Texas Appeals Court Rules Private Communications with Customers Not Protected Free Speech

By on February 13, 2020
Posted In Trade Secrets

In a case addressing the applicability of free speech as a defense to trade secret misappropriation, the Court of Appeals for the Fifth District of Texas retracted its previous ruling, holding that communications with customers and suppliers did not involve a matter of public concern and were therefore not an exercise of free speech. Goldberg, et al. v. EMR (USA Holdings) Inc., et al., Case No. 05-18-00261-CV (Tex. App. Jan. 23, 2020) (Myers, J).

The case concerns allegations of trade secret misappropriation brought by EMR (USA Holdings) (EMR), against Kenneth Goldberg, his company Geomet Recycling (Geomet), and several Geomet employees who, like Goldberg, formerly worked for EMR. EMR and Geomet are both involved in the business of scrap metal recycling. EMR alleged that Goldberg, Geomet and the former EMR employees (collectively, “Defendants”) violated the Texas Uniform Trade Secrets Act (TUTSA), breached fiduciary duties and tortuously interfered with contracts by, among other things, using EMR’s trade secrets and confidential and proprietary information to contact purchasers and suppliers.

Defendants moved to dismiss all claims under the Texas Citizen’s Participation Act (TCPA), claiming that their contacts with purchasers and suppliers were protected free speech involving a matter of public concern. The TCPA allows litigants to seek early dismissal of a lawsuit if they prove by a preponderance of the evidence that the legal action is based on, or is in response to, a party’s exercise of the right of free speech.

The TCPA defines “exercise of the right of free speech” as “a communication made in connection with a matter of public concern.” The statute states that a “‘[m]atter of public concern’ includes an issue related to: (A) health or safety; (B) environmental, economic, or community well-being; . . . or (E) a good, product, or service in the marketplace.” Id. § 27.001(7). Additionally, under the “commercial-speech exemption,” the TCPA does not apply to a legal action brought against a person engaged in the business of selling goods or services if the conduct arises out of a commercial transaction in which the intended audience is an actual or potential buyer or customer.

After the trial court denied Defendants’ motion to dismiss without providing any reasoning, Defendants appealed.

On August 22, 2019, the Court of Appeals for the Fifth District of Texas affirmed the trial court’s decision. The Court held that the commercial-speech exemption to the TCPA applied to the Defendants’ communications with purchaser and suppliers. However, the Court also found that these communications concerned “an issue related to . . . a good, product, or service in the marketplace” and therefore involved a matter of public concern under the TCPA.

Both sides asked for rehearing. In its new ruling, the Court of Appeals reversed course and found that Defendants’ communications with purchasers and suppliers did not involve matters of public concern. Defendants argued that the business of recycling scrap metal relates to environmental, economic and community well-being, which are considered matters of public concern under the TCPA. The Court rejected this argument, noting that while scrap metal recycling may indeed relate to matters of public concern, the communications at issue “were private communications regarding private commercial transactions for the purchase and sale of a commodity.” The Court held that, because the communications themselves did not implicate matters of public concern, they were not subject to the TCPA.

Practice Note:

The new ruling significantly restricts the application of the TCPA. The holding indicates that the TCPA cannot shield defendants from trade secret claims based on communications between the defendant and potential customers or suppliers that solely relate to the purchase or sale of a commodity—even if the commodity at issue might arguably relate to matters of public concern.