In re Mud King Prods., Inc.

• Decision Date: 17 July 2014
• Docket Number: No. 13–32101–H5–11.,13–32101–H5–11.
• Parties: In re MUD KING PRODUCTS, INC.
• Court: U.S. Bankruptcy Court — Southern District of Texas

514 B.R. 496

In re MUD KING PRODUCTS, INC.

No. 13–32101–H5–11.

United States Bankruptcy Court,

S.D. Texas,

Houston Division.

Signed July 17, 2014.

Melissa Anne Haselden, Mazelle Sara Krasoff, Annie E. Catmull, Ruth E. Piller, Edward L. Rothberg, Hoover Slovacek LLP, Houston, TX, for Debtor.

Ellen Maresh Hickman, Office of the U.S. Trustee, Houston, TX, for U.S. Trustee.

MEMORANDUM OPINION AND ORDER

KAREN. K. BROWN, Bankruptcy Judge.

Before the Court are Debtor's Motion to Estimate Claim of National Oilwell Varco, L.P. (“NOV”) for Purposes of Allowance, Distribution and Voting Pursuant to 11 U.S.C. § 502(c) and Debtor's Objection to Claim # 14 Filed by National Oilwell Varco, L.P.

NOV filed a proof of claim in debtor's bankruptcy listing the amount as “unknown.” ¹ On September 21, 2012, NOV filed a petition in state court, styled National Oilwell Varco, LP v. Mud King Products, Inc., Nigel Brassington, and Freddy Rubiano, cause no.2012–55427, in the 165th District Court of Harris County, Texas. NOV's state court petition sought a restraining order against Mud King, Nigel Brassington, and Freddy Rubiano seeking to prohibit their use of NOV drawings of mud pump parts. NOV also seeks monetary damages from defendants for various causes of action allegedly due to debtor's acquisition and use of certain drawings from NOV's database that NOV contends are trade secrets.

After debtor filed bankruptcy on April 1, 2013, NOV's lawsuit was removed from state court and is currently pending in the United States District Court for the Southern District of Texas, Houston Division (Atlas, J.), styled, National Oilwell Varco, LP v. Mud King Products, Inc., Nigel Brassington, Freddy Rubiano, Donald R. Humiston, Oilman Group Co., Ltd. a/k/a Oilman Group Ltd., Wellhead Solutions, Inc., Dezhou L & A Petroleum Machinery, Co., Ltd., Gary Clayton, Sean Cougot, Martin Rodriguez, SMC, Inc., and Larry D. Murray, civil action no. 4:12–CV–03120. NOV's 3rd amended complaint filed in civil action no. 4:12–CV–03120 asserts causes of action against Mud King and other defendants for trade-secret misappropriation, conversion, conspiracy, and for violations of the Texas Theft Liability Act and the Computer Fraud and Abuse Act. NOV seeks damages including disgorgement of debtor's alleged profits of $283,859.96, avoided development costs of $4,001,546.90, and exemplary damages of $2,554,739.64, plus attorneys' fees, costs and prejudgment interest.

Mud King contends its gross profits made in connection with the NOV drawings was $131,094.28. However, Mud King seeks to estimate NOV's claim at zero dollars.

This Court has jurisdiction over these contested matters under 28 U.S.C. § 157 and § 1334. These are core proceedings under 28 U.S.C. § 157(b)(2).

After review of all exhibits and considering the testimony of witnesses, this Court concludes that as to some of the 202 drawings at issue, NOV has failed to prove, as a basis for estimation of its claim, its causes of action for conversion, for unjust enrichment, and for violations of the Computer Fraud and Abuse Act (CFAA) NOV has failed to prove entitlement to exemplary damages. However, as a basis for its claim, NOV has borne its burden to prove Mud King misappropriated some trade secrets and violated the Texas Theft Liability Act (TTLA), for the following reasons:

I. FINDINGS OF FACT

a. The parties

NOV is a manufacturer and distributor of equipment and parts used in the oil and gas industry.² NOV has approximately 65,000 employees and locations world wide including 90 locations in the Houston area alone. (MK Ex. 46; Doc. 213 ³ pp. 141–143) Among NOV's divisions is Rig Solutions, through which NOV sells drilling equipment and parts, including mud pumps and mud pump replacement parts. (Doc. 213 pp. 4–5) NOV's Rig Solutions sells “billions of dollars of equipment.” (Doc. 213, pp. 5–7) NOV controls roughly 70% of the market share of the mud pump replacement parts industry. (Doc. 214 p. 38) NOV's customers include some of the largest Fortune 100 and Fortune 500 operators in the oil and gas industry. (Doc. 213 p. 145)

In addition to complete mud pumps, NOV sells replacement parts for mud pump components. NOV also sells OEM ⁴ replacement parts for the brands that it owns. NOV's Mission division also sells fluid end replacement parts for mud pump brands that NOV does not own. Mission manufactures these aftermarket parts by reverse engineering an already manufactured OEM part to create an engineering blueprint that can be used to duplicate as closely as possible the specifications and tolerances of the original OEM part.⁵ After market mud pump parts are designed to be compatible with OEM mud pumps. (Doc. 202 pp. 57–58, 132–133)

