“IF IT AIN’T BROKE – DON’T FIX IT” A BROAD REVIEW OF TEXAS

“IF IT AIN’T BROKE – DON’T FIX IT” A BROAD REVIEW OF TEXAS TRADE SECRET LAW

WILLIAM M. PARRISH STEFANIE SCOTT

DiNovo Price Ellwanger & Hardy LLP 7000 N. MoPac Expressway, Suite 350

Austin, Texas 78731 Telephone: 512-539-2628 Facsimile: 512-539-2627

[email protected]

State Bar of Texas 23RD ANNUAL ADVANCED

INTELLECTUAL PROPERTY LAW COURSE March 4-5, 2010

Austin

CHAPTER 5.2

Texas Trade Secret Law Chapter 5.2

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TABLE OF CONTENTS

I. “TRADE SECRET “DEFINED” .........................................................................................1 A. Restatement of Torts § 757, Comment b (1939)......................................................1 B. Restatement (Third) of Unfair Competition § 39 (1995). ........................................1 C. Uniform Trade Secrets Act (UTSA). .......................................................................2 D. Economic Espionage Act of 1996, 18 U.S.C. § 1831, et. seq. .................................3 E. Texas Case Law. ......................................................................................................3 F. Texas Penal Code § 31.05(a)(4). ..............................................................................3

II. DETERMINING IF A TRADE SECRET EXISTS.............................................................4 A. Substantial Secrecy Not Absolute Secrecy Is Required. .........................................4 B. Factors Considered...................................................................................................6

III. CAUSES OF ACTION FOR TRADE SECRET MISAPPROPRIATION .........................8 A. Uniform Trade Secrets Act, § 1(2). .........................................................................9 B. Restatement (Third) Unfair Competition § 40. ........................................................9 C. Texas Standard for Misappropriation. ...................................................................10 D. Other Causes of Action to Consider. .....................................................................12

IV. Remedies for Misappropriation of Trade Secrets ..............................................................13 A. Injunctive Relief .....................................................................................................14 B. Damages .................................................................................................................15

V. CONCLUSION ..................................................................................................................23


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Unlike some other areas of intellectual property law such as patent law, copyright law and trademark law, there is no federal statutory law governing claims for misappropriation of trade secrets. Trade secrets are a creature of state law. Consequently, a litigator preparing a case for misappropriation of trade secrets must look to the laws of the state or states that are relevant to the claim at hand in order to determine (a) how those states define a trade secret; (b) what the elements of the cause of action for trade secret misappropriation are in those states; and (c) the remedies which may be available in those states. As of January 2010, 45 states along with the District of Columbia and the U.S. Virgin Islands have adopted the Uniform Trade Secrets Act (“UTSA”) or at least a version of the UTSA with some independent modifications. Texas has not adopted the UTSA. There some who argue that Texas should adopt the UTSA. There are others who argue that Texas has gotten along by fine for all these years without adopting the UTSA and “if it ain’t broke, don’t fix it.” In order to intelligently decide whether we need a change, we need to understand the current status of the law. This article is intended to provide a broad overview of the law as it relates to claims for trade secret misappropriation, with an emphasis on Texas law.

I. TRADE SECRET DEFINED

There are a number of different sources that can be consulted for an accepted definition of a “trade secret.”

A. Restatement of Torts § 757, Comment b (1939).

Historically, Texas courts and other courts have often looked to Section 757, Comment b, of the Restatement of Torts for the definition of a trade secret. Comment b

provides as follows:

A trade secret may consist of any formula, pattern, device or compilation of information which is used in one’s business and which gives him an opportunity to obtain an advantage over competitors who do not know or use it. It may be a formula for a chemical compound, a process of manufacturing, treating or preserving materials, a pattern for a machine or other device, or a list of customers. A trade secret is a process or device for continuous use in the operation of the business. Generally it relates to the production of goods, as, for example, a machine or formula for the production of an article. It may, however, relate to the sale of goods or to other operations in the business such as a code for determining discounts, rebates or other concessions in a price list or catalogue, or a list of specialized customers, or a method of bookkeeping or other office management.

The Texas Supreme Court adopted this definition of a trade secret in 1958 in the seminal case Hyde Corp. v. Huffines, 314 S.W.2d 763, 776 (Tex. 1958), cert. denied, 358 U.S. 898 (1958), and this definition was followed for years by Texas courts and continues to be cited.

B. Restatement (Third) of Unfair Competition § 39 (1995).

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Trade Secret Law Chapter 5

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The cause of action for misappropriation of trade secrets has been moved from the Restatement of Torts to the Restatement (Third) of Unfair Competition. Section 39 of the Restatement (Third) Unfair Competition defines a trade secret as follows:

A trade secret is any information that can be used in the operation of a business or other enterprise that is sufficiently valuable and secret to afford an actual or potential economic advantage over others.

Comment d to Section 39 illustrates, with a non-exclusive list, subject matter that may qualify for trade secret status:

A trade secret may consist of a formula, pattern, compilation of data, computer program, device, method, technique, process or other form or embodiment of economically valuable information. A trade secret may relate to technical matters such as a composition or design of a product, a method of manufacture, or the know-how necessary to perform a particular operation or service. A trade secret may also relate to other aspects of business operations such as pricing and marketing techniques and the identity or requirements of customers.

C. Uniform Trade Secrets Act (UTSA).

As noted above, the UTSA or some

variation thereof, has been adopted by 45 different states, the District of Columbia and the U.S. Virgin Islands. Section 1(4) of the UTSA provides the following definition of trade secret:

“Trade secret” means: information, including a formula, pattern, compilation, program, device, method, technique, or process, that: (1) derives independent economic value, actual or potential, from not being generally known and not being readily ascertainable by proper means by other persons who can obtain economic value from its disclosure of use, and (2) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.1

The comments to the UTSA as amended in 1985 prepared by the Committee of the National Conference of Commissions on Uniform State Laws, point out that this definition of “trade secret” is a departure from the Restatement of Torts definition because it eliminates the requirement that the secret be “continuously used in one’s

1 It should be noted that some states who have adopted a version of the UTSA modify the definition of “trade secret” to include additional enumerated items. For example, the definition in the Georgia statute specifically includes “financial data, financial plans, product plans or a list of actual or potential customers or suppliers which is not commonly known by or available to the public”. GA. CODE

ANN. § 10-1-761(4) (2009). The Illinois statute also specifically includes financial data and lists of actual or potential customers or suppliers in its definition of “trade secrets”. 765 ILL. COMP. STAT. ANN. § 1605/2 (d).


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business.” The comments point out that the UTSA definition extends protection to a plaintiff who has not yet had an opportunity or acquired the means to put the secret to use. The comments also indicate that the definition applies to negative know-how.

D. Economic Espionage Act of 1996, 18 U.S.C. § 1831, et. seq.

Another definition of “trade secret” is found in § 1839(s) of the Economic Espionage Act of 1996, which provides:

(3) [T]he term “trade secret” means all forms and types of financial, business, scientific, technical, economic, or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs or codes, whether tangible or intangible, and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing if –

(A) the owner thereof has taken reasonable measures to keep such information secret; and

(B) the information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by the public.

E. Texas Case Law.

Under Texas law, the definition of a trade secret is short and sweet and very broad.

A trade secret is 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 Assocs. Int’l v. Altai, Inc., 918 S.W.2d 453, 455 (Tex. 1996); In re Cooper Tire & Rubber Co., No. 14-09-00906-CV, 2010 WL 343509, at *2 (Tex. App.—Houston [14th Dist.] Feb 2, 2010); CQ, Inc. v. TXU Min. Co., L.P., 565 F.3d 268, 274 (5th Cir. 2009). A 2008 unpublished Fifth Circuit decision does a good job of laying out Texas law on the issue. Nova Consulting Group, Inc. v. Engineering Consulting Services, Ltd., No. 07-50832, 2008 WL 3889995 (5th Cir. Aug. 22, 2008). There are a number of factors that Texas courts will consider in determining whether information meets this definition and constitutes a trade secret (explored in detail below).

F. Texas Penal Code §

31.05(a)(4).

Texas also penalizes theft of trade secrets under criminal law. Section 31.05(a)(4) of the Penal Code sets forth the following definition:

Trade secret means the whole or any part of any scientific or technical information, design, process, procedure, formula or improvement that has value and that the owner has taken measures to prevent



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from becoming available to persons other than those selected by the owner to have access for limited purposes.

II. DETERMINING IF A TRADE

SECRET EXISTS

A. Substantial Secrecy Not Absolute Secrecy Is Required.

By definition, information must be "secret" to constitute a trade secret. If the information is common or widespread knowledge, if the information is commonly known within a particular industry, or if the putative trade secret can be learned by examining the product itself, it cannot constitute a trade secret and is not entitled to protection.

The subject matter of a trade secret must be secret. Matters of public or general knowledge in an industry cannot be appropriated by one as his secret. Matters which are completely disclosed by the goods which one markets cannot be secret. Substantially, a trade secret is known only in the particular business in which it is used.

