This is part four of my four-part series commemorating the one-year anniversary of the Defend Trade Secrets Act.
What is the minimum it takes to meet the Defend Trade Secrets Act’s “reasonable measures” requirement?
Meet Kenny Ribler. He was a regional sales manager for Protech, a company that sells world-class perimeter security systems for sensitive sites. Protech fired Kenny on February 16. In the early morning hours of the following day, Kenny downloaded files from Protech’s customer-management database to a private drive. Then he emailed the files to his personal email account and deleted the emails from his company account.
Protech claims the downloaded files contain confidential Protech information concerning customers, products customers purchased, and profit margins. The customer information includes:
- Product preferences
- Buying patterns
- Credit profiles
- Customer invoices and pricing
- Customer practices
- Margins and profit variances
In other words, Protech claims that Kenny took the typical sort of customer list information at issue in “soft” trade secrets cases. As I explained here, this has been the most common type of lawsuit in the first year of the Defend Trade Secrets Act.
Protech argues that this information would give a competitor an unfair advantage. A competitor could use the information to undercut Protech’s price quotes, to offer better service, and to divert Protech’s customers.
Time out. Isn’t price competition a good thing? Don’t we want competitors to try to take business away by charging lower prices? Don’t we want competitors to divert business by offering better service? Aren’t these basic foundations of our free-market system?
Hold that thought.
Protech also claims that it took “significant” steps to protect its confidential information, including (1) requiring employees to sign confidentiality agreements, and (2) only enabling its employees to gain access to the data through “password-protected entry points.” I assume this means computer passwords.
Here’s the legal question. In a federal lawsuit under the Defend Trade Secrets Act, are these facts enough for a judge to issue a Temporary Restraining Order barring Kenny from using any of the information he downloaded or soliciting business from any Protech customer?
The judge in Protection Technologies, Inc. v. Ribler thought so. “At this stage,” the judge wrote, “the court is satisfied that the customer data that Ribler allegedly downloaded constitutes a trade secret.” “Moreover,” the judge said, “the court finds that Protech took reasonable measures to keep this information secure by requiring employees to sign confidentiality agreements and limiting access to the data to password-protected entry points.” Protection Technologies, Inc. v. Ribler, No. 3:17-cv-00144-LRH-WGC, 2017 WL 923912 (D. Nev. Mar. 8, 2017).
Why this last part about “reasonable measures”? It has to do with the definition of “trade secrets” in the Defend Trade Secrets Act (which is roughly the same as the definition in the Uniform Trade Secrets Act). Essentially, you have to prove three things to show that a customer list, or any kind of information, is a trade secret:
- The information has “independent economic value”
- The information is not “readily ascertainable” by competitors
- The company took “reasonable measures” to keep the information secret
The big fight is usually over the first two elements. The “reasonable measures” element gets relatively less attention. Perhaps that is because courts tend to set the bar low for reasonable measures. If it’s enough to show that the company requires confidentiality agreements and has password-protected computers, then most companies are going to be ok.
Can the bar go any lower? What if the company doesn’t require employees to sign confidentiality agreements? In Texas, an employee has a common-law duty of confidentiality anyway, so should the lack of a written agreement make a difference? Is it enough if the company just has a written policy that company information is to be kept confidential?
That remains to be seen. In the meantime, companies that want to protect their trade secrets should be careful not to neglect the “reasonable measures” requirement. It may be a low bar, but it’s still a bar that must be cleared. See, e.g., Mesquite Servs., LLC v. Standard E&S, LLC, 610 S.W.3d 548, 562 (Tex. App.—Amarillo 2020, pet. filed Nov. 30, 2020) (plaintiff wholly failed to establish that it took any efforts to protect its alleged trade secrets regarding who it employed and the identity of its customers); Weinfuse, LLC v. Infuseflow, LLC, No. 3:20-CV-1050-L, 2021 WL 1165132, at *4 (N.D. Tex. March 26, 2021) (despite detailed allegations of protocols to protect proprietary software, company failed to sufficiently allege reasonable measures, where its “lack of confidentiality measures for prospective clients is notable”).
Just ask the plaintiff in M.C. Dean v. City of Miami Beach. As I wrote here last August, in that case the federal district court dismissed a Defend Trade Secrets Act lawsuit because the plaintiff failed to plead a plausible case that it made reasonable efforts to maintain the secrecy of the information. The key fact that doomed the trade secrets claim was that the plaintiff sub-contractor signed a contract that expressly stated the information at issue could be used by the City of Miami Beach without restriction.
But in most cases, it won’t be that hard for the plaintiff to plausibly plead and prove “reasonable measures” to keep the information secret.
“Reasonable measures” in price undercutting cases
This means companies that take basic steps to protect the confidentiality of their customer information, including prices, will be able to pursue the “price undercutting” theory seen in Protection Technologies and many other soft trade secrets cases. But as I asked earlier, shouldn’t courts want to promote price competition?
Well, yes, of course. We don’t want to discourage competition. On the other hand, we don’t want to allow a competitor to undercut a company’s prices by using the company’s trade secrets. Deciding whether price information is in fact a “trade secret” therefore becomes critical. It is the dividing line between fair and unfair competition.
Here the “reasonable measures” issue becomes important. If a company wants to argue that its prices are trade secrets, it must take reasonable measures to keep the prices confidential.
Wouldn’t this include requiring customers to sign confidentiality agreements barring them from disclosing the company’s prices? If Protech, for example, did not require its customers to keep its prices confidential, did it really take reasonable measures to keep those prices secret?
As in most cases addressing the price undercutting theory, this argument was not addressed in the Protection Technologies opinion. But if you represent the plaintiff in a price undercutting case, you should be ready to address it. Especially after people read my blog.
Zach Wolfe is a Texas trial lawyer who handles non-compete and trade secret litigation at his firm Fleckman & McGlynn, PLLC. Thomson Reuters named him a 2020 Texas “Super Lawyer”® for Business Litigation.
These are his opinions, not the opinions of his firm or clients, so don’t cite part of this post against him in an actual case. Every case is different, so don’t rely on this post as legal advice for your case.