Can You Keep a Secret? Texas Legislature Says Yes

Chris Hanslik

August 13, 2013

After years of common law remedies for trade secret misappropriation, the Texas Legislature has adopted the Texas Uniform Trade Secrets Act (TUTSA) which becomes effective September 1, 2013.  Once effective, TUTSA is sure to change the way companies react to preserve information they consider and treat as a trade secret.  The new statute can be found in Texas Civil Practice & Remedies Code Chapter 134A.  Some of the important aspects of TUTSA are:

  1. TUTSA displaces any conflicting law in Texas providing civil remedies for misappropriation of a trade secret.  However, it does not affect any contractual remedies (whether or not based on misappropriation of a trade secret), other civil remedies that are not based on misappropriation of a trade secret, or criminal remedies (whether or not based on misappropriation of a trade secret).
  2. A “trade secret” gets defined.  Although Texas courts have provided various definitions of what a trade secret is, with TUTSA there is now a uniform definition for courts to apply.  The statute defines a “trade secret” as “information, including a formula, pattern, compilation, program, device, method, technique, process, financial data, or list of actual or potential customers or suppliers.”  However, the information identified above must meet two additional criteria.  First, the information must derive “independent economic value” from not being “generally known” or “readily ascertainable by proper means.”  Second, the party claiming ownership of the “trade secret” must have taken “reasonable” efforts to maintain the secrecy of the information.
  3. Knowledge becomes a focus of establishing liability.  Under TUTSA, liability is established by showing that a third party “knows or has reason to know that the trade secret was acquired by improper means.”  Accordingly, placing third parties on notice of the types of trade secrets the company believes may have been misappropriated.  While this has always been a good practice to follow under the injunction provisions of TUTSA it will now have a material effect on the remedies available.
  4. Limiting the time period for injunctions.  While “actual or threatened” misappropriation may be enjoined, upon request by a party, the court can terminate an injunction when the trade secret has ceased to exist.  This suggests that an injunction might end when a competitor could have discovered the information on its own or the information no longer warrants trade secret protection.
  5. An injunction can provide for the payment of a reasonable royalty.  Section 134A.003(b) provides that in “exceptional circumstances” an injunction may “condition future use upon payment of a reasonable royalty” for no longer than the “time for which use could have been prohibited.”  The statute goes on to state that “exceptional circumstances include a material and prejudicial change in position” before a third party gains “knowledge” or a “reason to know” of the misappropriation.  This provision makes “notice” or “cease and desist” letters critically important under the statutory scheme.
  6. Preserving the secrets.  TUTSA mandates that “a court shall preserve the secrecy of an alleged trade secret by reasonable means.”  This alleviates the hesitation by some in the past to pursue enforcement of their trade secret i.e. the fear of public disclosure.  In fact, the express language of TUTSA provides for a presumption in favor of granting protective orders to preserve the secrecy of trade secrets.
  7. Recovering attorney’s fees.  Until TUTSA, an action for misappropriation of trade secrets under common law did not allow for the recovery of attorney’s fees.  Section 134A.005 changes that if one of three requirements is met:  (a) a claim of misappropriation is made in bad faith; (b) a motion to terminate an injunction is made or resisted in bad faith; or (c) willful and malicious misappropriation exists.
  8. Uniformity.  Perhaps the most open-ended part of TUTSA is section 134A.008 which states “this chapter shall be applied and construed to effectuate its general purpose to make uniform the law with respect to the subject of this chapter among states enacting it.”  It is difficult to predict how Texas courts will apply the law from other jurisdictions, if at all.  To date, 48 states have adopted similar statutes.  The big question to be answered is which of those states are Texas courts likely to side with when there is a difference in interpretation.