NEW 1998 DECISIONS IN TRADE SECRETS LAW
R. Mark Halligan, Esq.
email@example.com Last Revision Date: 12/5/98
COPYRIGHT 1998 R. MARK HALLIGAN, ESQ.
1. Trident Perfusion Associates, Inc. v. Lesnoff, 1998 WL 47201 (W.D. Va.) (Jan. 29, 1998).
The District Court held that the successful Defendant under Virginia Trade Secrets Act may recover counsel fees not only incurred at trial level but also those incurred in successful defense of all or part of trial court's final judgment on appeal upon a finding that Plaintiff acted in bad faith in bringing the trade secrets to claim under the Virginia Trade Secrets Act.
"To put this another way, it is unconscionable for this court to think that a party who acted in bad faith could erode the value of the legal fees it was ordered to pay in the lower court because of its bad faith there simply by appealing the case and loosing the appeal. In a sense, therefore, a causal connection continues to exist between the initial bad faith and the fees incurred by the prevailing party particularly where the judgment in its favor is affirmed on appeal."
DEFENDANT AWARDED ATTORNEY'S FEES UNDER VIRGINIA TRADE SECRETS ACT FOR ATTORNEYS FEES INCURRED BOTH AT TRIAL LEVEL AND APPELLATE LEVEL.
2. Intravascular Research Limited v. Endosonics Corporation, 1998 WL 84411 (D.Del.) (Feb. 13, 1998).
Intravascular Research Ltd. ("IRL"), a United Kingdom company located in Isleworth, England, brought this action against Endosonics Corporation ("Endosonics"), a Delaware corporation with its principal place of business in Sacramento County, California seeking inter alia, a declaratory judgment that certain patents were not infringed and that IRL had not misappropriated any trade secrets of Endosonics or breached any confidences of Endosonics (Count III).
IRL and Endosonics are also involved in a state court proceeding in the Superior Court of the State of California for the County of Sacramento ("the California action").
Under the facts of this case, the United States District Court for the District of Delaware held the declaratory judgment action should be dismissed in deference to the ongoing state suit in California.
Both the trade secret misappropriation action and the breach of confidence action have been brought under the California Trade Secrets Act and California common law, respectively. Only the California appellate courts can definitely interpret California law. The interpretation of these areas of state law are best left to the expertise of the California state court.
Furthermore, because state law governs the determination of the Count III issues, there is no federal interest in maintaining jurisdiction over this action.
FEDERAL DECLARATORY JUDGMENT ACTION STAYED TO ADJUDICATE STATE TRADE SECRETS CLAIM.
3. Expediters International of Washington, Inc. v. Direct Line Cargo Management Services, Inc., 1998 WL 67532 (D.N.J. Feb. 13, 1998).
Expediters International ("EI") is a large international freight forwarding company that engages in the business of ocean consolidation services. Defendant Direct Line Cargo Management Services, Inc. ("DLCMS") is part of a group of affiliated companies that offers ocean cargo consolidation services.
DLCMS was an agent for CMS-Taiwan in the United States and DLCMS had access to certain freight consolidation software (the "Software") owned by CMS-Taiwan pursuant to a License Agreement with CMS-Taiwan.
Thereafter, CMS-Taiwan became affiliated with EI and terminated the copyright/trade secret license with DLCMS for use of the Software. A lawsuit ensued. DCLMS moved for summary judgment to dismiss inter alia the trade secret claims.
Plaintiff alleges that the defendant, in conjunction with its Asian affiliates, misappropriated its trade secrets by copying and continuing to use the proprietary Software after the expiration of the License Agreement.
However, the defendant concedes, for the purposes of the summary judgment motion, that it is possible for the plaintiff to make out a claim for trade secret misappropriation relating to the underlying ideas and concepts of the Software.
Defendant seeks summary judgment on essentially two grounds. First, it urges the Court to grant its motion pursuant to Section 301(a) of the United States Copyright Act, which preempts state claims founded solely on allegations of copyright infringement. Second, the defendant argues that, even if the Court determines that EI's claim survives preemption because it alleges a breach of confidentiality, there is insufficient proof that DLCMS has breached such a duty.
While Section 301 preempts a state law claim of unfair competition founded solely on the defendant's use of copyrighted materials, Computer Associates Int'l, 982 F.2d at 719, a claim which involves an extra element, such as a breach of a confidential relationship, renders that cause of action qualitatively different from the rights protected by the Copyright Act. Id. at 717.
The legislative history of Section 301 provides that "[t]he evolving common law rights of ... trade secret ... would remain unaffected as long as the causes of action contain elements, such as ... a breach of trust or confidentiality, that are different in kind from copyright infringement ... '[m]isappropriation' is not necessarily synonymous with copyright infringement." House Report at 5748, cited in Computer Associates Int'l, 982 F.2d at 717.
As in Computer Associates Int'l, EI's allegations and arguments sufficiently assert a breach of confidentiality claim. The Complaint alleges that the defendant and Asian companies entered into a License Agreement with the plaintiff which limited the use of the Software. It alleges that the plaintiff strove to keep the Software's source code confidential. Furthermore, the Complaint alleges that the defendant used this secret information in violation of the agreement, and that this use prejudiced the plaintiff. Finally, the plaintiff devotes approximately one-third of its brief to a discussion concerning breach of confidentiality. In light of these arguments, the allegations within its Complaint, and the legislative history behind Section 301, the Court finds that the plaintiff adequately sets forth a breach of confidentiality claim. Because the plaintiff's trade secret misappropriation claim contains this "extra element", it survives preemption under Section 301.
The Court also rejected Defendant's claim that it did not violate the confidentiality provision in the license. There is a genuine issue of material fact as to whether the Asian companies, in concert with the defendant, continued to use the Software for billing purposes. The self-characterized "family of companies," jointly participated in freight dealings and shared both stock ownership and employees, this Court cannot find, as a matter of law, that the defendant did not act as a principal to influence or control the business practices of its affiliates.
NO COPYRIGHT PREEMPTION OF TRADE SECRET MISAPPROPRIATIONS CLAIM; CONTROL OF AFFILIATES QUESTION OF FACT FOR JURY TO DECIDE RE MISAPPROPRIATION CLAIM.
4. Best Industries v. CIS Bio International, Inc., 134 F.3d 362 (4th Cir. Feb. 2, 1998)
Best, a Virginia manufacturer of medical supplies, produces various products for brachytherapy, a medical treatment for cancer which involves the insertion of radioactive "seeds" either close to or inside a tumor for controlled radiation therapy. Recently, Best developed the technology for a new type of brachytherapy seed made of radioactive iodine-125. Best also developed a proprietary analysis of the brachytherapy market to assist in marketing the new product.
In 1995 Best entered into negotiations for the sale of its technology or business to CIS. The negotiations focused on the manufacture and sale of the brachytherapy seeds. Best and CIS entered into a "nondisclosure, non-use confidentiality agreement" that bound CIS to keep confidential any trade secrets disclosed by Best during the negotiations. Best alleges that after CIS received proprietary information from Best, CIS broke off the negotiations. Shortly thereafter, Best claims, CIS joined with NAS to manufacturer the brachytherapy seeds. Best also claims that CIS used its (Best's) protected pricing and marketing information in developing a strategy to enter the brachytherapy seed market.
On May 28, 1996, Best sued CIS and NAS under diversity jurisdiction in the Eastern District of Virginia. Best's complaint pressed a variety of state law claims, including claims under the Virginia Uniform Trade Secrets Act, relating to the alleged misappropriation of its proprietary marketing analysis and strategy by CIS and NAS. CIS and NAS answered, denying the charging allegations. On December 9, 1996, after discovery had ended, Best moved for a voluntary dismissal without prejudice pursuant to Fed.R.Civ.P. 41(a)(2). The district court granted the motion on the condition that Best pay CIS and NAS's attorneys' fees and costs for that portion of their work which "would not inure to the benefit of defendants in the event any future action is refiled."
Shortly thereafter, NAS filed a motion for more attorneys' fees under the Virginia Uniform Trade Secrets Act, alleging that Best had acted in bad faith because it failed to make reasonable inquiry before filing suit. The district court denied this motion on February 21, 1997, holding that because Best had "voluntarily dismissed" its complaint, NAS could not be considered a prevailing party. Further, the court found that there was insufficient evidence to show that Best had acted in bad faith. NAS appealed.
The district court denied NAS's motion for additional attorneys' fees under the Virginia Uniform Trade Secrets Act. That statute permits a court to "award reasonable attorneys' fees to the prevailing party" in a suit under its provisions. Va.Code § 59.1-338.1. Fees may be awarded if "the court determines that [ ] a claim of misappropriation is made in bad faith." Id. The statute does not define what constitutes a "prevailing party."
NAS claims that a voluntary dismissal without prejudice by a plaintiff makes the defendant a prevailing party eligible to receive attorneys' fees under this statute. Best argues that since a dismissal without prejudice permits the suit to be relitigated in a separate action, and is not a decision on the merits, NAS could not be considered a prevailing party and should not be awarded additional fees.
The purpose of a voluntary dismissal without prejudice under Rule 41(a)(2) is to permit the plaintiff to refile his suit at a later time. In fact, attorneys' fees as a condition for such a dismissal may only be awarded for work that could not be used again in a future suit. See Davis. USX Corp., 819 F.2d 1270, 1276 (4th Cir.1987). This suggests that further litigation is anticipated in a voluntary dismissal without prejudice, which makes it more like a draw than a victory for the defendant. As Judge Easterbrook persuasively noted in Szabo, when a defendant remains at risk of another suit on the same claim, he can hardly be considered to be in the same position as a defendant who no longer faces the claim due to a dismissal without prejudice. We therefore agree with the Seventh Circuit's view that a voluntary dismissal without prejudice does not render a defendant a prevailing party. Since the Virginia Uniform Trade Secrets Act permits an award of attorneys' fees only to prevailing parties, NAS cannot claim relief under that provision. The district court's order on that issue is therefore affirmed.
PLAINTIFF'S DISMISSAL OF COMPLAINT WITHOUT PREJUDICE AT THE CLOSE OF DISCOVERY DOES NOT ENTITLE DEFENDANT TO ATTORNEY'S FEES AND COSTS UNDER THE VIRGINIA TRADE SECRETS ACT.
5. Lauren Corporation v. Century Geophysical Corporation, 953 P.2d 200; (Ct. App. Colo. January 22, 1998)
During the discovery phase in this litigation, Lauren attempted over a period of time to inspect Century's computers, seeking evidence to support its claim that Century had used the software on unauthorized computers. Almost one year after Lauren filed its third set of interrogatories and request for production of documents, and after a magistrate had ordered that Lauren be allowed to conduct a physical inspection of the computers, the trial court granted Lauren's motion for sanctions against Century for destruction of evidence based on Century's disposal of certain computer hardware. Lauren does not allege that counsel for Century had any prior knowledge that Century had destroyed the hardware.
As a sanction, the trial court imposed a presumption at trial that Century had used the software on machines other than those described in the licensing agreements and further awarded Lauren its attorney fees and costs incurred in its attempts to gain access to the hardware through discovery.
Trial courts have certain inherent powers which are: reasonably required to enable a court to perform efficiently its judicial functions, to protect its dignity, independence, and integrity, and to make its lawful actions effective. These powers are inherent in the sense that they exist because the court exists; the court is, therefore it has the powers reasonably required to act as an efficient court. Pena v. District Court, 681 P.2d 953, 956 (Colo. 1984).
Further, a division of this court has held that it is within the trial court's discretion to impose sanctions for spoliation of evidence in the form of an adverse inference where there is a showing that the destruction of evidence was intentional. Implicit within this holding is the recognition that the trial court has the inherent power to impose such sanctions. See Rodriguez v. Schutt, 896 P.2d 881 (Colo. App. 1994), rev'd on other grounds, 914 P.2d 921 (Colo. 1996).
Unlike the question whether the trial court has the power to employ presumptions or adverse inferences as a sanction for the spoliation of evidence, the question whether the trial court has the inherent authority to order an award of attorney fees and costs under the same circumstances has not been addressed by the Colorado courts.
Nevertheless, we hold that a trial court may impose attorney fees and costs as a sanction for the bad faith and willful destruction of evidence, even in the absence of a specific discovery order.
We note that the opposite result --denying the court the inherent power to award sanctions, including attorney fees, where evidence has been intentionally destroyed --would only encourage unscrupulous parties to destroy damaging evidence before a court order has been issued.
Here, the trial court concluded that Century's actions constituted "a blatant, willful bad faith destruction of evidence . . . ." Specifically, the trial court determined that the complaint filed by Lauren put Century on notice of the issue regarding Century's unauthorized use of the software in controversy on certain computers almost one year before the hardware was destroyed.
Under these circumstances, we conclude that the trial court did not abuse its discretion in finding that Century had destroyed evidence in bad faith and in awarding attorney fees and costs as part of the sanction for such destruction.
TRIAL COURT HAS INHERENT AUTHORITY TO AWARD ATTORNEY FEES AND COSTS FOR THE SPOLIATION OF EVIDENCE.
6. Animal Health Clinic, P.C. v. Andrea Autorino, D.V.M., CV 970571715, (1198 Conn. Super. LEXIS 801 March 13, 1998).
Animal Health Clinic, P.C., sued Andrea Autorino, D.V.M. for allegedly converting confidential lists of customers and misappropriating trade secrets.
Dr. Autorino left her eight-year employment as a veterinarian with Hartford Veterinary Hospital in early November 1995, to join the plaintiff, veterinarian hospital owned by Dr. Patrick Hallisey. At that time, with Hallisey's approval and financial support, defendant sent announcements to her former clients at Hartford Veterinary of her new position and location. On March 13, 1997 she notified Hallisey in writing that she would be leaving his employ on March 27, 1997 to begin her own animal hospital in another location in Wethersfield.
