Recent Decisions in Trade Secrets Law--Year 2000
R. Mark Halligan, Esq.
1. Scott
System, Inc. v. William C. Scott, III., 2000 WL 38229 (Colo. App.) (January
20, 2000).
Scott System, Inc. alleged that, for more than 12 years, William and Mark, who are the sons of Samuel Scott, the president and sole stockholder of the corporation, were employed by the corporation. It also alleged that each served as a director and officer of the corporation. However, neither of the sons had a written employment agreement with the corporation.
The “thrust” of the complaint is that William and Mark left the corporation’s employ and went to work for the defendant, IBS, which is in competition with the corporation. It was alleged that, in doing so, William and Mark made improper use of trade secrets and other confidential information to which they were privy as a result of their employment and their positions of directors and officers of the corporation. In addition, it was asserted that William had improperly refused to assign to the corporation patent rights to an invention that he had developed while he was an employee, a director, and an officer of the corporation, and that he was allowing IBS to make use of that invention to compete with the corporation. The trial court granted summary judgment for the defendant and the company appealed. Reversed on appeal.
Generally, an invention is the property of the inventor who conceived, developed, and perfected it. Hence, the mere fact that the inventor was employed by another at the time of the invention does not mean that that inventor is required to assign the patent rights to the employer. The right, if any, of an employer to inventions of its employee is determined primarily by the contract of employment. If, as here, the contract of employment does not contain an express provision respecting the subject, an employer is, nonetheless, not necessarily precluded from claiming a right to the invention.
If an employee’s job duties include the responsibility for inventing or for solving a particular problem that requires invention, an invention created by that employee during the performance of those responsibilities belongs to the employer. Hence, such an employee is bound to assign to the employer all rights to the invention. This is so because, under these circumstances, the employee has produced only that which he was employed to produced, and the courts will find an implied contract obligation to assign any rights to the employer. United States v. Dubilier Condenser Corp., 289 U.S. 179, 53 S.Ct. 554, 77 L.Ed. 1114 (1933); Solomons v. United States, 137 U.S. 342, 26 Ct.Cl. 620, 11 S.Ct. 88, 34 L.Ed. 667 (1890); Hewett v. Samsonite Corp., 32 Colo. App. 150, 507 P.2d 1119 (1973).
On the other hand, if an employee is not employed to invent or to solve a particular problem, that employee owns the right to any invention made by the employee during the term of employment. However, under such circumstances, if the employer has contributed to the development of the invention, such as by paying for the employee’s efforts, the employer has a “shop right” to use it free of charge and without liability for infringement.
In opposition to defendants’ motion for summary judgment, Samuel submitted an affidavit in which he asserted that William had been employed “to engage in research and development” and that “his job responsibilities at [the corporation specifically included research and development of the [invention.”
Given this sworn testimony, a reasonable fact finder could find that, in addition to such other duties that William might have been assigned, he was specifically assigned the task of solving a particular problem and directed to use his inventive faculties to solve that problem, and that he did so by developing the invention.
Should the fact finder reach these conclusions, then, the law would give William no right to the invention. Under such circumstances, all of the rights thereto would be vested in the corporation, and William would be required to execute an assignment of the patent to the invention as evidence of the corporation’s ownership rights.
Plaintiff also contends that a genuine factual dispute exists with respect to whether William had a fiduciary duty to assign the rights in the patent to the corporation. All officers and directors of a corporation owe a fiduciary duty to the corporation and to its stockholders. They are required to act in good faith and in a reasonable manner in the best interests of those parties. Michaelson v. Michaelson, 939 P.2d 835 (Colo.1997).
Such a fiduciary duty obligates an officer or director to assign a patent to the corporation if the invention was developed while he or she was employed by the corporation and its is related to the corporation’s business. Lacy v. Rotating Productions System, Inc., 961 P.2d 1144 (Colo.App.1998).
Contrary to defendants’ assertion, the decision in Lacy was not based upon the nature of the particular responsibilities of the officer or director; it was based upon the general fiduciary responsibility owed by all who occupy such positions. Indeed, we know of no rule that states that a distinction in the degree of fiduciary obligation may be recognized based on the degree of corporation involvement. It is the nature of the position, itself, and not the nature of the specific responsibilities that may be assumed, that gives rise to the obligation.
OBLIGATION OF FORMER EMPLOYEE/OFFICER TO
ASSIGN INVENTIONS TO FORMER EMPLOYER.
2. The State ex rel. Besser et al. v. Ohio State University et al., 87 Ohio St.3d 535, 721 N.E.2d 1044)(January 19, 2000).
On February 17, 1999, Realtor Kenneth R. Besser (“Besser”), an attorney, filed a civil lawsuit in the Court of Claims on behalf of his wife, Realtor Susan L. Besser, M.D., against respondent Ohio State University (“OSU”), challenging OSU’s acquisition of Park Medical Center, a private Columbus hospital.
On February 18, Besser sent a letter to OSU stating that he represented his wife and Bexley Family Medicine in their lawsuit against OSU and that he was requesting under R.C. 149.43, Ohio’s Public Records Act, that OSU make available for his inspection “all records of OSU concerning or relating to OSU’s acquisition of Park Medical Center.”
On February 19, OSU advised Besser that it would not comply with his request because (1) he was limited to civil discovery in his pending Court of Claims lawsuit to obtain the requested records and could not use the Public Records Act to circumvent such discovery, and (2) the requested records were exempt from disclosure because they constituted trade secrets. OSU later additionally asserted that the Bessers’ request was not sufficiently specific.
On February 23, relators, Besser and his wife, filed this action in the Ohio Supreme Court for a writ of mandamus to compel respondents, to provide access to the requested records under R.C. 149.43.
Respondents claim that most of the withheld records constitute trade secrets, which are exempt from disclosure under state law. The Bessers countered that (1) although former R.C. 1333.51 exempted the disclosure of trade secrets under R.C. 149.43, the repeal of former R.C. 1333.51 in 1996 removed any trade- secrets exemption; (2) public entities like OSU cannot have trade secrets; and (3) respondents have not established that the records are trade secrets.
Effective July 20, 1994, the General Assembly enacted the Ohio Uniform Trade Secrets Act, R.C. 1333.61 through 1333.69, which provides for civil remedies, i.e., injunctive relief and damages, for the misappropriation of trade secrets.
There is also no evidence that the General Assembly intended its 1996 repeal of R.C. 1333.51 to represent a departure from long-standing precedent exempting trade secrets from disclosure under R.C. 149.43.
A contrary holding would afford no protection for an entity’s trade secrets that are created or come into the possession of an Ohio public office and would render the remedies in R.C. 1333.61 through 1333.69 meaningless when a request for these records is made under R.C. 149.43. “We must also construe statutes to avoid unreasonable or absurd results.” State ex rel. Cincinnati Post v. Cincinnati (1996), 76 Ohio St.3d 540, 543-544, 668 N.E.2d 903, 906; R.C. 1.47©.
Before Ohio’s adoption of the Uniform Trade Secrets Act, we held that public offices cannot have their own protected trade secrets under former R.C. 1333.51 because “[the protection of competitive advantage in private, not public, business underpins trade secret law.” State ex rel. Toledo Blade Co. v. Univ. of Toledo Found. (1992), 65 Ohio St.3d 258, 264, 602 N.E.2d 1159, 1163-1164.
In contrast, jurisdictions that have adopted the Uniform Trade Secrets Act hold that public entities like OSU can have their own trade secrets. See, e.g., Scientific Games, Inc. v. Dittler Bros., Inc. (Fla.App.1991), 586 So.2d 1128, 1131. Therefore, OSU can have its own trade secrets under R.C. 1333.61.
The Bessers next claimed that respondents have not established that the records constitute trade secrets, as that term is defined in R.C. 1333.61(D). “’[When a governmental body asserts that public records are excepted from disclosure and such assertion is challenged, the court must make an individualized scrutiny of the records in question. If the court finds that these records contain excepted information, this information must be released.’” State ex rel. Master v. Cleveland (1996), 75 Ohio St.3d 23, 31, 661 N.E.2d 180, 186-187, quoting State ex rel. Natl. Broadcasting Co., Inc. v. Cleveland (1988), 38 Ohio St.3d 79, 526 N.E.2d 786, paragraph four of the syllabus.
We have applied this general rule to require in camera inspections in cases in which a public entity’s claim that records are exempt as trade secrets is challenged.
Based on the foregoing, we hold that trade secrets remain exempt from disclosure under R.C. 149.43(A)(1)(p) and that governmental entities like OSU can have trade secrets, but that respondents should submit the records they claim to be exempt as trade secrets and intellectual property records to the court under seal for an in camera review. We also order respondents to submit the records that they have already provided to the Bessers in response to their public request.
TRADE SECRETS
PROTECTED UNDER OHIO PUBLIC RECORD ACT; IN CAMERA REVIEW NECESSARY.
3. DVD Copy Control Association, Inc. v. McLaughlin, et al., 2000 WL 48512 (Cal. Superior) (January 21, 2000).
Plaintiff, DVD Copy Control Association, is the sole licensing entity which grants licenses to the CSS technology in the DVD format. CSS. “Content Scrambling System,” is an encryption system developed by Plaintiff’s predecessor in interest in order to protect the copyrighted materials stored on DVDs. The alleged misappropriation of the CSS algorithm and master keys is the subject of this action and the instant Motion for Preliminary Injunction.
In order to prevail on the merits, Plaintiff must establish that they had a trade secret which was misappropriated. The Plaintiff has shown that the CSS is a piece of proprietary information which derived its independent economic value from not being generally known to the public and that Plaintiff made reasonable efforts under the circumstances to maintain its secrecy. Although Defendants argue extensively that a 40 bit encryption system is weak at best, it is undisputed that the encryption remained a secret for close to three years and was limited in its strength by certain international export regulations.
Plaintiff must also show that the trade secret was misappropriated, or that the trade secret was obtained through improper means and that the Defendants knew or should have known that the trade secret was obtained through improper means when they posted it or its derivatives to the Internet. (Civil Code § 3426.1(b)) Although the parties dispute the who and how, the evidence is fairly clear that the trade secret was obtained through reverse engineering.
The Legislative comment to the Uniform Trade Secret Act states, “Discovery by “reverse engineering,” that is, by starting with the known product and working backward to find the method by which it was developed,” is considered proper means.
The only way in which the reverse engineering could be considered “improper means” herein would be if whoever did the reverse engineering was subject to the click license agreement which preconditioned installation of DVD software or hardware and prohibited reverse engineering. Plaintiff’s case is problematic at this pre-discovery stage. Clearly they have no direct evidence at this point that Mr. Jon Johansen did the reverse engineering, and that he did so after clicking on any license agreement. However, in trade secret cases, it is a rare occasion when the Plaintiff has a video of an employee walking out with the trade secret, or an admission of a competitor that they used improper means to obtain Plaintiff’s intellectual property. In most situations, Defendants try to cover their tracks with considerably more effort than the Defendants did herein. The circumstantial evidence, available mostly due to the various defendants’ inclination to boast about their disrespect for the law, is quite compelling on both the issue of Mr. Johansen’s improper means and that Defendants’ knowledge of impropriety.
Most compelling in this matter is the relative harm to the parties. At this point in the proceeding, the harm to Defendants is truly minimal. They will simply have to remove the trade secret information from their web sites. They may still continue to discuss and debate the subject as they have in the past in both educational, scientific, philosophical and political context.
On the other hand, the current and prospective harm to the Plaintiff, if the Court does not enjoin the display of their trade secret, will be irreparable. It is undisputed that the Plaintiff’s predecessor-in-interest expended considerable time, effort and money in creating the intellectual property at issue in order to protect the copyrighted information contained on DVDs.
PRELIMINARY
INJUNCTION GRANTED TO PREVENT POSTING TRADE SECRETS ON THE INTERNET
4. Computer Management Assistance Company v. Robert F. DeCastro, Inc. et al., 2000 U.S. App. LEXIS 17962 (July 25, 2000).
Computer Management Assistance Company (“CMAC”) developed a computer program for the picture framing industry named ACCESS. ACCESS is a front-end pricing program that assists distributors in managing sales and facilitating transactions with customers. In 1983, CMAC licensed ACCESS to Robert F. deCastro, Inc., (“deCastro”) a major wholesale distributor of picture frames, and trained deCastro’s information system manager, Luis Escalona, (“Escalona”) to use ACCESS. Under this license agreement, CMAC placed confidentiality restrictions on deCastro’s right to use and disclose ACCESS.
In addition to ACCESS, deCastro used a “Backup Stock System” (BUSS) program that was written by Escalona in the same business basic language that ACCESS used. BUSS is a back-end inventory that assists distributors in managing stock. This program kept track of 25,000 boxes of framing and molding in deCastro’s inventory. It specified identity, quality and bin location of each item from receipt until sale. BUSS enabled employees to know what was in the warehouse and where to find it.
In 1992, Information Management Consultants (“IMC”), a value-added reseller of FACTS, a comprehensive software package for wholesale distributors in general (i.e., not industry specific) contacted deCastro. The next year, IMC presented a proposal to install and modify FACTS to fit deCastro’s needs. This was IMC’s inaugural foray into the picture framing industry. A document referred to as “Appendix A” proposed modifications to incorporate deCastro’s internal BUSS and interface with deCastro’s pricing regime.
In August of 1993, deCastro decided to enter into a new contract with CMAC. CMAC agreed to try to modify ACCESS to provide direct order entry and for that purpose get from IMC a FACTS demonstration package including that feature. CMAC was unable to modify ACCESS to satisfy deCastro’s need for direct order capability. DeCastro renewed discussions with IMC and eventually entered into a contract for FACTS that included items from Appendix A. The uncomplicated modifications were made by adding files (approximately 750 lines of code) to generic FACTS (containing over 600,000 lines of code). IMC installed the modified FACTS and deCastro began using it in June of 1996. Because FACTS was written in a different language (BBX basic) than ACCESS, IMC also installed another interpreter. The CMAC software was still installed and the CMAC interpreter was still utilized to run BUSS.
In February of 1997, CMAC filed suit against deCastro and IMC alleging copyright infringement, trade secret misappropriation, unfair and deceptive trade practices and breach of contract.
The district court found that the evidence did not establish that IMC programmers copied the ACCESS program. Testimony at trial revealed that, when IMC installed FACTS on deCastro’s computer hardware, CMAC’s code was still on the hardware. The district court found that the IMC installer did not see CMAC’s code and that he was not attempting to duplicate the methodology because FACTS had its own file layouts.
Fifth Circuit affirms. CMAC’s copyright claim against Generic FACTS and ACCESS are similar only in that they both serve deCastro’s needs when modified to reflect the particular practices of the framing industry and business. Accordingly, CMAC has not demonstrated that FACTS is substantially similar to ACCESS or that the defendants have misappropriated substantial elements of the ACCESS program.
CMAC also asserted that the complete source code and file layouts for ACCESS and all their revealed designs are trade secrets and that IMAC misappropriated those trade secrets in violation of Louisiana law.
In order to recover damages under the Louisiana Uniform Trade Secrets Act, “a complainant must prove (a) the existence of a trade secret, (b) a misappropriation of the trade secret, (b) a misappropriation of the trade secret by another, and (c) the actual loss caused by the misappropriation.” Reingold v. Swiftships, Inc., 126 F.3d 645, 648 (5th Cir. 1997).
Fifth Circuit affirms. CMAC’s trade secret claim against IMC fails for the same reason as its copyright claim; lack of proof of misappropriation. The primary reason deCastro changed to FACTS was the need for direct order capability, which ACCESS did not have and could not provide. CMAC’s features were or nominal interest to IMC’s programmers because ACCESS and FACTS were fundamentally different—FACTS already possessed capabilities that ACCESS did not. CMAC failed to show that IMC programmers even had an opportunity to see the ACCESS source code until four years after the modifications were completed on generic FACTS.
TRADE
SECRET/COPYRIGHT INFRINGEMENT CLAIMS IN COMPUTER SOFTWARE DISMISSED; NO
EVIDENCE OF ACCESS.
5. Financial Systems & Equipment, Inc. v. Easy Systems, Inc., 2000 U.S. Dist. LEXIS 7889 (D. Kansas 2000).
Plaintiff Financial Systems & Equipment, Inc. brought this action against defendant Easy Systems, Inc. claiming violation of the Kansas Uniform Trade Secrets Act, K.S.A. § 60-3320 et seq., and interference with business expectancy and seeking damages, an injunction, and a declaratory judgment. The claims arise from a dispute about a software licensing and distribution arrangement between the parties.
Defendant moved to dismiss the action for improper venue pursuant to Fed.R.Civ.P. 12(b)(3) and 28 U.S.C.§ 1406(a). Motion denied.
The relationship between the parties was governed by a Regional Distributor Software License and Distribution Agreement (“Distribution Agreement”) first executed in January 1994. The Distribution Agreement authorizes plaintiff to license and distribute defendant’s software products, and requires plaintiff to provide defendant with the names and addresses of all its customers as well as information about prospective customers. The agreement contains a venue selection provision, which reads as follows:
19. Venue/Jurisdiction
The parties specifically agree any dispute arising under
this Agreement at ESI’s sole discretion may be resolved in the Superior Court
of King County, State of Washington.
The parties agree that the courts in King County, Washington have
jurisdiction in such matters.
In a diversity action, venue is assessed under 28 U.S.C. § 1391(a), which provides that the action may be brought only in (1) a judicial district where any defendant resides, if all defendants reside in the same state, (2) a judicial district in which a substantial part of the events or omissions giving rise to the claim occurred, or a substantial part of property that is the subject of the action is situated, or (3) a judicial district in which any defendant is subject to personal jurisdiction at the time the action is commenced, if there is no district in which the action may otherwise be brought.
Plaintiff has the burden of showing that venue is proper. See Etiene v. Wolverine Tube, Inc., 12 F.Supp.2d 1173, 1180 (D. Kan. 1998). In its amended complaint, plaintiff has put forth allegations which demonstrate that a substantial part of the events or omissions giving rise to the claim occurred in the District of Kansas, and that defendant is subject to personal jurisdiction in the District of Kansas. Defendant does not contest these allegations in its motion to transfer, but argues instead that plaintiff has waived its right to bring a claim here due to the venue selection provision in the Distribution Agreement.
The enforcement of a forum selection clause by a federal court sitting in diversity is determined under federal law rather than state law. See Stewart Org., Inc. v. Ricoh Corp., 487 U.S. 22, 28, 101 L.Ed.2d 22, 108 S.Ct. 2239 (1988). Forum selected clauses should be enforced unless unreasonable under the circumstances. See M/S Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 10, 32 L.Ed.2d 513, 92 S.Ct. 1907 (1972).
Cases interpreting clauses relating to the commencement of litigation should be driven by the language the parties employed in agreeing upon the locus of litigation between them. SBKC Serv. Corp., 105 F.3d at 581. The court concludes that, according to the plain meaning of the language in the provision—in particular, the phrase “may be resolved”—the provision does not place any limits on either party’s right to bring an action in a court outside King County, Washington.
6. EFCO Corp. v. Symons Corp., 2000 U.S. App. LEXIS 17235 (8th Cir.) (July 18, 2000).
EFCO Corp. (EFCO), brought suit
against Symons Corporation (Symons) claiming that Symons: (1) engaged in false advertising in violation
of the Lanham Act; (2) misappropriated EFCO’s trade secrets in violation of the
Iowa Uniform Trade Secrets Act (IUTSA); (3) induced James D. Phillips, a former
high-level EFCO employee, to breach his fiduciary duty to EFCO; and 94)
interfered with EFCO’s prospective business relations. Symons counterclaimed against EFCO for libel
and for false advertising in violation of the Lanham Act.
Following the presentation of evidence, the district court charged the jury with deciding damages separately for each cause of action. The jury returned verdicts in favor of EFCO on its claims and in favor of Symons on its claim. The district court reversed the jury’s verdict on EFCO’s claim of interference with prospective business relations, modified the remaining jury awards to account for duplication, and entered judgment for EFCO in the amount of $14.1 million and in favor of Symons in the amount of $50,000.
Symons appealed.
EFCO and Symons are competitors in the concrete forming system trade. Among the products both companies make are metal panels that can be joined together to create large modular systems. These systems act as casts for concrete, which is poured into the metal systems and allowed to set. Once the concrete hardens, the metal forms are removed. The panels are reusable, and are manufactured in various sizes to accommodate different applications, and feature a universal bolt pattern so as to work interchangeably.
James D. Phillips worked at EFCO from 1963 to 1992. During that time he was instrumental to EFCO’s engineering operations, and was intimately involved in the development of one of EFCO’s new products, the Super Stud. The Super Stud is a metal beam designed to support the concrete forming system by acting as a buttress. When Phillips left EFCO in 1992, he entered into a severance agreement that prohibited him from disclosing confidential information or competing with EFCO.
Shortly after Phillips EFCO, Symons contacted him. He sent Symons a copy of his severance agreement. Symons then offered Phillips a position as a consultant, responsible for helping to upgrade Symons’ Korean manufacturing plant. Because Phillips was prohibited from working with Symons as a result of his severance agreement, Symons devised a clandestine payment scheme, whereby Phillips was paid by a third party, who Symons then reimbursed. Once Phillips’ noncompete clause lapsed, Symons hired him as an employee.
EFCO contends that Symons requested and received confidential information from Phillips, including: (1) EFCO’s method of welding its corner-bearing block on its forming systems; (2) the design of EFCO’s semi-automatic jig, a mechanism that allows EFCO to manufacture the design of EFCO’s panels of the same size and quality so that the panels fit together; (3) the design of EFCO’s column form jig, an instrument that can bend metal uniformly into round cylinders so as to allow concrete to be cast as round columns; (4) the design and development of the Super Stud, an instrument EFCO claims required over five years of research and development; and (5) its marketing and cost information, including pricing information on all products and non-engineering design details on the Super Stud.
During the relevant period, Symons advertised its products as compatible and interchangeable with EFCO’s products through several media. Symons further advertised its products as stronger and better than its competitor’s products. Some of these advertising claims were bald assertions; others were purportedly the result of in-house and independent testing. According to EFCO, Symons’ products were not stronger than its products, nor could the two be safely commingled.
Symons argues that EFCO failed to prove that it misappropriated any trade secrets. It further argues that even if it did misappropriate secrets, EFCO failed to show that any damages were caused by such misappropriation.
Symons’ arguments are based on three theories: (1) no trade secrets existed; (2) any secret that had once existed was now public information because it was visible to the naked eye or because EFCO did not take sufficient measures to ensure its secrecy; (3) EFCO failed to prove that Symons used any of these purported secrets.
Iowa law defines trade secrets broadly for the purposes of IUTSA. A trade secret is:
Information,
including but not limited to a formula, pattern, compilation, program, device,
method, technique, or process that is not of the following:
a. Derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by a person able to obtain economic value from its disclosure or use.
b. Is the subject or efforts that are reasonable under the circumstances to maintain its secrecy.
Iowa Code § 550.2(4) (2000).
Iowa’s broad definition of trade secrets, together with its liberal construction by Iowa courts, see, e.g., U.S. West Communications v. Office of Consumer Advocate, 498 N.W.2d 711, 714 (Iowa 1993), rebut Symons’ contention that any of EFCO’s research, development, pricing, cost or marketing data fell outside the definition of a trade secret. So long as EFCO received value from keeping the information secret and made attempts to keep it secret, the information is considered a trade secret under Iowa law.
Symons argues that EFCO did not make efforts to keep its information secret. EFCO conceded that it gave tours of its factory, but it screened tour candidates to ensure that none of its secret information would be at risk. Further, EFCO produced testimony that none of its trade secrets would be ascertainable to the naked eye by looking at its products because its manufacturing process cloaked the secrets.
Symons next asserts that it did not use any of EFCO’s secrets in its products. Symons fails to recognize that in making a claim for misappropriation of a trade secret, the plaintiff need not show that the defendant actually used the secret. See Iowa Code § 550.2(3) (2000) (defining misappropriation to include mere acquisition of trade secret). The extent to which Symons actually employed the trade secrets becomes appropriate when determining damages. See Iowa Code § 550.4 (2000).
In order to obtain damages, EFCO was required to provide that it was damaged by Symons’ misappropriation of one or more of its trade secrets. See id; Gerst v. Marshall, 549 N.W.2d 810, 817-18 (Iowa 1996).
