Texas Appeals Court: Try Again, and This Time Get the Jury Instructions Right

By on June 18, 2020
Posted In Trade Secrets

A Texas Court of Appeals reversed a jury verdict for the plaintiff on claims of trade secret misappropriation under the Texas Uniform Trade Secrets Act (TUTSA) and fraud. The Court reversed the misappropriation verdict because the jury form commingled valid and invalid theories of liability, and reversed the fraud verdict because the jury instructions permitted a finding of liability under theories that were closely related to trade secret misappropriation and therefore preempted by TUTSA, as well as theories that were not. The Court ordered a new trial on both claims. Title Source, Inc. v. HouseCanary, Inc., Case No. 04-19-00044-CV (Tex. App. – San Antonio June 3, 2020) (Watkins, J.).

Title Source (TSI) provides title insurance, property valuations and settlement services. HouseCanary is a real estate analytics company. TSI hired HouseCanary to build an iPad application for its appraisers to use. The app would be based on HouseCanary’s automated valuation models (AVM). The parties’ agreement specifically prohibited TSI from reverse-engineering or attempting to discover HouseCanary’s source code or confidential information. Nonetheless, and despite its assurances to the contrary, TSI sought and used HouseCanary’s proprietary information to develop its own AVM. The parties’ contract required HouseCanary to maintain a certain “hit rate” (a metric of accuracy), but TSI’s employees took steps to purposely drive down the hit rate (including searching for an appraisal of the supposed street address: “Wiping a Vendor Wipes the fee”). The parties’ contract originally provided for a per-appraisal royalty to be paid to HouseCanary; the parties later amended the agreement to provide for a flat fee in exchange for TSI’s promise to deliver valuable historical valuation data (which it did not deliver).

TSI sued HouseCanary for breach of contract and fraud, alleging that HouseCanary had failed to deliver the app as promised. HouseCanary counterclaimed for breach of contract, fraud, unjust enrichment, quantum meruit and misappropriation of trade secrets under TUTSA. The jury rejected all of TSI’s affirmative claims and found in favor of HouseCanary on its misappropriation, fraud and breach of contract claims. TSI moved for a new trial, which the trial court denied. HouseCanary elected to recover on its misappropriation and fraud claims. The trial court entered judgment in favor of HouseCanary and awarded almost $740 million. TSI appealed.

HouseCanary’s TUTSA Claim

On appeal, TSI argued that the verdict was insufficiently supported by evidence and that two questions on the jury form commingled valid and invalid theories of recovery (Casteel error). The first question involved ownership of trade secrets. The Texas Court of Appeals held that sufficient evidence had been presented to sustain the finding of trade secret ownership, and that TSI had waived its objection based on the alleged Casteel error.

The second question asked the jury whether TSI misappropriated HouseCanary’s trade secrets, and the corresponding instruction provided that misappropriation could be found on either a “use” or an “acquisition by improper means” theory. The Court found that there was enough evidence to sustain a verdict on the “use” theory, but that the jury instructions regarding “acquisition by improper means” was overbroad, because it included potential liability theories that were not supported by the evidence (e.g., bribery, espionage) and used a definition of “improper means” [i.e., “breach or inducement of a breach of a duty to maintain secrecy, to limit use, or to prohibit discovery of a trade secret”] without further instructing the jury that the defendant must have been shown to have acquired the trade secrets as a result of those breaches. Because the jury could have found that “acquisition by improper means” was a consequence of breaches that occurred after TSI acquired the information, which is an invalid theory of recovery, the Court reversed the judgment and remanded for a new trial.

HouseCanary’s Fraud Claim

TSI argued that HouseCanary’s fraud claim was preempted by TUTSA. TSI characterized the fraud claim as “a recycled version” of the “improper means” theory of trade secrets misappropriation. HouseCanary argued that its fraud claim was separate from trade secrets misappropriation and was based on damages it allegedly suffered in reliance on TSI’s promises about paying for and rolling out the app (among other things).

The Texas Court of Appeals explained that both parties were correct: TSI was correct that a fraud theory based on misappropriation of trade secrets was preempted, and HouseCanary was correct that a fraud theory independent of trade secrets was not preempted. However, the Court could not determine which theory was the basis for the jury’s verdict and, accordingly, reversed and remanded for a new trial.

TSI’s Breach of Contract Claim

The Court found that the evidence supported the jury’s verdict against TSI on its breach of contract claim. The Court therefore affirmed the take-nothing judgment against TSI.

Practice Note: In this case, a $740 million award was wiped out based on improper jury instructions. Be careful that proposed jury instructions are not so broad as to permit both valid and invalid theories of recovery. Parties opposing recovery should seek more tailored instructions and preserve objections.

Paul Devinsky
Paul Devinsky advises clients on patent, trademark and trademark litigation and counseling, as well as copyright counseling. He is also active in intellectual property (IP) licensing, transactions and due diligence, as well as post-issuance US Patent and Trademark Office (USPTO) proceedings such as reissues and inter partes review, covered business method patent review and post grant review, and appellate (Federal Circuit) advocacy. Read Paul Devinsky's full bio.