Hawg Tools, LLC v. Newsco Int'l Energy Servs., Inc.

411 P.3d 1126

HAWG TOOLS, LLC, Plaintiff-Appellee,

v.NEWSCO INTERNATIONAL ENERGY SERVICES, INC. ; Newsco International Energy Services USA, Inc.; Newsco Directional & Horizontal Services, Inc.; and Joe Ficken, Defendants-Appellants.

Court of Appeals No. 14CA1321

Colorado Court of Appeals, Div. II.

Announced December 1, 2016

As Modified on Denial of Rehearing January 12, 2017

Robinson Waters & O'Dorisio, P.C., Anthony L. Leffert, Laura J. Ellenberger, Denver, Colorado, for Plaintiff-Appellee

Gordon & Rees LLP, John R. Mann, Thomas B. Quinn, Tamara A. Hoffbuhr Seelman, Denver, Colorado, for Defendants-Appellants

Opinion by JUDGE BERNARD

¶ 1 What is a trade secret? According to a Colorado statute, it is, as is pertinent to this case, "the whole or any portion ... of any ... design ... which is secret and of value." § 7–74–102(4), C.R.S. 2016. We conclude in this appeal that the act of keeping a design secret does not necessarily mean that it is a trade secret. Rather, the design itself must be secret; focusing on the act of protecting the design's secrecy skips the first and fundamental step in the analytical process.

¶ 2 In this appeal, defendants, Newsco International Energy Services, Inc.; Newsco International Energy Services USA, Inc.; Newsco Directional & Horizontal Services, Inc.; and Joe Ficken, appeal the trial court's judgment in favor of plaintiff, Hawg Tools, LLC, on Hawg's claims for misappropriation of a trade secret and conversion. Mr. Ficken appeals the judgment against him on Hawg's claim for breach of contract. We reverse the judgment as far as Hawg's claim for misappropriation of a trade secret is concerned, but we affirm the judgment on Hawg's claims for conversion and breach of contract.

I. Background

A. Mud Motors

¶ 3 We have learned from the record that drilling operations typically employ a tool called a mud motor to drill for oil. (Drilling fluid is commonly referred to as "mud.") During a drilling operation, a mud motor is inserted into a well hole. When fluid is pumped through the mud motor, the motor drives a drill bit, and the drill bit drills a hole.

¶ 4 A mud motor consists of a power section and a transmission. The power section contains a stator and rotor. (A stator is a static part; a rotor is a moving part.) Drilling fluid is pumped through the stator to turn the rotor.

¶ 5 The transmission consists of three parts:

(1) a mandrel, or a tubular shaft around which other parts are assembled, which is attached to the rotor to drive the drill bit;

(2) a bearing pack that allows the mandrel to turn the drill bit without friction; and

(3) a bit box that contains the drill bit.

¶ 6 Bearing packs come in two types: wash bearing packs and sealed bearing packs. A wash bearing pack leaves the bearings exposed to the surrounding mud. In a sealed bearing pack, the bearings are lubricated by an oil bath. The oil bath is enclosed by seals to prevent mud from leaking in. This case involves an alleged trade secret concerning the design of a sealed bearing pack.

¶ 7 The following diagram, Figure 1, shows a typical mud motor with a sealed bearing pack.

¶ 8 As seen in Figure 1, a sealed bearing pack includes a pressure compensating piston. As drilling fluid pressure increases during drilling, the piston slides to compress the lubricant reservoir. Similarly, as the oil bath heats up when the drill is withdrawn, the piston slides back to expand the reservoir. In this way, the piston maintains equal pressure between the drilling fluid and the oil bath.

¶ 9 Sealed bearing packs protect components called thrust bearings longer than wash bearing packs. When using a wash bearing pack, thrust bearings last a few hours before they break and then have to be replaced. But, when using a sealed bearing pack, the seals break first instead of the thrust bearings, and the seals can last days instead of hours. So the obvious advantage of a sealed bearing pack is that the drill runs longer before it has to be stopped to perform maintenance.

¶ 10 This kind of sealed bearing pack was invented in 1971.

B. This Case

¶ 11 Hawg rents mud motors to oil and gas drilling companies. Newsco uses mud motors to provide drilling services.

¶ 12 Daniel Gallagher owned Hawg. Before he formed this company, he operated a similar business called New Venture. In 2008, he asked a machinist to manufacture sealed bearing packs for use in New Venture's mud motors. The machinist arranged for a designer, Joe Ficken, who is one of the defendants in this case, to design the sealed bearing packs.

¶ 13 The designer did not receive compensation for the design. He testified that he created it as a favor to help the machinist, a friend who was having financial difficulties. The design was "simple," and it took him only two days to do it. Neither Mr. Gallagher nor the machinist asked him to incorporate any specific features or customizations into the design.

