Nova Consulting Group, Inc. v. Engineering Consulting Services, Ltd.

IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
August 22, 2008
No. 07-50832 Charles R. Fulbruge III
Clerk
NOVA CONSULTING GROUP, INC.
Plaintiff-Appellee
v.
ENGINEERING CONSULTING SERVICES, LTD.
Defendant-Appellant
Appeal from the United States District Court
for the Western District of Texas
USDC No. 5:03-CV-305
Before JONES, Chief Judge, and BARKSDALE and STEWART, Circuit Judges.
RHESA HAWKINS BARKSDALE, Circuit Judge:*
At trial, claims for misappropriation of trade secrets and tortious
interference with contractual relations remained in this diversity action by Nova
Consulting Group against Engineering Consulting Services (ECS). A jury
returned a verdict for Nova on both claims and awarded actual (past and future
lost profits) and exemplary damages. The district court reduced substantially
the future-lost-profits award.
*
Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not
be published and is not precedent except under the limited circumstances set forth in 5TH CIR.
R. 47.5.4.
No. 07-50832
Nova does not appeal that reduction. At issue for ECS’ appeal are: the
admission of Nova’s expert witness’ testimony on damages; the sufficiency of the
evidence for liability and damages; and two ECS-proposed jury instructions
being refused. AFFIRMED.
I.
Nova and ECS are competing, nationwide, environmental consulting firms.
Their work involves, among other things, evaluating soil conditions for architects
and engineers, as well as testing air quality, construction materials, and for
asbestos.
Nova opened an office in San Antonio, Texas, in September 1998. All its
employees signed employment agreements, with prohibitions against ever
disclosing confidential information, and, for one year after leaving Nova, against
competing with Nova or soliciting its employees.
By 2001, Nova’s San Antonio office had over $2 million in revenue. That
same year, ECS entered the San Antonio market. Mike Harwood was hired to
establish the ECS San Antonio office by hiring top talent from other firms.
Harwood had not worked for Nova; but, he had worked with several of its
employees.
From February through April 2002, ECS hired top managers, project
managers, and key technicians away from Nova. Included in this group were
four former Nova managers: McIntosh, Burge, Hernandez, and Hunter. (Named
in this action as individual defendants, they were voluntarily dismissed during
trial.)
By 2002, revenues for ECS’ San Antonio office were nearly $2.5 million;
for 2003, $2.3 million. During this same period, Nova’s San Antonio-office
revenue dropped to $1.5 million the first year; $578,000, the second.
In filing this Texas diversity action against ECS and the four former Nova
managers, Nova alleged: ECS ignored Nova confidentiality agreements, by
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No. 07-50832
requiring the Nova employees hired away by ECS to load into its database client
information taken from Nova; ECS allowed former Nova employees hired away
by ECS to solicit employees still at Nova to also join ECS; ECS employees, who
were former Nova employees, solicited and hired employees still at Nova; ECS’
conduct damaged Nova through loss of client base and loss of key employees; and
ECS intended to harm Nova, because evidence shows a plan to dominate the
market by decreasing other firms’ ability to compete.
ECS responded: Nova employees moved to ECS because Nova was losing
its place as a leader in the industry, not because of improper solicitation; the
changing nature of the environmental consulting practice caused Nova revenues
to drop because it did not adapt to changes as well as ECS; and there was no
misappropriation of protected or confidential information by ECS because there
is a reasonable explanation for everything alleged to have been taken.
Nova also alleged the four former Nova managers breached the following
prohibitions in their employment agreements: non-disclosure of confidential
information, non-solicitation of Nova employees, and non-competition. Prior to
trial, the district court ruled by summary judgment that the covenants not to
compete were overbroad and unenforceable. On the other hand, the employment
agreements’ non-disclosure-of-confidential-information and non-solicitation-of-
Nova-employee provisions remained in issue. As noted, the four former Nova
managers were voluntarily dismissed during trial.
Following four days of testimony, including by an expert witness on
damages for each party, the jury was instructed, inter alia, to determine whether
ECS unfairly competed with Nova by misappropriating trade secrets, or
tortiously interfering with employment agreements, or both. After deliberating
approximately two and one-half hours, the jury found ECS had engaged in both
practices and awarded $1.5 million in past, and $1 million in future, lost profits,
and $500,000 in exemplary damages.
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No. 07-50832
In ruling on ECS’ post-verdict motions, the district court reduced the
future lost profits to $144,260. (ECS asserts this reduced amount was based on
the district court’s misunderstanding of ECS’ expert’s damages-calculation.)
Otherwise, the district court denied ECS’ motions for judgment as a matter of
law (requested at the close of Nova’s case, at the close of all the evidence, and
post-verdict), and for new trial. ECS’ motion for remittitur was granted to the
extent the court had already reduced future lost profits.
II.
The Seventh Amendment preserves the right of trial by jury for civil
actions. U.S. CONST. amend. VII. For the unfair-competition verdict at hand,
this appeal, concerning expert witness expertise, conflicting evidence, and two
proposed jury instructions, is a classic example why trial must take place in
district court, not here. The below-discussed standards of review for the issues
presented amply demonstrate this.
