RECENT DECISIONS IN TRADE SECRETS LAW: NEW 1997-1998 DECISIONS

NEW CASES

R. Mark Halligan, Esq.

mhallign@execpc.com Last Revision Date: 3/31/98

COPYRIGHT 1997-1998 R. MARK HALLIGAN, ESQ.

1. RSR Corp. v. EPA, 1997 U.S. App. LEXIS 5523 (2^nd Cir. 1997).

RSR operates a secondary lead smelting plant in Wallkill, New York near the Wallkill river. The lead smelting process generates industrial wastewater, which subjects the plant to the requirements of the Clear Water Acts (CWA), 33 U.S.C. § 1251 et seq.

RSR submitted compliance reports to the EPA which RSR marked "confidential" because the compliance reports contained confidential business information relating to production rates.

A third party, Carpenter Environmental Associates, made a FOIA request for public release of RSR’s CWA compliance reports. Upon receipt of Carpenter’s request, the EPA notified RSR that the request had been made and requested further information why the compliance reports fell under the confidential business exception to FOIA. The EPA also asked Carpenter to submit arguments as well. After consideration, EPA’s Regional Counsel concluded that the monthly production rates constitute "effluent data" under the CWA and therefore this information cannot be protected as confidential information under the FOIA "confidential business information" exemption. See 5 USC § 554(b)(4). The Second Circuit affirms the EPA Regional Counsel and District Court’s decision in favor of EPA.

FOIA DISCLOSURE OF EPA COMPLIANCE REPORTS RE EFFLUENT DATA NOT PROTECTED BY CONFIDENTIAL BUSINESS EXCEPTION.

2. Midgard Corp. v. Todd, 1997 U.S. App. LEXIS 3874 (10^th Cir. March 5, 1997).

Midgard was in the business of recycling waste products and its primary activity was grinding scrap wood and selling the resulting wood residue. In 1991-1992, Defendant Paul Todd held discussions with Midgard’s President about purchasing Midgard’s business and Todd was allegedly informed about various aspects of Midgard’s business, including the name of some of its wood-scrap suppliers, its pricing arrangements, its alleged exclusive arrangement to supply wood residue to a fiberboard manufacturer (Medite) and Midgard’s planned purchase of certain equipment.

Todd decided not to purchase the Company. In April, 1993, Todd entered into a contract to supply Medite with wood residue and Todd obtained wood scrap from some of the same suppliers that had previously sent their woodscrap to Midgard. In May, 1993, Midgard filed for Chapter 11 bankruptcy protection.

A trade secret misappropriation/tortious interference claim ensued and Midgard lost in trial court. The 10^th Circuit Court of Appeals affirms.

The Court of Appeals observes: "Like the bankruptcy court, we are hard-pressed to understand what this secret information is. Midgard claims only generally that the secret is "the compilation of information as to its customers, suppliers, pricing and practices." Midgard admitted that it told hundreds of people about its exclusivity agreement with Medite. Further, the names of Midgard’s scrap suppliers was easily ascertainable from directories, and the wood-grinding machine that Midgard was planning to buy (which Todd also bought) was an off-the-shelf machine advertised in trade publications. A trade secret must contain elements which are unique and not generally known or used in the trade.

GENERAL BUSINESS INFORMATION RELATING TO POSSIBLE SALE OF BUSINESS NOT PROTECTABLE AS TRADE SECRETS.

3. Litton Systems, Inc. v. Ssangyong, Corp., 1997 U.S. App. LEXIS 2386 (Fed. Cir. February 13, 1997).

Ssangyong ("SSY"), a Korean company, was held liable for unfair competition (trade secret misappropriation) under Section 44 of the Lanham Act for misappropriation of Litton’s radar and microwave technology.

The original action was filed on October 25, 1989 against SSY, M-Square, and two of M-Square’s officers (former Litton employees), Rubin Lee and Paul Launderville.

Discovery established that in 1987 the chairman of SSY directed a representative to meet with Rubin Lee while he was still employed at Litton. This meeting resulted in the preparation of an M-Square business plan (with a proposed SSY investment in M-Square).

The trial court found that SSY was liable for the actions of M-Square because SSY was the "alter ego" of M-Square based upon SSY’s control of M-Square and M-Square’s undercapitalization.

Using a 1989 SSY business plan, the trial court awarded $27,496,000 as unjust enrichment based upon the expected stream of income set forth in the 1989 business plan. The Federal Circuit vacated this damages award. In cases of trade secret misappropriation, unjust enrichment is normally measured by the defendant’s profits on sales attributable to the trade secret. The defendant’s gain has also been measured by the cost savings that the defendant realized from using the trade secret. However, the district court’s theory of unjust enrichment as encompassing "unrealized expected gain" is unsupported in the law of unfair competition and cannot serve as a valid basis for an award of damages in this case.

The trial court held that Litton, a U.S. citizen, enjoyed a federal right to sue SSY, a foreign company of a signatory country, for an act of unfair competition. The Treaty of Friendship, Commerce and Navigation between the United States and Korea ensures "nationals and companies" of either country "national treatment" with respect to patents, trademarks and "industrial property of every kind."

Relying on Toho Co. v. Sears, Roebuck & Co., 645 F.2d 788 (9^th Cir. 1981), the Federal Circuit affirmed the trial court’s decision that Section 44 creates a federal cause of action that incorporates state law rights and remedies (e. trade secret misappropriation) in addition to the remedies of the Lanham Act to repress acts of unfair competition.

SECTION 44 OF THE LANHAM ACT CREATES A FEDERAL CAUSE OF ACTION FOR UNFAIR COMPETITION/TRADE SECRET MISAPPROPRIATION AGAINST FOREIGN COMPANIES.

4. Merckle v. Johnson & Johnson, 1997 U.S. Dist. LEXIS 5216 (D. N.J. April 15, 1997).

Merckle filed a lawsuit against Johnson & Johnson and Ortho Pharmaceutical Corp. alleging that defendants misappropriated Merckle’s trade secrets relating to erythropoietin ("EPO") protein, a hormone that stimulates the formation of red blood cells.

Defendants moved for summary judgment arguing that (1) Merckle publicly disclosed its formulation, (2) an identical product (HEMAX) was publicly available, (3) Merckle failed to adequately protect the confidentiality of its clinical trials, and (4) Defendants made no "competitive use" of Merckle’s trade secrets.

The Court denied Defendants’ motion for summary judgment construing the evidence most strongly in favor of the non-moving party (Merckle) as required by Rule 56, Federal Rules of Civil Procedure.

The Court noted that the resolution of questions regarding the alleged secrecy of Merckle’s formulation will rest largely on the credibility of witnesses and therefore summary judgment is inappropriate.

No one factor is dispositive of whether Merckle took reasonable precautions to protect its purported trade secrets. The test is one of reasonable, not absolute, precautions and the jury will be charged with considering the entire record to determine whether Merckle’s alleged trade secrets were, in fact, secret. As evidenced by the parties’ conflicting factual accounts, the resolution of the secrecy issues will hinge upon factual issues properly resolved by the factfinder.

Regarding the "competitive use" defense, the Court found scant case law regarding what constitutes detrimental uses to the trade secret owner. Further, Ortho argued that it used Merckle’s purported trade secrets only for the purpose of litigating its patent infringement claims against Merckle and Ortho therefore argued that its use of Merckle’s information was "privileged."

The Court rejected this privilege defense (where disclosure of information is relevant to public health or safety or to the commission of a crime or a theft) stating: "this case is not a whistleblower case."

