Under Texas law, how secret must trade secret be?

November 26, 2012 / By Robert Wood

A recent opinion by the Dallas Court of Appeals explains what constitutes a trade secret and gives an example of information acquired through unfair means.

The court defines a trade secret as “any formula, pattern, device, or compilation of information that is used in one’s business and presents an opportunity to obtain an advantage over competitors who do not know or use it.” The opinion lists a number of items which have been recognized as trade secrets, including customer lists, pricing information, blueprints, and market strategies. Furthermore, the court noted that “secret” implies the information is not generally known or available; however, when information is acquired through unfair means, the fact that it is available through experimentation and analysis does not mean that the information is not protected.

The lawsuit involved owners and executives of long-term acute care hospitals. These facilities treat patients who require longer care than a regular acute care hospital. According to the opinion, the Plaintiff filed a lawsuit against several of its former executives and several entities for misappropriation of trade secrets and other claims. One of the issues presented before the court was whether market summaries, which included information regarding reputation and acquisition targets, referral sources, and a bed need analysis, should be afforded trade secret protection.

At trial, the chairman of the board for the Plaintiff testified that a considerable amount of time, money, and effort had been put into developing the infrastructure and contacts necessary to gather the information. He testified that if competitors received the information, the Plaintiff would be at a competitive disadvantage. He described the information as the Plaintiff’s “strategic work product” and noted that the information also conveyed the Plaintiff’s vulnerabilities. Specifically with regard to the bed need analysis, one defendant testified that the analysis determines how many beds are needed in the market based on the current demand for rehab beds and the current number of beds. He explained the process for conducting the analysis and also admitted that the information generated from the analysis would be considered confidential.

The Defendants argued that the information was readily available through the internet or by talking with others in the industry and therefore should not be afforded trade secret protection. The court held that just because the information is available through inspection or analysis does not preclude it from being afforded trade secret protection.

The evidence at trial showed that one former executive had made a number of contacts while employed by the Plaintiff and used those contacts to acquire information regarding the Plaintiff’s target market and business plan. He then sent that information to another long-term acute care hospital while he was still employed by Plaintiff. The court noted that the important question is not “How could he have secured the knowledge?” but rather “How did he?” The information gave its holder an opportunity to gain a competitive advantage over competitors who did not know or use it. Therefore, the court held that the information should be afforded trade secret protection.

As this opinion demonstrates, information that may technically be available to others may still be afforded trade secret protection when it is acquired through unfair or improper means.

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About the Author

Robert Wood has been a Texas trial lawyer since 1993. During that time, he has represented small, mid-sized, and Fortune 100 companies in business and employment litigation matters all over Texas and the United States. He has also advised and represented hundreds of individuals in employment litigation matters. Read more about Robert Wood