Defendant concedes that the names and addresses of some of the clients to whom she mailed announcements were obtained from the "call-back" lists generated by the office computer and directed to each veterinarian in plaintiff's office for the purpose of making follow-up good will calls after a client's visit to the hospital.
Under the statutory definition of trade secret, plaintiff is required to prove that the call-back lists were not generally known to other persons and not readily ascertainable by proper means by other persons and that the call-back lists were the subject of efforts that are reasonable under the circumstances to maintain their secrecy. Plaintiff has not met his burden of proof on either prong of this definition.
The defendant could have kept daily notes of the clients that she served as well as the names of their animals without violating any contract or ethical rule. Although plaintiff and his office manager testified that defendant was told to destroy the call-back lists after she made the required calls, this claimed instruction was never put in writing and the conflicting evidence on this point was not sufficient to sustain plaintiff's burden. The names and addresses could have been obtained at any time from the individual files of each client which were stored in an open, easily accessible office area. The circumstances and lack of security with respect to these files hardly indicates efforts on the plaintiff's part that "were reasonable to maintain its secrecy."
In the present case, there was a lack of proof connecting plaintiff's use of the call-back lists to the loss of any clients of plaintiff's to the defendant. Defendant was an established veterinarian in the community prior to her affiliation with plaintiff. Many of the names to whom the announcements were sent were obtained from her family who were well known and established in the community and may have included some names on the call-back lists.
Neither of the witnesses who testified on the plaintiff's behalf, as long standing clients who received announcements from the defendant, testified that he took his business to the defendant.
Finally, there was no evidence, and plaintiff did not claim, that defendant sent an announcement to anyone she had not professionally served. It is part of common experience that clients served by a professional in one business affiliation will often follow that professional when established in a new affiliation. Plaintiff was candid in testifying to the quality of defendant's professional services, her pleasing qualities to clients and his desire of retaining her services. These qualities of the defendant were natural causes for clients served by her while in the employ of plaintiff for seeking her services after she established her own hospital whether they received announcements or not.
VETERINARIAN HOSPITAL "CALL-BACK" LISTS DO NOT CONSTITUTE PROTECTABLE TRADE SECRETS
7. Lucas v. Avery Dennison Corporation, 141 F.3d 1159 (4th Cir. 1998).
Carol O. Lucas, Jr. filed a trade secret misappropriation claim under the South Carolina Uniform Trade Secrets Act, ("SCUTSA"), S.C.Code Ann. § § 39-8-1 through 39-8-9 (Law. Co-op. Supp. 1997) against Avery Dennison Corporation ("Avery") alleging that Avery misappropriated an idea for a time-saving product that Avery ultimately stole, developed, and marketed as the "Letter N Label", a form of stationary with a removable address label.
The district court granted summary judgment and awarded attorney's fees in the amount of $5197 in favor of Avery.
On appeal, the Fourth Circuit Court of Appeals affirmed the award of statutory attorneys fees. Even though no reported South Carolina case had interpreted the meaning of bad faith under SCUTSA, the court applied the note that accompanies § 39-8-4 and inferred that the pursuit of a specious claim constituted bad faith. The district court found that Lucas should have known at the end of the discovery period that his claims were baseless. Accordingly, because Lucas continued to pursue his claims even after it became clear that he had no cause of action, the court ordered him to pay attorney's fees that Avery incurred after the close of the discovery period.
As the district court properly found, Lucas failed to present even a scintilla of evidence to contradict the documentation presented by Avery that proved that Avery had begun development of the "Letter N Label" before Lucas's first contact with the company or that Avery's evidence was not genuine. Further, in determining the amount of attorney's fees to award under South Carolina law, the district court properly considered the factors enumerated in Dedes v. Strickland, 307 S.C. 155, 414 S.E2d 134, 137 (S.C. 1992). Accordingly, we find that the award of attorney's fees in the amount of $5197 was not an abuse of discretion.
STATUTORY ATTORNEY FEES AWARDED FOR PURSUING A SPECIOUS TRADE SECRET CLAIM AFTER THE CLOSE OF DISCOVERY.
8. Honeywell, Inc. v. Brewer-Garrett Company, 145 F.3d 1331, (6th Cir. 1998).
Plaintiff in this diversity action, Honeywell Inc., appeal from district court's denial of Honeywell's preliminary injunction motion to enjoin the defendants, Brewer-Garrett Company, Harold K. Tisdale, and Kathleen Wileman, from allegedly misappropriating Honeywell's trade secrets.
Honeywell and Brewer-Garrett are rivals in the commercial heating, ventilating, and air conditioning (HVAC) business. Tisdale and Wileman, resigned their positions at Honeywell's Akron office on June 14, 1996.
In consideration of his employment by Honeywell, Tisdale signed "nondisclosure" and "noncompetition" agreements promising that he would not use, or disclose to others, Honeywell's trade secrets or proprietary information. Each agreement obligated Tisdale to return to Honeywell, upon the termination of his employment, all tangible proprietary information. The noncompetition agreement also proscribed Tisdale from competing in various respects with Honeywell for one year. Defendant Wileman signed similar nondisclosure and noncompetition agreements.
The Uniform Trade Secrets Act, adopted by Ohio in 1994, provides that "[a]ctual or threatened misappropriation [of trade secrets] may be enjoined." Ohio Rev. Code Ann. § 1333.62(A) (Anderson Supp. 1996). "Misappropriation" under the Act includes improper acquisition or disclosure of a trade secret. Ohio Rev. Code Ann. § 1333.61 (B) (Anderson Supp. 1996). Of course, "[a] former employee can use to his own advantage all the skills and knowledge of common use in the trade that he acquires during his employment." Wiebold Studio, Inc. v. Old World Restorations, Inc., 19 Ohio App.3d 246, 484 N.E.2d 280, 284 (Ohio Ct. App. 1985); see Official Aviation Guide Co. v. American Aviation Assocs., 150 F.2d 173, 178 (7th Cir. 1945).
Injunctive relief for misappropriation under the Act is discretionary and is subject to the same equitable principles that underlie any grant or denial of an injunction.
The standard of review on appeal to the Sixth Circuit Court of Appeals was abuse of discretion. An abuse of discretion exists when the district court applies the incorrect legal standard, misapplies the current legal standard, or relies upon clearly erroneous findings of fact. Conclusions of law are reviewed de novo and findings of fact are reviewed for clear error.
There was some evidence that Wileman may have breached her nondisclosure agreement by providing a previous Honeywell proposal to a Brewer-Garrett manager but the manager denied using the report and instructed Wileman to destroy the report. There was also evidence that Wileman may have breached her noncompetition agreement by working on one of these projects/bids that Brewer-Garrett was in competition with Honeywell. Wileman was subsequently removed from the project.
However, the district court found insufficient evidence at the injunction stage of improper actual disclosure to Brewer-Garrett, or improper use by Brewer-Garrett, of Honeywell proprietary information.
The controlling factor was the disparity in the three competing bids in issue. The competing bids on all three government projects were dissimilar in every material respect. For example, one of Brewer-Garrett's winning bids exceeded Honeywell's by nearly $163,000. "If Brewer-Garrett was using Tisdale to undercut Honeywell, one would expect that disparity to work in the opposite direction."
The Court of Appeals therefore agreed that Honeywell has failed to show by clear and convincing evidence an inadequate remedy at law or irreparable harm.
PRELIMINARY INJUNCTION DENIED WHERE THERE WAS DISPARITY IN COMPETING BIDS.
9. Gazelah v. Rome General Practice, Inc., 232 Ga. App. 343, 502 S.E.2d 251 (April 7, 1998).
Trade secret misappropriation suit involving two weight loss clinics. Rome General Practice sued Shawn Gazelah, M.D. d/b/a/ MED FIRST and two former employees alleging a scheme to direct patients from the Rome General Practice clinic to Dr. Gazelah's new weight loss clinic.
A former receptionist at Rome testified that she in fact had participated in a scheme to divert Rome's waiting list patients' names directly to Dr. Gazelah. A preliminary injunction was granted.
The issue on appeal was contempt for Dr. Gazelah's failure to produce MED FIRST's customer list because this was MED FIRST's "trade secret."
The appellants argue that because "customer lists" are trade secrets within the meaning of OCGA § 10-1-761(4), they cannot be required to reveal this information. See Avnet, Inc. v. Wyle Labs., 263 Ga. 615, 616-617(1), 437 S.E.2d 302 (1993). But to determine their compliance with the court's order restraining them from using the Practice's customer list, and to determine their violation, if any, of the Georgia Trade Secrets Act, as well as damages resulting therefrom, this information is essential to the litigation. We cannot endorse the appellants' disingenuous attempt to conceal information properly subject to discovery by using the law they are accused of violating to insulate themselves from disclosing this information. Compare Leo Publications v. Reid, 265 Ga. 561, 562(1), 458 S.E.2d 651 (1995).
In considering the entire protracted history of discovery and their continued defiance of an explicit order, the trial court was plainly authorized to find the appellants in contempt. Vining v. Kimoto, USA, 209 Ga. App. 296, 298(3), 433 S.E.2d 342 (1993). See Kemira, 210 Ga. App. at 52(1), 435 S.E.2d 236 (the finding of wilfulness and international failure to respond to discovery will be upheld where there is any evidence to support it). OCGA § 9-11-37(b).
FINDING OF CONTEMPT FOR FAILURE TO PRODUCE CUSTOMER LIST IN RESPONSE TO DISCOVERY REQUEST.
10. General Clutch Corp. v. David A. Lowry & Cema Technologies, Inc., 1998 WL 327069, (D. Conn. 1998). (March 30, 1998).
David A. Lowry, a former employee of General Clutch Corporation ("GCC") and his new corporation, CEMA Technologies, Inc., were found liable for violation of the Connecticut Uniform Trade Secrets Act, Conn. Gen. Stat. § 35-51 et. seq. ("CUTSA") for the misappropriation of trade secrets relating to GCC's friction hinges. Defendants' Fed. Civ. R. 50(b) Motion for Judgment as a Matter of Law (IMOL) was denied.
It is not the Court's province in deciding a Rule 50(b) motion to consider the credibility of testimony or the weight to be given evidence. Instead, the Court must determine whether there exists such a complete absence of evidence supporting the verdict that the jury's findings could only have been the result of sheer surmise and conjecture, or whether the evidence in defendants' favor is so overwhelming that reasonable persons could not render a verdict against it.
The evidence established that Lowry had access in confidence to GCC's confidential engineering drawings and customer lists prior to preparing CEMA's business plans and the trial evidence showed the "near identical" features of the CEMA and GCC's hinges based upon the testimony of Plaintiffs' technical expert witness.
The court approved the following jury instructions relating to "unjust enrichment" damages: "Now, I indicated I would give you further instruction on the element of damages called unjust enrichment. With respect to the damages for defendants' violations of the Connecticut Uniform Trade Secrets Act. CUTSA, in addition to determining what actual damages General Clutch suffered, you may also consider what benefit the defendants have gained from misuse of the trade secrets. Regardless of whether you find that General Clutch itself suffered losses, if you find that the defendant benefitted from using a trade secret belonging to plaintiff, then you may award the monetary value that you attribute to those benefits as the measure of the plaintiff's damage."
"These two approaches to damages, actual damages and unjust enrichment, are different in some respects, but may also overlap. That is, may be that the defendant profited from particular sales that the plaintiff would have made had the defendant not competed using trade secrets. Now, in that situation, the two ways of approaching damages that I've just described would measure the identical damages, whether viewed as plaintiff's loss or defendant's gain. The law does not permit a plaintiff to recover twice for the same damages. Thus you may include as damages both plaintiff's losses and defendant's gain only if and to the extent that they do not overlap in this way."
Lowry's testimony indicates that CEMA received over $500,000 in revenue from hinge sales to customers such as Apple Computer and Accr. Further, plaintiffs produced evidence that CEMA's business plan capitalized on Lowry's confidential relationship with GCC in order to induce investment into the company. IMOL Motion denied.
JURY JUSTIFIED IN AWARDING $100,000 IN "UNJUST ENRICHMENT" DAMAGES.
11. Intergraph Corporation v. Intel Corporation, 3 F.Supp.2d 1255 (N.D. Ala.) (April 10, 1998).
Intergraph Corporation filed a 23 Count Complaint against Intel Corporation alleging, inter alia, violations of the antitrust laws and violations of the Alabama Trade Secrets Act. Intergraph moved for a preliminary injunction to prevent Intel from terminating NDAs (nondisclosure agreements) with Intergraph in order to coerce Intergraph to accede to Intel's demands relating to other business disputes. The Court (District Judge Edwin L. Nelson) granted the preliminary injunction.
Intel is the world's largest designer, manufacturer, and supplier of high performance microprocessors, frequently described as the "brains" of a computer because they control the central processing of data in personal computers.
Most of the entire world's personal computers today are powered by Intel designed and manufactured microprocessors in the "x86" series created by Intel.
Intel, over a period of almost twenty years, has continued to develop the "x86" line of microprocessors, creating even faster and more powerful units. Its current generation of the "x86" microprocessors, the Pentium series, is an extraordinarily complex product, which is difficult and expensive to design and manufacture. According to Intel, the Pentium Pro processor has 5.5 million transistors and can execute 300 million instructions per second. More than 200 major steps are required to produce the Pentium Pro.
Until the development of its latest generation of Pentium II microprocessors, Intel used an "open architecture," which was available generally to all participants in the industry. For example, other manufacturers such as Cyrix, AMD, and IBM designed, developed and marketed microprocessors that were more or less compatible with the earlier Intel CPUs. Beginning with the Pentium II, however, Intel changed to a closed or proprietary architecture, which included the use of a new "bus," the P6. This means that the Pentium II and planned Intel microprocessors will not be compatible with other CPUs.
