Recent case illustrates when you can sue a non-Texas company in Texas for taking trade secrets from Texas

If you own a Texas company and a competitor outside of Texas takes your company’s trade secrets, can you sue the competitor in Texas? This was the issue in the recent case RSM Production Corp. v. Global Petroleum Group decided by the Houston Court of Appeals.[1]

The answer: You can sue a nonresident company in Texas if it established “minimum contacts” with Texas through “purposeful availment” of the benefits and protections of Texas law, your claim for misappropriation of trade secrets “arises out of or relates to” its contacts with Texas, and exercising jurisdiction would not conflict with “traditional notions of fair play and substantial justice.”

Simple, right?

If a law school graduate gave this answer on a bar exam, he would be absolutely right. But if a practicing litigator said this, it would tell you nothing. That’s because the legal rules for “personal” jurisdiction, like many legal rules, are too vague to give you a determinate answer. Lawyers need to know the right buzzwords to recite, but the buzzwords are not enough. Effective lawyers have to understand two other things: the rationale for the rules, and the sub-rules.

The sub-rules are the rules that emerge from decades of case law applying the general rules to specific factual situations. For example, if you’re a criminal defense lawyer arguing that the police illegally searched your client’s vehicle, it’s not enough to know that the police had to have “probable cause.” You need to know how courts have applied probable cause to your factual situation, such as “is there probable cause to search a tour bus if the police smell marijuana?”

The bad news is that there are literally hundreds of Texas cases on personal jurisdiction. The good news is that I spent five years of my life working on the defense of a group of foreign banks in a series of Texas lawsuits, and I have probably read most of those cases. From that experience, I’m going to share two things that will turn you into an instant authority on personal jurisdiction law, especially in trade secrets cases:

  1. A framework for how to think about personal jurisdiction that will help you make sense of the case law and guide your arguments.
  1. The specific sub-rule that applies to trade secrets cases.

The key to making sense of personal jurisdiction law

The thing you need to understand about personal jurisdiction law is that it is bipolar. I don’t mean that it’s crazy, but that there are two intersecting considerations. One is called “purposeful availment.” The other is called “relatedness.”

Purposeful availment is the idea that someone who deliberately seeks the “benefits and protections” of doing business in a particular state should reasonably expect he can be sued in that state. For example, if I sign a contract with a Louisiana company that has a clause saying that the contract will be governed by Louisiana law, that’s a good indication of my “purposeful availment” of the “privilege” of doing business in Louisiana. [Insert your own Louisiana joke here.]

Relatedness is entirely different. It is a question of whether the plaintiff’s claim against me “arises out of or relates to” my contacts with the state. Let’s say the Louisiana company is suing me in Louisiana for negligently crashing my car into one of their trucks in Nacogdoches. In that case the contract would reflect purposeful availment but not “relatedness,” because the negligence claim arises from the accident in Texas, not from the contract. (Nacogdoches is in Texas, y’all.)

Graphically, the interaction between purposeful availment and relatedness looks like this:

jurisdiction-graph

As the chart shows, high purposeful availment combined with high relatedness equals jurisdiction.

For example, let’s say a Russian company sends representatives to a meeting in Texas where they receive alleged trade secrets from a Texas oil and gas company. I know it’s hard to imagine Russia doing something like this—it would be like hacking into confidential emails to try to influence another country’s election—but stay with me.

The Texas company later sues the Russian company in Texas, claiming misappropriation of trade secrets. In that case, the meeting would reflect “purposeful availment” of the right to do business in Texas. There would also be “relatedness” because the claim for misappropriation of trade secrets arose directly from what happened at the meeting.

These were the basic facts in Moncrief Oil, where the Texas Supreme Court held that the Texas company could sue the Russian company in Texas for trade secret misappropriation.[2]

The case for jurisdiction is weaker when the alleged misappropriation of trade secrets happens outside of Texas. Suppose your client is an offshore company that sent a representative to meet with a Texas oil and gas company. The Texas company later sues your client, claiming trade secret misappropriation, and arguing the Texas meeting establishes “purposeful availment.” You respond that your client acquired and disclosed the alleged trade secrets outside Texas, and there was no discussion of the alleged trade secrets at the Texas meeting. Therefore there is no “relatedness” and no jurisdiction in Texas. This was basically the holding in the recent RSM Production case, and also in Bower v. American Lumber Co., a case I argued to the Waco Court of Appeals.[3]

Personal jurisdiction law does recognize that contacts with a state can occur through email and cyberspace. This is especially true with trade secrets, which can be sent across the globe with the click of a mouse. But the case law shows that where a communication physically occurs still matters in personal jurisdiction law. The idea is that when a nonresident physically attends a meeting in Texas, he should reasonably anticipate being sued in Texas for things that happen at that meeting. When he receives information from Texas on his computer in another part of the world, not so much.[4]

So, while the familiar buzzwords of personal jurisdiction law don’t give us the answer, from reading the cases we can state this sub-rule: a nonresident defendant who allegedly misappropriates trade secrets from a Texas company will usually be subject to jurisdiction in Texas if he was physically in Texas when he received or disclosed the alleged trade secrets.

Harder Cases

Of course, facts don’t always fit into neat categories. What if an employee of a Texas company emails trade secrets from his Texas office to a company in California, and the Texas company sues the California company in Texas? There is less purposeful availment when the defendant is not physically present in Texas. Courts have repeatedly said that emails, phone calls, and other correspondence from outside the state do not weigh heavily on the purposeful availment scale. But if you represent the Texas company, you would argue that there is a high degree of relatedness, because your client’s claim is directly related to the email that transmitted the trade secrets.

