Like beauty, victory can be in the eye of the beholder. A plaintiff who establishes all of the necessary elements of a theft of trade secrets will typically be entitled to an injunction prohibiting the defendant from using the trade secrets. However, this is not guaranteed. If the court determines that “exceptional circumstances” exist, the court may permit the defendant to continue use of the misappropriated trade secrets provided that the defendant pays a reasonable royalty to the plaintiff. When this occurs, the plaintiff may view the court’s judgment as an imperfect victory because the plaintiff has not regained its prior monopoly on use of the trade secrets.
No Texas appellate decision has yet examined what qualifies as “exceptional circumstances” under the Texas Uniform Trade Secrets Act (“TUTSA”). The text of the statute provides the following, non-exclusive, example:
Exceptional circumstances include a material and prejudicial change of position before acquiring knowledge or reason to know of misappropriation that renders a prohibitive injunction inequitable.
The commentary to the 1985 Uniform Trade Secrets Act (“UTSA”) explains that this refers to the situation where a person acquires a misappropriated trade secret in good faith and without reason to know about the misappropriation. The commentary states that a court may weigh the interests of the aggrieved party against the interests of the party who relied in good faith upon the ability to use the trade secrets to determine whether an injunction prohibiting use is warranted. UTSA 1985 Commentary, pp. 8-9. Therefore, the greater the level of the detrimental reliance by the good faith acquirer, the more likely that a court will permit that party to continue using the trade secret conditioned upon paying a royalty to the plaintiff. For example, a good faith purchaser of the assets of a business who pays a large amount to the seller may satisfy the “exceptional circumstances” test.
What is not apparent from the face of TUTSA is that a court may implement this form of royalty injunction even when the defendant is not a good faith acquirer of the trade secrets. It will be interesting to see whether Texas courts implement royalty injunctions in any of the following situations that have arisen in cases outside of Texas or develop new “exceptional circumstances.”
UTSA’s commentary states that “exceptional circumstances” also include situations where there is an overriding public interest that justifies denying a prohibitory injunction. The commentary cites a New York case as an example where a court denied a request for an injunction prohibiting the defendant from supplying the U.S. government with aircraft weapon control systems because doing so would have endangered American military personnel in Viet Nam. UTSA 1985 Commentary, p. 8.
A court in Washington permitted a defendant to continue using the plaintiff’s trade secrets provided that the defendant pay a royalty to the plaintiff for the amount of time it would have taken the defendant to reverse engineer the trade secrets.
An opinion by the Federal Circuit notes that the district court stayed a prohibitory injunction and imposed a ten percent royalty on the defendant’s net sales while the defendant appealed the judgment.
What all of this shows us is that a victorious plaintiff will not always be able to stop the defendant from using the plaintiff’s trade secrets. There will be some exceptional circumstances where the defendant will be allowed to continue its operations – although, burdened with a royalty obligation.