Capstone Associated Services, Ltd. et al v. Organizational Strategies, Inc. et al
Filing
70
MEMORANDUM AND ORDER granting Defendants' Motion to Dismiss or for Summary Judgment 4 as to the TUTSA claim and the common law trade secret misappropriation claim, and denying Motion as to the breach of contract claim. (Signed by Judge Nancy F Atlas) Parties notified.(TDR, 4)
United States District Court
Southern District of Texas
ENTERED
IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF TEXAS
HOUSTON DIVISION
CAPSTONE ASSOCIATED
SERVICES, LTD., et al.,
Plaintiffs,
v.
ORGANIZATIONAL STRATEGIES,
INC., et al.,
Defendants.
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August 14, 2019
David J. Bradley, Clerk
CIVIL ACTION NO. H-15-3233
MEMORANDUM AND ORDER
This case is before the Court on the Motion to Dismiss or in the Alternative for
Summary Judgment (“Motion”) [Doc. # 27] filed by Defendants Organizational
Strategies, Inc. (“OSI”), Nicolette Hendricks, William Hendricks, Integration Casualty
Corp., System Casualty Corp., and Optimal Casualty Corp., to which Plaintiffs
Capstone Associated Services, Ltd. and Capstone Associated Services (Wyoming),
Limited Partnership (collectively, “Capstone”) filed a Response [Doc. # 35].
Defendants filed a Reply [Doc. # 37].
After a stay pending arbitration of other claims in the lawsuit, the case was
reinstated on the Court’s active docket and Defendants filed a Supplemental Brief
[Doc. # 62] in support of their Motion. Plaintiffs filed a Supplemental Response [Doc.
# 63], and Defendants filed a Supplemental Reply [Doc. # 64]. On August 6, 2019,
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the parties presented oral argument to the Court in support of their respective
positions.
The Court has carefully reviewed the full record and applicable legal
authorities. Based on that review, the Court grants the Motion as to the common law
trade secret misappropriation claim and the Texas Uniform Trade Secrets Act
(“TUTSA”) claim, and denies the Motion as to the breach of contract claim.
I.
BACKGROUND
A captive insurance company is a property and casualty insurance company
specifically established to insure the risks of an associated business. Plaintiffs and
their affiliates offer comprehensive captive management plans, including “Captive
Planning” services.
Capstone entered into a Services Agreement [Doc. # 21-1] with Defendants to
provide services in connection with the formation and administration of three captive
insurance companies – Integration Casualty Corp., System Casualty Corp., and
Optimal Casualty Corp. (collectively, the “Captives”). The Services Agreement
included a limited license for Defendants to receive and use Capstone’s “Documents,”
defined in the Services Agreement to mean “documents prepared by or at the direction
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of Capstone for the Companies,1 including but not limited to insurance policies,
insurance contracts, insurance coverage agreements, reinsurance agreements and
treaties, and loan agreements.” See Services Agreement, Art. V.
The Services
Agreement provided that the license would expire upon the termination of the
agreement.2
In 2012, Defendants expressed concern regarding the Captives’ insurance
polices and potential tax implications. In connection with those concerns, Mrs.
Hendricks requested certain policy and pricing information from Capstone. Capstone
alleges that it provided the documents and information to Defendants to address these
concerns, having been assured by Mrs. Hendricks that the information would not be
redistributed, copied, or provided to any party other than Defendants and their
accounting firm. Capstone alleges that Defendants did not intend to keep the
information confidential and, instead, intended to share the information “with an
unauthorized third party that is one of Plaintiffs’ competitors” – specifically Intuitive
1
“Companies” is a defined term in the Services Agreement, referring to the three
Captives. See Services Agreement, p. 1.
2
The Services Agreement had an initial mandatory term of three years, ending
December 31, 2013. See Services Agreement, Art. IV, ¶ 4.6. The term would
automatically renew for an additional three-year term unless written notice of
termination was given by July 1, 2012. See id. Every three years thereafter the
Services Agreement would automatically renew unless terminated upon sixteen
months prior written notice of termination. See id.
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Captive Solutions, LLC (“Intuitive”). See Amended Complaint [Doc. # 21], ¶ 23.
Capstone did not, in the Amended Complaint, in its briefing, or during oral argument,
identify any documents it provided to Defendants in 2012 that Defendants were not
entitled to receive under the terms of the Services Agreement.
Capstone alleges that the Services Agreement terminated effective
December 31, 2012. Capstone further alleges that, at that point, Defendants were
contractually obligated to return Plaintiffs’ documents to Capstone. Capstone alleges
that Defendants failed to return the documents and, instead, disseminated copies of the
documents to a second competitor.
