Court Opinion

ID: 1036725
Source: CourtListenerOpinion
Date Created: 2013-08-07 15:27:27.698274+00
Date Added: 2024-06-11T15:15:41.140340
License: Public Domain

NOTE: This disposition is nonprecedential.

  United States Court of Appeals
      for the Federal Circuit
                ______________________

             CORE LABORATORIES LP,
                Plaintiff-Appellant,

                           v.

      SPECTRUM TRACER SERVICES, L.L.C.,
       STEVE FAUROT AND KELLY BRYSON,
               Defendants-Appellees.
              ______________________

                      2013-1263
                ______________________

    Appeal from the United States District Court for the
Western District of Oklahoma in No. 11-CV-1157, Judge
Vicki Miles-LaGrange.
                ______________________

                Decided: August 7, 2013
                ______________________

    TANYA L. CHANEY, Sutton McAughan Deaver, PLLC,
of Houston, Texas, argued for plaintiff-appellant. With
her on the brief was MICHAEL O. SUTTON.

   JONATHAN S. FRANKLIN, Fulbright & Jaworski, L.L.P.
of Washington, DC, argued for defendants-appellees.
With him on the brief were SHELIA KADURA, of Austin,
Texas; J. CHRISTOPHER DAVIS, PAUL KINGSOLVER and
JONATHAN D. CARTLEDGE, Johnson & Jones, P.C., of
Tulsa, Oklahoma.
2         CORE LABORATORIES LP   v. SPECTRUM TRACER SERVICES

                  ______________________

    Before NEWMAN, LOURIE, and TARANTO, Circuit Judges.
NEWMAN, Circuit Judge.
     Core Laboratories LP, with its principal place of busi-
ness in Houston, Texas, is in the business of providing
services to oil well operators, particularly chemical and
radioactive tracer services for hydraulic fracturing
(“fracking”) processes. Defendants Steve Faurot and
Kelly Bryson are ex-employees of Core Laboratories.
Faurot and Bryson formed the company Spectrum Tracer
Services in 2010 to provide tracer services for hydraulic
fracturing processes. This appeal is from the district
court’s denial of a preliminary injunction against the
defendants’ use of Core’s trade secret and proprietary
information. The defendants concede that they possess
Core information, including software.
    Core Laboratories filed this suit in March 2011 in the
United States District Court for the Western District of
Texas, alleging that when Faurot and Bryson each left
their employment at Core “they took with them various
confidential and proprietary trade secret information
belonging to Core” and that “[t]hey used Core’s trade
secrets to establish Spectrum, which directly competes
with Core.” Appellant Br. 3. The complaint contains
counts for misappropriation of trade secrets, unfair com-
petition, breach of contract, copyright infringement, and
violation of Texas’ Theft Liability Act. The initial com-
plaint did not include a count of patent infringement.
Federal jurisdiction was established by federal question
because the action arises in part under the copyright
laws, and by diversity of state citizenship. 28 U.S.C.
§§1331, 1332.
    At the defendants’ request the case was transferred to
the United States District Court for the Western District
of Oklahoma pursuant to 28 U.S.C. §1404(a). After the
transfer, on November 18, 2011 Core filed an amended
CORE LABORATORIES LP   v. SPECTRUM TRACER SERVICES         3

complaint adding counts for infringement of two patents
directed to Core’s method of tracing of underground
fracking. Core requested a preliminary injunction against
infringement of the patents, asserting likelihood of suc-
cess on the merits, irreparable harm, the public interest,
and that the balance of the equities weighed in favor of an
injunction. The district court denied the motion on March
27, 2012, stating that “any harm that Core has suffered or
may suffer as a result of defendants’ unlawful use of
Core’s patent protected services can be adequately reme-
died through an award of monetary damages.” Order, 4,
Mar. 27, 2012, ECF No. 94.
    The district court held a Markman hearing in June
2012, and construed the claims of both Core patents,
adopting Core’s proposed claim constructions. Order, July
3, 2012, ECF No. 111. On September 6, 2012, the defend-
ants requested inter partes reexamination of both patents
in the Patent and Trademark Office, and then moved the
district court to stay the litigation until completion of the
reexaminations. The district court granted the motion on
February 8, 2013, and stayed all judicial proceedings
“until such time as the PTO completes its reexamination
proceedings.” Order, 5, Feb. 8, 2013, ECF No. 129. The
court stated that “to wait for the PTO to resolve the issue
of validity of the relevant patents will simplify the issues
in question and facilitate the trial of this case.” Id.
     On the same day, February 8, 2013, Core received a
communication from a Spectrum employee concerning
certain Core information. The employee stated that he
had been asked to “recreate” some Core “functionality,”
and forwarded a copy of a Core electronic file designated
“Software Application,” which includes software and
information about business procedures, customer lists,
charges, and other details of Core’s tracing services. The
employee also contacted Core by telephone. Four days
later Core filed an Emergency Motion with the district
court, requesting an injunction against Spectrum’s “use”
of Core’s trade secret Software Application and the infor-
4       CORE LABORATORIES LP   v. SPECTRUM TRACER SERVICES

