Trade secrets play a crucial role in safeguarding a business’s proprietary information, ensuring a competitive advantage in the marketplace. In the United States, businesses have the option to seek protection for trade secrets under both state and federal laws. In Texas, the Texas Uniform Trade Secrets Act (TUTSA) governs trade secrets, while the federal Defense of Trade Secrets Act (DTSA) applies nationwide. In this blog, we’ll dive into how these statutes define a trade secret, what constitutes misappropriation, and whether specific assets like customer lists and vendor lists receive protection under each act.
What Constitutes a Trade Secret?
Both TUTSA and DTSA provide similar definitions of a trade secret, but there are nuances to consider.
Under TUTSA), a trade secret can include a wide range of information, such as formulas, patterns, compilations, programs, devices, methods, techniques, or processes, provided the information:
1. Derives independent economic value from not being generally known to or readily ascertainable by others who can derive economic value from its disclosure or use.
2. Is subject to reasonable measures under the circumstances to maintain its secrecy.
Similarly the DTSA provides a broad definition of trade secrets, encompassing nearly any type of information, whether tangible or intangible, as long as it meets two key criteria:
1. It has economic value from being unknown to others who could benefit from its disclosure or use.
2. The owner has taken reasonable measures to keep it secret.
In practice, both statutes recognize a wide variety of proprietary business information as trade secrets, including technical, financial, or business information such as customer lists and vendor lists. Both statutes afford protection to customer lists and vendor lists, but only if they meet the standards of deriving economic value and being kept secret by reasonable efforts. These efforts may include implementing non-disclosure agreements, restricting access, or marking documents as confidential.
Protecting Customer Lists, Contract Prices, and Vendor Information
Customer lists, specially negotiated contract prices, and vendor information are vital assets for a business, often developed over years of effort and significant investment. These types of information represent more than just a collection of names or numbers; they are the result of building relationships, negotiating terms, and curating valuable contacts that provide a competitive edge in the marketplace.
When properly safeguarded, such information meets the criteria for trade secret protection under both TUTSA and DTSA. Customer and vendor lists, for instance, derive independent economic value because they are not readily available to competitors, and obtaining them could save a rival significant time and expense. Specially negotiated contract prices can also qualify as trade secrets, as they often reflect unique agreements tailored to a business’s specific needs and strategies, providing an advantage over others in the industry.
Theft or misappropriation of this type of proprietary information can have severe consequences for a business. It can undermine the competitive advantage that the business has worked hard to achieve, enabling competitors to gain access to carefully cultivated customers or vendor relationships without incurring the same costs. This loss can lead to reduced market share, lost revenue, and a weakened position in negotiations.
Both TUTSA and DTSA aim to protect such sensitive information by recognizing it as a trade secret, provided that reasonable steps are taken to maintain its confidentiality. Ensuring that customer lists, contract terms, and vendor information are kept secret through confidentiality agreements, restricted access, and proper security protocols can help a business assert its rights in case of misappropriation.
Misappropriation and Improper Means
Keep in mind that Misappropriation is a polite way to say “theft.”
Misappropriation is a key element for both TUTSA and DTSA, referring to the improper acquisition, use, or disclosure of a trade secret.
Under TUTSA, misappropriation occurs in any of the following circumstances:
1. Acquisition of a trade secret by someone who knows or has reason to know it was acquired by improper means.
2. Disclosure or use of a trade secret without consent by a person who used improper means to acquire it, or knew or should have known that the trade secret was obtained under circumstances requiring its secrecy.
TUTSA defines “improper means” to include theft, bribery, misrepresentation, breach of duty to maintain secrecy, or espionage, whether electronic or otherwise. Importantly, reverse engineering or independent derivation is not considered improper means under TUTSA.
Under the DTSA, the definition of misappropriation is nearly identical, with the same emphasis on improper acquisition, disclosure, or use. The DTSA’s definition of improper means aligns closely with TUTSA’s definition and also includes theft, bribery, and other deceptive practices while exempting legitimate techniques like reverse engineering and independent discovery.
Both TUTSA and DTSA have significant provisions to protect the rights of trade secret owners and establish remedies in cases of misappropriation. For example, both statutes allow for injunctive relief, monetary damages, and in cases of willful and malicious misappropriation, the possibility of exemplary damages and attorney fees.
Comparing Protections: Customer Lists and Vendor Lists
One of the more common questions businesses have is whether customer lists and vendor lists qualify as trade secrets under TUTSA and DTSA. Both statutes indeed protect such lists, but only if the lists meet the basic requirements of deriving independent economic value from secrecy and having reasonable measures to ensure their confidentiality.
Under TUTSA, customer lists are frequently considered trade secrets because they represent valuable, confidential compilations of information that give a business a competitive edge. However, a customer list must not be easily assembled from public sources, and its protection often depends on how much effort the owner has put into keeping it confidential.
Similarly, DTSA extends its trade secret protections to customer and vendor lists, provided they have economic value and are subject to reasonable efforts to remain confidential. Notably, DTSA offers businesses the opportunity to file civil actions in federal court for misappropriation, which is particularly beneficial for companies operating across state lines.
Key Differences to Consider
Although TUTSA and DTSA are similar in many respects, there are a few distinctions worth noting:
1. Jurisdiction: DTSA allows for federal jurisdiction, making it possible to bring a misappropriation claim in federal court if the trade secret is related to interstate or foreign commerce. This is a broad reading of the Commerce Clause, meaning that almost any trade secret used in the production, sale, or distribution of goods or services that cross state or national borders would qualify. TUTSA is a state statute, so claims under it are typically brought in state court.
2. Whistleblower Immunity: DTSA includes a provision that provides immunity for whistleblowers who disclose trade secrets to government officials or attorneys for the purpose of reporting or investigating a suspected violation of law. TUTSA lacks an explicit provision for whistleblower immunity.
3. Ex Parte Seizure: The DTSA contains a unique remedy allowing for the ex parte seizure of property (that is, seizure of property without notifying the bad actor / other side) necessary to prevent the dissemination of trade secrets in extraordinary circumstances. This remedy is not available under TUTSA.
Conclusion
Both TUTSA and DTSA provide robust protections for trade secrets, including customer and vendor lists, provided those lists are economically valuable and properly safeguarded. While the core definitions and elements of misappropriation are similar, DTSA’s federal jurisdiction, whistleblower immunity, and ex parte seizure remedy add layers of protection not explicitly found in TUTSA.
For businesses, understanding the overlap and differences between TUTSA and DTSA is essential for effectively protecting their proprietary information. Properly identifying what qualifies as a trade secret and implementing reasonable measures to keep it confidential are critical steps in safeguarding the lifeblood of your competitive advantage.
If your business faces a potential misappropriate of trade secrets claim, or wishes to protect its trade secrets, contact us. Because at the Vethan Law Firm, PC
Your Problem Is Our Business®
