MOTION MEDICAL TECHNOLOGIES, L.L.C.; WABASH MEDICAL COMPANY, L.L.C.; ORTHOFLEX, INCORPORATED, doing business as Integrated Orthopedics, Plaintiffs - Counter Defendants - Appellees v. THERMOTEK, INCORPORATED, Defendant- Counter Claimant- Third Party Plaintiff - Appellant v. TRI 3 ENTERPRISES, L.L.C.; THERMO COMPRESSION SOLUTIONS, L.L.C.; WMI ENTERPRISES, L.L.C., Third Party Defendants - Appellees; THERMOTEK, INCORPORATED, Plaintiff - Appellant v. MIKE WILFORD, Defendant - Appellee
No. 16-11381
United States Court of Appeals, Fifth Circuit
November 14, 2017
Before SMITH, OWEN, and HIGGINSON, Circuit Judges.
STEPHEN A. HIGGINSON, Circuit Judge:
ThermoTek, Inc. convinced a jury that Mike Wilford and his companies engaged in unfair competition and fraud in violation of Texas law. The district court, however, granted judgment as a matter of law to the defendants, concluding that federal law preempted the unfair competition claim and that ThermoTek failed to prove its damages for fraud. We affirm.
I.
ThermoTek designs, manufactures, and sells the VascuTherm system, which consists of a medical device and specially designed wraps that provide thermal and compression therapy. ThermoTek sells this equipment to medical goods distributors, who then sell or lease it to hospitals and clinics. Once a doctor prescribes VascuTherm, a distributor delivers it to, demonstrates it for, and fields questions from the patient. The distributor then bills the patient‘s insurance.
In addition to vending VascuTherm to distributors, ThermoTek trains those distributors to use and care for the unit and wraps. Distributors receive access to a password-protected portion of ThermoTek‘s website, user manuals, pricing data, insurance coding information, and other written materials.
Mike Wilford is an executive of several medical equipment companies, including Orthoflex, Inc., Motion Medical Technologies, LLC, and Wabash Medical Co., LLC (the Orthoflex companies). In 2008, Wilford, through his companies, began buying and distributing the VascuTherm system. As a distributor, Wilford received various ThermoTek materials, including billing codes and
Soon after his companies started purchasing the VascuTherm system, Wilford reported problems with the product and requested information about its design, repairs, and manufacturing. ThermoTek believes these reports were pretexts for Wilford to obtain proprietary information about VascuTherm. In March 2010, the Orthoflex companies sued ThermoTek in the Northern District of Illinois, alleging breach of the products’ warranties. ThеrmoTek alleges that Wilford used the discovery process to obtain additional proprietary information, including a non-public version of ThermoTek‘s
Three months later, in November 2010, ThermoTek sued Wilford and another of his companies, WMI Enterprises, LLC, for fraud and unfair competition in Texas state court.2 Wilford removed that case to the Northern District of Texas, which then consolidated it with the related breach-of-warranty suit from Illinois. After several pretrial motions and amended pleadings, the parties tried the following to a jury:
- the Orthoflex companies’ counterclaim against ThermoTek for breach of express warranty;
- ThermoTek‘s claim against Wilford for fraud;
ThermoTek‘s claim against Motion Medical, Wabash Medical, and Tri 3 Enterprises LLC3 for breach of contract; and - ThermoTek‘s claim against Wilford and Thermo Compression Solutions, LLC4 for unfair competition by misappropriation.
Important for our purposes, ThermoTek‘s Texas common law claim of unfair competition by misappropriation was the only unfair competition claim tried to the jury. Although ThermoTek had pleaded a distinct claim for misappropriation of trade secrets, it voluntarily dismissed that claim before trial.5
The jury broke ThermoTek‘s way. It rejected the Orthoflex companies’ warranty claim, but found for ThermoTek on the fraud, contract, and unfair competition claims. The jury also awarded ThermoTek more than $7.5 million in damages for “lost profits.” On the unfair competition claim, it awarded $4 million for infringing unit sales and $2 million for infringing wrap sales. On the fraud claim, it awarded $770,000 for VascuTherm wrap sales; $500,000 for VascuTherm unit sales; $193,000 for additional expenses from unit repairs; $90,000 for additional engineering costs; and $13,000 for additional evaluation and tooling costs. (The jury awarded no damages for breach of contract.)
