What employers and executives need to know about bringing a misappropriation of trade secrets claim under the Texas Uniform Trade Secrets Act.
If you believe your company’s trade secrets are being misappropriated, you may be able to bring a claim to secure injunctive relief, monetary damages, and recovery of attorneys’ fees.
In September 2013 the Texas Legislature enacted the Texas Uniform Trade Secrets Act (TUTSA). The Texas Uniform Trade Secrets Act was modeled after the Uniform Trade Secrets Act (UTSA), which had served as the foundation for trade secret laws in 47 other states prior to the passage of the TUTSA.
Prior to the implementation of TUTSA, trade secret cases were governed by Texas common law, but the rapid advancement of technology necessitated a more robust legal framework. The passage of the Texas Uniform Trade Secrets Act brought clarification of the duties of executives and employees to protect confidential company information.
TUTSA was last amended in 2017 to incorporate important elements of the Defend Trade Secrets Act (DTSA) which was passed into law in 2016 by the 114th U.S. Congress.
In this article we’ll look at the most important factors for employers and executives to understand as they seek to protect proprietary company under the Texas Uniform Trade Secrets Act.
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What is a Trade Secret Under Texas Law?
Under the TUTSA, a trade secret is 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:
- 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
- Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.
To break down this language a bit, the key elements of a trade secret are that it is not generally known or readily ascertainable by people who could profit from it, and reasonable efforts have been taken to maintain its secrecy.
How Are Trade Secrets Commonly Misappropriated?
A trade secret may be misappropriated in a number of ways. The first, and most predominant, involves the acquiring of trade secrets by improper means, such as an employee accessing information he or she has no authority to access.
The second category of misappropriation deals with the acquisition of the trade secret by mistake or accident, the person had reason to know that it was a trade secret, and the person used or disclosed the trade secret without consent.
The third category involves misappropriation stemming from the proper and even invited acquisition of trade secrets. This category includes claims that arise often in the employment context. In the context of their employment, employees often receive varying degrees of confidential and proprietary information from their employers.
What Are the Elements of Misappropriation of Trade Secrets in Texas?
Under the TUTSA, a plaintiff must be able to prove two elements:
- Plaintiff had a legally recognizable trade secret; and
- Defendant misappropriated the trade secret.
So how are each of the elements proven under Texas law?
How are Each of the Elements Proven Under Texas Law?
Understanding the Statutory Elements of Misappropriation
First, to have a valid misappropriation claim, you must be able to show that you have a valid trade secret. There is specific language in the TUTSA that defines a trade secret. In general, the statute makes clear that the trade secret can take many different forms—from formulas to patterns to methods and even to customer lists—but it is, at its root, information. Then, a trade secret must have some key elements:
- It is generally not known to or readily ascertainable by another party that could use it to for economic gain; and
- It is information that has been subject to reasonable efforts to maintain its secrecy.
Second, to have a misappropriation claim, you must be able to show that the valid trade secret was misappropriated. Under the statute, misappropriation of a trade secret can be defined in two different ways:
- Trade secret was acquired by a person who either knows or has reason to know that the trade secret was acquired by improper means; or
- Trade secret was disclosed without consent (either express or implied) by someone who:
- Used improper means to acquire knowledge or the trade secret;
- Knew or had reason to know, at the time of disclosure, that the trade secret was:
- Derived from or through a person who had used improper means to acquire it;
- Acquired it under circumstances that gave rise to a duty to maintain its secrecy or limits its use; or
- Derived from or through a person who owed a duty to maintain the secrecy of or limit the use of the trade secret; or
- 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 by mistake.
It is important to note that the TUTSA does not require the plaintiff to prove that the defendant actually used the trade secret. Rather, its misappropriation and threatened use is sufficient to allow for injunctive relief.
What is the Inevitable Disclosure Doctrine?
A controversial subject in Texas employment law circles is the applicability of the “inevitable disclosure” doctrine in trade secret cases. The basic idea behind this doctrine is that a person with intimate knowledge of a former employer’s trade secrets will “inevitably disclose” them to a new employer in the same field.
Therefore in states that adhere to the inevitable disclosure rule, the former employer can seek an injunction without having to first prove it would suffer an irreparable injury–i.e., an imminent disclosure of its trade secrets.
Texas courts have never expressly adopted the doctrine, despite many cases inviting them to do so. For example, in December 2016, a state appeals court in Houston denied a company’s request for a temporary injunction against a former employee based on inevitable disclosure. The employee previously signed a nondisclosure and noncompete agreement, by which he agreed not to disclose certain trade secrets.
More than three years into his employment, the employee left for a rival company. The former employer then sued, alleging trade secret misappropriation under Texas law. Before the trial court, the employer could not produce any proof of probable or imminent harm arising from the former employee’s actions. Rather, the employer argued the ex-employee’s nondisclosure agreement and “inevitable disclosure” relieved it of any duty to produce such proof before obtaining an injunction.
Both the trial court and the appeals court disagreed. The appeals court noted that “recent Texas law has rejected the notion of a categorical rule of inevitable disclosure with regard to all nondisclosure provisions.” A Texas court is therefore not required to issue an injunction absent concrete evidence of misappropriation. The “fear of possible injury” is insufficient.
What are the Remedies for Trade Secret Misappropriation?
What kinds of remedies are available in a trade secret misappropriation case? The TUTSA allows for the following remedies:
- Injunctive relief for actual misappropriation or threatened misappropriation;
- Damages for actual loss or a reasonable royalty, and in some cases exemplary damages when the defendant’s behavior was particularly malicious; and/or
- Attorneys’ fees.
What is the Statute of Limitations for Misappropriation of Trade Secrets?
A statute of limitations is the legal term for the time period in which you have to file your lawsuit. Typically, statutes of limitations begin from the date at which the plaintiff suffers a legal harm, or the date by which the plaintiff reasonably should have discovered the legal harm. When we talk about a statute of limitations for certain lawsuits, we typically say that the clock begins ticking at that point in time.
Texas Uniform Trade Secrets Act (TUTSA) does not have a provision for the statute of limitations in trade secret cases. As such, the statute of limitations for such a claim falls under the Texas Civil Practice & Remedies Code, Section 16.010.
This particular section of the law applies only to the misappropriation of trade secrets. It specifies that “a person must bring suit for misappropriation of trade secrets not later than three years after the misappropriation is discovered or by the exercise of reasonable diligence should have been discovered.” In other words, you have three years from the date that the trade secret was misappropriated, or three years from the date by which reasonable diligence should have allowed you to determine that the trade secret was misappropriated.
What happens if the misappropriation continues over time? The law takes this possibility into account and clarifies that the statute of limitations will begin running—and you will have three years from the initial misappropriation of the trade secret—whether the misappropriation “is a single or continuing act.”