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Harper v. Wellbeing Genomics Pty Ltd.

Court of Appeals of Texas, Third District, Austin

April 4, 2018

Dr. Ruthie Harper and PLLG, LLC, Appellants
v.
Wellbeing Genomics Pty Ltd., Appellee

          FROM THE DISTRICT COURT OF TRAVIS COUNTY, 98TH JUDICIAL DISTRICT NO. D-1-GN-14-002452, HONORABLE KARIN CRUMP, JUDGE PRESIDING

          Before Justices Puryear, Field, and Bourland.

          MEMORANDUM OPINION

          David Puryear, Justice.

         Appellants Dr. Ruthie Harper and PLLG, LLC, appeal the trial court's judgment rendered on a jury verdict finding that appellants misappropriated a trade secret of Wellbeing Genomics Pty Ltd. and that PLLG violated a non-disclosure agreement in connection with the distribution and marketing of a DNA test developed by Wellbeing to inform the personalized selection of skin-care products. Appellants challenge the evidentiary sufficiency to support the jury's findings that (1) the DNA test was a trade secret, (2) Harper and PLLG misappropriated it, and (3) Wellbeing suffered quantifiable damages. They also challenge the trial court's award of lost-profits damages against PLLG as consequential damages precluded by the non-disclosure agreement. For the following reasons, we will affirm the portion of the trial court's judgment pertaining to liability and damages against Harper, reverse the damages awarded against PLLG, and remand this cause for a new election of remedy against PLLG.

          BACKGROUND

         Wellbeing filed this lawsuit against appellants after it became aware that Harper was filing a patent application that allegedly disclosed some of Wellbeing's confidential information and that PLLG was negotiating a distribution agreement with a third party, Qivana, LLC, in the course of which the parties were allegedly misappropriating Wellbeing's intellectual property. Wellbeing asserted causes of action against Harper, PLLG, Qivana, and David Urman (a consultant hired by PLLG to help market and distribute Harper's skin-care products)[1] for trade-secret misappropriation, breach of contract, unfair competition, and civil theft under the Texas Theft Liability Act. The case was tried to a jury, which found in favor of Wellbeing on all of its theories and awarded corresponding damages under each. After Wellbeing made an election of remedies, the trial court rendered judgment awarding Wellbeing $356, 712 in damages (plus pre-judgment interest) against PLLG and Urman for breach of their respective confidentiality agreements with Wellbeing; $900, 000 in damages (plus pre-judgment interest) against Harper for misappropriation of trade secrets; $22, 500 in damages (plus pre-judgment interest) against Qivana for misappropriation of trade secrets; and over $380, 000 in attorney's fees against PLLG, Harper, and Urman.

         Evidence at trial showed that the parties' relationship began in August 2010, when Harper contacted Stefan Mazy, the manager and owner of Wellbeing, an Australian company. At the time, Harper was looking for a DNA test to distinguish the skin-care products she developed and sold (under the name SkinShift') in her Austin, Texas, skin-care clinic and customize her product recommendations based on an individual patient's specific DNA. Harper had been contacting various domestic laboratories to see if any of them had or could develop such a test for her, and several of the laboratories recommended that she contact Wellbeing. Shortly after Harper contacted Mazy, she emailed him: "We are excited to be partnering with you and feel the ability to quickly access what you all have spent considerable time and money on is a real asset in us getting to market quickly."

         Mazy testified at trial that his experience working at a skin-care clinic in Sydney, Australia, prompted him to begin developing a DNA test based on variations in individuals' DNA that his research had indicated were associated with particular skin-health categories (e.g., firmness and elasticity, wrinkling, and sun damage and pigmentation). Mazy testified that he spent three years of his personal time and money researching and developing his DNA test, which he ultimately trademarked as the SkinDNA' Genetic Test. He sold the test to spas, estheticians, healthcare providers, and individual consumers and partnered with other businesses to market and distribute the test, often rebranding it to accommodate Wellbeing's so-called "white label" partners. One such white-label partner was VITAGenes, which posted on its website samples of the patient reports that Wellbeing prepared after its lab analyzed a patient's DNA.

         Mazy testified extensively about his process developing the SkinDNA' test and explained the genetics terms and science behind it (as did Wellbeing's expert witness on genetics, Dr. Michael Lee Metzger, PhD). Dr. Metzger explained that a gene is a part of the DNA molecule that is related to a specific trait or that encodes a particular function. Mazy testified that he first considered about 6, 000 genes and then closely analyzed about 200 of them before choosing 12 genes for his test. He explained that his research focused on variations within genes that have been found to occur in 1% or more of the population; such variations are known as single nucleotide polymorphisms (SNPs). Millions of SNPs have been identified by the scientific community, each assigned a unique reference number (an "rs number") that essentially serves as its genetic "address." Metzker explained: "If you have the rs number, you can type it into the database and it pulls out the SNP" as well as the population data associated with that SNP. Mazy testified that he analyzed hundreds of SNPs before selecting 15 for his test and showed the jury spreadsheets that reflected his detailed analysis of genes and SNPs. He testified that the SNPs he chose for his test are found in 20-30% of the global population, which was important because he wanted a test that all ethnicities could find useful. He also showed the jury a stack of articles that he read (which reflected only about 20% of all the articles that he read) to evaluate whether the presence of particular SNPs was associated with particular skin categories affecting skin health and aging. He additionally showed the jury his clinical outcomes, validation study, and extensive research notes. The DNA test that Mazy ultimately developed identified a panel of 15 specific SNPs (each identified by its unique rs number) and grouped them into five particular skin-health categories.[2] This particular DNA panel of SNPs and category grouping was asserted by Wellbeing at trial as its alleged "Trade Secret No. 1."[3]

