Date: 10-23-2005

Case Style: The Bancservices Group, Inc. and Glenn C. Ault v. Strunk & Associates, L.P.

Case Number: 14-03-00797-CV

Judge: John S. Anderson

Court: Fourteenth Court of Appeals of Texas on appeal from the 333rd District Court of Harris County

Plaintiff's Attorney:

John M. Mings and Michael S. McCoy

Defendant's Attorney:

B. Edward Williamson and H. Victor Thomas

Description:

Appellee Strunk & Associates, L.P. sued appellants The Bancservices Group, Inc. and Glenn C. Ault, Jr. for misappropriation of trade secrets, breach of contract, tortious interference, and conspiracy alleging appellants copied and misappropriated Strunk=s trade secrets related to its overdraft privilege program for banks. The jury found Ault and Bancservices misappropriated Strunk=s trade secrets, and Strunk was awarded $601,000 in damages. The trial court also awarded Strunk attorney=s fees against Ault. Bancservices and Ault appeal from the judgment awarding Strunk actual damages and attorney=s fees and argue the following three issues on appeal: (1) there is no evidence Strunk possessed trade secrets as defined under Texas law, and the evidence conclusively establishes the information could not be a trade secret because the information was voluntarily disclosed by Strunk and is commonly known; (2) there is no evidence Ault or Bancservices used Strunk=s alleged trade secrets in the conduct of their business; and (3) the trial court erred in awarding attorney=s fees against Ault. We modify the judgment to delete the award of attorney=s fees and affirm the judgment as modified.

I. Background

In the early 1990's, Sam Davis joined Strunk and Associates (AStrunk@), a bank consulting firm, and began to research a bank overdraft program. Davis and other consultants at Strunk spent at least two years researching the best method for banks to address checking account overdrafts. Strunk developed an overdraft privilege program it marketed to banks in which the banks could increase their profit from overdraft fees while the customers could avoid the embarrassment of a returned check. By 1996, Strunk had sold the program to at least six banks and its business was growing. Each bank agreed to pay Strunk twenty percent of its profit from the program for the first two years of the program.

Davis testified that in the early days of the program, some banks rejected Strunk=s proposal because the banks thought they could implement the program on their own. Later, most of those banks returned to Strunk and were willing to pay for Strunk=s program. Davis explained that while some of the components of the overdraft privilege program are well known in the banking industry, the compilation and application of those components is unique to the Strunk program. The program provides banks with a competitive advantage and is not easy to compile from public sources without obtaining information through improper means.

In August, 1997, Sam Pierce came to work for Strunk. During his employment, the confidential nature of the overdraft privilege program was explained to Pierce. Employees of Strunk were required to sign a confidentiality agreement, but Pierce failed to do so. While working for Strunk, Pierce downloaded files concerning the overdraft privilege program from his computer at Strunk. After leaving Strunk in January, 1998, Pierce entered into an agreement with Bill Brady and Glenn Ault to modify the materials he had taken from Strunk and use those materials plus the knowledge he learned while working at Strunk to market a program in competition with Strunk. Pierce, Brady, and Ault called their new company Impact Financial Services (AImpact@).

After Pierce left Strunk, one of Strunk=s bank customers phoned to tell Strunk that Pierce presented a program to the bank very similar to the overdraft privilege program presented by Strunk. Based on that telephone call and other information, Strunk initiated a lawsuit in federal court against Pierce. In an agreement to settle the federal lawsuit, Strunk granted a license to Impact for approximately $600,000. In July, 1999, Pierce conveyed his interest in Impact to Brady and Ault. A dispute arose between Brady and Ault over ownership of Impact, so in November, 1999, Ault left Impact. Ault and Pierce later agreed to create a new company to market and implement the overdraft privilege program. The new company was called Bancservices Group, Inc. (ABancservices@). The training, concepts, and materials from Bancservices were to be based on the Impact materials that Pierce admitted he substantially derived from Strunk. Although Pierce attempted to obtain a license from Strunk, Pierce defaulted on the payment of the license, so Strunk revoked the license.

Strunk filed suit in state court for misappropriation of trade secrets, breach of contract, tortious interference, and conspiracy. Pierce settled with Strunk prior to trial. The jury found Bancservices and Ault misappropriated trade secrets and that $601,000 would fairly compensate Strunk for any damage caused by that misappropriation.

