Texas Appeals Court Erases Verdict of $4.4 Million in Lost Profits for Trade Secret Misappropriation
One monetary remedy often sought by a trade secrets-plaintiff is lost profits. Want to know what kind of evidence a trade secret-plaintiff needs to marshall and present to support a lost profits damage model? A recent Texas appeals court provides instructions about how NOT to do it. Indeed, in Hunter Buildings & Manufacturing, L.P. v. MBI Global, L.L.C., No. 14-12-00246-CV, 2014 WL 1258017 (Tex. App.—Houston [14th Dist.] Mar. 27, 2014, no pet. h.), the court reversed a $4.4 million verdict for lost profits, finding that the proof offered by trade secrets-plaintiff was insufficient to establish that the defendants’ alleged trade secret misappropriation caused the trade secret-plaintiff’s damages.
The dispute in Hunter Buildings arose out of the departure of Milo Nickel and Michael LeBlanc, president and vice-president, respectively, from MBI Global (“Global”)—a company in the business of manufacturing and selling blast-resistant buildings. Nickel and LeBlanc left in 2009 to form another company, BBG Group. Although Nickel and LeBlanc both had signed a “Non-competition and Trade Secrets Agreement” at Global, Nickel and LeBlanc formed BBG Group, and went into business with Hunter Buildings to compete against Global.
Global ultimately filed the underlying lawsuit against Nickel and LeBlanc, as well as other corporate defendants such as BBG Group and Hunter Buildings, asserting several claims, including misappropriation of trade secrets. The jury found that Nickel and LeBlanc had breached fiduciary duties to Global, that BBG Group has knowingly participated in the fiduciary breaches by Nickel and LeBlanc, and that Nickel, LaBlanc and BBG Group had misappropriated Global’s trade secrets. After jury awarded Global the sum of $4.4 million in lost profits damages, the trial court imposed the award jointly and severally against the former officers (Nickel and LeBlanc) and BBG Group. The defendants appealed.
There were two primary issues on appeal: (1) the legal significance of the jury’s finding that Nickel and LeBlanc were not proportionately responsible for causing or contributing to cause harm to Global; and (2) the sufficiency of Global’s lost profits evidence.
With respect to proportionate responsibility, the verdict form had several liability questions on breaches of fiduciary duty and misappropriation of trade secrets, but there was only one question regarding the percentage of responsibility of the harm to Global. The jury answered zero responsibility as to Nickel and LeBlanc. The trial court, however, entered judgment of joint and several liability as to Nickel, LeBlanc, and the corporate defendants. The appellate court determined that the trial court erred in doing so because the proportionate responsibility finding was material to the verdict.
Having determined no damages were awarded against Nickel and LeBlanc, the court next turned to the issue of whether there was sufficient evidence to sustain the $4.4 million lost profits damage verdict as to the corporate defendants. Here, the court focused on whether Global had offered sufficient proof to support a finding that the corporate defendants’ trade secret misappropriation had proximately caused Global to sustain lost profits. After stressing the fact-intensive determination of its analysis, the court reviewed Global’s expert testimony on damages and found that the evidence was legally insufficient to support an award of lost profits.
Key for the court appeared to be that there was no testimony that the corporate defendants’ misappropriation or use of Global’s trade secrets caused any damage or lost profits. The court stated, “at best, [the] testimony [addressed] lost gross revenue by all of the actionable conduct” alleged in the petition and that “significant components of this alleged conduct do not constitute misappropriation of trade secrets.” Thus, the “calculation of lost profits was not tied in any way to the portion, if any, of the lost profits which may have been caused by the Defendants’ alleged misappropriation of [Global’s] trade secrets, but instead extended globally to all of the Defendants’ allegedly actionable conduct.”
Based upon this finding, the Court of Appeals reversed the ruling awarding $4.4 million in damages to Global. The valuable lesson here is that, if you are seeking to prove lost profits damages in a misappropriation of trade secrets case by and through expert testimony, you must have the expert directly tie the damages calculations to the trade secrets at issue. We believe there is an equally important takeaway here—don’t get blinded by the beauty of all of the “bad facts” you allege in connection with bringing a trade secret theft case. In order to recover damages, the trade secret-plaintiff must tie the damages testimony to the “bad facts” associated with the trade secret theft itself. Said another way, the testimony will be insufficient to support an award of damages if it is nothing more than a recitation of “bad acts” constituting reprehensible conduct alone.
Article co-authored with former Fish attorney, Stephen E. Fox