The same evidence that supports a jury inference of causation on EFCO’s false advertising claim supports an inference that EFCO was damaged by Symons’ misappropriation of trade secrets. As discussed above, EFCO produce evidence of a general revenue erosion that coincided with Symons’ increased revenues, as well as evidence of sales lost to Symons. Further, EFCO produced evidence of losses in Super Stud revenues that coincided with the introduction of Symons’ rival product, the Symons Solider, developed using EFCO’s trade secrets. From this evidence, the jury could properly infer that Symons’ misappropriations damaged EFCO and could determine the extend of such damage.
AWARD OF $13 MILLION IN COMPENSATORY
DAMAGES BY IOWA TRIAL COURT FOR TRADE SECRET MISAPPROPRIATION/FALSE ADVERTISING
AFFIRMED BY 8TH CIRCUIT.
7. Weins v. Sporleder, 605 N.W.2d 488 , (Sup. Ct. S. Dakota) (January 26, 2000)Sup. Ct. S.D.
In examining a plaintiff’s claims to determine if claims are related, numerous courts have specifically found that tort claims such as fraud, unfair competition, and breach of fiduciary duty are preempted by the Uniform Trade secret Act. See Leucadia, 755 F. Supp. At 636-637 (claims of unfair competition and unfair trade or business practices claims were found to be displaced); Ed Nowogroski Ins., Inc., 88 Wash. App. 350, 944 P.2d 1093 at 1097 (claims for misuse of confidential information and intentional interference were displaced by trade secrets act); Composite Marine Propellers v. Van Der Woude, 962 F.2d 1263 (7th Cir. 1992) (claims of unfair competition and breach of fiduciary duty were found to be displaced).
What the trial court did in amending judgment was to render SbCl 37-29-7(b)(2) meaningless. In effect, the trial court stated if a plaintiff’s trade secret claim is dismissed, plaintiffs can simply pursue the same claim in the name of a tort. Courts should not construe a statute in such a way as to render the language meaningless. See Appeal of Black Hills Legal Servs., 1997 SD 64, 563 N.W.2d 429.
In analyzing the displacement provisions of the Uniform Trade Secrets act the trial court cited a federal case from Minnesota, Micro Display Systems, Inc. v. Axtel, Inc., 699 F. Supp. 202, 205 (Dminn 1988):
Using this interpretation of 325C.07, the court will allow plaintiff to go forward and maintain its separate causes of action to the extent that the causes of actin have “more” to their factual allegations than the mere misuse or misappropriation of trade secrets.
Clearly, if the causes of action as pled amount to “more” than misappropriation of a trade secret, the court should allow those tort claims to be presented to a jury. That was not the case here. Every claim by Weins and Meyer in their second amended complaint arises out of the alleged misappropriation of the trade secret. The factual basis of the tort claims of Weins and Meyer relate to allegations that Van Liere and En-R-G Max obtained information which amounted to a trade secret and took or misappropriated it for their own purposes when starting their own business. Under the facts of this case, the tort claims and the trade secrete claims are inseparable. There may be other cases where a trade secret misappropriation is alleged and there is a further factual basis for fraud and deceit claims apart from the trade secret claim. However, that is not the case with the tort claims of Weins and Meyer.
8. Virginia Electronic & Lighting Corporation v. National Service Industries, Inc. 2000 U.S. App. LEXIS 131 (January 6, 2000)
Virginia Electronic & Lighting Corp. (“Velcorp”) brought suit against National Service Industries, Inc. d/b/a/ Lithonia Lighting (“Lithonia”), in the United States District Court for the Northern District of Georgia alleging that Lithonia had misappropriated Velcorp’s trade secrets and that Velcorp’s president, Gregory Stepp, was the true and sole inventor of the invention claimed in Lithonia’s United States Patent No. 5,463,280 (“the ‘280 patent”). Velcorp sought damages for the alleged trade secrets misappropriation under the Georgia Trade secrets Act, O.C.G.A. 10-1-760 et seq. (“the Georgia Act”) and also an order pursuant to 35 U.S.C. 256 (1994) substituting Stepp for James Johnson,, the sole named inventor of the ‘280 patent. Velcorp appeals from the district court’s grant of Lithonia’s motion for summary judgment on both claims.
In the spring of 1993, Lithonia attempted to develop a replacement lamp for exit signs using LED’s as its light source. During the development process, Gene Justice, a Lithonia employee, contacted his friend at Velcorp, Stepp, for Assistance in developing and manufacturing the new lamp. While Lithonia continued development efforts on its own, Stepp had Mori Denshi Sango Co. (“MDS”) in Japan produce a series of prototype LED replacement lamps beginning in June or July of 1993. According to Velcorp, these prototypes, unlike the designs developed by Lithonia, used capacitance instead of resistance to limit the current flow through the LEDs. Velcorp subsequently delivered these prototypes to Lithonia.
The first written agreement between the parties requiring Lithonia to maintain the secrecy of Velcorp information was signed by Lithonia’s authorized agent on January 31, 1994. Because this confidentiality agreement expressly excepted information that Velcorp had previously disclosed to Lithonia, Velcorp excepted information that Velcorp relies on an implied confidentiality agreement allegedly arising from its relationship with Lithonia to demonstrate that it made reasonable efforts to maintain the secrecy of its LED lamp design prior to this date.
Velcorp does not demonstrate in its submissions supporting its opposition to summary judgment that it made any reasonable effort to protect the secrecy of its LED lamp design prior to December of 1993, when the two parties first began discussing confidentiality. Though Velcorp alleges that Stepp insisted that Lithonia not tamper with the prototypes, Stepp acknowledged during his deposition that one “can see what’s inside [the prototypes just be looking at them.” More significantly, Velcorp cannot reconcile Stepp’s unambiguous statement in his January 26, 1994 letter that Velcorp’s prior disclosures to Lithonia were “not protected” and were “public” with Velcorp’s claim to making reasonable efforts in 1993 to maintain the secrecy of its design.
Given Stepp’s admission and Velcorp’s failure to allege or supply any evidence of reasonable efforts to protect the secrecy of its alleged LED lamp design, Velcorp has failed to demonstrate that it could carry its burden of establishing an element essential to its case at trial. Therefore, the district court properly granted summary judgment for Lithonia on Velcorp’s claim for misappropriation of trade secrets.
SUMMARY JUDGMENT
GRANTED; NO THIRD-PARTY PROTECTION OF ALLEGED TRADE SECRET INFORMATION.
9. Fireworks Spectacular, Inc. and Piedmont Display Fireworks, Inc. v. Premier Pyrotechnics, Inc. and Matthew P. Sutcliffe 2000 U.S. Dist. LEXIS 2362 (February 23, 2000).
Plaintiffs are engaged in the business of selling fireworks. Fireworks Spectacular sells fireworks for retail and conducts firework displays or shoes for customers. Piedmont sells fireworks for wholesale to distributors and to persons who want to shoot their own firework shows. Fireworks Spectacular and Piedmont have common ownership, officers, and directors. For all practical purposes, they are treated as one and the same by both plaintiffs and defendants.
In the fireworks industry, the identity of potential customers is not information which is readily available to the public. There is no known source from which one can ascertain the identity of persons who display fireworks or who may be interested in purchasing fireworks; instead, the most common and useful way to acquire customers is through “cold-calling,” an often lengthy and costly process.
Over the past several years, plaintiffs have compiled computerized customer lists for both Fireworks Spectacular and Piedmont. In addition, Mr. Sutcliffe (Defendant) made notes in a personal logbook concerning the specifics of customers with whom he came into contact and sales that he made. The computerized lists and Mr. Sutcliffe’s logbook (collectively referred to as plaintiffs’ “customer lists”) include some or all of the following information with regard to each customer: the name, address, and phone number of the customer; the “contact person”, the amount of money previously spent; a sight survey concerning the size of explosives that can be shot in the customer’s area; and general notes concerning anything that could be done to improve the customer’s show in the future.
Plaintiffs’ trade secret claims is brought under the Uniform Trade secrets Act, K.S.A. 60-3320 et seq. (1994). According to that statute, “trade secret” means information “including a formula, pattern, compilation, program, device, method, technique, or process” that “(i) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and (ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.” 60-3320(4).
The primary “trade secrets” at issue in this case is plaintiffs’ customer lists, which include some or all of the following information with regard to each customer: “the name, address, and phone number of the customer; the “contact person”; the amount of money previously spent; a sight survey concerning the size of explosives that can be shot in the customer’s area; and general notes concerning anything that could be done to improve the customer’s show in the future. Defendants argue that the customer lists do not constitute a “trade secret” because they solely contain information that is either generally known or readily ascertainable through independent investigation.
The existence of a trade secret under the Uniform Trade secrets act is a question of fact for determination by the trier of fact. See All West Pet Supply Co. v. Hill’s Pet Prod. Div., Colgate-Palmolive Co., 840 F. Supp. 1433, 1437 (D. Kan. 1993). “Customer lists and other customer information may constitute a trade secret.” Id. at 1438; see also Curtis 1000, Inc. v. Pierce, 905 F. Supp. 898 (D. Kan. 1995). Customer lists containing merely public information that could be easily compiled by third parties will not be protected as trade secrets; however, where “the party compiling the customer lists, while using public information as a source, … expends a great deal of time, effort and expense in developing the lists and treats the lists as confidential in its business, the lists may be entitled to trade secret protection.” Robert B. Vance & Assocs., Inc. v. Baronet Corp., 487 F. Supp. 790, 799 (N.D. Ga. 1979).
The court concludes that plaintiffs have shown a substantial likelihood of success on the merits with respect to their trade secrets claim. Neither party disputes the great amount of time, effort, and energy that it takes to put together the type of customer lists that plaintiffs have compiled. In fact, plaintiffs contend that the lists were compiled over man years and thousands of hours. Moreover, the evidence shows that the customer lists give plaintiffs a competitive advantage in the fireworks industry. Mr. Sutcliffe admits that the customer lists allowed him to immediately solicit customers and engage in competition with plaintiffs without first having to compile a data list of his own, and that he would likely have lost money during the first year without the customer lists. Moreover, Mr. Sutcliffe knew it was the policy of plaintiffs to keep the customer lists secret, and that he was expected to protect them from disclosure.
Mr. Sutcliffe argues that the personal logbook which he kept while working for plaintiffs is not a trade secret, because he was solely responsible for assembling it and because it only contains information concerning sales that he made. The court concludes, however, that such logbook, even if prepared by Mr. Sutcliffe, is the property of the employer. See Morrison v. Woodbury, 105 Kan. 617, 185 P. 735, 737 (Kan. 1919) (citing Empire Steam Laundry v. Lozier, 165 Cal. 95, 130 P. 1180 (Cal. 1913), which held that a customer list, even through in part prepared by the defendant, was the absolute property of the plaintiff and deserving of trade secret protection).
In addition to showing a substantial likelihood of success on the merits, plaintiffs have successfully shown that, if defendants are not enjoined from misappropriating their trade secret, they will likely suffer irreparable harm. Defendants are engaging in behavior that is likely to result in plaintiffs’ further loss of customers as well as customer goodwill. The court determines that such activity is causing irreparable harm because of the “extreme difficulty and uncertainty in restoring goodwill among the customers and regaining the business of customers who are being, and will be, induced away or lost by [plaintiffs. Inter-Collegiate Press, Inc. v. Myers, 519 F. Supp. 765, 770 (D. Kan. 1981). Furthermore, the court concludes that any harm the injunction may cause to defendants is outweighed by the injury that a failure to impose the injunction may cause to plaintiffs. Defendants will not be prohibited from engaging in the fireworks industry altogether; they will merely be prohibited from doing so with the unauthorized use of plaintiffs’ customer lists. Finally, the court concludes that the public has an interest in protecting valid trade secrets and preventing unfair competition.
10. Dunsmore & Associates, Ltd. v. Dominick A. D’Alessio, 2000 Conn. Super. LEXIS 114 (January 6, 2000).
The plaintiff, Dunsmore & Associates, Ltd., is a Connecticut corporation engaged in the business of recruiting marketing researchers (candidates) and placing them at many of the largest consumer goods corporations (clients) in the United States for a fee. The fee paid by the client company was generally 30% of the candidate’s annual starting salary. The plaintiff was founded in August 1981, by Joseph Dunsmore (Dunsmore), its president. The following month, Dunsmore hired the defendant, Dominick A. D’Alessio, to work with him in recruiting marketing researchers. The defendant had no experience in the business. In March 1993, Dunsmore also hired John Hoover. For most of its history, the company consisted of these three gentlemen and a small office support staff.
When the plaintiff first began to do business, it had a few client contacts and virtually no pool of candidates. Over time, it developed extensive contacts in the marketing research departments of many major companies and acquired a veritable library of information on thousands of marketing researchers.
The plaintiff claims that its Alpha list and candidate files (including candidate resumes) constitutes trade secrets. With certain exceptions not claimed to be applicable here, General Statutes 35-51(d) provides that “trade secret” means information, including a ... compilation” It is this compilation of information that is the claimed trade secret here. CF Allen Mfg. Co. v. Loika, 145 Conn. 509, 515-516, 144 A.2d 306 (1958). This is not to say, or to hold, that “each and every component is necessarily a trade secret in and of itself...” Elm City Cheese Co. v. Federico, supra, 251 Conn. 73. The court finds that the information at issue here is a type considered a “trade secret” under General Statutes 35-51(d) and is protected by CUTSA.
The defendant argues that the compilation of information claimed to be a trade secret is generally known or readily ascertainable by proper means. He claims that he had dealt with many candidates before and suggests that he had committed to memory the information contained in the plaintiff’s documents. “The Restatement of Agency takes the position that an employee is ordinarily privileged to use the names of customers retained in his memory as a result of his normal employment activities in competing with his former employer, after termination of his employment. Restatement (Second), Agency [396. Most of the cases have supported this view.” Holiday Food Co. v. Munroe, 37 Conn. Supp. 546, 555, 426 A.2d 814 (App. Sess. 1981) (Shea J. concurring). The defendant further argues that the information was available from reference resources such as the American Marketing Association’s (“AMA”) directory, Inside Research, business schools, and ordinary business channels. “A matter may be generally known...through general publication, as in a trade journal..(Internal citations omitted.) Plastic & Metal Fabricators, Inc. v. Roy, supra, 163 Conn. 265-66.
The AMA directory, however, does contain an abundance of information, including the names of thousands of people in the marketing research, their areas of specialty or familiarity (i.e., consumer marketing, marketing research, the position they occupy, and their employer. The names number over 20,000. Many, however, are not in the field of marketing research or are academicians of marketing research. In many instances, the directory contains the home address and phone number of individuals. It does not reveal salary information, or prior employers, as does the Alpha list.
The names of marketing researchers and their current employer, as contained on the Alpha list, were, therefore, generally known. A trade secret plaintiff, however, need not prove that every element of information in a compilation is unavailable elsewhere. Boeing Co. v. Sierracin Corp., 108 Wash. 2d 38, 736 P.2d 665, 675 (Wash. 1987). The researcher’s current salary and his past employment, however, was not generally known, nor was such information readily ascertainable by proper means by persons other than the plaintiff who could obtain economic value from the disclosure or use of such information. The information in the plaintiff’s candidate files was not generally known, or readily ascertainable by proper means. Those files often contained unique, personal information about the candidate, as well as the candidate’s resume. The court does not find credible the defendant’s evidence that, in response to a telephone call from a recruiter, out of the blue, people in marketing research would readily forward their resumes or disclose other personal information.
There are well over 20,000 marketing researchers in the United States. In the absence of personal data about candidates, finding the right candidate for a job opening would be like taking a shot at a target in the dark. Armed with information such as salary, last employer, age, experience and other personal information gleaned from the Alpha list and candidate files, a new enterprise such as the defendant’s could readily ascertain which candidates reached that station in their career to be suitable for a particular job opening. From other information in the candidate files, such as that pertaining to the candidate’s spouse or family, the defendant could further target his search by ascertaining which suitable candidate would be likely to welcome the job change or job relocation presented by the new employment opportunity. Although some of this information might have been obtainable by telephoning the marketing research departments in the various divisions of major corporations throughout the United States, the time and expense in doing so would be enormous. And, while some percentage of the Alpha list was not up-to-date at any given time because researchers changed jobs (or names, by marriage) faster than the plaintiff could keep track of such changes, the Alpha list was still the most efficient vehicle for locating candidates and gauging their qualifications. The plaintiff’s Alpha list and candidate files derive independent economic value from their information not being generally known.
For many years, the plaintiff’s offices have been located on the third floor of a building in the town of Quilford. No other business shared office space with the plaintiff. The picture that emerges from the evidence is of a relatively small office space in a modest building. The main door to the building from the street is locked. There is a separate entry into the plaintiff’s offices which has a dead-bolt and conventional lock. Only Dunsmore, the defendant, and Hoover had keys to the plaintiff’s offices. There was a file room with filing cabinets containing the plaintiff’s files. The door to the file room was locked; only the three recruiters had keys to the room. In addition to the files, candidate and corporate client information was stored on a computer to which Dunsmore alone had the code. It was unusual for anyone to visit the plaintiff’s offices other than to deliver packages. Regular mail deliveries were not made at the offices. Communication with candidates, nearly all of whom resided outside of Connecticut, was accomplished by telephone. In the history of the plaintiff’s business, hardly any candidates visited the office.
Efforts that are reasonable under the circumstances to maintain the secrecy of information for a large company are quire different for a small company, such as the plaintiff company. See Jackson v. Hammer, 274 Ill.App.3d 59, 653 N.E.2d 809, 815, 210 Ill. Dec. 614, rehearing denied, appeal denied, 164 Ill.2d 565, 660 N.E.2d 1270 (1995); Elm City Cheese Co. v. Federico, supra, 251 Conn. 80 (“what may be adequate under the peculiar facts of one case might be considered inadequate under the facts of another”).
Absolute secrecy is not essential. Plastic Metal Fabricators, Inc. v. Roy, supra, 163 Conn. 268. General Statutes 31-51(d)(2) requires only that efforts to maintain secrecy be “reasonable under the circumstances” (Emphasis added.) See Elm City Cheese Co. v. Federico, supra, 251 Conn. 80; cf. Allen Mfg. Co. v. Loika, supra, 145 Conn. 516 (under common law, “reasonable precautionary measures for maintaining...secrecy...were all that were required”). The court finds that the plaintiff undertook efforts that were reasonable under the circumstances to maintain the secrecy of the information in its Alpha list and candidate files.
Whether the defendant made use of the Plaintiff’s Alpha list and candidates files is not a difficult factual question because he admitted doing so. The defendant surreptitiously photocopied or removed original confidential documents of the plaintiff en masse without consent. Toward the end of his employment, the defendant took documents and photocopies without knowledge by Dunsmore and, at his termination, despite Dunsmore’s protest. The defendant then used the information contained in these documents in the recruitment of candidate after his employment had ceased. Clearly, he did not have consent to do so. This was misappropriation.
Having determined that the defendant misappropriated the plaintiff’s trade secrets in violation of General Statutes 35-51(b)(2), the next issue is what the plaintiff’s remedy will be.
The court, Downey, J., granted the plaintiff temporary injunctive relief on September 9, 1998. In the case-in-chief, evidence was heard on March 30, 1999, March 31, 1999, June 29, 1999 and June 30, 1999. Oral argument was held on September 27, 1999, at which time, the plaintiff did not strenuously argue for protracted injunctive relief. After one year, on October 25, 1999, this court terminated that injunction based on equitable considerations, including the interest of the general public in an open marketplace. See New Haven Tobacco Co. v. Perrelli, 11 Conn. App. 636, 642, 528 A.2d 865 (1987), on appeal, after remand, 18 Conn. App. 531, 559 A.2d 715, cert. denied,, 212 Conn. 809, 564 A.2d 1071 (1989) (“the interest the employer seeks to protect must be weighed against the interest of the general public in an open marketplace. See also Robert S. Weiss Associates, Inc. v. Wiederlight, supra, 208 Conn. 529.
From his placement of Fiery, Kohlstruck, Krish, Norgren, Whisler, Wingite, Backs and Rubin, the defendant earned fees of $164,835.00. This is the measure of his unjust enrichment.
General Statutes 35-53(b) provides: “In any action brought pursuant to subsection (a) of this section, if the court finds willful and malicious misappropriation, the court may award punitive damages in an amount not exceeding twice any award made under subsection (a) and may award reasonable attorneys fees to the prevailing party.”
Although the defendant’s action was willful enough, it was not malicious. Malice imports a motivating intent or design, actual or constructive, to harm. Triangle Sheet Metal Works, Inc. v. Silver, 154 Conn. 116, 128, 222 A.2d 220 (1966) (award of punitive damages reversed in action for divulging trade secrets in violation of contract); see Mingachos v. CBS, Inc., 196 Conn. 91, 102-03, 491 A.2d 368 (1985); Markey v. Santangelo, 195 Conn. 76, 77-78,m 485 A.2d 1305 (1985). While the evidence supports a finding that the defendant certainly was motivated to help himself, there is no evidence from which the court may reasonably infer that the defendant intended to harm the plaintiff. See Triangle Sheet Metal Works, Inc. v. Silver supra, 1545 Conn. 128; see also Roton Barrier, Inc. v. Stanley Works, 79 F.3d 1112, 1121 (Fed. Cir. 1996), rehearing denied, on appeal after remand, 108 F.3d 1394 (Fed. Cir. 1997). For this reason, the plaintiff’s claim for punitive damages under General Statutes 35-53(b) is denied.
JUDGMENT ENTERED
FOR MISAPPROPRIATION OF CUSTOMER INFORMATION; UNJUST ENRICHMENT DAMAGES; NO
PUNITIVE DAMAGES.
11. Mafcote Industries v. James River Paper Co., 2000 Conn. Super. LEXIS 210 (January 20, 2000).
The plaintiff raised a genuine issue of material fact as whether the defendant’s transfer of information to the plaintiff’s competitor constituted a violation of the Connecticut Uniform Trade Secrets Act. The Plaintiff’s method for packaging its doilies could qualify as a trade secret. See Elm City Cheese Co. v. Federico, 251 Conn. 59, 75 (1999)(“the fact that every ingredient is known to the industry is not controlling fort the secret may consist of the method of combining them which produces a product superior to that of competitors”). (Internal quotation marks omitted). Requiring the defendant’s employees to sign confidentiality/nondisclosure agreements constitutes sufficient evidence that the plaintiff sought to maintain secrecy concerning its packaging. See Id. at 86 (“reasonable precautionary measures for maintaining the secrecy of the [information were all that were required.”) (“Internal quotation marks omitted). Furthermore, the very fact that both parties sought protective orders in this matter demonstrates the economic importance of the plaintiff’s alleged trade secret. Finally, disclosing information to the plaintiff’s competitors after signing a confidentiality agreement with the plaintiff raises a material issue of fact as to whether the disclosure of information qualifies as a misappropriation. See General Statutes 35-51(b). Accordingly, the court denies the defendant’s motion for summary judgment on the second count of misappropriation of trade secrets because a genuine issue of material fact exists. Contrary to the defendant’s arguments, the definition of misappropriation fails to include evidence of an economic benefit from the disclosure of information. See General Statutes 35-51(b).
ARGUMENT THAT
MISAPPROPRIATION REQUIRES ECONOMIC BENEFIT IS REJECTED; SUMMARY JUDGMENT
DENIED.
12. Kuehn v. Selton & Associates, 2000 Ga. App. LEXIS 293 (March 9, 2000).
Brad Kuehn worked for Selton & Associates, Inc. (“SAI”) as a commercial real estate agent and broker. He negotiated office Jesse transactions with landlords on behalf of SAI’s clients, who were tenants. When the transactions were completed, the landlords paid SAI commissions, which SAI shared with its agents who handled the transactions. Believing that SAI was not paying him the commissions it owed him, Kuehn resigned from his position. A short time later, he established Atlanta Office Realty, Inc.(“AOR”), of which he was the only officer and employee. During his affiliation with AOR, Kuehn used information received during his tenure at SAI and competed with SAI in some lease transactions.
Kuehn sued SAI and its sole shareholder, Daniel Selton, for breach of contract and conversion, seeking to recover commissions he believes were due him but not paid. SAI countersued, claiming Kuehn breached the contract’s non-competition and other provisions, and improperly used and disclosed confidential information and trade secrets belonging to SAI after leaving the company.
On appeal, Kuehn contends the trial court erred in denying his motion for partial summary judgment regarding the enforceability of this restrictive covenant because it is too broad to be enforceable. We agree.
