Many businesses have a list of vendors or suppliers they routinely use in the course of business. This list of vendors is often compiled after years of effort and references the vendors that the business knows to sell high quality products at a good value. Arguably, this information is a trade secret because it could only have been discovered after many years of trial and error and substantial financial investment.
In an earlier post, we discussed the likely use of common law factors in identifying trade secrets under the Texas Uniform Trade Secrets Act. Under the common law, Texas courts utilized a six factor test to determine whether something was a trade secret. Those factors are:
- The extent to which the information is known outside the employer’s business;
- The extent to which it is known to employees and others involved in the employer’s business;
- The extent of the measures taken by the employer to guard the secrecy of the information;
- The value of the information to the employer and its competitors;
- The money or effort expended by the employer in developing the information; and
- The ease or difficulty with which others might properly acquire or duplicate the information.
While the Texas Uniform Trade Secret Act explicitly replaces the common law, other states’ courts with similar statutes have still drawn from the common law by using these six factors. Should Texas follow these states, recent Texas case law applying the common law factors indicates that your company’s list of vendors/suppliers may be entitled to trade secret protection.
In a recent Texas Court of Appeals case, the court considered the trade secret status of a company’s vendors in determining whether the vendor information was entitled to protection from discovery under the trade secret privilege. The company seeking the trade secret protection was part of the salon haircare product diversion industry. Within that industry, companies divert products outside of their normal, authorized, distribution channels. Due to the nature of the industry, the product supply is limited and thus the identity of the supplier more valuable. The company seeking protection established that it had been in the business for 25 years, it had developed its contacts and sources through substantial effort and expertise, its contacts/suppliers were not readily known to the public or the industry itself, its suppliers were the most valuable part of its business, and the suppliers’ identities were only known by a few people within the company.
Viewing this evidence, the court, weighing the six common law factors, found that the company’s supplier information was a trade secrets and thus, protected under the trade secret privilege. While this case did not involve a misappropriation of trade secrets claim, it did firmly establish that, under the six factor test, a vendor can, in fact, be a trade secret. However, the protection available for you and your business depends greatly on the efforts you take in protecting that information and the value of the information you wish to protect.
At Lindquist Wood Edwards, LLP, our attorneys are up-to-date on the law pertaining to all avenues available for protecting your business’s confidential information and trade secrets. Whether or not your business is facing a breach of your confidential and proprietary information or wanting to prevent a future one, our attorneys can counsel you as to the best options for your company.