In response, Wilford and Thermo Compression renewed their motion for judgment as a matter of law. See
II.
First up is whether Wilford and Thermo Compression waived their preemption defenses by failing to plead them. The district court sаid no—an answer we review for abuse of discretion.8 We find no abuse of discretion here.
ThermoTek got fair notice. It learned of the preemption defense at a pragmatically sufficient time and suffered no prejudice. The preemption issue first surfaced at the summary judgment stage before discovery closed and nearly two years before trial. And, in denying the motion to reconsider its summary judgment order, the district court noted that it could “consider a preemption challenge to ThermoTek‘s unfair competition claim by motion for judgment as a matter of law and by post-judgment motion, if necessary, assuming ThermoTek prevails on that claim at trial.” The parties therefore had two years’ notice that preemption was on the table.
In any event, even under ThermoTek‘s proposed de novo standard we would still agree with the district court.
Preemption resurfaced closer to and during trial. After the parties had engaged in substantial additional discovery—and still before trial—Wilford and Thermo Compression raised copyright and patent law preemption in the parties’ joint proposed pretrial order. Wilford and Thermo Compression raised those defenses again in
All this was enough to meet our “sufficiently pragmatic” requirement. We have repeatedly rejected waiver arguments when a defendant raised an affirmative defense for the first time at summary judgment—or even later. See, e.g., Pasco ex rel. Pasco v. Knoblauch, 566 F.3d 572, 578 (5th Cir. 2009) (no waiver when defendant first raised affirmative defense of qualified immunity in summary judgment motion filed two months before disсovery was due and six months before the pretrial conference); Lafreniere Park Found. v. Broussard, 221 F.3d 804, 808 (5th Cir. 2000) (no waiver where defendants first raised affirmative defense of res judicata in summary judgment motion and plaintiffs had fourteen months to respond and filed three responsive briefs during that period); Allied Chem., 695 F.2d at 855-56 (no waiver where defendant first raised affirmative defense of usury in motion for summary judgment and the defense appeared in the pretrial order); Lucas, 807 F.2d at 417-18 (no waiver when the government first raised affirmative defense of a statutory damages cap at trial immediately after expert testimony on damages). In fact, we have recognized that sometimes a preemption defense is most suitably raised after the defendant answers the complaint. See Fisher v. Halliburton, 667 F.3d 602, 610 (5th Cir. 2012) (“Unless the complaint itself establishes the applicability of a federal-preemption defense—in which case the issue may properly be the
Nor did ThermoTek suffer prejudice “in its ability to respond.” Allied Chem., 695 F.2d at 856. The company admitted as much to the district court. When asked to identify specific prejudice, including what it would have done differently had Wilford and Thermo Compression pleaded preemption, ThermoTek‘s counsel stated, “I don‘t know what we would have done differently,” and “[p]ractically speaking, I don‘t know that we would have done anything differently.”
The district court did not abuse its discretion in reaching the preemption defense on the merits.
III.
The merits question is whether federal copyright and patent laws preempted the unfair-competition-by-misappropriation claim. They did.
A.
The district court held that federal copyright law preempts ThermoTek‘s unfair competition claim insofar as that claim relates to works of authorship fixed in a tangible medium of expression—here, ThermoTek‘s manuals, reports, billing information, and other written documents.
But the Copyright Act preempts more than it protects. Ultraflo Corp. v. Pelican Tank Parts, Inc., 845 F.3d 652, 656 (5th Cir.), cert. denied, 137 S. Ct. 2266 (2017). Specifically,
Our copyright preemption test involves two steps. Ultraflo, 845 F.3d at 656 (citing Alcatel USA, Inc. v. DGI Techs., Inc., 166 F.3d 772, 785 (5th Cir. 1999)).
i.
We agree with the district court that most of the misappropriated information—including ThermoTek‘s manuals, reports, billing information, and other written documents—is within the subject matter of copyright. That information constitutes original works of authorship fixed in a tangible medium of expression.
