Client Insights
Identifying and Protecting Trade Secrets in a Construction Business
Oct 15, 20268 min read
By Varant Yegparian
Consider the following fact pattern, typical in trade secret disputes involving construction companies. A construction business is formed by two principals. One supplies the capital. The other supplies the operational knowledge, manages the work, and develops the customer relationships. After several years, the operating principal leaves to start a competing business. Soon, word circulates that he is bidding for work from the company’s customers.
The remaining owner calls a lawyer. The former principal, he explains, has taken the company’s confidential information and is now using that information to compete against the company. When asked to describe what that information is, the remaining owner says that it is the company’s customer lists, customer relationships, and proprietary pricing methodology. When asked to elaborate on what the proprietary pricing methodology actually is, the remaining owner stumbles over his words, unable to articulate with specificity what the methodology actually is. When asked about the value of the customer lists and relationships, the remaining owner eventually concedes that the identity of its customers could be discovered through simple internet searches. The specificity, or lack thereof, of these answers greatly impacts the viability of a claim against the departing owner.
Before ever needing to speak with counsel, construction owners must be able to directly and specifically articulate what their confidential information is. Descriptions such as “proprietary pricing” and “customer information” need detail: what the information consists of, why its secrecy gives the company a competitive advantage, and how the company protects it. Identifying those specifics allows the business to direct its protections toward the information that matters and explain what a former insider has misused. The ability to do so will improve or destroy the aggrieved company's prospects in a lawsuit.
Most states protect trade secrets: information that derives independent economic value from not being generally known or readily ascertainable through proper means by someone who could benefit from its disclosure or use. See, e.g., Tex. Civ. Prac. & Rem. Code § 134A.002(6).
While these requirements may seem obvious, applying them in practice to a construction company’s confidential information requires a closer examination as to whether the information at issue actually can qualify as a trade secret. And that is because the courts distinguish between trade secrets and general understanding and know-how: the former is protected; the latter is not. See, e.g., T-N-T Motorsports, Inc. v. Hennessey Motorsports, Inc., 965 S.W.2d 18, 22 (Tex. App.—Houston [1st Dist.] 1998, pet. dism’d).
The fate of a construction company facing a trade secret dispute will rise or fall on its ability to navigate the difference between actual trade secreted information and general understanding and know-how. The following analyzes two common forms of information used in the industry with an eye towards what makes the information protected as a trade secret.
Pricing methods and estimating processes.
The lifeblood of any business involved in construction is its pricing/bidding processes. Oftentimes, those processes consist of a simple calculation: multiply the anticipated labor and material quantities by unit costs and add a percentage markup. On its own, this method does not necessarily constitute a trade secret. Indeed, this process could fall prey to a claim that this methodology does not have anything proprietary or secretive about it and is instead simply information accumulated from conducting business in the industry or that could be gleaned from calling other contractors, subcontractors, or suppliers. If so, that information may not be protected. CDC Restoration & Construction, LC v. Tradesmen Contractors, LLC, 2012 UT App 60, 274 P.3d 317. If the claimed information consists entirely of readily available prices and a commonly used calculation, the company needs to identify what gives its particular approach value by virtue of secrecy. Indeed, an appellate decision from the CDC Restoration litigation upheld a verdict protecting the contractor’s project-specific bid information, labor estimates, and equipment estimates, distinguishing that information from the employee’s general estimating experience. CDC Restoration & Construction, LC v. Tradesmen Contractors, LLC, 2016 UT App 43, ¶¶ 21–24, 30.
Nor does dressing the information up under the auspices of commercial pricing software resolve the issue. While a company may use a widely available program to process information, that information still needs to meet the statutory requirements to qualify for trade secret protections. That said, the combination of otherwise publicly accessible information can warrant protection if the combination itself is secret and confers a competitive advantage. Tewari De-Ox Systems v. Mountain States/Rosen, 637 F.3d 604, 613–14 (5th Cir. 2011).
The task for a construction company dealing with proprietary pricing or estimating methods, then, is to (i) articulate precisely what it is about its methods that is proprietary and not generally known and (ii) explain how the secrecy of the method(s) provides the company with a competitive advantage in the marketplace.
Customer lists and relationships.
Often, companies seek to protect lists of customers (both actual and prospective) as well as particular information developed through customer relationships concerning the customers’ preferences, needs, etc. In each instance, the company must similarly identify what it claims is secret and explain the competitive advantage that secrecy provides.