It is undisputed that Texas law applies in this diversity action. ECS
asserts: Nova’s expert witness’ testimony was inadmissible; judgment as a
matter of law should have been granted for ECS because there was not sufficient
evidence for the jury to find either liability or damages; and the district court
erred by refusing two ECS-proposed jury instructions. Again, Nova does not
appeal the district court’s reducing the future-lost-profits award.
A.
Judgment as a matter of law is proper when “a party has been fully heard
on an issue during a jury trial and the court finds that a reasonable jury would
not have a legally sufficient evidentiary basis to find for the party on that issue
. . . .” FED. R. CIV. P. 50(a) (emphasis added); see also FED. R. CIV. P. 50(b) (post-
trial motion for judgment as a matter of law). In deciding whether judgment as
a matter of law should have been granted, an appellate court must first excise
inadmissible evidence; such evidence “contributes nothing to a legally sufficient
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evidentiary basis”. Weisgram v. Marley Co., 528 U.S. 440, 454 (2000) (internal
quotation marks omitted). Therefore, addressed first is the contested admission
of Nova’s expert witness’ testimony on damages. See Hodges v. Mack Trucks,
Inc., 474 F.3d 188, 193 (5th Cir. 2006).
The Federal Rules of Evidence require the district court to act as
“gatekeeper”, to ensure expert testimony is relevant and reliable. FED. R. EVID.
702; Daubert v. Merrell Dow Pharm., Inc., 509 U.S. 579, 589-95 & n.7 (1993).
“The focus, of course, must be solely on principles and methodology, not on the
conclusions that they generate.” Daubert, 509 U.S. at 595 (emphasis added).
The admissibility of expert testimony is reviewed for abuse of discretion.
E.g., Pipitone v. Biomatrix, Inc., 288 F.3d 239, 243 (5th Cir. 2002). In that
regard, the admissibility ruling is not reversed unless it is “manifestly
erroneous”. Gen. Elec. Co. v. Joiner, 522 U.S. 136, 142 (1997).
In contending the district court abused its discretion by admitting the
expert’s (Malek’s) testimony, ECS challenges his expertise and the reliability of
his opinions. ECS maintains: Malek “was not qualified to render opinions
regarding the inner-workings of an environmental consulting business”; and,
“his methodology was fundamentally flawed and lacked the reliability required
under the exacting standards of Daubert”. For the reasons that follow, there was
no abuse of discretion, especially in the light of the untimeliness of ECS’ pre-trial
motion to exclude his testimony.
ECS waited until 25 September 2006, only six days before trial, to first
move to exclude the testimony by Malek—Nova’s only expert witness on
damages. As it does now, it contended: Malek was unqualified to render
opinions regarding the inner-workings and resiliency of an environmental
consulting firm; and his methodology was flawed because it failed to take into
account the loss of “mold work” in San Antonio, relied on a budget whose
achievability Malek did not analyze or investigate, assumed Nova’s San Antonio
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No. 07-50832
office was “destroyed”, disregarded the nature of the employment agreements at
issue, and used terminal values. ECS’ counsel “ple[d] for mercy” to excuse the
untimeliness of the motion, asserting that they had not become lead counsel
until 31 January 2006, after the scheduling order was entered, and had
inadvertently missed the deadline; they urged Nova would suffer no prejudice.
At a pre-trial conference on 29 September, ECS’ motion was discussed and
denied as untimely. As a result of the discussion, the district court had ample
opportunity to consider ECS’ objections. (As reflected below, after denying ECS’
motion, the district court entertained ECS’ repeated Daubert challenges. In that
regard, Nova’s counsel conceded at the pre-trial conference that ECS could
renew its Daubert challenge at a later date if it had grounds, despite ECS’
motion’s being denied that day as untimely.)
On 5 October 2006, during ECS’ voir dire of Malek at trial, a Daubert
hearing was held. Malek’s testimony was ruled admissible. In doing so, the
district court stated: “[W]e have invested this much time, and we will proceed
to a jury verdict, unless [Nova] decide[s] that the Supreme Court and the Fifth
Circuit ha[ve] made it untenable to go forward”.
Subsequently, when Nova tendered Malek at trial as an expert witness on
economic harm and computation of economic damages, ECS’ objections were
renewed and overruled. After Malek’s testimony, ECS reurged its Daubert
motion, contending: “There is absolutely no evidence tying any alleged wrongful
conduct [to the damages]”. The motion was again denied.
1.
Regarding Malek’s qualifications, ECS contends he should not have been
allowed to testify regarding Nova’s ability to recover from a particular market
shift (the decline of “mold work”), because he is a “financial consultant and
certified public accountant who has no experience in the environmental
consulting field”. On the other hand, during the voir dire of Malek at trial, he
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No. 07-50832
testified, inter alia, that he is also a “certified insolvency and restructuring
advisor”, who “works with businesses that are failing”, and has “consulted with
[an engineering consulting firm] for methodologies of revitalizing its business
after it came out of bankruptcy”. Accordingly, it was not an abuse of discretion
(“manifestly erroneous”) to rule Malek was qualified to testify on this subject.
See Trugreen Cos. v. Scotts Lawn Serv., 508 F. Supp. 2d 937, 958-59 (D. Utah
2007) (ruling insolvency and reorganization advisor qualified).
2.
