Does “trade secrets” make you picture Mission Impossible?
When you hear “misappropriation of trade secrets,” you might picture some elaborate heist. The thief is lowered into the secure underground vault from an opening in the AC duct, like Tom Cruise in Mission Impossible. The thief hacks into the company’s server and downloads the secret weapons technology. Then he boards a plane to China where he hands the flash drive to a shadowy figure in exchange for a briefcase full of cash.
Of course, most trade secrets lawsuits are nothing like that.
For one thing, the typical trade secrets claim involves boring “soft” trade secrets like customer lists, pricing, and other customer information. And even in cases involving “hard” trade secrets like the literal or figurative secret sauce, the parties to the dispute usually had some legitimate business or employment relationship with each other before things went south.
That means in most trade secrets lawsuits, the person who allegedly “misappropriated” the trade secrets initially acquired them lawfully.
For example, in the typical departing employee dispute, an employee legitimately acquires the company’s trade secrets while working for the company. Another typical scenario is a contract between two companies containing an NDA. It might be an agreement between a vendor and a customer, or an agreement between two companies pursuing some kind of joint venture. They voluntarily share confidential information with each other, agreeing not to use it outside of that particular transaction.
In these situations, the initial acquisition of the trade secrets is not tortious. The claim is that misappropriation happened later, when the person did something with the trade secrets that he wasn’t supposed to do.
Both the Texas trade secrets statute and the federal trade secrets statute anticipate this kind of claim in the same way: a complicated multi-pronged definition of “misappropriation.”
“Misappropriation” means stealing, using, or disclosing
The definition of “misappropriation” is the same in both the Texas and federal trade secrets statutes. See Tex. Civ. Prac. & Rem. Code § 134A.002(3); 18 U.S.C. § 1839(5). I would quote it but that would just confuse you. Instead, I’ll just sum it up as Wolfe’s Second Law of Trade Secrets Litigation: You can’t steal a trade secret, and you can’t use or disclose a trade secret without the owner’s consent.
(In case you missed it, Wolfe’s First Law of Trade Secrets Litigation says whatever company information the employee takes on the way out the door will be the alleged “trade secrets” in the company’s subsequent lawsuit.)
My Second Law is, of course, an oversimplification. And the statute doesn’t use the word “steal.” But Wolfe’s Second Law does capture the essence of “misappropriation.”
What I call stealing is what the statute calls “acquisition” of a trade secret by someone who knows or has reason to know that the trade secret was acquired by “improper means.”
The statute has a non-exclusive definition of “improper means” that includes “theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, to limit use, or to prohibit discovery of a trade secret, or espionage through electronic or other means.”
As you can see, “acquisition” through “improper means” is not limited to stealing a trade secret. It also includes getting a trade secret from someone you know (or should know) stole it. But for simplicity, let’s stick with “stealing.”
Stealing is fundamentally different from the other kind of misappropriation, use or disclosure. If you steal a trade secret, you can be held liable, even if you never do anything else with it. In other words, if you steal a trade secret in the woods and nobody hears it, it still makes a sound.
This distinction between stealing and using/disclosing becomes important in litigation. If you’re thinking ahead, you can see where this is going: the use or disclosure of a trade secret will often cause compensable damages to the owner of the trade secret, but how does mere acquisition of a trade secret harm the owner?
To make this more concrete, suppose an employee walks out the door on his last day with the company’s entire secret customer list, throws it in a drawer, and never looks at it again. How does that cause any damages?
Hold that thought.
The jury charge in a trade secrets trial
In most cases, the trade secrets damages question will be for a jury to decide, if the case gets that far. The Court’s Charge will give the jury questions, definitions, and instructions to guide the decision.
Typically, a trade secrets charge will have three key questions: (1) is the information actually a trade secret? (2) did the defendant “misappropriate” the trade secret? (3) what damages, if any, did the misappropriation cause?
But why only three questions? What if there are multiple trade secrets at issue in the case? And what if there are multiple ways the defendant allegedly “misappropriated” the trade secrets? In cases like that, it seems like it would be more precise to break these broad questions down into more specific questions.
Well, that’s not the way we typically do it. Texas law requires “broad-form” submission of questions to the jury, at least when “feasible.” There is a mountain of literature on what broad-form submission means, but to save you time I’ll sum it up as follows: the trial court should submit one broad question on each element of a cause of action, except when there is a good reason not to.