This "closed architecture," for practical purposes, allows Intel, by exercising its intellectual property rights in its "closed architecture," to wield absolute power over who will and who will not be allowed to participate in that part of the high-end computer industry that is based upon the P6 "x86" microprocessor.
To protect its trade secret rights, Intel provides its products, as well as technical and design information, to Intergraph under NDAs, which are terminable at will by Intel. These NDAs are documents drafted by Intel and presented to Intergraph and other customers on a take-it or leave-it basis.
At the preliminary injunction hearing, the trial court concluded that Intel used the threatened or actual termination of NDAs as a contractual weapon, coercing customers such as Intergraph to accede to Intel's demands, and thereby restraining competition.
A monopolist cannot use the pretext of protecting intellectual property in order to violate the antitrust laws. Image Technical Serv., 125 F.3d at 1218-1219 ("Neither the aims of intellectual property law nor the antitrust laws justify allowing a monopolist to rely upon a pretextual business justification to mask anticompetitive conduct.") (citing Eastman Kodak, 504 U.S. at 484, 112 S. CT. at 2091).
The Court concluded that Intel has no legitimate intellectual property basis with which it can refuse to supply Intel microprocessors and technical information to Intergraph, especially since Intel has been doing so for the last four years on a mutually beneficial basis.
The Court concluded that Intel's retaliatory lawsuits and the threatened and actual termination of its NDAs with Intergraph, under which Intel provided technical information to Intergraph, constitute unlawful restraints of trade. See e.g. United States v. Microsoft Corp., 1995-2 Trade Cas. ¶ 71,096, at p. 75, 245, 1995 WL 505998 (Microsoft enjoined from using NDAs for purpose of restraining competition).
Further, the Court concluded that Intel had no legitimate business justification for the immediate termination of its NDAs with Intergraph, particularly since there is no evidence that Intergraph ever failed to conform to its obligations under any of the NDAs. Intel's enforcement of the at-will termination provisions through two retaliatory lawsuits and other threatened actions is unreasonably onerous and intended to restrain competition by Intergraph and others.
CANCELLATION OF TRADE SECRET NDAs BY INTEL CONSTITUTES ANTITRUST VIOLATION.
12. Pope v. Alberto Culver Company, 694 N.E.2d 615, 230 (Ill. Dec. 646) (1st Dist. April 27, 1998).
Plaintiff alleged that defendant misappropriated a proposal she submitted to the company which involved the dispensing of lye based hair relaxer in a squeezeable tube, using the tube to apply the product. Pope contended defendant misappropriated her proposal by introducing a similar product line after the company rejected her proposal.
The trial court granted defendant's motion for summary judgment and the Illinois Court of Appeals affirms.
It is well established that a product or service that is within the realm of general skills and knowledge in the industry cannot be a trade secret. Web Communications Group, Inc. v. Gateway 2000, Inc., 889 F.Supp. 316, 319 (N.D. Ill. 1995), citing Service Centers of Chicago, Inc. v. Minogue, 180 Ill. App. 36, 447, 129 Ill. Dec. 367, 535 N.E.2d 1132 (1989).
"Simply being the first or only one to use certain information does not in and of itself transform otherwise general knowledge into a trade secret. If it did, the first person to use the information, no matter how ordinary or well known, would be able to appropriate it to his own use under the guise of a trade secret. We do not believe such a result was intended by the Act." Service Centers, 180 Ill.App.3d at 455, 129 Ill.Dec. 367, 535 N.E.2d 1132.
As noted by the trial court, if we were to find plaintiff's proposal a trade secret, then placing any well-known, commercially available product into a well-known, commercially available container would be a secret entitled to legal protection.
The plaintiff's product could be easily duplicated and her proposal was based on information generally available within the hair care industry and to the general public, therefore, her proposal does not constitute a protectable trade secret under Illinois law.
PLAINTIFF'S IDEA SUBMISSION FOR HAIR CARE PRODUCT NOT PROTECTABLE AS A TRADE SECRET.
13. Sovereign Chemical Company v. Condren, 1998 WL 195876 (Ohio App. 9 Dist.) (April 22, 1998).
Sean E. Condren began working for Sovereign Chemical Company ("Sovereign") in 1991. Condren's sales duties included selling terpene hindered phenols as antioxidants to the rubber industry. On May 15, 1992, Condren entered into an employment contract with Sovereign. This contract contained confidentiality restrictions and a covenant not to compete. Condren also entered into several other confidentiality agreements with respect to information he obtained from sales meetings.
In September 1995, Condren's employment was terminated by Sovereign and shortly thereafter, Condren started his own company, Seacron. Seacron marketed and sold a product, which the trial court designated as "Chemical Z" determined to be identical to a Sovereign product designated as "Chemical X."
The chemical in question was marketed and used as an antioxidant in the rubber industry. Without an antioxidant in the rubber polymer, oxygen will eventually degrade the rubber. The market for better and different antioxidants for use in the rubber industry is apparently fairly competitive, and the best antioxidant for a given product may depend upon the product. There is heat buildup in tires, for example, which accelerates the oxidation and degradation processes, and an antioxidant in a rubber polymer used to make tires must be capable of counteracting those processes.
Based on this evidence, the trial court granted a permanent injunction against the Defendants (Sean Condren and Seacom) enjoining them from five years from: 1. Engaging in any contract with any customer or client that had a relationship with [Sovereign] regarding [Chemical X] prior to September 8, 1995, 2. Using, receiving and/or disclosing [Sovereign's] confidential information or trade secrets relating to [Chemical X] including but not limited to the ingredients, formulas, applications, use and/or suppliers for [Chemical X]: and customer lists, pricing data and other proprietary information relating to [Chemical X], and 3. Selling, offering to sell, marketing, formulating or producing any product for the rubber industry which is blended, compounded with, mixed or incorporates ingredients from the same hindered phenol family as [Chemical X]. Specifically, and without limitation [the Appellants] are hereby prohibited from further selling, offering to sell, marketing, formulating or producing [the Appellants'] product currently known as [Chemical Z].
On appeal, the Ohio Court of Appeals affirmed the 5-year permanent injunction holding that Chemical X, the customer lists and pricing data all constituted trade secrets under the Ohio Trade Secrets Act, R.C. 1333.61 to R.C. 1333.69.
However, the Court modified the injunction to restrict it to Chemical X instead of the entire family of terpene hindered phenols used as antioxidants in the rubber industry: "Sovereign's trade secret is the specific use of Chemical X, one type of terpene hindered phenol, as an antioxidant in rubber polymers. This trade secret does not encompass all other terpene hindered phenols. The injunction is therefore overbroad and should be limited in scope to Chemical X."
The Court also rejected Sovereign's subsequent application to dissolve the injunction by showing evidence that it independently developed Chemical "X." The standard is not whether the information is "ascertainable." The standard is whether such information is readily ascertainable by proper means. Condren cannot allege in all seriousness that he did not have a "head start" on independently ascertaining this information by virtue of the knowledge he acquired while in the employ of Sovereign. The record supports the trial court's determination that Sovereign's application of Chemical X is innovative, valuable, and, most importantly, secret, and that Sovereign is still entitled to an injunction prohibiting the Appellants from using information concerning the supplier of Chemical X, its unique application as an antioxidant in rubber polymers, and its formula.
FIVE-YEAR PERMANENT INJUNCTION TO PROTECT TRADE SECRETS AFFIRMED ON APPEAL.
14. D.L. Ricci Corp. v. Forsman, 1998 WL 202595 (Minn. App.) (April 28, 1998).
Jackie Forsman was an employee of a temporary employment agency (Express Services) and she was assigned to work in a temporary-for-hire position at D.L. Ricci, Inc. as a billing clerk and sales coordinator. Forsman was required to sign a non-compete agreement at Ricci.
Thereafter, Forsman terminated her employment at Express Services and began working at Mactech, a competitor of D.L. Ricci, Inc. Ricci filed suit to enforce the non-competition provision to protect its trade secrets and the trial court granted a temporary injunction.
According to the affidavit of Donato Ricci, a number of confidential items were missing following Forsman's departure, including Forsman's daily notepad, a copy of the company's Customer Contact Book, and a customer information file that had been in Forsman's possession. Forsman maintains that, except for some personal items, she took nothing from the office.
It is undisputed that Forsman had access to and knowledge of confidential information, regarding among other things, Ricci's customer lists, pricing information, cost information, profit margins, inventory lists, sales representative information. Frosman's knowledge of this information would allow a competitor of Ricci to underbid Ricci and interfere with Ricci's ability to obtain new work. We note that only days after leaving Ricci, Forsman was hired by Mactech to develop a marketing plan and to do the exact work she was doing at Ricci. Here, a monetary remedy would be inadequate to compensate Ricci if Forsman disclosed the confidential information she obtained while employed at Ricci. Therefore, the Minnesota Court of Appeals affirmed the injunction.
TEMPORARY INJUNCTION GRANTED TO ENFORCE NON-COMPETITION AGREEMENT TO PROTECT TRADE SECRETS.
15. Clifford McFarland Read & Lundry, Inc. v. Brier, 1998 WL 269223 (R.I. Super.) (May 13, 1998).
Plaintiff (R & L) is an industrial supplier. It sells hardware items to industrial concerns, manufacturing facilities, and the boat building industry. A distinctive feature of R & L's operations is that it uses the consigned inventory system with several of its major customers. Thus, instead of carrying its own inventory and having to employ personnel to oversee this inventory, the system enables a customer to stock R & L's inventory in its plant on a consigned basis. R & L replaces the inventory as necessary and bills the customer on a monthly basis for items used.
Defendant (Michael Brier) was an employee of R & L who had negotiated to buy R & L. A contractual dispute ensued and Brier formed a new company (CSI) on September 25, 1995. A lawsuit against Brier and CSI ensued.
The plaintiff allege that the defendants, Brier, CSU and Brier & Co., used trade secrets which Brier and Bibeau had improperly acquired from R & L. The plaintiffs state that these trade secrets include R & L's information concerning the following: customer lists, identities of purchasing managers, customer credit histories, special discounts, cost and selling prices, sales histories, specialty items, product lists, sourcing of products, and promotional material. Plaintiff's seek compensatory and punitive damages and seek imposition of a permanent injunction against Brier and CSI from competing with R & L.
In response, the defendants argued that the "trade secrets" alleged by the plaintiffs are, in fact, generally known within the industrial distribution industry and are readily ascertainable by proper means.
Citing the Rhode Island Uniform Trade Secrets Act, the Court found that customer information concerning credit history, sales volume, prospective future business, service relationships, special needs of customers, supplier lists, cost information, pricing policies, and profitability are trade secrets under the Act. Although, as the defendant argues, the names of the individual customers of R & L might be readily ascertainable from other sources, here it is clear that CSI had more than a mere list in its possession. There is an abundance of evidence which demonstrates that CSI used customer and stock lists which are identical to those of R & L. Although these are not, of themselves, trade secrets, they are compelling circumstantial evidence that CSI misappropriated R & L's trade secret information with regard to its cost and pricing of these items.
Further, the defendants' argument, that R & L made no effort to maintain the secrecy of said information, is without merit. The evidence indicates that it was Bibeau who hired Brier on R & L's behalf and gave Brier access to confidential information, and that it was Bibeau, as R & L's president, who was the individual in charge of developing and implementing a security system. It is disingenuous for the defendants to argue, as they do now, that these security measures were insufficient protection from the misappropriation of R & L's trade secrets by individuals, such as Brier and Bibeau, who had unlimited access to same.
Section 6 41-2 of the Rhode Island Trade Secrets Act, authorizes injunctive relief in misappropriation cases, such as the instant one. The defendants are hereby permanently restrained and enjoined from retaining, using, or disclosing directly or indirectly any of R & L's customer lists of records, any information obtained from R & L's customer lists or other records or any other information to which CSI, Brier or Brier & Co. were privy by reason of their acquaintance with Bibeau, or in the case of the latter two, by reason of their employment by or position at R & L which relates to R & L's customers, customer product requirements, customer credit history, product costs, product sources, identity of vendors, capabilities of vendors and the availability of discounts from vendors. This injunction is limited to information which is stored in magnetic or electronic form or computer tape, disk, hard copy or otherwise.
PERMANENT INJUNCTION GRANTED TO PROTECT CUSTOMER INFORMATION; INJUNCTION LIMITED TO INFORMATION STORED IN TANGIBLE FORM.
16. Micro Data Systems, Inc. v. Dharma Systems, Inc., 1998 WL 272761 (Ca. 7 (Ind. 1998).
Contractual dispute involving trade secret issues between Micro Data Base Systems, Inc. (MDBS) and Dharma Systems, Inc. The district court ruled as a matter of law that MDBS had violated the contract and owed Dharma $25,000 and the jury returned a verdict in the amount of $75,867.50 for trade secret damages. The Court ruled as a matter of law that Dharma was not entitled to punitive damages. Both sides appealed. Chief Judge Posner wrote the opinion affirming the judgment in the trial court.
The underlying dispute was a four-way deal. The Internal Revenue Service requested bids to update the IRS's computer facilities. Unisys wanted to bid on the project to Unisys made a contract with MDBS who in turn made a contract with Dharma. Thereafter, MDBS, without Dharma's consent, shipped six copies of the RDMS Emulation software to Unisys resulting in the alleged trade secret violations.
MDBS's business is in Indiana and Dharma's in New Hampshire.
