Dresser-Rand Co v. Virtual Automation ( 2004 )

United States Court of Appeals
Fifth Circuit
F I L E D
Revised March 12, 2004
February 23, 2004
UNITED STATES COURT OF APPEALS
For the Fifth Circuit Charles R. Fulbruge III
Clerk
No. 02-20834
DRESSER-RAND COMPANY
Plaintiff-Appellee-Cross-Appellant,
VERSUS
VIRTUAL AUTOMATION INC, ET AL.
Defendants
APIX, INC., a Florida Corporation; DENNIS C. MEZZATESTA,
Individual; CHRIS TSIPOURAS, Individual
Defendants-Appellants-Cross-Appellees
__________________________________________________________
consolidated with
No. 03-20417
DRESSER-RAND COMPANY
Plaintiff-Appellant,
VERSUS
VIRTUAL AUTOMATION INC, a Texas Corporation, ET AL.
Defendants
DENNIS C. MEZZATESTA, Individual
Defendant-Appellee
Appeals from the United States District Court
For the Southern District of Texas
Before DeMOSS, DENNIS, and PRADO, Circuit Judges
DeMOSS, Circuit Judge:
Dennis Mezzatesta, Apix, Inc., Chris Tsipouras and others were
found by a jury to have acted fraudulently, breached contracts, and
misappropriated confidential information relating to industrial
control systems developed by Dresser-Rand. All of the parties
filed various post-trial motions, each of which were denied by the
district court. Apix appeals the denial of its motion for judgment
as a matter of law or for a new trial on Dresser-Rand's
misappropriation claim. Tsipouras appeals the denial of his motion
for judgment as a matter of law or for a new trial on Dresser-
Rand's fraud claim. Mezzatesta appeals the denial of his motion
for judgment as a matter of law or for a new trial on Dresser-
Rand's fraud and breach of contract claims. Finally, Dresser Rand
cross appeals: 1) the district court’s denial of its motion for
judgment as a matter of law on its breach of contract claim against
Apix; and 2) the district court's denial of its motion for
injunctive relief against Apix and Mezzatesta.
BACKGROUND & PROCEDURAL HISTORY
Dresser-Rand supplies industrial control products and services
worldwide. Specifically, Dresser-Rand manufactures compressors and
2
turbines for large industrial applications such as oil and gas
operations. Dresser-Rand also makes its own control products that
regulate the turbines, compressors, and other machinery it sells.
In 1996, Dresser-Rand hired Dennis Mezzatesta to join its controls
business. At the time Mezzatesta was hired by Dresser-Rand, most
industrial operations had two types of control systems: one for the
machinery and another to control the balance of the plant's
operations. Although Dresser-Rand had previously only sold
machinery control systems, it planned to enter the plant or
"process" control market. Dresser-Rand and Mezzatesta set out to
develop a new type of control system, through the "Trax" project,
that could perform both the machinery and plant control functions.
To protect the confidential information related to Trax, Dresser-
Rand required its employees to sign confidentiality agreements. In
particular, Mezzatesta was required to sign a "Code of Conduct,"
pledging to protect the company's confidential information and
avoid conflicts of interest.
Mezzatesta was responsible for overseeing the Trax project,
including the negotiation of supply agreements for the hardware and
software components that were to make up the control system.
Mezzatesta recommended to Dresser-Rand that Apix, Inc., was the
best hardware supplier for the project. Subsequently, in January
1999, Dresser-Rand entered into a supply and distribution contract
with Apix to create a hardware component that would meet the Trax
product specifications. The contract granted Dresser-Rand the
3
exclusive right to sell products containing the Apix hardware in a
defined "Area of Application," which involved primarily new
machinery control systems.1 Apix also gave Dresser-Rand the non-
exclusive right to sell control products using the Apix hardware in
all other markets worldwide.
Because Apix would have access to the Trax specifications
developed by Dresser-Rand and other proprietary information, the
contract contained provisions intended to impose a confidential
relationship between the parties.2 Chris Tsipouras, acting in his
capacity as an officer of Apix, signed the contract acknowledging
1
In exchange for the exclusive right to sell Apix hardware in
the “Area of Application,” the contract imposed upon Dresser-Rand
minimum purchase obligations of $750,000 for the first year of the
contract, $1,000,000 for the second year, $1,500,000 for the third
year, and $2,000,000 for the fourth and any following years.
2
The relevant confidentiality provisions state, in pertinent
part:
WHEREAS, APIX and Dresser-Rand mutually agree that
Dresser-Rand has expended valuable time and expenses, and
has provided valuable Dresser-Rand confidential
information and trade secrets in order for APIX to create
products in a form factor specific to the DIN Rail
industry, the sale of which will result in additional
sales of APIX products; and
WHEREAS APIX to its benefit is in possession of, or
has become privy to, valuable Dresser-Rand trade secrets,
and recognizes Dresser-Rand's need to control or protect
the sale and distribution and
WHEREAS, the parties have agreed to a mutually
cooperative arrangement intended to provide customers
with the best technical solution and to increase the
sales of both the parties' respective products, while
protecting the respective parties [sic] property
(including intellectual property) and under which
Dresser-Rand will obtain certain rights of use and sale
in an Area of Application. . . .
4
that Dresser-Rand was entrusting Apix with trade secrets and other
confidential information.
