Texas Trade Secret Litigation: The Basics
by Michael A. McCabe and Jeffrey B. Chugg
What is a trade secret?
Texas courts have seen an explosion in trade secret cases in recent years. Simply put, trade secrets are valuable business information that a company seeks to keep confidential. Texas courts formally define a trade secret as “any formula, pattern, device or compilation of information which is used in one’s business and presents an opportunity to obtain an advantage over competitors who do not know or use it.” Computer Associates Int’l, Inc. v. Altai, Inc., 918 S.W.2d 453, 455 (Tex. 1996). For example, items such as customer lists, pricing information, marketing strategies, blueprints and drawings have all been shown to be trade secrets. Unlike patents, trade secret protection continues indefinitely—so long as the information remains a secret.
To be classified as a trade secret, information must, in fact, be secret. The party seeking trade-secret status must therefore establish a “substantial element of secrecy.” Failure to adequately protect the secrecy of information will result in denial of trade-secret status. Texas courts look to see whether reasonable security measures were taken in deciding whether trade-secret protection is warranted.
Businesses may maintain the secrecy of their trade secrets through a variety of methods, including the use of written company policies against the dissemination of confidential information. Non-disclosure agreements are also essential to companies that must disclose trade-secret information to others in the course of business.
Trade Secret Misappropriation
Texas courts provide a common-law cause of action for misappropriation of trade secrets. To establish a prima facie case of trade secret misappropriation, a plaintiff must show: (1) the existence and ownership of a trade secret; (2) breach of a confidential relationship or improper discovery of a trade secret; (3) use or disclosure of the trade secret; and (4) damages to the owner.
Texas courts use a six factor test to determine whether information qualifies as a trade secret. These six factors include:
(1) the extent to which the information is known outside the business;
(2) the extent to which it is known by employees and others involved in the business;
(3) the extent of measures taken by the employer to guard the secrecy of the information;
(4) the value of the information to the employer;
(5) the amount of effort or money expended by the employer in developing the information; and
(6) the ease or difficulty with which the information could be properly acquired or duplicated by others.
Information that is generally known and readily available in an industry will not qualify as a trade secret. Similarly, if a plaintiff fails to substantially protect the information, then trade-secret status will not be afforded.
To establish liability for a misappropriation claim, a plaintiff must show that the trade secret was acquired through improper means (such as theft or fraud) or through the breach of a confidential relationship (such as the employer-employee relationship).
A plaintiff must also show that the defendant used or disclosed the trade secret at issue and that a loss resulted from that use or disclosure. Evidence that a competitor developed a similar product may give rise to an inference of actual use.
Legal and Equitable Relief
Trade-secret misappropriation may result in both money damages and injunctive relief.
A plaintiff may be entitled to a temporary injunction to prevent the further use or disclosure of its trade secrets. A temporary injunction is proper if a trade-secret owner shows a probable right to recover on its cause of action, a probable injury in the interim, and that no adequate legal remedy exists.
A prevailing plaintiff in a misappropriation suit is entitled to actual and, if warranted, exemplary damages. Actual damages can be established through several methods. First, it may include the plaintiff’s lost profits. To recover lost profits, an injured party must put forth competent evidence to determine the amount of profits lost with reasonable certainty. Estimates of the amount of lost profits should be based on objective facts, figures or data.
If lost profits are too difficult to calculate, a court may instead grant the injured party a reasonable royalty. In determining a reasonable royalty award, courts attempt to measure the actual value of the trade secret that was misappropriated. In so doing, they calculate an amount that the parties would have agreed to in a theoretical negotiation for a license of the trade secret at issue.
Texas courts may also award exemplary damages if there is clear and convincing evidence of fraud, malice or gross negligence by the defendant.