TX Tanks, Inc v. Owens-Corning Fiber ( 1998 )

United States Court of Appeals,
Fifth Circuit.
No. 95-10893.
TEXAS TANKS, INC., Plaintiff-Appellant,
v.
OWENS-CORNING FIBERGLAS CORP., Defendant-Appellee.
Nov. 14, 1996.
Appeals from the United States District Court for the Northern
District of Texas.
Before HIGGINBOTHAM, WIENER and PARKER, Circuit Judges.
ROBERT M. PARKER, Circuit Judge:
Appellant, Texas Tanks, Inc. ("TTI") appeals the district
court's judgment for Appellee, Owens-Corning Fiberglas Corp.
("Owens-Corning") notwithstanding the verdict and seeks
reinstatement of the jury's compensatory damage award of $2,000,000
and exemplary damage award of $3,000,000. Finding that the
evidence was legally sufficient to support the jury's verdict, we
reverse.
I. PROCEDURAL BACKGROUND
TTI brought this action against Owens-Corning in September of
1994, claiming theft of trade secrets, breach of confidentiality
agreements, fraud, and negligent misrepresentation. TTI filed the
original action in Texas state district court. Owens-Corning later
removed the case to federal district court on the basis of complete
diversity.
State law governs this diversity dispute. The parties tried
and argued this case on the assumption that Texas law applies.
1
Since there are substantial Texas contacts, this Court will also
apply the law of Texas. House of Koscot Development Corp. v.
American Line Cosmetics, Inc., 468 F.2d 64, 66 (5th Cir.1972).
From September 11 to September 15, 1995, TTI's claims were
tried to a jury. On September 18, 1995, the jury returned a
verdict in favor of TTI, awarding $2,000,000.00 in compensatory
damages and $3,000,000.00 in exemplary damages. TTI moved for
entry of judgment on the jury's verdict, and Owens-Corning moved
for judgment as a matter of law notwithstanding the verdict.
The district court granted Owens-Corning's motion for JNOV.
Specifically, the district judge found that there was no evidence
that Owens-Corning had commercially "used" TTI's trade secrets,
and, therefore, the evidence would not support the jury's verdict
on theft of trade secrets or breach of confidentiality agreements.
In addition, the district judge found that the evidence would not
support the jury's verdicts on fraud or negligent representation,
or the award of compensatory or exemplary damages. The district
court entered judgment in favor of Owens-Corning, and TTI timely
appealed.
II. FACTUAL BACKGROUND
TTI is a family owned company that designs and manufactures
above-ground petroleum storage tanks (referred to as "AST").
Owens-Corning is a large manufacturer of fiberglass products. This
case concerns business dealings between TTI and Owens-Corning from
January through April 1994.
In the Spring of 1993, Owens-Corning decided to sell its tank
2
division, which produced under-ground petroleum storage tanks made
from fiberglass. In 1992 and 1993, tank division sales decreased
by approximately $40 million annually. Owens-Corning believed it
could recapture lost market share and thereby make the tank
division more attractive to potential buyers by introducing its own
AST. It decided to pursue the licensing of existing technology
rather than pursuing its own research and development to allow a
quicker market entry. Owens-Corning contacted TTI for the purpose
of licensing AST technology for a fiberglass lined tank and
negotiations ensued. At TTI's request, each member of Owens-
Corning's negotiating team executed a written confidentiality
agreement. TTI thereafter disclosed the details of its AST
technology, including providing Owens-Corning a prototype tank.
In February or March 1994, during the ongoing negotiations,
Owens-Corning began a parallel independent AST development project.
On April 1, 1994, Owens-Corning made a formal offer to license
TTI's technology, but offered a 1% royalty rather than the 8-12%
royalty that had been discussed and excluded the $2,000,000 upfront
payment that TTI had insisted on throughout the negotiations. TTI
did not accept this offer.
Owens-Corning eventually sold its tank division to Fluid
Containment, Inc. Owens-Corning never marketed or sold an AST. At
the time of trial, Fluid Containment, Inc. had not developed,
marketed or sold the type of AST at issue in this case.
III. SUFFICIENCY OF THE EVIDENCE
a. Standard of review.
3
The primary issue presented for our review is whether the
district court erred in concluding that the evidence was not
legally sufficient to support the jury's verdict. This Court
reviews a judgment as a matter of law de novo, applying the same
standard as the district court. Great Western Directories, Inc. v.
Southwestern Bell Telephone Co., 63 F.3d 1378, 1384 (5th Cir.1995).
The district court, in entertaining a motion for directed verdict
or JNOV, must view the evidence in the light most favorable to the
party against whom the motion is made. Id. On appeal, this Court
must consider the evidence in the same way, giving the non-moving
party the advantage of all reasonable inferences the evidence
justifies. A judgment notwithstanding the verdict should be
granted only when the facts and inferences point so strongly and
overwhelmingly in favor of the moving party that a reasonable juror
could not arrive at a contrary verdict. Id.