The record in this case can be construed to indicate that Ortho disclosed Merckle’s purported trade secrets to the German courts to protect its own commercial interests—as evidence of patent infringement. Ortho’s reliance on a privilege theory is unavailing."

MOTION FOR SUMMARY JUDGMENT TO DISMISS TRADE SECRET MISAPPROPRIATION CLAIM ON LACK OF SECRECY AND PRIVILEGED USE ISSUES DENIED.

5. Blimpie International, Inc. v. ICA Menyforetagen, 1997 U.S. Dist. LEXIS 3950 (March 21, 1997).

Blimpie is a New Jersey corporation authorized to transact business in the State of New York. Defendant ICA is a Swedish corporation. Blimpie operates an international franchise system that licenses the right to own and operate "Blimpie" style restaurants.

Blimpie sued ICA in state court in New York for trade secret misappropriation, particularly Blimpie’s "Grab’n Go" concept. ICA approved the action to federal court and then moved to dismiss the action on the ground of forum non conveniens.

The relevant facts are as follows. ICA began to consider whether to expand its fast food business in Sweden and ICA retained the services of the Swedish American Chamber of Commerce, JFM International (an international convenience store consulting firm incorporated in the State of Mississippi) and SohlenRosenfeld Capital, Inc., a consulting firm in Minnesota.

On May 7, 1995, five ICA executives arrived in New York City to two various fast food establishments. During that visit, JRM arranged a meeting with Blimpie executives to discuss the Blimpie franchise system. During the Blimpie meeting, these Blimpie executives allegedly disclosed trade secret information, in confidence, to the ICA executives, including strategic plans and marketing strategies relating to the "Grab’n Go" marketing strategy. In affidavits filed by ICA, ICA denied that any trade secret information was discussed and denied that ICA made any assurances to hold any information shared by Blimpie in confidence.

Thereafter, ICA formed a subsidiary in Sweden and filed a trademark application for "Grab’n Go" in Sweden. Blimpie thereafter initiated litigation in Sweden to contest ICA’s Swedish application.

Applying a forum non conveniens analysis, the trial court noted that there is a strong presumption in favor of the Plaintiff’s choice of forum. However, the trial court may, in the exercise of discretion, dismiss a case on the grounds of forum non conveniens. Piper Aircraft Co. v. Regno, 454 U.S. 235 (1981).

Weighing both "private interest factors" and "public interest factors" the Court then dismissed Blimpie’s lawsuit.

The trial court found that ICA is subject to personal jurisdiction in Sweden and Sweden has a well-developed legal system capable of hearing Blimpie’s claims. With respect to the "private interest factors" analysis, the District Court observed that all of Blimpie’s causes of action stem from the alleged use in Sweden of information allegedly obtained during the course of meetings between Blimpie and ICA in New York. Moreover, the District Court found that ICA has no assets to satisfy a money judgment in the United States and no employees or operations to be bound by a judgment in the United States. Furthermore, Blimpie would be unable to enforce a U.S. judgment in a Swedish court because there exists no agreement between Sweden and the United States regarding the recognition and enforcement of judgments. The final factor cited was the unavailability of compulsory process for unwilling witnesses to testify in the United States.

Weighing the public interest factors, the District Court concluded that the effect of a judgment in this litigation would be felt predominantly in Sweden where Blimpie is attempting to expand and ICA is attempting to claim rights in the "Grab’n Go" concept.

TRADE SECRET LAWSUIT AGAINST SWEDISH COMPANY DISMISSED ON FORUM NON CONVENIENS GROUNDS.

6. Faith Freight Forwarding Corp. v. Ruiz, 1997 U.S. LEXIS 3641 (N.D. Ill. March 24, 1997).

Plaintiff (a Florida corporation) brought this trade secret misappropriation action against Ruiz (a citizen and resident of Costa Rica) and Defendant Seamax (a Missouri corporation with its principal place of business in Des Plaines, Illinois).

The Complaint alleged various theories of liability including civil conspiracy, breach of fiduciary duty, tortious interference with prospective economic advantage, usurpation of corporate opportunities, trade secret misappropriation and deceptive trade practice.

With respect to the trade secret misappropriation claim, the Court denied Defendants’ motion to dismiss the claim because Plaintiff alleged the existence of "trade secrets" that would have "economic value to any entity in competition" with Plaintiff, that such trade secrets could not be easily duplicated without significant time, effort and expense, and that Plaintiff took reasonable measures to preserve the confidentiality of the information. The Court also rejected Defendants’ "extraterritorial effect" argument. The Court noted that Plaintiff has alleged that Defendants "misappropriated" and "used" Plaintiff’s trade secrets acting within this judicial district. This is sufficient to allege that the defendants "inflicted" injuries in the State of Illinois which may be actionable under the Illinois Trade Secrets Act.

With respect to Plaintiff’s claim for attorneys fees and punitive damages, the Court granted Defendants’ motion to dismiss Plaintiff’s claim for punitive damages and attorney’s fees as to every cause of action except the claim under the Illinois Trade Secret Act (which provides for an award of attorneys fees and increased damages). The Court concluded: It is clear that Illinois follows the "American Rule" which provides that a party may not recover attorneys’ fees unless he prevails under a statute which authorizes them or unless the parties have contracted for the payment of attorney’s fees. See, e.g., Pennsylvania Truck Lines, Inc. v. Solar Equity Corp., 882 F.2d 221, 227 (7^th Cir. 1989); Krantz v. Chassick, 282 Ill. App. 3d 322 (Ill. Ct. App. 1996).

"EXTRATERRITORIAL EFFECT" DEFENSE REJECTED UNDER ILLINOIS TRADE SECRETS ACT.

7. Southwestern Energy, Co. v. Eickenhorst, 1996 U.S. Dist. LEXIS 2294 (W.D. Ark. February 5, 1997).

Southwestern Energy Company entered into an agreement with Enron Oil & Gas Company to permit Enron’s outside counsel (Marilyn Eickenhorst) to review Southwestern’s internal documents to resolve a dispute over Enron’s claims of unpaid royalties on certain oil and gas leases. Eickenhorst executed an agreement that the documents made available by Southwestern would only be used by Enron for purposes of negotiating a settlement of the claims and that the information would not be disseminated to any person or entity not necessary for the analysis and prosecution of such claims.

Thereafter, Eickenhorst used the Southwestern internal documents to prepare a class action suit on behalf of other royalty owners. Enron terminated its relationship with Eickenhorst. Eickenhorst thereafter filed a class action suit against Southwestern. Southwestern the sued Marilyn Eickenhorst for trade secret misappropriation seeking to enjoin Eickenhorst from using Southwestern’s internal files and documents in the class action.

Eickenhorst thereafter moved for summary judgment under the Arkansas Trade Secrets Act. Eickenhorst argued that there was no improper "acquisition" of Southwestern’s documents and there was no improper "use" of Southwestern’s documents because Eickenhorst was not using Southwestern’s internal documents to obtain an unfair competitive advantage.

The trial court reviewed the Arkansas Trade Secrets Act and noted that "misappropriation" is defined to include unauthorized acquisition, disclosure and use of trade secrets.

The Court agreed with Defendant Eickenhorst that the "use" prong of the statute require that the use be for competitive reasons in order to give rise to a cause of action under the Act. However, Defendant is nevertheless subject to liability under the "disclosure" prong of misappropriation because "public disclosure" of Southwestern’s secrets would render the protection under the Arkansas Trade Secrets Act meaningless. The Act is designed to prevent disclosure to third parties irrespective of motive so that the owner of the trade secret may reasonably maintain its secrecy. "If the Act allowed the information to freely pass into the public arena so long as the messenger had no anti-competitive reasons, then the Act would provide no real protection at all."

