legal issues associated with departing employees in the
TRANSCRIPT
Legal Issues Associated With Departing Employees In The Energy Industry
Dwayne L. Mason1
Greenberg Traurig LLP
Houston, Texas
Scott M. Nelson
Baker McKenzie
Houston, Texas
Albert K. Shung
Total Petrochemicals and Refining USA, Inc.
Houston, Texas
§ 1.01 Introduction
In today’s crude production and oil services market, intellectual property owned by oil
producers and oilfield service companies is at risk like never before. During the time period
including 1990 and the early 2000s, the U.S. domestic demand for oil far out-weighed the
domestic production of oil and the U.S. oil supplies. However, new techniques for hydrocarbon
production such as horizontal drilling and hydraulic fracturing made it possible for the U.S. to
increase its oil production to a level that allowed it to rely less on foreign oil producers, such as
the Organization of the Petroleum Exporting Countries (OPEC).
Additionally, OPEC also increased its levels of oil production during the same time
period. On top of these events, oil production from shale formations came on-line in a huge way.
It is estimated that hydraulic fracturing and horizontal drilling reversed around 40 years of
declining U.S. oil production between 2011 and 2014; the result was to add new production of
around four million barrels of oil daily to U.S. oil preserves.2
As a result of all of this new crude production, oil prices collapsed in 2014 leading to a
wave of bankruptcies and layoffs in the E&P industry sector that continue to color the E&P
landscape to this day. For example, as of March 2015, Halliburton laid off 6,600 employees,
Baker Hughes laid off 7,000 employees, Schlumberger laid off 9,000 employees and
Weatherford laid off 8,000 employees.3 As of March 2015, the E&P Industry laid off 8,362
employees including the following: Royal Dutch Shell laid off 600 employees; Suncor Energy
laid off 1,000 employees, Marathon Oil laid off 400 employees, Chevron laid off 162 employees,
and Conoco Phillips laid off 230 employees.4 These numbers increased for each of these
companies for the year 2016. In all, Houston lost around 77,000 oil-related jobs since the 2014
1 Ira R. Hatton and Tara Williams of Greenberg Traurig LLP are also authors on this Article. 2 Institute For Regional Forecasting, A False Start for Oil Markets in 2017 Means Weak Prospects for Houston’s
Economy, Robert D. Gilmer, PH.D. (September 11, 2017). 3 Forbes, Itemizing The Oil Bust: 75,000 Layoffs and Counting, Christopher Helman (March 16, 2015). 4 Id.: 75,000 Layoffs and Counting, Christopher Helman (March 16, 2015).
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oil decline.5 Overall, it has been estimated that, by June of 2016, the oil industry worldwide has
lost around 350,000 oil and gas industry related jobs.6
The manner in which each of these oilfield services7 and E&P companies8 create,
maintain and protect its intellectual property including its trade secrets become critical when
looking at these issue through the context of departing and newly hired employees. In this vein,
one can imagine that the tens-of-thousands of rig workers, geologists, engineers, and technicians
are not voluntarily staying out of the work force until oil prices rebound to the $100/barrel price
point. Many of these previously employed workers have are moved on to find work in other
states and in other industries, such as the solar industry. However, most of these aforementioned
workers are now finding employment at different oilfield service and E&P companies. This
means that each worker is taking certain inalienable knowledge that most likely includes
confidential and/or trade secret information owned by their previous employer with them as they
matriculate to their new employment destinations. Indeed, many of these newly found jobs are
with companies that compete directly with or partner with companies that compete directly with
the worker’s previous employer.
The confidential and trade secret information that each oilfield services and E&P
company owns varies widely by type, application, value and breadth. In the energy industry, a
company’s confidential and trade secret information exists in many different areas of business
activities in which a particular company is engaged. For example, a typical oilfield service
company provides oilfield data analysis, well casing and fracking services, testing equipment and
data interpretation in areas such as seismic data acquisition and formation testing, drilling
equipment, pumping services, equipment, etc. Meanwhile, the oilfield service companies’
clients are the entities that take ownership of the hydrocarbons produced as a result of the
activities that surround include the drilling for the hydrocarbons. Due to the fact that a company
that provides these types of services to oil producing companies typically has to submit requests
for proposals (RFPs) that include bids to provide some or all of the supporting services to
hydrocarbon production, the profit margins are always a factor. A company’s confidential and
trade secret information often times includes systems, processes and/or knowledge and know-
how (collectively referred to hereinafter as “Confidential Information”) that enables the owner of
this Information to maintain its profitability while submitting competitive bids to secure the
project. Maintaining the confidentiality of its Confidential Information within the energy
industry is a problem when previous employees that have engaged in these aforementioned areas
of expertise are now working for a company’s direct or indirect competitor and still retain the
company’s Confidential Information, whether in their heads or in a readable medium.
Indeed, the exercise of retaining a company’s Confidential Information when an
employee leaves the company has become one in which the Confidential Information owner has
invested greater efforts and received diminishing returns. Technology has reached the point
5 Bauer College of Business, A False Start for Oil Markets in 2017 Means Weak Prospects for Houston’s Economy
(September 11, 2017). 6 Oilprice.com, After 350,000 Layoffs Oil Companies Now Face Worker Shortages, Nick Cunningham (June 8,
2016). 7 These companies include Schlumberger, Haliburton, Saipem, Transocean, Baker Hughes, Fluor, etc. 8 These companies include ExxonMobil, Royal Dutch Shell, Chevron, ConocoPhillips, BP, etc. Other energy
companies include refineries such as Marathon Petroleum, Phillips 66 and Valero Energy.
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where highly-skilled and low-level employees alike are required to use and acquire the
knowledge to use computers that execute software applications and interact with databases to
perform their everyday responsibilities and use portable data storage devices to perform their
duties efficiently. Unfortunately, it is these same skills and devices that enable departing
employees to retain their previous employer’s Confidential Information after they are no longer
employed. As a result of the need for greater access to systems and databases across a
company’s network and the ease of portability of a company’s Confidential Information, the
former employee, the previous and the new employer are often legally bound to one another due
to trade secret laws, labor and employment agreements or a combination of both.
In this Note, we will focus on various intellectual property law issues that can arise in the
context of departing employees generally and employees in the energy and oil services industry,
including protecting employer confidential information and trade secrets, off-boarding best
practices, and relevant federal and state laws impacting employer and employee rights. Below,
we will discuss certain laws that may be used to protect confidential, trade secret and proprietary
information owned by an employer that are central to all professions, generally, and then apply
the same to the energy and oil services industry.
§ 1.02 WHAT IS A TRADE SECRET
[1] Uniform Trade Secrets Act & First Restatement § 757
Before the passage of the Texas Uniform Trade Secrets Act (TUTSA) on September 1,
2013, trade secrets were protected against violation in Texas by operation of Texas common law.
Trade secrets are not a product of statutory law or born from the Constitution but, rather, are
simply secrets held by the trade secret owner that gives the owner an advantage over other
entities. Before the enactment of the uniform trade secrets act, laws protecting trade secrets was
under the jurisdiction of each individual state to develop and, as a result, trade secret protection
and the activities that constituted misappropriation evolved differently across the states with an
unbalanced application of the afforded protections.9 The legal community urged that a uniform
trade secret body of law be enacted for all of the states that would define what a trade secret is
and apply trade secret protections uniformly.
The first version of the Uniform Trade Secrets Act (UTSA) was drafted by the National
Conference of Commissioners on Uniform State Laws in 1979. The amended version of the Act
was approved by the National Conference of Commissioners in 1985.10 The UTSA includes
9 Courts could rely upon what is widely considered to be the first authority of trade secret law, Restatement of Torts
§ 757 (1939). The Restatement defined a trade secret as “any formula, pattern, device or compilation of information
which is used in one’s business, and which gives him an opportunity to obtain an advantage over competitors who
do not know or use it.” 10 The Uniform Trade Secrets Act stated that (1) “Trade secret’ means information, including a formula, pattern,
compilation, program, device, method, technique, or process, that: ( i) derives independent economic value, actual or
potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons
who can obtain economic value from its disclosure or use, and (ii) is the subject of efforts that are reasonable under
the circumstances to maintain its secrecy. ;” (see § 1(4)); (2) “Improper means’ includes theft, bribery,
misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, or espionage through electronic
or other means;” (see § 1(1)); and (3) “Misappropriation’ means: (i) acquisition of a trade secret of another person
who knows or has reason to know that the trade secret was acquired by improper means; or (ii) disclosure or use of a
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definitions of “trade secret,” "improper means" and "misappropriation" that are based upon the
First Restatement of Torts Section 757. By 1994, all but eleven States had enacted a version of
the Uniform Trade Secrets Act, these States included the following: Texas, Massachusetts,
Michigan, Missouri, New Jersey, New York, Ohio, Pennsylvania, Tennessee, Vermont, and
Wyoming.11
Before the Texas Uniform Trade Secret Act (TUTSA) was enacted, the Texas courts
defined a trade secret as “any process, compilation of information, formula, pattern, or device
that gives a business an opportunity to obtain an advantage over competitors who do not know or
use it.”12 In this pre-TUTSA era, Texas courts applied a comparative and weighted six-factor
test to determine whether the relevant subject matter qualified as a trade secret: (1) the extent to
which the information is known outside of his business; (2) the extent to which it is known by
employees and others involved in his business; (3) the extent of the measures taken by him to
guard the secrecy of the information; (4) the value of the information to him and to his
competitors; (5) the amount of effort or money expended by him in developing the
information;(6) the ease or difficulty with which the information could be properly acquired or
duplicated by others.13 To establish that the relevant subject matter was a trade secret, “[t]he
party claiming a trade secret is not required to satisfy all six factors “because trade secrets do not
fit neatly into each factor every time.”14 The status of information claimed as a trade secret must
be determined through a comparative evaluation of all the relevant factors, including the value,
secrecy, and definiteness of the information as well as the nature of the defendant's misconduct.
However, it was firmly established that in order for the court to determine that the relevant
subject matter was indeed a trade secret, the subject matter must have been secret.15 Moreover, it
was widely held that because the Restatement of Torts § 757 was conditional in defining what a
trade secret may be, it is the burden of the entity claiming secrecy status of the subject matter to
prove that the subject matter is indeed secret.16
Relying upon the First Restatement of Torts § 757, Texas courts defined the act of trade
secret misappropriation as the following: “One who discloses or uses another's trade secret,
without a privilege to do so, is liable to the other if (a) he discovered the secret by improper
trade secret of another without express or implied consent by a person who (A) used improper means to acquire
knowledge of the trade secret; or (B) at the time of disclosure or use, knew or had reason to know that his
knowledge of the trade secret was (I) derived from or through a person who had utilized improper means to acquire
it; (II) acquired under circumstances giving rise to a duty to maintain its secrecy or limit its use; or (III) derived from
or through a person who owed a duty to the person seeking relief to maintain its secrecy or limit its use; or (C)
before a material change of his position, knew or had reason to know that it was a trade secret and that knowledge of
it had been acquired by accident or mistake. (see § 1(2)). 11 The Restatement of Torts § 757 was relied upon as its foundation for trade secret law by at least nine (9) of the
aforementioned States, including: Texas, Massachusetts, Michigan, Missouri, New Jersey, New York, Ohio,
Pennsylvania and Tennessee. 12 Bancservices Group, Inc. v. Strunk & Associates, L.P., 2005 WL 2674985, at *2 (Tex.App.-Houston [14
Dist.],2005). 13 Id. at *3 (Tex.App.-Houston [14 Dist.],2005). 14 Id., at *3 (Tex.App.-Houston [14 Dist.],2005). 15 Wissman v. Boucher, 240 S.W.2d 278, 280 (Tex.1951); Hallmark Personnel of Texas, Inc. v. Franks, 562 S.W.2d
933, 936 (Tex.Civ.App.—Houston [1st Dist.] 1978, no writ); Thermodics, Inc. v. BAT–JAC Tool Company, Inc.,
541 S.W.2d 255, 260 (Tex.Civ.App.—Houston [1st Dist.] 1976, no writ); Lamons Metal Gasket Co. v. Traylor, 361
S.W.2d 211, 213 (Tex.Civ.App.—Houston [14th Dist.] 1962, writ ref'd n.r.e.). 16 Richardson v. Andrews, 718 S.W.2d 833 (Tex.App.—Houston [14th Dist.] 1986, no writ).
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means, or (b) his disclosure or use constitutes a breach of confidence reposed in him by the other
in disclosing the secret to him, or (c) he learned the secret from a third person with notice of the
facts that it was a secret and that the third person discovered it by improper means or that the
third person's disclosure of it was otherwise a breach of his duty to the other, or (d) he learned
the secret with notice of the facts that it was a secret and that its disclosure was made to him by
mistake.17
[2] Uniform Trade Secrets Act & Texas Uniform Trade Secret Act (TUTSA)
In 1979, The National Conference of Commissioners on Uniform State Laws developed
the next framework upon which the courts could rely to protect commercially valuable
confidential information—a Uniform Trade Secrets Act. Building upon the established rights
and protections afforded by the patenting regime, the National Conference of Commissioners
recognized that trade secrets are valuable intellectual property assets that are important to a trade
secret owner’s business and sustainability in the marketplace.18 Due to inconsistencies in the
development and in the application of the then-existing trade secrets model by the various State
courts—the model fashioned upon the First Restatement of Torts § 757—, the National
Conference of Commissioners proposed the first Uniform Trade Secrets Act.19
The Uniform Trade Secrets Act was first approved in 1979. In 1985, the 1979 Act was
amended to make changes in the sections directed to damages, injunctive relief, effects on other
law and uniformity of application and construction. Thus, there are two versions of the Uniform
Trade Secrets Act. As of 2017, 48 States, the District of Columbia, Puerto Rico and the U.S.
Virgin Islands have enacted either the 1979, the 1985 or a combination of the two acts, the States
including the following: Alabama, Alaska, Arizona, Arkansas, California, Colorado,
Connecticut, Delaware, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas,
Kentucky, Louisiana, Maine, Maryland, Michigan, Minnesota, Mississippi, Missouri, Montana,
Nebraska, Nevada, New Hampshire, New Jersey, New Mexico, North Dakota, Ohio, Oklahoma,
Oregon, Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah,
Vermont, Virginia, Washington, West Virginia, Wisconsin, and Wyoming.20 Currently, the
States of Massachusetts, New York21 and North Carolina22 have not enacted the Uniform Trade
17 Stewart & Stevenson Services, Inc. v. Serv-Tech, Inc., 879 S.W.2d 89, 95 (Tex.App. Hous. [14 Dist.],1994). 18 See Uniform Trade Secrets Act With 1985 Amendments, Prefatory Note at pg. 1 (1985). 19 According to The National Conference of Commissioners on Uniform State Laws, as of August 1985 both the
development and the application of the state trade secret laws across the United States was uneven: “Although there
typically are a substantial number of reported decisions in states that are commercial centers, this is not the case in
less populous and more agricultural jurisdictions. Secondly, even in states in which there has been significant
litigation, there is undue uncertainty concerning the parameters of trade secret protection, and the appropriate
remedies for misappropriation of a trade secret.” Uniform Trade Secrets Act With 1985 Amendments, Prefatory
Note at pg. 1 (1985). 20 Legislative Fact Sheet - Trade Secrets Act, Uniform Law Commission (retrieved 12/2017). 21 Senate Bill S4688 has been introduced in 2017 that, if passed, would impose some form of the Uniform Trade
Secret Act. 22 North Carolina has enacted a modified version of the UTSA that is not generally received to be the UTSA. N.C.