This kind of case is harder. It is similar to the common fact pattern where a Texas resident sues a nonresident for fraud and the nonresident made the allegedly fraudulent statement in a phone call or other communication to the Texas resident. The outcome in that kind of case may depend on whether you are in state or federal court. There are federal cases in the Fifth Circuit holding that a fraudulent misrepresentation to a Texas resident is a sufficient basis for jurisdiction. But the Texas Supreme Court held in the landmark Michiana case that an alleged misrepresentation from outside Texas is insufficient to establish purposeful availment.[5]

It gets even more complicated when the plaintiff makes multiple claims arising from different events. For example, a company could be subject to jurisdiction for a trade secrets claim where its representative received trade secrets at a meeting in Texas, but not subject to jurisdiction in the same lawsuit for a tortious interference claim that arose from actions taken in California. This was the situation in Moncrief Oil. Now you’re earning your Ph.D. in personal jurisdiction law.

The Texas Supreme Court recently muddied the waters a little in Cornerstone Healthcare. In that case, a Texas company’s officers allegedly breached their fiduciary duties by helping a Rhode Island company usurp an opportunity to acquire a chain of Texas hospitals. The court said the Rhode Island company could be sued in Texas. Rather than focusing on what happened at the Texas meetings, the court emphasized that the Rhode Island company “specifically sought both a Texas seller and Texas assets,” and that the facts surrounding the “crux” of the contacts with Texas would be the focus of the claims at trial.[6]

But the general rule for tort cases, including trade secrets cases, is still this: if the defendant committed the alleged tortious activity in Texas, there is probably jurisdiction; if the defendant committed the alleged tortious activity outside Texas, there probably isn’t jurisdiction. This cheat sheet can help you keep the details straight.

*UPDATE: In Northern Frac Proppants v. 2011 NF Holdings, 2017 WL 3275896 (Tex. App.–Dallas July 27, 2017), the court rejected the argument that the defendants were subject to jurisdiction because they combined to steal Texas-based companies’ trade secrets. Northern Frac is consistent with my general rule the court emphasized that there was no allegation that the defendant obtained the alleged trade secrets in Texas, as the defendant in Moncrief Oil did. And the court said it was not a case like Cornerstone Healthcare where the assets at issue were in Texas. See also Vinmar Overseas Singapore PTE Ltd. v. PTT Int’l Trading PTE, 2017 WL 4797842 (Tex. App.–Houston [14th Dist.] Oct. 24, 2017).

Overtime: The Dragnet and The Escape Hatch

If you have a little extra time, there are two complications worth mentioning, although just barely: a “dragnet” called “general jurisdiction” and an “escape hatch” called “fair play and substantial justice.” The case law has evolved to the point where these concepts are almost extinct, but they do still exist.

The general jurisdiction dragnet applies when a defendant has such “continuous and systematic” contacts with the state that it is subject to jurisdiction even if the plaintiff’s claims are totally unrelated to those contacts. But in American Type Culture Collection, the Texas Supreme Court set the bar very high for general jurisdiction, essentially requiring an ongoing physical presence in the state. More recently, the U.S. Supreme Court moved the general jurisdiction bar even higher in Daimler Chrysler v. Bauman, holding that in most cases a corporation is only subject to general jurisdiction in the state where it is incorporated or has its principal place of business. As a result, cases of general jurisdiction are increasingly rare.

While general jurisdiction can snag a defendant who otherwise would not be subject to jurisdiction, “fair play and substantial justice” provides an escape hatch for a defendant who otherwise would be subject to jurisdiction. In effect, it says “regardless of purposeful availment and relatedness, there is no jurisdiction if exercising jurisdiction would be really unfair for some other reason.”

But don’t get too excited. Application of this escape hatch has also become increasingly rare. It is almost entirely limited to international defendants or individual defendants who would be highly burdened by the expense of litigating in a state where they do not reside. In a trade secrets case, this escape hatch probably won’t do much for a company that allegedly received or disclosed trade secrets in the state where it is sued.

Then the real fun will start: arguing about whether the information is a “trade secret” in the first place.

_________________________________________________

head-shot-photo-of-zach-wolfe

Zach Wolfe (zwolfe@fleckman.com) is a Texas trial lawyer who handles non-compete and trade secret litigation. His firm Fleckman & McGlynn, PLLC has offices in Houston, Austin, and The Woodlands.

These are his opinions, not the opinions of his firm or clients, so don’t cite part of this post against him in an actual case. Every case is different, so don’t rely on this post as legal advice for your case.

[1] RSM Prod. Corp. v. Global Petroleum Group, Ltd., 2016 WL 6110913 (Tex. App.—Houston [1st Dist.] Oct. 20, 2016, no pet. h.).

[2] Moncrief Oil Int’l, Inc. v. OAO Gazprom, 414 S.W.3d 142 (Tex. 2013).

[3] Bower v. Am. Lumber Co., 2015 WL 1755311 (Tex. App.—Waco Apr. 16, 2015, no pet.).

[4] Searcy v. Parex Resources, Inc., 496 S.W.3d 58 (Tex. 2016), illustrates the distinction. The Canadian defendant was subject to jurisdiction in Texas for a fraud claim because it allegedly made the misrepresentation in Texas, but it was not subject to jurisdiction in Texas on a tortious interference claim that arose from the Canadian company’s communications from outside Texas. The dissent argued in vain that it should not matter that the Canadian company communicated with executives in Texas by emails and phone calls rather than in person.

[5] Michiana Easy Livin’ Country, Inc. v. Holten, 168 S.W.3d 777 (Tex. 2005).

[6] Cornerstone Healthcare Group Holding, Inc. v. Nautic Mgmt. VI, LP, 493 S.W.3d 65 (Tex. 2016).

2 thoughts on “The Key to Jurisdiction in Texas Trade Secrets Litigation

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