First Western: A Court of Appeals Decision on the Defend Trade Secrets Act

First Western: A Court of Appeals Decision on the Defend Trade Secrets Act

TexasBarToday_TopTen_Badge_VectorGraphicAh, the fall season, it’s finally here. When the Astros win the World Series, the Cowboys win as many games as they can while Ezekiel Elliott can still play, and the sweet smell of pumpkin pie and indictments wafts through the nation’s capital. The only thing that could make fall better would be a real Court of Appeals decision applying the relatively new Defend Trade Secrets Act.

And then it appeared like the Great Pumpkin, the day before Halloween.

In one of the first Court of Appeals decisions applying the federal Defend Trade Secrets Act, the Tenth Circuit Court of Appeals recently held in First Western Capital Management Co. v. Malamed that a plaintiff must prove irreparable harm to get a preliminary injunction under the Act.

If you know anything about injunctions, that probably doesn’t surprise you. “Irreparable harm” is one of the traditional requirements for obtaining an injunction.

But it wasn’t that simple. The plaintiff made the plausible argument that, because the statute authorizes an injunction and does not expressly require proof of irreparable harm, then evidence of irreparable harm is not required. In other words, there is a presumption of irreparable harm when the plaintiff proves the statute was violated.

The Tenth Circuit rejected this argument. The Court of Appeals reconciled its prior decisions by drawing a distinction between a statute that mandates injunctive relief and a statute that merely authorizes injunctive relief. When a statute only authorizes an injunction—as the DTSA does—then the plaintiff still has to prove the “traditional” requirements for an injunction, including irreparable harm.

The district court had already found that the plaintiff did not prove irreparable harm, so the Court of Appeals reversed the preliminary injunction. (You can read more about the district court opinion here.)

So what does this case from Colorado mean for lawyers who handle trade secrets litigation in my home state of Texas?

Lessons from First Western: Plaintiffs should offer evidence of irreparable injury

As I said here, if you represent a plaintiff asking for a preliminary injunction in a Defend Trade Secrets Act case, you should offer evidence of irreparable harm. Then you can make two arguments. First, we’ve proven irreparable harm. Second, even if we haven’t proven irreparable harm, we don’t have to.

Unless and until the Fifth Circuit Court of Appeals holds that the Tenth Circuit got it wrong in First Western, you don’t want the second argument to be your only argument; you want it to be your fallback position. So come prepared with evidence of irreparable harm.

But what evidence is that?

There is no single way to show irreparable harm, but here are a few typical arguments that damages would be inadequate to compensate your client for the defendant’s use of your client’s trade secrets:

  • It will be difficult to quantify the amount of damages.
  • Loss of the trade secrets at issue will be irreversible.
  • It’s unlikely the defendant has sufficient assets to satisfy a judgment for damages.

These arguments don’t always hold up to scrutiny, but you want to have something to argue. The judge will feel more comfortable granting an injunction if you at least offer some evidence to try to show irreparable harm.

Of course, if you represent the plaintiff you can still argue that proving a violation of the statute is sufficient. There is some authority in the Fifth Circuit for the proposition that “where a statute expressly provides for injunctive relief, irreparable harm is presumed and need not be established.”[1]

You can also cite pre-DTSA case law holding that the threatened disclosure of trade secrets is presumed to cause irreparable injury.[2]

But you don’t want to put all your eggs in one basket.

Should the First Western principle apply to Texas statutes?

If you represent the defendant in a Texas trade secrets lawsuit, First Western can help you in two ways. First, and more obvious, you can cite First Western for the argument that the plaintiff still has to prove irreparable harm to get an injunction under the Defend Trade Secrets Act.

First Western isn’t binding in the Fifth Circuit, you can concede, but its reasoning is sound. When Congress passed the DTSA, it was well aware (in theory) of the long-established principle that courts require proof of irreparable injury to get an injunction. If Congress had wanted to excuse plaintiffs from that requirement, it could have expressly said so.

Second, and perhaps less obvious, defendants can argue that the principle applied in First Western should also apply to the Texas trade secrets statute and the Texas non-compete statute.

Like the Defend Trade Secrets Act, these statutes expressly authorize but do not require injunctions.

Just as the DTSA says a court “may grant” an injunction, the Texas non-compete statute says that a court “may award” injunctive relief.[3] Similarly, the Texas Uniform Trade Secrets Act says that actual or threatened misappropriation of trade secrets “may be enjoined.”[4]

The fact that these statutes do not mandate an injunction for violating the statute means that the plaintiff still has to prove the traditional equitable requirements for obtaining an injunction—including irreparable harm.

