United States: Statute Of Limitations For Trade Secret Misappropriation Begins Accruing On Date Injury Occurs

Affirming a district court’s grant of summary judgment, the United States Court of Appeals for the Fifth Circuit held that Texas’s two-year statute of limitations barred the plaintiffs’ trade secret misappropriation claim. General Universal Sys. Inc. v. HAL Inc., 500 F.3d 444 (5th Cir., 2007) (Garza, J.).

In 1979, plaintiff General Universal Systems, Inc. (GUS) developed a software program called CHAMPION PACKER for co-plaintiff Jose Lopez. Later, Lopez created a derivative program called LOPEZ COBOL. LOPEZ COBOL was based on CHAMPION PACKER, but written in a different computer language. Lopez began selling and leasing the derivative program to clients through his own company. One of those clients was Superior Packing, Inc., a company owned by defendant Herrin. In 1992, defendants Herrin and Parkin and plaintiff Lopez formed a company named HAL Inc. (HAL) and agreed to develop and market a new software program to succeed LOPEZ COBOL. The new program was to be based in large part on LOPEZ COBOL. Herrin, Parkin and Lopez began working on the new program—called MEPAW—in the summer of 1992. Beginning in December of 1992, Lopez spent seven months in a Mexican prison. In a letter dated March 22, 1993, Herrin notified Lopez that he and Parkin agreed to oust Lopez from their agreement because Lopez’s incarceration prevented him from fulfilling his duties. Through HAL, Herrin and Parkin continued the development of MEPAW until approximately August 1993, when they began marketing MEPAW to potential clients.

Although HAL began demonstrating MEPAW in the fall of 1993, it did not license the software to any customers until October 1994. By then, Lopez had assigned all his rights in LOPEZ COBOL to GUS. In November 1994, GUS began placing customers of HAL on notice that MEPAW had been improperly derived from LOPEZ COBOL. Subsequently, in May 1995, GUS filed suit against the HAL defendants and customer defendants alleging, among other things, trade secret misappropriation. The district court held that GUS was time-barred from raising its trade secret misappropriation claim on May 23, 1995, because the claim was subject to a two-year statute of limitations and the trade secret misappropriation accrued prior to May 23, 1993. GUS appealed.

On appeal, the Court held that "a cause of action accrues when a wrongful act causes some legal injury, even if the fact of injury is not discovered until later, and even if all resulting damages have not yet occurred." Under Texas law, to establish an injury of trade secret misappropriation, the plaintiff must establish "(1) a trade secret exists; (2) Defendants acquired the trade secret by breach of a confidential relationship; and (3) Defendants used the trade secret without authorization." The district court applied the ousting of Lopez from HAL as the date on which the relevant confidential relationship would have been dissolved, therefore, any "use" by LOPEZ COBEL would have occurred after the ousting date: March 22, 1993. The 5th Circuit agreed and found that GUS was barred from asserting a claim of trade secret misappropriation because GUS filed the complaint more than two years after the accrual of the claim.

GUS also argued that its claim of trade secret misappropriation should not be barred by the two-year statute of limitations because trade secret misappropriation is a continuing tort. For a continuing tort, "the cause of action is not complete and does not accrue until the tortuous acts have ceased." The Court rejected this argument and held that trade secret misappropriation should not be treated as a continuing tort under Texas law. Specifically, the Court found that the basis for a trade secret case is a breach of a contract or wrongful disregard of confidential relationships, thus the controlling date is the date that the contract is breached or the confidential relationship wrongfully disregarded. Accordingly, the date Herrin and Parkin wrongfully disregarded their confidential relationship with Lopez was the date the tort occurred. Therefore, the Court affirmed the district court’s grant of summary judgment.

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