Opinions Released July 20, 2017

In this weekly blog, the Law Offices of Brandy Wingate Voss, PLLC will summarize recent decisions from the Thirteenth Court of Appeals and provide links to decisions on the court’s website.

Super Starr International, LLC v. Fresh Tex Produce, LLC, No. 13-16-00663-CV (Opinion by Justice Rodriguez; Panel Members: Justices Benavides and Hinojosa)

In this interlocutory appeal from a temporary injunction, the Thirteenth Court of Appeals exhaustively analyzed an injunction implemented to protect the plaintiff’s trade secrets, and held—for the first time—that the Texas Uniform Trade Secrets Act preempts all common law claims stemming from the misappropriation of trade secrets.

This case stems from a joint venture between Fresh Tex Produce, LLC (“Distributor”)—a distributor of produce—and Super Starr International, LLC (“Importer”)—an importer of produce grown by Red Starr SPR de R.L. de C.V. in Mexico.

In 2010, the Distributor’s president, Kenneth Alford, spoke with the Importer’s president, David Peterson. The two agreed to a partnership to import, distribute, and sell new “hybrid papayas” grown by Red Starr. Alford, Peterson, and Peterson’s son Lance—who later became president of the Importer—entered into an operating agreement and created an LLC for the distribution of hybrid papayas. The LLC’s operating agreement included a time-limited exclusivity provision, stating that the distributor was the sole and exclusive distributor for papayas exported to the United Stated by the Petersons’ companies. In 2014, a nearly-identical, updated operating agreement took effect with a new exclusivity provision lasting two years. The LLC was very profitable, bringing in net worth income of approximately $1 million per year.

The Distributor staffed the LLC with salespeople, provided warehouse space, and generally housed the LLC and its employees. Kemal Mert Gumus—an Importer employee—then began working at the LLC papaya facility. Although he was responsible only for quality assurance, he began spending time in the sales and shipping offices and was seen taking photos of key documents including the Distributor’s pricing and customer data.

Similarly, Jose Pina—a Distributor employee—resigned after he was caught making unauthorized copies of the shipping information and customer phone numbers. Two weeks after resigning, Pina was hired by the Importer.

When the exclusivity provision expired in 2015, the parties were unable to agree on a new provision. In 2016, the importer informed the Distributor that it would no longer supply the hybrid papayas but would begin distributing them on its own. The Importer sent a promotional e-mail announcing the change to all of the LLC’s customers, incorporating a sales brochure very similar to that used by the Distributor.

In October 2016, the Distributor filed suit for injunctive relief, asserting eight different causes of action against the Importer, Peterson, Red Starr, and Gumus (collectively, “Defendants”). The claims included breach of partnership agreement, breach of joint enterprise, breach of joint venture agreement, breach of fiduciary duty, Texas Uniform Trade Secrets Act (“TUTSA”), Texas Theft Liability Act (“TTLA”), tortious interference with contract, and aiding and abetting in the breach of a fiduciary duty.

The trial court set a temporary injunction hearing. Alford testified that the LLC’s customer lists contained trade secrets because they contained more than 10,000 customers built up and filtered over time as reliable purchasers of a specific product. The trial court found that the Importer established a probable right to relief on its claims and entered a temporary injunction. The court ordered Defendants to continue an exclusive business relationship with the LLC and to preserve related electronic data, while also prohibiting Defendants from using any LLC trade secrets, conducting business in competition with the LLC, diverting of LLC business, or soliciting LLC customers.

The defendants filed an interlocutory appeal.

Held: The only claim sufficient to support the injunction was the Distributor’s claim under the Texas Uniform Trade Secrets Act. Even then, the injunction was vague and overbroad. The Thirteenth Court dissolved the majority of the injunction and remanded the portions based on the Distributor’s TUTSA claim for further clarification.

Defendants argued: (1) the Distributor’s claims were legally insufficient to support their probable right to recovery; (2) the non-competition provisions of the injunction were overbroad and insufficiently specific; and (3) the evidence was legally insufficient to support the injunction provision as to the preservation of electronic data.

