Texas Theft of Trade Secrets

Theft of Trade Secrets in Texas

In order for a business to be successful, it often uses information or practices that give it a competitive edge. Protecting that edge means protecting trade secrets. Often tied to production, such as a machine or a process, protecting this proprietary information is essential to the operation of the business. Hyde Corp v. Huffines, 158 Tex. 566, 586, 314 S.W.2d 763, 776, 117 U.S.P.Q. Because the trade secret is not fully or easily available to others, it provides economic value for the company, and the company actively maintains secrecy around it.

Definitions of Trade Secrets

While many people can easily agree that stealing a company’s ideas or data is not an acceptable practice, Texas courts have had some difficulty consistently interpreting what actually falls under the definition of trade secret, making enforcement a challenge.  Previously, Texas used a six-question system to determine whether or not information falls under the definition of a trade secret: the extent to which the information is known outside of the business seeking to protect it; the extent to which it is known to employees and others involved in the business in question; the extent of the measures taken by the business to guard the secrecy of the information; the value of the information to the business and its competitors; the money or effort expended by the business in developing the information; and the ease or difficulty with which others might properly acquire or duplicate the information.

Though these questions helped parties discern whether their data qualified as a trade secret, different courts focused on different aspects of the misappropriation, leading to divergent legal outcomes. Some courts, for example kept the focus on defining whether a trade secret actually existed. See In re Bass, 113 S.W.3d 735 (Tex. 2003).  Others focused on the competitive advantage that might result from a trade secret. See Triple Tee Golf, Inc. v. Nike, Inc., 485 F.3d 253 (5th Cir. 2007). While still others focused on whether or not the trade secret entails “continuous use in the operation of the business.” See CQ, Inc. v. TXU Min. Co., 565 F.3d 268 (5th Cir. 2009) (quoting Restatement of Torts § 757, cmt. b.). These differing interpretations eventually led to statutory changes in 2013.

The Texas Uniform Trade Secrets Act

Passed in 2013 as part of chapter 134A of the Texas Civil Practice and Remedies Code, the Texas Uniform Trade Secrets Act (TUTSA), more clearly defines what exactly qualifies as a trade secret and provides more uniform solutions to protect trade secrets. According to TUTSA, a trade secret is "information, including a formula, pattern, compilation, program, device, method, technique, process, financial data, or list of actual or potential customers or suppliers that (1) 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 (2) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy." See Tex. Civ. Prac. & Rem. Code § 134A.002(6).

Any claims or alleged instances of misappropriation of trade secrets filed after September 2013 are subject to the new Texas trade secret statute.

Common Scenarios for Misappropriation of Trade Secrets

Theft of a trade secret may be a civil offense. If found liable, an individual may be required to pay economic costs, other damages, and attorney’s fees. Additionally, under the Texas Penal Code § 31.05 and the Federal Economic Espionage Act of 1996, 18 U.S.C. § 1832, misappropriating a trade secret may also be prosecuted as a criminal act. However, any trade secrets shared in the process of reporting or investigating a violation of law or shared as part of a complaint or documentation in a court proceeding may be exempt from criminal prosecution.

As part of the hiring process, employees often sign an agreement to protect the company’s trade secrets. Commonly, a contract includes a non-disclosure agreement, consenting to protect information, directly and indirectly, from other people or companies who might benefit from that information. In this section of the contract, the company clearly outlines which information or practice belongs exclusively to the company. If during the course of employment, an employee has obligations or expectations which conflict the company, the employee agrees to inform the employer in writing of those conflicts. This non-disclosure agreement may even remain in effect for 1-2 years after employment ends.

Another common component of an employment contract is the employee’s agreement to return any and all confidential company resources, including electronic copies of information. Intellectual property such as patents, copyrights, or trademarks related to a company’s product also belongs to the company and should be relinquished to the employer when the employee leaves the company.

Employees also agree not to solicit company clients or other employees, directly or indirectly, often for two years after employment ends. In addition, the employee agrees to limit competition in the market area in order to minimize the possibility of sharing information or soliciting clients.

Failure to comply with any of these agreements makes the employee vulnerable to a Cease and Desist Notice. A party who does not comply is subject to a lawsuit. Even complying with the Cease and Desist Notice can be costly since the former employee may be responsible for damages as well as costs and expenses of experts such as a forensics investigator to ensure that all information has been destroyed or turned over to the company.

By signing an employment contract, an employee may be agreeing to more than he or she realizes. At the same time, an employer might not be protecting company interests effectively without a quality employment agreement. Having a qualified business lawyer review an employment contract is advisable in order to fully understand and protect the rights of both the company and the employee.

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