Since the parties' dispute over trade secrets (like the claim for restitution) grows out of the contract, and the trade secrets themselves were created in and are held in New Hampshire and it is there that the primary harm from their unlawful disclosure would be felt because that is where Dharma's business is located, we think it reasonably clear that New Hampshire law governs the trade secret issues.
The Uniform Trade Secrets Act, which both New Hampshire and Indiana have adapted, authorizes punitive damages for the wilful and malicious appropriation of a trade secret. Id. § 350-B:3(II); IC 24-2-3-4(c). But the Act says nothing about standard of proof--whether only a preponderance of the evidence is required, or as the district court ruled in turning down Dharma's punitive damages claim, clear and convincing evidence. There are no cases from either Indiana or New Hampshire on the question, and the cases from other jurisdictions are split over it. See Trandes Corp. v. Guy F. Atkinson Co., 996 F.2d 655, 666 (4th Cir. 1993) (Maryland law) (clear and convincing); Centrol, Inc, v, Morrow, 489 N.W.2d 890, 896 (S.Dak. 1992) (clear and convincing); Zawels v. Edutronics, Inc., 520 N.W.2d 520, 523-24 (Minn.App. 1994) (preponderance).
In any event, the standard of proof doesn't matter here, for there is no basis for punitive damages under either standard. This is a garden variety trade secret dispute rather than anything that smacks of willfulness or malice--vague terms but obviously implying some element of aggravation. Cf. Superbird Farms, Inc. v. Perdue Farms, Inc., 970 F.2d 238, 251 (7th Cir. 1992), overruled on other grounds by Medcom Holding Co. v. Baxter Travenol Laboratories, Inc., 106 F.3d 1388, 1397 (7th Cir. 1997); Von Gonten v. Research Systems Corp., 739 F.2d 1264, 1268 (7th Cir. 1984).
The misappropriation of a trade secret is an intentional tort, but it is not the law that the fact that a tort is intentional automatically authorizes the award of punitive damages. See Sufrin v. Hosier, 128 F.3d 594, 598 (7th Cir. 1997), and with specific reference to trade secrets Sokol Crystal Products, Inc. v. DSC Communications Corp., 15 F.3d 1427, 1435 (7th Cir. 1994); In re Innovative Construction Systems, Inc., 793 F.2d 875, 889 (7th Cir. 1986). If it did, the Uniform Trade Secrets Act would not limit punitive damages to cases in which the violation of the Act is willful or malicious. When an award of punitive damages requires that the defendant have committed an aggravated form of the wrongful act sought to be punished, a defendant who commits the barebones tort is not liable for such damages. Sufrin v. Hosier, supra, 128 F.3d at 598; Anthony v. Security Pacific Financial Services, Inc., 75 F.3d 311, 316 (7th Cir. 1996).
Dharma put in evidence that if its relations with Unisys hadn't soured as a result of its quarrel with MDBS, it would probably have sold at least 1,000 copies of the RDMS Emulation to Unisys, obtaining net royalties on these sales of $750,000. MDBS argues that since the evidence consisted entirely of testimony by Dharma's president, and was thus self-serving (as well as purely oral), it cannot provide a ground for an award of damages. This is not correct. There is no rule that damages can be proved only by documents, only by experts, or only by disinterested third parties. See, e.g., Secunitron Magnalock Corp. v. Schnabolk, 65 F.3d 256, 265 (2d Cir. 1995); Miami Int'l Realty Co. v. Kanter, 841 F.2d 348, 351 (10th Cir. 1988).
MDBS, in turn, demonstrated that it had only made an unauthorized transfer of 6 copies of the RDMS Emulation software (involving Dharma's proprietary software known as SQL Access) which Dharma conceded only to $18,000 in lost revenues.
In a case if first impression, Judge Posner concluded that consequential damages can be awarded for trade secret misappropriation:
The jury awarded only a fraction of the damages sought, but the question is whether it should have awarded anything above $18,000 since the additional damages are not based on the commercial exploitation of Dharma's trade secret, which is the usual form that misappropriation takes. But by refusing to negotiate a license agreement, MDBS forced Dharma to undertake measures of self protection likely to irritate Unisys by jeopardizing Unisys's ability to perform its contract with the IRS. The loss of future business with Unisys was a foreseeable consequence of MDBS's misconduct, and so Dharma was entitled to seek damages for that consequence. Consequential damages, as long as they are reasonably foreseeable, are the norm in tort cases (with an irrelevant exception discussed in Rardin v. T & D Machine Handling, Inc., 890 F.2d 24 (7th Cir. 1989), and the misappropriation of a trade secret is a tort, we are just surprised not to have found any case in which consequential damages were awarded for such a misappropriation.
"It's as if MDBS, having stolen a program from Dharma, inserted a bug in it as a result of which the program didn't work, and buyers blamed Dharma and refused to do any further business with it. That would be a consequence of misappropriation, and Dharma would be entitled to the foreseeable damages flowing from that consequence."
CONSEQUENTIAL DAMAGES MAY BE AWARDED FOR TRADE SECRET MISAPPROPRIATION; WILFUL AND MALICIOUS MISAPPROPRIATION OF A TRADE SECRET REQUIRES SOME ELEMENT OF AGGRAVATION.
17. Benada Aluminum of Florida, Inc. v. Rodriguez, 712 So.2d 438 (3rd Dist.) (June 10, 1998).
Florida Court of Appeals reverses dismissal of trade secret misappropriation claim by trial court.
The Complaint alleges that upon his departure from Beneda's employ, Rodriguez took "confidential information not available in the public domain," Thomas v. Alloy Fasteners, Inc., 664 So.2d 59, 60 (Fla. 5th DCA 1995), such as customer lists indicating the customer's purchasing history, the customer's specifications, and unique drawings prepared for customers by Benada's technical staff. These items "qualify as trade secrets, are the property of the employer, and cannot be used by the former employee for his own benefit." Unistar Corp. v. Child, 415 So.2d 733 (Fla. 3d DCA 1982). Thus, the complaint stated a claim for relief under the Florida Uniform Trade Secrets Act.
DISMISSAL OF "CUSTOMER INFORMATION" TRADE SECRETS CLAIM REVERSED ON APPEAL.
18. Delucca, v. GGL Industries, Inc., 712 So.2d 1186 (4th Dist.) (June 17, 1998).
Thomas Delucca was employed as the comptroller of GGL Industries, Inc. for approximately four years and had signed a noncompete agreement. While Delucca was still employed, GGL discovered that an outsider possessed confidential information about the GGL and was disseminating that information to GGL's clients. After an investigation determined that Delucca had been giving out this information, GGL brought this action for injunctive relief under Florida Uniform Trade Secrets Act (Section 688.003, Florida Statutes).
Delucca admitted that he had given out copies of GGL's tax returns, documents reflecting income, including rebates from vendors, customers' names and addresses, and shipping information. However, Delucca argued on appeal that because he is no longer employed and has destroyed all evidence which he had in his possession, there is no need for a permanent injunction. The Court of Appeals contended that this issue goes to Delucca's credibility and affirmed the permanent injunction.
Delucca also argued on appeal that he disclosed the information (which the Florida Court of Appeals concluded was trade secrets) to expose alleged fraudulent practices by the Company. The Florida Court of Appeals rejected this argument: "We agree with the appellee [GGL] that even a person who suspects unfair trade practices does not have unbridled authority to disclose trade secrets. Becker Metals Corp. v. West Florida Scrap Metals, 407 So.2d 380, 382 (Fla. 1st DCA 1981) (even when fraud is alleged and disclosure of trade secrets is necessary, the court is required to "take protective measures to: (1) protect the interests of the holder of the privilege; (2) protect the interests of the parties; and (3) further the interests of justice.").
NO PRIVILEGE TO DISCLOSE COMPANY FINANCIAL INFORMATION TO THIRD PARTY TO EXPOSE ALLEGED FRAUDULENT PRACTICES.
19. K-Sun Corporation v. Heller Investments, Inc., 1998 WL 422182 (Minn. App.) (July 28, 1998).
K-Sun Corporation created a comprehensive marketing program and an enhanced version of a labeling machine (working with Epson). Kroy, Inc., a competitor of K-Sun, placed K-Sun on notice that the machine that K-Sun was planning to distribute in North America violated a Kroy patent.
Thereafter, there were merger discussions between Kroy and K-Sun and K-Sun provided confidential business information to Kroy's investment firm (Heller Investments, Inc.) which in turn through its employees disclosed the information to Kroy in violation of a confidentiality agreement. The confidential business information related to K-Sun's comprehensive marketing program and Epson line. The disclosures were made pursuant to a confidentiality agreement. Kroy secretly decided that a merger was unacceptable but nevertheless continued discussions with K-Sun and continued to obtain confidential business information from K-Sun. Eventually Kroy told K-Sun that there would be no merger and a trade secret misappropriation lawsuit ensued.
The jury found that Kroy had misappropriated K-Sun's trade secrets and awarded damages to K-Sun in the sum of $580,000 as against Heller and $290,000 as against Kroy. In an advisory capacity, the jury also found that the actions of Kroy and Heller were wilful and malicious. The trial court awarded exemplary damages in the sum of $870,000 and attorney fees of $153,771.75.
On appeal, Kroy argued that the evidence fails to establish that respondent had a protectable trade secret, arguing that trade secret status is restricted to formulas, patterns, blueprints, manufacturing specifications and the like. The law, however, is not so restrictive. Business information can be the subject of trade secrets.
Business information qualifies as a trade secret if (1) it is not generally known or readily ascertainable, (2) derives economic value from the secrecy, and (3) reasonable efforts are used to maintain the secrecy. Electro-Craft Corp. v. Controlled Motion, 332 N.W.2d 890, 898-99 (Minn. 1983). The evidence supports inferences of all three elements. The information included sales, strategies, plans, and programs that K-Sun created especially for the marketing of the Epson products.
Further, the evidence supports the determination that Heller disclosed and Kroy used K-Sun's confidential information in violation of the known duty to keep the information confidential. Furthermore, since such disclosure and use occurred as a result of a breach of a duty to maintain secrecy, the misappropriation occurred through improper means.
The damages awarded by the jury were not speculative. The amount of damages is a fact question. Snyder v. City of Minneapolis, 441 N.W.2d 781, 789 (Minn. 1989). The evidence contains testimony about K-Sun's out-of-pocket losses and K-Sun's and Kroy's respective projections and estimates of future sales revenues. The estimates and projections were based, in part, on the past actual sales experiences of the companies. These experiences provide a reasonable factual basis for predictions as to future performances.
The Court of Appeals also affirmed the award of exemplary damages and attorneys' fees under the Minnesota Uniform Trade Secrets Act. Minn.Stat. § 325C.03(b) (1996) provides that "if wilful and malicious misappropriation exists, the court may award exemplary damages in an amount not exceeding twice any award * * * of compensatory damages. In its advisory capacity, the jury found the conduct of Heller and Kroy to have been wilful and malicious. The trial court agreed and rejected the appellants' argument that Kroy was acting in good faith to determine how to proceed to protect its legitimate patent interests. The evidence supports the view that high-level executives of appellants deliberately engaged in a scheme to obtain confidential business information about K-Sun, its products, and its relationship with Epson, and its marketing potential to use to the economic disadvantage of K-Sun. Coupled with the fact that the scheme was carried our through a breach of an express confidentiality agreement, this evidence satisfies the requirement that conduct be both wilful and malicious to support an award of exemplary damages. See Zawels v. Edutronics, 520 N.W.2d 520, 524 (Minn. App. 1994); Aries Information Sys., Inc., 366 N.W.2d at 367.
JURY VERDICT AFFIRMED; EXEMPLARY DAMAGES AWARDED UNDER MINNESOTA UNIFORM TRADE SECRETS ACT.
20. Zdeb v. Baxter International, Inc. 697 N.E.2d 425 (1st Dist.) (June 26, 1998).
A jury entered a verdict against defendants Baxter International, Inc., and Baxter Healthcare Corporation (collectively referred to as Baxter) and awarded approximately $8 million in damages to plaintiffs Brian Zdeb (Zdeb) and Prime Medical Products, Inc. (Prime) (collectively referred to as plaintiffs).
Plaintiffs argued before the jury that Zdeb did not incorporate Baxter technology in his infuser and if Baxter had conducted a proper investigation, then Baxter would not have interfered with Zdeb's business. Baxter denied these allegations and claimed that Zdeb had misappropriated Baxter trade secrets.
On appeal, Baxter raised several assignments of error including alleged defects in the jury instructions on the trade secret issues.
The trial court gave two jury instructions on trade secrets, numbers 16 and 17. Jury instruction number 16 provided:
"The Illinois Trade Secrets Act defines a `trade secret' as information which is:
(1) sufficiently secret to derive economic value, actual or potential, from not being generally known to other persons who can obtain economic value from its disclosure or use;
(2) is the subject of efforts that are reasonable to maintain its secrecy or confidentiality.
Matters of general knowledge in an industry cannot be trade secrets.."
Instruction 16 virtually quotes the definition of trade secret provided in the Illinois Trade Secrets Act (765 ILCS 1065/2(d) (West 1994)).
Jury instruction number 17 provided:
"In determining whether specific information is a trade secret, you may consider the following factors:
(a) The extent to which the information was known outside of Defendants' business;
(b) The extent to which it was known by employees and others involved in Defendants' business;
(c) The extent of measures taken by Defendants to guard the secrecy of the information;
(d) The value of the information to Defendants and their competitors;
(e) The amount of effort or money expended in developing the information;
(f) The ease or difficulty with which the information could be properly acquired or duplicated by others."
Baxter's proposed instruction No. 16F added to the definition of a trade secret:
"A combination of things, each of which, by itself, is generally known, can be a trade secret where the combination, design and operation of those things form a unique combination which is not generally known and which affords an actual or potential competitive advantage to persons possessing that information."
