Texas Uniform Trade Secrets Act and Recovery of Attorney’s Fees

May attorneys’ fees be recovered on a claim that trade secrets were stolen?

Under the Texas Uniform Trade Secrets Act, a court may award attorney’s fees to the prevailing party.  “The 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) wilful and malicious misappropriation exists.”  Tex. Civ. Prac. & Rem. Code § 134A.005.

Remedies for Misappropriation of Trade Secrets

What remedies are available if trade secrets have been misappropriated?

Under Texas law, a claimant who prevails on a claim for misappropriation of trade secrets may be entitled to injunctive relief as well as damages.  “Damages 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.”  Tex. Civ. Prac. & Rem. Code § 134A.004(a).  Alternatively, “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.”  Tex. Civ. Prac. & Rem. Code § 134A.004(a).  Additionally, “if wilful and malicious misappropriation is proven by clear and convincing evidence, the fact finder may award exemplary damages in an amount not to exceed twice any award” described above.  Tex. Civ. Prac. & Rem. Code § 134A.004(b).

Texas Statute Defines What are Trade Secrets

What are “Trade Secret” in Texas?

The Texas Uniform Trade Secrets Act states that:

“Trade secret” means 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.

See Tex. Civ. Prac. & Rem. Code section 134A.002(6).

Theft of Trade Secrets is a Third Degree Felony

Is it a crime to take, copy or transmit someone else’s trade secrets?

The Texas Penal Code specifically addresses this question.  Texas Penal Code section 31.05 (“Theft of Trade Secrets”) defines a trade secret as “the whole or any part of any scientific or technical information, design, process, procedure, formula, or improvement that has value and that the owner has taken measures to prevent from becoming available to persons other than those selected by the owner to have access for limited purposes.”  Section 31.05 further provides in pertinent part that “A person commits an offense if, without the owner's effective consent, he knowingly: (1) steals a trade secret; (2) makes a copy of an article representing a trade secret; or (3) communicates or transmits a trade secret.”  Theft of a trade secret is a third degree felony.  The punishment for a third degree felony is a range of confinement from two to ten years, with the option of a fine not to exceed $10,000.  See Tex. Penal Code § 12.34.

Customer Lists may be Trade Secrets

Is an employer’s list of customers a trade secret?

“Under Texas law, customer lists may be protected as trade secrets.  But a customer list of readily ascertainable names and addresses will not be protected as a trade secret.  Texas courts consider three factors to determine whether a customer list is a trade secret: (1) what steps, if any, an employer has taken to maintain the confidentiality of a customer list; (2) whether a departing employee acknowledges that the customer list is confidential; and (3) whether the content of the list is readily ascertainable.  In considering whether information was readily ascertainable, courts have considered the expense of compiling it.  Other Texas courts focus on the method used to acquire the customer information.  Even if the information is readily available in the industry, it will be protected if the competitor obtained it working for the former employer.”  Alliantgroup, L.P. v. Feingold, 803 F. Supp. 2d 610, 625-26 (S.D. Tex. 2011)(citations omitted); see also Rimkus Consulting Group, Inc. v. Cammarata, 688 F.Supp.2d 598, 667 (S.D. Tex. 2010).

Published Patent Applications and Trade Secrets

Can the contents of a published patent application be a trade secret?

“Although no post-2000 Texas case directly addresses whether a published patent application destroys the secrecy of its contents for trade secret purposes, the weight of authority from other jurisdictions holds that it does.  There can be no dispute that a published patent application, like a patent, is readily available – the United States Patent and Trademark Office and Google both allow free online searching of published patent applications.  Under Texas law, information that is generally known or readily available by independent investigation is not secret for purposes of trade secrecy. . . . [T]he decision to seek a patent is an either/or choice: either ‘secure the material rewards for his invention for a limited time’ on condition ‘that he make full disclosure for the benefit of the public of the manner of making and using the invention" or "make no public disclosure of his invention and thereby protect his trade secret.’”  Tewari De-Ox Systems, Inc. v. Mountain States/Rosen, L.L.C., 637 F.3d 604, 612-13 (5th Cir. 2011)(citations omitted).  “However, Texas law also recognizes that trade secret status may be maintained along with patent protection in situations where the patent does not disclose the exact information or details that a plaintiff contends are trade secrets.”  Wellogix, Inc. v. Accenture, LLP, 823 F. Supp. 2d 555, 563 (S.D. Tex. 2011).