The Thirteenth Court recited the elements necessary for a temporary injunction: (1) a claim; (2) a probable right to recovery; and (3) probable imminent irreparable injury pending trial. The court then addressed each of Defendants’ points of error in turn, reviewing the injunction for an abuse of discretion.

Probable Right to Recovery

The court began by examining the Distributor’s probable right to recovery, splitting the Distributor’s claims into two categories: the partnership-related claims supporting the exclusivity provisions of the injunction, and the claims related to trade secrets supporting the non-competition provisions.

Exclusivity Restrictions

The court began by examining the Distributor’s probable right to recovery under the causes of action related to the partnership and joint venture, supporting the exclusivity restrictions.

Breach of Partnership Agreement

First, the Thirteenth Court of Appeals held that the LLC was not a partnership. Not only did the operating agreement explicitly provide that it was not a partnership or joint venture, the LLC was formed under the Business Organizations Code to be governed as a limited liability company and not a partnership. Although the Distributor highlighted two points in Alford’s testimony when he referred to the LLC as a “partnership,” he also stated that the partnership was incorporated as an LLC.  Moreover, the context of Alford’s statements revealed that he used the word “partner” in the colloquial sense, rather than the legal sense. Thus, there was legally insufficient evidence that the LLC was a partnership.

Breach of Joint Venture and Joint Enterprise

The courts have held that there is no legal difference between a joint venture, joint enterprise, and partnership. Thus, for the same reasons, the LLC was not a joint venture or joint enterprise.

Exclusivity Provision

The Thirteenth Court also addressed the nature of the injunctive exclusivity requirements. Defendants complained that the exclusivity aspect of the injunction was not supported by the terms of the parties’ agreement because the exclusivity provision had expired. The Distributor however, argued the exclusivity provision was ambiguous, and the trial court properly preserved exclusivity as the status quo. Specifically, the Distributor argued that the phrase “this portion of the Agreement shall apply for two years” was ambiguous as to which portion of the operating agreement it governed. The Thirteenth Court, however, held that the provision was not ambiguous and clearly referred to the immediately preceding sentence: the exclusivity clause. This interpretation was supported by other phrases in the contract, which referred to “renewing” the relevant portion of the agreement.

The Thirteenth Court thus held that there was no evidence to support the injunction as to the claims for partnership, joint venture, or joint enterprise, and reversed the exclusivity portions of the injunction.

Non-Competition Provisions

The Thirteenth Court next turned to the non-competition provisions, which were based on the Distributor’s claims for breach of fiduciary duty and aiding and abetting the breach; the Texas Uniform Trade Secrets Act; the Texas Theft Liability Act; and tortious interference with contractual relations.

Breach of Fiduciary Duty

First, regarding the breach of fiduciary duty claim, the court noted that the Distributor framed the argument so as to hinge entirely upon the court’s disposition of the exclusivity provision. Yet, the court found that the exclusivity provision expired on December 31, 2015. Moreover, the Distributor did not identify any evidence to support the breach element of its claim.

Even if the Distributor had identified relevant evidence to support its claim, however, the Thirteenth Court noted that the Distributor’s claim for breach of fiduciary duty relied on the same premise as its claim under the TUTSA. Specifically, the Distributor could not poach customer accounts or LLC employees without using the Distributor’s trade secrets. Yet, the TUTSA contains a preemption provision.

Because there was very little Texas case law on the preemption provision, the Thirteenth Court examined case law from other states and from the federal courts to determine its effect on the Distributor’s breach of fiduciary duty claim. Other states with similar provisions have held that similar trade secrets statutes preempt common law claims that are based on the misappropriation of a trade secret. The Thirteenth Court gave the same effect to the preemption provision in the TUTSA. Thus, the Distributor’s breach of fiduciary duty claim was preempted and could not support the temporary injunction.

Aiding and Abetting Breach of Fiduciary Duty

Similarly, the Distributor’s aiding and abetting claim—the only claim asserted against Red Starr—hinged on the success of the underlying breach of fiduciary duty claim. Since there was no breach of fiduciary duty claim, there could be no aiding and abetting such a breach.

