Cedar Fiber Company, Inc. v. Robert Murr ( 1991 )

CV0-107 IN THE COURT OF APPEALS, THIRD DISTRICT OF TEXAS,

AT AUSTIN









NO. 3-90-107-CV





CEDAR FIBER COMPANY, INC.,

APPELLANT

vs.





ROBERT MURR, ET. AL.,

APPELLEES

FROM THE DISTRICT COURT OF TRAVIS COUNTY, 167TH JUDICIAL DISTRICT

NO. 450,059, HONORABLE JAMES MEYERS, JUDGE

PER CURIAM

Cedar Fiber appeals a take-nothing judgment rendered against it after a jury trial. Cedar Fiber sued Robert Murr, Charles Murr, and Andrew McMahan, Jr., former employees and officers of Cedar Fiber; Wesley Hooker, a former employee of Cedar Fiber; and Chem-Pac, Inc., the company for which the individual appellees began working after leaving employment with Cedar Fiber (the Murrs, for simplicity). Cedar Fiber alleged causes of action for breach of confidential relationships and conspiracy to misappropriate trade secrets and confidential information. The Murrs counterclaimed for a declaratory judgment that a previous settlement agreement barred this suit.

Cedar Fiber brings three points of error, contending that the trial court erred in: (1) giving an improper definition of the term "confidential information or trade secret"; (2) refusing to submit a proper instruction on whether Cedar Fiber possessed trade secrets or confidential information in a unique combination of characteristics and components; and (3) rendering judgment for appellees based upon the jury's failure to find that Cedar Fiber possessed any confidential information or trade secrets in response to question one because the jury's answer to that question is so contrary to the great weight and preponderance of the evidence as to be clearly wrong and unjust.

BACKGROUND

Cedar Fiber owns and operates a mill in Junction, Kimble County, Texas. The mill extracts oil from chipped cedar logs and sells it in the essential oils market. Cedar Fiber also sells for various uses that part of the chipped cedar not used as boiler fuel in the steam distillation process. In April 1984, Kimble County Industries, Inc., bought Cedar Fiber. C. Murr was one of the founders and principal owner of Cedar Fiber before its sale. C. Murr, R. Murr, and McMahan were employees and officers of Cedar Fiber.

Beginning in 1987, R. Murr, C. Murr, McMahan, Hooker and other principals of Chem-Pac, the company they joined after leaving Cedar Fiber, began planning and designing a cedar oil mill to be built on property adjacent to Cedar Fiber's plant. In October 1987, R. Murr submitted to the Texas Air Control Board an application for a permit to construct and operate this plant. In September 1988, Cedar Fiber sued, seeking temporary and permanent injunctions based upon claims of improper disclosures of trade secrets and confidential information to various individuals and the Air Control Board.

Cedar Fiber contended that it possessed trade secrets involving equipment modifications and specific details of manufacturing processes developed through experimenting with the batch production method of producing cedar oil by steam distillation. It also contended that it had a trade secret in the unique way in which the plant, equipment, and processes operated together and fit into a "production matrix."

Cedar Fiber produced witnesses who testified about its general operations, equipment, logbooks, production cycle, financial operating data, and other information. They identified the aspects of each that Cedar Fiber considered protected as a trade secret. Cedar Fiber also claimed trade secret protection for the unique combination or unified process as a whole. Cedar Fiber's witnesses testified that the interrelation of all of the production equipment and processes produced quality products at the lowest possible cost. On the other hand, the Murrs' witnesses testified that the process used at the Cedar Fiber mill was the common method of batch production using steam distillation. According to them, developments at one mill, including Cedar Fiber, customarily had been shared among others in the industry.

CHARGE ISSUES

In point of error one, Cedar Fiber contends that the trial court erred in submitting an improper definition of the term "confidential information or trade secret." In point of error two, Cedar Fiber contends that the trial court erred in refusing to submit to the jury a proper instruction concerning whether Cedar Fiber possessed trade secrets or confidential information in a combination of characteristics and components, each of which by itself is in the public domain, but the unified process, design or operation of which in a unique combination affords a competitive advantage.