As noted, Nova’s employees left to join ECS from February through April
2002. Regarding the reliability of Malek’s testimony, ECS challenges several
assumptions it contends were underlying his calculation of profit loss caused by
ECS: that Nova would have adapted to San Antonio’s loss of environmental
consulting work involving testing for mold, achieved its 2002 budget, and
remained operational with its pre-April-2002 employees for perpetuity; and that
all of Nova’s lost profits were attributable to ECS’ unfair competition, which
Malek did not specifically identify. Those assumptions, however, were fully
explored at trial.
Malek opined that the 2002 budget was achievable, and testified to the
basis of that belief, including that it was prepared by McIntosh (who also
testified to its achievability), a few months before he joined ECS in April 2002.
(It was approved on 17 January 2002.) Malek recognized the declining
availability of consulting work related to mold, and opined that it would not have
affected Nova’s budget because of Nova’s ability to adapt. (The nature, extent,
and effect of the decline in “mold work” was a contested issue, on which both
parties presented conflicting accounts.) Malek testified he knew Nova’s
employees were at-will employees; took into account the possibility they would
resign to join other entities; did not identify specific acts of misconduct or
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No. 07-50832
differentiate between legal or illegal conduct; and projected discounted damages
for hundreds of years into the future.
ECS, however, cites nothing to show any of those assumptions render an
expert’s opinion unreliable in these circumstances. Moreover, “[w]hen, as here,
the parties’ experts rely on conflicting sets of facts, it is not the role of the trial
court to evaluate the correctness of facts underlying one expert’s testimony”.
Micro Chemical, Inc. v. Lextron, Inc., 317 F.3d 1387, 1392 (Fed. Cir. 2003)
(citations omitted). Rather, “‘[v]igorous cross-examination, presentation of
contrary evidence, and careful instruction on the burden of proof are the
traditional and appropriate means of attacking shaky but admissible evidence’”.
Pipitone, 288 F.3d at 250 (quoting Daubert, 509 U.S. at 596).
There was vigorous cross-examination of Malek, as discussed infra, as well
as the presentation of contrary evidence. Further, although ECS’ expert used
a different approach, he agreed with much of Malek’s underlying methodology.
In addition, the following limiting instruction was given: “[T]he court accepts
[the competing experts on damages] at a threshold level . . . . But ultimately,
then you all as the judges of the facts still make the determination of whether
you want to believe any, all[,] or none of [their] testimony”. (Emphasis added.)
Therefore, the decision to permit Nova’s expert, Malek, to testify was not
“manifestly erroneous”. Accordingly, the district court did not abuse its
discretion by admitting that testimony.
B.
“A motion for judgment as a matter of law . . . in an action tried by jury is
a challenge to the legal sufficiency of the evidence supporting the jury’s verdict.”
Hiltgen v. Sumrall, 47 F.3d 695, 699 (5th Cir. 1995). ECS contends the evidence
was insufficient to support the verdict for misappropriation of trade secrets, for
tortious interference with Nova’s employment agreements, and for actual and
exemplary damages.
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This court reviews de novo the district court’s ruling on a motion for
judgment as a matter of law, applying the same standard as did the district
court. E.g. Flowers v. S. Reg’l Physician Servs., Inc., 247 F.3d 229, 235 (5th Cir.
2001). “We consider all of the evidence, drawing all reasonable inferences and
resolving all credibility determinations in the light most favorable to the non-
moving party.” Brown v. Bryan County, OK, 219 F.3d 450, 456 (5th Cir. 2000)
(citation omitted). This is because “[c]redibility determinations, the weighing of
the evidence, and the drawing of legitimate inferences from the facts are jury
functions, not those of a judge”. Reeves v. Sanderson Plumbing Prods., Inc., 530
U.S. 133, 150 (2000) (quoting Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255
(1986)). Before us is only the cold record.
Therefore, as quoted earlier, the judgment must be upheld unless “a
reasonable jury would not have a legally sufficient evidentiary basis to find” as
the jury found. FED. R. CIV. P. 50(a)(1); see Navigant Consulting, Inc. v.
Wilkinson, 508 F.3d 277, 282 (5th Cir. 2007). Accordingly, although our review
is de novo, this standard of review with respect to a jury verdict is especially
deferential. E.g., Brown, 219 F.3d at 456-57 (citing Snyder v. Trepagnier, 142
F.3d 791, 795 (5th Cir. 1998)). “As such, judgment as a matter of law should not
be granted unless the facts and inferences point so strongly and overwhelmingly
in [ECS’] favor that reasonable jurors could not reach a contrary conclusion.”
Navigant, 508 F.3d at 282 (citation and internal quotation marks omitted).
Nova’s claims concern unfair competition, “the umbrella for all statutory
and nonstatutory causes of action arising out of business conduct which is
contrary to honest practice in industrial or commercial matters”. United
Sporting Prods., Inc. v. Johnny Stewart Game Calls, Inc., 865 S.W.2d 214, 217
(Tex. App.—Waco 1993, writ denied) (quoting Am. Heritage Life Ins. Co. v.
Heritage Life Ins. Co., 494 F.2d 3, 14 (5th Cir. 1974)). Again, Nova’s underlying
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No. 07-50832
tort claims were for misappropriation of trade secrets and tortious interference
with its employment agreements.
1.