Unknown to Dresser-Rand, on the same day that Apix signed the
contract with Dresser-Rand, Apix signed another contract with
Virtual Automation, a company that had been formed by Mezzatesta
and another associate for the purpose of marketing a controls
product that could simultaneously perform machinery and process
controls. Formed while Mezzatesta was still working for Dresser-
Rand, Virtual Automation was to use hardware that was substantially
the same as the hardware Apix sold to Dresser-Rand.
In July 2000, Paul Fairbanks, Mezzatesta's supervisor at
Dresser-Rand, discovered the existence of Virtual Automation when
he picked up a piece of paper trash in the Dresser-Rand parking
lot. The scrap of paper turned out to be a Virtual Automation
price list for what appeared to Fairbanks to be Trax items.
Fairbanks immediately initiated an investigation. After learning
of Fairbank's discovery, Mezzatesta resigned, taking with him
electronic data relating to the Trax project. Upon his resignation
from Dresser-Rand, Mezzatesta immediately began working for Apix,
where he continues to work today.
During his investigation, Fairbanks inquired as to Tsipouras's
knowledge of Virtual Automation. Tsipouras denied having done any
business with Virtual Automation. However, it was discovered that
Tsipouras had not only signed a contract with Virtual Automation,
but was also a stockholder in the company, holding a seat on
5
Virtual Automation's board of directors.
In August 2000, Dresser-Rand filed suit in state court for
injunctive relief to prevent Virtual Automation and others from
cloning its product. After non-suiting the case, Dresser-Rand
filed suit in October 2000 in United States District Court for the
Southern District of Texas against multiple defendants, including
Apix, Mezzatesta, and Tsipouras. Dresser-Rand asserted various
claims against the defendants including, among others, RICO, trade
secret misappropriation, common law misappropriation, fraud, and
breach of contract. Apix counterclaimed that Dresser-Rand had
breached its contract with Apix.
After a three and one-half week trial, the jury found for
Dresser-Rand on its common law misappropriation claim against Apix,
on its fraud claims against Tsipouras and Mezzatesta, and on its
breach of contract and civil theft claims against Mezzatesta. The
jury also found that Dresser-Rand breached its contract with Apix
and awarded Apix $130,000 in damages and $100,000 in attorney's
fees. The jury awarded Dresser-Rand compensatory damages on its
fraud and misappropriation counts in the amount of $2.2 million,
the value of its lost development costs. The jury also awarded
$317,000 against Mezzatesta for breach of his employment contracts
with Dresser-Rand and civil theft. In addition, the jury assessed
punitive damages in the amount of $1,650,000 against Mezzatesta,
$550,000 against Tsipouras, and awarded Dresser-Rand $900,000 in
attorney's fees. On April 29, 2002, the district court entered
6
judgment on the verdict.
Shortly after judgment was entered, Apix, Tsipouras, and
Mezzatesta filed motions for judgment as a matter of law, to amend
the judgment, or for a new trial. In addition, Dresser-Rand filed
a motion seeking injunctive relief against Apix. On July 15, 2002,
the district court denied all parties' pending motions.
Subsequently, on July 22, 2002, Apix, Tsipouras, and Mezzatesta
filed their notices of appeal. Dresser-Rand filed its notice of
cross-appeal on August 5, 2002.
STANDARD OF REVIEW
We review de novo a district court's ruling on a motion for
judgment as a matter of law. Miss. Chem. Corp. v. Dresser-Rand Co.,
287 F.3d 359, 365 (5th Cir. 2002). However, when an action is
tried by a jury, such a motion is a challenge to the legal
sufficiency of the evidence supporting the jury's verdict. Brown v.
Bryan County, OK, 219 F.3d 450, 456 (5th Cir. 2000), cert. denied,
532 U.S. 1007 (2001). Accordingly, we consider the evidence,
"drawing all reasonable inferences and resolving all credibility
determinations in the light most favorable to the non-moving
party." Id. This Court grants great deference to a jury's verdict
and will reverse only if, when viewing the evidence in the light
most favorable to the verdict, the evidence points so strongly and
overwhelmingly in favor of one party that the court believes that
reasonable jurors could not arrive at any contrary conclusion.
7
Dahlen v. Gulf Crews, Inc., 281 F.3d 487, 497 (5th Cir. 2002). A
motion for a new trial should not be granted unless the verdict is
against the great weight of the evidence, not merely against the
preponderance of the evidence. Id.
We review the denial of a motion for new trial for abuse of
discretion. Miss. Chem. Corp., 287 F.3d at 365; Hidden Oaks Ltd. v.
City of Austin, 138 F.3d 1036, 1049 (5th Cir. 1998) ("Absent a
clear showing of an abuse of discretion, we will not reverse the
trial court's decision to deny a new trial.").
Finally, the denial of injunctive relief is reviewed under an
abuse of discretion standard, while the legal conclusions
underlying the denial are subject to de novo review. Waco Int’l,
Inc. v. KHK Scaffolding Houston, Inc., 278 F.3d 523, 528-29 (5th
Cir. 2002).
DISCUSSION
I. Whether the district court erred in denying Apix's motion for
judgment as a matter of law or for a new trial on Dresser-
Rand's misappropriation claim.
On appeal, Apix contends that it did not misappropriate
Dresser-Rand's product because: 1) Dresser-Rand never had a
finished product; 2) Apix never made a product with features
Dresser-Rand planned to include in its proposed product; 3) Apix
never sold its own product that Dresser-Rand claimed was a Trax
"clone;" and 4) Apix simply planned to combine its own hardware
with publicly available software that Dresser-Rand neither made nor
8
planned to use in the future, which Apix claims is not
misappropriation.
