514 B.R. 496
Bankr. S.D. Tex.2014Background
- Mud King (a small aftermarket mud-pump parts maker) filed bankruptcy after NOV (a large OEM) sued for alleged theft and misuse of NOV engineering drawings that NOV contends are trade secrets.
- A NOV employee (Arredondo) admitted providing NOV drawings to Mud King employee Rubiano in exchange for cash; NOV discovered additional NOV drawings on Mud King computers after a TRO and forensic imaging.
- NOV alleged misappropriation of 204 drawings, sought disgorgement of profits, avoided-development costs, exemplary damages, attorneys’ fees, and CFAA and TTLA remedies; Mud King admitted profits on some parts but moved to estimate NOV’s claim at zero.
- The bankruptcy court conducted an evidentiary estimation hearing under 11 U.S.C. § 502(c) to value NOV’s claim for allowance, distribution, and voting purposes.
- Court found NOV proved misappropriation of some trade secrets and TTLA theft for drawings obtained from Arredondo and used by Mud King, but rejected NOV’s conversion, CFAA, unjust enrichment, and exemplary damages theories in large part.
- Court estimated NOV’s trade-secret damages at $74,439.95 (disgorgement of Mud King’s net profits from altered parts), awarded $1,000 statutory TTLA additional damages, and reserved attorneys’ fees and prejudgment interest issues for further hearing.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Trade-secret misappropriation (existence/use) | NOV: drawings are confidential trade secrets, were stolen by Arredondo and used by Mud King to make/sell parts. | Mud King: many drawings or specifications are publicly available or obtainable in the aftermarket; NOV’s protections were inadequate. | Court: NOV proved trade-secret status for the drawings at issue (except certain Murray-sourced drawings) and proved misappropriation and use for some parts. |
| Conversion (of drawings/paper copies) | NOV: Mud King converted NOV property by possessing/copying drawings. | Mud King: conversion law in Texas covers tangible property only; NOV wasn’t deprived of possession of originals. | Court: Conversion claim failed—intangible trade-secret misuse is not conversion; no deprivation of originals proved. |
| Texas Theft Liability Act (TTLA) / Penal Code §31.05 (theft of trade secrets) | NOV: unauthorized copying/transmission of trade secrets constitutes theft; seeks damages, costs, fees. | Mud King: disputes public availability and causation for damages. | Court: TTLA claim established for theft by copying; awarded actual damages (as proven) plus $1,000 statutory additional damages and attorney’s fees to be determined. |
| Computer Fraud and Abuse Act (CFAA) | NOV: Mud King accessed NOV protected computers (via Arredondo) and incurred >$5,000 in loss investigating and restoring systems. | Mud King: NOV suffered no impairment of system integrity or losses as defined by CFAA; investigation/discovery costs are not CFAA "loss." | Court: NOV failed to prove CFAA "damage" or "loss" as defined; CFAA claim disallowed in proof of claim. |
| Measure of damages & exemplary damages | NOV: seeks disgorgement of all profits from parts in possession, avoided development costs (~$4M), and exemplary damages. | Mud King: profits attributable to actual use are limited; avoided-cost claims and punitive damages are unsupported. | Court: Awarded disgorgement limited to Mud King’s net profits from parts actually altered/ sold using NOV drawings ($74,439.95); rejected multiple recoveries and avoided-development damages; exemplary damages denied (no clear & convincing malice). |
Key Cases Cited
- Wellogix, Inc. v. Accenture, L.L.P., 716 F.3d 867 (5th Cir. 2013) (elements and analysis for Texas trade-secret claim)
- In re Bass, 113 S.W.3d 735 (Tex. 2003) (factors for trade-secret existence under Texas law)
- General Universal Sys., Inc. v. HAL, Inc., 500 F.3d 444 (5th Cir. 2007) (definition of "use" of a trade secret)
- Univ. Computing Co. v. Lykes-Youngstown Corp., 504 F.2d 518 (5th Cir. 1974) (available measures of trade-secret damages)
- Carson v. Dynegy, Inc., 344 F.3d 446 (5th Cir. 2003) (Texas law limits conversion to tangible property)
- Express One Int'l v. Steinbeck, 53 S.W.3d 895 (Tex. App.—Dallas 2001) (conversion of intangible rights only when merged into a document)
- Fiber Systems Int'l, Inc. v. Roehrs, 470 F.3d 1150 (5th Cir. 2006) (CFAA civil-action framework)
- Brooks v. AM Resorts, LLC, 954 F. Supp. 2d 331 (E.D. Pa. 2013) (fees paid to litigation experts are generally not CFAA "loss")