Texas Fashionably Late to the Uniform Trade Secrets Act Party

Significant changes in the law in Texas with respect to trade secrets went into effect September 1, 2013, with Texas becoming the 48th state to adopt the Uniform Trade Secrets Act.  Previously, there was no central repository for Texas trade secret law, as it was a combination of the common law, restatements, and the Texas Theft Liability Act.

The Act changes Texas trade secret law in a number of material respects and applies to any alleged misappropriation occurring on or after the effective date.  The extent of the changes will be determined by the courts as they interpret the Act but the Act is believed by many to eliminate a number of ambiguities that existed in the prior trade secret laws of Texas.  The changes will make trade secret protection broader in some circumstances and narrower in others, but will likely give more clarity to what is and is not considered a trade secret in Texas.

What is a trade secret?

One notable change is in the definition of trade secret, which is now defined as:

[I]nformation, 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.

The change in the definition of a trade secret broadens the definition of the prior law in several respects. There is no longer a requirement that the information remain in “continuous use” as the common law seemed to require.  This is a reasonable change as a company should not be penalized if it does not use the information on an ongoing basis or decides to delay the implementation of a secret process or the sale of a new product, for example.  Although financial data and customer or supplier lists were generally considered trade secrets under the common law, the specific inclusion of these items will avoid disputes over whether those items are in fact trade secrets, assuming all other requirements of the definition are met.

The new definition also suggests that the inquiry into whether the information is known by the employees and others involved in the business is no longer relevant.  Rather, the focus is on whether the trade secret is not generally known outside of the business.  There is also no suggestion that the plaintiff must expend actual money or effort to develop the information, which was one of the factors considered under the prior law.  So, for these reasons, it may now be easier to prove the existence of a trade secret.

On the other hand, proof of a trade secret may be more difficult if the owner was lacking in implementing procedures and policies to protect the secrecy of the information.  The definition now specifically requires that efforts to maintain secrecy must be “reasonable under the circumstances.”  Previously it was only required that some effort was made. Although important under prior law, it is more important than ever for companies to document an inventory of trade secrets and develop written procedures and policies for protecting the trade secrets.  This should be done in consultation with an attorney who is knowledgeable as to what the courts consider to be reasonable measures.

What are my damages?

The Act still allows recovery of actual damages for trade secret misappropriation in three categories which were allowed under prior law:  (1) actual loss suffered by the plaintiff; (2) the amount by which the defendant was unjustly enriched; or (3) a reasonable royalty.  However, the Act does not expressly provide for two categories of damages that were previously available under the common law:  (1) the amount a reasonably prudent investor would have paid for the trade secret and (2) the development costs the defendant avoided by the misappropriation.  However, it could be argued that these two categories of damages previously available fall into the category of unjust enrichment by the defendant.

Although exemplary (or punitive) damages are also still available under the Act, such damages are now capped at two times any award of actual damages.  There was no cap on exemplary damages under the common law.  To recover exemplary damages, the plaintiff must prove “willful and malicious misappropriation” by clear and convincing evidence.

Can I stop the misappropriation of trade secrets?

The Act specifically provides for the entry of an injunction by a court for both actual and threatened misappropriation of trade secrets.  A party can apply to have any injunction terminated by the court when the trade secret is no longer secret, but the injunction can be continued for an additional reasonable period of time to eliminate the commercial advantage that might be derived from the misappropriation.  In exceptional circumstances, such was where the defendant made a material and prejudicial change of position prior to receiving knowledge or reason to know of the misappropriation, the court can allow future use of the trade secret upon payment of a reasonable royalty by the defendant.

The Act also allows the court to order the defendant to take affirmative acts to protect the trade secret.  For example, the court could order the defendant to return the trade secrets to the plaintiff.  How Texas courts interpret the Act remains to be seen, but some courts have found that “threatened misappropriation” includes the situation in which a trade secret will inevitably be disclosed.  This could include the scenario where an engineer having access to trade secrets leaves one company and goes to work for another company designing a product to compete with the product the engineer previously designed for his former employer.  Under the common law, Texas courts have not developed a clear rule on whether the inevitable disclosure doctrine should be applied.

Are attorney’s fees available?

Attorney’s fees were not previously available under Texas common law in trade secret cases.  However, the parties would often ask for attorney’s fees under the Texas Theft Liability Act as it provides for the recovery of attorney’s fees by the prevailing party.  The Texas Uniform Trade Secrets Act now allows the court to award attorney’s fees to the prevailing party if:  (1) a claim of misappropriation is made in bad faith;  (2) a motion to terminate an injunction is made or resisted in bad faith; or (3) the misappropriation is willful and malicious.  The “bad faith” requirement is not defined but will likely be a high hurdle to clear.  In the context of bad faith pleadings, the courts have interpreted bad faith as “not simply bad judgment or negligence; rather it is the conscious doing of wrong for dishonest, discriminatory, or malicious purposes.”

With respect to the prior law, it will be more difficult for the plaintiff to recover attorney’s fees as a result of the requirement that the misappropriation be “willful and malicious.”  Previously, under the Texas Theft Liability Act, it was only required to prove that the defendant’s misappropriation was done “knowingly.”

Conclusion

Although the Act significantly changes the law in Texas with respect to trade secrets, it does bring Texas law in line with the vast majority of other states, giving some predictability to those companies that move to Texas from another state.  The Act removes some ambiguities from the prior law, but as with any new law, there will be areas that are subject to interpretation by the courts.  What the Act does not change, however, is the importance of having procedures in place for monitoring and protecting trade secrets.

Vincent Allen is a shareholder at Carstens & Cahoon, LLP. He focuses on the litigation of intellectual property disputes and the prosecution of patent and trademark applications.

This blog is maintained by Carstens & Cahoon, LLP to inform readers of recent developments in intellectual property. Solely informational in nature, this blog is not intended to create an attorney-client relationship or to be used as a substitute for legal advice or opinions. For more information, please visit www.cclaw.com

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