Copied right, but not copyright.

copyright_symbol_9The plaintiff in GlobeRanger Corp. v. Software AG won a $15 million judgment for misappropriation of trade secrets. The Fifth Circuit affirmed, holding:

  1. After a thorough review of Circuit precedent – not all entirely consistent – “that GlobeRanger’s trade secret misappropriation claim requires establishing an additional element than what is required to make out a copyright violation: that the protected information was taken via improper means or breach of a confidential relationship. Because the state tort provides substantially different protection than copyright law, it is not preempted.”
  2. Recognizing the “jurisdictional Catch-22” created by that ruling, and referring back to an earlier panel opinion from the time of the case’s removal: “As the complaint [then] alleged only conversion of intangible property for which there is equivalency between the rights protected under that state tort and federal copyright law, complete preemption converted the conversion claim into one brought under the Copyright Act that supported federal question jurisdiction at the time of removal and supplemental jurisdiction after it was dismissed.”
  3. Found that GlobeRanger had offered sufficient evidence of: (1) what specifically constituted its claimed trade secrets; (2) whether Software AG acquired trade secrets improperly or with notice of impropriety, particularly in light of federal contracting regulations; and (3) whether Software AG “used” any trade secret.

The opinion concluded with an unfortunately apt observation about the business litigation that is the focus of this blog: “This case demonstrates the unfortunate complexity of much of modern civil litigation. A trial involving a single cause of action—misappropriation of trade secrets (plus a derivate conspiracy claim)—has resulted in an appeal raising numerous issues that span the lifecycle of the lawsuit: jurisdiction; preemption; federal contracting regulations; expert testimony on damages; and jury instructions.

Oklahoma law wins “Red River Shootout” in noncompete case

texas-ouCardoni v. Prosperity Bank, an appeal from a preliminary injunction ruling in a noncompete case, involved a clash between Texas and Oklahoma law, and led to these noteworthy holdings from the Fifth Circuit in this important area for commercial litigators:

  • Under the Texas Supreme Court’s weighing of the relevant choice-of-law factors, Oklahoma has a stronger interest in the enforcement of a noncompete than Texas, “with the employees located in Oklahoma and employer based in Texas”;
  • As also noted by that Court, “Oklahoma has a clear policy against enforcement of most noncompetition agreements,” which is not so strong as to nonsolicitation agreements;
  • The district court did not clearly err in declining to enforce a nondisclosure agreement, given the unsettled state of Texas law on the “inevitable disclosure” doctrine; and
  • “[T]he University of Texas leads the University of Oklahoma 61-44-5 in the Red River Rivalry.”

No. 14-20682 (Oct. 29, 2015).

Trade secret tactics

copyrightSMI alleged ten causes of action, claiming that the defendants “had stolen both technical and business trade secrets related to VaultWorks,” a software program that helps banks manage their cash inventories.  Spear Marketing, Inc. v. Bancorpsouth Bank, No. 14-10753 (June 30, 2015).    A series of unfortunate events for SMI ensued:

1.  Defendants removed on the grounds of complete preemption under the copyright laws.  Acknowledging a lack of Fifth Circuit precedent on the specific issues in this case, as well as a split among other circuits, the Court found that “the technical trade secrets found within VaultWorks fall within the subject matter of copyright,” and that SMI’s Texas Theft Liability Act claim — and to the extent it involved intangible assets, its conversion claim – – were preempted.

2.  SMI’s post-removal amendment to drop the key language for preemption failed because “jurisdictional facts are determined at the time of removal, and consequently post-removal events do not affect that properly established jurisdiction.”  The Court concluded that “SMI has conflated the question whether the initial removal was proper . . . with the question whether the district court should, in its discretion, remand the case when the federal claims disappear as the case progresses.”

3.  The remaining claims — trade secret misappropriation, in particular — failed for a lack of proof that the defendants actually used the information in question.

How to enjoin a former employee

stopsignHalliburton obtained an injunction in an arbitration against a former employee.  The employee sought vacatur under the FAA, arguing that it allows judicial review of an injunction for vagueness.  After reviewing some dispute as to whether such review is allowed after Hall Street, the Court rejected the challenge.  The employee challenged a provision that enjoined him from “utilizing in any fashion” certain documents “that concern [Halliburton’s] products or services, arguing that “utilization” was undefined, the limitation had no time period, and the document description was vague.  The Court found that, “read in context,” it was clear that the arbitrator was referring to material that the employee had improperly taken from Halliburton.  Because this gave the employee “fair notice of what he may, and must not, do,” it was “clearly capable of being implemented and enforced.” McVay v. Halliburton Energy Services, No. 10-10172 (April 22, 2015).  The entire injunction appears on pages 6-7 of the opinion and is of general interest to noncompete and trade secret litigation.

Trade secret grab bag

Aspen Technology Inc v. M3 Technology Inc. affirmed an $11 million judgment in a suit to enforce a noncompetition agreement.  Nos. 12-20388 & 13-20268 (May 29, 2014, unpublished).  Most of the grounds are fact-specific and substantially influenced by spoliation matters.  On a key copyright issue, the Court held: “Aspen’s registration of its derivative materials permits Aspen to bring a claim that M3 had infringed preexisting versions of its software,” aligning the Fifth Circuit with several other courts that have addressed the point.  The Court removed roughly $500,000 in attorneys fees arising in prior litigation from the award for tortious interference, noting that the opposing party in that litigation was also a party in this case, removing the fee claim from the “equitable exception” to the rule that a contract or statute must allow recovery of fees.