Since this case comes to us on a judgment notwithstanding the
verdict, we will review the evidence in the light most favorable to
the non-movant, TTI, and thus in the light most favorable to the
jury's verdicts. There was conflicting evidence on many points,
but the evidence was sufficient for the jury to draw the following
conclusions.
b. The evidence.
TTI's owner, William A. Hall and his sons developed the first
AST to receive an Underwriter's Laboratories ("UL") approval. The
Halls were instrumental in securing changes in the relevant fire
codes and UL testing procedures that allowed widespread
4
introduction of ASTs into the storage tank market in 1993.
Owens-Corning is an international manufacturer and seller of
fiberglass related products. Owens-Corning's tank division was the
largest manufacturer and seller of underground petroleum storage
tanks in the world. The tank division's significant net losses in
1992-93 resulted, in part, from the introduction of ASTs into the
market.
During the course of the licensing negotiations, TTI explained
design specifications and production methods and provided drawings
of critical design elements. TTI indicated early on in the
discussions that it would not be willing to license its technology,
sell production equipment and release its sales force, (all terms
that were discussed) without an up-front payment of $2,000,000.00.
This was the amount the Halls estimated it would take to reimburse
the expenses and debt incurred in the research and development of
the AST. At the time Owens-Corning contacted TTI, TTI was
exploring the availability of investment capital with financial
advisors and potential investors. TTI broke off those discussions
when Owens-Corning indicated that it was committed to pursuing a
business relationship.
During negotiations, Owens-Corning requested information on
the patents TTI had applied for and obtained the rights to. The
Halls testified that the only concern Owens-Corning expressed
regarding patents was that it needed to avoid infringing on anyone
else's patents when it marketed its own AST. Owens-Corning also
expressed concern regarding UL approval of an AST with a fiberglass
5
inner tank. TTI assured Owens-Corning that it could obtain that
approval. TTI had already passed UL tests with a fiberglass clad,
steel inner tank, and did in fact receive UL approval on an AST
with a fiberglass inner tank after the negotiations had come to a
stand-still.
Because Owens-Corning was planning to sell its tank division,
Owens-Corning chief negotiator Mike Messmer had been told he did
not have the authority to enter into an agreement that required an
up-front payment. Therefore, he knew when he began negotiations
with the Halls that their insistence on a $2 million dollar
up-front payment would be a problem. Nevertheless, Messmer never
told the Halls that he did not have that authority. Instead,
Messmer indicated that he could put the up-front payment in the
contract as guaranteed profit on initial purchases of inventory.
During the negotiations, the parties discussed a royalty on
ASTs sold by Owens-Corning in the amount of 12, 10, and 8 percent,
decreasing over time.
During the negotiations, Owens-Corning began to develop its
own AST. Although Owens-Corning contends that Dave Bartlow, an
Owens-Corning engineer, developed an AST design relying entirely on
intuition, general engineering knowledge, and the advice of expert
suppliers, there is ample evidence that Bartlow participated in
detailed discussions with Owens-Corning's negotiating team
regarding TTI tank design and production techniques. In the middle
of March, these Owens-Corning representatives created invention
records, a preliminary step in the patent application process, for
6
their own AST design. Bill Hall, Sr. testified that the drawings
attached to Owens-Corning's invention records were virtual copies
of the drawings TTI had provided during negotiations. Owens-
Corning secretly produced its own AST prototype for testing and
actively pursued potential buyers for its tank division, using the
prospect of an AST that was in development.
On April 1, 1994, Owens-Corning sent the Halls an offer that
included no up-front payment and a royalty of 1%. It is undisputed
that this proposal did not reflect the terms negotiated by the
parties. Owens-Corning representatives admitted that the Halls had
consistently demanded the up-front payment and that they knew there
was no chance TTI would accept the proposal. Owens-Corning claims
that the reason for the drastic change in the proposal was the
determination that the Halls' patents were worthless because they
were so narrow that they would not be effective as offensive tools
to keep other companies from producing competing ASTs. The Halls
testified that this had never been an expressed concern.
c. Analysis.
1. Theft of trade secrets.
The district court instructed the jury that
to establish a trade secret violation, plaintiffs have the
burden of proving by a preponderance of the evidence that
First, trade secrets existed;
Second, the defendant acquired those secrets as a result
of a confidential relationship;
Third, that the defendant used the secret information
(without authorization of the plaintiff).
Only wrongful use of secret information disclosed in
7
confidence gives rise to liability. To find defendant liable
for misappropriation of trade secrets, you must find by the
preponderance of the evidence that plaintiff had specific,
identifiable trade secrets which were acquired by the
defendant as a result of a confidential relationship and that
defendant used these secrets in developing or making its
product.
This instruction is consistent with Texas law on theft of trade
secrets, see Sikes v. McGraw-Edison Co., 665 F.2d 731, 733 (5th
Cir.1982); Hurst v. Hughes Tool Co., 634 F.2d 895, 896 (5th
Cir.1981), and the parties do not argue that it was an inaccurate
instruction.