The elements of a cause of action for unfair competition by
misappropriation in Texas are: "(i) the creation of plaintiff's
product through extensive time, labor, skill and money, (ii) the
defendant's use of that product in competition with the plaintiff,
thereby gaining a special advantage in that competition (i.e., a
"free ride") because defendant is burdened with little or none of
the expense incurred by the plaintiff, and (iii) commercial damage
to the plaintiff." United States Sporting Prods., Inc. v. Johnny
Stewart Game Calls, Inc., 865 S.W.2d 214, 218 (Tex. App.—Waco 1993,
writ denied).
Taking these elements and each of Apix's arguments in turn, we
first look at Apix's claim that Dresser-Rand never had a finished
product. Apix contends that because the Trax project was never
completed, there was no final product to misappropriate. This
Court, however, has previously determined that the Texas
misappropriation law is "specially designed to protect the
labor—the so-called 'sweat equity'—that goes into creating a work."
Alcatel USA, Inc., v. DGI Techs., Inc., 166 F.3d 772, 778 (5th Cir.
1999). It appears from the evidence presented at trial that
Dresser-Rand expended substantial time and expense towards the Trax
project. As Dr. Stephen Carr, an expert witness, testified,
"Dresser-Rand came up with the plan to do the product, the
specifications for the product, . . . and that's where the essence
9
of a product is, in the work, in the contribution of Dresser-Rand."
Based on this Court's previous interpretation of what is protected
under state misappropriation law and the evidence elicited at
trial, it appears clear that a final product is not required before
it can be misappropriated, and therefore, Apix's first argument
fails.
Second, Apix argues that it never made a product using
features Dresser-Rand planned on using in the Trax product. Apix
again bases its argument, in part, on the premise that it could not
have used features from the Trax product because the Trax features
were unfinished at the time of trial. However, there is evidence
that Apix planned to use the Trax technology to create a competing
control product to be sold through Virtual Automation.
Specifically, exhibits presented at trial demonstrated the
similarities between the Trax product and Virtual Automation's
product materials, including the manner in which the products were
marketed. In addition, expert testimony revealed that the
differences between the Dresser-Rand and Apix control products were
only superficial. As such, there was sufficient evidence presented
at trial supporting the jury's conclusion that Apix used technology
features associated with the Trax product in its own control system
products.
Third, Apix claims it never sold its own product, and
therefore, it did not "use" it in competition with Dresser-Rand.
Currently, there are no published cases interpreting the term "use"
10
as that term is applied in the Texas common law definition of
misappropriation. However, there is an analogous argument that the
term "use," as defined in the common law tort of misappropriation,
includes activities other than the actual selling of the product.
For example, in Forscan Corp. v. Dresser Indus., Inc., 789 S.W.2d
389, 395 (Tex. App.—Houston [14th Dist.] 1990, writ denied), a case
involving the misappropriation of trade secrets with facts
resembling those present here, the defendant made an argument
similar to Apix's, specifically arguing that it had not made
commercial use of the misappropriated information.3 However, the
Texas Court of Appeals rejected this argument, finding that the
defendant's attempts to market the product satisfied the commercial
use requirement.4
In this case, there was testimony that Mezzatesta and Apix
were already taking orders for sales of the "clone" product even
before Mezzatesta resigned from Dresser-Rand. In addition,
3
To prove misappropriation of trade secrets, a plaintiff must
show: 1) the existence of a trade secret; 2) a breach of a
confidential relationship or improper discovery of the trade
secret; and 3) use of the trade secret without authorization. Guy
Carpenter & Co., Inc. v. Provenzale, 334 F.3d 459, 467 (5th Cir.
2003).
4
Specifically, the Forscan court found that:
[The defendant] himself stated that in 1981 he was in the
process of both testing his tool and attempting to market
it. He had employed a marketing director who was
conducting a marketing survey and contacting prospective
customers. Clearly, this is evidence of intended
commercial use.
Forscan, 789 S.W.2d at 395.
11
evidence proffered at trial revealed that Apix and Mezzatesta were
prepared to give away the product to gain the competitive advantage
of entering the new control market before Dresser-Rand. It is
undisputed that Apix was actively marketing its competing product
at least six months before trial. Therefore, based on Apix's
marketing activities and the fact that it was already taking
product orders, we find that Apix did in fact "use" the Trax
technology.
In its fourth argument, Apix claims that it simply planned to
combine its own hardware with publicly available software that
Dresser-Rand neither made nor plans to use in the future. However,
as discussed previously, the evidence presented at trial indicated
that Dresser-Rand, not Apix, was responsible for coming up with the
idea for the control system, investing the time, labor, skill, and
money to design the specifications, modify the existing hardware
and software components, and conduct the alpha testing of the
product.
In sum, there is sufficient evidence to affirm the district
court's order denying Apix's motion for judgment as a matter of law
or for a new trial on Dresser-Rand's misappropriation claim.
II. Whether the district court erred in denying Chris
Tsipouras's motion for judgment as a matter of law or for
a new trial on Dresser-Rand's fraud claim.
On appeal, Tsipouras contends that Dresser-Rand failed to
produce evidence supporting its claim that Tsipouras intended to
12
allow Virtual Automation to sell Apix hardware in competition with
Dresser-Rand. Tsipouras argues that in its contract with Virtual
Automation, Apix expressly prohibited Virtual Automation from
selling the hardware in Dresser-Rand's “Area of Application,” and
therefore, cannot be liable for fraud. Dresser-Rand responds by
pointing to the fact that on the same day Tsipouras signed the
contract with Dresser-Rand giving Dresser-Rand non-exclusive rights
to sell the hardware worldwide and exclusive rights to sell the
hardware in Dresser-Rand's Area of Application, Tsipouras also
signed a distributorship agreement with Virtual Automation giving
Virtual Automation exclusive worldwide rights to distribute the
same hardware, including in Dresser-Rand's Area of Application.