Defendant argued that there was no evidence of "disclosure" to third parties by Eickenhorst and Southwestern’s claim of alleged disclosure was speculative. The Court rejecting this argument noting that this case involves not simply the trade secrets themselves (production data, names and addresses of royalty, volume and price data) but a product derived from these trade secrets—the underlying claim and class action complaint. Proof of derivation removes the possibility of independent development and then further supports the court’s finding of misappropriation.

The Court also rejected Defendant’s argument that Plaintiff could not prove irreparable harm. In attempting to protect one’s secrets, it is not necessary to wait until actual harm occurs in order to enjoin use or disclosure. Such a rule would negate any real benefits to trade secrets protection because, under most scenarios, relief could not be obtained until after the secrecy was lost. Instead, injunctive relief is a tool by which the court provides protection of trade secrets by preventing disclosure or use. Under these circumstances, a reasonable trier of fact could conclude that plaintiffs are faced with a definite possibility of substantial future harm. If Southwestern can show that Eickenhorst will inevitably disclose trade secrets if she continues to represent the class action, then the irreparable harm element is satisfied.

ATTORNEY SUBJECT TO LIABILITY UNDER ARKANSAS TRADE SECRETS ACT FOR UNAUTHORIZED DISCLOSURE OF DOCUMENTS; COMPETITIVE USE DEFENSE SUSTAINED.

8. Supra Medical Corp. v. James R. McGonigle at al., 1997 U.S. Dist. LEXIS 986 (E.D. Pa. January 31, 1997).

Supra Medical Corp. filed suit on May 16, 1996 against eight defendants pursuant to the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1961 et seq. alleging that the defendants had engaged in a scheme to defraud Supra by misappropriating the Plaintiff’s proprietary interest in certain medical scanner equipment and technology.

Three of the defendants were physicians from the United Medical and Dental School in the United Kingdom (the "UMDS defendants"). The UMDS Defendants moved to dismiss the Complaint claiming immunity from suit under the Foreign Sovereign Immunities Act (FSIA), 28 U.S.C. § 1602 et seq.

The FSIA sets forth a comprehensive set of legal standards governing claims of immunity in any civil action against a foreign state, its political subdivisions, agencies or instrumentalities. The FSIA "provides the sole basis for obtaining jurisdiction over a foreign state in the courts of this country." Saudi Arabia v. Nelson, 507 U.S. 349 (1993). Unless one of the exceptions to the FSIA applies, a U.S. court lacks subject matter jurisdiction over a claim against a foreign state or its agency or instrumentality.

Upon examination of affidavits, the Court concluded that the medical school do not qualify as "an organ of the British government." The UMDS school provides medical and dental education in the United Kingdom and the governing body is a body corporate selected by private individuals. The Court concluded: "The UMDS Defendants’ assertions that the Schools were created by an Act of Parliament and receive a majority of funding from the state are insufficient to provide them with sovereign immunity under the FSIA.

Further, even assuming that UMDS were entitled to immunity as an agency or instrumentality of the British government, the FSIA’s commercial activity exception would strip the UMDS defendants of such immunity. 28 U.S.C. § 1605(a)(2).

The Court noted that at the heart of Plaintiff’s RICO claim are allegations that UMDS, Dr. Dyson and Hugh Lewis caused harm inside Pennsylvania [to Supra Medical Corp.], namely misappropriating the Plaintiff’s trade secrets or confidential business information while testing its proprietary technology [Supra Scanner Technology] in England.

The Court also rejected arguments of lack of personal jurisdiction, forum non conveniens, and improper service under the Hague Convention.

BRITISH MEDICAL SCHOOLS MUST DEFEND TRADE SECRET MISAPPROPRIATION/RICO CLAIMS IN FEDERAL COURT.

9. Hoffman-La Roche, Inc. v. Frank W. Yoder, M.D., 950 F.Supp. 1348 (S.D. Ohio 1997).

The issue presented in this case is whether documents provided to a physician (Frank W. Yoder, M.D.) by a pharmaceutical company (Hoffman-La Roche, Inc.) are protected trade secrets under Ohio’s Uniform Trade Secrets Act.

Dr. Yoder was a clinical investigator for Roche and he obtained 550 pages of documents in the late 1970s and early 1980s which allegedly contain "trade secret" information.

On March 20, 1996, the Court heard testimony on Plaintiff’s motion for a preliminary injunction to enjoin Dr. Yoder from selling the documents. Thereafter, the Court granted Defendant’s Rule 65(a)(2) motion to consolidate the hearing on the preliminary injunction with the trial on the merits.

On January 12, 1996, Dr. Yoder sent a letter to Roche enclosing a copy of an advertisement that he intended to sell his collection of documents relating to "ACCUTANE" and an unpublished transcript entitled "Accutane Induced Birth Defects—A Preventable Tragedy." This advertisement, published in The Columbus Daily Reporter on January 4, 1996 stated that the minimum bid would be $9.5 million dollars and 20% of the net proceeds will be designated for the prevention of birth defects. A similar advertisement appeared in The Washington Post on February 11, 1996. On February 27, 1996, Roche filed suit against Dr. Yoder seeking an injunction to prevent Dr. Yoder from selling or disseminating "any highly proprietary, confidential and trade secret information" Dr. Yoder received from Roche while he was a clinical investigator for Roche.

The 550 documents comprised three types of information: (1) protocols for clinical trials, (2)investigational drug brochures, and (3) correspondence between Roche and Dr. Yoder.

Applying the statutory definition of a "trade secret" in the Ohio Uniform Trade Secrets Act, the Court found that the information had independent "economic value" based on the $9.5 million price tag that Dr. Yoder himself placed on the information. With respect to "secrecy" requirements, the Court found that the protocols for clinical trials are readily ascertainable from public sources as well as two of the three contested drug brochures. The Court also found no alleged "trade secrets" in the correspondence. Also, the Court found that Roche failed to take reasonable measures to protect the alleged trade secret information. Dr. Yoder did not sign a written confidentiality agreement and the Court found no oral agreement. The documents were largely not marked confidential (only 3 out of 550). And, there was widespread dissemination of the information to 19 research centers across the country involved in the Accutane trials. The Court also found a lack of adequate internal and external controls on the documents (confidential documents were not locked or stored in a safe at all times contrary to Roche’s representations) and Roche had no policy for retrieval of these alleged confidential documents after disseminating these largely unmarked materials across the country. Motion for Preliminary Injunction Denied.

CLINICAL TRIAL INFORMATION NOT PROTECTABLE AS TRADE SECRET; INADEQUATE SECURITY MEASURES.

10. IDA Life Insurance Company v. SunAmerica, Inc., 1997 U.S. Dist. LEXIS 56 (N.D. Ill. January 2, 1997).

Evidence established that Plaintiffs suffered the loss of millions of dollars of insurance policies and mutual fund investments to Defendants. In a sampling of the accounts of customers formerly assigned to 72 agents who resigned from plaintiffs (IDS) to join defendants, in excess of $150 million had been diverted from Plaintiff’s accounts to Defendants’ accounts in the last two years.

With respect to the trade secret claims, the Court found, upon Plaintiffs’ motion for a preliminary injunction, that Plaintiffs have paid millions of dollars to develop confidential customer information and Plaintiff has taken reasonable measures to preserve the confidentiality of that information by having all agents sign contracts requiring the agents to maintain the confidentiality of such information and to return that information upon leaving plaintiff’s employment. The customer lists and customer information (customer names, addresses, and investment characteristics) have economic value and are likely to constitute trade secrets.

