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© 2017 Kirkland & Ellis LLP. All rights reserved.

Presentation to the Association of Corporate Counsel, Houston Chapter

Legal Strategies to Protect Your Trade Secrets: TUTSA and DTSA Anna RotmanSarah WilliamsMay 24, 2017

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Agenda

1. Protection Under Texas Law: Texas Uniform Trade Secrets Act

2. Protection Under Federal Law: Defend Trade Secrets Act

3. DTSA Scope and Key Provisions: A Comparison to TUTSA

4. Protecting Trade Secrets: Practical Pointers

5. Interplay Between Non-Compete Agreements and Trade Secret Protection

6. Conclusion

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PROTECTION UNDER TEXAS LAW: TEXAS UNIFORM TRADE SECRETS ACT

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Replaced Texas common law Displaces conflicting statutory law that

provided civil remedies for misappropriation of trade secrets, e.g., Texas Theft Liability Act as it relates to trade secret misappropriation

Applies to claims arising on or after September 1, 2013– If the misappropriation commenced before September

1, 2013, but continued after this date, the claim does not arise under TUTSA

Updates pending in the Texas Legislature

Texas Uniform Trade Secrets Act (TUTSA)

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1. Contractual remedies (i.e. breach of non-compete) Even if based on misappropriation claim

2. Criminal consequences for misappropriation of trade secrets

3. Any other civil remedies that are not based upon misappropriation of a trade secret E.g., a claim for conspiracy

TUTSA Does NOT Displace

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1. Amend TUTSA to align with DTSA

2. Revise key definitions

3. Codify recent Texas case law

Pending Updates: House Bill 1995 and Senate Bill 953

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“[I]nformation, including a formula, pattern, compilation, program, device, method, technique, process, financial data, or list of actual or potential customers or suppliers, that: A. derives independent economic value, actual or potential,

from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use; and

B. is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.”

TUTSA−“Trade Secret”

Importantly, TUTSA has no “continuing use” requirement: Information can qualify as a trade secret even if it is not currently being used or does not yet have economic value.

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Proper Means

“[D]iscovery by independent development, reverse engineering unless prohibited, or any other means that is not improper.” – §134A.002(4)

Parties may prohibit reverse engineering by contract

Improper Means

“[I]ncludes 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.”– §134A.002(2)

TUTSA−“Proper” and “Improper” Means

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Acquisition by improper means; or

Disclosure or use without express or implied consent where user:– Knew at time of disclosure that trade secret was acquired by

improper means;

– Knew at time of disclosure that trade secret was acquired under circumstances that gave rise to a duty to maintain secrecy;

– Knew at time of disclosure that trade secret was derived from a person who owed a duty to maintain secrecy; or

– Before a material change in position, knew trade secret was acquired through accident or mistake

TUTSA−“Misappropriation”

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Injunctive relief– Injunction can continue for a reasonable amount of time after

the trade secret has ceased to exist– Applies to both actual and threatened misappropriation

Injunction to prevent inevitable disclosure (potentially)– Texas has not adopted the inevitable disclosure doctrine, but

courts have sometimes implicitly applied the doctrine to find irreparable harm

– Q’Max America Inc. v. Screen Logix, LLC, 2016 WL 796838 (Tex. App.─Houston [1st Dist.], March 1, 2016)

TUTSA Remedies

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Reasonable royalty for defendant’s future use of trade secret

Damages, including exemplary damages for willful and malicious misappropriation

Attorney’s fees under certain circumstances

TUTSA Remedies

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Presumption in favor of Protective Orders

Possible exclusion of party representative when trade secrets disclosed – In re M-I L.L.C., 505 S.W.3d 569 (Tex. 2016) (finding trial court should conduct a

balancing test to determine whether party representative should be excluded from hearing where trade secrets of opposing party would be disclosed)

TUTSA Procedural Protections During Litigation

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PROTECTION UNDER FEDERAL LAW: DEFEND TRADE SECRETS ACT

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DTSA Enactment

Enacted May 11, 2016 Commission on Theft of American

Intellectual Property: $300B/year cost of trade secret theft

Broad bipartisan and industry support Amended Economic Espionage Act to add

a private, federal civil cause of action

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DTSA Basics

Federal jurisdiction of trade secret theft in interstate or international commerce

