Wal-Mart Stores, Inc. v. P.O. Market, Inc.

• Decision Date: 14 February 2002
• Docket Number: No. 00-1223.,00-1223.
• Parties: WAL-MART STORES, INC., A Delaware Corporation d/b/a Sam's Club v. THE P.O. MARKET, INC., A Texas Corporation; Joseph O'Banion, Leonard Hoffman, and Michael McNew.
• Court: Arkansas Supreme Court

66 S.W.3d 620

347 Ark. 651

WAL-MART STORES, INC., A Delaware Corporation d/b/a Sam's Club v. THE P.O. MARKET, INC., A Texas Corporation; Joseph O'Banion, Leonard Hoffman, and Michael McNew.

No. 00-1223.

Supreme Court of Arkansas.

February 14, 2002.

Williams & Anderson LLP, by: Peter G. Kumpe and Stephen B. Niswanger, Little Rock, for appellant.

Hardin, Jesson & Terry, by: Bradley D. Jesson and Rex Terry, Fort Smith; Dover & Dixon, P.A., by: Thomas S. Stone and Michael Johns, Little Rock; McKool Smith, P.C., by Lewis T. LeClair, Robert Goodfriend, and Garret W. Chambers, Dallas; and Patton, Haltom, Roberts, McWilliams & Greer, by: James C. Wyly, Texarkana, for appellees.

ROBERT L. BROWN, Justice.

This is a trade-secrets case. The appellant is Wal-Mart Stores, Inc., doing business as Sam's Club. The appellee is P.O. Market, Inc., a Texas corporation, as well as three individuals: Joseph O'Banion, Leonard Hoffman, and Michael McNew, all of whom are principals in P.O. Market. Following a ten-day jury trial, P.O. Market was awarded $31.7 million in compensatory damages for misappropriation of a trade secret. The trial court also awarded attorneys' fees of $5 million. Wal-Mart now appeals the jury's verdict and raises four points: (1) a trade secret was not involved; (2) there was no competent evidence of misappropriation; (3) the trial court erred in various evidentiary rulings and in instructing the jury; and (4) the judgment improperly permits double recovery of damages. We reverse the judgment on the first point and dismiss the case.

P.O. Market was a Texas corporation which was incorporated by Joe O'Banion on December 4, 1992. O'Banion's brother-in-law, Dallas attorney Leonard Hoffman, prepared the incorporation documents. P.O. Market was capitalized at $1,500 and never received any additional capital. It never filed income tax returns. P.O. Market's three shareholders (O'Banion, Hoffman, and McNew), however, did conduct regular business meetings. In 1992 and 1993, the corporation was in good standing in Texas and qualified to do business in Arkansas.¹

Before the creation of P.O. Market, O'Banion and McNew were owners of Southwest Factors, a Little Rock factoring business. Southwest Factors offered credit to subcontractors by purchasing their accounts receivable and then collecting those accounts.

Sam's Club is a division of Wal-Mart Stores and is headquartered in Bentonville. It is a wholesale warehouse club. Members of Sam's Club are able to buy goods in bulk at wholesale prices. The Export Division of Sam's Club handles bulk transactions for large-scale purchasers. These bulk purchasers typically buy in large quantities by the truckload or in shipping containers. Most of these export purchasers are domestic companies, despite the name of the department. These large-scale bulk sales are effected via direct shipment from a manufacturer, vendor, or a Sam's distribution center to the customer and do not involve any individual Sam's Club store.

Prior to November 1993, there was not a system in place at Sam's Club for purchasers of large quantities of goods to finance their purchases.² Specifically, Sam's Club customers could not submit a purchase order from their company that was payable at a later time, because Sam's Club operated on a "cash and carry" basis, with the sole exception of Discover credit card purchases.

In August of 1992, O'Banion first learned of this cash-and-carry feature of Sam's Club. At that time, he was approached by Dan DeLaughter, who was a representative of a corporation called The Service Department in Little Rock. The Service Department bought goods wholesale from Sam's Club and then resold them to its customers at a markup. DeLaughter approached O'Banion at Southwest Factors about financing a bulk purchase of computers for The Service Department, to be resold to the University of Arkansas at Little Rock. Southwest Factors declined to do the financing due to the credit risk. Through these negotiations, O'Banion met the manager of the Sam's Club store in Little Rock, Mike Hampson. According to O'Banion's trial testimony, Hampson told him that bulk credit purchases were a huge untapped market for Sam's Club.

