). 126 Southwest Research Inst. v. Keraplast Technologies, Ltd. 103 S.W.3d 478, 482 (Tex. App.–San Antonio 2003, no pet.); Gonzales v. Zamora, 791 S.W.2d 258 at 267 (Tex. App.–Corpus Christi 1990, no writ). 127 Id. at 268. 128 Kulkarni v. Braeburn Valley West Civic Ass’n, 880 S.W.2d 277, 278 (Tex. App.–Houston [14th Dist.] 1994, no writ); see also Ex parte Tucci, 859 S.W.2d 1, 5-6 (Tex. 1993) (free speech “may not be restricted solely on the grounds that its exercise will have the effect of producing imminent and irreparable harm”). 129 Rugen v. Interactive Business Systems, Inc., 864 S.W.2d 548, 551 (Tex. App.–Dallas 1993, no writ) (citing Johnston v. American Speedreading Acad., Inc., 526 S.W.2d 163, 166 (Tex. Civ. App.–Dallas 1975, no writ).

Protecting Trade Secret 12-18 and Confidential Information B. State Statutory Remedies 1. Civil Remedies Chapter 134 of the Texas Civil Practice and Remedies Code – called the Texas Theft Liability Act – provides statutory civil liability for, among other actions, unlawfully appropriating property described as trade secret by Section 31.05 of the Texas Penal Code.130 A person who sustains damages resulting from the unlawful appropriation of trade secret property addressed by Texas Penal Code § 31.05 may recover actual damages as well as additional damages not to exceed $1,000. If a person prevails in a suit under chapter 134, the person shall be awarded court costs and reasonable and necessary attorney’s fees.131 So far, a handful of cases have been brought under the Act but none have been ultimately successful. 132 2. Criminal Remedies Section 31.05 of the Texas Penal Code defines a trade secret as “the whole or any part of any scientific or technical information, design, process, procedure, formula, or improvement that has value and that the owner has taken measures to prevent from becoming available to persons other than those selected by the owner to have access for limited purposes.” Section 31.05 provides that, “[a] person commits an offense if, without the owner’s effective consent,” he “communicates or transmits a trade secret.”

In order to be a trade secret under section 31.05 of the Penal Code, the owner must have taken measures to protect the information. The Texas Court of Criminal Appeals has held that a combination of employment agreements, strict plant security, restricted computer access, the non-authorization of disclosure of the subject programs and the general non-disclosure of those established trade secret status of the computer programs.133

130 See Tex. Civ. Prac. & Rem. Code § 134 (Vernon 1997 & Supp. 2001). 131 See id. § 134. 132 Molina v. Air Starter Components, Inc., 2004 WL 1277491, *1 (Tex. App.–Houston [1st Dist.] 2004, no pet.); Petka Corp. v. Puma Energy, Inc., 2002 WL 538951, *1 (Tex. App.–Houston [1st Dist.] 2002, pet. denied); IBP, Inc. v. Klumpe, 101 S.W.3d 461, 478-479 (Tex. App.-Amarillo 2001, pet. denied); see also Nature's Formula, Inc. v. Norstar Consumer Products Co., Inc., 2003 WL 23282765, *3 -4 (N.D.Tex. 2003); Alcatel USA, Inc. v. Cisco Systems, Inc., 239 F.Supp.2d 660, 673 (E.D.Tex. 2002). 133 Schalk v. State, 823 S.W.2d 633, 643 -644 (Tex. Crim. App. 1991)

C. Federal Statutory Remedies 1. The Trade Secrets Act

The Trade Secrets Act – a broadly worded criminal statute – prohibits the disclosure of much more than simply “trade secret” information and instead prohibits the unauthorized disclosure of all data protected by Exemption 4, including confidential business information. Virtually every court that has considered the issue has found that the Trade Secrets Act is “coextensive” with Exemption 4.134 The Trade Secrets Act, however, does not preclude disclosure of information if the disclosure is “authorized by law.”