Seeking to avoid this result, ThermoTek contends that the district court should have required proof that the intellectual property at issue “fell outside of section 102(b).” This argument carries no purchase because it conflates copyright protection with copyright preemption. See, e.g., Ultraflo, 845 F.3d at 656. Again, preemption is the broader concept becаuse it preserves Congress‘s calls on what gets protection. Id. (“[T]o allow states to protect fixed ideas would intrude upon Congress‘s exclusion in section 102(b) of ideas from federal copyright protection.“).
ThermoTek also faults the district court for not requiring Wilford and Thermo Compression to identify which
We therefore agree with the district court on step one.
ii.
So, too, for step two. Here, we ask whether the relevant state law claim seeks to protect property rights “equivalent” to those “within the general scope of copyright.”
(i) the creation of plaintiff‘s product through extensive time, labor, skill and money, (ii) the defendant‘s use of that product in competition with the plaintiff, thereby gaining a special advantage in that competition (i.e., a “free ride“) because defendant is burdened with littlе or none of the expense incurred by the plaintiff, and (iii) commercial damage to the plaintiff.
U.S. Sporting Prods., Inc. v. Johnny Stewart Game Calls, Inc., 865 S.W.2d 214, 218 (Tex. App.—Waco 1993, writ denied); see also Alcatel, 166 F.3d at 788. A copyright claim also has three prongs: “(1) ownership of a valid copyright; (2) factual copying; and (3) substantial similarity.” Nola Spice Designs, L.L.C. v. Haydel Enters., 783 F.3d 527, 549 (5th Cir. 2015) (quotation mark omitted).
We have twice held that Texas‘s unfair-competition-by-misappropriation tort does not afford protection qualitatively different from federal copyright law. See Ultraflo, 845 F.3d at 657-59 (holding that copyright preempted a Texas unfair-competition-by-misappropriation claim); Alcatel, 166 F.3d at 787-89 (same). We do so again here.
We also disagree with ThermoTek‘s position that the jury instructions added an extra element—an “improper means” prong—to the misappropriation claim. The instructions did no such thing. They informed the jury that
[a] person does not misappropriate a competitor‘s product . . . merely by developing a competing product through such means as inspection and analysis of the competitor‘s product, reverse engineering applied to the competitor‘s finished product, independent research, or use of publicly-available information.
According to ThermoTek, that language distinguishes “information discovered by fair and honest means” from “information obtained wrongfully“—a dichotomy that supposedly sets the state law claim outside of copyright‘s ambit. The
As ThermoTek concedes, a claim for unfair competition by misappropriation does not include an “improper means” element; that prong instead appears in the Texas tort of misappropriation of trade secrets. And in the trade secrets context, Texas law defines “improper means” as “theft, fraud, unauthorized interception of communications, inducement of or knowing participation in a breach of confidence, and other means either wrongful in themselves or wrongful under the circumstances of the case.” Astoria Indus. of Iowa, Inc. v. SNF, Inc., 223 S.W.3d 616, 636 (Tex. App.—Fort Worth 2007, pet. denied). We have held that, precisely because a trade secrets claim requires “wrongful conduct beyond mere reproduction,” federal copyright law does not preempt the Texas action for misappropriation of trade secrets. GlobeRanger Corp. v. Software AG United States of Am., Inc., 836 F.3d 477, 488 (5th Cir. 2016). No such requirement appeared in this case.
Here, the jury instruction never mentioned “improper means,” nor did it condition liability on a defendant‘s “wrongful conduct beyond mere reproduction.” Id. The instruction instead defined the “use” element of ThermoTek‘s misappropriation claim as involving literal copying—a specific type of reproduction. See, e.g., Oracle Am., Inc. v. Google Inc., 750 F.3d 1339, 1356 (Fed. Cir. 2014) (distinguishing between literal and non-literal copying, both of which may be actionable copyright infringement); Nichols v. Universal Pictures Corp., 45 F.2d 119, 121 (2d Cir. 1930) (Hand, J.) (same); see also 4 Nimmer & Nimmer, supra, § 13.03[A][1]. In other words, the jury instruction still protected against the type of reproduction against which copyright guards. The state law claim was therefore preempted.
