Texas Business Dispute Blog

Monday, December 12, 2016

A Look Back at 2016 – Legal Issues Affecting Texas Private Company Owners and Investors (Part 1)

By: Ladd Hirsch

A sure sign the year is winding up is the release of TIME magazine’s “Person of the Year” list.  If TIME created a similar list of legal developments impacting owners and investors in private Texas companies this past year, at least two issues would be on it: the adoption of the Defend Trade Secrets Act and the stalemate that continues to exist for minority shareholders who have claims for oppression against majority owners.  The legal restrictions on the oppression claim have spurred an increase in shareholder derivative lawsuits containing allegations that private company officers and directors breached their fiduciary duties to the business.

This blog post will discuss what the Defend of Trade Secrets Act means for business owners, and our next post will tackle the reasons behind the increase in shareholder derivative litigation.   

The Defend Trade Secrets Act of 2016

In May 2016, President Obama signed the Defend Trade Secrets Act of 2016 (“DTSA”) into law. The Act is designed to make it much easier for companies to protect their intellectual property by allowing businesses to file suit in federal court when their trade secrets are stolen. This new law has been widely hailed as a positive development for companies, because corporate espionage and theft of trade secrets is costing American businesses an estimated $300 billion a year.

Filing Suit in Federal Court

Before the DTSA was passed, lawsuits alleging theft of trade secret could be filed only in state court. While many trade secret cases will continue to be filed in state courts premised on state law, permitting companies to bring claims for theft of trade secrets in federal court is important for several reasons.  First, in today’s modern economy, business operations often cross both state and national boarders, and a law that is national in scope is much more practical for companies in taking action to protect their valuable trade secrets.

In addition, federal judges are more likely to have experience managing complex business cases involving confidential information.  Further, more extensive federal pre-trial procedures ensure companies that their claims will be considered carefully and on full briefing of all issues.

Ex Parte Seizures of Trade Secrets

Another important aspect of the DTSA is the provision granting companies the right to seize stolen trade secrets on an ex parte (no notice to the other side) basis.  Under this seizure process, companies with a DTSA claim can go to court on an emergency basis and request the judge issue an order allowing them to seize trade secrets stolen by the opposing party. The seized materials are then turned over to the court so they can be protected while the case proceeds.

The seizure process has the potential to be an especially significant tool for business owners because it permits them to act promptly to protect the company’s proprietary information. They are not required to wait for their trade secrets to be exploited to act.  If a business can convince a court to order a seizure to take place, the stolen information can be recovered before the other party can improperly benefit from its misuse.

An Important Cautionary Note

The DTSA also includes a provision protecting employee whistleblowers, which should not be overlooked.   This provision gives whistleblower protections to employees who disclose trade secrets to the government (or an attorney) if they believe their company is engaged in illegal conduct.  Before the DTSA was passed, whistleblower employees could technically be sued by their company for disclosing trade secrets to the government, and that is no longer the case.

In addition, the DTSA mandates that all employment contracts or agreements that impose any confidentiality requirement on employees must include an exclusion that permits the employee to disclose information to the government under the DTSA’s whistleblower protections. This new law therefore requires all non-compete and other employment agreements to be updated (not just those in Texas).

If the proper information about the rights of whistleblowers is not provided to employees, the company may not be able to recover exemplary damages or legal fees in any DTSA lawsuits that they bring against that employee. It is also possible that a court could invalidate an employment agreement that failed to comply with the DTSA, but that remains to be seen.

A Bumpy Road Ahead

Whenever a new statute is enacted creating an entirely new claim, the law will be subject to legal challenges and some of its key provisions will be fleshed out in case law.  To this point, while a sizable number of DTSA cases have been filed across the country, few have been decided. We will closely monitor the developing case law and will publish a post in 2017 once significant decisions have been issued providing guidance about how the statute will be interpreted.

The next post will our final one in 2017, and will focus on the substantial rise in shareholder derivative litigation that has taken place during the past year.  


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