The Casteel problem in Texas trade secrets jury trials
Let’s apply this to the most ordinary kind of lawsuit, a personal injury claim arising from a car accident. Typically, there will be one damages question that combines multiple elements of recoverable damages. The instruction might look like this:
In determining the damages Big Trucking caused Ms. Smith, you may consider:
- Physical pain and mental anguish.
- Loss of earning capacity.
- Physical impairment.
- Medical care.
Yawn. What could be more ordinary?
But suppose during the trial Ms. Smith’s lawyer offered no evidence whatsoever regarding loss of earning capacity. And suppose Big Trucking’s lawyer specifically objected to this instruction ahead of time, saying “Your Honor, you can’t include loss of earning capacity in the instruction because there’s no evidence.”
The judge brushes aside the objection, the jury returns a verdict for $90,000 in damages, and the trial court enters judgment for Ms. Smith in that amount. What should the Court of Appeals do with that?
A. Affirm the judgment. Any error is harmless, because the jury could have based the $90,000 on the other three elements of damages.
B. Reverse the judgment and order that Ms. Smith gets nothing. Her lawyer shouldn’t have included loss of earning capacity in the charge.
C. Reverse the judgment and remand for a new trial. Including an element for which there was no evidence is reversible error because there is no way for Big Trucking to show whether the $90,000 improperly included some amount for loss of earning capacity.
There is a case to be made for A, emphasizing judicial economy and respect for jury verdicts. If you picked B, you might be a sociopath. But if you picked C, you are in sync with the Texas Supreme Court.
Texas Supreme Court precedent
These were essentially the facts of Harris County v. Smith, 96 S.W.3d 230 (Tex. 2002), except the defendant was Harris County, not Big Trucking. Harris County held that it was an error for the trial judge to submit a broad-form question that included an element for which there was no evidence, and that this was a harmful error because it prevented the appellate court from determining whether the jury based its verdict on an invalid element of damages. Id. at 234.
The court based this decision on a precedent from two years earlier, Crown Life Ins. Co. v. Casteel, 22 S.W.3d 378 (Tex. 2000). Casteel had followed the same reasoning, except that Casteel involved a liability question (not damages), and the objectionable element in Casteel was improper because it was legally invalid (not because of lack of evidence).
In Harris County the Texas Supreme Court found these distinctions immaterial. It therefore established a general principle for Texas jury trials: If a question to the jury includes an element that should not have been submitted, either because it is legally invalid or there is no evidence to support it, and if the complaining party timely and specifically objects to that defect, then the jury’s affirmative answer cannot stand.
Appellate lawyers now call this a Casteel error. They could call it a Harris County error, but that doesn’t have the same ring to it.
Ok, but what does this appellate procedure detour have to do with trade secrets litigation?
The definition of “misappropriation” is custom-designed to create a Casteel problem
It is easy to see how a trade secrets lawsuit could create a Casteel error. This is likely to happen in several ways.
First, suppose the plaintiff claims that it has two kinds of trade secrets. Maybe one is a customer list and the other is a proprietary software program. Suppose there is evidence that the software is a trade secret, but insufficient evidence that the customer list is a trade secret. If the judge submits a single broad question asking whether the plaintiff owned a trade secret and the jury answers “yes,” how do we know if the jury improperly based that answer on the customer list?
Second, let’s assume the court submits a single damages question, but the plaintiff advances multiple theories about what was a trade secret and how the trade secrets were misappropriated, some of which have no evidence to support them. How do we know which theory the jury based the damages on?
Third, and most to the point here, there is the question on “misappropriation.” Let’s say the plaintiff claims both kinds of misappropriation, i.e. stealing and using/disclosing. What if there is no evidence of stealing? If the jury answers yes, there was misappropriation, there is no way to know if the jury based that answer on stealing or not.
In other words, a Casteel problem.
Fortunately, we have the Texas Pattern Jury Charges to help.
The Texas Pattern Jury Charge tracks the statute’s definition of “misappropriation”
A committee of the State Bar of Texas publishes the Texas Pattern Jury Charges, affectionately known as the PJC. The PJC provides standardized jury questions, definitions, and instructions. It is not legally binding on judges, but most judges will follow it most of the time.
In 2016 the PJC added new questions specifically addressing trade secrets claims. These questions line up with the three questions I outlined earlier, i.e. (1) existence of a trade secret, (2) “misappropriation” of a trade secret, and (3) damages.
