United States: Texas Court Of Appeals Rules That Mere Suspicions Of Trade Secret Misappropriation Are Insufficient To Trigger The Discovery Rule

Applying new Texas Supreme Court precedent, a Texas Court of Appeals recently held that a six-year-old cease-and-desist letter alleging trade-secret misappropriation did not constitute proof of knowledge for purposes of the discovery rule. By allowing for the accrual date of this claim to be deferred, the court appears to have made it easier for trade-secret plaintiffs to overcome the statute-of-limitations defense in the future.

According to the opinion issued by the First Court of Appeals in Houston, Garner Environmental Services, Inc. ("Garner") provides disaster-response training and related services. In 2008, Garner's then-vice president quit, formed a competing company called First in Rescue, Safety and Training, LLC ("FIRST"), and hired several Garner employees. In January 2009, Garner sent FIRST a letter accusing it of wrongfully using Garner's customer lists, contacts, and other trade secrets to solicit Garner's customers. Garner based these allegations solely on the fact that, shortly before sending this letter, Garner had learned that a client scheduled to attend one of Garner's training classes switched at the last minute to attend a class held by FIRST instead. Later that month, FIRST responded that it had not stolen Garner's trade secrets because Garner's customer lists and contacts were readily available to the general public, could be replicated from memory, and were therefore not confidential information in the first instance. FIRST's letter also pointed out that none of the former Garner employees had entered into non-compete or non-solicitation agreements while employed by Garner, so they were not prohibited from contacting Garner's customers. Apparently, this mollified Garner because it did not file suit against FIRST at this time.

Fast-forward nearly five years: In late 2013, FIRST filed suit against a former employee that had gone to work for another competitor. At an unspecified time in 2014, after reviewing documents the employee had filed in that suit, Garner determined that FIRST had unlawfully used Garner's confidential information. So, in July 2015—more than six years after sending the initial cease-and-desist letter in January 2009—Garner filed suit against FIRST asserting, inter alia, a claim for misappropriation of trade secrets. FIRST filed for summary judgment, arguing that all of Garner's claims were barred by the statute of limitations because it discovered or should have discovered the nature of its injury in January 2009. Garner argued in response that the discovery rule applied and, as such, limitations did not begin to run until it discovered the injury in 2014 when it reviewed the documents filed in connection with the lawsuit FIRST's former employee had asserted against a third party. The trial court granted FIRST's motion and dismissed Garner's claims with prejudice.

On appeal, the sole issue before the Court of Appeals was when Garner discovered, or in the exercise of reasonable diligence should have discovered, the nature of its injury. Under the discovery rule, the accrual of a claim is deferred until the injured party learned of, or in the exercise of reasonable diligence should have learned of, the wrongful at causing the injury. Garner argued that the court of appeals was bound by the Texas Supreme Court's recent decision in Southwestern Energy Production Co. v. Berry-Helfand, 491 S.W.3d 699 (Tex. 2016), which involved the discovery rule in the context of trade-secret misappropriation. In that case, the court held that surmise, suspicion, and accusation, even if sufficient to make one aware of a potential for misuse of trade secrets, are not facts that in the exercise of reasonable diligence would lead to the discovery of theft of trade secrets. Furthermore, the Southwestern court held that the defendant asserting the limitations defense "ha[d] not identified any evidence revealing what [the plaintiff] would have discovered had she made further inquiry."

Finding "no meaningful differences between Southwestern and this case," the Garner court noted that although Garner alleged in its January 2009 letter that FIRST had stolen its trade secrets, it had no facts to support these allegations other than mere suspicion that FIRST was competing with Garner's clients. As in Southwestern, accusations were insufficient to establish knowledge of injury, the discovery rule applied. The Court of Appeals further noted that FIRST did not explain why it is entitled to have Garner's statements of accusation construed as proof of knowledge while having its own statements of denial construed as "lawyer posturing" upon which Garner could not reasonably rely. The court thus rejected FIRST's attempt to have its cake and eat it too.

FIRST also argued that Garner could have discovered the injury had it conducted presuit depositions under Texas Rule of Civil Procedure 202, which it did not do. In order to take a presuit deposition under Rule 202, the petitioner must show that there is a reason that the deposition must occur before the anticipated lawsuit is filed, and not after. The Court of Appeals, however, reiterated that Garner lacked any proof of its suspicions and thus had no basis to establish that FIRST had any information in its possession that could justify a Rule 202 deposition. A petitioner is also entitled to conduct a Rule 202 deposition if it demonstrates that the likely benefit of the requested deposition to investigate a potential claim outweighs the procedure's burden or expense. The Court of Appeals stated: "To allow a rule 202 deposition in th[is] situation would require the other party to reveal the confidential information in their possession," which the court concluded was too heavy a burden on FIRST. Thus, FIRST failed to establish a date (prior to Garner's stated discovery date in 2014) by which Garner knew or, with reasonable diligence, could have discovered the nature of its injury. Accordingly, the Court of Appeals reversed the judgment of the trial court, and remanded for further proceedings.

The take-away from this case is that potential plaintiffs who, although suspicious, lack concrete proof that a potential defendant has misappropriated its trade secrets, will, on account of the Southwestern and Garner decisions, likely find it easier to assert the discovery rule to defer the accrual date of its misappropriation claim. Moreover, according to Garner, such potential plaintiffs will find it difficult, if not impossible, to meet their burden to establish the necessity of the information to be entitled to conduct a Rule 202 presuit deposition. It remains to be seen, however, if this case might decrease the use of Rule 202 depositions in trade-secret cases. Still, the boot-and-suspenders approach of attempting a Rule 202 deposition may be the better course to preserve the legal rights of a potential misappropriation plaintiff.

Garner Envtl. Services, Inc. v. First In Rescue, Safety & Training, LLC, 01-16-00388-CV, 2016 WL 7671377 (Tex. App.—Houston [1st Dist.] Dec. 22, 2016, no. pet. h.)

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