BUSINESS TORT UPDATE I. NEGLIGENT MISREPRESENTATION. A. Background

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1 BUSINESS TORT UPDATE I. NEGLIGENT MISREPRESENTATION A. Background Texas has adopted the tort of negligent misrepresentation as described by the Restatement (Second) of Torts Sec See Federal Land Bank Ass n of Tyler v. Sloane, 825 S.W.2d 439, 442 (Tex. 1991). In Sloane, the court endorsed section 522 to define the scope of a lender s duty to avoid negligent misrepresentation to prospective borrowers. Section 522 (1) provides: One who, in the course of his business, profession or employment, or in any transaction in which he has a pecuniary interest, supplies false information for the guidance of others in their business transactions, is subject to liability for pecuniary loss caused to them by their justifiable reliance upon the information, if he fails to exercise reasonable care or competence in obtaining or communicating the information. Courts applying Texas law have recognized a section 522 cause of action against a variety of professionals and business. See, e.g., Steiner v. Southmark Corp., 734 F. Supp. 269, (N.D. Tex. 1990) (auditor); Smith v. Sneed, 938 S.W.2d 181, 185 (Tex. App. Austin 1997, no writ) (physician); Hagans v. Woodruff, 830 S.W.2d 732, 736 (Tex. App. Houston 1992, no writ) (realestate broker); Lutheran Bhd. v. Kidder Peabody & Co., 829 S.W.2d 300, 309 (Tex. App. Texarkana 1992, writ granted w.r.m.), judgment set aside, 840 S.W.2d 384 (Tex. 1992) (securities placement agent); Blue Bell v. Peat, Marwick, Mitchell & Co., 715 S.W.2d 408, (Tex. App. Dallas 1986, writ ref d n.r.e.) (accountant); Cook Consultants, Inc. v. Larson, 700 S.W.2d 231, 234 (Tex. App. Dallas 1985, writ ref d n.r.e.) (surveyor); Great Am. Mortgage Investors v. Louisville Title Ins. Co., 597 S.W.2d 425, (Tex. Civ. App. Fort Worth 1980, writ ref d n.r.e.) (title insurer); Shatterproof Glass Corp. v. James, 466 S.W.2d 873, 880 (Tex. Civ. App. Fort Worth 1971, writ ref d n.r.e.) (accountant). Nast v. State Farm Fire and Cas. Co., 82 S.W.3d 114 (Tex. App. - San Antonio 2002, no pet.) (insurance agents). 1 Applying section 522, Texas courts have set out the following four elements for a cause of action in negligent misrepresentation: (1) a representation is made by the defendant in the course of his business, or in a transaction in which the defendant has a pecuniary interest; (2) the defendant supplies false information for the guidance of others in their business; (3) the defendant did not exercise reasonable care or competence in obtaining or communicating the information; and (4) the plaintiff suffers pecuniary loss by justifiably relying on the defendant s misrepresentations. Federal Land Bank Ass n of Tyler v. Sloane, Id. B. Recent Developments 1. Application to Attorneys In McAmish, Martin, Brown, and Loeffler v. F. E. Appling Interests, et al., 991 S.W.2d 787 (Tex. 1999), the Texas Supreme Court held that nonclients could sue attorneys for negligent misrepresentation without regard to the nonclient s lack of privity with the attorney. The court rejected arguments that a negligent misrepresentation claim is equivalent to a legal malpractice claim, stating that liability is not based on the breach of duty that a professional owes his or her clients, but on an independent duty to the nonclient based on the professional s manifest awareness of the nonclient s reliance on the misrepresentation and the professional s intention that the nonclient so rely. The Court made it additionally clear that there were several inherent limits on the cause of action as it applied to attorneys. First, negligent misrepresentation is available only when information is transferred by an attorney to a known party for a known purpose. A lawyer may avoid or minimize the risk of liability by setting forth (1) limitations as to whom the representation is directed and who should rely on it, or (2) disclaimers as to the scope and accuracy of the factual investigation or assumptions forming the basis of the representation or the representation itself. Second, the Court stated that the justifiable reliance element required a consideration of the nature of the relationship between the attorney, client, and nonclient. Generally, a third party s

2 reliance on an attorney s representation is not justified when the representation takes place in an adversarial context. Id. at 794. The characterization of the inter-party relationship should be guided by the extent to which the interests of the client and the third party are consistent with each other. Id. In a subsequent case by the Dallas Court of Appeals, Mitchell v. Chapman, 10 S.W.3d 810 (Tex. App. Dallas, 2000, pet. denied), the Dallas Court had a chance to construe the Supreme Court s language regarding an adversarial context. The plaintiff alleged that the opposing attorney in a case negligently misrepresented the existence of a document. The Dallas Court held that the unsuccessful litigant did not have a cause of action for negligent misrepresentation against the attorney on the other side of the case, citing McAmish and Section 522 of the Restatement (Second) of Torts. See also Chapman Children s Trust v. Porter and Hedges, 32 S.W.3d 429 (Tex. App. Houston [14 th ], 2000, pet. denied). In 2003, the Fourteenth Court of Appeals in Houston further applied the McAmish case to an attorney in the case of McMahan v. Greenwood, et al, 108 S.W.3d 467 (Tex. App. Houston [14 th Dist.] 2003, pet. denied). In McMahan, the issue was when the attorney s relationship became adversarial before or after the representations were made. The attorney argued that after he became adversarial with the plaintiff, the plaintiff could no longer rely on previous statements made at a time when arguably they were getting along with and helping each other. The Fourteenth Court of Appeals rejected this argument, holding that no authority was cited to support the argument that a non-client was not entitled to rely on the attorney s previous statements once they became adversarial. Id. at 26. At a minimum, a fact issue was raised in this situation. Id. 2. Application to Accountants In Compass Bank v. King, Griffin & Adamson, P.C., 388 F.3d 504 (5 th Cir. 2004), the plaintiff Compass Bank appealed the dismissal of its negligent misrepresentation claim and asked the 5 th Circuit to certify the following question to the Texas Supreme Court: whether Texas uses an actual knowledge test or a foreseeability requirement for negligent misrepresentation claims against accountants. The 5 th Circuit refused to 2 certify the question, comparing the Restatement (Second) of Torts, Sec. 522 (1977) (requiring actual knowledge) with Blue Bell v. Peat, Marwick, Mitchell & Co., 715 S.W.2d 408 (Tex. App. Dallas 1986, writ ref d n.r.e.)(requiring foreseeability). The 5 th Circuit reached the conclusion that the Restatement position would be the position the Texas Supreme Court would take since Texas has adopted the Restatement of Torts for negligent misrepresentation. The Court was also persuaded by an unpublished opinion by the current Dallas Court of Appeals this year, which appears to go a different direction from Blue Bell. See below Tara Capital Partners I, L.P. v. Deloitte & Touche, L.L.P., 2004 WL (Tex. App. Dallas 2004, pet. denied). Tara Capital Partners v. Deloitte & Touche arose out of a summary judgment for the auditors of a bankrupt corporation. The plaintiffs were shareholders who had purchased stock in Just for Feet, Inc. a month after Deloitte issued its audit report and that report formed the basis for subsequent quarterly statements that Deloitte reviewed. The Dallas Court of Appeals focused on whether the plaintiffs were members of an identifiable limited group of which Deloitte was aware of and intended to influence, which is from the Restatement (Second), Sec.552. The Restatement (Second), Sec. 552 provides that liability is limited to those providers who (1) either intend to supply the information to (or know the recipient of the information intends to supply the information to) a particular person or limited group, and (2) either intends the person or limited group to rely on the information (or knows the person or limited group intends to rely on the information) for a particular or substantially similar transaction. Since the plaintiffs were not existing shareholders at the time the audit report was issued, they were not members of a limited group to which Deloitte owed a duty. The Dallas Court of Appeals did not mention or distinguish Blue Bell v. Peat Marwick, supra. Until the Texas Supreme Court addresses the issue, the appellate opinions on this issue appear to be in conflict. 3. Damages/Fact v. Promise In D.S.A., Inc. v. Hillsboro Independent School District, 973 S.W.2d 662 (Tex. 1998), the Texas Supreme Court considered the question of the appropriate measure of damages under negligent misrepresentation and whether punitive

