Out With the Old, In With the New: The Texas Uniform Trade Secrets Act (TUTSA) Explained

The Texas Uniform Trade Secrets Act (TUTSA) became effective on September 1, 2013, replacing the hodgepodge of common law, restatements and the Texas Theft Liability Act with a well-established statutory framework that 46 other states are already employing. TUTSA is a welcome change in our state because it modernizes and clarifies a lot of outdated rules, some of which have not been updated since 1930s. TUTSA does not apply to any misappropriation, including continuing misappropriation, occurring prior to September 1, 2013.

This post explains the major changes brought by TUTSA and their effect on trade secret litigation n Texas.

1.         TUTSA clarifies and expands the definition of “trade secret.“

Under TUTSA § 134A.002(6), “trade secret” means information that derives independent economic value from not being generally known or readily ascertainable and for which reasonable efforts are made to maintain its secrecy.  Such “information” includes “a formula, pattern, compilation, program, device, method, technique, process, financial data, or list of actual or potential customers or suppliers.”

• The new definition omits the “continuous use” language, thus allowing plaintiffs to claim as trade secret information that they have not yet had an opportunity to use.

• Trade secrets now include not only positive information, but “negative knowhow,” which is information that has commercial value from a negative viewpoint, such as the results of lengthy and expensive research which proves that a certain process will not work could be of great value to a competitor.  See UTSA § 1 cmt.

• Whether the information is considered “secret” is now determined by whether a party undertook “reasonable efforts to maintain the secrecy of such information,” rather than the difficulty with which such information could be acquired.  The new standard allows a fact finder to consider the nature of the trade secret and the facts and circumstances surrounding the efforts to maintain its secrecy in order to determine whether these efforts were reasonable under the circumstances.

2.         TUTSA requires “knowing” misappropriation.

Under TUTSA § 134A.002(3), “misappropriation” includes: (1) acquiring a trade secret by improper means or (2) disclosing a trade secret without consent.  Unlike the old common law, this new statutory definition makes clear that liability applies only to those who know or have reason to know that a trade secret was acquired by improper means, rather than accident or mistake.  Thus, for example, if an employee misappropriates a former employer’s trade secrets and uses them in his new job, the new employer is not liable for misappropriation of trade secrets unless the employer had actual or constructive knowledge that the material was improperly obtained. Needless to say, this provision is a great improvement for employers.

3.         Under TUTSA, “improper means” might include reverse engineering.

Under TUTSA § 134A.002(2), “improper means” includes theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, to limit use of, or to prohibit discovery of a trade secret, or espionage through electronic or other means.  When a license agreement prohibits reverse engineering, such activity would constitute a breach of the duty to limit the use of trade secret information and would constitute “improper means.”  In absence of any prohibition in a license agreement, however, reverse engineering would constitute “proper means” as defined in § 134A.002(4).

4.       TUTSA broadens injunctive relief. 

• Texas courts have traditionally been reluctant to expressly recognize the idea of “threatened misappropriation,” which is often linked to the “inevitable disclosure” doctrine.  TUTSA § 134A.003 now includes a provision that allows injunctive relief for both actual and threatened misappropriation of trade secrets.  In some states that have adopted a version of the Uniform Trade Secrets Act,  “threatened misappropriation” does not equal “inevitable disclosure,” while in other states, the courts have found that as long as an employer can show that an employee will perform duties in his new employment that will inevitably cause the employee to use or disclose the former employer’s trade secrets, the old employer can establish “threatened misappropriation.”  Only time will tell, which way Texas will lean.

• TUTSA § 134A.003 allows the continuation of an injunction for additional time to eliminate any commercial advantage derived from misappropriation, rather than termination of the injunction once the protected information is no longer secret.

• The same section, “in exceptional circumstances,” allows an injunction that conditions future use of a trade secret upon payment of a reasonably royalty for no longer than the period of time for which use could have been prohibited.  “Exceptional circumstances” include a material and prejudicial change of position before acquiring knowledge or reason to know of misappropriation that renders a prohibitive injunction inequitable.

• Finally, TUTSA § 134A.003 gives courts the power to compel “affirmative acts to protect a trade secret” under appropriate circumstances.

5.        TUTSA creates a cap for exemplary damages. 

Under TUTSA § 134A.004, “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 any award” of actual damages.  Such cap did not exist under Texas common law.

6.        TUTSA allows recovery of attorneys fees. 

Prior to TUTSA, the only way a party could recover attorneys’ fees for misappropriation of trade secrets was by filing a claim under the Texas Theft Liability Act, which allows for the recovery of attorneys’ fees to the prevailing party.  Now, under TUTSA § 134A.005, a court may award reasonable attorney’s fees to the prevailing party if: (1) a claim of misappropriation is made in bad faith; (2) a motion to terminate an injunction is made or resisted in bad faith; or (3) willful and malicious misappropriation exists.

7.       TUTSA enhances protection of trade secrets in court. 

TUTSA provides “a presumption in favor of granting protective orders to preserve the secrecy of trade secrets” and under TUTSA § 134A.006, “protective orders may include provision limiting access to confidential information to only the attorneys and their experts, holding in camera hearings, sealing the records of the action, and ordering any person involved in the litigation not to disclose an alleged trade secret without prior court approval.”

8.        TUTSA has not changed the following rules:

• Statute of Limitations.  The three-year statute of limitations on misappropriation of trade secrets remains unchanged.  See Texas Civil Practice and Remedies Code §16.010.

• Damages. Under TUTSA § 134A.004(a), “in addition to or in lieu of injunctive relief,” a claimant is entitled to recover damages for misappropriation, which can include both the actual loss caused by misappropriation and the unjust enrichment caused by misappropriation that is not taken into account in computing actual loss.  A court may also impose reasonable royalty for a misappropriator’s unauthorized disclosure or use of a trade secret.  These are the same type of damages allowed under Texas common law prior to TUTSA‘s enactment.

Leiza Dolghih is a partner at Lewis Brisbois Bisgaard & Smith LLP in Dallas, Texas and a Co-Chair of the firm’s Trade Secrets and Non-Compete Disputes national practice.  His practice includes commercial, intellectual property and employment litigation.  You can contact her directly at Leiza.Dolghih@LewisBrisbois.com or (214) 722-7108.