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How Should Litigators Establish Evidence in Trade Secret Cases? Part One: Liability

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4/11/23 - Insights

How Should Litigators Establish Evidence in Trade Secret Cases? Part One: Liability

By Varant Yegparian

I. Introduction

In recent years, juries have returned verdicts in trade secret disputes of $2.04 billion, $570 million, $152 million, and $105 million.[1] The enormity of these verdicts reflect the importance the modern economy places on trade secrets. That these verdicts arise in connection with car manufacturers, oilfield services companies, and vegan creameries reflects a subtler, though no less important, fact: every modern American corporation is, to a certain extent, a technology company that must develop its own intellectual property in order to refine its products and services.

Trade secret litigation is set to increase in the coming decades, accelerated by the enactment of the federal Defend Trade Secrets Act (“DTSA”) in 2016. Most cases do not contain direct evidence of stolen secrets, however. Instead, stray pieces of indirect evidence must come together to tell a larger story of theft. Consequently, lawyers handling this type of litigation must take the time to understand its intricacies and machinations, particularly the specific statutory requirements imposed by the uniform trade secrets acts (such as the Texas Uniform Trade Secrets Act, or “TUTSA”) and the evidence that will and will not satisfy these requirements.

This three-part series examines different concerns regarding evidence in trade secret cases, aiming to shed light on the correlative legal requirements to which this evidence is applied. This first article outlines the legal framework envisioned by TUTSA, addressing the requirements to prove the existence of a trade secret and to establish liability. The second article discusses the evidence needed to articulate a legally cognizable damages model. Finally, the third article turns to some of the more practical evidentiary considerations present in trade secret cases: namely, what evidence to collect and how, as well as confidentiality concerns engendered in the presentation of this evidence at a hearing or trial.

II. The Framework: Trade Secrets and Their Misappropriation Under Texas Law

TUTSA is set out in Civil Practice and Remedies Code, Section 134A.002(6).[2] Under the statute, a trade secret is any “form or type of information” including “business, scientific, technical, economic, or engineering information,” any “formula, design, prototype, pattern, plan, compilation, program device, program, code, device, method, technique, process, procedure, financial data,” and any list of “actual or potential customers or suppliers.” Tex. Civ. Prac. & Rem. Code § 134A.002(6). The information can be tangible or intangible and stored, compiled, or memorialized in any number of ways. However, there are two critical elements that must be established:

  • “[T]he owner of the trade secret has taken reasonable measures under the circumstances to keep the information secret.” Id. § 134A.002(6)(A)
  • “[T]he information derives 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.” Id. § 134A.002(6)(A)

Therefore, establishing the presence of a trade secret turns on the presence of evidence showing that i) the owner has taken reasonable measures to protect the information and ii) the information provides the owner with a competitive advantage by being unknown or difficult to discover by others.

TUTSA’s definition of misappropriation is more involved. Under the statute, misappropriation refers to the unauthorized acquisition, disclosure, or use of a trade secret. Courts recognize six pathways for misappropriation to occur under the Act. Id. § 134A.002(3). The act further defines “improper means” as including theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, to limit use, or to prohibit discovery of a trade secret, or espionage through electronic or other means. Id. § 134A.002(2).

It is important to also note the recently enacted federal trade secrets statute, the “Defend Trade Secrets Act” (“DTSA”). See, 18 U.S.C. § 1836 et seq. The statute provides a private right of action to an owner of a trade secret. DTSA states: “An owner of a trade secret that is misappropriated may bring a civil action under this subsection if the trade secret is related to a product or service used in, or intended for use in, interstate or foreign commerce.” 18 U.S.C. § 1836(b)(1). While there are some important differences between TUTSA and DTSA,[3] the overlap in the two statutes’ terminology as well as the court’s use of TUTSA caselaw to construe DTSA’s provisions illustrates a high degree of overlap between them. See, Hybir, Inc. v. Dell Glob., 2023 WL 1424074, at *6 (W.D. Tex. 2023) (“Under the DTSA and the TUTSA, ‘improper means’ ‘includes theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, or espionage through electronic or other means’”); Well Cell Glob. LLC v. Calvit, 2022 WL 16857060, at *9 (S.D. Tex. 2022) (applying TUTSA cases to construe DTSA). As a result, this article focuses on TUTSA as the evidentiary concerns at play in that statute should be identical to those at issue with DTSA.

A. Evidence of a Trade Secret

i. Information

TUTSA broadly defines “information,” meaning most types of evidence will satisfy this element. However, there are limited situations where the trade secret may not constitute “information” for purposes of the act. Typically, those cases involve a plaintiff who has not come forward with clear and specific evidence of the trade secret, resulting in broad and amorphous allegations that courts are reluctant to indulge.