Gen. Stat. Secs. 66-152 defines a trade secret as "business or technical information, including but not limited to a
formula, pattern, program, device, compilation of information, method, technique, or process that: (a) Derives
independent actual or potential commercial value from not being generally known or readily ascertainable through
independent development or reverse engineering by persons who can obtain economic value from its disclosure or
use; and (b) Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy." The 1985
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Secrets Act. As a result of the States adopting their own versions of the UTSA, there are
differences in the trade secret law across the States and the imposition of a uniform trade secret
law pursuant to the UTSA is not likely to occur.23
The UTSA defines a trade secret as
information, including a formula, pattern, compilation, program, device, method,
technique, or process, that:
(i) derives independent economic value, actual or potential, from not being
generally known to, and not being readily ascertainable by proper means by, other
persons who can obtain economic value from its disclosure or use, and
(ii) is the subject of efforts that are reasonable under the circumstances to
maintain its secrecy.24
The UTSA further clarifies that its definition of “trade secret” is different from the Restatement
(First) model that requires that the trade secret be “continuously used in one’s business” in that
the UTSA definition is broader and extends to information that is not in use. The UTSA also
extends trade secret protection to both know-how and negative know-how. Additionally,
different persons may own the same trade secret and information can be independently
developed or acquired by proper means and still satisfy the trade secret criteria. The UTSA also
explains that information that is generally known by persons that can use that information to
obtain an economic benefit, that information cannot qualify for trade secret protection pursuant
to the phrase “not being generally known to, and not being readily ascertainable by proper
means, by other persons[.]” In other words, the information does not have to be generally known
to lose trade secret protection.25
The UTSA defines “misappropriation” as
(i) acquisition of a trade secret of another by a person who knows or has reason to
know that the trade secret was acquired by improper means; or
(ii) disclosure or use of a trade secret of another without express or implied
consent by a person who
(A) used improper means to acquire knowledge of the trade secret; or
(B) at the time of disclosure or use, knew or had reason to know that his
knowledge of the trade secret was
(I) derived from or through a person who had utilized improper
means to acquire it;
(II) acquired under circumstances giving rise to a duty to maintain
its secrecy or limit its use; or
UTSA defines a trade secret as “information … that (i) derives independent economic value … from not being
generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic
value from its disclosure or use, and (ii) is the subject of efforts that are reasonable under the circumstances to
maintain its secrecy[,]” a somewhat simplified definition. UTSA § 1(4). 23 From this point on, as most of the States have adopted versions of the UTSA closer to the 1985 version, each
reference to the UTSA will reference the 1985 version unless explicitly stated. 24 UTSA § 1(4) (1985). 25 UTSA § 1(COMMENT) (1985).
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(III) derived from or through a person who owed a duty to the
person seeking relief to maintain its secrecy or limit its use; or
(C) before a material change of his [or her] position, knew or had reason
to know that it was a trade secret and that knowledge of it had been acquired by
accident or mistake.26
Under the UTSA, misappropriation also includes the unauthorized disclosure of a trade secret as
a trade secret may cease to be eligible for protection if the public becomes aware of the
information.27
The UTSA also explains that “improper means” “includes includes theft, bribery,
misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, or espionage
through electronic or other means[.]”28 According to the UTSA, “improper means” could
include aerial reconnaissance to discovery confidential information (e.g., construction plans).29
In September of 2013, Texas became the latest state to adopt the UTSA which will apply
to theft of trade secrets occurring on or after its enactment. Before the UTSA was enacted by the
Texas Legislature, trade secret owners could use the State courts to sue defendants for trade secret
misappropriation via common law or theft of trade secrets pursuant to the Texas Theft Liability Act
(TTLA) which was enacted in 1989. The Texas Legislature enacted a modified version of the UTSA
in 2013 to displace both common law trade secret misappropriation and TTLA theft of trade secret
claims.30 However, the TUTSA cannot be applied retroactively and, thus, a trade secret owner may
still sue under the TTLA theft-of-trade secret statute or for common law misappropriation depending
upon the date of the offense.31
Interestingly, the conditions that must be satisfied such that information could qualify as a
trade secret under the TTLA set a lower bar than what is required under the TUTSA. Under the
TTLA, information that had value to the trade secret owner could qualify as a trade secret if the
owner took “measures” to protect the information from access to unauthorized persons.32 Under the
26 UTSA § 1(2) (1985). 27 UTSA § 1(COMMENT) (1985). 28 UTSA § 1(1) (1985). 29 UTSA § 1(COMMENT) (1985). 30 See BHL Boresight, Inc. v. Geo-Steering Solutions, Inc., 2017 WL 2730739, at *10 (S.D.Tex., 2017) (“In 2013, in
an effort to bring Texas law in line with the “overwhelming majority of the United States” and “provid[e] a simple
legislative framework for litigating trade secret issues in Texas,” the Texas Legislature enacted a modified version
of the Uniform Trade Secrets Act. Texas Bill Analysis, S.B. 953, 2013 at 1. The enrolled bill, known as the TUTSA,
became effective on September 1, 2013, and displaces both common-law misappropriation-of-trade-secret and
TTLA theft-of-trade-secret claims.”). 31 Although the TTLA theft-of-trade-secret claims and common-law misappropriation merged into the TUTSA
framework in 2013, because the TUTSA is not retroactive, a plaintiff may still proceed with TTLA theft-of-trade
secret, common-law, and TUTSA trade-secret-misappropriation claims in a single case depending on when her
claims accrued and what claims the facts of his case support. See ZeniMax Media, Inc. v. Oculus VR, LLC, 166 F.
Supp. 3d. 697, 704 (N.D. Tex. 2015) (TUTSA and common-law claims of misappropriation of trade secrets are
distinct claims) 32 The TTLA states that "Trade secret" means 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. Tex. Penal Code § 31.05(a)(4). The TTLA states the offense of theft of trade secret is a third degree felony
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Texas Uniform Trade Secrets Act (TUTSA) as originally passed, “trade secret” is defined as the
following:
“Trade secret” means information, including a formula, pattern, compilation,
program, device, method, technique, process, financial data, or list of actual or
potential customers or suppliers, that:
(A) derives independent economic value, actual or potential, from not being generally
known to, and not being readily ascertainable by proper means by, other persons who
can obtain economic value from its disclosure or use; and
(B) is the subject of efforts that are reasonable under the circumstances to maintain its
secrecy.33
As one can see from the definition of trade secret under the TUTSA, a trade secret owner now must
take “reasonable” efforts to guard her secrets for the same to be considered a trade secret under the
law, a standard that is considered to be higher than that put forth under the preempted TTLA.
On September 1, 2017, the TUTSA was amended34 to (1) expand the definition of “trade
secret,”35 (2) preserve and clarify the reach of injunctive relief under TUTSA,36 (3) clarify the
definition of “willful and malicious misappropriation,”37 (4) clarify and expand the scope of what it
means to be the “owner” of a trade secret,38 and (5) codify the seven factor balancing test put forth in
the Texas Supreme Court’s holding in In re M-I L.L.C., 505 S.W.3d 569 (Tex. 2016) that determines
and occurs “if, without the owner's effective consent, [a person] knowingly: (1) steals a trade secret; (2) makes a
copy of an article representing a trade secret; or (3) communicates or transmits a trade secret. Tex. Penal Code §§
31.05(b),(c). 33 Tex. Civ. Prac. & Rem. Code § 134A.002(6)(A),(B). 34 TUTSA was amended by House Bill No. 1995. 35 The definition of “trade secret” was expanded to include “all forms and types of information[.]” Now, under
TUTSA,, information that may qualify as a trade secret may be tangible or intangible including, by way of example,
“business, scientific, technical, economic, or engineering information and any [a] formula, design, prototype,
pattern, plan, compilation, program device, program, code, device, method, technique, process, procedure, financial
data, or list of actual or potential customers or suppliers, whether tangible or intangible and whether or how stored,
compiled, or memorialized physically, electronically, graphically, photographically, or in writing[.]” The amended
definition of “trade secret” is now more closely aligned with the Defend Trade Secrets Act (DTSA) which was
passed by Congress in May of 2016 to provide trade secret owners with a federal cause of action for
misappropriation—discussed in more detail below. 36 Under TUTSA, a trade secret owner may enjoin a defendant for actual or threatened misappropriation. The
amendment seeks to preserve the common law that indicates that a trade secret owner cannot “prohibit a person
from using general knowledge, skill, and experience that person acquired during employment[]” via an injunction
order. See Sharma v. Vinmar Int’l, Ltd., 231 S.W.3d 405, 424 (Tex. App.—Houston [14th Dist.] 2007, pet. dism’d). 37 To satisfy the requirements for an award of exemplary damages and attorney’s fees, a trade secret owner must
prove “willful and malicious” misappropriation. Pursuant to the amendment, “willful and malicious” is defined as
“intentional misappropriation resulting from the conscious disregard of the rights of the owner of the trade secret.”
See Learning Curve Toys, Inc. v. PlayWood Toys, Inc., 342 F.3d 714, 730 (7th Cir. 2003). 38 The Texas Legislature also relied upon the DTSA for its amended definition of “owner” of a trade secret which
provides that an “owner” is a “person or entity in whom or in which rightful, legal, or equitable title to, or the right
to enforce rights in, the trade secret is reposed.” In other words, a trade secret “owner” that has standing to file a
trade secret misappropriation action under TUTSA may include qualifying persons or entities that do not wholly
own the trade secret such as licensees or other persons or entities that hold legal title, equitable title and/or rights of
enforcement.
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whether a party or a party’s representative should be excluded from any stage of the litigation to
prevent the same from exposure to the identity of the trade secrets-at-issue.39 Exposing the trade
secret owner’s trade secrets is of special concern to participants in the oil, gas and energy industry as
it may costs anywhere from hundreds of thousands to millions of dollars to develop oil fields and
viable places to drill, practices wherein both the methodologies to find the viable drilling locations
and the processes used to drill include confidential, proprietary information and numerous trade
secrets.40
The definition of misappropriation under the TUTSA, which modifies the definition as put
forth in the UTSA, is the following:
"Misappropriation" means:
(A) acquisition of a trade secret of another by a person who knows or has reason to
know that the trade secret was acquired by improper means; or
(B) disclosure or use of a trade secret of another without express or implied consent
by a person who:
(i) used improper means to acquire knowledge of the trade secret;
(ii) at the time of disclosure or use, knew or had reason to know that the
person's knowledge of the trade secret was:
(a) derived from or through a person who had utilized improper
means to acquire it;
(b) acquired under circumstances giving rise to a duty to maintain its
secrecy or limit its use; or
(c) derived from or through a person who owed a duty to the person
seeking relief to maintain its secrecy or limit its use; or
(iii) before a material change of the person's position, knew or had reason to
know that it was a trade secret and that knowledge of it had been acquired by
accident or mistake.41
Generally speaking, the TUTSA definition of misappropriation is seen as an improvement
over the preempted Texas common law trade misappropriation. For example, liability under the
TUTSA may only be attached to persons that “know or have reason to know” that the trade secret as
acquired via improper means. On the other hand, under Texas common law a defendant may be
39 There is a presumption that all parties are allowed to participate and be present during all of the court proceedings.
However, a trade secret owner may petition a court to exclude a party from proceedings after a court considers the
following seven factors: (1) the value of an owner’s alleged trade secret; (2) the degree of competitive harm an
owner would suffer from the dissemination of the owner’s alleged trade secret to the other party; (3) whether the
owner is alleging that the other party is already in possession of the alleged trade secret; (4) whether a party’s
representative acts as a competitive decision maker; (5) the degree to which a party’s defense would be impaired by
limiting that party’s access to the alleged trade secret; (6) whether a party or a party’s representative possesses
specialized expertise that would not be available to a party’s outside expert; and (7) the stage of the action. 40 Tex. Civ. Prac. & Rem. Code § 134A.006 requires the court to protect an owner’s trade secrets via an assumption
in favor of granting protective orders. 41 Tex. Civ. Prac. & Rem. Code § 134A.002(3)(B)(i).
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found liable for misappropriation if she acquired and used the trade secret by mistake or under
accidental circumstances.42 Therefore, under the Texas common law, an employer that acquired a
competitor’s trade secrets due to hiring the competitor’s former employee may be liable for
misappropriation even if the employer was not aware and had no reason to know of the acquisition.
However, the definition of misappropriation pursuant to the TUTSA attaches liability to the new
employer only after (1) the new hire misappropriated the competitor’s trade secrets, (2) the new hire
used the trade secrets in his capacity at the employer’s place of business, and (3) the employer had
actual (e.g., a notice letter) or constructive knowledge that the trade secret was acquired by improper
means.43
Additionally, the plain language of § 134A.002(3)(B)(i) requires that one accused of
misappropriation ‘acquire’ knowledge of the trade secret through “improper means.”44 Under
TUTSA, “improper means” includes theft, bribery, misrepresentation, breach or inducement of a
breach of a duty to maintain secrecy, to limit use, or to prohibit discovery of a trade secret, or
espionage through electronic or other means.45 Another important change between the common law
definition and the TUTSA definition of “improper means” is that the TUTSA has included a breach
of a duty to limit the use of a trade secret within the definition of “improper means.” Therefore,
under the TUTSA, a license agreement may limit an authorized person’s activities under the
agreement even if those activities would be lawful absent the license agreement. For example, a
legal purchaser of a software product may be held liable for trade secret misappropriation for reverse-
engineering the software due to the provisions agreed to in the associated purchase license agreement
even though reverse engineering the same product may be a lawful exercise absent the agreement. In
contrast, “improper means” under the common law could be found where a person “acts below the
generally accepted standards of commercial morality and reasonable conduct.”46 Under common
law, to discover a trade secret by “improper means” requires that the Defendants have notice of both
(1) the fact the information is a trade secret, and (2) that the disclosure by the third person to the
defendant was in violation of a confidential or contractual relationship that person had with MGE.47
For employers and litigators in the oil, gas and energy industry, it is important to remember
that, under TUTSA, if the trade secret was obtained through means that are deemed to be proper
under the statute, the previous owners of that information cannot stop the new acquirers of the same
by asserting a claim for trade secret misappropriation.48 Under TUTSA, a competitor may acquire
information that is held in confidence by a trade secret owner via means that include independent
development, reverse engineering unless prohibited, or by any other means that is not improper.
Therefore, one of the safest ways for a trade secret owner in the oil, gas and energy industry to
protect its trade secrets and other confidential and proprietary information is by agreement. These
agreements may include confidentiality agreements, nondisclosure agreements and service
agreements that have the aforementioned therein. To protect trade secret owners from employee
theft and mitigate the risks of competitors gaining access to owner’s secret information, employers
may utilize employment agreements that include confidentiality provisions and reasonable covenants
not to compete under the Texas CNCA (which is discussed below).
42 See MGE UPS Sys. v. GE Consumer & Indus. Inc., 622 F.3d 361, 364 (5th Cir. 2010). 43 See Tex. Civ. Prac. & Rem. Code § 134A.002(3). 44 See Tex. Civ. Prac. & Rem. Code § 134A.002(3)(B)(i). 45 See Tex. Civ. Prac. & Rem. Code § 134A.002(2)). 46 Alcatel USA, Inc. v. DGI Techs., Inc., 166 F.3d 772, 778, 785 (5th Cir. 1999). 47 See Metallurgical Indus., Inc. v. Fourtek, Inc., 790 F.2d 1195, 1204 (5th Cir. 1986). 48 Tex. Civ. Prac. & Rem. Code § 134A.002(4).
11
[3] Economic Espionage Act (EEA)
As is demonstrated above, although the National Conference of Commissioners
recognized the need for a uniform body of law that would both define and protect trade secrets in
the same manner across all of the states and approved the enactment of the Uniform Trade
Secrets Act to address this need, a “uniform” trade secrets law that is applied equally across all
of the States had yet to be achieved.49 The Economic Espionage Act (EEA) changed this non-
uniformity in certain aspects of trade secret law across the States and, for the first time,
established a comprehensive body of law under which theft of trade secrets as information, as
opposed to tangible property, is punishable as a criminal offense.50
The Federal Government enacted the Economic Espionage Act (EEA)51 in October of
1996 and criminalized the theft of trade secrets by classifying this and other recited acts as
economic espionage.52 The EEA is a federal tool that may be used by businesses to protect their
trade secret information from theft and misappropriation by foreign and domestic activities and
actors. Under the EEA, “trade secret” has been given a definition, that is generally in line with
the same under the UTSA, that requires the owner information to take reasonable measures to
keep the information secret and that information to derive independent economic value from not
being generally known or readily ascertainable through proper means by the public.53
Additionally, the definition of “misappropriation”54 under the EEA is similar to the definition
49 Although 48 States—including North Carolina that has enacted a vastly different version of the UTSA—have
enacted some version of the UTSA, a large majority of these States, inter alia, have different definitions of “trade
secret,” take different positions as to what constitutes “misappropriation,” have different statutes of limitations, and
have cherry-picked which provisions of the UTSA each State would adopt notwithstanding any modifications made
to the provisions adopted. For example, Alabama has enacted a statute of limitations of two (2) years (Ala. Code §
8-27-4(a)(2) (2015) while Vermont has enacted a statute of limitations of six (6) years (Vt. Stat. Ann. tit. 12, § 523
(2015)—both States rejecting the three (3) year UTSA statute of limitations. 50 Prior to the enactment of the Economic Espionage Act (EEA), theft of trade secrets was an act punishable
criminally under various other federal statutes such as the Interstate Transportation of Stolen Property Act (ITSP),
wire fraud, federal mail fraud and racketeering. The mechanism used in the ITSP by corporations to prosecute theft
of trade secrets states the following: “Whoever transports, transmits, or transfers in interstate or foreign commerce
any goods, wares, merchandise, securities or money, of the value of $5,000 or more, knowing the same to have been
stolen, converted or taken by fraud; … Shall be fined under this title or imprisoned not more than ten years, or
both.” 18 U.S.C. § 2314. 51 The Economic Espionage Act (EEA), Pub. L. 104–294, 110 Stat. 3488, enacted October 11, 1996. 52 The EEA criminalizes (1) the knowing theft, unauthorized duplication, receipt and/or possession of a trade secret
to benefit a foreign government, its agents, or instrumentalities, and (2) the knowing theft, unauthorized duplication,
receipt and/or possession of a trade secret related to a product in interstate or foreign commerce with the intent or
knowledge that such conversion will injure the owner of the trade secret. Under the EEA, attempts and conspiracies
to commit the offenses described above are also punishable within the statute. 18 U.S.C. § 1832. 53 Under the EEA, the term “trade secret” means all forms and types of financial, business, scientific, technical,
economic, or engineering information, including patterns, plans, compilations, program devices, formulas, designs,
prototypes, methods, techniques, processes, procedures, programs, or codes, whether tangible or intangible, and
whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in
writing if—(A) the owner thereof has taken reasonable measures to keep such information secret; and (B) the
information derives independent economic value, actual or potential, from not being generally known to, and not
being readily ascertainable through proper means by, the public[.]” 18 U.S.C. § 1839(3). 54 Under the EEA, the term “misappropriation” means—(A) acquisition of a trade secret of another by a person who
knows or has reason to know that the trade secret was acquired by improper means; or (B) disclosure or use of a
trade secret of another without express or implied consent by a person who—(i) used improper means to acquire
12
under the UTSA in that it proscribes (1) acquisition, (2) disclosure and (3) use of a trade secret,
but also includes, inter alia, three (3) main differences: (1) To prosecute a bad actor under the
EEA, the prosecutor must prove a mens rea element recited in the statute;55 (2) Bad actors may
be prosecuted for an attempt or a conspiracy to misappropriate a trade secret; and (3) The
misappropriated trade secret must be used or be intended to be used in interstate or foreign
commerce.56
The EEA also seeks to criminalize the theft of trade secrets with the knowledge or intent
that the theft will benefit a foreign government, instrumentality or agent.57 Penalties for a
violation by an individual of this provision includes fines of up to $5 million and imprisonment
of up to 15 years, and fines of up to $10 million for organizations.
