TradeSecrets12Sept20 06

Trade Secrets: 

Trade Secrets September 12, 2006

Trade Secret Elements: 

Trade Secret Elements Secrecy Economic value-competitive advantage Reasonable security measures

Electro-Craft Corp. v. Controlled Motion, Inc. et al. 332 N.W. 2d 890 (Minn. 1983): 

Electro-Craft Corp. v. Controlled Motion, Inc. et al. 332 N.W. 2d 890 (Minn. 1983) ECC and CMI mfg. Servo motors Mahoney (founder of CMI) was former employee of ECC and established customer relationships with STC and IBM while at ECC. ECC (P) sued CMI and Mahoney a former employee of ECC (D) for misappropriation of moving coil motor and brushless motor designs. Trial held and order issued enjoining CMI from mfg. any brushless or low inertia motor with dimensions within 10% of ECC’s 1125 motor or brushless motor for IBM. Damages awarded to ECC.

Slide4: 

CMI later found in contempt for ignoring order. Both sides appeal. Court to review whether ECC had trade secrets, did CMI take them, was relief appropriate. CMI says that ECC’s TS were not sufficiently specifically defined. Court agrees for brushless motor: No dimensions or tolerances in evidence; lower court found TS in general design procedures but issued injunction w/res to only dimensions of brushless motor.

Slide5: 

W/res to 1125 motor, ECC says the combination of details (dimensions , tolerances, adhesives and mfg. processes ) are TS and that the evidence of specific features of motors sold to STC identifies the information which is TS. Court agrees for 1125. Court looked at common-law and UTSA Court looked at 4 point Restatement test: 1) not be generally known or readily ascertainable; 2) provide competitive advantage; 3) be subject of intentions to keep confidential. Court found that ECC did not meet its burden to prove the existence of TS. Intentions of secrecy not enough. Did not use reasonable security efforts to maintain secrecy of 1125.

Slide6: 

Common law duty of confidentiality arising out of employer-employee relationship is only as to information which employer treated as secret. ECC’s failure to make reasonable security efforts to maintain secrecy was fatal to its claim of confidential relationship. Employee was not put on notice of the duty of confidentiality. “Misappropriation” is theft, bribery, misrepresentation, breach or inducement of breach of a duty to maintain secrecy, or espionage through electronic or other means. Since no secrecy measures and no notice to employee, no misappropriation.

Peggy Lawton Kitchens, Inc. v. Hogan et al.,466 N.E. 2d 138 (Mass. App. Ct. 1984): 

Peggy Lawton Kitchens, Inc. v. Hogan et al.,466 N.E. 2d 138 (Mass. App. Ct. 1984) PLK chocolate chip cookies were mediocre until “nut dust” was added to batter—then commercial success immediately. PLK carefully guarded recipe, concealed proportions and only long time trusted employee knew recipe. Hogan, a maintenance and equipment employee illicitly obtained recipe and left to start bakery—Hogie Bear CC cookies His Hogie Bear CC cookies were the same as PLK’s CC cookies and also used “nut dust” . Court said that even though basic CC cookie ingredients the same, nut dust was original ingredient and TS. Sales took off immediately so improved recipe had competitive value.

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Court says admonitions about secrecy and lack of employment contract is not fatal to PLK since Hogan had no experience in baking and used improper means to obtain recipe. Listing of “nut meal” on label is not publication-it does not give proportions nor what kind of nuts nor what part of nuts. Injunction was permanent and without territorial limit. Court said not a hardship because injunction only forbids use of PLK’s CC cookie recipe. There are other available CC cookie recipes.

Zotos International, Inc. v Young et al.830 F. 2d 350 (U.S. App. D.C. 1987) : 

Zotos International, Inc. v Young et al. 830 F. 2d 350 (U.S. App. D.C. 1987) Zotos (P) mfg. hair care products and had petitioned FDA for TS status of secret ingredient. FDA said no and P appealed to district court who remanded. FDA revised its TS procedures but still denied TS status to secret ingredient. Appeal to district court and now this appeal. Court found FDA procedure to be arbitrary and capricious. FDA adopted Restatement comment b definition of TS-analysis of six factors. FDA acknowledged other five factors met, but said secret ingredient could be reverse engineered. Appeals Court asks, why has it not been done in the last 20 years—FDA has no answer.

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Court remands to FDA to reconcile finding of ease of discoverability with fact of non-discovery over 20 year period. Court does not address constitutional claims. Says that FDA’s efforts to resolve the TS issues identified by the Court should dispose the objections to the agency’s application of its procedures.