Capstone filed this lawsuit in Texas state court, asserting causes of action for
trade secret misappropriation, violation of TUTSA, and breach of contract.
Defendants removed the case to federal court, then filed their Motion to Dismiss. The
Court granted the Motion to Dismiss the trade secret misappropriation and TUTSA
claims, with leave to replead. See Memorandum and Order [Doc. # 18]. Plaintiffs
then filed an Amended Complaint, again asserting each of the three claims.
Defendants filed the pending Motion.
Meanwhile, Plaintiffs sought and obtained an order from this Court compelling
arbitration pursuant to the arbitration provision in the parties’ Engagement Letter. See
Memorandum and Order [Doc. # 42]. The Engagement Letter required arbitration of
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disputes relating to or arising out of services provided by the Feldman Law Firm LLP
and its principal attorney Stewart Feldman (collectively, “Feldman”), who were the
attorneys for Capstone in connection with its business of providing planning services
for captive insurance companies. The Final Arbitration Award [Doc. # 49-1] was
issued February 25, 2019, and resolved issues not asserted in this lawsuit.
Following entry of the Final Arbitration Award, this case was reinstated on the
Court’s active docket. The parties filed supplemental briefing on the pending Motion,
and presented oral argument in support of their respective positions. The Motion is
now ripe for decision.
II.
APPLICABLE LEGAL STANDARDS
A.
Standard for Rule 12(b)(6) Motion to Dismiss
A motion to dismiss under Rule 12(b)(6) of the Federal Rules of Civil
Procedure is viewed with disfavor and is rarely granted. Turner v. Pleasant, 663 F.3d
770, 775 (5th Cir. 2011) (citing Harrington v. State Farm Fire & Cas. Co., 563 F.3d
141, 147 (5th Cir. 2009)). The complaint must be liberally construed in favor of the
plaintiff, and all facts pleaded in the complaint must be taken as true. Harrington, 563
F.3d at 147. The complaint must, however, contain sufficient factual allegations, as
opposed to legal conclusions, to state a claim for relief that is “plausible on its face.”
See Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009); Patrick v. Wal-Mart, Inc., 681 F.3d
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614, 617 (5th Cir. 2012). When there are well-pleaded factual allegations, a court
should presume they are true, even if doubtful, and then determine whether they
plausibly give rise to an entitlement to relief. Iqbal, 556 U.S. at 679.
B.
Summary Judgment Standard
Summary judgment is proper only if the pleadings, depositions, answers to
interrogatories, and admissions in the record, together with any affidavits filed in
support of the motion, demonstrate that there is no genuine issue as to any material
fact, and that the moving party is entitled to judgment as a matter of law. See FED. R.
CIV. P. 56(a); Bacharach v. Suntrust Mortg., Inc., 827 F.3d 432, 434 (5th Cir. 2016).
The moving party bears the burden of demonstrating that there is no evidence to
support the nonmoving party’s case. Celotex Corp. v. Catrett, 477 U.S. 317, 325
(1986); Cannata v. Catholic Diocese of Austin, 700 F.3d 169, 172 (5th Cir. 2012). If
the moving party meets this initial burden, the burden shifts to the nonmovant to set
forth specific facts showing the existence of a genuine issue for trial. See Brandon v.
Sage Corp., 808 F.3d 266, 270 (5th Cir. 2015) (citing Bayle v. Allstate Ins. Co., 615
F.3d 350, 355 (5th Cir. 2010)). The Court construes all facts and considers all
evidence in the light most favorable to the nonmoving party. See Guar. Bank & Trust
Co. v. Agrex, Inc., 820 F.3d 790, 794 (5th Cir. 2016).
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III.
TUTSA CLAIM
TUTSA applies “to the misappropriation of a trade secret made on or after
[September 1, 2013].” See In re Mandel, 578 F. App’x 376, 384 n.8 (5th Cir. Aug.
15, 2014) (citing Uniform Trade Secrets Act, 83rd Leg. R.S., ch. 10 § 3, 2013 TEX.
GEN. LAWS 12, 14); Sisoian v. Int’l Bus. Machines Corp., 2014 WL 4161577, *2 n.4
(W.D. Tex. Aug. 18, 2014). In this case, Plaintiffs allege, and the record establishes,
that by the end of June 2012, Defendants had obtained documents and information
from Plaintiffs. It is these documents that Plaintiffs allege Defendants improperly
used in violation of TUTSA. Capstone does not identify in the Amended Complaint
or in their briefing, any alleged misappropriation after September 1, 2013. Indeed,
during oral argument, Plaintiffs’ counsel conceded that he was not aware of any postSeptember 1, 2013, misappropriations. Therefore, TUTSA does not apply to the
alleged misappropriation and that claim is dismissed.