ECS claims the evidence was insufficient to hold it liable for
misappropriating Nova’s trade secrets. “Under Texas law, there are three
elements needed to establish the injury of trade secret misappropriation: (1) a
trade secret exists; (2) [ECS] acquired the trade secret by breach of a confidential
relationship or other improper means; and (3) [ECS] used the trade secret
without authorization.” Gen. Universal Sys., Inc. v. HAL, Inc., 500 F.3d 444, 449
(5th Cir. 2007) (citation and internal quotation marks omitted). ECS contends
Nova failed to adduce competent evidence to support any of those elements.
Each is considered in turn.
a.
Under Texas law, “[a] trade secret is any . . . compilation of information
used in one’s business, and which gives an opportunity to obtain an advantage
over competitors who do not know or use it”. Taco Cabana Int’l, Inc. v. Two
Pesos, Inc., 932 F.2d 1113, 1123 (5th Cir. 1991) (citation omitted); see also
Computer Assocs. Int’l, Inc. v. Altai, Inc., 918 S.W.2d 453, 455 (Tex. 1996).
Among other examples of trade secrets, Texas courts have provided the
following: customer lists, client information, customer preferences, and buyer
contacts. Miller Paper Co. v. Roberts Paper Co., 901 S.W.2d 593, 601 (Tex.
App.—Amarillo 1995, no writ); T-N-T Motorsports, Inc. v. Hennessey
Motorsports, Inc., 965 S.W.2d 18, 22 (Tex. App.—Houston [1st Dist.] 1998, pet.
dism’d).
Texas courts consider six factors when evaluating whether a trade secret
exists. Triple Tee Golf, Inc. v. Nike, Inc., 485 F.3d 253, 267 (5th Cir. 2007); In re
Bass, 113 S.W.3d 735, 739 (Tex. 2003). Those factors are:
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No. 07-50832
(1) the extent to which the information is known outside of [the]
business; (2) the extent to which it is known by employees and
others involved in [the] business; (3) the extent of the measures
taken . . . to guard the secrecy of the information; (4) the value of the
information to [the person claiming the trade secret] and to his
competitors; (5) the amount of effort or money expended by [the
person claiming the trade secret] in developing the information;
[and] (6) the ease or difficulty with which the information could be
properly acquired or duplicated by others.
Triple Tee Golf, 485 F.3d at 267; see also In re Bass, 113 S.W.3d at 740.
On the other hand, Texas law does not require a “party claiming a trade
secret . . . to satisfy all six factors because trade secrets do not fit neatly into
each factor every time”. In re Bass, 113 S.W.3d at 740. There may be other
circumstances relevant to the trade-secret analysis; therefore, Texas courts
“weigh the [six] factors in the context of the surrounding circumstances to
determine whether” a trade secret exists. Id. (As discussed infra in part II.C.,
ECS maintains the district court reversibly erred by refusing ECS’ proposed
instruction that incorporated this six-factor test.)
Nova presented evidence that its client information was confidential and
a trade secret. Nova President Cummings testified that client recruitment, and
hence the protection of client information, is critical to an environmental
consulting firm; this takes an enormous amount of time and resources.
Cummings explained that, while developing clients, Nova inputs confidential
client information into its client-contact database, called Telemagic. This client
information includes names, locations, cell-phone and work-telephone numbers,
and other important information obtained about clients from interactions with
them. Cummings testified that this information, which, again, is entered by
Nova employees into Telemagic, is considered confidential, trade secret, and
proprietary. He also explained that Nova employees are aware this information
is considered a trade secret.
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No. 07-50832
Consistent with Cummings’ testimony, ECS employee, and former Nova
manager, McIntosh testified that confidential client information developed by
Nova employees was recorded in Telemagic, and that steps were taken by Nova
and its employees to protect that information. McIntosh explained that the
types of information he recorded in Telemagic included: names; addresses; cell-
phone, work-telephone, and fax numbers; email addresses; and other key
information to be used to contact customers and satisfy their particular
preferences.
b.
For the second element for trade-secret misappropriation, ECS must have
acquired a Nova trade secret by breach of a confidential relationship or other
improper means. “One is liable for disclosure of trade secrets if (a) he discovers
the secret by improper means, or (b) his disclosure or use constitutes a breach
of confidence reposed in one who is in a confidential relationship with another
who discloses protected information to him.” Phillips v. Frey, 20 F.3d 623, 630
(5th Cir. 1994) (citations omitted).
The four former Nova managers who left Nova to work for ECS (McIntosh,
Burge, Hernandez, and Hunter) signed employment agreements in which they
agreed not to disclose confidential information. These agreements defined
confidential information as proprietary or trade-secret information, such as
information relating to present and prospective customers.
ECS Vice President Harwood admitted that, when he opened the ECS
office in San Antonio, he had nothing but a notebook, checkbook, cell phone, and
the ECS goal of becoming the dominant environmental consulting firm in the
city. Harwood confirmed that, to dominate the market, he needed to rapidly
grow the ECS office and increase revenue; and that, to achieve this, he needed
to recruit top-grade professional employees who could bring in client
information, do the work, and produce revenue. Harwood also confirmed the
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No. 07-50832
ECS strategy for entering the market was to take top talent from other firms,
which it did by hiring out of Nova’s San Antonio office its top managers, project
managers, and key technicians. It was stipulated that all four former Nova
managers (individual defendants until voluntarily dismissed during trial)
resigned during February and April 2002; and three of them (McIntosh,
Hernandez, and Hunter) were solicited by ECS on 2 April before resigning from
Nova on 8 April.
