Software laptop

A software developer brought claims against a consulting firm for misappropriation of trade secrets under Texas common law and theft of trade secrets under Texas Theft Liability Act (TTLA).

A software company (“Company W”) developed software that allowed oil companies to “plan, procure, and pay for complex services”—all online. The software featured: “dynamic templates” that adjusted cost and supply estimates. Company W was, according to its CEO, the only company offering complex services software from 2000 to 2005. The software was not a stand-alone solution, but needed other companies’ software to perform core accounting functions.  To fill this technology gap, it contracted with SAP in 2005.  The agreement allowed Company W to integrate its complex services software with SAP’s accounting software. As part of the agreement, Company W provided its program code to SAP.

 

A major petroleum company used this software at two well sites, and hosted a confidential online portal that allowed Company W to share files and information.  The oil company then sought to implement global software that “was not just for complex services, but was for [its] entire … system.”  To that end, the oil company sponsored a new pilot, and instructed a management consulting company to select a software provider.  SAP and Company W pitched their integrated software to the management consulting company in May 2005 and as part of this, Company W described the software’s dynamic templates.

Without telling Company W, the management consultants and SAP began developing the complex services piece of the global software for the petroleum company.  The management consultant and SAP apparently accessed Company W’s technology—including flow diagrams, design specifications, and source code critical to Company W’s software—that had been uploaded to the confidential portal.  Company W sued the oil company, management consultant company and SAP in district court in 2008, alleging that they had stolen and misappropriated its trade secrets. SAP was dismissed for lack of venue. Company W and the oil company agreed to arbitrate, with a district court judge acting as the arbitrator.  The judge found that Company W’s source code was a trade secret.  Even though the petroleum company didn’t use the code, the judge found that the oil company breached its confidentiality agreement with Company W by making confidential information accessible to the management consultants and SAP.

The suit against the management consulting company went to trial, and the jury returned a verdict award for Company W, of $26.2 million in compensatory damages and $68.2 million in punitive damages. The district judge, upon motion, suggested a remittitur of the punitive damages award to $18.2 million—the amount Company W sought at trial. Company W accepted the remittitur, and the district court entered final judgment. The defendant appealed.

Circuit Judge Stephen A. Higginson for the U.S. Court of Appeals, Fifth Circuit, wrote the opinion of the court.  The judge started his analysis of the case by setting out the definitions and criteria for trade secrets in Texas. The existence of a trade secret is properly considered a question of fact to be decided by the judge or jury as fact-finder, and is defined as “any formula, pattern, device, or compilation of information used in one’s business, and which gives an opportunity to obtain an advantage over competitors who do not know or use it.”  Judge Higginson explained that in order to determine whether a trade secret exists, the judge or jury must consider six factors, weighed “in the context of the surrounding circumstances”:

(1) the extent to which the information is known outside of his business;
(2) the extent to which it is known by employees and others involved in his business;
(3) the extent of the measures taken by him to guard the secrecy of the information;
(4) the value of the information to him and to his competitors;
(5) the amount of effort or money expended by him in developing the information; and
(6) the ease or difficulty with which the information could be properly acquired or duplicated by others.

The Court believed that Company W presented enough evidence and testimony to support the jury’s finding that its technology contained trade secrets.  The developer showed that it was the only company offering this type of complex services software in 2000 for five years.  As a result, its software—and, in particular, the underlying proprietary source code—gave it “an opportunity to obtain an advantage over competitors.”   Company W also showed that the six factors for the existence of a trade secret weighed in its favor.

One is liable for disclosure of trade secrets if:

(a) he discovers the secret by improper means; or
(b) his disclosure or use constitutes a breach of confidence reposed in one who is in a confidential relationship with another who discloses protected information to him.”

Company W presented sufficient evidence and testimony to support the jury’s finding that the management consultants improperly acquired Company’s trade secrets. The defendant argued that there was no evidence, other than expert R’s testimony that Company W’s trade secrets were on the portal.  The management consulting company maintained that R’s testimony was not probative because he did not have personal knowledge that certain trade secrets were on the portal. However, as an expert, R did not need firsthand knowledge or observation.  Instead, the expert testified that, in his experience in the software industry, he believed it was likely that companies working together on a pilot project would share documents containing trade secrets on an online portal. He added that he based this belief, in part, on the petroleum company’s contractor’s deposition testimony that information resembling Company W’s trade secrets was on the portal. Given that “an expert is permitted wide latitude to offer opinions,” and that, as discussed below, R’s testimony was sufficiently “reliable” and “relevant,” the jury was reasonable in crediting his testimony.

