New Texas Statute Provides Businesses With Added Protection for Their Trade Secrets

by Ogletree, Deakins, Nash, Smoak & Stewart, P.C.
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It is 4:00 p.m. on a Friday afternoon. You just learned that your top-performing salesman resigned his position to accept employment with a direct competitor. You quickly locate the salesman’s personnel file to determine whether he signed a non-compete or similar restrictive covenant agreement. Much to your dismay, you see that he did not sign such an agreement. You do not know whether the salesman took any company documents with him when he abruptly departed the office. Regardless, the salesman does not need any documents to recall your company’s confidential information. He knows your significant customers, the cost at which you obtain your products, and your company’s pricing. Your salesman has yet to solicit any of your customers, but he will.  It is inevitable given his new sales position working for your biggest competitor. You know that you must take immediate legal action against your now-former employee to prevent substantial financial harm to your company. You then call your employment attorney to frantically explain the situation and authorize your attorney to pursue injunctive relief.

For those of you who have experienced this ever-reoccurring situation, you may not have been satisfied with your attorney’s response, namely, that there was no immediate legal recourse under Texas law to prevent the anticipated harm. Even assuming the salesman took customer lists or other financial information belonging to the company, the determination of whether such information constituted “trade secrets” was uncertain under existing Texas case law. More importantly, the harm had not yet occurred. 

Under the newly enacted Texas Uniform Trade Secrets Act, this undesirable response may no longer be the one you receive in instances of misappropriation occurring after September 1, 2013. This new statute provides companies with greater protection for their trade secrets and will expand the available legal remedies to address actual and anticipated harm. 

The first of many significant changes is the act’s broad definition of “trade secret” to include a company’s financial information, as well as lists of prospective and current clients and suppliers. Previously, the determination of whether such information constituted a trade secret turned on the specific facts of the case. 

The act also addresses the common factual scenario described above by authorizing the remedy of injunctive relief for actual and threatened misappropriation of trade secrets. As a result, an employer may now pursue legal action against a former employee who is not subject to a valid restrictive covenant but whose mere employment with a direct competitor presents a high risk that confidential information will be misappropriated.

In addition, the act creates a presumption in favor of the entry of protective orders during litigation to regulate access to, and disclosure of, the trade secret information forming the basis of the dispute. The act authorizes Texas courts to limit the disclosure of trade secrets to the parties’ attorneys and expert witnesses, to seal court records, and to hold in-camera hearings (in the judge’s chambers rather than in open court) when trade secret information is discussed. 

Another significant change is the act’s allowance for the recovery of attorneys’ fees. A court may award reasonable attorneys’ fees to a plaintiff that proves its trade secrets were stolen willfully or maliciously. A court also may award reasonable attorneys’ fees to a defendant who proves the plaintiff filed suit in bad faith. Finally, a court may award exemplary damages in an amount not to exceed twice the economic damages awarded when the plaintiff establishes willful or malicious misappropriation by clear and convincing evidence.

In short, the new statute provides Texas companies with heightened legal protection for their trade secrets and additional legal remedies in instances of actual or threatened misappropriation. Of note, however, the act excludes from the definition of “trade secret” any information learned through the “reverse engineering” of a competitor’s product, which the act defines as “the process of studying, analyzing, or disassembling a product or device to discover its design, structure, construction, or source code.” Thus, assuming the product was lawfully acquired, a company remains without legal recourse against a competitor that learns of research and development processes through reverse engineering. 

Tiffany L. Cox is an associate in the San Antonio office of Ogletree Deakins.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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