2010 Unfair Competition Law

Document Sample
2010 Unfair Competition Law Powered By Docstoc
					                              2010 Unfair Competition Law

                                 Federal Court Decisions

MedioStream, Inc. v. Microsoft Corporation
749 F. Supp. 2d 507
Eastern District of Texas
October 29, 2010

        MedioStream filed a motion to dismiss several counterclaims, including a
counterclaim for misappropriation of trade secrets. The Court found that the
misappropriation claim was sufficiently pled under Rule 8(a). Pleading a claim under
California’s Uniform Trade Secret Act requires two main elements: (1) the existence of a
trade secret; and (2) misappropriation of the trade secret. The counterclaim alleged that
portions of the embedded API constituted trade secret information because details of
portions of the API were not generally known to the public, provided a competitive
advantage, and these portions were guarded by reasonable measures to protect their
secrecy. The counterclaim further included allegations that MedioStream received a copy
of the embedded API and that MedioStream was given strict limitations on use of the API.
The counterclaim alleged that MedioStream sent the embedded API to its Chinese
subsidiary and used the trade secret information without authorization and in a manner
inconsistent with its confidentiality obligations. These allegations were sufficient because
the counterclaim identified the trade secret as well as specific actions taken to protect the
trade secret information. Accordingly, the counterclaim pled facts establishing that the
claim was plausible.

        The Court was then asked to consider whether the misappropriation claim was
barred by the statute of limitations. MedioStream argued that the 3-year limitations had
run because its alleged failure to submit bug reports, report destruction, and return the API
would have put any reasonably diligent person on notice of a misappropriation claim.
However, counterclaimant argued that it could not have known of the misappropriation
until discovery began in this action. The Court could only dismiss the counterclaim if it
could conclude beyond doubt that the statute of limitations had run. The Court
concluded that the counterclaim revealed no facts compelling the Court to conclude as a
matter of law that the limitations period had run. Further, California’s discovery rule
might apply to the counterclaim.

        Finally, MedioStream alleged violation of California Civil Procedure Code Section
2019.210 warranting dismissal. This Section requires the party alleging misappropriation
to identify the trade secret with reasonable particularity before commencing discovery. The
Court concluded that this Section does not require that a party identify the trade secret
before discovery in general begins. Rather, it requires that the trade secret be identified
before commencing discovery related to the trade secret. Thus, MedioStream made no
showing that discovery related to the trade secret began before disclosure of the trade
Technomedia International, Inc. v. International Training Services Inc.
2010 U.S. Dist. LEXIS 93981
Southern District of Texas
September 9, 2010

         Defendants alleged that Technomedia failed to identify the allegedly
misappropriated trade secrets, show how Defendants disclosed those trade secrets, or state
how Technomedia was injured. The Court found that Technomedia’s complaint satisfied
the first element of a trade secret misappropriation claim by alleging that Technomedia
used “proprietary” information to perform the work called for under various statements of
work. Technomedia stated that the trade secrets included an “optional proprietary multi-
language graphical user interface called the XMp that ‘wraps around’ the CBTs and a
proprietary integrated learning solution (ILS) that deploys the CBTs and XMp into an on-
line training application for the training and management of oil and gas industry
employees” and that Technomedia developed and created both the ILS and XMp.
Technomedia pointed out that Defendants understood the information to be confidential
and proprietary and trade secrets under the confidentiality agreement signed by the parties.
Finally, Technomedia alleged that Defendants used proprietary information to generate
revenue that they refused to share. Accordingly, the Court found that Technomedia pled
its trade secret misappropriation claim with sufficient particularity.

Terra Nova Sciences, LLC v. JOA Oil and Gas Houston, LLC
738 F. Supp. 2d 689
Southern District of Texas
August 19, 2010

        Plaintiffs alleged fraud, misappropriation of trade secrets, quantum meruit, unjust
enrichment, and breach of fiduciary duty against defendants. Defendants filed motions to
dismiss under Fed. R. Civ. P. 12(b)(6). Plaintiffs moved for leave to file a second amended

        Defendants sought dismissal of the misappropriation claim, alleging that Plaintiffs
failed to plead the trade secrets were acquired through a breach of an improper
relationship or discovered by improper means or that Plaintiffs were damaged as a result of
Defendants’ use of the alleged trade secret. The Court found that Plaintiffs’ allegation that
Defendants obtained the algorithms by fraud was sufficient to allege that the trade secrets
were discovered by improper means. Further, Plaintiffs’ allegation that Defendants
incorporated the algorithms into the software from which they derived profits was
sufficient to allege the use element of misappropriation of a trade secret.

