Cases from 5th Circuit

Austin Division, United States District Court for the Western District of Texas
Texas Agency Sued in Trade Secrets Lawsuit

On November 17, 2016 pharmaceutical giant Pfizer, Inc. (“Pfizer”) sued Texas’s Health and Human Services Commission (“HHSC”) in federal court. Pfizer alleges that the HHSC misappropriated confidential information regarding its prices and rebate information for Texas Medicaid when it revealed the information to state lawmakers.

Pfizer claims the HHSC sent confidential detailed information regarding its drug prices and rebate protocol to two state senators. In its complaint, Pfizer argues this was a violation of 42 U.S.C. §1396r-8(b)(3)(D), which, in part, states that information disclosed by manufacturers or wholesalers is confidential, and cannot be disclosed a state agency. Furthermore, Pfizer alleges the HHSC violated a Texas law, which also prohibits the unauthorized disclosure of information obtained by the HHSC regarding drug rebate negotiations or other related trade secrets. Pfizer also claims that the HHSC has refused to specifically disclose which company information it released to the senators. Pfizer expresses concern in its complaint that the pricing information released would give competitors an unfair advantage in bidding situations.

Pfizer seeks a declaratory judgment in its favor and injunctive relief to prevent further release of its confidential information.

The case is Pfizer, Inc. v. Texas Health and Human Services Commission et al.

Pfizer’s complaint can be found here:
http://tsi.brooklaw.edu/cases/pfizer-inc-v-texas-health-and-human-services-commission-et-al/filings/pfizer-inc-v-texas-healt

United States District Court for the Fifth Circuit
Fifth Circuit Finds Copyright Act Does Not Preempt Trade Secrets Claim

Software company GlobeRanger Corporation (“GlobeRanger”) obtained a $15 million judgment from the United States District Court for the Northern District of Texas in a trade secrets misappropriation action against Software AG USA, Inc. (“Software AG”), a competing company. Software AG appealed, arguing that federal copyright law preempted GlobeRanger’s trade secret claim. The Fifth Circuit affirmed, finding no preemption.

GlobeRanger’s trade secret claim stems from its radio frequency identification (RFID) technology, which is most commonly used for electronic readers in tollbooths (e.g. E-Zpass). GlobeRanger uses RFID technology to manage its inventory. GlobeRanger claimed that Software AG misappropriated its RFID technology after taking over GlobeRanger’s subcontract with the NAVY to implement the technology. After a jury trial, GlobeRanger was awarded $15 million in compensatory damages.

On appeal, Software AG argued that federal copyright law preempted GlobeRanger’s trade secret claim. The United States Court of Appeals for the Fifth Circuit affirmed the judgment below, finding copyright law did not preempt GlobeRanger’s claim. The court reasoned that trade secrets claims seek to protect different rights than those protected under federal copyright law. The court explained that the claims are not based on Software AG copying the RFID technology, but that they did not have access to authorize it. Since a trade secret claim includes this element of unauthorized access, the court held it is different from copyright, and therefore not preempted.

The Fifth Circuit’s Opinion can be found here: http://tsi.brooklaw.edu/cases/globeranger-corp-v-software-ag-inc/filings/fifth-circuit-finds-copyright-act-does-not-preempt-

United States Court of Appeals for the Fifth Circuit
Fifth Circuit Affirms Preliminary Injunction for Misappropriation of Dietary Supplement Research Compilation

On an interlocutory appeal from the Southern District of Texas, the Fifth Circuit affirmed that court's grant of preliminary injunction against the former sales partner of a dietary supplements manufacturer.

Plaintiff Daniels Health Sciences ("DHS") had "compiled a distilled version of the science and research behind [its seaweed-based supplement] Provasca into a PowerPoint presentation titled 'The Path to Provasca.'" It shared this information with its marketing partner, Vascular Health Sciences ("VHS"). Despite the fact that DHS and VHS were led by brothers, this marketing relationship soured, and VHS allegedly relied on DHS's compiled research to develop and market a competing product.

The Fifth Circuit held that the grant of preliminary injunction was proper on DHS's breach of confidentiality agreement and trade secret misappropriation claims. The court rejected the defendant's argument that no evidence of confidential information, or of the existence of a trade secret, had been presented. The court called these distinct arguments "largely repetitive," but analyzed them under the parties' contractual definition, and Texas trade secret law (which adopts the Restatement) respectively.

United States Court of Appeals for the Fifth Circuit
Fifth Circuit finds that conduct that may cause market disruptions for a trade secret owner constitutes “use” of a trade secret in a claim of misappropriation

In Bohnsack v. Varco, L.P. the Fifth Circuit revisited the meaning of “use” of a trade secret in a claim of misappropriation. The court concluded that the jury had sufficient evidence to find that Varco. L.P. (“Varco”) misappropriated and used information that Clyde H. Bohnsack, a drilling fluids engineer, developed for the “Pit Bull,” a device that increased the efficiency of the process for drilling fluid cleaning. Varco and Bohnsack entered into negotiations in 2003 to manufacture and market the Pit Bull but the deal broke down. Varco then sought a declaratory judgment holding that it did nothing wrong in its dealings with Bohnsack, who counterclaimed that Varco had misappropriated trade secrets relating to the Pit Bull.

In a de novo review, the court defined “use” as “any exploitation of the trade secret that is likely to result in injury to the trade secret owner or enrichment to the defendant.” The jury therefore properly found that Varco “used” Bohnsack’s trade secrets because Varco’s actions would have 1) lowered the market value of the Pit Bull and 2) ensured that Bohnsack would be unable to find another manufacturer to compete with Varco. For example, Varco produced devices that could have competed with the Pit Bull for market share, if the Pit Bull was manufactured for sale. It also filed a patent application to the Pit Bull that would result in injury to Bohnsack by lowering the market value of Bohnsack’s invention.