RESTATEMENT (FIRST) OF TORTS § 757 cmt. b (1939) (emphasis added).

Under Texas case law, absolute secrecy is not required as long as the information sought to be protected as a trade secret is not generally known or readily ascertainable by independent investigation. H.E. Butt Grocery Co. v. Moody’s Quality Meats, 951 S.W.2d 33, 35 (Tex. App.- Corpus Christi 1997, den.). However, there must be a

substantial element of secrecy and the owner of a trade secret must take reasonable steps to protect the information claimed to be a trade secret. J.C. Kinley Co. v. Haynie Wire Line Serv., 705 S.W.2d 193, 196 (Tex. App.- Hou. 1985, ref. n.r.e.)

In today’s business environment, trade secrets often must be disclosed to some people in order to obtain a commercial advantage. Many business functions are outsourced or are performed with or by outside contractors or business partners. Whether in the factory, the board room, or the accounting department, the owner of a trade secret will generally need to share its secret to some degree. The Restatement and case law recognize the need for limited disclosures. RESTATEMENT (FIRST) OF

TORTS § 757 cmt. b (“It is not requisite that only the proprietor of the business know it. He may, without losing his protection, communicate it to employees involved in its use.”) Similarly, a trade secret owner may need to discuss her “secret” with others outside the company in order to obtain materials, engage in business with others, or manufacture its product. Such disclosure does not forfeit trade secret protection if there is an agreement or implied obligation not to further disclose the information. Id. (“[One] may likewise communicate [a trade secret] to others pledged to secrecy.”).

1. Implied Duty of Non-Disclosure.

While it is always best to obtain written non-disclosure agreements, Texas courts sometimes imply such a pledge of secrecy in certain contexts—e.g., a due diligence review in connection with a merger and acquisition, or in an employment relationship. See H.E. Butt Grocery Co. v. Moody’s Quality Meats, Inc., 951 S.W.2d 33, 36 (Tex. App.—Corpus Christi 1997, pet. denied) (negotiations relating to sale of







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a business constituted confidential relationship); see also Miller Paper Co. v. Roberts Paper Co., 901 S.W.2d 593, 600-01 (Tex. App.—Amarillo 1995, no writ) (employee has a continuing duty not to disclose trade secret information where the employee knows or should know that employer wants information kept secret); Hewlett-Packard Co. v. Byd Sign, Inc., 2007 U.S. Dist. LEXIS 5323, at *26-27 (E.D. Tex. January 25, 2007) (misappropriation of employer's proprietary information with intent to use in competition can support breach of fiduciary duty claim); Fox v. Tropical Warehouses, Inc., 121 S.W.3d 853, 858 (Tex. App.—Fort Worth 2003, no pet.) (“Even in the absence of an enforceable nondisclosure agreement, a former employee may not use confidential information or trade secrets the employee learned in the course of his employment for his own advantage and to the detriment of his employer.”). A prudent practitioner should not rely on such implied duties, which inject an unnecessary series of fact questions into an attempt to protect trade secrets. See American Derringer Corp. v. Bond, 924 S.W.2d 773, 777 (Tex. App.—Waco 1996, no writ) (plaintiff must prove “the offending party abused the trust that was reposed in him incident to a confidential relationship with the injured party”). Again, the best practice is to make the pledge of secrecy explicit by a non-disclosure agreement and to implement security measures to protect the information.

2. Independent Invention.

No matter how secretive and diligent a trade secret owner may be, there is always the potential for someone outside the business to independently develop the same "secret"—for example, adopting a similar

manufacturing process or designing a similar software module—without having any knowledge of the competitor’s product or business. Such independent development of the same trade secret does not eliminate trade secret status, so long as the information is kept secret by the other developer. RESTATEMENT OF TORTS § 757, cmt. b. (“Others may also know of [the subject matter of a trade secret] as, for example, when they have discovered the process or formula by independent invention and are keeping it secret.”).

While these limited types of disclosures or discoveries will not void trade secret status, “a substantial element of secrecy must exist, so that, except by improper means, there would be difficulty in acquiring the information.” Id. (emphasis added). Texas case law has adopted these principles of substantial, if not absolute, secrecy. Under Texas law, a trade secret need not be entirely secret. E.g., H.E. Butt Grocery Co. v. Moody’s Quality Meats, Inc., 951 S.W.2d 33, 35 (Tex.App.—Corpus Christi 1997, pet. denied). However, there must be a substantial element of secrecy, and the owner of a trade secret must take reasonable steps to protect the information claimed to be a trade secret. E.g., INEOS Group Ltd. V. Chevron Phillips Chemical Co., No. 01-09-00504-CV, 2009 WL 4854349, at *8 (Tex. App.—Houston [1st Dist.] Dec. 17, 2009, no pet.) (“A trade secret owner may disclose trade secret information to a third party without risk of losing trade secret protection if the owner takes steps to insure the secrecy of the information.”).








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B. Factors Considered.

In determining whether information should be accorded trade secret status, courts often look to the following six factors that were set forth in Comment b to the Restatement of Torts § 757.

(1) the extent to which the information is known outside of [the] business;

(2) the extent to which it is known by employees and others involved in [the] business;

(3) the extent of the measures taken…to guard the secrecy of the information;

(4) the value of the information to [the business] and to…competitors;

(5) the amount of effort or money expended…in developing the information;

(6) the ease or difficulty with which the information could be properly acquired or duplicated by others.

Texas courts consider these six factors. In re Bass, 113 S.W.3d 735, 739 (Tex. 2003); see also Triple Tee Golf Inc. v. Nike, Inc., 485 F.3d 253, 267 (5th Cir. 2007) (reciting Texas’ six-factor test); Nova Consulting Group, Inc. v. Engineering Consulting Services, Ltd., No. 07-50832, 2008 WL 3889995 (5th Cir. Aug. 22, 2008); In re Union Pacific R.R. Co., 294 S.W.3d 589, 591 (Tex. 2009). In Bass, the Texas Supreme Court clarified an issue that had caused some inconsistency in trade secret case law. Texas courts had differed in the relative weight of these factors and whether all six factors were required to be met in a particular case. In Bass, the Texas Supreme Court held that information did not need to satisfy all six factors in order for trade secret status to apply. ("We agree…that the party

claiming a trade secret should not be required to satisfy all six factors because trade secrets do not fit neatly into each factor every time.") In re Bass, 113 S.W.3d at 740. The Fifth Circuit had long before held that a trade secret might exist where some factor was unmet. Metallurgical Industries, Inc. v. Fourtek, Inc., 790 F.2d 1195, 1201 (5th Cir. 1986) (applying Texas law). While the Bass and Metallurgical opinions illustrate the fact-specific nature of trade secret status, these factors continue to provide guidance for courts and practitioners.

1. The Extent to Which Information is Known Outside the Business

As discussed above, substantial secrecy rather than absolute secrecy is required for trade secret protection. Disclosure outside the company pursuant to a non-disclosure agreement, or where there is an implied obligation of confidentiality, does not void trade secret status. Nor does a competitor's knowledge of the information due to independent invention. On the other hand, the information can not be “of public or general knowledge in the industry” or available for public view. See e.g., Interox America v. PPG Industries, Inc., 736 F.2d 194, 201 (5th Cir. 1984); Research Equip. v. Galloway & Scientific Cages, 485 S.W.2d 953, 956 (Tex. Civ. App.—Waco 1972, no writ); McClain v. State, 269 S.W.3d 191, 195 (Tex. App.—Texarkana 2008, no pet.). Courts will examine the degree to which the purported trade secret is known outside the business in determining trade secret status.

2. The Extent to Which Information is Known By Employees and Others In the Business














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This factor illustrates the importance of caution in sharing trade secret information—even with those who might have an express or implied duty to maintain its secrecy. Courts look not only at the extent to which a trade secret is shared with others outside the business but will consider the way the information was distributed inside the business. Was the information available to all employees, even if it was not necessary for the employee's job performance? If so, the company has weakened its claim for trade secret protection. Compare In re Bass, 113 S.W.3d at 742 (upholding trade secret protection where access limited to 4 employees) with Auto Wax Co. v. Byrd, 599 S.W.2d 110, 112-13 (Tex. App. - Dallas 1980, no writ) (formulas shared with several employees and kept in unlocked cabinet). See also Lear Siegler, Inc. v. Ark. – Ell springs, Inc., 569 F.2d 286, 289 (5th Cir. 1978) (applying Texas law).

