Rorie v. Edwards ( 2002 )

UNITED STATES COURT OF APPEALS
For the Fifth Circuit
______________________
No. 01-40907
KENNETH L. RORIE, d/b/a Kentex,
Plaintiff-Appellee,
VERSUS
TRACY EDWARDS,
individually, d/b/a Tyler Fab & Equipment, d/b/a Remco,
SHERRI EDWARDS,
C. WAYNE HEWITT,
individually, d/b/a Red Eye Machine, d/b/a Remco,
Defendant-Appellant.
___________________________________________________
Appeal from the United States District Court for the
Eastern District of Texas, Tyler
CA# 6:00-CV 141
____________________________________________________
August 13, 2002
Before DAVIS, DeMOSS, and STEWART, Circuit Judges.
PER CURIAM:*
Appellants challenge the district court’s judgment against
*
Pursuant to 5th Cir. R. 47.5, the Court has determined that
this opinion should not be published and is not precedent except
under the limited circumstances set forth in 5th Cir. R. 47.5.4.
1
them for misappropriation of trade secrets, disparagement, and
false advertising, primarily on grounds that the evidence does not
support the verdict and judgment. For the reasons that follow, we
affirm in part, vacate in part, and remand.
I.
Plaintiff-appellee Kenneth Rorie owns and operates a business
called Kentex that builds machines including coil processing
machines that unroll coiled sheet metal, bend it flat, and cut it
to a desired length and width. Kentex is housed in a locked
building in a rural area.
Tracy Edwards joined Kentex in 1985 as a laborer and was soon
promoted to shop manager. As shop manager, Edwards used many of
the plans for the coil processing machine and had access to all the
plans. Rorie gave Edwards some of the responsibility for the
security of the plans and instructed him to release the plans on a
need to know basis. Although there was no written agreement, Rorie
informed Edwards in several conversations that the plans were
confidential and that Edwards should protect that confidentiality.
In 1998, Edwards left Kentex to start his own business. In
his new business, Edwards used Rorie’s plans to build a machine
similar to that sold by Kentex. He sold his first machine to
Standard Structures, a former Kentex customer.
Rorie sued Edwards, his wife, and Wayne Hewitt in Texas state
court on a number of state unfair competition causes of action, and
2
for false advertising under the Lanham Act. Defendants filed a
defamation and Lanham Act counterclaim. Defendants removed the
case to federal district court.
The district court dismissed defendants' counterclaims in a
partial summary judgment order. Rorie then abandoned a number of
his state law claims and went to trial on theft of trade secrets,
disparagement, and false advertising under the Lanham Act. The
jury found against the defendants on the claims of (1) trade secret
misappropriation and awarded a royalty of $150,000, plus $50,000 in
punitive damages; and (2) disparagement and awarded $50,000 special
damages and $50,000 punitive damages. The court found against
Edwards and in favor of Rorie on the Lanham Act claim of false
advertising and awarded one dollar of nominal damages and
injunctive relief, but denied Rorie's application for attorneys'
fees under the Act.
Defendants timely filed a notice of appeal.
II.
The appellants first challenge the sufficiency of the evidence
for the jury’s finding that the coil processing machine and plans
for its construction were trade secrets; Edwards also challenges
the sufficiency of the evidence for the jury’s royalty award for
misappropriation of those secrets. This court reviews such
challenges de novo, making the same inquiry required of the
district court. As we have stated:
3
We employ a deferential standard of review when examining
a jury's verdict for sufficiency of the evidence.