II. Legal Sufficiency of the Evidence

In their first two issues, Bancservices and Ault contend the evidence is legally insufficient to support the jury=s finding that the overdraft privilege program was a trade secret and that Bancservices and Ault misappropriated that secret. The jury found that Ault and Bancservices misappropriated Strunk and Associates= trade secrets. The jury found $25,000 in damages for Ault=s misappropriation and $576,000 in damages for Bancservices= misappropriation. On appeal, appellants seek a reversal and rendition in their favor based on the legal insufficiency of the evidence to support the jury=s findings.

A. Standard of Review

An appellant attacking the legal sufficiency of an adverse finding on an issue on which he did not have the burden of proof must demonstrate on appeal there is no evidence to support the adverse finding. Formosa Plastics Corp. USA v. Presidio Eng=rs & Contractors, Inc., 960 S.W.2d 41, 48 (Tex. 1998). In reviewing a no evidence issue, we consider only the evidence and inferences that tend to support the finding and disregard all evidence and inferences to the contrary. See Lenz v. Lenz, 79 S.W.3d 10, 19 (Tex. 2002). If more than a scintilla of evidence exists to support the finding, the no evidence challenge fails. Id.

B. Trade Secret

The jury was instructed:

A Atrade secret@ means any process, compilation of information, formula, pattern, or device that gives a business an opportunity to obtain an advantage over competitors who do not know or use it. In order to be a Atrade secret,@ there must be a substantial element of, though not absolute, secrecy and a party must take reasonable measures to protect the secrecy of its trade secrets. Matters of public knowledge or of general knowledge in an industry cannot be Atrade secrets.@ However, a Atrade secret@ need not be novel or unique and it may consist of a combination of simple and otherwise known components. The fact that a trade secret can be discovered by experimentation and other lawful means does not deprive its owner of protection from those acquiring it by unfair means. The personal efficiency, inventiveness, skills and experience that an employee develops through work belong to the employee, not the former employer; however, trade secrets developed by the employee in the course and scope of his employment, and trade secrets disclosed to the employee by the employer, are the property of the employer, not the employee.

To determine whether a trade secret exists, Texas courts apply a six-factor test:

(1) the extent to which the information is known outside of his business;

(2) the extent to which it is known by employees and others involved in his business;

(3) the extent of the measures taken by him to guard the secrecy of the information;

(4) the value of the information to him and to his competitors;

(5) the amount of effort or money expended by him in developing the information;

(6) the ease or difficulty with which the information could be properly acquired or duplicated by others.

In re Bass, 113 S.W.3d 735, 739 (Tex. 2003). The party claiming a trade secret is not required to satisfy all six factors Abecause trade secrets do not fit neatly into each factor every time.@ Id. at 740. The status of 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. Id. at 739. The party claiming trade secret status bears the burden of proof of establishing that something is a trade secret. Stewart & Stevenson Serv. Inc. v. Serv-Tech, Inc., 879 S.W.2d 89, 99 (Tex. App.CHouston [14th Dist.] 1994, writ denied).

Here, Sam Davis testified that while some of the component parts of the overdraft privilege program were generally known in the banking business, the compilation and implementation of those parts were not generally known. In fact, Davis testified that some banks that had initially rejected Strunk because they thought they could create the program on their own, returned to Strunk because they were unable to re-create the program with their general knowledge. All employees of Strunk were required to sign a confidentiality agreement. In addition, the banks who purchased the program were required to sign a confidentiality agreement. The information was valuable to Strunk and its competitors because it provided banks with a competitive advantage. Davis testified that Strunk spent tens of thousands of hours developing, testing, and implementing the program.

Appellants contend the program was generally known in the banking industry and nothing Bancservices was selling was confidential or not generally known. The supreme court has held, however, that while a person or company may gain possession of a competitor=s product, and through inspection and analysis, create a duplicate, the mere fact that such lawful acquisition is available does not mean he may, through a breach of confidence, gain the information in usable form. K & G Oil Tool & Serv. Co. v. G & G Fishing Tool Serv., 158 Tex. 594, 503, 314 S.W.2d 782, 788 (1958). The fact that a trade secret is of such a nature that it can be discovered by experimentation or other fair and lawful means does not deprive its owner of the right to protection from those who would secure possession of it by unfair means. Id. In other words, while Pierce or others could have engaged in the same research done by Davis and Strunk and spent the time to develop the overdraft privilege program, Pierce was not entitled to download Strunk=s information from Strunk=s computer and use that information to compete with Strunk.