For example, in Founder Starcoin, Inc. v. Launch Labs, Inc., the court ruled that the trade secret claimed by the plaintiff was not sufficiently defined and thus did not qualify for statutory protection. No. 18-CV-972 JLS (MDD), 2018 WL 3343790, at *6 (S.D. Cal. July 9, 2018). There, the plaintiff came forward with evidence—an email—that described a range of potential concepts, rather than a specific, identifiable trade secret. Id. (“Mr. Feinblatt’s email states “[t]he slide contains a sample of our current concept, although we have many different models, ideas for content, and the general [user experience] we’re currently discussing.”) Construing California’s analogue to TUTSA, the court held that this email was evidence of a broad range of potential concepts, not a hard and fast trade secret that the defendant could appropriate. Id. Thus, the plaintiff’s purported trade secret lacked “sufficient particularity that might allow Defendant to ascertain the boundaries of the trade secret.”

However, there is some conflict between Texas state and federal courts regarding whether an idea can be considered a trade secret. While the federal court in Bianco v. Globus Med., Inc. rejected the contention that a trade secret must be more than a mere idea, the court in Gonzales v. Zamora noted that the contention that a trade secret can only be an idea is not a correct statement of the law. Compare, Bianco v. Globus Med., Inc., No. 2:12-CV-00147-WCB, 2014 WL 5462388, at *7 (E.D. Tex. Oct. 27, 2014), aff’d, 618 Fed. Appx. 1032 (Fed. Cir. 2015) (rejecting contention that “a trade secret must be more than a mere idea”) with, Gonzales v. Zamora, 791 S.W.2d 258, 264 (Tex. App.—Corpus Christi–Edinburg 1990, no writ) (“We do not consider the statement that a trade secret may be only an idea to be a correct statement of the law”).

No reported decision from a Texas court has directly spoken to this issue. Nevertheless, a Texas court may hold that evidence of a trade secret “idea” will be sufficient to qualify for TUTSA’s protections. Nevertheless, it is important for businesses and individuals to clearly define their trade secrets and to take reasonable measures to keep the information confidential to ensure protection under trade secret law.

ii. Secrecy

Establishing trade secret status requires evidence of “reasonable measures” taken to preserve the secrecy of the information in question. There are various types of evidence that can be used to meet this element.

  • Requiring trade secret licensees to sign confidentiality agreements. INEOS Group Ltd. v. Chevron Phillips Chem. Co., LP, 312 S.W.3d 843, 849 (Tex. App.—Houston [1st Dist.] 2009, no pet.)
  • Password protecting computers, limiting employee access to the information, and tracking employees’ access of information. Universal Plant Services, Inc. v. Dresser-Rand Group, Inc., 571 S.W.3d 346, 361 (Tex. App.—Houston [1st Dist.] 2018, no pet.)
  • Requiring all employees and contractors working on the trade secret to execute non-disclosure agreements (“NDA”); emphasizing the confidential nature of its business in its offer letters and employee handbook; periodically reminding employees of their NDA obligations pursuant; closing work sites to the public; password protecting all computers; avoiding communicating details regarding the trade secret in writing with clients; and limiting disclosure of confidential and proprietary information to employees working on the trade secret. Morgan v. Clements Fluids S. Tex., LTD., 589 S.W.3d 177, 187 (Tex. App.—Tyler 2018, no pet.)
  • Providing access to the trade secret to a discrete and limited number of employees and providing warnings to those who do access the trade secret not to share or disclose the information. TASF, LLC v. Turn2 Specialty Companies, LLC, No. 01-21-00089-CV, 2022 WL 709836, at *8 (Tex. App.—Houston [1st Dist.] Mar. 10, 2022, no pet.)

The standard for trade secret protection requires the owner of the trade secret to take reasonable measures—but this standard does not require proof that the alleged trade secrets have been held in absolute secrecy. Turn2 Specialty Companies, 2022 WL 709836, at *8. Whether the owner has taken reasonable measures to keep the information secret is generally a fact-intensive determination. Id. (“Whether the owner has taken reasonable measures to keep the information secret is generally a fact-intensive determination.”)

Relatedly, disclosure to third parties will not destroy trade secret status if the disclosure occurs as part of a business transaction in which the owner of the secret expects to profit, and the disclosure is made to others involved in business dealings with the owner or part of a business transaction. Snowhite Textile & Furnishings, Inc. v. Innvision Hosp., Inc., No. 05-18-01447-CV, 2020 WL 7332677, at *6 (Tex. App.—Dallas Dec. 14, 2020, no pet.) (“Innvision (i) divulged its bid proposal to the Odessa Project customer—not as a public announcement and (ii) divulged its bid proposal as a part of a business transaction by which it expected to profit.”). In Taco Cabana Intern., Inc. v. Two Pesos, Inc., the Fifth Circuit held that if a voluntary disclosure occurs in a context that would not ordinarily occasion public exposure and in a manner that does not carelessly exceed the imperatives of a beneficial transaction, then the disclosure is properly limited and the requisite secrecy is retained. 932 F.2d 1113, 1124 (5th Cir. 1991) aff’d sub nom. Two Pesos, Inc. v. Taco Cabana, Inc., 505 U.S. 763, 112 S. Ct. 2753, 120 L. Ed. 2d 615 (1992); see also, Metallurgical Indus. Inc. v. Fourtek, Inc., 790 F.2d 1195, 1200 (5th Cir. 1986) (“[A] holder may divulge his information to a limited extent without destroying its status as a trade secret. To hold otherwise would greatly limit the holder’s ability to profit from his secret. If disclosure to others is made to further the holder’s economic interests, it should, in appropriate circumstances, be considered a limited disclosure that does not destroy the requisite secrecy.”).

