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INTELLECTUAL PROPERTY SURVEY

TRADE SECRET CASES

PROF. JANICKE

Fall 2010

[Note: These cases have been edited. Most footnotes and string cites have been deleted, without a specific signal. Asterisks *** indicate text deletions.]

2010I.P. Survey – Trade Secret Cases

1

UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT

LAMB-WESTON, INC., Plaintiff-Appellee

v.

McCAIN FOODS, LTD.

No. 91-35476

941 F.2d 970; 1991 U.S. App. LEXIS 18091; 19 U.S.P.Q.2D(BNA) 1775; 91 Cal. Daily Op. Service 6351; 91 Daily JournalDAR 9827

August 12, 1991, Filed

Before Eugene A. Wright, Robert R. Beezer and Charles Wiggins, Circuit Judges.

WRIGHT, Circuit Judge

Lamb-Weston's attempt to spiral ahead of its competitors was allegedly thwarted by the misappropriation by McCain of Lamb-Weston's trade secrets for manufacturing curlicue french fries. To keep Lamb-Weston from being left to twist in the wind before the trial on the merits, an eight-month preliminary injunction was imposed, barring McCain from producing or selling products made with the technology in question. McCain appeals and we affirm.

I

Lamb-Weston, a potato processor, began in 1986 to develop the technology for producing curlicue french fries. The unique process involved a helical blade and water-feed system. McCain, a competitor, began work on a manufacturing process for curlicue fries in 1989.

In January 1990, McCain approached several Lamb-Weston employees to help its development. At that time, Richard Livermore, who had helped create the Lamb-Weston blade and process, allegedly gave McCain a copy of Lamb-Weston's confidential patent application. Livermore later went to work for McCain. Subsequently, Jerry Ross, the independent contractor who fabricated the Lamb-Weston blade, was hired by McCain to craft a helical blade for it. McCain left the decisions about the specifications, materials and manufacturing process to Ross, knowing he was still working on Lamb-Weston's blades.

Lamb-Weston was issued two patents for its blade system on May 22, 1990. In August, after discovering Ross was working for McCain, Lamb-Weston had him sign a confidentiality agreement. Contemporaneously, it sent a letter to McCain asserting concern that McCain was misappropriating its trade secrets. In October, Lamb-Weston insisted Ross sign an exclusivity


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agreement. McCain then requested and received from Ross all the information he had on the McCain blade.

According to Lamb-Weston, with the help of Ross and Livermore, McCain built a prototype before the patents issued in May 1990. By June, McCain had the blades hooked up to a prototype water-feed system and by December was producing curlicue fries.

During the following month, Lamb-Weston sued for misappropriation of trade secrets. The parties consented to proceedings before a magistrate judge, who entered an eight-month preliminary injunction against McCain in March 1991. n1

n1 Oregon law governs this diversity action. Oregon has adopted the Uniform Trade Secrets Act. 1989 Or. Rev. St. § 646.475. Where there is no Oregon law on point, we have looked to other courts' interpretations of the Act for guidance.

II

McCain asserts that the court abused its discretion in granting the injunction because it based its determination of probable success on the merits on clearly erroneous findings. It contends that it had no reason to know that trade secrets were being transmitted through Ross, as he was an independent contractor who assured McCain that there would be no confidentiality problems.

Misappropriation of trade secrets under Oregon law requires a showing of (1) a valuable commercial design, (2) a confidential relationship between the party asserting trade secret protection and the party who disclosed the information and (3) the key features of the design that were the creative product of the party asserting protection. Holland Dev. v. Manufacturers Consultants, 81 Ore. App. 57, 62, 724 P.2d 844, 847 (1986).

This court reviews for abuse of discretion the grant or denial of a preliminary injunction. The use of an erroneous legal standard, the misapplication of law or a clearly erroneous finding of fact may serve as grounds for reversal. Big Country Foods v. Board of Educ., 868 F.2d 1085, 1087 (9th Cir. 1989).

Circumstantial evidence supports the court's preliminary conclusion that despite Ross's assurance he would not breach confidentiality, McCain knew that he would. McCain hired him knowing he was working on Lamb-Weston's blade. McCain told him to build a helical blade but said nothing about how he was to do it. In contrast, Lamb-Weston had specified what materials, dimensions and process to use. As a practical matter, it would be difficult for a person developing the same technology for two clients not to use knowledge gained from the first project in producing the second. This is obviously true here because McCain left the development to Ross.

McCain points to Ross's testimony that he left both the McCain and Lamb-Weston blades in the open where anyone could see them. McCain argues this shows that Lamb-Weston knew Ross was working on a McCain blade but was unconcerned about breaches of confidence. It was


3

not clear error for the court to reject this proposition. Ross's failure to keep the blades segregated suggests he was using the same information to build both blades.

Furthermore, Lamb-Weston employees testified that they did not see the McCain blade at Ross's shop and that, when they learned in August 1990 that Ross was working for McCain, Lamb-Weston had him sign a confidentiality agreement. This demonstrates Lamb-Weston was concerned about protecting its trade secrets.

Probable success in showing misappropriation is also supported by testimony that Livermore gave McCain a copy of the confidential patent application five months before the patent issued. McCain did not challenge this testimony.

Were we to view this argument as part of McCain's assertion that it did not know Ross was breaching any confidentiality and address it, we would find no clear error. McCain acknowledges that at the outset Ross orally agreed to keep Lamb-Weston's information confidential. It also does not challenge the finding that the blade and the fabrication process were trade secrets.

In addition, Lamb-Weston's efforts to secure first a written confidentiality agreement and then an exclusivity agreement show it believed the information Ross had was confidential. See Holland Dev. v. Manufacturers Consultants, 81 Ore. App. 57, 62-63, 724 P.2d 844, 847-48 (1986) (finding a confidential relationship existed and noting that the employer would not invest time and money to develop a project simply to allow its employee to turn around and use the developed technology for personal benefit); E.V. Prentice Dryer Co. v. Northwest Dryer & Machinery Co., 246 Ore. 78, 81-82, 424 P.2d 227, 229 (1967) (finding no confidentiality agreement where the information was not of a confidential nature and there was nothing in the employment relationship indicating that the plaintiff wanted it to be secret).

The district court's findings were not clearly erroneous. The court determined correctly that Lamb-Weston showed a probability of success on the merits. The court's granting of the injunction was not an abuse of discretion.

III

McCain argues that the court abused its discretion by imposing a geographically overbroad injunction. The court enjoined it from selling curlicue french fries worldwide even though Lamb-Weston's foreign market is limited. Arguing that Lamb-Weston cannot be harmed in countries where it is not selling, McCain urges this court to limit the injunction to those countries where Lamb-Weston actually sells its product.

A district court has considerable discretion in fashioning suitable relief and defining the terms of an injunction. Appellate review of those terms "is correspondingly narrow." Coca-Cola Co. v. Overland, Inc., 692 F.2d 1250, 1256 n.16 (9th Cir. 1982). Injunctive relief, however, must be tailored to remedy the specific harm alleged. Aviation Consumer Action Project v. Washburn, 175 U.S. App. D.C. 273, 535 F.2d 101, 108 (D.C. Cir. 1976); see also Califano v. Yamasaki, 442 U.S. 682, 702, 61 L. Ed. 2d 176, 99 S. Ct. 2545 (1979) ("injunctive relief should be no more


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burdensome to the defendants than necessary to provide complete relief to the plaintiffs"). An overbroad injunction is an abuse of discretion. United States v. BNS, Inc., 858 F.2d 456, 460 (9th Cir. 1988).

McCain's reliance on Mantek Div. of NCH Corp. v. Share Corp., 780 F.2d 702 (7th Cir. 1986), is not persuasive. The case involved violations of covenants not to compete signed by the plaintiff's former employees. The injunction barred the defendants from calling on the plaintiff's actual and potential customers. Noting that the injunction was to protect the goodwill the plaintiff had built up with its customers through its sales staff and reasoning that the plaintiff had no goodwill with respect to unsolicited but potential customers, the court held enjoining the defendants from approaching the unsolicited ones was an abuse of discretion. Id. at 710-11.

The interest protected here is fundamentally different. An injunction in a trade secret case seeks to protect the secrecy of misappropriated information and to eliminate any unfair head start the defendant may have gained. Winston Research Corp. v. Minnesota Mining and Mfg., 350 F.2d 134, 141 (9th Cir. 1965). A worldwide injunction here is consistent with those goals because it "places the defendant in the position it would have occupied if the breach of confidence had not occurred prior to the public disclosure, . . ." Id. at 142.

Lamb-Weston alleged that without the worldwide injunction it will be irreparably harmed because its novel french fries are important in creating a niche for its products. According to Lamb-Weston, this novelty will enable it to compete more effectively with McCain, which apparently has a more established distribution system. Allowing McCain to sell the french fries at all will permit it to profit from its head start and to shut Lamb-Weston out of new markets it is trying to reach.

The geographic scope of the injunction was not an abuse of discretion.

IV

McCain argues that the court erred by failing to make specific findings about the length of its alleged head start. McCain also contends the injunction was an abuse of discretion because it is too long.

A

The court made no explicit findings about how long it would have taken McCain to develop independently its helical blade. It simply imposed an eight-month injunction for McCain's head start without explaining its method of calculation. McCain asserts that this violates Federal Rule of Civil Procedure 52(a), which requires that the court specify its findings of fact and conclusions of law. See Atari Games Corp. v. Nintendo Inc., 897 F.2d 1572, 1578, 14 U.S.P.Q.2D (BNA) 1034 (Fed. Cir. 1990) (applying Ninth Circuit law).


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The court indicated that the eight-month duration corresponded to McCain's head start. Although we encourage district courts to make more specific findings of fact, we conclude that the statement here was sufficient for the purposes of Rule 52(a).

B

"The appropriate duration for the injunction should be the period of time it would have taken he defendant], either by reverse engineering or by independent development, to develop [the product] legitimately without use of [plaintiff's] trade secrets." K2 Ski Co. v. Head Ski Co., 506 F.2d 471, 474 (9th Cir. 1974). Cf. Surgidev Corp. v. Eye Technology, Inc., 828 F.2d 452, 457 (8th Cir. 1987) (injunction is warranted to insure defendants are not unjustly enriched by their misappropriation); Premier Indus. Corp. v. Texas Indus. Fastener Co., 450 F.2d 444, 448 (5th Cir. 1971) (a court has equitable powers to enjoin defendants for a time beyond the expiration of covenants not to compete to effectuate relief for the time they violated the covenants).

McCain argues that April 19, 1990 is the only date for which there is evidence of misappropriation and that at most it had a one-year advantage beginning on that date. It asserts that with a one-year head start, the injunction imposed on March 27, 1991, should have ended on April 19, 1991, one year from the misappropriation date.

If we were to accept McCain's argument that the misappropriation was April 19 and the head start should be calculated from that date, see A.L. Laboratories, Inc. v. Philips Roxane, 803 F.2d 378, 385 (8th Cir. 1986), cert. denied, 481 U.S. 1007, 95 L. Ed. 2d 206, 107 S. Ct. 1632 (1987), the injunction imposed was not an abuse of discretion simply because it ended a year and seven months after that date. See Winston Research Corp. v. Minnesota Mining and Mfg., 350 F.2d 134, 142-43 (9th Cir. 1965). Lamb-Weston presented testimony that its development time for the materials, dimensions and fabricating process for the blade was about a year and a half. Additional testimony was given about Lamb-Weston's reputation for ingenuity and its development time for the blade design.

We reject McCain's argument that if the misappropriation through Ross occurred on April 19, it had only a 33-day head start because Lamb-Weston's patents were issued May 22. Although the shape of the blade and the slicing process was public on May 22, the specifications, materials and manufacturing process for making the blade were still trade secrets because they were not included in the patent applications.

Oregon law affords broad protection to trade secrets so public disclosure of the blade shape did not exonerate McCain from previous illegal use of that trade secret or the subsequent illegal use of the remaining trade secrets. Although a defendant may ask the court to vacate an injunction after the trade secret is public, "the injunction may be continued for an additional reasonable period of time in order to eliminate commercial advantage that otherwise would be derived from the misappropriation." 1989 Or. Laws 646.463(1); Kamin v. Kuhnau, 232 Ore. 139, 157-59, 374 P.2d 912, 921-22 (1962).

The eight-month injunction was not an abuse of discretion. AFFIRMED.


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U.S. Court of Appeals for the Seventh Circuit

LEARNING CURVE TOYS, INC., Plaintiff-Counter-Defendant-Appellee,

v.

PLAYWOOD TOYS, INC., Defendant-Counter-Plaintiff-Appellant,

342 F.3d 714No. 02-1916.

Argued Dec. 13, 2002.Decided Aug. 18, 2003.

Before RIPPLE, KANNE and ROVNER, Circuit Judges.

RIPPLE, Circuit Judge.

PlayWood Toys, Inc. (“PlayWood”) obtained a jury verdict against Learning Curve Toys, Inc. and its representatives, Roy Wilson, Harry Abraham and John Lee (collectively, “Learning Curve”), for misappropriation of a trade secret in a realistic looking and sounding toy railroad track under the Illinois Trade Secrets Act, 765 ILCS 1065/1 et seq. The jury awarded PlayWood a royalty of “8% for a license that would have been negotiated [absent the misappropriation] to last for the lifetime of the product.” R.194. Although there was substantial evidence of misappropriation before the jury, the district court did not enter judgment on the jury's verdict. Instead, it granted judgment as a matter of law in favor of Learning Curve, holding that PlayWood did not have a protectable trade secret in the toy railroad track. PlayWood appealed. For the reasons set forth in the following opinion, we reverse the judgment of the district court and reinstate the jury's verdict. We further remand the case to the district court for a jury trial on exemplary damages and for consideration of PlayWood's request for attorneys' fees.

I

BACKGROUND

A. Facts

In 1992, Robert Clausi and his brother-in-law, Scott Moore, began creating prototypes of wooden toys under the name PlayWood Toys, Inc., a Canadian corporation. Clausi was the sole toy designer and Moore was the sole officer and director of PlayWood. Neither Clausi nor Moore had prior experience in the toy industry, but Clausi had “always been a bit of a doodler and designer,” Trial Tr. at 58, and the two men desired to “create high-quality hard-wood maple toys for the independent toy market,” id. at 241. As a newly formed corporation, PlayWood did


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not own a facility in which it could produce toys. Instead, it worked in conjunction with Mario Borsato, who owned a wood-working facility. Subject to a written confidentiality agreement with PlayWood, Borsato manufactured prototypes for PlayWood based on Clausi's design specifications.

PlayWood's first attempt to market publicly its toys was at the Toronto Toy Fair on January 31, 1992. PlayWood received favorable reviews from many of the toy retailers in attendance; PlayWood also learned that the best way to get recognition for its toys was to attend the New York Toy Fair (“Toy Fair”) the following month. Based on this information, Clausi and Moore secured a position at the Toy Fair in order to display PlayWood's prototypes. It was during this


8

Toy Fair that Clausi and Moore first encountered Learning Curve representatives Roy Wilson, Harry Abraham and John Lee.

On the morning of February 12, 1993, the first day of the Toy Fair, Roy Wilson stopped at PlayWood's booth and engaged Clausi and Moore in conversation. Wilson identified himself as Learning Curve's toy designer and explained that his company had a license from the Britt Allcroft Company to develop Thomas the Tank Engine & Friends TM (hereinafter “Thomas”) trains and accessories. Wilson commented that he was impressed with the look and quality of PlayWood's prototypes and raised the possibility of working together under a custom manufacturing contract to produce Learning Curve's line of Thomas products. Clausi and Moore responded that such an arrangement would be of great interest to PlayWood. Later that same day, Harry Abraham, Learning Curve's vice president, and John Lee, Learning Curve's president, also stopped by PlayWood's booth. They too commented on the quality of PlayWood's prototypes and indicated that PlayWood might be a good candidate for a manufacturing contract with Learning Curve.

Clausi and Moore continued to have discussions with Learning Curve's representatives over the remaining days of the Toy Fair, which ended on February 14. During these discussions, Lee indicated that he would like two of his people, Abraham and Wilson, to visit PlayWood in Toronto the day after the Toy Fair ended in order to determine whether the two parties could work out a manufacturing arrangement for some or all of Learning Curve's wooden toys. Clausi, feeling a little overwhelmed by the suggestion, requested that their visit be postponed a few days so that he could better acquaint himself with Learning Curve's products. The parties ultimately agreed that Abraham and Wilson would visit PlayWood at Borsato's facility on February 18, 1993, four days after the conclusion of the Toy Fair. Clausi spent the next several days after the Toy Fair researching Learning Curve's products and considering how PlayWood could produce Learning Curve's trains and track.

On February 18, 1993, Abraham and Wilson visited PlayWood in Toronto as planned. The meeting began with a tour of Borsato's woodworking facility, where the prototypes on display at the Toy Fair had been made. After the tour, the parties went to the conference room at Borsato's facility. At this point, according to Clausi and Moore, the parties agreed to make their ensuing discussion confidential. Clausi testified:

After we sat down in the board room, Harry [Abraham of Learning Curve] immediately said: “Look, we're going to disclose confidential information to you guys, and we're going to disclose some designs that Roy [Wilson of Learning Curve] has that are pretty confidential. If Brio were to get their hands on them, then we wouldn't like that. And we're going to do it under the basis of a confidential understanding.”

And I said: “I also have some things, some ideas on how to produce the track and produce the trains now that I've had a chance to look at them for the last couple of days, and I think they're confidential as well. So if we're both okay with that, we should continue.” So we did.


9

Trial Tr. at 76-77. Moore testified to the existence of a similar conversation:

It was at this point that Harry Abraham told us that they were going to disclose some confidential documents, drawings, pricing, margins, and asked us if we would keep that information confidential.

I believe it was Robert [Clausi] who said that, you know, absolutely, we would keep it confidential. In fact, we had some ideas that we felt would be confidential we would be disclosing to them, and would they keep it, you know, confidential? Would they reciprocate? And Harry [Abraham] said: “Absolutely.” And then we proceeded to go along with the meeting.

Trial Tr. at 247-48.

***

The parties' discussion eventually *** focused on track design. Wilson showed Clausi and Moore drawings of Learning Curve's track and provided samples of their current product. At this point, Abraham confided to Clausi and Moore that track had posed “a bit of a problem for Learning Curve.” Trial Tr. at 85. Abraham explained that sales were terrific for Learning Curve's Thomas trains, but that sales were abysmal for its track. Abraham attributed the lack of sales to the fact that Learning Curve's track was virtually identical to that of its competitor, Brio, which had the lion's share of the track market. Because there was “no differentiation” between the two brands of track, Learning Curve's track was not even displayed in many of the toy stores that carried Learning Curve's products. Id. Learning Curve had worked unsuccessfully for several months attempting to differentiate its track from that of Brio.

