New Texas Trade Secret Law Takes Effect September 1

by Ogletree, Deakins, Nash, Smoak & Stewart, P.C.

The Texas Uniform Trade Secrets Act (TUTSA or the Act) takes effect on September 1, 2013, and will apply to the theft of trade secrets occurring on or after that date. While trade secrets have long received protection under Texas common law, TUTSA will provide companies with additional safeguards and will expand the available legal remedies to address actual and anticipated harm.

The new Texas statute is modeled after the Uniform Trade Secrets Act (UTSA), some version of which has already been adopted by 47 other states. New York and Massachusetts are the last two hold-outs. For Texas-based companies with multi-state operations, TUTSA’s enactment alleviates much of the uncertainty over protecting trade secrets under the laws of other states.

TUTSA Broadly Defines “Trade Secrets”

Prior to TUTSA’s enactment, determining whether certain business information constituted a trade secret turned on the specific facts of the case. Courts utilized a multi-factor test in making the determination, and this often produced conflicting results. These inconsistencies are now reconciled through codification of a very broad definition of trade secrets. Specifically, TUTSA defines trade secrets as:

information, including a formula, pattern, compilation, program, device, method, technique, process, financial data, or list of actual or potential customers or suppliers, that: (A) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by other persons who can obtain economic value from its disclosure or use; and (B) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

TUTSA expands upon the definition of trade secrets set forth in the model legislation recommended to other states by including a company’s financial information, as well as lists of prospective and current customers and suppliers. TUTSA’s express statutory protection for such information is significant, because these additional components of the definition are often at the center of misappropriation disputes, and previously were not always deemed worthy of trade secret protection by Texas courts. 

Notably absent from TUTSA’s definition of trade secrets is any sort of qualification that the information be in “continuous use” to be shielded under the Act. One of the inconsistencies in Texas common law was the issue of whether information had to be in continuous use by a company to receive trade secret protection. Thus, when a business was forced by a lack of funds to suspend a project temporarily, there was a risk that employees could walk away with the information with impunity. TUTSA’s trade secret definition suggests that all such information, whether continuously used or not, is entitled to safeguarding under the Act. 

Although TUTSA generally expands a company’s ability to protect its trade secrets, there are statutory limits. Excluded from the Act’s definition of trade secret is any information learned through the “reverse engineering” of a competitor’s product, which is defined 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 how it is made through reverse engineering.

TUTSA Broadens the Right to Injunctive Relief

When trade secrets are misappropriated, a company may seek an immediate, temporary injunction directing the adverse party to take, or refrain from taking, some course of action related to the trade secrets at issue. If ultimately successful in the underlying litigation, the temporary injunction may become a permanent injunction. 

Historically, Texas courts have freely granted injunctive relief in cases of actual misappropriation, but have been hesitant to do so in cases of “threatened” misappropriation. A common example of threatened misappropriation is that of a salesperson whose mere employment with a direct competitor poses a significant risk of trade secret misuse. TUTSA provides a remedy for former employers that find themselves in this situation by authorizing injunctive relief upon proof that a misappropriation of trade secrets is threatened, even if it has not already occurred.

In some circumstances, information that once constituted trade secrets becomes generally known or readily ascertainable and loses its status as a trade secret. If that information has been previously misappropriated, however, TUTSA allows for the continuance of an injunction when it is necessary to eliminate any commercial advantage gained from the misuse. TUTSA also empowers courts to compel “affirmative acts” to protect a trade secret under “appropriate circumstances,” although those circumstances are not defined in the Act.

TUTSA Enhances Potential Damages Awards

In addition to injunctive relief, TUTSA permits the recovery of economic damages, which includes actual economic loss including any unjust enrichment, such as the cost the misappropriator avoided in utilizing the plaintiff’s design or formula. In certain cases, a court has the power to condition future use of misappropriated trade secrets upon payment of a reasonable royalty to the plaintiff. Finally, a court may award exemplary damages in an amount not to exceed twice the economic damages if the plaintiff establishes by clear and convincing evidence that the misappropriation was willful or malicious.

Yet another significant change instituted by TUTSA is that parties may now recover attorneys’ fees in misappropriation cases. Given the occasional complexity of the trade secrets in these cases, the attorneys’ fees can be very high. Under TUTSA, 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.

TUTSA Favors Protective Orders

A common concern in trade secret litigation is protection of the confidential and proprietary information that is the subject of the lawsuit. When the owner of the trade secrets is required to disclose them during the discovery phase of the case, the direct competitor could actually acquire more information it would not have known but for the litigation. To address this concern, attorneys may seek a protective order from the court, limiting any disclosure of trade secret information. Previously, however, protective orders were not routinely granted. 

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

Considerations for Businesses

In short, TUTSA provides companies with increased legal protection for their trade secrets and additional legal remedies for actual or threatened misappropriation. To ensure the benefits of TUTSA, however, businesses must still ensure that they are taking reasonable steps to keep their trade secrets confidential, as this is essential for protection under the Act. 

Companies should consider specifying Texas law as controlling their written confidentiality agreements. TUTSA eliminates much of the uncertainty regarding what constitutes a trade secret, thereby reducing some of the risk associated with litigating misappropriation cases. The Act will likely streamline litigation by replacing a number of common law claims that were frequently asserted in lawsuits involving trade secret misappropriation. This, in turn, should reduce the overall expense of litigation. 

Note: This article was published in the August 29, 2013 issue of The Texas eAuthority.

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.

© Ogletree, Deakins, Nash, Smoak & Stewart, P.C. | Attorney Advertising

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Ogletree, Deakins, Nash, Smoak & Stewart, P.C.

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