3. The extent of the measures taken to guard the secrecy of the information

This factor concerns the security measures taken by the business to safeguard the information claimed to be trade secret. This factor involves the company’s efforts to protect information within the company as well as its efforts to prohibit its disclosure to others outside the company. Courts are more likely to confer trade secret status where a business can demonstrate that it has taken careful security measures to ensure its secrecy. See e.g., Expansion Plus Inc. v. Brown-Forman Corp., 132 F.3d 1083, 1086 (5th Cir.1998); FMC Corp v. Varco Int’l, Inc., 677 F.2d 500, 505 (5th Cir. 1982); Bertotti v. C. E. Shepherd Co., Inc., 752 S.W.2d 648, 652 (Tex. App. Houston [14th Dist.] 1998, no writ); McClain, 269 S.W.3d at 195.

Courts may consider questions like the

following in evaluating the security measures taken to protect the information alleged to be a trade secret:

4. The value of the information to the business and to competitors.

One of the definitional requirements of a trade secret is that it confer some type of actual or potential competitive advantage to those who know or use it. It is not surprising, then, that a court will consider the value of the information in determining trade secret status. Does it provide the owner a competitive advantage? See e.g., American Darringer Corp. v. Bond, 924 S.W.2d 773, 777 n.2 (Tex. App.—Waco 1986, no writ); Metallurgical Industries, Inc. v. Fourtek, Inc., 790 F.2d 1195, 1199 (5th Cir. 1986); In re Cooper Tire & Rubber Co., No. 14-09-00906-CV, 2010 WL 343509, at *2 (Tex. App.—Houston [14th Dist.] Feb 2, 2010). Courts in some states have suggested that the information needs to be “vital” to the business of the person seeking to protect it as a trade secret, while other courts have upheld trade secret protection when the information provided only a slight economic advantage. Comment e to the Restatement (Third) of Unfair Competition (1995) indicates that it is sufficient if the secret is of “more than trivial value”. This is an example of how important forum selection and choice of law can be. Compare Alabama’s version of the UTSA which requires that the trade secret have “significant economic value.” ALA. CODE § 38-27-2 (1) f cmt. 6.















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5. The amount of effort or money expended in developing the information.

Evidence of extensive time or money spent in developing the information can help support a finding that the information is entitled to trade secret protection. See e.g., T-N-T Motosports, Inc. v. Hennessey Motorsports, Inc., 965 S.W.2d, 18, 22 (Tex. App.—Houston [1st Dist.] 1998, pet. dism’d); Gonzalez v. Zamora, 791 S.W.2d 258, 265 (Tex. App.—Houston [14th Dist] 1988, no writ).

6. The ease or difficulty with which the information could be properly acquired or duplicated by others.

This element considers the likelihood that a competitor or person without knowledge of the information claimed to be a trade secret could duplicate or recreate it by proper means. (Note the UTSA definition, indicates that a trade secret has the characteristic of "not being readily ascertainable by proper means," but the California version, CALIFORNIA CIVIL CODE § 3426.1 (d)(1) (West 2009), deletes the “not readily ascertainable” language.) Information which can be discovered by proper means and readily duplicated without involving considerable time, effort and expense generally will not be afforded trade secret protection. See e.g., Rimes v. Club Corp. of America, 542 S.W.2d 909, 913 (Tex. Civ. App.—Dallas 1976, writ ref’d n.r.e.). Two examples of the types of information that may be duplicated through proper means include:

(a) Public Sources. Information that is readily available from public sources will not receive protection; nor will information that can be

readily discovered or duplicated. But, if the matter alleged to be trade secret is comprised of multiple elements, some of which are in the public domain, it is possible under some circumstances to protect it as trade secret. See e.g., Imperial Chemical Indus., Ltd. v. National Distillers & Chem. Corp, 342 F.2d 737 (2d Cir. 1965) (trade secret found even though 9 out of 10 elements were in public domain).

(b) Obvious Design. Where the alleged secret relates to the design of an item and that design is apparent from simple observation, is based on familiar mechanical means and principles, or involves the application of common skills, courts have declined to find a trade secret. See e.g., Research Equip. Co. v. Galloway & Scientific Cages 485 S.W.2d 953, 956 (Tex. Civ. App.—Waco 1972, no writ).

However, the fact that the secret could have been discovered by proper means, may not be a defense if the defendant used improper means to discover it. (Improper means is discussed in more detail below.)

III. CAUSES OF ACTION FOR TRADE SECRET MISAPPROPRIATION

Plaintiffs can chose from a number of different types of claims or causes of action when attempting to protect trade secrets. The choice of the cause or causes of action to be asserted is critically important and can








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determine not only the potential remedies available (e.g., exemplary damages or attorneys fees) but might determine whether the claim can go forward at all (some types of claims have shorter statutes of limitations than others)2 and might impact procedural issues as well. The most commonly asserted claim is for “misappropriation of trade secrets.” There are a number of sources that set forth the potential elements of such a claim.

A. Uniform Trade Secrets Act, § 1(2).

(2) “Misappropriation” means: (i) acquisition of a trade secret of

another by a person who knows or has reason to know that the trade secret was acquired by improper means; or

(ii) disclosure or use of a trade secret of another without express or implied consent by a person who

(A) used improper means to acquire knowledge of the trade secret; or

(B) at the time of disclosure or use, knew or had reason to know that his knowledge of the trade secret was

(I) derived from or through a person who had utilized improper means to acquire it;

(II) acquired under circumstances giving rise to a duty to maintain

2 Note that the UTSA has a three (3) year statute of limitations. However, Georgia, Illinois, and Missouri enactments of the UTSA provide for a five (5) year statute of limitations and Maine, Nebraska and Ohio’s enactments provide a four (4) year limitation period. Under Texas law, misappropriations of trade secret claims have a three (3) years statute of limitations and breach of contract claims have a four (4) year statute of limitations.

its secrecy or limit its use; or (III) derived from or through a

person who owed a duty to the person seeking relief to maintain its secrecy or limit its use; or

(C) before a material change of his [or her] position, knew or had reason to know that it was a trade secret and that knowledge of it had been acquired by accident or mistake.

B. Restatement (Third) Unfair

Competition § 40.

One is subject to liability for the appropriation of another’s trade secret if:

(a) the actor acquires by means that are improper under the rule stated in § 43 information that the actor knows or has reason to know is the other’s trade secret; or

(b) the actor uses or discloses the other’s trade secret without the other’s consent and, at the time of the use or disclosure,

(1) the actor knows or has reason

to know that the information is a trade secret that the actor acquired under circumstances creating a duty of confidence owed by the actor to the other under the rule stated in § 41; or

(2) the actor knows or has reason to know that the information is a trade secret that the actor acquired by means that are improper under the rule stated in § 43; or

(3) the actor knows or has reason to know that the information is a trade secret that the actor acquired from or through a


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person who acquired it by means that are improper under the rule stated in § 43 or whose disclosure of the trade secret constituted a breach of a duty of confidence owned to the other under the rule stated in § 41; or

(4) the actor knows or has reason to know that the information is a trade secret that the actor acquired through an accident or mistake, unless the acquisition was the result of the other’s failure to take reasonable precautions to maintain the secrecy of the information.

C. Texas Standard for

Misappropriation.

More recent cases have succinctly stated the Texas standard for misappropriation as follows:

Under Texas law, there are three elements needed to establish the injury of trade secret misappropriation: (1) A trade secret exists; (2) Defendants acquired the trade secret by a breach of a confidential relationship or other improper means; and (3) Defendants used the trade secret without authorization.

General Universal Systems, Inc. v. Hal, Inc., 500 F.3d 444, 449 (5th Cir. 2007); Triple Tee Golf, Inc. v. Nike, Inc., 485 F.3d 253, 261 (5th Cir. 2007); Guy Carpenter & Co. v. Provenzale, 334 F.3d 459, 467 (5th Cir. 2003); Nova Consulting Group, Inc. v. Engineering Consulting Services, Ltd., 2008 WL 38889995 (5th Cir. Aug. 22, 2008). See

also Taco Cabana Int’l, Inc. v. Two Pesos, Inc. 932 F2d 1113, 1123 (5th Cir. 1991) and Texas Integrated Conveyor Sys., Inc. v. Innovative Conveyor Concepts, 300 S.W.3d 348, 366 (Tex. App.—Dallas 2009, pet. denied) which articulate a fourth element – damages.

The RESTATEMENT provides as follows:

One who discloses or uses another’s trade secret, without privilege to do so, is liable to the other if:

(a) he discovered the secret by improper means, or

(b) his disclosure or use constitutes a breach of confidence reposed in him by the other in disclosing the secret to him, or

(c) he learned the secret from a third person with notice of the fact that it was a secret and that the third person discovered it by improper means or that the third person’s disclosure of it was otherwise a breach of his duty to the other, or

(d) he learned the secret with notice of the fact that it was a secret and that its disclosure was made to him by mistake.

RESTATEMENT (FIRST) OF TORTS § 757. The Texas Supreme Court employed this provision in the seminal case Hyde Corp. v. Huffines, 314 S.W.2d 763, 769 (Tex. 1958).