3 damages were available under a negligent misrepresentation theory. H.I.S.D. sued D.S.A., a contractor hired to build an elementary school, for recovery of costs involved in replacing a roof, repairing plumbing, and re-grading parking lots that were not performed pursuant to the contract between the parties. The Court held that a benefit of the bargain measure of damages was not available for a claim of negligent misrepresentation, since the cause of action implicates only the duty of care in supplying commercial information: honesty or good faith is no defense, as it is to a claim for fraudulent misrepresentation. Id. at 664. The Court held that H.I.S.D. did not meet its burden of proving an independent injury apart from the contract, distinguishing a negligent misrepresentation claim from a fraudulent inducement claim. Id. H.I.S.D. s charge to the jury did not make any distinction between its out of pocket damages and the benefit of the bargain, so it could not recover under negligent misrepresentation. The Court went on to reject H.I.S.D. s award of punitive damages based on gross negligence in the inducement of the contract, stating that [g]iven the availability of a cause of action for fraudulent inducement, we fail to perceive any rationale for acknowledging a claim for grossly negligent inducement. Id. Finally, the Court did not reach an issue that has remained open for Texas courts whether defendants can submit a comparative negligence question to the jury on negligent misrepresentation. See Federal Land Bank Assoc. of Tyler v. Sloane, 793 S.W.2d 692, 696 at n.4 (Tex. App. Tyler 1990), aff d in part and rev d in part on other grounds, 825 S.W.2d 439 (Tex. 1991) ( Contributory negligence is a defense to the cause of action for negligent misrepresentation. ). The trial court refused to submit the comparative negligence question to the jury and the Court of Appeals affirmed on the basis that error was not preserved. The Supreme Court refused to reach the issue because the negligent misrepresentation cause of action was reversed on other grounds, as discussed above. The Court of Appeals in the D.S.A. case has an excellent discussion of the issues involved in the comparative negligence issue. 975 S.W.2d at In Barnett v. Legacy Bank of Texas, 2003 WL (Tex. App. Eastland, pet. denied), a bank brought an action against a guarantor to recover for breach of a limited guaranty agreements in connection with a construction loan that the bank made to the project owner. The guarantor filed counter claims for fraud, negligent misrepresentation, and other claims against both the bank and a bank employee. The trial court granted a summary judgment to the bank and employee. The alleged misrepresentation claim that was the basis for fraud and negligent misrepresentation was that the bank would loan additional funds to cover the cost of change orders if another lender did not loan the needed funds. In regard to the negligent misrepresentation claims, the court held that the sort of false information contemplated in a negligent misrepresentation case is a misstatement of existing fact, not a promise of future conduct. Id. at 8. Since the alleged misrepresentation was a promise of future conduct, the guarantor failed to raise a fact issue and the summary judgment was affirmed. This case distinguishes negligent misrepresentation from fraud, which can be based on promises of future performance. See Formosa Plastics Corporation v. Presidio Engineers and Contractors, Inc., 960 S.W.2d 41 (Tex. 1998). Two other courts in 2004 also wrote on the fact v. promise distinction. In Roof Systems, Inc. v. Johns Mansville Corporation, 130 S.W.3d 430 (Tex. App. Houston [14 th Dist.] 2004, no pet.), a roofing subcontractor for construction of two schools brought claims against the manufacturer of the roofing materials for negligent misrepresentation and other claims. At issue was a representation that a warranty would issue if the roof installer was certified by the manufacturer. Plaintiff argued on appeal that the misrepresentation was that the manufacturer had a policy that precluded it from issuing a warranty. The 14 th Court held that no evidence was presented that the defendant ever represented that it had such a policy. Rather, the claim at trial was the misrepresentation consisted of a statement that the manufacturer would not issue the warranty. Based on this evidence, the 14 th Court held that the misrepresentation was a promise of future conduct and not actionable. Id. at 439. In Tull v. Chubb Group of Insurance Companies, 146 S.W.2d 689 (Tex. App. Amarillo 2004, no pet.), the Amarillo Court of

4 Appeals reached a similar result in a case by an automobile accident victim and the insurance carrier of the defendant driver s insurer against the uninsured motorist carrier. The issue on negligent misrepresentation was whether a statement to the effect that the defendant insurance carrier did not have any exposure and there was plenty of coverage could be an actionable misrepresentation. The Court held that, in context, these statements at most referred to actions that would be taken in the future in settlement of the claims. Id. at In MCN Energy Enterprises, Inc. v. Omagro de Colombia L.D.C., 98 S.W.3d 766 (Tex. App. Fort Worth 2003, pet. denied), a manufacturing company brought an action against a prospective investor for negligent misrepresentation, fraud, and other causes of action. The jury found in favor of the plaintiff and the investor appealed. The negligent misrepresentation involved in the case was the defendant indicating, through words and conduct, that it was committed to making an investment in the construction and operation of a fertilizer plant. Under many negligent misrepresentation cases, this would be considered a future promise and unenforceable. However, the Fort Worth Court of Appeals upheld the negligent misrepresentation finding of the jury against an argument of legally insufficient evidence, relying on the wording on the jury question in issue. The Court also upheld the damages found by the jury of $2.2 million, even though the damages arguably equaled a benefit of the bargain theory. Id. at 5. The evidence was the same on breach of contract, fraud, and negligent misrepresentation. This case may be explained by the wording of the jury questions, but it certainly seems to go a different direction that most of the negligent misrepresentation cases in See, e.g. Agillion, Inc. v. Oliver, 114 S.W.3d 86 (Tex. App. Austin 2003, no pet.)(no negligent misrepresentation when contract existed between parties); New York Life Insurance Company v. Miller, 114 S.W.3d 114 (Tex. App. Austin 2003, no pet.)(no negligent misrepresentation when representations were primarily from contract). Compare Lyda v. Butler Manufacturing Company, 103 S.W.3d 632 (Tex. App. San Antonio 2003, no pet.)(no contract was shown by supplier simply delivering materials after letter received by contractor, but fact issue on negligent misrepresentation). The plaintiff seems to be helped in these cases if its proof on breach of 4 contract fails to materialize. In 2004, the First Court of Appeals in Houston again illustrated this principle in a case between a franchisee and franchisor, Carousel s Creamery, L.L.C. v. Marble Slab Creamery, Inc., 134 S.W.3d 385 (Tex. App. Houston [1 st Dist.] 2004, pet. filed) In Carousel s Creamery, Carousel contended that negligent misrepresentations were made regarding Marble Slab s earnings, since they did not disclose that corporate employees provided labor at the stores and also added in catering revenue to the earnings. Marble Slab brought a counter claim based on breach of contract. The trial judge directed a verdict on the negligent misrepresentation claim and plaintiffs appealed. On appeal, the 1 st Court of Appeals focused on the elements of negligent misrepresentation and the independent injury requirement to hold that Carousel had no obligation to show an independent injury, since it had abandoned its contract claim. Id. at 392. Further, the Court held that a disclaimer clause that stated Carousel had not received any information on sales or profits and was not relying on representations regarding profitability was not effective to preclude the negligent misrepresentation claim because the parties were not represented by counsel and negotiations were not at arms-length. Finally, the Court also held that the alleged misrepresentations did not contradict the terms of the contract and that a merger clause did not operate to foreclose liability because the clause only contemplated contractual obligations, and not tort liability. 4. Statute of Limitations Discovery Rule The Texas Supreme Court in HECI Exploration Co., et al. v. Neel, et al., 982 S.W.2d 881 (Tex. 1999) discussed the issue of whether the discovery rule tolled the statute of limitations in a negligent misrepresentation claim arising from an oil and gas lessee s failure to notify royalty owners of a cause of action against an adjoining operator for depleting a common reservoir. The Court first noted that the statute of limitations for negligent misrepresentation is two years, which was not a disputed issue between the parties in this particular case. Id. at 884. See also, Milestone Properties, Inc. v. Federated Metals Corp., 867 S.W.2d 113 (Tex. App. Austin 1993, no writ). The Court then analyzed the discovery rule issue by focusing on the type of injury

5 suffered in this implied covenant case, following the reasoning of Computer Associates International v. Altai, 918 S.W.2d 453 (Tex. 1996). 1 The Court held that the type of injury in this case failure to notify about certain facts was not inherently undiscoverable because the royalty owners should have known about other operators in the area and the existence of a common reservoir. The Court s reasoning made it clear that the type of injury suffered by the plaintiffs in future cases will govern whether the discovery rule applies in other negligent misrepresentation cases. In more recent cases, lower courts have applied the rule set out in HECI Exploration Co. In Sabine Towing and Transportation Co., Inc. v. Holliday Insurance Agency, Inc., 54 S.W.3d 57 (Tex. App. Texarkana 2000, pet. denied), the Texarkana Court of Appeals also followed the HECI rule to find that the discovery rule did apply to negligent misrepresentation causes of action, but did not apply to the particular case they were reviewing. The Court of Appeals used the two prong test to find that a denial of insurance coverage was not an inherently undiscoverable injury, in a case in which the plaintiff complained about not being added as an insured under a commercial insurance policy. See also Matthiesen v. Schafer, 27 S.W.3d 25, 31 (Tex. App. San Antonio 2000, pet. denied) (discovery rule may be applied to negligent misrepresentation); Prieto v. John Hancock Mutual Life Insurance Company, 132 F. Supp.2d 506 (N.D. Tex. 2001) (discovery rule applied to negligent misrepresentation, but did not apply in insurance misrepresentation case because not objectively verifiable ); Heller Healthcare Finance, Inc. v. Boyes, 2002 WL (N.D. Tex.). But see In re: Precept Business Services, Inc., and Steve Turoff, Trustee v. Jackson Walker, L.L.P., 2004 WL (Bankr.N.D.Tex.) (discovery rule does not apply to negligent misrepresentation in Texas, but fraudulent concealment doctrine does apply). In Oat Note, Inc. v. Ampro Equities, 141 S.W.3d 274 (Tex. App. Austin 2004, no pet.), a real estate owner brought an action against a commercial vendor and a purchaser of a nearby lot. The purchaser had assumed an obligation to construct a road after the owner completed a lowlevel crossing. The issue on negligent misrepresentation was the effect on the negligent misrepresentation cause of action of an as is clause in the contracts between the parties. The negligent misrepresentation was that the purchaser had not received notice that the low-level crossing was complete, which led to the lawsuit over the construction of the road. The Austin Court of Appeals reviewed the law on as is contracts, including the Texas Supreme Court case of Prudential Insurance Co. of America v. Jefferson Associates, Ltd., 896 S.W.2d 156 (Tex. 1995), and held that the harm caused was not related to the value of the property, or other assertions about the condition of the property conveyed, so that the as is clause did not bar the negligent misrepresentation cause of action as a matter of law. The Court also held that damages could be assessed on the negligent misrepresentation. In Bynum v. Prudential Residential Services, Ltd. Partnership, 129 S.W.3d 781 (Tex. App. Houston [1 st Dist.] 2004, pet. denied), the 1 st Court of Appeals also wrote on an as is case. A purchaser of a home brought a claim against the seller of the home and others for failure to disclose structural and electrical problems in the home in response to a statutory disclosure form. The earnest money contract had an as is clause. The Court reviewed the totality of the circumstances, as required by the Prudential case, including whether the as is clause was a basis of the bargain, and whether the parties had relatively equal bargaining positions. Since the plaintiffs had a licensed real estate broker, had the home inspected, and had entered into as is contracts before, the Court held that they were barred by the as is clause from their negligent misrepresentation claim. 5. Justifiable Reliance 1 In Altai, a trade secret case, the Court articulated two principles that generally apply in discovery rule cases: (1) the nature of the injury must be inherently undiscoverable, and (2) the injury itself must be objectively verifiable. In Coastal Bank SSB v. Chase Bank of Texas, N.A., 135 S.W.3d 840 (Tex. App. Houston [1 st Dist.] no pet.), a participant in a bank syndicate that loaned money to a mortgage company brought a negligent misrepresentation claim against Chase Bank, the leader of the syndicate. The misrepresentation in issue was that Chase had indicated the credit history of the mortgage 5