Nowgrowski Insurance, Inc. v. Rucker et al., 971 P. 2d 936 (Wash. 1999) : 

Nowgrowski Insurance, Inc. v. Rucker et al., 971 P. 2d 936 (Wash. 1999) Former employees (D) were hired by a competitor (D) and then sued by former employer Nowgrowski Insurance (P). P alleges misappropriation of memorized customer lists that are protected under UTSA. District Court found that protection of the common-law and UTSA was not limited to written information. Written and memorized information protected. UTSA focuses on the nature of the information, not the form. Supreme Court affirms Appeals Court. Customer lists not entitled to TS protection if the information is readily ascertainable from public sources such as directories etc.

Slide12: 

Whether customer lists are protected depends on 1.whether list is a compilation of information. 2.whether list is valuable because it is unknown to others. 3.whether owner took reasonable security measures for secrecy. Yes to all inquiries for Nowgrowski Split of authority on “memorized lists”-agency rule gave agent right to use such unwritten information if not obtained in violation of agency duty. Common law prior to UTSA made no distinction between written and memorized information. UTSA is intended to abrogate only prior conflicting state law. No conflict with prior common law that protects intangible info.

John Felmlee et al. Lockett et al. 351 A. 2d 273 (Pa. 1976): 

John Felmlee et al. Lockett et al. 351 A. 2d 273 (Pa. 1976) Felmlee (P) sued Lockett et al (D) (his son-in-law) for using formulas, processes and molds for making soft fishing lures. P had patent on soft fishing lures, but the texture and natural fish color were the result of formulating known plastic components in special proportions (not patented). Formula locked up w/o access to others except owner. P told D the formula so he could function as plant manager. Eventually D left work and after 2 yrs. started his own business. The D lures were similar in structure, texture, color to P lures.

Slide14: 

Court will protect employer if employee had enforceable covenant restricting use or bound to secrecy by confidential relationship. Employer has no legally protectable TS in employee’s aptitude, skill, dexterity, manual and mental ability and such other subjective knowledge as he obtains while in the course of his employment. Employee has right to use unless he entered into a restrictive covenant. Pre-requisites for recovery of misappropriation by employer: 1)TS exists, 2) valuable to employer and in his business, 3) employer had right to use/enjoy, 4) TS communicated to employee while in position of trust/confidence so it would be unfair for him to use or disclose to prejudice of employer.

Slide15: 

Court found chemical formula for soft lures to be TS. Designs and molds to make lures not TS. Described in patent specification so public knowledge.

Pittsburgh Cut Wire Company v. Sufrin et al., 38 A. 2d 33 (1944): 

Pittsburgh Cut Wire Company v. Sufrin et al., 38 A. 2d 33 (1944) P mfg. paperclips and had developed new machine to make clips. D (Bradley) was former employee who drafted designs. P let him go and he went to competitor (Sufrin) and took sketches with him. Later made tracings from which were made blueprints. P sued D and sought injunction against use of machine, sale of clips and sought return of drawings. Court said Gem Clip Machine not new and used for many years. No secrecy for D’s work so he took sketches as was customary for draftsmen to do. No notice of secrecy or any contract. Since no restrictive covenant, D could use general knowledge and skills to make machine for Sufrin.

Healthcare Affiliated Services v. Lippany, 701 F. Supp. 1142 (7th Cir. 1987) : 

Healthcare Affiliated Services v. Lippany, 701 F. Supp. 1142 (7th Cir. 1987) P developed software for hospital management system, which D primarily developed. Had agreement not to disclose. D later developed a competing product derived in part from confidential information he learned from P. Court analyzed whether P was entitled to injunctive relief for misappropriation using four factors listed in Felmlee, supra. Applied the Restatement definition of TS from comment b. Computer software programs are a proper subject of TS protection. Looked at 6 factors to determine if TS exists. Confidential relationship created when employer turns over pre-existing TS to employee—secrecy pledge implied.

AMP, Inc. v. Fleischhacker, 823 F. 2d 1199, (7th Cir. 1987) : 

AMP, Inc. v. Fleischhacker, 823 F. 2d 1199, (7th Cir. 1987) P mfg. electrical connectors. D was high level employee who had access to a variety of sensitive information. Eventually left and went to competitor. P sued D alleging that he misappropriated confidential technical and business information. D had signed general confidentiality agreement but no restrictive covenant. Lower court found that the general information was a protectable business secret, but P had not shown that D compromised such information. On appeal, Court said general information not protected by confidentiality agreement. Without a restrictive covenant, Illinois court does not extend confidentiality to generalized business information.