"Unless the evidence is of such quality and weight that
reasonable and impartial jurors could not arrive at such
a verdict, the findings of the jury must be upheld." We
may not reweigh the evidence, re-evaluate the credibility
of the witnesses, nor substitute our reasonable factual
inferences for the jury's reasonable inferences. We must
view the evidence in the light most favorable to
upholding the jury's verdict and may only reverse if the
evidence points "so strongly and overwhelmingly in favor
of one party that the court believes that reasonable men
could not arrive at a contrary conclusion." Questions of
law, of course, we review de novo.1
Under Texas law, the tort of trade secret misappropriation is
established by showing: “(a) a trade secret existed; (b) the trade
secret was acquired through a breach of a confidential relationship
or discovered by improper means; and (c) use of the trade secret
without authorization from the plaintiff.”2 The Texas Supreme
Court has adopted the definition of “trade secret” provided by the
Restatement of Torts.3
A trade secret may consist of any formula, pattern,
1
Douglas v. DynMcDermott Petroleum Operations Co., 144 F.3d
364, 369 (5th Cir.1998), quoting Ham Marine, Inc. v. Dresser
Indus., Inc., 72 F.3d 454, 459 (5th Cir.1995); Hiltgen v. Sumrall,
47 F.3d 695, 699-700 (5th Cir.1995); citing Pagan v. Shoney's,
Inc., 931 F.2d 334, 337 (5th Cir.1991); U.S. v. O'Keefe, 128 F.3d
885, 893 (5th Cir.1997), cert. denied, 523 U.S. 1078 (1998); Munn
v. Algee, 924 F.2d 568, 575 (5th Cir.1991).
2
Alcatel USA, Inc. v. DGI Technologies, Inc., 166 F.3d 772,
784 (5th Cir. 1999), citing Phillips v. Frey, 20 F.3d 623, 627 (5th
Cir. 1994).
3
See Taco Cabana Intern., Inc. v. Two Pesos, Inc., 932 F.2d
1113, 1123 (5th Cir. 1991), citing Hyde Corp. v. Huffines, 158 Tex.
566, 586, 314 S.W.2d 763, 776 (adopting Restatement of Torts § 757
(1939)), cert. denied, 358 U.S. 898 (1958).
4
device or compilation of information which is used in
one's business, and which gives him an opportunity to
obtain an advantage over competitors who do not know or
use it. It may be a formula for a chemical compound, a
process of manufacturing, treating or preserving
materials, a pattern for a machine or other device, or a
list of customers. ... A trade secret is a process or
device for continuous use in the operation of the
business. Generally it relates to the production of
goods, as, for example, a machine or formula for the
production of an article.4
Appellants argue that under Texas law, Rorie’s machine and its
plans cannot be protected as trade secrets. The Texas and U.S.
Supreme Courts have held that trade secret law does not protect a
good or its plans that may be produced from reverse engineering.5
Appellants also argue that the machine and its plans are not secret
because the machine was almost identical to all competitor
machines, hence their only competitive advantage was the time
appellants saved by not having to reverse engineer the machine.
These arguments are not persuasive. We believe that Texas law
is clear:
One may use his competitor's secret process if he
discovers the process by reverse engineering applied to
the finished product; one may use a competitor's process
if he discovers it by his own independent research; but
one may not avoid these labors by taking the process from
the discoverer without his permission at a time when he
is taking reasonable precautions to maintain its secrecy.
To obtain knowledge of a process without spending the
time and money to discover it independently is improper
4
Hyde Corp., 158 Tex. at 586, 314 S.W.2d at 776, quoting
Restatement of Torts § 757 (emphasis added).
5
Wissman v. Boucher, 240 S.W.2d 278, 279-80 (Tex. 1951);
Bonito Boats, Inc. v. Thunder Craft Boats, Inc., 489 U.S. 1 (1989).
5
unless the holder voluntarily discloses it or fails to
take reasonable precautions to ensure its secrecy.6
Viewing the facts in the light most favorable to the verdict,
we are satisfied that the machine and its plans were secrets.