         Shortly after her first conversation with Mazy, Harper-as "President" of R.A. Harper, L.P.-entered into a "Stockist Agreement" with Wellbeing, which authorized Harper to exclusively market the SkinDNA' test in Texas and rebrand it under the SkinShift' label. Wellbeing agreed to provide the test kits, process the tests, and provide Harper the test results. About a year and a half later, and in connection with Harper's desire to expand her territory to all of the Unites States, she-as "President/Manager" of PLLG-and Wellbeing entered into an "Exclusive Distributor Agreement." Pursuant to that agreement, Wellbeing authorized PLLG to sell Wellbeing's SkinDNA' test throughout the United States. PLLG agreed to arrange wide publicity for Wellbeing's SkinDNA' test in the United States, and both parties agreed to "treat as confidential" and safeguard all "information, reports and records pertaining to their relationship that are marked as confidential or proprietary or that are, under the circumstances, reasonable to assume should be confidentially treated." The parties further agreed not to use such information for any purpose other than to perform their obligations under the agreement.

         To facilitate nationwide distribution of her skin-care products, Harper began discussions with potential distributors, including Qivana, a multi-level marketing company. Harper engaged David Urman[4] to assist with this effort. Because some of the potential distributors had questions about the science supporting the DNA test, Harper and Urman requested that Wellbeing provide them with "scientific back-up." Urman wrote to Mazy in November 2012: "An overinclusive brain dump would get me in a position to collaborate with you more effectively. Nothing goes to third parties without your consent." Urman further assured Mazy that Wellbeing's intellectual property was not at risk in this endeavor: "[W]e are 100% focused on showing the efficacy of the DNA test and that is where the Ferndale [a potential distributor] deal currently hinges. We have stringent NDAs [non-disclosure agreements] in place to protect our mutual IP [intellectual property]."

         Wellbeing provided Harper and Urman their requested scientific back-up, including so-called "data cards" for the genes used in the SkinDNA' test and supporting scientific articles. Mazy authorized Harper and Urman to disclose three data cards to potential distributors and others with which they sought to do business using the test, and Mazy assisted Harper with an interview she gave to a reporter from the L.A. Times in an effort to publicize their business. Upon Harper's request for further scientific back-up, Mazy provided her the additional12 data cards he had prepared for the SkinDNA' test. Mazy testified that these 12 data cards, combined with the first three that he provided (for a total of 15) contained his intellectual property in the form of his trade secret. Mazy further testified that he did not provide all 15 of the data cards to any party outside of Wellbeing except Harper and the lab that performed the tests.

         In March 2013, Harper filed a provisional application for a U.S. patent on "Methods of Skin Analysis and Uses Thereof." To assist in the preparation of the application, Urman sent to Harper's patent counsel various Wellbeing documents, including the data cards for three genes, one of which was copied nearly verbatim into the application. Later that year, Urman contacted Justin Banner, a founder and officer of Qivana, about the possibility of Qivana distributing Harper's skin-care products personalized with a DNA test. Urman sent to Banner a copy of the provisional patent application, a "white paper" originating from Wellbeing explaining SkinShift''s use of Wellbeing's DNA test (without attributing it to Wellbeing) to personalize patients' skin-care-product selections, and one of Wellbeing's data cards (slightly edited).

         Around the same time, Harper hired Dr. Linda DiBella, PhD, to help her create a DNA test for a U.S. lab to run for her skin-care line. Since 2012, PLLG had been searching for a U.S. lab to run its DNA tests and had attempted to find other labs, including one identified in the record as Genemarkers, to develop a DNA test of PLLG's own. The evidence showed that in January 2013, Urman sent an email to Harper attaching information to be provided to Genemarkers' president in advance of a conference call about the development of a test; the information included several of Wellbeing's data cards. The evidence showed that PLLG did not end up working with Genemarkers on the development of a test. Rather, DiBella and Harper pursued development of a DNA test for PLLG's use on their own. DiBella testified that she spent about 100 hours over the course of six months to develop a DNA test "from scratch, " pursuant to Harper's mandate. Harper testified that she collaborated with DiBella in the test development and was responsible for making the "final decision" regarding the 32 SNPs that PLLG selected for its DNA test. An email sent from Harper to DiBella during this time frame demonstrates that DiBella had access to all 15 of Wellbeing's data cards while developing PLLG's test.