mation therein. Core also asked the district court to lift
the stay as to the non-patent counts of the complaint,
severing the patent counts. On March 13, 2013, the
district court denied Core’s Emergency Motion, denying
the requested preliminary injunction and declining to lift
any aspect of the stay.
     This appeal is from the denial of the Emergency Mo-
tion. For the reasons we shall discuss, we reverse the
denial of the preliminary injunction as to Core’s trade
secret and proprietary information, and remand with
instructions to grant the motion forthwith. For the re-
quested severance and lift of the stay as to the non-patent
issues, we remand for reconsideration by the district court
in light of the grant of the preliminary injunction.
                       DISCUSSION
    The genesis of Core’s Emergency Motion was a com-
munication from an employee of Spectrum via the “Con-
tact Us” link on Core’s website, stating:
    I recently have been contracting with Spectrum
    Tracer Services and was converted as an actual
    employee in November. Not long ago I was hand-
    ed some documents that have your company logos
    and such on them and had them ask me to recre-
    ate the same functionality in other documents and
    programs for them. From what I have been able
    to learn I believe you have been in a law suit with
    my company, and I am not very happy with trying
    to re-create someone else’s work. I have provided
    one of the worksheets I have been provided with
    and have others I can provide if they would be of
    any assistance. I am not sure if you gave my
    company permission or not to use these, but it is
    my intention to learn what the truth of the matter
    is.
The employee attached to his message an electronic file
containing a copy of Core’s Software Application for its
hydraulic fracking services, see Exhibit 3 (a CD contain-
CORE LABORATORIES LP   v. SPECTRUM TRACER SERVICES        5

ing an electronic copy of the Excel file submitted to Core).
The submitted file states under “Properties” that it was
created by Will Williams, Core’s Operations Manager, and
released within Core on January 25, 2010. The record
describes a subsequent telephone conversation between a
Core manager and the Spectrum employee. Four days
later Core filed an Emergency Motion for a preliminary
injunction to enjoin Spectrum from “using” the Core
Software Application. Core filed its motion under seal to
protect the identity of the “whistleblower.”
    The Software Application is described as an interac-
tive Excel file comprised of twenty-five different work-
sheets for Core’s chemical and radioactive tracing
services. The Application’s worksheets set forth Core’s
system whereby users input information, which the
Application processes to populate other worksheets and
forms in the Application. The Application also contains
customer lists, price lists and other business information.
    Core explained to the district court and on this appeal
that the Software Application is used to help determine
how best to conduct its chemical and radioactive tracing
services for a particular customer, and to generate the
necessary technical data and records. Core provided
evidence in the district court of the value of this infor-
mation in conducting its services.
    The copy of the Software Application submitted by the
whistleblower employee was released within Core “about
a month” before defendant Kelly Bryson left Core. Core
states that Bryson had access to the Software Application
while employed by Core. The record before us states that
Spectrum was formed in 2010 by Bryson and Faurot. The
defendants do not say how they came into possession of
this and the other Core documents mentioned by the
whistleblower and admitted to be possessed by Spectrum.
The secret and proprietary status of this information is
not disputed.
6       CORE LABORATORIES LP   v. SPECTRUM TRACER SERVICES

     Spectrum identified the whistleblower employee and
filed a declaration signed by him that qualifies his state-
ments to Core. For example, in a telephone conversation
that was recorded by Core, he stated that the Core Soft-
ware Application “is one of the things that management
handed to me and said here’s what you need to do, here’s
what you need to reproduce,” J.A. 1044. However, the
whistleblower’s declaration states that “Management at
Spectrum has never instructed me to copy or reproduce
any text, code, formulas, scripts or data obtained from or
derived from Core Laboratories. In my conversation with
[the Core manager] I merely assumed that management
was involved.” J.A. 1106. The whistleblower declared
that he received the Software Application from Spec-
trum’s “network administrator” who asked him “to review
the [Core] Excel spreadsheets to incorporate field work
functions into the CRM I was developing.” Id. He de-
clared that “At no time have I used any text, code, formu-
las, scripts or data obtained from or derived from Core
Laboratories or ProTechnics in my duties as the person
responsible for developing Spectrum’s CRM or any other
computer related functions or programs.” J.A. 1105. The
defendants do not explain how the Spectrum “network
administrator” came into possession of the Core docu-
ment.
    The employee’s declaration stated that, “[i]nstead of
taking negative action against [him],” Spectrum “author-
ized” him to inspect all of the computers in the company
and search for any files connected with Core Laboratories.
J.A. 1106. He declared that he found “files that . . . might
have been created on a Core registered computer,” files
which have “Core Laboratories” listed in the file’s proper-
ties, and that he found a copy of Core’s Software Applica-
tion on his computers and also on “a portable hard drive.”
J.A.1106. No filing or argument by the defendants offers
any explanation of how they obtained any Core docu-
ments, or what was done with any of the information
therein.
CORE LABORATORIES LP   v. SPECTRUM TRACER SERVICES        7