At least that’s the argument, applying the distinction from First Western.

Just keep in mind there have been some Texas cases going the other way, suggesting that proof of irreparable injury is not required because the non-compete statute preempts other law and expressly authorizes injunctions.[5]

Personally, I think that’s wrong, but until the Texas Supreme Court definitively decides the issue, if I represent the plaintiff I may at least make the argument that proof of irreparable injury isn’t required.

Now if only I could convince the Second Circuit to let Zeke play.

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IMG_4571Zach Wolfe (zwolfe@fleckman.com) is a Texas trial lawyer who handles non-compete and trade secret litigation at his firm Fleckman & McGlynn, PLLC.

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, e.g., U.S. v. McMillan, 946 F. Supp. 1254, 1266 (S.D. Miss. 1995) (citing  EEOC v. Cosmair, Inc., 821 F.2d 1085, 1090 (5th Cir. 1987), and U.S. v. Hayes Int’l Corp., 415 F.2d 1038, 1045 (5th Cir. 1969)).

[2] See Heil Trailer Int’l Co. v. Kula, 542 Fed. Appx. 329, 335 (5th Cir. 2013) (citing Texas cases). Courts are a little imprecise about this. You could read the cases to say that the disclosure of trade secrets is irreparable injury, or that disclosure of trade secrets excuses the plaintiff from proving irreparable injury, but the distinction may be academic.

[3] Tex. Bus. & Com. Code § 15.51(a).

[4] Tex. Civ. Prac. & Rem. Code § 134A.003(a).

[5] Compare Sanders v. Future Com, Ltd., No. 02-15-00077-CV, 2017 WL 2180706, at *10 (Tex. App.—Fort Worth May 18, 2017, no pet.) (mem. op.) (plaintiff that proves violation of non-compete statute is entitled to permanent injunction without showing of traditional injunction elements), with Argo Group US, Inc. v. Levinson, 468 S.W.3d 698, 701-2 (Tex. App.—San Antonio 2015, no pet.) (joining courts holding that a plaintiff seeking a temporary injunction for violation of the non-compete statute still must show irreparable injury).

Texas Court Finds Indentured Servitude Contract Illegal

Texas Court Finds Indentured Servitude Contract Illegal

TexasBarToday_TopTen_Badge_VectorGraphicDo you have a college degree in restaurant and hotel management? Have I got a deal for you.

Work as an assistant manager at Buc-ee’s, the well-known Texas highway stop with the clean restrooms, massive selection of snacks, and funny billboards. On top of a weekly salary of $862.75, you will get a monthly bonus, I mean, “retention payment,” of 1.2652% of the store’s monthly net profit.

Naturally, your employment will be at-will, meaning Buc-ee’s can fire you at any time for any reason, or for no reason. That’s ok, because you can also quit for any reason, or for no reason.

But here’s the catch. If you quit or get fired in less than four years, or if you don’t give Buc-ee’s written notice at least 6 months before quitting, you have to pay back all of the retention payments you received, plus interest and attorneys’ fees.

In other words, you can check out any time you like, but you can never leave.

That was the basic deal in Rieves v. Buc-ee’s, a case recently decided by the Houston Court of Appeals (14th District).[1] Rieves, the employee, received about $67,000 in retention payments, paying federal income taxes on them, but quit the job three years in. Buc-ee’s sued her to recover the $67,000 plus interest and attorneys’ fees.

That doesn’t sound fair, you may be thinking, but this is Texas, and a deal’s a deal, right?

Well, yes, “that’s not fair” is usually not a defense to enforcement of a contract, and “unfairness” is not an exception to the at-will employment doctrine.

But it’s not just a question of enforcing the parties’ contract. The public’s interest in free competition is also at stake. That’s why Texas has a statute that says every contract in restraint of trade or commerce is illegal. The statute has an exception for non-competes, but the non-compete has to be reasonable in scope.

So, Rieves argued that the contract’s requirement to pay back the retention payments was an unenforceable restraint of trade, and the Houston Court of Appeals agreed.

Limitations on employee mobility must meet the reasonableness requirement for non-competes

Under Texas case law, the court said, limitations on employee mobility are unenforceable unless they fall within the statutory exception for non-competes. This rule applies not only to provisions that expressly limit employee mobility, but also to damages clauses that impose a “severe economic penalty” on a departing employee. Because the contract imposed a severe economic penalty on Rieves for exercising her right to quit, the court reasoned that the contract was unlawful unless it met the reasonableness requirements for non-competes.