Brett Gitskin, ECS Illinois President and a member of the ECS board of
directors, admitted he knew the former Nova managers had agreed in
employment agreements not to disclose Nova’s confidential information. This
notwithstanding, ECS’ Harwood admitted that every former Nova employee
hired by ECS was expected immediately to begin entering all of their contact
information into the ECS contact database. Gitskin confirmed ECS failed to
instruct the former Nova managers that ECS did not want Nova’s client-contact
information.
Burge, a former Nova manager, was hired away by ECS on 4 February
2002. When Nova became aware Burge was contacting his former Nova clients
on behalf of ECS, using client-contact information generated at Nova, Nova
lawyers sent a letter to Burge, to which was attached a copy of his Nova
employment agreement. A copy of that letter was also sent to ECS President
Lucas. This letter reminded Burge, and ECS, his new employer, that the Nova
employment agreement prohibited former Nova employees from using, or
disclosing, any of Nova’s confidential information and prohibited former Nova
employees, for a period of one year after leaving Nova, from soliciting Nova
employees for hire by ECS. ECS’ president and the firm’s general counsel
reviewed the letter and the employment agreement and instructed ECS
supervisors in San Antonio that the Nova employment agreement was not
enforceable and they need not worry about it.
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No. 07-50832
c.
For the third, and final, element for trade-secret misappropriation, ECS
must have used a Nova trade secret without authorization. “As a general
matter, any exploitation of the trade secret that is likely to result in injury to the
trade secret owner or enrichment to the defendant is a ‘use’. . . . [Therefore]
soliciting customers through the use of information that is a trade secret . . .
constitute[s] ‘use.’” Gen. Universal Sys., Inc., 500 F.3d at 451 (quoting
RESTATEMENT (THIRD) OF UNFAIR COMPETITION § 40).
Burge admitted that he took a business-card collection from Nova when
he moved to ECS. Burge confirmed those business cards contained handwritten
notes with further details gathered about clients through dealings with them,
such as names of contact persons, cell-phone numbers, and other notes. Burge
loaded into ECS’ database the contact details of several clients with whom he
had worked while he was employed at Nova. After moving to ECS, and using
such Nova client-contact information, Burge contacted these Nova clients on
behalf of ECS and generated work from them.
McIntosh, one of the Nova managers hired away by ECS in April 2002,
also admitted he took a business-card collection from Nova when he moved to
ECS. McIntosh admitted he had used Nova customer-contact information to
develop business for ECS. ECS Illinois President Gitskin confirmed that
McIntosh used this contact information and his relationship with Farmers
Insurance to increase ECS revenues significantly. Along this same line, the jury
heard testimony by Steve Tyson, a corporate recruiter in San Antonio who had
established a relationship with McIntosh while he was with Nova. Tyson
testified that, after McIntosh left Nova for ECS, he informed Tyson that he had
Nova clients, and that he would have taken the copier machine and the vehicle
if he could have gotten away with it.
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No. 07-50832
In sum, in the light of the foregoing evidence, there was sufficient evidence
for a reasonable jury to conclude ECS misappropriated Nova’s trade secrets. A
reasonable jury could have found that the information Nova employees loaded
into Telemagic—items such as names, locations, cell-phone and work-telephone
numbers, and other important information obtained about the client—was trade
secret, confidential, and proprietary. Contrary to ECS’ contentions, the jury was
not obligated to focus on whether the Telemagic software or printouts from the
system were misappropriated. A reasonable jury could consider evidence which
demonstrated that the information loaded into Telemagic was the true trade
secret, rather than the database which served as a repository of that
information.
There was also sufficient evidence for a reasonable jury to find that ECS
acquired the trade-secret client-contact information through breach by its former
Nova employees of their Nova employment agreements. The evidence showed
ECS was aware of the employment agreements; yet, in contravention of them,
continued to require former Nova managers to load their client information into
the ECS database.
A reasonable jury could also find that, after acquiring Nova’s trade-secret
information by hiring former Nova managers and requiring them to load the
protected information into the ECS database, ECS, without authorization, then
used that information to its advantage and Nova’s detriment. The evidence
supported a reasonable jury’s finding that ECS used Nova trade-secret client
information to gain new customers and to increase revenues.
2.
ECS also maintains the evidence was insufficient to hold it liable for
tortious interference with Nova’s employment agreements. Our having held
there was sufficient evidence for a reasonable jury to find ECS misappropriated
Nova’s trade secrets, it is not necessary, for liability purposes, to address this
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No. 07-50832
claim. It is addressed, however, because the jury’s finding both torts were
committed may have been a factor in its actual and exemplary damages awards.
Under Texas law, the elements of a tortious-interference-with-contract
claim are: “(1) the existence of a contract subject to interference; (2) a willful and
intentional act of interference; (3) the act was a proximate cause of damage; and
(4) actual damage or loss occurred”. Fluorine On Call, Ltd. v. Fluorogas Ltd.,
380 F.3d 849, 864 (5th Cir. 2004) (citation omitted); see also Friendswood Dev.
Co. v. McDade & Co., 926 S.W.2d 280, 282 (Tex. 1996).