1. “Improper Means.” Improper means encompasses activity that is not inherently illegal. The Restatement of Torts defines the term as “Means which fall below the generally accepted standards of commercial morality and reasonable









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conduct.” RESTATEMENT (FIRST) OF TORTS § 757 cmt. f. The following are a few examples of "improper means:"

(a) fraudulent misrepresentation to induce disclosure;

(b) tapping of telephone wires; (c) eavesdropping or other

espionage; (d) bribery; (e) flying over chemical plants

under construction to take pictures to discover secrets (even though in legal air space);

(f) acquiring a copy of pirated code from an ex-employee of a competitor.

See Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470, 745-76 (1974); Petersen, TRADE SECRETS IN AN INFORMATION AGE, §2.3 (1997).

2. “Breach of Confidence.” Disclosure is improper where it constitutes a breach of confidence. Such a breach may occur where the disclosing party is violating an express contract or an implied obligation pursuant to a fiduciary or confidential relationship.

a. Express Agreements. These may include non-disclosure agreements (“NDAs”), non-competition agreements, and prohibitions against the solicitation of customers of customers or employees.

b. Common Law Duties.

i. Employees. Even in the absence of an express contract, in Texas, an employee is under a common law duty not to disclose or use trade secrets of his employer except for the employer’s benefit. This duty exists during and after

employment. However, an employee may use the general knowledge, skills, and experience acquired during employment.

The Restatement (Third) of Unfair Competition expressly notes the continuing obligation of an employee not to use or disclose an employer's trade secrets:

An employee or former employee who discloses or uses a trade secret owned by the employer or former employer in breach of a duty of confidence is subject to liability for appropriation of the trade secret under the rule stated in § 40.

RESTATEMENT (THIRD) UNFAIR

COMPETITION § 42 (1995).

ii. Confidential Relationships. A variety of other relationships may imply obligations of confidentiality.

A duty of confidence owed to the trade secret owner for purposes of the rules stated in § 40 is created by: … (b) a disclosure of the trade secret under circumstances in which the relationship between the parties or other facts surrounding the disclosure justify the conclusions that, at the time of the disclosure, the recipient knew or had reason to know that the disclosure was intended to be in confidence and that the trade secret owner was reasonable in inferring that the recipient




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consented to an obligation of confidentiality.

RESTATEMENT (THIRD) UNFAIR

COMPETITION § 41 (1995). Examples of confidential relationships (outside the employment context) that may imply duties of confidentiality include:

a. Licensor-licensee relationships. E.g., Hyde Corp, 314 S.W.2d at 769-70.

b. Parties to negotiations for a merger or acquisition. E.g., H.E. Butt Grocery Co. v. Moody’s Quality Meats, Inc., 951 S.W.2d 33, 36 (Tex.App.—Corpus Christi 1997, pet. denied).

c. Other fiduciary relationships. Texas law will impose fiduciary obligations in a variety of contexts. These fiduciary obligations can support a cause of action for misappropriation of trade secrets. See Welex Jet Servs. V. Owen, 325 S.W.2d 856, 858 (Tex. App.—Fort Worth 1959, writ ref’d n.r.e.).

As a practical matter, trade secret owners should not rely on these implied common-law duties. Doing so will require the party to demonstrate that the employee or former employee knew or should have known that the information used or disclosed was a trade secret. See Furr’s, Inc. v. United Specialty Adver. Co., 385 S.W.2d 456, 459-60 (Tex. Civ. App.—El Paso 1964, writ ref’d n.r.e.) (requiring proof that the disclosing party was aware that the information shared was intended to remain confidential). An express written agreement, setting forth the obligations of

confidentiality makes for a much stronger case.

3. Receiving Trade Secret with Knowledge that it was Obtained by Improper Means or Transmitted by Mistake. Notably, a party may be liable for using or disclosing a trade secret that it obtains with knowledge that the trade secret was obtained by improper means. This has significant implications for companies hiring employees who were previously employed by competitors. Additionally, liability may be imposed if a party uses or discloses trade secret information that was transmitted by mistake.

D. Other Causes of Action to Consider.

1. Breach of Contract. A written agreement with a non-disclosure provision may provide an avenue for a plaintiff to pursue what is essentially a misappropriation of trade secret claim as a breach of contract claim. One advantage of pursuing trade secret claims under a breach of contract theory is the four (4) year statute of limitations that applies to breach of contract claims under Texas law. Another advantage is that the scope of the claims may be broader and a Plaintiff may be able to recover for disclosure of information which is covered by the contract but might not meet all the technical requirements of a “trade secret.” An additional potential advantage is the Texas statutory provision which allows the prevailing party in a suit on a contract to recover its attorney fees. See TEX. CIV. PRAC. & REM. CODE ANN. §

38.001 (Vernon 2009). Notably, under Texas law, a tort cause of action for misappropriation of trade secrets does not include right to recover attorneys fees.

While Section 4 of the USTA has its own provisions regarding recovery of attorneys





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fees. It only allows recovery under certain limited circumstances. It provides:

SECTION 4. ATTORNEYS FEES. If (i) a claim of misappropriation is made in bad faith, (ii) a motion to terminate an injunction is made or resisted in bad faith, or (iii) willful and malicious misappropriation exists, the court may award reasonable attorneys’ fees to the prevailing party. 3

This provision would not allow a successful Plaintiff to recover attorneys fees unless she proved the misappropriation was willful and malicious or unless the Defendant filed a motion to terminate the injunction in bad faith.

2. Breach of Fiduciary Duty. Many of the parties who receive confidential information do so in the context of a fiduciary or confidential relationship. In such cases, a common-law claim of breach of fiduciary duty may be appropriate. Pursuing a fiduciary duty claim might allow the Plaintiff to recover exemplary damages which would not be available in a claim for breach of contract. Note that the UTSA provides for exemplary damages in an amount not exceeding twice the amount of actual damages if the misappropriation of the trade secret is willful. UTSA § 3(b). However some states have not enacted this provision.

3. Tortious Interference with Contract or 3 Note that some states have eliminated this provision from the version of the UTSA enacted in their state. See for example the enactment by Idaho, Missouri, Nebraska and Vermont.

Interference with Prospective Relations. Where the wrongful acquisition of trade secret information directly impacts the trade secret owner's business relations, particularly where the defendant is actively engaged in direct competition with the plaintiff, this common-law cause of action can provide additional leverage. This cause of action may prove particularly useful where the defendant is using trade secret information to lure away existing or potential customers (for example, using customer lists or pricing information) or where the defendant is intentionally "raiding" the plaintiff's employees in order to acquire trade secret information. A claim under this theory may also provide an avenue for recovery of exemplary damages.

4. Texas Theft Liability Act. The Texas Civil Practice and Remedies Code provides a civil cause of action for the theft of property. TEX. CIV. PRAC. & REM. CODE ANN. §§ 134.001-134.005 (Vernon 2009). Theft of trade secrets in violation of Texas Penal Code § 31.05 is explicitly included as one of the types of theft that will support a cause of action pursuant to this statute. One of the advantages of an action pursuant to the Theft Liability Act is the potential recovery of attorney fees—even where there is no contractual provision that would otherwise permit such recovery. See TEX. CIV. PRAC. & REM. CODE ANN. § 134.005(b) (Vernon 2009). A successful plaintiff may also recover actual damages and court costs.

IV. Remedies for Misappropriation of Trade Secrets

The aim of remedies in trade secret cases is to restore the parties to the position they would have been in but for the misappropriation. Depending upon the facts of the particular case, injunctive relief and/or recovery of money damages might be


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available as a remedy.

A. Injunctive Relief

Injunctive relief – including temporary restraining orders, preliminary injunctions, and permanent injunctions – is a common remedy in cases involving misappropriation of trade secrets. The scope and duration of injunctive relief in trade secret cases, however, is heavily dependent upon the specific facts of each case, including the degree to which the trade secret has already been made public by the misappropriator, whether the secret has been made public by the owner subsequent to the misappropriation and/or whether a “head start” injunction is sufficient to protect the plaintiff.

Section 44 of the RESTATEMENT (THIRD) OF

UNFAIR COMPETITION sets forth the following “primary factors” that should be considered in determining the appropriateness and scope of injunctive relief in trade secret misappropriation cases: (a) the nature of the interest to be protected; (b) the nature and extent of the appropriation; (c) the relative adequacy to the plaintiff of an injunction and of other remedies; (d) the relative harm likely to result to the legitimate interests of the defendant if an injunction is granted and to the legitimate interests of the plaintiff if an injunction is denied; (e) the interests of third persons and of the public; (f) any unreasonable delay by the plaintiff in bringing suit or otherwise asserting its rights; and (g) any related misconduct on the part of the plaintiff; and (h) the practicality of framing and enforcing the injunction.

1. Preliminary Injunction. A plaintiff may pursue a temporary restraining order or a preliminary injunction. Generally, the requirements for such relief are the same as in other contexts:

a. Immediate threat of irreparable harm;

b. Likelihood of success on the merits;

c. No adequate remedy at law; d. Balancing of the harm to

plaintiff if the preliminary relief is not granted, versus the harm to the defendant if it is granted.