[4] DTSA
As discussed above, the EEA is a statute that provided primarily criminal causes of action
that could be brought by the federal government but did not provide civil causes of action that an
individual or entity could bring against a bad actor. In May of 2016, the EEA was amended to
knowledge of the trade secret; (ii) at the time of disclosure or use, knew or had reason to know that the knowledge of
the trade secret was—(I) derived from or through a person who had used improper means to acquire the trade secret;
(II) acquired under circumstances giving rise to a duty to maintain the secrecy of the trade secret or limit the use of
the trade secret; or (III) derived from or through a person who owed a duty to the person seeking relief to maintain
the secrecy of the trade secret or limit the use of the trade secret; or (iii) before a material change of the position of
the person, knew or had reason to know that—(I) the trade secret was a trade secret; and (II) knowledge of the trade
secret had been acquired by accident or mistake[.]” 18 U.S.C. § 1839(5). 55 The courts are not in agreement as to whether the government must prove that the bad actor knew the information
he was taking was a trade secret or if it is enough to prove that the actor knew he was taking information. See United
States v. Jin, 833 F. Supp. 2d 977, 1011-14 (N.D. Ill. 2012), aff’d, 733 F.3d 718 (7th Cir. 2013); United States v.
Chung, 633 F. Supp. 2d 1134, 1143 (C.D. Cal. 2009), aff’d, 659 F.3d 815 (9th Cir. 2011)(“It is not explicitly clear
from the language of section 1831(a)(3)[which corresponds to section 1832(a)(3)] whether the word ‘knowingly’
modifies the ‘trade secret’ element of the offense. The Government argues that it does not, and therefore it does not
have to prove that Mr. Chung knew that the information he possessed was a trade secret. Mr. Chung contends that
the Government must prove that he had such knowledge. The Court agrees with Mr. Chung”); but see United States
v. Krumrei, 258 F.3d 535, 539 (6th Cir. 2001)(indicating that the government must show that the defendant knew the
information was proprietary and thus by implication indicating that the government need not meet the higher
standard of showing that he knew the information constituted a trade secret. See Charles Doyle, Stealing Trade
Secrets and Economic Espionage: An Overview of the Economics Espionage Act, Congressional Research Service
(August 19, 2016). 56 See Theft of Trade Secret Clarification Act of 2012, Pub. L. No. 112-236, 126 Stat. 1627 (2012). 57 Under the EEA, Economic Espionage is defined as the following: (a)In General.—Whoever, intending or
knowing that the offense will benefit any foreign government, foreign instrumentality, or foreign agent,
knowingly—(1) steals, or without authorization appropriates, takes, carries away, or conceals, or by fraud, artifice,
or deception obtains a trade secret; (2) without authorization copies, duplicates, sketches, draws, photographs,
downloads, uploads, alters, destroys, photocopies, replicates, transmits, delivers, sends, mails, communicates, or
conveys a trade secret;(3) receives, buys, or possesses a trade secret, knowing the same to have been stolen or
appropriated, obtained, or converted without authorization; (4) attempts to commit any offense described in any of
paragraphs (1) through (3); or (5) conspires with one or more other persons to commit any offense described in any
of paragraphs (1) through (3), and one or more of such persons do any act to effect the object of the conspiracy,
shall, except as provided in subsection (b), be fined not more than $5,000,000 or imprisoned not more than 15 years,
or both. (b)Organizations.—Any organization that commits any offense described in subsection (a) shall be fined not
more than the greater of $10,000,000 or 3 times the value of the stolen trade secret to the organization, including
expenses for research and design and other costs of reproducing the trade secret that the organization has thereby
avoided. 18 U.S.C. § 1831.
13
include civil causes of action that could be brought in federal district court that allow trade secret
owners, as private citizens, to sue entities for trade secret misappropriation.58 With the exception
of immunity for whistleblowers and trade secret disclosures in filed under seal in legal
proceedings,59 the new causes of action created under the DTSA do not preempt any state law
causes of action that may be brought pursuant to respective state trade secret misappropriation
statutes under the UTSA regime such that trade secret owners may pursue misappropriation
causes of action in either state or federal district court. DTSA causes of action apply only to acts
of trade secret misappropriation that occur “on or after the date of the enactment of this Act,”
May 11, 2016. (Pub. Law 114-153.) However, if the alleged bad actor continues to use the trade
secret(s) after the date of enactment, then the alleged misappropriation may fall within the scope
of the DTSA.60
In an effort to foster a model of uniformity that more closely aligned with existing civil
misappropriation laws across the States, the EEA was amended to create civil remedies that are
similar to those provided by the UTSA. Following this line of reasoning, the definition for
“trade secret” was amended and the terms “misappropriation” and “improper means” were
defined in §§ 1839(3), 1839(5) and 1839(6), respectively.61 The DTSA’s amendment to the term
“trade secret” made clear that the existence of a trade secret depended upon the information not
being readily ascertainable through proper means by a person that can exploit the same for
economic value from its disclosure or use, a requirement closely aligned to the UTSA definition.
It is the plaintiff that bears the burden in a trade secret misappropriation action of demonstrating
both that the specific information it seeks to protect is secret and that it has taken reasonable
58 Defend Trade Secrets Act (DTSA), Pub. L. 114-153. The DTSA applies to acts that occur on or after May 11,
2016 (i.e., the enactment date) and amends 18 U.S.C. §§ 1832, 1833, 1835, 1836, 1838 and 1839. 59 See 18 U.S.C. §§ 1833(b)(1) and 1838. 60 See Syntel Sterling Best Shores Mauritius Limited v. Trizetto Group, Inc., 2016 WL 5338550, at *6 (S.D.N.Y.,
2016). 61 Under the DTSA, the term “trade secret” means “all forms and types of financial, business, scientific, technical,
economic, or engineering information, including patterns, plans, compilations, program devices, formulas, designs,
prototypes, methods, techniques, processes, procedures, programs, or codes, whether tangible or intangible, and
whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in
writing if—(A) the owner thereof has taken reasonable measures to keep such information secret; and (B) the
information derives independent economic value, actual or potential, from not being generally known to, and not
being readily ascertainable through proper means by, the public another person who can obtain economic value from
the disclosure or use of the information[]”—wherein the term “public” was removed from the definition and the
underlined language was added pursuant to the DTSA amendments. Under the DTSA, the added term of
“misappropriation” is defined as ”—(A) acquisition of a trade secret of another by a person who knows or has
reason to know that the trade secret was acquired by improper means; or (B) disclosure or use of a trade secret of
another without express or implied consent by a person who—(i) used improper means to acquire knowledge of the
trade secret; (ii) at the time of disclosure or use, knew or had reason to know that the knowledge of the trade secret
was—(I) derived from or through a person who had used improper means to acquire the trade secret; (II) acquired
under circumstances giving rise to a duty to maintain the secrecy of the trade secret or limit the use of the trade
secret; or (III) derived from or through a person who owed a duty to the person seeking relief to maintain the secrecy
of the trade secret or limit the use of the trade secret; or (iii) before a material change of the position of the person,
knew or had reason to know that—(I) the trade secret was a trade secret; and (II) knowledge of the trade secret had
been acquired by accident or mistake[.]” 18 U.S.C. § 1839(5). Under the DTSA, the added term “improper means,”
recited in the definition of “misappropriation,” is defined as ”—(A) includes theft, bribery, misrepresentation,
breach or inducement of a breach of a duty to maintain secrecy, or espionage through electronic or other means; and
(B) does not include reverse engineering, independent derivation, or any other lawful means of acquisition.” 18
U.S.C. § 1839(6).
14
steps to protect this secrecy.62 For example, information that is not maintained with the requisite
secrecy destroys any confidential character it might otherwise have enjoyed as a trade secret after
disclosure without an accompanying mechanism to maintain secrecy.63
On the other hand, the DTSA substantially expands, at least on paper, what may qualify
as a trade secret under the UTSA in that the DTSA definition includes the phrase “all forms and
types of” followed by a list of commercial areas and types of information that is modified by the
aforementioned phrase. Further, the definition of “misappropriation” under the DTSA is
substantially the same under the UTSA. However, the term “improper means,” recited in the
definition of “misappropriation” of both Acts, has been limited under the DTSA in that 1)
reverse engineering, 2) independent derivation or 3) any other lawful means of acquisition is
explicitly removed from the scope of “improper means.”64 To put this statement in other words,
the DTSA does not protect a trade secret owner from the acquisition, disclosure or use of a trade
secret(s) by a party that obtained the trade secret(s) legally.
[5] Trade Secrets as Intellectual Property
To give the reader some context as to where a trade secret fits within the intellectual
property spectrum, a patent is an intellectual property right that is conferred by congressional
legislation and authorized by the U.S. Constitution. Generally speaking, a patent gives the patent
owner the right to others from making, using, offering for sale, or selling the invention
throughout the United States or importing the invention into the United States. A patent owner
does not receive any patent rights until a governmental authority named the United States Patent
Office examines and issues the patent. On the other hand, a trade secret is by its nature
considered confidential business information that the owner has kept secret and that has a
commercial value associated therewith. Generally speaking, some intellectual property may
qualify for protection under the patent laws and as a trade secret, but not at the same time.
Intellectual property that may not qualify for protected under the patent laws may often times be
protected as a trade secret.
Where inventions developed or acquired by entities are protected by patents, trade secrets
are protected by keeping the information secret and should be guarded against disclosure. This
means that entities in the oil, gas and energy sector should stay vigilante when using or
disclosing their secret information when engaging in business activities whether they be for
fossil fuel production, hydrocarbon processing, oil field prospecting, or any activity in the joint
venture and business acquisition space. In this context, it is often required that the confidential
information be leveraged and used for its intended purpose, and this use often requires that third
parties have access to either the information itself, the underlying technology, or the results
produced by the confidential information. In these scenarios, it may be that a separate
confidentiality agreement is required to fully protect the confidential information and trade secret
owner from unauthorized and inadvertent disclosure of its secret information.
62 See Laing v. BP Exploration & Production Inc., NO. 8:13-CV-1041-T-23TGW, 2014 WL 272846, *4 (M.D. Fla.
Jan 14, 2014). 63 See In re Maxxim Med. Grp., Inc., 434 B.R. 660, 691 (Bankr. M.D. Fla. 2010) (“Disclosure of information to
others who are under no obligation to protect the confidentiality of the information defeats any claim that the
information is a trade secret.”). 64 18 U.S.C. § 1839(6).
15
For example, entities in the oil, gas and energy sector that perform business acquisitions
and looking for joint venture types of deals should look to include non-disclosure and
confidentiality agreements and provisions in their contracts. These agreements should be
directed to and specify the following: (1) the potential buyer knows the seller considers the
information to be a trade secret; (2) agreement that information is a secret, and to maintain its
secrecy; (3) the information is being examined for the sole limited purchase of evaluating
whether to purchase/invest; (4) specify the scope of the authorized disclosure; (5) prohibit
reverse engineering; (6) prohibit unauthorized disclosure and/or use; and (7) specify the remedies
for breach, including injunction, damages, attorney’s fees, venue, and choice of law.65
[6] What’s It All Mean
Although oil and gas production levels have not been at their peaks in the past few years,
the technology involved in the up-stream and downstream oil field services and the related
production methodologies, including technologies like horizontal drilling, hydraulic fracturing,
remote and on-site well-testing, IOT (internet-of-things) sensors and data processors, etc., is still
progressing. Therefore, trade secret misappropriation claims involving field discoveries, on-
boarding and off-boarding employees, oilfield technology and oilfield service company disputes
will continue whether the price of oil Bbl is turning down or gaining ground.
For example, in the A.M. Castle & Co. v. Byrne case,66 The issue to be decided by the
federal district court was whether customer purchase histories and contact information including
customer lists are protectable trade secrets under Texas law. Here, a former employee (Byrne) of
Tube Supply, Inc., which was subsequently acquired by A.M. Castle, held the position of Inside
Sales Representative. While employed by Tube Supply, Byrne was subject to a confidentiality
agreement that ran to acquirers of Tube Supply. After Byrne became a Castle employee, The
Byrne was given access to all of Castle’s confidential information within the scope of his new
employment. Due to the nature of the confidentiality agreement, the court determined that A.M.
Castle could rely upon the confidentiality agreement signed by Byrne that contained the
following nondisclosure provision prohibiting the disclosure of any of Tube Supply’s proprietary
information:
Trade secrets, confidential knowledge, data, or any other information of the
Company. By way of illustration but not limitation, “Proprietary Information”
includes:
(a) specifications, drawings, inventions, mask works, trade secrets, ideas,
processes, formulas, source and object codes, data, programs, other works of
authorship, know-how, improvements, deliveries, developments, designs and
techniques (hereinafter, collectively referred to as “Inventions”); and
(b) information regarding plans for research, development, new products,
regulatory matters, marketing and selling, business plans, budgets and
unpublished financial statements, licenses, prices and costs, suppliers and
65 Trends in Texas Oil & Gas Litigation – Review of Oil and Gas Law, Michael K. Hurst and Jonathan R. Childers,
2014 DBA Energy Law Annual Review of Oil & Gas Law Seminar (August 15, 2014). 66 A.M. Castle & Co. v. Byrne, 123 F.Supp.3d 909 (S.D.Tex.,2015).
16
customers; and information regarding the skills and compensation of other
employees of the Company.67
Byrne, thereafter left Castle and was subsequently hired by OSS, Castle’s competitor, and was
thereafter accused of 1) misappropriating Castle’s confidential information—information
including customer lists and information, vendor contact information, and sales and revenue
data—2) subsequently providing the same to his new employer, OSS, and 3) soliciting Castle's
customers and vendors on behalf of OSS based on this wrongfully obtained information.68
The Court sided with Castle that the information that was taken by Byrne was protectable
under Texas law as trade secrets and it was secret to Castle by virtue of the confidentiality
agreement.69 In light of this and other cases, confidentiality agreements should be used when at
all possible to protect a trade secret owner’s secret information in the oil, gas and energy sector.
The discussion below describes how confidentiality agreements in the form of and in
addition to covenants not to compete operate to further restrain former employees from taking
and disclosing an owner’s confidential and trade secret information to its competitors after these
employees are off-boarded to third party entities.
In another dispute between two oil services companies, BHL Boresight sued Geo-
Steering Solutions, Inc. for both theft of trade secrets and misappropriation of trade secrets.70
This case arises from the parties’ dispute over the genesis of GSSI’s geo-steering software. BHL
Boresight, LLC is a company in Tyler, TX that has developed a system for horizontal drilling.