After detailing the problems with Learning Curve's existing track, Abraham inquired of Clausi whether “there was a way to differentiate” its track from Brio's track. Trial Tr. at 86. Clausi immediately responded that he “had had a chance to look at the track and get a feel for it [over] the last few days” and that his “thoughts were that if the track were more realistic and more functional, that kids would enjoy playing with it more and it would give the retailer a reason to carry the product, especially if it looked different than the Brio track.” Id. at 87. Clausi further explained that, if the track “made noise and looked like real train tracks, that the stores wouldn't have any problem, and the Thomas the Tank line, product line would have its own different track” and could “effectively compete with Brio.” Id. Abraham and Wilson indicated that they were “intrigued” by Clausi's idea and asked him what he meant by “making noise.” Id.

Clausi decided to show Abraham and Wilson exactly what he meant. Clausi took a piece of Learning Curve's existing track from the table, drew some lines across the track (about every three-quarters of an inch), and stated: “We can go ahead and machine grooves right across the upper section ..., which would look like railway tracks, and down below machine little indentations as well so that it would look more like or sound more like real track. You would roll along and bumpity-bumpity as you go along.” Trial Tr. at 255. Clausi then called Borsato into the conference room and asked him to cut grooves into the wood “about a quarter of an inch deep from the top surface.” Id. at 88. Borsato left the room, complied with Clausi's request,


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and returned with the cut track three or four minutes later. Clausi ran a train back and forth over the cut piece of track. The track looked more realistic than before, but it did not make noise because the grooves were not deep enough. Accordingly, Clausi instructed Borsato to cut the grooves “just a little bit deeper so that they go through the rails.” Id. Borsato complied with Clausi's request once again and returned a few minutes later with the cut piece of track. Clausi proceeded to run a train back and forth over the track. This time the track made a “clickety-clack” sound, but the train did not run smoothly over the track because the grooves were cut “a little bit too deep.” Id. at 258. Based on the sound produced by the track, Clausi told Abraham and Moore that if PlayWood procured a contract with Learning Curve to produce the track, they could call it “Clickety-Clack Track.” Id. at 89.

*** Before he left, Wilson asked Clausi if he could take the piece of track that Borsato had cut with him while the parties continued their discussions. Clausi gave Wilson the piece of track without hesitation. The piece of track was the only item that Abraham and Wilson took from the meeting. Clausi and Moore did not ask Wilson for a receipt for the cut track, nor did they seek a written confidentiality agreement to protect PlayWood's alleged trade secret. After the meeting, Clausi amended PlayWood's confidentiality agreement with Borsato to ensure that materials discussed during the meeting would remain confidential. Clausi also stamped many of the documents that he received from Learning Curve during the meeting as confidential because they included information on products not yet released to the public. PlayWood never disclosed the contents of Learning Curve's documents to anyone.

During March of 1993, PlayWood and Learning Curve met on three separate occasions to discuss further the possibility of PlayWood manufacturing Learning Curve's Thomas products. At one of the meetings, and at Learning Curve's request, PlayWood submitted a manufacturing proposal for the Thomas products. Learning Curve rejected PlayWood's proposal. Learning Curve told Clausi that its licensor wanted the Thomas products to be made in the United States.

Thereafter, PlayWood had no contact with Learning Curve until late October of 1993, when Abraham contacted Clausi to discuss another possible manufacturing contract because Learning Curve's secondary supplier was not providing enough product. Again, PlayWood submitted a manufacturing proposal at Learning Curve's request, but it too was rejected. Learning Curve later stated that its new business partner had decided to manufacture the product in China.

*** In December of 1994, while shopping for additional track with which to experiment, Moore discovered that Learning Curve was selling noise-producing track under the name “Clickety-Clack Track.” Like the piece of track that Clausi had Borsato cut during PlayWood's February 18, 1993, meeting with Learning Curve, Clickety-Clack Track TM has parallel grooves cut into the wood, which cause a “clacking” sound as train wheels roll over the grooves. Learning Curve was promoting the new track as

the first significant innovation in track design since the inception of wooden train systems.... It is quite simply the newest and most exciting development to come along recently in the wooden train industry, and it's sure to cause a sensation in the marketplace.... [I]t brings that sound and feel of the real thing to a child's world of make-believe without bells, whistles, electronic sound chips or moving


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parts.

PlayWood's Tr. Ex.71.

Moore was “stunned” when he saw the track because he believed that Learning Curve had stolen PlayWood's concept. Trial Tr. at 268. He testified: “This was our idea. This is what we've been working on even up to that day to go back to [Learning Curve] as an opportunity to get in the door, and there it is on the shelf.” Id. Moore purchased a package of Clickety-Clack Track TM and showed it to Clausi. Clausi testified that he was disappointed when he saw the track because he believed that Learning Curve had taken PlayWood's name and design concept “almost exactly as per [their] conversation” on February 18, 1993. Trial Tr. at 103.

PlayWood promptly wrote a cease and desist letter to Learning Curve. The letter accused Learning Curve of stealing PlayWood's concept for the noise-producing track that it disclosed to Learning Curve “in confidence in the context of a manufacturing proposal.” PlayWood's Tr. Ex.66 at 1. Learning Curve responded by seeking a declaratory judgment that it owned the concept.

Previously, on March 16, 1994, Learning Curve had applied for a patent on the noise-producing track. The patent, which was obtained on October 3, 1995, claims the addition of parallel impressions or grooves in the rails, which cause a “clacking” sound to be emitted as train wheels roll over them. The patent identifies Roy Wilson of Learning Curve as the inventor.

Clickety-Clack Track TM provided an enormous boost to Learning Curve's sales. Learning Curve had $20 million in track sales by the first quarter of 2000, and $40 million for combined track and accessory sales.

B. District Court Proceedings

Learning Curve responded to PlayWood's cease and desist letter by seeking a declaratory judgment that it owned the concept for noise-producing toy railroad track, as embodied in Clickety-Clack Track.TM PlayWood counterclaimed against Learning Curve, as well as its representatives, Roy Wilson, Harry Abraham and John Lee. PlayWood asserted that it owned the concept and that Learning Curve had misappropriated its trade secret. Learning Curve voluntarily dismissed its complaint for declaratory relief, and PlayWood's claim for trade secret misappropriation proceeded to trial. The jury returned a verdict in favor of PlayWood. The trial court declined to enter judgment on the verdict and instead asked the parties to brief Learning Curve's [JMOL] motion on the issue of whether PlayWood had a protectable trade secret under the Illinois Trade Secrets Act, 765 ILCS 1065/1 et seq. The district court granted Learning Curve's motion and entered judgment in its favor on the ground that PlayWood presented insufficient evidence of a trade secret. See R.202. Specifically, the court determined that PlayWood did not have a trade secret in its concept for noise-producing toy railroad track under Illinois law because: (1) PlayWood did not demonstrate that its concept was unknown in the industry; (2) PlayWood's concept could have been easily acquired or duplicated through proper means; (3) PlayWood failed to guard the secrecy of its concept; (4) PlayWood's concept


12

had no economic value; and (5) PlayWood expended no time, effort or money to develop the concept. See id.

II

DISCUSSION

A. Trade Secret Status

We review the district court's decision to grant Learning Curve's motion for judgment as a matter of law de novo, viewing the evidence in the light most favorable to PlayWood. See Veach v. Sheeks, 316 F.3d 690, 692 (7th Cir.2003). “We shall not second-guess the jury's view of the contested evidence; the proper inquiry is whether, given the totality of the evidence, [PlayWood] presented sufficient evidence from which a reasonable jury could find in [its] favor.” David v. Caterpillar, Inc., 324 F.3d 851, 858 (7th Cir.2003).

The parties agree that their dispute is governed by the Illinois Trade Secrets Act (“Act”), 765 ILCS 1065/1 et seq. To prevail on a claim for misappropriation of a trade secret under the Act, the plaintiff must demonstrate that the information at issue was a trade secret, that it was misappropriated and that it was used in the defendant's business. The issue currently before us is whether there was legally sufficient evidence for the jury to find that PlayWood had a trade secret in its concept for the noise-producing toy railroad track that it revealed to Learning Curve on February 18, 1993.

The Act defines a trade secret as:

[I]nformation, 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). Both of the Act's statutory requirements focus fundamentally on the secrecy of the information sought to be protected. However, the requirements emphasize different aspects of secrecy. The first requirement, that the information be sufficiently secret to impart economic value because of its relative secrecy, “precludes trade secret protection for information generally known or understood within an industry even if not to the public at large.” Pope, 230 Ill.Dec. 646, 694 N.E.2d at 617. The second requirement, that the plaintiff take reasonable efforts to maintain the secrecy of the information, prevents a plaintiff who takes no affirmative measures to prevent others from using its proprietary information from obtaining trade secret protection. See Jackson v. Hammer, 274 Ill.App.3d 59, 210 Ill.Dec. 614, 653


13

N.E.2d 809, 816 (1995) (“[T]he Act requires a plaintiff to take ‘affirmative measures' to prevent others from using information.”).

Although the Act explicitly defines a trade secret in terms of these two requirements, Illinois courts frequently refer to six common law factors (which are derived from § 757 of the Restatement (First) of Torts) in determining whether a trade secret exists: (1) the extent to which the information is known outside of the plaintiff's business; (2) the extent to which the information is known by employees and others involved in the plaintiff's business; (3) the extent of measures taken by the plaintiff to guard the secrecy of the information; (4) the value of the information to the plaintiff's business and to its competitors; (5) the amount of time, effort and money expended by the plaintiff in developing the information; and (6) the ease or difficulty with which the information could be properly acquired or duplicated by others.

Contrary to Learning Curve's contention, we do not construe the foregoing factors as a six-part test, in which the absence of evidence on any single factor necessarily precludes a finding of trade secret protection. Instead, we interpret the common law factors as instructive guidelines for ascertaining whether a trade secret exists under the Act. The language of the Act itself makes no reference to these factors as independent requirements for trade secret status, and Illinois case law imposes no such requirement that each factor weigh in favor of the plaintiff. See ILG Indus., Inc. v. Scott, 49 Ill.2d 88, 273 N.E.2d 393, 396 (1971) (“An exact definition of a trade secret, applicable to all situations, is not possible. Some factors to be considered in determining whether given information is one's trade secret are [the six factors enumerated in the Restatement].”) (internal quotation marks omitted). In this respect, Illinois law is compatible with the approach in other states. Courts from other jurisdictions, as well as legal scholars, have noted that the Restatement factors are not to be applied as a list of requisite elements. See, e.g., Basic American, Inc. v. Shatila, 133 Idaho 726, 992 P.2d 175, 184 (1999); Minuteman, Inc. v. Alexander, 147 Wis.2d 842, 434 N.W.2d 773, 778 (Wis.1989); 2 Gregory E. Upchurch, Intellectual Property Litigation Guide: Patents & Trade Secrets § 16.02, at 16-17 to 16-18 (2002) (“On the whole, these factors are a guide to the proper decision on the existence of a trade secret, not a list of requirements.”).

The existence of a trade secret ordinarily is a question of fact. As aptly observed by our colleagues on the Fifth Circuit, a trade secret “is one of the most elusive and difficult concepts in the law to define.” Lear Siegler, Inc. v. Ark-Ell Springs, Inc., 569 F.2d 286, 288 (5th Cir.1978). In many cases, the existence of a trade secret is not obvious; it requires an ad hoc evaluation of all the surrounding circumstances. For this reason, the question of whether certain information constitutes a trade secret ordinarily is best “resolved by a fact finder after full presentation of evidence from each side.” Id. at 289. We do not believe that the district court was sufficiently mindful of these principles. The district court, in effect, treated the Restatement factors as requisite elements and substituted its judgment for that of the jury. PlayWood presented sufficient evidence for the jury reasonably to conclude that the Restatement factors weighed in PlayWood's favor.

1. Extent to which PlayWood's concept for noise-producing toy railroad track was known outside of PlayWood's business


14

PlayWood presented substantial evidence from which the jury could have determined that PlayWood's concept for noise-producing toy railroad track was not generally known outside of Playwood's business. It was undisputed at trial that no similar track was on the market until Learning Curve launched Clickety-Clack Track TM in late 1994, more than a year after PlayWood first conceived of the concept. Of course, as Learning Curve correctly points out, “[m]erely being the first or only one to use particular information does not in and of itself transform otherwise general knowledge into a trade secret.” George S. May Int'l, 195 Ill.Dec. 183, 628 N.E.2d at 654. “If it did, the first person to use the information, no matter how ordinary or well known, would be able to appropriate it to his own use under the guise of a trade secret.” Serv. Ctrs., 129 Ill.Dec. 367, 535 N.E.2d at 1137. However, in this case, there was additional evidence from which the jury could have determined that PlayWood's concept was not generally known within the industry.

First, there was substantial testimony that Learning Curve had attempted to differentiate its track from that of its competitors for several months, but that it had been unable to do so successfully.

Furthermore, PlayWood's expert witness, Michael Kennedy, testified that PlayWood's concept, as embodied in Clickety-Clack Track TM, was unique and permitted “its seller to differentiate itself from a host of competitors who [were] making a generic product.” Trial Tr. at 518. Kennedy explained that the look, sound and feel of the track made it distinct from other toy railroad track: “[W]hen a child runs a train across this track, he can feel it hitting those little impressions. And when you're talking about young children [,] having the idea that they can see something that they couldn't see before, feel something that they couldn't feel before, hear something that they couldn't hear before, that is what differentiates this toy from its other competitors.” Id. at 489.

Finally, PlayWood presented evidence that Learning Curve sought and obtained a patent on the noise-producing track. It goes without saying that the requirements for patent and trade secret protection are not synonymous. Unlike “a patentable invention, a trade secret need not be novel or unobvious.” 2 Rudolf Callmann, The Law of Unfair Competition, Trademarks and Monopolies § 14.15, at 14-124 (4th ed.2003). “The idea need not be complicated; it may be intrinsically simple and nevertheless qualify as a secret, unless it is common knowledge and, therefore, within the public domain.” Forest Labs., Inc. v. Pillsbury Co., 452 F.2d 621, 624 (7th Cir.1971) (internal quotation marks omitted). However, it is commonly understood that “[i]f an invention has sufficient novelty to be entitled to patent protection, it may be said a fortiori to be entitled to protection as a trade secret.” 1 Roger M. Milgrim, Milgrim on Trade Secrets § 1.08[1], at 1-353 (2002) (internal footnotes omitted). In light of this evidence, we cannot accept Learning Curve's argument that no rational jury could have found that PlayWood's concept was unknown outside of its business.

2. Extent to which PlayWood's concept was known to employees and others involved in PlayWood's business

The district court did not address the extent to which PlayWood's concept was known to


15

employees and others involved in PlayWood's business. However, we agree with PlayWood that the evidence was sufficient to establish that its concept for noise-producing track was known only by key individuals in its business.

At the outset, we note briefly that PlayWood was a small business, consisting only of Clausi and Moore. Illinois courts have recognized on several occasions that the expectations for ensuring secrecy are different for small companies than for large companies. See Jackson, 210 Ill.Dec. 614, 653 N.E.2d at 815 (“[T]he determination of what steps are reasonably necessary to protect information is different for a large company than for a small one.”); Elmer Miller, Inc. v. Landis, 253 Ill.App.3d 129, 192 Ill.Dec. 378, 625 N.E.2d 338, 342 (1993) (“[R]easonable steps for a two or three person shop may be different from reasonable steps for a larger company.”). Apart from Clausi (PlayWood's sole toy designer and the person who conceived of the concept for noise-producing track) and Moore (PlayWood's sole officer and director), the only person who knew about the concept was Borsato, the person who physically produced PlayWood's prototype at Clausi's direction. The concept was disclosed to Borsato in order for PlayWood to develop fully its trade secret. See 1 Roger M. Milgrim, Milgrim on Trade Secrets § 1.04, at 1-173 (2002) (“A trade secret does not lose its character by being confidentially disclosed to agents or servants, without whose assistance it could not be made of any value.”) (internal quotation marks omitted). Moreover, Borsato's actions were governed by a written confidentiality agreement with PlayWood. Indeed, as an extra precaution, Clausi even amended PlayWood's confidentiality agreement with Borsato immediately after the February 18, 1993, meeting to ensure that materials discussed during the meeting would remain confidential. From this evidence, the jury reasonably could have determined that this factor also weighed in favor of PlayWood.

3. Measures taken by PlayWood to guard the secrecy of its concept

There also was sufficient evidence for the jury to determine that PlayWood took reasonable precautions to guard the secrecy of its concept. The Act requires the trade secret owner to take actions that are “reasonable under the circumstances to maintain [the] secrecy or confidentiality” of its trade secret; it does not require perfection. 765 ILCS 1065/2(d)(2). Whether the measures taken by a trade secret owner are sufficient to satisfy the Act's reasonableness standard ordinarily is a question of fact for the jury. Indeed, we previously have recognized that “only in an extreme case can what is a ‘reasonable’ precaution be determined [as a matter of law], because the answer depends on a balancing of costs and benefits that will vary from case to case.” Rockwell Graphic Sys., Inc. v. DEV Indus., Inc., 925 F.2d 174, 179 (7th Cir.1991).

Here, the jury was instructed that it must find “by a preponderance of the evidence that PlayWood's trade secrets were given to Learning Curve as a result of a confidential relationship between the parties.” Trial Tr. at 1449. By returning a verdict in favor of PlayWood, the jury necessarily found that Learning Curve was bound to PlayWood by a pledge of confidentiality. The jury's determination is amply supported by the evidence. Both Clausi and Moore testified that they entered into an oral confidentiality agreement with Abraham and Wilson before beginning their discussion on February 18, 1993. In particular, Clausi testified that he told Abraham and Wilson: “I also have some things, some ideas on how to produce the track and


16

produce the trains now that I've had a chance to look at them for the last couple of days, and I think they're confidential as well. So if we're both okay with that, we should continue.” Trial Tr. at 77. In addition to this testimony, the jury heard that Learning Curve had disclosed substantial information to PlayWood during the February 18th meeting, including projected volumes, costs and profit margins for various products, as well as drawings for toys not yet released to the public. The jury could have inferred that Learning Curve would not have disclosed such information in the absence of a confidentiality agreement. Finally, the jury also heard (from several of Learning Curve's former business associates) that Learning Curve routinely entered into oral confidentiality agreements like the one with PlayWood.

