Case 4:09-cv-00782 Document 160 Filed in TXSD on 09/07/12 Page 1 of 8
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`UNITED STATES DISTRICT COURT
`SOUTHERN DISTRICT OF TEXAS
`HOUSTON DIVISION
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`ULTRAFLO CORPORATION,
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` Plaintiff,
`VS.
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`PELICAN TANK PARTS, INC., et al,
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` Defendants.
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`§
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` CIVIL ACTION NO. 4:09-CV-782
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`OPINION AND ORDER
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`Pending before the Court is Defendants Pelican Tank Parts, Inc., Pelican Worldwide,
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`Inc., and Thomas J. Mueller’s motion to dismiss Plaintiff Ultraflo Corporation’s amended
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`complaint. Doc. 122. In response to the Court’s request (Doc. 116), both parties have submitted
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`memoranda addressing the questions of whether federal subject matter jurisdiction exists over
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`Plaintiff’s state-law claims and whether Plaintiff’s claims for unfair competition by
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`misappropriation, conversion, and civil conspiracy are preempted by the federal Copyright Act.
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`Docs. 119, 124. Defendants have also filed a motion to sever into separate lawsuits Plaintiff’s
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`claims against the corporate Defendants and Plaintiff’s claims against Defendant Mueller. Doc.
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`128.
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`After considering the motions, the background of this case, and the applicable law, the
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`Court finds that the Court has jurisdiction to consider Plaintiff’s claims, but that Plaintiff’s state
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`law claims for unfair competition by misappropriation and conversion, and civil conspiracy for
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`these alleged acts are preempted by the federal Copyright Act and must be dismissed. Ultraflo
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`retains its remaining claims for misappropriation of trade secrets, for civil conspiracy for the
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`alleged misappropriation, and for a declaratory judgment. Further, the Court finds that
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`Case 4:09-cv-00782 Document 160 Filed in TXSD on 09/07/12 Page 2 of 8
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`Defendants’ motion to sever or for bifurcated trials should be denied.
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`Background
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`The Court set forth the factual history of this case in its opinion and order of October 18,
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`2011. Doc. 116 at 1-3. In that order, the Court found that Ultraflo did “not adequately allege the
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`grounds for federal subject matter jurisdiction” and ordered it to file an amended complaint
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`addressing the validity of federal subject matter jurisdiction premised on the existence “of a
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`federal issue in the context of an action for declaratory judgment.” Id. at 8. The Court also,
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`acting on its own motion, addressed “the potential preemption of Ultraflo’s state law claims for
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`misappropriation of trade secrets, unfair competition by misappropriation, conversion, and civil
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`conspiracy,” and, having found that the latter three claims were preempted by the federal
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`Copyright Act, ordered Plaintiff to “re-allege its causes of action, avoiding allegations of state
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`law claims that are clearly preempted by federal law.” Id. at 9, 15.
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`On November 2, 2011, Ultraflo filed its second amended complaint (Doc. 118) and
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`memorandum of law (Doc. 119). Ultraflo re-asserted its state law claims for misappropriation of
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`trade secrets, unfair competition by misappropriation, conversion, and civil conspiracy. Doc. 118
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`at 6-7. Ultraflo also re-asserted its request for a declaratory judgment that Mueller’s copyright in
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`the contested valve drawings either is invalid or that the drawings were “works made for hire”
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`and that the copyright therefore rightfully belongs to Ultraflo. Id. at 10.
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`Defendants filed a motion to dismiss (Doc. 122), their second amended answer (Doc.
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`123), the requested memorandum concerning federal subject matter jurisdiction (Doc. 124), and
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`a motion to sever the case against the corporate Defendants from that against Defendant Mueller
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`(Doc. 128). The motions have been fully briefed and now are ripe for consideration.
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`Analysis
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`a. Plaintiff’s Preempted State Law Claims
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`Despite the Court’s admonition that Ultraflo should file an amended complaint that
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`“avoid[s] allegations of state law claims that are clearly preempted by federal law” (Doc. 116),
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`Ultraflo has re-alleged its claims for unfair competition by misappropriation, conversion, and
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`civil conspiracy. Doc. 118. It nevertheless contends that these claims are not preempted because
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`of an apparently subtle distinction between the many cases holding such claims to be preempted
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`and the case now before the Court.
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`Ultraflo relies on the “distinction between a useful article and a drawing of a useful
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`article” in an attempt to revive its preempted state law claims. Doc. 119 at 3. “[T]he exclusive
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`rights afforded to copyright owner under 17 U.S.C. § 106 apply only to the drawing, not to the
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`article shown in the drawing,” Ultraflo contends, and therefore Ultraflo’s claim to stop “the use
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`of those drawings to make useful articles” is distinct from and not preempted by the federal law.