The practical effect of the Trade Secrets Act is to limit an agency’s ability to use its discretion to release otherwise-exempt material, because to do so in violation of the Trade Secrets Act would be a criminal offense and also constitute “a serious abuse of agency discretion” redressable through a reverse FOIA suit. Thus, in the absence of a statute or properly promulgated regulation giving the agency authority to release the information – which would remove the disclosure prohibition of the Trade Secrets Act – a determination by an agency that information falls within Exemption 4 is “tantamount” to a decision that it cannot be released. Although the proprietor of trade secret or confidential information does not have a private right of action to enforce the Trade Secrets Act, it may seek review of an agency action that violates the Act on the ground it is “contrary to law,” under § 10 of the Administrative Procedure Act, 5 U.S.C. § 702.135 2. The Economic Espionage Act of 1996

The Economic Espionage Act of 1996136 makes trade secret misappropriation a federal crime. The EEA applies to both acts that take places outside of the United States, and to purely domestic trade secret misappropriation. The EEA reaches beyond the borders of the United States, applying to conduct committed outside the United States so long as (1) the offender is either a citizen or permanent resident alien of the United States or a U.S. corporation, or (2) the offender has committed an act in furtherance of the offense in the United States. Although section 1831 prohibits trade secret theft that benefits (or is intended to benefit) a foreign entity, section 1832 focuses on domestic violations and prohibits trade secret theft regardless of whe ther a foreign entity benefits.

134 McDonnell Douglas Corp. v. U.S. Dept. of the Air Force, 375 F.3d 1182, 1185-1186 (D.C. Cir. 2004); CNA Financial Corp. v. Donovan, 830 F.2d 1132, 1151 (D.C. Cir. 1987). 135 Chrysler Corp. v. Brown , 441 U.S. 281, 317, 99 S.Ct. 1705, 1725, 60 L.Ed.2d 208 (1979) 136 18 U.S.C. §§ 1831 –1839 (1996).

Protecting Trade Secret 12-19 and Confidential Information

Trade secret theft that is intended to benefit a foreign government, instrumentality, or agent is punishable by up to fifteen years in prison and fines of up to $500,000 for an individual and $10 million for an organization. Domestic trade secret theft is punishable by up to ten years in prison and fines of up to $500,000 for individuals and $5 million for organizations. Convictions for attempted violations and conspiracy carry the same penalties. In addition to the fines and prison terms, the EEA contains a forfeiture provision. VIII. USE AND ENFORCEABILITY OF NON-

COMPETITION AGREEMENTS Another method of protecting a company’s trade

secrets or its confidential business information is through the use of a non-competition agreement.137 A non-competition agreement is generally considered to be a restraint of trade that is disfavored. However, under appropriate circumstances, a well-written non-competition agreement can be enforced and can protect an employer’s valuable trade secrets.138 Section 15.50 of the Texas Business and Commerce Code defines the parameters of an enforceable on-competition agreement entered into or performed in this state.139 To be enforceable, the covenant must be “ancillary to or part of an otherwise

137 The enforceability of a non-competition agreement is generally governed by state law. State laws regarding the enforceability vary widely. For example, they are not enforceable in the employment context in California. See Cal. Bus. & Prof. Code § 16600. Non-competition agreements can only be used to restrict the seller of a business from starting a competing business in Louisiana. See SWAT 24 Shreveport Bossier, Inc. v. Bond, 808 So.2d 294 (La. 2001); Bail Bonds Unlimited, Inc. v. Chedville , 831 So.2d 403 (La. Ct. App. 2002). In fact, many states will not recognize choice of law provisions in an employment agreement containing a non-competition agreement and will apply the forum state’s law for determining the enforceability of the non-compete. Accordingly, employers with operations in multiple states should carefully examine whether the non-competition agreements they use in those states are enforceable in the states where the employees perform their duties. 138 While the same test for enforceability applies regardless of whether the non-competition agreement is included in a contract for the sale of a business or in an employment contract, this section focuses primarily on the non-competition agreements that are found and used in the employment context. 139 TEX. BUS. & COM. CODE §§ 15.50 et seq.; DeSantis v. Wackenhut , 793 S.W.2d 670, 679 (Tex. 1990) (holding that Texas law should be used for determining enforceability of non-competition agreement entered into in Texas despite a choice of law provision stating that Florida law would govern).

enforceable agreement at the time the agreement is made to the extent that it contains limitations as to time, geographical area, and scope of activity to be restrained that are reasonable and do not impose a greater restraint than is necessary to protect the goodwill or other business interest of the promissee.”140 A. An “Otherwise Enforceable Agreement.” An enforceable non-competition agreement must be ancillary to or part of an “otherwise enforceable agreement.” At-will employment alone is not an otherwise enforceable agreement that will support a non-competition agreement because it may be terminated at any time.141 Thus, any promise conditioned on at-will employment of an indeterminate length is illusory. 142 However, there are other agreements that may arise within the context of at-will employment may become otherwise enforceable agreements, such as the promise to: provide fourteen days notice of termination;143 return all company equipment or property;144 provide initial specialized training;145 and providing access to and use of trade secret or confidential information.146

In determining whether the agreement is “otherwise enforceable,” courts apply the principles of general contract formation. In applying these principles many non-competition agreements have be held unenforceable because they were based on consideration that had been provided in the past or that might be provided at some undetermined time in the future.147 The courts of appeals are split as to whether,

140 TEX. BUS. & COM. CODE § 15.50 (Vernon 2002); see Light v. Centel Cellular Co. of Texas, 883 S.W.2d 642, 644-45 (Tex. 1994). 141 See Light, 883 S.W.2d at 644-45. 142 See Light, 883 S.W.2d at 645; Travel Masters, Inc. v. Star Tours, Inc., 827 S.W.2d 830, 832-33 (Tex. 1991). 143 Light, 883 S.W.2d at 648 n. 15. 144 Kadco Contract Design Corp. v. Kelly Services, Inc., 38 F.Supp.2d 489, 496 (S.D.Tex. 1998). 145 Light, 883 S.W.2d at 645-646. 146 Id. The fact that an agreement is an otherwise enforceable agreement does not end the analysis. The non-competition agreement must also be ancillary to the otherwise enforceable agreement. 147 Roark v. Stallworth Oil & Gas, Inc., 813 S.W.2d 492, 496 (Tex. 1991) (“Consideration is a present exchange bargained for in return for a promise.”) (emphasis added); Trilogy Software, Inc. v. Callidus Software, Inc., 2004 WL 1792391 (Tex. App.–Austin 2004, no pet. h.) (providing training and confidential information to an employee prior to

Protecting Trade Secret 12-20 and Confidential Information in the at-will employment context, the promise to provide initial specialized training and access to and use of confidential information during employment is sufficient to give rise to an interest worthy of protection or whether the employer must immediately provide the employee with the training or confidential information on execution of the otherwise enforceable agreement.148 The majority of the courts addressing his execution of a non-compete is past consideration that will not support a non-competition agreement). 148 Cf. Guy Carpenter & Co., Inc. v. Provenzale, 334 F.3d 459, 466 (5th Cir. 2003) (applying Texas law and rejecting requirement that contemporaneous exchange of confidential information be made with the execution of the non-competition agreement promising to provide such information because “[t]o hold otherwise would pin the enforceability of non-solicitation agreements on whether an employer discloses confidential information at the time the employee signs the employment contract. This is not what Light or § 15.50 intends or requires.”); Ireland v. Franklin , 950 S.W.2d 155, 158 (Tex. App. –San Antonio 1997, no writ) (promise to share trade secrets sufficient consideration for return promise not to disclose those trade secrets and therefore enforcing covenant not to compete); Curtis v. Ziff Energy Group Ltd., 12 S.W.3d 114, 118 (Tex. App.–Houston [14th Dist.] 1999, no pet.) (enforcing non-compete in agreement that promised to provide confidential information and trade secrets to employee); Totino v. Alexander & Assocs., Inc., 1998 WL 552818 (Tex. App.– Houston [1st Dist.] 1998, no pet.) (not designated for publication) (statement in non-compete that employee would “become acquainted” with employer’s confidential information during the course of his employment was non-illusory promise); Curtis, 12 S.W.3d at 119 (stating that employer’s agreement to provide confidential information and trade secrets for at-will employee’s promise not to disclose them supported the non-competition agreement); Trilogy Software, 2004 WL 179239 n. 6 (observing that a delay of less than one day between employer’s promise to provide training and confidential information and transfer of the training and information rendered the contract illusory); with 31-W Insulation Co., Inc. v. Dickey, 2004 WL 1699989 (Tex. App.–Fort Worth 2004, pet. filed) (holding that the promise to at-will employee to provide access to employer’s confidential information in return for employee’s promise not to disclose such information was illusory because the employer could immediately terminate the employee immediately after signing the agreement and thereby never be obligated to provide the confidential information at all); C.S.C.S., Inc. v. Carter, 129 S.W.3d 584, 590-91 (Tex. App.–Dallas 2003, no pet.) (refusing to read non-competition agreement signed four days before an employment agreement conclude that non-compete was part of an otherwise enforceable agreement); Alex Sheshunoff Mgmt. Servs., L.P. v. Johnson, 124 S.W.3d 678, 686 (Tex. App.–Austin 2003, pet. granted) (providing new confidential information to employee some time after entering non-competition agreement is insufficient and holding that court must evaluate sufficiency of consideration at the moment the agreement is entered); Tom James of Dallas, Inc. v. Cobb,

the issue have concluded that unless the exchange of the confidential information is contemporaneous with the execution of the non-competit ion agreement, the employer’s promise to provide the information is illusory because the employer remains free to terminate the employee at any time and for virtually any reason.149 Therefore, the employer can terminate the employment and never provide training or confidential information.

