- posted: Mar. 16, 2013
- Trade Secrets
This is a short guide designed to provide general background with respect to the nature of trade secrets under Texas law.
1. What is the definition of a trade secret in Texas?
In 1958, the Texas Supreme Court adopted the following definition of a trade secret, which comes from the First Restatement of Torts:
A trade secret may consist of 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. It may be a
formula for a chemical compound, a process of manufacturing, treating or
preserving materials, a pattern for a machine or other device, or a list of
customers. A trade secret is a process or device for continuous use in the
operation of the business. Generally it relates to the production of goods, as,
for example, a machine or formula for the production of an article. It may,
however, relate to the sale of goods or to other operations within the business
such as a code for determining discounts, rebates or other concessions in a
price list or catalog, or a list of specialized customers or a method of
bookkeeping or other office management.
The Texas courts continue to follow that definition to this day.
2. What are the elements of a trade secret in Texas?
Despite the lengthy definition set forth above, it is often stated that a trade secret has three elements:
- It must be secret.
- It must be used in the owner's trade or business.
- It must give the owner a competitive advantage over persons who do not know or use it.
While that may sound simple, each of those elements have nuances.
3. What is "secrecy"?
This element is the most difficult hurdle for a company. A trade secret cannot consist of public information or something that can be readily ascertained by someone who puts forth the effort. If the information can be found with a Google search or by going to the library, it is not "secret."
The courts have recognized three general requirements:
- Absolute secrecy is not required. Instead, the information or device must be "substantially secret." This means that every aspect of the trade secret need not be secret, but a substantial element must not known to outsiders. For example, general principles about a production process may be well known in the industry, but the specific details of the company's proprietary process may still be secret.
- The information or device must not be readily ascertainable or easily discoverable without the use of improper means.
- The owner must take reasonable precautions to maintain the secrecy of the information or device.
In applying these requirements, the courts look to a number of different factors that are fact-specific to each case:
- The extent to which the information is known outside the business.
- The extent to which the information is known by employees and others involved in
- The extent of the measures that the owner has taken to guard the secrecy of the
- The value of the information to the company.
- The amount that the owner has spent in developing the information.
- The ease or difficulty with which the information could be properly acquired or
duplicated by others.
4. When is a trade secret "used in the owner's trade or business"?
In most cases, this element is simple and straightforward. According to the definition adopted by the Texas Supreme Court, however, the trade secret must be "continuously" in use by the company. However, the courts have sometimes found that this element is satisfied if the trade secret was previously used by the company, even if it is not currently in use. However, the law is not entirely settled on this point.
5. When does a trade secret give its owner a "competitive advantage"?
There is no specific legal standard for measuring a "competitive advantage." However, the courts have usually not treated this element as imposing an exacting standard. Evidence of a modest competitive advantage has often been good enough. Courts have found the existence of a competitive advantage through evidence of the value of the secret, the opinions of customers, the cost of developing the secret, and other circumstances.
David C. Holmes is a Houston employment lawyer with The Law Offices of David C. Holmes