Based on a review of the two contracts, they cannot be
reconciled. Although Tsipouras claims to have prohibited Virtual
Automation from selling hardware in Dresser-Rand's Area of
Application, the relevant contract provision expressly states that
Virtual Automation "shall not sell to Dresser-Rand, it's [sic]
subsidiaries and affiliates in the Area Of Application." (Emphasis
added). Therefore, Virtual Automation still appears to have the
right to compete with Dresser-Rand in its Area of Application as
long as Virtual Automation sells to buyers other than Dresser-Rand.
This right conflicts with the exclusive right granted by Tsipouras
on behalf of Apix to Dresser-Rand.
Based on the fact that the contract between Dresser-Rand and
Apix directly conflicts with the distributorship agreement between
13
Virtual Automation and Apix, and that both contracts were signed by
Tsipouras on behalf of Apix on the same day, the evidence is
sufficient to support the district court's denial of Tsipouras's
motion for judgment as a matter of law or for a new trial on
Dresser-Rand's fraud claim.
III. Whether the district court erred both in allowing
Dresser-Rand's expert to testify on lost profits and in
denying Apix's and Tsipouras's motion for judgment as a
matter of law on the issue of lost profits.
Apix and Tsipouras argue that the district court erred in
allowing the testimony of two witnesses called by Dresser-Rand in
support of its lost profits damage theory — Dr. Meherwan Boyce,
called as an industry expert, and Mr. Thomas Jollay, an accountant.
At trial, Dr. Boyce estimated the market penetration that Dresser-
Rand's Trax product would have had, and Mr. Jollay opined that,
based on Dr. Boyce's estimate, Dresser-Rand suffered lost profits
in the amount of $25 million. Apix and Tsipouras contend that
under Daubert v. Merrell Dow Pharms., Inc., 509 U.S. 579 (1993),
the district court improperly admitted Dr. Boyce's testimony as
"scientific knowledge." Apix and Tsipouras address in detail the
Daubert factors, arguing that Dr. Boyce's estimates should be
excluded.
In response, Dresser-Rand insists that the lost profits
analysis is irrelevant because it had no impact on the judgment.
Dresser-Rand argues that the jury rejected the lost profits
analysis and instead only awarded Dresser-Rand its $2.2 million
14
development costs. In addition, Dresser-Rand asserts that a
Daubert challenge cannot support reversal because, at most,
admission of the testimony at issue would amount to harmless error.
The district court's determination of admissibility of expert
evidence under Daubert is reviewed for abuse of discretion. St.
Martin v. Mobil Exploration & Producing U.S., Inc., 224 F.3d 402,
405 (5th Cir. 2000) (citing Moore v. Ashland Chem., 151 F.3d 269,
274 (5th Cir. 1998) (en banc)). Erroneous admission of expert
testimony is subject to a harmless error analysis. St. Martin, 224
F.3d at 405; United States v. Matthews, 178 F.3d 295, 304 (5th Cir.
1999). Moreover, pursuant to Fed. R. Civ. P. 61, this Court is
bound to disregard any errors, including the admission of expert
testimony, that do not affect the substantial rights of the
parties. Bell v. Swift & Co., 283 F.2d 407, 409 (5th Cir. 1960).
The burden of proving substantial error and prejudice is upon the
appellant. Id.
Even if the district court erred in allowing Dresser-Rand’s
witnesses to testify concerning lost profits, this testimony had
little or no effect on the jury's verdict. The jury awarded
Dresser-Rand only its $2.2 million development costs and divided
that amount among three defendants — $1,100,000 against Mezzatesta,
$550,000 against Tsipouras, and $550,000 against Apix. Testimony
at trial revealed that Dresser-Rand's development costs and claim
for lost profits were distinct and separable from one another. In
addition, the jury charge specifically makes a distinction between
15
compensatory damages and lost profits. The jury appears to have
taken into account the testimony of Dr. Boyce and Mr. Jollay,
evaluated the validity of the lost profits analysis, and
subsequently rejected that analysis. Therefore, because the jury
did not award Dresser-Rand any of its lost profits claim, even if
the district court erred in admitting the lost profits testimony,
such error would be harmless.
IV. Whether the evidence at trial conclusively established
that Apix incurred $2,760,000 in damages in addition to
the $130,000 awarded by the jury for Dresser-Rand's
breach of its contract with Apix.
The jury found that Dresser-Rand breached its contract with
Apix by retaining certain hardware components provided by Apix
without remitting payment. Apix claims that although the jury
correctly determined that Dresser-Rand breached its contract with
Apix and awarded Apix $130,000 for failing to pay Apix for the
hardware Dresser-Rand received, the contract also imposed minimum
purchase obligations on Dresser-Rand.5 Specifically, Apix argues
that at the time of trial Dresser-Rand failed to purchase
$2,760,000 of Apix hardware as required by the contract. Apix
asserts that it invested $300,000 to upgrade its manufacturing
5
The minimum purchase obligation provision of the contract
states that "[d]uring the first four years and future years of the
Agreement, Dresser-Rand shall purchase the minimum purchase
requirement for such years as set forth in Exhibit A,” which
requires Dresser-Rand to purchase Apix hardware in the following
amounts: $750,000 in the first year, $1,000,000 for the second
year, $1,500,000 for the third year, and $2,000,000 for the fourth
and any future years.