PlayWood might have done more to protect its secret. As Learning Curve points out, PlayWood gave its only prototype of the noise-producing track to Wilson without first obtaining a receipt or written confidentiality agreement from Learning Curve-a decision that proved unwise in hindsight. Nevertheless, we believe that the jury was entitled to conclude that PlayWood's reliance on the oral confidentiality agreement was reasonable under the circumstances of this case.FN4 First, it is well established that “[t]he formation of a confidential relationship imposes upon the disclosee the duty to maintain the information received in the utmost secrecy” and that “the unprivileged use or disclosure of another's trade secret becomes the basis for an action in tort.” Burten v. Milton Bradley Co., 763 F.2d 461, 463 (1st Cir.1985). Second, both Clausi and Moore testified that they believed PlayWood had a realistic chance to “get in the door” with Learning Curve and to produce the concept as part of Learning Curve's line of Thomas products. Clausi and Moore did not anticipate that Learning Curve would violate the oral confidentiality agreement and utilize PlayWood's concept without permission; rather, they believed in good faith that they “were going to do business one day again with Learning Curve with respect to the design concept.” Trial Tr. at 236-37. Finally, we believe that, as part of the reasonableness inquiry, the jury could have considered the size and sophistication of the parties, as well as the relevant industry. Both PlayWood and Learning Curve were small toy companies, and PlayWood was the smaller and less experienced of the two. Viewing the evidence in the light most favorable to PlayWood, as we must, we conclude that there was sufficient evidence for the jury to determine that PlayWood took reasonable measures to protect the secrecy of its concept.

FN4. We iterate that the proper inquiry is not whether, in our independent judgment, we believe that PlayWood took reasonable precautions to maintain the secrecy of its concept; rather, the issue is whether PlayWood's “failure to do more was so plain a breach of the obligation of a trade secret owner to make reasonable efforts to maintain secrecy as to justify” overturning the jury verdict in its favor. Rockwell, 925 F.2d at 177.

4. Value of the concept to PlayWood and to its competitors

There was substantial evidence from which the jury could have determined that PlayWood's concept had value both to PlayWood and to its competitors. It was undisputed at trial that Learning Curve's sales skyrocketed after it began to sell Clickety-Clack Track TM. In addition, PlayWood's expert witness, Michael Kennedy, testified that PlayWood's concept for noise-producing track had tremendous value. Kennedy testified that the “cross-cuts and changes in


17

the [track's] surface” imparted value to its seller by causing the track to “look different, feel different and sound different than generic track.” Trial Tr. at 504. Kennedy further testified that, in his opinion, the track would have commanded a premium royalty under a negotiated license agreement because the “invention allows its seller to differentiate itself from a host of competitors who are making a generic product with whom it is competing in a way that is proprietary and exclusive, and it gives [the seller] a significant edge over [its] competition.” Id. at 518-19.

Despite this evidence, the district court concluded that PlayWood's concept had no economic value. The court's conclusion was based, in part, on the fact that PlayWood's prototype did not work perfectly; as noted by the court, the first set of cuts were too shallow to produce sound and the second set of cuts were too deep to permit the train to roll smoothly across the track. In the district court's view, even if the concept of cutting grooves into the wooden track in order to produce noise originated with Clausi, the concept lacked value until it was refined, developed and manufactured by Learning Curve.

We cannot accept the district court's conclusion because it is belied by the evidence. At trial, Kennedy was asked whether, in his opinion, the fact that PlayWood's prototype did not work perfectly affected the value of PlayWood's concept, and he testified that it did not. See Trial Tr. at 578. Kennedy testified that he would assign the same value to PlayWood's concept as it was conceived on February 18, 1993, as he would the finished product that became known as Clickety-Clack Track TM because, at that time, he would have known “that most of the design [had] already been done and that [he] just need[ed] to go a little bit further to make it really lovely.” Id. at 578. Kennedy further testified that it was standard practice in the industry for a license to be negotiated based on a prototype (much like the one PlayWood disclosed to Learning Curve) rather than a finished product and that the license generally would cover the prototypical design, as well as any enhancements or improvements of that design. See Trial Tr. at 500-01. Based on this testimony, we cannot accept the district court's conclusion that PlayWood's concept possessed no economic value.

It is irrelevant under Illinois law that PlayWood did not actually use the concept in its business. “[T]he proper criterion is not ‘actual use’ but whether the trade secret is ‘of value’ to the company.” Syntex Ophthalmics, Inc. v. Tsuetaki, 701 F.2d 677, 683 (7th Cir.1983).FN6

Kennedy's testimony was more than sufficient to permit the jury to conclude that the concept was “of value” to PlayWood. It is equally irrelevant that PlayWood did not seek to patent its concept. So long as the concept remains a secret, i.e., outside of the public domain, there is no need for patent protection. Professor Milgrim makes this point well: “Since every inventor has the right to keep his invention secret, one who has made a patentable invention has the option to maintain it in secrecy, relying upon protection accorded to a trade secret rather than upon the rights which accrue by a patent grant.” 1 Roger M. Milgrim, Milgrim on Trade Secrets § 1.08[1], at 1-353 (2002). It was up to PlayWood, not the district court, to determine when and how the concept should have been disclosed to the public.

FN6. Both the Uniform Trade Secrets Act and the Restatement (Third) of Unfair Competition expressly reject prior use by the person asserting rights in the information as


18

a prerequisite to trade secret protection. See Unif. Trade Secrets Act § 1 cmt. (1990) (“The broader definition in the proposed Act extends protection to a plaintiff who has not yet had an opportunity or acquired the means to put a trade secret to use.”); Restatement (Third) of Unfair Competition § 39 cmt. e (1995) (“Use by the person asserting rights in the information is not a prerequisite to protection under the rule stated in this Section,” in part, because such a “requirement can deny protection during periods of research and development and is particularly burdensome for innovators who do not possess the capability to exploit their innovations.”).

5. Amount of time, effort and money expended by PlayWood in developing its concept

PlayWood expended very little time and money developing its concept; by Clausi's own account, the cost to PlayWood was less than one dollar and the time spent was less than one-half hour. The district court determined that “[s]uch an insignificant investment is ... insufficient as a matter of Illinois law to establish the status of a ‘trade secret.’ ” R.202 at 16. We believe that the district court gave too much weight to the time, effort and expense of developing the track.FN7

FN7. Professor Milgrim, for one, rejects any per se requirement of developmental costs:

Where cost is referred to it is almost always invariably incidental to other, basic definitional elements, such as secrecy. Since it is established that a trade secret can be discovered fortuitously (ergo, without costly development), or result purely from the exercise of creative facilities, it would appear inconsistent to consider expense of development of a trade secret as an operative substantive element.

See 1 Roger M. Milgrim, Milgrim on Trade Secrets § 1.02[2], at 1-146 & 1-150 (2002) (internal footnotes omitted).

Although Illinois courts commonly look to the Restatement factors for guidance in determining whether a trade secret exists, as we have noted earlier, the requisite statutory inquiries under Illinois law are (1) whether the information “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) whether the information “is the subject of efforts that are reasonable under the circumstances to maintain its secrecy or confidentiality.” 765 ILCS 1065/2(d). A significant expenditure of time and/or money in the production of information may provide evidence of value, which is relevant to the first inquiry above. However, we do not understand Illinois law to require such an expenditure in all cases.

As pointed out by the district court, several Illinois cases have emphasized the importance of developmental costs. However, notably, none of those cases concerned the sort of innovative and creative concept that we have in this case. Indeed, several of the cases in Illinois that emphasize developmental costs concern compilations of data, such as customer lists. In that context, it makes sense to require the expenditure of significant time and money because there is nothing original or creative about the alleged trade secret. Given enough time and money, we


19

presume that the plaintiff's competitors could compile a similar list.

Here, by contrast, we are dealing with a new toy design that has been promoted as “the first significant innovation in track design since the inception of wooden train systems.” PlayWood's Tr. Ex.71. Toy designers, like many artistic individuals, have intuitive flashes of creativity. Often, that intuitive flash is, in reality, the product of earlier thought and practice in an artistic craft. We fail to see how the value of PlayWood's concept would differ in any respect had Clausi spent several months and several thousand dollars creating the noise-producing track. Accordingly, we conclude that PlayWood's lack of proof on this factor does not preclude the existence of a trade secret.

6. Ease or difficulty with which PlayWood's concept could have been properly acquired or duplicated by others

Finally, we also believe that there was sufficient evidence for the jury to determine that PlayWood's concept could not have been easily acquired or duplicated through proper means. PlayWood's expert witness, Michael Kennedy, testified: “This is a fairly simple product if you look at it. But the truth is that because it delivers feeling and sound as well as appearance, it isn't so simple as it first appears. It's a little more elegant, actually, than you might think.” Trial Tr. at 504. In addition to Kennedy's testimony, the jury heard that Learning Curve had spent months attempting to differentiate its track from Brio's before Clausi disclosed PlayWood's concept of noise-producing track. From this evidence, the jury could have inferred that, if PlayWood's concept really was obvious, Learning Curve would have thought of it earlier.

Despite this evidence, the district court concluded that PlayWood's concept was not a trade secret because it could have been easily duplicated, stating that “[h]ad PlayWood succeeded in producing and marketing [the] notched track, the appearance of the track product itself would have fully revealed the concept PlayWood now claims as a secret.” R.202 at 5-6. Of course, the district court was correct in one sense; PlayWood's own expert recognized that, in the absence of patent or copyright protection, the track could have been reverse engineered just by looking at it. See Trial Tr. at 562. However, the district court failed to appreciate the fact that PlayWood's concept was not publicly available. As Professor Milgrim states: “A potent distinction exists between a trade secret which will be disclosed if and when the product in which it is embodied is placed on sale, and a ‘trade secret’ embodied in a product which has been placed on sale, which product admits of discovery of the ‘secret’ upon inspection, analysis, or reverse engineering.” 1 Roger M. Milgrim, Milgrim on Trade Secrets § 1.05[4], at 1-228 (2002). “Until disclosed by sale the trade secret should be entitled to protection.” Id.; see also 2 Rudolf Callmann, The Law of Unfair Competition, Trademarks and Monopolies § 14.15, at 14-123 (4th ed. 2003) (“The fact that a secret is easy to duplicate after it becomes known does not militate against its being a trade secret prior to that time.”). Reverse engineering can defeat a trade secret claim, but only if the product could have been properly acquired by others, as is the case when the product is publicly sold. Here, PlayWood disclosed its concept to Learning Curve (and Learning Curve alone) in the context of a confidential relationship; Learning Curve had no legal authority to reverse engineer the prototype that it received in confidence. See Laff v. John O. Butler Co., 64 Ill.App.3d 603, 21 Ill.Dec. 314, 381 N.E.2d 423, 433 (1978) (“[A]


20

trade secret is open to anyone, not bound by a confidential relationship or a contract with the secret's owner, who can discover the secret through lawful means.”). Accordingly, we must conclude that the jury was entitled to determine that PlayWood's concept could not easily have been acquired or duplicated through proper means.

B. Exemplary Damages

The Illinois Trade Secrets Act authorizes exemplary damages of up to twice the amount of compensatory damages if there was a “willful and malicious misappropriation.” 765 ILCS 1065/4(b). The jury was not given an instruction on exemplary damages because the district court granted Learning Curve's motion for judgment as a matter of law on this issue prior to closing argument. See Trial Tr. at 1355. PlayWood submits that the jury should have been permitted to determine whether Learning Curve's intentional misappropriation of PlayWood's trade secret in the realistic looking and sounding toy railroad track justified an award of exemplary damages. *** We agree with PlayWood that a rational jury could determine that exemplary damages are justified in this case. Specifically, we believe that a rational jury could determine that Learning Curve intentionally misappropriated PlayWood's trade secret in the noise-producing track and then attempted to conceal the misappropriation by creating false evidence of prior independent development. Accordingly, we remand this case to the district court with the instruction to hold a jury trial on exemplary damages. We leave it to the district court on remand to consider PlayWood's request for attorneys' fees. See 765 ILCS 1065/5(iii) (permitting the court to award reasonable attorneys' fees to the prevailing party where “willful and malicious misappropriation exists”).

Conclusion

For the foregoing reasons, the judgment of the district court is reversed, and the jury's verdict is reinstated. The case is remanded to the district court for a jury trial on exemplary damages and for consideration of attorneys' fees by the court. PlayWood may recover its costs in this court.

Reversed And Remanded.


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WEED EATER, INC., Appellant

v.

THOMAS W. DOWLING, JR., Appellee Court of Civil Appeals of Texas, First District, Houston 562 S.W.2d 898; 1978 Tex. App. LEXIS 2921 February 9, 1978

COLEMAN, J.

This is an appeal from an order denying a temporary injunction. Weed Eater, Inc., sued Thomas W. Dowling to enforce the provisions of an employment agreement containing a covenant not to compete and a covenant against the disclosure of trade secrets or confidential information. The trial court enjoined Dowling from revealing trade secrets or confidential information, but refused to enforce the covenant not to compete.

Thomas W. Dowling, Jr., was employed by Weed Eater, Inc., as vice president of manufacturing. While so employed, he designed and organized an assembly line for the production of a string line trimmer. He was included in all company meetings and was on the list of vice presidents who received confidential information. He had access to all trade secrets and confidential information including new product plans, market forecast, testing methods and results, market strategy, sales prices, performance specifications for components, and the confidential list of component vendors.

All employees were required to sign nondisclosure agreements. The company maintains a security system utilizing guards, employee badges, sign-in procedures, television monitors, restricted areas, and censor devices. Visitors are required to wear a special badge and to be escorted at all times by an employee.

About a year after Weed Eater, Inc., hired Dowling, Emerson Electric Company acquired Weed Eater, Inc., as a subsidiary. Shortly after the acquisition, Emerson presented all Weed Eater vice presidents with a new employment contract. Dowling signed such a contract on March 2, 1977. On October 21, 1977, Dowling resigned and went to work in California for Hawaiian Motor Company as its director of manufacturing.

For some time prior to that date, Hawaiian Motor Company had been purchasing from Weed Eater a flexible line trimmer "head" which they used in manufacturing a flexible line trimmer. Dowling's employment with Hawaiian Motor Company would place him in control of the assembly line required to manufacture the Hawaiian Motor Company's trimmer heads.

By his contract with Weed Eater, Dowling agreed that he would not directly or indirectly use for himself or disclose to any party other than Emerson any secret or confidential information or


22

data regarding the business of Emerson or any secret or confidential information or data regarding the cost, uses, methods, applications or customers, trade accounts, or suppliers of products made, produced or sold by Emerson or its subsidiaries, or regarding any secret or confidential apparatus, process, system, manufacturing or other method at any time used, developed or investigated by or for Emerson or its subsidiaries.

The agreement provided that for a period of one year following any termination of employment by Emerson or a subsidiary, the employee would not engage in or enter the employ of or have any interest in, directly or indirectly, any other person, firm, corporation or other entity engaged in activities relating to lawn and garden care and the contract specifically provided that the restriction would only be applicable with respect to the manufacturing and sales areas in which Emerson or its subsidiaries shall conduct business operations during Dowling's employment by Emerson.

After an evidentiary hearing, the trial court entered an order reciting that Weed Eater was entitled to a temporary injunction "because the plaintiff has various proprietary and trade secret information which has been disclosed to defendant in confidence and because the defendant was employed by the plaintiff in a fiduciary relationship as vice president of manufacturing under an employment agreement which the defendant has threatened to breach by attempting to take employment with a competitor of plaintiff." The order then enjoined Dowling from disclosing to any third party any confidential or secret information of plaintiff relating to new product development, layout and design of the assembly line for flexible line trimming devices, marketing strategy and forecasts, product specifications, performance specifications, testing equipment, testing procedures, vendor identity, past proposed product design, proposed but unadopted product components and/or designs, and past assembly line modifications and refinements.

It is clear from the evidence that Dowling was fully informed as to Weed Eater's new product development, layout and design of the assembly line for flexible line trimming devices and all of the other matters mentioned in the trial court's order. Dowling, however, testified that he knew of no confidential or secret information relating to these matters.

In reaching a decision on the issues presented by this case, we will apply certain well established general rules of law. The trial court has broad discretion in determining whether or not to issue a temporary injunction, and his judgment will not be overturned unless the record discloses a clear abuse of discretion. However, it is an abuse of discretion where the trial court makes an erroneous application of the law to undisputed facts. City of Spring Valley v. Southwestern Bell Telephone Co., 484 S.W.2d 579 (Tex.1972).

It is well settled that injunctive relief may be granted when one breaches his confidential relationship in order to unfairly use a trade secret. In the area of confidential relationship such as between employer and employee, the injured party is not required to rely upon an express agreement to hold the trade secret in confidence. Hyde Corporation v. Huffines, 158 Tex. 566, 314 S.W.2d 763 (1958); Thermotics, Inc. v. Bat-Jac Tool Co., Inc., 541 S.W.2d 255 (Tex.Civ.App. Houston (1st Dist.) 1976, no writ history).


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Where an employee will acquire trade secrets by virtue of his employment, the law permits greater restrictions to be imposed on the employee than in other contracts of employment. 14 Williston on Contracts § 1643 (3rd edition, 1972).

Confidential business information is not given protection merely as a reward to its accumulator. The courts condemn the employment of improper means to procure trade secrets. The fact that a trade secret is of such a nature that it can be discovered by experimentation or other fair and lawful means does not deprive its owner of the right to protection from those who would secure possession of it by unfair means. An injunction to prevent one from making use of trade secrets acquired in a confidential relationship such as that of the employer and employee relationship does not run counter to a public policy which discourages contracts which tend to lessen competition. K and G Oil Tool and Service Company v. G and G Fishing Tool Service, 158 Tex. 594, 314 S.W.2d 782 (Tex.1958).

A covenant by an employee not to compete with his employer for a period of time after the termination of the employment will be enforced if the restraint placed upon the employee is necessary for the protection of the business or the good will of the employer, and the restraint on the employee is not unduly onerous.

The trial court found that Weed Eater disclosed to Thomas W. Dowling various proprietary and trade secret information in confidence. He was enjoined from disclosing to any third party, confidential or secret information with relation to a number of specific matters including the layout and design of an assembly line for flexible line trimming devices, and past assembly line modifications and refinements. He was not specifically enjoined from using such information in his employment as director of manufacturing for a company which proposed to compete directly with Weed Eater.

Since the trial court enjoined Dowling from revealing to third parties information relating to the matters above set out, the court necessarily found that Dowling had received confidential information with respect to these matters as a result of his employment by Weed Eater. Dowling has been employed by Hawaiian Motor Company to supervise the production of a device which it formerly purchased from Weed Eater. He set up the assembly line by which the product was produced by Weed Eater. Even in the best of good faith, Dowling can hardly prevent his knowledge of his former employer's confidential methods from showing up in his work. The only effective relief for Weed Eater is to restrain Dowling from working for Hawaiian Motor Company in any capacity related to the manufacture by Hawaiian Motor Company of a flexible line trimming device. Electronic Data Systems Corp. v. Powell, 524 S.W.2d 393 (Tex.Civ.App. Dallas 1975, writ ref'd n. r. e.); Grace v. Orkin Exterminating Co., 255 S.W.2d 279 (Tex.Civ.App. Beaumont 1953, writ ref'd n. r. e.).