Baxter's proposed instruction No. 16E addressed misappropriation of trade secrets and provided:
"A trade secret is misappropriated even if the overall structure of a new device is a modification or improvement of the trade secret, is different from the trade secret, or is the subject of a patent, as long as the new device is substantially based on or developed from a trade secret seen or learned about while employed at the owner of the trade secret's business."
The Illinois Court of Appeals rejected Baxter's argument. The jury instructions given were clear enough not to mislead the jury and they fairly and accurately state the applicable law. We cannot say that the minimal amount of evidence available to support Baxter's proposed instructions was sufficient to warrant more instructions on the issue of trade secrets. Even assuming that the trial court's refusal to give Baxter's proposed instructions was an abuse of discretion, a new trial will not be granted based on a court's refusal to provide tendered instructions unless the refusal seriously prejudiced the party's right to a fair trial. Poelker, 251 Ill.App.3d at 278, 190 Ill.Dec. 487, 621 N.E.2d 940. On this record, the failure to give Baxter's two supplemental jury instructions on trade secrets did not so seriously prejudice Baxter's right to a fair trial as to warrant a new trial.
$8 MILLION JURY AWARD UPHELD; JURY INSTRUCTIONS NOT MISLEADING.
21. Essex Group, Inc. v. Southwire Company, 501 S.E.2d 501 (Sup.Ct. Ga.) (June 29, 1998).
Southwire Company brought suit against its former employee, Richard McMichael, and his new employer, Essex Group, Inc., to enjoin McMichael from disclosing to Essex any Southwire trade secrets, particularly, trade secrets involving Southwire's logistics system.
Southwire and Essex are direct competitors in the cable and wire industry. Southwire's logistics system is a warehouse organizational system with components extending from architectural layout features to customized equipment and modified computer software. Southwire's logistics system was primarily designed over a three-year period, with a development cost exceeding $2 million by a project team headed by McMichael. In addition to self-testing and a trial-and-error learning process, development of Southwire's logistics system also included modifications based on observation of logistics systems in other industries and the adaption of commercially-available components. Further, the trial court found that the logistics system has resulted in substantial efficiencies to Southwire, with annual savings of $12 million.
Based on this evidence, the trial court granted a permanent injunction under the Georgia Trade Secrets Act of 1990, OCGA § 10-1-760 et seq. and Essex appealed.
Essex contended Southwire's logistics system cannot be a trade secret because it is composed primarily of matters within the public domain. The Georgia Supreme Court disagreed. "The fact that some or all of the components of the trade secret are well-known does not preclude protection for a secret combination, compilation, or integration of the individual elements." Restatement of the Law 3d, Unfair Competition (1995), § 39(f), p. 432. Hence, courts have recognized that
"a trade secret can exist in a combination of characteristics and components, each of which, by itself, is in the public domain, but the unified process, design and operation of which in unique combination, affords a competitive advantage and is a protectable secret."
Walter Services, Inc. v. Tesco Chemicals, Inc., 410 F.2d 163, 173 (5th Cir. 1969).
A unique process which is not known in the industry "can be a trade secret even if all of its component steps are commonly known." In other words, "a trade secret process may be established even if known components are assembled and known techniques are combined to produce a useful process which is not known in the industry."
Salsbury Laboratories, Inc. v. Merieux Laboratories, Inc., 735 F.Supp. 1555, 1569(13) (M.D.Ga. 1989), aff'd. 908 F.2d 706(III)(A) (11th Cir. 1990).
[A] trade secret can include a system where the elements are in the public domain, but there has been accomplished an effective, successful and valuable integration of the public domain elements and the trade secret gave the [trade secret owner] a competitive advantage which is protected from misappropriation.
Rivendell Forest Products v. Georgia-Pacific Corp.. 28 F.3d 1042, 1046 (10th Cir. 1994). We find this legal precedent persuasive and consistent with the Georgia Trade Secrets Act.
The Georgia Supreme Court also rejected the argument that information cannot be protectable as a trade secret merely because it may be independently discovered or ascertained by others.
"The theoretical ability of others to ascertain the information through proper means does not necessarily preclude protection as a trade secret. Trade secret protection remains available unless the information is readily ascertainable by such means. Thus, if acquisition of the information through an examination of a competitor's product would be difficult, costly, or time-consuming, the trade secret owner retains protection against an improper acquisition, disclosure, or use." Restatement of the Law 3d, Unfair Competition § 39(f).
McMichael brought to Essex not only the general information acquired in his job, i.e., that a certain logistical factor such as the positioning of storage containers would need to be resolved before certain other factors were decided: McMichael also brought specific information, such as how, where, and when those storage containers had to be positioned so as to accommodate most efficiently the very same product Essex was producing in competition with Southwire. It was the disclosure of this specific information that Southwire sought to enjoin and the record supports a finding that Southwire carried its burden of proving that McMichael possessed not only general logistics information, but also particularized information learned solely through his position of trust at Southwire.
FIVE-YEAR PERMANENT INJUNCTION TO PROTECT TRADE SECRETS IN LOGISTICS SYSTEM AFFIRMED; COMBINATION ANALYSIS FOR TRADE SECRET PROTECTION.
22. Flotec, Inc. v. Southern Research, Inc., 1998 WL 437416 (S.D. Ind.) (June 9, 1998).
Plaintiff Flotec, Inc. manufactures and sells oxygen regulators for medical uses.
After dealings with Flotec in late 1995 and early 1996 that are at the core of this dispute, Southern Research, Inc. (SRI) developed in 1996 and early 1997 a competing line of oxygen regulators.
SRI was a small manufacturing firm with sophisticated machining equipment and personnel skilled in specialized precision manufacturing in late 1995, SRI was in financial trouble and was looking for new business. In November 1995 SRI met with Gilbert Davidson and others from Flotec. There was some discussion of the possibility of Flotec to discuss the possibility of having SRI manufacture key components of Flotec's oxygen regulators.
Flotec personnel showed the SRI personnel some of Flotec's manufacturing techniques. Moreover, Flotec gave SRI several Flotec engineering drawings for the components. The drawings contain a host of dimensions and tolerances for the components. The drawings do not contain any explicit warnings that the information on them is confidential. They have a legend saying: "Property of Flotec All Rights Reserved." Davidson did not tell Zaiser that Flotec considered the drawings confidential.
SRI took the drawings and product samples back to Florida. SRI personnel then undertook a substantial effort to gather information about prices and quantities for materials and some outside processing that SRI would need to provide a price to Flotec. See Ex. 147. Sometime during the next couple of months, SRI orally submitted a "ballpark" number to Flotec for three key components as a set. Flotec wanted written quotations for separate components, but SRI never provided written separate quotations. In any event, Flotec thought the quoted price for the set was too high. Flotec never asked SRI to return its technical drawings at any point after the negotiations had stalled.
SRI began manufacturing and selling its own line of regulators at the end of 1996 or beginning of 1997. These products first came to the attention of Flotec in early 1997, when an SRI advertisement appeared for a product called "Millennium." The evidence before the court shows that SRI and its successor Inovo produce their regulators at costs considerably lower than Flotec's.
Flotec sued SRI inter alia for misappropriation of trade secrets under the Indiana Trade Secrets Act and moved for a preliminary injunction. Flotec claims that the technical drawings of several regulator components that it provided to SRI contained product dimensions and tolerances that amount to trade secrets, that SRI had an implied duty to keep the drawings confidential and not to use the information for its own purposes.
Trade secret law does not protect information that is publicly available, including information that can be discerned with reasonable effort by inspecting a product available for purchase on the market. See, e.g., Roboserve, Ltd. v. Tom's Foods, Inc., 940 F.2d 1441, 1454-55 (11th Cir. 1991) (sale of plaintiff's product destroyed any reasonable expectation of secrecy as to unpatented parts); Skoog v. McCray Refrigerator Co., 211 F.2d 254, 257 (7th Cir. 1954) (public display of product in plaintiff's store amounted to full public disclosure so that information was not protected); Restatement (3d) of Unfair Competition § 43 (1995) (independent discovery and analysis of publicly available products or information are not improper means of acquiring information).
The owner may disclose information in confidence to employees or others without losing the legal protection of the trade secret, but a disclosure outside a confidential relationship destroys the legal protection. Thomas v. Union Carbide Agricultural Products Co., 473 U.S. 568, 105 S.Ct. 3325, 87 L.Ed.2d 409 (1985); Smith v. Snap-On Tools Corp., 833 F.2d 578, 580 (5th Cir. 1987); Eli Lilly & Co. v. EPA, 615 F.Supp. 811, 820 (S.D. Ind. 1985); Restatement (3d) of Unfair Competition § 39 comment.
The process known as "reverse engineering," in which a skilled person studies a product and figures out how to produce it, is permissible and even encouraged under trade secret law. The Supreme Court has explained that trade secret law "does not offer protection against discovery by fair and honest means, such as by independent invention, accidental disclosure, or by so-called reverse engineering, that is by starting with the known product and working backward to divine the process which aided in its development or manufacture." Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470, 476, 94 S.Ct. 1879, 40 L.Ed.2d 315 (1974); accord, Bonito Boats, Inc. v. Thunder Cradt Boats, Inc., 489 U.S. 141, 155-58, 109 S.Ct. 971, 103 L.Ed.2d 118 (1989) (trade secret law does not protect information that can be derived by reverse engineering from products and information publicly available).
Excellent discussion on the law of trade secrets relating to tolerances and dimensions in manufacturing drawings. The court asked Flotec's expert witness, Dr. Allen T. MacDonald, to identify features disclosed on the Flotec drawings given to SRI that satisfied two criteria: first, the dimension or tolerance or other characteristic of the product was not disclosed by the final product and thus was not available by reverse engineering, and second, the particular dimension is critical to the functioning of the device. Tr. 278. The second criterion keeps the focus on features of the product that actually add value by being secret.
From among hundreds of dimensions and tolerances on the Flotec drawings given to SRI, Dr. MacDonald could identify only four features that satisfied both criteria. Examining those four features, the Court concluded that none of this information qualified as protected trade secret information under the Indiana Trade Secrets Act.
Even if any of the information that Flotec disclosed to SRI qualified as a trade secret, the weight of the evidence presented here shows that Flotec's disclosure of that information to SRI was outside the scope of any confidential relationship, so that Flotec's disclosure destroyed the secrecy of all the information. That disclosure and loss of secrecy provide an independent reason for concluding that Flotec is unlikely to prevail on the merits of its trade secret claim.
The basic problem for Flotec in this case is that it did not take even the most elementary steps to protect the technical drawings it provided to SRI. The drawings did not bear a legend that they were confidential. Flotec did not ever tell SRI that it considered the information confidential, let alone obtain a confidentiality agreement when it provided the information to SRI, and Flotec never sought assurances from SRI that it would keep the information confidential. There also is no evidence that SRI ever gave Flotec any indication that it believed the information was confidential or that it intended to keep the information confidential. Even after the negotiations broke down in early 1996, Flotec never asked SRI to return the drawings.
Flotec has not shown that it is likely to succeed on the merits of its claim for misappropriation of trade secrets. It has not shown the existence of truly valuable information that is not disclosed by the product itself; it has not shown that it exercised reasonable measures to protect the alleged trade secrets; and it has not shown that SRI used improper means to obtain information about Flotec's product.
DISCLOSURE OF INFORMATION OUTSIDE CONFIDENTIAL RELATIONSHIP DESTROYS TRADE SECRET STATUS OF INFORMATION.
23. Twin Vision Corporation v. Bellsouth Communication Systems, Inc., 1998 WL 385135 (9th Cir. Cal.) (June 22, 1998).
Twin Vision Corporation ("Twin Vision") sued Bellsouth Communications Systems, Inc. ("Bellsouth") under California's Uniform Trade Secrets Act ("UTSA"), Cal.Civ.Code § 3426, alleging that Bellsouth, Bellsouth's product manager, and two individual defendants who serviced products for Bellsouth, Stuart Rose and Timothy Kenyon, (collectively "defendants") misappropriated Twin Vision's trade secrets in performing upgrades on products distributed by Bellsouth. Twin Vision had acquired the alleged trade secret assets from Microvoice.
The district court granted summary judgment in favor of defendants on Twin Vision's UTSA claim after finding that Twin Vision never obtained the rights to any of Microvoice's intellectual property. At most, Twin Vision obtained a secured interest in Microvoice intellectual property (e.g. trade secrets).
We cannot agree with the district court's reasoning. The record indicates that State Financial, the secured party, properly disposed of Microvoice's "general intangibles" pursuant to U.C.C. § 9-504, Section 9-504 states, "When collateral is disposed of by a secured party after default, the disposition transfers to a purchaser for value all of the debtor's rights therein, discharges the security interest under which it is made and any security interest or lien subordinate thereto."
Nevertheless, the Ninth Circuit Court of Appeals affirmed the district court's summary judgment ruling with respect to Twin Vision's UTSA claim because Twin Vision has not shown that defendants misappropriated its purported trade secret.
A plaintiff who seeks relief for misappropriation of trade secrets must identify the trade secrets and carry the burden of showing that they exist. Mai Sys. Corp., 991 F.2d at 522 (citing California cases). It is insufficient for a plaintiff to state, for example, that its software "contain[s] valuable trade secrets." Id. Here, Twin Vision does precisely that with respect to several of its alleged trade secrets. See Appellant's Opening Brief at 16 (conclusorily asserting that its engineering change orders ("ECOs"), schematics, and software constitute trade secrets). The only trade secret that Twin Vision specifically identifies in its complaint and its brief is its factory access code, which it describes as "necessary to activate the optional features of the Apex product." Exh. 1 § 34 (complaint). Therefore, the Court of Appeals limited its review to only this one specific trade secret.