6 company was very satisfactory. Chase moved for summary judgment on the grounds that Coastal could not prove reliance as a matter of law because provisions in the contract provided that Coastal would do its own independent investigation and analysis of the credit. The 1 st Court of Appeals cited the Texas Supreme Court cases of McCamish and Schlumberger, supra, for analysis of reliance on representations made in an adversarial context and representations made with sophisticated parties. Since the language of the contract provided that Coastal would do its own credit investigation and further provided that it was entering into the contract without reliance upon the Lead (Chase), the Court affirmed the summary judgment. In Swank, et al v. Sverdlin, et al, 121 S.W.3d 785 (Tex. App. Hous. [1 st Dist.] no pet.), a corporation s investors and agents brought an action for an injunction against a former CEO of the corporation. The former CEO filed a counterclaim individually and on behalf of the corporation in its derivative capacity for fraud, breach of fiduciary duty, negligent misrepresentation, and other causes of action. The jury awarded $1.5 billion to the CEO and the corporation. The verdict was reduced by the trial judge who heard the case to $235 million. A second trial judge who heard further post judgment motions reduced the judgment to $180 million. Numerous issues were appealed on the various causes of action. In regard to the negligent misrepresentation cause of action, the trial judge had disregarded the jury s affirmative finding and the plaintiffs appealed. In particular, the First Court analyzed whether plaintiff had proven justifiable reliance. The First Court focused on both the nature of the relationship and the contract to hold that the reliance was not justified as a matter of law. Id. at 19. The Court cited McCamish, et al v. F.E. Appling Interests, supra, holding that representations made in a business or commercial transaction were not justified when the representation took place in an adversarial context. The contracts were also contrary to the misrepresentations. This case may mark the first time that the McCamish analysis, which has previously only been applied to attorneys, also is applied to other negligent misrepresentation. The Court further held that the representations were promises of future conduct, and, as such, could not form the basis for negligent misrepresentation. 6 The Fourteenth Court of Appeals in Houston also wrote on justifiable reliance in In Beal Bank v. Schleider, 124 S.W.3d 640 (Tex. App. Houston [14 th Dist.], pet. denied), a maker of a promissory note asserted claims for negligent misrepresentation and other causes of action against a bank. The jury found in favor of the plaintiff and judgment was entered against the bank. The bank appealed, claiming no justifiable reliance as a matter of law. The Court also focused on the contract, holding that a provision stating that no modification is binding unless it is in writing foreclosed the plaintiff from proving reliance. Id. at Partial Disclosure/Duty to Disclose Two cases came out in 2004 regarding the issue of partial disclosure in negligent misrepresentation cases. First, the Waco Court of Appeals in Rosas v. Hatz, 147 S.W.3d 560 (Tex. App. Waco 2004, no pet.) decided a case arising out of a home purchase. In Rosas, the purchaser of the home brought suit because of electrical and plumbing problems that came to light after the purchase. The trial court granted summary judgment on the grounds that no affirmative representation was made by the defendant. On appeal, the Waco Court reviewed the law on negligent misrepresentation and stated the following: A negligent misrepresentation claim requires that the defendant make a false representation. Fed. Land Bank Ass n. v. Sloane, 825 S.W.2d 439, 442 (Tex. 1991). While a broker has no duty to inspect the property and disclose all facts which might affect its value or desirability, one who knows all the facts and provides false information, or one who makes a partial disclosure and conveys a false impression, may be liable for negligent misrepresentation. See Hagans v. Woodruff, 830 S.W.2d 732, 736 (Tex. App. Houston [14 th Dist.] 1992, no writ) (citing Kubinsky v. Van Zandt Realtors, 811 S.W.2d 711, 715 (Tex. App. Fort Worth 1991, writ denied)); Hoggett v. Brown, 971 S.W.2d 472, 487 (Tex. App. Houston [14 th Dist.] 1997, pet. denied).

7 The evidence at the trial court level was that the plaintiffs had been told the house was partially re-wired and the plumbing was replaced and redone. The Court held this gave rise to a reasonable inference that any problems with the house had been fixed. The Court acknowledged that the defendants did not make any affirmative misrepresentations, but still held that fact issues were presented by the testimony on negligent misrepresentation. The 14 th Court of Appeals in Bennett v. Cochran, 2004 WL (Tex. App. Houston [14 th Dist.], no pet.) not designated for publication, substitute opinion on remand), in a law partnership dispute case, dealt with several potential statements that the plaintiff alleged were negligent misrepresentations: (1) the defendant had a $250,000 line of credit ; (2) the defendant s law firm was a viable law firm, with substantial cases on its docket; and (3) the defendant s docket had good cases that were worth a lot of money. In regard to the first representation on the line of credit, the Court held that the bare statement to this effect was true, even though the defendant had drawn down on the letter of credit. Id. at 6. The second statement was not supported by evidence at trial. The final statement was made by one of the defendant s partners in his presence, and he failed to correct it. The Court held that the defendant had no duty to correct it and it was nonactionable puffing or opinion. Id. At 8. These differences in these two cases demonstrate how the appellate courts are treating partial disclosure in misrepresentation cases. With both negligent misrepresentation and fraud, there are definitely different views on whether misrepresentations are actionable when a false impression is left with the plaintiff based on statements that are literally true. 7. Alter Ego In an unusual case dealing with a Rule 13 sanctions motion, the Texarkana Court of Appeals held that a creditor cannot maintain a negligent misrepresentation claim against shareholders of a corporation arising out of corporate debt without proving alter ego. Texas-Ohio Gas, Inc. v. Mecom, et al., 28 S.W.3d 129 (Tex. App. Texarkana 2000, no pet.). The trial court in this case dismissed the shareholders from the suit on the basis of Rule 13 sanctions, ruling that the suit 7 against the defendant shareholders was groundless as a matter of law. The Texarkana Court of Appeals agreed, but reversed because the trial court had held no hearing to determine that the case was filed in bad faith or for the purposes of harassment. The interesting part of the case dealing with negligent misrepresentation states (possible dicta) that the allegation of negligent misrepresentation was groundless because by definition there can be no fraud involved to pierce the corporate veil under Art of the Texas Business Corporation Act. In Harco Energy, Inc., et al v. The Re-Entry People, Inc., 23 S.W.3d 389 (Tex. App. Amarillo 2000, no pet.), the Amarillo Court of Appeals went a different direction, holding that the evidence was not sufficient in a bench trial to support a negligent misrepresentation claim against some of the corporate entities because there was no evidence of reliance on the part of the plaintiff. The evidence was sufficient to sustain the judgment against the president of the corporation, although the Court apparently only reached the issue on breach of contract and fraud. The issue of when a president or individual of a corporation may be held individually liable for negligent misrepresentations made in the capacity of corporate representative was specifically addressed by the Corpus Christi Court of Appeals in Kingston v. Helm, 82 S.W.3d 755 (Tex. App. - Corpus Christi 2002, pet. denied). Kingston involved a purchaser who brought action against the developer and its president for alleged deceptive trade practices, fraud, and negligent misrepresentation stemming from the purchase of a town home. The Court of Appeals held that: (1) the purchaser was not required to pierce the corporate veil in order to hold developer s president individually liable, and (2) the purchaser was not required to prove fraud by the shareholder liability provision of the Texas Business Corporation Act in order to hold president personally liable. 8. Jury Charge Carr, et al v. Weiss, 984 S.W.2d 753 (Tex. App. Amarillo 1999, pet. denied) involved a claimant who found an apartment complex as an investment opportunity and sued the ultimate purchaser of the complex, alleging negligent misrepresentation on the basis of an agreement

8 that the two would own it together. The plaintiff submitted the following as the jury question on negligent misrepresentation: Did Jim Carr make a negligent misrepresentation on which Larry Weiss justifiably relied? Negligent misrepresentation occurs when: a. a party makes a representation in the course of his business or in a transaction in which he has a pecuniary interest, b. the representation supplies false information for the guidance of others in their business, and c. the party making the representation did not exercise reasonable care or competence in obtaining or communicating the information. The defense argued that the jury question was inadequate because it did not contain a definition of negligence and the jurors might not understand the legal meaning or have a different understanding of the legal meaning. The Court held without elaboration that the question and instruction submitted were sufficient. Id. at Release In Atlantic Lloyds Insurance Company v. Butler, et al, 137 S.W.3d 199 (Tex. App. Houston [1 st Dist.] 2004, pet. denied), the 1 st Court of Appeals reviewed a summary judgment in favor of defendants on coverage issues that arose out of a settlement and release in a toxic tort case. The plaintiffs claimed that negligent and fraudulent misrepresentations had been made on the amount of coverage available for settlement. The defendants relied on a disclaimer of reliance clause in the releases signed by the parties, which they argued precluded the claims. The 1 st Court analyzed both the negligent and fraudulent misrepresentations by focusing on the reliance element and the Texas Supreme Court case of Schlumberger Technology Corporation v. Swanson, 959 S.W.2d 171 (Tex. 1997). The plaintiffs attempted to distinguish Schlumberger by arguing that the amount of available coverage 8 was not a subject of the parties dispute, but the 1 st Court held that the record indicated otherwise. Id. at 217. The disclaimer contained in the releases conclusively negated the element of reliance on the coverage representations and the summary judgment was affirmed. The Court further held that the release also applied to the parent company of the defendants expressly named in the release, one of the defendant s insurers, and employees of the defendant under a broad release clause (defendant and its parent companies, subsidiaries, officers, agents, and employees). Id. at 218. This clause was not so broad as to be a general class of tortfeasors, which does not discharge the liability of each member of that class. See Duncan v. Cessna Aircraft, 665 S.W.2d 414 (Tex. 1984). Trinity Industries, Inc. v. Ashland, Inc., et al, 53 S.W.3d 852 (Tex. App. Austin 2001, pet. denied), involved a plaintiff who purchased a steel vessel manufacturing subsidiary from the defendant, and later brought suit for environmental contamination and cleanup costs. The defendant seller asserted third-party claims against the subsidiary, now owned by the plaintiff, for negligent misrepresentation and fraud, seeking to put the responsibility effectively back on the plaintiff for the misrepresentations made prior to the sale. At issue was a release in the purchase agreement that provided that Ashland (Seller) and their affiliates shall have released Beaird (subsidiary) from any and all claims, demands, debts and liabilities of any nature whatsoever. The question presented by the release was whether the release covered negligent misrepresentation and fraud claims, leaving plaintiff Trinity free to sue the defendant Ashland for breach of contract for bringing the suit against its subsidiary Beaird. The Austin Court of Appeals reviewed the law regarding releases, stating that releases were subject to the rules of construction governing both contracts and indemnities. In particular, the Court found that a releasing instrument must specifically mention the claim to be released to be effective, and that the broad language of the clause ( all claims ) did not release either negligent misrepresentation or fraud. The Court s reasoning included a reference to the express negligence test involved in Dresser Industries, Inc. v. Page Petroleum, Inc., 853 S.W.2d 505 (Tex. 1993). See also Baty v. Protech