Reviews were largely positive. See Book Review: The New Texas Pattern Jury Charge on Trade Secrets. As one reviewer wrote:
The new questions and instructions on trade secret misappropriation do what the Pattern Jury Charge is supposed to do. They provide a template for submitting trade secrets misappropriation questions that is consistent with Texas law and broad enough to apply to different kinds of cases.
Above all, the one thing you want to avoid in a jury instruction is misstating the law. The PJC question on misappropriation of trade secrets tries to avoid this by asking one simple question, “Did Don Davis misappropriate Paul Payne’s trade secret,” and following that question with instructions that track the statutory definition of “misappropriation.” This is a common PJC approach.
You can see the appeal of this. How can the other side complain about your proposed jury instruction if it quotes the language of the statute verbatim?
The problem with the Pattern Jury Charge approach to “misappropriation”
Still, tracking the language of the statute is not always the best approach, and sometimes it’s even the wrong approach, as we will see.
The problem is that the statutory language may not fit the facts of the case. As one reviewer noted back in March 2017:
There is a danger of rote use of the PJC questions when more specific questions tied to the facts of the case would be more appropriate and more understandable to the jury. . . . If the dispute is about whether the former employee used the employee’s customer list, why not just ask “did Don Davis use Paul Payne’s customer list?”
Ok, I confess. That reviewer was me. But still, it’s a valid point.
As I explained in my review, I tend to prefer more factually-specific trade secrets questions. “I like my questions better than the PJC questions,” I wrote. “They get right to the point and are easier for the jury to understand.”
But I neglected to mention another benefit of a trade secrets question that is specifically tailored to the facts of the case: it helps you avoid a Casteel problem.
A case study on “misappropriation” and the Casteel problem: Title Source v. HouseCanary
The San Antonio Court of Appeals applied Casteel to a trade secrets claim in Title Source, Inc. v. HouseCanary, Inc., No. 04-19-00044-CV, 2020 WL 2858866 (Tex. App.—San Antonio June 3, 2020, no pet. h.). The jury question tracked three alternative elements of the statutory definition of “misappropriation” and quoted the statutory definition of “improper means.” The problem, Title Source argued, was that there was no evidence to support one of those elements.
The stakes for this technical issue of appellate procedure? Only a $706 million verdict, the largest in Bexar County history (according to Title Source’s brief).
The case arose from a contractual relationship in which acquisition of the alleged trade secrets was initially lawful. Title Source, a company affiliated with Quicken Loans that provides services including real estate appraisals, contracted with HouseCanary, a real estate analytics company, to develop an iPad app that could be used to perform appraisals more efficiently. The parties signed several contracts that included nondisclosure obligations.
The facts detailed in the opinion are worth reading, but suffice to say that Title Source claimed the app didn’t work, while HouseCanary claimed that in the course of the relationship Title Source misappropriated HouseCanary’s trade secrets to develop its own app, called MyAVM. The jury answered yes to the misappropriation question and then found actual damages of $235.4 million and punitive damages of $470.8 million. Id. at *1-6.
There were also some juicy allegations that came out after the trial, including alleged collusion between HouseCanary and a Title Source officer and “hush money” paid to HouseCanary employees. You can read about that in Title Source’s Brief. (I would also include HouseCanary’s brief, but it was filed under seal.)
Canary in a coalmine
The Court of Appeals didn’t need to reach these spicier issues, because it focused on the Casteel problem presented by the misappropriation question. That question told the jury it could find misappropriation based on either a “use” theory” or an “acquisition by improper means” theory (my “stealing”). Id. at *9.
HouseCanary argued that the evidence showed that Title Source used HouseCanary’s trade secrets by relying on the information to assist or accelerate its own research and development. Id. at *10. And there seemed to be at least some evidence to support this argument.
The problem was that the jury question on misappropriation included elements for which HouseCanary had no evidence, i.e. a Casteel error.
The question went wrong in two ways. First, it quoted the statutory definition of “improper means” verbatim. It was therefore a correct statement of the law, but the definition of “improper means” included “bribery” and “espionage,” and there was no evidence that Title Source acquired the trade secrets through bribery or espionage. Because there was no evidence to support those theories, they should have been omitted from the “improper means” definition submitted to the jury. Id.
Hold on a minute. In HouseCanary’s defense, what if no one ever said anything about bribery or espionage in the trial? What is the chance that the jury actually based its answer on a theory that was included in the definition but never argued? This seems like a hyper-technical application of Casteel.