Rorie kept his building locked and never allowed his suppliers or
contractors access to any plan beyond what was needed. We are also
satisfied that Edwards was under a duty not to improperly use the
plans. As we have stated, trade secret “protection will be awarded
to a trade secret holder against the disclosure or unauthorized use
by those to whom the secret has been confided under either express
or implied restriction of nondisclosure or by one who has gained
knowledge by improper means.”7 Edwards was Rorie’s right-hand man,
with overall responsibility to construct the machine. Rorie
repeatedly informed Edwards that the plans were proprietary and
that Edwards was to provide plans to suppliers on a need-to-know
basis. We are therefore satisfied that the record was sufficient
for the jury to find that Rorie took adequate steps to protect the
confidentiality of the plans and that Edwards violated Rorie’s
6
E. I. duPont deNemours & Co. v. Christopher, 431 F.2d 1012,
1015-16 (5th Cir. 1970).
7
Phillips at 629, citing Kewanee Oil Co. v. Bicron Corp., 94
S.Ct. 1879, 1883 (1974). See also Taco Cabana at 1123, citing
Furr's, Inc. v. United Specialty Advertising Co., 385 S.W.2d 456,
459 (Tex.Civ.App.--El Paso 1964, writ ref'd n.r.e.), cert. denied,
382 U.S. 824 (1965)(A secret-holder “will lose his secret by its
disclosure unless it is done in some manner by which he creates a
duty and places it on the other party not to further disclose or
use it in violation of that duty.”)
6
trust when he misappropriated the plans and built the coil
processing machine.
A reasonable royalty is the appropriate measure of damages for
the misappropriation of the trade secret in this case. Appellants
argue that under Metallurgical Industries, Inc. v. Fourtek, Inc.,
the estimation of damages that underlies the quantification of a
reasonable royalty may not be based on “sheer speculation. If too
few facts exist to permit the trier of fact to calculate proper
damages, then a reasonable remedy in law is unavailable.”8
Appellants’ argument is unavailing because the jury did not
base its award on “sheer speculation.” The cases allow a
plaintiff considerable flexibility in establishing a reasonable
royalty. If actual losses are not known, a reasonable royalty
should be awarded, based on the legal fiction of a licensing price
for the secrets.
In calculating what a fair licensing price would have
been had the parties agreed, the trier of fact should
consider such factors as the resulting and foreseeable
changes in the parties' competitive posture; the prices
past purchasers or licensees may have paid; the total
value of the secret to the plaintiff, including the
plaintiff's development cost and the importance of the
secret to the plaintiff's business; the nature and extent
of the use the defendant intended for the secret, and
finally whatever other unique factors in the particular
case might have affected the parties' agreement, such as
the ready availability of alternative process.9
8
790 F.2d 1195, 1208 (5th Cir. 1986).
9
Id. at 539, citing Hughes Tool Co. v. G. W. Murphy
Industries, Inc., 491 F.2d 923, 931 (5th Cir. 1973).
7
Rorie asked for $140,000 to $150,000 as a reasonable royalty,
based on the money he testified he spent on research and
development to create his plans, lost gross profits from two
machines per year for two years, and the effect the loss of profits
had upon his competitive research and development. Plaintiff
produced sufficient evidence to support the award.
III.
Appellants next challenge the sufficiency of the evidence to
support the jury’s finding of false advertising under the Lanham
Act. They argue that Rorie failed to demonstrate that the
advertising was false. Rorie produced evidence that Edwards (1)
copied Rorie’s brochure almost verbatim from the Kentex brochure,
(2) misrepresented the capabilities of the copycat machine, and (3)
posted a picture of a machine on his website that Edwards did not
actually manufacture.
The court awarded Rorie one dollar in nominal damages
consistent with the jury verdict. The court also entered a
permanent injunction that prevented Edwards from (1) distributing
advertising material using the text, or deceptively similar text,
of Rorie’s brochure, or (2) distributing or posting advertising
material displaying photographs of any machines Edwards did not
actually or substantially manufacture.