iii. Value

The concept of “independent economic value” is central to the determination of whether certain information constitutes a trade secret under Texas law. Essentially, this element requires that the information at issue have some sort of value that is derived from not being generally known to the public or to those who could potentially benefit from the information. Nevertheless, there is “little applicable precedent … interpreting … TUTSA’s “independent economic value” requirement. Providence Title Co. v. Truly Title, Inc., 547 F. Supp. 3d 585, 609 (E.D. Tex. 2021), reconsideration denied, No. 4:21-CV-147-SDJ, 2021 WL 5003273 (E.D. Tex. Oct. 28, 2021)and aff’d sub nom. Providence Title Co. v. Fleming, No. 21-40578, 2023 WL 316138 (5th Cir. Jan. 19, 2023).

A central component to the element of value is that the information provides a benefit to the holder. Title Source, Inc. v. HouseCanary, Inc., 612 S.W.3d 517, 529 (Tex. App.—San Antonio 2020, pet. denied) (“Finally, the jury saw multiple internal TSI documents showing TSI intended to use HouseCanary’s data to develop its own products and believed having access to the data and analytics underlying HouseCanary’s products would help it do so. This evidence supports a finding that the five trade secrets derived independent economic value from not being generally known or readily ascertainable through proper means.”) Similarly, in Reingold v. Swiftships, Inc., the Fifth Circuit concluded that a ship mold derived independent economic value, in part, because a competitor had paid to lease the mold. 126 F.3d 645, 650 (5th Cir. 1997) (“Swiftships’s agreement to pay $145,000 per vessel for using the mold in building two initial vessels, and $20,000 for its use in building each subsequent vessel, cogently indicates that the mold derived independent economic value from not being generally known to and not being readily ascertainable by proper means by other persons.”) (analyzing analogue under Louisiana Uniform Trade Secrets Act).

Evidence of the costs incurred in developing the trade secret often weigh into a court’s determination of whether independent economic value exists. In Swiftships, the intensive capital invested in developing the mold and the correlative expenses others would incur in attempting to duplicate it also figured heavily into the Fifth Circuit’s determination of independent economic value. Id. (“Originally, it had cost $1 million and had taken nine months to construct the 90 foot ship mold. Consequently, it would have been extremely expensive and time consuming for anyone to duplicate the mold through independent designing, planning, and construction or by reverse engineering.”). Relatedly, in Turn2, the plaintiff put on evidence that its trade secrets (including rates, terms, and conditions) had independent economic value because it had spent many years cultivating this information. Turn2, 2022 WL 709836, at *12. The plaintiff argued that if this information were made known to another contractor, it would allow that contractor to reverse engineer their overhead and profit margins and potentially undercut them in future bid proposals. Id. (“Clayton and Vardell both testified that Turn2 spent many years cultivating a relationship with Formosa, bidding on jobs, and eventually negotiating a mutually agreeable set of rates, terms, and conditions that allowed Turn2 to profit by its work and successfully bid on jobs at the plant. … The trial court as factfinder could rely on this evidence to find that the allegedly misappropriated information “derive[d] independent economic value … ”)

However, this requirement is not met simply by showing that the information in question has been kept secret. Indeed, one court has noted that “just because a business benefits from keeping certain information confidential does not necessarily mean that the information has independent economic value derived from its confidentiality.” Providence, 547 F. Supp. 3d at 610–11. Otherwise, all confidential business information would constitute a trade secret, making meaningless the additional statutory requirement that the information have independent economic value. Id. Providence dealt with a claim that salary and compensation figures were trade secrets. Rejecting that theory, the court noted:

In essence, Providence contends that its employees are economically valuable and that Providence’s salary and revenue information, in turn, derives value from its potential use to aid in the solicitation of Providence employees. However, a trade secret must have independent economic value. Under Providence’s theory, its salary and revenue information is not independently valuable; rather, the information is valuable only to the extent that it can be used successfully to aid in the solicitation of valuable Providence employees. If a competitor used Providence’s salary information to solicit a Providence employee whose performance is poor and whom the competitor ended up overpaying, the competitor would have gained no economic value from the salary information. Likewise, if a competitor with access to Providence’s salary and revenue information nonetheless failed in its solicitation efforts, the information would not have any economic value to the competitor. In sum, whether the information Fleming and Sheffield provided to Truly has any economic value at all is wholly contingent on the relative economic value and performance of the Providence employees in question and whether the use of the information results in the successful solicitation of those employees.

Id. Put another way, information that depends entirely on other factors for its economic value cannot have “independent” economic value and, therefore, will not qualify as a trade secret. Id.

