Stephen Cochell July 9, 2018

Trade secrets are often the lifeblood of a company and the competitive advantage of a trade secret determines whether a business lives, dies, or becomes the next Google or Uber. While everyone thinks of Apple, Coca-Cola or Uber as the great concepts of our time, these companies grew primarily as a result of aggressive product development, cutting-edge technology or creative business approaches that were the product of many years of hard work, innovation and people possessing creativity or even brilliance in a narrow area of their industry. Something that all of these companies have in common is the fact that they had or continue to have trade secrets that they protect or have patented.

Many companies protect trade secrets by applying for patents before they are commercially sold in interstate commerce. Competitors may or may not be able to replicate their products or technology without infringing the patents, or they quickly figure out how to either challenge or circumvent the patent application through lawful or even unlawful means by foreign or domestic competitors. Trade secrets may remain secret whereas your patent application ultimately becomes part of the “public domain.” Theft of trade secrets is punishable in Texas both civilly and criminally.

The Texas Trade Secrets Act

Trade secret law in Texas changed dramatically in 2013 when Texas adopted a modified version of the Uniform Trade Secrets Act (“TUTSA”).[1] The statute, in pertinent part, defines the term “trade secret” as:

Information, including a formula, pattern, compilation, program, device, method, technique, process, financial data, or list of actual by or potential customers or suppliers, that:

  • 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

  • Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

The statute is broadly written to protect a broad array of industries where innovation and technological advances can be achieved to the advantage of the owner or holder of the trade secret. Coca-Cola has successfully protected the trade secret to Coke for decades. Business strategies, methods, techniques, and processes are closely guarded to assure that competitors don’t steal your business including, for example, your marketing strategies for different products.

Distilled to its basic elements, a trade secret is:

  1. Information, processes, methodologies, or just customer lists have economic value;

  2. The information is not generally known, but not capable of being readily ascertained by proper means (so it can’t be stolen);

  3. Is the subject of reasonable efforts to protect its secrecy.

In other words, you likely have a trade secret if you have an idea that makes you money and that is “readily ascertainable” by others who are playing by the rules. If someone can look at a product and reverse engineer it, that is entirely proper, although a former employee leaving with your trade secrets is improper. The law does not require that you take to protect the secret like Fort Knox, you need only take reasonable steps to protect its secrecy from third parties. Reasonable steps, for example, includes keeping your trade secret in safe, password protecting it in your computer system, and making sure that employees sign a confidentiality agreement if they have access to your secrets.

Pricing, customer lists, and other confidential information are often closely guarded by companies who sell products. It is difficult to protect your pricing information if you give it out to any company asking for a price quote that is given without the understanding that they are receiving confidential information. Even if they don’t agree that the information is “confidential”, you have arguably taken reasonable steps to protect your pricing information.

Trade Secret Theft

Assume that, after years of hard work, your company finally started taking market share and reaching its full economic potential. However, one of your employees leaves and starts a business that directly competes against yours, taking customers but most importantly, your “secret recipe” for getting clients. Unfortunately, the employee did not sign a non-compete agreement and did not sign a confidentiality agreement. However, everyone understood from the way you operated your business that the secret recipe was secret, with only certain employees gaining access to the recipe. The night before he resigned, the employee downloaded your recipe, or he photocopied it and escaped before you knew the recipe was missing. All is not lost. You can still file a lawsuit under TUTSA.

Your Remedies Under TUTSA

The most powerful and effective remedy for theft of trade secrets is injunctive relief. The statute provides that actual or threatened misappropriation of trade secrets may be enjoined. Significantly, the relief granted by the Court can be granted until or when the trade secret has ceased to exist. Even then, the injunction may be continued for an additional time period to eliminate the commercial advantage obtained through misappropriation; colloquially referred to as the “head start” period. The term “threatened misappropriation” modifies prior law because the courts refused to issue injunctive relief based on the theoretical possibility or fear that a party might misappropriate a trade secret. Although there have not been many decisions interpreting the Act, the language seems to hold that an injunction under the Act terminates when the trade secret ceases to exist.

In exceptional cases, the Court may condition future use of the stolen trade secret upon payment of a reasonable royalty for “no longer than the period of time for which use could have been prohibited.” This language is ripe for litigation. Exceptional circumstances are defined as including a “material and prejudicial change of position before acquiring knowledge or reason to know of misappropriation that renders a prohibitive injunction inequitable. In other words, if someone unknowingly learned that part or all of a process was stolen, a Court could grant a reasonable royalty to balance the potential inequities to the innocent user. This coincides with granting damages based on a calculation of a reasonable royalty.

Economic Damages

Essentially, the plaintiff in a trade secret case can recover either their actual losses or damages for unjust enrichment or a reasonable royalty for the misappropriator’s use or unauthorized disclosure of a trade secret. Tex. Civ. Prac. & Rem. Code §134A.004(a). Actual damages, or what has been lost by the plaintiff may be measured by lost profits. In some cases, a plaintiff may recover the value of the trade secret if the defendant has somehow impaired or destroyed the value of the trade secret. Alternatively, a defendant's gained profits or unjust enrichment may be recovered. A reasonable royalty is generally calculated by expert testimony as to what a willing buyer and seller would have agreed on for a license for the defendant’s use of the trade secret.

Exemplary Damages

Exemplary damages are allowed upon clear and convincing evidence of willfully and malicious misappropriation. TUTSA limits exemplary damages so that damages do not exceed twice any award of economic damages. §134A.004(b).

Attorneys Fees

Fees are granted in three circumstances: (1) willful and malicious misappropriation of the trade secret(s); a bad faith claim of misappropriation of trade secrets; and (3) a motion to terminate an injunction or is resisted in bad faith. §134A.005.

Practical Considerations

TUTSA provides a powerful tool to protect your trade secrets. The decision to file a trade secret claim is ultimately a business judgment based on the importance and value of the trade secret to your business as well as the costs of enforcement of your rights. You should consult an experienced litigator regarding the decision to file a claim under TUTSA.

[1] Texas Civil Practice & Remedies Code 134A.002.