We find more than a scintilla of evidence to support the jury=s finding that the overdraft privilege program was a trade secret. Appellants= first issue is overruled.

C. Usage of a Trade Secret

In their second issue, appellants contend the evidence is legally insufficient to show they used the trade secret. The elements of misappropriation of a trade secret are: (1) existence of a trade secret; (2) breach of a confidential relationship or improper discovery of a trade secret; (3) use of the trade secret; and (4) damages. Trilogy Software, Inc. v. Callidus Software, Inc., 143 S.W.3d 452, 463 (Tex. App.CAustin 2004, pet. denied). Use of a trade secret means commercial use, by which a person seeks to profit from the use of the secret. Atlantic Richfield Co. v. Misty Prods., Inc., 820 S.W.2d 414, 421 (Tex. App.CHouston [14th Dist.] 1991, writ denied).

With regard to use of a trade secret, the jury was instructed:

A person Amisappropriates@ a trade secret if he discloses it or uses it (a) in breach of a confidential relationship, or (b) after learning the trade secret from a third person with notice of the facts that it was a secret and that the third person=s disclosure of it was otherwise a breach of duty to the other. Misappropriation does not require that he use it in exactly the form in which he received it; however, it must be substantially derived therefrom. He may be liable even if he uses it with modifications or improvements upon it effected by his own efforts. Liability is avoided when the contribution of the other=s secret is slight and the actor=s process can be said to have been derived from other sources.

Appellants contend the evidence is legally insufficient to show they misappropriated a trade secret because the implementation program being used by Bancservices was developed by Ault, Raymond Huston, and Marty Morris without the benefit of Pierce=s materials and knowledge from Strunk. The record reflects, however, the implementation and training materials used by Bancservices and the materials originally created by Strunk are similar beyond coincidence. Davis testified that the Strunk program refers to a project plan, which is formatted as a spreadsheet. Bancservices uses the same information, calls it a time schedule, and formats it as an outline. Strunk created a series of collection letters to be used by the banks in collecting the overdraft amounts. Strunk uses six to eight letters and recommends they be sent at specific intervals. Bancservices uses the same or similar letters with similar timetables. Strunk spent several months determining how many test accounts should be used by each bank before the bank initiated the overdraft program. Strunk, after much research, learned that five test accounts was the optimal number for the bank. Bancservices also recommends five test accounts. Further, the questions and answers to be used in training bank employees are virtually identical.

The record reflects that Bancservices ultimately acquired the overdraft privilege program through Pierce=s breach of his confidential relationship with Strunk. With regard to whether Bancservices used the trade secret to the disadvantage of Strunk, there was evidence that Bancservices sold their program to several banks in competition with Strunk. Reviewing the evidence in the light most favorable to the verdict, we find legally sufficient evidence that appellants misappropriated Strunk=s trade secret. Appellants= second issue is overruled.

III. Attorney=s Fees

In issue three, Ault argues the trial court abused its discretion in awarding attorney=s fees to Strunk. The final judgment awards Strunk attorney=s fees in the amount of $250,000 for trial of the case, $130,000 in attorney=s fees should Strunk prevail in the court of appeals, and $70,000 in attorney=s fees for a successful appeal to the Texas Supreme Court.

A. Standard of Review

The allowance of attorney=s fees is within the discretion of the trial court and will only be reversed for an abuse of discretion. See Butler v. Arrow Mirror & Glass, Inc., 51 S.W.3d 787, 796 (Tex. App.CHouston [1st Dist.] 2001, no pet.). Attorney=s fees are not recoverable in an action in tort or a suit upon a contract unless provided for by statute or contract between the parties. Holland v. Wal-Mart Stores, Inc., 1 S.W.3d 91, 95 (Tex. 1999).

B. Strunk=s Pleadings

Ault first contends he is not responsible for attorney=s fees under the statute pleaded by Strunk. In its petition, Strunk specifically seeks recovery of attorney=s fees against Sam Pierce, Ault=s co-defendant, and alleges Pierce is liable for attorney=s fees under section 143.002 of the Texas Civil Practice and Remedies Code for accessing computer information in a manner prohibited by Chapter 33 of the Texas Penal Code. The only other reference in Strunk=s petition to attorney=s fees is Strunk=s general request for attorney=s fees in the prayer. Strunk=s prayer, however, does not state a specific basis for recovery of attorney=s fees, or name the party against whom the fees are sought. Strunk argued for the first time, in post-trial briefing, that it was entitled to attorney=s fees against Ault under section 38.001(8) of the Texas Civil Practice and Remedies Code. Pursuant to an agreement between the parties, the issue of attorney=s fees was submitted to the trial court for consideration after the conclusion of the jury trial.

