What Executives and Employers Need to Know About the Texas Uniform Trade Secrets Act

Originally published by Keith Clouse.

Prior to the enactment of the Texas Uniform Trade Secrets Act (TUTSA), Texas had no dominant law regarding the duties of executives and employees to protect confidential company information. Employers wishing to protect proprietary company information were left to rely on Texas common law and outdated Restatements of law that proved unfit to deal with the expanding developments in technology. As a result, the Texas Legislature provided a legal framework for litigating trade secret disputes by enacting TUTSA on September 1, 2013.

TUTSA was based upon the Uniform Trade Secrets Act (UTSA), which has served as the model act for 47 other state trade secret laws. TUTSA outlines a modernized definition of protectable trade secrets, provides a streamlined channel for employers to obtain injunctive relief, and includes a provision for employers to recover attorneys’ fees for willful or malicious conduct by employees.

Four years after its enactment, the Legislature revisited and amended TUTSA to better integrate the Defend Trade Secrets Act (DTSA) into Texas law. The DTSA is a federal law passed by Congress in May 2016 that provides a cause of action for employers when employees misappropriate (essentially steal) company trade secrets. See 18 U.S.C. § 1832.

Below are the key highlights of TUTSA, including a discussion of its most recent amendments, that outlines the duties of executives and employees to safeguard proprietary company information.

Who can bring a claim?

Under TUTSA, anyone seeking to recover damages for alleged misappropriation of trade secrets may bring a claim under the act. Interestingly, the statute does not limit claims to those brought strictly by “Owners” of trade secrets (as defined by the statute). Rather, other individuals or entities (such as licensees of trade secrets) are permitted to bring misappropriation claims so long as such individuals or entities have “rightful, legal, or equitable title to, or the right to enforce rights in” the given trade secret. Regardless of who is bringing the claim, it is important to keep in mind that TUTSA only applies to claims for misappropriation that began on or after its original enactment date of September 1, 2013.

Elements of a Claim under TUTSA

To bring a successful claim for misappropriation of a company’s trade secrets under TUTSA, the following elements must be established:

1. the existence of a legally protectable trade secret;
2. that was acquired through a breach of a confidential relationship or discovered by improper means; and
3. such trade secret was used without authorization. AHS Staffing, LLC v. Quest Staffing Grp., Inc., 335 F. Supp. 3d 856, 862 (E.D. Tex. 2018).

To determine whether these elements have been satisfied, courts begin by looking at the statutory definitions of “trade secret” and “misappropriation.”

Key Statutory Definitions

“Trade Secret”

Under Section 134A.002(6) of TUTSA, a “trade secret” includes information (i) whose secrecy has been protected by “reasonable measures,” and (ii) “derives independent economic value” because such information is not generally known or ascertainable.

Under the original statute, such “information” only included a “formula, pattern, compilation, program, device, method, technique, process, financial data, or list of actual or potential customers or suppliers.” The recent amendment broadened this definition to add “all forms and types of information,” which also includes categories such as “business, scientific, technical, economic, or engineering information,” as well as any “design, prototype, plan, program device, code, or procedure,” whether such information is “tangible or intangible and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing.” TEX. CIV. PRAC. & REM. CODE § 134A.002(6).

Although most of this new language was pulled directly from the DTSA, TUTSA’s definition reaches even broader than that of the DTSA, with its inclusion of a list of “potential customers or suppliers,” which gives employers stronger protections under state law than those provided under the federal law. Another key difference between the DTSA and TUTSA is that the DTSA requires a trade secret to be “related to a product or service used in, or intended for use in, interstate or foreign commerce,” whereas such limiting language is omitted from the TUTSA – again, highlighting TUTSA’s greater protection for employers.

TUTSA’s expanded post-amendment definition of “trade secret” was crafted to be flexible enough that it can stand the test of time with our ever-increasing advances in technology. It also gives quite a bit of lee-way for employer’s to argue that certain company information falls within the protected definition of a “trade secret.”

“Misappropriation”

Misappropriation is defined as either the (i) “acquisition” of a trade secret by “improper means,” or (ii) the “disclosure” or “use” of a trade secret without consent. TEX. CIV. PRAC. & REM. CODE § 134A.002(3). Under the statute, consent may either be express or implied.

This statutory definition imposes liability only where there is actual or constructive knowledge that the confidential information was obtained improperly.

Newly Defined Terms (per 2017 amendment)

Several definitions have been added to the TUTSA for enhanced clarity, including the following:

• A definition of “willful and malicious misappropriation” (the prerequisite recovery of exemplary damages). The willful and malicious standard requires intentional conduct that is taken with “conscious disregard” to the rights of the trade secret owner. TEX. CIV. PRAC. & REM. CODE § 134A.002(7).
• A definition of “clear and convincing evidence” (the standard of proof required for exemplary damages). Clear and convincing evidence must give the fact-finder a “firm belief or conviction” in the truth of the allegations. TEX. CIV. PRAC. & REM. CODE § 134A.002(1-a).
• An expanded definition of “owner,” which allows certain individuals, such as licensees, to assert a claim for misappropriation. TEX. CIV. PRAC. & REM. CODE § 134A.002(3-a).

