Texas Supreme Court Raises the Bar for Trade Secrets Damages–Again

Texas Supreme Court Raises the Bar for Trade Secrets Damages–Again

Horizon v. Acadia finds expert’s assumptions too speculative to support lost profits verdict

Mamas, don’t let your babies grow up to be damages experts in Texas.

That’s the refrain CPAs may feel like singing after the Texas Supreme Court recently raised the bar for proving lost profits damages in trade secrets lawsuits—again.

It started in 2016 with Southwest Energy v. Berry-Helfand, where the damages expert calculated lost profits for misappropriation of oilfield trade secrets by assuming a flat reasonable royalty rate of 3%, which was consistent with industry standards. As I reported here, the Texas Supreme Court said this opinion was faulty because the information available to the expert would have allowed for a more precise calculation.[1]

More recently, the Texas Supreme Court addressed trade secrets damages again in Horizon Healthcare v. Acadia Healthcare. The court rejected the expert’s calculation of lost profits damages because it was based on assumptions about causation and profitability of contracts that were not supported by the evidence.[2]

Horizon had somewhat complicated facts, but in essence it was a typical departing employee case where a management group left a company to work for a competitor:

  • Horizon provided contract management services to healthcare providers
  • Four Horizon executives, the “Saul group,” signed non-competes with Horizon.
  • The Saul group began negotiating to join Acadia, a Horizon competitor.
  • The Saul group solicited Piechocki, a successful Horizon salesman, to join them in moving to Acadia.
  • Shortly before leaving, Saul secretly copied a “massive amount” Horizon documents to an external hard drive.
  • The copied documents included contracts, financial models, and lists of Horizon’s sales leads.
  • After leaving Horizon to join Acadia, the former Horizon employees began competing with Acadia and soliciting Acadia’s clients.

If you think these facts are bad, you should read some of the emails recounted in the Court of Appeals opinion. But bad facts don’t necessarily make a good damage model.

The facts concerning damages were a mixed bag. Here is what Horizon’s damages expert had to work with:

  • After leaving Horizon, Piechocki used Horizon’s financial models to win a contract from Westlake.
  • Westlake was on Horizon’s “lead list” but was not a Horizon client.
  • Horizon did not lose any existing clients to Acadia.
  • Piechocki was an at-will employee without a non-compete who could have left Horizon at any time.
  • Piechocki was Horizon’s best salesperson.

So, if you represent Horizon, how do you work with your expert to construct a defensible damages theory?

Keep in mind that Texas law does not require lost profits damages to be “susceptible of exact calculation.” Lost profits must be calculated with “reasonable certainty.”[3]

As I explained here when I reported on the oral argument in Horizon, calculating lost profits damages requires entering a hypothetical world. The question is how much profit the plaintiff would have earned if the defendant had not used the plaintiff’s trade secrets, breached the non-compete, etc. This necessarily requires making assumptions.

Assumptions made in Horizon v. Acadia – the Westlake contract

Take the Horizon case as an example. To calculate lost profits based on the Westlake contract, Horizon’s expert assumed that Westlake would have signed a similar contract with Horizon if it had not signed the contract with Acadia. Based on that assumption, the expert calculated lost profits of $898,000 on the Westlake contract, and the jury included that amount in its verdict.[4]

Was it a mistake for the expert to assume Horizon would have won the Westlake contract? Not necessarily. To prove causation, Horizon had to show it would have obtained the contract but for the defendants’ wrongful conduct. It was an essential assumption.

But was it a reasonable assumption? The challenge for the plaintiff’s lawyer is that there must be evidence to support the assumption. The strategic question is how to support the assumption: with expert opinion or with some other evidence?

Often it will be better to prove the assumption with other evidence. Financial experts are good at crunching numbers, so it’s pretty easy for them to calculate the amount of profits that would have been made on a contract. But whether the plaintiff would have gotten a contract is another story. On that issue, a CPA doesn’t necessarily have any special insight that an ordinary jury member doesn’t have.

The problem for Horizon was not so much that the expert made the assumption, but that there was insufficient evidence to support the assumption. The Texas Supreme Court said it was “pure speculation” to assume Horizon would have won the Westlake contract if the defendants had not. This was especially true given the fact that there was no evidence that Horizon would have included a specific $150,000 incentive that Acadia included in its bid. Thus, “Horizon failed to establish the fact of damages relating to the Westlake contract with reasonable certainty.”[5]

Assumptions made in Horizon v. Acadia – Piechocki’s future contracts

The Westlake contract was not the only one lost. Horizon’s loss of Piechocki, its top salesperson, also caused Horizon to lose the future contracts Piechocki would have obtained if he had stayed at Horizon.

To quantify the lost profits for these hypothetical contracts, Horizon’s expert had to make assumptions about three issues:

(1) how long Piechocki would have stayed at Horizon

(2) how many contracts Piechocki would have generated at Horizon

(3) the amount of profits Horizon would have made on those contracts

Based on ten years of Horizon’s retention data for employees in Piechocki’s position, the expert provided two alternatives: Piechocki would have stayed either two years or four years. This was only an assumption, because Piechocki was an at-will employee not bound by a non-compete or any employment agreement. The court found there was some evidence to support this assumption, including testimony by Piechocki himself that suggested he would have stayed at Horizon if not solicited to work for Acadia.

There was also some evidence to support the assumption that the loss of Piechocki caused Horizon to lose future sales. This included an email from one of the defendants saying “I cannot think of a bigger body blow relative to impacting future new sales for Horizon than to get Piechocki out of there.”

But the Texas Supreme Court said there was no evidence to support the third assumption: the profitability of contracts Piechocki sold or would have sold had he remained at Horizon. In the court’s view, the specific problem with the expert’s calculation of lost profits was that it was based on the historical profitability of Horizon contracts generally, rather than the historical profitability of Piechocki’s Horizon contracts. The court held that the absence of evidence showing the profit associated with Piechocki’s sales was “fatal” to Horizon’s lost profits claim.[6]

A trend of nit-picking expert calculations of lost profits damages

I see the logic in the Horizon court’s criticism of the expert’s third assumption, but isn’t this getting a little nit-picky? The evidence of Horizon’s contract profitability generally seems like at least a scintilla of evidence of the profit Horizon would have made on Piechocki’s contracts. Remember that all it takes to uphold a jury verdict on appeal is some evidence (in theory).

But at least the Texas Supreme Court has been consistently nit-picky about lost profits damage theories lately. As mentioned earlier, the court did the same thing in Southwest Energy v. Berry-Helfand, finding that the reasonable royalty rate assumed by the expert was not precise enough.

So what practice pointers can prudent practitioners pry from this pair of persnickety opinions? First, if you represent the plaintiff in a lost profits case and you hire a damages expert, you need to work closely with the expert to identify the key assumptions underlying the expert’s calculations, and to evaluate whether the evidence will support those assumptions. If you don’t have the evidence, find another theory.