A contract in general restraint of trade or which tends to lessen competition is against public policy and is void. W. R. Grace & Co. v. Mouyal, 262 Ga. 464, 465 (1) (422 S.E.2d 529) (1992). A restrictive covenant contained in an employment contract, however, is considered to be in partial restraint of trade and will be upheld if the restraint imposed is reasonable, is founded on a valuable consideration, is reasonably necessary to protect the interest of the party in whose favor it is imposed, and does not unduly prejudice the interest of the public. Id. A restrictive covenant will only be enforced if it is reasonable in terms of duration, territory, and the scope of activity precluded. Chaichimansour v. Pets Are People Too, No. 2, 226 Ga.App. 69, 70 (1) (485 S.E.2d 248) (1997); Sunstates Refrigerated Svcs. v. Griffin, 215 Ga.App. 61, 62 (2) (449 S.E.2d 858) (1994). To be reasonable, it must be strictly limited as to time and territorial effect. Davis v. Albany Area & C, Inc., 233 Ga.App. 311, 312 (503 S.E.2d 909) (1998). If any clause within a restrictive covenant is unenforceable, the entire covenant must fail; we will not apply the blue-pencil theory of severability to restrictive covenants in employment contracts. Wolff v. Protege Systems, 234 Ga.App. 251, 254-255 (1) (506 S.E.2d 429) (1998).
The restriction at issue in this appeal is unreasonable in terms of duration. It cannot be determined from the contract how long Kuehn’s activities would be restricted. The language “as long as Tenant remains in the building or project” renders the restriction operable for an indefinite number of years.
Furthermore, the territory is not reasonably limited. Where the restriction is broad - for example, not limited to clients the employee served - the territorial limitation must be specified and closely tied to the area in which the employee actually worked. See Chaichimansour, 226 Ga.App. at 70-71 (1); see generally W. R. Grace, supra at 466 (2); Nunn v. Orkin Exterminating Co., 256 Ga.558, 559 (1)(a) (350 S.E.2d 425) (1986); Puritan/Churchill Chemical Co. v. McDaniel, 248 Ga. 850, 851 (1) (286 S.E.2d 297) (1982); Howard Scultz & Assoc. & C. v. Broniec, 239 Ga. 181, 184(1) (236 S.E.2d 265) (1977).
Kuehn’s argument that he was entitled to summary judgment on SAI’s claim that he misappropriated trade secrets is also without merit. He contends that he cannot have misappropriated trade secrets when SAI gave him copies of the files. However, the Georgia Trade Secrets Act not only prohibits wrongful acquisition of trade secrets, it prohibits disclosure of trade secrets acquired under circumstances in which one has a duty to limit the use of the information. OCGA @ 10-1-761(2)(B)(ii)(II), (III). Whether Kuehn misappropriated trade secrets and improperly used confidential information are questions of fact for trial.
BROKER/LEASE INFORMATION; RESTRICTIVE
COVENANT NOT ENFORCEABLE; TRADE SECRET CLAIM SET FOR TRIAL.
13. The State Ex Rel. Lucas County Board of Commissioners v. Ohio Environmental Protection Agency et al., 88 Ohio St. 3d 166 (March 8, 2000).
Respondent Envirosafe Services of Ohio, Inc. (“Envirosafe”) owns and operates a licensed, commercial hazardous-waste landfill in the city of Oregon, Lucas County, Ohio. At this site, Envirosafe treats, stores, and disposes of solid and hazardous waste that is transported to it from Envirosafe’s customers, who generate this waste. A substantial portion of the waste that is handled by Envirosafe is electric are furnace (“EAF”) dust, which is a by-product of steel production. The management of EAF dust is highly competitive, and numerous treatment and recycling options exist for steel mills that generate EAF dust.
Under the testing procedure implemented by Envirosafe to ensure compliance with these environmental land disposal restrictions, Envirosafe “grabs” a sample of hazardous waste generated by its customers and “holds” the sample until it tests whether the trade waste meets the applicable land disposal restrictions, including the TCLP standards. As part of the waste treatment and testing process, Envirosafe created a “1997 Grab and Hold Tracker,” which compiled information concerning its treatment of waste from various waste generators from 1997 to July 1998. The tracker was an internal, informal company record used by Envirosafe’s laboratory personnel for several purposes, including tracking their treatment and results for different waste streams. The tracker was not generated to meet any standard of accuracy or legal requirement and could not be used to determine compliance with the land disposal restrictions. In other words, a test result listed as a failure in the tracker did not necessarily mean a failure to meet the land disposal restrictions; it could have simply referred to an elective failure relating to Envirosafe’s research and development work.
On November 23, 1998, the Director of the Ohio EPA upheld Envirosafe’s trade secrets claim for the generator name, mix time, and that portion of the comments relating to these data fields. In so holding, the director reasoned that “listings of generator identifications submitted to the Ohio EPA by hazardous waste treatment, storage or disposal facilities historically have been considered by this Agency to be confidential as customer lists” and that “the Mix Time entries that are provided will be considered trade secrets of Envirosafe as knowledge of mix times associated with various waste loads is information regarding Envirosafe’s treatment processes that may be of value to competitors.
Instead of appealing the director’s decision to the Environmental Review Appeals Commission, on December 3, 1998, relator Lucas County Board of Commissioners, filed a complaint in the court for a writ of mandamus to compel the Ohio EPA to provide the board with access to the complete, unredacted tracker.
Unlike the list in Urgent Medical Care, however, the generator-names data field is not a simple list of customer names. Instead, the generator-names field in the context of the tracker contains additional information, i.e., its disclosure would permit persons to determine the relative amount of waste each generator sends to Envirosafe, which generates waste fails Envirosafe’s tests more than other generators, whether one generator has more waste streams that are physically different and require different treatment from other generators, and if disclosed with mix times, whether one generator’s waste has to be mixed longer in order to be properly treated.
It does not matter that some of the tracker has been publicly disclosed. “Where documents already in the public domain are combined to form a larger document, a trade secret may exist if the unfiled result would afford a party a competitive advantage.” Plain Dealer, 80 Ohio St.3d at 528, 687 N.E.2d at 674-675; see also, Save Our Selves, Inc. v. Louisiana Environmental Control Comm. (La.App. 1983), 430 So.2d 1114, 1120 (requested information protected as trade secrets because information together with information publicly disclosed in patent would enable business competitors to duplicate secrets).
The fragments of information that the board claims are available through other public sources is not as complete nor as information as the tracker, which provides a comprehensive list of Envirosafe’s current customers and their specific relation to Envirosafe’s treatment of their waste. No other company in the EAF dust-treatment business known all of Envirosafe’s customers and their treatment needs. Therefore, the generator-names data field of the tracker is not readily ascertainable from the public sources specified by the board.
The redacted portions of the tracker give Envirosafe an “opportunity to obtain a business advantage over competitors who do not know or use it.” R.C. 3734.12(G); Ohio Adm. Code 3745-49-031(D). Disclosure of the redacted portions of the tracker would permit an Envirosafe competitor to avoid some of Envirosafe’s expenditures and effort to create and expand its business by using knowledge of Envirosafe’s customers, their wastes, and associated mix time to treat the different wastes. Envirosafe and its employees would consequently be at risk of losing their business and jobs. A competitor could determine that a longer treatment time for certain waste from a specific generator would be more costly than treating the waste from another generator that required a shorter mix time and could thereby target those generators that would be more profitable customers from whom to solicit business.
14. Real-Time Laboratories, Inc., Appellant/Cross-Appellee, v. Predator Systems, Inc., Gordon Yowell, William E. Davis and Duane H. Samuelson, Appellees/Cross-Appellants, 757 So.2d 634; 2000 Fla. App. LEXIS 6216; 25 Fla. Law W. D 1250 (May 24, 2000).
After obtaining a final judgment for damages and enjoining the appellee/cross-appellant, Predator Systems (“Predator”), from future misappropriation of Real Time Laboratories’ (“RTL”) trade secrets, RTL moved for the assessment of attorney’s fees on the ground that the misappropriation was willful and malicious. In addition, RTL moved for contempt for violation of the injunction. The trial court denied both motions. Court of Appeals affirms.
The instant case involves the manufacture and sale of “rate dampers” on Paveway II and III laser-guided bomb systems. RTL, a defense contractor, designed these rate dampers exclusively for Texas Instruments (“TI”). After years of design and testing, RTL produced a rate damper in the 1970’s which met TI’s specifications. This rate damper was designed for the P II bomb and was the first of its kind. In the late 1970’s or early 1980’s, RTL began to design a new damper for the Paveway III bomb. The design also satisfied TI’s specifications. From 1983 to 1992, RTL was the first and only company to successfully design qualified rate dampers for the P III laser-guided bomb.
During this time, William Davis, Gordon Yowell, Gentry Ellis and Duane Samuelson headed the project. Each of them entered into an Employee Patent and Confidential Information Agreement with RTL, which noted that they had agreed not to disclose to anyone during or subsequent to employment, information not already available to the public relating to products, materials, sales methods, design, manufacturing process or business method. In February of 1988, Yowell, Davis and Samuelson all resigned from RTL. One week later they formed a new corporation called Predator Systems, Inc. Several months later Ellis also resigned from RTL and joined Predator’s engineering staff.
Because RTL was not able to meet TI’s production needs, TI approached Predator in 1991 regarding manufacturing a rate damper for the P III bomb. By 1991, TI awarded Predator a contract to build several units of the P III damper. In analyzing Predator’s qualifications, TI noted that Predator was “staffed by former engineers from Real-Time Labs.” When RTL discovered that Predator was manufacturing these bomb parts, it objected to Predator and later RTL filed suit against Predator asserting that Predator had misappropriated trade secrets relating to the rate dampers it produced. The complaint sought monetary damages and injunctive relief.
After a trial of the issues, the court found that Predator’s P III design was “substantially similar” to the existing RTL design, noting that the differences can be traced to the different type of hydraulic fluid. Most importantly, this change to RTL’s design required the relocation of a pathway leading from the chamber to the fluid reservoir to allow for expansion of the fluid when the unit was warmed. Thus, Predator had modified RTL’s original design. The court also found that Predator and its management were aware of RTL’s design and value, and that the company acted in “knowing disregard of RTL’s trade secret rights.” Furthermore, the court noted that ‘the obvious similarities between RTL and Predator designs are not matters of coincidence.”
The trial court concluded that under section 688.002 of the Uniform Trade Secrets Act (“UTSA”) the defendants had breached the confidentiality agreement and relationship by misappropriating RTL’s trade secrets. In addition, despite the defendants’ claim that they altered, modified or improved RTL’s design, the court found that the user of another’s trade secret is liable, even if it is used with modification or improvement. Finally, the court found that Predator misappropriated RTL’s damper costs and pricing. The court awarded damages in the amount of profits earned by Predator. It also provided for injunctive relief, requiring Predator to account to RTL for all of its profits from future sales of the P III damper and to pay them to RTL. However, although the court declined to enter an injunction to forbid Predator from making sales of the damper to TI, it did enjoin Predator from making sales to anyone else. Furthermore, the court ordered:
the
defendants will each be further enjoined from any future misappropriation of RTL’s
trade secrets, as through the utilization of any confidential information
regarding the design and manufacture of any component for any weapons system
designed or manufactured by RTL during any of the individual defendants’
tenures at RTL.
Predator
appealed the final judgment, but the appeal was dismissed.
Section 688.005, Florida Statutes (1995) provides, in pertinent part, that “if … willful and malicious misappropriation exists, the court may award reasonable attorney’s fees to the prevailing party.” (Emphasis supplied). RTL argues that “willful and malicious” requires only that the trade secrets were taken with “knowing or reckless disregard.” Predator not only disputes that standard but also argues that in any event the court is given discretion whether to award fees even if it finds a willful and malicious misappropriation, and the trial court cannot be shown to have abused its discretion in denying the fee request under the facts of this case. Cf. Canakaris v. Canakaris, 382 So.2d 1197, 1203 (Fla. 1980) (defining the abuse of discretion standard).
To support its position, RTL relies most strongly on two federal cases in which the appellate court affirmed the award of attorney’s fees by the district court. In Mangren Research, discussed supra, the court said that “although we have found no Illinois case interpreting that phrase [willful and malicious, it surely must include an intentional misappropriation as well as a misappropriation resulting from the conscious disregard of the rights of another.” 87 F.3d at 946 (citations omitted). The conduct of the misappropriating parties in Mangren, however, was far more egregious than the facts present in this case. In Mangren, two employees who had been terminated from Mangren formed a new corporation with a third party to manufacture the same product that these employees had been involved with at Mangren. At the time the new corporation was formed, they discussed the fact that they might be sued by Mangren if they developed a competing product, but the third incorporator explained that he had once been sued for a trade secret violation but had won the case by changing one ingredient in creating the new product. He laughed and said that the same would happen if Mangren sued them. The new corporation then set about to produce the new product and market it to Mangren’s largest customer.
In contrast, there was no testimony that the employees of RTL who incorporated Predator set out to use RTL’s trade secrets to undermine its business. Predator was formed two years before any interest it had in the P III rate damper. It was only after RTL experienced production problems on the P III during the Gulf War that TI approached Predator about the possibility of Predator being a secondary source for the P III rate damper. Thus, even if the misappropriation could be considered by the court to be knowing, the court may have concluded that Predator did not set out to compete or to steal RTL’s main customer, as in Mangren.
In Boeing Co. v. Sierracin Corp., 108 Wa.2d 38, 738 P.2d 665 (Wash. 1987), the trial court also awarded attorney’s fees in a trade secret misappropriation case, but again the facts are substantially different from those present here. Sierracin had manufactured plane windows for Boeing, using blueprints developed by Boeing. As part of each contract Boeing signed with Sierracin, Boeing required it to agree not to use the drawings for any purpose other than exclusive Boeing manufacture. Sierracin had signed more than 270 agreements with this provision. At some point, Boeing decided not to continue its relationship with Sierracin, but Sierracin decided to continue to manufacture the Boeing windows on its own for the “after market” (spare parts). Even though a Boeing official warned Sierracin against using Boeing’s drawings for this purpose, Sierracin ignored the warning and used the drawings to obtain its own authorization from the FAA to manufacture these windows. On these facts, the trial court awarded attorney’s fees finding that Sierracin knew its actions were of “dubious legality.” 738 P.2d at 680. “The trial court did not believe that Sierracin ever entertained any honest doubt as to the legality of its conduct, but took a calculated risk and lost.” Id. at 680‑81.
In the instant case, while the Predator s had agreed to non-disclosure requirements with RTL, they did not set out from the start to violate those agreements. There is evidence from which it could be concluded that Predator had a reason to believe that its design was not a violation of the policy, as TI had discussed the subject, and Predator had represented that neither the s nor the corporation were concerned that it was violating the terms of its non-disclosure agreement.
In both Mangren and Boeing the appellate court affirmed the trial court’s findings and rulings. RTL has not pointed us to a similar case where the appellate court has reversed the denial of an attorney’s fee award. The statute gives the trial court discretion to award attorney’s fees even if the actions of the misappropriating parties is found to be willful and malicious. In this case, the trial court determined that the actions of Predator were not malicious and denied the attorney’s fees. The trial court’s finding is supported by competent, substantial evidence, and its denial of attorney’s fees cannot be said to be an abuse of discretion. Cf. Canakaris, 382 So.2d at 1203.
INSUFFICIENT
EVIDENCE TO SUPPORT AN AWARD OF ATTORNEY’S FEES FOR WILLFUL AND MALICIOUS
MISAPPROPRIATION OF TRADE SECRETS.
15. Danforth Associates, Inc. et al. v. Michael C. Gagnon et al., 2000 Conn. Super. LEXIS 1648 (May 5, 2000).
The plaintiff in this action is an insurance agency located in Milford, Connecticut. The defendant Michael Gagnon is an insurance agent who was employed by the plaintiff for a period of several years which employment terminated with the defendant’s resignation on or about June 21, 1999. The co-defendant is the Founders Insurance Group, Gagnon’s employer subsequent to his resignation. It is the plaintiff’s claim that when the defendant Gagnon left the plaintiff’s employment he thereafter utilized a list of customers of the plaintiff which list the plaintiff contends falls within the ambit of “Trade Secrets” as defined by Section 35‑50 C.G.S. Such use prohibited under the statute caused the plaintiff damage and in the second count of the two-count complaint it is claimed that Gagnon violated an employee’s duty of loyalty to his employer.
The defendant prior to coming into employment with the plaintiff insurance agency in 1991 in the capacity of an agent had many years of experience with insurance agencies located in Hartford, Connecticut and elsewhere and had developed an area of specialization which involved soliciting clients with a common area of activity, i.e. fuel oil dealers, trash haulers, etc., according to his testimony. He became dissatisfied with his situation in Hartford and looked for employment elsewhere and happened to contact George Smith of the plaintiff agency in Milford. His role with the Smith Agency drew upon his knowledge of clients at his former place of employment as well as developing new clients with leads being produced by telemarketers at the plaintiff’s agency and analysis of insurors’ records.
“A list of customers may be a trade secret,” Town and Country House and Homes Service, Inc. v. Evans, 150 Conn. 314, 318, 189 A.2d 390 (1963). Nevertheless, a substantial element of secrecy must exist, to the extent that there would be difficulty in acquiring the information except by the use of improper means,” id., 319 189 A.2d 390. Factors to be considered in determining if information is a trade secret include (1) the extent the information is known outside the business; (2) the extent to which it is known by employees or others involved in the business; (3) the extent of measures taken by the employer to guard the secrecy of the information; (4) the value of the information to the employer and to his competitors; (5) the amount of effort or money expended by the employer in developing the information; (6) the ease or difficulty with which the information could properly be acquired or duplicated by others (citation omitted).” Robert S. Weiss and Associates, Inc. v. Wiederlight, 208 Conn. 525, 538, 546 A.2d 216 (1988).
The evidence offered by the parties during the course of the trial suggests that the methods employed by the plaintiff to develop a “customer list” were by no means unique. In fact, Gagnon employed the same techniques prior to his employment by the plaintiff and according to other witnesses the lists were made up by inquiries to insurance carriers, present clients, association news letters and telephone listings in the Yellow Pages. The court concludes that there was nothing esoteric about any customer list maintained by the plaintiff and that Gagnon apparently simply continued some of his marketing practices which had been successful for him at prior places of employment as well as drawing on his own contacts prior to Smith’s employment. Several witnesses testified that no copies of lists were taken by Gagnon when he terminated his employment with the plaintiff and any reconstruction which took place after his termination was done from his prior experience while at plaintiff’s agency and prior places of employment.
Another requirement to establish that a customer list is a trade secret is the effort on the part of the proponent to ensure that the list or compilation is protected from disclosure. The evidence offered indicated that the plaintiff took no steps to advise employees of the requirement of confidentiality and there were no agreements executed by employees with regard to protecting such claimed “Trade Secrets”; the lists were readily available without restriction, and one of the witnesses who had occasion to use the lists never heard of any “locked bin” as testified to by one of the witnesses for the plaintiff.
CUSTOMER
LIST/INFORMATION NOT PROTECTABLE AS TRADE SECRET (INSURANCE AGENT).
16. Biocore, Inc. et al. v. Hamid Khosrowshahi, 96 F.Supp.2d 1221, 2000 U.S. Dist. LEXIS 7196 (May 4, 2000).
The existence of a trade secret under the Kansas Uniform Trade Secrets Act is a question of fact for determination by the trier of fact. All West Pet Supply Co. v. Hill’s Pet Products Div., 840 F.Supp. 1433, 1437 (D. Kan. 1993). The Kansas Uniform Trade Secrets Act (KUTSA), K.S.A. 60‑3320 et seq., defines a trade secret as
Information, including a formula, pattern, compilation, program, device, method, technique, or process, that:
(i) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and
(ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.
K.S.A. § 60‑3320(4). Whether customer information is generally known or readily ascertainable is a question of fact. All West, 840 F.Supp. at 1438. Similarly, whether the possessor of such information has taken reasonable steps to protect its secrecy is also a question of fact. Id.
Whether defendant disclosed or used plaintiffs’ alleged trade secrets is also a question of fact. See Hudson Hotels Corp. v. Choice Hotels Int’l, 995 F.2d 1173, 1178 (2d Cir. 1993); Heyman v. A.R. Winarick, Inc., 325 F.2d 584, 588 (2d Cir. 1963). Defendant, as a former vice president of BioCore and president of BMT, had a duty not to disclose any trade secrets he acquired while employed by plaintiffs. Testimony of Hamid Khosrowshahi, Volume I (Doc. #610) at 42 (testifying as to positions held); Koch Engineering Co., Inc. v. Faulconer, 227 Kan. 813, 828, 610 P.2d 1094, 1105 (1980) (former employee has duty not to disclose trade secrets).
The record contains little evidence which suggests that Khosrowshahi disclosed any information regarding equipment, modifications and processing conditions. Plaintiffs rely mainly on circumstantial evidence which allegedly suggests that Integra hired Khosrowshahi in exchange for his agreement to disclose trade secrets. Plaintiffs attempt to meet their burden of proof by establishing that (1) Khosrowshahi had access to documents which detail most of plaintiffs’ manufacturing conditions and (2) Khosrowshahi had a significant falling out with Jain and wanted to harm plaintiffs in the best way he could—by driving them out of business. Plaintiffs must do more, however, than merely establish that Khosrowshahi knew trade secrets and had an evil heart. While plaintiffs suggest that Khosrowshahi had reasons to harm them, such evidence does not establish that he acted on his alleged motive by disclosing trade secrets. Plaintiffs’ evidence simply does not establish that Khosrowshahi misappropriated trade secrets. Just as plaintiffs cannot “simply persist in the blunderbuss statement that ‘Everything you got from us was a trade secret,’” QAD, Inc. v. ALN Associates, Inc., 1990 U.S. Dist. LEXIS 7458, 1990 WL 93362 at *2 (N.D. Ill. 1990), plaintiffs must likewise identify with specificity what trade secrets Khosrowshahi disclosed. See Utah Medical Prods., Inc. v. Clinical Innovations Associates, Inc., 79 F.Supp.2d 1290, 1312‑13 (D. Utah 1999); Pulsecard, Inc. v. Discover Card Servs., Inc., 1996 WL 137819 at *3 (D. Kan. 1996); AMP Inc. v. Fleischhacker, 823 F.2d 1199, 1203 (7th Cir. 1987). Plaintiffs must offer more than vague assertions that “defendant could not help but use trade secret information.” Utah Med. Prods., 79 F.Supp.2d at 1313. Plaintiffs have little evidence, however, that hints at disclosure of specific information regarding their manufacturing processes.
Further, plaintiffs fail to meet their burden of proving that Khosrowshahi had access to any customer database, that he took this database with him when he left, and that he disclosed the customer list to Integra. While plaintiffs suggest that Khosrowshahi had access to all of their documents, and that he took thousands of documents when he left, the record contains no evidence that the database could be (or was) reduced to document form. Even assuming that it was both reducible and reduced, the record does not suggest that Khosrowshahi disclosed any customer list to Integra or that he or Integra used the customer list. While plaintiffs produce evidence that Integra wanted Khosrowshahi to target existing collagen customers, this evidence does not allow an inference of disclosure because Integra never introduced a competing product into the marketplace. Even assuming that Khosrowshahi would have disclosed plaintiffs’ customer list, the record quite simply suggests that he never did so because Integra never created a product which it could sell to plaintiffs’ customers.
Based on the above discussion, the Court finds that plaintiffs have not met their burden of proving that Khosrowshahi misappropriated plaintiffs’ trade secrets in violation of the KUTSA, K.S.A. 60‑3320 et seq. Plaintiffs further fail to show any risk of future disclosure, since Integra abandoned its collagen wound care project no later than January of 1998.
Plaintiffs argue that even if the Court finds that Khosrowshahi did not misappropriate trade secrets, plaintiffs can recover if the Court finds that Khosrowshahi misappropriated confidential information.