    The district court denied Core’s Emergency Motion in
its entirety, stating that Core still had not established
that it would be irreparably injured. The court explained:
   The Court finds the only new or different evidence
   presented in support of Core’s second motion for
   preliminary injunction is the alleged method by
   which defendants are allegedly misappropriating
   its patents, trade secrets and copyrighted materi-
   al.
Order, 5–6, March 13, 2013, ECF No. 137. The court
stated that “any harm Core has suffered or may suffer as
a result of defendant’s unlawful use of the proprietary and
confidential information can be adequately remedied
through an award of monetary damages.” Id. at 6.
    We conclude that the district court clearly erred in its
application of the law relating to wrongful possession and
use of trade secret and proprietary information, and thus
that the court abused its discretion in declining to enjoin
such use pendente lite.
                             A
     The parties debate the choice of law that applies in
this case. State law applies to misappropriation of trade
secrets and proprietary information. A federal court
sitting in diversity applies the procedural law of the
forum, and upon transfer of venue pursuant to 28 U.S.C.
§1404(a) the substantive law of the transferor state
continues to apply, for a transfer for convenience of the
defendant does not change the law governing the plain-
tiff’s state law claims. Van Dusen v. Barrack, 376 U.S.
612, 642 (1964) (“The transferee district court must under
§ 1404(a) apply the laws of the State of the transferor
district court”); Hanna v. Plumer, 380 U.S. 460, 465
(1965) (“federal courts are to apply state substantive law
and federal procedural law”); Erie R.R. Co. v. Tompkins,
304 U.S. 64 (1938) (federal courts sitting in diversity
cases, when deciding questions of substantive law, are
bound by state court decisions as well as state statutes).
8       CORE LABORATORIES LP   v. SPECTRUM TRACER SERVICES

Because this case was originally brought in Texas, Texas
state law governs the trade secret misappropriation and
proprietary information count. “Erie guarantees a litigant
that if he takes his state law cause of action to federal
court, and abides by the rules of that court, the result in
his case will be the same as if he had brought it in state
court.” NASCO, Inc. v. Calcasieu Television and Radio,
Inc., 894 F.2d 696, 706 (5th Cir. 1990).
    The grant or denial of a preliminary injunction is re-
viewed on the standard of abuse of discretion. RoDa
Drilling Co. v. Siegal, 552 F.3d 1203, 1208 (10th Cir.
2009). “A district court abuses its discretion if it commits
an error of law, or is clearly erroneous in its preliminary
factual findings.” Dominion Video Satellite, Inc. v. EchoS-
tar Satellite Corp., 269 F.3d 1149, 1153 (10th Cir. 2001).
The criteria for grant of a preliminary injunction do not
vary significantly among the forums; the moving party
must show (1) a substantial likelihood of success on the
merits; (2) irreparable injury to the movant if the injunc-
tion is denied; (3) the threatened injury to the movant
outweighs the injury to the opponent; and (4) the injunc-
tion would not be adverse to the public interest. Winter v.
Natural Res. Def. Council, 555 U.S. 7, 20 (2008); Domin-
ion Video Satellite, Inc., 269 F.3d at 1154.
    The relevant facts are reviewed under the applicable
state law. “While federal law governs the procedural
questions when a preliminary injunction may issue and
what standards of review we apply, because the district
court heard this case only by virtue of its diversity juris-
diction, . . . we analyze the substantive legal questions
associated with their dispute under, and in light of, that
state’s law.” Flood v. ClearOne Commc’ns, Inc., 618 F.3d
1110, 1117 (10th Cir. 2010). Accord Valley v. Rapides
Parish Sch. Bd., 118 F.3d 1047, 1051 (5th Cir. 1997)
(applying Louisiana substantive law of the forum state
and 5th Circuit procedural law); Digital Generation, Inc.
v. Boring, 869 F. Supp. 2d 761, 774 n.2 (N.D. Tex. 2012)
(“A federal court sitting in diversity applies the federal
CORE LABORATORIES LP   v. SPECTRUM TRACER SERVICES         9