Second, the at-will status of departing employees is not necessarily fatal to proving causation. Yes, the Texas Supreme Court ultimately found there was insufficient evidence to support Horizon’s damage theory, but its opinion makes clear that an expert can make a reasonable assumption about how long an at-will employee would have stayed at the company, provided there is evidence to support the assumption.

That brings us to the third tip: Whatever assumptions the damages expert is going to make, the plaintiff’s lawyer must be prepared to offer evidence to support those assumptions.

Easy, right?

__________________________________________________________________

head-shot-photo-of-zach-wolfeZach Wolfe is a Texas trial lawyer who handles non-compete and trade secret litigation. His firm Fleckman & McGlynn, PLLC has offices in Austin, Houston, and The Woodlands. He correctly predicted that the Texas Supreme Court would not like the lost profits award in Horizon

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] Sw. Energy Prod. Co. v. Berry-Helfand, 491 S.W.3d 699, 720 (Tex. 2016).

[2] Horizon Healthcare Co. v. Acadia Healthcare Co., __ S.W.3d __, 2017 WL 2323106, at *5-8 (Tex. May 26, 2017).

[3] Id. at *4 (citing ERI Consulting Eng’rs, Inc. v. Swinnea, 318 S.W.3d 867, 876 (Tex. 2010)).

[4] Id. at *5.

[5] Id. at *6.

[6] Id. at *6-8.

A SLAPP in the Face to Texas Trade Secrets Lawsuits, or Much Ado About Nothing?

A SLAPP in the Face to Texas Trade Secrets Lawsuits, or Much Ado About Nothing?

Part 3 of 3 in my series

Fivers, you may be wondering why I have not yet reported on the Texas legislature’s recent amendments of the Texas Uniform Trade Secrets Act. I like trade secrets law. I like litigation. And I like making fun of whatever the Texas legislature does. So what gives?

Well, three things. First, you can already find other good reports on this topic, like Leiza Dolghih’s blog post here. Second, the recent changes to the Texas trade secrets statute, while important, are not that big of a deal. And third, I predict that recent court decisions applying the Texas Citizens Participation Act (TCPA) are going to be a bigger deal for Texas trade secrets litigation.

That’s because filing a motion to dismiss under the TCPA is likely to become a routine move by defendants in Texas trade secrets lawsuits.

Texas courts have held that the TCPA applies to claims based on disclosure of alleged trade secrets

So how did we get here? To recap Part 1 and Part 2:

  • The TCPA is the Texas “anti-SLAPP” statute intended to protect the “little guy” from nuisance litigation filed in retaliation for exercising free speech rights.
  • The TCPA allows the defendant to file a motion to dismiss that stays discovery and requires the plaintiff to offer evidence proving each element of its claims.
  • The purpose of the statute is to protect constitutional rights, but the Texas Supreme Court has instructed Texas courts to apply the “plain meaning” of the text, which is much broader.
  • In Elite Auto Body, the Austin Court of Appeals followed the Texas Supreme Court’s instructions and held that the TCPA applied to a company’s claim that its former employees communicated the company’s confidential information and trade secrets to a competitor.[1]

In Part 1, I explained how this issue provides a sort of case study for the “textualist” theory of statutory interpretation, which has received some airplay recently with Neal Gorsuch taking the Scalia seat on the Supreme Court. In Part 2, I hypothesized that the holding in Elite Auto Body is inconsistent with the legislature’s intent and suggested that this illustrates a problem with strict textualism.

But if you’re a lawyer or a party in a trade secrets lawsuit, you don’t care about all that. You want to know what Elite Auto Body means for your lawsuit.

Will it become routine for defendants in Texas trade secrets lawsuits to file motions to dismiss under the TCPA?

It seems likely that defendants in trade secrets lawsuits will now routinely file motions to dismiss under the TCPA. First, because Elite Auto Body says they can. Second, because it will usually be good strategy.

The crux of the Elite Auto Body decision was the statute’s broad definition of the “exercise of the right of association” as “a communication between individuals who join together to collectively express, promote, pursue, or defend common interests.”[2]

The court found that the plaintiff alleged two kinds of communications falling under the statute’s broad definitions: (1) communications between the departing employees and the second employer disclosing confidential information or trade secrets; and (2) communications with employees of the first employer to induce them to work for the second employer.[3]

So, in any case where the plaintiff alleges either (1) communication of the plaintiff’s trade secrets or (2) solicitation of the plaintiff’s employees, the defendants have the option to file a motion to dismiss under Elite Auto Body. I will even provide this Form Motion to Dismiss you can use if you want.[4]

Filing a motion to dismiss will often have benefits for the defendant:

  • The motion will take the wind out of the plaintiff’s sails by immediately staying discovery until the court rules on the motion.[5]
  • It requires the plaintiff to respond with evidence of each element of its claims.[6] This will force the plaintiff to put its “cards on the table” early in the case.
  • In some cases, it will be difficult for the plaintiff to meet its burden before it has had any meaningful discovery.

Of course, there are potential disadvantages to filing a motion to dismiss. Despite the Texas Supreme Court’s instruction to apply the plain meaning of the statute, some trial court judges will still be reluctant to dismiss trade secrets claims that do not implicate constitutional free speech rights. Fighting over the motion to dismiss will often be expensive, and if the judge denies the motion, it will tend to embolden the plaintiff, which could make settlement more difficult. Worst case, if the judge finds that the defendant’s motion was frivolous or solely intended to delay, the court can award attorneys’ fees to the plaintiff.[7]

Despite these concerns, in most cases filing an early motion to dismiss under the TCPA will be good strategy for defendants, if the plaintiff alleges “communication” of the alleged trade secrets.

But that’s a big “if.”

Will it become routine for plaintiffs to plead around the TCPA?

If it becomes routine for defendants to file a motion to dismiss in Texas trade secrets lawsuits, plaintiffs will catch on.

And Elite Auto Body suggests a solution for them. As I pointed out in Part 2, the court in Elite Auto Body said that the TCPA does not apply to allegations of using the alleged trade secrets, as opposed to communication of the trade secrets. That’s why the Austin Court of Appeals only dismissed the plaintiff’s claims in part. It did not dismiss the claims based on conduct that does not constitute “communications” as defined by the TCPA.[8]

So, as Patrick Keating suggested on his trade secrets blog here, it may become routine for plaintiffs to avoid a motion to dismiss by pleading only use of the alleged trade secrets rather than disclosure of the alleged trade secrets. (Here is a Form Original Petition that does just that.) If that happens, then case law applying the TCPA to trade secrets claims may become, as Keating says, “much ado about nothing.”

But I’m not sure this maneuver will become totally routine. First, the plaintiff doesn’t always have a basis to claim use of the trade secrets. Second, the disclosure of the trade secrets is sometimes just too good a part of the story to leave out.