Plaintiff does not come forward with any Kansas case or statute that recognizes a cause of action for “misappropriation of confidential information.” In fact, it appears that in terms of tort liability for misappropriation, Kansas courts do not distinguish trade secrets and confidential information. See Wilkin v. Sunbeam Corp., 377 F.2d 344, 346 (10th Cir. 1967) (applying trade secret elements to claim of “misappropriation of confidential information”); Morrison v. Woodbury, 105 Kan. 617, 185 P. 735, 737 (1919) (equating trade secret with confidential information); see generally Southwestern Bell Telephone Co. v. State Corp. Commission, 6 Kan. App. 2d 444, 457, 629 P.2d 1174, 1184 (1981) (“For purposes of disclosure, any distinction between trade secrets and confidential commercial information would appear immaterial”). Even if confidential information can be something less than a trade secret, it must at least be a trade secret to give its owner a property right in it. See Puritan-Bennett Corp. v. Richter, 235 Kan. 251, 256, 679 P.2d 206, 211 (1984) (if knowledge does not qualify for protection as trade secret, court should not inhibit employee’s ability to use knowledge to further career) (quoting Great Lakes Carbon Corp. v. Koch Industries, 497 F.Supp. 462, 471 (S.D. N.Y. 1980)); see also Koch v. Faulconer, 227 Kan. at 831, 610 P.2d at 1107 (noting that former employees can only be enjoined from using customer lists when lists qualify as trade secrets). While Kansas might apply a lesser standard for confidential information in cases of fiduciary duty, that question is not before the Court because it has already dismissed plaintiff’s claim for breach of fiduciary duty. The Court therefore finds that plaintiffs cannot recover on any claim for misappropriation of confidential information.
INSUFFICIENT
EVIDENCE TO ESTABLISH MISAPPROPRIATION; NO CAUSE OF ACTION FOR MISAPPROPRIATION
OF CONFIDENTIAL INFORMATION.
17. Chasteen et al. v. UNISIA JECS Corp. et al., 2000 U.S. App. LEXIS 15553 (10th Cir., July 5, 2000).
In 1997, Injection Research Specialists, Inc. and Pacer Industries, Inc. (collectively, “Injection Research”) filed suit against Arctic Cat, Inc., Arctic Cat Sales, Inc. (collectively, “Arctic Cat”), Suzuki Motor Corp. (“Suzuki”) and UNISIA JECS Corp. (“JECS”) (collectively, the “Defendants”), claiming the Defendants committed trade secret misappropriation and fraud. Specifically, Injection Research alleged the Defendants stole its trade secrets and used them to develop an electronic fuel injection (“EFI”) system for two-cycle snowmobile engines. The Defendants moved for summary judgment on both claims, contending Injection Research filed suit after the statutes of limitations had run. Applying a three-year statute of limitations to both the trade secrets and fraud claims pursuant to Colorado state law, the District Court for the District of Colorado granted the Defendants’ motion and dismissed the suit as time-barred.
Injection Research now appeals the grant of summary judgment, asserting the following three arguments: (1) the district court erroneously concluded that Injection Research’s misappropriation claim accrued more than three years before it filed suit; (2) even if Injection Research filed its misappropriation claim outside the limitations period, the Defendants’ wrongful concealment of information equitably tolled the statute of limitations; and (3) the fraud claim should be governed by Minnesota’s six-year statute of limitations, and thus, that claim was timely filed. All these arguments rejected and 10th Circuit affirms.
This court reviews de novo a grant of summary judgment. See Charter Canyon Treatment Ctr. v. Pool Co., 153 F.3d 1132, 1135 (10th Cir. 1998). Summary judgment is appropriate “if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.” Fed. R. Civ. P. 56©. A “material fact” is one which could have an impact on the outcome of the lawsuit, while a “genuine issue” of such a material fact exists if a rational jury could find in favor of the non-moving party based on the evidence presented. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48, 91 L.Ed.2d 202, 106 S.Ct. 2505 (1986). In applying this standard, this court views the evidence and draws reasonable inferences therefrom in a light most favorable to the non-moving party. See Kaul v. Stephan, 83 F.3d 1208, 1212 (10th Cir. 1996).
“An action for misappropriation of a trade secret shall be brought within three years after the misappropriation is discovered or by the exercise of reasonable diligence should have been discovered. For the purposes of this section, a continuing misappropriation constitutes a single claim.” Col. Rev. Stat. § 7‑74‑107. The statutory definition of “misappropriation” includes both disclosure and use of a trade secret in contravention of a duty to maintain its secrecy. See Id. § 7‑74‑102(2)(b)(II). Injection Research filed the instant suit against the Defendants on December 12, 1997. If, therefore, Injection Research knew or should have discovered prior to December 12, 1994 that Arctic Cat, Suzuki, and JECS misappropriated its trade secrets, Injection Research filed its trade secrets misappropriation claim beyond the limitations period.
The Fall 1989 issue of Snowmobiler’s Race & Rally magazine contained an article entitled “Fuel Injection Under development at Arctic Cat.” On November 2, 1989, that article was faxed to Injection Research. Ronald Chasteen admitted in his deposition testimony that in the article, a manager at Arctic Cat disclosed trade secrets belonging to Injection Research in violation of Arctic Cat’s confidentiality agreement. In November 1989, therefore, more than six years before filing the instant lawsuit, Injection Research had actual knowledge that Arctic Cat had misappropriated its trade secrets by disclosing them when it had a duty to maintain their secrecy. Even though in the instant suit Injection Research more directly complained of Arctic Cat’s use of its trade secrets, rather than disclosure of them, the controlling statute of limitations states, “For purposes of this section, a continuing misappropriation constitutes a single claim.” Id. at § 7‑74‑107.
In interpreting an identical statute of limitations provision in California’s version of the Uniform Trade Secrets Act (“UTSA”), the Ninth Circuit similarly held that the statute of limitations begins to run once a plaintiff learns a defendant improperly disclosed trade secrets, even though the defendant subsequently may also have unlawfully used those same trade secrets. See Ashton-Tate Corp. v. Ross, 916 F.2d 516, 523-24 (9th Cir. 1990).
Furthermore, whether Chasteen or anyone else at Injection Research understood that the disclosures legally constituted a misappropriation of trade secrets is of no consequence, as long as Injection Research knew the facts which could give rise to such a claim. Cf. Morris v. Geer, 720 P.2d 994, 997 (Colo. App. 1986) (“What is critical in determining when a legal malpractice action accrues is knowledge of the facts essential to the cause of action, not knowledge of the legal theory upon which an action may be brought.”). Because it is undisputed that Injection Research had actual knowledge Arctic Cat misappropriated its trade secrets more than six years before filing the instant suit, the district court properly ruled that Injection Research’s misappropriation claim against Arctic Cat was filed outside the limitations period.
Injection Research cites Sokol Crystal Products, Inc. v. DSC Communications Corporation for the proposition that mere suspicion of misappropriation does not trigger the statute of limitations. See 15 F.3d 1427, 1430 (7th Cir. 1994); see also Intermedics, Inc. v. Ventritex, Inc., 775 F.Supp. 1258, 1266 (N.D. Cal. 1991) (“Intermedics I”) (“Suspicion and fear are not sufficient predicates for launching a lawsuit ….”). In Sokol, the plaintiff never discovered or produced evidence to directly demonstrate that the defendant used plaintiff’s confidential information in developing a product; “instead, the jury inferred the misuse from the fact that [the defendant had access to this information and from the similarity between Sokol’s and [the defendant’s products.” 15 F.3d at 1429-30. The Seventh Circuit concluded, based on Sokol’s lack of knowledge, that the statute of limitations did not begin to run until the defendant’s product was sold on the market. See Id. at 1430. Contrary to Injection Research’s position, therefore, the lesson of Sokol is that the statute of limitations on trade secret misappropriation claims begins to run not when a plaintiff can positively and directly prove misappropriation rather than independent development, but simply when the plaintiff has knowledge of sufficient facts from which a reasonable jury could infer misappropriation.
A rule such as the one Injection Research proposes, under which a statute of limitations only begins running when a plaintiff can unassailably establish a legal claim for trade secret misappropriation, would effectively eviscerate the statute of limitations in all cases in which the plaintiff never discovers “smoking gun” evidence of misappropriation, but instead must rely on circumstantial and inferential evidence to prove misappropriation. The District Court for the Northern District of California recognized a further absurd consequence which would flow from Injection Research’s proposed approach:
Under
plaintiff’s theory, a defendant could successfully invoke the statute of
limitations only by proving, in trial, that at an earlier time, outside the
limitations period, plaintiff would have established liability if it had
litigated the matter to judgment.
Defendant, in other words, would be required to litigate against herself
the plaintiff’s stale claim, introducing the evidence that plaintiff would have
introduced in the hypothetical earlier litigation, then introducing the
evidence that she as defendant would have presented, and then asking the jury
to find that she (as defendant) would have lost.
Intermedics, Inc. v. Ventritex, Inc., 822 F.Supp. 634, 641 (N.D. Cal. 1993) (“Intermedics II”).
In sum, as early as October 1991, Injection Research had knowledge of sufficient facts from which a reasonable jury could infer that JECS and Suzuki had misappropriated Injection Research trade secrets to develop an EFI system for use in Arctic Cat snowmobiles. The district court therefore properly ruled that Injection Research had filed its misappropriation of trade secrets claim against JECS and Suzuki beyond the three-year statute of limitations. The misappropriation claim against Arctic Cat was also filed outside the limitations period because Injection Research had actual knowledge in November 1989 that Arctic Cat improperly disclosed Injection Research trade secrets.
The Colorado Supreme Court has adopted the doctrine of equitable tolling of the statute of limitations “where the defendant’s wrongful conduct prevented the plaintiff from asserting his or her claims in a timely manner.” Dean Witter Reynolds, Inc. v. Hartman, 911 P.2d 1094, 1096 (Colo. 1996). Injection Research has alleged no wrongful conduct committed by defendant Suzuki which may have prevented Injection Research from timely filing its misappropriation claim against Suzuki. Because “the principle underlying equitable tolling [for wrongful concealment is that a person should not be permitted to benefit from his or her own wrongdoing,” Injection Research’s failure to file its misappropriation claim against Suzuki within the limitations period cannot be saved under the doctrine of equitable tolling absent evidence that Suzuki itself wrongly concealed information. Id. at 1096-97 (emphasis added).
The mere denial of liability, which is what an assertion of independent development amounts to in the face of a trade secret misappropriation claim, is not “wrongful conduct” which implicates the doctrine of equitable tolling. Id. at 1096. To hold otherwise would place defendants in the untenable position of either admitting liability or foregoing a statute of limitations defense.
However, JECS’s failure to produce documents regarding the development history of its EFI system, which Injection Research sought to discover in the Polaris litigation, could potentially require the equitable tolling of the limitations period. “Equity will toll a statute of limitations if a party fails to disclose information that he is legally required to reveal and the other party is prejudiced thereby.” Garrett v. Arrowhead Improvement Ass’n, 826 P.2d 850, 855 (Colo. 1992) (emphasis added).
Because Injection Research has failed to provide this court with a sufficient record to determine the appropriateness of summary judgment on the issue of whether, prior to October 1994, JECS withheld discovery documents which it was legally required to produce, we cannot employ the doctrine of equitable tolling to disturb the district court’s judgment that Injection Research’s misappropriation of trade secrets claims against JECS was time-barred. See Tilton v. Capital Cities/ABC, Inc., 115 F.3d 1471, 1474 (10th Cir. 1997) (stating that if “the appellant’s appendix is insufficient to permit assessment of [a claim of error, we must affirm”). We therefore conclude the district court properly dismissed Injection Research’s misappropriation claim against the Defendants for its failure to file the claim within the three-year statute of limitations period.
Because we concluded that Injection Research’s misappropriation of trade secrets claim against all three defendants accrued more than six years before it filed suit and because Injection Research bases its fraud claim on the same conduct as it does its misappropriation claim, the district court’s choice of law on the proper statute of limitations for fraud is irrelevant. Injection Research’s fraud claim was filed outside the limitations period established in either Minnesota or Colorado.
TRADE SECRET
MISAPPROPRIATION CLAIM TIME-BARRED BY COLORADO UTSA 3-YEAR STATUTE OF
LIMITATIONS.
18. Cook Group Inc., et al v. Wiltek Medical Inc., 248 B.R. 745; 2000 U.S. Dist. LEXIS 7380 (M.D. N.C., May 23, 2000).
This appeal is from the United States Bankruptcy Court for the Middle District of North Carolina.
The bankruptcy court, in its Memorandum Opinion of May 22, 1995, found that Wiltek had misappropriated nine of Cook’s trade secrets and awarded compensatory and punitive damages to Cook. The bankruptcy court also enjoined Wiltek from using these nine trade secrets, as long as they remained trade secrets. At a later time, the court entered an order that allowed Cook to conduct one surprise inspection of Wiltek’s manufacturing facilities in order to ensure compliance with the injunction.
Cook conducted this inspection on October 1, 1997, and thereafter alleged that Wiltek was using five of the processes that earlier had been declared by the bankruptcy court to be trade secrets. Cook filed a Motion for Entry of Rule or Order to Show Cause in which it requested that the bankruptcy court determine whether Wiltek was in contempt of the court’s May 22, 1995, Order and Injunction. Specifically, Cook alleged the continuing misappropriation of five of Cook’s trade secrets, including Trade Secrets 5, 6, and 8. The bankruptcy court held several hearings on the matter, and on December 8, 1997, the court entered a Second Memorandum Opinion. In this opinion, the court found that Wiltek had misappropriated Cooks’ Trade Secrets 5, 6, and 8.
Ten days after this opinion was entered, Wiltek filed an Emergency Motion for Stay and Reconsideration.
After several hearings and a period of discovery, the opinion was amended and vacated in part by the bankruptcy court in its May 7, 1998, Order and Amendment to the Second Memorandum Opinion. The court found that Trade Secrets 5, 6, and 8 were no longer trade secrets because the processes were “readily available in the public domain,” and thus, Wiltek was not in contempt.
In this case, those issues were determined in 1995, when the bankruptcy court concluded that Trade Secrets 5, 6, and 8 were protected as trade secrets and that Wiltek had misappropriated these trade secrets. (Injunction and Judgment, No. 6:90CVS00206, May 22, 1995; Memorandum Opinion, Findings of Fact and Conclusions of Law, May 22, 1995.) At that time, the court issued an injunction that prohibited Wiltek from using any of Cook’s trade secrets “for as long as said trade secrets continue to exist.” (Injunction and Judgment, at 1, May 22, 1995.)
This remedy was in accord with the North Carolina Trade Secrets Protection Act, which provides that “misappropriation … shall be permanently enjoined upon judgment finding misappropriation for the period that the trade secret exists plus an additional period as the court may deem necessary.” N.C. Gen. Stat. § 66‑154(a).
This remedy, specified by the North Carolina legislature, implicitly affirms a principle of trade secret law that the Fourth Circuit recognized in the 1930s. That is, “the long-recognized principle of equity that no man ought to be allowed to enrich himself unjustly at the expense of another.” Hoeltke v. C.M. Kemp Mfg. Co., 80 F.2d 912, 928 (4th Cir. 1936).
The bankruptcy court then reexamined the issue in its May 7, 1998 order. At that point, the court concluded that the processes were readily available in the public domain, and therefore were no longer trade secrets. While this finding would furnish a complete defense to an original claim of trade secret misappropriation, it does not completely answer the question in this contempt proceeding. In this proceeding, there has already been an initial finding that Wiltek illegally appropriated the trade secrets. There is, however, no finding that Wiltek’s present use of the processes is not simply a continuation of the misappropriation and, therefore, a violation of the bankruptcy court’s original injunction. Once a process has been adjudicated a trade secret, the law protects that secret from those who obtain it illegally. This is the essence of misappropriation, which is defined as the “acquisition, disclosure, or use of a trade secret of another … unless such trade secret was arrived at by independent development, reverse engineering, or was obtained from another person with a right to disclose the trade secret.” N.C. Gen. Stat. § 66‑152(1).
Wiltek, which had previously misappropriated the trade secret, would be allowed to use the process only after that process was (1) no longer a trade secret and (2) Wiltek had obtained the process lawfully. In essence, Cook’s prima facie case of misappropriation was established by the 1995 injunction and judgment entered against Wiltek. Thus, at the 1997 hearing, Wiltek should have had the burden of rebutting this prima facie case. In order to rebut this evidence, Wiltek would need to introduce substantial evidence that it “acquired the information comprising the trade secret by independent development, reverse engineering, or it was obtained from another person with a right to disclose the trade secret.” N.C. Gen. Stat. § 66‑155.
Such a decision is consistent with cases from other jurisdictions. In a case for conversion of trade secrets and unfair competition, a federal district court in Florida stated, “The principle that because a secret is of such a nature that it can be discovered by lawful means does not deprive its owner of a right to protection from those who obtain it unlawfully is not only generally accepted, it is also sagacious.” Biodynamic Techs., Inc. v. Chattanooga Corp., 644 F.Supp. 607, 611 (S.D. Fla. 1986). In another trade secrets case, the Indiana Supreme Court held that “even if information potentially could have been duplicated by other proper means, it is no defense to claim that one’s product could have been developed independently of plaintiff’s, if in fact it was developed by using plaintiff’s proprietary designs.” Amoco Prod. Co. v. Laird, 622 N.E.2d 912, 918 (Ind. 1993) (internal quotation omitted).
Although not a trade secrets case, support for this holding can also be found in a case involving claims of patent infringement and unfair competition decided by the Fourth Circuit. See Servo Corp. of Am. v. General Elec. Co., 393 F.2d 551, 555 (4th Cir. 1968). In Servo, the court rejected a case from Pennsylvania, stating that “if [the case holds that the mere presence in the public domain of the information upon which a trade secret is based precludes recovery for breach of a confidential relationship, we decline to follow it.” Id. at 555. The court continued to say that it was irrelevant that the information was in the public domain, unless the defendant could meet the burden of proving that it developed the process that it was using from that information in the public domain and not from the confidential relationship that existed between the plaintiff and defendant.
Thus, the burden should have been placed on Wiltek to show that it obtained the processes that it was using in October of 1997 either through independent development or from someone with a right to disclose the processes.
On remand the bankruptcy court, of course, may consider all aspects relating to whether Wiltek should be held in contempt. In order for civil contempt to be appropriate, the injunction issued by the court must be clear, unambiguous, and set forth in specific detail the behavior that is to be avoided. See In re General Motors Corp., 61 F.3d 256, 258 (4th Cir. 1995); see also International Longshoremen’s Ass’n v. Philadelphia Marine Trade Ass’n, 389 U.S. 64, 76, 19 L.Ed.2d 236, 88 S.Ct. 201 (1967) (“The judicial contempt power is a potent weapon. When it is founded upon a decree too vague to be understood, it can be a deadly one.”).
The burden to prove civil contempt is on Cook and must be established by clear and convincing evidence. See id. Willfulness is not an element, and contempt may even be established where the act that violated the court’s order was done innocently. See id.; McComb v. Jacksonville Paper Co., 336 U.S. 187, 191, 93 L.Ed. 599, 69 S.Ct. 497 (1949).
CONTEMPT
PROCEEDING: BURDEN OF PROOF ON DEFENDANT TO SHOW LAWFUL MEANS; “COULD HAVE”
DEFENSE REJECTED UNDER NORTH CAROLINA LAW.
19. United States v. Martin 228 F.3d 1 (First Cir. September 28, 2000).
On September 16, 1998, a grand jury returned an indictment charging Dr. Stephen R. Martin and Caryn L. Camp with ten counts of ira fraud, two counts of mail fraud, one count of conspiracy to steal trade secrets, one count of conspiracy to transport stolen goods, and one count of interstate transportation of stolen goods. Camp agreed to testify against Martin as part of a plea agreement. Martin proceeded to trial, where a jury found him not guilty on six counts of wire fraud (counts 1-6) and on interstate transportation of stolen goods (count 15). The jury found Martin guilty on*2 the remaining counts of wire fraud (counts 7-10), mail fraud (counts 1-12), conspiracy to steal trade secrets (count 13), and conspiracy to transport stolen property in interstate commerce (count 14).
First Circuit Affirmed.
The jury found Martin guilty of count 13, which charged him with conspiracy to steal trade secrets in violation of the Economic Espionage Act of 1996. Specifically 18 U.S.C. § 1832(a) (5). n7 In order to find a defendant guilty of conspiracy, the prosecution must prove (1) that an agreement existed, (2) that it had an unlawful purpose, and (3) that the defendant was a voluntary participant. See United States v. Echevarri, 982 F. 2d 675, 679 (lst. Cir. 1993).The government must prove that the defendant possessed both the “intent to agree and (the) intent to commit the substantive offense.” United States v. Andujar, 19 F. 3d 16, 20 (1st Cir. 1995) (citing United States v. Garcia, 983 f. 2nd 1160, [165 (1st Cir. 1993)). In addition, the government must prove that at least one conspirator committed an “overt act,” that ism took an affirmative step toward achieving the conspiracy’s purpose. 17 See 18 U.S.C., § 1832 (a) (5); United States v. Cassiera, 4 F. 3d 1006, 1014 (1st Cir. 1993).
The agreement need not be express, however, as long as its existence may be inferred from the “defendants’ words and actions and the interdependence of activities and persons involved.” Cdassiere, 4 F 3d at 1015 (quoting United States v. Boylan, 898 F. 2d 230, 241-42 (1st Cir. 1990)). A so-called “tacit” agreement will suffice. See United States v. Woodward, 149 F. 3d 46, 67 (1st Cir. 998). Moreover, the conspirators need not succeed in completing the underlying act, see United States v. Giry, § 18 F. 2nd 120, t Cir. 1987), nor need that underlying act even be factually possible. See id.
As of yet, only the Third Circuit has had the opportunity to address § 832(a), which specifically covers private corporate espionage. See United States v. Hsu, 155 F. 3d 189 (3d Cir. 1998). The statute criminalizes the knowing theft of trade secrets. The Act defines a “trade Secret” broadly, to include both tangible property and intangible information, as long as the owner “has taken reasonable measures to keep such information secret” and the information 19 “derives independent economic value . . . from not being generally known to . . . the public,” Id. at 196; 18 U.S.C. § 1839(3). n8 This definition of trade secret protects a wider variety of information than most civil laws; however, it is clear that Congress did not intend . . . to prohibit lawful competition such as the use of general skills or parallel development of a similar product,” Hsu, 55 F. 3d at 196-97, although it did mean to punish “the disgruntled former employee who walks out of his former company with a computer diskette full of engineering schematics,” id. at 201 (citing H. R. Rep. No. 104-788, at 7). In other words, § 1837(a) was not designed to punish competition, even when such competition relies on the know-how of former employees of a direct competitor. It was, however, designed to prevent those employees (and their future employers) from taking advantage of confidential information gained, discovered, copied, or taken while employed elsewhere.
Martin contends that the evidence is factually insufficient to establish a “meeting of the minds” or agreement to violate § 1832(a), because (1) insufficient evidence exists to establish an agreement between Martin and Camp; (2) insufficient evidence exists to prove that Martin had the necessary intent to commit an act prohibited by § 1832 (a), i.e., injured the owner of the trade secret (IDEXX); and (3) the information provided by Camp to Martin did not meet a statutory definition of a trade secret under § 1839 (3).
The evidence is sufficient for a reasonable jury to conclude that Martin and Camp formed an agreement regarding the theft of trade secrets. Martin’s argument against the existence of an agreement relies on the facts that (a) his early e-mails specifically requested that Camp not send him confidential information, and (b) Camp did not seem to know the distinction between confidential information, proprietary information, and office gossip. However, while Martin’s disclaimer and Camp’s confusion indicate the lack of an explicit agreement at that time, they do not necessarily negate the existence 21 of an agreement. See Woodward, 149 Fd.3d at 67 (including tacit agreements within conspiracy requirements. A rational jury could have plausibly concluded on the basis of the evidence presented at trial that an agreement existed. By July 21, Martin had received extensive correspondence from Camp that she had either marked “confidential” or “proprietary,” or had expressed some hesitation in forwarding. n9 Despite his previous protestations that he wanted nothing to do with IDEXX or its confidential information, Martin asked Camp on July 21 to absorb as much information, physically and intellectually; as you can,” and included a set of questions to direct Camp to research. Throughout June and July, Martin referred to Camp and “Agent Ace,” or as his “spy.” Given the type of information that Martin had already received, a reasonable jury could have concluded that, whatever Martin’s original intentions, as of July 21, Camp and Martin had reached a tacit agreement by which she would send him items and information that potentially fell under the trade secret definition of 18 U.S.C. 1839 (3). In other words, sufficient evidence exists to show an 22 agreement between Camp and Martin to violate § 1832 (a).