The trial court gave the following definition:

The term "CONFIDENTIAL INFORMATION OR TRADE SECRET" means any process, information, or compilation of information, formula, pattern or device which is used in one's business and which gives an opportunity to obtain an advantage over competitors who do not know or use it. In order to be a trade secret, there must be a substantial element of secrecy; however, secrecy need not be absolute. Matters of public knowledge or general knowledge in an industry cannot be appropriated as a secret. Personal efficiency, inventiveness, skills and experience which an employee develops through his work belong to him and not his former employer.

Cedar Fiber contends that it specifically objected to the definition as given and submitted to the court a less restrictive and confusing definition which deleted the last two sentences of the definition. The Murrs contend that Cedar Fiber did not make a proper objection because it objected only to this definition as it was used in conjunction with question three, not to the definition itself. Question three read: ⁽¹⁾

Do you find from a preponderance of the evidence that on April 30, 1984, Cedar Fiber Company, Inc. possessed confidential information or trade secrets in a combination of characteristics and components in its processes, methods of business, equipment, products and/or information, each item of which, by itself, may be in the public domain, but the unified process, design or operation of which in unique combination, work to competitive advantage?

The court held a charge conference on August 17, 1989. Cedar Fiber began by tendering to the clerk for filing the plaintiff's requested charge. Counsel then began with the following:

With respect to the Court's definition of the term "confidential information" or "trade secret," in conjunction with Issue No. 3, which inquires concerning the combination of characteristics and components, I think we have created a serious error there in that we submit an issue, No. 3, which the instruction specifically precluded the jury from answering in favor of the plaintiff. Specifically, the issue asks whether there can be a -- whether there is a combination of characteristics and components, each item of which may be in the public domain, but the unified process of which a unique combination affords a competitive advantage.

So the issue asks and would allow an answer affirmatively if there are items that are in the public domain. However, in the instruction of confidential information or trade secrets, we have specifically told the jury they cannot consider anything that is in the public domain. Specifically we have said, "Matters of public knowledge cannot be appropriated as a secret."

Having told the jury that they cannot consider matter of public knowledge a secret, and then asking them in question No. 3, if indeed a combination of items that are in the public domain can be a trade secret, we have created an inherent logical conflict; and the jury following the instruction given cannot, it is our position, answer Question No. 3. We view that as a very, very serious error in the charge as drafted and would request that the Court submit the instruction we have previously tendered to go along with that Issue No. 3.

Counsel then went on to object to questions two through seven; the definition of "confidential relationship"; the failure to charge on conspiracy; the omission of instructions concerning certain employment agreements and a settlement agreement. Then counsel said, "That concludes our objections, Judge. Thank You." The court responded:  "They are overruled."

To preserve error about its complaint of a defective submission, Cedar Fiber had to object to the submission with specificity. Tex. R. Civ. P. Ann. 274 (Supp. 1991). The objectionable matter and the grounds for objection must be pointed out with specificity. Failure to do so waives error. Monsanto Co. v. Milam, 494 S.W.2d 534, 537 (Tex. 1973); Chrysler Corp. v. Roberson, 619 S.W.2d 451, 459 (Tex. App. 1981, no writ).

The objection in question is not adequate to preserve error on appeal. The purpose of the requirement that an objection be specific is to allow the trial court the opportunity to correct errors in the charge. Castleberry v. Branscum, 721 S.W.2d 270, 276 (Tex. 1986); K-Mart Corp. v. Martinez, 761 S.W.2d 522, 524 (Tex. App. 1988, writ denied). The objection in question was to the use of the definition as it interacted with question three. This interaction was emphasized several times. Counsel did not object to the definition itself (as it did later to the definition of "confidential relationship"). Counsel did not object to question one to which the definition also related.