In many cases, the employer will discover that an employee has taken company information and joined a competitor, but the employer will not have any direct knowledge that the employee has used the information. And it is not unusual for employees to take company information when they leave but to refrain from using it after coming to their senses (or talking to a lawyer).

In cases like that, it may be dangerous for the employer to plead that the employee has used the alleged trade secrets. The plaintiff must have a good-faith factual basis for the allegation. Look for more plaintiffs to plead “on information and belief” that the defendant has used the alleged trade secrets.

In other cases, the plaintiff will really want to plead disclosure of the trade secrets, because that will be the juiciest part of the story. When an employee secretly emails confidential company information to his next employer, who can resist emphasizing that fact in the lawsuit? In those situations, the plaintiff’s lawyer will have to weigh the value of pleading bad acts by the defendants against the possibility of inviting a motion to dismiss.

Or just make a federal case of it

On the other hand, the plaintiff’s lawyer can simply avoid this dilemma by filing suit in federal court under the federal Defend Trade Secrets Act. All you need is a sufficient connection to interstate or foreign commerce, and any claim you would make under the Texas trade secrets statute can be made under the federal statute. And then the TCPA would not apply.

Or would it? I will let the appellate lawyers and former law review editors discuss among themselves.

____________________________________________________________

head-shot-photo-of-zach-wolfeZach Wolfe is a Texas trial lawyer who handles non-compete and trade secret litigation. His firm Fleckman & McGlynn, PLLC has offices in Austin, Houston, 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. The provided forms are only for the convenience of other lawyers. Every case is different, so don’t rely on this post or the forms as legal advice for your case. 

[1] Elite Auto Body LLC v. Autocraft Bodywerks, Inc., No. 03-15-00064-CV, 2017 WL 1833495 (Tex. App.—Austin May 5, 2017, no pet. h.).

[2] Tex. Civ. Prac. & Rem. Code § 27.001(2).

[3] Elite Auto Body, 2017 WL 1833495 at *8.

[4] See my disclaimer about forms above.

[5] Tex. Civ. Prac. & Rem. Code § 27.003(c). Under Section 27.006(b), for good cause the court may allow “specified and limited discovery” relevant to the motion.

[6] See Tex. Civ. Prac. & Rem. Code § 27.005(c).

[7] Tex. Civ. Prac. & Rem. Code § 27.009.

[8] Elite Auto Body, 2017 WL 1833495 at *9.

A SLAPP in the Face to Texas Trade Secrets Lawsuits – Part 2

A SLAPP in the Face to Texas Trade Secrets Lawsuits – Part 2

Even before I went to law school, one of my favorite Shakespeare plays was The Merchant of Venice, and now that I’m a trial lawyer I like it even more. The climactic scene is basically a courtroom drama. More about that later.

In my last post, I set the stage for Elite Auto Body v. Autocraft Bodywerks, a recent case holding that the Texas anti-SLAPP statute allows a defendant in a trade secrets lawsuit to file an early motion to dismiss before the plaintiff has any real chance to take discovery.

To recap Part 1:

  • Despite its literal language, the First Amendment’s protection of “freedom of speech” generally does not apply to communication of trade secrets.
  • The Texas Citizens Participation Act (TCPA) is an “anti-SLAPP” statute intended to protect free speech rights.
  • The problem with the statute is that its literal text goes far beyond speech protected by the First Amendment.
  • Elite Auto Body is therefore an interesting test case for the “textualist” approach to interpreting statutes.

So how did the court interpret the statute, and what does it mean for trade secrets litigation?

A typical trade secrets lawsuit

For a case raising important First Amendment and statutory interpretation issues, the facts of Elite Auto Body were about as ordinary as you can get.

Autocraft Bodywerks was an auto-repair shop specializing in high-end collision repair services. Precision Auto Body was a competing auto-repair business founded by a former Autocraft employee. When two Autocraft employees left to join Precision, Autocraft sued, claiming the employees provided Autocraft’s confidential information and trade secrets to Precision.[1]

The alleged trade secrets were typical internal company information: salary and personnel information, financial information, proprietary compilations of technical information, and proprietary client forms. Like every company that files this kind of trade secrets suit, Autocraft claimed that Precision and the former employees used the information to obtain an unfair advantage.[2]

Alfa Romeo

The usual defense would be to challenge the trade-secret status of the information, and/or to claim the defendants did not take or use the information. But Precision asserted an additional defense: it filed a motion to dismiss under the TCPA.

So does the statute apply to an ordinary trade secrets misappropriation case?

The plain language of the TCPA applies to disclosure of trade secrets

The language of the statute is quite simple about when it applies: “If a legal action is based on, relates to, or is in response to a party’s exercise of the right of free speech, right to petition, or right of association, that party may file a motion to dismiss the legal action.”[3]

If that was all the statute said, you could easily argue that these “rights” mean constitutional rights. But the statute has more expansive definitions:

  • “Exercise of the right of association” means “a communication between individuals who join together to collectively express, promote, pursue, or defend common interests.”
  • “Exercise of the right of free speech” means a “communication made in connection with a matter of public concern.”
  • “Communication” includes “the making or submitting of a statement or document in any form or medium, including oral, visual, written, audiovisual, or electronic.”
  • “Matter of public concern” is defined broadly and includes an issue related to “a good, product, or service in the marketplace.”[4]

Under the broad definition of “right of association,” when employees of one company go to work for a competitor and communicate the first company’s confidential information to the competitor, that is a “communication between individuals” who are joining together to “pursue common interests,” i.e. making money by competing with the first company.

This was the defendants’ argument in Elite Auto Body, and the Austin Court of Appeals agreed. The court reasoned that the statute would not apply to allegations of using the alleged trade secrets that did not involve communication of the information. But the plain language of the statute would clearly apply to the alleged disclosure of the trade secrets:

Yet it would also be true, at least under a literal reading of the “communication” definition, that Autocraft also bases each of its claims, at least in part, on two types of alleged “communications”—(1) appellants’ “communications” (so defined) among themselves and others within the Precision enterprise through which they have allegedly shared or utilized the information that Autocraft claims is its trade secrets or confidential information; or (2) “communications” (so defined) by appellants to current Autocraft employees to induce them to leave Autocraft and come work for Precision.[5]

So what do you do if you’re Autocraft, the plaintiff in Elite Auto Body, and you want to avoid the motion to dismiss? You argue against a literal reading of the statute. The court should interpret the statute based on its larger context and purpose, you argue, which is to protect constitutional rights and provide a remedy for “SLAPP” lawsuits.

But how do we know the purpose of the statute?

