How many people are tired of hearing “before enactment of TUTSA, Texas had no central law governing trade secrets,” or not being able to collect attorneys’ fees under the common law misappropriation of trade secrets cause of action, or having Texas law rejected as the law governing your non-disclosure agreements because Texas trade secrets law was too complicated?
In the past, Texas trade secrets law relied upon the Texas common law, Restatement of Torts, Restatement (Third) of Unfair Competition, and Texas Theft Liability Act. Now, after the effective date of September 1, 2013, one only needs to read the TUTSA statute to determine the law. TUTSA is a well-reasoned statute that modernizes Texas law for today’s age of rapidly evolving technologies. This article will explore the changes made to Texas law and comment on the possible effect of the changes with a Texas court’s interpretation of the statute.
A. How will the Texas courts interpret TUTSA?
In interpreting TUTSA, Texas courts can also look to other states’ interpretations of their own UTSAs.i A few states have similar variations in their UTSAs to those of the TUTSA and therefore one would expect Texas courts would regard such other states’ precedent as persuasive. However, until the courts have spoken and chosen the precedent to follow, there will be some uncertainty in the law.
B. Did TUTSA Dramatically Change the Definition of a Trade Secret in Texas?
Prior to September of 2013, Texas common law used the Restatement of Torts definition of a trade secret, among other sources. A “trade secret” was defined as:
any formula, pattern, device or compilation of information which is used in one’s business, and which gives him an opportunity to obtain an advantage over competitors who do not know or use it. It may be a formula for a chemical compound, a process of manufacturing, treating or preserving materials, a pattern for a machine or other device, or a list of customers. It differs from other secret information in a business … in that it is not simply information as to single or ephemeral events in the conduct of the business, as, for example, the amount or other terms of a secret bid for a contract or the salary of certain employees, or the security investments made or contemplated, or the date fixed for the announcement of a new policy or for bringing out a new model or the like. A trade secret is a process or device for continuous use in the operation of the business. Generally it relates to the production of goods, as, for example, a machine or formula for the production of an article. It may, however, relate to the sale of goods or to other operations in the business, such as a code for determining discounts, rebates or other concessions in a price list or catalogue, or a list of specialized customers, or a method of bookkeeping or other office management.ii
Now, in TUTSA, a “trade secret” is statutorily defined as “information, 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.”iii
While the words are not the same, there is only one substantive difference in the definition of a trade secret after September 1, 2013 and that is the removal of the continuous use requirement. Prior to the enactment of TUTSA, continuous use of a trade secret was a requirement to be entitled to a misappropriation action of such trade secret in some Texas courts. Texas common law, however, was unsettled as to what constituted continuous use for a trade secret as some courts required continuous use while other courts did not.iv TUTSA therefore, by removing the continuous use requirement, answers affirmatively that the knowledge of what does not work in a process can be a trade secret.
Prior to TUTSA, Texas Courts used the Restatement Third of Unfair Competition to determine what constituted a trade secret. The factors included: “(1) the extent to which the information is known outside of the business, (2) the extent to which it is known by employees and others involved in the business, (3) the extent of measures taken to guard the secrecy of the information, (4) the value of the information to the business and to its competitors, (5) the amount of effort or money expended in developing the information, and (6) the ease or difficulty with which the information could be properly acquired or duplicated by others.”v Because these factors are not were not included in the statute, clarification from the appellate courts will likely be required before certainty is reached as to what constitutes a trade secret. However, the In re Bass factors will likely be used in applying the statute and therefore, the definition of what constitutes a trade secret in Texas will largely stay the same.
TUTSA adds a few definitions that were added by the drafters when considering how the UTSA had been adopted in other jurisdictions. The added provisions should largely benefit the application of TUTSA. For example, TUTSA defines “proper means” as “discovery by independent development, reverse engineering unless prohibited, or any other means that is not improper.”vi In large part, this definition follows Texas common law.vii TUTSA further defines “reverse engineering” as “the process of studying, analyzing, or disassembling a product or device to discover its design, structure, construction, or source code provided that the product or device was acquired lawfully or from a person having the legal right to convey it.”viii However, there is an open question as to what constitutes prohibited reverse engineering.ix
When considered in its entirety, TUTSA has broadened the definition of what constitutes a trade secret, therefore enlarging the types of information for which trade secret protection can be sought.