Cedar Fiber also failed to preserve error with regard to the court's failure to submit its requested instruction, which it raises in point of error two. To complain of the refusal to submit a requested instruction, the instruction must be endorsed, "refused"; signed by the court; and filed with the clerk. Tex. R. Civ. P. Ann. 276 (Supp. 1991); Greenstein, Logan & Co. v. Burgess Marketing, Inc., 744 S.W.2d 170, 181 (Tex. App. 1987, writ denied). If there is no endorsement by the court, the inclusion of a written request in the transcript will not preserve error in failing to submit the question, definition, or instruction. Freedom Homes of Texas, Inc. v. Dickinson, 598 S.W.2d 714 (Tex. Civ. App. 1980, writ ref'd n.r.e.).

Cedar Fiber contends that we should not strictly construe Rule 276 or construe it as the only method of preserving charge error, relying on American Motorists Insurance Co. v. Lynn, 762 S.W.2d 229, 232 (Tex. App. 1988, writ denied). In American Motorists, the requested charge had "denied" rather than "refused" written on it and had not been signed by the trial judge, but the court of appeals held, based on the rest of the record, that error had been preserved. In our case, however, we have nothing written on the copy of the charge included in the record. At a hearing on the motion for new trial, at which the absence of this document from the file was discovered, the judge said that his usual practice was to write "refused" on a party's requested charge but he did not say that he remembered doing so for this particular charge. We overrule points one and two.

SUFFICIENCY OF THE EVIDENCE

In point of error three, Cedar Fiber contends that the trial court erred in rendering judgment for the Murrs based on the jury's finding that Cedar Fiber did not possess confidential information or trade secrets because the finding is not supported by sufficient evidence and is so contrary to the great weight and preponderance of the evidence as to be clearly unjust. In reviewing a factual sufficiency challenge, we first review all of the evidence. Having considered all of the evidence we may set aside the verdict only if it is so contrary to the overwhelming weight of the evidence as to be clearly wrong and unjust. Cain v. Bain, 709 S.W.2d 175, 176 (Tex. 1986); see generally, W. Wendell Hall, Standards of Appellate Review in Civil Appeals, 21 St. Mary's L.J. 865, 909 (1990).

In order to prove its case, Cedar Fiber needed evidence on the numerous factors considered in determining whether trade secrets exist. See generally, Annotation, What is a Trade Secret so as to Render Actionable its Use or Disclosure by Former Employee, 59 A.L.R. 4th 641 (1988). First, a secret must exist. The matter cannot be a matter of common knowledge in an industry. Furr's Inc. v. United Specialty Advertising Co., 338 S.W.2d 762, 765 (Tex. Civ. App. 1960, writ ref'd n.r.e.). Reasonable measures must have been taken to protect the secrecy of the trade secret. Rimes v. Club Corp. of America, 542 S.W.2d 909 (Tex. Civ. App. 1976, writ ref'd n.r.e.). The information sought to be protected must have been learned in confidence. Auto Wax Co. v. Byrd, 599 S.W.2d 110 (Tex. Civ. App. 1980, no writ.).

The jury, in the face of conflicting evidence, failed to find that Cedar Fiber possessed confidential information or trade secrets. The Murrs produced evidence that before the sale ⁽²⁾: Cedar Fiber did not consider any part of its manufacturing process to be a trade secret; that its operations were open to its competitors and the public; that management freely exchanged information with competitors in order to improve operations mutually; that the only security measures in effect before the sale were for the purposes of safety, not for protection of trade secrets; the records of production claimed by Cedar Fiber to be evidence of trade secrets were production logs to which access was open; that the Murrs were never advised that they were under a policy of confidentiality and were never advised that what they had learned could not be used at a later date; that Cedar Fiber's operation was essentially the same as any other batch plant using the same principles known to all in the industry to produce cedar oil.

Cedar Fiber produced evidence to show: that it had taken security precautions, including a fence around the plant and a night security foreman; that it limited access to confidential information to management level employees and secured agreements from them regarding confidential information; that it had conducted experiments to improve its plant process with regard to the processing of the material, the plant layout, the production cycles, specific pieces of equipment, and water quality; and that it kept extensive logs on these experiments which would give a competitive advantage to one possessing the information.

