Texas Court of Appeals: Providing "Treasure Map" to Potential Investors Without Non-Disclosure Agreement Does Not Destroy Trade Secret Status
A Texas Court of Appeals upheld a jury's determination that a seismic map of an underground natural gas field retained its trade secret status, despite the fact that the owner gave the map to the alleged misappropriator and others without the protection of a non-disclosure agreement. The case is Lamont v. Vaquillas Energy Lopeno Ltd., LLP, No. 04-12-00219-CV (Tex. Ct. App. December 11, 2013).
Two investors co-owned an oil and gas development company called Ricochet. Ricochet's geologist identified a gas reservoir containing natural gas worth $40 to $60 million. The geologist prepared a seismic map of the reservoir that the parties referred to as the "Treasure Map."
One of the co-owners, Lamont, left Ricochet. Lamont teamed with another individual who had received the "Treasure Map" from Ricochet as a potential investor in Ricochet's efforts to develop the prospect, and formed a competing venture. The competing venture ultimately secured a lease and extracted all of the natural gas from the field identified by the "Treasure Map."
In the ensuing lawsuit by Ricochet investors against the competitor for misappropriation of trade secrets, tortious interference and conspiracy, a jury returned a verdict in favor of the plaintiffs on all claims. On appeal, the defendants argued, among other things, that Ricochet's failure to obtain confidentiality agreements from employees and prospective investors before sharing the Treasure Map with them destroyed its trade secret status.
The Texas Court of Appeals rejected the Defendants' argument. Sharing information with employees who are not bound by confidentiality agreements did not destroy the status because, the court noted, an employee's duty of loyalty prevents him from "using trade secret information acquired during the employment relationship in a manner adverse to [their] employer, and this obligation survives the termination of employment." Because of this, "[a]fter Lamont resigned his position at Ricochet, regardless of the effective date, Lamont's duty to protect the trade secret information survived."
Sharing the information with prospective investors who had not entered into Non-Disclosure Agreements (NDAs) did not destroy trade secret status, because under the Restatement (Third) of Unfair Competition § 41 cmt. b (1993), "[t]rade secret status is not destroyed simply by showing the protected item to prospective buyers, customers, or licensees."
Trade secret status can be lost if an owner fails to take reasonable steps to protect the item's secrecy. Best practice is to use NDAs with potential investors, buyers or licensees who need to review the trade secret, and to use confidentiality policies or agreements with employees and officers who need access to the trade secret to do their jobs. However, as the ruling in Vaquillas Energy Lopeno shows, an owner's failure to take these protective steps will not always destroy trade secret status. Where the trade secret is disclosed to a potential investor under circumstances where the recipient knows or should know of its duty to maintain confidentiality, trade secret status may be maintained.
Note that Texas has not adopted the Uniform Trade Secrets Act (UTSA) that forms the basis for most states' trade secrets laws. But the Lamont decision relied heavily on the Restatement (3d) of Unfair Competition sections relating to trade secret protection, and those provisions are intended to be consistent with the UTSA. Accordingly, the case may have persuasive value in jurisdictions that have adopted the UTSA.
This article was featured in the April issue of Stinson Leonard Street's Business Torts Update, which focuses on recent developments affecting litigation of securities law, whistleblower, trade secret and non-compete claims.