Texas recently became the 47th state to adopt a version of the Uniform Trade Secrets Act (UTSA). The Texas UTSA, taking effect on September 1, 2013, aims to benefit the business community by bringing Texas trade secret law more in line with the law of other states and by bringing increased predictability to Texas’s own trade secret jurisprudence.
However, the Texas UTSA contains some key variations from the model UTSA, which businesses should keep in mind when crafting documents and determining strategies with respect to their trade secrets.
Trade secret law and the need for a common, national framework
Trade secret law often plays a key role in a company’s development and success. Businesses generally want to maintain valuable information in confidence so the information can be used to gain an advantage over competitors who do not possess it, but businesses’ ability to do so depends in part upon the governing state’s trade secret law, which defines (1) what constitutes a protectable trade secret; (2) what constitutes “misappropriation” of a trade secret; and (3) what remedies are available to a trade secret’s owner in the event of misappropriation.
State-by-state variations in trade secret law can create numerous problems for businesses. Due to the increasingly interstate nature of commercial transactions and the inherently free-flowing nature of information, a business based in one state may find itself subject to the trade secret laws of numerous other states.
In determining which state’s law governs a trade secret-related dispute, courts often favor the state with the most significant relationship to the dispute; however, when a business headquartered in State A and incorporated in State B also has offices and employees in States D and E; customers and partners in States F, G and H; and competitors in States I, J and K, that can be a complex determination and the outcome will be difficult to predict. And when the governing trade secret laws vary greatly across the nation, the effect of this unpredictability is only compounded. A business may find the protections and remedies it relied upon in one state are unavailable under the state law governing the dispute at hand.
In 1979, in an effort to address this problem, the Uniform Law Commission introduced the model UTSA. The UTSA is a 12-section model act intended to serve as a framework for each state’s trade secret statutes. On January 1, 1981, Minnesota became the first state to enact a version of the UTSA. Forty-six other states subsequently followed suit. Texas, Massachusetts, North Carolina and New York remained the only holdouts until Texas’s recent passage of the Texas UTSA. (Massachusetts and North Carolina each have a trade secret act, but their acts are not based upon the UTSA.)
The Texas UTSA
Texas previously had no central law governing trade secret protection, instead relying upon a complicated quilt of common law, treatises and related statutes (e.g., the Texas Theft Liability Act). The resulting lack of predictability in the application of trade secret protection worried many individuals and companies doing business in Texas. The Texas UTSA should assuage these concerns by simplifying Texas trade secret law while bringing it more in line with the law of 46 other states.
However, Texas did not adopt the UTSA whole cloth – there are a number of key areas where the Texas UTSA diverges from the model UTSA (and, thus, from the laws of many of other states). Often the divergence is in a manner quite favorable to trade secret owners. The following are some key aspects of the Texas UTSA that businesses should keep in mind going forward:
What constitutes a protectable trade secret?
Texas chose to expand the model UTSA’s definition of a trade secret by expressly including financial data and lists of customers and suppliers. The Texas UTSA provides the term “trade secret” means confidential business information, including:
[a] formula, pattern, compilation, program, device, method, technique, process, financial data, or list of actual or potential customers or suppliers …
Financial data and customer (or supplier) lists generally have been recognized as trade secrets under Texas common law, but they are not listed in the model UTSA’s definition and, therefore, are not included in the definition of “trade secret” adopted by many jurisdictions, such as California, Virginia, Florida and Minnesota. A business that considers its financial data and its lists of customers and suppliers to be protectable trade secrets should consider this factor when negotiating and drafting choice-of-law provisions in future agreements.
To maintain trade secret protection for financial data and lists of customers and suppliers (and any other confidential business information), a business also must be careful to consistently treat the information as confidential. A trade secret owner must be able to show the information is valuable because it is confidential and that reasonable steps have been taken to maintain the information’s confidentiality, such as limiting employee access to the information and requiring confidentiality agreements.
What constitutes “misappropriation” of a trade secret?
Texas also chose to expand the type of conduct that qualifies as misappropriation of a trade secret. Misappropriation occurs when someone (1) acquires a trade secret through improper means, or (2) discloses a trade secret that was acquired through improper means or in violation of a duty owed to maintain the information’s confidentiality or limit its use. The model UTSA defines “improper means” to include theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, or espionage through electronic or other means. The Texas UTSA enlarges this definition to expressly include breaching, or inducing someone to breach, a duty to limit use or to prohibit the discovery of a trade secret. Texas businesses should update employee confidentiality training, policies and agreements to reflect this definition of “improper means,” and apprise employees of the change.
Among states that have adopted the UTSA, Texas now provides perhaps the best defined defense of trade secret acquisition through “proper means” (i.e., lawful means). The model UTSA recognizes, in the authors’ comments to the act, that a trade secret may be acquired through proper means (including reverse engineering) but does not define the term. The Texas UTSA, in contrast, expressly defines the “proper means” of acquiring a trade secret, which are “discovery by independent development, reverse engineering unless prohibited, or any other means that is not improper.” This definition is based upon Texas common law, which recognized independent discovery as a defense to a claim of trade secret misappropriation.
The Texas UTSA also defines the term “reverse engineering.” Reverse engineering, under the Texas UTSA, means:
[T]he 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.
The fact a trade secret could be discovered through reverse engineering or other independent investigation, standing alone, will not insulate a party from liability for trade secret misappropriation so individuals and businesses that engage in reverse-engineering types of investigation should be careful to keep detailed records of their research.
What remedies are available to a trade secret’s owner in the event of misappropriation?
Texas adopted the remedies provided under the UTSA with very little variation from the model act, but the Texas UTSA does not diminish the remedies available under Texas common law and, in fact, expands them in at least one very significant way. Previously, there was no statutory basis for the recovery of attorneys’ fees in a claim for misappropriation. Texas adopted the UTSA’s provision allowing a court to award reasonable attorneys’ fees to the prevailing party where (1) the misappropriation was willful and malicious (i.e., intended to substantially injure the trade secret’s owner); (2) a claim of misappropriation was brought in bad faith; or (3) a motion to terminate an injunction was made or resisted in bad faith.
The Texas UTSA further provides that a trade secret owner can seek an injunction to enjoin actual or threatened misappropriation. Commentators have speculated that the Texas UTSA’s inclusion of threatened misappropriation may support application of the “inevitable-disclosure doctrine,” which Texas state courts have not yet expressly adopted. The inevitable-disclosure doctrine allows a trade secret owner to enjoin a former employee if his or her work for a new employer would necessarily entail the disclosure of the trade secrets. It remains to be seen whether the Texas UTSA will impact the inevitable-disclosure doctrine here. Notably, California adopted the UTSA’s “threatened misappropriation” language, but California courts nonetheless rejected the inevitable-disclosure doctrine.
The Texas UTSA also allows a trade secret owner to recover damages, which can include recovery for the actual loss and the unjust enrichment caused by the misappropriation. Alternatively, damages may be measured through the imposition of a reasonable royalty. If the trade secret owner proves willful and malicious misappropriation by clear and convincing evidence, a court or jury may further award exemplary damages in an amount up to two times the amount of actual damages.
The Texas UTSA’s damages provisions have the potential to benefit plaintiffs and defendants in trade secret misappropriation disputes, by penalizing frivolous claims but also permitting increased awards in cases of truly malicious and willful conduct.
Maximizing the advantages the new law brings to businesses
The Texas Uniform Trade Secrets Act, which takes effect on September 1, 2013, benefits the business community by bringing greater uniformity to trade secret law. Texas businesses should update their proprietary information and employment agreements, policies and related documents to maximize the potential advantages of the new law.