ECS contends that, for Nova to prevail on this claim, Nova was required
to show ECS caused one of the former Nova managers (who were all party to the
Nova employment agreements, discussed supra) to either breach the
confidentiality provision of the employment agreement or to solicit Nova
employees for employment at ECS. ECS confines its challenge on this claim,
however, to ECS’ solicitation of Nova employees, apparently relying on its
earlier-addressed contention that there was no misappropriation of Nova’s trade
secrets. In other words, ECS does not again address the sufficiency of the
evidence on ECS’ interfering with the confidentiality provision of the Nova
employment agreements.
To find ECS tortiously interfered with contractual relations, the jury could
have found either that ECS tortiously interfered with the confidentiality
provisions, or that ECS tortiously interfered with the contractual prohibitions
on solicitation by former Nova employees of current Nova employees for
employment at ECS. The jury was not required to find both. Therefore, we need
address only ECS’ tortious interference with the confidentiality provisions of the
Nova employment agreements; this one matter provided sufficient basis for a
reasonable jury’s finding such interference.
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No. 07-50832
a.
As noted, the first element for the tortious-interference-with-contractual-
relations claim is that there must be a contract subject to interference. The
Nova employment agreements were in evidence. As discussed, supra, with
regard to Nova’s misappropriation-of-trade-secrets claim, evidence was
presented about Nova employment agreements signed by former Nova managers
who were later hired away to work for ECS. By signing the employment
agreements, the Nova managers agreed, inter alia, not to disclose or use Nova’s
confidential information, except as required by their duties to Nova. ECS does
not appear to challenge the Nova employment agreement’s being a contract
subject to interference.
b.
To satisfy the willful-and-intentional-act-of-interference element of this
tortious-interference claim, Nova was not required to prove ECS acted with
intent to injure. Fluorine On Call, 380 F.3d at 864. Nova, however, was
required to prove ECS acted with intent to interfere with the contract. Id.
As discussed, supra, with regard to the second element of Nova’s
misappropriation-of-trade-secrets claim, the jury received evidence from which
a reasonable jury could find ECS willfully and intentionally interfered with Nova
employment agreements. Along this line, as also discussed, supra, ECS’
president and its general counsel reviewed the employment agreement and
declared it was not enforceable and that ECS need not worry about it.
Harwood admitted that, to dominate the San Antonio market, he needed
to rapidly grow the ECS office and increase revenue, which he could achieve
most quickly by recruiting top-grade professional employees who could bring in
client information. Harwood confirmed that, in this regard, the ECS strategy
was to take top talent from other firms, which ECS did by hiring Nova’s top
managers, project managers, and key technicians.
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No. 07-50832
Gitskin admitted he knew the former Nova managers were prohibited by
their Nova employment agreements from disclosing Nova’s confidential
information. Nevertheless, as discussed supra, every former Nova employee
hired by ECS was expected immediately to begin entering all of their contact
information into the ECS contact database.
c.
Tortious-interference elements three and four are, respectively, that there
must be causation and damage. As discussed infra, concerning the sufficiency
of the evidence of actual damages, evidence was presented through which a
reasonable jury could find Nova suffered damage proximately caused by ECS’
tortious interference. “Preexisting profit figures, combined with evidence of
relevant facts and circumstances, are sufficient to establish causation and the
reasonably certain amount of damages.” Univ. Computing Co. v. Mgmt. Sci.
Am., Inc., 810 F.2d 1395, 1398 (5th Cir. 1987) (internal quotation marks
omitted). An established business’ profits before the unfair competition (e.g.
tortious interference), “together with other facts and circumstances, may
indicate with reasonable certainty the amount of profits lost”. Sw. Battery Corp.
v. Owen, 115 S.W.2d 1097, 1098-99 (Tex. 1938). Nova’s evidence of past profits
and profits that would have been made absent the wrongful conduct, in the light
of the facts and circumstances, is sufficient to permit a reasonable finding of
causation.
Based on the foregoing evidence, there was a sufficient basis for a
reasonable jury to find ECS tortiously interfered with Nova’s employment
agreements. A reasonable jury could have found that those agreements satisfied
the first element of a claim for tortious interference—the existence of a contract
subject to interference. There was also sufficient evidence for a reasonable jury
to find that ECS intentionally interfered with those agreements. The evidence
supports a reasonable jury’s finding that ECS was aware of the agreements; yet,
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No. 07-50832
in contravention of them, and ignoring the warning from Nova lawyers that the
agreements would be enforced through legal action if necessary, continued to
require former Nova managers to load their client information into the ECS
database. Finally, a reasonable jury could also find from the evidence that Nova
suffered damage proximately caused by ECS’ tortious interference.
3.
Next, ECS contends Nova’s evidence of damages, presented by its above-
discussed expert, Malek, is insufficient to support the damages awarded. At
issue is whether Nova adduced competent evidence from which a reasonable jury
could “determine that damage was caused by the breach or interference, and to
assess with reasonable certainty the amount of damage and degree of causation
of the damage by the [unfair competition] relative to other factors”. Univ.