A bond is typically required. A preliminary injunction or temporary restraining order should preserve the status quo until the dispute can be resolved, and it may prevent further damage to the trade secret owner's proprietary interest. An advantage of this form of relief is that it is available before the resolution of potentially lengthy litigation, providing leverage for the plaintiff and potentially encouraging a mutually satisfactory settlement.

2. Permanent Injunction vs. “Head Start” Injunction. In a number of Texas cases, courts have limited injunctive relief to the “head start” that the defendant gained and have limited the injunction to either the time it actually took the plaintiff to develop the information or the time it would have taken the defendant to develop the information through independent development or reverse engineering. See e.g., Gonzales v. Zamora, 791 S.W.2d 258, 267 (Tex. App.—Corpus Christi 1990, no writ); Research Equipment Co., Inc. v. C.H. & Scientific Cages, Inc., 485 S.W.2d 953, 956-957 (Tex. Civ. App. – Waco 1972,no writ); Bryan v. Kershaw, 366 F.2d 497, 499 (5th Cir.1966), cert denied, 386 U.S. 959 (1967). However, in other cases, Texas courts have issued perpetual injunctions – even in situations where the trade secret had become public. See e.g., Elcor Chemical Corp. v. Agri-Sul, Inc., 494 S.W.2d 204, 212-13 (Tex. App.—Dallas 1973, ref. n.r.e.); Atlas Bradford Co. v.









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Tuboscope Co., 378 S.W.2d 147, 149 (Tex. App. – Waco 1964, writ ref’d n.r.e.); K&G Oil Tool & Service Co. v. G&G Fishing Tool Service, 314 S.W.2d 782, 790 (Tex. 1958). These cases have generally involved defendants who learned of the trade secret through confidential relationships. The national trend is to limit injunctions to the “head start” period. For an extensive discussion on factors to consider in determining the scope and duration of injunctive relief see the RESTATEMENT

(THIRD) OF UNFAIR COMPETITION § 44(3) and cmts. d and f. See also USTA § 2. Note that the UTSA and the Commissioner’s Comments to the UTSA suggest that trend of authority in the country is to limit injunctions to the “head start” period. See also ROGER M. MILGRIM, MILGRIM ON TRADE SECRETS§ 15.02[1][d]. Texas can be expected to follow that general trend, although the remedy in each case should be tailored to the specific facts of that case.

3. Strategic Implications. While the remedy of injunctive relief is appealing, particularly prior to the defendant’s use or disclosure of plaintiff’s trade secret information, a party needs to weigh the costs and benefits of pursuing an injunction. This is particularly important where a party hopes to recover damages, as injunctive relief may limit or eliminate damage claims. See NextLevel Comms. v. DSC, 179 F.3d 244, 249-57 (5th Cir. 1999) (denying injunction based upon jury award of past and future damages).

B. Damages

It is important to remember that trade secret remedies are state-specific. Whether in federal or state court, the law of the state that will be applied must be considered before evaluating the merits of any specific damage model. Courts applying Texas law take a flexible approach to determining damages; “most courts adjust the measure of damages to accord with the commercial setting of the injury, the likely future consequences of the misappropriation, and the nature and extent of the use the defendant put the trade secret to after misappropriation.” Univ. Computing Co. v. Lykes-Youngstown Corp., 504 F.2d 518, 538 (5th Cir. 1974).

There are three basic measures of damage in trade secret misappropriation cases:

Value of the trade secret to the plaintiff. This method consists of profits lost on sales diverted from the plaintiff by the appropriation, and can encompass more than the goods or services embodying the secret(s). This measure can approach or be equivalent to the value of the trade secret if it has been destroyed through public disclosure by the defendant.

Unfair gain to the defendant/unjust enrichment. This method awards to the plaintiff the defendant’s profits earned on sales that are attributable to the trade secret. It can also include






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the cost savings to the defendant attributable to the misappropriation of the trade secret.

Reasonable royalty standard. This method seeks to award damages for a “hypothetical” negotiation between a willing buyer and willing seller for the information at the time of misappropriation for the use made of the trade secret by the defendant, a familiar concept in patent law.

See RESTATEMENT (THIRD) OF UNFAIR

COMPETITION § 45 cmt.d. Courts will sometimes apply a hybrid approach and combine the first two measures.

1. The Value of the Secret to the Plaintiff.

One way courts have measured damages is by determining the loss suffered by the plaintiff from the defendant’s use or disclosure of the trade secret. See Univ. Computing Co. v. Lykes-Youngstown Corp., 504 F.2d 518, 535-36 (5th Cir. 1974), (applying Georgia law); Zoecon Indus. V. Am. Stockman Tag Co., 713 F.2d 1174, 1180 (5th Cir. 1983) (stating that actual damages are available when a plaintiff has sustained economic injury from the use of its trade secrets). This is usually measured by the Plaintiff’s lost profits resulting directly from the misappropriation. Jackson v. Fontaine’s Clinics, Inc., 499 S.W.2d 87, 89-90 (Tex. 1973).

The battle to recover lost profits often centers on the question of whether the alleged lost profits can be proven with

reasonable certainty or whether they are merely speculative. Under Texas law, lost profits (past and/or future) must be shown by competent evidence with reasonable certainty. Southwest Battery Corp. v. Owen, 115 S.W.2d 1097, 1098-99 (Tex. 1938). See also M & A Technology, Inc. v. iValue Group, Inc., 295 S.W.3d 356, 366 (Tex. App.—El Paso 2009, pet. filed). A determination of what constitutes “reasonably certain” evidence of lost profits is fact intensive. Id.; Holt Atherton Ind. U.S.. Inc. v. Heine, 835 S.W.2d 80, 84 (Tex. 1992); Knox v. Taylor, 992 S.W.2d 40, 60 (Tex. App.—Houston [14th Dist.] 1999, no pet.). The recovery of lost profits does not require that the loss “be susceptible to exact calculation,” however, a plaintiff must do more than demonstrate that it suffered some lost profits. Knox 992 S.W.2d at 60. Rather, the plaintiff must establish the amount of its loss by competent evidence with “reasonable certainty.” Id. See M & A Technology, Inc., 295 S.W.3d at 366; Ishin Speed Sport, Inc. v. Rutherford, 843 S.W.2d 343, 350-51 (Tex. App.—Ft. Worth 1996, no writ); Vingcard A.S. and Vingcard Sys., Inc. v. Merrimac Hospitality Sys., Inc., 59 S.W.3d 847, 864 (Tex. App.—Ft. Worth 2001, no pet.). The more subjective or unestablished a trade secret’s value, the more difficult it is to meet this legal standard. It is much easier for a plaintiff to prove lost profits with reasonable certainty if it has a history of using the trade secret to generate a profit. Where a business is already established and making a profit at the time the tort is committed, pre-existing profit, coupled with other facts and circumstances may be taken to indicate with reasonable certainty the amount of profits lost. However, opinions or estimates of lost profits must be based upon objective facts, figures or data from which the amount of lost profits can be ascertained. For example,













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the court can consider the amount of business done and profit earned by Plaintiff during a specified time, not too remote, and the amount of business done and profit earned by Plaintiff during the time for which recovery is sought. Texas Instruments v. Teletron Energy Mgmt., Inc., 877 S.W.2d 276, 279 (Tex. 1994). See also M & A Technology, Inc., 295 S.W.3d at 366. However, the requirement of reasonable certainty may be met even where the subject matter of the trade secret has not yet resulted in an exiting profit – for example, in the case of a product which has not reached the market, if proper proof is provided. Id. See Grain Processing v. American Maize Prod., 185 F.3d 134 (Fed. Cir. 1999). Lost profits damages may be supported by either a history of profitability or the actual existence of future contracts from which lost profits can be calculated with reasonable certainty. Furthermore, Texas cases have permitted recovery for lost profits in reliance on routinely kept business records so long as the evaluation of the business’s decreased profitability is based on objective facts. D/FW Comm. Roofing Co., Inc. v. Mehra, 854 S.W.2d 182, 187 (Tex. App.—Dallas 1993, no writ). The Texas Supreme Court has explicitly recognized the need for flexibility in proving lost profits. Texas Instruments, 877 S.W.2d at 279. (“The requirement of “reasonable certainty” is intended to be flexible enough to accommodate the myriad of circumstances in which claims for lost profits arise.”).

It is important to consider the entire impact of the misappropriation when developing a damage model. In assessing the loss suffered by the plaintiff due to the misappropriation, it may in some circumstances be appropriate to consider goods or services that do not embody the misappropriated secrets. In patent infringement cases, under the “entire market value rule,” a plaintiff is often entitled to

recover lost profits on the sale of unpatented components which accompany the sale of patented components where, in reasonable probability, the patent owner would have made the convoyed sales which the infringer made. Similarly, a plaintiff in a trade secret case should argue that she is entitled to recover the “entire market value” of her loss or the defendant’s wrongful gain.