Texas Uniform Trade Secrets Act

Next, the court examined the Distributor’s TUTSA claim. Rather than challenging the legal sufficiency of the Distributor’s TUTSA claim, Defendants argued that the non-competition injunctive provisions contradicted the portions of the operating agreement that (a) allowed the Importer to engage in “other business” in competition with the LLC, and (b) gave the Importer access to the LLC’s records.

However, the court of appeals noted that there was another explicit provision in the agreement mandating confidentiality of the records inspected by the Importer. The provision allowing inspection of the LLC’s records did not negate the confidentiality provision, but was read in conjunction with it. Similarly, the provision in the operating agreement allowing the Importer to engage in “other business” was expressly subject to the confidentiality provision, and the agreement even stated that a breach of confidentiality would entitle the non-breaching party to an injunction. Furthermore, the trade secrets at issue belonged to the LLC; they were not property of the individual members of the LLC such that the importer could use the information in a competing business. Finally, although the agreement stated that the members were not required to disclose other business opportunities, it did not state that the members could take opportunities from the LLC. Thus, the trial court did not abuse its discretion in restraining competitive conduct based on the Distributor’s TUTSA claim.

Texas Theft Liability Act

Next, Defendants cited Glattly v. Air Starter Components, Inc. 332 S.W.3d 620 (Tex. App.—Houston [1st Dist.] 2010, pet. denied) for the rule that the TTLA does not support injunctive relief. The Distributor did not respond to this argument. The Thirteenth Court of Appeals agreed with Defendants and held that the TTLA could not support the injunction.

Tortious Interference with Existing and Prospective Contractual Relations

Defendants also challenged the legal sufficiency of the Distributor’s tortious interference claims.

First, the Thirteenth Court cited Funes v. Villatoro, 352 S.W.3d 200 (Tex. App.—Houston [14th Dist.] 2011, pet. denied), for the rule that a party alleging tortious interference must establish that the defendant interfered with a specific contract. The Distributor did not identify or present evidence of a specific existing contract with which Defendants interfered to support the injunctive relief. Thus, there was legally insufficient evidence of tortious interference with an existing contract.

Similarly, with regard to prospective contractual relations, the Thirteenth Court cited Faucette v. Chantos, 322 S.W.3d 901 (Tex. App.—Houston [14th Dist.] 2010, no pet.), for the rule that competitive activity does not constitute interference. Yet, the only specific prospective contract the Distributor could identify was the business conducted between the LLC and its customers for hybrid papayas. The defendants were not contractually required to supply the papayas after the exclusivity period ended, so the alleged interference was mere competitive activity. Moreover, the Distributor did not present any evidence that it could provide the hybrid papayas to its customers without Defendants’ supply, and thus failed to show any evidence of harm.

In sum, the Thirteenth Court held that the trial court abused its discretion by ordering injunctive relief based on any of the Distributor’s claims other than the TUTSA claim.

Overbreadth and Vagueness.

Defendants next claimed that the injunction was overbroad because it prevented lawful activities, and insufficiently specific because it did not clearly indicate what actions would be in violation. The Thirteenth Court reiterated that a trial court abuses its discretion if it enjoins lawful activities where such actions are divisible from the impermissible activity. Furthermore, the injunction must be definite, clear, and precise to ensure that the defendant is adequately informed of the acts enjoined.

Turning to the specific prohibitions contained in the injunction, the Thirteenth Court quoted provisions prohibiting Defendants from “soliciting or conducting business with [the Distributor’s] customers or growers,” or the accounts of the LLC. The testimony and arguments before the trial court revealed that the parties interpreted who qualified as an LLC “customer” differently—Alford testified the LLC had 10,000 to 12,000 customers, while Defendants estimated approximately 24 customers. Furthermore, because the exclusivity provision had expired, Defendants were prohibited only from conducting business to the extent that it required misappropriation. Yet, as written, the injunction prohibited Defendants from mass advertising with no trade secrets because it might solicit the LLC’s customers. Thus, the injunction was overbroad and vague.

The court next analyzed the provisions of the injunction prohibiting Defendants from diverting business opportunities away from the LLC. Again, these provisions were overbroad because the exclusivity provision had dissolved and the Distributor’s TUTSA claim could not support a prohibition on all competitive activity.