Geo-Steering Solutions Inc. (GSSI) is a company that develops software for horizontal drilling
and provides consulting services in the oil and gas production space for horizontal drilling
methods. BHL filed suit against GSSI and Defendant Statoil alleging that Defendants
misappropriated confidential and proprietary software that constitutes trade secrets when GSSI
and Statoil accessed and used BHL’s geo-steering software to develop GSSI’s competing
software.71 The takeaway here is that although the TUTSA has preempted the common-law and
the TTLA, plaintiffs are still free to avail themselves of any and all of these causes of action
depending upon when the actions that led to the claim for misappropriation or theft occurred.72
67 A.M. Castle & Co. v. Byrne, 123 F.Supp.3d 909, 913–14 (S.D.Tex.,2015). 68 Id. at 914 (S.D.Tex.,2015). 69 Id. at 920 (S.D.Tex.,2015)(“The list that Byrne assembled and misappropriated was marked as confidential by
Castle. That fact and the fact that Castle had a Confidentiality Agreement with Byrne in place and a confidentiality
policy in its Employee Handbook show that Castle took measures to protect the secrecy of the information at issue
and thus the list is protectable under Texas law. Here the Court must agree with Castle that some Texas courts have
held that even if customer information is readily available in the industry, liability will be upheld if the defendant
gained the information in usable form while working for the former defendant.”). 70 BHL Boresight, Inc. v. Geo-Steering Solutions, Inc., 2017 WL 2730739, at *11 (S.D.Tex., 2017). 71 BHL also filed a claim of action for copyright infringement. The copyright claim is important here because the
court held that trade secret claims filed pursuant to the TTLA are preempted by the Copyright Act but neither the
TUTSA nor the common law trade secret claims are preempted because the aforementioned include an ‘extra
element’ of breach of confidentiality or improper methods that is not equivalent to any of the exclusive rights
included in the Copyright Act. BHL Boresight, Inc. v. Geo-Steering Solutions, Inc., 2017 WL 2730739, at *11
(S.D.Tex., 2017). 72 See BHL Boresight, Inc. v. Geo-Steering Solutions, Inc., 2017 WL 2730739, at *11 (Notwithstanding the merger
of TTLA theft-of-trade-secret claims and common-law misappropriation into the TUTSA framework in 2013,
17
§ 2.0 THE IMPACT OF RECEIVING AND OFF-BOARDING KEY EMPLOYEES
THAT RETAIN CONFIDENTIAL AND TRADE SECRET INFORMATION
[1] Contamination Risks and The Inevitable Disclosure Doctrine
As an initial matter, it is important to note that Texas courts have not adopted the
inevitable disclosure doctrine.73 Inevitable disclosure is a common law doctrine developed by
some state courts pursuant to state trade secret laws. The doctrine is not uniformly administered
throughout the states. Under state law, the “inevitable disclosure doctrine” may be relied upon
by previous employers to prove secret misappropriation. The doctrine is helpful in instances
where the employee’s old position—that necessarily included access and/or exposure to the
employer’s confidential, trade secret and proprietary information—is essentially the same or
similar to the employee’s new position for which the employee was hired at the new company
that is a competitor of the former employer. It may be said in this instance that the employee’s
responsibilities in his/her new role will ‘inevitably’ include the disclosure and/or use of the
former employer’s trade secrets.74 The following Illinois state court test for inevitable disclosure
relies upon the rationale behind the doctrine and, in determining if a trade secret
misappropriation will inevitably occur, asks the court to consider whether: (1) the plaintiff and
defendant’s new company are direct competitors; (2) the employee’s new position is comparable
to his or her former position; and (3) the new employer has taken any action to prevent the
former employee from using or disclosing trade secrets.75
The “inevitable disclosure doctrine” is an extension of trade secret protection that
provides a powerful, yet controversial, tool to trade secret owners. Texas courts have described
the doctrine as follows:
“[T]here are circumstances in which trade secrets inevitably will be used or
disclosed, even if the defendant swears that he or she will keep the information
confidential. Courts applying the doctrine have differed over its reach and the
circumstances required for its application, but, generally speaking, the doctrine
applies when a defendant has had access to trade secrets and then defects to the
trade secret owner’s competition to perform duties so similar that the court
believes that those duties cannot be performed without making use of trade secrets
relating to the previous affiliation.” 76
because the TUTSA is not retroactive, a plaintiff may still proceed with TTLA theft-of-trade secret, common-law,
and TUTSA trade-secret-misappropriation claims in a single case depending on when his claims accrued and what
claims the facts of his case support.”). 73 “Like the Cardoni court, we conclude that the inevitable disclosure doctrine has not been adopted by Texas courts
and is not a blanket rule applicable to all nondisclosure provisions in Texas.” DGM Services, Inc. v. Figueroa, 2016
WL 7473947, at *5 (Tex.App.-Hous. (1 Dist.), 2016); see Cardoni v. Prosperity Bank, 805 F.3d 573, 589–90 (5th
Cir. 2015). In the Cardoni case, an employer suing a former employee argued that the “inevitable disclosure”
doctrine may be utilized in Texas courts to presume disclosure of a trade secret. The Cardoni court rejected the
employer’s argument noting that Texas courts have never announced a blanket rule that applies to scenarios in
which trade secret misappropriation is based upon the nondisclosure of the relevant trade secret. 805 F.3d at 589. 74 PepsiCo, Inc. v. Redmond, 54 F.3d 1262, 1269 (7th Cir. 1995). 75 Saban v. Caremark Rx, L.L.C., 780 F. Supp. 2d 700, 734–35 (N.D. Ill. 2011). 76 Cardinal Health Staffing Network, Inc. v. Bowen, 106 S.W.3d 230, 242 (Tex. App.-Houston [1st Dist.] 2003, no
pet.). The Cardinal Court goes on to state that Texas courts have rejected the inevitable disclosure doctrine. See
18
In its application, a former employee is exposed to a trade secret owned by his previous
employer that is deemed to be so central to his current role taken at the employee’s new
employer that the former employee will “inevitably” disclose the trade secret in her new
employment. Therefore, the trade secret owner’s position is that the former employee cannot
work for the new employer due to the inevitable use and disclosure of the relevant trade secret,
even if the trade secret has not been used or disclosed at that present point in time. In its truest
form, a trade secret owner would not need an employment agreement to enforce an inevitable
disclosure doctrine claim. Due to the fact that a disclosure of the trade secret does not have to
occur to enforce the doctrine, many courts are reticent to invoke the same.
Texas courts, generally speaking, have held true to this position in theory. For example,
the DGM Services Court in 2016 relied upon the fact that the inevitable disclosure doctrine is not
recognized in Texas.77 However, Texas courts have relied upon some modified theories of trade
secret misappropriation wherein it was found that disclosure and/or use of the relevant trade
secrets by previous employees was probable enough that the imposition of an injunction was
proper under the circumstances, even where there was no evidence presented that the employee
disclosed or used the trade secret.
For example, in Weed Eater, Inc. v. Dowling, the appellate court determined that the trial
court correctly issued an injunction that enjoined Weed Eater’s former employee “from
disclosing to any third party, confidential or secret information with relation to a number of
specific matters including the layout and design of an assembly line for flexible line trimming
devices, and past assembly line modifications and refinements,” after the employee left the trade
secret owner to work for a direct competitor of the same, but “abused its discretion in failing to
include in the injunction order a provision restraining [the former employee] from continuing in
the employment of [the employer’s direct competitor] so long as [the employee’s] duties include
activities related to developing, manufacturing and marketing lawn and garden trimmers,
lawnmowers and similar products.78 The employee was the vice president of manufacturing for
the trade secret owner and was responsible for designing and organizing an assembly line for the
production of the employer’s line of string line trimmers. It was found that the employee
attended the employer’s meetings and had access to confidential and trade secret information
including new product plans, market forecast, testing methods and results, market strategy, sales
prices, performance specifications for components, and the confidential list of component
vendors. After signing a non-disclosure agreement with the trade secret owner, the employee left
the trade secret owner’s employment to supervise an assembly line for a direct competitor to the
trade secret owner that wanted to start producing its own line of gardening trimmers, rather than
buying them from Weed Eater. The appellate court found that merely issuing an injunction that
prohibited the employee from using Weed Eater’s confidential information and trade secrets was
Cardinal at 230, 242–43 (observing that the Court has found “no Texas case expressly adopting the inevitable
disclosure doctrine”); see also M-I, L.L.C. v. Stelly, 2009 WL 2355498, at *7 (S.D.Tex.,2009) (finding that “Texas
courts have not expressly adopted the inevitable disclosure doctrine, and it is unclear to what extent Texas courts
might adopt it or might view it as relieving an injunction applicant of showing irreparable injury,” and, on that basis,
refused to order an injunction due to lack of evidence that the accused former employees took any trade secrets or
used the same in their new roles). 77 DGM Services, Inc. v. Figueroa, 2016 WL 7473947, at *5 (Tex.App.-Hous. (1 Dist.), 2016). 78 Weed Eater, Inc. v. Dowling, 562 S.W.2d 898 (Tex. Civ. App. 1978).
19
insufficient to fully protect the Plaintiff’s property because the evidence established that there
was an “imminent danger of irreparable injury” to Weed Eater's business the former employee
was allowed to work in the same area of production.79 Thus, the appellate court modified the
original injunction reasoning that the only effective relief for Weed Eater was to restrain [the
former employee] from working for the competing entity in any capacity related to the
manufacture of a flexible line trimming device.
In Correa v. Houston Surgical Assistant Services, Inc., the standard, used to decide
whether an injunction preventing former employees from providing the same services to the
same client’s previously serviced under the employment of a trade secret owner was proper, was
framed as whether the appellant’s actions would result in probable, imminent, and irreparable
harm to the trade secret owner.80 By way of background, the trade secret owner (HSAS) was in
the business of supplying surgical assistants to hospitals. It was found by the court that it was
the trade secret owner as part of the employment relationship that enabled appellants to form
relationships of confidence with the trade secret owner’s clients by disclosure of its confidential
and trade secret information. For example, the evidence established that HSAS shared with
appellants, among other things, its’ confidential contract pricing and reimbursement information
and it was this information that gave HSAS, Inc. a competitive advantage over market
participants. The evidence also established that the appellants were working in the same
hospitals with the same surgeons, i.e. with HAS’s clients. The evidence further established that
in at least one circumstance, the client surgeon was not aware that one of appellants was no
longer employed by HSAS while the employee was servicing the client. In summation, the court
found that “[a]ppellants [were] able to assist surgeries in the same hospitals, with the same
physicians as HSAS, Inc., using HSAS, Inc.'s compiled techniques to undermine HSAS, Inc.'s
created relationships, knowing and undercutting HSAS, Inc.'s negotiated and, thus, fixed contract
pricing.”81
The Correa Court found that the trial court did not abuse its discretion in entering the
temporary injunction, tailored to prevent the former employees from using the trade secret
owner’s secret information to gain a competitive advantage, in determining that the harm to
HSAS was greater than the harm to appellants caused by a temporary injunction as HSAS was
able to establish a probable, imminent, and irreparable injury.82
79 The court reasoned that “[e]ven in the best of good faith, Dowling can hardly prevent his knowledge of his former
employer's confidential methods from showing up in his work. The only effective relief for Weed Eater is to restrain
Dowling from working for Hawaiian Motor Company in any capacity related to the manufacture by Hawaiian Motor
Company of a flexible line trimming device.” Weed Eater, Inc. v. Dowling, 562 S.W.2d 898, 902 (Tex.Civ.App.
1978) 80 Correa v. Houston Surgical Assistant Services, Inc., 2013 WL 3958499, at *10 (Tex.App.-Houston [14
Dist.],2013) 81 Id. at *11 (Tex.App.-Houston [14 Dist.],2013). 82 “We conclude that, on balance, the trial court did not abuse its discretion in determining that the harm to HSAS,
Inc. upon appellants' breaching their noncompetition covenants is greater than the harm to appellants caused by a
temporary injunction. The temporary injunction is specifically tailored to prevent appellants from usurping the
competitive advantage derived from HSAS, Inc.'s confidential information, as the injunction is appropriately limited
to specific hospitals and the physicians with whom the appellants actually worked.” Correa v. Houston Surgical
Assistant Services, Inc., 2013 WL 3958499, at *12 (Tex.App.-Houston [14 Dist.],2013).
20
In Flake v. EGL Eagle Global Logistics, L.P., the court of appeals affirmed the
imposition of a temporary injunction that upheld a trade secret owner’s right to prevent the
former employee from gaining an unfair market advantage. According to the court, a
preliminary injunction is proper if the trade secret shows, in addition to the prong that no
adequate legal remedy exists (i.e., damages are difficult to calculate or their award may come too
late), a probable right to recover and a probable injury in the interim. 83 Here, the trade secret
owner (Eagle) was a freight forwarding company and the accused employee (Flake) was a
salesman that signed an at-will employment agreement that contained a covenant not to compete.
The court established that the covenant not to compete prohibited Flake from (1) working for a
competing business in the same geographic area for one year; (2) calling on or soliciting business
from customers with whom Flake with/for while employed at Eagle; and (3) using and disclosing
confidential information or trade secrets to which he had access and/or was provided while
employed at Eagle to use in his official capacity as a salesman. The evidence showed that Flake
worked for Eagle for more than two years before Eagle required him to execute the employment
agreement/covenant not to compete. After Flake resigned, he immediately became part owner of
a competing business. In seeking a temporary injunction, Eagle alleged that Flake was breaching
the agreement by: (1) soliciting Eagle’s former customers in direct violation of the covenant not
to compete; and (2) utilizing confidential pricing structures, customer lists and trade secrets
owned by Eagle.
The Flake Court stated that seeking injunctive relief is proper to prevent a party that
appropriated another’s trade secrets from gaining unfair market advantage. The court reasoned
that an employee who possesses confidential information is in a position to use that information
to compete directly with the owner of the secret information.84
In Baker Petrolite Corp. v. Spicer, a trade secret owner (Baker) alleged that its former
employee (Spicer) misappropriated its trade secrets and confidential information.85 This case is
of particular interest due to the findings of the trial court: (1) The covenant not to compete was
unenforceable because it was not “ancillary to or part of” an otherwise enforceable agreement, as
required by Section 15.50 of the Texas Business and Commerce Code;86 and (2) There was no
evidence that Spicer misappropriated or used Baker’s trade secrets or confidential information.
However, due to the fact that Spicer did receive confidential, proprietary and otherwise secret
information during his employment and it amounts to more than general knowledge, the Court
applied FMC Corp. reasoning (discussed below) that by Spicer’s act of accepting employment
with a direct competitor of Baker, Spicer “placed himself in a position in which he could
83 Flake v. EGL Eagle Global Logistics, L.P., 2002 WL 31008136, at *4 (Tex.App.-Houston [14 Dist.],2002) 84 Id. at *4 (Tex.App.-Houston [14 Dist.],2002)(“ Although any damages Eagle stands to suffer or has suffered are
compensable through money damages, injunctive relief is proper to prevent a party, that has appropriated another's
trade secrets, from gaining unfair market advantage. Therefore, the only effective relief available to an employer is
to restrain the employee's use of trade secrets and confidential information pending trial.”)(internal citations
omitted). 85 Baker Petrolite Corp. v. Spicer, 2006 WL 1751786 (S.D.Tex.,2006). 86 Id. at *6 (S.D.Tex.,2006)(“The requirement that the otherwise enforceable agreement exist “at the time the
[noncompete] agreement is made” comes directly from the Texas statute. Tex. Bus. & Com.Code Ann. § 15.50.
Courts considering this requirement have been clear that promises by the employer that depend on continued
employment of an at-will employee are illusory because the employee could be terminated by the employer at any
time prior to performance.”).