In its motion for JNOV Owens-Corning argued that the evidence
fails to support the jury's conclusion that Owens-Corning used
TTI's trade secrets. Likewise, the district court's order granting
JNOV focused on the "use" requirement, holding:
There is no evidence that the Defendant used the Plaintiff's
technology. The Defendant has never marketed or sold an
aboveground storage tank. There is furthermore no evidence
that the Defendant provided to Fluid Containment, Inc., the
purchaser of Defendant's tank division, any of the Plaintiff's
proprietary information. The evidence shows that Fluid
Containment, Inc. has not marketed or sold an aboveground
storage tank containing a fiberglass inner tank. No evidence
was offered which showed that Fluid Containment, Inc. had
intentions or plans to develop, market, or sell the type of
aboveground storage tank at issue in this case. Thus, no
evidence supports the jury's findings on breach of contract or
theft of trade secrets.
Therefore, our review of the jury's trade secrets verdict will
be limited to determining whether the evidence supports the finding
that Owens-Corning "used" TTI's trade secrets.
TTI presented evidence that the same individuals at Owens-
Corning who had access to their proprietary information were
leading Owen-Corning's effort to develop its own AST and that the
8
drawings Owens-Corning included in its invention records were
virtual copies of TTI's drawings. Also, Owens-Corning "used" the
development of the AST to enhance the value and attractiveness of
the tank division to potential buyers. Owens-Corning argues that
these actions do not, as a matter of law, constitute the commercial
use necessary to support a theft of trade secrets verdict. Owens-
Corning takes too narrow a view of "use".
Discussing this issue in a similar context, a Texas court of
appeals has stated that using trade secrets to complete the design
for a competing device, consulting a patent attorney about
protecting its design, and seeking financing from investors for the
development of its product constituted a commercial use even though
the defendant had not commenced production and sales of its
product. Garth v. Staktek Corp., 876 S.W.2d 545 (Tex.App.—Austin
1994). "Any misappropriation of trade secrets, followed by an
exercise of control and domination, is considered a commercial
use." Id. at 548. Viewing the evidence in the light most
favorable to the verdict, there was sufficient evidence in this
case to allow the jury to conclude that Owens-Corning made use of
TTI's trade secrets.
Because we find sufficient evidence to support the jury's
verdict on theft of trade secrets, and the damages awarded may all
be attributed to a single claim, we need not address plaintiff's
other causes of action.1
1
The question of damages was submitted to the jury, without
objection, as follows:
9
2. Compensatory damages.
The district court held that the jury's award of compensatory
damages is not supported by sufficient evidence because TTI's
evidence of damages is too speculative. There was uncontroverted
evidence that TTI's demand for an up-front payment of $2 million
was reasonably based on its cost of research and development.
In University Computing Co. v. Lykes-Youngstown Corp., 504
F.2d 518 (5th Cir.1974), this Court developed a flexible standard
for measuring damages in a theft of trade secret case.2 While
noting that a plaintiff's costs of development would frequently be
inadequate to sufficiently compensate the plaintiff, we held that
this was one possible, and allowable, component in the calculation
of damages. Id. at 538. Using this measure of damages, rather
that some computation of lost profits, we find that the evidence
was more than sufficient to support the jury's award of $2 million
in compensatory damages.
3. Exemplary damages.
The jury was allowed to award exemplary damages if it found
If you have answered "Yes" to Question 1, 2, 3, or
4, [plaintiff's individual claims] then answer the
following question....
What sum of money, if any, if paid now in cash,
would fairly and reasonably compensate Texas Tanks, Inc.
for its damages, if any, that were proximately caused by
the conduct, if any, of Owens-Corning Fiberglas
Corporation?
2
Although University Computing was a decision under the
Georgia law of trade secrets, Georgia, like Texas, bases its law of
trade secrets on the Restatement of Torts § 757 (1939). Further,
the Austin, Texas Court of Appeals in Garth relies on University
Computing. Garth, 876 S.W.2d at 549.
10
that Owens-Corning acted with malice or conscious indifference
towards the rights of TTI. "Malicious" was defined for the jury as
"done willfully and purposely, to the injury of another." TTI
relies on evidence that Owens-Corning began development of their
own AST design one week after they received delivery of TTI's
prototype; Owens-Corning had its own secret prototype ready for
testing within six weeks after they began work on the project,
rather than the two years they originally estimated such a project
would require; and that Owens-Corning included copies of TTI trade
secrets in its AST invention record. Owens-Corning's conflicting
evidence notwithstanding, the jury's award of exemplary damages was
supported by sufficient evidence.
IV. ATTORNEYS FEES
TTI appeals the district court's failure to award its
attorney's fees. Since no cause of action alleged by TTI would
allow the award of exemplary damages and attorneys fees, this Court
may affirm the award that would allow the largest recovery—in this
case, exemplary damages. See Star Houston, Inc. v. Shevack, 886
S.W.2d 414, 422 (Tex.App.—Houston (1st) 1994). Therefore, we find
TTI's argument for award of attorney's fees without merit.
V. CONCLUSION
For the foregoing reasons, we reverse the district court's
JNOV and remand for entry of judgment in favor of TTI pursuant to
the jury's verdict.
REVERSED AND REMANDED.
11