Exploring the Contours of “Threatened Disclosure” Under Texas’ Uniform Trade Secrets Act

In
a commercial market increasingly connected through the Internet, the importance
of trade secret protection for businesses is growing exponentially. A single
key employee can wreak havoc if he misappropriates trade secrets and then uses
that information or discloses it to compete against his former employer.
Traditionally, employers have been able to secure injunctions in Texas courts
against former employees’ actual use or disclosure of trade secret information
based on evidence of those employees’ intentions. And while a few Texas courts
have gone so far as to issue injunctions where it was merely probable a
defendant would use or disclosure trade secrets, none have expressly or
formally adopted the doctrine is known as ‘inevitable’ disclosure. The Texas
Uniform Trade Secrets Act (TUTSA) may have changed that effective September 1,
2013, wherein the state legislature added a new tool to employers’ arsenal by
expressly authorizing injunctive relief for “threatened misappropriation.” When
combined with the Texas Supreme Court’s trend toward favoring enforcement of
non-competes, Texas has, at least temporarily, tilted pro-business in the
never-ending tug-of-war between employer proprietary concerns and employee
mobility interests. What is less clear is how this augurs for the future.
Although
the concept of threatened misappropriation has been a part of the Uniform Trade
Secrets Act since its inception in 1979, the flavor known as “inevitable
disclosure” did not gain widespread currency until PepsiCo Inc. v. Redmond, 54 F.3d 1262 (7th Cir. 1995). Traditional
threatened misappropriation cases issued injunctive relief based on evidence of
probability under the circumstances that the former employee would use the
trade secret information in his new job. The inevitable disclosure doctrine
dispenses with an analysis of the circumstantial evidence surrounding the
particular former employee’s subjective likely future intent, and instead
entertains the objective question of whether someone in the former employee’s
situation would inevitably use the former employer’s proprietary
information.  Some state courts have
adopted “inevitable disclosure” as the standard for measuring “threatened
disclosure” under the Uniform Trade Secrets Act. Others have rejected it,
opting for an approach that balances the competing interests of employee
mobility against the need to protect trade secrets.
The
inevitable disclosure doctrine has a checkered past in Texas jurisprudence. Although
no Texas court has formally recognized the doctrine under a common law theory,
several have fashioned analogous remedies using similar analysis. But with
TUTSA, the days of non-recognition have changed. What is unknown is what form “threatened
disclosure” may take in Texas jurisprudence. Will it be of the “inevitable
disclosure” variety espoused by Redmond,
or a more conservative flavor adopted by other jurisdictions? Prior Texas cases
provide few clues.
Three
common threads run through the Texas cases that approximated the inevitable
disclosure doctrine even before TUTSA: (1) possession of trade secret
information, (2) the employee is in a position to use the trade secret
information, and (3) that the trade secrets “probably would” be disclosed in
the absence of injunctive relief. For example, in Rugen v. Interactive Bus. Sys., Inc., 864 S.W.2d 548
(Tex.App.-Dallas 1993, no writ), the court of appeals upheld a temporary
injunction prohibiting the defendant from calling on, soliciting, or
transacting business with customers and consultants of her former employer, and also
from using confidential information and trade secrets she acquired while
employed by her former employer. Id.
at 550. Despite evidence in the record that the defendant had not actually
used or disclosed the trade secrets, the court nonetheless affirmed the
injunction, stating, “Rugen is in possession of IBS’s confidential information
and is in a position to use it. Under these circumstances, it is probable that
Rugen will use the information for her benefit and to the detriment of IBS.” Id. at 552. Thus, each of the above
threads, (1) possession of the information, (2) position to use the
information, and (3) probability of disclosure, are present in the Rugen holding.
Other
decisions tend to support the Rugen
court’s reasoning. In Williams v. Compressor
Eng’g Corp.
, 704 S.W.2d 469 (Tex. App–Houston [14th Dist.] 1986, writ ref’d
n.r.e.), the court of appeals affirmed an injunction based on a jury finding
that trade secrets “probably would” be disclosed. Id. at 470-472. That court went on to note that proof that trade
secrets “will be used” by a former employee to compete supports injunctive
relief. Id. The court of appeals in Weed Eater, Inc. v. Dowling, 562 S.W.2d
898, 902 (Tex.Civ.App.—Houston[1st Dist.] 1978, ref’d n.r.e.),
upheld an injunction prohibiting a former employee from working for a competitor.
The Weed Eater court noted that
injunctive relief was the only viable remedy where even in the best of good
faith, the former employee could hardly prevent his knowledge of his former
employer’s confidential methods from showing up in his work. And finally, in Fox v. Tropical Warehouses, Inc., 121
S.W.3d 853, 860 (Tex.App.–Fort Worth 2003, no pet.), the court of appeals held
that a plaintiff was not required to prove that a defendant is actually using
the information, but only needed to prove that the defendant was in possession
of the information and was in a position to use it.