The management consulting company also argued that Company W’s CEO’s “vague and unsupported” testimony did not show that they acquired its trade secrets.  The management consulting company maintained that the CEO’s testimony that one of its pilot partners “had access” to the source code did not “support the inferential leap” that it had the same access.  They added that it could not access Company W’s source code because, as the CEO testified, the code was behind a firewall. However, their involvement in the pilot, as the “consultant and the implementer [of software]” supported the inference that they could have accessed Company W’s source code through the pilot.  Further, Company W’s CEO’s testimony that the company kept its source code behind a firewall for the project does not preclude a jury from finding that the management company otherwise had access to the code.

Any exploitation of the trade secret that is likely to result in injury to the trade secret owner or enrichment to the defendant is a “use[.]”  It can include “activities other than the actual selling of the product.”  An act that “lower[s] the market value” of a trade secret by “making it less likely that [the plaintiff] would sell his invention to [the defendant’s] competitors” could amount to “use.”

Judge Higginson wrote that Company W also presented sufficient evidence and testimony to support the jury’s finding that the management company used its trade secrets. The defendant admitted that it developed complex services templates for its software, but argued that its templates lacked “dynamic” features, and were “nothing like Company W’s.”  The management consulting company also noted that the Company W CEO recognized that his company didn’t own the concept of templates.  Nonetheless, the judge said, the standard for finding “use” is not whether the defendant’s templates contained Company W’s trade secrets, but whether the management consulting company relied on those trade secrets to help or speed up the research or development of its own templates.  As such, a jury could legitimately infer that the defendant relied on Company W’s templates to develop its own.

The management consulting company argued that expert witness R’s testimony about the meaning of certain terms in the defendant documents, such as “development,” was “pure conjecture,” which should not sustain the judgment.  However, as a software development expert witness, Judge Higginson held, R had the requisite “experience, training, or education” to testify as to the software industry’s understanding of such terms.  Further, the judge said, even without the expert witness testimony of R, a jury could “legitimate[ly] infer” that the defendant used Company W’s trade secrets.

The Court of Appeals held that Company W presented sufficient evidence and testimony to support the jury’s $26.2 million compensatory damages award to Company W. It introduced testimony by damages expert WM that the company was worth $27.8 million in 2005, and the information on which he based his valuation. The damages expert testified that, before projecting Company W’s value, the venture capital groups audited Company W’s financials; made phone calls “to partners and customers”; “asked knowledgeable people … what they thought of the software”; and “tried to find out i[f] there [was] any competition.” WM also testified that “it would be very unusual” if Company W did not supply information to the groups because “[t]hat is the source of most of your information when you[ ] come in and [are] asked to value a company.” Given the “ ‘flexible’ approach used to calculate damages,” reasonable jurors could find that the $8.5 million investment for a 31% stake, and the underlying projections, supported a $27.8 million valuation.

The management consulting company argued that, notwithstanding expert WM’s valuation, Company W did not show that the alleged misappropriation “totally or almost totally destroyed” the software company’s value.  The defendant maintained that Company W did not establish “the market value of the business immediately before and immediately after” the alleged misappropriation. However, expert WM testified that the investment and projections were made “right about the time that the theft occurred.” Expert R testified that, based on his knowledge of the software industry, “the total value of Company W went to zero” after the alleged misappropriation.  Independently, the Company W CEO testified that, by 2005, the “money was all gone” and his company was “nearly broke.” The judge wrote that reasonable jurors could find that this testimony established the “market value of the business immediately before and after” the alleged misappropriation.  In that expert R’s general background in computer sciences qualified him to testify about Company W’s software, his software expertise allowed him to offer his opinion as to the general effect that defendant’s misappropriation of Company’s technology would have on the company’s value—particularly given that its value was derived from this technology.

The district court did not err by allowing Company W’s software expert R to testify.  R’s experience as a software developer and forensic analyst, and his fluency in different programming codes, qualified him as an expert on the subject of software programming and source codes.  Further, Judge Higginson said that by limiting his testimony to whether Company W’s source code was a trade secret, and whether its code matched SAP’s, R did not stray from this subject matter.

The management consulting company argued that expert R’s general computer sciences background did not qualify him to testify about “the oil-and-gas industry, complex-services procurement, or SAP software.” However, R didn’t need particular expertise in that industry or complex services procurement to help the jury understand software concepts and terms.  Further, the expert had “specialized knowledge” about SAP’s software because he had been able to teach himself SAP’s programming language and implement the SAP software. Given that “Rule 702 does not mandate that an expert be highly qualified in order to testify about a given issue,” R’s background in computer science and knowledge about SAP’s software was acceptable.

The district court did not abuse its discretion by allowing expert R to testify about software because R’s computer sciences background qualified him as an expert on software, and because he limited his testimony to that subject matter. As a result, the district court did not abuse its discretion by denying the defendant’s motion for a new trial.

Accordingly, the Court of Appeals affirmed the district court’s judgment.

Case: 716 F.3d 867, 106 U.S.P.Q.2d 1796 (C.A.5 (Tex.) May 15, 2013).

By: Kurt Mattson, J.D., LLM