The elements of a Lanham Act claim for false advertising are:
(1) a false or misleading statement of fact about a product; (2)
8
that either deceived or had the capacity to deceive a substantial
segment of potential consumers; (3) the deception is material, in
that it is likely to influence the consumer's purchasing decision;
(4) the product is in interstate commerce; and (5) the plaintiff
has been or is likely to be injured as a result of the statement at
issue.10
If a statement of fact is shown to be literally false, then
deception is inferred.11 If a plaintiff is seeking damages based
on a statement that is ambiguous or misleading, however, actual
deception may not be inferred and must be proven.12
Rorie presented no evidence that any consumers were confused
or deceived by the brochure or Edwards’ representation of the
abilities of Edwards’ machine. But the jury was entitled to find
that Edwards made a literally false statement when he depicted a
machine (frame welder) that he did not build as his own on his
website. Although the machine shown on the website was a frame
welder and not a coil processor, Edwards’ implicit representation
that he produced this machine apparently led the jury to conclude
that Edwards was trying to project an image as a much more
experienced manufacturer in this field than he actually was. This
10
See Pizza Hut, Inc. v. Papa John's Intern., Inc., 227 F.3d
489, 495 (5th Cir. 2000).
11
See id. at 497.
12
See id.9
evidence was sufficient–-although barely–-to support the Lanham Act
injunction and nominal damages.
IV.
Tracy Edwards argues that the business disparagement verdict
must be reversed, because Rorie failed to prove special damages--
an essential element of the tort. This court has interpreted the
Texas requirement for special damages in disparagement cases as
follows: “To prove special damages, a plaintiff must provide
evidence of direct, pecuniary loss attributable to the false
communications of the defendant.”13
Rorie presented ample evidence to show that Edwards disparaged
Rorie’s equipment and customer service before and after he left
Kentex. Rorie showed that his coil machine sales receipts fell
from $333,000 in 1998 to $156,000 in 1999 to $80,000 in 2000. He
sold seven machines in 1998, three in 1999, and two in 2000.
Edwards sold three machines during this time. But Rorie admitted
that he could not say that any of his lost sales were attributable
to Edwards’ disparaging remarks about the Kentex machine. And
Rorie produced no other probative evidence connecting his loss in
sales to Edwards’ remarks. Rorie’s proof was therefore
insufficient to show a “direct pecuniary loss” attributable to
Edwards’ remark. We must therefore vacate the award for both
pecuniary and punitive damages for disparagement.
13
Johnson v. Hospital Corp. of America, 95 F.3d 383, 391 (5th
Cir. 1996).
10
V.
Appellants argue that the injunction regarding appellants’
trade secret misappropriation is overbroad in that it prevents his
use of any “document” that they obtained from Rorie and not limited
to the plans the jury found to be trade secrets. We are satisfied
that the court used the word “document” to identify the plans found
to be trade secrets, and giving the injunction this interpretation,
it is not overbroad.
VI.
Appellants filed a counterclaim for violation of the Lanham
Act and defamation based upon investigative letters mailed by Rorie
during the investigative stage of the lawsuit. The district court
held these letters to be absolutely privileged under Texas law as
part of the judicial process. Appellants argue on appeal that the
database of addresses that Rorie used to send his investigative
letters included organizations and businesses that could not
possibly be connected to a reasonable investigation. The record
reveals no evidence to conflict with Rorie’s affidavits that from
the database, he only sent the letter to clients and potential
clients. The district court did not err in its ruling on
privilege.
VII.
For the reasons stated above, we affirm the judgment of the
district court except for the compensatory and punitive damage
11
award on plaintiff Rorie’s disparagement claim.14 Because the
evidence does not establish an essential element of Rorie’s
disparagement claim, we vacate the award on this claim and remand
the case to the district court for entry of judgment consistent
with this opinion.
AFFIRMED IN PART, VACATED IN PART, REMANDED.
14
Appellants also seek attorneys’ fees based on the Texas Theft
Liability Act. Rorie originally brought his trade secrets action
under this Act, but he abandoned this statutory action prior to
trial. Had Rorie seen the action through, the prevailing party
would have been entitled to attorneys’ fees, but he did not. Hence
neither side is entitled to attorneys’ fees under the Act.
12