Twin Vision clearly fails in its proof of misappropriation. There is no competent evidence in the record that defendants actually misappropriated the purported trade secret.
Specifically, Twin Vision asserts that a "feature upgrade" cannot be done without the use of the factory access code or with EPROMS that it claims have copyright protection. Even assuming that as true, we find no record evidence that Global or anyone else performed a "feature upgrade" on any of the Apex call processors at Bellsouth.
Twin Vision also alleged that Bellsouth conspired with former Microvoice employee, Stuart Rose and Timothy Kenyon, to misappropriate Twin Vision's trade secrets. There is simply no evidence in the record to support Twin Vision's allegation that Bellsouth, Rose and Kenyon entered into an agreement to appropriate trade secret information.
Twin Vision's conspiracy claim must fall in tandem with its UTSA claim. As one California court has explained, "No cause of action for conspiracy can exist unless 'the pleaded facts show something was done which, without the conspiracy, would give rise to a right of action.'" Lyons v. Security Pac. Nat'l Bank, 40 Cal.App. 4th 1001, 1019, 48 Cal.Rptr.2d 174 (1995) (quoting Agnew v. Parks, 172 Cal.App.2d 756, 762, 343 P.2d 118 (1959)). Here, as explained above, the pleaded facts do not show that "something was done which ... would give rise to a right of action." Accordingly, no cause of action for conspiracy can exist.
NO EVIDENCE OF MISAPPROPRIATION; CONSPIRACY CLAIM FAILS TOO.
24. Early, Ludwick & Sweeney, LLC v. Steele, 1998 WL 516156 (Conn.Super.) (August 7, 1998).
Plaintiff, Early, Ludwick & Sweeney, LLC ("ELS"), a law firm specializing in pediatric lead paint poisoning cases, brings suit against John-Henry Steele ("Steele"), an attorney formerly employed by ELS, and the law firm of Brown, Welsh & Votre, P.C. ("BWV") for misappropriation of trade secrets in violation of Connecticut's Uniform Tarde Secrets Act, ("UTSA") General Statutes, Sections 35-50ff.
ELS's specialty in pediatric lead poisoning cases had its genesis in the beginning of this decade and the firm has acquired experience, expertise and a client base in this area of the law. ELS has over 100 such cases pending. Defendant Steele began working for the firm circa 1991 and his practice was predominently in the area of pediatric lead poisoning cases.
At the time of his departure, Steele was in charge of the firm's lead poisoning cases.
By letters dated January 2, 1998, Steele notified sixteen clients of ELS that he had moved from ELS to BMV. ELS argued that the names, addresses and telephone numbers, guardians, blood levels, and insurance coverage of said clients constitute a trade secret, namely a client list, misappropriated by defendants. Plaintiff loses.
Twelve of the sixteen clients' matters had been put into suit; their names and their claims are public knowledge. They were certainly known to the defendants in their respective law suits. Plaintiff obtained many of its clients by referral from the Connecticut Citizen's Action Group (CCAG), a nonprofit advocacy organization concerned, inter alia, with aiding victims of lead paint poisoning. There was no showing that CCAG considered the names and addresses of, or information relating to, people it referred to plaintiff as trade secrets, nor that such information would not be available to others on inquiry to CCAG. Of the four clients whose cases were not in suit, two elected to stay with ELS. ELS turned the files of a third over to Steele and Steele took the remaining file from ELS openly and with the knowledge of ELS attorneys.
Defendant Steele acquired the client list by proper means, in the course of his work for plaintiff. Having worked on the cases in question and established relationships with these clients, Steele was entitled to notify them of his change of employer and to signify his willingness to represent them if they so desired.
Were the court to grant the relief requested, the clients' right to change counsel would be restricted. This would clearly be contrary to public policy. For the foregoing reasons, plaintiff's claim must fail. There being no violation of the Uniform Trade Secrets Act, there can be no wilful violation of the same.
A LAW FIRM'S CLIENT INFORMATION IS NOT PROTECTABLE AS A TRADE SECRET.
25. The Ages Group, L.P. v. Raytheon Aircraft Company, Inc., 1998 WL 477413 (M.D. Ala.) (August 11, 1998).
AGES is a provider of aviation parts and services. Raytheon is a competitor of AGES in the aircraft maintenance and support business. Up until 1995, Raytheon had the Army, Navy, Air Force Life Cycle Contractor Support ("LCCS") contract for maintenance of C-12 aircraft. In 1995, the United States competitively bid this contract. AGES competed with Raytheon for the entire LCCS contract.
In preparing its proposal, AGES hired several companies and subcontractors and eventually submitted a bid for the LCCS contract. On July 3, 1996, the government requested a Best and Final Offer from AGES and Raytheon to be submitted by July 22, 1996. AGES's final bid was being put together by The Libertatia Associates, Inc. ("TILA") in Slocomb, Alabama.
Thereafter, Raytheon retained a private investigator ("Wackenhut") to conduct surveillance operations on TILA in Slocomb, Alabama. There was a factual dispute whether Wackenhut investigations were merely observing activities from an automobile parked on a public street or conducting electronic surveillance activities. Residents of Slocomb, Alabama testified that they observed a woman on the passenger side of the car wearing a headset and the woman was speaking into a microphone. The Court therefore denied Defendants' motion for summary judgment regarding Plaintiffs' claims based on violation of federal and state surveillance statutes.
With respect to the trade secret misappropriation claim under the Alabama Trade Secrets Act, Alabama Code § 8-27-3(1), the Plaintiff (AGES) relied on the same evidence to establish that there is a question of fact as to whether Wackenhut agents were using improper means such as eavesdropping in order to intercept oral communications.
While it may be that there is a question of fact as to whether oral communications were intercepted, to violate this statute intercepted information would have to meet the definition of "trade secret" under Alabama law. Under Alabama law, a "trade secret" is used or intended for use in an business; is included or embodied in a formula, pattern, compilation, computer software, drawing, device, method, technique or process; is not publicly known; cannot be readily ascertained or derived from publicly available information; is the subject of efforts that are reasonable under the circumstances to maintain its secrecy; and has significant economic value. Ala.Code § 8-27-2 (1993). There has been no evidence presented to this court which suggests that any oral communications which might have been intercepted meet the definition of "trade secret."
Nevertheless, the trial court denied Defendants' motion for summary judgment on the trade secrets claim too because there was other evidence that a Schedule B appendix to Plaintiff's bid for the government contract was stolen by Wackenhut agents and given to Raytheon. It was undisputed that Raytheon had in possession of this Schedule B, but Wackenhut contends that Raytheon's copy was obtained through a government debriefing.
ELECTRONIC SURVEILLANCE DOES NOT CONSTITUTE A TRADE SECRET VIOLATION IF THE INFORMATION IS NOT A TRADE SECRET.
26. Injection Research Specialists, Inc. v. Polaris Industries, L.P., 1998 WL 536585 (Fed. Cir. Colo.) (August 13, 1998).
Injection Research was established by inventor Ron Chasteen and investor John Balch to develop an electronic, fuel injected snowmobile engine. Chasteen, a former snowmobile dealer, developed his engine in response to certain problems he had experienced with carbureted, two-stroke engines at high altitudes and warm mountain-side temperatures.
In July 1987, Research contacted Polaris, a major manufacturer of recreational vehicles including snowmobiles. The initial solicitation package sent by Injection Research included twelve color photographs of Chasteen's prototype as well as a letter discussing the benefits of Chasteen's system, requesting a meeting, and explaining that the project was "discrete." Polaris responded by letter dated August 20, 1987, stating that it was "pleased to receive ideas from outside sources," but that "in order that the proprietary interests of Polaris Industries and your interests and ideas, inventions and other intellectual property be protected, we have developed a policy of handling such ideas which is the only basis upon which we will agree to evaluate your ideas." Accordingly, Polaris enclosed its written "Policy" (the "Statement of Policy") which stated, inter alia, that Polaris "cannot agree to accept any submissions on a confidential basis" and that "[a]ll disclosures submitted must be in writing... Failure to [reduce an oral conversation to writing] shall invalidate the oral conversation." The Statement of Policy was duly executed by the parties with Injection Research adding by letter that it wished to have its materials returned of Polaris had "no interest" and further noting that it was currently applying for a patent on the innovation.
On September 11 and 12, 1987, Chasteen and Balch met with various Polaris officers and engineers at the Polaris testing facility in Roseeau, Minnesota. Injection Research presented testimony at trial that the parties agreed to a confidential relationship at that meeting, although Polaris contended that such a relationship was simply inferred by Injection Research and never confirmed in writing.
Three days after this meeting, Charles Baxter, Polaris's vice-president of engineering who had been involved in the discussions with Injection Research, traveled to Japan to meet with representatives of Fuji.
On October 12, 1987, Injection Research sent Polaris a written business proposal for Polaris to be an exclusive licensee. Injection Research also disclosed that it was filing a patent application to cover its electronic, fuel injection system. This patent application was in fact field on November 12, 1987, and issued on February 20, 1990, as United States Patent No. 4,901,701 (the "'701 patent") entitled a "Two-Cycle Engine With Electronic Fuel Injection."
On December 16, 1987, Polaris responded that it did not wish to enter into a licensing agreement at that time because "systems similar in theory to yours are being tested and developed at a number of other sources."
In November 1989, Polaris publicly announced that it had produced the world's first snowmobile with an electronic, fuel injected engine. Polaris subsequently recorded sales of these snowmobiles totaling approximately $250 million and became the market leader in snowmobile sales.
Thereafter, Injection Research filed a trade secret misappropriation suit against Polaris and Fuji and the case was tried to a jury.
The jury assessed actual damages of $24 million against Polaris and $15 million against Fuji as well as $10 million of exemplary damages against Polaris and $8 million against Fuji. The jury was also asked to quantify the amount of damages arising from the misappropriation of trade secrets before February 20, 1990, the date of issuance of the '701 patent. The jury found that $2.01 million of actual damages against each defendant arose from misappropriation of trade secrets prior to that date.
The district court granted Fuji's motion to the extent of ordering a remittitur of the jury's damages award against Fuji to $11.6 million. This order included a vacatur of the exemplary damages award against Fuji. The court reasoned that the vacatur was necessary because Injection Research "failed to provide evidence from which the jury could have concluded beyond a reasonable doubt that Fuji acted with wilful and wanton disregard for [Injection Research's] rights and feelings."
Both parties appealed to the Federal Circuit.
Polaris and Fuji argue that any trade secrets that Injection Research may have possessed were no longer trade secrets after the '701 patent issued on February 20, 1990. In particular, they argue that CUTSA per se precludes trade secret damages after a patent issues, that the burden of proving that the trade secrets thereafter remained substantially secret was shifted to Injection Research, that the district court, abusing its discretion, prevented them from putting on evidence regarding the '701 patent, and that the jury was improperly instructed as to the patent's effect.
The Federal Circuit rejected this argument. The '701 patent was an affirmative defense.
That the jury here was not persuaded that the '701 patent disclosed Injection Research's claimed trade secrets is not grounds for reversal. Instead, given the sparse amount of testimony regarding the contents of the '701 patent as well as the fact that the '701 patent was not even put into evidence, it is hardly surprising that the jury chose to reject this affirmative defense.
Polaris and Fuji also argued that the "Statement of Policy and the Disclosure Agreement" barred Injection Research's trade secrets claim as a matter of law because no duty of confidentiality was created.
The Federal Circuit rejected this assignment of error too. First, the Federal Circuit found the policy language to be ambiguous: "We are not persuaded that any of the district court's rulings of law on this issue are erroneous, nor are we persuaded that a reasonable jury could have not found the existence of a confidential relationship from the totality of the evidence. As an initial matter, the Statement of Policy and Disclosure Agreement are far from unambiguous. For instance, it is difficult to discern the precise meaning of paragraph four of the Statement of Policy which reads "oral conversations will be permitted only in the event that such conversations are reduced to writing and furnished to Polaris Industries, Inc. by the submitter. Failure to do so shall invalidate the oral conversation." The Disclosure Agreement contemplates protection of "proprietary information," at least if so marked, which seems inconsistent with the Statement of Policy's pronouncement that Polaris cannot ever "accept any submissions on a confidential basis."
Nevertheless, it was proper for the jury to find an implied obligation of confidentiality based upon the totality of the circumstances.
The conduct of the parties suffices to support the jury's finding of a confidential relationship. CUTSA permits the duty of confidentiality to be either implied or express. As CUTSA § 102(2)(b)(II)(B) provides: "Misappropriation" means ... [d]isclosure or use of a trade secret without express or implied consent by a person who ... [a]t the time of the disclosure or use, knew or had reason to know that his knowledge of the trade secret was ... [a]cquired under circumstances giving rise to a duty to maintain its secrecy or limit its use.
See also Kodeky Elecs., Inc. v. Mechanex Corp., 486 F.2d 449, 453-54, 179 USPQ 770, 773 (10th Cir. 1973); Julius Hyman & Co. v. Velsicol, 123 Colo. 563, 233 P.2d 977, 1003 (Colo. 1951); Mineral Deposits Ltd. v. Zigan, 773 P.2d 606 (Colo.App. 1988) (all recognizing that a confidential relationship may be implied from the conduct of the parties). Under this statutory standard, the relevant inquiry is whether Polaris "knew or had reason to know" that it was acquiring information from injection Research under circumstances giving rise to a duty to maintain its secrecy or limit its use. CUTSA § 102(2)(b)(II)(B).
Alternatively, there was also evidence in the record that Polaris had hired Gerard Maier who had worked as an independent contractor for Injection Research with access to the Plaintiff's trade secrets under a confidentiality agreement.