The problem for Buc-ee’s? The contract had no limits on the employee’s repayment obligation based on whether her new employment involved competitive activities or was located within certain areas. Not only that, the contract gave Buc-ee’s the right to enforce the repayment provision even if, for example, Buc-ee’s fired the employee without cause on the last day of the four-year period, or if the employee quit to take a noncompeting job, or no job at all.

This was just too much, even for the relatively conservative 14th Court of Appeals.

“These provisions go far beyond protecting any legitimate competitive interest of Buc-ee’s,” Justice Busby wrote for the court, “impose significant hardship on Rieves by clawing back substantial compensation already paid to her and on which she had paid taxes, and injure the public by limiting choice and mobility of skilled employees.” The court therefore rendered judgment that the repayment provision of the contract was unenforceable.

That sounds like a fairly common-sense application of Texas law, right?

What about ExxonMobil v. Drennen?

But those of you who follow Texas non-compete law may be thinking, what about Drennen?

Exxon Mobil v. Drennen was a Texas Supreme Court case decided in 2014.[2] Technically, it addressed a narrow issue only a lawyer could love: choice of law. The contract at issue in Drennen required an executive to forfeit stock options if he went to work for a competitor. New York law allows that sort of thing, and the legal issue presented was whether the Texas court should apply New York law or Texas law.

I won’t get down in the weeds of the choice of law analysis, but the key was that one step was to ask whether Texas has any “fundamental policy” against this kind of forfeiture provision.

Some of you may recall a certain statute that says something about, what was it, restraints of trade or commerce being unlawful? That kind of sounds like a “fundamental policy” to me.

But the Texas Supreme Court didn’t see it that way. It held in Drennen that there was no fundamental Texas policy that would bar the forfeiture clause, and that cleared the way for New York law to apply.

As explained here, I thought Drennen got it wrong on this point. In my view, Texas courts should take the legislature’s ban on restraints of trade more seriously. But of course I don’t get to make the rules. And while bloggers and pundits are free to criticize, the Texas Courts of Appeals have to follow what the Texas Supreme Court says.

So if Drennen said the forfeiture of employee benefits does not violate Texas public policy, why didn’t that control the outcome in the Buc-ee’s case?

The Buc-ee’s court found that Drennen did not apply. First, the type of compensation at issue was different. In Drennen, it was forfeiture of future unvested stock options, while in Buc-ee’s it was money already paid to the employee, on which she had already paid income taxes.

Second, the Buc-ee’s contract was different because, unlike the stock option provision in Drennen, it did not necessarily reward the employee for her loyalty. The contract required the employee to pay back a substantial part of her compensation even if Buc-ee’s fired her, and the longer she worked at Buc-ee’s, the larger the penalty if she decided to quit.

These sound like reasonable distinctions, but would the Texas Supreme Court agree? I wouldn’t be surprised to see Buc-ee’s petition the Texas Supreme Court to take the case, arguing that it conflicts with Drennen.

Then we may really see if the Texas prohibition of restraints of trade has any teeth.

The Bigger Picture

The Buc-ee’s decision shows that some Texas courts still take the legislature seriously when it says that restraints of trade are unlawful. It’s an important decision, because it restores some balance to the basic social contract that Texas law provides to businesses and employees.

The at-will employment doctrine and the ban on restraints of trade are two sides of this coin. What’s in it for business is they can hire and fire at will, with only some narrow exceptions (like unlawful discrimination).

The at-will employment doctrine is widely known but not fully appreciated. Everybody knows that employers can fire employees at will, yet with most people that knowledge really hasn’t sunk in. In the back of their minds, employees still seem to feel that employers can’t fire them for a bad reason.

But they can, and that’s a big deal. I would even say the at-will employment doctrine is the most serious source of injustice in the workplace in America.[3]

Think about it. At-will employment means you can slave away for the same company for twenty years and get fired because the owner wanted to make room for his son who just got out of college and needs a job. It’s just not fair!

Yet I fully support the at-will employment doctrine. While at-will employment is a source of great injustice on the “micro” level, we accept it as a necessity for its “macro” benefits, which fall into two categories.

First, there is the judicial capability problem. While judges sometimes speak of at-will employment as if it were some immutable law of nature, it isn’t. Courts could adopt a common-law rule that employers must have good cause to fire an employee. But imagine all the lawsuits that would follow. And imagine all the inconsistent and subjective rulings by judges and juries on “good cause.”

