2-3 TRADE SECRETS UNDER TUTSA

• Jurisdiction: United States

2-3 Trade Secrets Under TUTSA

TUTSA attempted to resolve these common law issues by, among other things, regularizing how Texas courts defined trade secrets. The statute begins by setting forth a non-exhaustive list of the types of information entitled to trade secret protection, "all forms and types of information including business, scientific, technical, economic, or engineering information, and any formula, design, prototype, pattern, plan, compilation, program device, program, code, device, method, technique, process, procedure, financial data, or list of actual or potential customers or suppliers."¹³ Notably, this list includes both "financial data" and a "list of actual or potential customers or suppliers"—two categories omitted from the definition of a "trade secret" in the UTSA (the model statute on which the Texas Legislature based TUTSA).¹⁴

After listing these broad categories of potentially protected information, TUTSA imposes two conditions for determining whether the information within those categories does, in fact, qualify as a trade secret. The first condition is that the "owner of the trade secret . . has taken reasonable measures under the circumstances to keep the information secret."¹⁵ The second is that the information must "derive[] independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, another person who can obtain economic value from the disclosure or use of the information."¹⁶

Before addressing t hese elements in detail, however, it is import ant to remember that TUTSA is a new law. By its own terms, the common law still exclusively applies to claims based on misappropriations occurring before September 1, 2013, or to claims for misappropriations based on "continuing acts." However, in the transition to TUTSA, courts have bridged this gap by looking to decisions from other states that have adopted statutes similar to TUTSA.¹⁷ More importantly, except where expressly contrary to the statutory language, Texas courts have revived the pre-TUTSA common law decisions discussed above to interpret and give color to this statute.¹⁸

This means that TUTSA's stark treatment of pre- and post-September 1, 2013 claims is not as clear cut as the statutory language appears. As a result, while this book's primary focus is the Texas trade secret regime established by TUTSA, we will nevertheless rely on pre-TUTSA case law where those decisions spotlight TUTSA's provisions. In doing so, judgment is required because some courts have cautioned against relying too extensively on pre-TUTSA common law in analyzing post-TUTSA claims.¹⁹

2-3:1 "Reasonable Efforts to Maintain Secrecy"

TUTSA requires the plaintiff to have undertaken "efforts that are reasonable under the circumstances to maintain" the information's secrecy. The qualifier "reasonable" means that the plaintiff need not go to extreme or costly lengths to protect its trade secrets from espionage. While reasonableness depends on the circumstances of each case, there is no shortage of cases discussing the reasonable measures the plaintiff can take to maintain its trade secrets. Various combinations of the following measures have been deemed reasonable enough to maintain the secrecy of the alleged trade secrets:

• limiting internal disclosure of trade secrets to only those employees who need access to carry out their job responsibilities;²⁰
• requiring employees or third parties who obtain access to the trade secret to sign confidentiality or nondisclosure agreements;²¹
• placing the trade secret in a locked room or vault accessible only by key card or password;²²
• maintaining the information in a password protected database;²³
• locating plants or facilities in inaccessible or remote places;²⁴
• posting security guards at entrances and exits of locations where trade secrets are accessible;²⁵
• requiring an access card or security clearance to enter locations where trade secrets are accessible;²⁶
• checking material going in and out of a location where trade secrets are accessible;²⁷
• immediately blocking access to trade secret information upon termination of an employee;²⁸ and
• regularly training employees on their confidentiality obligations.²⁹

It's important to note that the same evidence demonstrating reasonable efforts by the plaintiff to protect its trade secrets can also be used to establish the other elements of "value" and "secrecy" discussed above.³⁰

2-3:2 "Independent Economic Value, Actual or Potential"

To qualify under TUTSA, a trade secret must "derive independent economic value, actual or potential" from the fact that it is either not "generally known" or not "readily ascertainable through proper means." Information has "independent economic value" if its hypothetical use by a competitor would somehow disadvantage the trade secret owner.³¹ Passwords, for example, fail to qualify under TUTSA because alone they lack inherent "independent economic value" to the company.³² By contrast, a compilation of publicly available names and compensation rates for mortgage brokers did exhibit "independently valu[e]" under TUTSA because, although public, the plaintiff undertook the expense of researching and compiling the list, and a hypothetical competitor could use the list to undercut the plaintiff's pricing.³³

