Americans love food. We also love the next biggest and best thing as far as high end restaurants are concerned. Houston, along with New York and Los Angeles has the most competitive restaurant market in the U.S.
So, what makes one restaurant take off and another file for bankruptcy? Yes, the ambience, the décor and the service matters, but at the end of the day, it’s their secret sauce – their recipes – that keep you coming back. When is that secret sauce a trade secret – something that gives a restaurant a commercial edge in the marketplace? What can the restaurant chain really protect?
RECIPES AS TRADE SECRETS
The advent of the Food Channel has brought the culinary arts into living rooms everywhere, along with the rivalries of big-name (and not so big-name) chefs. At the heart of any chef’s success are his “signature dishes” that distinguish him from his competitors, and the recipes are jealously-guarded secrets. The same is true in the restaurant industry, where chefs must transform their galley know-how into the real-world business environment. As in the world of the Food Channel’s chefs, one thing that sets a restaurant apart from its competitors is its signature dishes. But the realities of the kitchen mean a lot of people will likely end up knowing the recipes for signature dishes. That probability becomes even more likely, and potentially fatal, when a chef franchises out his restaurant concept. In Texas, can a recipe be a trade secret? If so, what steps must a chef or restaurant owner take to protect that trade secret?
THE H.E.B. CASE
A recipe can be protected as a trade secret in Texas. H.E. Butt Grocery Co. v. Moody’s Quality Meats, Inc., 951 S.W.2d 33 (Tex.App.—Corpus Christi 1997, review denied).The H.E.B. case, however, didn’t involve a restaurant. Rather, in the H.E.B. case, the plaintiff, Moody’s Quality Meats, developed marinating process for beef fajitas that gave Moody’s Meats competitive edge because it could offer a juicier, tenderer, more flavorful fajita than its competitors. Moody’s Meats had disclosed the process to H.E.B., and the primary question was whether the process had been disclosed in confidence. Nonetheless, the case does hold that a recipe, if it meets the requirements of a trade secret, is protected from improper disclosure and use under Texas law. Where the H.E.B. case falls short, however, is not in its reasoning, but in the realities of the business context in which it was applied. Moody’s Meats was not a restaurant, and it was not necessary for the business to disclose its trade secret beyond a few trusted individuals. Turnover in the restaurant industry, both in terms of wait staff and kitchen staff, is high. Food preparation responsibilities are shared by numerous individuals on the kitchen staff and, to some extent, members of the wait staff. Thus, it becomes impractical to restrict knowledge of signature dish recipes to a few trusted individuals. Texas’ common law is relatively silent, however, regarding the protection of a recipe in the context of a restaurant business. But big changes are on the way.
THE 205 CASE
There have been a few reported cases around the country involving a restaurant’s efforts to protect its recipes as a trade secret. One case is 205 Corporation v. Brandow, 517 N.W.2d 548 (Iowa 1994). In that case, 205 Corporation, doing business as The Tavern Restaurant, had recipes for pizza sauce, pizza crust, and “grinder” sandwiches it claimed were trade secrets. It sued a former employee who had provided the recipes to a competitor.
Analyzing the claim under Iowa’s trade secrets law, the Iowa Supreme Court considered the following evidence significant: (1) the most valuable asset of the restaurant was the recipes, (2) the exact amount of specific ingredients in the recipes could not be determined without access to prohibitively expensive chemical analysis machinery, and there was no way to determine the underlying assembly and baking processes, (3) the restaurant’s popularity was shown by receipt of several local, highly-prized food awards, and (4) the recipes were not made available to the public, were not left anywhere readily accessible to others, and were kept in a safe deposit box at all times. Based upon that evidence, the Iowa Supreme Court determined the recipes were trade secrets under Iowa law.
A particularly contentious issue was the preparation of pizza crust. The Court recognized that the realities of pizza crust creation required that the crust be prepared fresh every day. The kitchen employees who made the crust were thus made aware of the recipe, and consequently, the recipe became known to all the employees. The Court noted that the evidence conflicted as to whether the employees considered the crust recipe confidential. Again turning to Iowa’s trade secret statute, the Court found that secrecy needed only to be “reasonable under the circumstances.”[1] The Iowa Supreme Court concluded “Given the evidence of the special needs inherent in crust preparation, we think substantial evidence supported the conclusion that plaintiff’s secrecy procedures were reasonable under the circumstances.”[2]
Iowa’s trade secret statute is pattered on the Uniform Trade Secrets Act (“UTSA”). Under Iowa’s statute, and under UTSA, two factors are critical to the determination of whether a trade secret is protected: (1) whether it derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by a person able to obtain economic value from its disclosure or use, and (2) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy. Until recently, this differed from Texas law, which follows the common law pattern set out in the Restatement (Second) Torts.[3] However, in May 2013, Texas Governor Rick Perry signed Senate Bill 953, creating Chapter 134A of the Texas Civil Practices and Remedies Code, and adopting the provisions of the Uniform Trade Secrets Act. The new Act becomes effective September 1, 2013, and preempts Texas’ common-law approach to Trade Secrets.
TEXAS – THE LAST HOLDOUT AGAINST THE UTSA?
Most states have adopted the Uniform Trade Secrets Act in one form or another. Texas was, in fact, one of the last hold-outs. UTSA supplants the former common-law, and while it is uncertain how much of the former common-law Texas courts will draw upon to construe Texas’ implementation of UTSA, they will have a wealth of authority from other states to draw upon as a resource. Cases such as 205 Corporation open a new door to protection for recipes as trade secrets in a restaurant business. Nonetheless, lessons learned under the former common law remain applicable. One such lesson is the importance of keeping a trade secret … a secret. Restaurants can use different strategies to maintain recipe secrecy. For example, straightforward confidentiality agreements to be signed by each employee can be used. If possible, ingredients can be prepackaged by a few trusted employees, to be used by other kitchen staff in the preparation of dishes. The actual recipes can be kept secure in a lock box or safe deposit box, and access limited. Even if Texas courts more strictly construe secrecy under the common-law or the Uniform Trade Secrets Act, the foregoing examples of secrecy efforts will assist restaurant owners in their efforts to protect their recipes as trade secrets.
The intellectual property and business lawyers at The Vethan Law Firm, P.C. are always willing to visit with hospitality and restaurant business clients to discuss whether their secret sauce can be a legally protectable saucy secret. Call us today to find out more information.
[1] Id. at 551.
[2] Id.
[3] In fact, in the 205 Corporation case, the Iowa Supreme Court rejected an argument that the common-law understanding of trade secrets should guide its interpretation of the definition of a trade secret under Iowa’s statute. Id. at 550.