The purpose of the TCPA is to protect constitutional rights

In this case, the legislature made it easy for us by expressly stating the purpose of the statute:

The purpose of this chapter is to encourage and safeguard the constitutional rights of persons to petition, speak freely, associate freely, and otherwise participate in government to the maximum extent permitted by law and, at the same time, protect the rights of a person to file meritorious lawsuits for demonstrable injury.[6] (emphasis added)

The statute also says it “shall be construed liberally to effectuate its purpose and intent fully.”[7]

AMG

This gives you Autocraft’s argument: the statute has a First Amendment “overlay.” Despite the broad definitions of “right and association” and “right of free speech,” you should limit the statute to its stated purpose of protecting constitutional rights. There’s no constitutional right to communicate trade secrets, so the statute shouldn’t apply to trade secrets lawsuits.

This is a plausible argument, the Austin Court of Appeals said, but it is foreclosed by the Texas Supreme Court’s recent decision in ExxonMobil Pipeline Co. v. Coleman.

Coleman held that the TCPA applied to a former employee’s defamation claim based on internal company statements about his job performance. The Coleman court based this holding on a textbook formulation of textualism. “We do not substitute the words of a statute in order to give effect to what we believe a statute should say,” the court said, but “instead, absent an ambiguity, we look to the statute’s plain language to give effect to the Legislature’s intent as expressed through the statutory text.”[8]

Let me pause here to note that the TCPA itself seems to instruct courts not to construe it this way; the statute says it should be liberally construed to effectuate its purpose. Oh well.

Citing this language, Elite Auto Body construed Coleman as an instruction that Texas courts must adhere to a “plain-meaning” construction of the statute, “notwithstanding an acknowledged expansiveness and breadth.”[9]

Reading between the lines, Justice Pemberton’s opinion in Elite Auto Body seems to be saying “we know this result is kind of crazy, but that’s what the statute says, and the Texas Supreme Court says we have to apply the statute literally, so our hands our tied.”

That’s a reasonable position, but is this really the result the legislature would have wanted?

Elite Auto Body shows us the problem with strict textualism

I haven’t researched the legislative history of the Anti-SLAPP Statute. But I think it is safe to say that the legislature did not intend the statute to apply to ordinary claims for misappropriation of trade secrets.

Let’s assume I’m right, and (1) the literal terms of the statute apply to trade secrets lawsuits, but (2) the legislature did not intend the statute to apply to trade secrets lawsuits, because there is no constitutional right to disclose trade secrets.

So what is a judge to do? Apply the “plain meaning” of the text even though it leads to a result the legislature didn’t intend?

This is where the true textualist must bite the bullet. Yes, the strict textualist would say, you apply the plain meaning of the statute, even if the result is bad public policy or not what the legislature intended. You do that because the plain meaning of the text is objective, while the subjective intent of the legislature is too easy for litigants and judges to manipulate to serve their own agendas. Focusing on “purpose” rather than the text would allow courts to substitute their own policy judgments for the decisions of the legislature.

There is some merit to this line of argument, but on the whole I think it is wrong, and the odd result in Elite Auto Body illustrates why.

The problem with this kind of strict textualism is that it thwarts the intent of the legislature in the name of deference to the legislature.[10]

Processed with VSCO with hb2 preset

In practice, strict textualism tends to undermine the legislature’s purpose—and can lead to absurd results. When courts strictly apply the “plain meaning” of a statute, in conflict with its obvious purpose, they are effectively saying to the legislature, “we know what you were trying to do, but you screwed up in the language you used, and we’re going to hold you to your sloppy language.” Hey, if you don’t like it, amend the statute.

Shakespeare’s view of anti-SLAPP statutes

This kind of textualism reminds me of the final “courtroom” scene in Shakespeare’s Merchant of Venice, where Portia, posing as a man and a legal scholar, thwarts Shylock’s purpose by strictly construing his contractual right to a “pound of flesh.” The audience, typically, is rooting for Portia because she is trying to save Antonio from the horrific results of an unjust contract. But there is no denying that she effectively deprives Shylock of the remedy intended by the parties to the contract.

Texas courts are doing something similar with the TCPA when they say we’re going to hold you to your incredibly broad definitions, even when they conflict with your obvious purpose.

As in The Merchant of Venice, this may lead to a just result in some cases. Instinct tells me the information at issue in Elite Auto Body probably did not deserve trade-secret protection, so maybe early dismissal of part of the trade secrets claim was a good thing. But as a broader matter of public policy, applying the TCPA to trade secrets lawsuits that do not involve any constitutional rights seems like a mistake.

Ok, you say. That’s all very interesting, Mr. Smarty Pants. But what if I’m a litigator who sometimes handles non-compete and trade secret cases? What are the practical consequences?

I’ll cover that in Part 3.

______________________________________________________________________________________

head-shot-photo-of-zach-wolfeZach Wolfe is a Texas trial lawyer who handles non-compete and trade secret litigation. His firm Fleckman & McGlynn, PLLC has offices in Austin, Houston, and The Woodlands. You can probably tell his son picked this week’s photos.

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] Elite Auto Body LLC v. Autocraft Bodywerks, Inc., No. 03-15-00064-CV, 2017 WL 1833495, at *1 (Tex. App.—Austin May 5, 2017, no pet. h.).

[2] Id.

[3] Tex. Civ. Prac. & Rem. Code § 27.003.

[4] Tex. Civ. Prac. & Rem. Code § 27.001.

[5] Elite Auto Body, 2017 WL 1833495 at *4.

[6] Tex. Civ. Prac. & Rem. Code § 27.002.

[7] Tex. Civ. Prac. & Rem. Code § 27.011.

[8] ExxonMobil Pipeline Co. v. Coleman, 512 S.W.3d 895, 901 (Tex. 2017). The qualification “absent an ambiguity” further complicates the issue, but I don’t have time to address that here.

[9] Elite Auto Body, 2017 WL 1833495 at *7.

[10] Personally, I have little confidence in the Texas legislature doing anything right, especially when it meddles with the civil justice system, but as a general proposition I agree that courts should interpret statutes to effectuate the legislature’s purpose.

A SLAPP in the Face to Texas Trade Secrets Lawsuits – Part 1

A SLAPP in the Face to Texas Trade Secrets Lawsuits – Part 1

In Elite Auto Body v. Autocraft Bodywerks, the Austin Court of Appeals held that the Texas anti-SLAPP statute applies to a company’s claim that a former employee communicated confidential information and trade secrets to a competitor. This meant that the company was required to produce evidence to support every element of the claim at the beginning of the lawsuit—a significant burden.

This sounds like a fairly technical issue, but it’s an important development, with potentially far-reaching consequences for departing employee litigation—and other kinds of litigation. Elite Auto Body is also a great case to read if you’re fascinated by questions of statutory interpretation. And who isn’t?

Textualism vs. originalism

Interpreting the text of a statute or constitution is a fundamental challenge in the law.  The “textualist” would say that courts should apply the “plain meaning” of the text of a statute, without resort to any extrinsic sources such as the intent of the legislature or what would make better public policy.