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`Id. at 2, 9. The Court finds the distinction unavailing. Ultraflo is not asserting state law claims
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`based on the loss of the physical drawings themselves, nor the valves, but rather from the loss of
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`the intellectual property contained in graphic representations of the valves and the valve
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`dimensions. That intellectual property is subject to the federal Copyright Act. The Court stands
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`by the reasoning in its earlier opinion and order and finds that Ultraflo’s state law claims of
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`unfair competition by misappropriation and conversion are preempted and therefore dismissed.
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`Similarly, Ultraflo’s claim for civil conspiracy is preempted to the extent that it alleges a
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`conspiracy to engage in unfair competition by misappropriation and conversion; it is not
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`preempted as to Ultraflo’s claim that the corporate Defendants conspired with Mueller, during
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`his employ with Ultraflo, to engage in the unlawful conduct of misappropriation of trade secrets.
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`b. Ultraflo’s Claim for Misappropriation of Trade Secrets
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`As the Court laid out in its previous opinion and order, the elements of a claim for
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`misappropriation of trade secrets under Texas law are “that (1) a trade secret existed, (2) the
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`trade secret was acquired through a breach of a confidential relationship or discovered by
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`improper means, and (3) the defendant used the trade secret without authorization from the
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`plaintiff.” CQ, Inc. v. TXU Mining Co., 565 F.3d 268, 273 (5th Cir. 2009). Here, Defendants
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`argue that no trade secret existed for the contested valve because Ultraflo’s valve was “publicly
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`available to the world and [could] be purchased by anyone.” Doc. 122 at 16.
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`“A trade secret is any formula, pattern, device or compilation of information used in
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`one’s business, and which gives an opportunity to obtain an advantage over competitors who do
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`not know or use it.” Taco Cabana Intern., Inc. v. Two Pesos, Inc., 932 F.2d 1113 (5th Cir. 1991)
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`(citing Hyde Corp. v. Huffines, 158 Tex. 566, 586, 314 S.W.2d 763, 776 (adopting
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`RESTATEMENT OF TORTS § 757 (1939)), cert. denied, 358 U.S. 898, 79 S.Ct. 223, 3 L.Ed.2d 148
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`(1958)).1 See also RESTATEMENT (THIRD) OF UNFAIR COMPETITION § 39 (1995). “Matters which
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`are completely disclosed by the goods which one markets cannot be his secret.” RESTATEMENT
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`OF TORTS § 757 cmt. b. And while “[t]he theoretical ability of others to ascertain the information
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`through proper means [like difficult, costly, or time-consuming examination of a publicly
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`available product] does not necessarily preclude protection as a trade secret,” “information
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`readily ascertainable from an examination of a product on public sale or display is not a trade
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`secret.” RESTATEMENT (THIRD) OF UNFAIR COMPETITION § 39 cmt. f. Thus, whether a publicly
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`sold object may contain trade secret information turns on how available that information is from
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`1 Although the Restatement has been superseded by the Restatement (Second) and, in part, by sections of the
`Restatement (Third), the updated versions omit the sections on Unfair Competition and Trade Regulation, including
`Section 757. See RESTATEMENT (SECOND) OF TORTS 9 intro. note (1979). Texas courts continue to rely on the § 757
`definition of “trade secret” contained in the Restatement (First) and in the more recent Restatement (Third) of Unfair
`Competition § 39 cmt. d (1995). See In re Union Pacific R. Co., 294 S.W.3d 589, 592 (Tex. 2009).
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`Case 4:09-cv-00782 Document 160 Filed in TXSD on 09/07/12 Page 5 of 8
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`an examination of the product.
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`Defendants contend that “a pleading or public record that admits that the alleged ‘trade
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`secret’ is a design that is publicly available is one that fails as a matter of law.” Doc. 122 at 18
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`(emph. omitted). Because Ultraflo has asserted a secret in its “non-patented butterfly valves
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`publicly sold by Plaintiff . . . which any person can buy off-the-shelf and observe,” Defendants
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`claim that Ultraflo cannot state a claim for misappropriation of trade secrets. That position is an
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`overstatement of the requirement for secrecy. Whether the alleged secret is “readily available” is
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`not the same question as whether it is “publicly available.” The comment to the Restatement
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`(Third) of Unfair Competition makes clear that the relevant inquiry is into the difficulty a
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`Defendant must undertake to obtain the information. As an illustration of the principle, the
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`Institute gives the following example:
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`“A manufactures heavy-duty centrifugal blowers. Drawings containing
`dimensions and specifications for components of the blowers are taken without
`authorization by B, a former employee of A, and used to manufacture a
`competing product. Although the approximate dimensions and specifications of
`A’s products can be determined by measuring blowers sold by A on the open
`market, the evidence establishes that the information resulting from such
`measurements would be less accurate than the drawings taken by B and less
`valuable in manufacturing competing products. The acquisition of information as
`accurate as that contained in the drawings taken by B would require a statistical
`analysis of measurements taken from a large number of A’s blowers. The court
`may properly conclude that the information contained in the drawings is not
`readily ascertainable by proper means and is thus sufficiently secret to be
`protected as a trade secret. B is thus subject to liability to A for the appropriation
`of A’s trade secrets under the rules stated in § 40.”
