Patrick Keating

Texas Trade Secrets

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Have Fears of the DTSA Matched Reality?

More than eight months elapsed since the federal Defend Trade Secrets Act (“DTSA”) went into effect in May 2016.  This and the beginning of a new year led to me to check into how the courts applied one aspect of the statute that initially caused alarm for some people. Continue reading

Jurors Don’t Understand Trade Secrets

When presenting theft of trade secret claims to a jury, it is important for the lawyer representing the Plaintiff to explain the difference between a trade secret and a patent.  It is common for a juror to begin a case with the incorrect belief that a business must obtain a patent to be able to protect business information or techniques in litigation.  The truth, however, is that trade secrets are an alternative form of intellectual property that courts enforce through awards of damages and injunctions.

Dallas jury consultant, Jason Bloom, recently conducted a survey of approximately 1,000 Dallas, Texas residents summoned for jury duty.  82% of the prospective jurors believed, “If someone has a trade secret, then they should get a patent on it.”  This is a reminder that an important part of presenting a trade secret case to a jury is explaining the difference between trade secrets and patents.

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NDA Tolling Clauses

When using a non-disclosure agreement or non-use agreement (collectively, a “NDA”) to protect trade secrets, a good practice is to include a tolling clause in the contract to extend the life of the NDA if the restricted party breaches the contract. 

Imagine a plaintiff who files a theft of trade secrets claim against a defendant who continuously violates a NDA.  If the lawsuit takes several years to complete, the NDA might expire before the plaintiff obtains a judgment.  The defendant would then argue that the plaintiff is not entitled to an injunction prohibiting the defendant’s further use or disclosure of the trade secrets because the NDA expired.  After all the defendant asserts, “Regardless of whether I breached the NDA, I am entitled to use the trade secrets once the contractual restrictions expire.”

To avoid this situation, include language in a NDA stating that the term of the NDA will be extended for the amount of time that the restricted party breaches the contract.

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Preemption: It’s Not Just for the Feds

Attorneys representing plaintiffs in theft of trade secrets lawsuits frequently use the “kitchen sink” approach when selecting the legal causes of action to assert on behalf of their clients.  In addition to a theft of trade secrets claim arising under the Texas Uniform Trade Secrets Act (“TUTSA”), lawyers tend to also assert alternative claims based upon the alleged theft of the trade secrets.  Examples of alternative claims are conversion, unjust enrichment and unfair competition.

As the saying goes, the fact that everyone does it does not make it right.

Section 134A.007 of TUTSA states that – with few exceptions —  the statute replaces other Texas law providing a remedy for misappropriation of a trade secret.  This is known as preemption.  You might expect defendants in TUTSA lawsuits to frequently raise preemption as a basis for dismissing some of the claims asserted against them.  Yet if they are, the issue is not making it into the case law.

I was only able to find one case considering the extent to which TUTSA preempts other legal claims.  In March 2016, United States District Judge Sam Sparks issued an opinion holding that TUTSA preempts a plaintiff’s alternative legal claims unless the plaintiff can show that the alternative claim is based on facts unrelated to the misappropriation of the trade secret.  That opinion is 360 Mortgage Group, LLC v. Homebridge Financial Services, Inc., No. A-14-CA-00847-SS, 2016 WL 900577 (March 2, 2016 W.D. Tex.).

Judge Sparks also addressed the thorny issue of how TUTSA preemption applies when a plaintiff claims that the business information stolen by the defendant includes both (i) trade secrets and (ii) other business information that does not qualify as a trade secret.  Does TUTSA preempt alternative legal claims based upon the theft of the non-trade secret information?  Judge Sparks says the answer is yes.

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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. Continue reading

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