No state law preemption Largely mirrors Uniform Trade Secrets Act

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Private party access to federal courts for trade secret protection– Legislative perception of a more sophisticated judiciary re IP protection and less crowded docket

Nationally consistent substantive and procedural law– UTSA creates opportunities for state-to-state distinctions in trade secret protection (e.g., burden of

proof, threatened misappropriation, innocent acquisition, scope of information protectable, “reasonable” measures to protect)

– Only a small impact on substantive law to date

Availability of civil seizure power Partial extraterritoriality Timing of misappropriation does not matter so long as misappropriation is

continuous

DTSA Advantages

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1 jury verdict awarding damages

At least 4 preliminary injunctions granted (in whole or in part)

At least 5 temporary restraining orders granted

Nationwide Reach: N.D. Texas; E.D. California, N.D. California, M.D. Florida, S.D. Florida., N.D. Illinois, W.D. New York., S.D. New York, D. Oregon, D. Utah, W.D. Washington; E.D. Missouri; E.D. Pennsylvania

Summary of DTSA Cases Thus Far

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DTSA SCOPE AND KEY PROVISIONS: A COMPARISON TO TUTSA

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DTSA Scope−Jurisdiction

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DTSA Scope−“Trade Secret”

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the owner thereof has taken reasonable measures to keep such information secret

subject of efforts that are reasonable under the circumstances to maintain its secrecy

DTSA vs. TUTSA−“Trade Secret”DTSA

(“Actual or Threatened Misappropriation”) TUTSA

(“Actual or Threatened Misappropriation”)

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DTSA Scope−“Misappropriation”

“Misappropriation” elements: Acquisition by improper means Disclosure or use

– used improper means to acquire;– knew or had reason to know that knowledge of trade

secret was derived from improper means; or– knew or had reason to know it was a trade secret

and had been acquired by accident or mistakeDTSA and TUTSA “misappropriation” definitions are substantially identical

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DTSA Scope–“Improper Means”

TUTSA definition of “improper means” is more expansive

Recall under TUTSA you can contract to prohibit reverse engineering

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DTSA Remedies

Civil remedies: Injunctive relief Protective order Monetary award, including enhanced

damages Ex parte seizure

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Court may order seizure of property “necessary to prevent the propagation or dissemination of the trade secret”

Performed by federal law enforcement agents

Only available in “extraordinary circumstances”

Targets may seek damages for improper seizure

Not available under Texas law

DTSA Remedies−Ex Parte Seizure

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Ex parte seizure is limited to “extraordinary circumstances” and requires affidavit showing:

Equitable relief inadequate due to expected evasion or noncompliance

Immediate and irreparable injury if seizure is not ordered

Harm to the applicant of denying application outweighs harm to the legitimate interests of defendant

Likelihood of success in showing: (1) information is a trade secret; and (2) defendant misappropriated or conspired to misappropriate the trade secret

Defendant has actual possession of trade secret and property to be seized

Description with reasonable particularity of matter to be seized and location

Defendant would destroy, hide, or move matter if given notice of seizure

Applicant has not publicized the requested seizure

DTSA Remedies−Ex Parte Seizure

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Statute of limitations for both statutes is three years after the date on which the misappropriation is discovered or by the exercise of reasonable diligence should have been discovered

– Continuing misappropriation constitutes a single claim of misappropriation

● DTSA applies to misappropriations that began prior to DTSA enactment, if the misappropriation continues

● TUTSA does not apply to misappropriations that began prior to September 1, 2013

DTSA/TUTSA Statute of Limitations

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DTSA immunizes a disclosing party from both criminal and civil liability if the disclosure is:– A confidential disclosure to a government official or an attorney for the purpose of reporting a

suspected violation of law;

– In a complaint or other document filed in a lawsuit or other proceeding – filed under seal; or

– To the court or an attorney in a lawsuit for retaliation by an employer for reporting a suspected violation of law – documents containing the trade secret must be filed under seal

DTSA requires notice of whistleblower immunity in employment agreements– Employers must provide notice through (1) employment agreement or (2) cross-reference in agreement

to applicable policy document.