Customer lists are a quintessential trade secret, even when their individual components are publicly available. The key requirement is that the compilation as a whole is not generally known or readily ascertainable and provides its owner with value from its secrecy. A simple list of customers, contractors, or vendors that a competitor could readily assemble from public sources may fall short. The company should therefore specifically identify what it is about the compilation, as opposed to the compiled information, that helps it compete.
Information developed through customer relationships may also qualify as a trade secret. Privately communicated budgets, negotiated terms, purchasing preferences, and plans for upcoming projects may give a company an advantage when pursuing work. But a longstanding relationship, standing alone, does not identify a trade secret, and a customer preference readily known throughout the industry offers little basis for protection. Knowing that a general contractor regularly purchases concrete differs from knowing its confidential budget and plans for a particular project. Again, the company must identify the particular knowledge developed through the relationship and explain why its secrecy matters.
For example, a California court upheld protection for a roofing contractor’s customer information, which included pricing and knowledge of particular roofs and customers’ roofing needs. That information allowed a competitor to target customers more effectively than publicly available information would permit. Morlife, Inc. v. Perry, 56 Cal. App. 4th 1514, 1521–23 (1997).
Both categories require the same examination: what information is not generally known or readily ascertainable through proper means, what economic value derives from that secrecy, and what reasonable measures the company takes to preserve it. Protection does not depend on the information appearing in a particular document; Texas law includes information regardless of whether or how it is recorded. The task is to identify and protect the specific information underlying the company’s claim of a proprietary list or relationship. Tex. Civ. Prac. & Rem. Code § 134A.002(6).
The following review can help owners and counsel move from familiar descriptions to the information and protections those descriptions are meant to capture.
Assumption | What needs to be identified |
|---|---|
“Our pricing methodology is proprietary.” | The particular costs, markups, estimating assumptions, calculations, or combination claimed as secret, and the advantage a competitor would gain from knowing them. |
“Our customer list is confidential.” | The nonpublic information within the list, or the confidential compilation as a whole, and how the compilation, as opposed to the information contained in it, helps the company win or retain work. |
“Those are our customer relationships.” | The specific information developed through those relationships, what the principal brought into the business, and the agreements governing the company’s rights. |
“We have our own way of doing the work.” | The particular sequence, technique, specifications, or operating knowledge that competitors cannot readily obtain and how, specifically, that gives the company an advantage. |
“Everyone knows this information is confidential.” | The agreements, access restrictions, and actual handling practices that protect the identified information are put in place and systematically followed. |
The ability to sufficiently articulate how the information at issue constitutes a trade secret under the applicable statutes is only part of the process. Construction companies must implement a best-practices approach to sufficiently maintaining the secrecy of their information because a court will investigate the reasonableness of the protective measures used. A useful exercise in tackling this task is to follow the information at issue as it flows through the business: Who needs it to perform the work? Where is it stored? What is shared with customers, suppliers, and subcontractors? A bid disclosing a total price and several cost categories may leave the calculations behind those figures undisclosed. Sending the underlying estimating workbook presents a different question.
The company’s documents and practices should address those distinctions. Confidentiality agreements should cover the information employees and principals actually receive. Access should be limited to the people who need it. Written policies should explain how sensitive material is stored, shared, and returned, and the company should follow those policies in daily operations.
A password on an employee’s computer provides some protection, but it does not explain who can access the underlying estimating files, whether they can copy them elsewhere, or what restrictions govern their use. Sequestration of information on select drives along with the implementation of multi-factor authentication further protects the information—and the prevalence of these measures’ use might make them absolute requirements to clear the reasonable measures bar.
These arrangements require regular review and revisions. As the business grows, access permissions and confidentiality obligations may need to be updated and changed. An outdated policy that bears little relationship to actual operations will be difficult to explain when the company seeks protection in court.
Construction companies should address these issues well before litigation becomes necessary. Waiting until a principal leaves or a competitor begins pursuing the company’s customers may expose deficiencies that cannot then be corrected. A lawsuit cannot restore secrecy to information that has become generally known or retroactively supply protections the company never implemented. The foundation for a trade secret claim must be established while the company is developing and using the information in its business.
That requires two related tasks. First, identify the particular information the company considers a trade secret, distinguish it from general understanding and know-how or readily ascertainable information, and explain the competitive advantage its secrecy provides. Second, audit the company’s agreements, policies, access restrictions, and actual practices to determine whether reasonable measures protect that information. Address any deficiencies and repeat the review as the business changes. Those steps put the company in a position to explain both what it seeks to protect and what it has done to protect it before either question becomes an issue in litigation.