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Commercial LitigationTrade Secrets

Texas adopts Uniform Trade Secrets Act—Does this mean predictability for your business? Maybe

July 2, 2013

Commercial LitigationTrade Secrets

Texas adopts Uniform Trade Secrets Act—Does this mean predictability for your business? Maybe

July 2, 2013

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In May, Texas became the 48th state to adopt a version of the model Uniform Trade Secrets Act (UTSA), a framework that many states have adopted with the goal of bringing uniformity and predictability to trade-secrets litigation.  The Texas UTSA is generally consistent with the model UTSA with a few variations.  It also adds to and clarifies existing Texas common law, including, for example, specifically providing for the award of attorneys’ fees and exemplary damages in certain circumstances.

Consistent with longstanding Texas common law, Texas’ modified version of the UTSA provides a broad definition of what can constitute a “trade secret.”  The statute protects all kinds of “information” in your or your client’s business, including “a formula, pattern, compilation, program, device, method technique, process, financial data,” as well as lists of “actual or potential customers or suppliers.”  This definition is not surprising given the well developed and longstanding body of common law in Texas, which has allowed broad protection not only for a variety of different types of information, but also for “compilations” of information such as customer lists and even combined elements of information obtained from public sources.  If you have information in your or your client’s business that is confidential and provides you with a potential or actual competitive advantage, it warrants protection under the statute.

Also consistent with the prior Texas common law is a provision in the statute providing for the remedy of injunctive relief in cases of “actual or threatened misappropriation” of trade-secret information.  Many Texas courts have recognized the theory of “probable” or “inevitable” disclosure in various forms and circumstances for many years, but in recent years courts have been less willing to issue injunctions based on this theory, and the injunctions they have approved have been more narrow.  The Texas UTSA now explicitly approves this theory, which likely will lead courts to be more inclined to grant injunctive relief on the basis of threatened disclosure.  This provides a strong weapon for obtaining an injunction against a former employee or that employee’s new employer when the former employee is likely to disclose confidential and sensitive business information.  The ability to obtain injunctive relief in the face of probable disclosure can supplement relief already provided by a valid noncompetition agreement, or even in those cases where a valid covenant not to compete does not exist.

The Texas UTSA also clarifies which business practices constitute “misappropriation” under the Act and which ones do not.  This concept under the statute reiterates Texas common law, at a high level, but introduces new and concrete concepts to help courts draw the lines between what is proper and improper behavior.  Among other things, the Act prohibits the use of trade-secret information obtained by “improper means.”  The statute gives a laundry list of conduct that constitutes “improper means,” such as theft and a breach of duty to maintain secrecy of the information.  This laundry list may lead the courts to recognize grounds for misappropriation claims that had not existed previously.  Likewise, a particularly notable provision of the statute is its definition of “proper means” of obtaining information, which includes “discovery by independent development, reverse engineering unless prohibited, or any other means that is not improper.” The protection for reverse engineering even extends to “decompiling” computer source code.   Clearly, the drafters intended to exempt reverse engineering as the subject of a misappropriation claim, unless the act of reverse engineering is prohibited under the facts of a particular case.  Texas common law decisions had stated before that otherwise legitimate reverse engineering is not prohibited but this explicit statutory language likely will lead to a fresh wave of litigation concerning defendants’ claims that reverse engineering cannot be the proper subject of a trade-secrets theft claim.  This could have a profound effect on many businesses including, for example, software companies who provide access to information through click-wrap and other user agreements that do not expressly prohibit reverse engineering.  The addition of this provision makes it even more important to be sure your or your client’s company uses nondisclosure agreements that clearly set forth the ways in which information can be used and that clearly address reverse engineering.

Importantly, the Texas Act also provides for the award of attorneys’ fees to defendants in cases in which a claim of trade-secret misappropriation is made in bad faith, to either party if a motion to terminate an injunction is made or resisted in bad faith, or to plaintiffs in cases of willful or malicious misappropriation of information.  Previously, companies asserting trade-secret-theft claims only had the Texas Theft Liability Act to look to for obtaining an award of attorneys’ fees, except in those cases where they could prove a breach of contract (e.g., a breach of a non-disclosure agreement).  Now, parties on both sides of the case have other avenues for recovering attorneys’ fees, including new provisions the drafters of the statute clearly included to help control frivolous litigation.

The drafters of the UTSA intended to provide certainty and predictability to trade-secret litigation.  Much of the language of the statute clearly reconfirms longstanding principles that have existed under Texas law, suggesting that predictability and certainty, in the long-term, might be achieved.  But the UTSA also introduces nuanced language that did not previously exist in Texas case law, opening the door for practitioners to advance arguments and legal positions that they previously might well not have advanced.  Additionally, by doing so through the “Uniform Trade Secrets” platform, the statute will potentially allow Texas courts to look to court decisions in other states interpreting similar statutory language, which could lead to results that diverge from previously existing law in Texas.  For both of these reasons, the statute’s goal of predictability and certainty may prove to be an elusive one—at least in the short-term.

Written by Natalie Arbaugh and Tommy Jacks

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Trade Secrets

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