`RESTATEMENT (THIRD) OF UNFAIR COMPETITION § 39 cmt. f, illus. 5.
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`The similarity between that example and the circumstances alleged in this case is striking.
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`Ultraflo has alleged that “Pelican Tank’s competing valve . . . matches Ultraflo’s drawings better
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`than Ultraflo’s own valve matches the drawings,”2 suggesting that even a statistical analysis of
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`2 Doc. 118 at 3.
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`the publicly available valve would fail to give the Defendants the information they sought to
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`obtain. The Court cannot, therefore, determine on the basis of the fact that Ultraflo sold its valve
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`on the open market that it forfeited the secrecy of the valve’s dimensions as contained in its
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`drawings.
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`Defendants also encourage the Court to delve into deposition testimony in which Ultraflo
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`representatives admit that Mueller “was not subject to any confidential relationships” with
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`Ultraflo. Doc. 122 at 21. The Court finds it sufficient at the motion to dismiss stage that Ultraflo
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`has alleged the existence of “at least two separate documents promising to keep Ultraflo
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`information secret” that Mueller signed during or as a condition of his employment. Doc. 130 at
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`19. Defendants’ motion to dismiss Ultraflo’s claim for misappropriation of trade secrets
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`therefore is denied.
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`c. Declaratory Judgment
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`Although Defendants contested the validity of federal subject matter jurisdiction based on
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`Ultraflo’s request for relief under the Declaratory Judgment Act (Doc. 124), they have not
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`moved to dismiss this aspect of Ultraflo’s complaint. See Doc. 122. Nevertheless, Ultraflo again
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`has failed to cite to the relevant provisions of the Copyright Act on which it challenges the
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`validity or ownership of Mueller’s copyright. See Doc. 116 at 8 (“If Ultraflo is alleging . . . that
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`the validity of the copyright itself is at issue, they may have a claim that “arises under the
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`Copyright Act . . . but they have failed to identify the relevant provisions of the Copyright Act.”).
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`The Court therefore orders Ultraflo to file a supplement to its second amended complaint stating,
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`with particularity, the relevant provisions of the Copyright Act which give rise to their claim of
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`ownership to Mueller’s copyright (their “work for hire” argument) and those portions of the
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`Copyright Act which grant this Court the authority to invalidate or transfer ownership of that
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`copyright.
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`Currently, Ultraflo makes general assertions that “Muller’s assorted valve drawings are
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`not original to Mueller,” and that they do not “demonstrate the necessary modicum of original
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`authorship and creativity over and above Ultraflo’s preexisting drawings to warrant copyright
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`protection.” Doc. 118 at 10. Ultraflo then states that the drawings are “‘works made for hire’
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`under the Copyright Act that belong to Ultraflo.” Id. The process of litigation would be eased by
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`direct citations to those portions of the Copyright Act, if any, that require originality, that set
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`forth the grounds (such as lack of originality) on which a copyright can be challenged and
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`invalidated, and that determine ownership of original works produced “for hire.”
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`d. Defendants’ Motion to Sever Defendants or Bifurcate Trial
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`Defendants have moved for severance of the corporate Defendants from individual
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`Defendant Mueller on the grounds that Ultraflo’s case against the Defendants involves different
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`legal theories or that the corporate Defendants would be prejudiced or inconvenienced if the trial
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`included Ultraflo’s claims against them and its request for a declaratory judgment relating to
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`Mueller’s copyright. Doc. 128. All the claims in this case arise out of the same set of transactions
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`and occurrences, and certain facts are common to all claims. The Court sees no reason to
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`continue to prolong what already has been a lengthy and convoluted pre-trial experience.
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`Defendants’ motion therefore is denied.
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`Conclusion
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`For the foregoing reasons, the Court hereby
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`ORDERS that Defendants’ motion to dismiss Plaintiff’s second amended complaint
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`(Doc. 122) is GRANTED with respect to Plaintiff’s state law claims for unfair competition by
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`misappropriation, conversion, and conspiracy to commit these acts and DENIED with respect to
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`Plaintiff’ claim for misappropriation of trade secrets and conspiracy to commit this act. Further,
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`the Court
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`ORDERS that Defendants’ motion to sever or to bifurcate (Doc. 128) is DENIED. Finally, as
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`the Court previously mentioned, Plaintiff shall file a supplement to its second amended
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`complaint specifying the portions of the Copyright Act relevant to its Declaratory Judgment Act
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`claims.
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`SIGNED at Houston, Texas, this 7th day of September, 2012.
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`___________________________________
` MELINDA HARMON
` UNITED STATES DISTRICT JUDGE
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