Computing Co., 810 F.2d at 1398.
To recover lost profits under Texas law, the loss amount must be shown
by competent evidence with reasonable certainty. E.g., Sw. Battery Corp.,
115 S.W.2d at 1098.
Where the business is shown to have been already established and
making a profit at the time when the contract was breached or the
tort committed, such pre-existing profit, together with other facts
and circumstances, may indicate with reasonable certainty the
amount of profits lost. It is permissible to show the amount of
business done by the plaintiff in a corresponding period of time not
too remote, and the business during the time for which recovery is
sought. Furthermore, in calculating the plaintiff’s loss, it is proper
to consider the normal increase in business which might have been
expected in the light of past development and existing conditions.
Id. at 1098-99 (citation omitted). “The distinguishing feature between Texas
cases permitting and denying recovery for lost profits is reliance upon routinely
kept business records produced in court to show an evaluation of the business’
decreased profitability based upon objective facts, figures[,] and data . . . .”
Holland v. Hayden, 901 S.W.2d 763, 766 (Tex. App.—Houston [14th Dist.] 1995).
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No. 07-50832
ECS does not dispute Nova’s expert relied upon routinely kept business
records produced in court, including Nova’s financial statements from 1998
through 2006 and its 2002 budget, which was prepared by McIntosh only months
before he left Nova to join ECS. Nor does ECS dispute Nova’s history of
profitability. Rather, ECS claims numerous “flaws” in Malek’s methodology
rendered his damages calculation unreliable, so that the amount of damages
could not be ascertained with reasonable certainty. (These claimed flaws are
discussed supra: attributing all profits lost to wrongful conduct by ECS;
assuming Nova’s at-will employees would remain at Nova forever; accepting
Nova’s 2002 budget; and using “terminal values” to calculate future profits for
perpetuity.)
On the other hand, the claimed flaws potentially affecting Nova’s expert’s
reliability were presented by ECS to the jury; and an expert’s lost-profits
calculation is “not required to be exact”. Howell Crude Oil Co. v. Donna Refinery
Partners, 928 S.W.2d 100, 108 (Tex. App.—Houston [14th Dist.] 1996) (citation
omitted).
Although an award is speculative and cannot be upheld “where there is no
basis for determining how much of the damages suffered resulted from the
wrongful acts of the defendant”, Univ. Computing Co., 810 F.2d at 1398, Nova’s
evidence of past profits and profits that would have been achieved absent the
wrongful conduct, in the light of the facts and circumstances, is sufficient to
permit a reasonable finding of causation. For instance, Nova president
Cummings testified: “[W]hen the four [individual] defendants [former
managers] and then subsequently the employees that they hired left, in addition
to our client base, it basically devastated our office within short order”.
“[A] trier of fact has the discretion to award damages within the range of
the evidence presented at trial”. Howell, 928 S.W.2d at 108 (citation omitted).
Malek opined that Nova had lost profits of $8.1 million resulting from ECS’
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No. 07-50832
unfair competition. ECS’ expert countered that the most Nova could have lost
was $144,260 during the 15 months following ECS’ conduct beginning in early
2002, or a total of $263,000 over the ten years following that conduct. In the
light of Nova’s expert’s calculations, a reasonable jury could find a lesser amount
was more appropriate, such as that awarded by the jury: $1.5 million for past,
and $1 million for future, profits. See id. (upholding award within the range of
evidence).
Similarly, a reasonable fact-finder could also conclude the district court’s
award of $1.5 million for past, and $144,260 for future, profits was appropriate.
Again, Nova does not appeal the district court’s future-profits reduction. As
testimony showed, because the Nova at-will employees could have resigned from
Nova at any time, which could have affected Nova’s profitability, a reasonable
fact-finder could have found $144,260 more appropriate for future lost profits.
ECS also contends Nova’s counsel’s recalculating damages, differently
than his expert, Malek, during closing argument shows Malek’s calculation was
not made with the requisite certainty. The record reflects, however, that ECS
did not object to this argument, and Nova’s counsel’s statement was merely an
alternative argument that Nova was entitled to “a minimum” of $2,266,269 for
past lost profits, and an equal amount for future lost profits.
Accordingly, a reasonable jury could find with reasonable certainty that,
due to ECS’ conduct, Nova suffered the awarded amount of lost-profits.
Therefore, judgment as a matter of law regarding actual damages was properly
denied.
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No. 07-50832
4.
As it does with actual damages, ECS contends there was insufficient
evidence to support the exemplary-damages of $500,000. (We need not address
ECS’ contending they are unwarranted because the evidence was insufficient for
a reasonable jury to find a tort or damages, our having ruled sufficient evidence
existed on those points.)
Exemplary damages may be awarded if clear and convincing evidence
shows Nova’s harm was caused by ECS’ malice, i.e., “specific intent by [ECS] to
cause substantial injury or harm to [Nova]”. TEX. CIV. PRAC. & REM. CODE §§
41.001, 41.003; Marrs & Smith P’ship v. D.K. Boyd Oil & Gas Co., 223 S.W.3d
1, 22 (Tex. App.—El Paso 2005). Specific intent means the defendant “desires
to cause the consequences of his act, or he believes the consequences are
substantially certain to result from it”; and it may be proven by circumstantial
evidence. Marrs & Smith, 223 S.W.3d at 22. At issue, then, is whether there is
substantial evidence from which a reasonable jury could have found, by clear
and convincing evidence, that ECS, through its use of Nova’s confidential
information and tortious interference, desired to substantially injure or harm
Nova, including for Nova to lose profits, or believed that was substantially
certain to result.