HouseCanary argued this very point, citing a Casteel exception: “a Casteel issue is not reversible if the reviewing court can be ‘reasonably certain’ the jury did not base its findings on the invalid theories.” Id. (citing Romero v. KPH Consol., Inc., 166 S.W.3d 212, 227-28 (Tex. 2005)). HouseCanary never pursued bribery or espionage theories at trial, it argued, so it was reasonably certain the jury did not base its answer on those theories.
But the Court of Appeals sidestepped this argument by focusing on the second problem with the misappropriation question. The question allowed the jury to find misappropriation based on acquisition of the trade secrets through “breach of inducement of a breach of a duty to maintain secrecy, to limit use, or to prohibit discovery of a trade secret.” And HouseCanary argued that theory throughout the seven-week trial, and on appeal. Id.
“But there is no evidence that TSI actually acquired the trade secrets through those breaches,” the Court of Appeals said. “Instead, the evidence shows those breaches, if any, occurred after HouseCanary willingly turned over its data under the NDA, the licensing agreement, and Amendment One.” Therefore, “those breaches do not support a misappropriation finding.” Id.
This was harmful error under Casteel, especially considering the arguments made by HouseCanary’s counsel in the trial. “[B]ecause HouseCanary so heavily emphasized the evidence it presented to the jury of TSI’s alleged post-acquisition breaches, we cannot rule out the possibility that the jury found misappropriation based on those breaches.” Thus, including the acquisition by improper means language in the charge was reversible error. Id.
The result: the Court of Appeals poured out the $700+ million trade secrets verdict and remanded the trade secrets claim for a new trial. Id. at *11. (According to legal-lingo.net, “pour out” is slang for “to deny (a claimant) damages or relief in a lawsuit.”)
Suppose instead that HouseCanary had submitted a simpler misappropriation question like the one I suggested in my review of the PJC, something like “did Title Source use HouseCanary’s trade secrets to aid or accelerate development of its own app?”
Do you think the jury still would have answered yes? Would the verdict and judgment have stood up on appeal?
We’ll never know for sure, and most of my cases don’t involve $700 million verdicts, so what do I know. But I can at least say this simpler question might have avoided the Casteel problem that got the judgment reversed.
Does the Pattern Jury Charge do more harm than good?
To be fair, the PJC question on trade secrets misappropriation anticipates the kind of problem illustrated by Title Source v. HouseCanary. Tucked away in the Comment section to PJC 111.2 (Question and Instructions on Trade-Secret Misappropriation), you will find these nuggets:
For further discussion, see PJC 116.2 regarding broad-form issues and the Casteel doctrine.
The above instruction lists these six alternative improper methods of acquisition, use, or disclosure in brackets, but only the method(s) supported by the pleadings and evidence should be submitted.
Only those [improper] means raised by the evidence should be submitted.
Only the methods or means raised by the evidence should be submitted! It’s right there in the PJC comments. They even mention Casteel by name.
So, defenders of the PJC could say, with some justification, that the problem in Title Source v. HouseCanary was not that the judge followed the PJC on “misappropriation,” but that the judge didn’t follow the PJC closely enough.
Still, it makes me wonder. Does the PJC question on misappropriation of trade secrets do more harm than good? Might it be better just to tell trial courts to look at the statute and then apply it to the specific facts in dispute?
Keep in mind, it is likely that most Texas trial court judges have never submitted a trade secrets case to a jury. This is based on purely anecdotal evidence, but I’d be willing to bet money on it. Even if I’m wrong, I guarantee most of them could count their trade secrets jury trials on one hand.
I don’t mean this as a criticism, just to point out that jury trials on trade secrets claims are very rare.
As a result, most trial court judges may feel a little unsure of themselves when deciding how to charge the jury on a trade secrets claim. They will tend to fall back on the PJC and the language of the statute, because that feels like the safer thing. It wouldn’t surprise me if that is what happened in Title Source v. HouseCanary.
But the safer thing is not always the best thing.
Just ask Tom Cruise in Mission Impossible.
*Update: The San Antonio Court of Appeals issued a new opinion on rehearing on August 26, 2020.
Zach Wolfe (firstname.lastname@example.org) is a Texas trial lawyer who handles non-compete and trade secret litigation at Zach Wolfe Law Firm. Thomson Reuters named him a Texas “Super Lawyer”® for Business Litigation in 2020 and 2021.
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.