In the fourth installment of our 2021 Trade Secrets Webinar Series, Seyfarth attorneys Jesse Coleman, Matt Simmons, and Kevin Green outlined recent legal developments in Texas trade secret and non-compete law and how it is similar to and diverse from other jurisdictions. The webinar also covered how these latest developments impact counseling, litigation, and deals involving companies with employees based in Texas.
As a conclusion to this webinar, we compiled a summary of takeaways:
- A restrictive covenant is a legal term for a clause in an employment contract (or a standalone agreement) that prevents an employee from doing something. Most often, restrictive covenants are designed to prevent a departing employee from competing with his/her former employer for clients or business.
- There are four types of restrictive covenants: 1) non-competition; 2) non-solicitation of customers; 3) non-solicitation of employees; and 4) non-disclosure. Common limitations relate to time, geographic or customer restrictions, and the departing employee’s scope of activity in their new employment.
- Trade secret can be elusive to define, but generally consists of: 1) identifiable information 2) not generally known to others (i.e. secret) 3) that is economically valuable and 4) subject to reasonable efforts to maintain secrecy. Famous example is Coca-Cola recipe, but trade secrets are not limited to products alone and can also be processes, confidential information such as business plans, and other know how.
- In over 90% of trade secret cases, the misappropriator is someone the trade secret owner knew (former employee or business partner). Vast majority of cases involve misappropriation by electronic means.
- Texas believes in the freedom to contract with certain statutory safeguards on the reasonableness of the restrictive covenant (non-compete, non-solicitation) as it relates to time, geographical area, and scope of activity restrained.
- Unlike other States, Texas does not have a minimum salary for the restrictive covenant to be enforceable or differentiate enforceability of the covenant based on whether the employee was terminated or resigned.
- Generally, Texas employee and customer non-solicitation covenants are adjudged based on the same reasonableness requirements as non-competes pursuant to Tex. Bus. & Com. Code Section 15.50(a).
- Generally, reformation of a restrictive covenant is required under Texas law; however, the timing of the reformation (during the initial stages of litigation or upon a final trial on the merits) is still an open question.
- In order to later revise restrictive covenant agreements, employer must provide additional consideration in Texas and it is highly recommended that such consideration is provided close in time to the employee’s execution of the new agreement.
- Texas enacted its own trade secret statute – the Texas Uniform Trade Secrets Act- in 2013, modeled on the Uniform Trade Secrets Act (UTSA), and amended in 2017 to align more closely to the federal Defend Trade Secrets Act (DTSA) and controlling case law.
- Minor differences exist in the definition of “trade secret” between TUTSA and DTSA, TUTSA lacks whistleblower immunity provisions and a specific mechanism for ex parte seizures, and TUTSA preempts related common law claims while the DTSA does not.
- TUTSA provides greater scope of injunctive relief to employers in cases of trade secret theft than DTSA but will not enjoin a departing employee from using general knowledge, skill, and experience acquired during the employment relationship.
- Texas appellate courts vary in applying the inevitable disclosure doctrine when granting injunctive relief under TUTSA, while the Texas Supreme Court recognizes that a competitive decision maker may not be able to resist acting on what they learn of a competitor’s trade secrets, even when acting in good faith.
- TUTSA provides similar monetary relief to both DTSA and UTSA, including actual losses, unjust enrichment, reasonable royalties, exemplary damages, and attorneys’ fees, under specific circumstances.