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Trading Secrets A Law Blog on Trade Secrets, Non-Competes, and Computer Fraud

Texas Considers Adopting the Uniform Trade Secrets Act

Posted in Legislation, Trade Secrets

Texas, New York, North Carolina, and Massachusetts are the only states that do not subscribe to some version of the Uniform Trade Secrets Act (“UTSA”).

Common law presently governs misappropriation of trade secrets lawsuits in Texas.

Legislation was recently proposed that, if enacted, would adopt a version of the UTSA for the State of Texas. The common law of Texas is very similar to the UTSA in many ways.

The biggest change that adoption of the UTSA could bring about has to do with the recovery of attorneys’ fees. There is currently no basis for recovery of attorneys’ fees in Texas for the misappropriation of trade secrets, absent a separate cause of action (such as breach of a confidentiality agreement or recovery under the Texas Theft Liability Act (“TTLA”)).

The ability to recover attorneys’ fees in trade secret cases is significant. First, these cases can easily involve attorneys’ fees well into the six figure range for both the company trying to protect its trade secrets as well as the individual or company defending the lawsuit. Second, proof of actual damages can be problematic because it is difficult to put a value on a stolen trade secret or put a value on the benefit a competitor obtained from the trade secret. Some defendants successfully take the approach in litigation that, “Yes, we took it, but it did not help us [or hurt the owner or the trade secret].” Therefore, a plaintiff many times ends up spending a large amount of money only to get no damages and an injunction telling the competitor not to use the trade secret. There is significant value in getting the injunction, but there would be more value if the plaintiff could also get its attorneys’ fees.

It is not entirely clear how the attorneys’ fees provisions of the UTSA, if enacted, would be enforced in Texas. The proposed legislation allows only a “prevailing party” to recover under certain circumstances. It is unclear whether obtaining an injunction and no actual damages would be sufficient to allow someone to be a prevailing party, which it is not under the TTLA. In addition to being a prevailing party, one of the following must also be true: (1) a claim for 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.

There are a few other provisions worth highlighting from the proposed legislation. The proposed legislation in Texas provides for a presumption in favor of granting protective orders to preserve the secrecy of trade secrets during the pending litigation. This change could do away with occasional disputes over whether to enter a protective order, which many attorneys in trade secret litigation now agree to put in place without the need for court intervention. The proposed statutory language also provides that reverse engineering is allowed in certain circumstances, which is also true under Texas common law. Finally, the proposed statutory language departs from the model UTSA and Texas common law by specifically including customer lists in the definition of a trade secret. Under Texas common law, some customer lists and other compilations of information are considered proprietary, but a fact intensive inquiry is involved to determine if a specific list is worthy of trade secret protection.

For more more information and analysis on the proposed legislation please see the excellent articles from Law360 and John Marsh.

We will keep you posted on this proposed legislation.