Second, the evidence is sufficient to show that Martin intended to injure IDEXX by obtaining trade secrets and competing against IDEXX. Although Martin consistently claimed that he had no interest in developing products that competed with IDEXX, and hence had no intention of injuring IDEX economically, is correspondence with Camp detailed a plan of competition. Martin had, among other things, considered the possibility of starting a competing veterinary lab n10 and had asked Camp to think, in particular, about ways to compete with tests that IDEXX manufactured. A reasonable jury 23 could have found that Martin intended to use the information gained from Camp, particularly information on IDEXX’s costs and customer dissatisfaction with IDEXX, to create a more successful competitor with greater capability to injure IDEXX.
Third, Martin’s final argument—that he actually received no trade secrets—even if true, is irrelevant. Martin has only been found guilty of a conspiracy to steal trade secrets, rather than the underlying offense. n11 See Giry, 818 F.2d at 126. The relevant question to determine whether a conspiracy existed was whether Martin intended to violate the statute. See id; see also IIsu, 155 F. 3d at 198 (“The crimes charged 24 - attempt and or conspiracy - do not require proof of the existence of an actual trade secret, but, rather, proof only of one’s attempt or conspiracy with intent to steal a trade secret.”) The key question is whether Martin intended to steal trade secrets. A rational jury, considering the information Camp had already sent Martin, could have concluded that his further queries indicated such an intention.
A reasonable jury could therefore have concluded that Martin and Camp formed an agreement by which Camp conveyed information and property to Martin that potentially fell under the definition of a trade secret in 18 U.S.C. § 1839. As a result, sufficient evidence existed to convict Martin of conspiracy.
FIRST CIRCUIT
AFFIRMS EEA CONVICTION FOR CONSPIRACY TO STEAL TRADE SECRETS.
20. Thomas & Betts Corporation v. Wimmer 2000 U.S. Dist. LEXIS 6010 May 1, 2000.
Plaintiffs Thomas & Betts Corporation and Thomas & Betts Holdings, Inc. (collectively” T&B) filed a seventeen-count complaint against competitor Panduit Corp. (Panduit) and former employee Jeffrey Wimmer (Wimmer) (collectively “defendants”), alleging misappropriation of confidential information in violation of contract, tort, and state statutory law. Defendants have moved for summary judgment with respect to fourteen of the seventeen counts. Motion granted.
The facts underlying this lawsuit (as well as the acrimonious tone of the litigation) have been described in the numerous prior opinions issued in this case, and therefore our summery here will be brief. Wimmer worked at T&B from 1965 to 1992. For much of his tenure Wimmer was the vice-president of sales for the central region of T&B’s electrical division. Wimmer’s position provided him with access to confidential information, and therefore he was required by T&B to execute an Employment Priority Information & Invention Agreement (the confidentiality agreement). The confidentiality agreement provided that Wimmer would surrender confidential information upon his departure from T&B and would not disclose T&B’s confidential information to others.
In June 1992, Wimmer began working for Panduit, a competitor of T&B. When T&B learned of Wimmer’s new job it expressed its concerns regarding Wimmer’s knowledge of T&B confidential information (Cplt. Exhs. F & G). In a letter dated June 1, 1992, an attorney for Panduit advised T&B that Panduit had directed Wimmer not to disclose any confidential information he had acquired while working at T&B (Cplt. Exh. K). Enclosed with the letter was Panduit’s employment agreement with Wimmer, which provided that Wimmer would not disclose any information in violation of his confidentiality agreement with T&B (Cplt. Exh. L). In 1993, T&B hired Michael Ferraro, a former Panduit market research manger, and subsequently learned that Wimmer possessed the computers, disks and documents containing T&B’s confidential information and that were using that information in the operation of Panduit’s business. T&B subsequently filed this lawsuit on July 2, 1993.
At bottom, T&B claims that defendants wrongfully took confidential information from T&B and used that information to undermine T&B’s business. T&B weaves this straightforward claim into a seventeen-count complaint, alleging breach of contract (Count I), misappropriation of trade secrets in violation of the Illinois Trade Secrets Act, 765 ILCS 1065/1 et seq. (Counts II and XI), breach of fiduciary duty (Count III), conversion (Counts IV and XII) unfair competition (Counts V and XIII),tortious interference with business relations (Counts VI and XIV), fraud (Counts VII and XV), violation of the Illinois Consumer Fraud Act, 815 ILCS 505/1 et seq. (Counts VIII and XVI),conspiracy (Counts IX and XVII), and tortious interference with a contract (Count X). Defendants move for summary judgment with respect to Counts III-X and XIII-XVII. Defendants do not challenge T&B’s claims for breach of contract (Count I) and misappropriation of trade secrets (Counts II and XI), but argue that all of T&B’s other causes of action are preempted by the Illinois Trade Secrets Act (ITSA). We agree and therefore grant defendants’ motion.
Under Section 8 of the ITSA, non-contract causes of action are preempted to the extent that they are based on a misappropriation of trade secrets. Specifically, Section 8(a) states:
Except as provided in subsection (b), this Act is intended to displace conflicting tort, restitutionary, unfair competition, and other laws of this State providing civil remedies for misappropriation of a trade secret.
765 ILCS 1065/8(a). The It’s preemption provision is not without limits, however, as Section 8(b) provides that the ITSA does not affect or displace.
(1) contractual remedies, whether or not based upon misappropriation of a trade secret, ...;
(2) other civil remedies that are not based upon misappropriation of a trade secret;
(3) criminal remedies, whether or not based upon misappropriation of a trade secret or
(4) the
definition of a trade secret contained in any other Act of this State.
765 ILCS 7 1065/8(b). The Seventh Circuit has observed that with the passage of the ITSA, “Illinois ... abolished all common law theories of misuse of [secret information.” Composite Marine Propellers, Inc. v. Van Der Woude, 962 F 2d 1263, 1265 (7th Cir. 1992); see PepsiCo Inc. v. Redmond, 54 F, 3d 1262, 1269 (7th Cir. 1995) (The ITSA abolishes any common law remedies or authority contrary to its own terms.”). Indeed, the ITSA was meant “to codify all the various common law remedies for theft of ideas.” Learning Curve Toys, L.P. v. Playwood Toys, Inc., 1999 U. S. Dist. LEXIS 11262, 1999 WL 529572, *3 (N.D. Ill. July 20, 1999). As the Seventh Circuit held in Composite, “Unless defendants misappropriated a (statutory) trade secret, they did no legal wrong.” Composite 962 F 2d at 1265. In other words, facts constituting a misappropriation of trade secrets give rise to liability under ITSA, but not under any other state law theory.
Defendants argue that all of the seventeen counts contained in T&B’s complaint arise from an alleged misappropriation of trade secrets and therefore, other than the breach of contract and ITSA causes of action, T&B’s 8 claims run afoul of Section 8 of the ITSA. The case law supports defendants’ argument. Illinois courts, both at the state and federal level repeatedly have applied Section 8 of the ITSA to preempt non-contract claims to the extent that they are based on a misappropriation of trade secrets. See, e.g.., Composite 962 F. 2d at 1265; Learning Curve, 1999 WL529572, at *3-4; Nilssen v. Motorola , Inc. 963 F, Supp. 664,683-84 (N.D. Ill. 1997); Thermodyne Food Service Products, Inc. v. McDonald’s Corp., 940 F. Supp. 1300, 1309 (N.D, Ill. 1996); C.F. Packing Co., Inc. v. IBP, Inc., 1994 U.S. Dist. LEXIS 973, 1994 WL 30540, at *6-7(N.D. Ill. Feb. 1, 1994) (applying nearly identical provision of Kansas statute); Chicago Show Printing Co. v. Sherwood, 1992 U.S. Dist. LEXIS 10843, 1992 WL 175577, at *3 (N.D. Ill. July 14, 1992; Pope v. Alberto Culver Co., 296 Ill. App. 3d 512, 694 N.E. 2d 615,619 (Ill. App. 1 Dist. 1998, 230 Ill. Dec.646). Therefore, under Section 8 and its case law progeny, we must review the challenged counts of T&B’s complaint to determine whether they are based on a misappropriation of trade 9 secrets, or on something more. To the extent that Counts III-X and XII-X VI are based on a misappropriation of trade secrets, they are preempted by the ITSA.
T&B attempts to avoid any preemption by arguing that its fiduciary claim against Wimmer is based only on the taking of confidential information, but also on Wimmer’s theft of T&B’s computer, disks, and documents. These physical items, however, have no real value apart from the confidential information contained in them. In its discovery responses, and other submissions, T&B has stated that Wimmer breached his fiduciary duty by “taking, possession and use of T&B’s computer and innumerable hard disk, floppy disks, computer files, and documents containing [T&B’s confidential and trade secret information” (emph. added). AS T&B’s discovery responses confirm, this seven-year old litigation is not about pieces of computer hardware or sheets of paper, but about the information contained in those items.
T&B is correct to point out that Section 8 of the ITSA does not authorize blanket preemption; instead, the provision preempts claims only to the extent that they are based on a misappropriation of trade secrets. But T&B’s breach of fiduciary duty claim in this case simply alleges that Wimmer took, disclosed and used confidential information. These factual allegations are preempted by Section 8 of the ITSA, compelling summary judgement in favor of defendants with respect to Count III.
14 (OUT OF 17)
CLAIMS FOR BREACH OF FIDUCIARY DUTY; CONVERSION, UNFAIR COMPETITION, TORTIOUS
INTERFERENCE WITH BUSINESS RELATIONS, FRAUD, COMSPIRACY, TORTIOUS INTERFERENCE
WITH CONFIDENTIALITY AGREEMENT PREEMPTED BY SECTION 8 OF THE ITSA.
21. Auto Club Family Insurance Company v. Jacobsen, 19 S.W.3d 178 (Mo. App. June 6, 2000).
On June 24, 1998, HAS Holdings, Heartland Automotive, and Jiffy Lube brought a six-count suit against Jacobsen (the “HAS Holdings suit”) seeking injunctive relief and damages for breaches of the confidentiality and non-competition agreements (Counts I-III), breach of fiduciary duty (Count IV), violation of the Missouri Trade Secrets Act (Count V), and unfair competition (Count VI). On July 20, 1998, Jacobsen notified Auto Club of the HAS holdings suit and demanded that Auto Club provide a defense pursuant to a homeowner’s policy (“Homeowner’s Policy”) and a personal catastrophe and excess liability policy (“Excess Policy”) issued to Jacobsen by Auto Club. Auto Club denied coverage under both policies, forcing Jacobsen to hire his own attorney.
In summary, we hold that Auto club had no duty under the Excess Policy to defend Jacobsen against the HAS Holdings suit because it was neither for “personal injury” nor “property damage” as those terms are defined by the Excess Policy. Moreover, had the HAS Holdings suit been for “personal injury” or “property damage,” Auto Club would not have had a duty to defend because the suit was for damages that arose out of Jacobsen’s “business pursuits,” which are excluded from the Excess Policy’s coverage. As stipulated to by Jacobsen, Auto Club had no duty under the Homeowner’s Policy to defend him against the HAS Holdings suit.
The trial court’s judgment is reversed and the cause remanded with instructions to enter judgment in favor of Auto Club on its action for declaratory judgment and on Jacobsen’s counterclaim for attorney’s fees.
NO DUTY TO DEFEND
AGAINST TRADE SECRET MISAPPROPRIATION CLAIM UNDER HOMEOWNER’S POLICY.
22. Mallinckrodt Inc. v. West, 2000 U.S. Dist. LEXIS 11008 (D. D.C. June 22, 2000).
Mallinckrodt Medical, Inc. (Mallinckrodt) manufactures and distributes a variety of medical products, including radiopharmaceuticals and contrast media. By two letters dated October 8, 1997, the Department of Veterans Affairs’ (VA) Heartland Veterans Health Network (VISN 15) contacted Mallinckrodt to solicit a Blanket Purchase Agreement (BPA) bid for both radiopharmaceuticals and contrast media.
FOIA’s Exemption 4 prohibits disclosure of “trade secrets and commercial or financial information obtained from a person [that is privileged or confidential.” 5 U.S.C. §522(b)(4). Although FOIA exemptions are normally permissive rather than mandatory, see General Dynamics v. U.S. Dept. of Air Force, 822 F. Supp. 804, 806 9D. D.C. 1992), the Trade Secret Act, 18 U.S.C. §1905, independently prohibits the disclosure of confidential information. For disclosure purposes, FOIA and the Trade Secrets Act are treated as coextensive. CNA Financial Corp. v. Donovan, 265 U.S. App. D.C. 248, 830 F.2d 1132, 1151 (D.C. Cir. 1987); see also General Dynamics, 822 F. Supp. at 806. Thus, the Trade Secrets Act affirmatively prohibits the disclosure of information covered by Exemption 4. Id., see also McDonnell Douglas Corp. v. Widnall, 313 U.S. App. D.C. 77, 57 F.3d 1162, 1165 (D.C. Cir. 1995). As a result, a decision to disclose information that falls within Exemption 4 is contrary to the Trade Secrets Act, and should be overturned as “not in accordance with law.” Se McDonnell Douglas Corp. v. NASA, 336 U.S. App. D.C. 368, 180 F.3d 303, 306 (D.C. Cir. 1999) (agency’s decision to release confidential information violated the Trade Secrets Act and is therefore not in accordance with law).
To determine whether the information is privileged or confidential within the meaning of Exemption 4, it is necessary to resolve first the issue of whether the information was provided to the government voluntarily or if it was required to be provided. If it was voluntarily provided, the submitter of the information has to satisfy a lower threshold to prevent disclosure. Critical Mass Energy Project v. Nuclear Regulatory Comm’n, 298 U.S. App. D.C. 8, 975 F.2d 871 (D.C. Cir. 1992) (en banc), cert. denied, 507 U.S. 984, 123 L.Ed.2d 147, 113 S.Ct. 1579 (1993). Under the test set forth in Critical Mass, financial or commercial information provided to the government on a voluntary basis is “confidential” for purposes of Exemption 4 if it is the kind that would customarily not be released to the public by the submitter. 975 F.2d at 874. If, however, the information was given involuntarily, it will not be considered confidential unless the submitter can show that disclosure will (1) impair the government’s ability to obtain necessary information in the future or (2) cause substantial harm to the competitive position of the person from whom the information was obtained. National Parks Assn. v. Morton, 162 U.S. App. D.C. 223, 498 F.2d 765, 770 (D.C. Cir. 1974).
While it is beyond dispute that unit pricing data is required to be submitted in order to compete for a government contract and would therefore be disclosable, it does not follow that information relating to rebates and incentives constitutes unit pricing data. On the contrary, the unit price is the amount of public funds the government must pay for goods and services. See Defendant’s Opposition at 4 and cases cited therein. However, it is clear from a review of the plaintiff’s motion and the accompanying declaration of Mark Osterman that rebates and incentive programs reveal very little, if anything, about the cost of the product to the government. In fact, with respect to most of the incentive or rebate programs, they would have absolutely no effect on the unit price, but rather, they would only add some unspecified value to the contract.
For the foregoing reasons, the Court concludes that the rebates and incentives are shielded from disclosure under Exemption 4 of the FOIA. The agency’s contrary conclusion is overturned as arbitrary, capricious and contrary to law, for neither the facts in the record, nor the relevant law of this Circuit or the Federal Acquisitions Regulations support the government’s overly expansive interpretation of pricing information as including rebates and incentives or its argument that all information submitted in an effort to win a government contract must be treated as having been required by the contact solicitation.
PRICE DISCOUNTING
INFORMATION (REBATES AND INCENTIVES) SHIELDED FROM DISCLOSURE UNDER EXEMPTION 4
OF FOIA.
23. Theragenics Corp. v. Department of Natural Resources, 244 Ga. App. 829 (Ct. App. Ga. July 7, 2000).
Appellant Theragenics Corporation is a Georgia corporation founded din 1981 to develop, manufacture and sell radioactive “seeds” (sold under the brand name of TheraSeed ®) that are used in a cancer treating procedure known as brachytherapy. The radioactive ingredient in TheraSeed ® is Palladium-103, also referred to as Pd‑103. The active ingredient in Pd‑103 does not exist in nature, and Theragenics manufactures the raw material used in TheraSeed ® using its own proprietary method. Theragenics was the first company in the world to produce and commercially market a Palladium brachytherapy seed and is apparently one of only two companies in the world manufacturing and selling a brachytherapy seed containing Pd‑103 as the active ingredient.
Theragenics’ operations are subject to regulation by the appellee in this case, the Environmental Protection Division (EPD) of the Georgia Department of Natural Resources (DNR). In order to receive and maintain a license to operate in Georgia, Theragenics has been required to furnish the EPD with detailed information concerning all aspects of its operation. This has resulted in a substantial number of documents being filed with the EPD. Theragenics designated approximately one-third of the documents as “proprietary” or “confidential” when they were submitted to the EPD.
In November 1997, the EPD received a request under what is commonly referred to as the Georgia Open Records Act, OCGA § 50‑18‑70 et seq, to review Theragenics’ files. The request was made by an attorney for International Brachytherapy, S.A. (IBt), a foreign competitor whose s are former Theragenics’ employees. The EPD subsequently informed Theragenics of this request and its intent to make available those documents which were not marked confidential or proprietary when they were filed with the EPD. Thereafter, representatives of Theragenics reviewed the EPD files and indicated to the EPD staff that man of the unmarked files also contained trade secret information. In early December, Theragenics was allowed to place yellow “stick‑on” notes on those documents; Theragenics also requested that the EPD not allow access to those documents, which consisted of approximately 60 percent of the file. Theragenics was subsequently informed that all documents not originally marked or otherwise designated as trade secrets when submitted to the EPD would be provided to IBt. Theragenics filed a motion for a preliminary and permanent injunction, seeking to enjoin the release of those documents it contended contained trade secret information. The trial court denied the motion, and Theragenics filed this appeal.
The trial court framed the question in this case as “whether submitting documents not designated as confidential to a public agency that is subject to the Georgia Open Records Act constitutes reasonable efforts to protect the information in those documents?” The trial court answered the question in the negative and held that Theragenics failed to take reasonable efforts to protect its trade secret information because it did not specifically notify the EPD that it was submitting documents containing trade secret information. However, we find the trial court erred in focusing its inquiry on the manner in which Theragenics filed documents with the EPD. Rather, the proper inquiry in this case was whether Theragenics took reasonable efforts to protect the information without regard to its actions in submitting the information to the EPD. If reasonable efforts were made to protect the dissemination of the information except for providing it to the EPD, then trade secret status was not lost simply because Theragenics did not notify the EPD each time that it provided them with information containing trade secrets. Here, the EPD has made no contention that Theragenics did not take reasonable efforts to protect its trade secrets, except for the fact that Theragenics failed to designate them as such when it filed them with the EPD.
We reach this result for several reasons. First, we note that Theragenics was required to provide the EPD with confidential, proprietary and trade secret information as a condition of maintaining operations in this state. Moreover, there were no applicable statutory provisions or DNR rules or regulations which explicitly required Theragenics to notify the EPD that its documents contained trade secret information at the time of filing.
And our holding does not eviscerate the purpose of the Open Records Act, which is “to encourage public access to government information and to foster confidence in government through openness to the public.” McFrugal Rental &c. v. Garr, 262 Ga. 369 (418 S.E.2d 60) (1992). Indeed, it is hard to envision how disclosure to a foreign corporate competitor of a private entity’s confidential or proprietary information, which it was required to file with a state agency in order to operate a business in this state, would promote the purpose of the Open Records Act.
DOCUMENTS DID NOT
LOSE TRADE SECRET STATUS BECAUSE THEY WERE NOT MARKED “CONFIDENTIAL” AT TIME OF
FILING WITH GEORGIA EPD.
24. Glue-Fold, Inc. v. Slautterback Corp., 82 Cal. App 4th 1018 (Cal. App. August 4, 2000).
Appellant company challenged a decision of the Alameda County Superior Court (California), which dismissed appellant’s claims against appellee corporation for misappropriation of a trade secret because appellant’s claim was barred by the applicable statute of limitations.
Glue-Fold, Inc. developed a new process for applying glue to paper products intended for mailing. The evidence at the trial court level showed that Slautterback misappropriated appellant’s trade secret with respect to the glue, shortly after the parties terminate negotiations between them to manufacture the glue. Glue-Fold waited more than four years to bring suit for misappropriation of a trade secret, and the court dismissed because the statute of limitations was three years. Glue-Fold argued that it became aware of Slautterback’s conduct, confronted appellee, and that Slautterback pulled its advertising, thereby tolling the statute of limitations because appellant had a reasonable belief that appellee was going to stop the misappropriation. The court affirmed the trial court, finding that Slautterback’s promise to stop advertising was insufficient to toll the statute, and that appellant’s claim was barred by the applicable statute of limitations. Summary judgment in favor of Slautterback was affirmed.
The parties agree that Glue-Fold’s cause of action for “Violation of Uniform Trade Secret Act” is governed by section 3426.6, which provides: “An action for misappropriation must be brought within three years after the misappropriation is discovered or by the exercise of reasonable diligence should have been discovered. For the purposes of this section, a continuing misappropriation constitutes a single claim.”
Slautterback’s position, which the trial court accepted, is elementary: Glue-Fold alleged in its complaint that “in or about August, 1995,” it “discovered that Slautterback had begun advertising the Buckle Folder Applicator for sale.” Glue-Fold is bound by this admission. (E.g., Foxborough v. Van Atta (1994) 26 Cal. App. 4th 217, 223; Miller v. Lakeside Village Condominium Assn. (1991) 1 Cal. App. 4th 1611, 1623.) Glue-Fold’s complaint was filed in January of 1999, at least three years and four months after its admitted discovery of Slautterback’s misappropriation. Glue-Fold’s trade secret cause of action is therefore barred by the three-year period specified by section 3426.6.
In an attempt to avoid this conclusion, Glue-Fold advances a novel interpretation of the evidence and the statute. It sees itself as the victim of two distinct periods of misappropriation by Slautterback. The first extends up to October of 9195, when Glue-Fold protested to Slautterback. The second, during which Glue-Fold mistakenly believed that Slautterback would desist, began in November of 1995. Looking to a dictionary definition of “continuing” as “continuous, constant: needing no renewal: enduring” and the definition of “continuous” as “marked by uninterrupted extension in space, time, or sequence’ (Webster’s Ninth New Collegiate Dict. (1984) p. 284), Glue-Fold argues that these circumstances show a “sufficient cessation or interruption” of Slautterback’s misappropriation that “subsequent acts may give rise to a new statute of limitations period.” In short, Glue-Fold contends that it was the victim of two discrete acts and periods of misappropriation, and because it commenced suit within three years of discovering the second period, which was a “continuing” misappropriation, the first is of no consequence.
There are numerous difficulties with this construction. One is that by basing its approach on dictionary definitions of “continuing” and “continuous” Glue-Fold pays insufficient attention to other statutory language, specifically, the central concept of “misappropriation.” That term is defined by the Uniform Act as acquisition of a trade secret or disclosure of a trade secret or use of a trade secret. (§3426.1, subds. (b)(1) & (b)(2).) Any one of these methods of betraying confidence may constitute the misappropriation that actual or constructive discovery of which will start the clock. The limitation period is not triggered solely by what the statute terms “a continuing misappropriation.” Unlike Glue-Fold’s approach, proper statutory construction must consider and give meaning to all parts of the enactment at issue. (E.g., Garcia v. McCutchen (1997) 16 Cal. 4th 469, 476, 940 P.2d 906; Select Base Materials v. Board of Equal. (1959) 51 Cal. 2d 640, 645, 335 P.2d 672.)
Glue-Fold’s construction also sidesteps the fact that section 3426.6 expressly uses the discovery of a misappropriation as commencing the limitation period: “An action of for misappropriation must be brought within three years after the misappropriation is discovered or by the exercise of reasonable diligence should have been discovered.” As previously mentioned, Glue-Fold alleged that it “discovered” Slautterback’s misappropriation in October of 1995.
The undisputed evidence shows that in August of 1995 Glue-Fold had actual notice of the misappropriation of its trade secret by Slautterback. Glue-Fold’s cause of action for that wrong, initiated in January of 1999, more than three years later, was therefore barred by section 3426.6. Because this conclusion was established as a matter of law, the trial court correctly granted summary judgment.
PLAINTIFFS’ CLAIM
FOR TRADE SECRET MISAPPROPRIATION TIME-BARRED ON FACE OF COMPLAINT; STATUTE OF
LIMITATIONS IS NOT TOLLED.
