The Texas Legislature adopted the Texas Uniform Trade Secrets Act (TUTSA), effective Sept. 1. The act is, no doubt, a blockbuster. It blows away years of common law civil remedies for trade secret misappropriation; just check out Texas Civil Practice & Remedies Code §134A.007.
Let’s take a look at a few places where TUTSA impacts a fairly common scenario for trade-secret theft: when a key employee defects to a competitor.
• Up for grabs: Texas courts rarely look outside the state’s borders for guidance. But TUTSA §134A.008 demands it. Courts must apply the act with an eye toward creating a "uniform" law among the 48 states that have adopted the act.
The trouble is that states sometimes apply parts of the act differently. Issue-by-issue, Texas courts must now pick the camp to join. My bet is that they’ll stick as closely as possible to the current common law with which they’re comfortable. Only time will tell.
• New trade-secret definition: TUTSA’s new definition of "trade secret" looks innocuous enough. But is it? That depends on how Texas courts apply it.
The definition covers information, including a "list of actual or potential customers or suppliers," that meets two criteria. First, the information must derive "independent economic value" from not being "generally known" or "readily ascertainable by proper means." Second, the trade secret owner must have taken "reasonable" efforts to keep the information secret.
Some states, such as Nebraska, narrow the definition of trade secrets to exclude information that others could reverse-engineer by inspecting a product or culling through public sources. They say the information is "readily ascertainable." Other states, like Georgia, expand the definition by instead focusing more on a company’s time and expense to create the information in the first place.
Before the act, Texas common law stiff-armed many reverse-engineering challenges. Even when a competitor theoretically could discover a secret on its own, Texas courts treated valuable information as trade secrets when a company made "an effort" to protect the information and an employee took it.
The difference matters to noncompetes. Trade secrets are tried-and-true consideration to enforce them. If fewer pieces of information warrant trade-secret protection, courts may invalidate noncompetes more often, based on the secrets — or at least pare down a noncompete’s reasonable scope.
• Premium on hiring precautions:When hiring from the competition, a company can fall into the crosshairs of a trade-secret enforcement action. In-house counsel’s best bet is to take reasonable measures to respect competitors’ trade secrets.
For example, new hires may agree in writing not to mix their jobs with a former employer’s trade secrets. Going a step further, the company can use orientation training to educate employees about common types of trade secrets in its industry, along with how to use the company’s trade secrets. These measures will be more effective, thanks to the TUTSA.
Knowledge is key to liability. Under the act, liability only attaches for a third party, like a hiring company, when it "knows or has reason to know" the trade secret was acquired wrongfully. Purposefully taking steps to respect competitors’ trade secrets helps. The company can put up a stronger defense that it had no idea about its new hire’s alleged indiscretion.
• Prompt cease-and-desist letters: Sending cease-and-desist letters promptly is good practice now, but the TUTSA will make it critical. A competitor may continue using misappropriated trade secrets, according to §134A.003(b), if the competitor materially and prejudicially changes its position before learning of the alleged trade secret theft. The competitor might simply pay a "reasonable royalty" for future use. So much for a hard injunction. And, a comment to TUTSA notes that a court may deny all money damages for past use.
That’s a radical break from common law laches and waiver. They come into play only when the trade secret owner delayed filing suit for an unreasonable time. The act’s text has no timing requirement.
In-house counsel should send a cease-and-desist letter immediately upon learning that an ex-employee has landed a job with a competitor — and certainly before the competitor could get far into launching a new product or business initiative using any misappropriated trade secrets. The letter should specifically notify the competitor regarding the types of trade secrets the employee may have. A vague letter might not put the competitor on the hook for using the stolen secrets.
• Protective orders: In-house counsel may hesitate to file a trade-secret enforcement action for fear that the secrets will be disclosed in the lawsuit. The act alleviates much of that concern. Under §134A.006, courts must take "reasonable means" to protect the confidentiality of alleged trade secrets, and they must presume they should grant a protective order.
• Limited-time injunctions: Texas common law leaves the door open to trade-secret injunctions that have no expiration date. TUTSA puts an end to those days. A comment to §134A.003 notes that an injunction cannot last longer than needed to even the odds between the trade secret owner and its competitor. The injunction might end when the competitor could have discovered the secret on its own. Even after an injunction is in place, the competitor can ask the court to lift it, because the information no longer warrants trade secret protection.
No matter how you slice it, TUTSA will change Texas’ protection for soft IP. The question is: How drastically?
Alan Bush of The Woodlands represents companies in labor and employment matters. He breaks legal developments down into business points on his blog at hrriskybusiness.com.