Texas Trade Secret Case Reminds of Risk Associated with Not Supplementing Rule 26 Disclosures

Holland & Knight LLP

Holland & Knight LLP

ResMan LLC (ResMan) sued Karya Property Management LLC (Karya) and Scarlet Infotech Inc. d/b/a/ Expedien Inc. (Expedien), in federal court in Texas alleging misuse of the "ResMan Platform," a property management software developed and owned by ResMan. The software provides property managers with tools designed to aid in the management of all aspects of the property management business. ResMan alleged that, after signing an agreement imposing strict confidentiality restrictions, Karya unlawfully provided access to the software to Expedien for the purposes of producing a competing software.

One month before trial, Karya filed a motion seeking to strike ResMan's claim for lost profit damages as set forth in the parties' proposed joint pretrial order. In a close call, the court ultimately sided with ResMan, thus allowing the claim to go forward. However, the court took issue with ResMan's failure to supplement its initial Rule 26 disclosures.

Pursuant to Federal Rule of Civil Procedure (FRCP) 26(a)(1)(A)(iii), initial disclosures must contain "a computation of each category of damages claimed by the disclosing party." ResMan initially disclosed compensatory, consequential, and/or monetary damages, pre and post-judgment interest, plus attorney's fees. ResMan stated that it would supplement the disclosures as allowed and required by the Federal Rules.

Analyzing Karya's motion to strike ResMan's later claim for lost profit damages, the court acknowledged that one proper measure of damages in a trade secret case is lost profits. However, the court took issue with ResMan for failing to supplement its initial disclosures to reflect its claim for lost profit damages. Notably, under FRCP 37, the court has discretion to overlook such a failure if it was "substantially justified or harmless." The Rule would otherwise bar ResMan from using any information relating to the lost profit damages claim at trial. ResMan provided no justification for failing to supplement, leading the court to engage in a four-step analysis to determine harmlessness, such that the evidence could still be used at trial: 1) the importance of the evidence of the witness's testimony, 2) the prejudice to the opposing party of allowing the evidence in, 3) the possibility of curing such prejudice by granting a continuance and 4) an explanation, if any, for the party's failure to identify the witness or evidence.

The court's analysis ended in a dead split, with the first and fourth factors tilting in favor of ResMan, and the second and third factors tilting in favor of Karya. In the end, what saved ResMan was that its First Amended Complaint specifically pled that it sought lost profit damages for Karya's violations of federal and state trade secrets laws. ResMan also indicated in its interrogatory responses that it sought "lost profits" or Karya's profits. The court held that these facts placed Karya on "constructive, if not actual, knowledge of the lost profits claim." It also weighed against Karya that it chose not to pursue any relief until the filing of the motion to strike all lost profits damages a month before trial, while also failing to question any of ResMan's knowledgeable witnesses to date on the question of lost profit damages.

In the end, the court denied Karya's motion and allowed ResMan's claim for lost profits damages to proceed to trial.

The ruling serves as a reminder of the risk that may be avoided by making sure to supplement your Rule 26 disclosures, even though doing so may be duplicative of other discovery.

The case is ResMan, LLC v. Karya Property Management, LLC and Scarlet Infotech, Inc. d/b/a Expedien, Inc., No. 4:19-CV-00402, 2020 WL 5884820 (E.D. Tex. Oct. 1, 2020).

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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