Unique Combinations of Known Components Can be Trade Secrets

Trade secrets can be unique combinations of disclosed technologies or processes.

A trade secret “is one of the most elusive and difficult concepts in the law to define.”  Tewari De-Ox Systems, Inc. v. Mountain States/Rosen, L.L.C., 637 F.3d 604, 613-14 (5th Cir. 2011).  In Tewari, the trial court ruled that the plaintiff did not have any trade secrets because the specifics of its claimed secret process had already been publically disclosed or were know in the industry.  The Fifth Circuit, however, disagreed and ruled that whether plaintiff’s process was a trade secret was a question for the fact finder to decide.  In many cases, the question of whether certain information constitutes a trade secret ordinarily is best “resolved by a fact finder after full presentation of evidence from each side. . . .  A trade secret can exist in a combination of characteristics and components each of which, by itself, is in the public domain, but the unified process, design and operation of which in unique combination, affords a competitive advantage and is a protectible secret."  Tewari De-Ox Systems, Inc. v. Mountain States/Rosen, L.L.C., 637 F.3d 604, 613-14 (5th Cir. 2011)(citations omitted).

Availablity of Mandamus

When is mandamus available?

Mandamus will issue to correct a discovery order if the order constitutes a clear abuse of discretion and there is no adequate remedy by appeal.  In re Colonial Pipeline Co., 968 S.W.2d 938, 941 (Tex. 1998).  Mandamus relief may be justified when: (1) the appellate court would not be able to cure the trial court's discovery error, such as when privileged information or trade secrets would be revealed or production of patently irrelevant or duplicative documents imposing a disproportionate burden on the producing party is ordered; (2) the party's ability to present a viable claim or defense is severely compromised or vitiated by the erroneous discovery ruling to the extent that it is effectively denied the ability to develop the merits of its case; or (3) the trial court's discovery order disallows discovery that cannot be made a part of the appellate record, thereby denying the reviewing court the ability to evaluate the effect of the trial court's error.  In re Colonial Pipeline Co., 968 S.W.2d 938, 941 (Tex. 1998)(citing Walker v. Packer, 827 S.W.2d 833, 843-44 (Tex. 1992)).  A trial court abuses its discretion if it reaches a decision so arbitrary and unreasonable as to amount to a clear and prejudicial error of law, or if it clearly fails to analyze or apply the law correctly.  In re Cerberus Capital Mgmt., L.P., 164 S.W.3d 379, 382 (Tex. 2005).

Recovery of Attorneys' Fees for Theft of Trade Secrets

Can attorneys’ fees be recovered on a misappropriation of trade secrets claim?

The Texas Theft Liability Act imposes civil liability for, among other actions, “unlawfully appropriating property” as described by Texas Penal Code section 31.05.  See  Tex. Civ. Prac. & Rem. Code Ann. §§ 134.002(2), 134.003.  Under penal code section 31.05(b), a person commits theft of trade secrets if, without the trade-secret owner's consent, he knowingly: (1) steals a trade secret; (2) copies an article representing a trade secret; or (3) communicates or transmits a trade secret.  Tex. Penal Code Ann. § 31.05(b) (2013).  A person who sustains damages resulting from the unlawful appropriation of property under section 31.05 may recover actual damages, as well as additional damages not to exceed $1,000 and attorney's fees.  Tex. Civ. Prac. & Rem. Code Ann. § 134.005.  See also Twister B.V. v. Newton Research Partners, LP, 364 S.W.3d 428, 440 (Tex. App. –  Dallas 2012).

