Cases from United States Court of Appeals for the Fifth Circuit

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
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.

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 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).