It
is unclear, however, whether the three factors enumerated above are more or
less restrictive than the inevitable disclosure doctrine enunciated in Redmond. In its purest formulation in Redmond, “inevitable disclosure” means
that a plaintiff may prove a claim of trade secret misappropriation by
demonstrating that the defendant’s new employment will inevitably lead him to
rely on the plaintiff’s trade secrets. Behind the Seventh Circuit’s holding
stands a well-reasoned opinion: Teradyne Inc.
v. Clear Communication Corp.
, 707 F. Supp. 353 (N.D. Ill. 1989). As in Redmond, the court in Teradyne analyzed inevitable disclosure
in light of the Illinois Uniform Trade Secret Act, holding that “threatened
misappropriation can be enjoined under Illinois law” where there is a “high
degree of probability of inevitable and immediate … use of … trade secrets.”
Id. None of the Texas cases cited
above, however, discuss the degree of probability that information will
be disclosed necessary to support injunctive relief for threatened
misappropriation. This appears to be an unanswered question in Texas.
Not
all courts have lauded the inevitable disclosure doctrine. The California
appellate court for the Fourth Appellate District rejected the doctrine in Whyte v. Schlage Lock Co., 125 Cal.
Rptr. 2d 277 (Cal. App. 2002). Although the court acknowledged that the
majority of jurisdictions which had considered the inevitable disclosure
doctrine had accepted it in some form, the California court joined a small but
growing number of jurisdictions rejecting the doctrine. In doing so, the court
explained, “Decisions rejecting the inevitable disclosure doctrine correctly
balance competing public policies of employee mobility and protection of trade
secrets.” The California court observed that the inevitable disclosure doctrine
created a de facto covenant not to
compete that ran counter to California’s established public policy favoring
employee mobility. The court also criticized the doctrine because it rewrote
employment agreements after-the-fact, without the employee’s consent, based on
inferences drawn from circumstantial evidence.
As
previously stated, Texas courts have been reluctant to adopt a common-law
variant of the inevitable disclosure doctrine. Two factors now militate against
that trend, however. First, of course, is TUTSA. Texas’ Uniform Trade Secrets
Act closely resembles Illinois Act. For example, both states that include a
“list of actual or potential customers or suppliers” in the definition of a
trade secret; that particular addition is absent from the Uniform Act and most
other states’ adoption of the Uniform Act. The Redmond case has its origins in the Illinois Act. The second factor
is the Texas Supreme Court’s recently announced public policy shift in Exxon Corp. v. Drennen, — S.W.3d —, 57
Tex. Sup. J. 1346 (Tex. Aug. 29, 2014), a non-compete case. There the Texas
Supreme Court noted that with Texas hosting many of the world’s largest
corporations, “public policy has shifted from a patriarchal one in which we
valued uniform treatment of Texas employees from one employer to the next above
all else, to one in which we also value the ability of a company to maintain
uniformity in its employment contracts across all employees, whether the
individual employees reside in Texas or New York.” Thus, the Texas Supreme Court
effectively jettisoned its role as the protector of employee mobility in favor
of a policy that avoids “’disruptions of orderly employer-employee relations’
within large multistate companies and avoids disruption to ‘competition in the
marketplace.’” This public policy shift is quietly abetted by TUTSA, which
provides that the Act overrides conflicting law, which could include the Texas
Covenant Not to Compete Act’s stringent requirements to establish an
enforceable non-compete agreement. Under TUTSA’s provisions, Texas courts may
find the justification needed to impose de
facto
non-competes in the form of injunctive relief for threatened
misappropriation. Thus, while Texas courts have previously shied away from
adopting the inevitable disclosure doctrine, those days are likely numbered in
the pro-business environment prevalent at Texas’ highest legislative and
jurisprudential levels.
How
Texas courts interpret “threatened disclosure” under TUTSA remains to be seen. Texas
courts will have to balance the public policy behind the Uniform Trade Secrets
Act against that behind the Covenants Not to Compete Act. One way of doing so
would be to require a high degree of probability of inevitable disclosure to
trigger relief for threatened disclosure. That is the standard for “inevitable
disclosure,” however, and courts rejecting the doctrine argue it runs the risk
of creating de facto non-competes in
employment relationships. Furthermore, Texas courts are reluctant to depart from
existing precedent. Existing precedent suggests that proof of a probability of
disclosure is all that is necessary to support injunctive relief. Doesn’t
that create an even greater risk of turning TUTSA into a tool for forging de facto non-competes in the employment
relationship? None of this bodes well for a balanced approach that weighs employee
mobility against the protection of trade secrets. Thus, Texas courts may well
trend away from such a balanced approach when interpreting TUTSA’s threatened
disclosure provision. How far away they will trend, and whether the Covenant
Not to Compete Act’s public policy goals militate against that trend, remain to
be seen. Until a Texas court delivers a definitive decision, Texas lawyers will
be navigating uncertain waters, and employer attempts to enjoin former
employees from unfairly competing may be very difficult to predict.
To learn more about how the Vethan Law Firm P.C. (VLF) may help you, visit our website at vethanlaw.com or call our main office at (713) 526-2222