Thus, the jury could have found that the hiring of Maier was an independent means by which Polaris obtained Injection Research's trade secrets. Any agreements between the parties would, of course, be inapplicable to information obtained by Polaris through Maier. The obtaining of information from Maier might properly be considered "misappropriation" under CUTSA § § 102(2)(II)(C), which encompasses the disclosure or use of information that the receiver knows or has reason to know was "[d]erived from or through a person who owed a duty to the person seeking relief to maintain its secrecy or limit its use." Because Maier was hired for the purpose of developing an electronic, fuel injected, two-stroke engine, had previously worked on such a project for Injection Research, had signed a confidentiality agreement with Injection Research, and because Polaris did not inform Injection Research of his hiring, it would not be unreasonable for the jury to have found that Maier provided an independent source for trade secret misappropriation.
There was substantial evidence in the record from which a reasonable jury could find that Fuji had reason to know that it was acquiring Injection Research's trade secrets. See Cybor Corp. v. FAS Techs., Inc., 138 F.3d 1448, 1454, 46 USPQ2d 1169, 1172 (Fed.Cir. 1998) (in banc) ("[w]e can reverse a denial of a motion for JMOL only if the jury's factual findings are not supported by substantial evidence or if the legal conclusions implied from the jury's verdict cannot in law be supported by those findings."). Such evidence includes the uncanny similarity between the Fuji engine and that designed by Injection Research, including replicating a mistake in the fuel map. The jury could also have taken account of Fuji's possession of the power curve derived from testing the Injection Research engine prototype. Accordingly, we do not disturb the district court's denial of Fuji's motion for judgment as a matter of law.
With respect to damages, the Federal Circuit rejected Fuji's argument that the damages award should be reduced from $11.6 million down to $1.35 million based upon Fuji's claim that this was the correct amount of profits attributable to sales of engines equipped with the electronic fuel injection system.
Instruction 38 correctly permitted the jury to calculate damages by offsetting sales "not attributable to the trade secret, such as other features of the products, demand for defendants' products without the EFI technology, defendants' sales and marketing techniques, their distribution system and their reputation and goodwill." We agree too with the district court that Fuji had the burden of proving any such offsets in damages. See R. Milgrim, 3 Trade Secrets § 15.02[c] (1997). Accordingly, we find no error of law in the methodology of damages calculation given to the jury and we are not persuaded that the evidence was insufficient to support the jury's verdict. See Rolls-Royce v. GTE Valeron Corp., 800 F.2d 1101, 1107, 231 USPQ 185, 188 (Fed.Cir. 1986) ("Where there are two permissible views of evidence, the fact-finder's choice between them cannot be clearly erroneous.").
The Federal Circuit reversed the trial court on the issue of statutory prejudgment interest.
Colorado courts appear to regard trade secrets as "property" for which there is prejudgment interest in cases of misappropriation. See, e.g., City of Northglen v. Grynberg, 846 P.2d 175, 183 (Colo. 1993) (referring to trade secrets as "property"); Julius Hyman & Co. v. Velsicol Corp., 123 Colo. 563, 233 P.2d 977, 1016-17 (Colo. 1951) (allowing prejudgment interest on trade secret misappropriation damages, although decided prior to the enactment of the statute at issue. See Fasing v. LaFond, 944 P.2d 608, 615 (Colo.Ct.App. 1997) (noting that the prejudgment interest statute is to be "liberally construed").
Polaris argued that the damages awarded to Injection Research were restitutional, rather than compensatory and therefore there was no right to statutory prejudgment interest. The Federal Circuit rejected this argument. It was not apparent that the damages were restitutional in nature. Instruction 36 offered the jury a choice of three methodologies for determining damages: "(1) any unlawful gains, profits or benefits by defendants; (2) the value to plaintiffs of any of plaintiffs' confidential information taken by defendants; or (3) a reasonable royalty for any improper use of trade secrets." Damages calculated under any of these three methods would qualify for prejudgment interest under the two separate bases for recovery set forth int eh Colorado statute. See,
Mesa Sand, 776 P.2d at 364 (noting that Colo.Rev.Stat. § 5-12-102(a) and first methodology satisfies section 5-12-102(1)(a) ("the gain or benefit realized by the person withholding such ... property"), while the second and third methodologies qualify for prejudgment interest under section 5-12-102(1)(b) ("all moneys or the value of all property after they are wrongfully withheld").
DAMAGES IN INVENTOR (IDEA SUBMISSION CASE AFFIRMED BY FEDERAL CIRCUIT; IMPLIED OBLIGATION OF CONFIDENTIALITY; REASON TO KNOW STANDARD; PREJUDGMENT INTEREST AWARDED.
27. T-N-T Motorsports, Inc. v. Hennessey Motorsports, Inc., 965 S.W.2d 18 (Feb. 12, 1998).
Hennessey Motorsports, Inc. sued former employee for misappropriation of trade secrets concerning employer's business of selling high performance upgrades for Dodge Viper Roadster and Dodge Viper GTS Coupe.
In April 1994, Hennessey hired Joe Terpstra. In 1996, Terpstra incorporated a part-time body shop called T-N-T Motorsports, Inc.
On May 20 1997, Terpstra terminated his employment and began full-time employment with T-N-T. Terpstra told a private investigator hired by appellee that the T-N-T upgrades were identical to the Venom upgrades, that he had learned how to create these packages as an employee of Hennessey and that he offered the same upgrades as appellee but at a better price. The trial court granted a preliminary injunction and T-N-T Motorsports, Inc. appealed.
A trade secret mat consist of any formula, pattern, device, or compilation of information that is used in one's business, and which gives one an opportunity to obtain an advantage over competitors who do not know or use it. Computer Assoc. Int'l, Inc. v. Altai, Inc. 918 S.W.2d 453, 455 (Tex. 1996); Rugen, 864 S.W.2d at 548. "A trade secret may be a device or process which is patentable; but it need not be that. It may be a device or process which is clearly anticipated in the prior art or one which is merely a mechanical improvement that a good mechanic can make." K & G Oil Tool & Serv. Co. v. G & G Fishing Tool Serv., 158 Tex. 594, 314 S.W.2d 782, 789 (1958). When money and time are invested in the development of a procedure or device that is based on an idea which is not new to a particular industry, and when that certain procedure or device is not generally known, trade secret protection will exist. K & G Oil Tool, 314 S.W.2d at 785; Gonzales, 791 S.W.2d at 264. Further, when an effort is made to keep material important to a particular business from competitors, trade secret protection is warranted. Rugen, 864 S.W.2d at 552; Gonzales, 791 S.W.2d at 265. Items such as customer lists, pricing information, client information, customer preferences, buyer contains, market strategies, blueprints, and drawings have been shown to be trade secrets. Miller Paper, 901 S.W.2d at 601; American Precision, 764 S.W.2d at 278.
The word "secret" implies that the information is not generally known or readily available. Rugen, 864 S.W.2d at 552; Gonzales, 791 S.W.2d at 264. Courts have refused to give trade secret protection when the material or procedure sought to be protected has been publicly disclosed. Gonzales, 791 S.W.2d at 264. The mere fact that knowledge of a product may be acquired through inspection, experimentation, and analysis does not preclude protection from those who would secure that knowledge by unfair means. K & G Oil Tool, 314 S.W.2d at 788; Weed Eater, Inc. v. Dowling, 562 S.W.2d 898, 901 (Tex.Civ.App.--Houston (1st Dist.) 1978, writ ref'd n.r.e.).
Applying these standards the Texas Court of Appeals affirmed the injunction. The idea of upgrading the performance of any vehicle is not a new idea. However, the specific means by which appellee upgrades the performance of the Vipers is not common knowledge. Hennessey explained that through years of trial and error, appellee builds the "fastest normally aspirated Vipers." He knows which components work and which do not. Appellee spent a substantial amount of time and money developing the upgrade packages that would fit the exact needs of its clientele. Henenssey testified that the component parts used by appellee in its upgrade packages are confidential. Many components are not available and need to be built from the ground up. Although materials for these parts are purchased from outside vendors, most parts are then modified to fit together and work in concert with all the other components to achieve the desired horsepower, so that the car performs reliably and is cost efficient and profitable. Even Hennessey's customers are not told the exact specifications of the work done on their vehicles.
The Terpstras did not, and were not required to, sign any agreement not to compete or confidentiality agreement. But a former employee may not use, for his own advantage and to the detriment of his former employer, confidential information or trade secrets acquired by or imparted to him in the course of his employment. Rugma, 864 S.W.2d at 551. "Injunctive relief is recognized as a proper remedy to protect confidential information and trade secrets." Id. The record supports the court's conclusion that appellee demonstrated a liklihood of success on the merits of its claims against appellants.
Appellants argue that the injunction is not limited to appellee's alleged trade secrets or confidential information. Instead, appellants assert, the injunction restrains not only them, but other nondisclosed and nonascertainable entities from disclosing, using, selling, or testing any information related to the two types of Dodge Vipers or the Mitsubishi 3000 GT. Appellants also contend the injunction prevents them and various other parties from working on or providing any type of service for Dodge Viper GTS, Dodge Viper Roadster, or Mitsubishi 3000 GT vehicles. Appellants assert that, read literally, the injunction would prevent former customers of appellants from even changing the oil or rotating the tires on their own cars.
The Court of Appeals confirmed that the injunction was overbroad and modified the injunction from "any information" to "any Hennessey Trade Secret information."
INJUNCTION TO PROTECT TRADE SECRETS AFFIRMED; NO WRITTEN AGREEMENT REQUIRED.
28. Vermont Microsystems, Inc. v. Autodesk, Inc., 138 F.3d 449, (Ct. App. 2nd Cir., Feb. 30, 1998).
The facts underlying this dispute were previously before the Second Circuit in its prior opinion reported at 88 F.3d 142. This appeal related to the trial court's increase of the "unjust enrichment" award.
If the trade secret accounts for only a portion of the profits earned on the defendant's sales, such as when the trade secret relates to a single component of a product marketable without the secret, an award to the plaintiff of defendant's entire profit may be unjust.
Section 3426.3(b) of the California Uniform Trade Secrets Act (the law applicable in the case), provides that "[i]f neither damages nor unjust enrichment caused by misappropriation are provable, the court may order payment of a reasonable royalty for no longer than the period of time the use could have been prohibited." Cal.Civ.Code § 3426.3(b) (West 1997).
The magistrate judge found that "if the parties had negotiated in good faith, they would have agreed on a price of $20 per unit for all R12 Windows units," the design software at issue. Use of this figure resulted in a reasonable royalty for the display list drivers of $6,470,380. To this, the magistrate judge added $1,283,030 as a reasonable royalty for misappropriation of a related technology called "triangle shading" which facilitates by coloration the representation of objects on a display screen. The total judgment, entered on December 23, 1996, was $7,753,410 plus interest from the date of the 1994 judgment.
Following the entry of the December 23, 1996 judgment, VMI moved to amend the judgment by increasing the display driver award from $6,470,380 to $20,359,017, stressing the alleged desirability of creating a deterrent effect on future violators.
In response to VMI's exhortations, the magistrate judge "doubled" his original award for misappropriation of the display list driver software from $6,470,380 to $12,926,360. "Under all the circumstances of this case, the Court finds that the reasonable royalty should be doubled to reflect the cost of infringement for R12 Windows and to deter Autodesk from electing to risk infringement instead of engaging in negotiations with VMI or creating a new driver. This results in a total award for use of VMI's trade secrets in R12 Windows of $12,926,360 (323,159 x $40)."
The Second Circuit Court of Appeals reverses. Under Section 3426.3(a) of the Uniform Trade Secrets Act, a victim of misappropriation may recover from both his actual loss and the wrongdoer's unjust enrichment but only to the extent that the latter is not taken into account in computing the former. This comports with the general principle that precludes double recovery.
Furthermore, a punitive deterrent award does not fall within the description of "actual loss caused by misappropriation" for which recovery may be had under Section 3426.3(a). Provision for an award of exemplary damages is contained in section 3426.3(c), which permits such an award only in cases of "willful and malicious misappropriation." The magistrate judge has held consistently that Autodesk's conduct was not willful and malicious and therefore VMI was not entitled to punitive or exemplary damages.
The Court of Appeals therefore reinstated the original award of $7,753,410.
REASONABLE ROYALTY CALCULATION CANNOT BE PUNITIVE UNDER THE UNIFORM TRADE SECRETS ACT
29. Micro Data Base Systems, Inc. v. Nellcor Puritan Bennett, Inc., 1998 WL 681440 (N.D. IN, Aug. 3, 1998).
MDBS is a data base software manufacturer located in West Lafayette, Indiana. Nellcor is now a subsidiary of Mallinckrodt, Incorporated, one of the world's largest medical supply manufacturers, and is the result of a merger between Nellcor, Incorporated and Puritan-Bennett Corporation in 1995. In 1988, MDBS and Nellcor, as its predecessor Puritan-Bennett, negotiated an agreement which would allow Nellcor to use MDBS' database software, then known as "MDBS III," in its own products. Therefore, a trade secrets misappropriation claim/copyright infringement claim was asserted by MDBS against Nellcor and Nellcor moved, inter alia, to dismiss the trade secret misappropriation claim on preemption grounds.
Although the Seventh Circuit has not directly addressed the issue of copyright preemption, the Tenth Circuit has considered whether the Colorado Trade Secrets Act, which is identical to the Indiana act, is preempted by 17 U.S.C. § 301 in Gates Rubber Co. v. Bando Chemical Indus., Ltd., 9 F.3d 823 (10th Cir. 1993). Applying the logic of Computer Associates Int'l, Inc. v. Altai, Inc., 982 F.2d 693 (2nd Cir. 1992) and Trandes Corp. v. Guy Atkinson Co., 996 F.2d 655 (4th Cir. 1993), the Tenth Circuit found that the Colorado Trade Secrets Act contained an additional element, specifically breach of trust, which was not required by the Copyright Act, thus exempting the Trade Secrets Act from preemption under the Copyright Act. 9 F.3d at 847-48. As the Colorado and Indiana acts are identical (both are based on the Uniform Trade Secrets Act), the Tenth Circuit's decision is applicable here as well. Thus, the trade secrets claim is not preempted.
