July 20th, the Fifth Circuit released an opinion of some importance for commercial and intellectual property litigation.
In MGE UPS Systems Inc. v. GE Consumer Industrial Inc. (pdf), the Court affirmed an injunction against a competitor's unauthorized use of security "dongles" to boot up software necessary to service and calibrate uninterruptible power supplies. All the underlying damage claims, however, failed. Judge Garza wrote the Court's opinion.
The Court held that
- The Digital Millennium Copyright Act's provisions on circumventing technological measures protecting copyrighted work "prohibits only forms of access that would violate or impinge on the protections that the Copyright Act otherwise affords copyright owners." You can get a copy of the Act here (pdf) and a summary of it's contents here (pdf).
- The plaintiffs' claims for damages for copyright and misappropriation of trade secrets claims could not be sustained based upon evidence of the wrongdoer's gross revenues.
The damages question has the widest application to commercial and intellectual property litigation. The Plaintiff's "Plan A" failed when it's damages expert was struck and it's lay witness was found to be insufficient to establish a reasonable royalty. The Fifth Circuit was not asked to review these trial court rulings. While the statutory and common law claims would have allowed for recovery of the wrongdoer's profits from the violation or misappropriation, all that was left was information concerning the defendant's gross revenues from a variety of businesses.
This was not enough. Not only is gross revenue not the same as profit, the Court made an "Erie Guess" that Texas would not adopt a comment from the Restatement (Third) of Unfair Competition placing the burden on the defendant to show what was not attributable to the wrong once a plaintiff had placed a gross number in issue.
Said the Court:
In the only reported Texas case involving the recovery of defendant’s profits for a misappropriation of trade secrets claim, the Dallas Court of Appeals held that although defendant’s profits are a “proper element[ ] of damages in a case involving the wrongful use of a trade secret,” a plaintiff cannot recover damages without offering evidence “to show the actual profit made by [defendant].” Elcor Chem. Corp. v. Agri-Sul, Inc., 494 S.W.2d 204, 214 (Tex. Civ. App.--Dallas 1973, writ ref’d n.r.e.) . . .
* * *
MGE points to PMI’s total revenue . . . and argues that, under the Restatement, this exhibit satisfies its burden of proof with regard to PMI’s “sales” of providing service to UPS machines. MGE contends that GE/PMI subsequently had the burden of demonstrating which portions of PMI’s revenue were not attributable to the state law claims, which it failed to do. Texas courts have not adopted the RESTATEMENT (THIRD) OF UNFAIR COMPETITION in its entirety and whether § 45’s comment f is controlling in Texas courts is still an open question. . . . The burden-shifting procedures noted in comment f are not included in the first RESTATEMENT OF TORTS, whose definition of and factors used to identify trade secrets are still used by Texas courts. . . . Neither the Texas Supreme Court nor any of the Texas appellate courts have specifically applied comment f to determine a defendant’s profits in a trade secret action. Given that comment f’s standard sets a plaintiff’s burden of proof for trade secret damageslower than the standard applied in Elcor, we conclude that the Texas Supreme Court would not adopt the burden-shifting procedures of comment f.
Watch this space for some further commentary on MGE.
From Andrews Kurth's Appellate Record Blog: