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Fifth Circuit Declines to Apply Restatement’s Burden Shifting Scheme in Proving Trade Secret Damages

In Damages, Restatement on September 13, 2010 at 9:26 pm
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The Fifth Circuit reversed a denial of summary judgment on a misappropriation of trade secrets claim In MGE UPS Systems, Inc. v. GE Consumer and Industrial, Inc., et al., 612 F.3d 760 (5th Cir. 2010).  In that case, an owner of copyrighted software sued unauthorized user of the software for copyright infringement, misappropriation of trade secrets, unfair competition, and violation of Digital Millennium Copyright Act (DMCA).

Defendant argued that the district court erred in denying its Rule 50(a) motion regarding plaintiff’s misappropriation of trade secrets and unfair competition claims because the evidence did not support damages for these claims.  Id. 768-69.  At the close of plaintiff’s case, the only evidence introduced to support its damages claims was a chart showing defendant’s total revenues earned from all sources of income.  Id. 769. Defendant contended that without evidence of plaintiff’s net profits earned, plaintiff’s claims should have been dismissed on defendant’s Rule 50(a) motion. Id.

The only reported Texas case involving the recovery of defendant’s profits for a misappropriation of trade secrets claim held that although defendant’s profits are a “proper element[ ] of damages in a case involving the wrongful use of a trade secret,” a plaintiff cannot recover damages without offering evidence “to show the actual profit made by [defendant].”  Id. (citing Elcor Chem. Corp. v. Agri-Sul, Inc., 494 S.W.2d 204, 214 (Tex. Civ. Ct. App. 1973)).

The evidence “demonstrated PMI’s total revenue, not ‘actual profits.’” Id. “MGE has not presented evidence that provides any means of distinguishing revenue PMI gained from other sources from revenue gained through misappropriation of MGE’s trade secrets, let alone a calculation of profits from the relevant portion of revenue.” Id. The court held that plaintiff “needed to take additional steps to deduct unrelated revenue and costs from these total figures in order to demonstrate PMI’s profits related to the infringement.” Id.

Plaintiff argued that comment f to the Restatement (Third) of Unfair Competition § 45 (1995) governs damages under Texas law, and contends that it met its burden under this burden-shifting framework:

The traditional form of restitutionary relief in an action for the appropriation of a trade secret is an accounting of the defendant’s profits on sales attributable to the use of the trade secret….  The plaintiff has the burden of establishing the defendant’s sales;  the defendant has the burden of establishing any portion of the sales not attributable to the trade secret and any expenses to be deducted in determining net profits.

Id. 769 (citing Restatemnt (Third) of Unfair Competition § 45 (1995)).

The Fifth Circuit rejected this argument, predicting that the Texas Supreme Court would not adopt the burden-shifting procedures of comment f:

Texas courts have not adopted the RESTATEMENT (THIRD) OF UNFAIR COMPETITION in its entirety and whether § 45’s comment f is controlling in Texas courts is still an open question. . . . Neither the Texas Supreme Court nor any of the Texas appellate courts have specifically applied comment f to determine a defendant’s profits in a trade secret action.  Given that comment f’s standard sets a plaintiff’s burden of proof for trade secret damages lower than the standard applied in Elcor, we conclude that the Texas Supreme Court would not adopt the burden-shifting procedures of comment f.

Id. 770.

Judges and Attorneys

Circuit Judge Emilio M. Garza wrote the opinion for the court.  Circuit Judges Rhesa H. Barksdale and Edward C. Prado concurred.

On appeal from District Judge Terry R. Means.

Stephen Andrew Kennedy (argued), Zachary M. Groover, Kennedy, Clark & Williams, P.C., Dallas, TX, for MGE UPS Systems, Inc.

Joseph F. Cleveland, Jr. (argued), Jeremy Heath Coffman, Richard Hunt Gateley, Brackett & Ellis, P.C., Fort Worth, TX, for Defendants-Appellees-Cross-Appellants.

By CHARLES JUNG

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