Following that conversation, O'Banion contacted Hampson with a proposal that Sam's Club buy his idea for a way to execute bulk credit transactions. Subsequently, Hampson put O'Banion in touch with a Sam's Club executive named Sharon Austin. Austin was a member of the Export Division of Sam's Club, and her title was Export Business Developer. For part of the time relevant to this litigation, she reported directly to Colin Washburn, who was then Sam's Club General Merchandise Manager. Washburn, in turn, reported to the CEO of Sam's Club. At other times, Austin reported to another member of the Export Division, manager Scott Burford. In September 1992 O'Banion and Austin arranged to meet in Bentonville to discuss the P.O. Market proposal. O'Banion testified at trial that Austin agreed during this telephone conversation to keep O'Banion's proposal confidential.

On October 7, 1992, O'Banion sent Austin a letter confirming the meeting and requesting that all information disclosed thus far be kept confidential. O'Banion's proposal to Sharon Austin was outlined in his letter. The salient points were these: After a purchaser submitted a purchase order to Sam's Club, P.O. Market would buy the named goods from Sam's Club. P.O. Market would receive the most favorable pricing from Sam's Club, which the letter described as "favored nation" pricing. It would be a same-day settlement. P.O. Market would take title to the goods, would mark up the price of the goods, and sell them on a credit basis to the purchaser. Between the "favored" pricing of the goods and the markup to the end customer, O'Banion estimated that P.O. Market would realize a profit of between 8% and 12% of gross sales. O'Banion further proposed that P.O. Market be granted a nonexclusive license to use Sam's Club logos and trademarks in order to boost bulk purchaser confidence in its operation.³ He proposed that P.O. Market have a regional sales force, in addition to advertising, to market the bulk credit purchase service to Fortune 500 companies and other large purchasers. These purchasers would be preapproved by P.O. Market's financing institution, which O'Banion contemplated would manage the credit risk as well as the same-day settlement of Sam's sales transactions. The lender would also track the purchasers' orders and accounts.

Under O'Banion's proposal, Sam's Club would guarantee the quality of their products just as in any regular sales transaction made directly between a customer and Sam's Club. He also proposed setting up direct computer communications to allow a purchaser to place an order with P.O. Market, and that same day for the order to be transmitted to Sam's Club for the goods to be pulled and "dock ready" for delivery the next business day. The letter proposed a five-year exclusive arrangement between P.O. Market and Sam's Club. Though O'Banion's proposal later changed in certain respects, for ease of convenience we will refer to it as the O'Banion concept.

O'Banion testified that his concept allowed the bulk purchaser to get the benefit of a credit transaction for a wide variety of products. A business's entire procurement needs could be satisfied with one purchase order. This could be accomplished under his plan without exposing Sam's Club to any credit risk, because P.O. Market took title to the goods and thereby assumed the risk of non-payment. Further, Sam's Club would receive same-day settlement of sales transactions, which O'Banion understood to be critical to Sam's Club. According to O'Banion, Sam's Club also got the benefit, if P.O. Market expanded Sam's Club's market share, of gaining deeper discounts from vendors as its own purchases got bigger. P.O. Market got the benefit of the price mark up, although it bore the credit risk. O'Banion testified at trial that he was not very concerned about credit risk, because he contemplated doing business only with large corporate and government purchasers. Moreover, potential purchasers would have to qualify with P.O. Market's financial institution as a low credit risk to participate in the program. The October 7, 1992 letter contained a paragraph requesting Austin to keep the proposal confidential.

In early October 1992, O'Banion, Leonard Hoffman, and Michael Hill, who was also interested in the O'Banion concept met with Sharon Austin and another Export Division employee named Ralph Bane at the Sam's Club headquarters in Bentonville. According to O'Banion's trial testimony, Austin and Bane told him that Sam's Club was not discussing a similar credit arrangement with any other potential partner. O'Banion further testified that Austin told him that she would communicate his proposal to her Sam's Club superiors and to the Wal-Mart legal department. If they were not interested, she said she would contact him within 24 hours. In her trial testimony, Austin stated that she only remembered giving the proposal to her boss, Export Division manager Scott Burford.

At the October meeting, Hoffman stressed to all parties the need to maintain confidentiality. He produced a confidentiality agreement that he had prepared for the meeting. According to O'Banion's trial testimony, Austin told him to put his agreement away, because it would not be needed. She preferred to give her word that the matters discussed at the meeting would be kept confidential.

After Austin and O'Banion's initial meeting, a second meeting was held on November 9. At this meeting, O'Banion, Hoffman, and Hill met with Sharon Austin in her office in Bentonville. O'Banion took a draft license and sales agreement with him, but he did not show her the document, because there were some changes that Hoffman wanted to make to the draft. After the second meeting, O'Banion and Hoffman mailed...