As a practical matter, a plaintiff can establish the trade secret's economic value in any number of ways. For instance, in In re Bass the Texas Supreme Court allowed the plaintiff to prove the trade secret's value by relying on expert testimony that the information at issue was worth between $800,000 and $2.2 million—a fairly imprecise range.³⁴ Not only does In re Bass show that expert testimony suffices to establish a trade secret's value, but it also highlights that the value ascribed to the alleged trade secret need not be a precise calculation.³⁵ Rather, a range—even one of $1.4 million—appears to satisfy the requirement.

Expert testimony is not the only way to establish value. A plaintiff can also show the value of its trade secret through affidavit or deposition testimony.³⁶ Beyond this, the plaintiff can introduce evidence of third-party offers to acquire or license the claimed secret as evidence of the trade secret's value.³⁷ Or, a plaintiff can simply have an employee testify at trial detailing how the information took substantial time and effort to develop.³⁸ Other recent cases used internal employee emails to show both the value of and the difficulty in reproducing the trade secrets at issue.³⁹

One decision even found that the plaintiff had offered sufficient evidence of the trade secret's value because (1) other companies partnered with the plaintiff to obtain access to the trade secret; and (2) third-party investors viewed the company as worth more than $27 million.⁴⁰ To be clear, where the alleged trade secret makes up only one element of a broader product or process, the plaintiff usually must offer evidence that that the specific aspect of the product claimed to be a trade secret is itself valuable and not just the product or process as a whole.⁴¹ But, apart from this, plaintiffs can proceed down any number of evidentiary paths to show the value of its trade secret.

2-3:2.1 "Not Generally Known"

Beyond economic value, TUTSA requires the plaintiff to prove that the trade secret is not "generally known" to others in the same business or industry. In other words, no trade secret exists if the plaintiff's competitors—i.e., those who can benefit from the information's use—already know about it. This is true even if the information remains otherwise secret to the general public.⁴²

Along these lines, where information is "so common, well known or readily ascer-tainable that it lacks all novelty, uniqueness and originality, it necessarily lacks the element of privacy necessary to make it legally cognizable as a trade secret."⁴³ Thus, courts deny trade secret status to information that can be easily gathered through mere observation.⁴⁴ That said, unlike patent law, TUTSA does not require novelty or uniqueness to protect trade secrets.⁴⁵ Moreover, a collection of components or characteristics, each of which is in the public domain, can combine to qualify as a trade secret if those components together afford the plaintiff a competitive advantage.⁴⁶

Limited disclosure of trade secret information does not alone destroy its protected status.⁴⁷ The reason for this is simple: "[t]o hold otherwise would greatly limit the holder's ability to profit from his secret."⁴⁸ Thus, under TUTSA, a plaintiff can disclose its trade secret in order to advance its economic interests provided that the plaintiff takes proper measures to restrict any further disclosure.⁴⁹ A business can therefore provide its employees with access to its trade secrets if, among other things, those employees agree to maintain the information's secrecy in a confidentiality or nondisclosure agreement.⁵⁰ Of course, unlimited disclosure, such as the type of information disclosed in a patent application, does not retain its secrecy.⁵¹ The same goes for information indiscriminately disclosed in marketing materials.⁵² In the litigation context, however, inadvertent public disclosure also does not destroy the trade secret's protected status.⁵³

One way a plaintiff can establish that information is "not generally known" is to examine the actions of the individual alleged with misappropriating the information. One court found that a customer list was "not generally known" because the defendant, a departing employee, had emailed herself that customer list upon her departure from the company, suggesting that she could not otherwise obtain the information from a public source.⁵⁴

Another way to establish that information is not generally known is to offer proof of the measures taken by the plaintiff to ensure the information's secrecy, including where the information is kept. This overlaps with the...