File: 060709HF - From documents
transmitted: 02/14/2008
AFFIRM and
Opinion Filed February 14, 2008
In The
Court of Appeals
Fifth
District of Texas at Dallas
............................
No. 05-06-00709-CV
............................
GLOBAL WATER GROUP, INC., Appellant
V.
ROBERT ATCHLEY and
ASPEN WATER, INC., Appellee
.............................................................
On Appeal from the 116th Judicial District
Court
Dallas County,
Texas
Trial Court Cause No.
01-08780-F
.............................................................
OPINION
Before Justices
Moseley, O'Neill, and Lang
Opinion By
Justice O'Neill
Appellant Global Water
Group, Inc.'s motion for rehearing is denied. On the Court's own motion, we withdraw our earlier opinion of January 9, 2008
and vacate our judgment of that date. This is now the opinion of the
court.
Global Water Group, Inc.
appeals a take-nothing judgment notwithstanding the verdict (j.n.o.v.) for Robert Atchley and Aspen Water, Inc. on
Global's claims for misappropriation of trade secrets and conspiracy. It also
appeals a partial summary judgment for Atchley on Global's claims for breach of
a shareholder agreement. In six issues, Global argues the trial court erred
in (1) granting a j.n.o.v. because there is sufficient evidence to support the
jury's verdict, and (2) granting a partial summary judgment because fact issues
exist regarding the shareholder agreement. For the following reasons, we affirm
the trial court's judgment.
Background
In the 1990s, Global
Water Technologies, Inc. See
Footnote 1
(GWT) created the first successful mobile
self-powered, self-contained water purification system. It is undisputed that
GWT treated this system and associated products as trade secrets and required
all employees to sign confidentiality agreements. Robert Atchley was GWT's
president and was familiar with its product line and had access to all of the
claimed trade secrets. Atchley resigned from GWT in 1994.
In 1995, all
of GWT's assets, including its trade secrets, were acquired by Global, who was then known as AMW. GWT and Global remained
legally separate entities, but GWT retained no assets and ceased operating. Four
years later, in 1999, Atchley began manufacturing portable self- sustained water
purification systems through his company Aspen Water Inc. Global sued Aspen and
Atchley claiming conspiracy and misappropriation of trade
secrets.
Following a jury trial,
the jury found Atchley and Aspen had misappropriated Global's trade secrets and that Global suffered one million dollars in
damages based on lost profits. The particular trade secrets found to exist were
(1) a formula used in a “mixed media pod” which is a device used to remove
contaminates from water, and (2) the “sequence of the process” Global used for
water purification. Following the jury's verdict, Atchley and Aspen filed a
motion for judgment notwithstanding the verdict (j.n.o.v.), asserting that
Global failed to prove (1) it had a trade secret in its mixed media formula or
the sequence of the process or (2) Atchley or Aspen used any such alleged
secrets. The trial court granted Atchley and Aspen's motion and entered judgment
that Global take nothing on its claims. This appeal followed.
Standard of Review
A trial court's decision
to grant a judgment notwithstanding the verdict should be affirmed if the evidence is legally insufficient to support one or
more of the jury findings on issues necessary to liability. Wal-Mart Stores,
Inc. v. Miller, 102 S.W.3d 706, 709 (Tex. 2003) (per curiam); Mancorp,
Inc. v. Culpepper, 802 S.W.2d 226, 227 (Tex.1990). Evidence is legally
insufficient where (1) there is a complete lack of evidence of a vital fact; (2)
the court is barred by rules of law or of evidence from giving weight to the
only evidence offered to prove a vital fact; (3) the evidence offered to
prove a vital fact is no more than a scintilla; or (4) the evidence conclusively
establishes the opposite of a vital fact. Lochinvar Corp. v. Meyers, 930
S.W.2d 182, 188 (Tex. App.-Dallas 1996, no writ). In a legal sufficiency review,
we consider the evidence in the light most favorable to the verdict and indulge
every reasonable inference that would support it. City of Keller v.
Wilson, 168 S.W.3d 802, 822 (Tex. 2005). The ultimate test of legal
sufficiency is whether the evidence would enable reasonable and fair-minded
people to reach the verdict under review, crediting favorable evidence if
reasonable jurors could and disregarding contrary evidence unless reasonable
jurors could not. Id. at 827; Deere v. Ingram, 198 S.W.3d 96, 100
(Tex. App.-Dallas 2006, pet. granted).