IV.
TRADE SECRET MISAPPROPRIATION CLAIM
Absent the applicability of TUTSA, common law trade secret misappropriation
law applies. See id. To prevail on a trade secret misappropriation claim under Texas
law, “a plaintiff must show that (1) a trade secret existed, (2) the trade secret was
acquired through a breach of a confidential relationship or discovered by improper
means, and (3) the defendant used the trade secret without authorization from the
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plaintiff.” GE Betz, Inc. v. Moffitt-Johnston, 885 F.3d 318, 325 (5th Cir. 2018).
Defendants argue that Plaintiffs have failed to allege acquisition through improper
means, and failed to allege use of the trade secrets.
A.
Obtaining the Trade Secrets
1.
Texas Legal Requirements
An essential element of a trade secret misappropriation claim is that “the trade
secret was acquired through a breach of a confidential relationship or discovered by
improper means.” Id. Stated differently, “trade secret law protects against . . . any
taking that occurs through breach of a confidential relationship or other improper
means.” GlobeRanger Corp. v. Software AG United States of Am., Inc., 836 F.3d 477,
486 (5th Cir. 2016) (emphasis added).
The Court in its Memorandum and Order entered December 23, 2015, stated
that the Texas common law trade secret misappropriation claim requires a showing
that “the trade secret was acquired through a breach of a confidential relationship or
discovered by improper means . . ..” See Memorandum and Order [Doc. # 18], p. 4
(quoting Spear Marketing, Inc. v. Bancorpsouth Bank, 791 F.3d 586, 600 (5th Cir.
2015)). During oral argument, Capstone’s counsel stated – somewhat cryptically –
that the Spear case is viewed with disfavor and is no longer considered a correct
statement of the law. Capstone argues that the trade secret misappropriation claim
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does not require that the information be acquired through breach of a confidential
relationship. Capstone contends that the claim requires only that the disclosure of the
information was a breach of the relationship. Capstone relies on a 1958 decision from
the Texas Supreme Court quoting a portion of the Restatement of Torts: “One who
discloses or uses another’s trade secrets, without a privilege to do so, is liable to the
other if (a) he discovers the secret by improper means, or (b) his disclosure or use
constitutes a breach of confidence reposed in him by the other in disclosing the secret
to him.” Hyde Corp. v. Huffines, 158 Tex. 566, 575 (Tex. 1958); see also Daniels
Health Sciences, LLC v. Vascular Health Sciences, LLC, 710 F.3d 579, 583 (5th Cir.
2013). The Texas courts have consistently, and recently, stated that misappropriation
of trade secrets under Texas law requires that the defendant have acquired the trade
secret “through a breach of a confidential relationship or through other improper
means.” See Universal Plant Servs., Inc. v. Dresser-Rand Grp., Inc., 571 S.W.3d 346,
360 (Tex. App. – Houston [1st Dist.] 2018, no pet.) (citing Trilogy Software, Inc. v.
Callidus Software, Inc., 143 S.W.3d 452, 463 (Tex. App. – Austin 2004, pet. denied));
Lamont v. Vaquillas Energy Lopeno Ltd., LLP, 421 S.W.3d 198, 210 (Tex. App. –
Dallas 2013, review denied) (citing Twister B.V. v. Newton Research Partners, LP,
364 S.W.3d 428, 437 (Tex. App. – Dallas 2012, no pet.); Rusty’s Weigh Scales &
Serv., Inc. v. N. Tex. Scales, Inc., 314 S.W.3d 105, 109 (Tex. App. – El Paso 2010, no
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pet.)). Likewise, the Fifth Circuit has repeatedly, both before and after Daniels
Health, identified the second element as they did in Spear, requiring that “the trade
secret was acquired through a breach of a confidential relationship or discovered by
improper means.” See Tewari De-Ox Sys., Inc. v. Mountain States/Rosen, L.L.C., 637
F.3d 604, 610 (5th Cir. 2011) (citing Phillips v. Frey, 20 F.3d 623, 627 (5th Cir.
1994)); accord, GE Betz, Inc. v. Moffitt-Johnston, 885 F.3d 318, 325 (5th Cir. 2018);
GlobeRanger Corp. v. Software AG United States of Am., Inc., 836 F.3d 477, 486 (5th
Cir. 2016). Based on this clear and recent legal authority, binding on this federal
district court, the Court identifies the second element of the misappropriation of trade
secret claim as “the trade secret was acquired through a breach of a confidential
relationship or discovered by improper means.”