This view probably resonates with the average “man on the street,” but in its strict form, textualism borders on the absurd.  If hard cases could really be decided by simply applying the plain text, we wouldn’t need judges schooled in the law.

Textualism is often associated with “originalism,” which is the view that a statutory or constitutional provision should be interpreted based on the original understanding of the text. But the two are not the same. In fact, originalism shows that textualism is insufficient (at least in hard cases). If the text alone were sufficient to resolve disputes, then resort to the original understanding of the text would be unnecessary.

Trade secret protection vs. freedom of speech

Let’s take an example everyone knows: the First Amendment protection of “freedom of speech.” Then let’s take a statute pertinent to the Elite Auto Body case: the Texas Uniform Trade Secrets Act (TUTSA). TUTSA provides civil remedies for “misappropriation” of “trade secrets.”[1]  Emailing your employer’s trade secrets to a competitor would be a clear violation of TUTSA.

So does TUTSA violate the First Amendment? If I can’t email my employer’s confidential information to another company, doesn’t that restrict my “freedom of speech”?

The “vulgar textualist” would say no, under the plain meaning of the First Amendment, sending an email is not “speech,” so the First Amendment doesn’t apply. But no serious person in the law, even a “textualist,” would apply such a hyper-literal interpretation. Obviously, the First Amendment is intended to protect forms of communication broader than actual “speech.”

And it is well established that there are certain categories of communication that do not enjoy full First Amendment protection: fraudulent statements, intentionally defamatory statements, communications between participants in a criminal conspiracy, just to name a few. People may disagree on the exact contours of the categories of expression that do not enjoy First Amendment protection, but no one seriously questions the basic premise that some kinds of communication are not protected (even though the premise is not derived from the “plain meaning” of the text).

Similarly, just about everyone would agree that communication of trade secrets is one of these categories. People may argue about where to draw the line on trade secret protection, but few would seriously dispute the general principle that the First Amendment allows laws that prohibit the communication of trade secrets.

With this point established, we have set the stage for the Texas anti-SLAPP statute, the recent Elite Auto Body case, and an interesting test for textualism.

The Texas anti-SLAPP statute

Texas adopted its anti-SLAPP statute in 2011. SLAPP stands for Strategic Lawsuit Against Public Participation. The term SLAPP doesn’t actually appear in the statute, but the “anti-SLAPP” purpose of the statute is widely recognized. (For background, see A Primer on the Texas Anti-SLAPP Statute and Five Years of Anti-SLAPP in Texas.)

The idea was to give defendants the right to seek early dismissal of unfounded lawsuits that plaintiffs file to punish Texas citizens for exercising their free speech rights. When the statute applies, the defendant can require the plaintiff to produce evidence to support each element of its claims at the beginning of the lawsuit. If the plaintiff fails to meet this burden, the lawsuit gets dismissed.[2]

This is a big deal. As Texas litigators will recognize, a SLAPP motion is equivalent to a “no-evidence” motion for summary judgment. The Texas Rules of Civil Procedure allow a defendant to file a no-evidence motion for summary judgment, which places the burden on the plaintiff to come forward with evidence to support the challenged elements of its claims. If the plaintiff fails to respond with evidence, the claim gets dismissed.

That’s effectively the same thing the anti-SLAPP statute does. So why is it such a big deal? The key difference is that you can’t file a no-evidence motion for summary judgment until after the plaintiff has had adequate time for discovery.[3] This is a significant limitation.

The anti-SLAPP statute, in contrast, allows the defendant to file a motion to dismiss at the beginning of the case, before the plaintiff has had any time for discovery.[4] This is a major strategic advantage for the defendant. Often the plaintiff needs discovery in order to obtain evidence to support all of the elements of its claims. If the legislature gave defendants the right to file this kind of motion in every case, it would be a tectonic shift in the balance of power between Texas plaintiffs and defendants.

But the anti-SLAPP statute only applies to SLAPP lawsuits, right?

The problem with the anti-SLAPP statute

The problem is that it is not so easy to distinguish between a SLAPP lawsuit and an ordinary lawsuit. A SLAPP, as the term is commonly used, has two distinguishing characteristics, one going to the merits of the lawsuit and the other going to the motive behind it. First, a SLAPP lawsuit has no merit, meaning no evidence to back it up. Second, a SLAPP lawsuit is filed for an improper motive—i.e. to silence or punish the defendant by forcing the defendant to spend money defending a lawsuit.

But defendants say these things about all kinds of lawsuits. So the first problem with the anti-SLAPP statute is that it singles out one type of litigation, when the problem it purports to address applies to all kinds of litigation.

In my view, this sort of thing is generally a bad idea. I haven’t seen a compelling explanation of why defendants in SLAPP lawsuits should get to file an early motion to dismiss while defendants in other kinds of unfounded lawsuits don’t.

Of course, there is a long tradition of the Texas legislature singling out certain types of litigation for special treatment. For example, plaintiffs in medical malpractice cases have to get an expert report just to file a lawsuit, before any discovery, while plaintiffs in other cases don’t. Defendants in residential construction lawsuits have special statutory rights that defendants in other lawsuits don’t. But why? Why should special rules apply to medical malpractice lawsuits and not, say, architectural malpractice suits?

The answer is pretty obvious. You don’t have to be a political scientist or a reporter covering the Texas legislature to understand that laws like this get passed in response to pressure from interest groups seeking protection from lawsuits. That doesn’t necessarily mean that these laws are bad public policy. We could debate all day whether the limits on medical malpractice suits are good policy or not.

But it does mean that we should approach these special-interest statutes with some skepticism. The same is true of the anti-SLAPP statute. Granted, it appears that a wide range of groups from across the political spectrum backed it, but we should still ask whether it makes sense to single out one type of lawsuit for special treatment.

While it is clear that the anti-SLAPP statute singles out one type of lawsuit, it is not so clear what type of lawsuit that is. This gets to the second problem with the statute: it tries to do surgery with a meat cleaver. The “cancer” it tries to cut out is the “big guy” filing a frivolous lawsuit against the “little guy” to try to deter the little guy from exercising his First Amendment right to criticize the big guy.

The statute does say that its purpose is to safeguard constitutional rights, but the operative language of the statute–particularly the definition of the “right of association”–is much broader than that. Nothing in the statute expressly limits its reach to “big guy vs. little guy” lawsuits, or even to lawsuits involving the exercise of First Amendment rights.

Perhaps the language of the statute could be made more precise so that it cuts like a scalpel. But no, this second problem is almost unsolvable. It would be very difficult to come up with language that would apply only to “true” SLAPP lawsuits and not to ordinary lawsuits. Like obscenity, a SLAPP is hard to define with precision. You just “know it when you see it.” That doesn’t make for a good statutory definition.

Does the anti-SLAPP statute apply to trade secrets lawsuits?

And that brings us to the question presented in Elite Auto Body v. Autocraft Bodywerks.