We do not pass upon the credibility of the witnesses or substitute our judgment for that of the trier of fact. Clancy v. Zale Corp., 705 S.W.2d 820, 826 (Tex. App. 1986, writ ref'd n.r.e.). The trier of fact had sufficient evidence from which it could conclude that no trade secrets or confidential information existed. We overrule point of error three.

SUMMARY JUDGMENT ON THE MURRS' COUNTERCLAIM

In their first cross-point of error, the Murrs contend that the trial court erred in granting summary judgment against them on their counterclaim. Cedar Fiber, as plaintiff, sued the Murrs, who counterclaimed for a declaratory judgment on a settlement agreement. In its fourth amended petition, Cedar Fiber dropped all claims based on contract. It then moved for summary judgment on the basis that it was bringing a claim founded on the tort of the intentional misappropriation of trade secrets, and, as a matter of law, an intentional tort could not be prospectively released by such an agreement. Therefore, all of Murr's defenses based on the settlement agreement, as well as its counterclaim, should be summarily denied. Summary judgment was granted on two grounds: (1) as a matter of policy, a settlement agreement could not prospectively release intentional torts; and (2) the counterclaim was based in contract, but plaintiff's amended petition made claims only in tort. We cannot affirm the summary judgment on either ground.

In reviewing a summary judgment, the question is whether the summary judgment proof establishes as a matter of law that no genuine issue of material fact exists as to one or more of the essential elements of the plaintiff's cause of action. Gibbs v. General Motors Corp., 450 S.W.2d 827, 828 (Tex. 1970). We use the following rules:

1. The movant for summary judgment has the burden of showing there is no genuine issue of material fact and that it is entitled to judgment as a matter of law.

2. In deciding whether or not there is a disputed material fact issue precluding summary judgment, evidence favorable to the non-movant will be taken as true.

3. Every reasonable inference must be indulged in favor of the non-movant and any doubts resolved in their favor.

Nixon v. Mr. Property Management Co., 690 S.W.2d 546, 548 (Tex. 1985).

The summary judgment order states that defendants' fourth amended counterclaim and the defenses asserted in defendants' fourth amended original answer are based entirely upon the alleged effect of an earlier settlement agreement involving some of the parties in the instant suit. Because plaintiff's current claim is based solely upon the intentional tort of misappropriation of trade secrets, that earlier settlement agreement as a matter of law could not have released any party from future intentional tortious conduct because releases that attempt to prospectively release intentional, reckless, or grossly negligent actions are unenforceable and void in violation of public policy. The judgment then goes on to say that the obligation to maintain the confidentiality of trade secret and proprietary information is separate and distinct from any contractual relationship relating to the trade secret and subjects the breaching party to tort liability for breach of its confidential relationship.

Cedar Fiber relied on, and the summary judgment cites, Smith v. Golden Triangle Raceway, 708 S.W.2d 574 (Tex. App. 1986, no writ), for the proposition that the settlement agreement was void on public policy grounds. Golden Triangle Raceway involved a person, injured while in the pit area of a racetrack, who had signed a release for all liability on the part of the track, including for negligent acts. There are several problems with relying on this case in the way in which Cedar Fiber did. First, the holding of the case is not that an attempt to release liability for gross negligence or intentional or reckless acts is contrary to public policy. The actual holding is: "We hold a term in a release attempting to exempt one from liability or damages occasioned by gross negligence is against public policy." Golden Triangle Raceway, 708 S.W.2d at 57 (emphasis added). The court had previously quoted a section from the restatement of contracts that included the intentionally or recklessly language.

Second, although in general, a party may not release itself from future grossly negligent or intentional acts not all states agree with that view or have ruled on the issue. See Comment, Releases: An Added Measure of Protection from Liability, 39 Baylor L. Rev. 487, 502-03 (1987). These cases do not appear to have occurred in the context of a "business tort" such as misappropriation of trade secrets, but in the personal injury, fraud, warranty, or deceptive trade practice context. We do not believe that the policies are the same in all areas. Trade secret law involves a balance between the factors favoring competition and free mobility of labor, and those favoring investment and entrepreneurial conduct. See generally, Henry Perritt, Workplace Torts § 9.1 (1991). ⁽³⁾ In this cause, in which the release was a function of a settlement of a lawsuit arising out of the sale of a business, and was between two parties with apparently equal bargaining power, we cannot find that public policy would, as a matter of law, prohibit the release.