The Court also found a likelihood of success regarding "misappropriation" of trade secrets because the Defendants have obtained plaintiffs’ customer records through the agents they have hired for Plaintiff.

The Court rejected the argument that the Defendant companies could not be liable for the acts of misappropriation of the former agents. The UTSA bars this actual misappropriation of trade secrets and use of those trade secrets "by a person who knows or has reason to know that the trade secret was acquired by improper means." Thus, an employer or principal misappropriates trade secrets when it knowingly reaps the advantages of its employees’ or agents’ conversion of trade secrets from a former employer or principal. See, e.g. Pepsico, Inc. v. Redmond, 54 F.3d 1262, 1271 (7^th Cir. 1995); MAI Systems Corp. v. Peak Computer, Inc., 991 F.2d 511, 521-22 (9^th Cir. 1993).

INSURANCE CUSTOMER INFORMATION PROTECTIBILITY AS A TRADE SECRET AGAINST MISAPPROPRIATION BY FORMER AGENTS.

11. Baystate Technologies v. Bentley Systems, Inc., 946 F.Supp. 1079 (D. Mass. 1996).

Baystate Technologies, Inc. filed a six count complaint against Bentley Systems, Inc. alleging misappropriation of trade secrets, copyright infringement, violation of the Lanham Act, conversion, tortious interference with advantageous business relations, and unfair and deceptive trade practices. After a three-day bench trial, the Court found in favor of the Defendant on all counts.

With respect to the trade secret misappropriation claims, the Court found a lack of reasonable measures to preserve any trade secrecy and no evidence of misappropriation of the alleged trade secret information in the CADkey source code and tool kit information. For example, there was testimony at the trial that the Tool Kit source code was distributed without restriction to requesting third party developers.

INADEQUATE SECURITY MEASURES TO PROTECT SOURCE CODE AS TRADE SECRET.

12. JMP-Newcor International, Inc. v. Sourcing Solutions, Inc. 1996 U.S. Dist. LEXIS 19525 (N.D. Ill. 1996).

Plaintiffs moved for a temporary restraining order (TRO) against two former employees who suddenly resigned and set up a new company (Sourcing Solutions, Inc.) to compete with their former employer in the distribution of flatware and cutlery products.

The Court denied the TRO because "it is not clear at all, that the information about the identity of the manufacturers and the price structure rise to a level of a trade secret. Now it is clear that Defendants Martinson and Gronneberg have obtained customers from Plaintiff through the use of "confidential information."

Additionally, plaintiffs have not established how disclosure of information about the identity of the manufacturers and the price structure for the products enables a competitor to obtain economic advantage or value.

MOTION FOR TRO DENIED; INSUFFICIENT EVIDENCE OF A TRADE SECRET.

13. Powell Products, Inc. v. Frederick W. Marks et al., 948 F.Supp. 1469 (D. Colo. 1996).

Plaintiff produces plastic applicators having foam tips for use in the cosmetics industry. A former employee (Trey Marks) quit working for Plaintiff and took with him drawings and specifications relating to Plaintiff’s confidential machine design for producing these high quality foam applicators. Trey Marks and other defendants thereafter built a machine using the Plaintiff’s drawings and specifications for a new company, Accessories Plus. In June, 1995, the Court granted a preliminary injunction enjoining the defendants from various activities regarding applicator production using machines derived from Plaintiff’s confidential information.

Two defendants (Steve and David Wormser) who loaned the money to Trey Marks to build the machine for Accessories Plus moved for summary judgment on the trade secret misappropriation claim. Plaintiff, in turn, contended that because Steve and David Wormser provided Trey Marks with a large sum of money without inquiring into his qualifications to build the applicator machine, knowing that Trey Marks had worked for plaintiff and that plaintiff owned a confidential machine to produce applicators, a reasonable juror could find that they knew (or should have known) that Trey Marks would use Plaintiff’s trade secrets. This evidence would be sufficient to establish liability under 102(2)(b)(II)(e) or under 102(2)(a) because "a reasonable juror could find that Steve and David Wormser would not have provided Trey Marks and Accessories Plus with such large sums of money without first personally acquiring plaintiff’s trade secrets.

LENDERS LIABLE FOR TRADE SECRET MISAPPROPRIATION.

14. Gold Messenger, Inc. v. McGuay, 1997 Colo. App. LEXIS (April 17, 1997).

The Colorado Court of Appeals affirmed the entry of injunctive relief enforcing a restrictive covenant in a franchise agreement on April 17, 1997. Donald Kittelson began publishing an advertising circular known as "Gold Messenger." In 1992, after developing a comprehensive system for setting up and operating an advertising circular business, Kittelson began selling "Gold Messenger" franchises.

Defendant Jesse McGuay and his roommate purchased a Gold Messenger franchise. Jesse McGuay did not sign the franchise agreement itself but he signed the $1000 deposit check and was present for the negotiations to buy the franchise.

As part of the franchise, franchisee received Plaintiff’s Operations and Procedures Manual which details how to set up and operate a Gold Messenger franchise. The franchise agreement contains a covenant not to compete which provides that at the termination of the franchise, franchisee may not compete directly or indirectly with Gold Messenger for three years and within 50 miles of Gold Messenger franchise territories.

In January, 1996, after the franchisee failed to pay royalties under the agreement, plaintiff terminated the franchise agreement. Thereafter, Defendant McGuay began publishing a competing circular called "Penny Power."

Under Colorado law, any covenant not to compete which restricts the right of any person to receive compensation for performance of skilled or unskilled labor for any employer is void. Section 8-2-113(2) C.R.S. However, this statute does not apply to (1) any contract for the purchase and sale of a business or the assets of a business or (2) any contract for the protection of trade secrets.

The court noted that jurisdictions are split on the issue whether the creation of a franchise arrangement constitutes the sale of a business. See generally, Restrictive Covenant Not To Compete Ancillary to Franchise Agreement, 50 ALR 3d 746 (1973).

However, the court concludes that this covenant not to compete provision falls within the trade secret exception to Section 8-2-113(2). It is evident from the preamble to the franchise agreement, that the agreement was entered into with the express purpose of protecting trade secrets:

WHEREAS, Franchisor is the owner of certain techniques, know-how, trade secrets and procedures (the Know-How) which are used in connection with Franchisor’s Controlled Circulation Advertising Publication business and Franchisor’s Franchisees; and

WHEREAS, Franchisor [has] developed a unique system for operating [the] business, including business forms, bookkeeping and accounting materials and techniques, management and control systems, and, in general, a style, system, technique and method of business operation...

WHEREAS, Franchisee recognizes that it does not currently have the expertise contained in the developments as stated above and desires to use those developments pursuant to a franchise agreement...

WHEREAS, [Franchisee] has a full and adequate opportunity to be thoroughly advised of the terms and conditions of this Franchise Agreement by counsel of its own choosing; and

WHEREAS, the parties wish to enter in the following terms and conditions of this Franchise Agreement.

The covenant not to compete provides that the franchisee will not engage, in any fashion:

in any other business which offers or sells any product or service (or component thereof) which comprises or may in the future comprise a part of Franchisor’s franchise system or which competes directly or indirectly with Franchisor’s system, if such other business is located in or within fifty (50) miles of Franchisee’s Territory, or in or within fifty (50) miles of any other Territory which is part of Franchisor’s franchise system...

The Court thus concluded that the covenant not to compete provision, read in conjunction with the preamble, precludes the franchisee from using the confidential information contained in the manual to compete unfairly with the franchisor. Thus, by both its purpose and its scope, the covenant is, in essence, for the protection of trade secrets.

