© 2013 The Texas Lawbook.
By Michael E. Schonberg
Special Contributing Writer to The Texas Lawbook
A February 2013 report from the Obama Administration on strategies to reduce the risk of trade secret theft noted: “In America, innovation doesn’t just change our lives. It’s how we make a living.” Protecting that innovation in Texas just got a whole lot more interesting as the Texas Uniform Trade Secrets Act (TUTSA) became effective on Sept. 1. Texas joined 47 other states, leaving behind the only remaining holdouts, New York and Massachusetts, in enacting its version of the Uniform Trade Secrets Act. The TUTSA applies to acts of trade secret misappropriation occurring on or after Sept. 1, 2013, and is found in the Texas Civil Practice and Remedies Code, Chapter 134A.
The TUTSA is most certainly not a mere codification of the Texas common law, although the general concepts and principles will be familiar to lawyers who have worked in the area. But those planning to litigate a new trade secret case relying on their working knowledge of the old trade secret common law will be in for a few big surprises.
Notably, the TUSTA preempts existing common and statutory law to the extent it is inconsistent with the new act. Moreover, the law expressly states that it is to be construed and applied to further its purpose of making trade secret theft law uniform in the states adopting the UTSA. Accordingly, case law from other states interpreting the UTSA should be instructive, if not persuasive, while Texas develops its own body of law interpreting the new statute. This is, of course, consistent with the overall purpose of the act – to provide predictability and consistency for businesses wanting to protect their trade secrets in any state.
The TUTSA now makes clear that any information not generally known and not readily ascertainable can acquire trade secret protection. The act specifically identifies lists of “actual or potential customers or suppliers” as potential trade secrets. This provides even more fire power to aggrieved companies seeking to stop departing employees from using their business contacts to compete. And opening up trade secret protection to any qualifying “information” relieves a plaintiff from establishing that the misappropriated secrets fit into one of the formulaic categories found in Section 757 of the Restatement of Torts. Because the primary goals of the new law are to protect information and encourage investment in research and development, the TUTSA has also eliminated the Restatement’s “continuous use” requirement for trade secret protection. So now, even information not put into immediate use can garner trade secret protection while R&D continues or the market develops.
Of course, secrecy is still the key requirement. So the first question any judge is going to ask remains the same: “Counselor, what efforts did your client undertake to identify this information as confidential or containing trade secrets and what did they do to protect it internally?” Without a good answer to this question, any trade secret case is going to flounder under either the old or the new law. For this reason alone, it’s always a good idea to review and update employment agreements and employee policy manuals to ensure that confidential trade secret information is maximally protected.
According to the FBI, “[t]here are two types of companies, those that have been hacked and those that will be.” The TUTSA uses the broad term “misappropriation” for any improper acquisition of trade secret information. A misappropriation can be accomplished through direct theft, hacking, or by breaching any duty to maintain secrecy. Even inducing another to breach a duty of secrecy can result in direct liability under the new law.
Perhaps the most significant aspects of the TUTSA are the new and enhanced remedies available. For the first time in Texas trade secret misappropriation cases, attorney fees are on the table for a “prevailing party.” If a plaintiff brings a misappropriation claim in “bad faith”, fees may be awarded to the defendant. On the other hand, where “willful or malicious misappropriation exists” the prevailing plaintiff may recover its fees. There is also an allowance for fees where a motion to terminate an injunction is made or resisted in bad faith. These fee shifting provisions should curtail misuse of trade secret theft claims for anticompetitive purposes while at the same time encouraging early settlement where a defendant is caught in a scheme red-handed. Either way, the number of cases being tried should decrease, and those that don’t settle will have more at stake for both sides. For these reasons, defendants should be wary of entering into agreed temporary injunctions lest they admit the other side is a “prevailing party.” At the very least, part of the language of any agreed interim order should preserve that issue for later resolution.
In addition to fees, the TUTSA’s new injunction provisions are likely to provide the most immediate and significant impact at the courthouse. Although previously not explicitly recognized in Texas, the inevitable disclosure doctrine has been lurking in the shadows of trade secret dicta for years. Now, section 143A.003 authorizes injunctions against both “actual or threatened misappropriation.” This will no doubt be a very useful tool for businesses that cannot yet demonstrate actual misappropriation harm or damages. Allegations sufficient to demonstrate likely inevitable disclosure of protected information based on the circumstances – former position, access to information, new job responsibilities, competitive situation – should provide a more direct avenue to temporary injunctions against not only disclosure or use, but even employment at a competitor’s business. Further, the TUTSA expressly authorizes mandatory injunctions requiring parties to take affirmative acts to protect trade secrets in addition to merely preserving the status quo.
Another noteworthy provision related to injunctions allows the equitable extension of injunctive relief beyond the life of the trade secret “in order to eliminate commercial advantage that otherwise would be derived from the misappropriation.” Thus, where a business gains an unfair commercial “leg up” from using another’s intellectual property, courts in Texas now have the power to enjoin the use of that information on equitable grounds even after it becomes public. Also, from the defense perspective, where a business innocently comes to have and use another’s trade secrets, perhaps when a new employee brings and uses trade secrets from a former employer without the knowledge of the new employer, the new employer may argue for a reasonable royalty instead of an injunction on equitable grounds.
Under the TUTSA, damages can include both actual loss and the unjust enrichment caused by the misappropriation. Exemplary damages may also be awarded where willful and malicious misappropriation is demonstrated by clear and convincing evidence.
Procedurally, the TUTSA expressly provides for protective orders to more fully protect a company’s trade secrets during litigation. The TUTSA gives courts the power to seal filings and records without following the burdensome requirements of Rule 76a. This provision should make businesses much more comfortable with bringing their cases and trade secrets to the courthouse.
The new law is designed to foster innovation and economic investment in Texas through the uniform protection of trade secret information. It is no doubt business-friendly but at the same time it does make equitable allowances to protect against anticompetitive or vexatious litigation against the “little guy.” Litigating trade secret cases in Texas over the long term will be much more predictable, particularly once the state’s courts of appeal begin issuing cases addressing the statute directly. In the meantime, businesses should do what they can to ready themselves for litigation under the TUTSA. Update employment agreements. Tighten up confidentiality policies. And above all, enforce those agreements and policies on a day-to-day basis so that a company’s secrets are actually – get this – secret.
Mike Schonberg is a Partner in the Dallas office of Thompson & Knight and concentrates his practice on complex business litigation and business counseling involving patents, trade secrets, non-competition issues, and real estate disputes. He can be reached at mike.schonberg@tklaw.com.
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