Clear and convincing evidence of ECS’ intent to cause specific harm to
Nova could have been found by a reasonable jury from the evidence concerning
ECS’ knowing decisions to: (1) “conquer and dominate” the market; (2) deprive
Nova of its key employees; (3) intentionally ignore the contractual obligations of
the former Nova employees not to disclose Nova’s confidential information; and
(4) compel the former Nova employees to “immediately” input their confidential
Nova client contact information in ECS’ database and begin using it for ECS.
The above-described testimony of a recruiter’s conversation with an ECS
employee, McIntosh, provides further evidence a reasonable jury could consider;
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No. 07-50832
it reflected his joking about leaving Nova and saying he “got the clients and he
would have taken the copier machine and the vehicle if he could have gotten
away with it”. There was also evidence that future-ECS-employees sought and
did business for ECS with Nova clients while still employed by Nova. In
addition, vulgarity about a Nova officer in an email between a former Nova
manager who joined ECS and the ECS president was evidence a reasonable jury
could consider regarding malice. Accordingly, there was substantial, competent
evidence from which a reasonable jury could have found clear and convincing
evidence of ECS’ malice.
In sum, the jury found that ECS misappropriated Nova’s trade secrets and
tortiously interfered with its employment agreements, resulting in actual and
exemplary damages. Regarding ECS’ seeking judgment as a matter of law on
liability and damages, and considering the evidence in the requisite light most
favorable to Nova, with all reasonable inferences made in its favor, the facts and
inferences do not point so strongly and overwhelmingly in favor of ECS that
reasonable jurors could not arrive at a contrary verdict.
C.
Consistent with its objections at trial, ECS maintains the district court
failed to properly instruct the jury on two points: (1) how to determine whether
information is a trade secret under Texas law; and (2) the parameters of lawful
competition. The district court refused ECS’ proposed instruction in that regard.
Abuse of discretion is the standard for reviewing jury instructions objected to at
trial. E.g., Nat’l Hispanic Circus, Inc. v. Rex Trucking, Inc., 414 F.3d 546, 550
(5th Cir. 2005).
“A district court does not abuse its discretion if its instructions, as a whole,
state the law correctly and instruct the jury properly on the legal principles to
be applied to the facts that they will decide.” Id. Three requirements must be
met in order to successfully challenge a jury instruction:
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No. 07-50832
First, the challenger must demonstrate that the charge as a whole
creates “substantial and ineradicable doubt whether the jury has
been properly guided in its deliberations.” Second, even if the jury
instructions were erroneous, we will not reverse if we determine,
based upon the entire record, that the challenged instruction could
not have affected the outcome of the case. Third, the appellant must
show that any proposed instruction it contends should have been
given was offered to the district court and correctly stated the law.
Int’l Ins. Co. v. RSR Corp., 426 F.3d 281, 290-91 (5th Cir. 2005) (citations
omitted).
1.
ECS contends the earlier-discussed six-factor trade-secret test from In re
Bass, 113 S.W.3d at 740, should have been included in the instructions. Texas
courts “weigh the [six] factors in the context of the surrounding circumstances
to determine whether” a trade secret exists. Id. As noted, and contrary to ECS’
contention, this six-factor test was crafted as a tool to be used by courts to
evaluate whether evidence supports the existence of a trade secret. Id.
(explaining the factors are relevant, not dispositive, because it is not possible to
state the precise criteria for determining the existence of a trade secret).
ECS cites no authority holding juries must be instructed on the test.
Furthermore, the instructions provided Texas substantive law on trade secrets,
including what constitutes such a secret, and properly guided the jury in its
deliberations on this point.
2.
ECS also contends the jury should have been instructed on the parameters
of lawful competition. To this end, ECS proposed an instruction with language
derived from Schoellkopf v. Pledger, 778 S.W.2d 897, 904-05 (Tex. App.–Dallas
1989, writ denied) (explaining it is not unfair competition to appropriate all the
customers a firm can obtain—even if this drives the competition out of
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No. 07-50832
business—so long as the means used does not violate the law or the competitors’
legal rights).
As previously stated, to successfully challenge a jury instruction, the
challenger must first show the jury instructions, as a whole, create “substantial
and ineradicable doubt whether the jury has been properly guided in its
deliberations”. Int’l Ins. Co., 426 F.3d at 290. ECS attempts to satisfy this
requirement by claiming its proposed instruction was necessary to guide the jury
on the vague tort of unfair competition. The district court instructed the jury,
however, that it was allowed to find unfair competition only if it found ECS had
engaged in either misappropriation of trade secrets, tortious interference, or
both. The district court instructed the jury on the substantive law of both torts.
Pursuant to the submission of the claims in that manner, the jury was properly
guided in its deliberations.
In sum, for these two points, the district court did not abuse its discretion
by declining to instruct the jury in the manner requested by ECS.
III.
For the foregoing reasons, the judgment is AFFIRMED.
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