21
reasonably be expected to reveal, base judgments upon, or otherwise disclose or use any of the
proprietary and confidential information or trade secrets of [Baker].”87 In the end, the trial court
relied upon a probable or inevitable theory of disclosure to apply and enter a preliminary
injunction that restrained Spicer from working with specific Baker customers in specific
locations over a specific period of time.88 The court carefully tailored the injunction to allow
Spicer the maximum amount of freedom to pursue new employment, while still protecting
Baker’s confidential information.89
In the FMC Corp. relied upon above, the defendant, Best Industries, recruited an FMC
engineer (Witt) involved in research and product development for FMC (the trade secret owner)
to work for Best after attempting, unsuccessfully, to independently develop FMC’s technology.90
The court determined Witt signed FMC’s standard nondisclosure agreement but that a covenant
not to compete was not executed between the parties. FMC sought a preliminary injunction
enjoining Witt from using or disclosing FMC’s trade secrets, and enjoining Best from placing
Witt in a position that would create the inherent threat of disclosure. Although the district court
denied the application, the Fifth Circuit Court of Appeals reversed the trial court’s decision,
holding that all four requirements necessary for preliminary injunctive relief were met. As in the
Baker case, the court found that “[e]ven assuming the best of good faith, Witt will have difficulty
preventing his knowledge of FMC’s ‘Longsweep’ manufacturing techniques from infiltrating his
work.”91 Although there was no direct evidence of disclosure and/or use of FMC’s trade secret
or confidential information, the court rejected FMC’s argument that Witt could self-police
reasoning that the only way to protect FMC’s trade secrets was to grant the injunction and enjoin
Best from putting Witt in a position that would pose an inherent threat of use or disclosure of
FMC’s secret information.92
As discussed above, cases such as FMC and Weed Eater are directed towards scenarios in
which a competitor is attempting to enter the market using the know-how and technology owned
by another concerning the manufacture of a competing product. It is important to know that the
Cardoni court distinguished the FMC and Weed Eater cases holding that more recent Texas law
87 Baker Petrolite Corp. v. Spicer, 2006 WL 1751786, at *9 (S.D.Tex.,2006)(the court relied upon FMC Corp. v.
Varco Intern., Inc., 677 F.2d 500, 504-05 (5th Cir.1982) reasoning: “Even assuming the best of good faith, Spicer
will have difficulty preventing his knowledge of Baker's products and processes relating to specific locations and
customers from infiltrating his work if Spicer works with those customers in those specific locations. Both Texas
courts and the Fifth Circuit have recognized the need for injunctive relief in similar situations.”). 88 “Thus, Spicer will be free under the injunction to work with Baker customers in locations other than those in
which he worked during the last eighteen months of his employment.” Id. at *10 (S.D.Tex.,2006)(The court also
prohibited Spicer from disclosing Baker’s confidential and trade secret information to any customers at any time as
prohibited in the relevant covenant. FN3.) 89 The trial court found that due to the threat of disclosure, the nature of the information at issue, and the direct
competitive relationship between Baker and Multichem, Spicer should be further enjoined from working with Baker
customers with which he had contact in a sales capacity during the last eighteen months of his employment with Id.
at *9-10 (S.D.Tex.,2006). 90 FMC Corp. v. Varco Intern., Inc., 677 F.2d 500 (C.A.Tex., 1982). 91 “Texas has recognized the need for injunctive relief in similar situations.” Id. at 504 (C.A.Tex., 1982)(citing
Weed Eater, Inc. v. Dowling, 562 S.W.2d 898, 902 (Tex. Civ. App.-Houston 1978, writ ref'd n.r.e.)”. 92 FMC Corp. v. Varco Intern., Inc., 677 F.2d 500, 505 (C.A. Tex., 1982)(“The injunction is necessary, however,
because Best argues that the items described by FMC as trade secrets do not constitute trade secrets. Therefore,
without the injunction, Witt may, out of ignorance of what information constitutes a trade secret, reveal the
confidential matters FMC seeks to protect.”).
22
has rejected the notion of an automatic application of an inevitable disclosure rule with respect to
nondisclosure provisions in employment agreements.93
Employers that rely upon their confidential, proprietary and trade secret information to
maintain their market position in highly competitive marketplaces are fearful of former
employees taking this information with them to a competitor and disclosing and using the same
in discharging their duties owed to the next employer. Equally so, new employers are fearful of
new employees bringing with them the confidential, proprietary and trade secret information
owned by another and disclosing or using the same in the employee’s business activities
performed for the new employer. These acts of contaminating the new employer’s legally-
obtained information and know-how with information owned by another are the intended target
of the inevitable disclosure doctrine. The doctrine allows former employers to request injunctive
relief and prevent their former employees from working for a competitor where, due to the
similar role and/or responsibilities undertaken by the former employee, the former employee
would "inevitably" rely on her knowledge of her former employer's trade secrets in her new role.
For example, in the PepsiCo, Inc. v. Redmond case,94 the PepsiCo company sought an injunction
preventing a former high-level manager from going to work in a similar role for Quaker's
Gatorade brand. The court of appeals upheld a district court's injunction preventing the manager
from taking the position at Quaker because, even though the manager did not take any physical
or electronic trade secrets, the court determined that the former employer would "inevitably" rely
on his knowledge of PepsiCo's trade secrets in his new job.95
Pursuant to 18 U.S.C. 1836(b)(3)(A), the Defend Trade Secrets Act (DTSA) precludes a
court from granting injunctive relief that “prevent[s] a person from entering into an employment
relationship” and by requiring “that conditions placed on such employment shall be based on
evidence of threatened misappropriation and not merely on the information the person knows.”
This provision was widely viewed as a rejection of the inevitable disclosure doctrine by the
DTSA. However, former employers may now be able to plead trade secret misappropriation
under the DTSA in federal court relying upon the “inevitable disclosure” doctrine to prevent a
former employee from taking a new role at a competitor when the responsibilities of the new role
will inevitably lead him/ her to rely on the employer's trade secrets.
In 2017, the federal district court in the Northern District of Illinois considered whether
the inevitable disclosure doctrine was precluded by the DTSA in Molon v. Nidec.96 In the cited
opinion and order, the federal district court denied a 12(b)(6) motion to dismiss the trade secret
misappropriation claim—the motion premised upon the position that Molon presented no factual
93 Cardoni v. Prosperity Bank, 805 F.3d 573 (C.A.5 (Tex.), 2015). 94 PepsiCo, Inc. v. Redmond, 54 F.3d 1262 (7th Cir. 1995). 95 Id. at 1270-71 (7th Cir. 1995)(“Thus, when we couple the demonstrated inevitability that Redmond would rely on
PCNA trade secrets in his new job at Quaker with the district court's reluctance to believe that Redmond would
refrain from disclosing these secrets in his new position (or that Quaker would ensure Redmond did not disclose
them), we conclude that the district court correctly decided that PepsiCo demonstrated a likelihood of success on its
statutory claim of trade secret misappropriation.”). 96 Molon Motor and Coil Corp. v. Nidec Motor Corp., No. 16 C 03545, 2017 WL 1954531, at *5-6 (N.D. Ill. May
11, 2017).
23
allegations in the complaint that the new employer (Nidec) used the former employer’s (Molon)
trade secrets—stating that the facts plead were sufficient at the pleading stage.97
Stepping through the requirements of the inevitable disclosure doctrine, the court found
that Molon’s former Head of Quality Control, Mr. Desai, stole Molon’s confidential and trade
secret information pertaining to its engineering, design, and quality control by downloading the
same onto a personal portable data drive before taking on an identical role at Nidec, Molon’s
direct competitor. The court found that Mr. Desai’s position with his former employer, Molon,
was similar to his new position at Nidec discussing the overlap in responsibilities. The court
found that Molon further alleged that Mr. Desai unlawfully disclosed the trade secrets to Nidec
which in turn has used and continues to use Molon’s trade secret information stolen by Mr.
Desai. Mr. Desai was bound to an employment agreement with Nidec that included a restrictive
covenant which stated that Molon’s trade secrets and confidential information were Molon’s sole
and exclusive property and banned the unauthorized use of Molon’s company data.98 In its’
motion to dismiss, Nidec’s primary argument was based upon the premise that Manish Desai
acquired Molon’s trade secrets by “proper” means due to the fact that Mr. Desai downloaded the
information while he was employed at Molon.99 However, the Court rejected Nidec’s argument
reasoning that the restrictive covenant in Mr. Desai’s employment agreement forbid Mr. Desai
from using Molon’s confidential information for any other purpose other than his work at
Molon.100
The Molon decision is illustrated above to illuminate the type of risks that comes from
new employers hiring employees who can contaminate their networks, service and/or process
methods and other business methodologies and supporting systems with confidential information
legally owned by a competitor, namely the former employer of the newly hired employee. The
adoption of the doctrine of inevitable disclosure or some modified doctrine thereof (e.g.,
probable disclosure) means that a trade secret owner may be able to circumvent the burdensome
and high-hurdle requirements of proving both illegal taking and disclosure/use of the owner’s
trade secrets at the early stages of litigation and withstand motions to dismiss. In fact, it follows
that the hurdles to the imposition of a preliminary injunction and a permanent injunction further
down the line will also be impacted in a jurisdiction that allows the doctrine in some form or
another.
However, there are other examples of contamination that have resulted in much stiffer
fines and penalties than the above new employer will likely face. For example, in 2016, the
online real estate company Zillow agreed to pay Move, a competing company, $130 million over
allegations of trade secret theft concerning two former Move executives hired by Zillow that
brought with them trade secrets and other confidential proprietary information owned by
97 Id. at *15. 98 Id. at *9-10. 99 Id. at *7-10. 100 Id. at *11-15 (N.D. Ill. May 11, 2017) (“All told, Molon’s allegations on the direct competition between the
parties, as well as the allegations on the employment breadth and similarity of Desai’s quality control work at the
two companies, are enough to trigger the circumstantial inference that the trade secrets inevitably would be
disclosed by Desai to Nidec. To be sure, going forward, Molon ultimately will bear the burden of proving—not just
alleging—enough facts such that disclosure is not premised on a mere unsubstantiated fear.”).
24
Move.101 In 2010, Hilton Worldwide settled with Starwood Hotels & Resorts Worldwide for $75
Million cash and another $75 million in hotel-management contracts in a case that stemmed from
Hilton hiring Starwood executives that brought Starwood confidential and trade secret
information along with them to facilitate Hilton’s plans to create a Denizen brand hotel to
compete with the W hotels.102 For example, in May of 2016, Boeing Company paid a $615
million fine after admitting, inter alia, to hiring several past Lockheed Martin employees that
brought thousands of pages of Lockheed proprietary documents.103
The discussion above highlights the fact that the jurisdiction where a trade secret claim is
litigated will still matter greatly in terms of the applicability of the inevitable disclosure doctrine
or some other similar doctrine. Plaintiffs pursuing trade secret claims against former high-level
or low-level employees, as the case may be, will continue to seek out forums where the state or
federal courts have upheld the doctrine. In those cases, plaintiffs may now be able to seek out
inevitable disclosure remedies under state law and federal law (i.e., DTSA).
[2] Texas Covenants Not To Compete Act And Its Impact
[a] Generally
Covenants not to compete are enforceable in Texas, as long as they comply with Section
15.50 et. seq. of the Texas Business & Commerce Code— otherwise known as the Covenants
Not to Compete Act (the “Act” or the “CNCA”)—and are most commonly found in employment
contracts and business sale contracts.104 All covenants that place limits on employees’
professional mobility are restraints on trade and are governed by the Act, and must among other
things, contain reasonable limitations.105 This includes both non-competes as well as agreements
that restrict employees’ solicitation of the former employers’ customers and employees (“non-
solicits”). In other words, there is no requirement that an agreement contain the specific
terminology “covenant not to compete” in order to be deemed such and therefore subject to
101 Zillow to pay $130M to settle lawsuit with Move over alleged trade secret theft, Ben Lane, Housingwire (June 6,
2016), found at URL: https://www.housingwire.com/articles/37204-zillow-to-pay-130m-to-settle-lawsuit-with-
move-over-alleged-trade-secret-theft. 102 Hilton and Starwood Settle Dispute, Peter Lattman, New York Times (December 22, 2010), URL:
https://dealbook.nytimes.com/2010/12/22/hilton-and-starwood-settle-dispute/. 103 Boeing Agrees to Pay $615 Million Settlement, Renae Merle, Washingtonpost.com (May 16, 2006),
URL:http://www.washingtonpost.com/wpdyn/content/article/2006/05/15/AR2006051500704.html. 104 The enforceability of noncompetition agreements in Texas has made a full pendulum swing in favor of the same
once more. By the end of the 1980s, noncompetes were highly disfavored by Texas courts. However, the Texas
Legislature came to the rescue of corporations seeking to mitigate their risks with the Texas Covenants Not to
Compete Act (Tex. Bus. & Com. Code § 15.50-52), which brought noncompetes back to forefront to be used as a
tool for employers to protect their investments. Generally speaking, the Act favors enforcement of noncompete
agreements so long as they are (1) ancillary to an otherwise enforceable agreement, (2) serve a legitimate business
purpose, and (3) contain reasonable limits as to time, and geography and scope of activity restricted. 105 Marsh USA Inc. v. Cook, 354 S.W.3d 764, 771 (Tex., 2011)(“At one time the common law generally prohibited
all restraints on trade, and Texas jurisprudence once held covenants not to compete to be unenforceable because they
were in restraint of trade and contrary to public policy. But people and the courts came to recognize that it was in the
interest of trade that certain covenants in restraint of trade should be enforced. And the rule became well-established
in Texas that reasonable noncompete clauses in contracts pertaining to employment are not considered to be
contrary to public policy as constituting an invalid restraint of trade. Texas courts have enforced reasonable
covenants not to compete dating back at least to 1899.”)(internal citations and quotations omitted).
25
CNCA. Rather, because “[u]nreasonable limitations on employees’ abilities to change
employers ... could hinder legitimate competition between businesses and the mobility of skilled
employees,” Texas courts have routinely held that any stipulations “limiting employees’
professional mobility are unlawful restraints of trade . . . unless they fall within the exception
created by the Covenants Not to Compete Act."106 Hence, the requirements of the CNCA “apply
not only to provisions that expressly limit a former employee’s professional mobility, but also to
damages provisions that impose a severe economic penalty on a departing employee” because
the practical and economic reality of such damages provisions is that they inhibit employee
mobility in virtually the same manner as a covenant not to compete.107
Although most restraints on competition are unlawful under Texas law,108 the Act creates
an exception for non-compete agreements: To be enforceable under Texas law, a covenant not to
compete must be: (1) ancillary to or part of an otherwise enforceable agreement; (2) contain
reasonable limitations as to time, geographical area, and scope of activity to be restrained; and
(3) not impose a greater restraint than is necessary to protect the goodwill or other business
interest of the promisee. Tex. Bus. & Comm. Code Ann. § 15.50(a).109
To determine whether there is an enforceable covenant not to compete, the court must
first examine whether the parties entered into an “otherwise enforceable agreement,” and then
decide whether the covenant was “ancillary to or part of” that agreement at the time the
agreement was made.110
[b] Ancillary Agreement
In Texas, covenants not to compete that were enacted as a stand-alone agreement have
been held to be unenforceable. Section 15.50 of the Covenants requires that the agreement be
106 ” Rieves v. Buc-ee's Ltd., 2017 WL 4557796, at *4 (Tex.App.-Hous. (14 Dist.), 2017) (citing Marsh USA Inc. v.
Cook, 354 S.W.3d 764, 768 – 770, 782 (Tex., 2011)). 107 Id. at *5 (Tex.App.-Hous. (14 Dist.), 2017) (citing Peat Marwick Main & Co. v. Haass, 818 S.W.2d 381, 385-
386, 388 (Tex. 1991)). 108 “In the Free Enterprise and Antitrust Act, the Legislature declared that ‘[e]very contract, combination, or
conspiracy in restraint of trade or commerce is unlawful.’ The Supreme Court of Texas has concluded that
covenants limiting employees' professional mobility are unlawful restraints of trade under this statute unless they
fall within the exception created by the Covenants Not to Compete Act. As the court explained, ‘[u]nreasonable
limitations on employees' abilities to change employers ... could hinder legitimate competition between businesses
and the mobility of skilled employees.’ The Covenants Not to Compete Act provides that a covenant is enforceable
only if (among other things) ‘it contains limitations as to time, geographic 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 promisee.’” Id. at *4 (Tex.App.-Hous. (14 Dist.), 2017) (citing Tex. Bus. & Com. Code Ann. §
15.50(a))(internal citations omitted). 109 RealPage, Inc. v. Enterprise Risk Control, LLC, 2017 WL 3313729, at *5 (E.D.Tex., 2017). 110 See § 15.50(a); see also Wharton Physician Services, P.A. v. Signature Gulf Coast Hospital, L.P., 2016 WL
192069, at *3 (Tex. App.-Corpus Christi, 2016)(“When determining whether an enforceable covenant not to
compete has been created under section 15.50, [we ask]: (1) is there is an otherwise enforceable agreement and (2)
was the covenant not to compete ancillary to or part of that agreement at the time the otherwise enforceable
agreement was made. The common meaning of those words control; the covenant not to compete must be ancillary
to (supplementary) or part of (one of several units of which something is composed) an otherwise enforceable
agreement. The otherwise enforceable agreement requirement is satisfied when the covenant is part of an agreement
that contained mutual non-illusory promises.”)(quotations and internal citations omitted).