¶ 14 The designer assigned his rights in the design to the machinist. The machinist assigned those rights to Mr. Gallagher in exchange for $350,000, some of which was allocated to manufacture a number of sealed bearing packs for Mr. Gallagher using the design. Mr. Gallagher later assigned his rights in the design to Hawg.

¶ 15 The designer continued to make changes to the design through June of 2011. During this time—in February 2011—he accepted a job at Newsco, and he began designing a sealed bearing pack for his new employer.

¶ 16 Mr. Gallagher learned in 2013 that the designer had designed a sealed bearing pack for Newsco. After determining that the Newsco design was similar to the Hawg design, Mr. Gallagher filed this lawsuit.

II. Analysis

A. Hawg Did Not Establish That Defendants Misappropriated a Trade Secret

¶ 17 Defendants contend that the trial court erred when it denied their motions for directed verdict and judgment notwithstanding the verdict on Hawg's claim for misappropriation of a trade secret. We agree because, for the reasons that we discuss below, the evidence did not prove that the design of the sealed bearing pack in question was a secret.

¶ 18 We review a trial court's rulings on motions for directed verdict and for judgment notwithstanding the verdict de novo. Vaccaro v. Am. Family Ins. Grp. , 2012 COA 9M, ¶ 40, 275 P.3d 750.

¶ 19 The determination of whether a trade secret exists is a question of fact. Colo. Supply Co. v. Stewart , 797 P.2d 1303, 1307 (Colo. App. 1990). In reviewing a trial court's rulings when these sorts of motions concern a question of fact, "[w]e consider all the evidence in the light most favorable to the nonmoving party and indulge every reasonable inference that can be drawn from the evidence in that party's favor." Hall v. Frankel , 190 P.3d 852, 862 (Colo. App. 2008). A motion for directed verdict or judgment notwithstanding the verdict should be granted only if "no reasonable person would conclude that any evidence, or any reasonable inference arising therefrom, has been presented on which the jury's verdict against the moving party could be sustained." Id. ; see also Boulders at Escalante LLC v. Otten Johnson Robinson Neff & Ragonetti PC , 2015 COA 85, ¶ 19.

¶ 20 As we noted above, and as is relevant to our analysis in this case, " '[t]rade secret' means the whole or any portion ... of any ... design ... which is secret and of value." § 7–74–102(4). To determine whether a trade secret exists, the fact finder considers, among other things, the extent to which the information is known outside the business. Colo. Supply Co. , 797 P.2d at 1306. "The subject of a trade secret must be secret, and must not be of public knowledge or of a general knowledge in the trade or business." Kewanee Oil Co. v. Bicron Corp. , 416 U.S. 470, 475, 94 S.Ct. 1879, 40 L.Ed.2d 315 (1974) ; see also In re S & D Foods, Inc. , 144 B.R. 121, 168 (Bankr. D. Colo. 1992) (matters commonly known in a trade or business cannot be considered trade secrets).

¶ 21 Trade secrets can consist of a combination of elements that are in the public domain if the combination is unique and the unified process, design, and operation of these elements afford the claimant a competitive advantage. Electrology Lab., Inc. v. Kunze , 169 F.Supp.3d 1119, 1153 (D. Colo. 2016) ; cf. Colo. Supply Co. , 797 P.2d at 1306 (product formulas were not trade secrets because they "were not unique to plaintiff and were versions of formulas from products not created by or unique to the plaintiff").

¶ 22 In this case, the general verdict form indicates only the jury's conclusion that defendants misappropriated a trade secret. But the trial court instructed the jury on the definition of the term "trade secret" in accordance with section 7-7-102(4) and relevant case law. So the verdict demonstrates that the jury found, at least implicitly, that the sealed bearing pack design was secret.

¶ 23 However, our review of the record reveals that "no reasonable person would conclude that any evidence, or any reasonable inference arising therefrom, [was] presented on which the jury's verdict against [defendants] could be sustained." Hall , 190 P.3d at 862.

¶ 24 Hawg presented ample evidence to establish that its design and the Newsco design were essentially the same. But we conclude that Hawg did not present sufficient evidence to distinguish its design from other designs that were publicly available at the same time. In other words, the evidence in the record showed that the design of Hawg's sealed bearing pack was "of public knowledge or of a general knowledge" in the mud motor manufacturing business, Kewanee Oil Co. , 416 U.S. at 475, 94 S.Ct. 1879, and that the design was commonly known in that business, see In re S & D Foods, Inc. , 144 B.R. at 168. In light of such evidence, which we now discuss, the record does not support a finding that Hawg's design was secret.

¶ 25 First, Mr. Gallagher testified that the "special or unique" aspect of the design he commissioned was "[t]hat, if it didn't run, [the designer] would be there to fix it." This...