The Supreme Court of Texas held that a limited partner had standing to sue for alleged loss in the value of its interest in the partnership, but reversed a damages award in favor of that limited partner for insufficient evidence. Pike v. Texas EMC Management, LLC, Case No. 17-0557 (Tex. June 19, 2020) (Busby, J) (Bland, J, dissenting).
Texas EMC Products (the partnership) was formed between investors (Wilson and Walker, both individually and through Walker’s company Few Ready Mix) and a Dutch company, EMC Cement BV, which held technology in “energetically modified cement.” Texas EMC Management, LLC, was the general partner. EMC Cement BV, Wilson and Walker were all limited partners with minority shares. The partnership established an EMC plant in Texas. Pike was hired as general manager of Texas EMC Management and the plant.
The partnership’s technology did not work as hoped, and the partnership never made a profit. At some point, Walker and Wilson refused to make further loans to the partnership, and the partnership defaulted on its loan. EMC Cement BV cancelled its license agreement with the partnership. Through Few Ready Mix, Walker and Wilson paid the bank the remaining balance of the loan, and Few Ready Mix held a foreclosure sale of the partnership’s property.
VHSC Cement purchased the property. VHSC had been formed less than a week before the foreclosure sale by two people affiliated with a California competitor. On the day of the foreclosure, VHSC hired Pike to be its president. VHSC continued to operate the plant without modification for six weeks. Subsequently, VHSC continued operating the plant but with different inputs and, eventually, with different equipment.
The partnership, Texas EMC Management and EMC Cement BV (collectively, EMC plaintiffs) sued Pike, Walker, Wilson and VHSC on a variety of theories, including trade secret misappropriation. The EMC plaintiffs sought an injunction to prevent VHSC from using or disseminating the alleged trade secrets. The defendants counterclaimed, including for failure to pay the deficiency balance on the promissory note. After a jury verdict, the trial court awarded damages to the EMC plaintiffs, declined to enter an injunction, and entered judgment against the defendants on their counterclaim. Both parties appealed.
The court of appeals largely affirmed the trial court’s judgment, and both parties petitioned for review, raising many of the same issues again at the Texas Supreme Court.
The Texas Supreme Court first found that EMC Cement BV had constitutional standing to bring suit to redress the alleged harm to the value of its share of the partnership. The majority reasoned that EMC Cement had the requisite injury-in-fact for standing, and whether it was authorized to bring suit was a question of capacity, not standing. Unlike standing, capacity is waivable. Thus, the Court found that it had jurisdiction over the dispute. Justice Bland, in dissent, argued that EMC Cement had no constitutional standing and would have dismissed the case. In his opinion, “[A] limited partner does not own the limited partnership’s claims. The partnership does.”
The Texas Supreme Court next found that the appellate court had erred in reinstating one category of damages that the jury had found but that the trial court had disregarded. The EMC plaintiffs had not challenged the trial court’s order disregarding the category of damages on appeal. The Texas Supreme Court held that it was error for the appellate court to grant relief on an issue not raised by the parties.
Next, addressing the damages the trial court had awarded, the Texas Supreme Court held that the plaintiffs’ evidence was legally insufficient. The jury charge defined “value” as “market value,” but the expert evidence was not probative of the market value. Both damages experts had used models assuming large growth in the partnership’s revenue; the Texas Supreme Court found no explanation in the experts’ testimony for the difference between these assumptions and the reality of the partnership history, which had lost money every year and had never made a profit. The Court found that the expert testimony was conclusory and legally insufficient to establish damages. Because the plaintiffs had failed to establish damages, the Court reversed the damages award and entered a take-nothing judgment against the plaintiffs.
The Texas Supreme Court further reversed the initial appellate decision and concluded that the trial court did not abuse its discretion by denying an injunction because plaintiffs had not shown there was no adequate remedy at law. To the contrary, the Court explained that the plaintiffs’ damages model was premised on the notion that the future income streams from the use of the trade secrets could be measured monetarily. The Court distinguished between the availability of a remedy at law (as determined by the initial appellate court) and plaintiffs’ showing of entitlement to that remedy.
Finally, the Texas Supreme Court found that substantial evidence supported the jury’s verdict against VHSC on its loan deficiency counterclaim.