16
capabilities so that it could produce the quantities Dresser-Rand
agreed to purchase. In addition, Apix maintains that by focusing
on its contract with Dresser-Rand and giving up on other business
opportunities, it was severely damaged.
Dresser-Rand insists that the minimum purchase provisions in
its contract with Apix were not intended to go into effect until
the Trax product was complete. Paul Fairbanks, the manager of
Dresser-Rand’s control system operations, also testified that
Dresser-Rand’s minimum purchase obligations were directly tied to
Dresser-Rand’s exclusive right to purchase, use, and sell Apix’s
hardware in Dresser-Rand’s Area of Application. In other words,
according to Dresser-Rand, to maintain its exclusive right granted
by Apix, Dresser-Rand had to purchase the minimum quantities as set
forth in the contract.6
In the absence of an error of law, this Court reviews the
district court’s award for damages for clear error only. In re
Liljeberg Enters., Inc., 304 F.3d 410, 447 (5th Cir. 2002). If the
award of damages is plausible in light of the record, a reviewing
court should not reverse the award even if it might have come to a
different conclusion. Id. (quotation marks and citation omitted).
At the conclusion of the trial, the jury found that Dresser-Rand
breached its contract with Apix. In awarding damages, however, the
jury determined that Dresser-Rand was only liable to Apix for
6
It is undisputed that at the time of trial Dresser-Rand
failed to meet any of the minimum purchase obligations.
17
$130,000, the value of the Apix hardware that Dresser-Rand received
but did not pay for. As for Dresser-Rand’s minimum purchase
obligations, the jury instructions specifically inquired as to the
amount of money, “if any, . . . [that] would fairly and reasonably
compensate Apix for its damages, if any, that were proximately
caused . . . [by] Dresser-Rand’s failure, if any, to meet its
minimum purchase obligations under the contract.” The jury
answered this question by awarding Apix nothing.
Apix fails to provide this Court with any compelling reason to
overturn the jury’s damage award for Dresser-Rand’s breach.
Additionally, given that the jury also found that Tsipouras, an
Apix officer, was liable for defrauding Dresser-Rand on the same
contract, the determination that Apix should not benefit under the
minimum purchase obligation provision is certainly appropriate.
Thus, the minimum purchase obligation damage award, or lack
thereof, was not clear error.
V. Whether the district court erred in denying Mezzatesta's
motion for judgment as a matter of law or for a new trial
on Dresser-Rand's fraud and contract claims.
Mezzatesta argues that Dresser-Rand produced no evidence that
his alleged fraud or breach of contract caused Dresser-Rand injury,
i.e., damage. Mezzatesta recognizes that Dresser-Rand alleged two
different types of damages at trial — lost profits and lost
investment. Mezzatesta contends that both of these damage theories
were premised on Dresser-Rand's claim that Mezzatesta used Virtual
18
Automation to “clone” the Trax product. He argues, however, that
because the evidence at trial established that Virtual Automation
never made a product, Dresser-Rand never suffered damages, and
therefore, its fraud and breach of contract claims fail as a matter
of law.
1. Fraud
Among the essential elements of fraud is a showing of injury
suffered because of the fraud. C & C Partners v. Sun Exploration &
Prod. Co., 783 S.W.2d 707, 718 (Tex. App.—Dallas 1989, writ
denied). The absence of this element will prevent recovery for
fraud. Id. The measure of damages in a fraud case is the actual
amount of the plaintiff's loss that directly or proximately results
from the defendant's fraudulent conduct. Tilton v. Marshall, 925
S.W.2d 672, 680 (Tex. 1996). The desired end is actual
compensation for the injury, not lost profits. C & C Partners, 783
S.W.2d at 719.
Based on evidence presented at trial, Dresser-Rand determined
that its Trax product was going to be preempted in the new controls
market by Mezzatesta's fraudulently-acquired product by at least
six to eight weeks. Therefore, because this preemption would
effectively cause Dresser-Rand to lose its profitability, it
abandoned the Trax project, incurring investment costs up to that
time. Alternatively, Dresser-Rand presented evidence that it would
have suffered damages even if it had attempted to continue with the
Trax project. Specifically, there was evidence that Dresser-Rand
19
had tried but was unable to locate suitable substitute hardware
from a new vendor. Dresser-Rand also established that it had
budgeted neither the funds nor the time to start the Trax project
over with a new hardware supplier. Therefore, although Mezzatesta
and Virtual Automation did not ultimately complete and sell an end
product that they could have placed in direct competition with
Dresser-Rand's, the evidence supports the jury's conclusion that
Mezzatesta's fraudulent acts caused Dresser-Rand to prematurely
withdraw from the market, thereby suffering the loss of its
investment costs.
2. Breach of Contract
Mezzatesta also argues that this Court should reverse the
district court's denial of his motion for judgment as a matter of
law or for a new trial on Dresser-Rand's breach of contract claim.
Again, the sole basis for Mezzatesta's appeal on the breach of
contract issue is his contention that Dresser-Rand did not suffer
injury. The jury found that Mezzatesta breached his fiduciary
obligations imposed by his employment contract with Dresser-Rand by
using Virtual Automation as a vehicle to clone Dresser-Rand's Trax
product. As part of his employment agreement with Dresser-Rand,
Mezzatesta assigned all rights to any inventions or designs that he
made, conceived or created, either solely or jointly with others
that related to Dresser-Rand's business "directly or indirectly,"
or that were developed using Dresser-Rand's materials or
facilities. In addition, Mezzatesta agreed to "keep secret and
20
confidential" Dresser-Rand’s confidential information, both during
his employment and afterward.