The contract between Dowling and Weed Eater provides for a contract not to compete during the period of one year from the date of termination of employment. The agreement is unrestricted as to area. The period of time during which the restraint is to last and the territory that is included are important factors to be considered in determining the reasonableness of the agreement. There is testimony that there are some 18 firms engaged in the manufacture of flexible line trimmers and 2 foreign corporations engaged in this business. The evidence


24

establishes that it is a highly competitive business and that the devices manufactured by Weed Eater are sold in all parts of the United States. It is clear that Dowling's experience gained by setting up Weed Eater's assembly line and by observing it in operation for more than a year would enable Hawaiian Motor Company to set up an efficient assembly line immediately. As a result, that company would become more competitive in a shorter period of time than would likely be the case without the services of Mr. Dowling.

The enforcement of this covenant will restrict Dowling's ability to work only in employment closely related to his field of activity as an employee of Weed Eater. The covenant is not unreasonable as to time or, under the circumstances, area. The evidence establishes that there is imminent danger of irreparable injury to Weed Eater's business. Electronic Data Systems Corp. v. Powell, supra; Continental Group, Inc. v. Kinsley, 422 F. Supp. 838 (D.Conn.1976); Auto Club Affiliates, Inc. v. Donahey, 281 So.2d 239 (Fla.Ct.App.1973); World Wide Pharmacal Distributing Co. v. Kolkey, 5 Ill. App. 2d 201, 125 N.E.2d 309 (Ill.Ct.App.1955).

The trial court abused its discretion in failing to include in the injunction order a provision restraining Thomas W. Dowling, Jr., from continuing in the employment of Hawaiian Motor Company so long as his duties include activities related to developing, manufacturing and marketing lawn and garden trimmers, lawnmowers and similar products. The order will be modified to include this additional restraint. As thus modified, the judgment of the trial court is affirmed.


25


26

SUPREME COURT OF TEXAS

HYDE CORPORATION

v.

JAMES DONLE HUFFINES

158 Tex. 566; 314 S.W.2d 763; 1958 Tex. LEXIS 630; 1 Tex.Sup. J. 286; 117 U.S.P.Q. (BNA) 44; 117 U.S.P.Q. (BNA) 466 June 4, 1958

Mr. Justice Norvell delivered the opinion of the Court. Mr. Justice Walker, dissenting.

NORVELL, J.

OPINION ON MOTION FOR REHEARING

While petitioner's motion for rehearing presents nothing that was not passed upon in the original opinion, there are certain matters which may be clarified by further statement.

Petitioner seems to have some objection to the use of the term " trade secrets " in describing this case. The generally accepted definition of a " trade secret " is that contained in the Restatement of Torts. In Extrin Foods, Inc. v. Leighton, Supreme Court, King's County, N.Y. 115 N.Y.S. 2d 429, the Court said:

"In resolving this issue the Court is first required to define the term 'secret' as applied to a formula. The term ' trade secret' is defined in the Restatement of Torts, Section 757, p. 5, as follows:

'b. Definition of trade secret. A trade secret may consist of any formula, pattern, device or compilation of information which is used in one's business, and which gives him an opportunity to obtain an advantage over competitors who do not know or use it. It may be a formula for a chemical compound, a process of manufacturing, treating or preserving materials, a pattern for a machine or other device, or a list of customers. * * * A trade secret is a process or device for continuous use in the operation of the business. Generally it relates to the production of goods, as, for example, a machine or formula for the production of an article.' "See also Nims on Unfair Competition and Trade Marks (4th Ed.), page 403; Kaumagraph Co. v. Stampagraph Co., 235 N.Y. 1, 7, 138 N.E. 485, 487; Fairchild Engine & Airplane Corp. v. Cox, Sup., 50 N.Y.S. 2d 643, 656."


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To the authorities cited, we may add the following: Sun Dial Corporation v. Rideout, 29 N.J. Super. 361, 102 Atl. 2d 90, affirmed, 16 N.J. 252, 108 A. 2d 442; B.F. Gladding & Co. Inc. v. Scientific Angles, Inc. 6 Cir., 245 F.2d 722; Schreyer v. Casco Products Corp., 97 F. Supp. 159, reversed in part, 190 F.2d 921, 87 C.J.S. 413. It appears from the record before us that Huffines had conceived and developed a device which he called a "Compressor Mechanism for Refuse Truck", and had applied for a patent thereon. The details of this device were unknown to Hyde Corporation until disclosed to its representatives during negotiations which culminated in a licensing agreement. Such details of construction were " trade secrets " belonging to Huffines, Smith v. Dravo Corp., 7th Cir., 203 F.2d 369, and were fully disclossed by his patent application, the details of which were made available to Hyde Corporation, together with blue prints, etc., long before the application was made public by the Patent Office when a patent was granted covering some of the claims contained in the original application. If these details as to construction were received by Hyde Corporation in confidence and that company later attempted to exploit them to Huffines' injury through a breach of confidence, an action lies, and it matters not whether the suit be designated as a " trade secret " case or as a suit for breach of confidence, which is a term commonly used by Huffines in describing his claim for relief. See Bercher v. Contoure Laboratories, 279 U.S. 388, 49 S. Ct. 356, 73 L. ed. 752.

We have not held as a matter of law that the relationship of licensor and licensee in itself created a confidential relationship between the parties. It is undoubtedly true, as stated in one of the briefs filed herein, that, " The existence of a confidential relationship between a Licensor and Licensee is to be determined in each case [and] it does not follow that merely because the parties occupy a position of Licensor and Licensee a confidential relationship results as a matter of law." The trial judge was evidently of the opinion that the Hyde Corporation obtained its knowledge of the device involved through its dealings with Huffines while the parties were attempting to work out a contract for their mutual benefit. As a result of these negotiations, they entered into an agreeable arrangement which actually had the effect of putting the Hyde Corporation into the garbage disposal body business. "Viewing the picture as a whole," the conclusion was reached that a confidential relationship existed between the parties which entitled Huffines to relief by way of injunction. The picture as a whole encompasses the contract of the parties, the facts shown by the undisputed evidence as well as those established by the jury's verdict. The holding of the trial court on the point was affirmed by the Court of Civil Appeals and also by this Court upon authority of the decisions set forth in the original opinion.

The all-important question in this litigation is whether the injunction should extend beyond the date of the issuance of patent. Upon this point there is an admitted conflict of authority. On rehearing, petitioners adopt some change of approach or emphasis in argument. The trial judge in the present case rendered an extremely detailed decree as compared with the one entered in K & G Oil Tool & Service Co., Inc., v. G. & G. Fishing Tool Service, this volume 594, 314 S.W. 2d 782, which was attacked for indefiniteness of term. The descriptions of the claims in the patent application and the patent itself were incorporated in the decree, not as patent claims, but as descriptions of the features of the Huffines device which should be protected by injunction as so-called " trade secrets ". While there is a suggestion that certain of these descriptions or claims may relate to matters well within the realm of public knowledge long before Huffines held any negotiations with a representative of Hyde Corporation, that is hardly the gravamen of the argument


28

nor can it reasonably be supported by the grounds set forth in the motion for new trial filed in the trial court (even considering a "motion to amend and correct judgment" as a part of the motion for new trial), or the points urged in the Court of Civil Appeals, and the assignments contained in the original and amended application for writ of error.

It is contended that upon the issuance of the patent, the claims contained in the application for the patent as distinguished from the claims of the patent itself became public property. This of course is true. The effect of the injunction is to deprive Hyde Corporation of the right to do that which every other person could do, e.g., make full use of the disclosures of the claims contained in the patent application which were not carried forward and protected by the patent. This situation was recognized in the original opinion. We again encounter the conflict between Conmar Products Corporation v. Universal Slide Fastner Co., 2 Cir., 172 F.2d 150 and Adolph Gottscho, Inc. v. American Marking Corporation, 18 N.J. 467, 114 A.2d 438, and similar cases. All trade secrets are not patentable and it seems that where one has gained knowledge of trade secrets in confidence, he should not be permitted to exploit the economic advantage gained thereby to the detriment of the opposing party simply because of the public disclosure of the claims contained in the patent application. One who has obtained prior knowledge of a device in confidence may well establish a manufacturing head start, so to speak. He may not and often does not stand on the basis of economic equality with competing manufacturers or the public at large at the date of the public disclosure of the claims in the patent application. For this reason relief by way of injunction should not arbitrarily be denied because the trade secrets contained in an application for a patent have been made public. Whether an injunction should issue and if so the particular type of decree that should be rendered must, to a large degree, depend upon the facts of each particular case. Schreyer v. Casco Products Corp., 2nd Cir., 190 F.2d 921; Franke v. Wiltchek, 2nd Cir., 209 F.2d 493, 495.

In view of the dissenting opinion filed by Judge Jerome Frank in the latter case, we may comment on the holding thereof in some detail as the dissent raises a point similar to that suggested by amicus curiae in the case now before us. Franke v. Wiltchek was strictly a trade secrets case. The federal jurisdiction was based upon a diversity of citizenship of the parties. 28 N.S.C.A. Sec. 1332, and the law of the State of New York was applicable. It was urged that the heart of plaintiffs' process (alleged to be a trade secret) "was revealed by an expired patent, and that the improvements thereon were unpatentable applications of mechanical skill." The Court of Appeals said that,

"* * * This totally misconceives the nature of plaintiffs' right. Plaintiffs do not assert, indeed cannot assert, a property right in their development such as would entitle them to exclusive enjoyment against the world. Theirs is not a patent, but a trade secret. The essence of their action is not infringement, but breach of faith. It matters not that defendants could have gained their knowledge from a study of the expired patent and plaintiffs' publicly marketed product. The fact is that they did not. Instead they gained it from plaintiffs via their confidential relationship, and in so doing incurred a duty not to use it to plaintiffs' detriment. This duty they have breached. [Citations omitted.]

The Court divided upon the propriety of awarding injunctive relief. The majority in an opinion by Judge Clark upheld the action of the district judge in granting a perpetual injunction. It was said:


29

"It would appear, therefore, that New York law governs of this point. But the question remains largely academic; for the only way in which New York law seems at all unique is in the number and force of the pertinent decisions. The leading case not only for that jurisdiction, but -- in view of its extensive citation -- for the country, is still Tabor v. Hoffman, supra, 118 N.Y. 30, 37, 23 N.E. 12, 13, 16 Am. St. Rep. 740, where the court held a plaintiff 'entitled to the preventive remedies of the court,' without respect to whether 'one secret can be discovered more easily than another' or that a defendant's resort to the secret 'was more of a convenience than a necessity.' That decision is particularly in point because there defendant's counsel and a dissenting opinion took special exception to the grant of an injunction, as distinguished from the award of damages at law. [Citations omitted.]

"As the several cases cited earlier in this opinion show, there is nothing singular in this aspect of New York law. In citing a multitude of cases to the point that an inventor or discoverer 'will ordinarily be granted an injunction' against use of a formula or trade secret, the editors of a lengthy annotation of cases in 170 A.L.R. 449, 488-490, say that in fact 'most of the cases are injunction cases' and cite only two insignificant or inapposite cases to the contrary. See to like effect Spiselman v. Rabinowitz, supra, 270 App. Div. 548, 61 N.Y.S. 2d 138, appeal denied 270 App. Div. 921, 62 N.Y.S. 2d 608. We have found no case authority to throw doubt on this law. So, indeed, if a search be made for 'federal law' so-called, the result must be the same on existing authorities, as we have pointed out above; see, for example, the discussion below and in our court in Schryer v. Casco Products Corp., supra."

While Judge Frank was of the opinion that an award of damages would do complete justice under the facts of the case, his argument raises the question of an injunction of limited duration. In the dissenting opinion reference was made to a differentiation as to remedies suggested in the Restatement of the Law of Torts. In support of such differentiation, Judge Frank submitted the following argument:

"* * * (a) The harm done by a defendant's breach of a plaintiff's confidence is the use of the secret to the plaintiff's 'loss' or 'detriment.' (b) By defendant's wrong he deprives plaintiff of a trade secret defined as something which gives plaintiff 'an opportunity to obtain an advantage over competitors.' (c) Where the device or process consists of a 'novel invention,' the plaintiff may have chosen not to patent it -- which would limit the period of his monopoly -- but to keep the invention to himself with the expectation that no one, except those in his confidence, will discover the secret, so that his monopoly will endure for an unlimited time. If the defendant comes to know the secret of such an invention by improper means his use of this knowledge will cause a loss to plaintiff for an indefinite future period during which plaintiff will lose his 'opportunity to obtain an advantage over competitors.' Wherefore a perpetual injunction affords a proper protection -- a protection as enduring as the monopoly grounded on the secret invention. (d) But where the secret involves only a slight, non-patentable and easily-discoverable improvement, competitors will soon, in all probability, legitimately learn how to contrive this improvement. Consequently, defendant's wrong has caused a loss of plaintiff's


30

'advantage over competitors' which, at most, would not have lasted long. Perpetually to enjoin defendant in such circumstances would be to harm him without regard to the loss or detriment suffered by plaintiff.

"In short, such an injunction -- continued beyond the time when, in all likelihood, the trade, by legitimate means will catch up with the plaintiff -- is sheer punishment, nothing else. * * *

"The historic injunctive process was designed to deter, not to punish. The essence of equity jurisdiction has been the power of the Chancellor to do equity and to mould each decree to the necessities of the particular case. Flexibility rather than rigidity has distinguished it." * * *

By way of illustration of the Frank argument, it might be said that the "secrets" of the magnetic fishing tool involved in K & G Tool & Service Co., Inc. v. G & G Fishing Tool Service, this volume 594, 314 S.W. 2d 782 may be more readily ascertained from the publicized patent application or from a legitimate examination of the tool itself than could the "secrets" of the "Compressor Mechanism for Refuse Truck" here involved. If so, a fair competitive balance could be attained by a restraint of lesser duration in one case than in the other. Of course, as is indeed probable, the matter may be academic. With the loss of the trade advantage, the duration of the restraint may be wholly immaterial to a defendant. However that may be, as pointed out in the original opinion, the question of an injunction of limited duration is not before us. The issuance of a perpetual injunction is a common remedy afforded in trade secret cases. The authorities cited by the majority in Franke v. Wiltchek cannot be lightly brushed aside. Nor are we disposed to destroy "the carefully built law of trade secrets, " so that as a practical matter "such business assets (may) be left open to highjacking from all sides." The trial judge upon proper findings has correctly determined that this is a case for injunctive relief. He has ordered that the usual equitable order issue, e.g. the perpetual injunction. It would seem to follow that if an injunction of limited duration be substituted therefor as suggested by Judge Frank's argument, an abuse of discretion in issuing the perpetual injunction would have to be shown. Franke v. Wiltcheck, 209 F. 2d 493, 1.c. 499. No such showing was made in this case. As heretofore stated, the question of a limited duration injunction as opposed to a perpetual injunction is not raised by a party hereto. The matter is not before us.

Petitioner's motion for rehearing is overruled.

Opinion delivered June 4, 1958.

Mr. Justice Walker, dissenting.

After further consideration, I have concluded that our decision in this case is unsound. Since the entire patent file becomes public property when the patent issues, the information contained therein can no longer constitute a trade secret. When the parties made their license agreement, respondent had filed his original patent application containing seventeen separate and distinct claims of novelty


31

and invention. Thirteen of these claims were rejected by the Patent Office because of lack of invention or conflicts with prior patents and were cancelled by respondent in subsequent amendments to his application. While the patent as issued lists ten claims, these embody only four of those which were listed in the original application with some additional claims asserted in the amended applications.

The entire world now has access to the file and is free to manufacture and sell devices incorporating the features of the thirteen rejected and cancelled claims except as the same may be protected by other patents, but petitioner has been perpetually enjoined from doing so. The net result is that petitioner is prevented from ever hereafter doing that which everyone else is free to do. Since respondent can be adequately protected by damages or by an injunction of limited duration, the trial court's judgment is clearly more punitive than remedial.

This action cannot be justified by saying that a patent may not afford the same protection as a trade secret or that an award for damages for patent infringement may not fully protect respondent. Respondent testified that his patent application was made as broad as possible, because the Patent Office would "kick back" all he couldn't use. Although it was thus contemplated that some of the claims might be rejected and have no protection either from the patent or as trade secrets after the patent issued, the contract does not bind petitioner never to use any of the information disclosed to it. By applying for and accepting his patent, respondent elected to look to it for protection and broadcast his secrets to the world. He chose disclosure and patent protection in preference to a trade secret. The narrow question is whether under all these circumstances petitioner is under a legal duty never to use any of the information obtained from respondent, and in my opinion it is not.

Our original opinion apparently recognizes that the trial court's judgment goes too far. It suggests that respondent might have been entitled only to an injunction of limited duration if petitioner had laid a proper predicate by alternative pleadings and supporting evidence showing that the same would afford respondent adequate protection. This does not comport with my idea of the burden resting upon the moving party in an equitable proceeding. It should not be said that he can simply establish his right to some sort of relief and then be granted much more than is actually required for his protection unless the defendant proves that he is entitled to less.

While petitioner does not here argue that the injunction should have been limited to a period of years, it has vigorously contended from the beginning that the permanent injunction should not have been granted and that the rule of Conmar Products Corporation v. Universal Slide Fastener Co., 2nd Cir., 172 F. 2d 150, should be applied in this case. It is my opinion that the burden was upon respondent to establish his right to the relief granted, i.e., a perpetual injunction. This he has not done. In a case where there are no pleadings or evidence justifying the issuance of an injunction of limited duration, we should follow the rule of the Conmar case and deny injunctive relief after the trade secrets have been made public through the issuance of a patent. See 36 Texas Law Rev. 384.

I would reverse and render the judgments of the courts below in so far as petitioner has been permanently enjoined from manufacturing or selling any device embodying features described in the original patent application which were not carried forward and reserved in the patent.


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33

United States Court of Appeals, Seventh Circuit.

MANGREN RESEARCH AND DEVELOPMENT CORPORATION, Plaintiff-Appellee,

v.

NATIONAL CHEMICAL COMPANY, INCORPORATED, and National Mold Release Company, Defendants-Appellants

No. 95-1661.

Argued Nov. 28, 1995.Decided July 3, 1996.

Before MANION, ROVNER, and EVANS, Circuit Judges.

ILANA DIAMOND ROVNER, Circuit Judge.

This diversity case involves a misappropriation claim under the Illinois Trade Secrets Act (“ITSA”), 765 ILCS 1065/1 et seq. Mangren Research and Development Corporation (“Mangren”) contends that defendants misappropriated its trade secrets in the course of developing and marketing a competing mold release agent. The claim was tried to a jury, which found for Mangren and awarded $252,684.69 in compensatory damages and $505,369.38 in exemplary damages. The district court entered judgment on the jury's verdict and later denied defendants' renewed motion for judgment as a matter of law or for a new trial. The court also awarded Mangren its attorney's fees and costs. Defendants contend in this appeal that Mangren did not establish any protectable trade secrets under the Illinois statute, or that defendants had misappropriated any such secrets. They further argue that the jury's compensatory damage award is excessive and that there is no evidentiary basis for exemplary damages. For the reasons that follow, we reject defendants' arguments and affirm the judgment below.

I.

