Texas Trade Secret Law

How does Texas law protect your company's trade secrets?

They say everything is bigger in Texas, and intellectual property is no exception. Particularly given the state's prominence in the energy and tech industries, Texas companies rely on proprietary information as a core part of their business. They want to protect trade secrets like their customer lists, sensitive marketing information, non-patented inventions, software, formulas and recipes, techniques, processes, and other knowledge that gives them a business edge. How does Texas law help to safeguard such trade secrets?

What Is the Legal Definition of a Trade Secret?

Trade secrets often comprise customer lists, sensitive marketing information, non-patented inventions, software, formulas and recipes, techniques, processes, and other business information that provides a company with a business edge. Legall speaking, information is more likely to be considered a trade secret if it is:

  • not known outside of the particular business entity
  • known only by employees and others involved in the business
  • subject to reasonable measures to guard the secrecy of the information
  • valuable, and
  • difficult for others to properly acquire or independently duplicate.

Many Texas businesses will attempt to protect their trade secrets by the use of nondisclosure agreements (NDAs). NDAs are essentially private contracts in which the employee promises not to disclose certain information learned while working for a prior employer to a future employer.

For example, imagine that you own an energy company in Dallas. You have developed certain methods of energy production that give you a competitive edge, by allowing you to collect oil more efficiently than other similar businesses. You have your employees sign an NDA, so that if they leave for a competitor, they are contractually obligated not to share the information about oil production that they have learned while working for you.

If you believe that an employee has violated this obligation, you can sue for breach. This threat of litigation is often enough to prevent employees from stealing trade secrets.

The Law on Misappropriation of Trade Secrets in Texas

Texas is one of the last states to have adopted the Uniform Trade Secrets Act (UTSA). It is codified as Tex. Civ. Prac. & Rem. Code Ann. § 134A.001. Texas’s version of the UTSA also includes customer lists and financial data, making it slightly different from some other states.

The statute defines a trade secret as "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."

Texas’s version of the UTSA refers to the theft of trade secrets as misappropriation. Under Texas law, "misappropriation" refers to the "acquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means; or (B) disclosure or use of a trade secret of another without express or implied consent..." through improper means, such as theft, bribery, misrepresentation, breach or inducement of a breach of duty to maintain secrecy.

It also includes the disclosure or use of a trade secret without consent by someone who used improper means to acquire knowledge of the trade secret, for example, an ex-employee who spills company secrets to a rival.

Texas's "Reason to Know" Standard

Texas prohibits use of trade secrets by a company that has “has reason to know” that the material constitutes a trade secret. This is known as constructive knowledge (versus actual knowledge). In other words, even if a Texas company was unaware it possessed purloined trade secrets, it can still be prosecuted under Texas law if it should have known.

Penalties for Misappropriation of Trade Secrets in Texas

Under Texas law, a trade secret thief can be prevented from disclosure by court order, known as an injunction. This is true for both actual or threatened misappropriation.

The injunction may be terminated when the trade secret has ceased to exist, or may be continued for an additional reasonable period of time in order to eliminate any commercial advantage that otherwise would be derived from the misappropriation. In exceptional circumstances, an injunction may condition future use upon payment of a reasonable royalty for no longer than the period of time for which use could have been prohibited. Exceptional circumstances can mean a theft so bad that the court order would be rendered meaningless.

A victim of trade secret theft can also seek financial compensation based on the actual loss attributed to the theft or the profits (or “unjust enrichment”) acquired by the trade secret thief. In egregious situations, a Texas court can award punitive damages up to twice the amount of any award. Attorney fees will also be awarded in egregious (willful and malicious) situations or if a claim is brought in bad faith.

Texas Statute of Limitations for Bringing Suit Over Misappropriation

Pursuant to Tex. Civ. Prac. & Rem. Code Ann. § 16.010, an action for misappropriation must be brought within three years after the misappropriation is discovered or by the exercise of reasonable diligence should have been discovered.

Federal Law on Trade Secrets

In addition to Texas’s rules regarding trade secrets, certain federal rules also apply in Texas. The Economic Espionage Act of 1996 makes the theft of trade secrets a federal crime. The Act prohibits the theft of a trade secret by a person intending or knowing that the offense will injure a trade secret owner.

The Act also makes it a federal crime to receive, buy, or possess trade secret information knowing it to have been stolen. The Act’s definition of “trade secret” is similar to that of the Uniform Trade Secrets Act. The penalties for a violation of this statute include a potential prison term of 15 years and fines up to $5 million, depending on whether the defendant is an individual or a corporation. A private party can still sue for trade secret theft even if the federal government files a criminal case under the Economic Espionage Act.

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