B. Evidence of Misappropriation

Under the common law, proof of misappropriation required evidence that the trade secret was acquired or discovered by improper means and unauthorized use of the trade secret. Wellogix, Inc. v. Accenture, L.L.P., 716 F.3d 867, 874 (5th Cir. 2013) (“Trade secret misappropriation under Texas law is established by showing: (a) a trade secret existed; (b) the trade secret was acquired through a breach of a confidential relationship or discovered by improper means; and (c) use of the trade secret without authorization from the plaintiff.”).

TUTSA reformulated the elements of misappropriation. It expanded “acquisition and use” into six separate mechanisms through which misappropriation can occur under the Act. Stover, 202 F. Supp.3d at 694 (“[T]he Court concludes there are actually six alternative paths to liability under TUTSA.”). Judge Harmon’s opinion in Stover articulated the differences between the statutory text and the common law and, in doing so, laid out the six forms misappropriation can take under TUTSA:

  • Acquisition of a trade secret by improper means;
  • Disclosure or use of a trade secret by a person who acquired the trade secret through improper means;
  • Disclosure or use of a trade secret by a person who knew or had reason to know that their knowledge of the trade secret derived from a person who used improper means to acquire the trade secret;
  • Disclosure or use of a trade secret by a person who knew or had reason to know that their knowledge of the trade secret took place under circumstances giving rise to a duty to preserve the information’s secrecy;
  • Disclosure or use of a trade secret by a person who knew or had reason to know that their knowledge of the trade secret was derived from a person who owed a duty to preserve the information’s secrecy; and
  • Acquisition of the trade secret by a person who knew or had reason to know, under the circumstances, that the information was obtained through mistake or accident.

Id. Some courts follow the Stover formulation of the 6 types of misappropriation. Sears Authorized Hometown Stores, LLC v. Y&O WF, LLC, No. 7:18-CV-00083-O-BP, 2018 WL 6608354, at *4 (N.D. Tex. Nov. 29, 2018), report and recommendation adopted, No. 7:18-CV-00083-O-BP, 2018 WL 6603813 (N.D. Tex. Dec. 17, 2018) (“Judge Harmon concluded her analysis of TUTSA’s text by explaining that there are six alternative paths to liability for a misappropriation claim under the statute.”); Myart v. City of San Antonio, No. SA-19-CV-00702-OLG, 2019 WL 7067126, at *6 (W.D. Tex. Dec. 23, 2019) (citing His Company, Inc. v. Stover, 202 F. Supp. 3d 685, 692 (S.D. Tex. 2016). However, while there remain some important points of clarification regarding the differences between TUTSA and the common law with regard to the act of appropriation, the pre-TUTSA cases nevertheless remain instructive.[4] CAE Integrated, L.L.C. v. Moov Techs., Inc., 44 F.4th 257, 262 (5th Cir. 2022) (citing pre-TUTSA claims in connection with the definition of “misappropriation”); Technox Eng’g & Services Private, Ltd. v. Sunwoo Co., Ltd., No. 01-22-00006-CV, 2022 WL 17981848, at *9 (Tex. App.—Houston [1st Dist.] Dec. 29, 2022, no pet. h.)) (same); Neurodiagnostic Consultants, LLC v. Nallia, No. 03-18-00609-CV, 2019 WL 4231232, at *8 (Tex. App.—Austin Sept. 6, 2019, no pet.) (same). Recognizing TUTSA’s displacement of the common law, this article will use the concepts of “improper means” and “use and disclosure” to shed light on the evidence supportive of misappropriation.

Given the nature of trade secret disputes, Texas courts note that the evidence required to show misappropriation in most, if not all, cases will be circumstantial. Sw. Energy Prod. Co. v. Berry-Helfand, 411 S.W.3d 581, 599 (Tex. App.—Tyler 2013), rev’d, 491 S.W.3d 699 (Tex. 2016) (“Helfand’s case, as in many, if not most trade secret misappropriation cases, rests on circumstantial evidence.”) Circumstantial evidence can be used to prove any material fact, but it must transcend mere suspicion. Browning–Ferris, Inc. v. Reyna, 865 S.W.2d 925, 928 (Tex.1993). The material fact must be reasonably inferred from the known circumstances. Joske v. Irvine, 91 Tex. 574, 44 S.W. 1059, 1064 (1898). Each piece of circumstantial evidence must be viewed not in isolation, but in the light of all the known circumstances. Lozano v. Lozano, 52 S.W.3d 141, 149 (Tex.2001). The equal inference rule provides that a jury may not reasonably infer an ultimate fact from “meager circumstantial evidence which could give rise to any number of inferences, none more probable than another.” Id. at 148. “Thus, in cases with only slight circumstantial evidence, something else must be found in the record to corroborate the probability of the fact’s existence or non-existence.” Id.

 i. Improper Means

The definition of “improper means” is intentionally broad, including a swath of acts, because a complete catalogue of improper means is not possible. Alcatel USA, Inc. v. DGI Techs., Inc., 166 F.3d 772, 785 (5th Cir. 1999). Nevertheless, evidence of improper means includes acts “which fall below the generally accepted standards of commercial morality and reasonable conduct.” Id.