Ault argues Strunk is limited by its petition to recovery of only those attorney=s fees provided for by section 143.002 of the Texas Civil Practice and Remedies Code, under the Harmful Access by Computer statute, because Strunk may only recover attorney=s fees on the specific ground in its petition. To be entitled to a discretionary award of attorney=s fees, a movant must file an affirmative pleading requesting attorney=s fees, unless the issue is waived or tried by consent. In re Pecht, 874 S.W.2d 797, 803 (Tex. App.CTexarkana 1994, no writ). A petition is sufficient if it gives fair and adequate notice of the facts upon which the pleader bases its claim. Horizon/CMS Healthcare Corp. v. Auld, 34 S.W.3d 887, 896B97 (Tex. 2000). A plaintiff need only plead facts which, if true, entitle him to the relief sought. Mitchell v. LaFlamme, 60 S.W.3d 123, 130 (Tex. App.CHouston [14th Dist.] 2000, no pet.) (petition authorized recovery of attorney=s fees even though party failed to plead for attorney=s fees under the proper statute given petition included a general prayer for attorney=s fees and a recitation of facts entitling him to the relief sought); see also Swate v. Medina Cmty. Hosp., 966 S.W.2d 693, 701B02 (Tex. App.CSan Antonio 1998, pet. denied) (upholding award of attorney=s fees based on party=s post-verdict, prejudgment motion for attorney=s fees where party=s request was supported by competent evidence, opposing party was given ample time to respond, and opposing party presented no evidence of surprise or injury).

In this case, although Strunk=s petition seeks attorney=s fees under section 143.002 of the Texas Civil Practice and Remedies Code against Pierce, the pleading includes a general prayer in which Strunk requests attorney=s fees. Additionally, Strunk=s petition details Ault=s breach of certain provisions of the 1998 Impact settlement agreement, which would support a recovery of attorney=s fees under Chapter 38 of the Texas Civil Practice and Remedies Code. See LaFlamme, 60 S.W.3d at 130. In post-trial briefing, Ault objected to Strunk=s inadequate pleading of attorney=s fees. Strunk then responded by detailing its entitlement to attorney=s fees against Ault under Chapter 38. The trial court conducted hearings on the issue of attorney=s fees, during which the parties introduced evidence and argued the merits of Strunk=s claim for attorney=s fees. Based on the foregoing, we conclude Strunk=s pleadings support a claim for attorney=s fees under Chapter 38 against Ault.

Strunk contends for the first time on appeal that it had a contractual right to attorney=s fees under section 6.2 of the Impact settlement agreement, a provision permitting the recovery of attorney=s fees in the event of a breach of the agreement. By failing to present this theory to the trial court, Strunk has waived error on appeal on this issue. Strunk did not specifically plead this portion of the contract in its petition. As detailed above, Strunk only sought statutory recovery of attorney=s fees under Chapter 38. Strunk waived a contractual basis for recovery of attorney=s fees because this argument was not raised in the trial court below and is raised for the first time on appeal. See Tex. R. App. P. 33.1(a); Swink v. Alesi, 999 S.W.2d 107, 110 (Tex. App.CHouston [14th Dist.] 1999, no pet.).

We conclude Strunk=s pleadings are sufficient to support a claim for attorney=s fees against Ault under Chapter 38. Having so concluded, we must next address whether the trial court abused its discretion in awarding Strunk attorney=s fees on this basis.

C. Attorney=s Fees under Chapter 38

Strunk argues it can recover attorney=s fees under section 38.001(8) of the Texas Civil Practice and Remedies Code, which permits the recovery of attorney=s fees for a breach of contract. Strunk argues Ault breached the settlement agreement when he misappropriated trade secrets. Because the settlement agreement was a contract between the parties, Strunk argues Ault is liable for attorney=s fees for the breach of that contract. The jury, however, found that Ault committed the tort of misappropriation of trade secrets and awarded tort damages, not breach of contract damages.

