Court: Nevada Supreme Court; May 4, 2000; Nevada; State Supreme Court
The case involves Michelle Frantz and others as appellants against Charles R. Johnson, the respondent, concerning alleged misappropriation of trade secrets under Nevada's Uniform Trade Secrets Act (UTSA). The conflict began in 1990 when Frantz, previously a sales manager for Johnson Business Machines (JBM), left to join Plastic Graphics, Inc., a card manufacturer owned by Wesley Ru and Antonio Accornero. Following her departure, JBM's profits declined sharply, prompting JBM to accuse Frantz of stealing trade secrets to benefit Plastic. JBM initiated a lawsuit seeking damages, claiming misappropriation of customers and confidential information.
The district court ruled in favor of JBM, awarding compensatory and punitive damages, along with attorney fees. However, the appellants appealed, arguing several errors in the trial court's decision. The Supreme Court of Nevada found that the district court improperly calculated compensatory damages and failed to consider statutory provisions regarding punitive damages. Consequently, the court vacated the awards for both compensatory and punitive damages, remanding the case for a reassessment of damages.
Key factual elements include JBM's reliance on confidentiality in its customer lists and pricing, as testified by its owner, Charles Johnson, who claimed that Frantz had been granted significant access to sensitive information. Additionally, evidence was presented that Accornero had verbally committed not to solicit JBM's customers, which he allegedly violated.
In October 1990, Frantz was hired by Accornero to work as a salesperson for Plastic, competing against JBM in the plastic card industry. After her departure from JBM, Frantz actively solicited business from established contacts and sent communications indicating her new role at Plastic, offering competitive pricing and guaranteed delivery. Following Frantz's exit, JBM experienced significant sales losses, with approximately 40% of card sales and 30% of machine sales shifting to Plastic. JBM's Larsen attempted to contact clients but faced hostility, noting missing customer and pricing lists after Frantz left.
Frantz acquired the Riverboat, Showboat, and Harrah's accounts by underbidding JBM, prompting JBM to seek a temporary restraining order (TRO) against her for soliciting customers. The TRO was granted effective November 7, 1990, and Frantz claimed she did not solicit JBM's clients afterward but continued to fulfill pre-existing orders. JBM alleged that Frantz conspired with Ru and Accornero to circumvent the TRO, with testimony from Martha Kehn suggesting Frantz directed orders to Ru. Phone records indicated Frantz made numerous calls to Ru’s business entities, contradicting her compliance with the TRO.
Frantz transitioned to an independent contractor role but faced poor sales, leading to her termination by Plastic in April 1991. She attempted to start her own venture, Action Graphics, but was unsuccessful and later filed for unemployment. Plastic provided her with severance payments contingent upon submitting invoices until August 1991. By October 1991, Frantz had secured a retail position outside the plastic card industry.
JBM successfully obtained a preliminary injunction against Frantz on May 1, 1991, citing unethical conduct and violations of her agency duties. JBM subsequently filed multiple legal claims against Frantz and others, including misappropriation of confidential information, breach of fiduciary duty, and civil conspiracy. Expert witness Donald McGhie assessed damages based on the use of player tracking cards in casinos.
McGhie determined a 10:1 ratio of player tracking cards sold per slot machine monthly, based on invoices from four casinos: JBM's Stardust invoices (1989-94), Faraday's Mirage invoices (1992-94), and Plastic's Showboat and Riverboat invoices (1989-90). His aim was to project lost profits from thirteen casinos JBM claimed to have lost business to Plastic. He calculated gross profit percentages for JBM's 1990 Stardust records at 18.86% for magnetic cards and 34.68% for Hollerith cards. McGhie identified losses from various casinos between 1990-95 and calculated total losses of $411,042.00 from plastic card sales and $566,016.00 from reduced sales prices. He assumed these losses stemmed from the appellants' actions but did not contact the casinos to confirm their reasons for ceasing business with JBM. JBM inferred causation from statements made by Accornero about intending to compete against JBM.
After a ten-day bench trial, the district court ruled in favor of JBM, awarding $222,014.55 for lost profits over eighteen months, $47,612.75 for price reductions, and punitive damages against each defendant totaling $149,000. Additionally, JBM was awarded $160,000.00 in attorney fees, $15,779.00 in expenses, and $15,481.31 in costs. The judgment was adjusted to account for Frantz's counterclaim for wages and Plastic's counterclaim related to a California judgment. The appellants appealed, citing several errors, including reliance on McGhie's testimony and insufficient evidence of causation. The appellate court agreed with the appellants regarding errors in the damage calculations and the punitive damages award, affirming other aspects of the district court's decision while vacating the awards for damages and remanding for recalculation.
The parties and the district court failed to apply the Nevada Uniform Trade Secrets Act (UTSA), specifically NRS 600A.090(b), which precludes certain causes of action related to trade secret misappropriation. This statute displaces conflicting state laws providing civil remedies for such misappropriation, except for specific contractual and civil remedies not based on trade secret misappropriation. The plain language of NRS 600A.090 prevents a plaintiff from pursuing tort or restitutionary actions based on trade secret misappropriation, as established in Hutchison v. KFC Corp., which deemed claims for unjust enrichment and unfair competition duplicative of misappropriation claims. The district court erred in awarding damages based on several tort claims related to the misappropriation of bidding and pricing information, including misappropriation of confidential information, breach of fiduciary duty, and civil conspiracy, as these were explicitly excluded by the statute. However, this error was deemed harmless since the core elements of misappropriation were sufficiently pleaded and evidenced at trial, and the determination of whether particular corporate information qualifies as a trade secret is a factual question for the jury.