A.

Mangren's story is one of a grass-roots operation that made good. The company was founded in 1974 by Ted Blackman and Peter Lagergren while they were chemistry students at the University of Texas. Mangren initially manufactured dog shampoo and industrial cleaners and solvents in a garage that belonged to Blackman's father-in-law. Eventually, however, the company began to produce mold release agents. Rubber and plastics manufacturers apply such agents to the molds and presses they use in the manufacturing process. Typically, the end-product is formed by filling a mold or press with a liquified rubber or plastic and then heating, which causes the liquid to solidify and to take the shape of the vessel containing it. The mold release agent is designed to prevent the solidifying substance from sticking to the mold during this process.

In the mid-1970s, Masonite was a major user of mold release agents. At the time, Masonite was using a DuPont product called Vydax that was primarily composed of a flurotelemer (a type of fluorocarbon). Vydax was quite expensive, however, and Masonite asked Mangren to attempt to develop a cheaper mold release agent that would be even more effective. Blackman and Lagergren then began to study and to experiment with different component chemicals. They decided that the key ingredient in their mold release agent would be a fluorocarbon resin that would impart a low surface energy to the molding surface. After eighteen months of study and testing, Mangren found that a particular type of polytetrafluoroethylene (“PTFE”) performed this function. This type of PTFE had three essential characteristics: (1) it was highly degraded; (2) it had a low molecular weight; and (3) it had low tensile strength. At the time, PTFEs having these characteristics were used only as additives in manufacturing processes; they had never before been used as the primary component of a mold release agent. Indeed, the available literature indicated that this type of PTFE was unsuited for such an application.

Mangren first began selling a mold release agent that included TL-102, a highly degraded PTFE that had a low molecular weight and low tensile strength, in 1976. Before purchasing Mangren's product, Masonite tested it extensively to ensure its effectiveness. Masonite eventually approved the product and began using it with great success.

Once the formula was developed, Mangren's mold release agent was relatively inexpensive to produce.FN1 Because the product was extremely valuable to Masonite, however, Mangren was able to price its product high and to earn a considerable profit. Indeed, Mangren's prices caused Masonite to investigate other potential suppliers and, at one point, even to attempt to develop its own mold release agent. Yet Masonite was unable to locate or to develop a mold release agent that could match the effectiveness of Mangren's product.

FN1. Over time, Mangren developed other formulations of its original mold release agent, but each utilized the same type of PTFE.

Having had considerable success selling to Masonite, Mangren decided to market its product to others as well. It first compiled a list of companies that produced molded rubber and plastic products. Yet, because not all of those manufacturers would have the equipment necessary to use Mangren's mold release agent, the company contacted each one individually, explaining its product and the equipment needed to use it. In this way, Mangren developed a list of potential customers, but only after devoting a considerable amount of time and effort to the project.

Even as its sales grew, Mangren remained a small company, never having more than six employees at any one time. Because its success depended on the uniqueness of its mold release agent, Mangren took a number of steps to ensure that its formula remained secret. First, all employees were required to sign a confidentiality agreement, and non-employees were not permitted in the company's laboratory. Once chemical ingredients were delivered to the company's premises, moreover, the labels identifying those ingredients were removed and replaced with coded labels understood only by Mangren employees. The company's financial and other records also referred to ingredients only by their code names.

B.

The seeds of the present lawsuit were planted when Mangren made two ill-fated hiring decisions in the 1980s. First, it hired Rhonda Allen in 1986 to be its office manager. Eventually, however, Allen became Mangren's sales manager, a position that provided her access to Mangren's customers and its pricing policies. In 1988, Mangren hired Larry Venable, an organic chemist, to help Blackman develop a chromium-free mold release agent. Although Venable did not have prior experience with PTFE-based mold release agents, he and Blackman succeeded in developing a chromium-free product that also used a highly degraded PTFE with low molecular weight and low tensile strength.

For reasons not relevant here, Mangren terminated the employment of Allen and Venable in 1989. After holding two intervening jobs, Venable met William Lerch early in 1990. Lerch had recently incorporated defendant National Chemical Company, Inc. (“National Chemical”), which was but one of a number of companies he then owned. Venable told Lerch about his Mangren experience and about an idea he had for developing a mold release agent to be used in the rubber industry. Lerch was excited about the prospect and inquired about the market for such a product. Venable responded that Masonite was a large user and therefore a potential customer.

The two discussed the possibility that they might be sued by Mangren if they developed a competing mold release agent. Venable was especially concerned because he realized that any product he could develop would be similar to Mangren's mold release agent. He knew, for example, that a mold release agent using TL-102-the PTFE that Mangren used-would be “potentially troublesome” and probably would prompt a lawsuit. Lerch told Venable not to worry about a misappropriation suit and explained that he had once been accused of trade secret infringement but had won the case by changing one ingredient or proportion of ingredients in creating his product. Lerch laughed and said the same thing would happen here. Shortly thereafter, Lerch and Venable incorporated defendant National Mold Release Company to manufacture the mold release agent that National Chemical would sell.

Venable then set about developing a mold release agent that would be more effective than Mangren's product. The agent he produced, like Mangren's, used a highly degraded PTFE that had a low molecular weight and low tensile strength. For the most part, Venable used a PTFE designated as TL-10, although he at times also used TL-102, the very same PTFE used by Mangren.

Venable then recommended that Lerch hire Allen to market defendants' product. Lerch knew that Allen, too, was a former Mangren employee. Defendants hired Allen as a vice president and assigned her the responsibility of developing a customer base for their mold release agent. From their days at Mangren, Venable and Allen knew that company's customers and pricing policies. Allen therefore approached Mangren customers with the news of defendants' new mold release agent and quoted a slightly lower price for defendants' product than that charged by Mangren. Allen contacted Masonite, for example, a company with whom she had dealt on

behalf of Mangren, and informed them about National Chemical and the mold release agent it had developed. Masonite expressed interest, and after at least one preliminary test and one control test, defendants were able to qualify their mold release agent for use at Masonite. Masonite then began purchasing defendants' product.

Venable and Allen left defendants in April 1991. Venable began to work as a consultant for Bash Corporation (“Bash”), a Chicago-based construction supply company. Venable provided Bash with a mold release agent formula that was substantially derived from defendants' formula. Allen, whom Bash had hired on Venable's recommendation, then presented Bash's product to Masonite as the same high quality product she had sold on behalf of National Chemical. Indeed, in a letter notifying Masonite of her association with Bash, Allen represented that:This change will not affect Masonite in any way, except for the better. You can still expect the same quality coatings and service I have provided you with in the past.... The only change will be in my company name and address. Even the names of the coatings will not change.

(Joint Ex. 21.) Because of its similarity to defendants' mold release agent, Bash was quickly able to qualify its product for use at Masonite and to begin selling to that company. Early in 1992, however, Bash went out of business, prompting Allen to incorporate Bash Chemical Corporation (“Bash Chemical”) in Texas. That company then continued to manufacture and market the same mold release agent previously sold by the Illinois-based Bash.

C.

Mangren filed this suit in May 1993, after sales of its mold release agent markedly declined in the three previous years. Mangren alleged that defendants had misappropriated its mold release agent formula, and specifically its use of a highly degraded PTFE that had a low molecular weight and low tensile strength. Mangren also alleged the misappropriation of its customer list and pricing information. Mangren sought to recover the profits it lost due to defendants' misappropriation, including profits lost through sales of PTFE-based mold release agents by defendants and Bash, and profits lost when Mangren lowered its prices to meet defendants' competition. See 765 ILCS 1065/4(a). The jury found for Mangren and awarded compensatory damages of $252,684.69. Because it found defendants' misappropriation to have been “willful and malicious,” moreover, the jury awarded exemplary damages of $505,369.38, twice the compensatory damage award. See 765 ILCS 1065/4(b). The district court subsequently denied defendants' renewed motion for judgment as a matter of law (see Fed.R.Civ.P. 50(b)), as well as its motion for a new trial (see Fed.R.Civ.P. 59). Based on the jury's finding of a willful and malicious misappropriation, the district court awarded Mangren $113,426.50 in attorney's fees. See 765 ILCS 1065/5.

II.

Defendants first contend that Mangren failed to establish at least one protectable trade secret under Illinois law. Even if it did, moreover, defendants argue that there was no misappropriation of that trade secret. In denying defendants' renewed motion for judgment as a matter of law or for a new trial, the district court found that the trial evidence was sufficient to

support the jury's verdict. We review de novo the denial of defendants' renewed motion for judgment as a matter of law, but in doing so, we view the evidence in the light most favorable to Mangren and draw all reasonable inferences in its favor. LaFollette v. Savage, 63 F.3d 540, 543-44 (7th Cir.1995); DeBiasio v. Illinois Cent. R.R., 52 F.3d 678, 682 (7th Cir.1995), cert. denied, 516 U.S. 1157, 116 S.Ct. 1040, 134 L.Ed.2d 188 (1996). In this diversity case, we apply the federal standard for judgments as a matter of law, meaning that we will reverse only if no reasonable person could have found that Mangren established the challenged aspects of its claim. Mayer v. Gary Partners and Co., Ltd., 29 F.3d 330, 335 (7th Cir.1994); Fed.R.Civ.P. 50(a). Our review of the district court's denial of the alternative motion for new trial is even more limited. As LaFollette explains, a new trial is warranted only “where the jury's verdict is against the weight of the evidence, and because that decision is committed to the district court's discretion, we will not disturb it except under exceptional circumstances showing a clear abuse of discretion.” 63 F.3d at 543-44 (internal quotations and citations omitted).FN3

FN3. Although Mangren asserted below that defendants had misappropriated two distinct trade secrets-the formula for its mold release agent and its customer list and pricing information - the jury was not asked to make findings as to each but instead returned a general verdict in Mangren's favor. That verdict must be sustained if the evidence supports either aspect of Mangren's claim. Composite Marine Propellers, Inc. v. Van Der Woude, 962 F.2d 1263, 1265 (7th Cir.1992) (citing Griffin v. United States, 502 U.S. 46, 112 S.Ct. 466, 116 L.Ed.2d 371 (1991)). We therefore confine our discussion to whether the formula for Mangren's mold release agent was a trade secret and whether that secret was misappropriated by defendants. We express no opinion on whether the evidence also was sufficient to establish the customer list aspect of Mangren's claim.

A.

Under the ITSA, the term “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, 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; and

(2) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy or confidentiality.

765 ILCS 1065/2(d). This definition codifies two requirements for trade secret protection that had developed under the state's common law, both of which focus on the secrecy of the information sought to be protected. [Citations omitted.] Defendants argue that Mangren failed to establish either element here.

Under the first statutory requirement, the information at issue “must be sufficiently secret to impart economic value to both its owner and its competitors because of its relative secrecy.” George S. May, 195 Ill.Dec. at 189, 628 N.E.2d at 653. This requirement precludes trade secret protection for information generally known within an industry even if not to the public at large. Id.; see also ILG Indus., Inc. v. Scott, 49 Ill.2d 88, 273 N.E.2d 393, 396 (1971); Minogue, 129 Ill.Dec. at 371, 535 N.E.2d at 1136. A plaintiff like Mangren must prove that the real value of the information “lies in the fact that it is not generally known to others who could benefit [from] using it.” Minogue, 129 Ill.Dec. at 371, 535 N.E.2d at 1136. The evidence in this case presents a textbook example of information satisfying this requirement.

When Mangren first embarked on its mission to develop for Masonite a more effective mold release agent, Masonite was purchasing a product from DuPont that employed a flurotelemer as its primary ingredient. After eighteen months of intensive research and testing, Blackman and Lagergren found that a particular type of PTFE (one that was highly degraded and that had a low molecular weight and low tensile strength) would make their mold release agent more effective and less expensive than that of DuPont. When they made this discovery, the prevailing view was that such a PTFE was unsuited for the type of application that Blackman and Lagergren envisioned. Thus, Mangren was the first to successfully use this particular type of PTFE in a mold release agent. Although defendants are quick to point out that “[m]erely being the first or only one to use particular information does not in and of itself transform otherwise general knowledge into a trade secret” (George S. May, 195 Ill.Dec. at 190, 628 N.E.2d at 654; see also Minogue, 129 Ill.Dec. at 372, 535 N.E.2d at 1137), there was sufficient evidence for the jury to conclude that Mangren was not using general knowledge at all. A reasonable jury could find instead that Mangren had developed a distinctive formula based on information not generally known or accepted within the industry.

Mangren proved, moreover, that secrecy imparted considerable economic value to its new formula. Although its mold release agent was relatively inexpensive to produce, Mangren was able to exact a substantial price because of the product's value to the customers who used it. Masonite, in fact, attempted to find another supplier and even to develop its own mold release agent at one point, but was unable to find or to develop an equally effective product. Mangren, then, clearly satisfied the first of the statute's two requirements for a trade secret.

Defendants nonetheless contend that Mangren did not satisfy the second, as it did not make a reasonable effort to maintain the secrecy of its formula. They argue, for example, that all of Mangren's employees (of which there were never more than six at a time) knew Mangren's formula, that an observer of Mangren's premises could identify the formula's ingredients because Mangren did not replace existing labels with coded labels until ingredients had been delivered, and that Mangren could not produce signed agreements from Venable or Allen promising to maintain the confidentiality of its formula.

Arrayed against these purported deficiencies, however, is considerable evidence that the company made substantial efforts to protect the secrecy of its formula. Although Mangren was unable to produce confidentiality agreements for Venable and Allen, it presented to the jury signed agreements for other Mangren employees. Blackman testified, moreover, that each

employee (including Venable and Allen) was required to sign a confidentiality agreement and that employees were further advised of the secret status of the company's mold release agent formula. Lagergren added that only Mangren employees were permitted in the company's laboratory. Mangren also demonstrated that it regularly replaced identifying labels with coded labels once ingredients were delivered to its premises. Those ingredients were then referred to in Mangren's financial and other records only by their code names. Even if Mangren could have taken further protective measures just in case, as defendants suggest, a devious potential competitor were to stake out its premises and attempt to identify the chemicals delivered there, whether or not the actions Mangren actually took were sufficient to satisfy the ITSA's reasonableness standard was a question for the jury. See Rockwell Graphic Sys., Inc. v. DEV Indus., Inc., 925 F.2d 174, 179-80 (7th Cir.1991). The evidence was certainly sufficient to enable reasonable jurors to conclude that Mangren made ample efforts to maintain the secrecy of its formula.

B.

Having determined that Mangren established a protectable trade secret in its mold release agent formula, we turn to the question of misappropriation. The ITSA defines a “misappropriation” in pertinent part as follows:

[D]isclosure or use of a trade secret of a person without express or implied consent by another person who:

* * * * * *

(B) at the time of disclosure or use, knew or had reason to know that knowledge of the trade secret was:

(I) derived from or through a person who utilized improper means to acquire it:(II) acquired under circumstances giving rise to a duty to maintain its secrecy or limit its use; or(III) derived from or through a person who owed a duty to the person seeking relief to maintain its secrecy or limit its use....

765 ILCS 1065/2(b)(2). Defendants argue that they did not “use” Mangren's trade secret under this definition because their mold release agent formula is not the same as Mangren's. Although they concede that the primary ingredient of their formula is also a highly degraded PTFE with a low molecular weight and low tensile strength, defendants emphasize that many of the other ingredients are different. Furthermore, the specific PTFE used in defendants' product is typically not the same as the one used by Mangren, although its essential characteristics are identical. Finally, defendants use a slightly smaller volume of PTFE in their mold release agent-twenty as opposed to twenty-three percent in Mangren's product. These differences, in defendants' view, should have precluded the jury from finding that they misappropriated Mangren's formula.

Defendants' argument, however, is inconsistent even with the jury instruction to which they agreed below. The jury was instructed that:

In order for you to find that defendants misappropriated one of Mangren's trade secrets, you do not have to find that defendants copied or used each and every element of the trade secret. You may find that defendants misappropriated Mangren's trade secrets even if defendants created a new product if defendants could not have done so without use of Mangren's trade secret.

(Tr. at 781.) That instruction, as defendants apparently conceded below, is consistent with traditional trade secret law. We observed in In re Innovative Constr. Sys., Inc., 793 F.2d 875, 887 (7th Cir.1986), for example, that “the user of another's trade secret is liable even if he uses it with modifications or improvements upon it effected by his own efforts, so long as the substance of the process used by the actor is derived from the other's secret.” (Internal quotations omitted). Although that decision involved Wisconsin law, the law of Illinois is in accord. [Citations omitted.] We have observed before, in fact, that if trade secret law were not flexible enough to encompass modified or even new products that are substantially derived from the trade secret of another, the protections that law provides would be hollow indeed. Innovative Constr., 793 F.2d at 887; American Can Co. v. Mansukhani, 742 F.2d 314, 329 (7th Cir.1984).

Mangren emphasizes, moreover, that the trade secret misappropriated here was not necessarily its overall formula, but the essential secret ingredient-a highly degraded PTFE having a low molecular weight and low tensile strength, which had previously been considered unsuitable for such an application. Defendants do not contest that they use a similar PTFE in their mold release agent and that it was Venable, the former Mangren employee, who revealed to them that such a PTFE could be used effectively. Once Venable let defendants in on the secret and defendants then used that secret to develop their own product, there plainly was a misappropriation even if defendants' product was not identical to Mangren's. In other words, reasonable jurors could conclude from the evidence in this case that defendants' mold release agent was substantially derived from Mangren's trade secret, for defendants could not have produced their product without using that secret. Defendants were not therefore entitled to judgment as a matter of law or to a new trial on the trade secret and misappropriation issues.

This hyperbolic argument misses the mark. Mangren has never suggested that because it was the first to develop a PTFE-based mold release agent, it has the exclusive right to produce and market such a product-as if it held a patent on the product, for example. Mangren would certainly have no claim for misappropriation if another company, after months of independent research and testing, developed a mold release agent using a similar PTFE. Under that scenario, of course, there would be no misappropriation at all because our hypothetical company would have developed its product in the same way that Mangren did-through its own ingenuity. See American Can, 742 F.2d at 329. But if, as Mangren proved to the jury's satisfaction in this case, the other company markets a PTFE-based mold release agent that it developed not through independent research and testing, but by using Mangren's trade secret, there was a misappropriation for which the law provides a remedy. See PepsiCo, Inc. v. Redmond, 54 F.3d 1262, 1270 (7th Cir.1995) (describing this scenario as “a traditional trade secret case”). That conclusion, which is actually where Mangren's argument leads, makes neither bad law nor bad

sense.

III.

We turn then to the issue of damages. As we have explained, the jury awarded Mangren $252,684.69 in compensatory damages and $505,369.38 in exemplary damages. Defendants challenge only one aspect of the compensatory damage award, but contend that the entire exemplary damage award must go. *** Under the ITSA, a party proving trade secret misappropriation is entitled to recover the “actual loss caused by [the] misappropriation,” as well as any unjust enrichment not taken into account in computing actual loss. *** In denying a new trial on damages, the district court believed there was sufficient evidence to permit a reasonable jury to conclude that the Bash sales represented lost profits to Mangren that were caused by defendants' misappropriation.