Penalty for non-compliance: Forfeiture of attorneys’ fees and enhanced damages remedies

DTSA Whistleblower Immunity

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PROTECTING TRADE SECRETS: PRACTICAL POINTERS

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Make Confidentiality a Part of the Culture– Address confidentiality issues when employees join, throughout employment,

and especially when they leave (e.g., through exit interviews)– Require all employees and independent contractors to comply with an internal

confidentiality policy– Train employees frequently on company policies

Conduct a Risk Assessment– Pay special attention to employee access to personal electronic devices and

applications– Inventory your key trade secrets and catalogue who has access to them and

where they are located

Protecting Your Trade Secrets: What Constitutes“Reasonable Measures”?

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Need-to-Know Policy– Restrict access to confidential information to employees who need the information

to perform their job duties– Don’t forget about contractors and JV partners

Contractual Protections– Extend to third-party contractors with access to confidential information, as well as

employees (e.g., NDAs)– Require a separate signed acknowledgement regarding receipt of trade secrets

Enhanced Security Measures– Building security and access– Revisit frequently in light of changing technologies

Protecting Your Trade Secrets: What Constitutes “Reasonable Measures”?

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Data Protection Measures– Encrypt trade-secret files that are stored on the cloud and use multiple-phase

authentication – Ensure policies related to employee use of mobile or non-company electronic

devices prevent inadvertent disclosure– Implement a process for employees to report potential vulnerabilities and

breaches– Label files appropriately (e.g., confidential and/or proprietary)

Protecting Your Trade Secrets: What Constitutes“Reasonable Measures”?

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Protecting Your Trade Secrets: Comply With DTSA Whistleblower Immunity Notice Requirement

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INTERPLAY BETWEEN NON-COMPETE AGREEMENTS AND TRADE SECRET PROTECTION

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Misappropriation of trade secret claims are often brought in the context of breach of non-compete agreements

Courts analyzing DTSA claims for injunctive relief preventing employees from taking competitive action will look to state law and policy regarding restrictions on competition

Texas law generally prohibits restrictions on trade, but there is a statutory exception for non-compete covenants

– Tex. Bus. & Com. Code § 15.50(a)

Interplay Between DTSA and Texas Non-Compete Law

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Use business goodwill or receipt of confidential or proprietary information as consideration for covenants not to compete

Be prepared to justify the restrictions imposed– Duration must be reasonable; two years and under is advisable, but some

courts have upheld agreements with five-year terms– Limit the geographic scope to the territory or areas where the employee

worked– Tailor scope of activity restrictions to employee’s responsibilities and duties; do

not prohibit employment in an entire industry Courts will reform rather than discard, but damages will be limited

Practical Pointers for Drafting Non-Compete Agreements

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CONCLUSION

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Attorney BiographiesAnna Rotman – Partner, Litigation713-835-3750 | anna.rotman@kirkland.com

Anna G. Rotman is a partner in the Houston office of Kirkland & Ellis LLP. Anna represents both plaintiffs and defendants in state and federal court throughout the United States. Anna has counseled clients on their thorniest issues arising in North America, Latin America, Europe, and the Middle East. She has accumulated significant trial experience in business disputes and antitrust litigation, representing both large and small companies. Her clients span global industries, with particular focus on energy, technology, and aviation.

A graduate of Harvard Law School, Anna has been recognized as a “Texas Super Lawyer” and was recently honored as one of the Benchmark Litigation’s “Top 100 Trial Attorneys” in the country. Anna worked for several years in the technology industry before law school, and clerked for the Honorable Marvin J. Garbis on the Federal District Court for the District of Maryland.

Sarah Williams – Associate, Litigation713-835-3610 | sarah.williams@kirkland.com

Sarah Williams is a litigation associate in Kirkland’s Houston office, where she focuses her practice on complex commercial litigation matters. She has experience representing both plaintiffs and defendants in state and federal court in a variety of matters, including contract, fraud, professional liability, consumer, energy, employment and bankruptcy-related disputes.

Before entering private practice, Sarah served as a law clerk to the Honorable Marcia A. Crone in the United States District Court for the Eastern District of Texas. Additionally, she worked as a journalist for several years prior to law school.

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