26
ancillary to or part of an otherwise enforceable agreement at the time the agreement is made.111
Although the objective of a noncompete agreement is to restrain the future activities of a former
employee, the objective of the covenant cannot be to “restrain competition, which is the basis for
the requirement that the covenant be ancillary to a valid contract or transaction having a primary
purpose that is unrelated to restraining competition between parties.”112 To determine whether a
covenant is “ancillary to or part of” an otherwise enforceable agreement, a two-prong test must
be satisfied: “(1) the consideration given by the employer in the otherwise enforceable agreement
must give rise to the employer's interest in restraining the employee from competing; and (2) the
covenant must be designed to enforce the employee's consideration or return promise in the
otherwise enforceable agreement.”113
For example, the Wharton Physicians Services case is about a contract between Wharton
Physician Services and Gulf Coast Hospital wherein Wharton coordinate the hiring of individual
physicians employed by Gulf Coast for a combination of flat fees and monthly fees paid by Gulf
Coast to Wharton. 114 The relevant portions of the non-compete clause at issue stated the
following:
If this Agreement is terminated by either party for any reason, then HOSPITAL
[Gulf Coast] shall have the right to contract directly with all or some of the
Hospitalist Physicians retained by GROUP [Wharton] to perform the services
required by the terms of this Agreement to enable HOSPITAL to continue the
Hospitalist Program in a manner consistent with how it is being operated at the
time the Agreement is terminated. In the event that HOSPITAL, or any individual
or entity otherwise affiliated with HOSPITAL, for work or services that would be
provided at HOSPITAL, desires to contract directly with one of more of the
Hospitalist Physicians previously recruited, retained, and presented to HOSPITAL
by GROUP for hospitalist services at any time during the six (6) months period
following the termination of this Agreement, HOSPITAL shall pay to GROUP as
liquidated damages an amount of $100,000 per physician.115
Although the Wharton Court determined that the underlying contract, of which the
above-provided noncompete provision was a part, was enforceable, the Court found that the
noncompete clause itself was unenforceable because no additional consideration was given
outside of the main contract for hospital services.116
111 Tex. Bus. & Comm. Code § 15.50. 112 Wharton Physician Services, P.A. v. Signature Gulf Coast Hospital, L.P., 2016 WL 192069, at *2 (Tex.App.-
Corpus Christi, 2016). 113 See Valley Diagnostic Clinic, P.A. v. Dougherty, 287 S.W.3d 151, 157 (Tex. App. Corpus Christi, 2009); see also
Marsh USA Inc. v. Cook, 354 S.W.3d 764, 775 (Tex., 2011)(“The common meaning of those words control; the
covenant not to compete must be ancillary to (supplementary) or part of (one of several units of which something is
composed) an otherwise enforceable agreement.”). 114 Wharton Physician Services, P.A. v. Signature Gulf Coast Hospital, L.P., 2016 WL 192069, at *4 (Tex.App.-
Corpus Christi, 2016). 115 Id. at *3 (Tex.App.-Corpus Christi, 2016). 116 Id. at *3 (Tex.App.-Corpus Christi, 2016)(“Based on the summary judgment evidence presented by both sides,
we hold that there was no additional consideration given outside of the main contract for hospitalist services.
Wharton and Gulf Coast had entered into a contract for services to be provided by Wharton with a $375,000.00 flat
fee paid by Gulf Coast to Wharton and a monthly fee of $31,250.00 for the first year and $315,000 flat fee and a
27
Consideration is a present exchange bargained for in return for a promise and consists of
benefits and detriments.117 These “detriments must actually induce the parties to make the
promises, and the promises must induce the parties to incur the detriments.”118 For a
noncompete agreement, consideration must be “reasonably related to an interest worthy of
protection.”119 To satisfy the first prong of the test, the consideration given by the promisee
(employer) must "give rise to" the promisee's interest in restraining the promisor (employee).
Generally speaking, this means that the consideration received by the promisor gives her/him a
competitive advantage. Providing access to confidential and other secret information satisfies
this prong as the promisee has a legitimate interest in ensuring that the promisee’s information is
not disclosed to the public or a competitor.
Texas is referred to as an “at-will” employment state that follows the at-will employment
doctrine.120 In fact, Texas courts have held that an employment relationship is, by default, at-
will absent a specific agreement to the contrary.121 However, for a non-compete agreement to be
enforceable under the CNCA (Covenants Not To Compete Act) before 2006, Texas courts held
that any noncompete agreement must be ancillary to an agreement that was enforceable when the
agreement was entered into by the parties.122 The effect of this requirement rendered covenants
not to compete unenforceable in the context of many at-will employment relationships across the
State because an employer could avoid hits obligation under an at-will agreement by ending the
employment relationship with the promisee. However, sarting in 2006, the Texas Supreme
Court, in the Alex Sheshunoff case,123 made it easier to enforce noncompete covenants premised
upon a promise to perform in the future. The Alex Sheshunof,f Court held that the Light case was
wrong to the exent Light precludes a unilateral contract made enforceable by some performance
in the future—a requirement that, under Light, could render the covenant unenforceable because
it was not enforceable at the time the covenant was made.124
monthly fee of $26,250.00 for the second year. The contract, submitted as evidence, does not show that non-
compete clause provided Gulf Coast with any new consideration by Wharton aside from the fees paid for their
services. Wharton agreed under the contract to provide services to Gulf Coast, and hence, provides no additional
consideration to Gulf Coast required for the non-compete clause. Stated another way, Gulf Coast promised to pay
Wharton for services and Wharton promised to perform those services; however, none of those obligations
amounted to additional consideration for Gulf Coast's promise not to hire any physicians if the contract between
Wharton and Gulf Coast was terminated. There must be additional consideration given by Wharton in order for the
non-compete clause to be enforceable and it was not shown in the evidence before the trial court that any additional
consideration was given.”) 117 Burges v. Mosey, 304 S.W.3d 623, 628 (Tex. App.—Tyler 2010, no pet.) (citing Roark v. Stallworth Oil & Gas,
Inc., 813 S.W.2d 492, 496 (Tex. 1991)). 118 Id. 119 Marsh, 354 S.W.3d at 775. 120 The Texas at-will employment doctrine is well established employment policy that goes back over one hundred
years. See Eastline & R.R.R. Co. v. Scott, 10 S.W. 99, 102 (Tex. 1888). 121 See Montgomery County Hospital Dist. v. Brown, 965 S.W.2d 501 (Tex. 1998). 122 Light v. Centel Cellular Co. of Tex., 883 S.W.2d 642, 645 (Tex. 1994). 123 Alex Sheshunoff Management Services, L.P. v. Johnson, 209 S.W.3d 644, 649 (Tex., 2006). 124 Id. at 650–51 (Tex., 2006)(“We agree with Light's recitation of basic contract law in footnote six that ‘[i]f only
one promise is illusory, a unilateral contract can still be formed; the non-illusory promise can serve as an offer,
which the promisor who made the illusory promise can accept by performance.’ Upon further review of the Act and
its history, however, we disagree with footnote six insofar as it precludes a unilateral contract made enforceable by
performance from ever complying with the Act because it was not enforceable at the time it was made.”).
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Since 2006, employers have steadily gained more power in Texas to restrain an
employee’s activities once he/she has been terminated. For example, it can be said that before
2009, a contract for employment upon which a covenant not to compete was premised had to
have an express promise that ran from the employer (promisee) to the employee (promisor). In
2009, the Texas Supreme Court expanded the scope of enforceable employment contracts
holding that merely the promise of performance by an employer can serve as consideration for a
covenant not to compete in an implied contract, and mutual consent can be inferred from the
circumstances.125
[c] Interest Worthy of Protection
Covenants that place limits on former employees' professional mobility or restrict their
solicitation of the former employers' customers and employees are restraints on trade must be
ancillary to or part of an otherwise enforceable agreement designed to protect an interest worthy
of protection.126 Generally, good will, confidential information and trade secrets are reasonably
related to an interest worthy of protection and therefore are sufficient consideration for
noncompete agreements.127 However, if this information is available from other sources, the
noncompete covenant may fail as the promisee’s competitor’s will be deemed to already have
this information in their possession and, thus, a competitive advantage will not be found.128
Traditionally, covenants in agreements for the sale of a business prove to be more straight-
forward and usually satisfy the ancillary requirement, but covenants arising in an employment
context tend to be more problematic. In the Mann Fankfort case, the Texas Supreme Court
found that “[the promisee’s] implied promise and its actual provision to [promisor] of access to
confidential information satisfied the first ancillary agreement prong (provided above) because
the promise and provision of confidential information generated [the promisee’s] interest in
preventing the disclosure of such information. In addition, the [promisor’s] promise not to
disclose any confidential information satisfied the second requirement because the client
purchase provision was designed to hinder [promisor’s] ability to use the confidential
information to compete against [the promisee]. Therefore, the client purchase provision was
‘ancillary to or part of’ the otherwise enforceable agreement when the otherwise enforceable
contract was made, and the client purchase provision is enforceable under the Act.”129
What constitutes “the employer’s interest” was further expanded by the Texas Supreme
Court in 2011 to include stock options.130 More specifically, the Marsh Court once again
overturned Light to the extent it excludes “good will” from the scope of what consideration may
“give rise” to the interest in restraining an employee from competing.131 “Consideration for a
noncompete that is reasonably related to an interest worthy of protection, such as trade secrets,
125 Mann Frankfort Stein & Lipp Advisors, Inc. v. Fielding, 289 S.W.3d 844 (Tex., 2009). 126 Wharton Physician Services, P.A. v. Signature Gulf Coast Hospital, L.P., 2016 WL 192069, at *4 (Tex.App.-
Corpus Christi, 2016). 127 Id. 128 Gallagher Healthcare Ins. Services v. Vogelsang, 312 S.W.3d 640, 653 (Tex.App.–Houston [1st Dist.] 2009, pet.
denied). 129 Mann Frankfort Stein & Lipp Advisors, Inc. v. Fielding, 289 S.W.3d 844, 852 (Tex.,2009). 130 Marsh USA Inc. v. Cook, 354 S.W.3d 764 (Tex.,2011). 131 Id. atv775 (Tex.,2011).
29
confidential information or goodwill, satisfies the statutory nexus; and there is no textual basis
for excluding the protection of much of goodwill from the business interests that a noncompete
may protect.”132
An agreement not to compete, like any other contract, must be supported by
consideration, but a covenant cannot merely be a promise to the employee that lacks any new
consideration from the employer.133 A promise for continued employment can serve as an
otherwise enforceable agreement.134 However, at-will employment cannot be an otherwise
enforceable agreement for a noncompete agreement on its own as it is illusory because the
employer can discontinue employment at any time. In this instance, an at-will employer must
provide independent consideration to have a valid noncompete agreement be operable for its
intended purpose.
Now, it is the case that, instead of the courts finding that the employer fails the first prong
of the "ancillary" test because the employer was giving adequate compensation in exchange for
the employee's promise not to compete, the court has now changed direction and now focuses
upon whether or not the noncompete agreement is reasonable—an analysis that leaves behind
any overly technical disputes over “whether the covenant is ancillary to an agreement.”135
[d] Reasonableness
In addition to the "ancillary" requirement discussed above, Tex. Bus. & Com. Code §
15.50 requires that the noncompetition agreement also contain reasonable limitations as to (1)
time, (2) geographical area, and (3) scope of activity to be restrained that do not impose greater
restraint than necessary to protect the employer’s good will or other business interest. Although
the Texas courts have not put forth a set of uniform rules that must be met in determining
whether the limitations in a covenant not to compete are considered to be reasonable, it is clear
that the restraints included in the covenant must not be viewed in isolation of one another. The
standards of reasonableness pursuant to CNCA apply not only to provisions in a covenant that
limit a former employee’s mobility but also applies to damage provisions that seek to impose
economic penalties during the performance or pursuant to a breach of the contract.136 This part
of the inquiry is fact-specific and requires a subjective analysis that takes into account the parties
to the covenant and their dispositions.
132 Id. at 775 (Tex.,2011). 133 Id. at 651. 134 Light v. Centel Cellular Co. of Tex., 883 S.W.2d 642, 645 (Tex. 1994) overruled on other grounds by Marsh USA
Inc. v. Cook, 354 S.W.3d 764, 772 (Tex. 2011). (citing E. Line & Red River R.R. Co. v. Scott, 10 S.W. 99, 102
(Tex. 1888)). 135 See Marsh, 354 S.W.3d 764, 777 (Tex.,2011)(“The hallmark of enforcement is whether or not the covenant is
reasonable. The enforceability of the covenant should not be decided on overly technical disputes of defining
whether the covenant is ancillary to an agreement. Rather, the statute's core inquiry is whether the covenant 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 promisee.”)(internal
citations and quotes omitted). 136 See Rieves v. Buc-ee's Ltd., 2017 WL 4557796, at *5 (Tex. App.-Hous. (14 Dist.), 2017)(“Under supreme court
precedent, these standards of reasonableness apply not only to provisions that expressly limit a former employee's
professional mobility, but also to damages provisions that impose a severe economic penalty on a departing
employee.”).
30
As to the time restraint, Texas courts have generally upheld non-compete periods ranging
from two to five years as reasonable. For example, in Salas v. Chris Christensen, the Court
upheld a 5-year covenant not to compete restraint wherein the promisor (employee) was a Vice-
President and obtained trade secrets and confidential information including customer lists.137 In
Accruent, LLC v. Jim Short, the Court upheld a two-year covenant not to compete that was
deemed to protect the promisee’s proprietary and confidential information based upon a software
development timeline.138 Additionally, the court in Gallagher held that a two-year covenant not
to compete restraint was reasonable and did not impose an undue hardship upon the former
employee even when the insurance contracts that were the subject of the former employee’s
work only lasted one year.139 As a practice tip, a covenant's duration should generally relate to
the promisee’s business needs. For example, if the trade secret and confidential information
provided to the promisor has real value for one year, then a two year non-competition restriction
might be unreasonable where a one year contract would be long enough to protect the promisee’s
business concerns.
Generally speaking, a reasonable area in which a noncompete agreement may limit the
activities of a former employee is considered to be “the territory in which the employee worked
while in the employment of his employer.”140 However, Texas courts have upheld covenants
wherein the restricted territory was larger than the territory in which the employee worked. In
fact, covenants that restricted the employee from working in the U.S. or covenants that have
imposed a worldwide restriction have been upheld when the scope of the covenant was justified
by the business interest underlying the covenant.141 In other words, where the broad scope of the
covenant did not impose a greater restraint than was necessary to protect the goodwill or other
business interest of the promisee (company), the covenant was upheld even if its scope reached a
geographical territory that was broader than the actual territories in which the promisor (former
employee) worked.
For example, in the Accruent case, the promisee (Accruent) helps retailers select and
manage their real estate and facilities via software and services sold by Accruent.142 The
promisor (Jim Short) was an Accruent employee that was acquired by Accruent after his old
employer, Lucernex, was acquired by Accruent in August 2017. Jim Short served as the director
of client services, a solution engineer and, thereafter, became the sole senior solution engineer.
In each position Jim Short had access to the company’s confidential and proprietary information,
which included the company’s customer information, plans, market information, software
functionality and limitations, and other information. The covenant not to compete had a 2 year
noncompete period and a geographical limitation that included “Texas or any other state or
country where Lucernex ‘engages or proposes to engage in Business.’” The Agreement defined
137 Salas v. Chris Christensen Systems, Inc., 2011 WL 4089999, at FN4 (Tex.App.-Waco,2011). 138 Accruent, LLC v. Jim Short, 2018 WL 297614, at *1 (W.D. Tex., 2018). 139 Gallagher Healthcare Ins. Services v. Vogelsang, 312 S.W.3d 640, 655 (Tex.App. Houston [1 Dist.],2009). 140 See Butler v. Arrow Mirror & Glass, Inc., 51 S.W.3d 787, 793 (Tex. App.—Houston [1st Dist.] 2001, no pet.)). 141 See Daily Instruments Corp. v. Heidt, 998 F. Supp. 2d 553, 567–68 (S.D. Tex. 2014) (upholding a covenant
extending to every country in which the employer did business where the global customer base was “very narrow”
and the high-level employee had access to confidential information about customers and projects outside his
territory). 142 Accruent, LLC v. Jim Short, 2018 WL 297614, at *1 (W.D. Tex., 2018).
31
the term “Business” as “those portions of the Company's business in which [Short] actively
participated or received Proprietary Information.”143 The Court found that Jim Short’s
knowledge of the Company included its confidential and proprietary information, relationship
with customers, future plans, customer information—information that far exceeded the territories
in which Jim Short actually performed work. The Accruent Court determined that in order to
properly protect the promisee’s business interests, the scope of the covenant not only reached
places where Lucernex did business, but also encompassed any country in the world where
Lucernex proposed that it may engage in business.144
Non-compete provisions also have to reasonable with respect to the limitations directed
to future relationships of which the parting employee will be a part. For example, the Haas case
is directed to a covenant not to compete that was put in place between an accounting firm and an
accounting partner. Specifically, upon termination, the covenant restricted the former accounting
partner from doing any work for the firm’s clients but did not restrict the accounting partner from
performing work for his personal clients.145 The Texas Supreme Court held these types of
provisions to be unreasonable because they are not deemed reasonably necessary to protect the
“business interest of preventing the former partner or employee from establishing rapport with
the clients and upon termination taking part of the client base with him.”146 In other words, a
covenant not to compete that extends to clients with whom a salesman had no dealings during his
employment will generally be viewed as unenforceable.