United States Court of Appeals for the Fifth Circuit
5th Cir.: Unique combinations of methods previously disclosed in patent applications, themselves no longer trade secrets, may be protectible as such

Tewari De-Ox Systems (“Tewari”) created a meatpacking method that results in an oxygenless environment, maximizing freshness. The method allegedly relied on many trade secrets, including special iron-based oxygen scavengers, special bags, and a special mixture of gases. As a result, Tewari required companies viewing demonstrations of the method to sign non-disclosure agreements.

Tewari demonstrated the method to Mountain States/Rosen, L.L.C. (“MTSR”) in this manner. However, Tewari suspected that MTSR subsequently misappropriated its trade secrets and brought suit in the United States District Court for the Western District of Texas. MTSR received summary judgment on the trade secrets claims, as the District Court held that Tewari had disclosed its trade secrets in two 2004 patent applications, and therefore no issue of fact could exist as the information was not truly secret.

The 5th Circuit reviewed the summary judgment order de novo and reversed the order. It agreed with the District Court that the pieces of information disclosed in the patent applications were no longer trade secrets, as Tewari’s patent applications were published in 2004 and were therefore no longer secret. Regardless, the court reversed the order of summary judgment on the ground that the District Court incorrectly ruled that the previously disclosed elements, when potentially combined in unique ways by Tewari,
could not be trade secrets.

Therefore, Tewari had at least raised material issues of fact as to whether or not these combinations were trade secrets and whether or not MTSR had used these combinations. As a result, summary judgment was inappropriate.

United States District Court for the Eastern District of Texas
Texas Jury Awards $58 Million for Breach of Confidentiality Agreement

On March 6, 2015, the jury awarded Texas Advanced Optoelectronic Solutions Inc. (TAOS) $58 million dollars for its trade secret misappropriation suit against Intersil after seven years of litigation in the Eastern District of Texas.

TAOS patented technology that empowers flat panel video displays to adjust brightness based on different light exposures. Intersil approached TAOS in 2004 to negotiate a potential merger to enter the light sensor market. During the course of negotiations, both parties signed confidentiality agreements to protect TAOS’ technology and competitive trade secrets – including vendor information.

Then after what TAOS characterized as an unreasonable offer, Intersil severed all ties with TAOS and soon introduced a competing light-sensor product. TAOS demonstrated that Intersil used its patented technology to create this competing product. Additionally, TAOS also demonstrated how Intersil secured supply contracts with Apple by using trade secrets procured from the failed negotiations.

While Intersil states that it will appeal the verdict, the case is a good example for the necessity of employing confidentiality agreements in preliminary negotiations where trade secrets are at stake. In the event a party breaches the agreement, it goes a long way to demonstrate fraud, malice and gross negligence.

United States Court of Appeals for the Fifth Circuit
The Fifth Circuit holds that Trade Secrets Fixed Within Software Fall within Copyrightable Subject Matter

On June 30, 2015, the Fifth Circuit affirmed the lower court's decision which found Spear Marketing's (SMI) Texas Theft Liability Act and trade secret misappropriation claims precluded by the Copyright Act.

Spear Mktg., Inc. v. Bancorpsouth Bank involved a dispute over cash management software. SMI, producer of the software VaultWorks, alleged that its competitor, Argo, had stolen both technical and business trade secrets related to VaultWorks. On April 1, 2010, SMI had approached Argo to measure Argo's interest in acquiring SMI. In the pursuit of this deal, SMI provided a demonstration of its software and sent Argo screenshots of its software interface. The instant controversy arose when Argo launched its own cash management software at the end of 2011 and SMI's client, BancorpSouth Bank (BCS), had informed SMI that it had no intention of renewing its licensing contract with SMI.

An issue of first impression for the Fifth Circuit, the court confronted the intersection of trade secrets and the preemption purview of federal copyright law. Because processes and methods are excluded from copyright protection per section (102)(b) of the Copyright Act, SMI argued that their trade secrets fell outside the scope of the Act. Thus, the court was presented with whether processes and systems that had been fixed in a tangible medium of expression may be copyrightable subject matter for purposes of preemption, even though such matter may not be copyrightable matter generally.

The court addressed the issue by noting the current circuit split and followed the majority of its sister circuits,* holding that ideas fixed within tangible matter falls within the scope of copyright subject matter for preemption purposes, even if some of the underlying matter is not copyrightable. The court first stated that the Copyright Act protects computer software as a tangible medium. Then the court noted that the ideas that were allegedly stolen were fixed within the provided screenshots and the overall computer software. Therefore, SMI's trade secrets were fixed within the software, falling under the scope of the Copyright Act's preemption provision.



*The Second, Fourth, Sixth, Seventh and Ninth Circuits recognize that the Copyright Act's preemption provision, § 301(a), covers ideas fixed in tangible media. See Forest Park Pictures v. Universal Television Network, Inc., 683 F.3d 424 (2d Cir. 2012); U.S. ex rel. Berge v. Bd. of Trustees of the Univ. of Ala., 104 F.3d 1453 (4th Cir. 1997); Stromback v. New Line Cinema, 384 F.3d 283 (6th Cir. 2004); ProCD, Inc. v. Zeidenberg, 86 F.3d 1447 (7th Cir. 1996); Montz v. Pilgrim Films & Television, Inc., 649 F.3d 975 (9th Cir. 2011) (en banc). The Eleventh Circuit disagrees, finding that ideas are categorically excluded from copyright protection, even if the matter is fixed in a tangible medium. See Dunlap v. G&L Holding Grp., Inc., 381 F.3d 1285 (11th Cir. 2004).