Injunctions to Protect Trade Secrets

Can a Court Issue an Injunction to Protect Trade Secrets?

The improper use of trade secrets provides a proper basis for an injunction; however, every order granting an injunction must be specific in its terms and describe in reasonable detail the  act or acts to be restrained.  In a case involving trade secrets or confidential information, the injunction must be narrowly tailored to address the improper use of confidential or proprietary information.  Further, the injunction must not be framed so broadly as to prohibit the enjoyment of lawful rights.  Sw. Research Inst. v. Keraplast Tech., Ltd., 103 S.W.3d 478, 482 (Tex. App. – San Antonio 2003, no pet.); see also Tex. R. Civ. P. 683.

Employees and Use of Trade Secrets

Can an employee use his employer’s trade secrets for his own benefit?

Upon the formation of an employment relationship, certain duties arise apart from any written contract.  One of those duties forbids an employee from using trade secret information acquired during the employment relationship in a manner adverse to the employer.  Miller Paper Co. v. Roberts Paper Co., 901 S.W.2d 593, 600 (Tex. App.-Amarillo 1995, no writ).

Proof of a Misappropriation of Trade Secrets Claim

What must a plaintiff prove to establish a claim for misappropriation of trade secrets?

To establish a claim for misappropriation of trade secrets, a plaintiff is required to establish (1) a trade secret existed; (2) the trade secret was acquired through a breach of a confidential relationship or was discovered by improper means; (3) the defendant used the trade secret without the plaintiff’s  authorization; and (4) the plaintiff suffered damages as a result.  See Tex. Integrated Conveyor Sys., Inc. v. Innovative Conveyor Concepts, Inc., 300 S.W.3d 348, 366-67 (Tex. App. – Dallas 2009, pet. denied).  A person is liable for disclosure of a trade secret if he either (1) discovers the secret through improper means or (2) his disclosure and use, after properly acquiring knowledge of the secret, constitutes a breach of the confidence reposed to him.  Hyde Corp. v. Huffines, 158 Tex. 566, 314 S.W.2d 763, 778 (Tex. 1958).  “Use of the trade secret” means commercial use by which the offending party seeks to profit from the use of the secret.  See Global Water Group, Inc. v. Atchley, 244 S.W.3d 924, 928 (Tex. App. – Dallas 2008, pet. denied).

Discovery of Trade Secrets

Assertion of the trade secret privilege.

The party resisting discovery must establish that the information is a trade secret.  The burden then shifts to the requesting party to establish that the information is necessary for a fair adjudication of its claims. If the requesting party meets this burden, the trial court should ordinarily compel disclosure of the information, subject to an appropriate protective order.  See In re Cont'l Gen. Tire, 979 S.W.2d 609, 613 (Tex. 1998).

Trade Secrets are Privileged

Trade Secrets Are Accorded Evidentiary Privilege.

Rule 507 Trade Secrets.  A person has a privilege, which may be claimed by the person or the person's agent or employee, to refuse to disclose and to prevent other persons from disclosing a trade secret owned by the person, if the allowance of the privilege will not tend to conceal fraud or otherwise work injustice. When disclosure is directed, the judge shall take such protective measure as the interests of the holder of the privilege and of the parties and the furtherance of justice may require.  Tex. R. Evid.  507 (2012).

Trade Secrets versus Other Types of Protected Intellectual Property

What are some ways that trade secrets differ from other types of protected intellectual property?