9 Insurance, 63 S.W.3d 841, 855 (Tex. App. Houston [14th Dist.] 2001, pet. denied) (settlement agreement providing for release of any claim based upon non-compete agreement did not release tort claims because not mentioned). 10. Declaratory Judgment In Averitt v. PriceWaterhouseCoopers L.L.P., 89 S.W.3d 330 (Tex. App. -Fort Worth 2002, no pet.), the Court addressed the issue of whether it was proper to use a declaratory judgment action to determine potential liability on a negligent misrepresentation claim. Averitt was a long standing client of PriceWaterhouseCoopers, L.L.P. (collectively, PWC) and eventually hired them to create a trust for her oil and gas interests. The Trust was created with the principle purpose of allowing the Averitt family to take advantage of the generation-skipping transfer tax exemption under the Internal Revenue Code. Eventually, it was discovered that PWC had never filed a gift tax return for the Trust, and Averitt filed suit in Midland County for breach of contract, accounting malpractice, breach of fiduciary duty, and fraud. In response, PWC filed a declaratory judgment action in Tarrant County. Averitt moved to transfer venue to Midland County and filed a plea in abatement asking the trial court to abate PWC s declaratory judgment action pending final adjudication of Averitt s suite in Midland County. In addition, Averitt moved for summary judgment on the grounds that PWC had failed to state a cause of action for which declaratory relief could be granted. The trial court denied Averitt s motion to transfer venue, plea in abatement, and motion for summary judgment and granted summary judgment for PWC on its declaratory judgment claim. The Fort Worth Court of Appeals held that the declaratory judgment action was improper because Averitt s claims sounded in tort rather then a breach of contract. Id. at 5. The court further stated that a declaratory judgment action can only be used to decide a real controversy, not a potential one. Id. II. BREACH OF FIDUCIARY DUTY be found in some relationships as a matter of law. See e.g., Langford v. Shamburger, 417 S.W.2d 438 (Tex. Civ. App. Fort Worth 1967, writ ref d n.r.e.) (trustee-beneficiary); Archer v. Griffith, 390 S.W.2d 735 (Tex. 1965) (attorney-client); Johnson v. Peckam, 120 S.W.2d 786 (Tex. 1938) (partners) (See also Texas Revised Partnership Act, Art. 6132b-1.01 et seq.); Anderson v. Griffith, 501 S.W.2d 695 (Tex. Civ. App. Fort Worth 1973, writ ref d n.r.e.) (real estate brokers and agents); International Bankers Life Ins. Co. v. Holloway, 368 S.W.2d 567 (Tex. 1963) (directors and officers-corporation); Hyde Corporation v. Huffines, 314 S.W.2d 763 (Tex. 1958) (licenseelicensor). In other relationships, the plaintiff must prove the fiduciary relationship as a question of fact. See e.g., Crim Truck & Tractor Co. v. Navistar Int l Transport Corp., 823 S.W.2d 591 (Tex. 1992) (no fiduciary duty as a matter of law between franchiser and franchisee existence of relationship is a fact question); Associated Indemnity Corp. v. CAT Contracting, 964 S.W.2d 276 (Tex. 1998) (no fiduciary relationship as a matter of law between surety and principal on construction bond); Insurance Co. of North America v. Morris, 981 S.W.2d 667 (Tex. 1998) (no fiduciary duty on surety-principal on securities investment bonds). The courts have focused on the entire relationship between the parties, and more specifically, on the defendant s acts, to determine whether the finding of a fiduciary relationship is warranted. See English v. Fisher, 660 S.W.2d 521 (Tex. 1983). Subjective belief and trust on the part of the plaintiff is not enough. The defendant must, by some undertaking, give the plaintiff a reasonable basis for believing that the defendant would act in the plaintiff s best interests. Crim Truck & Tractor Co. v. Navistar, Id. To impose a fiduciary relationship in a simple business transaction, Texas courts typically have required a finding of a fiduciary relationship prior to and apart from the transaction in question. See Swanson v. Schlumberger Tech. Corp., 959 S.W.2d 171 (Tex. 1997); Insurance Co. of North America v. Morris, Id. A. Background Under Texas law, the first step in determining whether a breach of fiduciary duty has occurred is determining whether a fiduciary relationship exists between the parties. A fiduciary relationship will 9 Other general factors that Texas courts have considered in deciding fiduciary relationships have included family ties, Texas Bank and Trust Co. v. Moore, 595 S.W.2d 502 (Tex. 1980) (auntnephew); non-legal professional relationships. Sauvres v. Christian, 253 S.W.2d 470 (Tex. Civ.

10 App. Fort Worth 1952, writ ref d n.r.e.) (accountant); Pace v. McEwen, 574 S.W.2d 792 (Tex. Civ. App. El Paso 1978 writ ref d n.r.e.) (stockbroker); co-tenants, Hammon v. Ritchie, 547 S.W.2d 698 (Tex. Civ. App. Fort Worth 1977, writ ref d n.r.e.). In these cases, the relationship alone does not create the fiduciary relationship, but it may be a factor in establishing a factual fiduciary relationship. The duties of a fiduciary, once the relationship has been established, can vary depending on the instrument involved, special statutes, and the common law. However, in general, the following duties have been recognized by Texas Law: 1) duty of competence; TEXAS PROP. CODE Sec (trustee); International Bankers Life Ins. Co. v. Holloway, 368 S.W.2d 567 (Tex. 1963) (corporate directors) (See also Tex. Bus. & Corp. Act Art D and Art C; T.R.P.A. Tex. Rev. Civ. Stat. Art. 6132b-4.04(c) - business judgment rule ) (partners); Davis v. Sheerin, 754 S.W.2d 375 (Tex. App. Houston [1 st Dist.] 1988, writ denied) (minority shareholders against majority). 2) duty to exercise reasonable discretion; Sassen v. Tanglegrove Townhouse Condo Assoc., 877 S.W.2d 489 (Tex. App. Texarkana 1994, writ denied) (condo association designated as atty-infact); Corpus Christi Bank and Trust v. Roberts, 597 S.W.2d 752 (Tex. 1980) (trustee exercise of discretion always subject to review). 3) duty of loyalty; Slay v. Burnett Trust, 187 S.W.2d 377 (Tex. 1945) (fiduciary cannot gain any benefit for himself at expense of his beneficiary); Texas Bank and Trust Co. v. Moore, 595 S.W.2d 502 (Tex. 1980) ( presumption of unfairness that arises from any gift or advantage of opportunity); International Bankers Life Ins. Co. v. Holloway, 368 S.W.2d 567 (Tex. 1963) (corporate officers took secret commissions on sale of corporate real estate). v. Kennedy, 669 S.W.2d 309 (Tex. 1984) (affirmative duty to make a full and accurate confession of transactions, profits, and mistakes); Willis v. Maverick, 760 S.W.2d 642 (Tex. 1988) (breach of duty of disclosure is same as fraudulent concealment); Archer v. Griffith, 390 S.W.2d 735 (Tex. 1965) (beneficiary not required to prove elements of fraud); Johnson v. Peckam, 120 S.W.2d 786 (Tex. 1938) (beneficiary not required to prove he relied on fiduciary to disclose). When a fiduciary profits or benefits in any way from a transaction with the beneficiary, a presumption of unfairness arises that shifts the burden of persuasion to the fiduciary to show: 1) that the transaction was made in good faith; 2) that the transaction was fair and equitable to the beneficiary; and 3) after full and complete disclosure of all material information to the principal. Stephens County Museum, Inc. v. Swenson, 517 S.W.2d 257 (Tex. 1974); Texas Bank and Trust Co. v. Moore, 595 S.W.2d at 509. If there is no evidence rebutting the presumption, no breach of fiduciary question is necessary. Id. B. Recent Developments 1. Stockbrokers In Edward Jones & Co., et al v. Fletcher, 975 S.W.2d 539 (Tex. 1998), the Texas Supreme Court addressed the question of whether a stockbroker has a legal duty to ascertain the mental competence of the investor prior to assisting in transferring securities. Plaintiff, the independent executrix of an estate, brought suit against Edward Jones & Co. based on the transfer of securities to the nephew of the decedent prior to the decedent s death. The lawsuit was based on negligence, breach of fiduciary duty, duty of good faith and fair dealing, and negligent misrepresentation, among other causes of action. The jury found in favor of plaintiff and the Court of Appeals affirmed. The Texas Supreme Court held that the stockbroker had no duty, fiduciary or otherwise, to determine the competence of the investor, reasoning that the law afforded protection already to incompetents through guardianships and by making their agreements voidable. Id. at ) duty of full disclosure; Montgomery 10 Courts interpreting Texas law in the past have