Additionally, where an employee is asked to sign a non-competition agreement mid-employment and after having had the specialized training or access to the confidential information, such agreements may not be supported by adequate consideration. 150

109 S.W.3d 877, 887 (Tex. App.–Dallas 2003, no pet.) (observing that where agreement represents that confidential and specialized training have been previously provided prior to execution of the agreement, providing such training or information was past consideration and could not support a subsequent promise not to compete); Strickland v. Medtronic, Inc., 97 S.W.3d 835, 839 (Tex. App.–Dallas 2003, pet. dism’d w.o.j.) (stating that whether there is a binding promise to provide training at the moment the agreement is made must be evaluated); Anderson Chemical Co., Inc. v. Green, 66 S.W.3d 434, 438 (Tex. App. –Amarillo 2001, no pet.) (promise not to disclose confidential information “which is later accepted by the employer’s performance in providing the information to the employee is a unilateral contract that cannot support a covenant not to compete because it is not otherwise enforceable at the time it is made.”); Terminex Int'l Co v. Denton , 2000 WL 84888 (Tex. App.–San Antonio 2000, no pet.) (not designated for publication) (agreement stating that the company expects to provide at-will employee with confidential information was an illusory promise because it was dependent on some period of continued employment). 149 See e.g., 31-W Insulation Co., 2004 WL 1699989; Alex Sheshunoff Mgmt. Servs. L.P., 124 S.W.3d at 686; Tom James of Dallas, Inc., 109 S.W.3d at 887; Strickland, 97 S.W.3d at 839; Anderson Chemical Co., Inc., 66 S.W.3d at 438; Terminex International Co., 2000 WL 848888. 150 See Alex Sheshunoff Management Servs. L.P., 124 S.W.3d at 686 (refusing to enforce non-competition agreement signed mid-employment when employee was given no additional confidential information to support agreement); The Terminex Int'l Co., L.P., 2000 WL 84888 (holding non-competition agreement unsupported by sufficient consideration where employee worked for company for years before it was bought out by new employer and employee was then required to sign non-competition agreement but was provided no new information on training); Beasley v. Hub City Texas L.P., 2003 WL 22254692 (Tex. App.–Houston [1st Dist.] 2003, no pet.) (not designated for publication) (upholding non-compete signed mid-employment where evidence showed employee received new confidential information on promotion and upon signing covenant not to compete); CRC-Evans Pipeline Int'l, Inc. v. Myers, 927 S.W.2d 259, 265-6 (Tex. App.–Houston [1st

Protecting Trade Secret 12-21 and Confidential Information

B. “Ancillary” to the Otherwise Enforceable Agreement.

In addition to the requirement that the non-competition agreement be contained in an otherwise enforceable agreement, the non-competition provisions must also be ancillary to that agreement. A non-competition agreement is ancillary to an otherwise enforceable agreement if the consideration given by the employer in the otherwise enforceable agreement gives rise to the employer's interest in restraining the employee from competing. Additionally, the covenant must be designed to enforce the employee's consideration or return promise in the otherwise enforceable agreement.151 The two most frequent promises employers make to employees that Texas courts have recognized as giving rise to an employer interest worthy of protection under section 15.50 include the promise (1) to provide initial specialized training to the employee and (2) to provide access to and use of the employer’s confidential or trade secret information. 152 By promising to provide the employee with initial specialized training or confidential information, the employer gives rise to an interest that is worthy of being protected so that the employee will not use the specialized training or confidential information post-employment for the benefit of a competitor. As a general rule, paying money to or promising a pecuniary interest to an employee in return for an agreement not to compete are not obligations that give rise to an employer’s interest that is worthy of protection. Consequently, these promises are of little assistance in rendering a non-competition agreement legally enforceable.153 C. Limitations on Time, Geography and Scope of

Activity to be Restrained. In addition to being ancillary to an otherwise

enforceable agreement, a non-competition agreement in Texas must contain reasonable limitations as to time,

Dist.] 1996, no writ) (holding that where employees worked for employer for years, returned to re-employment in same position, and signed a non-competition agreement without being provided any new confidential information or training, non-competition could not be enforced. 151 Light, 883 S.W.2d at 646-47 (Tex. 1994). 152 See e.g., Light, (stating that promises conditioned on providing initial specialized training or confidential information might support an enforceable non-competition agreement); Curtis, 12 S.W.3d at 118. 153 Strickland, 97 S.W.3d at 839; Alex Sheshunoff Management Servs. L.P., 124 S.W.3d at 681 (financial benefits do not give rise to interests worthy of protection by a covenant not to compete)

geography, and scope of activity to be restrained that are no greater than necessary to protect the legitimate interests of the party seeking to enforce the non-compete.