Mud King is a small, Houston-based manufacturer and distributer of aftermarket mud pump parts. Its only location is in Houston, Texas and it has approximately 30 employees. Mud King has been in business selling aftermarket replacement mud pump parts since 2000 and is one of numerous suppliers of aftermarket mud pump replacement parts that comprise the remaining 30% of the mud pump replacement part market share. (Doc. 202 pp. 172–173; NOV Ex. 145) Aftermarket mud pump parts are less costly than OEM parts, but usually compatible with OEM parts. (Doc. 213 pp. 146–147)

b. Mud King's acquisition of NOV drawings

Freddy Rubiano is a quality manager for Mud King and a former NOV employee. (Doc. 202 pp. 4–6; NOV Ex. 145) Liliana Arredondo is Rubiano's sister in-law. During the time period pertinent to this proceeding, Arredondo was employed by NOV as a buyer planner whose duties included maintaining sufficient levels of NOV's parts inventory. (Doc. 214 pp. 98–101; NOV Ex. 101) To perform her duties Arredondo kept in frequent contact with NOV's outside parts vendors authorized to manufacture NOV's OEM parts pursuant to NOV's specifications. Arredondo accessed NOV's mud pump drawings stored in NOV's engineering database multiple times each day in order to communicate with and to send electronic copies of drawings to NOV's authorized vendors concerning NOV's parts manufacturing specifications. When buyer planners, such as Arredondo, sent parts drawings to outside vendors, the original data remained unaffected and available to NOV in its data base.

In 2011, Rubiano asked Arredondo to give him copies of certain NOV blueprints. (Doc. 214 pp. 93–94) Although she resisted at first, eventually, Arredondo gave Rubiano the copies he requested.

At first, Arredondo emailed the requested drawings to Rubiano. Later, Arredondoleft paper copies on Rubiano's kitchen table. (Doc. 214 pp. 91–92) Rubiano gave Arredondo approximately $1,000 cash in exchange for the drawings.⁶

c. An anonymous tip and Arredondo's confession

In August 2012, NOV's in-house attorneys received an anonymous letter in the mail purportedly authored by a Mud King employee. The letter states that Rubiano was “currently paying someone with your company to make copies of prints for use at our company.” (NOV Ex. 7) The letter names Mud King COO Nigel Brassington as providing the funds. The letter is signed “Concerned Employee.” Enclosed with the letter were two NOV engineering drawings.

NOV's in-house counsel requested Brad Ortego, NOV's Investigations Manager, open an investigation of the matter to determine whether the allegations were true. Ortego began his investigation by verifying on the internet that Mud King existed. Then he contacted NOV's human resources department to see whether Rubiano was a former NOV employee and where he had worked. At that point, Ortego contacted Kimmons Investigative Service for assistance in the investigation to try to identify people who might be sending drawings out.

Ortego asked NOV's IT department to search for email traffic to or from Mud King. Ortego testified that when he got the email results from the IT department, he reviewed the list to see whether any of the emails had attachments that could have been NOV's drawings, but found none. Ortego then asked NOV's human resources department to research who had worked at the same facility at the same time as Rubiano to determine whether any of the same people continued to work for NOV. Ortego then tried to discover who had access to both of the drawings included with the letter but was unable to identify anyone.

Next, Ortego asked NOV's IT department to research Rubiano's personal email address to see whether any NOV email traffic went to that email address. That research lead to discovery of emails between Rubiano and Arredondo. In one of those emails, Rubiano asked Arredondo to proofread his English. The email also discussed drawings. The email indicated to Ortego that Rubiano and Arredondo had a close personal relationship. From the email, Ortego knew that Arredondo worked for RigSolutions. He contacted a manager of Arredondo to see whether she had access to drawings and to obtain a report of all drawings she had accessed. Ortego determined from access log reports that Arredondo had accessed both of the drawings included with the letter. One log shows that Arredondo accessed 170 drawings from April 28, 2011, to October 28, 2011. Another log shows that Arredondo accessed 477 drawings from November 4, 2011 to September 10, 2012.

At that point Ortego arranged to interview Arredondo at her work site. The following day, September 20, 2012, Ortego, along with the Kimmons investigators, met Arredondo at NOV's facility on Bammel. During the meeting, Arredondo admitted that Rubiano was her brother-in-law, that she had given him NOV's drawings for which he had paid her cash in increments of $300.00. Ortego had Arredondo sign an affidavit. Although Arredondo confessed to giving drawings to Rubiano, Ortego found no emails or other documents showing that Arredondo had sent drawings to Rubiano. When the meeting concluded, Ortego spoke with the human resource manager and told him that Arredondo had confessed to stealing drawings and selling them to a...