F.S. New Products v. Strong Industries

• Decision Date: 05 February 2004
• Docket Number: No. 01-01-00086-CV.,01-01-00086-CV.
• Citation: 129 S.W.3d 606
• Parties: F.S. NEW PRODUCTS, INC. and Tesco American, Inc. d/b/a Tesco/Williamsen, Appellants, v. STRONG INDUSTRIES, INC. and Brooks Strong, Appellees.
• Court: Texas Court of Appeals

129 S.W.3d 606

F.S. NEW PRODUCTS, INC. and Tesco American, Inc. d/b/a Tesco/Williamsen, Appellants, v. STRONG INDUSTRIES, INC. and Brooks Strong, Appellees.

No. 01-01-00086-CV.

Court of Appeals of Texas, Houston (1st Dist.).

February 5, 2004.

Carlton D. Wilde, Jr., Sheila M. Wollam, Jeffrey D. Meyer, Franklin, Cardwell & Jones, P.C., Laura P. Haley, Campbell, Harrison & Wright, Thomas C. Wright, Wright Law Firm, Houston, for Appellants.

Robert B. Dubose, Cook & Roach, LLP, Stephen G. Tipps, Baker & Botts, L.L.P., Houston, for Appellees.

Panel consists of Chief Justice RADACK and Justices ALCALA and HIGLEY.

OPINION ON MOTION FOR REHEARING

LAURA C. HIGLEY, Justice.

Appellant Tesco American, Inc. d/b/a Tesco/Williamsen ("Tesco") has filed a motion for rehearing and a motion for rehearing en banc. We deny rehearing, but withdraw our opinion and judgment of September 11, 2003 and issue this new opinion in its stead. Accordingly, we deny the motion for rehearing en banc as moot.¹

Appellees, Brooks Strong and Strong Industries, Inc. (collectively referred to as "the Strong Plaintiffs"), sued appellants, F.S. New Products, Inc. ("FSNP") and Tesco American, Inc. d/b/a Tesco/Williamsen ("Tesco"), for fraud, breach of contract, misappropriation of trade secrets, and conspiracy, alleging appellants had wrongfully obtained and used the Strong Plaintiffs' trade secrets related to the design and manufacture of dump truck trailing axles. FSNP and Tesco appeal from a judgment awarding the Strong Plaintiffs actual and punitive damages, attorney's fees, and permanent injunctive relief. FSNP and Tesco each filed individual briefs with numerous multi-pronged issues, which can be reduced to the following dispositive issues: (1) whether federal patent law preempts the Strong Plaintiffs' state law claims; (2) whether legally and factually sufficient evidence was presented to support the jury's finding that Tesco committed fraud; (3) whether Tesco preserved its objection to the trial court's failure to instruct the jury on the proper measure of fraud damages; (4) whether legally and factually sufficient evidence was presented to support the damage award against Tesco for fraud; (5) whether the Strong Plaintiffs were entitled to punitive damages against Tesco; (6) whether the breach of contract and misappropriation of trade secret damages awarded against FSNP were an impermissible "double recovery"; (7) whether the trial court erred in awarding attorney's fees against FSNP; and (8) whether the trial court erred in granting the Strong Plaintiffs permanent injunctive relief.

We affirm in part and reverse and render in part.

Factual and Procedural History

The Strong Plaintiffs

Strong Industries manufactures trailing axles for dump trucks. A trailing axle is a load-bearing axle that extends out visibly behind a truck. By increasing the truck's length and the number of tires that a truck has on the ground, the trailing axle enables a truck to carry an increased load, while still complying with federal weight restrictions.

Brooks Strong ("Brooks") began designing and manufacturing trailing axles in the mid-1980s. Brooks's first trailing axle, the "100 series," was a twin arm axle made for concrete trucks. In 1985, Brooks put a 100 series trailing axle on a dump truck. At that time, no other trailing axles were available for dump trucks on the open market, and no company had ever developed a dump truck trailing axle that had been successfully marketed for any length of time.

Between 1986 and 1989, Brooks engaged in research relating to the dump truck industry and trailing axles. In 1988, Brooks incorporated Strong Industries. Through Strong Industries, Brooks continued to develop a series of trailing axles known as the "Strong Arm." In 1989 and 1990, the Strong Plaintiffs developed and marketed the 200 series and 300 series. Unlike the 100 series, both the 200 and 300 series had a single arm rather than a twin arm. The 200 and 300 series also had other design features that were intended to be improvements over the 100 series. Even after the production of the 200 and 300 series, Strong Industries continued to develop the Strong Arm. In the early 1990's, Strong Industries developed and produced the 400 and 600 Strong Arm series.² The 400 and 600 had design features that differed from the previous Strong Arm series. Each series, from the 100 through the 600, represented an evolutionary step for the Strong Arm.