standard for determining whether a preliminary injunc-
tion should be granted. . . . [H]owever, the court will
apply Texas law . . . in deciding the substantive issue of
whether the covenant at issue is enforceable.”). The
applicable state law is that of the transferor state, Texas.
                             B
    The district court found that Core did not establish ir-
reparable injury. We think that the district court’s find-
ing is clearly erroneous, whether assessing irreparable
injury is a matter of Texas law or federal law.
    Under Texas law, “[w]hen a defendant possesses trade
secrets and is in a position to use them, harm to the trade
secret owner may be presumed.” IAC, Ltd. v. Bell Heli-
copter Textron, Inc., 160 S.W.3d 191, 200 (Tex. App. 2005).
The factual situation herein satisfies this presumption of
harm and, in any event, convincingly shows irreparable
harm for a preliminary injunction. As the Court ex-
plained in Ruckelshaus v. Monsanto Co., 467 U.S. 986
(1984), for trade secrets “[t]he economic value of that
property right lies in the competitive advantage over
others that [the trade secret holder] enjoys by virtue of its
exclusive access to the data, and disclosure or use by
others of the data would destroy that competitive edge.”
Id. at 1012. Core provided generally undisputed evidence
that its competitive position has been significantly eroded,
both as to loss of customers to Spectrum, and as to price
erosion.
    Texas precedent is that the threatened disclosure or
use of the trade secrets of another constitutes irreparable
injury as a matter of law. IAC, Ltd., 160 S.W.3d at 200
(“The threatened disclosure of trade secrets constitutes
irreparable injury as a matter of law.”); Williams v. Com-
pressor Eng’g Corp., 704 S.W.2d 469, 471 (Tex. App. 1986)
(holding that “where the uncontradicted evidence shows
that a former employee is working for a direct competitor,
no finding of irreparable injury is necessary to support a
permanent injunction to protect trade secrets” because
10      CORE LABORATORIES LP   v. SPECTRUM TRACER SERVICES

irreparable injury is established as a matter of law).
Moreover, the record here convinces us that it was clear
error to find no irreparable injury on the new facts pre-
sented to the district court by Core upon hearing from the
whistleblower; facts quite different from the facts relevant
to the earlier patent infringement motion.
    Core points out that its fortuitous knowledge that
Spectrum is in possession of Core’s Software Application,
including all twenty-five worksheets, was a dramatic
change in the litigation landscape. In the district court,
the defendants conceded possession of the Software
Application, and the defendants’ Opposition to Core’s
injunction motion included the admission that Spectrum
computers contain additional “files that . . . might have
been created on a Core registered computer” and which
have “Core Laboratories” listed in the file’s “Properties.”
J.A. 1106. The declaration of the whistleblower as pro-
vided by the defendants admits that Spectrum’s “network
administrator” gave him a copy of Core’s Software Appli-
cation and asked him “to review the Excel spreadsheets to
incorporate field work functions into the CRM I was
developing.” Id.
    Core provided evidence that Spectrum’s use of Core’s
proprietary information had already injured its business,
and that Core has lost nearly $1 million worth of jobs to
Spectrum. Core describes its extensive efforts over sever-
al years in development of the Software Application
technology to reliably implement Core’s chemical and
radioactive tracing services for use in underground frack-
ing, whereas Spectrum has avoided development costs by
copying Core’s methodology and software, thus gaining a
market advantage. Core states that an injunction would
require the defendants to “fend for themselves in the
marketplace without the benefit of the trade secrets they
stole from Core.” Appellant Br. 46. Texas courts have
held that competitive injury derived from misappropriat-
ed proprietary information warrants injunctive relief. See
T-N-T Motorsports, Inc. v. Hennessey Motorsports, Inc.,
CORE LABORATORIES LP   v. SPECTRUM TRACER SERVICES        11