Trial courts have broad discretion in determining whether non-competition agreements are reasonably limited in time, geography and scope of activity to be restrained. As a general rule, employers should limit the geographical area of the non-competition provisions to those geographical areas where the employee actually worked and only to those activities that the employee pursued for the employer. Additionally, the employer may want to further restrict the non-competition provisions to the customers the employee actually serviced or solicited. Many Texas courts have enforced non-competition agreement drafted so that a customer limitation (e.g., employee will not solicit the customers he solicited on behalf of his former employer) substituted as an adequate geographic limitation. 154 This can be an effective drafting tool for use with a highly mobile workforce where employees may not continue to service the geographic territory contained in the non-competition agreement. The length of the temporal restriction should be tied to the legitimate interest the employer is attempting to preserve. For example, if the employer’s confidential information that is the basis for supporting the non-competition agreement becomes stale and no longer of value to a competitor after nine months, then the temporal length of the restriction should be nine months.

IF an overbroad non-compete agreement is otherwise enforceable, the trial court has the statutory obligation to reform the agreement so that the limitations are reasonable and impose a restraint that is no greater than necessary to protect the goodwill and legitimate business interests of the promissee.155 Thus, where the only defects in the non-compete are that it is overly broad in time, geographic area or scope of activity to be restrained, the trial court (upon proper request) should reform the scope of the limitations to a

154 See e.g., American Express Financial Advisors, Inc. v. Scott, 955 F.Supp. 688, 692 (N.D. Tex. 1996) (applying Texas law and allowing customer restriction to substitute for geographic limitation); Totino, 1998 WL 552818 *3 (allowing customer restriction to substitute for geographic limitation); Investors Diversified Services, Inc. v. McElroy, 645 S.W.2d 338, 339 (Tex. App.–Corpus Christi 1982, no writ) (applying restriction only to those customers with whom the former employee had actual contact); Stocks v. Bonner American Corp., 599 S.W.2d 665, 666 (Tex. Civ. App.–Texarkana 1980, no writ) (same). 155 TEX. BUS. & COM. CODE § 15.51(c) (Vernon 2002).

Protecting Trade Secret 12-22 and Confidential Information reasonable scope.156 However, this does not mean that the employer should draft an overly broad agreement and rely on the court to redraw it; as discussed below, the employer’s ultimate remedy will be much more restricted if it sues to enforce an overly broad agreement. D. Burden of Proof.

Whether a covenant not to compete is enforceable is a question of law for the court.157 When enforcing a non-competition agreement, the party bearing the burden of proof depends on the nature of the agreement at issue.158 If the primary purpose of the agreement is for the rendition of personal services, either for a term or at-will, then the burden is on the employer attempting to enforce the non-competition agreement to demonstrate its enforceability. 159 In all other cases, it is the burden of the person or entity making the promise not to compete that has the burden to show it is unenforceable.160

E. Damages Recoverable. In a successful suit enforcing a non-competition agreement, the aggrieved party can recover damages, injunctive relief and attorney’s fees.161 Components of damages might include actual damages such as lost profits or sales and other consequential damages. The types of actual damages recoverable will depend on the