The Court then rejected Defendant’s argument that the Operations and Procedures manual did not contain any trade secrets. the franchise agreement expressly notes that the information, knowledge, and "know-how" contained in the manual are deemed confidential, and the trial court found that Gold Messenger had taken substantial steps to protect the confidential nature of the information.

The Court of Appeals also held that a non-signatory to a restrictive covenant agreement may be barred by the covenant not to compete based upon his or her relationship to the business in order to prevent a covenantor to do through others what the covenantor could not do directly. Where there is substantial evidence that a third party in "acting in concert" with the covenantor, the third party will be barred by the covenant not to compete.

RESTRICTIVE COVENANT IN FRANCHISE AGREEMENT ENFORCEABLE TO PROTECT TRADE SECRETS AGAINST THIRD PARTY ACTING IN CONCERT WITH FORMER FRANCHISEE.

15. Allen v. Hub Cap Heaven, Inc., 1997 Ga. App. LEXIS 300 (Ct. App. Georgia March 5, 1997).

Hub Cap Heaven, Inc. sued franchisees/defendant. (Clayton Allen, Barbara Hooper, Xanthus Holdings, Inc.) alleging fraud, theft of trade secrets and breach of nondisclosure and noncompetition clauses in a franchise agreement. Hub Cap Heaven franchises sell wheels, hubcaps and other automotive accessories. After Allen and Hooper (husband and wife) received training from Hub Cap Heaven, Allen helped others set up similar businesses (called "Hubcap Masters") in other cities. Xanthus rented a warehouse to sell inventory to the Hubcap Masters stores.

Hub Cap Heaven sought an injunction to prohibit the defendants from franchising, operating or advising others about the operation of stores selling hubcaps, wheels, and related automotive accessories. The trial court granted an injunction. The Court of Appeals reversed and vacated the injunction.

Appellants argued that the trial court could not validly base the injunction on the Georgia Trade Secrets Act because "the supposed secret business methods" of Hub Cap Heaven are actually "common practices" not protected by the Act. The President of Hub Cap Heaven admitted that other businesses in the United States use similar methods (taking trucks full of unordered parts to body shops and car dealers) and by its very nature this "secret" information is conveyed to every customer on the sales route. Therefore, this information is not a trade secret.

With respect to the information about suppliers, there was no evidence of any misappropriation of tangible lists of suppliers and customers. Under Georgia law, there must be evidence of the theft of tangible lists. Utilization of personal knowledge may be forbidden through the use of restrictive covenants but not under the Georgia Trade Secrets Act.

The Court of Appeals also rejected any injunctive relief for "breach of a confidential relationship." The franchise agreement specifically provides for an independent contractor relationship.

Finally, the Court of Appeals rejected any injunctive relief based upon enforcement of the restrictive covenant contained in the franchise agreement. The covenant not to compete clause stated: "Hooper would not compete with Hub Cap Heaven anywhere during the term of the agreement, or within 50 miles of ‘the location franchised’ for one year after the agreement was terminated."

The franchise was sold on June 26, 1995 so Defendants argued that the restrictive covenant expired of its own terms on June 26, 1996. Hub Cap Heaven argued that the covenant should start to run from the formal termination date in the contract (July 1, 1998) even though the franchise was terminated earlier. The Court agreed with the Defendants—it was error to enter an injunction past that date (June 26, 1996), which is when the covenant expired by its own terms.

The Court of Appeals also declared the nondisclosure clause void because "a nondisclosure clause with no time limit is unenforceable as to information that is not a trade secret." Because this covenant does not arise out of the sale of the business, one may not "blue-pencil" a term which is overbroad to impose a reasonable time limit.

INJUNCTION VACATED UNDER FRANCHISE AGREEMENT; NO TRADE SECRETS.

16. Servpro Industries, Inc. v. Schmidt, 1997 U.S. Dist. LEXIS 4013 (USDC N.D. Ill. March 31, 1997).

 Franchise dispute involving Servpro, a Tennessee corporation involved in the business of professional cleaning, deodorizing, restoration and related services. One of the issues before the United States District Court for the Northern District of Illinois was the enforceability of the non-competition clause.

The non-competition clause in the Servpro franchise agreement prevents an ex-franchisee from competing in the same kind of business covered by the franchise agreement for two years after termination within a ten mile radius of the area in which the franchisee rendered services.

The district court refused to enforce the covenant not to compete clause because Servpro failed to establish any legitimate business interest for the covenant not to compete provision. "Goodwill" is not a protectable interest in a franchise relationship because a franchise does not involve the sale of a business. There was also no evidence of near-permanent customer relationships or misuse of confidential business. The record established that Schmidt operated a competing business within the 10-mile radius but there was no evidence that any Servpro manuals, techniques or training manuals were used.

COVENANT NOT TO COMPETE PROVISION UNENFORCEABLE; NO EVIDENCE OF USE OF FRANCHISOR’S CONFIDENTIAL INFORMATION.

17. American Relocation Network International, Inc. v. Wal-Mart Stores, Inc., 1997 U.S. App. LEXIS 19189 (6th Cir. 7/21/97).

The Middle District of Tennessee granted summary judgment dismissing Plaintiff's trade secret misappropriation claim against Wal-Mart and the Plaintiff ("ARNI") appealed.

ARNI developed an idea to create a video real estate computer system that would show local, national, and worldwide real estate. ARNI (through Ms. Oldham VP) contacted Sam Walton in March 1990 in an attempt to gain interest and support for her idea. Ms. Oldham provided Wal-Mart with a blueprint containing her business plan. In November, 1990, Ms. Oldham called Wal-Mart a second time and forwarded additional information about her business plan.

On July 23, 1991, Mr. & Mrs. Oldham met with Sydney Thompson, VP of Llama, a Walton-owned investment banking group. During the meeting, Ms. Thompson took notes on ARNI's alleged trade secret, business plan, method of operation, income potential, prospectus, and computer system although Oldham did not disclose "the specific technology required to transmit the computer images in a cost-effective manner."

In August, 1991, the Oldhams sent Thompson statistics and information regarding market penetration. Ms. Thompson, in turn, provided the Oldhams with the name and telephone number of Dean Sanders, Wal-Mart's Executive VP of Operations. On October 14, 1991, Wal-Mart notified the Oldhams by letter that Wal-Mart was not interested in diversifying into the real estate arena and therefore were no longer interested in Oldham's system.

During the same time that ARNI was working on this real estate concept with Wal-Mart, Edwin Harwell, Chairman of the Board of Directors of American Parade of Homes, Inc. ("APH") also developed an idea for construing real estate services and APH and Wal-Mart entered into a contract on July 23, 1991 to test market the APH real estate system in Wal-Mart stores. This eventually lead to an agreement between APH and Wal-Mart executed on January 6, 1992 to lease space for Wal-Mart for its real estate operations.

On October 24, 1994, ARNI filed a trade secret misappropriation lawsuit against Wal-Mart, Llam Corp. and APH for violations inter alia of the Arkansas Uniform Trade Secrets Act and the Racketeer Influenced and Corrupt Organization Act ("RICO"), 18 U.S.C. ' ' 1961 et seq.

The Sixth Circuit Court of Appeals affirmed the District Court's dismissal of the lawsuit because ARNI had not shown any direct evidence of transfer of information and all of the defendants had signed affidavits that they had not used ARNI's information and the "record contains no contradicting evidence." The Court of Appeals concluded, construing the evidence most strongly in favor of ARNI, that there was only "indirect" evidence from which a reasonable jury could only "speculate" and therefore could not reasonably conclude, as a matter of law, that defendants made unauthorized use of ARNI's trade secret.