        Defendants also sought dismissal of the unjust enrichment claim as it was barred by
the statute of limitations. The case was filed more than two years after Plaintiffs stopped
providing software with any materials or services. Plaintiffs alleged that the statute of
limitations should not start until the date they discovered that Defendants had allegedly
used their proprietary information. The Court noted that Texas follows the “legal injury”
test in determining when a claim for unjust enrichment accrues. The Court found that
Plaintiffs alleged that fraudulently taking Plaintiffs’ ideas and incorporating them into
Defendants’ own software unjustly enriched Defendants. As statute of limitations is an
affirmative defense, Defendants must prove that Plaintiffs have set forth no plausible claim
for unjust enrichment. Defendants failed to show that the injury definitively occurred
more than two years before the case was filed. Accordingly, the claim survived the motion
to dismiss.

       Plaintiffs were granted leave to file an amended complaint bringing claims of fraud,
misappropriation of trade secrets, and unjust enrichment against new parties. Plaintiffs
were granted leave to file an amended fraud claim.

M-I LLC v. Stelley
733 F. Supp. 2d 759
Southern District of Texas
August 17, 2010

         The suit involved the alleged misappropriation of trade secrets and violation of
non-compete agreements by former employees. Defendants filed a motion to dismiss for
failure to state a claim, alleging that the complaint failed to comply with Rule 8 under the
Supreme Court’s Twombly and Iqbal decisions.

        Plaintiff’s complaint alleged that Defendants had access to various materials,
including nonconformance reports, tool drawings, tool designs, tech units, tool utility
reports, scrap reports, job proposals and procedures, sales forecasts, job tracker, customer
preferences, tool research and developments and project information. Plaintiff further
alleged that these materials were misappropriated. Defendants alleged that Plaintiff failed
to allege facts to support its misappropriation claim because there were no facts showing
what trade secret was misappropriated, that Plaintiff’s trade secrets were actually used or
disclosed by Defendants, or what injury was suffered by Plaintiff. The Court found that
Plaintiff’s misappropriation claim survived the motion to dismiss because Plaintiff alleged
facts that “raise a right to relief above the speculative level.”

         Defendants also sought to dismiss Plaintiff’s claim for tortious interference with
customer contracts. Defendants argued that there were no facts identifying the contracts
allegedly interfered with, how the alleged interference proximately caused injury to
Plaintiff, or the identity of the third person interfered with, or actual damage or loss
incurred. The Court found that the pleadings failed to allege a claim. Plaintiff failed to
allege or designate a specific contract that is the subject of interference. Further, Plaintiff
failed to adequately plead the proximate cause element of the cause of action. There were
no facts suggesting that any Defendant offered better terms or other incentives in order to
induce companies to breach their contracts. However, the Court ruled that additional
allegations might cure the existing deficiencies.

       Defendants further sought to dismiss Plaintiff’s claim for tortious interference with
prospective business relations. Defendants argued that the claim should fail because
Plaintiff failed to set forth facts showing “the reasonable probability that [Plaintiff] would
have entered into a business relationship with third persons, independently tortious or
unlawful conduct, the identity of the prospective business relationship . . . or actual
damage or loss incurred.” The Court found that the claim fell short of the Rule 12(b)(6)
pleading standard. Plaintiff failed to set forth any allegations establishing a reasonable
probability that it would have entered into a business relationship. Plaintiff also failed to
establish that Defendant committed an independently tortious act with a conscious desire
to prevent the relationship from occurring, or knew the interference was certain or
substantially certain to occur as a result of the conduct. However, Plaintiff was given the
opportunity to replead.

        Defendants also claimed that there were no facts to support a claim of unfair
competition by misappropriation. The Court noted that while the allegations were not
particularly detailed, the Fifth Circuit does not require them to be. Accordingly, the Court
found that the pleadings were sufficient as to this claim.