11 looked at the scope of the agency and the extent of authority to make trades in determining whether the stockbroker owed a fiduciary duty to the customer. See Miley v. Oppenheimer & Co., Inc., 637 F.2d 318 (5 th Cir. 1986); Magnum Corp. v. Lehman Bros., 794 F.2d 198 (5 th Cir. 1986). In general, a non-discretionary account has been viewed as creating a very narrow common law fiduciary duty, imposing only the obligation to not make unauthorized trades. Miley, supra. A broker who manages a discretionary account, where he is not limited to the express orders of the client, will be held to a much broader fiduciary duty. Id. The Texas Supreme Court in Edward Jones did not really analyze this case from the standpoint of a fiduciary duty, choosing instead to focus on whether any duty at all was owed to the customer. More recently, the Austin Court of Appeals has followed the Edwards case to hold that an investment firm had no fiduciary duty to inform a spouse of a change in beneficiary, even though she was also their client. In Anton v. Merrill Lynch, et al, 36 S.W.3d 251 (Tex. App. Austin 2001, pet. denied), an investor s surviving spouse sued Merrill Lynch and their investment advisor, claiming that Merrill violated a fiduciary duty when they complied with the investor s request to remove the spouse as death beneficiary of the investor s individual retirement account. The Austin Court of Appeals first held that the investment firm had no duty to ascertain the investor s competence, citing Edwards. The second issue the Court faced, whether the investment firm had a duty to inform the spouse of the change in beneficiary, was an issue of first impression. The Austin Court of Appeals reviewed the policy issues at stake and reached the conclusion that the imposition of such a duty would create great burdens on financial consultants. Id. at 257. The Court further reviewed the additional issue of whether Merrill had a duty to inform her that she would no longer receive all the IRA funds after her spouse s death, which the plaintiff based on an agency theory. The Court stated that this was a closer issue. Nevertheless, the Court found that no duty existed because the anticipated asset that disappeared was not part of her Merrill Lynch account for which the agency was created. In summary, the Austin Court concluded that none of the fiduciary claims survived summary judgment. 2. Attorneys 11 The Supreme Court in 2002 held that an associate owes a fiduciary duty to his law firm not to personally profit or realize any financial gain from referring a matter to another law firm or lawyer, absent the employer s permission. See Johnson v. Brewer & Pitchard, P.C., 73 S.W.3d 193 (Tex. 2002). The court had very little trouble concluding that under common-law agency principles, the associate-law firm relationship is a fiduciary one. Id. at 202. As such, an associate may not personally profit from a referral without the permission of the law firm. Justice Owen was very careful to state, however, that an associate may refer a client or potential client to someone other than his own firm without violating his fiduciary duty, provided the associate does not receive any benefit, compensation, or other gain as a result of the referral. Id. at 203. In Manon v. Solis, 142 S.W.3d 380 (Tex. App. Houston 2004 [14 th Dist.] pet. denied), an attorney employee brought an action against his former employer, alleging a fiduciary duty in preemployment negotiations. Plaintiff appealed after a judgment against her, claiming that the evidence at trial conclusively established the existence of a fiduciary relationship. The Court reviewed the evidence of a casual friendship in law school, social contact, and separate career paths after law school to reach the conclusion that no fiduciary relationship was present pre-employment. In Aiken v. Hancock, 115 S.W.3d 26 (Tex. App. San Antonio 2003, pet. denied), a client sued his attorney for misrepresenting that the attorney was ready for trial and that the retained expert was adequately prepared. The Court of Appeals rejected the breach of fiduciary duty claim because there was no indication that the attorney obtained an improper benefit. The Court distinguished breach of fiduciary duty from an ordinary negligence case. (For a similar perspective, see Gonzales v. America Title Company of Houston, 104 S.W.3d 588 (Tex. App. Houston [1 st Dist.] 2003, pet. denied). The Court held that the title company may have acted unprofessionally but that is not the same as a breach of fiduciary duty). In Burrow v. Arce, 997 S.W.2d 229 (Tex. 1999), the Texas Supreme Court held that a client need not prove actual damages to obtain forfeiture of an attorney s fee once a breach of fiduciary duty

12 by the attorney is established. Once the jury finds that an attorney has breached his fiduciary duty to the client, the trial court determines the amount of any fee forfeiture, since it is an equitable remedy. Id. at 234. It is within the discretion of the trial court to determine whether the attorney receives full compensation or whether compensation will be reduced or denied. Id. at 243. In Jackson Law Office, P.C. v. Chappell, et al, 37 S.W.3d 15, (Tex. App. Tyler 2000, pet. denied), the Tyler Court of Appeals followed Arce in determining that a trial court had exercised his discretion in reducing a fee by $5000. More recently, the Houston Court of Appeals followed Arce in deciding whether a directed verdict was proper relating to claims for fee forfeiture based on a law firm s alleged breaches of fiduciary duty. See Deutsch v. Hoover, Bax & Slovacek, L.L.P., 97 S.W.3d 179 (Tex. App. - Houston [14 th Dist.] 2002, no pet.). In Deutsch, the court reiterated the holding in Arce which stated that clients need not prove actual damages to obtain fee forfeiture for their attorney s breach of fiduciary duty. Id. at 8. Rather, the jury must determine the factual issues before the trial court can determine whether the breach of fiduciary duty, if any, found by the jury was a serious breach that merits fee forfeiture. Id. at 9. If the facts seem to warrant fee forfeiture, then the trial court determines the extent of the forfeiture. Id. Because there were fact issues regarding the breach of fiduciary duty, the jury, not the trial court, had to determine these fact issues. Therefore, the trial court erred in granting directed verdict as to the fee forfeiture claims. Subsequent appellate courts have made it clear that the forfeiture of attorney fees for the breach of fiduciary duty are reserved for clear and serious violations of duty. See e.g., Malone v. Watkins, 2002 WL (Tex. App. Houston [1st Dist.], no pet.) (holding that attorney s breach of fiduciary duty in allegedly disseminating confidential information was inadvertent, did not cause significant injury to the client, and therefore did not warrant forfeiture of attorney fees). 3. Insurance Duties health insurance underwriter brought a fiduciary duty claim against a third party administrator and its parent corporation in connection with a transfer of policies to a different insurer. After a jury verdict in plaintiff s favor, several issues were presented on appeal in regard to the fiduciary duty claim. First, the Austin Court of Appeals faced the issue of whether a fiduciary duty existed as a matter of law between the third party administrator and the health insurer. After reviewing the law of agency, the Texas Insurance Code, and the contract between the parties, the Court reached the conclusion that a fiduciary duty existed as a matter of law. The Court of Appeals next turned to the issue of burden of proof on compliance and breach of the duty. Reviewing the case law on presumption of unfairness, the Court held that the third party administrator, since it received benefits out of the transaction, had the burden of proof to prove that the transaction was fair and equitable. Finally, the Court addressed the issue of whether damages were appropriate for breach of fiduciary duty, since the parties relationship was created by and governed by a contract. The Court examined the nature of the injury and found that the claims were not governed by the contract, which dealt with how to market and administer the business, but with loss of a book of business and a decrease in the amount of funds available to pay claims. Therefore, the damages were primarily sounding in tort and were a result of the breach of fiduciary duty. In Duddlesten v. Highland Insurance Co., 110 S.W.3d 85 (Tex. App. Houston [1 st Dist.] 2003, pet. denied) an employer sued its worker s compensation carrier, claiming that it had breached its fiduciary duty by inappropriately settling and paying claims. The Houston Court of Appeals [1 st Dist.] held that there is no general fiduciary duty between an insurer and its insured. Citing its prior ruling in R.R. Street, the Court held that to impose an informal fiduciary relationship in a business transaction, the requisite special relationship of trust and confidence must exist prior to, and apart from, the agreement made the basis of the suit. Because the Appellant produced no evidence of such a relationship, the Court upheld the summary judgment on the breach of fiduciary duty claim. In National Plan Administrators, Inc. v. National Health Insurance Company, 2004 WL (Tex. App. Austin Sept. 10, 2004), a Power of Attorney Creates Fiduciary Duty as a Matter of Law

13 In Vogt v. Warmock, 107 S.W.3d 778 (Tex. App. El Paso 2003, pet. denied), the executor of estate sued the woman who had been given the decedent s power of attorney. She had never acted under the power of attorney and none of the gifts she received from her elderly lover were effectuated by the power of attorney. Nonetheless, the Court held that as a matter of law she owed a fiduciary duty on the basis of the power of attorney and that as a result, she had the burden to prove that the gifts she received were given fairly. 5. Aiding and Abetting a Breach of Fiduciary Duty/Contribution In Hendricks, et al v. Grant Thornton, 973 S.W.2d 348 (Tex. App. Beaumont 1998, pet denied), the Beaumont Court of Appeals wrote on several issues in a fraud and breach of fiduciary duty case arising out of a failed government securities trading program. The primary defendant was the accounting firm of Grant Thornton, which worked for an investment firm known as Hillcrest Securities Corporation. The trades, on which plaintiffs lost thousands of dollars, were purportedly reviewed and verified for authenticity by Grant Thornton. Summary judgment was granted for Grant Thornton on several causes of action, including fiduciary duty, Texas securities claims, fraud, and aiding and abetting breach of fiduciary duty. Summary judgment was also granted for the plaintiffs on the defendants claims for contribution against the plaintiffs. Both sides appealed. breach of fiduciary duty. See City of Fort Worth v. Pippen, 439 S.W.2d 660 (Tex. 1969) and Remenchik v. Whittington, 757 S.W.2d 836 (Tex. App. Houston [14 th Dist.] 1988, no writ). The third party can also be held liable for accepting benefits from the transaction knowing the benefits were the result of a breach of fiduciary duty. Cf. Stephens County Museum, Inc. v. Swenson, 517 S.W.2d 257 (Tex. 1975). A third party will not be held liable for knowingly participating in a breach of fiduciary duty when the third party is doing that which they have a legal right to do. See Baty v. Protech Insurance, 63 S.W.3d 841, 855 (Tex. App.- Houston [14th Dist.] 2001, pet. denied). In regard to contribution, the Court of Appeals listed the various contribution schemes available in Texas and reached the conclusion that the case fell within TEX. CIV. PRAC. & REM. CODE ANN. Sec , the original contribution scheme. The court was aided by the fact that the case had been filed before the effective date of the comparative responsibility statute, Ch. 33 of the Civil Practice and Remedies Code. However, the court noted that Ch. 33 would not apply in any event because the comparative negligence statute applies only to cases in which negligence is the only theory involved. Id. at 373. Since Ch. 32 only comes into play when a payment is made or a judgment rendered, the Court of Appeals found that the trial court was premature in granting summary judgment on this issue. Id. at 374. In regard to the aiding and abetting claim, the defendant claimed that since the trial court had ruled that the fiduciary duty claim was disposed of on limitation grounds, the aiding and abetting claim was gone as well, since it was just a tagalong claim. The Court of Appeals disagreed, stating that the claims were distinct and that [i]t is settled as the law of this State that where a third party knowingly participates in the breach of duty of a fiduciary, such third party becomes a joint tortfeasor with the fiduciary and is liable as such. Id. at 372. The third party liability rule set out by the Court of Appeals has been used both offensively and defensively in the past in Texas to either reach an additional defendant or to preclude a third party from enforcing a contract right against the principal if the right was obtained as the result of a 6. Business Relationships Both of the Houston Courts of Appeal wrote on the creation of a fiduciary duty in Swineheart v. Stubbeman, McRae, Sealy, Laughlin & Browder, Inc., 48 S.W.3d 865 (Tex. App. Houston [14 th Dist.] 2001, pet. denied) and R. R. Street & Co. v. Pilgrim Enterprises, Inc., et al, 81 S.W.3d 276 (Tex. App. Houston [1 st Dist.] 2001, rev. granted). In Swineheart, a geologist brought a legal malpractice action against his former attorneys, claiming that the firm had not properly represented him in connection with a lawsuit against an oil company that had gone into bankruptcy. One of the issues involved in the appeal was whether the oil company had owed a fiduciary duty toward the plaintiff geologist. The Houston 14 th Court of Appeals considered two possible grounds for the imposition of the fiduciary 13