The other ground on which the court granted summary judgment was that, after amendments, the claim that Cedar Fiber brought was in tort and the counterclaim that the Murrs brought was in contract. Although it is true that a duty not to disclose trade secrets exists at common law and need not be a matter of contract, tort and contract claims involving trade secrets are commonly brought together. See Perritt, supra. Both claims arose out of the same set of transactions -- the employment/ownership relationship between the Murrs and Cedar Fiber, the sale to Kimble Industries, and the settlement agreement from other litigation arising out of that sale. The counterclaim appears to be compulsory. Tex. R. Civ. P. Ann. 97(a) (1979); Wyatt v. Shaw Plumbing Co., 760 S.W.2d 245 (Tex. 1988).

Wyatt sets out six factors to consider to decide whether a counterclaim is compulsory:

(1) it is within the jurisdiction of the court; (2) it is not at the time of filing the answer the subject of a pending action; (3) the action is mature and owned by the pleader at the time of filing the answer; (4) it arises out of the transaction or occurrence that is the subject matter of the opposing party's claim; (5) it is against an opposing party in the same capacity; and (6) it does not require for adjudication the presence of third parties over whom the court cannot acquire jurisdiction.

Id. at 247. Under Tex. R. Civ. P. Ann. 97(g) (1979), tort cannot be a set-off or counterclaim against a contractual demand, or vice-versa, unless they arise out of or are incident to each other. These two claims arose out of the same set of facts. Therefore, the counterclaim was properly brought even after the pleadings were amended. We sustain the Murrs cross-point of error one that summary judgment was improperly granted on these two bases and remand that part of the cause.

DAMAGES FOR DELAY

The Murrs, in cross-point of error two, contend that Cedar Fiber appealed for purposes of delay and without sufficient cause and therefore the Murrs should receive damages in an amount not to exceed ten times the total taxable costs.

If the appellate court determines that a litigant has appealed "for delay and without sufficient cause, then the court may, as part of its judgment, award each prevailing appellee an amount . . . not to exceed ten times the total taxable costs as damages against such appellant." Tex. R. App. P. Ann. (Supp. 1991). The Murrs base this claim on their contention that Cedar Fiber failed to preserve error and so had no reasonable basis to believe the judgment would be reversed, citing Ferrer v. Corsicana Transmission, Inc., 807 S.W.2d 653 (Tex. App. 1991, no writ), and that Cedar Fiber misstated facts and misconstrued the record before the appellate court, citing Triland Investment Group v. Tiseo Paving Co., 748 S.W.2d 282 (Tex. App. 1988, no writ).

We first point out that the Murrs took an independent appeal from the adverse summary judgment -- an appeal which would have allowed Cedar Fiber to bring cross-points in the same way that the Murrs did in this suit. We conclude that sanctions for a frivolous appeal should not be imposed. We overrule cross-point of error two.

We affirm the trial court's judgment with regard to Cedar Fiber's claim. We reverse the summary judgment on the counterclaim and remand that portion of the cause for further proceedings.

[Before Chief Justice Carroll, Justices Aboussie and Kidd; Justice Kidd Not Participating]

Affirmed in Part; Reversed and Remanded in Part

Filed:  November 20, 1991

[Do Not Publish]

1. ¹ The jury did not answer question three. No objection was made in the charge conference to the conditioning of question three on question one.

2. ²  The sale of the plant in April 1984 is the relevant date. Cedar Fiber contends that the trade secrets in question were learned before the sale. There is no contention that the secrets were learned through industrial espionage, etc.

3. ³ There is some authority for the proposition that a contract may extinguish common law duties regarding trade secrets.

Michels v. Dyna-Kote Industries, Inc., 497 N.E.2d 586, 589 (1991) (Ind. Ct. App. 1986) ("except contract law" phrase in Ind. Code § 24-2-1(c) permits contractual specification of post-employment duties respecting customer list to supplant common law duties).