Trade Secrets
How Should Litigators Establish Evidence in Trade Secret Cases? Part One: Liability
Apr 12, 20237 min read
In recent years, juries have returned verdicts in trade secret disputes of $2.04 billion, $570 million, $152 million, and $105 million. 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, we turn 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.
TUTSA is set out in Civil Practice and Remedies Code, Section 134A.002(6). 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.” 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: the owner of the trade secret has taken reasonable measures under the circumstances to keep the information secret, and the 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.
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. 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.
It is important to also note the recently enacted federal trade secrets statute, the “Defend Trade Secrets Act” (“DTSA”). The statute provides a private right of action to an owner of a trade secret. While there are some important differences between TUTSA and DTSA, 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. 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.
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.
However, there is some conflict between Texas state and federal courts regarding whether an idea can be considered a trade secret. 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. 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.
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, including: requiring trade secret licensees to sign confidentiality agreements; password protecting computers, limiting employee access to the information, and tracking employees’ access of information; requiring all employees and contractors to execute non-disclosure agreements; and providing access to the trade secret to a discrete and limited number of employees with warnings not to share or disclose the information.
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. 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. 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.
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.
A central component to the element of value is that the information provides a benefit to the holder. Evidence of the costs incurred in developing the trade secret often weigh into a court’s determination of whether independent economic value exists.
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.” 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.
TUTSA reformulated the elements of misappropriation. It expanded “acquisition and use” into six separate mechanisms through which misappropriation can occur under the Act: acquisition of a trade secret by improper means; disclosure or use by a person who acquired the trade secret through improper means; disclosure or use by a person who knew or had reason to know their knowledge derived from improper means; disclosure or use by a person who knew or had reason to know their knowledge arose under circumstances giving rise to a duty to preserve secrecy; disclosure or use by a person whose knowledge derived from someone who owed a duty to preserve secrecy; and acquisition by a person who knew the information was obtained through mistake or accident.
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. Circumstantial evidence can be used to prove any material fact, but it must transcend mere suspicion.
The definition of “improper means” is intentionally broad, including acts “which fall below the generally accepted standards of commercial morality and reasonable conduct.” Evidence of improper means includes breach of contractual obligations, breach of the duty to maintain secrecy, deception, and other bad acts such as bribery, theft, and misleading third parties.
Texas adopts the restatement’s broad definition of “use.” Any exploitation of the trade secret that is likely to result in injury to the trade secret owner or enrichment to the defendant constitutes use. This includes 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 trade secret information.
While not an explicitly recognized distinction, Texas court decisions generally deal with evidence of actual use and indirect use. If available, the most direct evidence of use is proof that the defendant actually utilized the trade secret. However, evidence of actual use is often unavailable. More sophisticated parties may take greater care in creating evidence, and more nefarious actors may obstruct, damage, or even destroy such evidence. Given TUTSA’s broad definition, courts have accepted various types of indirect evidence as sufficient proof of use.
Texas courts recognize that disclosure, even without use, of a trade secret is actionable. 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.
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); Kept Secret (reasonable steps, fact-intensive inquiry); Value (broad, must be independent). Has it been misappropriated? Six pathways including acquisition by improper means, disclosure/use through improper means, and acquisition through mistake or accident.