These new definitions are beneficial for executives and employers accused of misappropriation because they impose a slightly higher standard of proof and require intentional conduct for exemplary damages to be awarded.

Injunctive Relief and Protective Orders

TUTSA permits injunctive relief to enjoin “actual or threatened misappropriation.” The recent changes make clear that such relief does not extend to prohibit activities where an individual is simply using “general knowledge, skill, and experience” that he or she acquired during prior employment. TEX. CIV. PRAC. & REM. CODE § 134A.003.

The “threatened misappropriation” language included in the statute provides extensive protection for employers seeking to enjoin a former employee who leaves and begins working for a competitor or attempts to start a competing venture because an injunction may be issued before any confidential information has actually been used, disclosed, or acquired by a competitor to the company’s detriment. Some courts have held that simply demonstrating that a former employee “remained in possession” of confidential information was sufficient to obtain injunctive relief without the requirement to prove irreparable harm. Orion Marine Construction, Inc. v. Coyle, No. 4:17-CV-00522, 2017 WL4875596 (S.D. Tex. October 26, 2017).

Besides issuing injunctions, there is a presumption under the statute “in favor of granting protective orders,” which can include limitations granting only the attorneys and experts access to the alleged trade secrets, sealing court records, and ordering individuals involved in the lawsuit not to disclose any alleged confidential information without the court’s approval. TEX. CIV. PRAC. & REM. CODE § 134A.006(a). This is because courts have a duty to “preserve the secrecy of an alleged trade secret by reasonable means,” in suits brought under TUTSA. Therefore, courts have the power to compel “affirmative acts to protect a trade secret” under appropriate circumstances.

SCOTX Balancing Test

In the case of In re M-I L.L.C., the Texas Supreme Court set forth a balancing test for when a court may restrict a party’s exposure to the trade secret during the course of litigation. In re M-I L.L.C., 505 S.W.3d 569 (Tex. 2016). TUTSA has codified this test – creating a presumption that parties are allowed to participate in all proceedings and requiring courts to consider the following seven factors prior to excluding a party during any stage when a trade secret is being discussed:

1. the value of an owner’s alleged trade secret;
2. the degree of competitive harm an owner would suffer from the dissemination of the owner’s alleged trade secret to the other party;
3. whether the owner is alleging that the other party is already in possession of the alleged trade secret;
4. whether a party’s representative acts as a competitive decision maker;
5. the degree to which a party’s defense would be impaired by limiting that party’s access to the alleged trade secret;
6. whether a party or a party’s representative possesses specialized expertise that would not be available to a party’s outside expert; and
7. the stage of the action.

Damages and Attorneys’ Fees

In addition to injunctive relief discussed above, TUTSA allows for monetary damages from actual losses or unjust enrichment caused by the misappropriation. Where an executive or employee’s actions are deemed to be willful and malicious (which must be proved by clear and convincing evidence), an employer may also recover exemplary damages.

TUTSA, however, limits such exemplary damages to no greater than twice the amount of actual damages. In addition, courts may award attorneys’ fees for misappropriation claims brought in bad faith or where willful and malicious misappropriation is deemed to exist.

Statute of Limitations

Those who wish to bring a claim under TUTSA must do so within three years of when the alleged misappropriation was discovered or should have been discovered by “reasonable diligence.” TEX. CIV. PRAC. & REM. CODE § 16.010. Therefore, executives and employees are protected from claims that reach beyond this three-year time period.

Avoiding a Trade Secret Claim

Overall, the recent amendments to TUTSA enhance clarity and establish uniformity between state and federal laws on the issue of trade secret misappropriation. Prevention, of course, is still the best course of action. We recommend the following Best Practices to executives who are considering leaving one employer for another:

• Upon leaving a company, executives and employees should ensure that they do not take any confidential or proprietary information from their former company to use in their new employment venture, especially information that the executive or employee knows was subject to reasonable protective measures (i.e. password protected, subject to restricted access, subject to a non-disclosure agreement or confidentiality policy, or marked “proprietary” or “confidential”).
• Executives and employees should return all company property (i.e. laptop, phone, documents, thumb drives, online account passwords, client lists, etc.) that remains in their possession upon termination or resignation.
• Further, executives and employees should not attempt to access their former work emails, documents, portals, computer programs, etc. once they have left a company.

Although the definition of trade secret has been expanded, it is important for executives and employees to keep in mind that, under TUTSA, information that is “publicly known or available” or was not subject to “reasonable means of protection” will not be considered protectable information that qualifies under the definition of a trade secret. In addition, executives and employees are permitted to use general knowledge and skills they have previously acquired when transitioning to a new job.

For assistance with workplace trade secret disputes, contact Clouse Brown PLLC. Our attorneys are available to assist employers and business owners in protecting confidential and proprietary information. We also counsel and advise executives and individual employees regarding how to comply with the various laws regarding trade secret protection.

The post What Executives and Employers Need to Know About the Texas Uniform Trade Secrets Act appeared first on Clouse Brown.

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