Protecting Trade Secrets – Part 2

So what are the laws of Texas that protect the holders of  "trade secrets"?  My potential client wants to hear them, so he can sleep at night after disclosing his great new idea to a prospective funder — who signed a written confidentiality and NDA with my prospective client BEFORE getting a peek at the "trade secret."  (That's my hopeful assumption.)

Here are two — one criminal, one civil.  There may be others (but this blog would go on too long to discuss them), including  breach of fiduciary duty (depending upon the relationship between the parties), tortious interference, unfair competition, and liability for theft under the Texas Theft Liability Act.  However, exactly which alternative causes of action survive after enactment of the Texas Uniform Trade Secrets Act (see discussion below) isn't yet definite, because that Act states that it "displaces" all conflicting tort law and other laws providing civil remedies for trade secret misappropriation.

I point out to my potential client that theft of a "trade secret" is a third degree felony under Texas criminal law — two to ten years in state prison, plus a fine of up to $10,000.  Section 31.05 of the Penal Code makes it a criminal offense for anyone "without the owner's effective consent" (that's one critical reason for obtaining a signed NDA before disclosing the trade secret — otherwise, there may be some doubt, or some "he said, he said" argument, as to whether my potential client consented to the third party's misconduct) to knowingly do ANY of the following:

  • steal a trade secret
  • make a copy of an article (a writing, drawing, sample, object, device, etc.) representing a trade secret
  • communicate or transmit a trade secret.

The definition of "trade secret" under the Penal Code is broad.  For example, a trade secret includes ANY PART of scientific or technical information, design, process, procedure, formula or improvement PROVIDED that (1) it has value AND (2) the owner has taken steps to protect it from access by anyone other than those persons the owner chooses to disclose it to for limited purposes.  If you reread (2), then you recognize ANOTHER reason for my potential client not to show his special idea to any possible funding source who hasn't first signed a NDA.

But criminal prosecution is a big, big thing; will require the victim's persuading the District Attorney (usually) to vindicate his rights; and has a higher standard of proof to meet than would apply in a noncriminal tribunal.  (On the other hand, the word "felony" is a pretty powerful noun that may cause a third party some hesitation, if he is tempted to steal the trade secret, copy it, or disclose it.)

On the civil side, Texas adopted its version of the Uniform Trade Secrets Act in 2013 (Chapter 134A of the Civil Practice and Remedies Code).

The Texas Uniform Trade Secrets Act offers my potentially wronged potential client three tools against the person who misuses or wrongly discloses his trade secret (or tries to):

  • Injunctive relief by a court against actual or threatened misappropriation
  • Monetary damages, including not only actual loss suffered by my potential client but also recovery from the bad actor of the profits he gained from his bad conduct (called his "unjust enrichment"); or in lieu of those damage measures, the court may impose a royalty for the benefit of the true owner on the bad actor's wrongful disclosure or use of the trade secret; PLUS, if that actor's misappropriation was "willful and malicious," my potential client may recover treble damages
  • Attorney fees.  This goes right to the heart of my potential client's worry that he won't be able to afford an attorney to pursue the wrongdoer, because where the court determines the misappropriation was "willful and malicious" it may award attorney's fees.

The definition of "trade secret" under the Texas Uniform Trade Secrets Act is far broader — as you would expect — than it is under the Penal Code.

A "trade secret" entitled to protection under the Texas Uniform Trade Secrets Act means ANY INFORMATION with two characteristics:

  1. it has economic value that comes from NOT being generally known by others and not being something they can readily obtain by proper means, and which would have economic value to them if they could use or disclose it;
  2. its reasonable owner has exercised reasonable efforts to keep the information secret (recognize another reason to insist on a NDA?)

So my potential client ought to feel pretty secure about demonstrating or disclosing his great new idea to third party investors, lenders or other capital sources BUT ONLY IF he has taken reasonable steps to guard the privacy of his idea, including  getting the other person to sign a confidentiality agreement and NDA BEFORE sharing the "trade secret."

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