156 See B.J. Software Systems, Inc. v. Osina, 827 S.W.2d 543, 546 (Tex. App.–Houston [1st Dist.] 1992, no writ) (holding that trial court was obligated to reform overly broad covenant upon request and was error to refuse to do so). 157 Light, 883 S.W.2d at 644. 158 In any injunctive proceeding, the party seeking the injunction bears the burden of showing entitlement to the injunction. 159 TEX. BUS. & COM. CODE § 15.51(b) (Vernon 2002). 160 TEX. BUS. & COM. CODE § 15.51(b) (Vernon 2002). 161 Attorney’s fees may only be recoverable under TEX. BUS. & COM. CODE § 15.51 (Vernon 2002), rather than under TEX. CIV. PRAC. & REM. CODE § 38.002 (Vernon 1997), because the Texas Covenant Not to Comp ete Act preempts other remedies provided under common law or otherwise. See Perez v. Texas Disposal Systems, Inc. , 103 S.W.3d 591, 593 (Tex. App.–San Antonio 2003, pet. denied). An alternative basis for recovery of attorney’s fees might be the Texas Declaratory Judgment Act. See, e.g., Gage Van Horn & Assoc., Inc. v. Tatom, 26 S.W.3d 730, 733 (Tex. App.–Eastland 2000, pet. denied); see also Butler v. Arrow Mirror & Glass, Inc., 51 S.W.3d 787, 796-97 (Tex. App.–Houston [1st Dist.] 2001, no pet.) (awarding attorneys fees under TEX. CIV. PRAC. & REM. CODE § 38.001(8) (Vernon 1997)). However, it is difficult to reconcile the reasoning of Perez and Van Horn ; it remains to be seen whether Van Horn will withstand the test of time.

nature and length of the competition and the damage done as a result of the breach. Where a temporary injunction is obtained early in the process, the resulting damages may be mitigated or minimized.

However, the relief recoverable by a party attempting to enforce a non-competition agreement is limited to injunctive relief where the covenant is overly broad in some respect and the court is required to reform the agreement. In that circumstance, no damages are recoverable for breaches that occur prior to the court’s reformation of the agreement.162

Additionally, if the primary purpose of the agreement is the rendition of personal services and the employee establishes that the former employer knew at the time of the execution of the agreement that it did not contain reasonable limitations as to time, geographic area and scope of activity to be restrained, the court may award the employee the costs, including reasonable attorney’s fees, actually and reasonably incurred by the former employee in defending the action to enforce the covenant.163

F. Injunctive Relief and Irreparable Harm. Generally, a party seeking a temporary injunction over the breach of a non-competition agreement must plead and prove: (1) a cause of action and (2) a probable right to the relief sought, and (3) a probable, imminent, and irreparable injury in the interim. 164 Irreparable harm can be established, if necessary, by showing that probable injury may occur in the interim in the absence of an adequate legal remedy. 165 A legal remedy is inadequate if damages are difficult to calculate or their award may come too late.166 Generally, where an employee has access to its former employer’s trade secrets and is in a position to use that information and compete directly with an employer, the only effective relief available to the former employer is to restrain the employee’s use of those

162 TEX. BUS. & COM. CODE § 15.51(c) (Vernon 2002). 163 TEX. BUS. & COM. CODE § 15.51(c) (Vernon 2002); see also Hill v. Shreve, 1999 WL 314854 (Tex. App.–Houston [14th Dist.] 1999, no pet.)(not designated for publication) (suit by former employee against former employer for former employer’s threat to sue employee’s new employer on basis of overly broad non-competition agreement). 164 See Butnares v. Ford Motor Co., 84 S.W.3d 198, 204 (Tex. 2002). 165 T-N-T Motorsports, Inc. v. Hennessey Motorsports, Inc., 965 S.W.2d 17, 23 (Tex. App.–Houston [1st Dist.] 1998, no pet.). 166 Id.

Protecting Trade Secret 12-23 and Confidential Information

trade secrets.167 However, it is sometimes unclear whether the injunction is granted based on a breach of the non-competition agreement or on the common law theory that a former employee has a common law obligation not to use or disclose his former employer’s confidential information and trade secrets. Finally, there is some authority in Texas for the proposition that an employer need not show irreparable harm to obtain a temporary injunction for the breach of the non-competition agreement under section 15.50. 168

167 Id.; Conley v. DSC Communications Corp., 1999 WL 89955 (Tex. App.–Dallas 1999, no pet.) (not designated for publication) (issuing temporary injunction under doctrine of inevitable disclosure where employee possessed former employer’s confidential information and was in a position to use it against his former employer by virtue of his employment with direct competitor in same marketplace.). 168 See Cardinal Health Staffing Network, Inc. v. Bowen, 106 S.W.3d 230, 240 (Tex. App.–Houston [1st Dist.] 2003, no pet.) (holding that a showing of irreparable harm must be shown to obtain a temporary injunction but stating that the Dallas Court of Appeals has held that the Texas Covenant Not to Compete Act superceded equitable temporary injunction requirements); but see C.S.C.S., Inc. v. Carter, 129 S.W.3d 584 (Tex. App.–Dallas 2003, no pet.) (noting without endorsement Cardinal Health’s holding was in conflict with the Dallas Court of Appeals decision that did not require showing of irreparable harm.).