Improper Use of Voluntarily Communicated Trade Secrets Sufficient to Maintain Action for Misappropriation in Texas

By on July 1, 2020
Posted In Trade Secrets

The US Court of Appeals for the Fifth Circuit held that, under Texas law, a plaintiff can sustain an action for trade secret misappropriation even if the plaintiff voluntarily communicated the alleged trade secrets to the defendant. Hoover Panel Systems, Inc. v. HAT Contract, Inc., Case No. 19-10650 (5th Cir. June 17, 2020) (per curiam).

HAT Contract hired Hoover Panel Systems to design and manufacture a power beam for desks in an open office environment. The parties engaged in oral negotiations that culminated in a written contract, which provided that “any . . . proprietary information shall be considered confidential and shall be retained in confidence by the other party.” The contract also provided that the “parties agree to keep in confidence . . . all information disclosed by the other party, which the disclosing party indicates is confidential or proprietary or marked with words of similar import.” Hoover developed a prototype and forwarded it to HAT, but never marked any information as confidential. HAT approved the prototype and placed several orders, although far fewer than Hoover expected. Hoover discovered that HAT had sent the prototype to at least one overseas manufacturer and was using it to manufacture products similar to those Hoover manufactured.

Hoover sued HAT in state court. HAT removed to federal court. Hoover then amended its complaint to recite causes of action for breach of contract, trade secret misappropriation, promissory estoppel, quantum meruit and unjust enrichment. HAT asserted affirmative defenses of waiver and ratification and a counterclaim of bad faith, but the district court declined to consider the counterclaim as untimely filed. HAT moved for summary judgment on all of Hoover’s claims and its waiver and ratification defenses, which the district court granted. Both parties appealed.

Breach of Written Contract
The district court found that HAT had not breached the contract because Hoover had never marked any information confidential, which was a condition precedent to HAT’s obligation to maintain secrecy. The Fifth Circuit reversed, holding the contract amenable to multiple plausible interpretations, the correct one of which  was a question of fact that precluded summary judgment.

Breach of Oral Contract, Promissory Estoppel, Quantum Meruit and Unjust Enrichment
The district court found that Hoover could not maintain claims for breach of oral contract, promissory estoppel, quantum meruit or unjust enrichment. The Fifth Circuit affirmed, holding that because the alleged oral contract occurred prior to or concurrent with the written contract, it was merged into that contract under Texas law. Similarly, Hoover’s three quasi-contract theories failed because the subject matter of the quasi-contract was covered by the written contract.

Trade Secret Misappropriation
The district court found that Hoover could not show that HAT had “acquired . . . by improper means” the alleged trade secrets because Hoover had voluntarily communicated them to HAT. The Fifth Circuit reversed, holding that “a ‘breach of a duty to maintain secrecy’ is a way of establishing improper means.”

Waiver and Ratification
The Fifth Circuit held that a fact question existed as to whether HAT ever told Hoover it was sending the prototype to a third-party manufacturer, or whether Hoover ever authorized HAT to do so. The factual disputes regarding the extent to which Hoover knew about and/or approved HAT’s activities precluded summary judgment on both the waiver and ratification defenses.

Bad Faith Counterclaim
HAT had asserted its counterclaim two months after deposing one of Hoover’s witnesses and after the deadline to amend pleadings. The Fifth Circuit held that the district court did not abuse its discretion by declining to consider the counterclaim given the two-month delay.

Practice Note: This case raises a potential Erie concern, as the result seems inconsistent with the Texas Court of Appeals’ recent holding in Title Source Inc. v. HouseCanary, Inc., that the “acquired by improper means prong” can only be satisfied by a breach of a duty of secrecy if the defendant actually acquired the trade secrets by way of the breach. Trade secret litigants in federal court should pay close attention to developments in analogous state court actions.

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.