By agreement of the parties below, the jury received the following instruction on compensatory damages:

Damages can include both the actual loss caused by defendants' misappropriation and the unjust enrichment caused by defendants' misappropriation that is not taken into account in computing actual loss. Here, Mangren's actual loss would be the profit it would have made on the product it would have sold but for the defendants' misappropriation. The unjust enrichment would be the profits others made because of defendants' misappropriation.

(Tr. at 782.) Under this instruction, Mangren demonstrated to the jury's satisfaction that absent defendants' misappropriation, it would have made the sales ultimately made by Bash. Mangren proved, for example, that it was Venable who provided Bash with its mold release agent formula, a formula that Venable had developed in conjunction with Lerch while he was employed by defendants. Bash's mold release agent was substantially similar to and even carried the same name as defendants' product, which enabled Bash to quickly qualify its product for use at Masonite. Allen also represented to Masonite that Bash's product was the same as National's, and that only the company name had changed. A reasonable jury could conclude from this evidence that if defendants had not financed Venable's development of a mold release agent derived from Mangren's trade secret, and also had not supported Allen's subsequent effort to market that product to Mangren customers like Masonite, Bash would never have gotten its hands on Mangren's trade secret and would not have made the sales at issue here. A reasonable jury could therefore conclude that but for defendants' misappropriation, Mangren would have made the disputed sales. The fact that defendants may not have personally benefitted from Bash's sales is not dispositive under the jury instruction so long as defendants' misappropriation was a “but for” cause of the third party's sales. The district court thus did not abuse its discretion in refusing to grant defendants a new trial on damages.

[Exemplary damages were also affirmed.]

A. C. CROUCH ET AL., Appellants

v.

SEWING MACHINERY COMPANY, INC., Appellee Court of Civil Appeals of Texas, Fourth District, San Antonio 468 S.W.2d 604; 1971 Tex. App. LEXIS 2584 June 9, 1971

CADENA, J.

Defendants, A. C. Crouch and W. L. Bedford, appeal from an order temporarily enjoining them from soliciting the customers of, or contacting the suppliers represented by their former employer, Swing Machinery Company, Inc., plaintiff below.

Plaintiff alleged that Crouch had been its office manager, while Bedford had been one of plaintiff's salesmen. According to plaintiff's petition:

1. As office manager, Crouch occupied a position of trust and confidence, and had access to plaintiff's trade secrets, customer lists, mailing lists and price lists.

2. Bedford, as a salesman, had access to such information because he occupied a position of trust and confidence. At the time that he entered plaintiff's employ, Bedford agreed that he would not engage in a business competitive with plaintiff for a period of five years after termination of his employment.

3. Both Crouch and Bedford, after terminating their employment with plaintiff by resignation, were employed by Southwest Vacu-Blast and Industrial Sales, Inc., a newly organized company which was in direct competition with plaintiff. Both Crouch and Bedford immediately began to call upon the customers and accounts of plaintiff, soliciting their business. In soliciting plaintiff's customers, defendants made use of plaintiff's trade secrets.

At the outset, we affirm the order below insofar as it applies to William L. Bedford. The evidence shows that at the time he entered plaintiff's employ, Bedford signed an agreement not to engage in post-employment competition with plaintiff. Bedford has failed to present any evidence which even tends to indicate that such agreement is unreasonable, and the record discloses no reason why he should not be compelled to abide by his agreement pending trial on the merits.

Crouch never agreed not to compete with plaintiff. On the effective date of his resignation, Crouch called on plaintiff for his accrued salary. His salary was withheld until he signed an instrument stating that he had been entrusted with trade secrets, and that he agreed not to divulge them. Despite the circumstances under which the instrument was signed by Crouch, it is,

perhaps, some evidence that he had, in fact, been entrusted with some trade secrets. But even if his agreement not to divulge such secrets is enforcible, it imposes on him no obligation greater than that which is imposed on him by the common law doctrine, which prohibits an ex-employee from disclosing, or using for his own benefit and to the detriment of his former employer, any confidential information obtained by virtue of his former employment. Hyde Corporation v. Huffines, 158 Tex. 566, 314 S.W.2d 763 (1958).

With reference to Crouch, we consider first the propriety of that portion of the order which prohibits him from "contacting" suppliers whom plaintiff represented in the San Antonio area. In this connection, plaintiff's pleadings fail to allege that the identity of such suppliers is not generally known to all persons engaged in the same business as plaintiff. Plaintiff's evidence discloses that the identity of such suppliers can be easily ascertained by any interested person merely by referring to trade journals. In fact, under the terms of plaintiff's sales representative agreement with one supplier, plaintiff was under a duty to advertise, at its own expense, by inserting at least one display listing in the classified section (yellow pages) of the telephone directories in all cities within plaintiff's trade area which prominently displayed the name of such supplier. We find nothing in the record to indicate that such information is not of a routine nature. Such information is nothing more than that which is necessarily known to all persons engaged in the business. Although there are cases where courts have gone to rather extreme lengths in protecting business information which represents nothing more than the normal accretion of day-to-day routines, 43 A.L.R. 2d, Anno: Employee -- Restrictive Covenant -- Area, pp. 94, 168-70 (1955), we do not believe that knowledge of the ordinary routines of a business is sufficient to justify a restriction on a person's post-employment economic mobility.

In reaching the conclusion that the temporary injunction prohibiting defendant, Crouch, from contacting the suppliers must be dissolved, we do not overlook the fact that we are reviewing the action of the trial court in granting a temporary injunction. As our Supreme Court has said, we may not reverse the decision below unless it appears that the trial court abused its discretion, and "there is no abuse of discretion in the issuance of a writ if the petition alleges a cause of action and the evidence adduced tends to sustain it." Transport Co. of Texas v. Robertson Transports, Inc., 152 Tex. 551, 261 S.W.2d 549, 552 (1953). Admittedly, the trial court has a wide discretion in determining whether a temporary injunction shall be granted or denied. But to authorize the issuance of a temporary injunction, the applicant has the "burden of not only pleading facts which, if proved, would entitle it to a permanent injunction, but, as well, of offering evidence tending to prove its probable right thereto on final hearing and of probable injury in the interim." Millwrights Local Union No. 2484 v. Rust Engineering Co., 433 S.W.2d 683, 686 (Tex. 1968). Far from tending to show a breach of any duty by Crouch, the evidence merely shows that Crouch, after he left plaintiff's employ, was making use of information which is necessarily known to all persons in the trade. What is known to all cannot be converted into confidential information worthy of equitable protection by merely whispering into the ear of even the most highly trusted employee.

The customer list cases stand on the periphery of that area of the law which can best be described as "the trade secret quagmire. " The confusion created by decisions concerning the use of customer lists and customer contact by ex-employees is due to the fact that the decisions seemingly turn on arbitrary distinctions unrelated to trade practices. n1

- - - - - - - - - - - - - - - - - -Footnotes- - - - - - - - - - - - - - - - - -

n1 In the numerous decisions in this area will be found language which at least tends to support each of the following statements: (1) Practically all customer lists will be protected; (2) practically no such lists will be protected; (3) only written lists will be protected; (4) only lists of retail customers will be protected. Notes: Protection and Use of Trade Secrets, 64 Harv. L. Rev. 976, 977 (1951). *** - - - - - - - - - - - - - - - - -End Footnotes- - - - - - - - - - - - - - - - -

In the absence of an express agreement restricting the post-employment activities of an employee, it is generally held that an ex-employee is free to compete with, and to solicit the customers of, his former employer. Therefore, what is described as an "ordinary" customer list is not considered a trade secret. Texas Shop Towel v. Haire, 246 S.W.2d 482, 485 (Tex. Civ. App. -- San Antonio 1952, no writ); 28 A.L.R. 3d, Anno: Customer List -- As Trade Secrets -- Factors, pp. 7, 18 (1969).

However, the former employer will be protected in some situations. An ex-employee will not be permitted to make use of a secret list of customers, nor of any other confidential information obtained about the customers by virtue of his former employment. This rule has been applied in a multitude of cases. In addition, there is considerable language in the decisions to the effect that injunctive relief will be granted when the defendant occupied a fiduciary relationship, such as that occupied by an officer of a corporation or other employee who has been the repository of special trust. 73 Harv. L. Rev. 625, 655, supra.

But neither of these two "exceptions" to the general rule against restraints on post-employment activities will explain the decisions. Admittedly, the courts have shown a willingness to protect secret customer lists and to prevent the use by an ex-employee of confidential information concerning the customers of his former employer. But there is no reliable test for determining when a list is secret, nor is there agreement as to the type of customer information which will be considered confidential. Further, the employer has been protected in many cases where the identity of the customers could not be classified as secret, as in the numerous cases where the courts have enjoined salesmen assigned to service a regular route. 43 A.L.R. 2d, Anno: Employee -- Restrictive Covenant -- Area, pp. 94, 316-21 (1958). Nor is the "fiduciary relationship" rationale particularly helpful. The fact that certain information is divulged only to the most trusted employees may be evidence of its confidential nature, but not all information revealed to such employees is necessarily confidential.

Where the list of customers is not secret, some courts have been inclined to grant relief where the employee's relationships with customers have been such as to create a substantial risk that he may be able to divert all or a part of their business. Absent secrecy, it is in cases where the employer's sole, or at least major, contact with his customers is through agents that there exists a real danger that the customers will come to regard their relationship with the agent as more important than the quality of products or services furnished by the employer, so that some of the customers may be persuaded, or even be willing, to forsake the employer and follow the employee. See Arthur Murray Dance Studios of Cleveland v. Witter, 62 Ohio L. Abs. 17, 105

N.E.2d 685, 705-09 (Common Pleas, Ohio 1952), for an enlightening discussion of the customer list problem. The "customer contact" approach is discussed in 73 Harv. L. Rev. 625, 657-61, supra.

It may be, as Crouch insists, that there is no evidence tending to show that the identity of plaintiff's customers is a secret, since plaintiff's president admitted potential buyers of the products sold by it could be ascertained by consulting the telephone directory or by touring the industrial section of a city. However, there is evidence to the effect that the important information relates not to the identity of particular businesses which might purchase plaintiff's products, but the identity of officers or other employees of such concerns who make the decisions concerning the purchase of such equipment. There is also evidence which at least tends to show that ascertaining the identity of such key personnel requires the expenditure of considerable time and money. While one may be justified in viewing with skepticism plaintiff's insistence that purchasers of industrial equipment try to keep the identities of their purchasing agents secret, such evidence stands uncontradicted.

In addition, there is testimony, uncontradicted, that because Crouch occupied a position of confidence, he acquired information concerning the credit ratings of plaintiff's customers and other useful customer data which, according to plaintiff's president, were strictly confidential and of great value to plaintiff in the conduct of his business. While the nature of such data was described in rather general terms, and the testimony of plaintiff's president concerning its confidential nature is not completely persuasive, in view of his insistence that such things as "telephone manners" and general accounting principles were also "secrets," we believe that such evidence, standing unchallenged, prevents the conclusion that the trial court abused its discretion in issuing the temporary injunction. See Ellis, Trade Secrets, Sec. 79 (1953).

That portion of the temporary injunction which prohibits Crouch from contacting plaintiff's suppliers is dissolved. In all other respects the order appealed from is affirmed.

The costs of this appeal are taxed one-half to appellant, W. L. Bedford, one-fourth to appellant, A. C. Crouch, and one-fourth to appellee, Swing Machinery Company, Inc.

UNITED STATES COURT OF APPEALS, NINTH CIRCUIT.

CHICAGO LOCK CO., Plaintiff-Appellee,

v.

Morris v. FANBERG and Victor Fanberg, Defendants-Appellants.

676 F.2d 400No. 80-5000.

Argued and Submitted Aug. 3, 1981.Decided May 6, 1982.

Before ELY and NORRIS, Circuit Judges, and PECKHAM, District Judge.

ELY, Circuit Judge:

The Chicago Lock Company (“the Company”), a manufacturer of “tubular” locks, brought suit against Morris and Victor Fanberg, locksmiths and publishers of specialized trade books, to enjoin the unauthorized dissemination of key codes for the Company's “Ace” line of tubular locks. The District Court granted summary judgment in favor of the Fanbergs as to the Company's federal claims of trademark infringement and unfair competition, but held trial on the common law claim of unfair competition under former Cal.Civ.Code s 3369.

The court concluded that the key codes for the Company's tubular locks were improperly acquired trade secrets and enjoined distribution of the Fanbergs' compilation of those codes. For the reasons set forth in this opinion, we reverse the District Court and order that judgment be entered in favor of the Fanbergs.

THE FACTS

Since 1933 the Chicago Lock Company, a manufacturer of various types of locks, has sold a tubular lock, marketed under the registered trademark “Ace,” which provides greater security than other lock designs. Tubular Ace locks, millions of which have been sold, are frequently used on vending and bill changing machines and in other maximum security uses, such as burglar alarms. The distinctive feature of Ace locks (and the feature that apparently makes the locks attractive to institutional and large-scale commercial purchasers) is the secrecy and difficulty of reproduction associated with their keys.

The District Court found that the Company “has a fixed policy that it will only sell a duplicate key for the registered series ‘Ace’ lock to the owner of record of the lock and on request of a bona fide purchase order, letterhead or some other identifying means of the actual recorded lock owner.” Finding of Fact No. 14, Excerpt of Record at 89. In addition, the serial number-key code correlations are maintained by the Company indefinitely and in secrecy, the Company does

not sell tubular key “blanks” to locksmiths or others, and keys to Ace locks are stamped “Do Not Duplicate.” See Excerpt at 86-91.

If the owner of an Ace lock loses his key, he may obtain a duplicate from the Company. Alternatively, he may have a proficient locksmith “pick” the lock, decipher the tumbler configuration, and grind a duplicate tubular key. The latter procedure is quicker than the former, though more costly. The locksmith will, to avoid the need to “pick” the lock each time a key is lost, record the key code (i.e., the tumbler configuration) along with the serial number of the customer's lock. See Excerpt at 92. Enough duplicate keys have been made by locksmiths that substantial key code data have been compiled, albeit noncommercially and on an ad hoc basis.

Appellant Victor Fanberg, the son of locksmith Morris Fanberg and a locksmith in his own right, has published a number of locksmith manuals for conventional locks. Realizing that no compilation had been made of tubular lock key codes, in 1975 Fanberg advertised in a locksmith journal, Locksmith Ledger, requesting that individual locksmiths transmit to him serial number-key code correlations in their possession in exchange for a copy of a complete compilation when finished. A number of locksmiths complied, and in late 1976 Fanberg and his father began to sell a two-volume publication of tubular lock codes, including those of Ace locks, entitled “A-Advanced Locksmith's Tubular Lock Codes.” In 1976 and 1977 Fanberg advertised the manuals in the Locksmith Ledger for $49.95 and indicated that it would be supplemented as new correlations became known. See Excerpt at 95-98. About 350 manuals had been sold at the time of trial. The District Court found that Fanberg “had lost or surrendered control over persons who could purchase the books,” id. at 98, meaning that nonlocksmiths could acquire the code manuals.

The books contain correlations which would allow a person equipped with a tubular key grinding machine to make duplicate keys for any listed Ace lock if the serial number of the lock was known. On some models, the serial numbers appear on the exterior of the lock face. Thus, Fanberg's manuals would make it considerably easier (and less expensive) for a person to obtain (legitimately or illegitimately) duplicate keys to Ace locks without going through the Company's screening process. This is what caused consternation to the Company and some of its customers. At no time did Fanberg seek, or the Company grant, permission to compile and sell the key codes. Nor did the individual locksmiths seek authorization from the Company or their customers before transmitting their key code data to Fanberg.

The Company filed a three-count complaint against the Fanbergs, alleging federal question jurisdiction and diversity of citizenship, on December 2, 1976. The complaint, see Excerpt at 1-12, was predicated on theories of trademark infringement under 15 U.S.C. §§ 1051 et seq., federal unfair competition under 15 U.S.C. §§ 1125(a), and California common law unfair competition under former Cal.Civ.Code s 3369. On November 17, 1977, Judge Enright granted summary judgment for the Fanbergs on the federal claims, but left intact the state law claim. See Excerpt at 32-34. The complaint was amended, see Excerpt at 38-46, and a four-day bench trial was held before Judge Kerr on January 23-26, 1979. On November 28, 1979, Judge Kerr entered judgment in favor of the Company and filed findings of fact and conclusions of law. See Excerpt at 75-121.

The court found that the Company's high security policy for its Ace tubular locks, of which the confidential key code data were a part, was a “valuable business or trade secret-type asset” of the Company, and that the Fanbergs' publication of their compilation of these codes so undermined the Company's policy as to constitute “common law unfair competition in the form of an unfair business practice within the meaning of Section 3369 of the Civil Code of the State of California,” as broadly interpreted in Barquis v. Merchants Collection Association, 7 Cal.3d 94, 496 P.2d 817, 101 Cal.Rptr. 745 (1972). Excerpt at 118-120. The court enjoined the Fanbergs from publishing or distributing any lists of key code correlations for the Company's registered series Ace tubular locks. See Excerpt at 121.

On this appeal the Fanbergs argue that the District Court erred on three grounds: (1) that the injunction against publication of their book constitutes a prior restraint prohibited by the First Amendment to the United States Constitution; (2) that the statute under which the injunction issued, former Cal.Civ.Code § 3369, is unconstitutionally vague; and (3) that the District Court applied erroneously the common law doctrine of trade secrets in concluding that the Fanbergs had committed an “unfair business practice” under Section 3369.

THE TRADE SECRETS CLAIM

Appellants argue that the District Court erroneously concluded that they are liable under Section 3369 for acquiring appellee's trade secret through improper means. We agree, and on this basis we reverse the District Court.

Although the District Court's Findings of Fact and Conclusions of Law are lengthy, the thrust of its holding may be fairly summarized as follows: appellants' acquisition of appellee's serial number-key code correlations through improper means, and the subsequent publication thereof, constituted an “unfair business practice” within the meaning of Section 3369. See Excerpt at 119-20. Even though the court did not make an explicit finding that appellee's serial number-key code correlations were protectable trade secrets, both appellants and appellee premise their appeal on such an “implicit” finding. See Brief of Appellee at 13-14. We think it clear that the District Court based its decision on a theory of improper acquisition of trade secrets, and in the following discussion we assume arguendo that appellee's listing of serial number-key code correlations constituted a trade secret.[FN2]

FN2. Both parties devote much of their argument to whether the Company's key code data properly constitutes a “trade secret” within the meaning of Restatement (First) of Torts s 757, comment b (1939). See Brief of Appellants at 30-33; Brief of Appellees at 13-20. Although for purposes of our holding we may assume arguendo that the correlations do constitute a trade secret, we think it clear that because the correlations are an unpatented compilation of information, they constitute a “trade secret” within the meaning of the Restatement as adopted by California courts. See Sinclair v. Aquarius Electronics, Inc., 42 Cal.App.3d 216, 222, 116 Cal.Rptr. 654, 658 (1974); Restatement (First) of Torts s 757, comment b (1939).

