Patrick Keating

Texas Trade Secrets

An Important Conflict in Case Decisions

Conflicting Texas federal district court opinions have been issued on one aspect of the Texas Uniform Trade Secrets Act (“TUTSA”).  The issue in dispute is whether (1) a plaintiff must establish that the defendant originally used improper means to gain access to the trade secret or (2) it is sufficient for the plaintiff to show that the defendant used or disclosed the trade secret in violation of an obligation not to do so.

This is significant when you consider a common fact pattern in trade secret lawsuits.  The plaintiff claims that it voluntarily disclosed its trade secrets to the defendant either because the defendant was the plaintiff’s employee or because the defendant first signed a non-disclosure agreement.  If voluntary disclosure of trade secrets under these circumstances is fatal to the plaintiff’s claim, then much of TUTSA’s bite disappears.  The statute would be left to cover situations of overt theft – such as breaking into a company office to steal a trade secret or bribing an employee to disclose the trade secret.

Although three of the cases discussed below held that the plaintiff must prove that the defendant acquired the trade secret through improper means, those decisions conflict with the text of TUTSA.  Recent opinions reaching the opposite conclusion are also discussed below.

The (Incorrect?) Cases

In three different cases, federal district courts in the Western District (San Antonio division) and Southern District of Texas dismissed TUTSA claims because the plaintiff did not allege that the defendant acquired the trade secret through use of “improper means.”  The cases involved defendants who allegedly gained access to the plaintiffs’ trade secrets in return for entering into agreements restricting the defendants’ ability to use or disclose the trade secrets.  The plaintiffs alleged that the defendants later used or disclosed the trade secrets in violation of the contract restrictions.  In each case, the courts dismissed the plaintiffs’ claims based upon the reasoning that the plaintiff did not assert that the defendant acquired the trade secrets through “improper means.”

The courts concluded that TUTSA requires a plaintiff to show that the trade secrets were “acquired by improper means” (quotation a portion of the definition of “missapropriation” in TUTSA; Tex. Civ. Prac. & Rem. Code §134.002(3)(B)(i)).  As a practical matter, the courts held that the plaintiffs effectively disproved their own cases by admitting that the plaintiffs voluntarily disclosed the trade secrets to the defendants.  The defendants’ breach of a contract prohibiting use or disclosure of the trade secret was no evidence that the defendants acquired the trade secrets through improper means.  Thus, the courts dismissed the plaintiffs’ TUTSA claims.

The cases at issue are: Capstone Assoc. Services, Ltd. V. Organizational Strategies, Inc., No. H-15-3233, 2015 WL 9319239 at *2 (SD Tex. December 23, 2015); Education Management Services, LLC v. Tracey, 102 F.Supp. 3d 906, 914 (WD Tex. 2015); Education Management Services v. Mark Cadero, No. SA-14-CA-587 (WD Tex. San Antonio Division December 23, 2014) (Order Denying Motion for Reconsideration is unpublished and not on Westlaw, but can be obtained at item 26 at this link).

Interestingly, none of those cases discussed the following language from TUTSA, which appears to apply:

“‘Misappropriation’ means: . . . disclosure or use of a trade secret of another without express or implied consent by a person who . . . at the time of disclosure or use, knew or had reason to know that the person’s knowledge of the trade secret was . . . acquired under circumstances giving rise to a duty to the person seeking relief to maintain its secrecy or limit its use”

Tex. Civ. Prac. & Rem. Code §134.002(3)(B).

The plaintiffs alleged the defendants acquired access to the trade secrets while the defendants were under a duty to maintain secrecy or limit use of the trade secrets.  The plaintiffs also asserted that the defendants were aware of that fact and still disclosed or used the trade secrets without the plaintiffs’ consent.  Facially, this meets the statutory elements quoted above.

Contrary (Correct?) Opinions

In March 2016, a federal district court in the Austin Division of the Western District of Texas rejected a similar argument advanced by a defendant.  The plaintiff claimed that the defendant signed an employment agreement with the plaintiff prohibiting use or disclosure of the plaintiff’s trade secrets.  The plaintiff also claimed that the plaintiff granted the defendant access to the plaintiff’s “Broker List” during the course of the defendant’s employment.  Finally, the plaintiff alleged that, while still employed by the plaintiff, the defendant transmitted the Broker List to the defendant’s personal email address then used it in work for the defendant’s new employer.

The defendant sought to dismiss the plaintiff’s TUTSA claim asserting that the defendant did not use improper means to obtain the broker list.  The court denied the motion because a factual dispute existed over whether the defendant breached her duty to maintain the secrecy of the plaintiff’s trade secrets by using or disclosing the Broker List.  That duty arose under the parties’ contract and common law cited in the opinion.  Unfortunately, the opinion does not distinguish itself from or even discuss the other three cases discussed above.

The Austin Division opinion is: 360 Mortgage Group, LLC v. Homebridge Financial Services, Inc., No. A-14-CA-00847-SS, 2016 WL 900577 at *5 (WD Tex. March 2, 2016).

Another recent federal opinion holding that a plaintiff may still prevail on a TUTSA claim when the plaintiff disclosed its trade secrets to the defendant under circumstances imposing duties of secrecy or non-use upon the defendant is Emerald City Management, LLC v. Kahn, No. 4:14-cv-358 , 2016 WL 98751 at *19 (ED Tex. January 8, 2016) (employee allegedly gained access to passwords and customer lists during employment).

photo credit: Asphalt Street Arrows Left Straight via photopin (license)

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1 Comment

  1. Great post, Patrick. I’ve noticed Texas courts are not paying enough attention to the specific language of TUTSA, which supersedes Texas common law. This is yet another example. The definition of “misappropriation” is very broad.

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