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Article of Interest

Texas Uniform Trade Secrets Act
By:  John W. Shaw, Whitaker Chalk Swindle & Schwartz PLLC

“AN ACT relating to the adoption of the Uniform Trade Secrets Act…”

So begins S.B. 953 of the 83(R) legislative session which amended Title 6 of the Civil Practices and Remedies Code by adding Chapter 134A whose short title is the “Texas Uniform Trade Secrets Act.” ¹

The Act will become effective as of September 1, 2013 and will be applicable to misappropriation of trade secrets on or after that date. “A misappropriation of a trade secret made before and a continuing misappropriation beginning before the effective date of this Act are governed by the law in effect immediately before the effective date of this Act, and that law is continued in effect for that purpose.”²

A review of the law governing trade secret misappropriation as it stands now is important to reveal the changes that will be effective for misappropriations that occur on or after September 1, 2013.

Currently under Texas law, trade secret misappropriation is established by showing that a trade secret existed, the trade secret was acquired through a breach of confidential relationship or was discovered by improper means, and the defendant used the trade secret without the plaintiff’s authorization.³  A court, in determining whether to grant a trade secret protection by a temporary injunction, does not determine whether the information sought to be protected is, in law and fact, a trade secret; rather, the trial court determines whether the applicant has established that the information is entitled to trade secret protection until the trial on the merits.⁴  A trade secret has heretofore been defined as “any formula, pattern, device or compilation of information which is used in one’s business and presents an opportunity to obtain an advantage over competitors who do not use it.”⁵  Information generally known and readily available is not protectable, but the fact that information is discoverable by lawful means does not deprive its owner of protection from one acquiring it by unfair means.⁶  

Trade secret misappropriation in Texas has been governed by the common law prior to the enactment of the Act. It has often times resulted in what will, and will not qualify as a trade secret, as well as what will and will not be entitled to injunctive protection to be a moving target.
The Act defines a “trade secret” to mean “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.”⁷

This definition appears to add clarification to the common law definition of trade secret and additionally addresses concerns about what has been afforded, or not, trade secret protection in the past by including lists of actual or potential customers or suppliers as long as that list is proven to meet both subparagraphs (A) and (B).

The Act defines “misappropriation” as: (A) acquisition of a trade secret by 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 the disclosure or use, knew or had reason to known 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.⁸ 

Again, the Act appears to make an effort to clarify the meaning of misappropriation as previously provided in the common law and importantly, compared to the common law, clearly includes the “or had to reason to know” standard of culpability. This would appear to make clear that if an individual uses something that they had reason to know had trade secret protection, they can be held liable for misappropriation.

The Act provides for injunctive relief for threatened misappropriation, whereas under the common law actual acquisition of the trade secret was an element of misappropriation.⁹  It also provides that an injunction may be continued for an additional reasonable period of time, after the trade secret has ceased to exist, in order to eliminate commercial advantage that otherwise would be derived from the misappropriation.¹⁰  To additionally slap that hand of wrongdoers, in exceptional circumstances, an injunction may condition future use of the trade secret upon payment of a reasonable royalty.¹¹  This royalty can only be ordered for so long as the period of time for which the use could have been prohibited.¹² 

Finally, the Act addresses the most confusing aspect of trade secret misappropriation, damages.

As stated in University Computing Co., v. Lykes-Youngstown Corp., 504 F.2d 518 (5th Cir. 1974):

“Our review of the caselaw leads us to the conclusion that every case requires a  flexible and imaginative approach to the problem of damages. We agree with the  Court of Appeals for the Sixth Circuit that ‘each case is controlled by its own peculiar  facts and circumstances,’ [citation omitted], and accordingly we believe that the cases  reveal that most courts adjust the measure of damages to accord with the commercial  setting of the injury, the likely future consequences of the misappropriation, and the  nature and extent of the use the defendant puts the trade secret to after   misappropriation.”¹³       

Thanks to the Act we have a little more clarity. According to the Act, damages are now measured to include: (a) in addition to or in lieu of injunctive relief, both actual loss caused by the misappropriation and the unjust enrichment caused by the misappropriation that is not taken into account in computing actual loss. In lieu of damages measured by any other methods, the damages caused by misappropriation may be measured by imposition of liability for a reasonable royalty for a misappropriator’s unauthorized disclosure or use of a trade secret.¹⁴  If willful and malicious misappropriation is proven by clear and convincing evidence, the fact finder may award exemplary damages in an amount not exceeding twice the award received.   

Although this article does not cover every nuance of the Act, the Act does make clear that “This chapter shall be applied and construed to effectuate its general purpose to make uniform the law with respect to the subject of this chapter among states enacting it.” 
Only time will tell if this is what actually occurs.

- John W. Shaw is a litigator at Whitaker Chalk Swindle & Schwartz PLLC in Fort Worth, Texas where he currently focuses on civil, business, and intellectual property litigation.

 

 _{[1] Texas Uniform Trade Secrets Act, 83d Leg., R.S. §1 (to be codified at Tex. Civ. Prac. & Rem. Code §134A).
[2] Id. at § 3.
[3] See IAC, Ltd. v. Bell Helicopter Textron, Inc., 160 S.W.3d 191, 197 (Tex. App. – Fort Worth, 2005, no pet.).
[4] Id.
[5] Id. citing In re Bass, 113 S.W.3d 735, 739 (Tex. 2003)(quoting Computer Assocs. Int’l, Inc. v. Altai, Inc., 918 S.W.2d 453, 455 (Tex. 1996).
[6] See IAC, 113 S.W.3d at 198.
[7] Texas Uniform Trade Secrets Act, 83d Leg., R.S. §1 (to be codified at Tex. Civ. Prac. & Rem. Code §134A.002(6)).
[8] Id. (to be codified at Tex. Civ. Prac. & Rem. Code §134A.002(3)).
[9] Id. (to be codified at Tex. Civ. Prac. & Rem. Code §134A.003).
[10] Id.
[11] Id.
[12] Id.
[13] University Computing Co., v. Lykes-Youngstown Corp., 504 F.2d 518, 538 (5th Cir. 1974, no pet.).
[14] Texas Uniform Trade Secrets Act, 83d Leg., R.S. §1 (to be codified at Tex. Civ. Prac. & Rem. Code §134A.004(a)).}