California courts have adopted the theory of trade secret protection set out in the Restatement (First) of Torts, § 757, and the comments thereto, in resolving disputes involving trade secrets. See Sinclair v. Aquarius Electronics, Inc., 42 Cal.App.3d 216, 116 Cal.Rptr. 654 (1974); Uribe v. Howie, 19 Cal.App.3d 194, 96 Cal.Rptr. 493 (1971); Cal Francisco Investment Corp. v. Vrionis, 14 Cal.App.3d 318, 92 Cal.Rptr. 201 (1971). Commission of this common law tort is enjoinable under the purview of “unfair competition” and “unlawful” or “unfair business practice” under Section 3369. See Barquis v. Merchants Collection Association, 7 Cal.3d 94, 496 P.2d 817, 101 Cal.Rptr. 745 (1972); Hesse v. Grossman, 152 Cal.App.2d 536, 313 P.2d 625, 627 (1957).

The pertinent portion of Section 757 of the Restatement provides:

One who discloses or uses another's trade secret, without a privilege to do so, is liable to the other if(a) he discovered the secret by improper means, or....(c) he learned the secret from a third person with notice of the facts that it was a secret and that the third person discovered it by improper means ...

....

Trade secrets are protected, therefore, in a manner akin to private property, but only when they are disclosed or used through improper means. Trade secrets do not enjoy the absolute monopoly protection afforded patented processes, for example, and trade secrets will lose their character as private property when the owner divulges them or when they are discovered through proper means. “It is well recognized that a trade secret does not offer protection against discovery by fair and honest means such as by independent invention, accidental disclosure or by so-called reverse engineering, that is, starting with the known product and working backward to divine the process.” Sinclair, 42 Cal.App.3d at 226, 116 Cal.Rptr. at 661.

Thus, it is the employment of improper means to procure the trade secret, rather than mere copying or use, which is the basis of liability. Restatement (First) of Torts, s 757, comment a (1939). The Company concedes, as it must, that had the Fanbergs bought and examined a number of locks on their own, their reverse engineering (or deciphering) of the key codes and publication thereof would not have been use of “improper means.” Similarly, the Fanbergs' claimed use of computer programs in generating a portion of the key code-serial number correlations here at issue must also be characterized as proper reverse engineering. Excerpt at 96, 100-01; Brief of Appellee at 29-30. The trial court found that appellants obtained the serial number-key code correlations from a “comparatively small” number of locksmiths, who themselves had reverse-engineered the locks of their customers. See Excerpt at 96-97. The narrow legal issue presented here, therefore, is whether the Fanbergs' procurement of these individual locksmiths' reverse engineering data is an “improper means” with respect to appellee Chicago Lock Company.

The concept of “improper means,” as embodied in the Restatement, and as expressed by the Supreme Court, connotes the existence of a duty to the trade secret owner not to disclose the secret to others. See Restatement (First) of Torts, § 757, comment h (1939). “The protection

accorded the trade secret holder (i.e., in this case the Company) is against the disclosure or unauthorized use of the trade secret by those to whom the secret has been confided under the express or implied restriction of disclosure or nonuse.” Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470, 475, 94 S.Ct. 1879, 1883, 40 L.Ed.2d 315 (1974).

Thus, under Restatement § 757(c), appellants may be held liable if they intentionally procured the locksmiths to disclose the trade secrets in breach of the locksmiths' duty to the Company of nondisclosure. See Restatement (First) of Torts, § 757, comment h (1939). Critical to the District Court's holding, therefore, was its conclusion that the individual locksmiths, from whom the Fanbergs acquired the serial number-key code correlations, owed an implied duty to the Company not to make the disclosures. See Excerpt at 116.

We find untenable the basis upon which the District Court concluded that the individual locksmiths owe a duty of nondisclosure to the Company. The court predicated this implied duty upon a “chain” of duties: first, that the locksmiths are in such a fiduciary relationship with their customers as to give rise to a duty not to disclose their customers' key codes without permission, see Excerpt at 116; and second, that the lock owners are in turn under an “implied obligation (to the Company) to maintain inviolate” the serial number-key code correlations for their own locks, see id.

The court's former conclusion is sound enough: in their fiduciary relationship with lock owners, individual locksmiths are reposed with a confidence and trust by their customers, of which disclosure of the customers' key codes would certainly be a breach. This duty, however, could give rise only to an action by “injured” lock owners against the individual locksmiths, not by the Company against the locksmiths or against the Fanbergs.

The court's latter conclusion, that lock owners owe a duty to the Company, is contrary to law and to the Company's own admissions. A lock purchaser's own reverse-engineering of his own lock, and subsequent publication of the serial number-key code correlation, is an example of the independent invention and reverse engineering expressly allowed by trade secret doctrine. See Sinclair, 42 Cal.App.3d at 226, 116 Cal.Rptr. at 661. Imposing an obligation of nondisclosure on lock owners here would frustrate the intent of California courts to disallow protection to trade secrets discovered through “fair and honest means.” See id. Further, such an implied obligation upon the lock owners in this case would, in effect, convert the Company's trade secret into a state-conferred monopoly akin to the absolute protection that a federal patent affords. Such an extension of California trade secrets law would certainly be preempted by the federal scheme of patent regulation. [Citations omitted.]

Appellants, therefore, cannot be said to have procured the individual locksmiths to breach a duty of nondisclosure they owed to the Company, for the locksmiths owed no such duty. The Company's serial number-key code correlations are not subject to protection under Restatement § 757, as adopted by the California courts, because the Company has not shown a breach of any confidence reposed by it in the Fanbergs, the locksmiths, or the lock purchasers - i.e., it has failed to show the use of “improper means” by the Fanbergs required by the Restatement.

The District Court's conclusion that the Fanbergs committed an “unfair business practice” under

Section 3369, therefore, must be reversed, and judgment should be entered in favor of appellants. In view of the foregoing we find it unnecessary to reach appellants' First Amendment and vagueness claims.

REVERSED AND REMANDED with instructions that judgment be entered in favor of defendants-appellants.

UNITED STATES COURT OF APPEALS SEVENTH CIRCUIT

SMITH

v.

DRAVO CORP.

203 F.2d 369April 10, 1953

Before DUFFY, LINDLEY and SWAIM, Circuit Judges.

LINDLEY

Plaintiffs appeal from a judgment for defendant entered at the close of a trial by the court without a jury. The complaint is in four counts: 1 and 2 charge an unlawful appropriation by defendant of plaintiffs' trade secrets relating to the design and construction and selling and leasing of freight containers; 3 and 4 aver infringement of plaintiffs' patents Nos. 2,457,841 and 2,457,842. Under count 1 plaintiffs seek: (a) to enjoin defendant from (1) competing with plaintiffs in the freight container business until such time as plaintiffs shall have re-established their container in the trade and (2) manufacturing any such container embodying the features of plaintiffs' design; (b) the surrender and destruction of defendant's containers and drawings and tools especially designed for the manufacture of the containers; (c) the assignment of all patents obtained by defendant on freight containers, container ships and lifting rigs; (d) an accounting of and payment to plaintiffs of the profits realized by defendant, together with threefold the amount of damages suffered by plaintiffs, as a result of the alleged unlawful appropriation of plaintiffs' trade secrets; (e) reasonable attorney's fees. Count 2 seeks recovery in the sum of $ 1,000,000 on a theory of unjust enrichment, while counts 3 and 4 demand the customary patent infringement relief of damages and injunction. We concern ourselves first with counts 1 and 2.

In the early 1940s Leathem D. Smith, now deceased, began toying with an idea which, he believed, would greatly facilitate the ship and shore handling and transportation of cargoes. As he was primarily engaged in the shipbuilding business, it was quite natural that his thinking was chiefly concerned with water transportation and dock handling. Nevertheless his overall plan encompassed rail shipping as well. He envisioned construction of ships especially designed to carry their cargo in uniformly sized steel freight containers. These devices (which, it appears, were the crux of his idea) were: equipped with high doors at one [**3] end; large enough for a man to enter easily; weather and pilfer proof; and bore collapsible legs, which (1) served to lock them to the deck of the ship by fitting into recesses in the deck, or to each other, when stacked, by reason of receiving sockets located in the upper four corners of each container, and (2) allowed sufficient clearance between deck and container or container and container for the facile insertion of a fork of a lift tractor, and (3) were equipped with lifting eyelets, which, together with a specially designed hoist, made possible placement of the containers upon or removal from a ship, railroad car or truck, while filled with cargo. The outer dimensions of the devices were such that they would fit compactly in standard gauge North American railroad cars, or narrow gauge South American trains, and in the holds of most water vessels.

World War II effectually prevented Smith from developing his conception much beyond the idea stage. Nevertheless blue prints were drawn in 1943, and in 1944, as a result of considerable publicity in trade journals and addresses delivered by Smith before trade associations, Agwilines, one of the principal New York ship operators, displayed great interest in the

proposals. Certain refined features, particularly in dimensions and folding legs, were the result of discussions between Smith and Agwilines' officials.

In 1945 production started, and in the fall of that year twelve containers were used by Agwilines in an experimental run. Relative success was experienced, with the result that, by the spring of 1946, Brodin Lines, Grace Lines, Delta Lines and Stockard, in addition to Agwilines, were leasing Safeway containers. (Leathem D. Smith Shipbuilding Company was the owner of the design and manufactured the containers. Safeway Container Corporation purchased the finished containers from the shipbuilding company and leased them to shippers.)

[The following drawing if from one of Smith’s patents for containers:

During this period the containers were occasionally seen on the docks. However, in view of their limited number (100) this was far from an every day occurrence. Further more, the details of their construction could not be ascertained by casual, distant appraisal. But, in the quest for acceptance, some minor construction details were revealed in the publicity material distributed throughout the shipping trade, including: the outer dimensions, cubic and weight capacities, placement of the lifting lugs, stacking sockets, double doors and the fact that the legs were folding. Three dimensional perspective illustrations demonstrated the use of the containers.

Up until this time the devices were of a 'knock-down' variety, i.e., they could be taken apart when not in use, thus enabling the user to conserve storage space when hauling a cargo for which they were not adapted. However, in the spring of 1946, having determined that return cargoes for which the containers could be employed were generally available, and that the cost of erecting and dismantling and empty 'knock-down' was greater than the cost of the hold space occupied by an empty container, the design was altered slightly so that future containers would be rigidly constructed. The first of the rigid type was placed in use in early 1947.

On June 23, 1946, Smith died in a sailing accident. The need for cash for inheritance tax purposes prompted his estate to survey his holdings for disposable assets. It was decided that the container business should be sold. Devices in process were completed but no work on new ones was started.

Defendant was interested in the Safeway container, primarily, it appears, for use by its subsidiary, the Union Barge Lines. In October 1946 it contacted Agwilines seeking information. It watched a loading operation in which Agwilines used the box. At approximately the same time, defendant approached the shipbuilding company and inquired as to the possibility of purchase of a number of the containers. It was told to communicate with Cowan, plaintiffs' eastern representative. This it did, and, on October 29, 1946, in Pittsburgh, Cowan met with defendant's officials to discuss the proposed sale of Safeways. But, as negotiations progressed, defendant demonstrated an interest in the entire container development. Thus, what started as a meeting to discuss the purchase of individual containers ended in the possible foundation for a sale of the entire business.

Based upon this display of interest, Cowan sent detailed information to defendant concerning the business. This included: (1) patent applications for both the 'knock-down' and 'rigid' crates; (2) blue prints of both designs; (3) a miniature Safeway container; (4) letters of inquiry from possible users; (5) further correspondence with prospective users. In addition, defendant's representatives journeyed to Sturgeon Bay, Wisconsin, the home of the shipbuilding company, and viewed the physical plant, inventory and manufacturing operation.

Plaintiffs quoted a price of $ 150,000 plus a royalty of $ 10 per unit. This was rejected. Subsequent offers of $ 100,000 and $ 75,000 with royalties of $ 10 per container were also rejected. Negotiations continued until January 30, 1947, at which time defendant finally rejected plaintiffs' offer.

On January 31, 1947 defendant announced to Agwilines that it 'intended to design and produce a shipping container of the widest possible utility' for 'coastal steamship application * * * (and) use * * * on the inland rivers and * * * connecting highway and rail carriers.' Development of the project moved rapidly, so that by February 5, 1947 defendant had set up a stock order for a freight container which was designed, by use of plaintiffs' patent applications, so as to avoid any

claim of infringement. One differing feature was the use of skids and recesses running the length of the container, rather than legs and sockets as employed in plaintiffs' design. However, Agwilines rejected this design, insisting on an adaptation of plaintiffs' idea. In short defendant's final product incorporated many, if not all, of the features of plaintiffs' design. So conceived, it was accepted by the trade to the extent that, by March 1948, defendant had sole some 500 containers. Many of these sales were made to firms who had shown considerable prior interest in plaintiffs' design and had been included in the prospective users disclosed to defendant.

One particular feature of defendant's container differed from plaintiffs: its width was four inches less. As a result plaintiffs' product became obsolete. Their container could not be used interchangeably with defendant's; they ceased production. Consequently the prospects of disposing of the entire operation vanished.

The foregoing is the essence of plaintiffs' cause of action. Stripped of surplusage, the averment is that defendant obtained, through a confidential relationship, knowledge of plaintiffs' secret designs, plans and prospective customers, and then wrongfully breached that confidence by using the information to its own advantage and plaintiffs' detriment.

Our jurisdiction of count 1 rests on the diverse citizenship of plaintiffs (citizens [**9] of Wisconsin and a Wisconsin corporation) and defendant (a Pennsylvania corporation). Eckert v. Braun, 7 Cir., 155 F.2d 517. Therefore, under Erie R. Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188, the law of the forum, Illinois, is determinative of the substantive issues raised. And this includes the Illinois law of conflict of laws. Klaxon Co. v. Stentor Electric Mfg. Co., Inc., 313 U.S. 487, 61 S.Ct. 1020, 85 L.Ed. 1477. Count 1 sounds in tort,- the misappropriation of trade secrets obtained through breach of a confidential relationship, Pidot v. Zenith Radio Corp., 1941, 308 Ill.App. 197, 31 N.E.2d 385; Aktiebolaget Bofors v. United States, 90 U.S.App.D.C. 92, 194 F.2d 145; Restatement, Torts, Sec. 757 (1939), the liability for which the courts of Illinois ascertain by the law of the place of the wrong. Whitney v. Madden, 400 Ill. 185, 79 N.E.2d 593. This is Pennsylvania, for it was there that the breach of confidence occurred by reason of defendant's employing the information acquired to its benefit and plaintiffs' detriment. Therefore, we look to the law of Pennsylvania.

In Macbeth-Evans Glass Co. v. Schnelbach, 239 Pa. 76, 86 A. 688, the Supreme Court of Pennsylvania painted, in broad strokes, the general picture of a claim of this nature, holding the essential elements to be: (1) existence of a trade secret, (2) communicated to the defendant (3) while he is in a position of trust and confidence and (4) use by the defendant to the injury of the plaintiff. This, then, is our broad basis for decision.

(1) The Existence of a Trade Secret

*** We assume that almost any knowledge or information used in the conduct of one's business may be held by its possessor in secret. *** We do not understand that defendant seriously contends otherwise. Rather its position is that the structural designs of plaintiffs' containers were disclosed by (1) public use of the containers and (2) publicity material freely circulated. Thus, defendant says, at the crucial time of communication, plaintiffs' knowledge was no longer secret, it had been publicly disclosed. As to the customer lists, defendant denies their very existence.

The [last] of these assertions can be disposed of readily. The evidence is undisputed that plaintiffs had in their possession, at the time of their negotiations with defendant, original letters of inquiry from numerous shipping companies and a consequential number of files of further

correspondence between plaintiffs and the inquirers. Together these comprised a valuable prospective customer list, the existence of which can in no way be challenged.

The continued secrecy of the construction plans presents a different question. The District Court entered the following finding of fact: ' * * * the record shows that Plaintiffs had published to the world, through public uses of the containers and unrestricted publications by circulars and in trade magazines, complete information concerning the subject-matter with which the material (the patent applications and plans) * * * was concerned.' From this the court concluded that no secrets were confidentially disclosed to defendant.

The publicity material did not, in any way, disclose plaintiffs' design. The outward dimensions were revealed, and the fact that the container employed large double doors, lifting eyelets, stacking sockets and folding legs was publicized. But this was not equivalent to a disclosure of the structural design, the engineering details, of either the container as a whole or its various working parts. These could be obtained only by careful inspection of the article and the drawings. Therefore, in this respect the finding of fact that plaintiffs had, through unrestricted publications in trade magazines and circulars, 'Published * * * complete information concerning the subject', was clearly erroneous and must be set aside.

There is no dispute that 100 of plaintiffs' products had been in public use at the time of the communication. There is, however, serious debate over the legal consequences of this fact. The lower court, in refusing plaintiffs recovery, applied the following conclusion of law: 'There can be no confidential disclosure where, as here, the alleged novel container was being manufactured and sold. * * * and all information concerning its construction was available from an inspection of the container.' Certain cases appear to give support to this broad statement. See, e.g., Sandlin v. Johnson, 8 Cir., 141 F.2d 660; Northup v. Reish, 7 Cir., 200 F.2d 924; Carver v. Harr, [**14] 132 N.J.Eq. 207, 27 A.2d 895. But, close examination reveals that the inquiry is much deeper than whether 'all information * * * was available from an inspection of the containers.'

As a starting point we must look again to Pennsylvania for our guide. In Pressed Steel Car Co. v. Standard Steel Car Co., 210 Pa. 464, 60 A. 4, 7, plaintiff sought to protect its secret construction design for railroad cars. These plans had been obtained by defendant through a known breach of confidence. It was urged by defendant that because it could have obtained the design from an inspection of the car (which was in public use) its use of knowledge gained through improper means would be condoned. In short, defendant suggested, as does defendant here, that the existence of a lawful means of acquiring the information precluded recovery for the employment of unlawful means. The court said:

' * * * these engineers and draftsmen * * * should have been able to measure the cars made by the company, and to produce in a short time detailed and practical drawings from which the cars could be constructed. They did not do this, for the obvious reason that blue prints of drawings were available and were accurate. * * * '

The court then affirmed recovery for the plaintiff.

Thus, Pennsylvania will not deny recovery merely because the design could have been obtained through inspection. Rather, the inquiry in that jurisdiction appears to be: How did defendant learn of plaintiffs' design? And this, we regard as the proper test. It recognizes the very nature of the type of wrong with which we are here concerned. Confidential business information is not

given protection merely as a reward to its accumulator. If the creator is entitled to reward it is available to him in the patent and copyright statutes. Nims, Unfair Competition and Trade Marks, Sec. 142. Instead our function is that of condemning 'the employment of improper means to procure the trade secret.' Restatement, Torts, Sec. 757, comment. Those who gain their information improperly are brought to book in recognition of 'the general principle that intentionally inflicted harm is actionable unless privileged.' Protection and Use of Trade Secrets, 64 Harv.L.Rev. 976.