965 S.W.2d 18, 24 (Tex. App. 1998) (“Injunctive relief is
proper to prevent a party, which has appropriated anoth-
er’s trade secrets, from gaining an unfair market ad-
vantage.”).
     Core also presented evidence that its clients have
been and are being successfully recruited by Spectrum.
Texas law holds that “[a]n injunction is appropriate when
necessary to prohibit an employee from using confidential
information to solicit his former employer’s clients.”
Rugen v. Interactive Bus. Sys., Inc., 864 S.W.2d 548, 551
(Tex. App. 1993). Core argues that injunctive relief is
necessary because damages adequate to compensate for
Spectrum’s use of Core’s information would be difficult to
calculate. See Miller Paper Co. v. Roberts Paper Co., 901
S.W.2d 593, 597 (Tex. App. 1995) (a legal remedy is
inadequate if damages are difficult to calculate or their
award may come too late). That argument is convincing
for the kind of information at issue here, even if it was not
convincing for the patent infringement at issue earlier.
                             C
    The undisputed facts well support the likelihood that
Core will succeed at trial in showing that “(1) a trade
secret exists; (2) Defendants acquired the trade secret by
breach of a confidential relationship or other improper
means; and (3) Defendants used the trade secret without
authorization.” Gen. Universal Sys., Inc. v. HAL, Inc., 500
F.3d 444, 449 (5th Cir. 2007) (applying Texas law).
    Core showed that information in the Software Appli-
cation meets the Texas definition of a trade secret as “any
formula, pattern, device or compilation of information
which is used in one’s business and presents an oppor-
tunity to obtain an advantage over competitors who do
not know or use it.” Computer Assoc. Int’l, Inc. v. Altai,
Inc., 918 S.W.2d 453, 455 (Tex. App. 1996). Spectrum
does not deny its possession of the Software Application.
Instead, Spectrum argues that Core did not prove that
Spectrum has used or intends to use Core information,
12      CORE LABORATORIES LP   v. SPECTRUM TRACER SERVICES

and points to the whistleblower’s declaration on behalf of
Spectrum: “At no time have I used any text, code, formu-
las, scripts or data obtained from or derived from Core
Laboratories or ProTechnics in my duties as the person
responsible for developing Spectrum’s CRM or any other
computer related functions or programs.” J.A.1105. Core
responds that the whistleblower’s declaration also states
that the “network administrator” instructed him “to
review” and “to incorporate” features of this Software
Application into Spectrum’s software. J.A. 1106.
    Use of a misappropriated trade secret does not require
complete copying or implementation of every detail.
“[A]ny exploitation of the trade secret that is likely to
result in injury to the trade secret owner or enrichment to
the defendant is a ‘use’ . . . [including] marketing goods
that embody the trade secret, employing the trade secret
in manufacturing or production, relying on the trade
secret to assist or accelerate research or development, or
soliciting customers through the use of information that is
a trade secret.” Gen. Universal Sys., 500 F.3d at 451
(applying Texas law). Texas law weighs heavily on Core’s
side.
    As for the public interest, Spectrum states that the
public interest is not implicated, and Core stresses the
public interest in commercial integrity and protection of
legal and property rights. “Injunctive relief is recognized
as a proper remedy to protect confidential information
and trade secrets.” Rugen, 864 S.W.2d at 551.
     Core showed that its information likely meets the def-
inition of trade secret, that it is likely to prevail on the
merits for trade secret misappropriation, and that the
balance of harms and the public interest are in its favor.
Spectrum’s possession of Core’s trade secret information
is presumptively improper and its adverse use during the
potentially prolonged PTO reexamination and appeal
periods is not likely to be fully remediable by monetary
damages. We conclude that the district court abused its
CORE LABORATORIES LP   v. SPECTRUM TRACER SERVICES       13

discretion in denying Core’s motion for a preliminary
injunction.
    We reverse the denial of the preliminary injunction.
The case is remanded to the district court with instruc-
tions to enjoin the defendants from using Core’s trade
secret Software Application and proprietary information
during the litigation of these issues. The court should
define the scope of the injunction consistent with this
opinion. See Utah Licensed Beverage Ass’n v. Leavitt, 256
F.3d 1061, 1077 (10th Cir. 2001) (reversing denial of
preliminary injunction and remanding with instructions
to enter the injunction).
                             D
    The district court stayed all judicial action pending
completion of the patent reexamination proceedings that
Spectrum had initiated. Core requested severance of the
patent counts, and that the district court proceed with the
non-patent counts. The power to stay proceedings “is
incidental to the power inherent in every court to control
the disposition of the causes on its docket with economy of
time and effort for itself, for counsel, and for litigants.”
Landis v. N. Am. Co., 299 U.S. 248, 254 (1936).
     In view of our ruling with respect to entry of the pre-
liminary injunction, the circumstances are sufficiently
changed that review of the severance and stay may be
warranted. On remand the district court may reconsider,
in its discretion, whether to continue the stay in whole or
in part.
                         SUMMARY
    The denial of Core’s motion for a preliminary injunc-
tion is reversed; we remand for implementation of the
injunction, and discretionary review of the stay order.
            REVERSED AND REMANDED