Computer Associates International, Inc. v. Altai, Inc.
39 Tex. Sup. Ct. J. 422, 11 I.E.R. Cas. (BNA) 923, 918 S.W.2d 453 (1996)
Rule of Law:
The discovery rule exception to the two-year statute of limitations does not apply to claims for misappropriation of trade secrets under Texas law, nor does the application of this limitations period violate the "open courts" provision of the Texas Constitution.
Facts:
- Claude Arney, a software developer, worked for Computer Associates International, Inc. (CA) from 1978 to January 1984, signing an agreement prohibiting retention or divulgence of CA's trade secrets.
- In January 1984, Arney left CA to join Altai, Inc., falsely representing during his exit interview that he retained no CA proprietary information.
- Upon leaving CA, Arney took copies of the computer source code for two versions of ADAPTER, an operating system compatibility component of CA's CA-SCHEDULER program.
- In early 1984, Arney copied approximately thirty percent of the ADAPTER source code to create OSCAR 3.4 for Altai.
- No one at Altai, other than Arney, knew he possessed the ADAPTER source code or that he had copied portions of it when he created OSCAR 3.4.
- From 1985 to August 1988, Altai used OSCAR 3.4 as a component in several of its computer programs that competed with CA's programs.
- In July 1988, Computer Associates first discovered that Altai had copied and used the ADAPTER source code in several of its computer programs.
Procedural Posture:
- In August 1988, Computer Associates International, Inc. (CA) sued Altai, Inc. in federal district court (United States District Court for the Eastern District of New York), alleging misappropriation of trade secrets under Texas law and copyright infringement.
- The federal district court found that Altai's OSCAR 3.4 program infringed CA's copyright but denied relief for OSCAR 3.5, and determined that CA's misappropriation claim was preempted by the federal Copyright Act.
- CA appealed the denial of relief for OSCAR 3.5 to the United States Court of Appeals for the Second Circuit.
- The Second Circuit affirmed the district court's ruling regarding OSCAR 3.5 copyright but reversed and remanded the preemption ruling for further consideration of CA's misappropriation claims, noting that Texas law would govern these claims.
- On remand, the district court determined that the discovery rule exception did not apply to CA's misappropriation claims and that the action was barred by the two-year statute of limitations under section 16.003(a) of the Texas Civil Practice and Remedies Code.
- Subsequently, the United States Court of Appeals for the Second Circuit certified two questions regarding Texas law to the Supreme Court of Texas, pursuant to Tex.R.App.P. 114(a).
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
1. Does the discovery rule exception apply to claims for misappropriation of trade secrets under section 16.003(a) of the Texas Civil Practice and Remedies Code? 2. If not, does the application of the two-year limitations period of section 16.003(a) to such claims contravene the “open courts” provision of Article I, Section 13 of the Texas Constitution?
Opinions:
Majority - Enoch, Justice
No, the discovery rule exception to the two-year statute of limitations does not apply to claims for misappropriation of trade secrets, and no, the application of this limitations period does not contravene the "open courts" provision of the Texas Constitution. The Supreme Court of Texas held that the discovery rule exception defers the accrual of a cause of action until the plaintiff knew or reasonably should have known of the facts, but it is a limited exception. Application is generally permitted only when the injury is "inherently undiscoverable" and the evidence of injury is "objectively verifiable." Trade secret misappropriation is not inherently undiscoverable because, in an age of technological innovation and high employee mobility, extensive precautions are taken to prevent misappropriation, and owners are expected to be vigilant. The Court emphasized that vigilance is required because trade secret ownership is lost once it becomes public. Permitting the discovery rule in such cases would simply allow the litigation of stale claims. The Court also declined to be the first state supreme court to adopt the discovery rule for trade secret cases as a matter of common law, especially given that many states have done so through the Uniform Trade Secrets Act, which Texas has not adopted. Regarding the "open courts" provision, the Court found that failing to permit a discovery rule exception does not abrogate a common law right. Even if it affected a common law right, the application of a two-year statute of limitations without a discovery rule exception is reasonable when balanced against the purpose of preventing stale claims and the owner's responsibility to diligently guard their trade secrets.
Concurring - Owen, Justice
I concur in the judgment but write separately to clarify that the "inherently undiscoverable" and "objectively verifiable" test is not universally determinative. There may be cases where these elements are present, yet other considerations mean limitations should not be deferred, or conversely, cases where deferral is warranted even without these elements (e.g., fraud, fraudulent concealment, fiduciary duty, or other special relationships). The Court's two-step inquiry should not be considered an "acid test" for every discovery rule invocation. Justice Owen noted that the conclusion that the misappropriation in this specific case was not "inherently undiscoverable" was a close call, and the court's reliance on other factors (like the owner's responsibility to guard secrets) was appropriate. He also pointed out inconsistencies with prior Texas Supreme Court decisions, particularly concerning medical malpractice and fiduciary duties, suggesting that some earlier rulings do not align with the newly articulated two-pronged test.
Analysis:
This case significantly limits the application of the discovery rule in Texas, particularly for intellectual property claims like trade secret misappropriation. It places a high burden on trade secret owners to implement robust security measures and diligently monitor for theft, reinforcing the principle that a plaintiff’s lack of awareness due to their own laxity will not toll the statute of limitations. Furthermore, the decision underscores the Texas Supreme Court's reluctance to expand common law exceptions to statutes of limitations where the legislature has not acted, especially in areas addressed by uniform acts in other states. This ruling signals that without legislative action, the "inherently undiscoverable" and "objectively verifiable" standard will be strictly applied, with a narrow interpretation of "inherently undiscoverable," thereby favoring the policy of repose over individual discovery.