2. Unjust Enrichment, or the Value of the Secret to Defendant.

In some cases, the defendant may use the trade secret to its advantage with no obvious effect on the plaintiff with the exception of the parties’ relative competitive positions. Absent proof of specific injury such as lost profits, damages are difficult to calculate based on the measure of plaintiff’s losses. Often, due to this limitation, the better measure of damages for misappropriation is the defendant’s gain.

As noted, Texas courts take a flexible approach to determining damages; “most courts adjust the measure of damages to accord with the commercial setting of the injury, the likely future consequences of the misappropriation, and the nature and extent of the use the defendant put the trade secret to after misappropriation.” Univ. Computing Co. v. Lykes-Youngstown Corp., 504 F.2d 518, 538 (5th Cir. 1974). The law is clear, however, that: “[i]f the defendant enjoyed actual profits, a type of restitutionary remedy can be afforded the plaintiff – either recovering the full total of defendant’s profits or some apportioned amount designed to correspond to the actual contribution the plaintiff’s trade secret made to the defendant’s commercial success.” Id. at 539; see also Sheldon v. Metro-Goldwyn Pictures Corp., 309 U.S. 390, 408 (1940) (“Equity is concerned with making a fair apportionment so that neither party will have what justly belongs to the other.”)










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(emphasis added). Moreover, uncertainty in damages does not preclude recovery; as the court in University Computing stresses, “the plaintiff should be afforded every opportunity to prove damages once the misappropriation is shown.” Univ. Computing, 504 F.2d at 539.

If the plaintiff cannot prove its specific injury and the trade secrets have not been entirely destroyed, damages may be measured by the actual value of the trade secrets as used by defendant. See Univ. Computing, 504 F.2d at 536 (“[The value of the secret to the defendant] is usually the accepted approach where the secret has not been destroyed and where the plaintiff is unable to prove specific injury.”); see also Carbo Ceramics, Inc. v. Keefe, 166 F.App’x 714, 722 (5th Cir. 2006) (citing and discussing Univ. Computing, 504 F.2d at 536); Metallurgical Indus., Inc. v. Fourtek, Inc., 790 F.2d 1195, 1208 (5th Cir. 1986), quoting Univ. Computing, 504 F.2d at 537, “[T]he trier of fact, should it find [the defendant] liable, must determine ‘the actual value of what has been appropriated.” The correct amount of damages is then “not what plaintiff lost, but rather the benefits, profits, or advantages gained by the defendant in the use of the trade secret.” Univ. Computing, 504 F.2d at 536; see also Int’l Indus., Inc. v. Warren Petroleum Corp., 248 F.2d 696, 699 (3d Cir. 1957) (providing that in the absence of plaintiff establishing its specific injury, the value of the trade secret to the defendant serves as a proper measure of damages in trade secret misappropriation cases); Sikes v. McGraw-Edison Co., 665 F.2d 731, 737 (5th Cir. 1982) (finding infringement injury and unjust enrichment compensable in trade secret cases even if such remedies are inappropriate in breach of contract cases). The plaintiff may likewise recover for any losses it has incurred as a result of the misuse of its trade secrets as long as doing so does not constitute double recovery. See

Sikes, 665 F.2d at 736-37 (finding remittance of unjust enrichment in addition to actual infringement damages did not constitute double recovery in a trade secrets case). The Restatement and the Uniform Trade Secret Act both support measuring damages based on the defendant’s unjust gains. The Restatement (Third) of Unfair Competition § 45(1) (1995) permits recovery for “the pecuniary loss to the [the trade secret owner] caused by the appropriation or for the actor’s own pecuniary gain resulting from the appropriation, whichever is greater, unless such relief is inappropriate under subsection (2)).” Comment e of Section 757 of the RESTATEMENT (FIRST) OF TORTS also supports awarding damages on the basis of ill-gotten gains in trade secret matters. Comment e states:

One who has a right under the rule stated in this Section is entitled to a remedy or remedies appropriate under the circumstances. He may recover damages for past harm, or be granted an injunction against future harm by disclosure or adverse use, or be granted an accounting of the wrongdoer’s profits, or have the physical things embodying the secret, such as designs, patters and so forth, surrendered by the wrongdoer for destruction. Moreover, he may have two or more of these remedies in the same action if the court is competent to administer them. Defenses generally available in tort actions and actions for injunctive relief are also available here,





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insofar as they are applicable.

RESTATEMENT (FIRST) OF TORTS § 757 cmt. e (1939). Likewise, Section 3(a) of the UTSA permits recovery for damages “caused by misappropriation and the unjust enrichment caused by misappropriation that is not taken into account in computing actual loss.” A defendant’s costs savings resulting from misappropriation are properly considered as the defendant’s unjust enrichment or illicit benefit and are properly recovered as such. See RESTATEMENT

(THIRD) OF UNFAIR COMPETITION § 45 cmt. d (1995). Courts often compare the defendant’s profits – if the defendant is selling something using the trade secret – or the defendant’s cost savings – if the defendant is using the trade secret in some other way – to what those amounts would have been if the defendant did not have the benefit of the misappropriated trade secret. Int’l Indus., Inc. v. Warren Petroleum Corp., 248 F.2d 696 (3d Cir. 1957).

Courts applying Texas law have approved of awarding the benefit conferred on the defendant as a proper measure of damages. See Elcor Chemical Corp. v. Agri-Sul, Inc., 494 S.W.2d 204 (Tex. App.—Dallas 1973, writ ref’d n.r.e.); Molex, Inc. v. Nolen, 759 F.2d 474, 478-79 (5th Cir.1985) (upholding award of damages to reasonably compensate the plaintiff for its loss or for the defendant’s profits); Am. Precision Vibrator Co. v. Nat’l Air Vibrator Co., 764 S.W.2d 274, 279 (Tex. App.—Houston [1st Dist.] 1988) (affirming a damages calculation when an expert testified that it “is a measurement of the financial result directly attributable to” “the defendant’s use of plaintiff’s trade secret), as modified 771 S.W.2d 562 (Tex. App.—Houston [1st Dist.] 1989, no writ). (Opinion subsequently withdrawn for reasons relating to appellant’s pending bankruptcy.)

The courts recognize several methods for determining the value a Defendant has gained through misappropriation of another’s trade secret. One measure is the Defendant’s actual profit resulting from use of the secret. Carbo Ceramics, Inc., 166 Fed.Appx. at 723; Elcor, 494 S.W.2d at 214; Univ. Computing, 504 F.2d at 536. A second measure is the value that a reasonably prudent investor would have paid for the trade secret. See Precision Plating & Metal Finishing, Inc. v. Martin Marietta Corp., 435 F.2d 1262, 1263-64 (5th Cir. 1970); Carbo Ceramics, Inc., 166 Fed.Appx. at 723. A third measure is the cost that the Defendant saved by using the trade secret, e.g., saved development costs. See Univ. Computing, 504 F.2d at 538-39; Boarus, Inc. v. Raychen Corp., 331 F.3d 704, 709-10 (9th Cir. 2003) (affirming award of $9 million measured by saving three years of development time); Carbo Ceramics, Inc., 166 Fed.Appx. at 723. Another measure of the value of the secret to a defendant is a reasonable royalty rate, addressed in more detail below.

Often times, the plaintiff is challenged in determining what portion of the profits earned on the defendant’s sales is attributable to the misappropriated trade secret. The Restatement offers some relief in this regard:

“The plaintiff has the burden of establishing the defendant’s sales; the defendant has the burden of establishing any portion of the sales not attributable to the trade secret and any expenses to be deducted in determining net profits.”

RESTATEMENT (THIRD) OF UNFAIR

COMPETITION § 45 cmt. f (1995). This burden-shifting authority from the











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Restatement is particularly useful when the plaintiff is not in a position to determine the amount of sales which are not attributable to the trade secret. Such information is generally exclusively in the possession of the defendant, and may not be fully discovered at the time that plaintiff is required to submit its expert report on damages. The Restatement shifts the burden on the defendant to establish the “portion of the sales not attributable to the trade secret and any expenses to be deducted in determining net profits.”

3. Reasonable Royalty Measure.

Texas cases have held that a plaintiff in a trade secret case can seek damages measured by a “reasonable royalty.” Elcor Chem. Corp. v. Agri-Sul, Inc., 494 S.W.2d 204, 214 (Tex. App.—Dallas 1973, writ ref’d n.r.e.); Metallurgical Indus., Inc. v. Fountek, Inc., 790 F.2d 1195, 1208 (5th Cir. 1986); Carbo Ceramics, Inc., 166 Fed.Appx. at 723. The reasonable royalty measure awards the plaintiff the price that would be set by a willing buyer and a willing seller for the use of the trade secret made by the defendant. Fourtek, 790 F.2d at 1208; See RESTATEMENT (THIRD) OF UNFAIR

COMPETITION § 45 cmt. g (1995). Indeed, the reasonable royalty method requires the jury to calculate what the parties would have agreed to as a fair price for licensing the defendant to put the trade secret to the use the defendant intended at the time the misappropriation took place. See Univ. Computing Co., 505 F.2d 539. A reasonable royalty is an appropriate measure of damages where the misappropriated trade secret has not been destroyed, the plaintiff is unable to prove specific injury, and the defendant has gained no actual profits by which to value secret’s worth to defendant. Alcatel USA, Inc. v. Cisco Sys., Inc., 239 F.Supp. 2d 660, 667-73 (E.D. Tex. 2002).