It is unquestionably lawful for a person to gain possession, through proper means, of his competitor's product and, through inspection and analysis, create a duplicate, unless, of course, the item is patented. But the mere fact that such lawful acquisition is available does not mean that he may, through a breach of confidence, gain the information in usable form and escape the efforts of inspection and analysis. 'The fact that a trade secret is of such a nature that it can be discovered by experimentation or other fair and lawful means does not deprive its owner of the right to protection from those who would secure possession of it by unfair means.' Nims, Unfair Competition and Trade Marks, Sec. 148.

*** It is, therefore, our conclusion, that the District Court applied an erroneous conclusion of law to the facts at hand. Here was no simple device, widely circulated, the construction of which was ascertainable at a glance. Cf. Carver v. Harr, 132 N.J.Eq. 207, 27 A.2d 895 and Northup v. Reish, 7 Cir., 200 F.2d 924. If such were the case our problem would be simple. Instead we are concerned with a relatively complex apparatus; designed to carry large and heavy amounts of cargo; proper inspection of which was, perhaps, accessible to defendant but, in no way shown to have been made. Under such circumstances the District Court's conclusion that plaintiffs no longer possessed a trade secret at the time of their negotiations with defendant was erroneous.

(2) Communication of the Secret Information to Defendant

Here we are concerned solely with a question of fact which the trial court decided adversely to plaintiffs in the following language:

'25. For the purpose of enabling Dravo to appraise the worth of the Safeway Container business, Cowan sent Dravo a model, several patent applications, an unassorted group of letters from users and potential users, a report of its patent attorney * * * and several drawings.'

'28. Out of the thousands of pages of papers in the many exhibits introduced by Plaintiffs * * * it is impossible to determine what particular papers or drawings, referred to in finding 25, were sent * * * to the Defendant * * * .'

In this context, finding 28 was equivalent to a finding that plaintiffs had failed to prove communication of the secret information to defendant. And, of course, this was fatal to plaintiffs' case. We think the finding is clearly erroneous for the following reasons. First, defendant stipulated prior to trial that it had received plaintiffs' exhibits 46, which is the application for a patent on the rigid container, and 47-1 through 47-38, which are original letters of inquiry and further correspondence files. Secondly, plaintiffs' exhibit 56 is a letter from

defendant to Cowan notifying the latter of the return to plaintiffs, defendant, of (1) patent applications relating to the containers, (2) correspondence files, (3) a miniature Safeway container and (4) 'drawings'. These drawings were identified by the testimony of Stearn and Cowan as plaintiffs' exhibit 53, blue prints of both the 'knock-down' and 'rigid' containers. Thus, by stipulation and a letter, supplemented in slight detail by plaintiffs' witnesses, defendant admitted receipt, at the time of the negotiations, of the information upon which plaintiffs predicated their case and which we have herein held to have been secret information.

(3) Was Defendant in a Position of Trust and Confidence at the Time of the Disclosure?

Mr. Justice Holmes once said that the existence of the confidential relationship is the 'starting point' in a cause of action such as this. E. I. DuPont de Nemours Powder Co., v. Masland, 244 U.S. 100, 102, 37 S.Ct. 575, 61 L.Ed. 1016. While we take a slightly different tack, there is no doubt as to the importance of this element of plaintiffs' case.

*** Here plaintiffs disclosed their design for one purpose, to enable defendant to appraise it with a view in mind of purchasing the business. There can be no question that defendant knew and understood this limited purpose. Trust was reposed in it by plaintiffs that the information thus transmitted would be accepted subject to that limitation. '(T)he first thing to be made sure of is that the defendant shall not fraudulently abuse the trust reposed in him. It is the usual incident of confidential relations. If there is any disadvantage in the fact that he knew the plaintiffs' secrets, he must take the burden with the good.' [**22] E. I. DuPont de Nemours Powder Co. v. Masland, 244 U.S. 100 at page 102, 37 S.Ct. 575, at page 576, 61 L.Ed. 1016.

Nor is it an adequate answer for defendant to say that the transactions with plaintiffs were at arms length. So, too, were the overall dealings between plaintiffs and defendants in Booth v. Stutz Motor Car Co., 7 Cir., 56 F.2d 962; Allen-Qualley Co. v. Shellmar Products Co., D.C., 31 F.2d 293, affirmed, 7 Cir., 36 F.2d 623 and Schavoir v. American Rebonded Leather Co., 104 Conn. [*377] 472, 133 A. 582. That fact does not detract from the conclusion that but for those very transactions defendant would not have learned, from plaintiffs, of the container design. The implied limitation on the use to be made of the information had its roots in the 'arms-length' transaction.

(4) The Improper Use by Defendant of the Secret Information

Defendant's own evidence discloses that it did not begin to design its container until after it had access to plaintiffs' plans. Defendant's engineers admittedly referred to plaintiffs' patent applications, as they said, to avoid infringement. It is not disputed that, at the urging of Agwilines, defendant revised its proposed design to incorporate the folding leg and socket principles of plaintiffs' containers. These evidentiary facts, together with the striking similarity between defendant's and plaintiffs' finished product, were more than enough to convict defendant of the improper use of the structural information obtained from plaintiffs.

[The customer lists were also protected secrets that were misappropriated.]

All that remains in this branch of the case is to outline the relief to which plaintiffs are entitled. Initially defendant must be enjoined from making further use of the information received from plaintiffs in confidence. Allen-Qualley Co. v. Shellmar Products Co., D.C., 31 F.2d 293,

affirmed, 7 Cir., 36 F.2d 623; Pressed Steel Car Co. v. Standard Steel Car Co., 210 Pa. 464, 60 A. 4. This may be accomplished by enjoining further production and sale of shipping containers incorporating plaintiffs' design. However, we do not think it necessary that the equipment used by defendant in this venture be destroyed. It may be that it is adaptable to other purposes. The injunction against continued use of the secret information should adequately protect plaintiffs in the future. Nor should defendant be totally restrained from continuing to engage in the container business. The injunctive relief should be restricted to the benefits flowing from the breach of the confidential relationship.

The record discloses that the taking of evidence relating to monetary recovery was deferred until after the presentation of the proof upon the issues herein discussed. Consequently the cause must be remanded for the purpose of hearing such evidence as the parties desire to present on this issue. However, we deem it proper to suggest that, in our opinion, plaintiffs are entitled to recover (1) the loss suffered with respect to their investment, Package Closure Corp. v. Sealright Co., 2 Cir., 141 F.2d 972 and (2) the profits realized by defendant as a result of the use of plaintiffs' design. Booth v. Stutz Motor Car Co., 7 Cir., 56 F.2d 962. There is, however, no basis upon which a threefold award of damages can be made. Nor are plaintiffs entitled to attorney's fees.

***

UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT

E.I. DUPONT DENEMOURS & COMPANY, INC., Plaintiff-Appellee,

v.

ROLFE CHRISTOPHER ET AL., Defendants-Appellants

No. 28254

431 F.2d 1012; 1970 U.S. App. LEXIS 8091; 167 U.S.P.Q. (BNA)1; 167 U.S.P.Q. (BNA) 1; 166 U.S.P.Q. (BNA) 421, cert. denied, 400 U.S. 1024 (1971)

July 20, 1970

Wisdom, Goldberg and Ingraham, Circuit Judges.

GOLDBERG, Circuit Judge:

This is a case of industrial espionage in which an airplane is the cloak and a camera the dagger. The defendants-appellants, Rolfe and Gary Christopher, are photographers in Beaumont, Texas. The Christophers were hired by an unknown third party to take aerial photographs of new construction at the Beaumont plant of E. I. duPont deNemours & Company, Inc. Sixteen photographs of the DuPont facility were taken from the air on March 19, 1969, and these photographs were later developed and delivered to the third party.

DuPont employees apparently noticed the airplane on March 19 and immediately began an investigation to determine why the craft was circling over the plant. By that afternoon the investigation had disclosed that the craft was involved in a photographic expedition and that the Christophers were the photographers. DuPont contacted the Christophers that same afternoon and asked them to reveal the name of the person or corporation requesting the photographs. The Christophers refused to disclose this information, giving as their reason the client's desire to remain anonymous.

Having reached a dead end in the investigation, DuPont subsequently filed suit against the Christophers, alleging that the Christophers had wrongfully obtained photographs revealing DuPont's trade secrets which they then sold to the undisclosed third party. DuPont contended that it had developed a highly secret but unpatented process for producing methanol, a process which gave DuPont a competitive advantage over other producers. This process, DuPont alleged, was a trade secret developed after much expensive and time-consuming research, and a secret which the company had taken special precautions to safeguard. The area photographed by the Christophers was the plant designed to produce methanol by this secret process, and because the plant was still under construction parts of the process were exposed to view from directly above the construction area. Photographs of that area, DuPont alleged, would enable a skilled person to deduce the secret process for making methanol. DuPont thus contended that the Christophers had wrongfully appropriated DuPont trade secrets by taking the photographs and delivering them to

the undisclosed third party. In its suit DuPont asked for damages to cover the loss it had already sustained as a result of the wrongful disclosure of the trade secret and sought temporary and permanent injunctions prohibiting any further circulation of the photographs already taken and prohibiting any additional photographing of the methanol plant.

The Christophers answered with motions to dismiss for lack of jurisdiction and failure to state a claim upon which relief could be granted. Depositions were taken during which the Christophers again refused to disclose the name of the person to whom they had delivered the photographs. DuPont then filed a motion to compel an answer to this question and all related questions.

On June 5, 1969, the trial court held a hearing on all pending motions and an additional motion by the Christophers for summary judgment. The court denied the Christophers' motions to dismiss for want of jurisdiction and failure to state a claim and also denied their motion for summary judgment. The court granted DuPont's motion to compel the Christophers to divulge the name of their client. Having made these rulings, the court then granted the Christophers' motion for an interlocutory appeal under 28 U.S.C.A. § 1292(b) to allow the Christophers to obtain immediate appellate review of the court's finding that DuPont had stated a claim upon which relief could be granted. Agreeing with the trial court's determination that DuPont had stated a valid claim, we affirm the decision of that court.

This is a case of first impression, for the Texas courts have not faced this precise factual issue, and sitting as a diversity court we must sensitize our Erie antennae to divine what the Texas courts would do if such a situation were presented to them. The only question involved in this interlocutory appeal is whether DuPont has asserted a claim upon which relief can be granted. The Christophers argued both at trial and before this court that they committed no "actionable wrong" in photographing the DuPont facility and passing these photographs on to their client because they conducted all of their activities in public airspace, violated no government aviation standard, did not breach any confidential relation, and did not engage in any fraudulent or illegal conduct. In short, the Christophers argue that for an appropriation of trade secrets to be wrongful there must be a trespass, other illegal conduct, or breach of a confidential relationship. We disagree.

It is true, as the Christophers assert, that the previous trade secret cases have contained one or more of these elements. However, we do not think that the Texas courts would limit the trade secret protection exclusively to these elements. On the contrary, in Hyde Corporation v. Huffines, 1958, 158 Tex. 566, 314 S.W.2d 763, the Texas Supreme Court specifically adopted the rule found in the Restatement of Torts which provides:

"One who discloses or uses another's trade secret, without a privilege to do so, is liable to the other if (a) he discovered the secret by improper means, or

(b) his disclosure or use constitutes a breach of confidence reposed in him by the other in disclosing the secret to him * * *."

Trade Secret Cases 64

Restatement of Torts § 757 (1939).

Thus, although the previous cases have dealt with a breach of a confidential relationship, a trespass, or other illegal conduct, the rule is much broader than the cases heretofore encountered. Not limiting itself to specific wrongs, Texas adopted subsection (a) of the Restatement which recognizes a cause of action for the discovery of a trade secret by any "improper" means.

The defendants, however, read Furr's Inc. v. United Specialty Advertising Co., Tex.Civ.App.1960, 338 S.W.2d 762, writ ref'd n.r.e., as limiting the Texas rule to breach of a confidential relationship. The court in Furr's did make the statement that

"The use of someone else's idea is not automatically a violation of the law. It must be something that meets the requirements of a 'trade secret' and has been obtained through a breach of confidence in order to entitle the injured party to damages and/or injunction.” 338 S.W.2d at 766 (emphasis added).

We think, however, that the exclusive rule which defendants have extracted from this statement is unwarranted. In the first place, in Furr's the court specifically found that there was no trade secret involved because the entire advertising scheme claimed to be the trade secret had been completely divulged to the public. Secondly, the court found that the plaintiff in the course of selling the scheme to the defendant had voluntarily divulged the entire scheme. Thus the court was dealing only with a possible breach of confidence concerning a properly discovered secret; there was never a question of any impropriety in the discovery or any other improper conduct on the part of the defendant. The court merely held that under those circumstances the defendant had not acted improperly if no breach of confidence occurred. We do not read Furr's as limiting the trade secret protection to a breach of confidential relationship when the facts of the case do raise the issue of some other wrongful conduct on the part of one discovering the trade secrets of another. If breach of confidence were meant to encompass the entire panoply of commercial improprieties, subsection (a) of the Restatement would be either surplusage or persiflage, an interpretation abhorrent to the traditional precision of the Restatement. We therefore find meaning in subsection (a) and think that the Texas Supreme Court clearly indicated by its adoption that there is a cause of action for the discovery of a trade secret by any "improper means." Hyde Corporation v. Huffines, supra.

The question remaining, therefore, is whether aerial photography of plant construction is an improper means of obtaining another's trade secret. We conclude that it is and that the Texas courts would so hold. The Supreme Court of that state has declared that "the undoubted tendency of the law has been to recognize and enforce higher standards of commercial morality in the business world." Hyde Corporation v. Huffines, supra 314 S.W.2d at 773. That court has quoted with approval articles indicating that the proper means of gaining possession of a competitor's secret process is "through inspection and analysis" of the product in order to create a


duplicate. K & G Tool & Service Co. v. G & G Fishing Tool Service, 1958, 158 Tex. 594, 314 S.W.2d 782, 783, 788. Later another Texas court explained:

"The means by which the discovery is made may be obvious, and the experimentation leading from known factors to presently unknown results may be simple and lying in the public domain. But these facts do not destroy the value of the discovery and will not advantage a competitor who by unfair means obtains the knowledge without paying the price expended by the discoverer." Brown v. Fowler, Tex.Civ.App.1958, 316 S.W.2d 111, 114, writ ref'd n.r.e. (emphasis added).

We think, therefore, that the Texas rule is clear. One may use his competitor's secret process if he discovers the process by reverse engineering applied to the finished product; one may use a competitor's process if he discovers it by his own independent research; but one may not avoid these labors by taking the process from the discoverer without his permission at a time when he is taking reasonable precautions to maintain its secrecy. To obtain knowledge of a process without spending the time and money to discover it independently is improper unless the holder voluntarily discloses it or fails to take reasonable precautions to ensure its secrecy.

In the instant case the Christophers deliberately flew over the DuPont plant to get pictures of a process which DuPont had attempted to keep secret. The Christophers delivered their pictures to a third party who was certainly aware of the means by which they had been acquired and who may be planning to use the information contained therein to manufacture methanol by the DuPont process. The third party has a right to use this process only if he obtains this knowledge through his own research efforts, but thus far all information indicates that the third party has gained this knowledge solely by taking it from DuPont at a time when DuPont was making reasonable efforts to preserve its secrecy. In such a situation DuPont has a valid cause of action to prohibit the Christophers from improperly discovering its trade secret and to prohibit the undisclosed third party from using the improperly obtained information.

We note that this view is in perfect accord with the position taken by the authors of the Restatement. In commenting on improper means of discovery the savants of the Restatement said:

"f. Improper means of discovery. The discovery of another's trade secret by improper means subjects the actor to liability independently of the harm to the interest in the secret. Thus, if one uses physical force to take a secret formula from another's pocket, or breaks into another's office to steal the formula, his conduct is wrongful and subjects him to liability apart from the rule stated in this Section. Such conduct is also an improper means of procuring the secret under this rule. But means may be improper under this rule even though they do not cause any other harm than that to the interest in the trade secret. Examples of such means are fraudulent misrepresentations to induce disclosure, tapping of telephone wires, eavesdropping or other espionage. A complete catalogue of improper means is not possible. In general they are means which fall below the generally accepted standards of commercial morality and reasonable conduct." Restatement of Torts § 757, comment f at 10 (1939).


In taking this position we realize that industrial espionage of the sort here perpetrated has become a popular sport in some segments of our industrial community. However, our devotion to free wheeling industrial competition must not force us into accepting the law of the jungle as the standard of morality expected in our commercial relations. Our tolerance of the espionage game must cease when the protections required to prevent another's spying cost so much that the spirit of inventiveness is dampened. Commercial privacy must be protected from espionage which could not have been reasonably anticipated or prevented. We do not mean to imply, however, that everything not in plain view is within the protected vale, nor that all information obtained through every extra optical extension is forbidden. Indeed, for our industrial competition to remain healthy there must be breathing room for observing a competing industrialist. A competitor can and must shop his competition for pricing and examine his products for quality, components, and methods of manufacture. Perhaps ordinary fences and roofs must be built to shut out incursive eyes, but we need not require the discoverer of a trade secret to guard against the unanticipated, the undetectable, or the unpreventable methods of espionage now available.

In the instant case DuPont was in the midst of constructing a plant. Although after construction the finished plant would have protected much of the process from view, during the period of construction the trade secret was exposed to view from the air. To require DuPont to put a roof over the unfinished plant to guard its secret would impose an enormous expense to prevent nothing more than a school boy's trick. We introduce here no new or radical ethic since our ethos has never given moral sanction to piracy. The market place must not deviate far from our mores. We should not require a person or corporation to take unreasonable precautions to prevent another from doing that which he ought not do in the first place. Reasonable precautions against predatory eyes we may require, but an impenetrable fortress is an unreasonable requirement, and we are not disposed to burden industrial inventors with such a duty in order to protect the fruits of their efforts. "Improper" will always be a word of many nuances, determined by time, place, and circumstances. We therefore need not proclaim a catalogue of commercial improprieties. Clearly, however, one of its commandments does say "thou shall not appropriate a trade secret through deviousness under circumstances in which countervailing defenses are not reasonably available."

Having concluded that aerial photography, from whatever altitude, is an improper method of discovering the trade secrets exposed during construction of the DuPont plant, we need not worry about whether the flight pattern chosen by the Christophers violated any federal aviation regulations. Regardless of whether the flight was legal or illegal in that sense, the espionage was an improper means of discovering DuPont's trade secret.

The decision of the trial court is affirmed and the case remanded to that court for proceedings on the merits.


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