A Development in Trade-Secret Cases

Originally published by Charles Sartain.

Posted by Charles Sartain

Co-author Sklyer Stuckey

The big trade-secret case, Southwestern Energy v. Berry-Helfand, reported on these pages here and here, has been worked over by the Texas Supreme Court. Highlights:

• Lack of certainty in damages does not preclude recovery.
• A “Flexible and imaginative” approach to damages in trade secret cases has its limits
• For the limitations clock to begin running, notice must be more than a suspicion or subjective belief.

A good tactical call

A defendant’s decision not to call an expert damages witness is reminiscent of the suicide squeeze. Judgment is withheld until the result is in. Run scores – manager is a genius; runner out at the plate – manager is reckless and should be fired. Here Southwestern introduced no witness of its own, but instead attacked factual underpinnings of Helfand’s expert’s methodology and the reliability of his calculations. Decision vindicated? Looks like yes. The jury awarded far less than Helfand’s expert calculated.

Reduced damages for misappropriation

As the court saw it, the only figure in the calculations that bore a relationship to the jury’s award was three-percent override applied to past production revenue on the disputed wells. There was no basis for valuing an override in Southwestern’s deep-rights sale. An estimate based on that sale was no evidence to support the jury’s $10.6 million award. The remainder of his calculations, though overstated, was sufficient evidence of actual damages for trade-secret misappropriation.

The proper measure was the reasonable royalty that would be obtained for the trade secret’s use, not an override. Relying on a “flexible and imaginative approach” for trade secret misappropriation is not justified when objective evidence is available. The compensation in the comparable Petrohawk agreement was probative of the trade secret’s value, and not necessarily of a reasonable royalty. Legally sufficient evidence existed to support actual damages, but insufficient evidence exists to support the entire amount the jury awarded.

The expert’s opinion was insufficient to support the entire judgment because he applied the total average payout (3%) received by the plaintiff under an exemplar agreement with Petrohawk to the total number of wells drilled by the defendant. He should have applied the specific formula for payout in the exemplar contract to each well to determine the exact amount that would have been paid for the trade secret.

Damages remanded – not rendered

Overstated damages do not entirely defeat recovery when legally sufficient evidence shows damages exist. There were damages to be had, just not in the amount awarded.

Breach of contract do-over

The court of appeals’ take-nothing judgment on breach of the confidentiality agreement was reversed and remanded. The jury award, based on the “value of the trade secret”, was not a proper measure of contract damages. Error in the measure of contract damages was not before the appeals court because Southwestern abandoned it on appeal. There was evidence of damages, but not enough to support the full award.

Limitations and the discovery rule – plaintiff survives

For the statute to begin to run on a trade secret misappropriation claim based solely on notice of sufficient facts that would cause a reasonable person to make further inquiry, the facts of which the plaintiff has notice must be egregious. Suspicions, subjective beliefs, and concerns are not sufficient. Southwestern failed to establish the date the misappropriation was discovered or as a matter of law, should have been, and couldn’t identify evidence revealing what Helfand would have discovered had she made further inquiry.

And we close with this enticement from the Supreme Court to unhappy defendants.

Curated by Texas Bar Today. Follow us on Twitter @texasbartoday.

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