14 duty: 1) the geologist had a joint venture with the oil company, which would give rise to a fiduciary relationship as a matter of law; and 2) an informal confidential relationship arose that created a question of fact. In holding that there was not duty created as a matter of law on the first ground, the Court pointed to testimony that indicated that the parties had not agreed to share losses in their business arrangement. In regard to the second ground, the Court reviewed the testimony and record to find that a prior confidential relationship (before the dispute in question) had not existed, nor did the record indicate anything other than an arm s length relationship, except for plaintiff s testimony that he had subjectively trusted the oil company. The Court found that subjective trust by one party to the agreement did not give rise to enough of a relationship to justify the imposition of a fiduciary duty. facilities. 6. For 20 years, Corbin filled a report card evaluating the performance of Pilgrim s dry-cleaning plants and would give the evaluations to Robertson. 7. Corbin helped teach the dry-cleaning business to Guy Robertson, Jr. 8. Corbin helped in selecting Pilgrim s waste disposal company and acted as an intermediary between it and Pilgrim. 9. Street s advertisements solicited reliance on its dry-cleaning technicians to insure that no PCE was lost. 10. Street had scientific knowledge about Pilgrim s processes that Pilgrim did not have. 11. Street had been doing business with the Robertson family for over 50 years, i.e., before Pilgrim existed. In R. R. Street, the Houston 1 st Court of Appeals reviewed a case in which the owner of a dry cleaning plant (Pilgrim) brought both statutory and common law claims against the supplier of dry cleaning products, seeking to recover environmental cleanup costs and other damages. The case was tried to a jury and the trial court directed a verdict against the plaintiff on their breach of fiduciary claims. On appeal, the Houston 1 st Court of Appeals reviewed the facts on the record that the plaintiff claimed created a special relationship: 1. Street s representative, Harold Corbin, had complete access to Pilgrim s facilities, but Street s competitors did not. 2. Corbin testified that he advised Pilgrim regarding what purchases to make and that he knew that Pilgrim followed his advice 98 percent of the time. 3. Corbin stated that had he been told about the possibility of PCE losses, he would have passed that information to Pilgrim. 4. Corbin stated that Street assigned him the job of becoming Pilgrim s vicepresident of the [dry] cleaning room. 5. Guy Robertson, Sr., testified that there was a time when Pilgrim was expanding in Houston that he spoke to Corbin either every night, every other day, or at least twice a week to get a weather report on Pilgrim s operations because Robertson could not visit all of Pilgrim s In affirming the trial court, the Court focused on the fact that no evidence was offered of a special relationship of trust and confidence apart from the business relationship made the basis of the lawsuit. Additionally, neither party was in a dependent position, since each was an accomplished businessman who knew how to deal with environmental issues. In Pabich v. Kellar, 71 S.W.3d 500 (Tex. App. Fort Worth 2002, pet. denied) a former employee and minority shareholder in a video reconditioning business sued the majority shareholder for breach of fiduciary duty, fraud, and tortious interference. The trial court held that as a matter of law a fiduciary duty existed between the shareholders. On appeal, the Fort Worth Court of Appeals held that the trial court committed error by assuming the existence of a fiduciary duty, instead of submitting it to the jury, stating that a co-shareholder in a closely held corporation does not as a matter of law owe a fiduciary duty to his co-shareholder. Id. at 48. The fact that the two parties worked together in several business ventures and at one time were close friends did not establish a fiduciary duty as a matter of law. The Pabich case must be distinguished from the older case of Davis v. Sheerin, 754 S.W.2d 375 (Tex. App. Houston [1 st Dist.] 1988, writ denied), which holds that minority shareholders are owed a fiduciary duty by the majority shareholder in close corporations. The Davis case has never been overruled and is cited by commentators as 14

15 still being good law. See Moll, Majority Rule Isn t What It Used To Be: Shareholder Oppression in Texas Close Corporations, 63 Tex.B.J.434 (2000); Moll, Shareholder Oppression in Close Corporations: The Unanswered Question of Perspective, 53 Vand.L.Rev. 749 (2000). In Willis v. Donnelly, 118 S.W.3d 10 (Tex. App. Houston [14 th Dist.] 2003, pet. filed), the Court cited Pabich for the proposition that the existence of a fiduciary duty between coshareholders in a closely held corporation depends on the circumstances. The Court focused on the defendant s oppressive conduct and dominating control of the business. The Court cited several facts that showed the defendant used his control to seek personal advantage. Based on these facts, the trial court instructed the jury that the defendant owed a fiduciary duty. On appeal, the defendant argued that it was error to instruct the jury on the fiduciary duty. The Houston Court of Appeals agreed that the existence of the duty was a fact question, but ruled that the defendant waived the error by not objecting to the charge prior to submission to the jury. Thus, the holding in Pabich remains the standard, leaving Willis as distinguishable on procedural grounds. The Amarillo Court of Appeals went a little further than Pabich in Robbins v. Payne, 55 S.W.3d 740 (Tex. App. Amarillo 2001, pet. denied), in holding that two founders of an internet business did not have a fiduciary duty toward each other, when the relationship was not longstanding and did not go beyond that ordinarily existing between parties to a contract of this type. Id. at 749. The Amarillo Court also held that it did not create a fact issue for one of the parties to admit owing a fiduciary duty since from a legal standpoint the party stated that he did not understand the term and only knew what it meant to him Id. Compare the Robbins case with Carr v. Weiss, 984 S.W.2d 753 (Tex. App. Amarillo 1999, pet. denied). In Carr, the Amarillo Court of Appeals reviewed the evidence on the existence of a fiduciary duty in a case where the plaintiff sued based on an oral contract to jointly acquire an apartment complex with the defendant. After the complex was purchased, the defendant purchaser denied the agreement and the plaintiff brought suit based on breach of fiduciary duty, fraud, negligent misrepresentation, and breach of oral contract. After reviewing the personal relationship between the parties, the Court of Appeals held that the evidence was sufficient to present a jury question on the existence of a fiduciary duty. The evidence reviewed by the court included the social history of the parties, the business relationship, and representations made by both parties during the time period in question. Id. at 766. The court stated that the relationship between the parties, their activities, and their objectives was more than a mere personal relationship but was, rather, of a confidential nature. Id. at 765. Under the same evidentiary standard as Carr, the Waco Court of Appeals in Cathy v. Meyer, 115 S.W.3d 644 (Tex. App. Waco 2003, no pet.) considered the following evidence as sufficient to support the jury s finding of a fiduciary duty: 1. The two parties had worked together on other projects for three years. 2. The defendant was always in charge of those projects and he controlled the financing and books. The plaintiff always trusted him to keep accurate financial records. 3. The defendant told the plaintiff they would make millions together. 4. The parties ate lunch together every day for four years. This evidence was considered more than a scintilla of evidence and the Court of Appeals overturned the trial court s take nothing judgment. Likewise, in El Paso Production v. Valence, 112 S.W.3d 616 (Tex. App. Houston [1 st Dist.] 2003, pet. denied), the Court held it was error to grant a motion for directed verdict on the breach of fiduciary duty claim where there was some evidence that the operator of the oil well was acting as an agent for the owner. In E.R. Dupuis Concrete Co. v. Penn Mutual Life Insurance Company, 137 S.W.3d 311 (Tex. App. Beaumont 2004, no pet.), a concrete company brought suit against a life insurance company and its agents for the purchase of a variable life insurance policy on the life of its president. The concrete company alleged that a fiduciary duty existed between the company and the agents because the agents gave an estate planning kit and prayed together at the local church. The Court held that this did not raise a fact issue because there was no indication from 15

