Thomas v. Hughes, 20-50671, 2022 WL 620238, at *1 (5th Cir. Mar. 3, 2022) [Opinion]
Texas attorney Lee Ann Hughes purchased Performance Probiotics, LLC from the company founder Pearcy. At the time of the purchase, Hughes was Pearcy’s attorney – a red flag. In addition to the purchase agreement, PPI agreed to license Pearcy’s proprietary formulation of probiotics at a rate of 14% of net sales with an option to purchase the rights for $100k at the end of five years. But, PPI did not pay the royalties and instead simply used the formulation without payment (a second red flag).
Percy sued in Texas state court an won a verdict of almost $1 million for trade secret misappropriation (by PPI) but just $1 against Hughes for breach of attorney fiduciary duty. But, PPI did not pay the money owed on the judgment — instead filed for bankruptcy. At that point, Percy (as well as PPI’s bankruptcy trustee Thomas) sued Hughes personally for the money owed. The veil-piercing action included allegations of fraudulent transfer pre-bankruptcy, fraud, and breach of fiduciary duty to the company — this time all against Hughes. A jury found that Hughes was liable for all of it — although by that time the interest pushed the award up to $1.5 million. In addition, the jury awarded $1.2 million in punitive (“exemplary”) damages. The district court additionally ordered:
- Disgorgement of $900k in compensations Hughes received from PPI;
- Injunction against Hughes and her new companies from using the trade secret formulation until the judgment is fully satisfied;
- Joint and several liability against Hughes personally for the prior judgment against PPI; and
- Attorney fees of $400k. (This brings the total due to about $4 million).
On appeal, the Fifth Circuit has affirmed (with only a slight modification).
Under Texas law, trade secret misappropriation requires the following three elements:
- existence of a trade secret
- acquisition of the trade secret through a breach of a confidential relationship or improper means; and
- unauthorized use of the trade secret.
Sufficiency of the Evidence: A litigant in federal court must take particular actions at trial in order to preserve a right to appeal a verdict on sufficiency-of-the-evidence grounds. In particular, the issue must be raised first in a pre-verdict R.50(a) JMOL motion; and then the same issue must be renewed as part of a post-verdict R.50(b) JMOL motion. On appeal here, Hughes argued that there was insufficient evidence to prove that Percy’s formulation was a trade secret. Although Hughes made that argument in her R.50(b) motion, she did not make the argument in a pre-verdict R.50(a) motion. On appeal, the Federal Circuit stuck to the rules and refused to consider this particular challenge. “Because Hughes did not challenge the existence of a trade secret or improper use in her initial Rule 50(a) motion, those issues were not properly raised in her post-trial Rule 50(b) motion. We therefore decline to address them on appeal.”
Trade Secret Damages: Although you have to prove damages in a trade secret case, the Texas Supreme Court allows for “flexible and imaginative” approaches. Here though the damages were easy to calculate because they were part of the contract – 14% of net sales + 100,000 for the purchase price. On appeal, the court affirmed the award.
Injunction: Hughes argued that the money paid fully compensated the defendant and thus no injunction was appropriate. The appellate court disagreed:
While it is true that the jury awarded “legally measurable damages” to Pearcy for Hughes’s misappropriation of trade secrets, the history of this case makes clear that such damages, without more, are incapable of remedying “the situation sought to be enjoined.” The Comal County jury originally awarded damages against PPI for breach of contract and misappropriation of trade secrets. But that award did not stop Hughes and companies she controlled from misappropriating Pearcy’s trade secrets again. Moreover, the money damages awarded to Pearcy compensate for past misappropriation, while the injunctive relief was fashioned by the district court to prevent future misappropriation—until the court’s judgment is satisfied, neither Hughes nor her companies have any more right to use Pearcy’s trade secrets than they did before. We agree with the district court that “the evidence adduced at trial and supported by the jury’s verdict shows that without injunctive relief, [Hughes] could continue harming Plaintiffs, which would … defeat the entire purpose of this long, expansive litigation.”