Texas, Trade Secrets, and Adoption of the Uniform Trade Secrets Act by S.B. No. 953
Though not easily defined, most would regard commercial trade secrets as, for example, the Colonel’s secret chicken recipe, the complicated and specific makeup of deep water drilling muds, proprietary customer phone or email databases, custom and in-house software applications, and unique business methods, techniques, and/or processes that businesses use to compete. Unlike patents, copyrights, and trademarks, which are registered with the government for statutory protections albeit at the expense of full and public disclosure, trade secrets are held closer and kept secret. In the competitive and profitable business of trade secrets, great steps are (or should be) taken to protect the secret, either by physical, contract, or other means.
Commonly and in the courts, a trade secret is defined as something:
- known only internally within a particular business entity,
- known only by specific employees entrusted with using the secret,
- possibly known by others doing business with the entity directly involving the secret,
- subject to physical and/or legal control and secrecy measures such as standard locks and passwords, but also non-disclosure agreements and confidentiality provisions,
- is regarded as particularly valuable to the business or industry, and
- is difficult for others in the industry to replicate or accomplish.
Texas has become the 48th state to adopt an amended form of the Uniform Trade Secrets Act, (the Texas Uniform Trade Secrets Act, S.B. No. 953, or “TUTSA”), putting the law into effect September 1st, 2013. Note that TUTSA does not apply, however, to any trade secret misappropriation or continuing misappropriations that occurred prior to September 1st, 2013. The Act brings in a lot of changes, protections, and penalties your business should be aware of. You can download a full version of the bill here: http://www.legis.state.tx.us/tlodocs/83R/billtext/pdf/SB00953F.pdf
Some Notable Changes/Implementations of the 2013 TUTSA:
1. Misappropriation of Trade Secrets
Theft of trade secrets in Texas is considered misappropriation. In Texas, misappropriation is the acquisition of a trade secret by someone who knows or has reason to know that the trade secret was acquired by improper means, such as bribery, breach or inducement to breach of contract, or outright theft. TUTSA Section 6 provides a statute of limitations for bringing such claims “within 3 years after the misappropriation is discovered or by the exercise of reasonable diligence should have been discovered.”
2. Reason to Know and Constructive Knowledge of Misappropriation
In Texas, it is illegal for a business to use trade secrets if that company has “reason to know” or effectively constructive knowledge that the material constitutes a trade secret. Simply put, even if a Texas company didn’t actually know it was in possession of unlawfully obtained trade secrets, that company can still be prosecuted if it should have known such secrets were unlawfully obtained.
3. Penalties and Remedies
In Texas, various damages and other remedies for misappropriation of trade secrets include:
- Protective Orders: The TUTSA provides for the granting of protective orders to preserve the secrecy of trade secrets which may include provisions “limiting access to confidential information to only the attorneys and their experts, holding in camera hearings, sealing the records of the action, and ordering any person involved in the litigation not to disclose an alleged trade secret without prior court approval.” See TUTSA Sec. 134A.
- Monetary relief: Victims can seek financial compensation for actual losses attributed to the theft or “unjust enrichment” the defendant acquired by the trade secret. In malicious or willful situations, a court can potentially award punitive damages twice the amount of any actual or lost profits award. Attorneys’ fees will also be awarded in willful and malicious misappropriation. Plaintiffs should note, however, that punitive damages are also available for defendants when a claim for misappropriation is brought in bad faith. Bad faith motions to terminate or resist termination of an injunction can also bring punitive damages.
Injunctions: Various changes to a party’s right to injunctive relief have been
enacted through TUTSA. These include:
- With TUTSA, Texas now expressly recognizes the doctrines of “threatened misappropriation” and “inevitable disclosure”. Now, at least in theory, a company may seek to enjoin a former employee turned competitor before any trade secret information has been used to that company’s detriment. Under TUTSA, courts also have the powers to compel a party to take “affirmative acts to protect a trade secret.”
- A party may seek continuation of an injunction for additional time necessary to remove the commercial advantage a thief had derived from the misappropriation.
- Under TUTSA, and only “in exceptional circumstances,” a party may seek an injunction that conditions future use of trade secrets upon payment of a reasonably royalty for no longer than the period for which use could have been lawfully prohibited.
Businesses that get caught up in trade secret disputes and litigation often
have to disclose some aspect of their trade secrets in order to prove
or disprove allegations and claims. This potentially causes much risk
in pursuing or defending against technology-stealing former employees,
competitors, and other thieves. Now that Texas has enacted the TUTSA,
hopefully many of the protections built in the law will help positively
address these ongoing concerns. A full version of the bill is available here:
As always, please contact Patout & Shaw, PLLC, should you have questions or concerns regarding your business’ existing or potential trade secrets and other intellectual property.