Misappropriation of trade secrets is not protected by the First Amendment, and it does not appear that the Texas legislature had trade secrets lawsuits in mind when it passed the anti-SLAPP statute. Yet the plain language of the statute is broad enough to apply to a claim that an employee communicated a company’s trade secrets to a competitor she has joined. So, can the defendant in that kind of trade secrets case file a motion to dismiss under the statute?

Stay tuned. I’ll address that in Part 2.

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head-shot-photo-of-zach-wolfeZach Wolfe is a Texas trial lawyer who handles non-compete and trade secret litigation. His firm Fleckman & McGlynn, PLLC has offices in Austin, Houston, 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] See Tex. Civ. Prac. & Rem. Code § 134A.002-004.

[2] Tex. Civ. Prac. & Rem. Code §§ 27.001-011.

[3] Tex. R. Civ. Pro. 166a(i).

[4] The defendant must serve the anti-SLAPP motion within 60 days of service of the lawsuit. Tex. Civ. Prac. & Rem. Code § 27.003(b). On the filing of such a motion, all discovery is suspended until the court has ruled on the motion. Tex. Civ. Prac. & Rem. Code § 27.003(c). For good cause, the court can allow specific limited discovery relevant to the motion. Tex. Civ. Prac. & Rem. Code § 27.006(b).

Book Review: The New Texas Pattern Jury Charge on Trade Secrets

Book Review: The New Texas Pattern Jury Charge on Trade Secrets

How well does the new Texas Pattern Jury Charge perform in a typical soft trade secrets case?

I recently received a mysterious package in the mail. After tearing open the cardboard, I saw a shiny new paperback in plastic shrink-wrap: the new Texas Pattern Jury Charges – Business, Consumer, Insurance & Employment (2016).

My heart raced. Yes, I already had the 2014 edition, but the 2016 edition has something new: questions and instructions on trade secret misappropriation. In the words of Joe Biden, this is a big f**ng deal!

You see, when I last tried a trade secret case to a jury, there were no Pattern Jury Charge questions for trade secrets, so we had to make up our own. That case was a typical “soft” trade secrets case.

“It’s a dirty story of a dirty man”

Soft trade secrets? Well, there are two paradigmatic types of “hard” trade secrets: secret technology and “secret sauce.” If your company develops new technology that allows you to drill for oil sideways at half the cost of your competitors, and you keep it secret, that’s a trade secret. If you have the secret formula for Coke, or the Colonel’s secret herbs and spices, those are trade secrets. Understanding why these things are trade secrets is not rocket science.

Soft trade secrets, on the other hand, are the type of information almost every business has: names and contact information for customers, information on what the customers buy, prices charged to the customers, names and contact information for vendors, prices charged by vendors, etc. The king of the soft trade secrets is the customer list, which may or may not be a trade secret, depending on the facts (see Customer List Confusion).

In the typical soft trade secrets case involving a departing employee, there are usually four key issues:

  1. Did the employee take information from the former employer?
  1. Was the information actually “trade secrets”?
  1. Did the employee actually use the information to compete with the former employer?
  1. What amount of damages did the employee cause the former employer by using the information to compete?

Experts on good writing may cringe at my repeated use of the intensifier “actually,” but it’s appropriate here. It’s a reminder to approach trade secrets claims with a healthy skepticism. As one federal judge said in a recent opinion, “Many plaintiffs allege trade secret misappropriation, but few prove it.”[1]

So how do the new Pattern Jury Charge (PJC) questions compare to these key issues in a typical soft trade secrets case?

“It took me years to write, would you take a look?”

Like other PJC sections, most of the new section on trade secrets consists of commentary on the applicable statute and case law. The questions themselves are quite short. They boil down to this:

  1. Did Paul Payne own a trade secret in the ___ listed below? [the jury answers separately for each thing alleged to be a trade secret]
  1. Did Don Davis misappropriate Paul Payne’s trade secret?
  1. What amount of damages . . . etc. [the standard damages question that applies to all kinds of claims]

This would be simple for a jury to understand but for one problem: How does the jury know what “trade secret” and “misappropriate” mean?

The PJC solves this problem with instructions. The question on ownership of a trade secret is followed by the statutory definition of a trade secret from the Texas Uniform Trade Secrets Act (affectionately known as “TUTSA”). The question on misappropriation is followed by the statutory definition of misappropriation.[2]

This sticks to the basic template for most PJC questions: ask a really simple question, then give detailed instructions that define the terms used in the question. The detailed instructions are, in effect, a mini-tutorial on the area of law at issue.

The questions tend to be broad, rather than focusing on specific facts. For example, in a breach of contract case, the PJC is going to ask “did Don Davis fail to perform the contract?” rather than “did Don Davis fail to deliver the truckload of bricks to the green house on Pecan Street on the date stated in the contract?”

Similarly, the PJC question on trade secret misappropriation asks “did Don Davis misappropriate Paul Payne’s trade secret?” rather than “did Don Davis email himself Paul Payne’s confidential customer list and use it to sell bricks to Paul Payne’s customers?”

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For my non-lawyer readers, this is part of what we call “broad-form” submission. Historically, the main reason for broad-form submission was to reduce the likelihood that the jury’s verdict would be reversed on appeal. There is a mountain of case law and articles on what broad-form submission means. It will suffice to say that the rule in Texas is this: broad-form submission is required, except when it isn’t.

“It could make a million for you overnight”

So what’s the alternative to the broadly stated trade secrets questions in the PJC? In the jury trial I mentioned above, we handled it differently. We submitted these questions (I’ve changed the names and the product):

  1. Was any of the information Dawn Davis obtained from Paula Payne trade secrets?
  1. Did Dawn Davis use Paula Payne’s trade secrets to make window sales at Real Cheap Windows?
  1. What sum of money . . . would fairly and reasonably compensate Paula Payne for her damages, if any, proximately caused by Dawn Davis’s use of Paula Payne’s trade secrets at Real Cheap Windows?

Like the PJC, the instructions included the statutory definition of “trade secret” taken straight from TUTSA.

Unlike the PJC, there was no question about “misappropriation,” because it was undisputed my clients had taken the information at issue. My argument was (1) the information wasn’t trade secrets, and (2) my clients didn’t use the information to make the sales. Those were the real issues in dispute, so I argued for submitting those specific questions, and the judge agreed.

I like my questions better than the PJC questions. They get right to the point and are easier for the jury to understand. They don’t require a jury to puzzle over a definition of “misappropriation.” But I admit the form of my questions won’t work in every case.

Why?

First, in my case there was no real dispute about what information was taken. I had asked the plaintiff in discovery to identify the alleged trade secrets, and it identified a specific stack of documents my clients admitted taking. The question was whether the information in those documents was trade secrets.

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Second, there was no dispute that my clients had sold products to customers of the first employer after leaving. The dispute was whether they made those sales by using the alleged trade secrets.