Mezzatesta also signed a "Code of Conduct" whereby he
acknowledged that he was required to "protect . . . confidential
and trade secret information." Pursuant to the Code of Conduct, he
agreed to avoid situations in which his personal interests
conflicted with those of Dresser-Rand, including holding an
interest in any company that might become either a competitor or a
supplier of Dresser-Rand.
The damages suffered by Dresser-Rand as a result of
Mezzatesta's breach of contract are similar in nature to the
damages Dresser-Rand suffered because of Mezzatesta's fraud. We
find that there was sufficient evidence to allow the jury to make
a reasonable determination of Dresser-Rand’s damages as a result of
Mezzatesta's breach of contract, and we conclude that the jury
award is not clearly erroneous.7
VI. Whether the district court erred in denying Dresser
Rand's motion for judgment as a matter of law on its
breach of contract claim against Apix.
At the close of Apix’s case-in-chief and before the case went
to the jury, counsel for Dresser-Rand orally moved for judgment as
7
Mezzatesta also argues that the district court erred by
entering judgment for punitive damages against him because there
was no evidence that Dresser-Rand suffered actual damages. Because
there is sufficient evidence that Dresser-Rand suffered actual
damages on both its fraud and breach of contract claims,
Mezzatesta's argument regarding punitive damages and attorney's
fees necessarily fails as well.
21
a matter of law on its breach of contract claim against Apix, which
the district court immediately denied. The issue went before the
jury, which ultimately determined that Apix did not breach its
contract with Dresser-Rand. On its cross-appeal, Dresser-Rand
cites two reasons in support of its contention that Apix breached
its contract when it assigned distributorship responsibilities to
Virtual Automation. First, Dresser-Rand maintains that its
contract with Apix clearly prohibits Apix from appointing a third
party, such as Virtual Automation, to act as a distributor within
Dresser-Rand's Area of Application. Second, Dresser-Rand argues
that the plain language of the contract expressly precludes Apix's
grant to Virtual Automation of the exclusive right to resell the
hardware outside Dresser-Rand's Area of Application.
In response, Apix argues that the notion that its appointment
of Virtual Automation violates its contractual obligation to
protect Dresser-Rand's confidential information ignores Apix's
contentions that: 1) the jury found Dresser-Rand had no trade
secrets; 2) nothing in the contract prohibited Apix from using
Virtual Automation as a distributor; 3) the obligations to protect
Dresser-Rand's information only applied within Dresser-Rand's Area
of Application — which is where Apix claims it prohibited Virtual
Automation from selling; and 4) Apix’s decision to employ Virtual
Automation as a distributor was its standard business practice. As
detailed below, none of these defenses appear meritorious.
The issue before us is governed by basic principles of
22
contract interpretation. It is well settled that courts must
enforce the unambiguous language in a contract as written, and the
applicable standard is the objective intent evidenced by the
language used, rather than by the subjective intent of the parties.
Petula Assocs., Ltd. v. Dolco Packaging Corp., 240 F.3d 499, 504
(5th Cir. 2001) (quotations omitted). Only after a court has
determined that a contract is ambiguous can it consider the
parties' interpretations. H.E. Butt Grocery Co. v. Nat'l Union Fire
Ins. Co., 150 F.3d 526, 529 (5th Cir. 1998).
1. Appointing a third-party distributor within Dresser-
Rand’s Area of Application
We must determine whether Apix's distributorship assignment
with Virtual Automation violated the express terms of Apix’s
contract with Dresser-Rand. Section 1.03 of the Dresser-Rand/Apix
contract states:
In order to protect the Dresser-Rand confidential
and trade secret information contained in the HARDWARE:
In circumstances that involve or are within Dresser-
Rand's Area of Application,
(a) APIX shall not sell or appoint, allow, or
permit any other party to sell the HARDWARE, and,
(b) APIX shall refer all requests to Dresser-Rand
for inquiries on, or orders for, the HARDWARE in
circumstances that involve or are within Dresser-Rand's
Area of Application.8
Apix's first argues that there can be no breach because the
8
With regard to section 1.03(b), Dresser-Rand asserts that it
is undisputed that none of its management knew that Apix had
assigned distributorship responsibilities to Virtual Automation, or
that Virtual Automation was privy to any of the Trax
specifications.
23
jury determined at trial that Dresser-Rand had not proven that the
technology associated with the Trax project was a trade secret.
Although this may be a correct statement, section 1.03 specifically
states that the contract is intended to protect "confidential and
trade secret information” contained in the Trax product. (Emphasis
added). Therefore, although Dresser-Rand did not persuade the jury
that it had a protectable trade secret, it nevertheless drafted a
contract that also protected confidential information.9
Apix next argues that nothing in the contract prohibited it
from using Virtual Automation as a distributor. However, it
appears that section 1.03(a) expressly contemplates and prohibits
such an assignment by specifically precluding Apix from appointing
any other party to sell the hardware within Dresser-Rand's Area of
Application. Meanwhile, the relevant provision in the Apix/Virtual
Automation distributorship agreement expressly states that Virtual
Automation “shall not sell to Dresser-Rand, it's [sic] subsidiaries
and affiliates in [Dresser-Rand’s] Area Of Application.” (Emphasis
added). Therefore, Virtual Automation still appears to have the
right to compete with Dresser-Rand in its Area of Application as
long as Virtual Automation sells to buyers other than Dresser-Rand.