Unreasonable noncompete restrictions have been found to serve as a way to limit and
restrain competition and, thus, have been found to unlawful. For example, in the Redi-Mix
Solutions case, the covenant not to compete contained a provision that prohibited customers from
contacting the former employee after he was no longer employed with his former employer. The
Redi-Mix Court found this limitation to be unreasonable and reformed the covenant not to
compete to prevent the former employee from contacting his previous employer’s customers
about core business concerns.147
[3] Injunctive Relief and Reformation
An employer that has sought to protect its confidential, proprietary and trade secret
information from disclosure, misuse and theft via a covenant not to compete that is a part of or
ancillary to an employment agreement may utilize different causes of action in a court of law to
assert its rights including, but not limited to, breach of contract, tortious interference with an
existing contract, fraud, negligent misrepresentation, conspiracy, and a permanent injunction.
However, it is prudent to go into court early in an effort to obtain preliminary injunction. Using
what we have learned above, the causes of action of breach of contract and tortious interference
143 Id. at *1 (W.D. Tex., 2018). 144 Id. at *9 (W.D. Tex., 2018). 145 Peat Marwick Main & Co. v. Haass, 818 S.W.2d 381, 386–88 (Tex. 1991)). 146 Id. at 387 (Tex. 1991)). 147 See Redi-Mix Solutions, Ltd. v. Express Chipping, Inc., 2017 WL 4079542, at *4 (E.D. Tex., 2017)(“The parties
do not dispute that the covenant not to compete was reformed by the order on preliminary injunction entered on
January 3, 2017. As originally written, the covenant not to compete prohibited customers from contacting Knox. The
Court determined that this limitation was broader than necessary and was unreasonable. As a result, the Order
reforms the noncompete agreement to only prevent Knox from contacting customers about the concrete business.”).
32
with an existing contract are relevant to the imposition of a temporary injunction and are all
based upon a covenant not to compete clause in an employment agreement. The remaining
actions for conspiracy, fraud and negligent misrepresentation are irrelevant to an injunction.
A common method of protecting business interests from competitive harm is to enforce
any covenants not to compete in state court by obtaining a temporary injunction or temporary
restraining order. In a Texas state court, a plaintiff must plead and 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.148 Generally speaking, a plaintiff seeking a temporary
injunction must show a probable, imminent, and irreparable injury in the interim before trial.149
An injury is irreparable if the injured party cannot be compensated adequately in damages or if
the damages cannot be measured by any certain pecuniary standard.150 At a temporary
injunction hearing, the trial court considers whether the applicant has shown a probability of
success and irreparable injury; the parties do not present the underlying merits of the
controversy.151
If an employer is seeking relief via a temporary injunction pursuant to a covenant not to
compete, the employer will be required to establish a “substantial likelihood of prevailing on the
merits of its claims regarding the enforceability” of the covenant not to compete, but only to the
extent necessary to determine whether the requirements for a temporary injunction have been
met.152 Therefore, an employer must determine whether the noncompetition clause at issue (1) is
ancillary to or part of an otherwise enforceable agreement and (2) contains reasonable limitations
as to time, geographic area, and scope of activity that do not impose a greater restraint than is
necessary—discussed above.
What is important to remember here is that the coexistence of an express, illusory
promise and an implied, nonillusory promise as consideration used to support a covenant not to
compete is not prohibited.153 Therefore, the disclosure of confidential information to the
employee in exchange for the employee’s promise to keep that information confidential qualifies
as performance under the covenant.154 Furthermore, when a court holds that a noncompete is
unreasonable for lack of a geographic restriction, it is required to reform it.155 However, once a
148 See Butnaru v. Ford Motor Co., 84 S.W.3d 198, 204 (Tex.2002). 149 Down Time–South Texas, LLC v. Elps, 2014 WL 1464320, at *7 (Tex.App.–Corpus Christi–Edinburg Mar. 20,
2014, no pet.). 150 Butnaru v. Ford Motor Co., 84 S.W.3d 198, 204 (Tex. 2002). 151 EMS USA, Inc. v. Shary, 309 S.W.3d 653, 658 (Tex.App.-Houston [14th Dist.] 2010, no pet.). 152 Loye v. Travelhost, Inc., 156 S.W.3d 615, 620 (Tex.App.-Dallas 2004, no pet.). 153 See Mann Frankfort Stein & Lipp Advisors, Inc. v. Fielding, 289 S.W.3d 858 (Tex.2009)(“ [W]hen it is clear that
performance expressly promised by one party is such that it cannot be accomplished until a second party has first
performed, the law will deem the second party to have impliedly promised to perform the necessary action. In the
agreement at issue here, Liss expressly promised not to disclose Tranter's confidential information. Liss could not
perform that promise until Tranter first disclosed its confidential information to him. Tranter's promise to give Liss
the confidential information is therefore deemed to be implied.”) (internal citations and quotations omitted). 154 See Alex Sheshunoff, 209 S.W.3d at 651 (“[I]f, as in the pending case, the employer's consideration is provided
by performance and becomes non-illusory at that point, ... we see no reason to hold that the covenant fails.”). 155 See Tex. Bus. & Com.Code Ann. § 15.51(c).
33
covenant is deemed to be unreasonableness, the noncompete is unenforceable as written and the
employer is precluded from recovering damages on its contract claims.156
Pursuant to Tex. Bus. & Com. Code § 15.51(c), if a court determines that a covenant not
to compete is unreasonable, it must reform the covenant to render it reasonable. In fact, a court
may go as far as to reform a covenant not to compete that has been found in the first instance to
be an unreasonable covenant into one that is reasonable for the purpose of entering a preliminary
injunction.157 For example, in the Redi-Mix Solutions case, due to the fact that the covenant not
to compete, discussed above with respect to the unreasonable provision that prohibited the
promisee’s customers from contacting the former employee, had to be reformed to render it
reasonable, only injunctive relief was available to the promisee (i.e., the employer Redi-Mix)—
precluding any claim for damages and, at least in this instance, leaving the promise without
recourse due to the fact that the promisor (i.e., the former employee) presented evidence that he
stopped working in the relevant industry more than one year before the expiration of the
preliminary injunction with respect to the noncompete agreement.158
Due to the fact that a covenant not to compete that has been found to be unreasonable in
its first instance may be reformed, a defect in the original—such as a lack of geographic
restriction, unreasonable time restraint or unreasonable scope of prohibited activity—will not be
seen as fatal to an employer’s ability to prove a probable right to relief via a permanent
injunction.159
Although some Texas courts have done away with the irreparable injury requirement all
together in establishing whether permanent injunction should be imposed,160 most Texas Courts
of Appeals have not done away with the requirement and still require proof of irreparable
156 See id. (stating that the court must reform an unreasonable covenant and enforce it as reformed “except that the
court may not award the promisee damages for a breach of the covenant before its reformation and the relief granted
to the promisee shall be limited to injunctive relief”); see also Travel Masters, Inc. v. Star Tours, Inc., 827 S.W.2d
830, 833 (Tex.1991) (holding that employer could not recover damages on its tortious interference of the covenant
not to compete claim when the covenant was an unreasonable restraint of trade), superseded by statute on other
grounds as stated in Alex Sheshunoff, 209 S.W.3d at 653 n. 5; Peat Marwick Main & Co. v. Haass, 818 S.W.2d 381,
388 (Tex. 1991) (“Since MH obtained no reformation of the covenant before Haass' actions for which it sought
damages, the act would prohibit MH from obtaining damages .”). 157 See Accruent, LLC v. Jim Short, 2018 WL 297614, at *3 (W.D.Tex., 2018)(citing Tranter, Inc. v. Liss, No. 02-
13-00167-CV, 2014 WL 1257278, at *10 (Tex. App.—Fort Worth Mar. 27, 2014, no pet.) (stating that “reformation
is not only a final remedy” and citing cases in which courts reformed covenants at the temporary-injunction stage). 158 See Redi-Mix Solutions, Ltd. v. Express Chipping, Inc., 2017 WL 4079542, at *5 (E.D.Tex., 2017). 159 See Tex. Bus. & Com.Code Ann. § 15.51(c) (“[T]he court shall reform the covenant to the extent necessary ...
and enforce the covenant as reformed.”). 160 See Sanders v. Future Com, Ltd., 2017 WL 2180706, at *10 (Tex.App.-Fort Worth, 2017)(“[A] plaintiff seeking
a permanent injunction under the Covenants Not to Compete Act (CNCA) does not need to establish each of these
elements. Rather, a plaintiff is entitled to a permanent injunction under the CNCA merely upon a showing of a
breach of a noncompete agreement covered by the CNCA. Because the evidence showed that Sanders breached the
nondisclosure provisions of the Contract, the trial court did not clearly abuse its discretion by issuing a permanent
injunction. Accordingly, we overrule Sanders's contention that Future Com was required to show harm, the
existence of irreparable injury, or the absence of an adequate remedy at law to be entitled to the permanent
injunction.”)(internal citations omitted).
34
injury.161 “Irreparable [injury] for purposes of a temporary injunction may include
noncompensable injuries such as a ‘company's loss of goodwill, clientele, marketing techniques,
office stability and the like.’”162 However, An injunction is not proper when the claimed injury
is merely speculative; fear of injury is not sufficient to support a temporary injunction.”); The
Reach Grp., L.L.C. v. Angelina Grp., 173 S.W.3d 834, 838 (Tex. App.–Houston [14th Dist.]
2005, no pet.) (explaining that testimony that company could be put at “great risk” by former
employee's competition did not support temporary injunctive relief because it “established only a
fear of probable injury”).
Pursuant to Tex. Bus. & Comm. Code §15.52, the remedies set forth in §15.51 relating to
covenants not to compete are exclusive. However, if a covenant not to compete is reformed by a
court, the remedies available to a promisee for breach of the covenant are altered. Pursuant to
Tex. Bus. & Comm. Code § 15.51(c), “the court may not award the promisee damages for a
breach of the covenant before its reformation and the relief granted to the promisee shall be
limited to injunctive relief.” Therefore, damages that normally would be available to a promisee
for a breach of a clause in a covenant not to compete are precluded under § 15.51(c) if the
covenant had to be reformed to render it enforceable. This preclusion also applies to damages
for a breach that occurred prior to or after the reformation of the covenant.163
As is seen from the discussion above, a great deal is at stake for parties to a non-compete
agreement. This can be particularly true for entities in the oil, gas and energy sector. In the case
of an employer or an entity that is an acquirer of other entities, the entity’s economic viability
may depend on its ability to protect its confidential information from being exposed to its
competitors or potential targeted entities. However, particularly one-sided agreement agreement
that unreasonably limits the ability of an employee to make a living will be frowned upon by the
courts. The rising mobility of oil field service employees that have been laid off over the last
few years due to the declining price of oil Bbl. makes these issues more and more pressing.
Employment agreements are traditionally one area where using an outdated form, or one from
another state, could have disastrous consequences. To make matters worse, these agreements are
often kept in an outdated employee on-boarding kit that is not reviewed with the care and
161 See Argo Group US, Inc. v. Levinson, 468 S.W.3d 698, 701 (Tex.App.-San Antonio, 2015)(“However, in 2012,
the Dallas Court of Appeals noted that although these cases do contain dicta suggesting the Act's enforceability
requirements supercede those under the common law for injunctive relief, we have never held the Act eliminates the
requirement that an applicant show irreparable harm to obtain a temporary injunction based on a covenant not to
compete. Primary Health Physicians, P.A. v. Sarver, 390 S.W.3d 662, 664–65 (Tex.App.–Dallas 2012, no pet.). The
Sarver court agreed with the reasoning of these cases that the Act governs only final remedies and does not supplant
the common law requirements for a pretrial temporary injunction. Since Sarver issued in 2012, other Texas courts of
appeals have agreed that evidence of a probable, imminent, and irreparable injury in the interim is a necessary
element for a temporary injunction. See Tranter, Inc. v. Liss, No. 02–13–00167–CV, 2014 WL 1257278, at *7
(Tex.App.–Fort Worth Mar. 27, 2014, no pet.) (mem. op.) (section 15.52 does not apply to temporary injunctions);
Down Time–South Texas, LLC v. Elps, 13–13–00495–CV, 2014 WL 1464320, at *7 (Tex.App.–Corpus Christi–
Edinburg Mar. 20, 2014, no pet.) (mem. op.) (requiring proof of injury). We join these courts and hold that a
plaintiff seeking a temporary injunction under section 15.51 must show a probable, imminent, and irreparable injury
in the interim before trial.”)(some internal citations and quotations omitted). 162 Midstate Environmental Services, LP v. Atkinson, 2017 WL 6379796, at *4 (Tex.App.-Corpus Christi,
2017)(citing Tex. Dep't of State Health Servs. v. Holmes, 294 S.W.3d 328, 334 (Tex. App.–Austin 2009, pet.
denied). 163 See Butler v. Arrow Mirror & Glass, Inc., 51 S.W.3d 787, 796 (Tex. App.—Houston [1st Dist.] 2001, no pet.).
35
attention that is commensurate to the value of the confidential information to which the
employee is exposed.
An employer should also know the types of other agreements that may operate in
conjunction with covenants not to compete and utilized to achieve its business needs. For
example, a confidentiality agreement may be put forth within the employment contract that
prohibits an employee from disclosing, for example, confidential or proprietary information,
including pricing and customer lists, for personal or professional gain. The advantage of
including such a provision is that even where a covenant not to compete is found to
unenforceable, a non-disclosure agreement may still be enforced to prohibit the employee from
engaging in specified acts negotiated by the parties to the agreement.164
[4] Attorneys’ Fees Under DTSA, TUTSA, TTLA and CNCA
DTSA, TUTSA, and CNCA all allow the recovery of attorneys’ fees in certain
circumstances. Litigation involving an employee leaving one business entity to work for another
competing business entity will often involve all three Acts. Because each Act provides
potentially different parameters for the recovery of attorneys’ fees, it is important to examine
these laws, their application, and their inter-applicability.
DTSA allows a court to award a prevailing party its reasonable attorneys’ fees if the
misappropriation claim is made in bad faith, if a motion to terminate an injunction is made or
opposed in bad faith, or if the trade secret was willfully and maliciously misappropriated. 165
However, in cases involving actions by an employer against an employee, attorneys’ fees under
DTSA may not be awarded to the employer in an action against an employee who was not
provided the immunity notice requirement found in DTSA Section 1833 (b).166 While this may
164 See Guy Carpenter & Co., Inc. v. Provenzale, 334 F.3d 459, 465 (5th Cir. 2003) (§ 15.50 does not “govern or
impair the enforceability of nondisclosure covenants”). 165 See 18 U.S.C. § 1836 (b)(3)(D) stating “(3) Remedies.—In a civil action brought under this subsection with
respect to the misappropriation of a trade secret, a court may— . . . if a claim of the misappropriation is made in bad
faith, which may be established by circumstantial evidence, a motion to terminate an injunction is made or opposed
in bad faith, or the trade secret was willfully and maliciously misappropriated, award reasonable attorney's fees to
the prevailing party.” 166 18 U.S.C. § 1833(b) states in pertinent part:
(b) Immunity From Liability for Confidential Disclosure of a Trade Secret to the Government or in a
Court Filing.—
(1) Immunity.—An individual shall not be held criminally or civilly liable under any Federal or State
trade secret law for the disclosure of a trade secret that—
(A) is made— (i) in confidence to a Federal, State, or local government official, either directly
or indirectly, or to an attorney; and (ii) solely for the purpose of reporting or investigating a
suspected violation of law; or
(B) is made in a complaint or other document filed in a lawsuit or other proceeding, if such
filing is made under seal.
(2) Use of trade secret information in anti-retaliation lawsuit.—An individual who files a lawsuit for
retaliation by an employer for reporting a suspected violation of law may disclose the trade secret to
the attorney of the individual and use the trade secret information in the court proceeding, if the
individual—
(A) files any document containing the trade secret under seal; and
(B) does not disclose the trade secret, except pursuant to court order.
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be discouraging news for employers that have not complied with DTSA’s immunity notice
requirement, it is important to note that as discussed supra, except for causes of actions based on
a whistleblower’s trade secret disclosure or a trade secret disclosure filed under seal in legal
proceedings, DTSA does not preempt any other State or Federal remedies available for trade
secret misappropriation. 167 Additionally, as also noted surpa, DTSA applies to trade secret
misappropriations that occurred on or after May 11, 2016.