In University Computing, the Fifth Circuit held that, when determining reasonable royalty damages, the jury may consider: (1) the development costs incurred by the plaintiff; (2) fees paid by customers of the plaintiff who utilized the system; (3) the prices at which the system was leased or sold by the plaintiff for restrictive use (4) the sales price placed on the system by defendants; and (5) expert testimony as to what would constitute a reasonable royalty for the rights to unrestricted use of the system, in determining what the parties would have agreed upon as a reasonable royalty. See id. at 539.

In calculating what a fair licensing price would have been had the parties agreed, the trier of fact should consider such factors as the resulting and foreseeable changes in the parties’ competitive posture; the prices past purchasers or licensees may have paid; the total value of the secret to the plaintiff, including the plaintiff’s development costs and the importance of the secret to the plaintiff’s business; the nature and extent of the use the defendant intended for the secret; and finally whatever other unique factors in the particular case which might have affected the parties’ agreement, such as the ready availability of alternative processes.

Id. Several cases have held that when the parties have engaged in prior negotiations for a licensing agreement, the proposed pricing for the license is a sufficient basis for establishing a fair price. See Sikes v.





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McGraw-Edison Co., 665 F.2d 731, 737 (5th Cir. 1982); Vitro Corp. of Am. V. Hall Chem. Co., 292 F.2d 678, 682-83 (6th Cir. 1961).

Of course, the “reasonable royalty” measure of damages is borrowed directly from patent law, which allows for the recovery of “…damages adequate to compensate for the infringement, but in no event less than a reasonable royalty for the use of the invention by the infringer, together with interest and costs.” 35 U.S.C. § 284 (2010). As such, the familiar Georgia-Pacific factors are often used as a guideline for determining the amount of damages. This method relies on a hypothetical negotiation immediately prior to the actual misappropriation of the trade secret and attempts to identify the factors that the parties would have taken into consideration at the hypothetical negotiation date. The Georgia-Pacific factors follow:

1. Royalties received by the licensor;

2. Royalties paid by the licensee;

3. Nature and scope of the license;

4. Licensor’s policies regarding licensing;

5. Commercial relationship; 6. Duration of patent and term

of license; 7. Effect of sales on other

products; 8. Established profitability; 9. Utility and advantages of

invention; 10. Benefit to the user; 11. Value of the invention to the

infringer; 12. Customary royalty rate; 13. it creditable to the invention; 14. thetical negotiation; and 15. ion of experts.

All of the Georgia-Pacific factors are not necessarily relevant and a plaintiff is not necessarily limited to the 15 Georgia-Pacific factors – rather the inquiry is fact-specific.

Significantly, a federal court in California used the reasonable royalty approach [under the The Uniform Trade Secrets Act, CAL. CIVIL CODE § 3426.3(b) (West 2009)] to award damages in the form of a significant lump sum payment, even though the trade secret turned out to be short-lived. The court found that the parties in their hypothetical negotiations would not have been able to predict such a development. See Micro Int’l Ltd. V. Monolithic Power Systems, Inc., 399 F. Supp. 2d 1064, 1077-78 (N.D. Cal. 2005). Specifically, the Court found as follows:

Thus, MPS argues that, because the trade secret became public six months after the hypothetical negotiation, it should only have to pay a fourth of the $900,000, which Mr. Meyer calculated based on a two-year benefit to MPS. But a paid-up royalty, unlike a running royalty, cannot be divided. Parties often enter into an agreement not knowing when the trade secret will become public; it is something the parties consider, and sometimes risk, during their negotiations. MPS provides no evidence that it would not have entered into this hypothetical agreement, or would have paid far less because it knew that the trade secret would soon become public. Nor





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does MPS cite a case holding that a paid-up reasonable royalty should not be imposed, or must be divided, if the trade secret becomes public shortly after the hypothetical negotiation. In sum, the $900,000 reasonable royalty does not require MPS to pay for longer than the period of time the use could have been prohibited; instead, it requires MPS to make a one-time payment while the use was prohibited. Therefore, the Court grants O2 Micro a reasonable royalty in the amount of $900,000.

4. Hybrid Measures.

Courts have taken a flexible approach to damages in trade secret cases, mandating that “the plaintiff should be made whole” but with the limitation that “there should be no double recovery.” Telex Corp. v. IBM Corp., 510 F.2d 894 (10th Cir. 1975); Sikes v. McGraw-Edison Co. 665 F.2d 731, 736-37 (5th Cir. 1982) (A court may take into account both infringement harm and unjust enrichment in computing damages in trade secret cases). Often times, a single measure of damages for misappropriation of trade secrets will not adequately compensate the plaintiff for its losses. A hybrid damage model, such as a combination of a plaintiff’s losses/defendant’s unfair gain, might be appropriate.

For example, in Sikes v. McGraw-Edison Co., the lower court was found to have properly charged the jury to compensate the prevailing plaintiff for his “actual damages, if any, caused by the Defendant’s infringement and the amount of money by which the Defendant was unjustly enriched,

if any, as a consequence of Defendant’s infringement.” 665 F.2d at 736 (emphasis added). Rejecting the contention that the award constituted double recovery, the Sikes court found the jury was properly instructed to “award [the plaintiff] for any actual losses suffered by him as a result of [the defendant’s] breach of faith plus a reasonable amount as compensation for the unauthorized use of his device.” See id. at 736-37 (upholding the jury charge and $900,000 award in a case of trade secret misappropriation). In the American Precision Vibrator case, the court upheld a $400,000 verdict reached upon asking the jury “what sum of money, if any, do you find from a preponderance of the evidence would compensate [the plaintiff] considering the loss it sustained, if any, or the benefits received [by the defendant], if any…?” Am. Precision Vibrator Co. v. Nat’l Air Vibrator Co., 764 S.W.2d 274, 279 (Tex. App.—Houston [1st Dist.]), as modified, 771 S.W.2d 562 (Tex. App.—Houston [1st Dist.] 1989, no writ); See also Univ. Computing, supra 504 F.2d at 539.







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5. Exemplary Damages.

Some states allow recovery of exemplary damages in trade secret cases. Section 3(b) of the UTSA specifically provides for exemplary damages not to exceed twice the amount of actual damages when the Plaintiff proves willful and malicious misappropriation. In Texas, if the case is plead as breach of a confidential or fiduciary relationship or as a tortious interference claim, and if the Plaintiff meets the proof requirements of Chapter 44 of the Texas Civil Practices and Remedies Code, the Plaintiff can seek exemplary damages. See Crutcher – Rolfs – Cummings v. Ballard, 540 S.W.2d 380, 388 (Tex. Civ. App.—Corpus Christi 1976, writ ref’d. n.r.e.); DSC Communications Corp. v. Next Level Communications, 107 F3d 332, 330 (5th Cir.1997). Special attention should be paid to the requirements of Chapter 41 of the Civil Practices and Remedies Code.

Note that, although exemplary damages are not recoverable if the case is plead purely as a breach of contract claim, when a trade secret misappropriation claim is plead and based on both breach of contract and tort claims, the Plaintiff may be able to recover exemplary damages on the tort claim even though it arises out of the same transaction as the contract claim. For example, the breach of a non-disclosure agreement, in addition to being a breach of contract, might also be pled as a breach of a confidential relationship. See Crutcher – Rolfs – Cummings, 540 S.W.2d at 388; Zoecom Indus. v. Am. Stockman Tag Co., 713 F.2d 1174, 1180 (5th Cir. 1983).

6. Attorneys Fees.

Under Texas law, attorneys fees are generally not recoverable in a tort case. However, as noted above, if the trade secret

misappropriation is based upon a contract and is pled as a breach of contract case, the Plaintiff may be able to recover attorneys’ fees under Section 38.001 of the Texas Civil Practice and Remedies Code. In addition as discussed above, attorneys fees might be recoverable under the Texas Theft Liability Act found in Section 134 of the Texas Civil Practices and Remedies Code.

V. CONCLUSION

The Texas common law covers the broad spectrum of issues encompassed by the UTSA. Hopefully this article will help you understand the issues in the debate of wheter Texas should adopt the UTSA.