Our caselaw сonfirms this conclusion. In fact, ThermoTek‘s argument is nearly identical with the one we rejected in Alcatel. See 166 F.3d at 789. There,
Seeking to circumvent Alcatel, ThermoTek argues that we must look to the “discrete facts” and “actual alleged misconduct,” not just the elements of a misappropriation claim. GlobeRanger, 836 F.3d at 485, 488 (finding no preemption on Texas‘s misappropriation-of-trade-secrets claim). ThermoTek‘s argument is self-defeating; the company contends that “the only difference” between this case and GlobeRanger is the “claim asserted by ThermoTek.” But that difference matters. Again, the claim asserted in GlobeRanger was misappropriation of trade secrets—a tort requiring proof that “the protected information was taken via improper means or breach of a confidential relationship.” Id. at 488. ThermoTek, however, voluntarily dismissed its trade secrеts claim and instead advanced an unfair-competition-by-misappropriation tort—a cause of action that, as explained above (and under the facts of this case), did not demand proof of improper means or breach of confidence. See Ultraflo, 845 F.3d at 657-59; Alcatel, 166 F.3d at 788. ThermoTek cannot escape copyright‘s clutches.
We therefore decline ThermoTek‘s invitation to depart from our binding precedent. The district court correctly found copyright preemption.
B.
The district court‘s patent preemption analysis was similarly sound. To
The federal patent statute protects those who “invent[] or discover[] any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement therof.”
The applicant whose invention satisfies the requirements of novelty, nonobviousness, and utility, and who is willing to reveal to the public the substance of his discovery and “the best mode . . . of carrying out his invention,”
35 U.S.C. § 112 , is granted “the right to exсlude others from making, using, or selling the invention throughout the United States,” for a period of 17 years.35 U.S.C. § 154 . The federal patent system thus embodies a carefully crafted bargain for encouraging the creation and disclosure of new, useful, and nonobvious advances in technology and design in return for the exclusive right to practice the invention for a period of years.
Bonito Boats, Inc. v. Thunder Craft Boats, Inc., 489 U.S. 141, 150-51 (1989) (alteration in original). Patent law‘s primary purposes are (1) “to foster and reward invention“; (2) to “promote[] disclosure of inventions, to stimulate further innovation and to permit the public to practice the invention once the patent expires“; and (3) “to assure that ideas in the public domain remain there for the free use of the public.” Aronson v. Quick Point Pencil Co., 440 U.S. 257, 262 (1979) (citing Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470, 480-81 (1974)).
Resolving a fеderal patent preemption defense requires courts to consider “whether [state] law stands as an obstacle to the accomplishment and
Whether federal patent law preempts the Texas claim for unfair competition by misappropriation is a novel question in our circuit. But we are not withоut guidance. Take the Bonito Boats decision. There, the Supreme Court held that federal patent law preempted a Florida state law prohibiting unauthorized duplication of boat hulls or other component parts. 489 U.S. at 144-45, 168. In reaching that result, the Supreme Court compared two categories of state unfair competition laws. The first group primarily sought to guard consumers against “deceit” and “confusion as to source.” Id. at 157. The second aimed to protect “the functional aspects of a product which [have] been placed in public commerce absent the protection of a valid patent.” Id. at 156 (citing Sears, Roebuck & Co. v. Stiffel Co., 376 U.S. 225, 233 (1964)). Federal patent law, the Supreme Court observed, would generally tolerate the former but preempt the latter. The former would typically pass muster because those laws protect “against copying of nonfunctional aspects of consumer products which have acquired secondary meaning such that they operate as a designation of source.” Id. at 158. The latter laws, however, would likely obstruct Congress‘s goals by “offer[ing] patent-like protection to intellectual creations which would otherwise remain unprotected as a matter of federal law.” Id. at 156.
Insofar as ThermoTek‘s misappropriation action seeks to protect its VascuTherm unit and wraps (or their functional aspects), that claim falls into the second Bonito Boats bucket. See id. at 156. ThermoTek‘s claim is indeterminate
In opposition, ThermoTek reprises the same arguments it leveled against the district court‘s copyright findings: that preemption analysis must consider a defendant‘s actions, and that ThermoTek‘s claim had an extra element of “fraud and dishonest[y]” because the jury instructiоns excluded reverse engineering from the proscribed conduct. These arguments fare no better the second time around. The jury needed only conclude that ThermoTek expended time and money to create its units and wraps, that Wilford and Thermo Compression used those products to gain a competitive advantage in the market, and that ThermoTek suffered damages. Alcatel, 166 F.3d at 788. There was no
We affirm the district court‘s patent preemption finding.