Breach of Contractual Obligations

Evidence that the defendant violated its contractual obligations to the plaintiff is one of the most often-used types of evidence to show misappropriation. In Wellogix, the court held that the plaintiff had presented sufficient evidence and testimony to support its position that the defendant had improperly acquired its trade secrets. 716 F.3d at 867. Specifically, the plaintiff put on evidence at trial showing that it had entered into six confidentiality agreements with the defendant; that the defendant had access to the trade secreted information through marketing agreements and a confidential online portal; and that one email from the defendant indicated that they were “harvesting IP” from the plaintiff. Id. at 877. Taken together, the evidence and testimony supported a “legitimate inference” that the defendant had acquired the plaintiff’s trade secrets through improper means. Id.

Breach of the Duty to Maintain Secrecy

Texas courts impose a duty not to use confidential, proprietary, or trade secret information acquired during the relationship “in a manner adverse to the employer.” T-N-T Motorsports, Inc. v. Hennessey Motorsports, Inc., 965 S.W.2d 18, 22 (Tex. App.—Houston [1st Dist.] 1998, pet. dism’d). So, evidence that a former employee violated this duty will constitute evidence of misappropriation through improper means. In 360 Mortgage Group, LLC v. Homebridge Fin. Services, Inc., the plaintiff came forward with evidence that the former employee emailed herself a list containing trade secret information soon after they learned that their access to their work email would soon be terminated. 2016 WL 900577, at *5 (W.D. Tex. 2016). This piece of evidence alone was sufficient to defeat summary judgment.

Deception

TUTSA lists—and courts have long held—fraud as an improper means of obtaining a trade secret. Tex. Civ. Prac. & Rem. Code § 134A.002(2); Terra Nova Scis., LLC v. JOA Oil & Gas Houston, LLC, 738 F. Supp. 2d 689, 696 (S.D. Tex. 2010) (“As plaintiffs have alleged JOA Software obtained the GeoMatriX algorithms by fraud, they have sufficiently alleged that the trade secrets were discovered by improper means.”).

Notably, if fraud and deception creep into otherwise proper receipt of a trade secret, courts will still hold that improper means have been used. In Lamont v. Vaquillas Energy Lopeno Ltd., LLP, the court noted the malleability of the concept of improper means in holding that a former executive of the plaintiff had misappropriated trade secrets. 421 S.W.3d 198, 214 (Tex. App.—San Antonio 2013, pet. denied). There, as part of the executive’s separation from the company, both he and the plaintiff negotiated a division of the plaintiff’s assets. Id. at 214. During those negotiations, the executive reviewed seismic information—the trade secret in question—on an oil play. Id. The court noted that this review, for purposes of effectuating the separation, was proper. Id. However, the executive used the information he gleaned from his review to invest in other nearby prospects. Id. at 215. The court concluded this evidence showed that the executive had misrepresented how his review of the data would be used and that such deception constituted misappropriation by improper means. Id. at 216 (“Based on a review of the entire record, we conclude that the evidence is legally and factually sufficient to support the jury’s determination that Appellants procured the Treasure Map by improper means.”).

Other Bad Acts

 In Alcatel, the plaintiff established the improper means element through evidence that the defendant misled and duped a customer of the plaintiff into providing the trade secreted information regarding an operating system. 166 F.3d at 785 (5th Cir. 1999) (“DSC adduced evidence that DGI misled NTS’s employee, Ernie Carrasco, by informing him that it needed to “test” a DGI card, but never told him that it planned to copy and remove DSC’s software. As such, DGI duped NTS into breaching its own contract with DSC—an act which DSC submits constitutes improper means.”).

And in Univ. Computing Co. v. Lykes-Youngstown Corp., 504 F.2d 518 (5th Cir. 1974), the plaintiff put on evidence that the defendant bribed an employee of one of the plaintiff’s customers “for $2,500 to deliver a suitcase filled with computer tapes and other materials” to an employee of the defendant. Id. at 529. This conduct was so egregious that, at trial, the defendant did not claim the “conduct was lawful or even defensible.” Id. at 534.