Summary of the Uniform Trade Secrets Act

Prepared by the

Uniform Law Commission (NCCUSL) 111 N. Wabash Avenue, #1010

Chicago, IL 60602

CHAPTER 5.2


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Summary of the Uniform Trade Secrets Act

I. Background

In these times of fast‐breaking and highly

profitable technological advances ‐‐ the kind

that spur intense competition and can rapidly

stimulate a region's economic growth ‐‐ no

state can afford to be without modern,

comprehensive laws protecting trade secrets. In

fact, recent and continuing innovations in all

fields make the wrongful appropriation of

commercially valuable information much more

costly to business, more frequent, and more

important to protect. Trade secrets law must be

sophisticated enough to keep pace with the

development of technology in the private

sector, simple enough to be of broad use, and

consistent between jurisdictions to

accommodate today’s nationwide and global

scale of business.

The Uniform Trade Secrets Act (UTSA),

completed by the Uniform Law Commission

(ULC) in 1979 and revised in 1985, meets these

requirements. When originally promulgated by

the ULC, it was the first comprehensive effort to

codify the law of trade secrets protection,

incorporating the major common law principles

while filling gaps left by the courts. It provides

real remedies, where none may have previously

existed. Moreover, in a field of law that had

been in large part a specialist's domain, the

uniform act was designed to be sufficiently

clear and readily interpreted by any lawyer

representing a client in trade secret litigation.

Enacting states have benefited from the

simplicity of the Uniform Trade Secrets Act and

the harmonized state of the law around the

country. Prior to its widespread enactment and

under the common law, some fundamental

concepts were disturbingly unclear ‐‐ including

the precise definition of a "trade secret," and

the question of rights and equitable relief for

businesses whose secrets have been improperly

obtained and used. In the past, only experts in

trade secrets law had been able to interpret the

existing law. The uniform act clarifies rights and

remedies, making the law comprehensible to a

far broader segment of the legal profession.

Thus, private industry should find it easier and

ultimately less expensive to obtain competent

legal assistance in protecting trade secrets.

Litigation over trade secrets frequently involves

parties from more than one state. Variations in

state law had created confusion about which

law should be applied, and encouraged litigants

to "forum shop" to find the most favorable

jurisdiction. Adoption of the UTSA by most

states has helped to alleviate these problems.

The UTSA also encourages and facilitates

businesses that wish to expand their operations

into new states. The common law required

businesses to take strict precautions to

safeguard any information they expect to be

legally treated as a "trade secret." While the

UTSA does not relax the common law

requirements, uniform adoption of the act

would assure businesses that their efforts will

be tested against the same measure of care in

every state.

II. Summary of the UTSA

Key highlights, section‐by‐section, of the UTSA

include:

● Section 1 – Definitions – Section 1 of

the uniform act sets the operating

definitions for the law. A “trade secret”


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is information (formula, pattern,

formula, compilation, device, method,

technique, process, etc.) by which

actual or potential value is derived

because it is not generally known and is

not readily discoverable by proper

means, and is the subject of efforts,

reasonable under the circumstances, to

maintain its secrecy. According to the

Official Comments to the UTSA, “proper

means” can include such methods as

“reverse engineering”, discovery

through independent invention or

under license from the owner,

observation from public use or display,

or obtaining the secret through

published literature. “Improper means”

is defined in the Act to include theft,

bribery, misrepresentation, breach of a

duty to maintain secrecy (or

inducement to commit such), or

espionage. This can also include

otherwise lawful behavior under given

circumstances. “Misappropriation” is

defined as acquiring the secret of

another by a person who knows or has

reason to know that it was obtained

through improper means. It is also

defined as disclosure without the

express or implied consent of the

owner by a party who used improper

means to acquire it, or who at the time

of disclosure or use, knew or had

reason to know that the knowledge was

gained through improper means, or was

acquired under circumstances giving

rise to a duty to protect the information

or from one who had such a duty to the

offended party. If a party discovers that

the information is a trade secret that

has been acquired by accident or

mistake prior to any material shift in

position, it will also be a

misappropriation if used or disclosed.

● Section 2 – Injunctive Relief – Section

2 provides for injunctive relief from any

actual or threatened misappropriation

of a trade secret. If a trade secret

ceases to exist, a Court may terminate

the injunction, but may also continue

an injunction for a reasonable length of

time to protect parties from any

unreasonable commercial advantage

that might be gained because of the

misappropriation. The original 1979

uniform act allowed an injunction to

condition future use of the secret upon

payment of royalties for the length of

time that use of the secret would

otherwise be proscribed. The 1985

amendment to the act changed the

terms of this clause, which originally

conditioned such a provision on

whether the Court determined that

prohibiting future use entirely would be

unjustified, to allowing the Court to use

such a condition under “exceptional

circumstances.” The amendment

defined “exceptional circumstances as

including, but not limited to, “a material

and prejudicial change of position prior

to acquiring knowledge or reason to

know of misappropriation that renders

a prohibitive injunction inequitable.”

The Court also has the statutory power

to require additional actions to protect

the secret. The injunctive relief

provision is designed to protect the

offended owner from any inequitable

commercial advantage that a

competitor may gain through the


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[3]

misappropriation, but not beyond the

point where the information becomes

generally available through proper and

lawful means. The Official Comments

to the UTSA provide an example where

a party misappropriates a trade secret,

but a third party is later able to discover

the secret properly through its own

reverse engineering process – in such a

circumstance, the trade secret would

likely be obviated and continuing the

injunction would be unnecessary and

improper.

● Section 3 – Damages – Under the

original section 3 of 1979 UTSA,

prevailing parties in an action for

misappropriation were allowed to

recover damages for actual loss, and for

unjust enrichment to the extent such

was not covered under damages for

actual loss. The 1985 amendments

incorporated a caveat to this provision,

granting exception for a situation where

a material change in position prior to

the misappropriating party’s discovery

that a misappropriation had occurred

would render a monetary judgment

inequitable, and clarified that damages

may alternatively be measured in terms

of what a reasonable royalty may have

been. It should be noted that damages

measured by a reasonable royalty

under section 3 are different from

royalties imposed by injunction under

section 2. Under section 3(a), the

method is a general and alternative

option used as a measurement for

reasonable damages for past use.

Under section 2(b), the remedy is an

actual, prospective royalty only where

exceptional circumstances dictate that

a prohibition on future use is

inequitable due to the material shift in

the party’s position prior to knowledge

of the misappropriation. Finally, the

UTSA also allows exemplary damages

up to twice the amount of the judgment

for “willful and malicious”

misappropriation.

● Section 4 – Attorney’s Fees – The

UTSA allows a party to recover

attorney’s fees where a claim of

misappropriation is made in bad faith or

motion to terminate an injunction is

made in bad faith. Attorney’s fees are

also accessible to a prevailing party

where the misappropriation has been

determined to be “willful and

malicious.”

● Section 5 – Preservation of Secrecy –

The UTSA provides that a Court shall

take reasonable measures to preserve

the secrecy of the trade secret in

question during its processes, including

sealing records, hearings in‐camera,

and protective orders on disclosure or

related to discovery proceedings. This

helps preserve the balance of interests

between a party’s need to defend with

the need of a party to seek redress from

the Court for misappropriation.

● Section 6 – Statute of Limitations –

The UTSA sets a three year statute of

limitations for an action, from discovery

of the misappropriation or when the

misappropriation should have been

discovered through reasonable

diligence. As drafted, the UTSA rejected


29

[4]

the idea that misappropriation of a

trade secret was a continuing wrong,

but defers the beginning of the

limitation period to discovery or when

the party should have known the

misappropriation occurred and sets a

reasonable period of time to assert a

claim.

● Section 7 – Effect On Other Law –

Once enacted, the UTSA is designed to

supplant any conflicting tort or

remedial law for the misappropriation

of a trade secret. Section 7 clarifies that

it is not intended to affect any other

contractual remedies, or civil remedies

other than those based on

misappropriation. The 1985

amendments to the act also expressly

clarified that enactment of the UTSA

does not preclude any criminal liability

that a state’s laws may provide for.

● Sections 8 through 12 – The final four

section of the UTSA provide boilerplate

language dealing with the application

and construction of the act in light of

the need for uniform treatment among

enacting states, short title of the act for

citation purposes, severability, and the

effective date of the new law.

Since its promulgation by the ULC, the UTSA has

been adopted by 45 states, the District of

Columbia, and the US Virgin Islands. As of 2010,

only Massachusetts, New Jersey, New York,

North Carolina, Puerto Rico, and Texas remain,

and North Carolina’s existing law is under

review for qualification as “substantially similar”

to the uniform act. Of those remaining states,

Massachusetts, New Jersey, and New York

currently have legislation introduced in 2010 in

their State Legislatures to enact UTSA. Reliance

on the common law to resolve disputes over

misappropriation of trade secrets creates great

uncertainty for industry, particularly for

companies that conduct business in multiple

states. Courts in non‐UTSA jurisdictions may

have conflicting decisions on trade secret issues

that are out of step with the majority of the

country operating under the uniform act.

Additionally, some important issues may never

have been adequately addressed in the

common law of those courts. The UTSA

provides a clear and uniform solution and

guidance for this important area of legal

practice.


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