        Defendants also filed a motion for protection from discovery of their trade secret
information. They argued that Plaintiff must be required to establish that the information
is necessary for fair adjudication of its claim or defense. Defendants further argued that
depositions demonstrated that Plaintiff has little proof of its claims of trade secret
misappropriation. Defendants therefore argued that Plaintiff could not meet its burden
under Texas Rule of Evidence 507 to show that discovery of trade secrets was necessary.
The Court found that the trade secret materials were discoverable. However, the Court
was not convinced that the depositions exposed the frivolity of Plaintiff’s claims. Parties
are given wide latitude in conducting discovery, and Defendants failed to set forth
compelling reasons for why the material should be entirely exempt from discovery.

ClearValue, Inc. v. Pearl River Polymers, Inc.
735 F. Supp. 2d 560
Eastern District of Texas
August 12, 2010

        During trial, the jury found Defendant liable for trade secret misappropriation.
Defendant moved for JMOL and requested a new trial arguing that there was no evidence
that the alleged trade secret was actually a secret. Defendant claimed that the alleged trade
secret was publicly disclosed by the publication of a U.S. patent and was marketed and
offered for sale. In the post-verdict briefing, Plaintiff alleged that there was more to the
alleged trade secret than what was presented at trial. The Court ruled that Plaintiff could
not alter its purported trade secret post-verdict. The Court found that the U.S. patent
disclosed the trade secret. As such, JMOL was granted.
Retractable Technologies, Inc. v. Occupational & Medical Innovations, Ltd.
2010 U.S. Dist. LEXIS 82069
Eastern District of Texas
August 11, 2010

        Plaintiff alleged that Defendant misappropriated its trade secrets. The jury found
in favor of Plaintiff on this claim. Defendant moved for JMOL regarding the statute of
limitations for the trade secret misappropriation claim and argued that no reasonable juror
could find that Defendant misappropriated any of Plaintiff’s trade secrets. Defendant
argued that Plaintiff knew of its misappropriation more than 4 years before bringing suit.
The Court found that there was evidence for the jury to find that Plaintiff’s claim did not
begin to accrue before the limitations date. Further, Plaintiff presented sufficient evidence
that Defendant’s fraudulent concealment tolled the statute of limitations. The Court also
concluded that Defendant presented sufficient evidence that the materials were trade
secrets and were used by Defendant.

Varco LP v. Bohnsack
2010 U.S. Dist. LEXIS 72878
Southern District of Texas
July 20, 2010

        Defendant brought a motion for summary judgment on the claims of tortious
interference with prospective contractual relations as well as misappropriation of trade
secrets. Defendant claimed that there was no evidence to support the claims and that the
claims were barred by the relevant statutes of limitation. The Court found that Plaintiff
had not raised a fact question establishing a breach of a confidential relationship or
improper discovery of the trade secret. Defendant was not a party to the secrecy agreement
and could not have breached any confidential relationship created by it. Further, Plaintiff
proffered no evidence that his trade secrets were disclosed. Accordingly, the Court granted
summary judgment in favor of Defendant on the misappropriation claim. With respect to
the tortious interference with a prospective contract claim, the Court found that the
statute of limitations had run. Accordingly, the claim was dismissed.

                                   State Court Decisions

Kellmann v. Workstation Integrations, Inc.
332 S.W.3d 679
Court of Appeals of Texas, Fourteenth District, Houston
December 30, 2010

        Kellmann challenged the district court’s decision that denied her motion for a
directed verdict on Workstation’s claims for misappropriation of trade secrets, breach of
fiduciary duty, and conversion. The district court awarded the company damages,
including lost profits, interest, and fees, and rendered a take-nothing judgment in favor of
         Kellmann worked for Workstation for approximately six years before resigning.
She then opened a competing business. The appellate court was asked to determine
whether the evidence supported the jury’s findings that Kellmann committed theft of trade
secrets and breached a fiduciary duty, thereby entitling Workstation to damages, including
lost profits and fees. The appellate court found that Workstation’s evidence of gross
figures, rather than net revenue, did not establish lost profits and did not account for any
expenses. Workstation’s attorney’s statements during closing agreement attempted to cure
the lack of evidence but could not constitute evidence. Although Workstation argued that
Kellmann testified to her after-tax income, Texas courts had rejected the argument that
gross sales reflected in tax returns could support an award of lost profits. The evidence was
insufficient to demonstrate lost profits with reasonable certainty. This also precluded an
award of attorney’s fees because Workstation was not the prevailing party. Accordingly,
the appellate court reversed the lost profits and fee award, rendered judgment that the
company take nothing on its claims, and affirmed the remainder of the judgment.