Other evidence of improper or illegal conduct has been held to be “improper means.” AHS Staffing, LLC v. Quest Staffing Group, Inc., 335 F. Supp. 3d 856, 865 (E.D. Tex. 2018) (holding plaintiff made a prima facie case of improper means when it put on evidence that defendants i) misrepresented their reasons for leaving employment with the plaintiff, ii) misrepresented what their new business venture would be, iii) deleted and hid key information in a database prior to leaving, and iv) deleted the entirety of their email inbox); Universal Plant Services, Inc. v. Dresser-Rand Group, Inc., 571 S.W.3d 346, 361 (Tex. App.—Houston [1st Dist.] 2018, no pet.) (“[T]he Former Employees accessed and copied the trade secrets while they were receiving and accepting job offers from Universal, providing at least some evidence that they obtained the trade secrets through breach of a confidential relationship or through other improper means.”); In re Mud King Products, Inc., 514 B.R. 496, 515 (Bankr. S.D. Tex. 2014), aff’d, No. BR 13-32101, 2015 WL 862319 (S.D. Tex. Feb. 27, 2015) (“The Court finds that Arredondo’s admitted theft of the drawings in exchange for payment constitutes Mud King’s acquisition of the drawings by improper means.”).

ii. Use

Texas adopts the restatement’s definition of “use.” Sw. Energy Prod. Co., 411 S.W.3d at 597. The restatement defines “use” broadly:

“Any exploitation of the trade secret that is likely to result in injury to the trade secret owner or enrichment to the defendant is a ‘use’ under this Section. Thus, marketing goods that embody the trade secret, employing the trade secret in manufacturing or production, relying on the trade secret to assist or accelerate research or development, or soliciting customers through the use of information that is a trade secret … all constitute ‘use.’”

Restatement (Third) of Unfair Competition § 40 (1995) cmt. C. 1995. In other words, “use” does not require wholesale incorporation of a trade secret, but also encompasses reliance on a trade secret in “manufacturing or production” or to “assist or accelerate research or development.” GlobeRanger Corp. v. Software AG United States of Am., Inc., 836 F.3d 477, 492 (5th Cir. 2016). “Use” may also be established where a trade secret provides the motivation to make a product and core concepts underlying the design of a device even where significant differences exist between the trade secret and the end product. Quintel Tech. Ltd. v. Huawei Techs., Inc., No. 4:15CV307, 2017 WL 9250312, at *22 (E.D. Tex. Dec. 18, 2017), report and recommendation adopted sub nom., Quintel Tech., Ltd. v. Huawei Techs. USA, Inc., No. 4:15CV307, 2018 WL 460227 (E.D. Tex. Jan. 18, 2018).

While not an explicitly recognized distinction, the Texas court decisions interpreting the “use” element of TUTSA generally deal with evidence of actual use and indirect use.

Actual Use

If available, the most direct evidence of use is proof that the defendant actually utilized the trade secret. For example, in Mendel Kaliff Co. v. Haas & Wilkerson, Inc., the plaintiff came forward with evidence that its former employee used its trade secrets to aid a competitor. No. SA-09-CA-926-FB, 2010 WL 11601330, at *9 (W.D. Tex. Sept. 16, 2010), report and recommendation adopted, No. SA-09-CA-926-FB, 2010 WL 11601463 (W.D. Tex. Nov. 2, 2010). As its summary judgment evidence, the plaintiff showed i) that at the time his employment ended, the former employee knew that the client lists and associated information in question were the employer’s confidential property; ii) the former employee downloaded this information, without permission, when his employment ended; and iii) the employee next gave this information to his new employer who used it to obtain new customers. Id. This evidence was sufficient to support a grant of summary judgment in the former employer’s favor. Id. (“Because Kaliff has met its burden to establish the elements of its claims and there is no genuine issue of material fact, Kaliff’s motion for partial summary judgment on Kaliff’s claims for misappropriation of trade secrets and violations of the Texas Theft Liability Act should be granted.”).

However, evidence of actual use is often unavailable for a variety of reasons. More sophisticated parties may take greater care in creating evidence that may show direct use, and more nefarious actors may obstruct, damage, or even destroy such evidence. As a result, proof of a defendant’s actual use of a trade secret often turns on circumstantial evidence.

For example, in Sw. Energy Prod. Co., the court noted numerous pieces of circumstantial evidence that corroborated the defendant’s use and disclosure of a compilation of information regarding an oil and gas play in East Texas. 411 S.W.3d at 600. First, the court cited the defendant’s initial aversion to developing certain prospects, only to then “zealously pursue” those prospects after meeting with the plaintiff. Id. The developed prospects just so happened to coincide with limited, targeted areas contained within a larger 2.5-million-acre area. Id. The timing of this development also happened to coincide with the timeline necessary to obtain information, develop a drilling program, and then deploy actual drilling operations. Id. The court further noted that it was not unreasonable for “the jury to infer that the spectacular success of that program, although not visible till later, related back to and was the product of information [the defendant] obtained from that misappropriation.” Id.

Indirect Use

Given TUTSA’s broad definition of the term, courts have accepted various types of evidence as sufficient proof of use. To that end, reliance on a trade secret to develop a product distinct from the plaintiff’s still constitutes “use” for purposes of establishing misappropriation. In General Universal Systems, Inc. v. HAL, Inc., the Fifth Circuit held that the plaintiff had sufficiently put on evidence of indirect use establishing misappropriation. 500 F.3d 444, 451 (5th Cir. 2007). HAL, Inc. involved a dispute over two competing software platforms used in the freight forwarding and shipping industry. Id. The court held that evidence of indirect use existed because the plaintiff came forward with evidence identifying that the defendant accelerated the development and marketability of its own competing product by relying upon and incorporating portions of the plaintiff’s software platform. Id. (“[I]t is clear the HAL Defendants ‘used’ LOPEZ COBOL, not by refusing to return World Trade System’s computer in March 1993, but by continuing to rely on LOPEZ COBOL, either directly or those portions incorporated into MEPAW, to accelerate the development and marketability of MEPAW, as GUS alleges.”) Citing the restatement, the court concluded that this evidence demonstrated continued use and exploitation of the plaintiff’s trade secret “that was likely to result in injury to [the plaintiff] and enrichment to [the defendants].”)