16 this evidence that there was a pre-existing relationship involving a high degree of trust and confidence over a long period of time. By way of contrast, in Flanary v. Mills, 2004 WL (Tex. App. Austin September 30, 2004, no pet.), a plaintiff shareholder in a home building corporation sued another shareholder, claiming a fiduciary duty existed. Plaintiff was defendant s nephew and the evidence was that he was more like a big brother than an uncle. They worked together in several businesses prior to the home building business and the nephew relied on his uncle to handle the finances and profitability of the business. Under these circumstances, the judgment in favor of the plaintiff was affirmed as sufficient evidence of the fiduciary relationship. 7. Partnerships In Welder v. Green, 985 S.W.2d 170 (Tex. App. Corpus Christi 1998, pet. denied), a former partner filed an action against another former partner on theories of breach of fiduciary duty, fraud, and breach of duty of good faith and fair dealing. The evidence on breach of fiduciary duty was that the defendant partner had paid increased amounts to himself as trust management fees, instead of accounting fees to the firm. When the plaintiff partner discovered his actions, he objected and the defendant partner repaid the money into the partnership. The parties could not agree on dissolution terms and the lawsuit resulted. Plaintiff partner received a jury verdict and judgment, which was partially taken away by the trial court. Both sides appealed. The Corpus Christi Court of Appeals affirmed in part, and reversed in part, holding that the evidence supported breach of fiduciary duty, but no damages, because the only evidence of damages occurred as a result of the dissolution. Id. at 177. In the absence of a written agreement, partners can dissolve the partnership at any time, even if the motive is self-gain. Id. The Court states on the fiduciary duty issue that a partner owes a strict duty of good faith and candor, and that there is a general prohibition against the fiduciary using the relationship to benefit his personal interest, except with full disclosure to the principal. Id. at 175. The Court s language tracks the language of cases prior to 1994, when the Texas Revised 16 Partnership Act was passed. Prior to 1994, the law in Texas was clear that each partner owed a fiduciary duty to each of the other partners and this relationship was characterized as highly fiduciary in nature. See Johnson v. Peckham, 120 S.W.2d 786 (Tex. 1938). The adoption of the Texas Revised Partnership Act was intended to bring partnership law in line with modern business practices, including a rejection of the traditional fiduciary label, but cases still carry over the stricter language. See e.g., Brosseau v. Ranzau, 81 S.W.3d 381, 395 (Tex. App. - Beaumont 2002, pet. denied)(partners owe one another a fiduciary duty, included in which is a strict duty of good faith, while a managing partner owes his partners the highest fiduciary duty recognized in law). In Harris v. Archer, 134 S.W.3d 411 (Tex. App. Amarillo 2004, pet. filed), the Amarillo Court of Appeals followed the presumption that partners still owe a traditional fiduciary duty to each other in a case that involved the sale and transfer of partnership interests. In Harris, one partner bought out two others on a building, then sold the building for a profit. The Amarillo Court, without discussing the Partnership Act, stated that as long as the partnership existed, the remaining partner had a duty to disclose material negotiations on the building that were ongoing prior to terminating the partnership as a part of his fiduciary duty. 8. Employer/Employee A key employee of a trucking company started a competing trucking company. Before leaving his job, he incorporated the new company, bought insurance, obtained hauling permits and talked with drivers about leaving the old company to join his new company. The trucking company sued the key employee for breach of fiduciary duty. Abetter Trucking Company v. Arizpe, 113 S.W.3d 503 (Tex. App. Houston [1 st Dist.] 2003, no pet.). In an opinion that appears contradictory, the Houston Court of Appeals acknowledges that an agent has a fiduciary duty not to compete with the principal and that an employee has a duty to deal openly with an employer and to fully disclose information affecting the company s business. After citing this established law, the Houston Court then concludes there is nothing legally wrong in engaging in such competition or in preparing to compete before the employment terminates. Id. at 510. The Court was influenced by the fact that the employee was

17 an at-will employee, not subject to a noncompete clause 9. Oil and Gas Duties The owner of the surface and mineral estate was sued for a failure to develop by the nonparticipating royalty owner. The Texas Supreme Court ruled that a fiduciary duty existed, but the owner of the surface and mineral estate had no duty to develop. In Re Bass, 113 S.W.3d 735 (Tex. 2002). The fiduciary duty only required the owner to acquire every benefit for the non-participating royalty owner that he acquired for himself. Since there was no special benefits on privileges obtained, there was no breach of fiduciary duty. Hlavinka v. Hancock, 116 S.W.3d 412 (Tex. App. Corpus Christi 2003, pet. denied). In Grinnell v. Munson, 137 S.W.3d 706 (Tex. App. San Antonio 2004, no pet.), the surface estate owner and oil and gas lessee brought suit against each other on several issues regarding lease termination and damages. After summary judgments were filed by both parties, the surface estate owner appealed. The issue in regard to fiduciary duty dealt with whether the executive interest owner (in this case the lessee) had breached its fiduciary duty by not accepting another lease with good or better terms. The San Antonio Court of Appeals reviewed the case law holding that an executive interest owner may be liable to the non-executive if he accepts a lease containing inferior terms and held that the evidence was equivocal as to whether the terms in the existing leases were actually inferior. Since there was no disproportionate benefit or inappropriate consideration inuring to the benefit of the executive interest owner, no breach of fiduciary duty had occurred. 10. Romantic Relationships relationship, by itself, did not establish a fact issue regarding the fiduciary relationship. The Court of Appeals also made it clear that the relationship between a husband and wife is normally a fiduciary relationship. See also Bohn v. Bohn, 420 S.W.2d 165 (Tex. Civ. App. Houston [1 st Dist.] 1967, writ dism d). 11. Statute of Limitations In re Estate of Fawcett, 55 S.W.3d 214 (Tex. App. Eastland 2001, pet. denied), involved a suit by a former shareholder against the remaining shareholder and the corporation for breach of fiduciary duty, based on failure to disclose the fact that the corporation had an opportunity to construct and operate a natural gas pipeline. A summary judgment was granted on limitations grounds by the trial court. On appeal, the Eastland Court of Appeals examined whether the discovery rule applied in breach of fiduciary cases and whether the accrual of the cause of action should be deferred until the plaintiff knew or should have known of the injury. The Court reviewed the Texas Supreme Court rulings over the last four years on the discovery rule (Computer Associates v. Altai; Murphy v. Campbell) and stated that both fraudulent concealment and inherently undiscoverable injuries have been referred to as discovery rule cases. The Court of Appeals reasoned that injuries occurring in a fiduciary relationship would seem to be in the first type of case (fraudulent concealment), but have instead been categorized as inherently undiscoverable. The Eastland Court pointed out that the result is the same: the issue is when the plaintiff knew or should have known, with the exercise of reasonable diligence, of the injury. In this case, the Court of Appeals ruled that the trial court erred in granting the summary judgment. 12. Punitive Damages In Hubbard v. Shankle, 138 S.W.3d 474 (Tex. App. Fort Worth, pet. denied), a daughter brought an action against her insured father s lover, seeking to recover life insurance proceeds that were paid to the lover-beneficiary upon the father s death. One of the daughter s claims was that a fiduciary relationship had existed between the lover and the father prior to death and the daughter alleged constructive fraud. The Court of Appeals reviewed the facts regarding the relationship and held that the romantic 17 In Brosseau v. Ranzau, 81 S.W.3d 381, 395 (Tex. App. - Beaumont 2002, pet. denied) the Beaumont Court of Appeals reviewed a case in which the plaintiff sued his partner over a house they owned together in Mexico. After a bench trial, the trial court entered a judgment for approximately $107,000 in actual damages and $200,000 in punitive damages. On appeal, the Beaumont Court of Appeals reviewed whether the breach of fiduciary duty would support the award of punitive damages. The Court noted that the

18 intent issue concerning exemplary damages is whether the one with a fiduciary duty intended to gain an additional unwarranted benefit for himself. See Cheek v. Humphreys, 800 S.W.2d 596 (Tex. App. Houston [14 th Dist.] 1990, writ denied). The Court reviewed the award in light of the established Kraus factors (Alamo Nat l Bank v. Kraus, 616 S.W.2d 908 (Tex. 1981) and found that the amount awarded was justified by the evidence presented to the trial court. III. TRADE SECRETS A. Background In Texas, the cause of action for misappropriation of trade secrets has four elements: (1) existence of a trade secret; (2) obtaining the secret through a confidential relationship or by other improper means; (3) unauthorized use or disclosure of the trade secret; and (4) damage caused to the owner of the trade secret by its use. K & G Oil Tool & Serv. Co. v. G & G Fishing Tool Serv., 314 S.W.2d 782 (Tex. 1958), cert. denied sub nom, 358 U.S. 898 (1958). Avera v. Clark Moulding, 791 S.W.2d 144, 145 (Tex. App. Dallas 1990, no writ). A trade secret can be any formula, pattern, device, or compilation used in business which provides an advantage over competitors who do not know or use it. Hyde Corp. v. Huffines, 314 S.W.2d 763, 776 (Tex.), cert. denied, 358 U.S. 898 (1958); Evans World Travel, Inc. v. Adams, 978 S.W.2d 225, 231 (Tex. App. Texarkana 1998, no pet.). In order to qualify for trade secret protection, however, the information must be kept secret and dissemination must be restricted. Furr s, Inc. v. United Specialty Advertising Co., 385 S.W.2d 456, 459 (Tex. Civ. App. El Paso 1964, writ ref d n.r.e.), cert. denied, 382 U.S. 824 (1965). Adequate measures must be taken by one claiming the trade secret to prevent its disclosure to anyone not under a duty to keep it secret. Id. A trade secret cannot be publicly known in the trade or business. Wissman v. Boucher, 240 S.W.2d 278, 280 (Tex. 1951). Similarly, matters completely disclosed by the goods themselves cannot be trade secrets. Id. Misappropriation occurs when trade secrets are acquired through breach of a confidential relationship or by other improper means, including theft, wiretapping, and even aerial espionage. E.I. DuPont de Nemours & Co. v. Christopher, 431 F.2d 1012, 1016 (5 th Cir. 1970, cert. denied, 400 U.S (1971)); Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470, (1974). When evaluating whether a misappropriation has occurred, the question is not how could the knowledge have been obtained but instead how was it obtained? American Precision Vibrator Co. v. National Air Vibrator Co., 764 S.W.2d 274, 277 (Tex. App. Houston [1 st Dist.] 1988, no writ), as modified 771 S.W.2d 562 (Tex. App. Houston [1 st Dist.] 1989, no pet.). Although reverse engineering is a proper means of gaining access to a competitor s secret process, obtaining trade secret information without spending the time and money to discover it independently is improper unless the holder of the trade secret discloses it voluntarily or fails to take reasonable precautions to ensure its secrecy. Id. at 278; Weightman v. State, 975 S.W.2d 621, 627 (Tex. Crim. App. 1998). 18 Employees have a duty not to use confidential, proprietary or trade secret information acquired during their employment in a manner adverse to their employer. T-N-T Motorsports, Inc. v. Hennessey Motorsports, Inc., 965 S.W.2d 18, (Tex. App. Houston [1 st Dist.] 1998, pet. denied); Welex Jet Services, Inc. v. Owen, 325 S.W.2d 856, 858 (Tex. Civ. App. Fort Worth 1959, writ ref d n.r.e.); Crouch v. Swing Machinery Co., 468 S.W.2d 604, (Tex. Civ. App. San Antonio, 1971, no writ); Johnston v. American Speedreading Academy, Inc., 526 S.W.2d 163, 166 (Tex Civ. App. Dallas 1975, no writ); Jeter v. Associated Rack Corp., 607 S.W.2d 272, 276 (Tex. Civ. App. Texarkana 1980, writ ref d n.r.e.); Reading & Bates Construction Co. v. O Donnell, 627 S.W.2d 239, (Tex. Civ. App. Corpus Christi 1982, writ ref d n.r.e.); Dannenbaum, Inc. v. Brummerhop, 840 S.W.2d 624, 632 (Tex. App. Houston [14 th Dist.] 1992, writ denied). This duty owed by employees is an implied duty arising out of the confidential relationship with their employer not to disclose information received during employment, if the employee knows that his employer desires such information kept secret, or if, under the circumstances, he should have realized that secrecy was desired. Lamons Metal Gasket Co. v. Traylor, 361 S.W.2d 211, 213 (Tex. Civ. App. Houston, 1962, writ ref d n.r.e.). The duty arises from the employment relationship regardless of whether a written employment