Second, we accept at-will employment for its economic benefits. The ability to hire and fire freely boosts overall economic growth and employment, benefitting everyone. If employers could only fire for good cause, think of how reluctant they would be to hire in the first place. At-will employment also encourages employee mobility, which increases competition.

But this gets to the other side of the deal: at-will employment has to be a two-way street. Just as employers can fire for any reason, or for no reason, employees have to be free to say “take this job and shove it.” Not only that, employees must be able to leave and work for a competitor (unless there is a reasonably limited non-compete). That’s the balance that makes at-will employment work.

The basic problem in Buc-ee’s was that the employer tried to upset this balance. Buc-ee’s wanted to have its beef jerky and eat it too: we can fire you any time for any reason, but we’re also going to make it cost-prohibitive for you to decide to leave.

This was just too much for the Houston Court of Appeals. You can’t always get what you want.

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IMG_4571Zach Wolfe (zwolfe@fleckman.com) is a Texas trial lawyer who handles non-compete and trade secret litigation at his firm Fleckman & McGlynn, PLLC. As a litigator he drives around Texas a lot and loves stopping at Buc-ee’s.

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] Rieves v. Buc-ee’s Ltd., No. 14-15-01061-CV, 2017 WL 4557796 (Tex. App.—Houston [14th Dist.] Oct. 12, 2017).

[2] Exxon Mobil Corp. v. Drennen, 452 S.W.3d 319 (Tex. 2014).

[3] This is not to downplay harassment and discrimination, which are certainly real problems.

How Do We Solve the Baby Litigator Crisis?

How Do We Solve the Baby Litigator Crisis?

TexasBarToday_TopTen_Badge_VectorGraphicFirst let me say for the record: I think it’s great when senior litigators give young lawyers opportunities to do things like arguing motions and taking depositions. That happened to me when I was a “baby lawyer,” and I’m grateful.

Having said that, I have to confess it has finally happened. I’ve become a grumpy old man. At 45 years old, I feel like I’m not even at the half-way point of my career, and I still think of myself as young. So what has me feeling like throwing open my front door and shouting “you kids get off my lawn”?

Well, lately there has been some handwringing in the legal community about the fact that younger lawyers don’t get to stand up and talk in the courtroom very often. (And forget about the decline in jury trials–that ship has sailed; we’re just talking about hearings and oral arguments.)

As a result, programs designed to give younger lawyers more courtroom speaking opportunities are now a “thing.” Some judges have even adopted formal policies designed to encourage more experienced lawyers to allow less experienced lawyers to argue cases in court.[1]

A First-World Problem?

The shortage of courtroom speaking opportunities for young litigators strikes me as a great example of a First-World Problem. If you’re not familiar with the concept, a First-World Problem is something that causes great annoyance to the upper-middle class in America, until you stop and think about whether someone in a third-world country would consider it a problem.

My personal favorite First-World Problem is when I order a cappuccino at Starbucks and they make it more like a latte. As I get the urge to complain to the barista, “more foam, less milk!” I have to stop and think to myself, “dude [I like to call myself ‘dude’], there are millions of people in this world who don’t even have clean water to drink.” And in the wake of Hurricane Harvey, I’m even more reluctant to complain about my relatively trivial problems.

Don’t get me wrong. I’m not saying that the lack of courtroom opportunities is not a problem for younger lawyers. But I have two concerns about the reaction to the problem.

What’s best for the client?

First, the reaction seems too focused on the needs of the lawyers, rather than the needs of the clients.

Mind you, I’m not suggesting the reaction is based on heartfelt concern for the job satisfaction of the young associates. Please! The problem big law firms are concerned about is “how can we justify charging $750/hour for a junior partner who never got much courtroom experience?” (Note to self: update this post once a year to increase the rate by $100.)

Maybe this is naïve, but I like to think that law firms should assign tasks based on what is best for the case and the client. For a routine motion or a deposition of a minor witness, there’s no reason to send the senior partner when a junior associate can do the job—and at a lower rate.

But who should handle a more difficult assignment, like arguing a case-dispositive motion, taking the deposition of a key hostile witness, or telling the CEO “we need to image your smartphone”?

In those cases, the overriding question should be who is going to do the job most effectively.

That doesn’t necessarily mean the assignment goes to the more senior lawyer. Sometimes the junior lawyer who knows the facts, documents, and case law inside-out may do just as good a job (or better). In those cases, I say give the young lawyer a chance. My Young Associate Development Program would simply be this: a tie goes to the less experienced lawyer.