Green Garden Packaging Co. v. Schoenmann Produce Company, Inc.
2010 Tex. App. LEXIS 8887
Court of Appeals of Texas, First District, Houston
November 4, 2010

      Green Garden sought review of a grant of summary judgment ruling that
Schoenmann had no liability on claims for breach of contract, quantum meruit,
misappropriation of trade secrets, and fraud.

        Green Garden alleged that the trial court erred in granting summary judgment on
its misappropriation of trade secrets claim because its “product information, forms, and
samples” constituted trade secrets and evidence was presented to support each of the
elements of the claim. The appellate court found that there was no evidence that Green
Garden actually possessed any trade secrets or that, in supplying the required information
for the purposes of a bid, Green Garden disclosed any of its trade secrets to Schoenmann.
The mere fact that Green Garden included a confidentiality notice does not constitute
evidence that Schoenmann acknowledged that Green Garden actually provided it with
trade secrets. Further, there was no evidence that Schoenmann actually disclosed any trade
secrets or used them in any way. Accordingly, the appellate court affirmed the grant of
summary judgment on the misappropriation claim.

Glattly et al. v. Air Starter Components, Inc.
332 S.W.3d 620
Court of Appeals of Texas, First District, Houston
October 7, 2010

         Air Starter obtained a judgment for misappropriation of trade secrets against
Specialized Components, its shareholders, and its salesman. Air Starter also obtained a
judgment for tortious interference with contract. The district court also entered damages
for lost profits and issued an injunction.
         The appellate court was asked to decide whether Air Starter proved the amount of
lost profits by competent evidence with reasonable certainty. The appellate court found
that there was no evidence that shows that all of Specialized Component’s sales would have
been made by Air Starter. There was no objective basis to support the assumption.
Further, the expert did not make a lost profit calculation based sole on misappropriation of
an Air Starter drawing. Accordingly, the appellate court reversed the trial court’s judgment
awarding damages to Air Starter and rendered judgment that Air Starter take nothing on
its claims for misappropriation of trade secrets and tortious interference.

        Air Starter contended that it was entitled to attorneys’ fees as a prevailing party
under the Texas Theft Liability Act, even though the jury found no damages for violation
of that statute. However, because the Texas Supreme Court had ruled that a party was not
a prevailing party on a breach of contract claim when the jury found a breach of contract
but answered “0” for damages, the appellate court ruled that Air Starter was not a
prevailing party.

In re Cooper Tire & Rubber Company
313 S.W.3d 910
Court of Appeals of Texas, Fourteenth District, Houston
May 27, 2010

         Cooper Tire filed a petition for writ of mandamus seeking to compel the trial court
to set aside its order compelling production of documents reviewed in camera because they
contained confidential trade secret information and alternatively, were not relevant.

        The plaintiffs were involved in a head-on collision with the driver. The plaintiffs
alleged that the tread separated from the right rear tire on the driver’s vehicle, causing him
to lose control and collide with the plaintiffs’ vehicle. The plaintiffs alleged that Cooper
Tire failed to incorporate a design element known as belt edge gumstrips (BEGs) into the
design for the tire, and that the incorporation of this design element would have resulted
in a safer alternative design. The plaintiffs sued Cooper Tire for strict liability, design
defect, manufacturing defect, marketing defect, and negligence. The plaintiffs sought
documents regarding a different tire that showed when the BEGs were added and removed
from that tire. In response, Cooper Tire objected on the basis of relevance. The plaintiffs
filed a motion to compel production, and Cooper Tire responded and argued that the
requested documents contained trade secrets and were not relevant because they
concerned information on a tire other than the tire involved in the accident. The trial
court ordered Cooper Tire to produce the documents in camera and later ordered them to
produce the documents to the plaintiffs.