B. How does misappropriation under the TUTSA differ from misappropriation under the common law?
Under TUTSA, “misappropriation” is defined as:
“(A) acquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means; or (B) disclosure or use of a trade secret of another without express or implied consent by a person who: (i) used improper means to acquire knowledge of the trade secret; (ii) at the time of disclosure or use, knew or had reason to know that the person’s knowledge of the trade secret was: (a) derived from or through a person who had utilized improper means to acquire it; (b) acquired under circumstances giving rise to a duty to maintain its secrecy or limit its use; or (c) derived from or through a person who owed a duty to the person seeking relief to maintain its secrecy or limit its use; or (iii) before a material change of the person’s position, knew or had reason to know that it was a trade secret and that knowledge of it had been acquired by accident or mistake.”x
Because Texas common law allowed for a claim of misappropriation based on both use and disclosure of the trade secret, TUTSA does not change what constitutes misappropriation.xi
The most commonly-used standard in pleading a misappropriation claim under common law
included the elements of: (1) the existence of a trade secret, (2) breach of a confidential relationship or improper discovery of the trade secret, (3) use or disclosure of the trade secret, and (4) resulting damages.xii
In apparently keeping with what worked, the drafters of TUTSA did not include a definition for either “use” or “disclosure” as the common law provided definitions that worked. Under common law in state courts, the term “disclosure” was given a standard dictionary definition and the term “use” was defined to mean a commercial use by which a person seeks to profit.xiii The Fifth Circuit in interpreting the common law adopted a broader understanding of use that would include any act that would likely cause injury to the plaintiff and benefit the defendant.xiv
In summary, determining misappropriation under TUTSA will largely be the same as it was under the common law, at least after the appellate courts use the previous standards.
C. Is TUTSA tort reform, meaning lower potential damages? How does it affect the granting of injunctions?
TUTSA greatly expanded an employer’s potential to protect its trade secrets by allowing causes of action for the “threatened misappropriation” of trade secrets. xv This additional injunctive relief provided by TUTSA is an important extension to Texas trade secret law. However, TUTSA also gives the trial court discretion, in exceptional circumstances, to allow further use of the trade secret by the misappropriator upon the condition of the payment of a reasonable royalty to the trade secret owner. xvi “Exceptional circumstances” are defined to “include a material and prejudicial change of position before acquiring knowledge or reason to know of misappropriation that renders a prohibitive injunction inequitable,” otherwise referred to as a good faith acquisition.xvii As Texas common law did not address good faith acquisition, it is likely the courts will look to those jurisdictions with comparable UTSA provisions.
2. Actual damages
The actual damages permissible under TUTSA are also very similar to what was permitted at common law. At common law, actual damages for misappropriation of trade secrets were based on the actual value of the secrets appropriated.xviii Actual damages could be based on lost business value if the business value was completely or almost completely destroyed.xix If the business value was not completely destroyed, the business owner could seek the value a reasonably prudent investor would have paid for the trade secret.xx In addition, lost profits could be used as a measure of damages for misappropriation of trade secrets.xxi Because there are high degrees of similarity available under TUTSA and the common law for actual damages, it is likely the courts will consider the same factors as under the common law for determining a reasonable royalty: (1) the resulting and foreseeable changes in the parties’ competitive posture; (2) prices past purchasers or licensees may have paid; (3) the total value of the secret to the plaintiff, including the plaintiff’s development costs and the importance of the secret to the plaintiff’s business; (4) the nature and extent of the use the defendant intended for the secret; and (5) whatever other unique factors in the particular case might have been affected by the parties’ agreement, such as the ready availability of alternative processes.xxii
3. Exemplary damages
Both the common law and TUTSA allow for exemplary damages. However, a statutory cap is in place under TUTSA. “[I]f wilful and malicious misappropriation is proven by clear and convincing evidence, the fact finder may award exemplary damages in an amount not exceeding twice any award made under Subsection (a)” for actual damages. xxiii As the common law required clear and convincing evidence before an award of exemplary damages, it is unlikely TUTSA will impact the proof required. Likewise, courts routinely remitted exemplary damages greater than an award of over two times the actual damages.xxiv Therefore, very little if any change will be felt from the adoption of TUTSA as applied to punitive damages except in an extreme case. As before, the jury, or fact finder, is the one to award the exemplary damages.xxv
4. Attorney’s Fees
Unlike the common law, attorneys’ fees are recoverable under TUTSA,. In fact, the statute provides three circumstances under which to collect an award of attorneys’ fees: (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) willful and malicious misappropriation exists.”xxvi For the plaintiff suing on a trade secret, an award of attorneys’ fees should make the decisions to litigate less problematic. For the defendant being sued, bad faith is explicitly recognized as a basis for an award of attorneys’ fees. It is likely that the availability of an award for attorneys’ fees under TUTSA will ultimately lead to simpler pleadings as plaintiffs and defendants will not be seeking a separate statute to plead that allows for the recovery of attorneys’ fees.
5. Statute of Limitations
A claim for misappropriation of trade secrets must be brought no “later than three years after the misappropriation is discovered or by the exercise of reasonable diligence should have been discovered.”xxvii “[A] misappropriation of trade secrets that continues over time is a single cause of action, and the limitations period … begins running without regard to whether the misappropriation is a single or continuing act.”xxviii
This limitations period is the same as the common law.
