LITIGATION ALERT: Texas Enacts New Uniform Trade Secrets Act

Texas Enacts New Uniform Trade Secrets Act

July, 2013

Authors:Trent W. Rexing

Texas recently enacted the Texas Uniform Trade Secrets Act (“TUTSA” or the “Act”) becoming the 48^th state to enact the model statute and leaving only Massachusetts and New York to remain.  Governor Rick Perry signed TUTSA into law on May 2, 2013, and the new Act will go in to effect on September 1, 2013.  TUTSA is an attempt to clear out existing Texas common law relating to misappropriation of trade secrets and provide a clearer definition of what constitutes a “trade secret.”  TUTSA’s definition of "trade secrets" is broader than that passed by other states to include financial data and customer lists.  This will provide greater protection to companies’ “trade secrets” in the absence of a restrictive covenant agreement.  Moreover, the Act affords greater relief to companies by permitting injunctive relief for both actual and threatened misappropriations.  Below is an overview of the key provisions of the Act, which will be embodied in Chapter 134A of the Texas Civil Practice and Remedies Code. [1]

Broader Definition of Trade Secrets

TUTSA provides a broader definition of “trade secret” to include lists of actual or potential customers and suppliers in addition to the more traditional concepts of “trade secrets” such as financial data, processes, methods formulas, patterns, compilations and programs.  This broader definition provides stronger protection to companies from the improper, unauthorized acquisition, use and disclosure of trade secrets.  Formerly, customer lists were a gray area of the law and usually addressed on a case-by-case basis.  However, the new Act provides a framework under which these disputes must now be decided.  Interestingly, TUTSA authorizes Texas courts to look to the courts of other states to make the application of the law "uniform."

Injunctive Relief

One of the biggest impacts of TUTSA is that the Act provides for injunctive relief from actual or threatened misappropriations.  As such, companies may seek to enjoin their former employees from the perceived threats of using “trade secrets’ in their new jobs or positions.  Upon application to the court, the injunction shall be terminated when the trade secret has ceased to exist.  Another key provision, which is likely to lead to additional litigation, provides that companies may seek to extend the injunction for additional time in order to eliminate any commercial or competitive advantage that may be derived from the misappropriation.  In some cases, courts may order payment of a royalty as a condition of future use of misappropriated trade secrets.

Damages

In addition to injunctive relief, the Act provides for recovery of economic damages for misappropriation of trade secrets.  Specifically, the economic damages contemplated by the Act include damages for actual loss and any unjust enrichment caused by misappropriation.  To enforce liability, a court may order an imposition of a royalty for the unauthorized use of a trade secret.  In cases where there is clear and convincing evidence of a willful and malicious misappropriation, a claimant can be awarded exemplary damages in an amount up to twice the actual or unjust enrichment damages.

Attorney’s Fees

In limited cases, the court may, at its discretion, award attorney’s fees to the prevailing party for claims of misappropriation.  However, while technically permissible, the attorneys’ fee provision appears to serve as a deterrent against frivolous lawsuits rather than as means of recovery.  The first instance where attorney’s fees may be awarded is for claims of misappropriation brought in bad faith.  Additionally, where motions to terminate injunctions are made or resisted in bad faith, the court can award attorney’s fees.  Finally, a claimant can be awarded attorneys’ fees where a willful and malicious misappropriation is proven.  The Act does not provide for a clear definition of “bad faith” nor “willful and malicious."

Preservation of Secrecy

TUTSA establishes a presumption in favor of granting protective orders to preserve the concealment of trade secrets, saving time and expense spent litigating the issue.  Protective orders may include provisions that limit access to confidential information to only attorneys or their experts.

Conclusion

TUTSA will provide greater protection for companies that do not have agreements covering trade secrets.  The purpose of the Act is to provide parties with a clear definition of what is a trade secret.  Indeed, the broader definition of “trade secret” and injunctive relief afforded under the Act may increase litigation in these arenas.  Nevertheless, it is now clear that under Texas law client lists represent a “trade secret.”  This classification may have a dramatic effect on the mobility of sales professionals who rely on these lists, and in turn may increase the costs of recruitment within the sales industry.  Consequently, while the Act provides some clarity on the scope of a “trade secret,” in the short term it may serve to spur more litigation.

[1] http://www.legis.state.tx.us/tlodocs/83R/billtext/pdf/SB00953F.pdf

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This Litigation Alert is a summary of recent developments in the law and is provided for informational purposes only.  It is not intended to constitute legal advice or to create an attorney-client relationship.  Readers should obtain legal advice specific to their situation in connection with topics discussed.

Copyright © 2013 Kane Russell Coleman & Logan PC.  All rights reserved.  Unless otherwise indicated, the authors are not certified by the Texas Board of Legal Specialization.

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