25. Rycoline Products, Inc. v. Walsh, 334 N.J. Super. 62 (April 11, 2000).
Plaintiff Rycoline Products, Inc. (Rycoline) manufactures chemical products for use in the printing industry. It appeals from certain pretrial rulings and from an order entered after the presentation of plaintiff’s case dismissing its claims pursuant to R. 4:37‑2(b). Defendant C&W Unlimited (C&W) is a competitor of Rycoline and is owned by operated by defendants Michael Walsh and Eric Berliner.
In granting defendant’s motion for an involuntary dismissal, the trial judge concluded that ACFS 276 was not a trade secret because it resulted from Rycoline’s efforts to reverse engineer Anchor MXEH.
Under Pennsylvania law, a trade secret will not be found to exist and a plaintiff’s misappropriation action will be dismissed if it can be proven that, at the time the misappropriation occurred, the defendant could have learned plaintiff’s trade secret because the marketed product was susceptible to reverse engineering. SI Handling Sys., Inc. v. Heisley, supra, 753 F.2d at 1262; Henry Hope X‑Ray Prods., Inc. v. Marron Carrel, Inc., 674 F.2d 1336, 1341 (9th Cir. 1982). The Court in SI Handling did not hold that a trade secret cannot exist in a product (ACFS 276) just because it was developed by attempts to reverse engineer a product which is a trade secret (Anchor MXEH.)
Information is readily ascertainable if it is available in trade journals, reference books, or published materials. Often, the nature of the product lends itself to being readily copied as soon as it is available on the market. On the other hand, if reverse engineering is lengthy and expensive, a person who discovers a trade secret through reverse engineering can have a trade secret in the information obtained from reverse engineering. [Unif. Trade Secrets Act §1, 14 U.L.A. 433 (1985).
Furthermore, even under the trial court’s formulation of the principle of law from the Hammock, SI Handling and Smith cases, Rycoline’s formula for ACFS 276 could still constitute a trade secret because there was no evidence that ACFS 276 could be reverse engineered or that ACFS 276 was itself the successful reverse engineering of the trade secret formula for Anchor MXEH. See Berkla v. Corel Corp., 66 F. Supp. 2d 1129, 1145 (N.D. Cal. 1999). A review of proofs adduced during plaintiff’s case in chief shows no evidence that the formula for ACFS 27 was reverse engineered or that SAFE 200+ could be reverse engineered from either ACFS 276 or Anchor MXEH. Thus, the trial judge’s primary reason for determining that plaintiff’s formula for ACFS 276 did not constitute a trade secret was in error.
Furthermore, we hold that once plaintiff introduces evidence of similarity in the products (ACFS 276 and SAFE 200+) the burden shifts to defendant to show that it could have arrived at its product by reverse engineering some product in the public domain. Henry Hope v. X‑Ray Prods., Inc., supra, at 1341. But See SI Handling, supra, 753 F.2d at 1255 (where the court assumed that plaintiff has the burden of proving that its product is not readily ascertainable). In determining whether ACFS 276 could be reverse engineered, defendant must demonstrate that it is “quickly reverse engineerable.” See Electro-Craft Corp. v. Controlled Motion, Inc., 332 N.W.2d 890 (Minn. 1983). The more difficult, time consuming and costly it would be to develop the product, the less likely it can be considered to be “reverse engineerable.” See Zotos International, Inc. v. Young, 265 U.S. App. D.C. 202, 830 F.2d 350 (D.C. Cir. 1987); ILG Industries, Inc. v. Scott, 49 Ill. 2d 88, 273 N.E.2d 393 (Ill. 1971).
TRIAL COURT
DISMISSAL OF TRADE SECRET FORMULA DERIVED FROM A REVERSE ENGINEERING PROCESS IS
REVERSED.
26. KW Plastics v. United States Can Co., 2000 U.S. Dist. LEXIS 15885 (M.D. Ala. October 6, 2000).
Defendants moved for summary judgment, in plaintiffs’ action for tortious interference with a prospective business relationship, breach of fiduciary duties, fraudulently suppressed information, fraudulent misrepresentation, breach of contract, breach of an implied covenant of good faith and fair dealing, promissory estoppel, equitable estoppel, misappropriation of trade secrets, and civil conspiracy.
This case focuses on the existence and effect of an alleged confidentiality and non-competition agreement between the United States Can Company (“Plaintiff” or “U.S. Can”) and KW Plastics (“Defendant” or “KW”), as well as numerous business torts arising from the transactions between the two parties.
KW manufactures plastic paint cans and the resin needed to mold them. In early 1991, KW and Plastite Corporation (which was subsequently purchased and merged into U.S. Can) executed a confidentiality, non-competition, and non-disclosure agreement (“1991 Agreement”), as well as a subcontract for various items related to the sale and production of paint cans. The 1991 Agreement was to expire April 3, 1996. U.S. Can bought out Plastite in early 1995 and became the successor in interest to the 1991 Agreement. U.S. Can contends that its officials met with KW officials in August 1995 and discussed a possible extension of the 1991 Agreement.
U.S. Can alleges that the two parties verbally agreed to extend the 1991 Agreement for an additional five years. This new agreement (“1996 Agreement”), according to U.S. Can, was reduced to writing in July 1996. (Second Am. Compl. PP 21‑24.) However, the 1996 Agreement is dated April 3, 1991, not July 1996. By its express terms, the 1996 Agreement expired in April 1996. U.S. Can contends that the 1996 Agreement’s date of “April 3, 1991’ is a drafting error, which does not reflect the true intent of the parties. (Moreau Aff.) KW says the date is accurate, and that it only signed the 1996 Agreement because it thought U.S. Can’s lawyers wanted something retroactive to reflect its purchase of Plastite.
In this case, the court is reviewing a covenant between two firms, rather than an employer and its employees. But the principles are the same. U.S. Can wanted to negotiate a long-term supply subcontract, and it wanted to guard against misuse of the confidential information to which KW had access, both during the normal course of business and during the subcontract negotiations. So when it went to KW and sought to initiate a relationship that might have benefited the parties—and, potentially, consumers who would benefit from expanded production—it wanted some type of agreement to protect its legitimate interests in keeping its information confidential. See Morrison, 422 N.E.2d at 1038; Baker’s Aid, 730 F.Supp. at 1214‑16.
But was there consideration? The fact that U.S. Can purchased resin and paint cans from KW could not constitute consideration. U.S. Can could have refused at any time. It had sole discretion to determine what it felt were appropriate prices, and it was held to no minimum purchase requirement. This is no consideration, for there is no commitment to perform. Cf. Engine Specialties, Inc. v. Bombardier, Ltd., 605 F.2d 1, 9‑11 (1st Cir. 1991). “If one of the promises appears on its face to be so insubstantial as to impose no obligation at all on the promisor—who says, in effect, ‘I will if I want to’—then that promise may be characterized as an ‘illusory’ promise, or one that is a ‘promise in form but not in substance.” Jacksonville, Inc. v. FPL Group, Inc., 162 F.3d 1290, 1311 (11th Cir. 1998) (quoting E. Allan Farnsworth, Contracts §2.13, at 75-76 (2d ed. 1990)).
The court also finds that the non-compete clauses will be terminated as of the date when any misappropriated information became stale. A court may modify a non-competition provision that is unreasonable in time or scope. See Weitekamp, 620 N.E.2d at 461-62; Arpac Corp. v. Murray, 226 Ill. App. 3d 65, 589 N.E.2d 640 at 652, 168 Ill. Dec. 240. The court should consider factors including the party’s need to protect a legitimate business interest; the hardship or injury to the former employee, and the likely injury to the public. It must also be mindful of the state’s pronounced aversion to partial restraints of trade. See Weitekamp, 62 N.E.2d at 461-62; Arpac, 589 N.E.2d at 651-52.
U.S. Can’s only legitimate interest is in proscribing unfair competition arising from the misuse of its confidential information. But once such information becomes commonly known or stale, then U.S. Can’s interest evaporates. After all, if KW had entered the plastic paint can market due to its own accord, then it would have deprived U.S. Can of nothing. The perpetuation of a non-compete clause in such a situation would amount to nothing more than a punitive, naked restraint of trade. See 765 ILCS 1065/3(a) (1997) (authorizing court to terminate injunction once confidential information “has ceased to exist” due to factors not attributable to defendant).
Illinois courts recognize this principle, and they have pared down overbroad covenants that have restrained trade beyond the time needed for the restrained party to become a competitor in its own right. See, e.g., Stampede, 651 N.E.2d at 217; see also Laidlaw, 20 F.Supp.2d at 757-61.
RESTRICTIVE
COVENANT IS NOT ENFORCEABLE AFTER TRADE SECRET INFORMATION BECOMES STALE.
27. Home Paramount Pest Control Companies, Inc. v. FMC Corporation/ Agricultural Products Group, 107 F. Supp. 2d 684 (D. Md. July 13, 2000).
Plaintiff Home Paramount is engaged in the pest control business in Maryland and Virginia. Its subsidiary York Distributors (“York”) sells and distributes pest control products to pest control operators primarily in the eastern United States. Among York’s clients is its parent company, Home Paramount. Defendant FMC Corporation (“FMC”) manufactures and sells pest control products to distributors, including York.
York was an authorized distributor of FMC pest control products for several years, beginning at least in 1993. York sold FMC products to extermination companies, including to its parent company, Home Paramount. In 1993, FMC implemented its “Alliance Points Program.” Under the Program, FMC provided rebates to exterminators who purchased their products through an authorized FMC distributor such as York. This program was advantageous to Home Paramount, because for each purchase of product Home Paramount made from its subsidiary York, Home Paramount received a rebate from FMC.
As a condition for participation in the Alliance Points Program, each authorized distributor was required to provide FMC with a list of all customers who purchased FMC’s products. The information included the amount and type of product purchased. In general, FMC limited access to this information. In return for the customer list, FMC paid a fee to York equal to 2% of York’s yearly FMC product sales. The parties dispute whether this payment represented the actual purchase of the list by FMC or was instead simply a reimbursement for York’s administrative costs in compiling the list.
Home Paramount charges that by disseminating York’s customer lists to competitors without permission, FMC is liable for misappropriation of trade secrets. FMC has provided the Court a copy of the information it transmitted to York’s competitor, VW&R. The documents consist of the names, addresses, and phone numbers of various pest control companies, and includes the names of contact persons at many of the companies. The documents do not list the actual volume of sales, but indicate they represent York’s top fifty customers in the Northeast and Southeast.
There is no question that a customer list can constitute a trade secret. See, e.g., Dworkin v. Blumenthal, 77 Md. App. 774, 781, 551 A.2d 947 (Md. Ct. Spec. App. 1989). Although MUTSA statute preempts common law definitions of trade secrets, Maryland courts have continued to apply the Restatement of Torts’s six-part test as “helpful guidance” in determining the existence of a trade secret. Bond v. Polycycle, Inc., 127 Md. App. 365, 372-73, 732 A.2d 970 (Md. Ct. Spec. App. 1999). The six factors are: (i) the extent to which the information is known outside of his [the employer’s business; (ii) the extent to which it is known by employees and others involved in his business; (iii) the extent of measures taken by him to guard the secrecy of the information; (iv) the value of the information to him and to his competitors; (v) the amount of effort or money expended by him in developing the information; and (vi) the ease or difficulty with which the information could be properly acquired or duplicated by others. Id. at 371 (citation omitted).
The names and addresses of York’s clients are obtainable through public sources such as a phone directory and trade associations. John Bolanos of VW&R testified as much at his deposition. Although the volume of the customers’ purchases is not so easily obtainable, FMC did not provide to any competitors actual quantities purchased. Rather, the documents include only a listing of York’s top fifty customers.
FMC did not reveal to VW&R the most detailed information, such as including price and volume of each product sold, which was presumably the most tedious to assemble. Rather, FMC only revealed the names and addresses of the top fifty customers. Such information would be gathered as a matter of course as part of York’s day-to-day operations.
On balance, the Court finds that the information contained in Exhibit E to FMC’s Reply Memorandum cannot as a matter of law constitute a trade secret. The Court will therefore grant summary judgment for FMC on Count V. The Court will however deny FMC’s request for attorney’s fees under Md. Code Ann. Comm. Law §11-1204(1), because the claim raised legitimate questions of law, and there is no evidence that the claim was brought in bad faith.
CUSTOMER LIST OF
NAMES AND ADDRESSES NOT PROTECTABLE AS TRADE SECRET (PEST CONTROL BUSINESS).
28. Scott System, Inc. v. William C. Scott, III et al., 2000 Colo. App. LEXIS 10; 53 USPQ 2d (BNA) 1692 (January 20, 2000).
Plaintiff, Scott System, Inc. (the corporation) appeals the summary judgment entered in favor of defendants, William C. Scott, III (William), Mark A. Scott (Mark).
The corporation’s complaint alleged that, for more than 12 years, William and Mark, who are the sons of Samuel Scott, the president and sole stockholder of the corporation, were employed by the corporation. It also alleged that each served as a director and officer of the corporation. However, neither of the sons had a written employment agreement with the corporation.
The “thrust” of the complaint is that William and Mark left the corporation’s employ and went to work for the defendant, IBS, which is in competition with the corporation. It was alleged that, in doing so, William and Mark made improper use of trade secrets and other confidential information to which they were privy as a result of their employment and their positions of directors and officers of the corporation. In addition, it was asserted that William had improperly refused to assign to the corporation patent rights to an invention that he had developed while he was an employee, a director, and an officer of the corporation, and that he was allowing IBS to make use of that invention to compete with the corporation.
Summary judgment is a drastic remedy, and such relief should be granted only if the moving party presents materials that demonstrate that no genuine controversy over a material factual issue exists and that the moving party is entitled to judgment as a matter of law. Churchey v. Adolph Coors Co., 759 P.2d 1336 (Colo. 1988). Hence, the party against whom summary judgment is sought is entitled to every favorable inference that may be drawn from the historical facts. Kaiser Foundation Health Plan v. Sharp, 741 P.2d 714 (Colo. 1987).
Generally, an invention is the property of the inventor who conceived, developed, and perfected it. Hence, the mere fact that the inventor was employed by another at the time of the invention does not mean that that inventor is required to assign the patent rights to the employer. The right, if any, of an employer to inventions of its employee is determined primarily by the contract of employment. If, as here, the contract of employment does not contain an express provision respecting the subject, an employer is, nonetheless, not necessarily precluded from claiming a right to the invention.
If an employee’s job duties include the responsibility for inventing or for solving a particular problem that requires invention, any invention created by that employee during the performance of those responsibilities belongs to the employer. Hence, such an employee is bound to assign to the employer all rights to the invention. This is so because, under these circumstances, the employee has produced only that which he was employed to produce, and the courts will find an implied contract obligation to assign any rights to the employer. United States v. Dubilier Condenser Corp., 289 U.S. 178, 53 S.Ct. 554, 77 L.Ed. 1114 (1933); Solomons v. United States, 137 U.S. 342, 11 S.Ct. 88, 34 L.Ed. 667 (1890); Hewett v. Samsonite Corp., 32 Colo. App. 150, 507 P.2d 1119 (1973).
On the other hand, if an employee is not employed to invent or to solve a particular problem, that employee owns the right to any invention made by the employee during the term of employment. However, under such circumstances, if the employer has contributed to the development of the invention, such as by paying for the employee’s efforts, the employer has a “shop right” to use it free of charge and without liability for infringement. United States v. Dubilier Condenser Corp., supra; Solomons v. United States, supra; Hewett v. Samsonite Corp., supra.
Our review of the materials presented to the trial court convinces us that a genuine factual dispute exists with respect to whether William was hired to invent or to solve a particular problem, and until this factual question is resolved, there can be no resolution of the issue whether William was under an implied contractual obligation to assign the patent rights to the corporation. See Moore v. American Barmag Corp., 693 F.Supp. 399 (W.D. N.C. 1988), aff’d, 902 F.2d 44 (Fed. Cir. 1990) (whether an employee has been hired to invent or assigned a specific task is a question of fact).
Plaintiff also contends that a genuine factual dispute exists with respect to whether William had a fiduciary duty to assign the rights in the patent to the corporation. Again, we agree.
All officers and directors of a corporation owe a fiduciary duty to the corporation and to its stockholders. The are required to act in good faith and in a reasonable manner in the best interests of those parties. Michaelson v. Michaelson, 939 P.2d 835 (Colo. 1997). Such a fiduciary duty obligates an officer or director to assign a patent to the corporation if the invention was developed while he or she was employed by the corporation and it is related to the corporation’s business. Lacy v. Rotating Productions Systems, Inc., 961 P.2d 1144 (Colo. App. 1998).
29. Fireworks Spectacular, Inc. v. Premier Pyrotechnics, Inc., 107 F. Supp. 2d 1307 (D. Kansas July 21, 2000).
Plaintiff filed an action against defendants alleging misappropriation of trade secrets, breach of employment agreement, and breach of fiduciary duty. The court issued a preliminary injunction against defendants regarding the use of names on a customer list. When plaintiff accidentally sent the list to plaintiff’s customers, defendants filed a motion for summary judgment arguing that the customer list was no longer a trade secret. The court, however, held that the disclosure was accidental and did not change the nature of the trade secret. More specifically, the court held that misappropriation of a trade secret can occur even when the trade secret was disclosed due to accident or neglect. In this case, the trade secret was disclosed when plaintiff’s employee mistakenly thought that the list was to be sent to the names on the customer list. Therefore, the court held that an issue of material fact existed and denied defendant’s motion for summary judgment.
The Kansas Uniform Trade Secrets Act, K.S.A. § 60‑3320 et seq. (1994), provides that a “trade secret” is any information “including a formula, pattern, compilation, program, device, method, technique, or process” that “(i) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and (ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.” §60‑3320(4). Kansas law does not require the holder of a trade secret to maintain its complete secrecy; rather Kansas law requires merely that the holder of a trade secret exercise reasonable efforts under the circumstances to maintain its secrecy. See K.S.A. §60‑3320(4); accord Gates Rubber Co. v. Bando Chem. Indus. Ltd., 9 F.3d 823, 849 (10th Cir. 1993) (noting that Colorado statute, identical to that at issue in this case, requires the holder of trade secret only to exercise reasonable efforts to maintain its secrecy) (citation omitted). In addition, Kansas law recognizes a possibility for a trade secret to be inadvertently disclosed without ceasing to exist, by defining “misappropriation” to include the “disclosure or use of a trade secret of another without express or implied consent by a person who before a material change of his position, knew or had reason to know that it was a trade secret and that knowledge of it had been acquired by accident or mistake.” See K.S.A. §60‑3320(2)(ii)©.
The court determines that a genuine issue of material fact exists as to whether Plaintiffs’ customer lists remain “the subject of efforts that are reasonable under the circumstances to maintain its secrecy.” K.S.A. §60‑3320(4). Defendants presented evidence showing that Plaintiffs disclosed a significant portion of their customer lists to their customers. Plaintiffs presented evidence, however, that such disclosure was made only to eleven customers, and that such disclosure was the result of a good faith mistake. Moreover, Plaintiffs presented evidence to show that, upon learning of the disclosure, they contacted each of the eleven customers by telephone, mail, or bother, and informed them that they had received the customer lists by mistake; that the originals with any copies should be returned to Plaintiffs’ office immediately; and that any use or disclosure of their contents would be deemed a misappropriation of Plaintiffs’ trade secrets.
The court also determines that a genuine issue of material fact exists with respect to whether Plaintiffs’ customer lists continue to provide Plaintiffs with a commercial advantage in the fireworks industry. The Kansas Uniform Trade Secrets Act states that “misappropriation” includes the “disclosure or use of a trade secret of another without express or implied consent by a person who before a material change of his position, new or had reason to know that it was a trade secret and that knowledge of it had been acquired by accident or mistake.” K.S.A. §60‑3320(2)(ii)©. There is no evidence in this case that any of the eleven customers who received Exhibits 15 and 17 materially changed his or her position prior to being informed that the exhibits were trade secrets and that knowledge of them had been acquired by mistake. Therefore, assuming that Plaintiffs’ customer lists constitute trade secrets, and that Exhibits 15 and 17 were disclosed only as a result of mistake, any use or disclosure of the contents of the exhibits by those eleven customers would provide Plaintiffs with an actionable claim for misappropriation. Under those circumstances, it seems that Plaintiffs’ customer lists would continue to provide Plaintiffs with the same commercial advantage as they did prior to their disclosure.
TRADE SECRETS IN CUSTOMER
LIST NOT DESTROYED BY INADVERTENT DISCLOSURE WHEN TRADE SECRET OWNER NOTIFIED
RECIPIENTS BEFORE MATERIAL CHANGE IN POSITION.
30. EFCO Corp. v. Symons, 219 F.3d 734 (8th Cir. July 18, 2000).
EFCO Corp. (EFCO), brought suit against Symons Corporation (Symons) claiming that Symons: (1) engaged in false advertising in violation of the Lanham Act; (2) misappropriated EFCO’s trade secrets in violation of the Iowa Uniform Trade Secrets Act (IUTSA); (3) induced James D. Phillips, a former high-level EFCO employee, to breach his fiduciary duty to EFCO; and (4) interfered with EFCO’s prospective business relations. Symons counterclaimed against EFCO for libel and for false advertising in violation of the Lanham Act.
Following the presentation of evidence, the district court charged the jury with deciding damages separately for each cause of action. The jury returned verdicts in favor of EFCO on its claim in favor of Symons on its claims. The district court reversed the jury’s verdict on EFCO’s claim of interference with prospective business relations, modified the remaining jury awards to account for duplication, and entered judgment for EFCO in the amount of $14.1 million and in favor of Symons in the amount of $50,000.
EFCO and Symons are competitors in the concrete forming system trade. Among the products both companies make are metal panels that can be joined together to create large modular systems. These systems act as casts for concrete, which is poured into the metal systems and allowed to set. Once the concrete hardens, the metal forms are removed. The panels are reusable, and are manufactured in various sizes to accommodate different applications, and feature a universal bolt pattern so as to work interchangeably.
James D. Phillips worked at EFCO from 1963 to 1992. During that time he was instrumental to EFCO’s engineering operations, and was intimately involved in the development of one of EFCO’s new products, the Super Stud. The Super Stud is a metal beam designed to support the concrete forming system by acting as a buttress. When Phillips left EFCO in 1992, he entered into a severance agreement that prohibited him from disclosing confidential information or competing with EFCO.
Shortly after Phillips left EFCO, Symons contacted him. He sent Symons a copy of his severance agreement. Symons then offered Phillips a position as a consultant, responsible for helping to upgrade Symons’ Korean manufacturing plant. Because Phillips was prohibited from working with Symons as a result of his severance agreement, Symons devised a clandestine payment scheme, whereby Phillips was paid by a third party, who Symons then reimbursed. Once Phillips’ noncompete clause lapsed, Symons hired him as an employee.
Symons argues that EFCO failed to prove that it misappropriated any trade secrets. It further argues that even if it did misappropriate secrets, EFCO failed to show that any damages were caused by such misappropriation.
Symons’ arguments are based on three theories: (1) no trade secrets existed; (2) any secret that had once existed was now public information because it was visible to the naked eye or because EFCO did not take sufficient measures to ensure its secrecy; (3) EFCO failed to prove that Symons used any of these purported secrets.
Iowa law defines trade secrets broadly for the purposes of
IUTSA. A trade secret is:
Information, including but not limited to a formula, pattern, compilation, program, device, method, technique, or process that is both of the following
a. Devices independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by a person able to obtain economic value from its disclosure or use.
b. Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.
Iowa’s broad definition of trade secrets, together with its liberal construction by Iowa courts, see, e.g., West Communications v. Office of Consumer Advocate, 498 N.W.2d 711, 714 (Iowa 1993), rebut Symons’ contention that any of EFCO’s research, development, pricing, cost or marketing data fell outside the definition of a trade secret. So long as EFCO received value from keeping the information secret and made attempts to keep it secret, the information is considered a trade secret under Iowa law.
Symons argues that EFCO did not make efforts to keep its information secret. EFCO conceded that it gave tours of its factory, but it screened tour candidates to ensure that none of its secret information would be at risk. Further, EFCO produced testimony that none of its trade secrets would be ascertainable to the naked eye by looking at its products because its manufacturing process cloaked the secrets.
