New statute aims to promote favorable business climate and may provide broader protection of information under Texas law.
On May 2, Texas Governor Rick Perry signed the Texas Uniform Trade Secrets Act (Texas UTSA) into law. The purpose of the act is to provide uniformity with other states in the protection of trade secrets, with Texas joining the overwhelming majority of states in adopting a version of the model Uniform Trade Secrets Act (model UTSA). Although Texas courts often cited the model UTSA in trade secret cases, Texas had not expressly adopted it. As a result, whether a particular category of information would be classified as "trade secrets" was difficult to predict and often turned on the facts of a particular case. While the new law will not end the fact-specific nature of trade secret inquiry, it should provide more guidance and broader protection of information under Texas law. The new law takes effect on September 1, 2013 and governs any misappropriation of a trade secret that occurs on or after that date. A misappropriation occurring prior to September 1, 2013 will not be governed by the Texas UTSA.
Overview of the Texas UTSA
Although largely patterned after the model UTSA, the Texas UTSA contains some notable differences. Importantly, it includes a broader definition of "trade secret," providing that financial data and lists of actual or potential customers or suppliers can constitute trade secrets. This type of information is often at issue in noncompetition litigation involving solicitation of clients by competitors. Texas lawmakers believe that the new statutory definition of "trade secret," which is broader than the existing definition under Texas law, will better reflect current business practices and technologies.
The Texas UTSA, however, does contain some express limitations on the definition of "trade secret." Most notably, the statute provides that information acquired through reverse engineering generally will not constitute a trade secret and that businesses may lawfully engage in reverse engineering, which is defined as "the process of studying, analyzing, or disassembling a product or device to discover its design, structure, construction, or source code." To fall under the definition of "reverse engineering," the product or device must have been lawfully acquired.
The Texas UTSA expressly provides for injunctive relief as an available remedy, and, significantly, the statute provides for the possibility of an injunction to enjoin either "actual or threatened misappropriation." Although not specifically addressed in any bill analysis, permitting injunctive relief for threatened misappropriation may be a legislative endorsement of the common law "inevitable disclosure" doctrine, under which an employer may obtain an injunction to prohibit an employee from working for a competitor in a position similar to that in which he or she previously worked. The Texas UTSA provides that the injunction should end when the trade secret no longer exists but that courts may extend the injunction for a reasonable additional period to ensure that a party does not derive a commercial advantage through misappropriation.
The Texas UTSA also creates a presumption in favor of granting protective orders to preserve the secrecy of trade secrets during litigation. Under these provisions, courts can seal documents and limit disclosure of information about trade secrets to lawyers working on the particular case.
The new law should give employers increased ability to protect trade secrets. The additional safeguards, as well as the potential for injunctive relief to stop "threatened" misappropriation of trade secrets, may make it possible for employers to prevent unfair competition through common law theories as opposed to noncompetition agreements, which can be difficult to enforce and may create employee morale issues. Employers should be mindful, nonetheless, that they must be cautious to segregate and mark as "confidential" information that they seek to protect. While the new law provides for more definitive guidance than under current Texas common law, trade secret litigation likely will remain fact intensive, and disputes as to what constitutes a "trade secret" may still turn on the measures taken by an employer to protect them.
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis attorneys:
Ronald E. Manthey
Paulo B. McKeeby
A. John Harper II
. View the Texas UTSA here.