Finally, the court examined the portion of the injunction prohibiting the use of trade secrets or confidential information owned by the LLC or the Distributor. The order did not define “trade secrets.” Furthermore, in its findings, the trial court referenced Gumus’s activities and—after listing multiple specific pieces of confidential data such as customer lists and rates—used the phrase “and other confidential information.” This phrase created further ambiguity regarding what was encompassed within “other confidential information” and thus what was enjoined.

Consequently, Defendants’ second issue was sustained.

Preservation of Electronic Information

Defendants further argued that the preservation of electronic information—as orderedby the trial court—was not raised at the injunction hearing, nor was it supported by sufficient evidence. The Thirteenth Court agreed, noting that the Distributor presented no evidence of probable, imminent, irreparable harm related to the electronic information. Moreover, spoliation is governed by common law, and the trial court cannot deviate from the common law doctrine without sufficient evidence.

In summary, the court dissolved five of the eight prohibitions in the injunction—those relating to the continued provision of papayas to the Distributor rather than directly to customers; the diversion of business opportunities; and the preservation of electronic information. The court remanded the provisions related to the use of trade secrets and the solicitation of business for the trial court’s clarification and modification.

Read the Full Opinion Here

Leach v. State, No. 13-16-00492-CR (Memorandum Opinion by Justice Rodriguez; Panel Members: Justices Contreras and Benavides)

In this appeal from a conviction for aggravated assault with a deadly weapon, the Thirteenth Court of Appeals analyzed whether a witness’s testimony regarding the defendant’s past acts required a mistrial.

On September 13, 2015, the police were dispatched to investigate a fight between David Alton Leach, Jr. and his wife, Jessica Leach. David was in the driveway of the home when police arrived, and he claimed he had been trying to arrange a visit with his son, D.L., when Jessica hit him in the face. Jessica, however, claimed David choked her and pulled a knife. The police observed red marks on Jessica’s throat. David was arrested and later indicted for aggravated assault with a deadly weapon.

David filed a motion in limine, and the State agreed to approach the bench prior eliciting testimony regarding specific issues, such as David’s prior offenses and misconduct.

During trial, Jessica testified that she was at her brother’s house on the day of the offense, and David visited because he wanted to restart their relationship. When Jessica refused, David choked her and drew a knife, asking Jessica to stab him but leading Jessica to believe that David in fact wanted to stab her. When Jessica’s brother appeared, David stopped, and Jessica called the police. 

Jessica also testified that the couple moved frequently for David’s work when they were still together. The State asked what job or type of work David had, and Jessica testified that he would like to go into the oil field because they don’t run background checks. David’s counsel objected to relevance, and the court sustained the objection. David moved for a mistrial, but the trial court instead instructed the jury to disregard the statement.

Later, Jessica explained why she separated from David, and why one of her children, R.L., did not live with her. Jessica stated that R.L. lived with a maternal aunt, and the State asked why. Jessica responded that CPS had become involved, and that she had “finished the whole thing” but David had not. David’s counsel objected to relevance, and the trial court sustained the objection. David’s counsel then asked for amistrial, but the court gave another instruction to disregard instead.

The jury convicted David of aggravated assault with a deadly weapon and sentenced him to five years’ confinement. David appealed, arguing that the trial court erred by refusing to grant a mistrial.

Held: The alleged error was not preserved and was nonetheless meritless. The trial court’s judgment of conviction was affirmed.

On appeal, David claimed that the State intentionally elicited Jessica’s prejudicial testimony. The State argued, however, that David waived the alleged error because he objected only as to relevance. The Thirteenth Court of Appeals agreed with the State, holding that any error was waived.

The court also noted that even if David had preserved error, Jessica’s statements would not have warranted a mistrial. Jessica’s statements about David’s “background” were vague and did not reveal any prior misconduct. Furthermore, the State’s questions were not framed so as to elicit testimony about David’s past acts; Jessica volunteered the information. Thus, even if David had preserved error regarding the need for a mistrial, the trial court’s instructions to disregard were sufficient and a mistrial was not warranted.

The Thirteenth Court thus affirmed David’s conviction.

Read the Full Opinion Here