Symons next asserts that it did not use any of EFCO’s secrets in its products. Symons fails to recognize that in making a claim for misappropriation of a trade secret, the plaintiff need not show that the defendant actually used the secret. See Iowa Code § 550.2(3) (2000) (defining misappropriation to include mere acquisition of trade secret). The extent to which Symons actually employed the trade secrets becomes appropriate when determining damages. See Iowa Case § 550.4 (2000).
In order to obtain damages, EFCO was required to prove that it was imaged by Symons’ misappropriation of one or more of its trade secrets. See id. Gerst v. Marshall, 549 N.W.2d 810, 817-18 (Iowa 1996).
The same evidence that supports a jury inference of causation on EFCO’s false advertising claim supports an inference that EFCO was damaged by Symons’ misappropriation of trade secrets. As discussed above, EFCO produced evidence of a general revenue erosion that coincided with Symons’ increased revenues, as well as evidence of sales lost to Symons. Further, EFCO produced evidence of losses in Super Stud revenues that coincided with the introduction of Symons’ rival product, the Symons Soldier, developed using EFCO’s trade secrets. From this evidence, the jury could properly infer that Symons’ misappropriation damages EFCO and could determine the extent of such damage.
JURY VERDICT FOR
TRADE SECRET MISAPPROPRIATION AFFIRMED; ACQUISITION LIABILITY, CIRCUMSTANTIAL
EVIDENCE OF MARKET EROSION SUFFICIENT NEXUS FOR TRADE SECRET DAMAGES
31. Hexagon Packaging Corp. v. Manny Gutterman & Associates, Inc., 2000 U.S. Dist. LEXIS 13085.
Plaintiff brought an action against defendants, asserting, as the only basis for federal jurisdiction, that defendants violated the civil provisions of the Racketeer Influenced and Corrupt Organization Act (RICO), 18 U.S.C.S. § 1962©, by misappropriating trade secrets. Defendants filed motions for summary judgment, arguing plaintiffs failed to allege injury and damages compensable under RICO. In order to allege injury and damages, plaintiff argued it lost the value of its trade secret formulas, it lost half its business as a result of some of the defendants ceasing to do business with it, and, for the first time in its response to the summary judgment motion, plaintiff argued defendants failed to pay a royalty. The court found plaintiff’s misappropriation of trade secret claim failed, as a matter of law, to establish a RICO injury. Also, breach of contract claims could not substantiate RICO violations. Finally, the court refused to allow claims of fraud brought for the first time in plaintiff’s response to the summary judgment motion. The court refused to exercise pendent jurisdiction over remaining state law claims and, therefore, dismissed the action.
In order to recover under RICO, Hexagon must show that it was injured by the defendants’ conduct. See Sedima, S.P.R.L. v. Imrex Co., Inc., 473 U.S. 479, 496 87 L.Ed. 346, 105 S.Ct. 3275 (1985) (“If the defendant engages in a pattern of racketeering activity in a manner forbidden by these provisions, and the racketeering activities injure the plaintiff in his business or property, the plaintiff has a claim under § 1964©.”), see also Beck, 120 S. Ct. at 1611.
In Holmes v. Securities Investor Protection Corp., 503 U.S. 258, 266-68, 117 L. Ed. 532, 112 S. Ct. 1311 (1992), the Supreme Court held that a plaintiff must establish that the defendant, by violating RICO, proximately caused the plaintiff’s injuries: there must be some relation between the injury asserted and the injurious conduct alleged.” See also , proximately caused the plaintiff’s injuries: there must be some relation between the injury asserted and the injurious conduct alleged.” See also Gagan v. American Cablevision, Inc., 77 F.3d 951, 958 (7th Cir. 1996).
In Beck, the Supreme Court abrogated Schiffels v. Kemprer Fin. Servs., Inc., 978 F.2d 344 (7th Cir. 1992). The court relied on Schiffels to find that “no predicate acts even need to be committed to sustain a RICO conspiracy claim.”
In Beck, the Supreme Court held that “a person may not bring a suit under § 1964© predicated on a violation of § 1962(d) for injuries caused by an overt act that is not an act of racketeering or otherwise unlawful under the statute.” 120 S. Ct. at 1616. In Beck, the Court dismissed the RICO conspiracy claim because the plaintiff’s injuries arose from the termination of his employment—not from an actionable racketeering activity. Id. Hexagon must show that the alleged overt acts were acts of racketeering, and that injuries suffered by Hexagon were caused by racketeering.
In sum, Hexagon’s four RICO Counts fail as a matter of law against all of the defendants. Hexagon cannot show that the defendants conspired to or conducted an enterprise through a pattern of racketeering activity which proximately caused injury to Hexagon. 18 U.S.C. § 1962©, (d), see also Sedima, at 496, Holmes 503 U.S. at 266-67, 117 L. Ed. 532, 112 S. Ct. 1311, Beck 120 S. Ct. at 1611.
Nevertheless, state law claims remain against Day and the Gutterman defendants for violating the Illinois Trade Secrets Act, against Ruth and Day for breach of fiduciary duty and against all of the defendants for common law fraud and civil conspiracy.
RICO CLAIMS
DISMISSED; STATE LAW CLAIMS FOR TRADE SECRET MISAPPROPRIATION, BREACH OF
FIDUCIARY DUTY, COMMON LAW FRAUD AND CIVIL CONSPIRACY REMAIN.
32. Joint Stock Society v. UDV North America, Inc. et al., 104 F.Supp. 2d 390 (D. Del. July 11, 2000).
On July 1, 1999, this court allowed Rita Farrell, a reporter with Reuters News Service, to intervene in this matter for the specific purpose of challenging the “confidential” designation of over 8,000 pages of material filed under seal in this case. Emphasizing the important First Amendment and common law interests in affording Ms. Farrell timely access to these judicial records, the court appointed a special master to preside over the de-classification process in order to afford Ms. Farrell timely access to the material she desired.
In the months which followed, the special master conducted a series of weekly meetings with the parties in an effort to narrow the documents that were in dispute. As a result of these meetings, roughly six thousand pages of material or two-thirds of the sealed filings) were voluntarily released from seal by the parties. The vast majority of these documents had been submitted by the plaintiffs in opposition to the defendants’ motions for summary judgment.
On August 13, 1999, roughly one hundred documents were submitted for the special master’s review. These materials were broken down into the following six categories: discovery materials and motions; vodka formula and process documents; consumer research studies, strategic planning and marketing information, financial information; and information that related to the defendants’ activities in Russia. Pursuant to the order of reference, the special master was to “determine whether any of these documents contained legitimate trade secrets or other proprietary information which [would] warrant their continued ‘confidential’ designation under the January 26, 1998 protective order issued in this case.” After the parties had briefed this issue, the special master heard oral argument. He issued his report and recommendation on January 24, 2000.
As the special master observed, under the good cause standard, he was required to examine the materials submitted for his review on a document-by-document basis in order to determine whether the defendants had made a “particularized showing of the need for continued secrecy” by specifically demonstrating that the disclosure of these materials would cause them to suffer a “clearly defined and serious injury.” Id. at 7-8 (citing, inter alia, Leucadia, Inc. v. Applied Extrusion Technologies, Inc.,998 F.2d 157, 166 (3d Cir. 1993) and Glenmede Trust Co. v. Thompson, 56 F.3d 476, 484 (3d Cir. 1995)). In conducting this exacting type of analysis, the special master noted, he was essentially engaging a narrowly tailored review of the sealed materials in order to determine whether there was a compelling interest in keeping them under seal.
This approach was entirely proper and in accordance with the case law. As the Third Circuit has repeatedly made clear, the focus of the inquiry is aimed at determining whether the party seeking to protect sealed judicial records has specifically demonstrated the need to keep the materials under seal. See, e.g., Leucadia, 998 F.2d at 167 (citing Republic of the Phillippines v. Westinghouse Elec. Corp., 949 F.2d 653, 663 (3d Cir. 1991); see also Hotel Rittenhouse, 800 F.2d at 346 (recognizing that the party seeking protection must make a “particularized showing of the need for continued secrecy”). Obviously, once a party makes this showing, the sealed judicial records should remain shielded from public view (even if the party seeking access has a First Amendment or common law right in viewing the materials).
Here the special master concluded that the disclosure of the limited number of materials which the defendants had submitted for his review would cause them to suffer a clearly defined and serious injury. See Rept. & Rec. at 15-25, 25-30, 30-34, 34-35, 35-43. He, therefore, recommended that these materials be kept under seal. The court can find no error with this approach. Leucadia, 998 F.2d at 166-67 (directing the district court on remand to conduct a document-by-document review” of the sealed materials in the case and “carefully weigh the factors for and against access,” including whether the defendants had demonstrated “good cause” for the protection of the documents because they contained “bona fide trade secrets”) (relying on Cipollome, 785 F.2d 1108 at 1121). Furthermore, after conducting an independent review of the materials submitted to the special master, the court cannot conclude that he clearly erred in finding that the overwhelming majority of these documents contained “legitimate trade secrets or other proprietary information which warrant their continued ‘confidential’ designation.” Most of the sealed materials contain vodka formulas, consumer research studies, strategic plans, potential advertising and marketing campaign or financial information.
TRADE SECRET
DOCUMENTS PORTECTED AGAINST DISCLOSURE TO NEWS REPORTER CLAIMING FIRST
AMENDMENT RIGHTS.
33. C&F PACKING CO., INC. v. IBP, INC., 224 F.3d 1296 (Fed. Cir. August 25, 2000).
C&F is an Illinois corporation that makes and sells meat products. Since the early 1970s, C&F had supplied uncooked sausage to pizza vendors, including Pizza Hut outlets. In this business, C&F perceived a need for national distribution of precooked sausage. After years of research, C&F developed a process for making and freezing precooked sausage for pizza toppings. This product had the appearance, taste, and other characteristics of freshly cooked sausage. C&F’s product surpassed other precooked products in price, appearance, and taste.
On August 6, 1985, C&F filed an application for a patent on its process. This application matured into U.S. Patent No. 4,731,006 (the ‘006 patent) for specially designed equipment to make the sausage, and U.S. Patent No. 4,800,094 (the ‘094 patent) for the process itself. C&F continued to improve its process after submitting its patent application, and kept its new developments as trade secrets.
In 1985, Pizza Hut agreed to buy C&F’s precooked sausage on the condition that C&F divulge its process to several other Pizza Hut suppliers, ostensibly to assure that back-up suppliers were available to Pizza Hut. In exchange for the process, Pizza Hut promised to purchase a large amount of precooked sausage from C&F. Under this agreement, C&F disclosed its process to several of Pizza Hut’s suppliers. C&F entered written confidentiality agreements with these entities. C&F also leased its specialized equipment to these suppliers and invested $4.5 million in a new plant to meet Pizza Hut’s needs. By early 1986, Pizza Hut’s other suppliers had learned how to duplicate C&F’s results. At that time, Pizza Hut told C&F that it would not purchase any more sausage without drastic price reductions.
In 1989, Pizza Hut entered into discussions with IBP about the purchase of pre-cooked sausage pizza toppings. IBP was one of Pizza Hut’s largest suppliers of meat products other than sausage. Pizza Hut furnished IBP with a “specification and formulation” for sausage toppings. IBP signed a confidentiality agreement with Pizza Hut concerning this information. Pizza Hut transferred information to IBP about the sausage process in document form, and in personal discussions with IBP employees. IBP also hired a former supervisor in C&F’s sausage[**4] plant as a production superintendent. IBP fired this employee five months later, by which time it had established its sausage-making process. By early 1991, Pizza Hut was buying precooked sausage topping from IBP.
In December 1998, a jury determined that IBP had misappropriated C&F’s trade secrets and awarded C&F $10.9 million in damages for unjust enrichment. The district court further awarded C&F $5.1 million in prejudgment interest.
The trial court dismissed of C&F’s misappropriation claim against Pizza Hut by ruling that “because the court has determined that Kansas law governs C&F’s misappropriation claims, this count is dismissed for failure to state a claim upon which relief can be granted.” C&F Packing Co. v. IBP, Inc., & Pizza Hut, Inc., 1994 U.S. Dist. LEXIS 973, at *13, No. 93- C1601, 1994 WL 30540,[**6] at *5 (N.D. Ill. Feb. 1, 1994) (C&F). The Kansas Uniform Trade Secret Act, Kan. Stat. Ann. § 60-3320 (1999) (KUTSA), has a three-year statute of limitations period; its Illinois equivalent has a five-year statute of limitations period. While this was enough for the district court to dismiss C&F’s complaint against Pizza Hut, the court also noted that C&F should have known of misappropriation by Pizza Hut “as early as March 1986,” so that “even if Pizza Hut had properly brought its claim under the Kansas . . . Act . . . the claim would be barred by the applicable statute of limitation.
Upon dismissal of its state law claims against Pizza Hut, C&F moved the district court for leave to file a Third Amended Complaint, asking the court to reconsider its ruling that Kansas, not Illinois, law applied, and also arguing for the first time that even if Kansas law governs, the Illinois Borrowing statute (735 Ill. Comp. Stat. 5/13-210 (West 1992)) requires the application of Illinois’ five-year Statute of limitations period. Without ruling on the applicability of the Illinois Borrowing statute the district court repeated its holding that C&F’s claims would have been time-barred even under a five-year statute of limitations.
The Federal Circuit affirms the jury verdict against C&F.(d) “Trade secret” means information, including but not limited to, technical or non-technical data, a formula, pattern, compilation, program, device, method, technique, drawing, process, financial data, or list of actual or potential customers or suppliers,[**11] that:
(1) is 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; and
(2) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy or confidentiality.
§ 765 Ill. Comp. Stat. 1065/2(d) (West 1995). Section 2(d)(2) of the ITSA parallels the common law factors for identifying a trade secret:
(1) the extent to which the information is known outside the employer’s business;
(2) the extent to which it is known by employees and others involved in the business;
(3) the extent of measures taken by the employer to guard the secrecy of the information;
(4) the value of the information to the employer and his or her competitors;
(5) the amount of effort or money expended by the employer in developing the information; and
(6) the ease or difficulty with which the information could be properly acquired or duplicated by others.
Stampede Tool Warehouse, Inc. v. May, 272 Ill. App. 3d 580, 651 N.E.2d 209, 215-16, 209 Ill. Dec. 281 (Ill. App. Ct. 1995). ”[T]he record evidence tracks closely the six factors for detecting a trade secret in the Stampede Tool Warehouse case.” See 651 N.E.2d at 215-16.
IBP contends that the district court committed prejudicial error by giving the jury the following instruction:
“Trade secret misappropriation may also occur or be facilitated by placing a person who has legitimate knowledge of trade secrets in a position that may inherently call for disclosure or use. However, employing a competitor’s former employee is not in and of itself sufficient to find misappropriation. An employee cannot be prevented from using his general skills or experience, even if they were obtained or developed while working for another employer.”
The Federal Circuit disagreed: “the jury
instruction neither misleads the jury nor prejudices IBP.”
IBP contested the jury’s award of $10.9 million to C&F for unjust enrichment because, it alleges, the jury’s damages formula erroneously assumed that IBP would make no profits on precooked sausage toppings made without using the misappropriated trade secrets. IBP also suggests that the damages formula did not properly account for IBP’s costs. These costs included the cost of sausage casings, water, electricity, glycol, carbon dioxide, quality control, payments to USDA inspectors, labor costs, and capital costs. The Federal Circuit disagreed.
“The record does not show that the jury’s damages award resulted from passion or prejudice, nor that the award bears no reasonable relationship to the loss suffered. The jury calculated IBP’s profits from IBP’s own financial reports for 1991-1995, and reasonably extrapolated from those figures amounts for 1996 and 1997, years for which records were not available. IBP does not contest these calculations. The jury calculated the $10.9 million award on the basis of $70 million in sales and, over C&F’s objection, made no allowance for IBP’s possible future use of C&F’s process.”
The jury was provided the following IBP jury instruction:
“In determining IBP’s[**19] profits, you must determine IBP’s actual gain. That means you must start with IBP’s sales . . . using the claimed trade secrets, then you must subtract from those sales all the costs incurred by IBP that were attributable to making the sales. You can consider the testimony of the two damages experts . . . in deciding what costs are properly attributable to IBP’s Italian sausage pizza topping sales.” No error.
C&F did not have a burden to show damages[**20] for lost profits “to a mathematical certainty,” but rather had only to show a reasonable basis for its computation. See Hemken v. First Nat’l Bank of Litchfield, 76 Ill. App. 3d 23, 394 N.E.2d 868, 872, 31 Ill. Dec. 666 (Ill. App. Ct. 1979). Therefore, on the basis of the record, this court concludes [*1305] that the jury’s assessment of damages was not manifestly erroneous or unreasonable.
The district court awarded C&F $5.1 million in prejudgment interest from IBP “as a matter of fairness and equity.” Under Illinois law, a party may generally recover prejudgment interest only by express agreement or by statutory authorization, see Continental Case Co v. Commonwealth Edison Co., 286 Ill. App. 3d 572, 676 N.E.2d 328, 331, 221 Ill. Dec. 807 (Ill. App. Ct. 1997), or if it is “warranted by equitable considerations,” Movitz v. First National Bank, 982 F. Supp. 566, 568 (N.D. Ill. 1997).
The district court[**21] found statutory authority for prejudgment interest in the ITSA’s authorization of damages for “both the actual loss caused by misappropriation and the unjust enrichment caused by misappropriation that is not taken into account in computing actual loss.” ITSA, 765 Ill. Comp. Stat. 1065/4(a) (West 1995). However, the ITSA does not incorporate a specific provision for prejudgment interest.
In the absence of an express agreement, IBP argues that the award of prejudgment interest depends solely on the equity exception, and that this exception is not justified because IBP had no fiduciary or confidential obligations to C&F. The Federal Circuit agrees. “In this case there was no direct relationship between C&F and IBP, much less a fiduciary relationship. Therefore, the district court committed an abuse of discretion in its award of prejudgment interest.”
The district court’s opinion states that C&F’s state law claims were dismissed for failure to state a claim, because the court determined that Kansas law governed, while C&F alleged in its second amended complaint that Pizza Hut had violated the ITSA, rather than the KUTSA. See C&F, 1994 U.S. Dist. LEXIS 973, at *13, Id. at *5. The choice of the proper trade secrets act affects this case primarily through the statute of limitations. The Federal Circuit reverses. “). A complaint need not specify the correct legal theory, or point to the right statute, to survive a motion to dismiss. See Tolle v. Carroll Touch, Inc., 977 F.2d 1129, 1134-35 (7th Cir. 1992). A complaint merely describes the claim.”
“If C&F chose, in the district court’s view, the law of the wrong state under which to bring its claim, such a mistake is akin to that of bringing a case under an incorrect legal theory. C&F presented sufficient facts to demonstrate that the claim at least was plausible, under the law of either Kansas or Illinois, and the district court should have proceeded to try the case on its merits under the state law it found more appropriate.”
The statute of limitations issues and the accrual issues were questions of fact not subject to dismissal on a Rule 12(b)(6) motion. “The record does not support any definitive conclusion on an accrual date, when Pizza Hut misappropriated the trade secrets. The trial record suggests to this court that Pizza Hut committed a misappropriation under KUTSA in 1989. The record suggests that Pizza Hut disclosed trade secrets to IBP in 1989 knowing of confidentiality agreements barring their compromise.”
The district court found that KUTSA preempted C&F’s fraud claim because KUTSA “displaces conflicting tort, restitutionary, and other laws of this state pertaining to civil liability for misappropriation of a trade secret.” Kan. Stat. Ann. § 60-3326(a). The district court found that Pizza Hut’s alleged fraud based upon alleged “knowingly false promises” [**30] and “acts of concealment” to be indistinguishable from its trade secret misappropriation. See, e.g., Thomas & Betts Corp. v. Panduit Corp., 2000 U.S. Dist. LEXIS 6010, at *12, No. 93- C4017, 2000 WL 549521, at *4 (N.D. Ill. 2000) (claims are preempted “to the extent they are based on a misappropriation of trade secrets”); Hutchinson v. KFC Corp., 809 F. Supp. 68, 71 (D. Nev. 1992) (unjust enrichment and unfair competition claims preempted); Precision Screen Machines, Inc. v. Elexon, Inc., 1996 U.S. Dist. LEXIS 12487, 1996 WL 495564, at *4 (N.D. Ill. 1996) (tortious breach of a confidential relationship preempted).. The Federal Circuit affirms the dismissal of the fraud claim on preemption grounds.
DAMAGES VERDICT
(UNJUST ENRICHMENT) AFFIRMED; NO PREJUDGMENT INTEREST UNDER THE ITSA(UTSA);
FRAUD CLAIM PREEMPTED; STATUTE OF LIMITATIONS CLAIM PRESENTS QUESTIONS OF FACT.
34. Procter & Gamble v. Stoneham, 2000 Ohio App. LEXIS 4475 (Ct. App. September 29, 2000).
Paul Stoneham worked for P&G for thirteen years. He had a master’s degree in marketing. During the latter part of his employment, he worked in the haircare division, focusing primarily on hair-conditioning products. As a senior-level manager, he had responsibility for international marketing. As a member of several teams of managers formulating P&G’s global business goals and strategies related to haircare, Stoneham was required to know and use information such as market research results, financial data related to the costs and profits of the products, and the technological development in existing and new products.
In 1998, Stoneham decided to take a job with Alberto-Culver, a company whose haircare products, including its conditioners, competed with P&G products to some extent. Alberto-Culver’s V05 brand of hair conditioner was the best-selling leave-in conditioner on the market at the time. Stoneham’s position was to be President of Alberto-Culver International, the complement to the company’s President of Alberto-Culver U.S.
Shortly after he accepted the position, P&G filed suit, alleging that Stoneham had breached the covenant not to compete and that his employment with Alberto-Culver posed an immediate threat that P&G’s trade secrets would be disclosed. Following a hearing on P&G’s requests for a preliminary and a permanent injunction, the trial court held that P&G had not established an entitlement to relief.
In Ohio, non-compete agreements that are reasonable are enforced, and those that are unreasonable are “enforced to the extent necessary to protect an employer’s legitimate interest.” The Supreme Court of Ohio has stated, “A covenant restraining an employee from competing with his former employer upon termination of employment is reasonable if the restraint is no greater than is required for the protection of the employer, does not impose undue hardship on the employee, and is not injurious to the public.”
In actions to enforce covenants not to compete, Ohio courts have held that an actual threat of harm exists when an employee possesses knowledge of an employer’s trade secrets and begins working in a position that causes him or her to compete directly with the former employer or the product line that the employee formerly supported. Although the courts do not refer to this evidentiary proposition as “inevitable use” or “inevitable disclosure,” the concepts are the same. According to the inevitable-disclosure rule, a threat of harm warranting injunctive relief can be shown by facts establishing that an employee with detailed and comprehensive knowledge of an employer’s trade secrets and confidential information has begun employment with a competitor of the former employer in a position that is substantially similar to the position held during the former employment.
P&G presented clear and convincing evidence that Stoneham had an intimate knowledge of P&G’s confidential information and trade secrets, and that Stoneham’s position with Alberto-Culver resulted in direct competition between the products that Stoneham formerly supported and the new products for which he had responsibility. Under these circumstances, Stoneham’s use of P&G’s information and secrets was a very real threat. P&G presented other evidence that Stoneham’s use or disclosure of P&G’s information was not just a threat, it was a substantial probability.
The evidence presented by P&G clearly and convincingly demonstrated that the covenant not to compete signed by Stoneham was valid and enforceable. Clear and convincing evidence also established a threat of harm to P&G from Stoneham’s employment with Alberto-Culver and his use or disclosure of P&G’s trade secrets and confidential information. The trial court’s denial of injunctive relief was an abuse of the court’s discretion. The judgment of the trial court is reversed, and this cause is remanded for presentation of Stoneham’s case in defense of the action and for further consideration of the issuance of a permanent injunction in accordance with the appropriate legal standards. Trial court reversed.
35. Phillip Morris Inc. v. Thomas R. Reilly, 113 F.Supp. 2d 129 (D. Mass. September 7, 2000).
The plaintiffs in these cases are manufacturers of cigarettes and smokeless tobacco products. They filed these suits seeking declaratory and injunctive relief prohibiting the defendants from enforcing certain provisions of Mass. Gen. Laws ch. 94, § 307B (the “Disclosure Act”). The plaintiff contend that enforcement of the Act would violate rights guaranteed them under the United States Constitution in three ways: (1) it would effect an uncompensated taking of property by the State in violation of the Fifth and Fourteenth Amendments, (2) it would deprive them of valuable property without procedural due process in violation of the Fourteenth Amendment, and (3) it would constitute an improper encroachment by the Commonwealth into the domain of interstate commercial regulation which the Commerce Clause reserves to the national government.