A feature common to all of the series was that the trailing axle attached to the frame of the dump truck below the truck's load. Attaching the trailing axle to the frame destabilized the truck. The destabilization could be remedied by attaching a twin arm trailing axle to the bed of the truck above the load. However, such an attachment had never been successful because it resulted in the narrowing of the truck's bed, which in turn decreased the truck's carrying capacity. The Strong Arm 700 series solved this problem. In 1991, Brooks conceived of an idea to design a twin arm trailing axle that attached to the corner posts of the truck's bed, rather than the truck's frame. Because the attachment would be in-line with the sides of the bed, it would not detract from the width of the bed or adversely impact the load-carrying capacity of the truck. Brooks's idea later became the Strong Arm 700 series.

Tesco

Tesco manufactures dump beds for dump trucks. In early 1992, John Newburn, Tesco's general manager, approached Strong Industries about becoming a dealer of the Strong Arm trailing axle. On April 6, 1992, Bill Brugger, Tesco's president, signed a dealer agreement with Strong Industries. As required by the dealership agreement, Brugger, on behalf of Tesco, also signed a non-competition agreement that included a non-disclosure of information provision. The non-competition agreement was attached to the dealership agreement as "Exhibit A." The non-competition agreement provided in relevant part as follows:

1. Covenant Not to Disclose Confidential Information

A. [Tesco] acknowledges that, in and as a result of his [sic] association with [Strong Industries], he [sic] shall be making use of, acquiring and/or adding to confidential information of a special and unique nature and value relating to certain matters of [Strong Industries]. Such matters may include the procedures, manuals, purchasing information, pricing policies, financial information, confidential reports and lists of customers of [Strong Industries].

B. As a material inducement to [Strong Industries] to engage in business with [Tesco], [Tesco] agrees that he [sic] shall not, except with prior written consent of [Strong Industries], directly or indirectly, disclose, transfer or use, for any purpose whatsoever, any of such confidential information which has been obtained by or disclosed to him as a result of his association with [Strong Industries].

. . . .

2. Covenant Not to Compete

A. It is recognized and understood by the parties hereto that [Tesco], through his association with [Strong Industries], has acquired a considerable amount of knowledge and goodwill with respect to the business of [Strong Industries] which are extremely detrimental to [Strong Industries] if used by [Tesco] to compete with [Strong Industries]. It is therefore, understood and agreed by the parties hereto that, because of the nature of the business of [Strong Industries] and [Tesco], it is necessary to afford fair protection to [Strong Industries] from competition by [Tesco].

B. As a material inducement to [Strong Industries] to do business with [Tesco], [Tesco] agrees that for a period commencing with the date hereof and ending eighteen months after termination of business with [Strong Industries], he [sic] shall not engage directly, indirectly or in concert with any other person or entity, in the business of manufacturing, selling, or distributing any device of the type(s) in which [Strong Industries] engages, within the territorial jurisdiction of the United States.

At trial, Brooks provided the following explanation regarding why he required Tesco to sign a non-compete and non-disclosure agreement:

Q: Why is it that you wanted [Tesco] to enter into a dealership agreement and also a noncompetition agreement?

A: We had spent years and years developing trailing axles. We learned a lot—got a lot of education. We learned a lot over the years. We learned a lot of the dos and a lot of the don'ts. Like I explained to [Tesco], I am not going to hand you a gun to shoot me with.

Q: What does that mean?

A: That means I am not going to teach you all these things, which you would have to learn if you are a dealer, and then have you come back and compete with me. I wouldn't, under any circumstances, ever teach these people what they needed to know unless I had some protection. It would be insanity.

Q: It's just an arm and an axle behind a truck. It is not rocket science, is it?

A: Well ... not that it had never been done before, but every invention has a certain amount of evolution that it goes through. Each one that is done leads you to the next step and the next step and the next step. We had gone through a lot of steps, and that took years to do that.

Over the course of the dealership relationship, Strong Industries shared its confidential and proprietary information with Tesco. This included providing Tesco with a Strong Arm sales manual. The manual was stamped privileged and confidential; it contained information derived from the Strong Plaintiffs' many years of experience building trailing axles and included technical drawings of the Strong Arm. Strong Industries also taught Tesco how to build a "super dump," which is the industry term for a dump truck with a trailing axle. Brooks testified at trial that Strong Industries educated its dealers about the super dump manufacturing process because it believed a dealer could better market and sell a super dump if the dealer understood...