SUMMARY JUDGMENT MOTION DISMISSING "IDEA SUBMISSION" CLAIM AFFIRMED BY THE SIXTH CIRCUIT.

18. Glaxo, Inc. v. Novopharm, Ltd., 110 F.2d 1562 (Fed. Cir. April 4, 1997).

Glaxo appealed the dismissal, inter alia, of a state unfair competition claim based upon the violation of a trade secret protective order. The Federal Circuit affirms.

Glaxo and Novopharm have been involved in an ongoing dispute over Novopharm's efforts to market a generic version of Glaxo's highly successful anti-ulcer medication, Zantac.

In earlier litigation (Glaxo I), Dr. Lazarowych had access to documents and information produced during discovery which was marked "CONFIDENTIAL UNDER THE PROTECTIVE ORDER." In the state unfair competition claim based upon the Protective Order, Glaxo alleged that Dr. Lazarowych (as an expert witness in the prior Glaxo I litigation) violated the Protective Order by working with Novopharm and using such information to assist Novopharm in the development of its competing product in violation of the Protective Order which prohibited Dr. Lazarowych, without qualification, from using the information in any documents marked CONFIDENTIAL UNDER PROTECTIVE ORDER in competition with Glaxo. In this defense, Novopharm and Dr. Lazarowych argued that since the alleged information was now publicly available (in documents that were not under seal) that the use of the information cannot constitute an act of unfair competition.

The Federal Circuit (applying Fourth Circuit law) noted that complainant has the burden to prove civil contempt by clear and convincing evidence. Applying this standard, the Federal Circuit concluded that the district court did not clearly err in determining that neither Novopharm nor Dr. Lazarowych violated the Protective Order because Paragraph 14(a) of the Protective Order clearly states that it does not restrict the dissemination of information in "documents that are used as exhibits in Court (unless such exhibits were filed under seal)." Since Glaxo had "openly exposed the bulk of its confidential documents before the entire industry at the previous trial," dissemination or use of the allegedly sensitive information cannot now violate the Protective Order.

UNSEALED DOCUMENTS NOW CANNOT VIOLATE THE PROTECTIVE ORDER. UNSEALED DOCUMENTS IN PRIOR TRIAL NO LONGER SUBJECT TO TRADE SECRET PROTECTIVE ORDER.

18. Fun-Damental Too, Ltd. v. Universal Music Group, Inc.,1997 U.S. District LEXIS 9597 (E.D. Pa. July 8, 1997).

The Plaintiff (Fun-Damental Too, Ltd.) was the importer of a novelty toy called the "Shark Cookie Jar" which depicts a smiling shark holding a half-eaten surfboard and when the lid is opened, pre-recorded music starts playing similar to the theme song in "Jaws."

Plaintiff filed a declaratory judgment motion for a declaration that it was not infringing Defendants' federal copyrights and trademarks. Defendants (Universal Music Group, MCA, Inc, and Duchess Music Corporation) filed state law counterclaims and Plaintiff moved to dismiss on preemption grounds. Excellent discussion of copyright preemption principles.

In discussing federal copyright preemption issues, the District Court (Judge Stevout Dalcell) noted that the Copyright Act does not preempt claims of misappropriation of trade secrets, breach of confidential relationships, or breaches of fiduciary duties. Those claims contain an "extra element" of a breach of a duty of confidence.

With respect to trademark claims, there are two types: (1) reverse passing off (the wrongdoer sells the plaintiff's products as its own) and (2) "passing off" (where the wrongdoer sells its products as the plaintiff's products). The Copyright Act preempts a "reverse passing off" unfair competition claim because such a claim is grounded in the alleged unauthorized copying and use of another's copyrighted expression. However, the text of "passing off" is not preempted because such a claim alleges an extra element of deception or misappropriation that is not necessary for a copyright cause of action.

Using this analysis, the Court concluded that Defendants' unfair competition was more akin to a "reverse passing off" claim and concluded that it was preempted by Section 301 of the Copyright Act.

TRADE SECRET MISAPPROPRIATION/"PASSING OFF" UNFAIR COMPETITION CLAIMS NOT PREEMPTED BY COPYRIGHT ACT; "REVERSE PASSING OFF" CLAIMS ARE PREEMPTED.

20. Softel, Inc. v. Dragon Medical and Scientific Communications, Inc., 1997 U.S. App. LEXIS 16808 (2nd Cir. July 9, 1997).

Softel is a small New Hampshire corporation engaged in the business of creating and selling computer graphics products. Paul Fiondella is its President and sole shareholder. Dragon is a New Jersey corporation engaged in the business of designing communications programs relating to medical and scientific information.

Fiondella/Softel were retained on a number of different projects by Dragon to assist Dragon in developing medical software. Softel never provided the service code to Dragon just the "exceatables." When de-bugging was done at Dragon's offices in New York, Softel would erase the source code from Dragon's computers after the "bugs" were worked out.

There was a falling out between Fiondella and Dragon and Softel was no longer used to write programs. Apparently, a Dragon employee continued to use the Softel source code by "unerasing" it from the computer. Softel sued for copyright infringement/trade secret misappropriation.

The trial court found in favor of Softel on some trade secret misappropriation claims but rejected other claims because Fiondella had "freely discussed his use of menus, functional modules and external files" with Dragon. Also, the trial court dismissed certain trade secret claims in the source code because the elements were not novel or original.

Applying New York common law, the Second Circuit reversed the dismissal of these trade secret claims. The manner of the combination of the various design elements by Fiondella in the source code can qualify as a trade secret. Further, a user-oriented description of how the source code operates is not a disclosure of the trade secrets in the underlying source code, citing Integrated Cash Management Srvs. Inc. v. Digital Transactions, Inc., 920 F.2d 171, 174 (2nd Cir. 1990). Also, the Second Circuit admonished the trial court that "novelty" is the patent law sense is not required to establish a prima facie case of trade secret misappropriation, distinguishing the "idea submissions" line of cases. See Aptel v. Prudential Bank Securities, Inc., 81 N.Y. 20470, 616 N.E. 2d 1095 (2nd Cir. 1993).

The Second Circuit affirmed the trial court's decision that the trade secret damages were cooxtensive with the copyright infringement damages and therefore there could not be any double recovery for trade secret misappropriation. In this case, Dragon did not publish Softel's trade secrets and therefore Dragon did not destroy their value to Softel except to the extent that Dragon itself used them.

DISTRICT COURT ERRED IN DISMISSING "COMBINATION" COPMPUTER SOFTWARE SOURCE CODE CLAIMS; COPYRIGHT AND TRADE SECRET DAMAGE CLAIMS HELD TO BE COOXTENSIVE CLAIMS; DOUBLE RECOVERY NOT PERMITTED.

21. General Commercial Packaging, Inc. v. TPS Package Engineering, Inc., 114 F.3d 888 (9th Cir. June 4, 1997).

Under California law, "every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void." California Bus. & Professional Code Section 16600.

California courts (and the Ninth Circuit) have rejected a strict interpretation of Section 16600 and California courts have permitted partial restrictions under certain circumstances. "While the cases are uniform in refusing to enforce a contract wherein one is restrained from pursuing an entire business, trade or profession..., where one is barred from pursuing only a small or limited part of the business, trade or profession, the contract has been upheld as valid." Campbell v. Board of Trustees of Lehard Staford Junior Unis., 817 F.2d 499, 502 (9th Cir. 1987).

In the instant lawsuit, General Commerical Packaging, Inc. ("GCP") had a long-term customer relationship with Walt Disney Company ("Disney") in providing creating and packing services in Florida and California. With the new EuroDisneyland, GCP sought out a subcontractor to assist it in California and GCP hired TPS Package Engineering ("CTPS").