IV.
Finally, we reаch damages. On the fraud claim, the jury awarded ThermoTek $770,000 in “lost profits” from wrap sales, $500,000 in “[l]ost profits from unit sales,” $193,000 in “[l]ost profits from additional expenses for unit repairs,” $90,000 in “[l]ost profits from additional engineering costs,” and $13,000 in “[l]ost profits from additional evaluation and tooling costs.”13
In granting Wilford‘s renewed
Texas law requires “[a] party seeking to recover lost profits [to] prove the loss through competent evidence with reasonable certainty.” Atlas Copco Tools,
The district court vacated the jury аward because ThermoTek presented evidence of gross profits instead of net profits. That is precisely what Texas law expects courts to do; if a party aims to recover lost profits, it must show its net profits, not gross profits. Atlas, 131 S.W.3d at 209 (citing Holt Atherton Indus. v. Heine, 835 S.W.2d 80, 83 n.1 (Tex. 1992)). Net profits are “what remains in the conduct of a business after deducting from its total receipts all of the expenses incurred in carrying on the business.” Id. (quoting Turner v. PV Int‘l Corp., 765 S.W.2d 455, 465 (Tex. App.—Dallas 1988, writ denied)). Contrast gross profits, the “[t]otal sales revenue less the cost of the goods sold, no adjustment being made for additional expenses and taxes.” Gross Profit, Black‘s Law Dictionary (10th ed. 2014). A legally adequate calculation of “lost profits” therefore accounts for all expenses in carrying out the business, not just the incremental costs of selling а particular product.14
Citing the Restatement (Third) of Unfair Competition § 37, ThermoTek argues that gross profits are the “proper measure of damages in this context.” ThermoTek also contends that Wilford had the burden to prove any “costs or
Without evidence of ThermoTek‘s business expenses, a jury viewing this record could not determine lost profits with reasonable certainty. E.g., id. Of course, this omission is not fatal if, for instance, there is evidеnce that the victim “was already profitable at the time damages began” and “could have performed profitable services using only its existing resources.” ERI Consulting Eng‘rs, Inc. v. Swinnea, 318 S.W.3d 867, 879 (Tex. 2010). But ThermoTek does not advance such an argument, nor do we see support for it in the trial record.
The proper recourse, then, was for the district court to enter judgment as a matter of law instead of remanding for a new trial. See
Thus, the trial court did not err.
* * * * *
AFFIRMED.
Notes
Unlike the Harris court, we are not breaking new ground. Our circuit has already articulated a rule: a “technical failure to comply precisely with
To be sure, at least one of our precedents, Pasco ex rel. Pasco v. Knoblauch, could be read to have applied a de novo standard to a district court‘s waiver determination. 566 F.3d 572, 575 (5th Cir. 2009). But there, unlike here, we reversed the district court‘s waiver determination for applying the wrong legal standard. Id. at 577; cf. Klier v. Elf Atochem N. Am., Inc., 658 F.3d 468, 474 (5th Cir. 2011) (“By definition, a district court abuses its discretion when it makes an error of law or applies an incorrect legal standard.“). Most of our decisions have instead applied an abuse-of-discretion standard when considering whether a party waived its affirmative defense. See, e.g., LSREF2 Baron, L.L.C. v. Tauch, 751 F.3d 394, 399 (5th Cir. 2014); Levy Gardens Partners 2007, L.P. v. Commonwealth Land Title Ins. Co., 706 F.3d 622, 633 (5th Cir. 2013).
(1) literary works;
(2) musical works, including any accompanying words;
(3) dramatic works, including any accompanying music;
(4) pantomimes and choreographic works;
(5) pictorial, graphic, and sculptural works;
(6) motion pictures and other audiovisual works;
(7) sound recordings; and
(8) architectural works.
all legal or equitable rights that are equivalent to any of the exclusive rights within the general scope of copyright as specified by section 106 in works of authorship that are fixed in a tangible medium of expression and come within the subject matter of copyright as specified by sections 102 and 103 . . . are governed exclusively by this title. Thereafter, no person is entitled to any such right or equivalent right in any such work under the common law or statutes of any State.