TRADE SECRETS, UNFAIR COMPETITION, EMPLOYEE RAIDS AND EMPLOYEE COVENANTS Alan N. Greenspan Jackson Walker LLP

Assets of Small & Mid- Size Businesses Tangible assets Tangible assets –Real estate –Equipment –Accounts receivable Intangible assets Intangible assets –Trademarks, patents, and domain names –Trade secrets –Gray matter

Protecting Company Assets Tangible assets Tangible assets –Locks –Armed guards Intangible assets Intangible assets –Registrations –Procedures –Contracts –Lawsuits

Trade Secret Defined “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.”

Trade Secret Test: 6 Factors Extent known outside business Extent known outside business Extent known within business Extent known within business Security measures taken to protect Security measures taken to protect Value of the information Value of the information Cost (effort or money) to acquire Cost (effort or money) to acquire Availability Availability

Examples of Trade Secrets Customer lists Customer lists Product formulae Product formulae Computer databases Computer databases Marketing strategy Marketing strategy Pricing structure Pricing structure Manufacturing process Manufacturing process

Legal Protections for Trade Secrets Criminal law Criminal law Civil law Civil law Contracts Contracts

Criminal Theft of Trade Secrets Theft of a trade secret Theft of a trade secret Copy something containing or embodying trade secrets Copy something containing or embodying trade secrets Communicate or transmit a trade secret Communicate or transmit a trade secret

Civil Theft of Trade Secrets Private cause of action for violation of the Penal Code Private cause of action for violation of the Penal Code Actual damages Actual damages Statutory damages up to $1000 Statutory damages up to $1000 Attorney’s fees to the prevailing party Attorney’s fees to the prevailing party No injunction No injunction

Common Law Misappropriation Existence of a trade secret Existence of a trade secret Bad conduct Bad conduct –Breach of confidential/contractual relationship OR –Improper discovery Use of the trade secret Use of the trade secret Damages & Injunctive Relief Damages & Injunctive Relief

Summary: Trade Secrets Multiple layers of protection Multiple layers of protection –Big stick of Penal Code Prerequisite procedures have business benefits Prerequisite procedures have business benefits No esoteric legal conundrum No esoteric legal conundrum

Employee Covenant Not to Compete Legal Paradigm: Employee non- competes should only be used to protect trade secrets Legal Paradigm: Employee non- competes should only be used to protect trade secrets Legal reality: Non-competes are complex methods of protecting trade secrets Legal reality: Non-competes are complex methods of protecting trade secrets Harsh reality: Non-competes won’t be permitted just to restrict competition Harsh reality: Non-competes won’t be permitted just to restrict competition

Section & Debbie Light An “otherwise enforceable” agreement An “otherwise enforceable” agreement Ancillary covenant not to compete Ancillary covenant not to compete Made at the time of the ancillary agreement Made at the time of the ancillary agreement

Enforceable agreement Not an “at will” employment agreement Not an “at will” employment agreement Consideration from employer gives rise to employer’s protectible interest Consideration from employer gives rise to employer’s protectible interest Covenant designed to enforce the employee’s return promise Covenant designed to enforce the employee’s return promise

Contemporaneous exchange Employer’s consideration: transfer contemporaneous with execution of covenant Employer’s consideration: transfer contemporaneous with execution of covenant Employer’s consideration: enforceable promise contemporaneous with execution of covenant Employer’s consideration: enforceable promise contemporaneous with execution of covenant

Possible Light Solution Promise to deliver AND Promise to deliver AND Actually deliver contemporaneously Actually deliver contemporaneously –Hand trade secrets to the new employee upon execution –Issue password to computer system with trade secrets –Issue key to file cabinet with trade secrets

Other Non-Compete Considerations Unreasonable terms are reformed Unreasonable terms are reformed No damages recoverable No damages recoverable Knowing unreasonableness results in legal fees against employer Knowing unreasonableness results in legal fees against employer

Alternative Covenants Non-disclosure Non-disclosure Non-recruitment Non-recruitment Non-solicitation Non-solicitation

Conclusion Intangible (intellectual) property must be protected Intangible (intellectual) property must be protected Trade secret audit and protection is essential Trade secret audit and protection is essential Protection through procedures, systems, employee manuals, and full panoply of agreements and covenants Protection through procedures, systems, employee manuals, and full panoply of agreements and covenants Non-compete is last line of defense Non-compete is last line of defense