       The appellate court ruled that the trial court abused its discretion by compelling
the company to produce to the plaintiffs the documents submitted in camera. The
company satisfied its burden to establish that the documents contained trade secret
information. Cooper Tire established that it maintained procedures to keep the
information secret. Cooper Tire also established the value of the information contained in
the documents to Cooper Tire and its competitors. Accordingly, the burden shifted to the
plaintiff to establish that the information was necessary to a fair adjudication of their
claims. The plaintiffs failed to do so. Accordingly, the trial court abused its discretion by
compelling Cooper Tire to produce the documents and conditionally granted the petition
for writ of mandamus.

Rusty’s Weigh Scales and Service, Inc. v. North Texas Scales, Inc.
314 S.W.3d 105
Court of Appeals of Texas, Eighth District, El Paso
April 7, 2010

        Rusty’s Weigh Scales sued Defendants for various claims, including theft of trade
secrets and tortious interference with contracts. At trial, the trial court rendered judgment
for Rusty’s Weigh Scales. However, Defendants moved to modify and vacate the
judgment, and after a hearing, the trial court vacated the initial judgment. After another
hearing, the trial court rendered a final take-nothing judgment in favor of Defendants. On
appeal, Rusty’s Weigh Scales challenged the trial court’s findings of fact on its trade secret
misappropriation claim. In challenging the damages element, Rusty’s Weigh Scales
contended that it was entitled to recover lost profits, out-of-pocket expenses, and exemplary
damages. Rusty’s Weigh Scales admitted that it produced no documentary evidence to
support a damages award but argued that documentation was not required.

        Rusty’s Weigh Scales asked the trial court for $2 million in lost profits but its
witness merely speculated as to the lost profits and failed to support the assertion with any
objective figures or data. Further, Rusty’s Weigh Scales failed to offer evidence that it
actually lost any business because Defendants had copied or used its software. Because
there was no reliable, non-speculative evidence on lost profits, the trial court correctly
concluded that Rusty’s Weigh Scales was not entitled to lost profits.

        The court was unable to find any evidence of a specific intent by Defendants to
injure Rusty’s Weigh Scales. See Tex. Civ. Prac. & Rem. Code Ann. § 41.001(7).
Although accessing indicators with a backdoor code was unethical, it was not malicious.
The evidence was not such that a jury could have found that Defendants acted with malice.
The trial court did not err in finding the evidence insufficient to support an award of
exemplary damages. See Tex. Civ. Prac. & Rem. Code Ann. § 41.003(a) (2008). Because
the trial court did not err by concluding that the evidence was insufficient to show the
fourth element of a misappropriation of trade secrets claim, damages, the court did not
need to address the remaining issues on appeal.

General Insulation Company v. King
2010 Tex. App. LEXIS 490
Court of Appeals of Texas, Fourteenth District, Houston
January 26, 2010

       The appellate court was asked to consider summary judgment proof of trade secret
misappropriation as it related to two types of information – client contacts and customer-
specific pricing data.

        General Insulation conceded that its list of customers was not confidential but that
the specific contact persons for each customer were confidential. King’s uncontroverted
testimony that he obtained the customer-contact information from sources other than his
employment with General supported summary judgment in favor of King on General
Insulation’s claims based on this information.

        The pricing information at issue was “job pricing,” the specific pricing information
quoted to a specific customer for a specific job. King alleged that he did not take any
customer-specific pricing information from General Insulation and that the customer-
specific pricing information was not confidential. The appellate court found that the proof
did not rise to the level at which courts had concluded the information was secret. Even
though pricing for an individual customer appeared in the customer’s contract and
customers were not required to sign confidentiality agreements, one could infer from a
witness’s testimony that customer-specific pricing was not usually discussed. The company
had, as its only policy, practice, or procedure to protect information, an “unspoken rule”
that the customer-specific pricing information was to stay in-house and the company
required its employees to sign a confidentiality agreement that specifically referred to
“price.” The company lost a job to a competitor when its bid was “within pennies” of the
competitor’s. Even viewed in the light most favorable to the company, the preceding proof
did not rise to the level at which courts have concluded the information at issue was secret.
Accordingly, the appellate court affirmed the grant of summary judgment to King.