Fred's Stores of Miss. v. M & H DRUGS
725 So.2d 902, 1998 WL 596048 (1998)
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Rule of Law:
Under the Mississippi Uniform Trade Secrets Act, a customer list may constitute a trade secret if it possesses independent economic value from its secrecy and the owner employs reasonable efforts to maintain its confidentiality, with such efforts being judged on a case-by-case basis considering the circumstances; however, common law claims not solely dependent on trade secret misappropriation are not preempted. Furthermore, damages for lost profits must be proven as net profits, not merely gross profits.
Facts:
- M & H Drugs, Inc. (Super D) maintained a master customer list, known as an I.R.S. list, which contained patient names, addresses, phone numbers, the number of prescriptions filled, and the dollar amount spent on prescriptions annually.
- Erik Broome, a manager and pharmacist at Super D, was responsible for supervising the creation and maintenance of the I.R.S. list, which Super D routinely printed annually for customer tax inquiries.
- In late May 1991, Fred's Stores of Mississippi, Inc. (Fred's) contacted Broome about managing its new pharmacy in Oxford, and Broome accepted the employment offer on May 30, 1991.
- On June 24, 1991, Broome returned to Super D's Oxford store to retrieve personal belongings and intentionally took the I.R.S. list from the counter.
- After starting work for Fred's on July 2, 1991, Broome met with Fred's Vice President of Pharmacy Operations, Mr. Casey, on July 11, 1991, and provided him with the I.R.S. list.
- Fred's used Broome's I.R.S. list to mail letters to between 954 and 1242 former Super D customers, announcing Broome's new position and promoting Fred's.
- Around July 15, 1991, Super D supervisors realized the list was missing and contacted Broome, who falsely denied taking it.
- Around July 29, 1991, Fred's Vice President Casey, after Broome expressed concern about Super D's inquiry, instructed a subordinate to shred the original I.R.S. list, and the related database was erased.
Procedural Posture:
- M & H Drugs, Inc. (Super D) filed a lawsuit against Fred's Stores of Mississippi, Inc. and Fred's, Inc. in Lafayette County Circuit Court, alleging unfair competition, misappropriation of a trade secret, intentional interference with a business relationship, intentional interference with a lawful trade, and intentional interference with a business interest. (Erik Broome, initially a defendant, was dismissed without prejudice).
- Fred's moved for partial summary judgment, arguing Super D's state law claims were preempted by the Mississippi Uniform Trade Secrets Act, which the trial court denied. (This motion is not in the record on appeal).
- Following a jury trial, a Lafayette County Circuit Court jury found for Super D, awarding actual compensatory damages of $56,750 and exemplary damages of $300,000.
- Final judgment was entered, awarding attorneys' fees and expenses ($72,042.48) and 8% interest on the compensatory award from October 26, 1992.
- Fred's filed a Notice of Appeal to the Supreme Court of Mississippi, stating four grounds for appeal.
- The trial court subsequently ruled on Fred's post-trial motions, denying them.
- Fred's then filed a second Notice of Appeal to the Supreme Court of Mississippi, adding the denial of its post-trial motions as additional grounds.
- The appeals were consolidated by the Supreme Court of Mississippi.
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Issue:
Does a pharmacy's customer list, containing names, contact information, prescription history, and spending, qualify as a trade secret under the Mississippi Uniform Trade Secrets Act, and are damages for lost profits properly calculated based on gross profits rather than net profits?
Opinions:
Majority - Presiding Justice Pittman
Yes, a pharmacy's customer list can qualify as a trade secret if sufficient efforts are made to maintain its secrecy, but no, damages for lost profits are not properly calculated based on gross profits. The court first held that Super D's common law claims (unfair competition, interference) were not preempted by the Mississippi Uniform Trade Secrets Act because they could stand alone without proving the I.R.S. list was a trade secret. Regarding the trade secret definition, the court found the I.R.S. list had independent economic value because marketing companies sought such data, Fred's considered it valuable, and it contained private customer spending habits. Crucially, the court determined that Super D took reasonable steps to maintain secrecy: the computer with the list was password-protected, the printed list was kept in the secure pharmacy area (like prescription drugs), access was limited to authorized personnel, and information was only divulged to customers on separate sheets, not the list itself. Despite not being labeled 'confidential' or requiring termination agreements for all employees, these steps were deemed reasonable given the unique pharmacy setting. However, the court reversed the compensatory damages for lost profits, finding Super D failed to prove net profits, instead presenting only gross profit figures, which is insufficient under Mississippi law. The court affirmed the $650 compensatory damages for recreating the list and the $300,000 punitive damages, finding the latter was not against the overwhelming weight of the evidence given Fred's deliberate actions and destruction of evidence. The court also affirmed the trial court's rulings on discovery and jury instructions as not constituting reversible error.
Concurring in part and dissenting in part - Justice Smith
I agree with the majority on all issues except the reversal of the $56,750 compensatory damages. I believe that Super D offered sufficient proof for lost profits through expert testimony. Specifically, expert Jerry Pardue presented multiple theories, including a customer comparison approach that showed $50,000 in prescription sales losses for the year following the list's misappropriation. Additionally, expert Henry Beattie testified about the net value of Super D's business before and after the loss of its customer list. The jury's verdict of $56,750 was clearly a reasonable assessment, accepting Pardue's customer comparison. Fred's had every opportunity to cross-examine these experts extensively on operating costs and expenses. Therefore, the jury's verdict was adequately supported by the evidence and should not have been disturbed by this Court. Furthermore, Fred's deliberate actions, including the destruction of the original customer list, provided ample basis for the punitive damages award, which Fred's is fortunate was not higher.
Analysis:
This case significantly clarifies the application of the Mississippi Uniform Trade Secrets Act, particularly regarding customer lists and the 'reasonable efforts' required to maintain secrecy. It provides important guidance for businesses on protecting proprietary customer information, emphasizing that physical security and restricted access can be sufficient, even without formal confidentiality agreements for all employees. The ruling also firmly reiterates Mississippi's clear legal standard that lost profit damages must be calculated based on net profits, not gross, providing a crucial distinction for plaintiffs and a common pitfall for those calculating business losses in litigation. This will likely push future plaintiffs to present more robust financial evidence for damages to avoid reversal.