Like DTSA, TUTSA allows a court to award a prevailing party its reasonable attorneys’
fees if the misappropriation claim is made in bad faith, if a motion to terminate an injunction is
made or resisted in bad faith, or if the trade secret was willfully and maliciously
misappropriated.168 Although TUTSA does not contain an immunity notice requirement like
DTSA, TUTSA does preempt certain state law causes of action and remedies. Specifically,
TUTSA provides that it preempts all “conflicting tort, restitutionary, and other laws of this state
providing civil remedies for misappropriation of a trade secret.” 169 And courts have noted that
TUTSA “expressly states that it displaces both common law misappropriation and TTLA
claims.” 170 But expressly excluded from TUTSA’s preemption are “contractual remedies,”
“other civil remedies that are not based upon misappropriation of a trade secret,” and “criminal
remedies.” 171
Although TUTSA has displaced TTLA based trade secret misappropriation claims,
because TUTSA did not become effective until September 2013, in actions involving trade secret
misappropriation allegations that occurred prior to September 2013, it is possible that TTLA
violations may still be viable claims. Unlike DTPA, TUTSA, and CNCA, which provide that a
court “may” award attorneys’ fees, TTLA mandates attorneys’ fees recovery, stating “[e]ach
person who prevails in a suit under this chapter shall be awarded court costs and reasonable and
necessary attorney’s fees.”172 To the extent employers are entitled to bring a claim under TTLA,
because of its mandatory award of attorneys’ fees to the prevailing party, employers should
carefully weigh the pros and cons of alleging claims under TTLA. For example, in Merritt
Hawkins & Assoc., LLC v. Gresham the jury found that the employee breached its non-compete
(3) Notice.—
(A) In general.— An employer shall provide notice of the immunity set forth in this subsection
in any contract or agreement with an employee that governs the use of a trade secret or other
confidential information.
(B) Policy document.— An employer shall be considered to be in compliance with the notice
requirement in subparagraph (A) if the employer provides a cross-reference to a policy
document provided to the employee that sets forth the employer’s reporting policy for a
suspected violation of law.
(C) Non-compliance.— If an employer does not comply with the notice requirement in
subparagraph (A), the employer may not be awarded exemplary damages or attorney fees under
subparagraph (C) or (D) of section 1836(b)(3) in an action against an employee to whom notice
was not provided. 167 See 18 U.S.C. §§ 1833(b)(1) and 1838. 168 See Tex. Civ. Prac. & Rem. Code § 134A.005. 169 Tex. Civ. Prac. & Rem. Code § 134A.007(a). 170 His Company, Inc. v. Stover, 202 F. Supp. 3d 685, 691-692 (S.D. Tex. Aug. 15, 2016), vacated as moot by No.
4:15-CV-00842, 2016 WL 6134939 (S.D. Tex. Sept. 8, 2016). 171 See Lifesize, Inc. v. Chimene, No. 16-1109, 2017 WL 1532609, at *12 (W.D. Tex. Apr. 26, 2017) (citing Tex.
Civ. Prac. & Rem. Code § 134A.007(b)). 172 Tex. Civ. Prac. & Rem. Code § 134.005.
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agreement and violated the Harmful Access by Computer Act, but because the jury determined
that the employee did not violate TTLA, which mandates fees to the prevailing party, the
employer was nonetheless required to pay the breaching employee’s fees for successfully
defending against the TTLA claim.173 Similarly, in NuVasive, Inc. v. Lewis, the jury found that
employee Lewis breached her employment contract, but the court determined that Lewis did not
violate TTLA and was entitled to her attorneys’ fees associated with the TTLA claim.174
CCNA allows an employee to recover its attorneys’ fees. But it is high hurdle and only
two (2) cases were found wherein employees were awarded fees under CCNA. 175 CCNA
Section 15.51(c) provides that to recover its fees an employee must prove that:
(1) the employer knew at the time of the agreement’s execution that the covenant did not
contain reasonable time, geographical area, and scope of activity limitations;
(2) the employer knew at the time of the agreement’s execution that the covenant’s
limitations imposed more restraint that necessary to protect the employer’s goodwill or
other business interest; and
(3) the employer sought to enforce the covenant to a greater extent than was necessary to
protect the employer’s goodwill or other business interest. 176
It is difficult for employees to meet their burden of proof under Section 15.51(c), as the
employee must meet all five (5) requirements, including the three (3) reasonable time,
geographical area and scope of activity prongs. For example, in Weber Aircraft, L.L.C. v.
Krishnamurthy, the court determined that employees were not entitled to fees under Section
15.51 (c) because although the Court found that the agreements did not contain reasonable
limitations as to geographical area and scope of activity, and that plaintiff sought to enforce the
agreements to a greater extent than was necessary to protect its goodwill or other business
interests, the court found that the agreements’ time limitation was reasonable, and the statute
required all three provisions to be unreasonable.177
173 See Merritt Hawkins & Assoc., LLC v. Gresham, 861 F.3d 143, 155-157 (5th Cir. 2017). 174 NuVasive, Inc. v. Lewis, No. A-12-CA-1156-SS, 2014 U.S. Dist. LEXIS 151117, at *4 (W.D. Tex. Oct. 22,
2014). 175 See e.g., Kenyon Intern. Emergency Services, Inc. v. Malcolm, 2013 WL 2489928, at *4 (5th Cir. 2013); and
Sentinel Integrity Solutions, Inc. v. Mistras Group, Inc., 414 S.W.3d 911, 921-927 (Tex. App.-Houston [1st Dist.]
2013, no pet.). 176 See Tex. Bus. & Com. Code Ann. §§ 15.51(c) stating:
If the primary purpose of the agreement to which the covenant is ancillary is to obligate the
promisor to render personal services, the promisor establishes that the promisee knew at the time
of the execution of the agreement that the covenant did not contain limitations as to time,
geographical area, and scope of activity to be restrained that were reasonable and the limitations
imposed a greater restraint than necessary to protect the goodwill or other business interest of the
promisee, and the promisee sought to enforce the covenant to a greater extent than was necessary
to protect the goodwill or other business interest of the promisee, the court may award the
promisor the costs, including reasonable attorney's fees, actually and reasonably incurred by the
promisor in defending the action to enforce the covenant. 177 Weber Aircraft, L.L.C. v. Krishnamurthy, No. 4:12-cv-666, 2014 WL 12521297, at *3-*4 (E.D. Tex. Jan. 27,
2014).
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In CCNA suits, employers have often sought recovery of their attorneys’ fees, but courts
have routinely held that CCNA Section 15.52 precludes an employer from recovering attorneys’
fees in suits that seek to enforce a covenant.178 Courts have reasoned that because Section 15.52
provides that the criteria for enforceability of a covenant in Section 15.50 and the procedures and
remedies for enforcement in Section 15.51 “are exclusive and preempt” any other enforceability
criteria or “procedures and remedies in an action to enforce a covenant not to compete under
common law or otherwise,” 179 and because Section 15.51 explicitly states that an employee may
recover attorneys’ fees but contains no provision for an employer to be awarded fees, employers
are not allowed fees.180 Courts have refused to award employers fees pursuant to Section 15.52
even when the agreement provided that the employer would be entitled to its fees for a breach.181
While a number of cases have held that CCNA Section 15.52 precludes an employer’s
recovery of attorneys’ fees, there have been cases involving enforcement of covenants under the
CNCA wherein employers were awarded attorneys’ fees. But in these cases it is unclear if
Section 15.52’s exclusivity and preemption provisions were at issue because the courts’ opinions
did not address it—perhaps because the employee did not make the argument.182 Clearly, the
issue of an employer’s ability to recover attorneys’ fees in cases involving a covenant’s
enforcement is unsettled, and the Texas Supreme Court has yet to decide this issue. It is
therefore important that prior to bringing an action on a covenant not to compete, or an
agreement that as discussed supra can be colorably asserted to constitute a covenant not to
compete, employers should carefully evaluate the impact/import of the CNCA on its potential
recovery of attorneys’ fees.
178 Rieves v. Buc-ee's Ltd., 2017 WL 4557796, at *7 (Tex.App.-Hous. (14 Dist.), 2017); Ginn v. NCI Bldg. Sys., Inc.,
472 S.W.3d 802, 825 (Tex. App.-Houston [1st Dist.] 2015, no pet.); Franlink v. GJMS Unlimited, Inc., 401 S.W.3d
705, 712 (Tex. App.—Houston [14th Dist.] 2013, pet. denied) (affirming trial court’s denial of employer’s request
for attorneys’ fees because Covenants Not to Compete Act preempts Civil Practices & Remedies Code Chapter 38);
Glattly v. Air Starter Components, Inc., 332 S.W.3d 620, 644–45 (Tex. App.—Houston [1st Dist.] 2010, pet.
denied); Perez v. Texas Disposal Sys., Inc., 103 S.W.3d 591, 594 (Tex. App.—San Antonio 2003, pet. denied)
(holding Covenants Not to Compete Act controls award of attorney’s fees and preempts award of fees under any
other law). 179 Tex. Bus. & Com. Code Ann. §§ 15.52 states “[t]he criteria for enforceability of a covenant not to compete
provided by Section 15.50 of this code and the procedures and remedies in an action to enforce a covenant not to
compete provided by Section 15.51 of this code are exclusive and preempt any other criteria for enforceability of a
covenant not to compete or procedures and remedies in an action to enforce a covenant not to compete under
common law or otherwise.” 180 Ginn v. NCI Bldg. Sys., Inc., 472 S.W.3d 802, 825 (Tex. App.-Houston [1st Dist.] 2015, no pet.). 181 Glattly v. Air Starter Components, Inc., 332 S.W.3d 620, 644–45 (Tex. App.—Houston [1st Dist.] 2010, pet.
denied) (holding Covenants Not to Compete Act preempted contractual provision allowing employer to recover
attorney’s fees in suit to enforce non-disclosure agreement construed as non-compete). 182 See e.g., Sanders v. Future Com, Ltd., 2017 WL 2180706, at *11 (Tex.App.-Fort Worth, 2017) (Upholding the
trial court’s award of attorneys’ fees to the employer for breach of a covenant not to compete. While the opinion
cited CCNA Section 15.51 as a basis for affirming the denial of attorney fees being awarded to the employee, it
appears that the employee did not argue the exclusivity and preemption provisions of Section 15.52. The Court
stated “[a]s for the award of attorney's fees to Future Com, Sanders offers no argument against the award other than
his contention that Future Com had knowledge of the covenant's defects.”); see also Merritt Hawkins & Assoc., LLC
v. Gresham, 861 F.3d 143, 155-156 (5th Cir. 2017) (The case involved covenants not to compete and the employer
was awarded its attorneys’ fees based on a finding that the employee violated employer’s Texas Harmful Access by
Computer claim, and “[a] prevailing party on a Harmful Access by Computer claim “is entitled” to attorneys’ fees.
Tex. Civ. Prac. & Rem. Code § 143.002.” The court’s opinion does not indicate whether the employees alleged that
CCNA preempted employer’s attorney fee award.).
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A word of caution, because of the potential overlap of an employer’s claims against a
former employee under the DTSA, TUTSA, TTLA and CNCA, and their respective provisions
concerning attorneys’ fees, employers should utilize strategic considerations in the causes of
action it asserts and positions it takes in the litigation. In the same vein, careful consideration
should be given to jury instructions so that the basis of relief for each asserted claim, defense,
and their respective requisite elements is clear.
For example, in NuVasive, Inc. v. Lewis, employer NuVasive alleged Lewis breached
three provisions of her employment contract: the non-competition, the non-solicitation, and the
non-disclosure provisions.183 Because of the exclusivity of relief for non-competes as set forth in
CNCA Section 15.51, the court held that if NuVasive prevailed on the breach of contract claim
based on the non-compete or non-solicit clause, then it may not recover its attorneys’ fees
pursuant to CCNA 15.51. 184 But if NuVasive prevailed on the breach of contract claim based on
violation of the non-disclosure provision, then NuVasive may recover its fees. 185 The jury
instructions did not separate the three basis of NuVasive’s breach of contract claim, and instead
simply asked “Did Lewis fail to comply with the Agreement?,” to which the jury answered
“Yes.” 186 Although the jury found that Lewis breached her employment contract, because the
jury instructions made it unclear as to basis of the jury’s liability determination, the Court held it
could not determine if the employer was entitled to attorneys’ fees and refused to grant them. 187
Not only should an employer asserting a claim associated with trade secret
misappropriation or violation of a covenant be strategic in the claims it asserts, and meticulous in
the jury instructions, the employer should be equally strategic in the facts it alleges and positions
it takes. For example, because the DTSA and TUTSA are available to acts that occurred after
May 11, 2016 and September 1, 2013, respectively, and TTLA (including common law trade
secret misappropriation) and CNCA are available for violations occurring much earlier, savvy
defendants might assert defenses or counterclaims or attempt to get an employer to take positions
that would result in a higher probability of the defendant recovering their attorneys’ fees.188
§ 3.0 ETHICS OF OFF-BOARDING AND HIRING EMPLOYEES
This article primarily discusses ways in which owners of information can protect that
information using agreements and legal causes of action, legal mechanisms that may be used to
support those efforts directed to protection, legal remedies that may be imposed to make the
183 NuVasive, Inc. v. Lewis, No. A-12-CA-1156-SS, 2014 U.S. Dist. LEXIS 151117, at *4 (W.D. Tex. Oct. 22,
2014). 184 Id. at *4 (W.D. Tex. Oct. 22, 2014). 185 Id. at *4 (W.D. Tex. Oct. 22, 2014). 186 Id. at *4 (W.D. Tex. Oct. 22, 2014). 187 Id. at *4 (W.D. Tex. Oct. 22, 2014). 188 See Merritt Hawkins & Assoc., LLC v. Gresham, 861 F.3d 143, 155-157 (5th Cir. 2017) as discussed supra
(Although the jury found that the employee breached its non-compete agreement and violated the Harmful Access
by Computer Act, because the jury determined that the employee did not violate TTLA, which mandates fees to the
prevailing party, the employer was nonetheless required to pay the breaching employee’s fees for successfully
defending against the TTLA claim); see also NuVasive, Inc. v. Lewis, No. A-12-CA-1156-SS, 2014 U.S. Dist.
LEXIS 151117, at *4 (W.D. Tex. Oct. 22, 2014), as discussed supra (The jury found that employee Lewis breached
her employment contract, but the court determined that Lewis did not violate TTLA and was entitled to her
attorneys’ fees associated with the TTLA claim).
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victim of theft and misappropriation whole, and the legal consequences that a thief or
misappropriator of information may face as a result of their actions. Due to the highly
competitive marketplace in which hydrocarbon production and other oil field service and energy
companies find themselves, these type of entities that want to maintain their trade secrets should
immediately identify the information that they regard as confidential and secret information and
the steps performed to establish and maintain its’ secrecy. These entities should perform the
following actions:
− Update employment, nondisclosure, CNCA and other restrictive employment
agreements and understand how to implement new agreements after the date of hire;
− Train your existing employees how to identify confidential information and maintain
the confidentiality of the same;
− Design guidelines and methods for restricting employees’ access to certain
confidential information;
− Give departing employees exit interviews to understand what policies the employee
followed, how the employee followed them and ensure the return of tangible and
intellectual property; and
− Document at pre-determined intervals employee’s compliance with procedures.
Similarly, there are actions and mitigating steps that both a hiring entity and an employee
could take before a hiring transaction has commenced to reduce the risks of litigation to both
parties to the employment transaction. Similar to the legal profession, wherein ethical walls are
constructed when attorneys join law firms in order to prevent the potential misuse of a client’s
confidential information, companies—such as those in the hydrocarbon production and energy
sector where employee mobility occurs more frequently than other economically situated
industries—should implement practices that safeguard against the potential violation of
employment, confidentiality, non-compete and other postemployment restrictive agreements,
provisions and covenants, and minimize the imposition of misappropriation of trade secret and
theft of confidential information legal actions. To meet these ever-increasing threats, companies
should impose a Code of best business practices, conduct and ethics. It is important that a
company’s recruitment practices are in line with its business practices and ethics guidelines. The
following is a list of issues and action items that should be evaluated before hiring any new
employee away from a competitor in a highly competitive market:
− Create intellectual barriers to information to prevent contamination;
− Scrutinize both the potential new hire and his/her previous employer;
− Determine if you are hiring the person from a direct competitor;
− Understand the new role and the associated responsibilities in comparison to the
candidate’s old role and associated responsibilities;
− If the candidate’s former employment agreements are not themselves confidential,
investigate to understand what obligations the candidate must fulfil during and after
his/her departure from the former employer; and
− Interview the candidate to achieve a comprehensive disclosure.
If you are an employee, you should make sure that you are complying with the company
policies that are stated in your employment manual and employment agreement, and make sure
that you familiarize yourself with the same. This means understanding 1) whether the
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information you either have access to or of which you are in possession is confidential and trade
secret information, 2) what entity the information belongs to, 3) and the rules that the owner or
the possessor of the information put in place to protect the information.
A little bit of forethought goes a long way to achieving any goal. This age-old adage
rings true not just for individuals but also for large corporations. Employers that work hand-in-
and with their employees to avoid the pitfalls of litigation are left to focus on profitability and
growth—rewards for which every organization should strive.