Trade Secret Protection
A trade secret is any
formula, pattern, device or compilation of information which is used in one's business and presents an opportunity to obtain an
advantage over competitors who do not know or use it. In re Bass, 113
S.W.3d 735, 739 (Tex.2003); Sharma v. Vinmar Intern., Ltd., 231 S.W.3d
405, 424 (Tex.App.-Hous. (14 Dist.) 2007, no pet.). Customer lists, pricing
information, client information, customer preferences, buyer contacts,
blueprints, market strategies, and drawings have all been recognized as trade
secrets. T-N-T Motorsports v. Hennessey Motorsports, 965 S.W.2d 18 at 22
(Tex. App.-Houston [1st Dist.] 1998, pet. dism'd).
To determine whether information
constitutes a trade secret, a court considers the following six factors: (1) the
extent to which the information is known outside the claimant's business; (2)
the extent to which the information is known by employees and others involved in
the claimant's business; (3) the extent of the measures taken by the claimant to
guard the secrecy of the information; (4) the value of the information to the
claimant and to its competitors; (5) the amount of effort or money expended by
the claimant in developing the information; and (6) the ease or difficulty with
which the information could be properly acquired or duplicated by others.
Bass, 113 S.W.3d at 739. The party claiming a trade secret need not
satisfy all six factors because trade secrets do not fit neatly into each factor
every time. Id. at 740.
The mere fact that
knowledge of a product or process may be acquired through inspection, experimentation, and analysis does not preclude
protection from those who would secure that knowledge by unfair means. K
& G Oil Tool & Serv. Co. v. G & G Fishing Tool Serv., 158 Tex.
594, 314 S.W.2d 782, 788 (1958). A trade secret must nevertheless be a secret.
“Secrecy” in this sense is not limited solely to confidentiality, but also
requires that the information “is not generally known or readily ascertainable
by independent investigation.” Trilogy Software, Inc. v. Callidus Software,
Inc., 143 S.W.3d 452, 467 (Tex. App. 2004, pet. denied).
Discussion
Aspen and Atchley moved
for a j.n.o.v. based on their contentions (1) there was no evidence Global had a trade secret and (2) there was no evidence
Atchley or Aspen used any alleged trade secret. To determine whether the trial
court properly granted Global's j.n.o.v, it is necessary to briefly describe the
water purification process at issue and what Global claims are its trade
secrets. Proper water
purification requires three steps. First, large particles are removed by
filtration, then the water is treated with a compound to remove chemicals
(absorption), finally, iodine or UV treatment kills viruses or bacteria in the
water (disinfection). It is not disputed that these three steps are commonly and
generally known and are required for any proper water purification. What Global
contends are its trade secrets are (1) the formula of the compound it used in a
mixed media pod in the second “absorption” step and (2) the “sequence of the
process” it used to purify water.
We first consider whether
there is any evidence Global had a formula that constituted a trade secret. In the absorption stage of water
purification, Global used a “mixed media pod,” a canister containing certain
substances that remove chemicals from water. Global used
KDF See
Footnote 2
and carbon in its pod. It is undisputed that other manufacturers of water
purification systems used “pods” with both carbon and KDF and there was nothing
secret about either the pod or these ingredients. It is the particular ratio of
KDF to carbon that Global used that it asserts is a trade secret. Global however
claims no secret in any discrete formula, but rather an approximate 10:90 ratio
of KDF to carbon. Global asserts this approximate formula is entitled to trade
secret protection because it was different from what others in the industry were
using. To show others in the industry used different ratios, Global relies on
the testimony of its president Alan Weiss. According to Weiss, the manufacturer
of KDF recommended using much more KDF than carbon and others in the industry
used ratios “nowhere close” to the ratio Global used.
The status of
the information claimed as a trade secret must be determined through a comparative evaluation of all the relevant factors,
including the value, secrecy, and definiteness of the information as well as the
nature of the defendant's misconduct. Bass, 113 S.W.3d at 739
(quoting RESTATEMENT (THIRD) OF UNFAIR COMPETITION § 39 cmt. d
(1995)).