Bianco v. Globus Med., Inc. shows the extent to which indirect evidence of use can be used to establish a trade secret claim. 2014 WL 5462388, at *13. In Bianco, the defendant did not actually use the plaintiff’s trade secret, a medical device utilized in spinal surgeries. Id. at *13. Nevertheless, the court held the absence of actual use did not defeat the trade secret claim, stating that the fact that the defendant’s final products differed in important ways from those depicted in the plaintiff’s product design drawings did not mean that use was absent. Id. Rather, the trade secret was broader in conception, encompassing the “overall idea for a product with several key features that were eventually implemented in the [defendant’s] devices.” Id. Indeed, the Bianco court accepted the theory that actionable “use” occurs when a defendant relies upon a trade secret, regardless of whether the ultimate product created from such reliance is wholly different than the plaintiff’s product. Id. (“‘[u]se’ does not require that a party use another’s trade secret in the form in which it received it.’”)

Moreover, using a trade secret for purposes other than developing a competing product is sufficient to state a claim for misappropriation. In Cudd Pressure Control Inc. v. Roles, the Fifth Circuit found evidence of “use” when the defendant used a profit and loss sheet obtained from his previous employer to secure financing for his new business venture. 328 Fed. Appx. 961, 966 (5th Cir. 2009). There, Roles and several other former employees of Cudd Pressure Control formed their own competing oilfield services company called Great White Pressure Control. Id. at 962. The financial data used in Great White’s business plan for investors, which was prepared by Roles, included many figures for rates charged on equipment and utilization rates that were identical to Cudd’s confidential financial numbers. Id. at 962-63. Also, Roles testified that he gave a Cudd profit and loss report to Great White investors “that just verified the information that I had told them.” Id. at 963. He also stated that “I wanted them to see that the numbers for the whole company and the coil tubing and the snubbing, it was a good service line to go into.” Id. As such, the Fifth Circuit held that Roles “exercised control over Cudd’s confidential information to convince investors to finance Great White. He therefore sought to profit from using the confidential information, and so ‘used’ it.” Id. at 966. Noting that i) any exercise of control or domination of trade secreted information is a commercial use and ii) use encompasses using a trade secret to secure financing, the Fifth Circuit reversed the trial court’s grant of summary judgment in Roles’ favor. Id.

iii. Disclosure

Texas courts recognize that disclosure, even without use, of a trade secret is actionable. Atl. Richfield Co. v. Misty Prods., Inc., 820 S.W.2d 414, 422 (Tex. App.—Houston [14th Dist.] 1991, writ denied) (“[A]ctual use or disclosure of the trade secret is a required element of the tort”) (emphasis added). Thus, evidence that a trade secret has been improperly disclosed, even without evidence that such disclosure was followed by use of the trade secret, is sufficient to establish misappropriation. For example, in 360 Mortgage Group, LLC v. Homebridge Fin. Services, Inc., the plaintiff presented evidence showing that its former employee had accessed its marketing database and emailed herself what was essentially a customer list (the parties were in the real estate mortgage business and the trade secret at issue involved a list of real estate brokers who could be solicited to use the parties’ mortgage services). 2016 WL 900577 at *6. Acknowledging that there was no evidence of any actual or “commercial use,” the court nevertheless denied summary judgment in the defendant’s favor, noting that even “if the marketing blast does not constitute ‘commercial use,’ as Defendants argue, there remains a fact issue as to whether the marketing database [the former employee] forwarded to [the defendant] constitutes disclosure.” Id. The simple fact that the defendant had improperly received the plaintiff’s trade secreted information, without more, was sufficient to defeat summary judgment.

It is important to note that the cases regarding actionable disclosure, without evidence of “use,” exhibit a new trend. Pre-TUTSA, courts held that trade secret appropriation claims required some form of use. For example, the Fifth Circuit stated that where a defendant had not put its product utilizing the plaintiff’s trade secret into commercial operation, no misappropriation had occurred. Metallurgical Indus. Inc. v. Fourtek, Inc., 790 F.2d 1195, 1205 (5th Cir. 1986). (“If Smith has not put the furnace into commercial operation to produce carbide powder it can then use, then no commercial use has occurred.”) The court went on to hold that because there was no evidence that the defendant had benefited from any such use, a directed verdict in its favor was proper. Id. Indeed, it noted that until the defendant sought to profit from the trade secret it had acquired (e.g., actually use the trade secret), the plaintiff could not state a claim as a matter of law. Id. (“Should it in future seek to profit from use or sale of the furnace, a new fact situation will be presented.”)