Scope of discovery requests

Duoline Technologies v. Polymer Instrumentation presents an unusual appellate review of a discovery order, arising from an ancillary proceeding to enforce a subpoena for a Pennsylvania case.  No. 13-50532 (March 5, 2014, unpublished).  Plaintiff Duoline sought to depose Joseph Schwalbach, a former employee, about the business dealings between his new company and Defendant Polymer.  Among other rulings, the district court limited the document requests and deposition scope to events during Schwalbach’s employment by Duroline.  The Fifth Circuit noted that some evidence supported the plaintiff’s theory of a connection between the businesses, and that logically, plaintiff’s theory relied upon events after Schwalbach left his job at Duoline.  The Court did not find an explanatory affidavit from Schwalbach to be dispositive.

$40+ million trade secret judgment affirmed.

In Wellogix, Inc. v. Accenture, LLP, LLP the district court entered judgment for the plaintiff — $26.2 million in compensatory damages and $18.2 million in punitives, after a remittitur —  in a trade secrets case about software to make oil exploration more efficient.  No. 11-20816 (May 15, 2013, revised Jan. 15, 2014).  Affirming, the Court: (1) reminded, in the opening paragraph, of the deference due to a jury verdict; (2) detailed the sufficient evidence before the jury of a trade secret, of its inappropriate use by the defendant, of damages, and malice; (3) rejected Daubert arguments about the scope of the plaintiff’s computer science expert’s testimony  and the material considered by its damages expert; and (4) affirmed the punitive damages award because it was less than the compensatory damages and the issue of “reprehensibility” was neutral.  The Court also analyzed aspects of the relationship between trade secret claims and the patent process.  Footnote 4 of the opinion provides a useful guide to the federal courts’ treatment of a “Casteel problem” in Texas jury submissions.

Gold mines, supplemental jurisdiction, and limitations.

The owner of technology for identifying promising sites for gold mines sued an engineering firm for misusing its confidential information.  Target Strike, Inc. v. Marston & Marston, Inc., No. 12-50221 (April 17, 2013, unpublished).  The Fifth Circuit found it appropriate to exercise jurisdiction after dismissal of the federal claim, when the claim had been litigated for an extended period and the timing of the remand motion seemed tactical “when the judicial tide appeared to turn . . .”  (That holding contrasts with a recent opinion that found an abuse of discretion in not remanding a case once all federal claims were eliminated at an early stage of the proceedings.  Enochs v. Lampasas County, 641 F.3d 155 (5th Cir. 2011) (citing Parker & Parsley v. Dresser Indus., 972 F.2d 580 (5th Cir. 1992))).  The Court went on to find the plaintiff’s claim time-barred because the sites were known to the plaintiff and the defendant’s activity was public.

How to keep a preliminary injunction on appeal in a trade secrets case

The Fifth Circuit affirmed a preliminary injunction about pharmaceutical development in Daniels Health Sciences v. Vascular Health Sciences.  No. 12-20599 (March 5, 2013). The opinion offers a practical road map for basic issues in trade secret litigation.  As to likelihood of success on the merits, the Court found adequate findings about damage, specific confidential information, a trade secret arising from a “compilation,” and a confidential relationship between the parties.  As to irreparable injury, the Court found sufficient findings about reputational injury that was not speculative.  While it found no abuse of discretion in the district court’s weighing of public and private interest factors, it did see a “close question” about the overall scope of the injunction in light of the conduct at issue and the defendant’s business plans and suggested that the district court “try to narrow the scope of its injunction on remand.”

Preemptive reach of Copyright Act

Globeranger Corp. v. Software AG involved Texas state law claims about the development of a radio frequency identification system.   No. 11-10939 (Aug. 17, 2012).  The defendants removed and obtained dismissal on the grounds of Copyright Act preemption.  The Fifth Circuit agreed that section 301(a) of the Act creates complete preemption, and on the applicable test: “whether [the claim] falls ‘within the subject matter of copyright'” and whether it “protects rights that are ‘equivalent'” to those of a copyright.  Id. at 6 (citing Carson v. Dynegy, 344 F.3d 446, 456 (5th Cir. 2003)).  After through review of prior cases, the Court held that the conversion claim was likely preempted (thereby maintaining federal jurisdiction), but that the general basis for the claims included business practices excluded from copyright protection, making dismissal at the Rule 12 stage inappropriate.  Id. at 10-12.

Fraud judgment reversed, trade secret judgment affirmed

Bohnsack v. Varco presented a post-judgment appeal of successful claims for fraud and misappropriation of trade secrets about an oil drilling device called the “Pit Bull.”  No. 10-20741 (Jan. 23, 2012).  The Court ruled: (1) the evidence was sufficient to hold the defendant liable for statements of its outside counsel, to show that those statements were a “material factor” to the plaintiff, and to establish injury from lost profits (op. at 13-16); (2) the fraud damages awarded were benefit-of-the-bargain damages, not compensable under common-law fraud (op. at 16-20 (discussing Haase v. Glazner, 62 S.W.3d 795 (Tex. 2001))); (3) fraudulent inducement failed because the defendant’s statements only induced negotiations, not entry into a contract (op. at 22); and (4) the damages were compensable as misappropriation of a trade secret, under the broad definition of “use” in Texas law, and in light of damages evidence sufficient to show “the value a reasonably prudent investor would pay for the trade secret.”  Op. at 25-26.