This provision in the distributorship agreement directly conflicts
with section 1.03(a)'s prohibition on the creation of third-party
assignments in Dresser-Rand’s Area of Application. Therefore,
9
It is noteworthy that the jury did find Apix liable for
unfair competition by misappropriation of confidential information.
24
based on basic principles of contract interpretation, Apix's second
argument fails.
Third, Apix argues that the obligation to protect Dresser-
Rand's information only applied within Dresser-Rand's Area of
Application. However, as discussed above, Apix failure to satisfy
that obligation renders this argument meritless. In other words,
the distinction Apix attempts to make between its obligations in
and out of the Area of Application would succeed only if it
successfully protected Dresser-Rand’s information in the first
place. Finally, Apix's fourth argument, that its decision to
employ Virtual Automation as a distributor was its standard
business practice, has no relevance to this discussion.
Finding no merit in any of Apix’s four arguments, we conclude
that Apix failed to satisfy its contractual obligations relating to
its duties within Dresser-Rand’s Area of Application.
2. Exclusive right to resell Apix hardware
outside Dresser-Rand’s Area of Application
Dresser-Rand’s second assertion on its cross-appeal is that
there is contradictory language between the contracts regarding the
right to resell the hardware outside Dresser-Rand’s Area of
Application. Apix first assigned Dresser-Rand the “non-exclusive
right to use and to purchase and resell the said APIX hardware in
a form factor specific to the DIN Rail industry to all customers in
all markets worldwide.” (Emphasis added). Immediately thereafter,
Apix granted Virtual Automation the “exclusive right to distribute
25
the said HARDWARE . . . in the DIN Rail Market.”10 (Emphasis added).
Simply stated, Apix’s non-exclusive grant to Dresser-Rand and the
contemporaneously-granted exclusive right to Virtual Automation
within the same market do not appear to be reconcilable.
Finding no ambiguous language between the Dresser-Rand/Apix
contract and the Apix/Virtual Automation distributorship agreement,
we conclude that Apix breached its contract with Dresser-Rand as a
matter of law. Therefore, we reverse the district court’s denial
of Dresser-Rand’s motion for judgment as a matter of law and remand
with instructions to the district court to determine damages, if
any, for Dresser-Rand as a result of Apix’s breach.
VII. Whether the district court erred in denying Dresser-
Rand's motion seeking injunctive relief against Apix and
Mezzatesta.
At the conclusion of the trial, Dresser-Rand filed a motion
with the district court requesting injunctive relief against both
Apix and Mezzatesta. Specifically, Dresser-Rand sought to enjoin
Apix and Mezzatesta from manufacturing, marketing, offering for
sale, or selling any electronic control product containing features
developed by Dresser-Rand for the Trax project. The district court
denied Dresser-Rand's motion for injunctive relief and Dresser-Rand
cross-appealed the district court's denial.
Dresser-Rand cites three reasons why the district court erred
10
The hardware referred to in both contracts was found by the
jury to be the same.
26
in denying its motion for a permanent injunction against Apix.
First, Dresser-Rand maintains that the district court failed to
comply with Fed. R. Civ. P. 52(a), which Dresser-Rand claims
requires findings of fact and conclusions of law to be entered with
respect to the grant or denial of an injunction. Second, Dresser-
Rand argues that this Court should reverse the district court's
denial of injunctive relief because the fully developed record
establishes that a denial under the facts constitutes an abuse of
discretion. Third, Dresser-Rand suggests that because Mezzatesta
filed for bankruptcy before the jury's verdict, the damages
subsequently awarded by the jury were virtually eliminated, leaving
Dresser-Rand without an adequate remedy at law.
1. Applicability of Rule 52(a)
Taking Dresser-Rand's arguments in turn, we first address
whether Rule 52(a) compels the district court to make specific
findings of facts and state its conclusions of law. As stated
previously, the district court did not make any express findings of
fact or conclusions of law supporting its denial of injunctive
relief. Although Rule 52(a) does require a district court to make
such findings and state its conclusions, these requirements are
only imposed when a trial is heard without a jury or when a court
is issuing an interlocutory order. Dresser-Rand's request for a
permanent injunction at the conclusion of a jury trial does not
trigger this rule. Therefore, as Rule 52(a) has no application
under the facts of this case, Dresser-Rand's first argument on its
27
appeal for injunctive relief fails.
2. Whether the district court abused its discretion.
Dresser-Rand also argues that the district court abused its
discretion in denying Dresser-Rand's motion for injunctive relief.
A trial court abuses its discretion if it "(1) relies on clearly
erroneous factual findings when deciding to grant or deny the
permanent injunction, (2) relies on erroneous conclusions of law
when deciding to grant or deny the permanent injunction, or
(3) misapplies the factual or legal conclusions when fashioning
injunctive relief." Peaches Entm't Corp. v. Entm't Repertoire
Assoc., 62 F.3d 690, 693 (5th Cir. 1995).