We begin by noting the
nature of the misconduct in this case was not particularly egregious. As discussed below, Atchley was not subject to
any type of noncompetition agreement. Thus, under the facts of this case, there
was no misconduct unless there was in fact a trade secret. We thus turn to the
other relevant factors. To prove its formula was a trade secret, Global focuses
almost exclusively on evidence that both it and (five years previously) GWT
treated the formula as a trade secret. Specifically, Global presented evidence
that it guarded its formula, limited access, and required employees to sign
confidentiality clauses. There is no evidence however regarding whether or not
Global's efforts were successful - specifically whether or not its formula was
nevertheless known outside its business.
Further, Global directs
us to no evidence of the value of its formula to its business. Global suggests the formula was necessarily valuable because
Global had developed the first successful self-contained water purification
unit. However, there is no evidence the formula itself was related to the
success of the unit. Specifically, Global directs us to no evidence the formula
was in any way related to the mobility of the unit or other supposedly novel
features of the unit. Weiss did testify that Global's formula removed more
contaminates and performed better than anyone else's. This testimony was however
largely conclusory and Weiss did not attempt to articulate or explain how
Global's formula created better water or how its particular blend gave it a
competitive advantage. Nor did he explain how the Global product performed
differently than any other product on the market. Indeed, when asked about
products that could remove contaminants from water, Weiss responded that he was
not an engineer, scientist, or biochemist. Further, there is no expert testimony
that the quality of Global's water was superior or that Global's process was
cheaper or more efficient. Global has thus failed to point to any evidence to
show its formula was valuable. Likewise, Global has not shown the formula gave
it a competitive advantage.
Moreover, Global directs us to no evidence of the effort or money it took to
create the formula. Compare Water Service
Inc. v. Tesco Chemicals, Inc., 410 F.2d 163, 165 (5th Cir.) (trade secret
existed when it took four years and $18,000 to develop product). This “formula”
had been used for several years and there is no evidence to suggest anyone in
the market place sought, but was unable to duplicate it. Compare id. at
72. (trade secret existed when competitor tried, but failed, to duplicate secret
before misappropriation). Indeed, it appears that if competitors were interested
in determining the formula, it would not have been particularly difficult for
them to have done so. The two ingredients in the pod were well known and were
visibly different. In fact, Aspen presented evidence of Global's formula by
ordering an alleged Global product and sending its contents to a lab for
evaluation. We recognize that the mere fact that knowledge of a product may be
acquired through inspection and analysis does not by itself preclude trade
secret protection. Nevertheless, it is a relevant consideration in determining
whether information was actually a secret. See Bass, 113 S.W.3d at 739.
(in determining trade secret, court considers the ease or difficulty with which
the information could be duplicated by others).
Finally, the imprecise
nature of the information weighs heavily against it being a trade secret. There is no discrete secret formula at issue,
but only an approximate mix of two well-known substances commonly used together.
Given the imprecise nature of formula, we question what information Atchley and
Aspen should be prohibited from using. For example, should they be prohibited
from using a 20:80 ratio, 30:70, 40:60? It thus becomes apparent, it would be
difficult to protect such a “formula,” without prohibiting fair
competition.
That no discrete formula
is claimed also raises a problem in determining whether Aspen or Atchley actually used the trade secret. Actual use or
disclosure of the trade secret is a required element of the tort. Use of the
trade secret means commercial use by which the offending party seeks to profit
from the use of the secret. See Metallurgical Indus. Inc. v. Fourtek,
Inc., 790 F.2d 1195, 1205 (5th Cir.1986); Atlantic Richfield Co. v. Misty
Products, Inc., 820 S.W.2d 414, 422 (Tex.App.-Hous. (14 Dist.) 1991, writ
denied). Evidence of a similar product may give rise to an inference of actual
use under certain circumstances. See Leggett & Platt, Inc. v. Hickory
Springs Mfg. Co., 285 F.3d 1353, 1361 (Fed. Cir. 2002).