So the format we used for the trade secrets questions in that case may not work in your case. But that only proves my point. The PJC should only be a starting point. Judges and lawyers should not be afraid to adapt it to the specific facts of their case.

“It’s a thousand pages, give or take a few”

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.

But that’s all they do. 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 real issue is whether a customer list was a trade secret or not, then why not just ask the jury that? Or if the dispute is about whether the former employee used the employer’s customer list, why not just ask “did Don Davis use Paul Payne’s customer list?”

Of course, the problem is that there is usually a fight between the lawyers over the wording of the jury questions. When the parties don’t agree, the safer thing for the judge to do is to follow the PJC and submit a broad question, rather than a question tied to the specific facts in dispute. This is “safe” in the sense that it reduces the judge’s chance of getting reversed on appeal.

But the safe thing is not always the best thing. Actually.

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head-shot-photo-of-zach-wolfeZach Wolfe is a Texas trial lawyer who handles non-compete and trade secret litigation. His firm Fleckman & McGlynn, PLLC has offices in Austin, Houston, and The Woodlands. It’s a steady job, but he wants to be a paperback writer.

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] Kuryakyn Holdings, LLC v. Ciro, LLC, No. 15-cv-703-jdp, 2017 WL 1026025, at *7 (W.D. Wis. Mar. 15, 2017).

[2] The definitions are in Section 134A.002 of the Texas Civil Practice and Remedies Code.

Agree on These Litigation Rules to Level the Playing Field

Agree on These Litigation Rules to Level the Playing Field

TexasBarToday_TopTen_Badge_VectorGraphicThe “Fiver Rules” Recognize the Reality of Modern Litigation Practice

WARNING: Typically, I try to write posts that will interest lawyers and non-lawyers alike. But this post is for attorneys only, particularly Texas attorneys. If you don’t have a “JD” or an “Esq.” after your name, DO NOT READ THIS. It is “inside baseball” exclusively for us lawyers.

The high-powered litigation firm Susman Godfrey popularized the practice of “Trial by Agreement,” a process where lawyers on both sides of a lawsuit agree on certain procedures up front to minimize gamesmanship and unnecessary discovery disputes.

This was an admirable goal, but as a practicing Texas litigator, I find that the suggested stipulations on “Trial by Agreement” don’t always match the reality of modern litigation practice. Having closely observed the way Texas lawyers actually handle lawsuits, I propose that readers of Five Minute Law agree on the following “Fiver Rules” for Texas litigation.

  1. Every response to a written discovery request must begin with three pages of detailed “general” objections. If the responding law firm is from California or New York, the requirement is increased to five pages. These general objections must state that they apply to every request, but most of them must not actually apply to every request.
  1. In state court, the response to each request for production must include an objection that the documents are privileged. Texas Rule of Civil Procedure 193.2(f) says that the responding party should withhold privileged documents, not object to the request, but the parties will be required to ignore this rule.
  1. Contention interrogatories must ask for “all facts” supporting the responding party’s contentions. Texas Rule of Civil Procedure 197 is clear that phrasing a contention interrogatory this way is objectionable, but the requesting party must ignore this rule. Conversely, an interrogatory asking for the basic factual grounds for a claim in a party’s pleading must be met with the objection that it improperly requires “marshaling evidence.”
  1. The “conference” requirement for discovery disputes may be satisfied by stating to opposing counsel in writing that all of his objections are unfounded. The statement must be in the form of a letter attached to an email to emphasize its seriousness. Alternatively, the procedure for resolving discovery disputes will be a conference call with at least three participants on each side. The lead lawyers are expected to use the conference call to train their associates on how to show the lawyers on the other side how tough and smart they are.
  1. Motions for summary judgment will be decided based on which side brings a larger binder of documents for the judge. If the binders are the same size, the tie-breaker will be which side has more PowerPoint slides.
  1. Every document produced in discovery must be designated “Confidential – Attorneys’ Eyes Only,” regardless of actual confidentiality. This includes documents found on the internet and copies of pleadings from publicly available court files.
  1. No one is allowed to smirk or make a sarcastic comment when a lawyer interrupts a difficult deposition question to “confer on a privilege issue.” If there is no plausible reason the question would raise any privilege issue, the remedy for the questioning lawyer will be limited to resuming the deposition with a snarky comment like “now that you’ve had a chance to confer with your lawyer . . .”
  1. The parties stipulate that every witness met with his lawyer five times for a total of 20 hours to prepare for the deposition. How many hours of your life have you spent listening to detailed deposition questions about who the witness met with, where, and for how long to prepare for the deposition? How many times has this questioning resulted in discovering a fact that will make any difference whatsoever at trial? This stipulation will save time for everyone.
  1. Each side’s first request for production will include a request for every document generated by the other side’s expert witness. Never mind that the “new” Texas discovery rules (which are now almost 20 years old) provide for only two exclusive methods of obtaining discovery about testifying experts (read Rule 195.1 if you don’t believe me). Why waste those forms your firm has been saving since the Reagan administration?
  1. In federal court, the defendant must file a motion to dismiss raising every possible factual defense to the plaintiff’s claims. A lot of court opinions say the judge should decide a motion to dismiss based only on the facts alleged in the plaintiff’s complaint. Those courts obviously do not appreciate the number of billable hours that a thorough motion to dismiss can generate for the benefit of both sides.

Agreeing on these rules up front will level the playing field for everyone. Nerds who take the Rules of Civil Procedure seriously will no longer be at a disadvantage. If the judge reprimands a lawyer for following one of the Fiver Rules, it will be socially acceptable for that lawyer to point at opposing counsel and say “he started it!”

And if you are a non-lawyer who has gotten this far and is now saying, “I wish I had that five minutes of my life back,” all I can say is, “you were warned.”

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head-shot-photo-of-zach-wolfeZach Wolfe is a Texas trial lawyer who handles non-compete and trade secret litigation. His firm Fleckman & McGlynn, PLLC has offices in Austin, Houston, 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.

Track These Changes: Ethics of Inadvertent Disclosure of Metadata

Track These Changes: Ethics of Inadvertent Disclosure of Metadata

Texas Ethics Opinion 665 says lawyers have an ethical duty to avoid inadvertently disclosing confidential metadata, but not an ethical duty to disclose they received inadvertently-sent metadata

Does a lawyer have an ethical duty to avoid sending opposing counsel a document containing metadata that reveals confidential client information? Does the receiving lawyer have a duty to inform the sending lawyer of the receipt of confidential metadata and to refrain from using the information obtained therefrom?

Did I really just use the word “therefrom” in Five Minute Law? Please don’t report me to Bryan Garner.

In any case, the Professional Ethics Committee for the State Bar of Texas recently addressed these questions in Opinion No. 665, which appeared in the January 2017 Texas Bar Journal. The Committee said yes, a Texas lawyer generally has an ethical duty to avoid transmission of confidential metadata, and no, a Texas lawyer generally does not have an ethical duty to notify opposing counsel of the inadvertent receipt of confidential metadata.

