Cases from Texas

United States Court of Appeals for the Fifth Circuit
5th Circuit Affirms Sanction for Law Firm Based on Accidental Disclosure

In Trenado v. Cooper Tire & Rubber Co., the surviving members of the Trenado family brought a products liability suit against Cooper Tire & Rubber Co. (“Cooper”), alleging the manufacturer was responsible for the family’s tragic rollover car accident. A jury returned a verdict in favor of the defendant, which the Fifth Circuit Court of Appeals affirmed in March, 2012.

As part of the litigation, plaintiff’s attorneys (“Smith & Fuller”) were privileged to Cooper’s trade secrets and confidential information. Smith & Fuller accidentally disseminated the information when it mistakenly copied the confidential files onto compact discs, which were then distributed to other personal injury attorneys. According to court documents, the recipients were attending a conference that specifically discussed “obtaining discovery from Cooper,” and were lawyers that generally “sue[d] Cooper and other tire manufacturers.”

Smith & Fuller’s dissemination violated the trial court’s Protective Order of Confidentiality regarding Cooper’s trade secret and confidential information. Following trial, the district court held that Smith & Fuller did not willfully violate the Protective Order. It determined, however, that sanctions should be imposed based on: (i) Cooper’s vigorous enforcement of the protective order prior to the violation; (ii) the costs Cooper incurred as a result of the violation; and (iii) the fact that Smith had previously violated similar protective orders. Pursuant to Rule 37(b)(2)(C), the court ordered Smith & Fuller to reimburse Cooper $29,667.71 in attorneys’ fees and expenses incurred as a result of Smith’s violation.

On appeal, Smith & Fuller argued the violation of the Protective Order was inadvertent and that the court erred by imposing sanctions. They further argued that the district court’s remedial powers were limited to the “Inadvertent Disclosure” provision of the Protective Order. However, the Fifth Circuit Court of Appeals affirmed the damages award. The Court held that:

[p]ursuant to Rule 37(b), the [district] court is authorized to impose
sanctions against parties or counsel, “‘including attorney’s fees,’ caused
by the failure to comply with discovery orders.” The district court provided
specific and well-reasoned grounds to impose sanctions as it determined that
any lesser penalty would not have been an adequate future deterrent. Appellants
concede that they violated the court’s Protective Order, and it was well within
the court’s discretion to use sanctions as a tool to deter future abuse of
discovery.

The Court’s decision cleared up ambiguity over whether Rule 37(b) sanctions can be imposed for violating Rule 26(c) protective orders. The Court not only questioned the Eleventh Circuit’s “narrow reading” of Rule 37(b), but moreover held that a Protective Order can also constitute an “order to provide or permit discovery.” The decision further exhibits the extremely delicate nature of trade secrets, such that an even accidental dissemination can destroy the vitality of the secret forever. Courts must decide whether a party should be punished for such a disclosure, and if so, how much.

Supreme Court of Texas
Texas Court to Hear Arguments Over Scope of Protective Order for "Tire Trade Secrets"

On April 19, 2013, the Supreme Court of Texas agreed to hear whether a Houston trial court ordered an overly broad disclosure of Defendant's trade secrets, such that it constitutes a "constitutional taking."

In IN RE CONTINENTAL TIRE THE AMERICAS, LLC,, Plaintiffs' allege that a defect in Continental Tire the Americas' (CTA) tires is responsible for the fatal crash of Juan Hernandez, and his daughter and granddaughter. Plaintiffs are all members of the Hernandez family. CTA claims it possess trade secrets in the tire and its manufacturing process. Furthermore, the company argues that the trial court's flimsy protective order constitutes an abuse of discretion: it not only failed to protect CTA's alleged trade secrets in the present case, but allows potential litigants in other states to access the confidential information in order to promote "shared discovery." CTA claims the extent of disclosure, as proscribed by the trial court, is so egregious it constitutes a constitutional taking without just compensation.

Per CTA's brief, under Texas Rule of Evidence 507, trade secrets, even if relevant, are privileged and not discoverable, unless the requesting party makes a particularized, evidentiary showing that disclosure of the trade secrets is necessary for a fair adjudication of the case. When the requesting party satisfies that burden of proof, the trial court ordering disclosure must issue a protective order sufficient to safeguard the trade secrets from further disclosure. Tex. R. Evid. 507.

Texas Court of Appeals
Texas Court Affirms Reasonable Royalty Damages Award

On July 10, 2013, a Texas Court of Appeals affirmed a jury’s award for damages in a trade secret misappropriation case stemming from proprietary data for natural gas extraction locations. The plaintiff, Toby Berry-Helfand, had conducted extensive geological research to determine locations likely to contain natural gas deposits. After sharing her findings under a confidentiality agreement with defendant Southwestern Energy Production Company (SEPCO) in hopes of forming a partnership, SEPCO declined to partner with Helfand, but commenced drilling in the locations recommended by Helfand’s research.