The jury was instructed to consider the following elements of damages: AThe net monetary benefits gained by [Ault and BancServices Group, Inc.] from the misappropriation of Plaintiff=s trade secrets, less that portion of the benefits solely attributable to modifications or improvements, if any, made by the Defendants, not derived from the Plaintiff=s trade secrets.@ As the misappropriation claim was pleaded, tried, and submitted to the jury, it was not solely dependent on contractual terms. The damages question for Strunk=s misappropriation claim instructed the jury on a disgorgement measure of damages, not breach of contract damages. Trade secret damages typically embrace some form of royalty, see Taco Cabana Int=l, Inc. v. Two Pesos, Inc., 932 F.2d 1113, 1128 (5th Cir. 1991), but damages based on the benefits received by the defendant have been upheld. American Precision Vibrator Co. v. Nat=l Air Vibrator Co, 764 S.W.2d 274, 279 (Tex. App.CHouston [1st Dist.] 1989, no writ). For a breach of contract action, the measure of damages is not the benefits received by the defendant, but the loss or damage actually sustained by the plaintiff. Walden v. Affiliated Computer Serv., Inc., 97 S.W.3d 303, 328 (Tex. App.CHouston [14th Dist.] 2003, pet. denied). The jury charge also included a request for exemplary damages, which are not recoverable for breach of contract. See Twin City Fire Ins., Co. v. Davis, 904 S.W.2d 663, 665 (Tex. 1995).

Strunk argues a stipulation made by the parties at trial allows it to recover attorney=s fees. The parties stipulated a finding of liability on the misappropriation of trade secrets claim would be the equivalent of a finding of liability on the breach of contract claim. The parties did not stipulate that a finding of damages on the misappropriation of trade secrets claim would equate to a finding of damages on the breach of contract claim. The record reflects the parties agreed to the following stipulation:

THE COURT: All right. Now, the evidence is closed, the Motions for Directed Verdict have all been ruled upon.

STRUNK=S COUNSEL: Well, we have this issue about the contract and how we=re gonna handle that, the stipulation, the contract, misappropriation, same deal, no, reason to submit the contract.

THE COURT:. . . . All right. We are not submitting a question to the jury as to Mr. Ault=s alleged breach of contract in this matter. We have reached a stipulation of sorts regarding this, but I would like to try to state as accurately as I can; but I invite [counsel for Ault] to interrupt if I=m not stating it correctly because my goal here is to make sure that it=s complete and not go any further than intended. I believe we=ve all agreed that if in fact there was a theft of trade secrets by Ault that that would constitute a breach of contract under the contract claim against him and therefore for that reason there is no need to submit a liability question on contract. That, however, is the extent of the stipulation made by the Defendants because it is their position that there are no contract damages sufficient to support recovery on a contract claim.

Strunk=s counsel sought a further stipulation that a finding of misappropriation would support an injunction as a contractual remedy. Appellants declined the stipulation and the trial court agreed a stipulation was unnecessary because the remedy for breach of contract would be specific performance through injunctive relief, not monetary damages. Although the parties stipulated to a finding of liability on breach of contract, there was no finding as to damages for any breach of contract. To recover attorney=s fees for a breach of contract, the plaintiff must recover damages under the breach of contract action. See Green Int=l, Inc. v. Solis, 951 S.W.2d 384, 390 (Tex. 1997).

Strunk=s misappropriation of trade secrets claim is a tort, and attorney=s fees are not recoverable in tort actions. See Metropolitan Life Ins. Co. v. Haney, 987 S.W.2d 236, 243B44 (Tex. App.CHouston [14th Dist.] 1999, pet. denied). Strunk did not recover damages on its breach of contract claim, and the trial court denied Strunk=s request for injunctive relief based on its breach of contract claim. Because Strunk did not prevail on its breach of contract claim, it was not entitled to attorney=s fees under section 38.001(8) of the Civil Practice and Remedies Code. The trial court, therefore, abused its discretion in awarding attorney=s fees. Ault=s third issue is sustained.

The judgment of the trial court is modified to delete the award of attorney=s fees. The remainder of the judgment is affirmed as modified.

Outcome: The judgment of the trial court is modified to delete the award of attorney=s fees. The remainder of the judgment is affirmed as modified.

Plaintiff's Experts: Unknown

Defendant's Experts: Unknown

Comments: None