In short, you could say the Texas rule on inadvertent disclosure of metadata is don’t disclose. If you’re the sending lawyer, don’t disclose confidential metadata. If you’re the receiving lawyer, you don’t have to disclose that you received it.

The Committee included this important qualification: the opinion applies only to the “voluntary transmission of electronic documents outside the normal course of discovery.” Disclosure of metadata in discovery—an issue currently before the Texas Supreme Court in the State Farm case—is an entirely different subject.

IMG_1616
 I read these things on the weekend so you don’t have to

The second part of Opinion 665 is consistent with Opinion 664, which I covered here. Opinion 664 said generally Texas lawyers do not have an ethical duty to notify opposing counsel they have inadvertently received confidential information. You might even say Opinion 665 simply applies Opinion 664 to metadata.

Once again, this puts Texas at odds with the ABA’s Model Rule of Professional Conduct 4.4(b), which  requires a lawyer to promptly notify the sender of the receipt of inadvertently-sent electronically stored information. This is Texas, the home of rugged individualism. If the other guy inadvertently sends you confidential information, that’s his problem.

But there is a limit. Would you believe the Texas ethics rules require lawyers to be honest? It’s right there in Rule 8.04(a)(3), which says a lawyer shall not “engage in conduct involving dishonesty, fraud, deceit or misrepresentation,” and Rule 3.03(a)(1), which requires that a lawyer shall not knowingly “make a false statement of material fact or law to a tribunal.” You can use confidential metadata opposing counsel inadvertently sent you; you just can’t lie about it.

In the Committee’s words:

[A]lthough the Texas Disciplinary Rules do not prohibit a lawyer from searching for, extracting, or using metadata and do not require a lawyer to notify any person concerning metadata obtained from a document received, a lawyer who has reviewed metadata must not, through action or inaction, convey to any person or adjudicative body information that is misleading or false because the information conveyed does not take into account what the lawyer has learned from such metadata.

That sounds reasonable. But it’s so abstract. What does it really mean?

Application of the Texas “don’t disclose” rule to metadata in a settlement agreement

Let’s make this concrete with my favorite hypothetical non-compete lawsuit, Paula Payne Windows v. Dawn Davis. Suppose Dawn’s lawyer sends Dawn Paula Payne’s proposed settlement agreement in Microsoft Word. Dawn revises it and inserts some confidential comments, such as “change this to a one-year non-compete, but I’ll agree to two years if that’s what it takes—I just want this nightmare to be over!”

Dawn’s lawyer emails Paula Payne’s lawyer, Sam Sneaky, a Word document containing metadata that allows Sam to recover and review Dawn’s comments, including the comment about the length of the non-compete. Sam decides not to tell Dawn’s lawyer about the inadvertent disclosure. Knowing that Dawn is desperate to settle and will cave on the non-compete, Sam sends back a demand for more money and a two-year non-compete.

So has anyone broken any ethical rules under Opinion No. 665?

Dawn’s lawyer probably failed to meet his duties of competent representation (see Rule 1.01) and maintaining confidentiality of client information (Rule 1.05).  According to Opinion 665:

Lawyers . . . have a duty to take reasonable measures to avoid the transmission of confidential information embedded in electronic documents, including the employment of reasonably available technical means to remove such metadata before sending such documents to persons to whom such confidential information is not to be revealed pursuant to the provisions of Rule 1.05.

Let’s assume Dawn’s lawyer knew the original Word document had sensitive client communications in it and should have known those communications could be recovered from the metadata in the new document. In that case, Dawn’s lawyer should have taken reasonable measures such as using a common metadata-scrubbing program when emailing the document to opposing counsel.

Screen Shot 2017-03-12 at 8.29.01 AM
Be careful what you send opposing counsel

On the other hand, Dawn’s lawyer only has to take reasonable measures. “Not every inadvertent disclosure of confidential information in metadata will violate Rule 1.05.”

What about Sam Sneaky? Under the ABA Rule, you could argue Sam had a duty to promptly notify Dawn’s lawyer that the confidential metadata was inadvertently sent. But under Opinion 665, he’s fine in Texas.

That is, unless he conveys information that is false or misleading because it doesn’t take into account what he learned from the metadata. For example, after reviewing the confidential metadata, Sam couldn’t say to Dawn’s lawyer, “I have no idea what length of non-compete your client is willing to agree to, but my client insists on two years.” That would be dishonest. It’s a statement Sam could truthfully make before seeing the confidential metadata, but not after.

Admittedly, this hypothetical is pretty contrived. Who talks like that?

Let’s imagine something more subtle and realistic. Can Sam say to Dawn’s lawyer, “we have to insist on a two-year non-compete because anything less than that won’t adequately protect my client”? That statement is misleading, you could argue, because it omits the material fact that Sam is insisting on the two-year non-compete because he knows from the inadvertently-disclosed metadata that Dawn will agree to it.

The bottom line seems to be this: when Texas lawyers receive confidential metadata from opposing counsel, they don’t have to disclose they received it, and they can use it to their advantage. They just have to be careful what they say after receiving it.

Is this the Cowboy Way?

I’ll be honest. I don’t like this. Ethics Opinion 665, like Opinion 664 before it, seems to make Texas an outlier, and in the wrong direction. I prefer the approach of the ABA Model Rule.

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Let’s rustle up some metadata

Yes, Texas is the Lone Star State, where the legacy of Old West rugged individualism is strong. But we should also remember “Tejas” means “friendship.” And last I checked, Texas was still part of the Bible Belt. The Bible says “do unto others as you would have them do unto you.” If you inadvertently sent a document containing confidential metadata and opposing counsel discovered it, wouldn’t you want him to tell you?

I’m not saying Ethics Opinion 665 is wrong. It’s a reasonable interpretation of the existing disciplinary rules. But using confidential information that opposing counsel inadvertently sends you just doesn’t feel like the Cowboy Way. If your neighbor’s cattle wander onto your ranch because he wasn’t careful, you don’t keep them and say “that’s his problem.”

Perhaps this comes down to the difference between “professionalism” and “ethics.” Ethics, in this context, means complying with a specific set of rules. Professionalism, on the other hand, is a higher—and admittedly fuzzier—standard. Telling a lawyer he accidentally sent you something you know he didn’t mean to send you is good professional courtesy, even if the Rules of Professional Conduct don’t require it.

It’s just following the Golden Rule. And the principles derived therefrom.

Texas lawyers: register for my March 22 webcast covering this very issue here.

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head-shot-photo-of-zach-wolfeZach Wolfe is a Texas trial lawyer who handles non-compete and trade secret litigation. His firm Fleckman & McGlynn, PLLC has offices in Austin, Houston, and The Woodlands. You can probably tell from this week’s image that his son is into Lamborghinis.  

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.