         Contemporaneously, Qivana and PLLG were negotiating the details of an agreement to distribute PLLG's SkinShift' products, combined with a DNA test, and both parties were also in communication with another U.S. lab, Sorensen, to engage it in the processing of PLLG's test. Qivana and PLLG signed a "Memorandum of Understanding" in March 2014 outlining their mutual intent to enter into an exclusive distributor agreement whereby Qivana would market and distribute the SkinShift' products, and PLLG would lend Harper's name and brand to Qivana for such purpose. The parties executed an "Exclusive Distribution Agreement" in September 2014, in which Qivana agreed to pay PLLG initial payments totaling $450, 000 as well as royalties equal to 8% of gross product sales, with a right to minimum royalties of $400, 000 the first year and $600, 000 each year thereafter (for the five-year contract term). During this time period, Urman sent Banner an email containing a "confidential" list of rs numbers-including eight of the 15 used on Wellbeing's test-to share with Sorensen. DiBella testified that PLLG's 32-SNP test was completed in July 2014; within ten days, Qivana and Sorensen entered into a contract whereby Sorensen agreed to process DNA tests for Qivana using PLLG's 32-SNP panel after first performing "assay development" and validation of the test. Wellbeing filed this lawsuit shortly thereafter.

         DISCUSSION

         Harper and PLLG challenge the sufficiency of the evidence supporting the jury's findings that (1) Trade Secret No. 1 was secret and (2) appellants misappropriated the secret, which directly and proximately caused Wellbeing damages. They also contend that Wellbeing's expert testimony on damages amounted to no evidence because it was based on "sheer speculation, " and was, therefore, insufficient to support the expert's "reasonable royalty" calculation of damages. See Southwestern Energy Prod. Co. v. Berry-Helfand, 491 S.W.3d 699, 722 (Tex. 2016) (listing factors that factfinder may consider in determining "reasonable royalty" damages for trade-secret misappropriation). Finally, appellants assert that the trial court erred in awarding Wellbeing lost-profit damages against PLLG for breach of contract because the contract expressly precludes indirect and consequential damages.[5]

         When conducting a legal-sufficiency review, we must view the evidence in the light most favorable to the jury's findings, "crediting favorable evidence if reasonable jurors could, and disregarding contrary evidence unless reasonable jurors could not." City of Keller v. Wilson, 168 S.W.3d 802, 807 (Tex. 2005). Moreover, we must indulge every reasonable inference that would support the jury's findings. Id. at 822. The ultimate test for legal sufficiency is whether the evidence at trial would enable reasonable and fair-minded people to reach the verdict under review. See id. at 827. When reviewing the factual sufficiency of the evidence, we consider and weigh all of the evidence in the record, and we should set aside the finding only if the evidence supporting the finding is so weak as to be clearly wrong and manifestly unjust. See Cain v. Bain, 709 S.W.2d 175, 176 (Tex. 1986) (per curiam). We must not merely substitute our judgment for that of the factfinder. Golden Eagle Archery, Inc. v. Jackson, 116 S.W.3d 757, 761 (Tex. 2003). We review a trial court's interpretation of an unambiguous contract de novo, Kachina Pipeline Co. v. Lillis, 471 S.W.3d 445, 449 (Tex. 2015), as we do a trial court's determination of whether damages awarded in a case constitute direct or consequential damages, Powell Elec. Sys., Inc. v. Hewlett Packard Co., 356 S.W.3d 113, 117 (Tex. App.-Houston [1st Dist.] 2011, no pet.).

         Was Trade Secret No. 1 actually secret?

         In their third issue, appellants contend that "there is legally and factually insufficient proof that Wellbeing's 'Alleged Trade Secret No. 1' was in fact secret." The jury charge defined a trade secret as:

a process, formula, pattern, device, or compilation of information which is used in one's business and which gives the business an actual or potential economic advantage over competitors who do not know or use it.
Information that is publicly available, or becomes publicly available by means other than breach of a contractual duty of confidentiality, cannot be a trade secret. Likewise, information that is generally known in the industry, or that is independently developed, or that is readily ascertainable by independent investigation or by reverse engineering, cannot be a trade secret. "Reverse engineering" means the process of studying, analyzing, or disassembling a product or device to discover its design, structure, construction, or source code provided that the product or device was acquired lawfully or from a person having the legal right to convey it.

         The charge further provided factors that the jury was permitted to consider in determining whether Alleged Trade Secret No. 1 was a trade secret: (1) the extent to which the information is known outside Wellbeing's business; (2) the extent to which the information is known by Wellbeing's employees and others involved in its business; (3) the extent of the measures taken by Wellbeing to guard the secrecy of the information; (4) the value of the information to Wellbeing and its competitors; (5) the amount of effort or money expended by ...


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