Expert Commentary

Texas Adopts the Uniform Trade Secrets Act

Joining 46 other states as well as the District of Columbia, Puerto Rico, and the US Virgin Islands, effective September 1, 2013, Texas adopted the Uniform Trade Secrets Act. See S.B. 953, 83rd Leg., Reg. Sess., § 4 (Tex. 2013).


Intellectual Property
April 2014

Housed in chapter 134A of the Texas Civil Practice and Remedies Code, the Texas Uniform Trade Secrets Act (TUTSA) is a new law that applies to "the misappropriation of a trade secret made on or after the effective date." Id. § 3. Thus, the law prior to the TUTSA still applies in cases where an alleged misappropriation occurred before September 1, 2013, even if the lawsuit is filed on or after that date.

As enacted, the TUTSA presents businesses with a clearer definition for what constitutes a trade secret and offers more expansive remedies to protect their intellectual property interests. In view of these new protections, businesses should consider drafting confidentiality agreements and employment contracts with controlling provisions governed by Texas law.

Former Texas Law on Trade Secrets

Before the effective date of the TUTSA, Texas trade secret law encompassed two causes of action: (1) common law trade secret misappropriation and (2) Texas Theft Liability Act claims.

Under Texas common law, courts adopted varying and sometimes diverging approaches to determine whether a trade secret existed. Some courts weighed various factors to determine whether a process or thing amounted to a trade secret. See, for example, In re Bass, 113 S.W.3d 735 (Tex. 2003). Others defined a trade secret by the resultant competitive advantage derived from something not generally known to the public. See, for example, Triple Tee Golf, Inc. v. Nike, Inc., 485 F.3d 253 (5th Cir. 2007). Still others suggested that a trade secret requires "continuous use in the operation of the business." See, for example, CQ, Inc. v. TXU Min. Co., 565 F.3d 268 (5th Cir. 2009) (quoting Restatement of Torts § 757, cmt. b.). Given this disharmony, the viability of a trade secret was less than predictable under common law.

Apart from common law, the Texas Theft Liability Act provided a civil remedy for certain violations of the Texas Penal Code, including the theft of trade secrets. See Tex. Penal Code Ann. § 31.05(b). Under the Texas Penal Code, a trade secret "means the whole or any part of any scientific or technical information, design, process, procedure, formula, or improvement that has value and that the owner has taken measures to prevent from becoming available to persons other than those selected by the owner to have access for limited purposes." Id. § 31.05(a)(4). In contrast to common law claims, the Texas Theft Liability Act provided an avenue for parties to collect attorney fees under certain circumstances. See Tex. Civ. Prac. & Rem. Code Ann. § 134.005(b).

A common litigation strategy involved suing under both causes of action. Given the disparate treatment of each distinct claim, liability often turned on the claims advanced by the parties.

Texas Uniform Trade Secrets Act

The TUTSA effectively supersedes and supplants both common law trade secret misappropriation and Texas Theft Liability Act causes of action accruing after September 1, 2013. See Tex. Civ. Prac. & Rem. Code Ann. § 134A.007. Among the notable changes, the TUTSA clarifies the status of trade secrets and adds to the collection of remedies available for successful litigants.

Normalizing an elusive concept into one uniform definition, the TUTSA states that a trade secret is "information, including a formula, pattern, compilation, program, device, method, technique, process, financial data, or list of actual or potential customers or suppliers that (1) 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 (2) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy." See § 134A.002(6).

In effect, with the stroke of a pen, the Texas legislature has given businesses seeking to protect and enforce trade secrets some much needed certainty. Although subject to future interpretation by Texas courts, any litigation concerns with respect to weighing factors or considering "continuous use" have seemingly faded away in favor of a more concrete definition with broader contours. Now, businesses can rest on "potential" economic value as opposed to realized value when attempting to prove a trade secret. Arguably, this definition also embraces "negative knowhow," or the value of time and effort spent learning how certain processes or things do not offer competitive value. See Uniform Trade Secret Act § 1 Comment. Likewise, adopting language such as "under the circumstances" when determining reasonable efforts to maintain secrecy essentially gives deference to the varied situations with which business enterprises are forced to contend over the span of different industries.

In addition to a singular definition embracing a wider array of subject matter, the TUTSA offers greater recovery for businesses that succeed at trial. Perhaps most important for businesses attempting to minimize competitive losses stemming from the prospect of a trade secret being exposed to the public, parties can seek to enjoin "threatened misappropriation" before actual misappropriation even occurs. See Tex. Civ. Prac. & Rem. Code Ann. § 134A.003(a). Moreover, as a new injunctive remedy available upon a showing of "exceptional circumstances," a court may allow an employee to continue using the trade secret but only after the employee pays "a reasonable royalty for no longer than the period of time for which use [of the trade secret] could have been prohibited." Id. § 134A.003(b). Further, the prevailing party in these lawsuits may be entitled to recover attorneys' fees, depending on whether the misappropriation was "willful or malicious" or the suit was brought in "bad faith." Id. § 134A.005.

Conclusion

Although the concept of trade secrets has been an area open to legal interpretation in the past, the TUTSA presents an opportunity for greater certainty for all involved in managing trade secrets. Whereas former trade secret laws could be viewed as vague and potentially imprecise, the TUTSA offers greater stability for businesses operating in Texas by presenting a viable tool to protect intellectual property interests from misappropriation. The TUTSA offers a clear definition for what constitutes a trade secret, coupled with examples of trade secret subject matter. Further, the TUTSA broadens the relief available to businesses that successfully pursue such claims. When reviewing intellectual property practices, businesses should be mindful of the different protections that a proper copyright, patent, trademark, and trade secret offer to their administrative platforms and future initiatives.

As with any area of intellectual property, protecting business interests necessarily involves identifying what property is valuable, how to protect that property, and when to enforce these protections. The TUTSA could make some of these decisions easier. In fact, to avoid uncertainty and reduce cost in subsequent litigation, businesses should consider drafting confidentiality and employment contracts with controlling Texas law provisions given the advent of the TUTSA.


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