In affirming the jury’s award of $11,445,000, the court held that the jury had correctly applied the reasonable royalty approach in reaching this figure. Reasonable royalty, a measure of damages borrowed from patent law, is used in trade secret cases where there is no way to quantify the loss to the plaintiff. The approach attempts to determine what the parties would have agreed to as a reasonable licensing fee for the use of the trade secret, calculated at the time the misappropriation occurred.

Here, the court found that the damages awarded, roughly 3% of the revenue SEPCO generated from the drilling sites identified in Helfand’s research, represented a reasonable licensing fee for that information. While courts consider a number of factors in calculating a reasonable royalty, the court here gave particular weight to several factors. Specifically, the court noted that rates used in agreements between Helfand and other drilling companies for comparable information, the extent to which SEPCO made use of Helfand’s trade secrets, and the portion of the profit attributable to Helfand rather than to SEPCO were of particular importance.

While the court affirmed the jury’s award, it also held that the equitable remedy of disgorgement was not appropriate in this case since there was no fiduciary relationship between Helfand and SEPCO.

Southern District of Texas
Accusation of abuse of confidential consumer info revealed by pharmacy benefit claims process

Six Texas pharmacies have brought suit against CVS Caremark for racketeering and misappropriation of trade secrets, accusing the company of requiring patients to buy maintenance medications at CVS retail pharmacies. The lawsuit, filed in September of 2010, claims that CVS does not maintain a “firewall” between its retail pharmacies and the pharmacy benefits management side of its business as required by the Federal Trade Commission. According to the complaint, each of the plaintiff pharmacies owns a trade secret in its patient lists, prescription files, and integrated patient information. The lawsuit claims that CVS misappropriated this confidential patient information, which was disclosed to CVS through the claims adjudication process.

Defendants moved to dismiss and compel arbitration on December 6, 2010. The deadline for plaintiffs to file their reply to defendants' motion to dismiss and compel arbitration was April 25, 2011.

Supreme Court of Texas
Texas relaxes standards concerning consideration required to bind employees to non-competition agreements; must be “reasonably related to an interest worthy of protection”

The Texas Supreme Court held that stock options can act as appropriate consideration to bind an employee to a non-competition agreement under Texas law.

The dispute arose between an insurance company, Marsh USA, Inc., and its former managing director, Rex Cook, over whether or not stock options were enough to bind Cook to his non-competition agreement. Cook had started to work for Marsh’s direct competitor and sought to invalidate his non-competition agreement on the grounds that it was unenforceable.

Texas has a statute which dictates that restrictive covenants, such as non-competition agreements, must be ancillary to otherwise enforceable agreements. Prior to the decision in this case, this meant that an otherwise enforceable agreement must “give rise” to the employer’s interest in enforcing a non-competition agreement. The parties disagreed not only on whether or not stock options met the "ancillary to an otherwise enforceable agreement" language, but also on whether or not mere consideration consisting of stock options could "give rise" to or create the interest in restraining competition.

In eliminating the “give rise” requirement and holding that the consideration only need be “reasonably related to an interest worthy of protection, such as trade secrets, confidential information or goodwill,” the court significantly loosened standards for Texas entities seeking to enforce non-competition agreements. The court noted that Marsh satisfied this standard, as the stock options, the value of which is clearly tied to the long-term success of the company, were reasonably related to the company’s interest in its former employee not working for a competitor and in maintaining industry goodwill.

127th Judicial District Court
Schlumberger Case Potentially Raises the Stakes in Texas Trade Secrets Litigation

The 127th Judicial District Court of Harris County, Texas might have raised the stakes of bringing Trade Secrets litigation in Texas by allowing for the grant of attorney’s fees and sanctions in such cases under the Texas Citizens’ Participation Act (“TCPA”).

Schumberger originally sued Charlotte Rutherford, former Schumberger chief intellectual property attorney, for Rutherford’s use of the company’s confidential information to help Acacia launch two patent infringement suits. Schumberger filed claims of misappropriation of trade secrets, conversion, breach of fiduciary duties, violations of the Texas Theft Liability Act and breach of contract.

Rutherford denied the claims and filed a motion to dismiss the suit under the TCPA. To survive the TCPA motion, Schumberger had to produce “clear and specific” evidence that the Rutherford had used the company’s trade secrets against it. Judge Sandill ruled that the company did not meet this burden and dismissed all causes of action save for the breach of contract claim, ordering Schlumberger to pay $350,000 in attorney’s fees and $250,000 sanction fees.

The TCPA is a statute passed to curb lawsuits threatening free speech. Various sources have voiced concern over the expansive reading of the TCPA that led to this hefty penalty against the Plaintiff and the resultant heightened burden of proof that the Plaintiff must meet to survive a TCPA motion to dismiss.