My New Hire Is Accused of Bringing a Competitor's Trade Secrets. Defending the Company

The short answer, expanded

The letter from the competitor's lawyer is addressed to the company for a reason. The former employee may have little money and no insurance; the new employer has both. Whether the company becomes a defendant depends almost entirely on what it does in the days after the letter arrives.

Texas law does not make a company liable for hiring a competitor's employee, and it does not make a company liable for what an employee did before arriving. It makes the company liable for its own use or disclosure of a trade secret it knows or has reason to know was improperly acquired. Until the letter, the company may have had no such knowledge. After the letter, it cannot say that.

How a new employer becomes liable

Section 134A.002(3) of the Texas Civil Practice and Remedies Code defines misappropriation to include disclosure or use of a trade secret, without consent, by a person who at the time of the disclosure or use knew or had reason to know that the trade secret was derived from someone who used improper means to acquire it, or who owed a duty to keep it secret. The federal definition in 18 U.S.C. § 1839(5) is the same.

Three features of that definition matter to the new employer.

• Knowledge can arrive late. A company that received the information innocently is not a misappropriator for having it. It becomes one if it uses or discloses the information after learning, or having reason to know, where it came from.
• Reason to know is enough. A sales manager who arrives with a spreadsheet of his former employer's accounts and pricing gives the company reason to know without anyone saying a word.
• Acquisition can be independent misappropriation. If the company encouraged the employee to bring the material, or knew when it accepted it, the acquisition itself is a violation, not only the later use.

The company's goal, therefore, is to be able to prove that it never used the information and that, from the moment it had reason to know, it did everything a careful company would do. The statute as a whole is described in the Texas Uniform Trade Secrets Act, explained.

The first 72 hours

The steps below are the ones a court will later ask about. The order matters less than doing all of them quickly and writing down when each was done.

1. Do not delete anything. The instinct to purge the files is the single most damaging thing a company can do. Deletion after notice of a claim is spoliation, it suggests the files were valuable, and it destroys the company's own best evidence that nothing was used. The consequences are described in deleted emails and lost data: spoliation consequences in Texas.
2. Issue a litigation hold. Tell the employee, the hiring manager and IT in writing to preserve all documents, devices and accounts that could relate to the accusation.
3. Stop any use. If the employee has been working from a list, a model or a document from the prior employer, that work stops. Projects that may have touched the material are paused pending review.
4. Segregate, do not search. Have IT quarantine anything the employee uploaded or brought, so it cannot be accessed or copied, without company personnel reading through it. A third-party forensic examiner, retained through counsel, can identify what is there without the company's managers learning the competitor's secrets in the process.
5. Interview the employee with counsel. What did they bring, where is it, who has seen it, what have they used? The answers shape everything that follows, and the interview should be conducted by counsel so that it is privileged.
6. Instruct the employee in writing. A letter confirming that the company does not want, and prohibits the use of, any former employer's confidential information, and directing the employee to identify and surrender anything they have.

Each step produces a document with a date. Those documents are the company's defense.

Answering the letter

A trade secret cease and desist letter usually demands four things: stop using the information, return or destroy it, confirm in writing, and sometimes terminate the employee or keep them out of a role. Silence is the wrong response, and so is a defensive denial written by the owner.

Counsel's response typically confirms that the company has taken steps to preserve and quarantine any material, states that the company did not solicit the information and does not want it, proposes a protocol for returning or destroying the material under supervision of a neutral examiner, and declines the demands that overreach, such as firing the employee or barring them from working in the field absent an enforceable non-compete. It does not admit that anything is a trade secret, because that is the plaintiff's burden to prove. The general approach to such letters is covered in I received a cease and desist letter, what now.

A prompt, cooperative, well-documented response often ends the matter. The former employer's real concern is usually the information, not the person, and a protocol that returns the information and verifies deletion gives it what a lawsuit would, without the cost.

The defenses the company has

If the former employer sues anyway, the new employer has defenses that the employee may not.

• No use. The clearest defense. Forensic evidence that the files were quarantined on day one and never opened by anyone at the company defeats the use branch of misappropriation.
• No knowledge until notice, and proper conduct after. The timeline of the company's response is the proof.
• Not a trade secret. The plaintiff must show reasonable secrecy measures and independent economic value. Information that was public, shared freely or readily ascertainable is not protected.
• Independent development. If the company already had its own pricing model or customer data before the hire, dated records of that work show the accused information was not needed and not used.
• General knowledge, skill and experience. Section 134A.003 bars an injunction that prohibits a person from using what they learned as a professional. A salesperson's knowledge of an industry and its players is not the former employer's property.

Section 134A.005 adds a deterrent: a court may award attorney's fees against a party whose misappropriation claim was made in bad faith. A former employer that sues a competitor over information it cannot identify, or that it knows is public, takes that risk.

Example

Suppose a Dallas logistics company hires a dispatcher from a competitor. Three weeks later the competitor's lawyer writes that the dispatcher emailed herself the competitor's carrier rate sheets before leaving. The company's general manager, acting on counsel's advice the same day, has IT quarantine the dispatcher's mailbox and laptop, sends a litigation hold, and arranges for a forensic examiner to image the devices. Counsel interviews the dispatcher, who admits forwarding the rate sheets to her personal email to finish an invoice dispute and says she never opened them at the new job. The company sends her a written instruction and obtains her consent to have the examiner delete the files from her personal account under a protocol.

Counsel's response letter offers the protocol and a sworn certification. The forensic image shows the rate sheets were never opened on the company's systems. The competitor accepts the protocol. Had the general manager instead told the dispatcher to delete everything and replied that the accusation was nonsense, the same facts would have produced a lawsuit naming the company, a spoliation motion and a far harder defense.

The injunction the company may face

If the former employer files suit, it will likely seek a temporary restraining order and temporary injunction quickly. The company should expect a demand to preserve devices, a request for expedited discovery and a hearing within about two weeks. The company's early documentation is what it will put in front of the judge.

Two statutory limits protect the company and the employee at that hearing. Under the Texas Act the order may not bar the use of general knowledge, skill and experience. Under the federal Act, section 1836(b)(3)(A)(i), an injunction may not prevent a person from entering into an employment relationship, and any conditions on employment must be based on evidence of threatened misappropriation and not merely on the information the person knows. A demand that the company fire or reassign the employee has to clear those bars.

The employee's separate exposure

The employee's position is different from the company's. They may have signed a confidentiality agreement, a non-solicitation covenant or a non-compete with the former employer, and those contract claims run against them personally, not against the new employer, unless the new employer induced the breach. A company that hired knowing of a non-compete has its own issues, covered in hiring someone bound by a non-compete.

The company and the employee may also need separate lawyers. Their interests align on most points but diverge on the key one: whether the company knew. Counsel for the company should say so early rather than let the conflict emerge in a deposition.

Preventing the next letter

Companies that hire from competitors regularly adopt a standard onboarding step: a written certification from each new hire that they have not brought, and will not use, any former employer's confidential information, together with a review of any agreements the new hire signed. The certification does not immunize the company, but it is evidence of good faith and it shifts the conversation with the new hire before the first day rather than after the first letter.

Tina Wysk represents Dallas companies accused of trade secret misappropriation through a new hire, as well as companies pursuing such claims, in state and federal court; the practice is described at trade secret litigation.