19 contract exists. Miller Paper Co. v. Roberts Paper Co., 901 S.W.2d 593, 600 (Tex. App. Amarillo 1995, no writ); T-N-T Motorsports, Inc. v. Hennessey Motorsports, Inc., 965 S.W.2d 18, (Tex. App. Houston [1 st Dist.] 1998, pet. dismissed); Texas Shop Towel, Inc. v. Haire, 246 S.W.2d 482, 485 (Tex. Civ. App. San Antonio 1952, no writ). See also Lamons Metal Gasket Co. v. Traylor, 361 SW.2d 211, 213 (Tex. Civ. App. Houston, 1962, writ ref d n.r.e.). Courts do uphold the rights of former employees to use the general knowledge, skill and experience acquired in their former employment in competition with their former employer. Johnston v. American Speedreading Academy, Inc., 526 S.W.2d 163, 166 (Tex. Civ. App. Dallas 1975, no writ). Absent special circumstances, once an employee resigns, he may actively compete with his former employer. Abetter Trucking Co. v. Arizpe, 113 S.W.3d 503, 510 (Tex. App. Houston [1 st Dist.] 2003, no pet.). In Texas, to resign from one s employment and go into business in competition with one s former employer is, under ordinary circumstances, a constitutional right. Id. There is nothing legally wrong with engaging in competition or in preparing to compete before the employment terminates. Id. The possibility of crippling, or even destroying, a competitor is inherent in a competitive market. Id. An employer who wants to restrict the post-employment competitive activities of a key employee should use a noncompetition agreement. Id. Texas law also recognizes a cause of action for common law misappropriation. This cause of action prohibits the appropriation and use by the defendant, in competition with the plaintiff, of a unique pecuniary interest created by the plaintiff through the expenditure of labor, skill and money. Universal City Studios, Inc. v. Kamar Indus., Inc., 217 U.S.P.Q. 1162, 1168 (S.D. Tex. 1982). The elements of common-law misappropriation are: (1) the creation of a product through extensive time, labor, skill and money; (2) the defendant s use of that product in competition with the plaintiff, thereby gaining a special advantage or free ride because the defendant has borne none of the expense incurred by plaintiff; and (3) damages. United States Sporting Prod., Inc. v. Johnny Stewart Game Calls, Inc., 865 S.W.2d 214, 218 (Tex. App. Waco 1993, writ denied) (citing Synercom Technology, Inc. v. 19 University Computing Co., 474 F. Supp. 37, 39 (N.D. Tex. 1979)); Gilmore v. Sammons, 269 S.W. 861, 863 (Tex. Civ. App. Dallas 1925, writ ref d); Aldridge v. The Gap, Inc., 866 F. Supp. 312, 313 (N.D. Tex. 1994). The difference between this claim and the cause of action for misappropriation of trade secrets is two-fold. First, trade secret law protects intellectual property and requires the existence of a trade secret. Commonlaw misappropriation requires no secrecy and protects a fully disclosed product or other tangible property. Second, common-law misappropriation requires the use of the stolen information or product in competition with its creator. With trade secret misappropriation, any use of an improperly acquired trade secret will suffice. United States Sporting Prod., Inc. v. Johnny Stewart Game Calls, Inc., 865 S.W.2d 214, 218 (Tex. App. Waco 1993, writ denied); Gilmore v. Sammons, 269 S.W. 861, 863 (Tex. Civ. App. Dallas 1925, writ ref d). Finally, there are also criminal liabilities both state and federal for misappropriation of trade secrets. Theft of trade secrets is a felony in Texas. TEXAS PENAL CODE sec (Vernon s 2000) Shalk v. State, 823 S.W.2d 633 (Tex. Crim. App., 1991, pet. denied). See also Weightman v. State, 975 S.W.2d 621 (Tex. Crim. App. 1998). Federal criminal liability may also attach for trade secret misappropriation under the federal Economic Espionage Act of 1996, 18 U.S.C B. Recent Developments 1. Texas Supreme Court The most significant recent case regarding proof of the existence of a trade secret is In Re Bass, 113 S.W.3d 735 (Tex. 2003). In Re Bass involved a discovery dispute over production of documents that the parties claimed were protected from disclosure as trade secrets under Rule 507 of the Texas Rules of Evidence. The Texas Supreme Court agreed with the Restatement (Third) of Unfair Competition and the majority of jurisdictions that a party claiming a trade secret should not be required to satisfy all six trade secret factors in order to establish that something qualifies as a trade secret, because trade secrets do not fit neatly into each factor every time. Id. at 740. The six trade secret factors used by the Texas Supreme Court to determine whether a trade

20 secret exists are: (1) the extent to which the information is known outside his business; (2) the extent to which it is known by employees an others involved in his business; (3) the extent of the measures taken by him to guard the secrecy of the information; (4) the value of the information to him and to his competitors; (5) the amount of effort or money expended by him in developing the information; (6) the ease or difficulty with which the information could be properly acquired or duplicated by others. Id. at 739 (citing Restatement of Torts 757 cmt.b (1939), Restatement (Third) of Unfair Competition 39, reporter s n. cmt.d, and Hyde Corp. v. Huffines, 314 S.W.2d 763 (Tex. 1958)). The Texas Supreme Court held that a court need only weigh these factors as relevant criteria in determining whether something qualifies as a trade secret. Id. at The Court also held, consistent with other jurisdictions and the position of the oil and gas industry, that geologic seismic data and its interpretations are trade secrets protected by Texas Rule of Evidence 507. Id. at Texas Courts of Appeals In Trilogy Software, Inc. v. Callidus Software, Inc., 143 S.W.3d 452 (Tex. App. Austin 2004, no pet.), the court held that the employer failed to meet its burden with regard to its claim of trade secret protection for knowledge of the difficulties inherent in implementing a compensation-management system meeting AETNA s requirements while coping with the complexities of its compensation system. Id. at 467. The court noted that there was no evidence that these difficulties were not readily ascertainable to someone with the employee s general knowledge, experience and skill set, and that there was uncontroverted evidence that AETNA had disclosed the inner workings of its compensation system to both the new employer and another competitor. The court found: [the employee s] general knowledge of the issues presented by a customer s compensation system, moreover, stands in sharp contrast to the types of customer information that have been held to comprise trade secrets, which characteristically have been compiled over long periods of time, through use of substantial resources and are shown to provide a competitive advantage. Id. at 467, 68. The court refused to find that trade secret status automatically attaches to any information that a company acquires regarding its customers. Id. at 467. In In Re Lowe s Companies, Inc., 134 S.W.3d 876 (Tex. App. Houston [14 th Dist.] 2004, no pet.), Lowe s sought to protect a database containing information on accidents and injuries occurring in its stores on the grounds that, inter alia, the manner in which Lowe s gathers such information is a trade secret. The court refused to extend trade secret privilege protection to a party s (or even expert s) conclusory opinion that information is a trade secret or is not used industry-wide, or a party s mere desire to avoid disclosing information to others because it would extend the privilege to almost any internal company records. Id. at 879. The court noted that Lowe s did not present evidence of any of the conventional trade secret factors (citing In Re Bass, supra) with regard to the database, and therefore Lowe s objection to providing deposition testimony on the creation and use of the database was overruled. Id. In Fox v. Tropical Warehouses, Inc., 121 S.W.3d 853 (Tex. App. Ft. Worth 2003, no pet.), the court held that a temporary injunction order granting trade secret protection does not mean the protected information is a trade secret. When deciding whether to grant or deny a request for a temporary injunction, the trial court does not decide whether the information sought to be protected is a trade secret; rather it determines whether the applicant has established that the information is entitled to trade secret protection until a trial on the merits. Id. at *3. The court also held that an applicant for a temporary injunction is not required to prove that the defendant is actually using the trade secret information. Id. at *5. Instead, the applicant need only prove that he is in possession of the information and is in a position to use it. Id. In Reliable Ambulance Service, Inc. v. Mercy Hospital of Laredo, 2003 WL (Tex. App. San Antonio 2003, pet. denied), the court refused to recognize a common law cause of action by a competitor for damages and injunctive relief based on violation of the federal anti-kickback statute. Id. at *6. The Court held that violation of the anti-kickback provision of the Social Security 20