To protect its business relationships with Disney and other California customers, GCP required TPS to sign a contract which provided that during the term of the contract and for one year after termination of the contract, that neither TPS nor any of its employees will back-solicit or otherwise deal directly with Walt Disney companies, its affiliates and subsidiaries, or any other company which GCP has introduced to and contracted with TPS to perform packing and crating subcontrcating services. TPS agrees thgat any work (during this time period) is directly providers to or performs for any GCP client without GCP involvement or approval will result in an automatic 25% commission of gross invoice.

Afetr the GCP/TPS relationship was terminated, TPS began working directly for Disney. GCP sued TPS to enforce the contract and the federal district court granted summary judgment dismissing GCP's lawsuit based upon Section 16600 of the California Business & Professional Code.

Applying the Campbell rule, however, the Ninth Circuit reverses. The Court of Appeals noted that the contract only limits TPS's access to a narrow segment of the packing and shipping market not the entire market. TPS was not barred from soliciting work from any firm with which it had a prior relationship. GCP is entitled to summary judgment on its contract claim.

PARTIAL RESTRICTIVE COVENANTS ARE ENFORCEABLE IN CALIFORNIA.

22. Engineering Resources, Inc. v. CRS Steam, Inc., 1997 U.S. Dist. LEXIS 6101 (N.D. Ill. April 29, 1997).

On December 13, 1996, a jury awarded ERI $1,000,000 in compensatory damages against CRS and punitive damages ($20,000 against CRS and $130,000 against Defendant LeBlanc). Defendants filed a Rule 50(b) motion for judgment as a matter of law notwithstanding the verdict. Judge William T. Hart denied the Rule 50(b) motion.

The jury found (and the Court agreed) that ERI's customer information and applications engineering information constituted trade secrets under the Illinois Trade Secrets Act.

On the statute of limitations defense, Defendants argued that ERI knew prior to November 21, 1989 (more than 5 years prior to commencement of the lawsuit) that CRS entered into two contracts to sell its competing SteamBloc product and that ERI had purchased four SteamBloc products itself by that date (which was more than 5 years before the lawsuit was filed).

The Court held, though, that the jury could reasonably find that ERI could not have reasonably discovered the misappropriation prior to November 21, 1989 merely because ERI knew that a former employee's company, now a competitor, entered into customer contracts. ERI presented affirmative evidence that it did not discover Defendants' misappropriation until March, 1990 when it had the opportunity to inspect one of the defendant's installations.

Under the ITSA, damages can include "both the actual loss caused by misappropriation and the unjust enrichment caused by misappropriation that is not taken into account in computing actual loss." 765 ILCS 1065/4(a). Unjust enrichment is the profit made by others as a result of defendants' misappropriation. Mangren Research and Development Corp. v. National Chemical Co., 87 F.3d 937, 945 (7th Cir. 1996).

ERI presented evidence that CRS had gross sales of approximately $3,700,000 through 1996. As to various projects, LeBlanc testified that CRS's profit margin was 25 to 35 per cent. Further, the evidence established that 90 to 95 percent of CRS's products used the ERI nozzle.

Based upon this evidence, the jury could have determined that through 1996 defendants had profits in the range from $832,500 (25% of 90% of $3,700,000) to $1,230,250 (35% of 95% of $3,700,000). The jury verdict assessed damages of $1,000,000 within this acceptable range -- slightly below the midpoint of the range.

The Court entered a permanent injunction enjoining use of ERI's trade secrets with no definite term. The injunction shall remain in full force and effect until ERI's trade secrets become publicly known. At that time, Defendants can petition the Court to dissolve the injunction.

UNJUST ENRICHMENT DAMAGES AWARDED--PERMANENT INJUNCTION ENTERED.

23. Ole K. Nilssen v. Motorola, Inc., 963 F.Supp. 664 (N.D. Ill. April 25, 1997).

Nilssen, a former Motorola employee, was President and owner of Innovation Center, Inc. In a July 12, 1982 letter to Galvin, Nilssen first approached Motorola about business opportunities in the electronic ballast business. Nilssen's idea was at first rejected but by mid-1987, Motorola decided to take a closer look and Motorola executed a Non-Disclosure Agreement on September 4, 1987.

From September 1987 to May 1988, Nilssen provided confidential information to Motorola employees pursuant to the Non-Disclosure Agreement. However, in May 1988, Nilssen was informed that Motorola had decided not to pursue the business any further. Thereafter, Motorola changed its mind a second time and a new Non-Disclosure Agreement was executed on September 27, 1988. Discussions then began relating to Nilssen's compensation. Motorola proposed "around 0.5% on sales" plus "a certain minimum" for technical assistance. Nilssen's position was that he should be paid "one third of the total value clearly attributable to his contribution." Negotiations ceased. Motorola terminated its relationship with Nilssen. Motorola entered the electronic ballast business, Nilssen was not compensated for any of his disclosures to Motorola. A lawsuit was thereafter filed by Nilssen for misappropriation of trade secrets in violation of the Illinois Trade Secrets Act (ITSA).

To establish the existence of a trade secret, it is not enough to point to broad areas of technology and assert that something must have been secret and misappropriated. Nilssen cannot state a claim for trade secret protection under the Act by simply "producing long lists of general areas of information which contain unidentified trade secrets." Amp Inc. v. Fleischhacker, 823 F.2d 1199, 1203 (7th Cir. 1987). Instead, Nilssen must articulate protectable trade secrets with particularity or suffer dismissal of his claim.

With respect to economic value, Nilssen must show that his information was sufficiently secret -- not being duplicable without considerable time, effort or expense.

The existence of a trade secret under the Act is ordinarily a question of fact, for that inquiry necessarily involves the factual question of whether the secrecy of the information has been maintained and the ease or difficulty of obtaining the information from other sources. Applying this standard, the Court concluded that it cannot decide as a matter of law whether or not Nilssen's alleged trade secrets were of sufficient "secrecy" to be of "value" under the Act.

Under Illinois law, a trade secret may exist in a combination of a number of elements of information, even if each discrete element may be found in the public domain. Computer Care, 982 F.2d at 1074; Thermodyne Food Slav. Products, Inc. v. McDonald's Corp, 940 F.Supp. 1300, 1305 (N.D. Ill. 1996). The facts taken in the light most favorable to Nilssen suggest that his package of four circuit elements was clearly of special "value" thus constituting a protectable trade secret.

Turning to the "misappropriation" issue, even if Nilssen had valuable trade secrets regarding the production of a marketable ballast, Motorola would still be entitled to summary judgment if it could demonstrate as a matter of law that Motorola did not "misappropriate" any of those secrets.

Express contractual relationships governed the parties' relationship. The Illinois Trade Secrets Act does not purport to limit or override an express contractual arrangement governing the confidential exchange of proprietary information. ITSA Section 8(b)(1). Instead, because a confidentiality agreement is a valid contract enforceable according to its terms, Illinois law precludes the finding of "any implied duty of nondisclosure" that "would directly contradict the express agreement of the parties." Thus a contract that defines the degree of confidentiality among the parties also serves to establish -- and to define -- the duty of confidentiality to underpin an ITSA claim. See Roton Barrier, Inc. v. Stanley Works, 79 F.3d 1112, 1118 (7th Cir. 1996).