To qualify as a trade secret, the information must be secret and have value to the owner's trade or business.  A trade secret cannot be a matter of general knowledge in an industry.   Absolute secrecy, though, is not required, but the owner must take “reasonable precautions to ensure its secrecy.” See Phillips v. Frey, 20 F.3d 623, 630 (5th Cir. 1994).  While other forms of intellectual property protections (patents, copyrights, and trade dress) protect intellectual property that has become public knowledge, an owner of a trade secret is only protected from wrongful disclosure of the trade secret.  The law provides, "[O]ne who either discloses or uses another's trade secret, without a privilege to do so, is liable for such disclosure or use if the disclosure or use constitutes a breach of confidence reposed in the party disclosing or using the trade secret by the owner of the trade secret." See IBP, Inc. v. Klumpe, 101 S.W.3d 461, 472 (Tex. App.—Amarillo 2001, pet. denied) ("To be actionable, the disclosure or use of the trade secret ordinarily must be to the competitive disadvantage of the owner of the trade secret."). See In re Waste Mgmt. of Tex., Inc., 286 S.W.3d 615, 2009 Tex. App. LEXIS 3671 (Tex. App. Texarkana 2009).  Unlike the case of copyright infringement, one need not make an exact or nearly exact copy of an algorithm or a compilation of information to be liable for trade secret misappropriation in connection with the misappropriation of the essence of the algorithm.  Nor do each of the steps of a process that is protected as a trade secret have to be novel or previously unknown.  See Restatement of Torts § 757, cmt. b (1939);  see also E.I. DuPont de Nemours & Co. v. Christopher, 431 F.2d 1012, 1014 (5th Cir. 1970).  The value of the trade secret comes from the fact that competitors do not possess the information embodied in the trade secret, which gives the holder a potential business advantage.

Appellate Review of Orders Compelling Disclosure of Trade Secrets

Is a court’s order compelling the discovery of trade secrets appealable?

Yes.  Because improper disclosure of a trade secret cannot be adequately remedied on appeal, mandamus relief is appropriate.  See In re Union Pac. R.R. Co., 294 S.W.3d 589, 593 (Tex. 2009)(orig. proceeding).

What is a trade secret?

What type of information does Texas law regard as “trade secrets”?

A trade secret is any "formula, pattern, device or compilation of information" that is "used in one's business and presents an opportunity to obtain an advantage over competitors who do not know or use it."  In re Bass, 113 S.W.3d 735, 739 (Tex. 2003).  Customer lists, pricing information, client information, customer preferences, buyer contacts, blueprints, market strategies, and drawings have all been recognized as trade secrets.  T-N-T Motorsports, Inc. v. Hennessey Motorsports, Inc., 965 S.W.2d 18, 22 (Tex. App.—Houston [1st Dist.] 1998, pet. dism'd).  To qualify as a trade secret, the information must be secret and have value to the owner's trade or business.  A trade secret cannot be a matter of general knowledge in an industry.  Absolute secrecy, though, is not required, the owner must take reasonable precautions to ensure its secrecy.  To determine whether information is a trade secret, Texas courts consider the following six-factor test:  (1) the extent to which the information is known outside of the business; (2) the extent to which it is known by employees and others involved in the business; (3) the extent of measures taken to guard the secrecy of the information; (4) the value of the information to the business and to its competitors; (5) the amount of effort or money expended in developing the information; and (6) the ease or difficulty with which the information could be properly acquired or duplicated by others.  See, e.g., In re Union Pac. R.R. Co., 294 S.W.3d 589, 593 (Tex. 2009)(orig. proceeding).  However, the party claiming a trade secret is not required to satisfy all six factors "because trade secrets do not fit neatly into each factor every time."  In re Bass, 113 S.W.3d 735, 740 (Tex. 2003).  Whether a trade secret exists is usually a question of fact to be determined by a factfinder.  See General Universal Systems, Inc. v. Lee, 379 F.3d 131, 150 (5th Cir. 2004).

Statute of Limitations for Misappropriation of Trade Secrets

If someone misappropriates my trade secrets, is there a limited time within which I must file a lawsuit?

Yes.  “A person must bring suit for misappropriation of trade secrets not later than three years after the misappropriation is discovered or by the exercise of reasonable diligence should have been discovered.”  See Tex. Civ. Prac. & Rem. Code § 16.010(a) (O’Connor’s CPRC Plus 2012-13);  see also Pressure Sys. Int'l, Inc. v. Southwest Research Inst., 350 S.W.3d 212, 216 (Tex. App. – San Antonio 2011, pet. denied).