The point is to focus on what is best for the case, not what is best for the law firm. Most clients don’t want to foot the bill for training young lawyers.

A radical alternative solution

The second problem I have with the reaction to junior lawyers not getting enough courtroom time is that the whole thing seems a little BigLaw-centric.

If you’re an associate slaving away at a big law firm and not getting enough courtroom experience, you have a few options. You could complain to the partners and hope they throw you a few more breadcrumbs. But if taking the lead in the courtroom is truly important to you, then the better solution is to bring in your own clients.

The problem, of course, is that not many third-year associates are going to land the kind of blue-chip clients who will pay BigLaw rates. So you may have to swallow your pride and find a job at—brace for it—a small firm, where you may have a better chance of developing your own business.

Or if you really care about being in charge of your own matters, you could take the plunge and hang out a shingle. In a solo practice, there is a very good chance the managing partner will let you argue the cases in the courtroom all you want.

Now we’re getting to the nitty-gritty. Because these options may mean shifting your expectations. You may need to trade in that new Lexus for a used Subaru. You may need to take your next vacation in Paris, Texas, rather than Paris, France. You might have to—gasp!—cancel your membership at the country club. You may be embarrassed at the law school reunion when you see your friends from law review and they ask where you’re working now.

And your clientele may have to change. You may no longer find yourself reporting to the Deputy Assistant General Counsel for Employment Litigation, Southwest Region, of a Fortune 500 company. Instead, you may find yourself reporting to Jim Bob, a middle-aged guy who dropped out of college to start a plumbing supply company.

But you know what? You may find that Jim Bob is smarter than you thought, and representing his company can be a lot of fun. Plus, when you’re in charge, you’ll get to argue his case in court all you want.

And, who knows, after a few years you may be the one sending a baby litigator to the courthouse in your place.

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Zach Wolfe (zwolfe@fleckman.com) is a Texas trial lawyer who handles non-compete and trade secret litigation at his firm Fleckman & McGlynn, PLLC. He is much nicer to younger lawyers in real life.

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] An interwoven issue is providing more opportunities for women and minorities. That’s an important topic in its own right, so I won’t try to cover it here.

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” of 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?

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Zach Wolfe (zwolfe@fleckman.com) is a Texas trial lawyer who handles non-compete and trade secret litigation at his firm Fleckman & McGlynn, PLLC. 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 filling the Merrick Garland 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.

*Update: The Austin Court of Appeals returned to applying the TCPA to a trade secrets claim in Craig v. Tejas Promotions, LLC, No. 03-16-00611-CV, 2018 WL 2050213 (Tex. App.–Austin May 3, 2018), holding that the TCPA applied to a claims for conspiracy to misappropriate trade secrets. This case suggests that, as I predicted, some plaintiffs will continue to plead communication of the alleged trade secrets, which invites a TCPA motion to dismiss.

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. (Narrator: whether you can file a TCPA motion in federal court would actually become a hot issue and even be raised in a suit involving the President.)

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IMG_4571 Zach Wolfe (zwolfe@fleckman.com) is a Texas trial lawyer who handles non-compete and trade secret litigation at his firm Fleckman & McGlynn, PLLC. 

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, 520 S.W.3d 191 (Tex. App.—Austin 2017, pet dism’d).

[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]

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]

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]

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 cover that in Part 3.

*Update: The Austin Court of Appeals addressed the TCPA’s application to a trade secrets claim again in Craig v. Tejas Promotions, LLC, No. 03-16-00611-CV, 2018 WL 2050213 (Tex. App.–Austin May 3, 2018). The court held that the TCPA applied to a claim for conspiracy to misappropriate trade secrets. This was a fairly straightforward application of Elite Auto Body. The court also held, for somewhat esoteric reasons very specific to the case, that the TCPA did not apply to a declaratory judgment claim.

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IMG_4571
Zach Wolfe (zwolfe@fleckman.com) is a Texas trial lawyer who handles non-compete and trade secret litigation at his firm Fleckman & McGlynn, PLLC. 

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., 2017 WL 1833495, 520 S.W.3d 191 (Tex. App.—Austin 2017, pet dism’d).

[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 for 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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IMG_4571
Zach Wolfe (zwolfe@fleckman.com) is a Texas trial lawyer who handles non-compete and trade secret litigation at his firm Fleckman & McGlynn, PLLC.

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).