Factors determining the protection of trade secrets include the extent of public knowledge of the information, its confidentiality, the employer's efforts to maintain secrecy, and the former employee's understanding of customer data relative to competitors. Notably, not all customer and pricing lists qualify as trade secrets, as established in Neal v. Griepentrog, where discount lists for medical providers were deemed public. In contrast, the information at issue was deemed highly confidential and not easily accessible due to the specialized nature of the plastic gaming card industry.
Regarding causation, the appellants argued that lack of direct evidence linking their actions to JBM's damages undermined the finding of trade secret misappropriation. However, the court found sufficient circumstantial evidence to support the claim. This included testimony of missing pricing lists post-departure of a key employee, Frantz, which correlated with a significant drop in sales; Frantz's outreach to JBM customers offering more competitive prices; and documented communications indicating Frantz's involvement with competitors. Additional evidence implicated Accornero and his company, Plastic, as well as Ru and Western, in the misappropriation, including intentions expressed to outcompete JBM and solicitation of JBM's customers. Thus, the court concluded that circumstantial evidence sufficiently established the misappropriation of trade secrets and the resulting economic loss to JBM.
Sufficient circumstantial evidence supported the district court's finding that the appellants misappropriated trade secrets, causing damage to JBM, leading to an affirmation of the district court's liability ruling. However, the court misapplied the calculation of damages. While the district court has broad discretion in determining damage awards, it must rely on a proper evidentiary basis. Damages do not require precise mathematical proof, but the burden of proof lies with the party seeking damages. An expert economist can assist in calculating damages, but their testimony must be fact-based and not speculative.
In this case, McGhie, an expert witness, calculated lost profits based on JBM's past sales and estimated future sales. The district court limited liability for damages to an 18-month period following Frantz's departure from JBM. However, it erroneously included losses from eight casino accounts that occurred outside this time frame in its damage calculations. This inclusion constituted an abuse of discretion, necessitating the vacating of the damage award and a remand for recalculation based solely on losses within the designated period.
Regarding punitive damages, although substantial evidence supported the finding of malicious conduct by the appellants, the award was reversed for the district court to reconsider it in light of NRS 600A.050(2), which likely sets specific criteria for such awards.
NRS 600A.050(2) allows for exemplary damages not exceeding twice the compensatory damages awarded if willful, wanton, or reckless misappropriation of a trade secret is found. The court has vacated both the compensatory and punitive damages awards for recalculation, ensuring compliance with NRS 600A.050(2). Regarding attorney fees, the district court awarded JBM $160,000 based on NRS 18.010(2)(b) and NRS 600A.060. The court ruled that NRS 18.010(2)(b) does not support attorney fees for malicious actions or improper discovery tactics but for groundless claims lacking credible evidence. Since the appellants prevailed on their counterclaims, the district court erred in asserting the counterclaims were frivolous, thus abusing its discretion under NRS 18.010(2)(b). However, this error was deemed harmless as attorney fees were validly awarded under NRS 600A.060(3) due to findings of willful and malicious misappropriation. The district court's errors in damage calculations necessitate vacating those awards and remanding for a hearing, while all other judgment aspects are affirmed.
Hollerith cards store customer data in binary code via punched holes, while magnetic cards use a magnetic strip for the same purpose. The approval of Hutchison has limitations; the UTSA does not provide blanket preemption for all claims potentially involving trade secrets. Future claims may be asserted that do not rely on the information being classified as a trade secret, including tort claims like intentional interference with prospective advantage or existing contracts. However, the claims in this case depend entirely on the misappropriation of trade secrets and are thus barred by the UTSA.
JBM's claim for breach of the implied covenant of good faith and fair dealing is not barred if it is based on a contractual foundation, as this covenant exists in every Nevada contract and prohibits arbitrary acts that unfairly disadvantage another party. The UTSA does not displace contractual remedies based on misappropriation of trade secrets, allowing the district court to award damages for this breach.
A trade secret, as defined by NRS 600A.030(5), is information that has economic value from being unknown and is subject to reasonable secrecy efforts. Misappropriation, under NRS 600A.030(2), includes acquiring a trade secret through improper means or disclosing it without consent, knowing it was obtained improperly, or under circumstances requiring secrecy.
Legal support exists indicating that direct evidence of causation, such as client loss testimony, is necessary to establish causation in employee disloyalty cases, as referenced in McCallister Co. v. Kastella and Bancroft-Whitney Co. v. Glen. However, the court disapproves of this requirement, asserting that businesses are entitled to compensation when indirect circumstantial evidence indicates harm from unfair and illegal tactics by competitors.
The court rejects the argument that compensatory and punitive damages against the corporations Plastic and Western should require evidence of corporate misconduct. It maintains that corporations are liable for the actions of their managerial agents performed within the scope of their employment, as established in Smith's Food, Drug Cntrs. v. Belle garde. Since Accornero and Ru are officers of Plastic and Western, their tortious actions are legally attributed to these corporations.
Evidence supporting a finding of malice includes: Frantz's misappropriation of JBM’s confidential information, misleading communications to JBM's customers, failure to comply with a temporary restraining order (TRO), Accornero’s plans to take JBM's customers, and Frantz contacting a third party in violation of the TRO. The court emphasizes that when evaluating evidence for punitive damages, it will favor the prevailing party and draw reasonable inferences in their support.
Additionally, NRS 18.010(2) allows for the awarding of attorney's fees to a prevailing party, particularly if the court finds the claim was initiated without reasonable ground or intended to harass the prevailing party.