Global does
not contend that Aspen used the same formula, but only that its formula was similar. While two products need not be identical
for an inference of use to arise, we nevertheless conclude that similarity under
these circumstances is not sufficient to raise such an inference. The similarity
lie in the ratio of only two of the components of the mixed media pod, KDF and
carbon. As noted above, it is not disputed that others in the industry used
canisters with KDF and carbon. Aspen allegedly “used' Global's trade secret
because its product, like Global's, used much more carbon than KDF. While the
two products were similar in this regard, there were also differences in the
contents of the mixed media pods. For example, Aspen's product contained
“separator pads” that kept the KDF and carbon separate. Global's product on the
other hand used another purifying substance, PM 1000, as well as gravel. In
light of these differences, and the fact that the similarity lie only in the
percentages of two commonly used ingredients, no inference of use arises. We
conclude there is legally insufficient evidence to show misappropriation of the
formula of Global's mixed media pod.
The jury also found
Global possessed a trade secret in the “sequence of the process” in its water purifiers. The evidence shows that Global uses a
three-step water purification process: filtration, absorption, and disinfection.
Global does not dispute that this three-step process is not a trade secret and
is used in virtually all water purification systems. Global has not identified
or described any particular “sequence” that constitutes a trade secret. Global
directs us to no evidence explaining how its “sequence” is different or unique
or produces a superior, cheaper, or efficient result or even what its sequence
is. Because Global has not identified any “sequence of the process” that it
contends was a trade secret, we cannot conclude the trial court erred in
granting a j.n.o.v. on this claim.
Partial Summary Judgment
In 1991, Atchley entered
into a shareholder agreement with the other shareholders of GWT. As part of that agreement, Atchley and the other GWT
shareholders agreed not to engage in any business that competed with GWT for a
period of three years after terminating their association with GWT. Neither GWT
or Global was a party to this agreement. Nevertheless Global sued Atchley for
violating the shareholder agreement. Atchley moved for summary judgment on the
shareholder agreement claim because (1) the covenant not to compete was
unreasonable and thus enforceable, (2) Atchley fully performed his obligations
under the agreement, and (3) Global had no standing because it was not a party
to the agreement.
The standard of review
for a traditional summary judgment is well known. See Nixon v. Mr. Prop. Mgmt. Co., 690 S.W.2d 546, 548
(Tex.1985). Atchley had the burden to demonstrate that no genuine issues of
material fact existed and he was entitled to judgment as a matter of law. See
id. at 548-49.
After reviewing the
agreement under the undisputed facts, we conclude the trial court properly granted Atchley's motion for summary judgment.
Global sued Atchley because it contends the shareholder agreement prohibits
Atchley from competiting against Global. However, the clear terms of the
shareholder agreement only prohibited Atchley from competing against GWT. GWT
and Global are distinct corporate entities. Global acquired GWT's assets, but
the two corporations were not merged and remained legally
distinct.
Further, the undisputed
summary judgement evidence established that Atchley did not reenter the water purification business until more than five
years after resigning from GWT and more than four years after GWT sold all of
its assets and ceased doing business. Global nevertheless asserts the covenant
not compete remains in effect, despite its three year limitation, because
Atchely still owns stock in the defunct GWT. According to Global's position, the
noncompete will run indefinitely if Atchley is unable to divest himself of the
valueless stock. In essence, Global seeks to stand in GWT's shoes for purposes
of the benefits under the agreement, but not for purposes of starting the three
year clock. Global cannot have it both ways. Atchley's relationship with GWT
effectively terminated when GWT sold all of its assets and ceased doing
business. Because Atchley waited more than three years after this date, he did
not violate the noncompetition clause of the shareholder agreement. We conclude
Global has not shown the trial court erred in granting Atchley's motion for
summary judgment on that claim.
Global also asserts the
trial court erred in granting a partial summary judgment on its claim that Atchley breached his fiduciary duty to
Global. Although Atchley moved for summary judgment on Global's breach of
fiduciary duty claim, the trial court did not grant summary judgment on that
claim. Thus, this issue presents nothing to review.
We affirm the trial
court's judgment.
MICHAEL J.
O'NEILL
JUSTICE
060709HF.P05
Footnote
1
Global Water Technologies and appellee Global Water Group are not legally
related entities.
Footnote
2
KDF is a trade name for a water purifying substance.
File Date[02/14/2008]
File Name[060709HF]
File
Locator[02/14/2008-060709HF]