6. Effect on other Laws
Prior to adoption of the TUTSA, a claim under Texas Penal Code Section 31.05 could also be alleged as a civil claim for theft under the Texas Theft Liability Act,xxix primarily done for the award of attorneys’ fees. However, TUTSA specifically ended this practice by displacing it.xxx
As in-house counsel you will likely not notice dramatic changes to Texas trade secrets law after TUTSA, but undoubtedly you will encounter less reluctance from your opposing counsel or business collaborators to apply Texas trade secrets law in contracts. In short, TUTSA simplified what was a complex web of common law.
i For a list of statutory citations for states that have adopted the Uniform Trade Secrets Act, see Unif. Trade Secrets Act § 1 (amended 1985), 14 U.L.A. 538 (2005).
ii See Restatement of Torts, §757, comment b.
iii See TEX. CIV. PRAC. & REM. CODE ANN. § 134A.002(6) (West 2013).
iv Compare Hyde Corp., 314 S.W.2d at 776 (“A trade secret is a process or device for continuous use in the operation of the business.”) to Bertotti v. C.E. Shepherd Co., 752 S.W.2d 648, 653 (Tex. App.—Houston [14th Dist.] 1988, no writ) (“The mere fact that a company is not utilizing information at the present time does not prevent that information from being a trade secret subject to protection.”).
v RESTATEMENT (THIRD) OF UNFAIR COMPETITION § 39 cmt. d (1995).
vi See TEX. CIV. PRAC. & REM. CODE ANN. § 134A.002(4) (West 2013).
vii See, e.g., Phillips v. Frey, 20 F.3d 623, 629 (5th Cir. 1994) (stating that trade secret law does not provide protection from discovery of the information by “independent invention, accidental disclosure, or ‘reverse engineering’).
viii See TEX. CIV. PRAC. & REM. CODE ANN. § 134A.002(5) (West 2013).
ix See, e.g., id.
x See TEX. CIV. PRAC. & REM. CODE ANN. § 134A.002(3) (West 2013).
xi See generally Michelle Evans, Trade Secret Misappropriation in Texas, 24 S. L.J. 67 (2014) (discussing trade secret misappropriation under Texas common law).
xii See IAC, Ltd. v. Bell Helicopter Textron, Inc., 160 S.W.3d 191, 197 (Tex. App.-Ft. Worth 2005, no pet.).
xiii See, e.g., Wellogix, Inc. v. Accenture, LLP, 823 F. Supp. 2d 555, 566 (S.D. Tex. 2011); IBP, Inc., 101 S.W.3d at 476.
xiv Gen. Universal Sys., Inc. v. HAL, Inc., 500 F.3d 444, 451 (5th Cir. 2007).
xv See TEX. CIV. PRAC. & REM. CODE ANN. § 134A.003 (West 2013).
xvi See TEX. CIV. PRAC. & REM. CODE ANN. § 134A.003(b) (West 2013).
xvii See CIV. PRAC. & REM. § 134A.003(b).
xviii See Calce v. Dorado Exploration, Inc., 309 S.W.3d 719, 737-738 (Tex. App. Dallas 2010, no writ).
xix See, Sawyer v. Fitts, 630 S.W.2d 872, 874-75 (Tex. App.—Fort Worth 1982, no writ).
xx See Sw. Energy Prod. Co. v. Berry—Helfand, 411 S.W.3d 581, 2013 WL 3461644, at *24 (Tex. App.—Tyler, 2013, no pet. h.)
xxi See ERI Consulting Eng’rs, Inc. v. Swinnea, 318 S.W.3d 867, 876 (Tex. 2010).
xxii See, e.g., Calce v. Dorado Exploration, Inc., 309 S.W.3d 719, 738 (Tex. App.-Dallas 2010, no pet.).
xxiii See TEX. CIV. PRAC. & REM. CODE ANN. § 134A.004(b) (West 2013).
xxiv Wellogix, Inc. v. Accenture, L.L.P., 716 F.3d 867, 873 (5th Cir. Tex. 2013).
xxv Wellogix, Inc. v. Accenture, LLP, 823 F. Supp. 2d 555, 570 (S.D. Tex. 2011); Rusty’s Weigh Scales and Serv., Inc., 314 S.W.3d at 113.
xxvi See TEX. CIV. PRAC. & REM. CODE ANN. § 134A.005 (West 2013).
xxvii See TEX. CIV. PRAC. & REM. CODE ANN. § 16.010(a) (West 2013); Seatrax, Inc. v. Sonbeck Int’l, Inc., 200 F.3d 358, 365-366 (5th Cir. 2000) (concluding the statute of limitations had run since there were several events that took place after the former employee left the company in 1991 to start a new company that should have put the plaintiff on notice of the trade secret misappropriation long before the suit was filed in 1996).
xxviii See TEX. CIV. PRAC. & REM. CODE ANN. § 16.010(b) (West 2013).
xxix See TEX. CIV. PRAC. & REM. CODE ANN. §§ 134.001-134.005 (West 2012).
xxx 2013 Tex. Sess. Law Serv. Ch. 10 (S.B. 953) (West).