2.
Capstone’s Allegations
Capstone’s allegations indicate that Defendants acquired the trade secrets in
connection with a valid license in the parties’ Services Agreement. Capstone alleges
that Defendants later breached the Services Agreement and the license contained in
that Agreement by allegedly “using” the trade secrets by disclosing them to third
parties.
Capstone conflates the element of improper acquisition with element
requiring “use” of the alleged trade secrets.
During oral argument, however,
Capstone’s attorney conceded that, although Defendants did not possess the
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documents in question until they were provided in response to Mrs. Hendricks’s
request, Defendants were entitled to request and obtain the documents under the
Services Agreement. Acquisition of the alleged trade secrets pursuant to the Services
Agreement, therefore, did not constitute acquisition or discovery “through improper
means” and thus fails to satisfy this element of a claim for trade secret
misappropriation.
3.
Acquisition Through Breach of a Confidential Relationship
In the Amended Complaint, Plaintiffs allege also that Defendants obtained the
documents and information relating to policy pricing, policy coverage and risk
diversification “through a breach of a confidential relationship” because Defendants,
through Mrs. Hendricks, promised that the information would not be redistributed,
copied or delivered to any other party except Defendants’ accounting firm and only
for accounting and pricing analysis purposes while “knowing all along she would be
sharing the trade secrets with an unauthorized third party that is one of Plaintiffs’
competitors.” See Amended Complaint, ¶ 23. As an initial matter, Capstone has
failed to allege a factual basis for the existence of a confidential relationship. For
purposes of a misappropriation of trade secret claim under Texas common
law,“‘confidential relationship’ means a relationship in which the owner of a trade
secret discloses it in confidence so as to place the other party under a duty to keep his
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secret.” Kana Energy Servs., Inc. v. Jiangsu Jinshi Mach. Grp. Co., 565 S.W.3d 347,
352 (Tex. App. – Houston [14th Dist.] 2018, no pet.) (internal quotation and citation
omitted). The Services Agreement specifically grants Defendants the right to “audit,
examine, and make copies of its books and accounts maintained by Capstone pursuant
to this Agreement.” See Services Agreement, Art. IV, ¶ 4.1(k). The Services
Agreement also grants Defendants a “limited, non-exclusive license to use certain
Documents3 delivered from time-to-time to [them] by Capstone.” See id., Art. V,
¶ 5.3. The License provision includes an acknowledgment by Defendants that “the
use and possession of such Documents under this license shall at all times remain
subject to the requirements of this Agreement.” Id. Capstone, in drafting the Services
Agreement, did not identify a confidential relationship between the parties or impose
a duty of confidentiality on Defendants.
Capstone cites the provision in the Services Agreement that acknowledges that
“all Documents shall remain the property of Capstone, and shall be returned to
Capstone or destroyed upon the termination of this Agreement for whatever reason.”
See id., Art. V, ¶ 5.2. This provision, entitled “Ownership Retained by Capstone,”
3
As noted above, “Documents” is defined in the Services Agreement to mean
“documents prepared by or at the direction of Capstone for the Companies,
including but not limited to insurance policies, insurance contracts, insurance
coverage agreements, reinsurance agreements and treaties, and loan
agreements.” See Services Agreement, Art. V.
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does not address how Defendants are to use the Documents while properly in their
possession. Instead, it addresses only Capstone’s ownership and right to insist on
return of the documents following termination of the Services Agreement.
Capstone cites also an email from Feldman to Mrs. Hendricks stating that the
policy and pricing documents are Capstone’s intellectual property, and thanking
Hendricks “for following our agreement not to redistribute.” See Email [Doc. # 63-4],
p. 3. There is no response or other communication from Mrs. Hendricks confirming
any agreement not to redistribute the documents.
In the Amended Complaint, Plaintiffs reference “various agreements” that they
allege created a confidential relationship. See Amended Complaint, ¶ 21. The
Services Agreement includes a provision that it “may be amended, modified, or
supplemented only by written agreement executed by the parties hereto.” See Services
Agreement, Art. VI, ¶ 6.9. There is no allegation that there exists a written
confidentiality agreement executed by all parties to the Services Agreement.
Therefore, Feldman’s unilateral email, to which there was no response, does not
provide a factual basis for the existence of a confidential relationship between
Capstone and Defendants. Additionally, the facts alleged in the Amended Complaint
do not establish an agreement between Capstone and Defendants that would create a
confidential relationship.