Moreover, given the restatement’s broad definition of “use,” along with the liberal application of this term by the Texas courts, the distinction between “use” and “disclosure” may be more academic than real. Garth v. Staktek Corp., 876 S.W.2d 545, 548 (Tex. App.—Austin 1994, writ dism’d w.o.j.) (“Any misappropriation of trade secrets, followed by an exercise of control and domination, is considered a commercial use.”); Rimkus Consulting Group, Inc. v. Cammarata, 688 F. Supp. 2d 598, 666 (S.D. Tex. 2010) (“Use” of a trade secret refers to “commercial use” and occurs whenever ‘a person seeks to profit from the use of the secret.’”).

C. Evidence Establishing Liability

The following checklist provides a quick reference to the types of evidence needed to establish liability in a trade secret case:

Is there a trade secret?

Information

  • Broad; almost anything qualifies as information.

Kept Secret

  • Reasonable Steps: fact-intensive inquiry into what the plaintiff has done to keep the secret from being disclosed.
  • Disclosure to third parties won’t kill the secret assuming additional steps taken to limit the disclosure.

Value

  • Broad;
  • Must be independent; value cannot hinge on externalities.

Has the trade secret been misappropriated?

Six Ways

  • Acquisition by improper means.
  • Disclosure/use through improper means.
  • Disclosure/use by a person whose knowledge derived from a person who used improper means.
  • Disclosure/use by a person whose knowledge derived from circumstances giving rise to a duty to preserve secrecy.
  • Disclosure/use by a person whose knowledge derived from a person who has duty to preserve secrecy.
  • Mistake or accident.

Improper Means

  • Includes theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, to limit use, or to prohibit discovery of a trade secret, or espionage through electronic or other means.
  • Includes acts “which fall below the generally accepted standards of commercial morality and reasonable conduct.”

Use

  • Direct or indirect.

Varant Yegparian is a partner at Schiffer Hicks Johnson PLLC, a Houston-based trial law firm.

[1] Eye-Popping Verdicts on Unjust Enrichment Theories in Trade Secret Litigation (Bloomberg Law) https://www.bloomberglaw.com/product/health/document/XBRDQA54000000?resource_id=88977b9d4399e7b44389f427511e5d2c; Syntel Asks 2nd Cir. To Scrap $570M Software IP Loss (Law 360) https://www.law360.com/articles/1531881/syntel-asks-2nd-circ-to-scrap-570m-software-ip-loss; ResMan ends up with $62mln in trade-secret win after $152 mln verdict (Reuters) https://www.reuters.com/legal/transactional/resman-ends-up-with-62-mln-trade-secret-win-after-152-mln-verdict-2021-08-13/; Ford hit with $105M verdict over trade secrets (Detroit Free Press) https://www.freep.com/story/money/cars/ford/2022/10/27/ford-versata-software-verdict-trade-secrets-contract-violation/69595605007

[2] The Texas Uniform Trade Secrets Act (“TUTSA”) was made effective on September 1, 2013, in an effort to bring Texas law in line with the “overwhelming majority of the United States” and “provid[e] a simple legislative framework for litigating trade secret issues in Texas.” His Co., Inc. v. Stover, 202 F. Supp. 3d 685, 691 (S.D. Tex. 2016), vacated as moot, No. 4:15-CV-00842, 2016 WL 6134939 (S.D. Tex. Sept. 8, 2016). While TUTSA codified and extended longstanding common law principles regarding trade secret appropriation, the Act “displaces conflicting tort, restitutionary, and other law of this state providing civil remedies for misappropriation of a trade secret.” Tex. Civ. Prac. & Rem. Code § 134A.007(a). As detailed below, this displacement has led some courts to note that the Act departs from the common law in subtle, but important, ways—which in turn impacts the evidentiary showing required of litigants. See, Stover, 202 F. Supp. 3d at 692-96 (detailing differences between TUTSA and the common law as it pertains to the act of misappropriation). In this article, TUTSA may also be referred to as the “Act.”

[3] For an explanation of some of the salient differences between the two statutes, see A Guide to Texas Trade Secret Laws, (JD Supra) https://www.jdsupra.com/legalnews/a-guide-to-texas-trade-secret-laws-6076535.

[4] See, e.g., Accresa Health LLC v. Hint Health Inc., No. 4:18-CV-00536, 2020 WL 3637801 (E.D. Tex. July 6, 2020) (leaving open the issue of whether a TUTSA claim could be established by a showing that the defendant appropriated the trade secret by improper means but did not subsequently use it); Sears Authorized Hometown Stores, LLC v. Y&O WF, LLC, 2018 WL 6608354, at *2 (N.D. Tex. Nov. 29, 2018), report and recommendation adopted, 2018 WL 6603813 (N.D. Tex. Dec. 17, 2018) (“There is No Requirement Under TUTSA to Allege ‘Use’ of a Trade Secret.”).