CLAIM FOR TRADE SECRET MISAPPROPRIATION UNDER INDIANA TRADE SECRETS ACT ALLEGING MISUSE OF COPYRIGHTED SOFTWARE NOT PREEMPTED BY FEDERAL COPYRIGHT ACT.
30. IMAX Corporation v. Cinema Technologies, Inc., 152 F.3d 1161 (Ct. App. 9th Cir., Aug. 19, 1998).
Imax is the world's largest supplier of "rolling loop" projectors, and until recently it was the only such supplier. In 1971, the Patent and Trademark Office issued the first of several patents relating to the "rolling loop" projector (the " '073 patent"). Imax acquired the rights to several of these patents and went on to manufacture and sell over 100 "rolling loop" projectors worldwide.
The Imax patents did not disclose everything needed to mass-produce its "rolling loop" projector.
Imax's '073 patent expired in August 1988.
In June 1988, mechanical engineer Neil A. Johnson, along with David Mariani and Keith Merrill, formed NJ Engineering with the goal of developing a large format projector that would compete with Imax.
Mariani and Merrill gave Johnson copies of several of the Imax patents and a service manual obtained from an Imax customer. This manual was not marked confidential. In July 1988, Johnson visited the Imax Theatre at the Los Angeles Museum of Space and Industry. He spent several hours in the projection booth, in the presence of the chief projectionist, observing the operation of the Imax projector.
In September 1990, NJ Engineering and its subsidiary, World Odyssey, Inc., unveiled its "rolling loop" projector at a trade show in Amsterdam. Almost three years later, in June 1993, Johnson left NJ Engineering and formed Cinema Technologies, Inc. ("CTI"). Shortly thereafter, CTI entered the market with its own "rolling loop" projector.
On August 31, 1994, Imax filed its suit against CTI and Johnson in which it alleged misappropriation of trade secrets and unfair competition. Imax originally named NJ Engineering as a defendant; however, it later dismissed them without prejudice. Thereafter, CTI moved for summary judgment on the grounds that Imax: (1) failed to identify any trade secrets; (2) placed all of its alleged trade secrets in the public domain; (3) failed to make reasonable efforts to maintain the confidentiality of its alleged trade secrets; and (4) failed to demonstrate any misappropriation. The trial court granted summary judgment dismissing Imax's trade secret misappropriation and unfair competition claims and Imax appealed.
A plaintiff seeking relief for misappropriation of trade secrets "must identify the trade secrets and carry the burden of showing that they exist." MAI Sys. Corp. v. Peak Computer, Inc., 991 F.2d 511, 522 (9th Cir. 1993). The plaintiff "should describe the subject matter of the trade secret with sufficient particularity to separate it from matters of general knowledge in the trade or of special knowledge in the trade or of special knowledge of those persons ... skilled in the trade." Universal Analytics v. MacNeal-Schwendler Corp., 707 F.Supp. 1170, 1177 (C.D.Cal. 1989) (citation omitted) (emphasis added), aff'd, 914 F.2d 1256 (9th Cir. 1990).
Imax while conceding that its patents revealed the existence and manner of operation of the projector's various components, nevertheless argued that summary judgment was improper because the patents did not reveal the components' precise dimensions and tolerances. However, Imax never identified the precise dimensions and tolerances in violation of a previous Court Order to do so.
The 9th Circuit Court of Appeals agreed with the District Court that Imax's Fourth Supplemental Responses failed to indicate precisely which dimensions and tolerances were trade secrets. Under these facts, reasonable specificity could only be achieved by identifying the precise numerical dimensions and tolerances as trade secrets. We reject Imax's contention that use of the catchall phrase "including every dimension and tolerance that defines or reflects that design" achieved the level of specificity necessary to identify the numerical dimensions and tolerances as trade secrets. See Forro Precision, Inc., 673 F.2d at 1057; see also Universal Analytics, 707 F.Supp. at 1177. Dismissal of the trade secret claim was affirmed.
"We further note that because Imax's trade secrets claim involves a sophisticated and highly complex projector system, it is unlikely that the district court or any trier of fact would have expertise in discerning exactly which of the projector system's many "dimensions and tolerances" were trade secrets. Moreover, CTI could not be expected to prepare its rebuttal to Imax's trade secrets claim without some concrete identification of exactly which "dimensions and tolerances" Imax alleged were incorporated into CTI's own projector system."
However, the 9th Circuit reversed the district court's entry of summary judgment on Imax's unfair competition claim.
Under California law a plaintiff can maintain a common law unfair competition claim regardless of whether it demonstrates a legally protectable trade secret. In Self Directed Placement Corp. v. Control Data Corp., 908 F.2d 462, 466-67 (9th Cir.1990) we recognized this principle and held that a plaintiff could state an unfair competition claim based upon the two separate traditional tort causes of action, breach of confidential relationship and common law misappropriation.
The unfair competition claim of Imax rests on a fusing of the separate torts of common law misappropriation and breach of confidentiality. Its common law misappropriation claim seeks to hold Johnson and CTI liable for Johnson's allegedly improper actions during his two-week inspection at Great America. At summary judgment, Imax also submitted evidence indicating that each of its customers is bound by a confidentiality agreement. Imax pointed out that Johnson admitted that shortly after leaving NJ Engineering, he learned that the confidentiality restriction in the Imax lease agreements covered projectors even beyond the term of the lease.
The 9th Circuit held that Imax submitted substantial evidence indicating that Johnson and CTI did not create the CTI projector by "fair and honest means such as by independent invention, accidental disclosure or by so-called reverse engineering." Chicago Lock Co. v. Fanberg, 676 F.2d 400, 404 (9th Cir. 1982) (citation omitted).
A competitor becomes a party to a breach of confidential relationship where the competitor accepts information from one who is under a duty not to disclose it and the information is received either with actual knowledge of such facts or under circumstances giving rise to a duty to inquire further. See Ralph Andrews Productions, Inc. v. Paramount Pictures Corp., 222 Cal.App.3d 676, 682-83, 271 Cal.Rptr. 797 (Cal.Ct.App.1990).
Construing the relevant evidence in the light most favorable to Imax, we hold that genuine issues of fact remain as to whether Johnson had constructive knowledge that Great America's senior manager did not have the right to permit unlimited access to the Imax projector--much less the photographing, measuring, and taking apart of the Imax projector. At the very least, Imax raised "facts which a jury could determine would have made a reasonable person suspicious." See Ralph Andrews Productions, Inc., 222 Cal.App.3d at 684, 271 Cal.Rptr. 797.
NINTH CIRCUIT DISMISSES TRADE SECRETS CLAIM BUT UPHOLDS "UNFAIR COMPETITION" CLAIM.
31. United States v. Kai-Lo HSU, 155 F.3d 189 (Ct. App. 3rd Circuit, Aug. 26, 1998).
On July 10, 1997, a federal grand jury indicted Kai-Lo Hsu, Chester S. Ho, and Jessica Chou (collectively, "the defendants") for their involvement in an alleged conspiracy to steal corporate trade secrets from Bristol-Myers Squibb. The indictment alleges that the defendants sought to obtain the processes, methods, and formulas for manufacturing Taxol, an anti-cancer drug produced by Bristol-Myers and regarded by the company as a highly valuable trade secret.
In this appeal the Third Circuit Court of Appeals explored for the first time the relationship between the confidentiality provisions of the newly-enacted Economic Espionage Act of 1996, 18 U.S.C. § 1831, et seq., and principles of criminal law regarding discovery and disclosure of material evidence.
According to the indictment, the defendants' conspiracy began on June 7, 1995, when Chou, the Manager of Business Development for Yuen Foong Paper Company in Taiwan ("YFP"), requested information about Taxol from John Hartmann, an undercover FBI agent whom Chou mistakenly believed to be a technological information broker in the United States. From August 28, 1995, until January 12, 1996, Chou allegedly contacted Hartmann repeatedly to obtain information about Taxol manufacturing techniques and distribution. These contacts led to a meeting in Los Angeles on February 27, 1996, between Hartmann and Hsu, the Technical Director for YFP's operations. Hsu purportedly told Hartmann at that meeting that YFP wanted to diversify into biotechnology and to introduce technology from advanced countries into Taiwan. When Hartmann responded that Bristol-Myers would be unlikely to share its secret technology with YFP, Hsu allegedly responded, "We'll get [it] another way," and told Hartmann to pursue paying Bristol-Myers employees for the confidential Taxol formulas.
Hsu and Chou then "communicated many times" with Hartmann over the next fourteen months to discuss the transfer of Taxol technology and to negotiate a specific price for the acquisition of Bristol-Myers's trade secrets. In response, Hartmann told the defendants that a corrupt Bristol-Myers scientist would be willing to sell Taxol information to YFP. The "corrupt" scientist was actually a Bristol-Myers employee cooperating with the FBI.
Hartmann agreed to a meeting, and on June 14, 1997, he and the Bristol-Myers scientist met with three representatives from YFP, including Hsu, Ho, and another unidentified scientist, at the Four Seasons Hotel in Philadelphia. Ho was a professor of biotechnology and the Director of the Biotechnology Innovation Center at the meeting as a favor to YFP.
The indictment alleges that the bulk of the June 14 meeting consisted of detailed discussions regarding the manufacturing processes for Taxol. The Bristol-Myers scientist explained the background and history of Taxol production, and displayed copies of Bristol-Myers documents outlining specific technological processes and scientific data pertaining to the manufacture of the drug. According to the indictment, these documents contained trade secrets and were "clearly marked with Bristol-Myers identification as well as the block stamped word 'CONFIDENTIAL.'" Hsu, Ho, and the other YFP employee reviewed the documents during the meeting and purportedly asked the Bristol-Myers scientist "numerous" questions regarding specific areas of Taxol technology. Finally, after Hartmann and the Bristol-Myers scientist left the room, the FBI rushed in and arrested Hsu and Ho at the hotel.
The indictment returned by the grand jury charged Hsu, Ho, and Chou with six counts of wire fraud in violation of 18 U.S.C. § 1343, one count of general federal conspiracy in violation of 18 U.S.C. § 371, two counts of foreign and interstate travel to facilitate commercial bribery in violation of 18 U.S.C. § 1952(a)(3), one count of aiding and abetting in violation of 18 U.S.C. § 2, and two counts of criminal activity under the Economic Espionage Act of 1996 ("the EEA"), including attempted theft of trade secrets, and a conspiracy to steal trade secrets, in violation of 18 U.S.C. §§ 1832(a)(4) and (a)(5).
Shortly after the indictment was returned, the defense requested in discovery a copy of the Bristol-Myers documents disclosed to Hsu and Ho at the June 14 meeting. However, on August 12, 1997, the government filed a motion pursuant to 18 U.S.C. § 1835 and Fed.R.Crim.P. 16(d)(1) for a protective order to prevent the disclosure of the Bristol-Myers trade secrets allegedly contained in those documents.
The District Court ordered the government to divulge the alleged trade secrets, because it found that the existence of a trade secret is an essential element of the crime of the theft of trade secrets, and that the existence of a trade secret in that prosecution is "a question of fact which the defendants have the right to have a jury decide."
The EEA's definition of a "trade secret" is similar to that found in a number of state civil statutes and the Uniform Trade Secrets Act ("USTA"), a model ordinance which permits civil actions for the misappropriation of trade secrets. There are, though, several critical differences which serve to broaden the EEA's scope. First, and most importantly, the EEA protects a wider variety of technological and intangible information than current civil laws.
If the defense of legal impossibility is viable-that is, if the defendants are not guilty of attempt if the material is not truly a trade secret--then it could matter, and the defendants' constitutional or statutory rights could be implicated. If the defense of legal impossibility is not cognizable, then the existence or nonexistence of an actual trade secret is of little consequence for an attempt or conspiracy crime.
The Third Circuit held that government need not prove that an actual trade secret was used during an investigation for attempt to misappropriate trade secrets in violation of Economic Espionage Act (EEA); government can satisfy its burden by proving beyond a reasonable doubt that defendant sought to acquire information which he or she believed to be a trade secret, regardless of whether information actually qualified as such.
The Third Circuit also held that the defendants have no need for the Taxol documents to defend against the government's charges of conspiracy, because legal impossibility is not a defense to conspiracy.
Legal impossibility occurs when A shoots a corpse believing it to be alive and intending to commit murder; the attempt does not amount to murder even if completed. Factual impossibility occurs when A fires a gun at a bed intending to kill V, and v is not on the bed; the crime cannot be completed because of extraneous factors beyond A's control.
The Congress intended that trade secrets be protected to the fullest extent during EEA litigation. Moreover, it further encourages enforcement actions by protecting owners who might otherwise "be reluctant to cooperate in prosecutions for fear of further exposing their trade secrets to public view, thus further devaluing or even destroying their worth." H.R.Rep. No. 104-788, at 13, 1996 U.S.C.C.A.N. at 4032.
The Third Circuit concluded that the great weight of the EEA's legislative history evinces an intent to create a comprehensive solution to economic espionage, and we find it highly unlikely that Congress would have wanted the courts to thwart that solution by permitting defendants to assert the common law defense of legal impossibility.
TRADE SECRET DOCUMENTS DO NOT HAVE TO BE DISCLOSED TO DEFENDANT IN EEA CASE.