At common law, for a permanent injunction to issue the
plaintiff must prevail on the merits of his claim and establish
that equitable relief is appropriate in all other respects. Amoco
Prod. Co. v. Village of Gambell, 480 U.S. 531, 546 n.12 (1987)
(recognizing that the standard for a permanent injunction is
essentially the same as for a preliminary injunction with the
exception that the plaintiff must show actual success on the merits
rather than a mere likelihood of success). A party seeking a
permanent injunction must also plead and prove an irreparable
injury for which no adequate remedy at law exists. Butler v. Arrow
Mirror & Glass, Inc., 51 S.W.3d 787, 795 (Tex. App.—Houston [1st
Dist.] 2001, no pet.). For purposes of injunctive relief, an
adequate remedy at law exists when the situation sought to be
enjoined is capable of being remedied by legally measurable
28
damages. Haq v. America's Favorite Chicken Co., 921 S.W.2d 728, 730
(Tex. App.—Corpus Christi 1996, writ dism'd w.o.j.).
In this case, Dresser-Rand was successful on its claim that
Apix misappropriated confidential information associated with the
Trax product and that Mezzatesta acted fraudulently and breached
his contract with Dresser-Rand. Dresser-Rand also established by
its own trial testimony that its claim of $25 million in lost
profits would have provided it fair and proper compensation. In
other words, according to Dresser-Rand's arguments at trial, any
harm that it might have suffered as a result of Apix's and
Mezzatesta’s wrongful actions could be adequately cured by
calculable monetary damages. Additionally, Dresser-Rand conceded
at trial that it abandoned the Trax project after learning of
Apix's misappropriation. Arguably, it would be difficult for
Dresser-Rand to claim it would suffer irreparable injury if Apix
were to manufacture, market, offer for sale, or sell any electronic
control product containing features similar to Dresser-Rand's Trax
product when Dresser-Rand has withdrawn its product from that
market.
3. Mezzatesta's Pre-Verdict Filing for Bankruptcy
In its third argument, Dresser-Rand argues that injunctive
relief is proper because Mezzatesta has essentially eliminated the
damages awarded against him when he filed for bankruptcy prior to
the jury's verdict. The jury awarded Dresser-Rand a total of
$3,967,700 in damages against Mezzatesta. However, prior to the
29
jury's verdict, Mezzatesta filed a voluntary Chapter 13 bankruptcy
petition in the Bankruptcy Court for the Southern District of
Texas. In his original bankruptcy schedules, Mezzatesta scheduled
general unsecured claims of $124,164.03, exclusive of the
$3,967,700 claim in favor of Dresser-Rand. Pursuant to his
original Chapter 13 Plan of Reorganization, Mezzatesta proposed to
pay unsecured creditors an aggregate distribution of $426.70.
According to Dresser-Rand's calculations, its pro rata share of the
distribution would total no more than $413.77. Dresser-Rand argues
that these circumstances preclude it from having an adequate remedy
at law, rendering an injunction appropriate.11
As previously discussed, a plaintiff can prove there is no
adequate remedy at law where damages cannot be calculated. Haq, 921
S.W.2d at 730. In addition, there is no adequate remedy at law if
the defendant is incapable of responding in damages. Texas Indus.
Gas, 828 S.W.2d at 533; Bank of the Southwest N.A., Brownsville v.
Harlingen Nat'l Bank, 662 S.W.2d 113, 116 (Tex. App.--Corpus
Christi 1983, no writ). The Texas Court of Appeals has concluded
that “insolvency can be a factor in determining whether there is an
adequate remedy at law.” Texas Indus. Gas, 828 S.W.2d at 533
11
Dresser-Rand originally filed a motion for injunctive relief
against both Apix and Mezzatesta. However, due to Mezzatesta's
bankruptcy and the correlating automatic stay, Dresser-Rand
voluntarily withdrew its motion for injunctive relief. Two months
later, the district court denied all post-trial motions and the
parties filed their respective notices of appeal and cross-appeal.
Thereafter, the bankruptcy court lifted its stay to allow Dresser-
Rand to seek injunctive relief against Mezzatesta.
30
(emphasis added).
4. Analysis
Based on a review of the parties’ respective arguments, we
conclude that the district court did not abuse its discretion in
denying Dresser-Rand injunctive relief. We first observe that by
its own argument, Dresser-Rand has calculable damages, i.e., its
$25 million lost profits claim. Damages capable of being measured
afford Dresser-Rand an adequate remedy at law, thus precluding
injunctive relief. Second, also by its own admission, Dresser-Rand
has completely abandoned the Trax project, thus eliminating any
irreparable harm it might incur as a result of any similar product
that Apix and/or Mezzatesta may or may not introduce into the
market. In the absence of such harm, the granting of injunctive
relief is not appropriate. See Butler, 51 S.W.3d at 795. Finally,
although Mezzatesta may not be capable of paying the damages
awarded Dresser-Rand by the jury, this factor is but one we may
consider in making our determination. Texas Indus. Gas, 828 S.W.2d
at 533. The first two factors discussed above, i.e., Dresser-
Rand’s calculable damages and the abandonment of its Trax project,
weigh far greater in our analysis as to the propriety of an
injunction. As such, the district court did not abuse its
discretion in denying Dresser-Rand's motion for injunctive relief
against Apix and Mezzatesta.
CONCLUSION
31
Having carefully reviewed the record of this case, the
parties’ respective briefing and arguments, and for the reasons set
forth above, we AFFIRM the post-trial rulings of the district
court, with the exception of the district court’s denial of
Dresser-Rand’s motion for judgment as a matter of law on its breach
of contract claim against Apix. Finding that the district court
erred in denying such motion, we REVERSE that portion of the
district court’s order and accordingly REMAND this case for further
proceedings not inconsistent with this opinion. AFFIRMED in part,
REVERSED in part, and REMANDED.
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