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Additionally, as noted above, it is conceded that Defendants were entitled to
receive the subject documents under the Services Agreement. As a result, they did not
obtain the documents through the breach of any confidential relationship that may
have existed.
4.
Conclusion on Elements of Trade Secret Misappropriation
Capstone provided documents that Defendants were entitled to receive under
the terms of the Services Agreement. Capstone fails to allege Defendants acquired or
discovered the documents through improper menas.
Capstone also has failed to allege a factual basis for the existence of a
confidential relationship, and has failed to allege factually that Defendants acquired
the relevant documents through the breach of any confidential relationship that
allegedly existed. Therefore, Capstone has not alleged that Defendants acquired its
trade secrets through a breach of a confidential relationship.
Absent factual
allegations to support this element of the common law trade secret misappropriation
claim, the claim must be dismissed.
B.
Statute of Limitations
Defendants also seek summary judgment on the trade secret misappropriation
claim based on the applicable statute of limitations. A plaintiff must file a trade secret
misappropriation claim “not later than three years after the misappropriation is
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discovered or by the exercise of reasonable diligence should have been discovered.”
TEX. CIV. PRAC. & REM. CODE § 16.010(a). The discovery rule is expressly
incorporated in the three-year statute of limitations, deferring accrual of a cause of
action until the “plaintiff knew or, exercising reasonable diligence, should have
known of the facts giving rise to a cause of action.” Seatrax, Inc. v. Sonbeck Int’l,
Inc., 200 F.3d 358, 365 (5th Cir. 2000). A misappropriation of trade secrets that
continues over time is a single cause of action and the limitations period begins to run
without regard to whether the misappropriation is a single or continuing act. Id.
(citing TEX. CIV. PRAC. & REM. CODE § 16.010(b)).
Capstone filed this lawsuit on October 1, 2015. Plaintiffs allege that they did
not learn that Defendants had allegedly misappropriated their trade secrets until 2014.
See Amended Complaint, ¶ 23. Defendants have presented uncontroverted evidence
that Plaintiffs knew by June 2012 that Defendants had disclosed Capstone’s trade
secret documents to Intuitive, an alleged competitor of Plaintiffs. See Motion, pp. 2022 (citing June 18, 2012 email transmitting Intuitive report to Capstone, and June 19,
2012 email from Feldman following his review of the report). Capstone failed to file
its common law trade secret misappropriation claim within three years thereafter. As
a result, the claim is time-barred and summary judgment in favor of Defendants is
granted.
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V.
BREACH OF CONTRACT CLAIM
Defendants argue that they are entitled to summary judgment on Plaintiffs’
breach of contract claim because Defendants were entitled to retain possession of the
documents while the parties were in litigation. As argued by Plaintiffs, the breach of
contract claim is much broader than simple retention of possession of Plaintiffs’
documents. In the Amended Complaint, Plaintiffs allege that Defendants breached the
Services Agreement “through their intentional use of the intellectual property after the
termination” of the Services Agreement’s licensing agreement. See Amended
Complaint, ¶ 40. Therefore, the argument that Defendants were entitled to retain
possession of the documents during litigation does not establish entitlement to
summary judgment on the breach of contract claim as asserted in the Amended
Complaint. Summary judgment on the contract claim is unwarranted.
VI.
CONCLUSION AND ORDER
Plaintiffs allege only misappropriation that occurred before September 1, 2013.
As a result, the TUTSA claim is dismissed with prejudice as outside the Act’s
coverage.
Plaintiffs in the Amended Complaint have failed to allege facts establishing an
essential element of their common law trade secret misappropriation claim – that the
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trade secrets were acquired or discovered through improper means or through breach
of a confidential relationship. Additionally, the claim is time-barred.
Plaintiffs allege a breach of contract claim that encompasses more than merely
retaining documents after the Services Agreement terminated. As a result, Defendants
are not entitled to summary judgment on the breach of contract claim based on their
argument that they were entitled to retain the documents because there was ongoing
litigation. Accordingly, it is hereby
ORDERED that Defendants’ Motion to Dismiss or for Summary Judgment
[Doc. # 4] is GRANTED as to the TUTSA claim and the common law trade secret
misappropriation claim, which are DISMISSED WITH PREJUDICE, and is
DENIED as to the breach of contract claim.
SIGNED at Houston, Texas, this 14th day of August, 2019.
NAN Y F. ATLAS
SENIOR UNI
STATES DISTRICT JUDGE
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