For the purpose of protecting the public health, and manufacturer of cigarettes, snuff or chewing tobacco sold in the commonwealth shall provide the department of public health with an annual report, in a form and at a time specified by that department, which lists for each brand of such products sold the following information:
(a) The identity of any added constituent other than tobacco, water or reconstituted tobacco sheet made wholly from tobacco, to be listed in descending order according to weight, measure, or numerical count, and
(b) The nicotine yield ratings, which shall accurately predict nicotine intake for average consumers, based on standards to be established by the department of public health.
Mass. Gen. Laws ch. § 307B (emphasis added).
Earlier in the case, this Court granted partial summary judgment in favor of the defendants on the plaintiffs’ claim that the Disclosure Act was preempted by the Federal Cigarette Labeling and Advertising Act (“Labeling Act”), 15 U.S.C. § 1331 et seq., or the Comprehensive Smokeless Tobacco Health Education Act of 1986 (“Smokeless Tobacco Act”), 15 U.S.C. §§ 4401-08. The Court also granted a preliminary injunction restraining the Commonwealth from enforcing the statute pending a full adduction of the remaining claims. After interlocutory appeals, those rulings were affirmed. See Philip Morris, Inc. v. Harshbarger, 122 F.3d 58 (1st Cir. 1997); Philip Morris, Inc. v. Harshbarger, 159 F.3d 670 (1st Cir. 1998).
The court now addresses the parties’ cross-motions for summary judgment. For the reasons that follow, the plaintiffs’ motions are granted, and defendants are permanently enjoined from enforcing so much of the Disclosure Act as requires manufacturers of cigarettes, snuff or chewing tobacco to disclose brand-specific information identifying constituent ingredients of their products.
Each plaintiff keeps secret the recipe of ingredients for its brand. For each plaintiff, the identity of the specific ingredients in a given product, and the relative quantities in which the ingredients are used, are kept secret from the public, from other plaintiffs, and from the plaintiffs’ other competitors. Even within the plaintiff companies, information regarding ingredient recipes is purposely compartmentalized. While many employees may each know a bit of a recipe, very few persons have access to any particular recipe in its entirety. To date, the plaintiffs have successfully maintained the secrecy of their ingredient recipes, even though the plaintiffs and their competitors are always alert to discovering competitors’ recipes. Several plaintiffs have made attempts in the past to discover the ingredient used in other plaintiffs’ brands, but these attempts have been unsuccessful. Although “reverse-engineering” may permit identification of what chemicals are present in a particular product, knowing the chemical composition of a brand apparently does not by itself disclose the ingredients, or the relative amounts of them, that were used to make the product. A list that disclosed what specific ingredients are used in an identified brand, arranged in descending order according to the relative amounts of each ingredient used, would aid a competitor’s efforts to duplicate that brand, even if the list did not tell exactly how much of each ingredient was used.
The record establishes that the plaintiffs have valuable property interests in confidential brand-specific ingredient information; the confidential information qualifies as trade secret information under the laws of Massachusetts; the inevitable effect of the Disclosure Act will be to compel the public disclosure of some or all of the trade secrets; by destroying the secrecy of the information, public disclosure deprives the plaintiffs of their property interest in the trade secrets; the Commonwealth’s deprivation of the property interest in the secrets is a “taking” for which the Fifth and Fourteenth Amendments require just compensation to be made; there is neither provision for, nor a prospect of, compensation to the plaintiffs for the taking that would be effected by the Disclosure Act; and therefore, the plaintiffs are entitled to an injunction preventing the taking without compensation, that is, preventing the defendants from acting to enforce the provisions of the Disclosure Act requiring the plaintiffs to submit brand-specific ingredient information.
COMMONWEALTH OF
MASSACHUSETTS ENJOINED FROM ENFORCING CIGARETTE [RECIPE] DISCLOSURE ACT.
36. Superior Consultant Company, Inc. v. Bailey, 2000 U.S. Dist. LEXIS 13051 (E.D. Mich. August 22, 2000).
In action alleging breach of an employment contract, plaintiff corporation moved for a preliminary injunction relative to defendant former employee’s employment at defendant software corporation.
Plaintiff Superior Consultant Company (“Superior”) filed a ten count complaint on May 12, 2000 alleging defendant Timothy Bailey was employed at Superior under a written “Employment Agreement” initially signed by Bailey on June 19, 1997. Plaintiff alleges Bailey signed a second Employment Agreement on December 26, 1997. Plaintiff alleges Bailey was later promoted to the position of an Executive Director where he worked with proprietary and confidential systems and information, and was privy to Superior’s corporate strategies and initiatives. Plaintiff alleges Bailey also worked closely with and/or supervised certain Superior employees including Tom Feuerer, Carl Duff, Bernard Addy, Ian Campbell, Jamie Scott and Scott Miller.
The non-compete clauses within the December 26, 1997 Employment Agreement are, of course, enforceable only to the extent they are “reasonable as to [their] duration, geographic area, and the type of employment or line of business.’ M.C.L. §445.774a. Section 10 of the Employment Agreement prohibits “soliciting business and/or performing services via direct employment through a party other than Superior for a period of ninety (90) days from the date of termination of employment with Superior for clients of Superior or prospective clients of Superior identified during the term of employment.” Another non-compete clause in Section 10 prohibits “engaging in healthcare information systems consulting and management consulting businesses for a period of six (6) months following the date of termination.” The non-solicitation clause of Section 20 prohibits “recruiting, assisting in the recruitment or solicitation of employees of Superior … either directly or indirectly following employee’s termination of employment with Superior.” Section 15 of the Employment Agreement requires the “return [of] all materials acquired during the term of employment” upon termination, including computers and computer disks. Section 11 prohibits using or disclosing confidential information such as “the identities of suppliers, customers and prospective customers … for any purpose other than the performance of this Employment Agreement.”
In a similar case also involving plaintiff Superior, Superior Consulting Co., Inc. v. Walling, 851 F.Supp. 839 (E.D. Mich. 1994), Judge Cohn found that a six month non-competition time period was reasonable where, as here, the agreement “is designed in part to protect proprietary information learned by the employee.” Id. at 847. Judge Cohn also found, again as is the case here, that a non-competition agreement lacking a geographical limitation “can be reasonable if the employer actually has legitimate business interests throughout the world.” Id (citing Sigma Chemical Co. v. Harris, 586 F.Supp. 704, 710 (E.D. Mo. 1998)). Judge Cohn further concluded, however, that the non-compete clause before him was unreasonably broad with respect to restrictions on the type of employment or line of business.
Consistent with the reasoning in Walling, this Court finds that the 90 day and six month non-compete restrictions in Section 10 of the December 26, 1997 Employment Agreement are reasonable, as is the absence of any geographical restriction. The Court further finds that the non-solicitation restriction in Section 10, construed as a non-competition covenant, is unreasonable absent any time duration. The Court will, at this time, apply the same six month time limitation to the non-solicitation clause as applies to the non-compete provision. Section 15 requiring the return of Superior’s materials upon termination is fundamentally reasonable. Section 11, indefinitely prohibiting the disclosure of confidential information, is also reasonable, and is consistent with Michigan public policy as embodied by the MUTSA. See Walling, 851 F.Supp. at a848.
Superior relies upon Pepsico, Inc. v. Redmond, 54 F.3d 1262 (7th Cir. 1995) for the proposition that Bailey should be enjoined from working at STC for six months, in any capacity, regardless of Bailey’s asserted current STC job responsibility of providing consulting services to Ames Department Stores, a non-healthcare entity.
Pepsico is distinguishable from the case at bar in several respects. Superior has not demonstrated that defendant Bailey’s new employment with STC, established computer consulting services outside the healthcare industry, will inevitably lead to Bailey’s reliance on Superior’s confidential information and trade secrets.
Each of the four factors weighs in favor of granting preliminary injunctive relief to plaintiff Superior consistent with the terms of the December 26, 1997 Employment Agreement and the standards of reasonableness recognized in M.C.L. §445.774a and M.C.L. §445.1906. A court may, in appropriate circumstances, extend injunctive relief beyond the term of a non-competition agreement where a party has “flouted the terms” of the agreement. See Thermatool Corp. v. Borzym, 227 Mich. App. 366, 375, 575 N.W.2d 334 (1998). Superior is entitled to an extension of the six month non-solicitation agreement, a time limitation affixed by the Court, due to Bailey’s demonstrated activities in soliciting Feuerer, Blocker, Scott, and Miller. The prohibition against disclosing confidential information and trade secrets is indefinite, and needs no extension. Superior has not shown that Bailey has breached a post-termination contractual duty not to provide healthcare information systems consulting for six months after his termination and, thus, no time extension is warranted. In that there has not been a showing that Bailey will inevitably rely on Superior’s confidential or trade secret information in his new position at STC, and further considering that Bailey and STC are prohibited from using Superior’s confidential information and trade secrets, it would be unreasonable to further prevent Bailey from working for STC in any and all capacities.
INJUNCTION GRANTED
BASED UPON RESTRICTION IN EMPLOYMENT CONTRACT, NOT THE MICHIGAN UNIFORM TRADE
SECRETS ACT.
37. Classic Limousine Airport Service, Inc. v. Alliance Limousine LLC, 2000 Conn. Super. LEXIS 2077 (August 1, 2000).
This application for a temporary injunction is brought by the plaintiffs, Classic Limousine Airport Service, Inc. (Classic) and Carey Limousine Stamford (Carey) against Alliance Limousine and Alan Oyugi (Oyugi) claiming, inter alia, violations by the defendants of the Connecticut Uniform Trade Secrets Act (CUTSA), the Connecticut Unfair Trade Practices Act (CUTPA) and breach of fiduciary duty. The plaintiffs claim that Oyugi, a former employee of Classic, has violated CUTSA by misappropriating trade secrets in the form of customer lists, “profiles” and other confidential information belonging to the plaintiffs, and utilizing them in the formation of his own new limousine company, Alliance Limousine, in competition with and to the economic detriment of the plaintiffs.
Classic hired Oyugi in 1985, initially as a driver, but eventually he became general manager of the company. He was responsible for relations with all of the customers of Classic, and knew them well. He was familiar with the person or persons in each company responsible for arranging limousine services, and in many cases established friendly and social relationships with these “contact” persons. His development of strong relationships with customers was a great benefit to Classic and he was deemed to be a good and loyal employee.
Oyugi also had duties regarding the supervision of staff and drivers and established close relationships with many of them as well. His managerial position did not provide him with any stock interest in the business nor was he an officer or director of the corporation. He did not have access to the corporation’s financial and banding information, nor to its profit and loss statements, and he possessed no check-signing privileges.
In June 1999, Classic was sold to Carey after many months of negotiations. Near the conclusion of the deal, Oyugi was told of the impending sale, and he became a focus of the transaction as the Venturas attempted to have him sign an employment agreement which Carey offered. Oyugi retained counsel to represent his interest. The various demands, offers and refusals made by the parties are important to this lawsuit only insofar as they resulted in no final agreement between Carey and Oyugi, created bad feelings, and may well have created additional impetus for this lawsuit.
Oyugi’s employment with Classic ended no later than June 3, 1999 and he later decided to form his own limousine company, which he did in September 1999.
It is true that a customer list may be a trade secret. The customer list here consisted of the names of the corporate clients, the contact names and telephone numbers, billing history and customer profiles containing customer preferences. This information was stored on Classic’s computer software, Limoware. It was obtained by the plaintiff through advertisement, public information and directories, cold calling and from lists of companies. The contact names and profiles and preferences were obtained from the companies themselves, by having them return information sheets which were then input into the computer. Oyugi formed his business in the same manner, except that he already knew the names of many of the companies and contacts from his experience with Classic. He contacted no customers prior to his severance from Classic, nor is there evidence that he brought with him when he left any written materials or copies thereof, or that he ever accessed the plaintiffs’ computers after he left Classic’s employ. From his constant, close and sometimes personal relationships with his former clients, he retained in his memory the names of many companies and people. But what clearly defeats the plaintiffs’ claims is that the information sought to be protected is not entitled to “trade secrets” status.
Competition in the limousine service business is substantial. There are literally hundreds of companies in Fairfield County whose employees require transportation to New York airports, and there is nothing unique about the business. Companies are readily identified by reference to directories, phone books, the Internet and by pounding the pavement. No companies have exclusive contracts with any one limousine service company, but often avail themselves of the service of several. In fact, some of the defendants’ customers still retain Classic on the list of limousine services to be used.
The plaintiffs concede that what separates one limousine company from another is customer service. The court senses nothing extraordinary about sending a driver in a car to pick up a passenger and taking that person to the airport. As stated above, potential customer companies are generally known or are readily ascertainable; no independent economic value is derived from knowing the names of plaintiffs’ customers; with little more difficulty, one can determine with a phone call who in any particular corporation is in charge of arranging transportation for its employees, and customer preferences can be obtained by asking one or two further questions. These are not trade secrets, because the information is readily ascertainable by proper means. Connecticut General Statutes 35‑51(d)(1); Ivy Mar Co., Inc. v. C.R. Seasons Ltd., 907 F.Supp. 547, 557-58 (E.D. N.Y. 1995).
With respect to billing history, this information likewise is readily ascertainable. A call to a customer will yield the credit card that will be used and the extent of use of limousine services. But beyond that, the plaintiff Classic made little effort to maintain secrecy concerning this or any other information on Limoware.
The court concludes that the defendants have not violated the Connecticut Uniform Trade Secrets Act. Rather, Mr. Oyugi, having learned the limousine business in the employ of Classic, decided for reasons having no bearing on the merits of this case, to leave their employ and not to join Carey, and eventually to start his own company. He did so without breaching any duty owed to his former employer, and with no restrictive covenant prohibiting it. Rather, using contacts retained in his memory, information generally known or readily ascertainable, he embarked on his own endeavor in competition with many other enterprises, including the plaintiffs’, vying for the business of a finite number of identifiable customers. Because he did not begin to compete with his employer in any way prior to the termination of his employment, and because the employer’s customer list is not a trade secret, Mr. Oyugi’s actions are validated by the principles announced in Town & Country House & Homes v. Evans, 150 Conn. 314, 189 A.2d 390 (1963).
38. Southwest Whey, Inc. v. Nutrition 101, Inc., 2000 U.S. Dist. LEXIS 15460 (C.D. Ill., October 12, 2000).
On May 10, 1989, Plaintiff Southwest Whey, Inc. (“Southwest Whey”) and Defendant Nutrition 101, Inc. (“Nutrition 101”) entered into a written agreement to operate a joint venture. Southwest Whey agreed to obtain whey from dairies and Nutrition 101 agreed to market whey to hog farmers in the region east of the Mississippi River and in other areas by mutual agreement. The joint venture was dissolved by Southwest Whey on September 16, 1993.
Nutrition 101 was owned and operated by Ross Peter (“Peter”). Nutrition 101 primarily sold feed to pork producers. Peter was experienced in marketing feed to farmers and had an extensive customer base of pork producers. Peter and Muse began discussions which led to the formation of the joint venture on May 13, 1989. A written agreement was included “to guide the joint venture.” Southwest Whey “agreed to procure whey from dairies and Nutrition 101 agreed to market whey to hog farmers in the region east of the Mississippi River.” The agreement did not specifically include a non-compete restrictive covenant to govern the parties’ actions or competition following dissolution.
On September 16, 1993, Southwest Whey informed Nutrition 101 that it had decided to cease operations as a joint venture, and that Nutrition 101 would no longer have access to whey from dairies under contract with the joint venture. One month later, Southwest Whey notified the customers of the dispute and solicited their continued business. Southwest Whey had no written contracts with pork producers who had no obligation to continue to take whey and could at any time “come and go.”
Southwest Whey alleges that it has developed and used certain trade secrets in connection with the marketing and distribution of whey as a hog feed element. Following the dissolution of the joint venture, Southwest Whey alleges that Nutrition 101’s efforts in connection with the marketing and distribution of whey as a hog feed element constitute the misappropriation of trade secrets of Southwest Whey in violation of ITSA. Nutrition 101 moves for summary judgment on Counts III and IV.
In
Illinois, a trade secret is defined as:
information,
including but not limited to, technical or non-technical data, a formula,
pattern, compilation, program, device, method, technique, drawing, process,
financial data, or list of actual or potential customers or suppliers, that:
(1) is 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; and
(2) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy or confidentiality. 765 ILCS 1065/2(d) (West 1998).
In order to establish improper use of trade secrets, there must be a showing that the information at issue was (1) secret (not generally known in the industry); (2) misappropriated; and (3) used in the appropriator’s business. See Composite Marine Propellers Inc. v. Van Der Woude, 962 F.2d 1263, 1265-66 (7th Cir. 1992).
Southwest Whey essentially alleges that it brought several methods, techniques, and practices into the joint venture which are the basis of its trade secrets claim. Specifically, in an answer to an interrogatory, Southwest Whey identified the following thirty-one methods, techniques, and practices which constitute trade secrets in connection with the marketing and distribution of whey as a hog feed element: (1) Contract language with farmers; (2) Contract language with dairies; (3) Allowable distance for hauling whey from dairy to farmer for freshness; (4) allowable distance for hauling whey from dairy to farmer for profit; (5) Techniques for hook ups at dairies; (6) Tank cleaning techniques; (7) Tank configurations, including the pumping equipment and appurtenances; (8) Pricing strategies; (9) How to prevent the whey from destroying concrete; (10) Knowledge of feed characteristics of whey; (11) Knowledge of whey sources generally; (12) Knowledge that farmers would pay for whey; (13) Routes from dairies to the farmers; (14) Customer lists; (15) Vendor lists; (16) Techniques for identifying suppliers and customers; (17) Marketing methods for farmers; (18) Marketing methods for dairies; (19) How to mix and/or dilute whey to make it an effective supplemental feed source; (20) Studies on the nutritional value of whey; (21) Handling plants and managers to minimize inconvenience with truckers; (22) Siting of loading operations; (23) Use tracking at farms to maximize sales and ensure continued customer care; (24) Confinement and location techniques and procedures for use at farms; (25) Development of on‑farm delivery system; (26) Use of cone bottom tanks; (27) Recirculation techniques and the need for them; (28) Tank agitation techniques; (29) Screening techniques; (30) Gauge for tank management; and (31) Use of elevator buckets and other products for delivery of whey at farms.
Southwest Whey asserts that it attempted to protect the thirty-one “trade secrets” by not giving them to anyone in their entirety other than Nutrition 101. Thus, they contend that even if some or most of the thirty-one enumerated elements do not constitute trade secrets, “the whole package put together” is a trade secret. Specifically, the various elements combine to form the “overall trade secret” which Southwest Whey has acquired after years of trial and error that has come at great expense.
The Court first notes that a “trade secret” “may include a compilation of confidential business and financial information.” See Nilssen v. Motorola, 963 F.Supp. 664, 673 (N.D. Ill. 1997). The key inquiry in ascertaining whether information is a trade secret under the ITSA is on the secrecy of the information sought to be protected. Specifically, courts look at how easily information can be duplicated without involving substantial time, effort, or expense. See Hamer Holding Group, Inc. v. Elmore, 202 Ill. App. 3d 994, 1011, 148 Ill. Dec. 310, 560 N.E.2d 907 (1st Dist. 1990). Factors in determining whether information constitutes a trade secret include the following: (1) The extent to which the information is known outside the business; (2) The extent to which it is known by others involved in the business; (3) The extent that measures have been taken to guard the secrecy of the information; (4) The value of the information to the party and his competitors; (5) The amount of money or effort expended by the party in developing the information; and (6) The ease or difficulty with which the information at question could be obtained or duplicated by others. See Colson Co. v. Wittel, 210 Ill. App. 3d 1030, 155 Ill. Dec. 471, 474, 569 N.E.2d 1082 (4th Dist. 1991).
The Court notes that the statutory protection afforded trade secrets reflects the balancing of social and economic interests. An individual who has put forth the time, money, and effort to obtain a secret advantage should be protected from a party who obtains the secret through improper means. Nevertheless, in a competitive market, a party is entitled to utilize the general knowledge and skills acquired through experience in pursuing his chosen occupation. See Service Centers of Chicago, Inc. v. Minogue, 180 Ill. App. 3d 447, 452, 535 N.E.2d 1132, 129 Ill. Dec. 367 (1st Dist. 1989).
Moreover, merely being the first or only one to use certain information does not alone turn what is otherwise general knowledge into a trade secret. Otherwise, no matter how ordinary or well known the information, the first person to use it would be able to obtain the protection of the statute. See Minogue, 180 Ill. App. 3d at 455. Additionally, “generalized confidential business information” does not constitute a protectable trade secret. See Amp Inc. v. Fleischhacker, 823 F.2d 1199, 1204 (7th Cir. 1987). Specifically, the mere legwork in acquiring this information cannot be the basis for a claim. Any other result would mean that a party who learns the basics of an industry from an individual would be precluded from entering the business at all in a competitive relationship. Such a result is contrary to a free market economy. See Nilssen, 963 F.Supp. at 674.
Southwest Whey basically asserts that it is the total process gained over the years that is the trade secret at issue in this case. Southwest Whey has alone on a large scale been able to transform this process into a workable, profitable enterprise. Southwest Whey contends that it has taken sufficient measures to protect its trade secrets. Specifically, although certain aspects of the process were revealed to the dairies, truckers, farmers or supply vendors, only that which was necessary for the process to function was revealed at any time. Muse indicated that only Southwest Whey and Nutrition 101 knew the entire process of marketing and delivering whey. Therefore, the trade secret in the “whole package” was protected.
Moreover, the record reveals that Nutrition 101 is Southwest Whey’s only competitor on a major scale in the procurement and selling of whey. There have been, however, a few individual truckers or farmers in the same geographical area engaging in this process on a much smaller scale. These instances are basically limited to the occasional farmer or trucker who hauls whey for the price of freight alone on nothing more than an individual dairy basis. No other entity in the area has engaged in the procurement and selling of whey on such a large scale.
Southwest Whey maintains that it is the “whole package” which constitutes a trade secret. The first prong of the statute requires the Court to assess whether the relevant information was sufficiently secret to derive economic value. At this stage, the Court must view the evidence in the light most favorable to Southwest Whey. It is undisputed that Southwest Whey’s only competitor on a major scale is Nutrition 101. Although there may have been individual truckers or farmers engaged in the business on a much smaller scale, there were no other participants in the industry of the same magnitude as Southwest Whey. This is instructive in determining whether Southwest Whey’s collection of information acquired over the years is sufficiently secret to derive economic value. It is true that some of the items that constitute a portion of the trade secret are not trade secrets. However, the fact that only Southwest Whey has engaged in the business at this level at least raises a material fact as to the first prong of the statute. Specifically, there is a material issue as to whether the entire package is sufficiently secret to derive economic value.
The record reveals that no restrictive covenant was signed between the parties to the action. However, it is important to note that a restrictive covenant or confidentiality agreement is not a prerequisite to recovery under the ITSA. See Hexacomb Corp., 875 F.Supp. 457, 464. Nonetheless, some affirmative step must be taken to maintain a trade secret. See Gillis Associated Industries, Inc. v. Cari‑All, Inc., 206 Ill. App. 3d 184, 191-92, 564 N.E.2d 881, 151 Ill. Dec. 426 (1st Dist. 1990). Southwest Whey contends that the language in Paragraph 13 of the written agreement constitutes a restrictive covenant: “101 personnel to sign agreement not to pass information or data to non involved parties or to be involved in any aspect of whey marketing other than as representatives of 101.” However, the Court finds that this language was included in the agreement to prevent employees of Nutrition 101 from entering the market on their own. The Court notes that the parties discussed the possibility of entering into a restrictive covenant when they discussed terminating the joint venture. This indicates that there was no restrictive covenant from the outset. Thus, the language in the agreement does not constitute a restrictive covenant.
The Court is not persuaded that Southwest Whey used reasonable efforts to maintain the secrecy of its trade secrets. The record does not reveal any affirmative steps taken by Southwest Whey to protect its trade secrets.
“TOTAL PACKAGE”
PROTECTABLE AS TRADE SECRET, BUT FAILURE OF PROOF ON REASONABLE MEASURES.
Recent Decisions in Trade Secrets Law--Year 2000
R. Mark Halligan, Esq.