It is not necessary to Nilssen's ITSA claiming that Motorola have copied Nilssen's ballast design exactly. As Mangren Research, 87 F.3d at 944 quotes from In res Innovation Constr. Sys., Inc., 793 F.2d 875, 887 (7th Cir. 1986): "The user of another's trade secret is liable if he uses it with modifications or improvements upon it effected by his own efforts, so long as the substance of the process is derived from the other's secret." Indeed, Motorola might face liability for misappropriation under the ITSA even if it used Nilssen's trade secrets "only to demonstrate what pitfalls to avoid" (Affiliated Home Products, 57 Ill. App. 3d at 807).

In conclusion, the record demonstrates that a reasonable jury might find that Motorola misappropriated both technical and nontechnical trade secrets from Nilssen. Thus, Motorola cannot prevail via summary judgment on Nilssen's ITSA claim.

Nilssen's other claims for breach of confidential relationship and quantum meruit/implied contract/unjust enrichment are simply common law claims for the alleged misappropriation of trade secrets and these claims are preempted by Section 8(a) of the ITSA.

DEFENDANTS' SUMMARY JUDGMENT MOTION FOR MISAPPROPRIATION OF TECHNICAL AND NONTECHNICAL TRADE SECRETS DENIED; QUESTIONS OF FACT FOR JURY TO DECIDE; COMMON LAW CLAIMS PREEMPTED BY THE ITSA.

24. Trident Perfusion Associates v. Lesnoff, 121 F.3d 700 (4^th Cir. Ct. App. August 28, 1997).

Trident provides perfusion services for numerous hospitals in various states. Trident sued three former employees for trade secret misappropriation and their new employer, Advanced Perfusion Care, Inc. The individual defendants were certified perfusionists. After a bench trial, the district court found that Trident’s procedures and protocols, fee schedule, and tubing specifications were "matters of common knowledge" and not protectable trade secrets.

Defendants then requested an award of attorney’s fees pursuant to the Virginia [Unfair] Trade Secrets Act which provides for an award of attorney’s fees to a prevailing defendant where it can be shown that the plaintiff made the claim of misappropriation "in bad faith."

The district court found that "there was no evidence to support Trident’s claims." The district court concluded that Trident had no objective basis for thinking that it could prevail under the Act. As a result, the district court held that Trident made its claim of misappropriation in "bad faith" and awarded Defendants’ attorneys fees.

Trident appealed and argued that the statutory "bad faith" standard is a subjective standard and requires clear evidence that the action was maintained vexatiously, wantonly, or for some other improper purpose. The 4^th Circuit Court of Appeals disagrees: "Although the term ‘bad faith’ has not been construed by any Virginia court in the context of the attorneys’ fees provision under the Act, we see no reason to believe that the Virginia Supreme Court would abandon its well-established practice of determining "bad faith" by an objective reasonableness standard."

The 4^th Circuit Court of Appeals revealed this conclusion by reference to filing a complaint "in good faith." "Good faith" is governed by an objective standard of reasonableness. A plaintiff has acted "in good faith" if "after reasonable inquiry," he could have formed a basis that his lawsuit "was warranted by existing law" and in "bad faith" if his "claim had no chance of success under existing law."

ATTORNEY’S FEES AWARDED UNDER VIRGINIA TRADE SECRETS ACT; PLAINTIFF’S TRADE SECRET MISAPPROPRIATION CLAIM FILED IN BAD FAITH; OBJECTIVE REASONABLENESS STANDARD APPLIED.

25. Reingold v. Swiftships, Inc., 126 F.3d 645 (5^th Cir. Ct. October 16, 1997).

Summary judgment reversed by Fifth Circuit in trade secrets case.

Irving Reingold purchased a 90 foot portable female fiberglass boat mold from Thompson Industries of Titusville, Florida in 1983. The record established that it took Thompson 9 months at a cost of $1 million to construct the mold. The mold was cast from a plug (which is a hull placed upside down). To make such a mold, multiple layers of fiberglass are laid on either side of a balsa wood core over a plug and the structure is braced externally with steel piping. The 90 foot mold built by Thompson was the largest structure of its kind in the United States when it was built in 1983.

Swiftships, Inc. contacted Reingold about purchasing or leasing the mold in 1986. Swiftships thereafter obtained a contract with the U.S. Navy to contract two fiberglass-hulled research survey vessels ("RSVs"). Swiftships then entered into a contract with Reingold for a fiberglass lease with lease payments to be made each time the mold was used to construct a hull. Reingold was paid for the two RSVs, but the third time the mold was used, Reingold was not paid. In addition, the record establishes that the "third" hull was used by Swiftships to have another company, American Fiberglass, Inc. build a 110-foot mold.

Reingold filed a lawsuit for inter alia breach of contract and violation of the Louisiana Uniform Trade Secrets Act. The trial court dismissed the trade secrets claim.

The trial court found that the 90-foot ship mold was a "trade secret" because (1) it was a "device" that incorporated a "pattern ...method, technique or process" for the construction of ship hulls and (2) the ship mold "derive[d] independent economic value from not being generally known to and not being readily ascertainable by proper means." Swiftship’s agreement to pay $195,000 per vessel using the mold in building the two initial vessels, and $20,000 for its use in building each subsequent vessel, cogently indicates that the mold derived independent economic value." The Court also found that reasonable measures to protect the trade secret had been taken because there was "controlled disclosure to employees and licensees."

The Court also found based upon the summary judgment record that it can be reasonably informed that Swiftships misappropriated Reingold’s trade secret by acquiring and using it, through improper means for a purpose to which Reingold did not expressly or impliedly consent.

The Court also rejected the Defendant’s public domain Bonito Boats defense. There was 5 known hulls made from the 90-foot mold, and therefore, using the direct molding process, a new 90-foot mold could be made for any of the 5 hulls previously made.

The 5^th Circuit Court of Appeals stated that "public domain" in a legal concept stating that matter is in the public domain only if "no intellectual property law, such as patent, copyright or trade secrets, protects it." Even assuming that the pre-existing hulls were in the public domain, the process of manufacturing of the mold could be a protectable trade secret. Phillips v. Frey, 20 F.3d 623, 629 (5^th Cir. 1994). Finally, while state trade secret law cannot bar reverse engineering or independent discovery, protection will be accorded a trade secret holder against disclosure or unauthorized use gained by improper means, even if others might have discovered the trade secret by legitimate means. Restatement (Third) of Unfair Competition at ' 39 comment f.

SUMMARY JUDGMENT DISMISSING TRADE SECRETS CLAIM FOR BOAT MOLDS AFTER BONITO BOATS REVERSED.

26. Combined Metals of Chicago Limited Partnership v. Airtek, Inc., 1997 WL 746895 (N.D. Ill. December 2, 1997).

Airtek sells catalytic converters. Airtek uses Combined Metals to fabricate its dies for the catalytic converters and pursuant to a contract between the parties, Airtek has provided designs and blueprints for the tooling necessary for Combined Metals to fabricate the catalytic converter shells for Airtek (the "Airtek die").

In July, 1997, Combined Metals used the Airtek die to produce and sell catalytic shells to competitors of Airtek. This lawsuit ensured and Combined Metals moved inter alia to dismiss Airtek’s trade secret misappropriation claim for failure to plead the statutory elements of a trade secret claim under the Illinois Trade Secrets Act (ITSA). Judge Alesia concludes, under "notice pleading" rules that the ITSA claim stands.

However, Defendant also moved to dismiss the Complaint because Airtek had failed to identify the trade secrets. Judge Alesia received Airtek’s trade secrets claim and concluded that Airtek claims that the trade secret is: (1) the Airtek die itself and (2) the knowledge of producing the catalytic converter shells used to build and develop the Airtek die.

Judge Alesia then concludes: "Airtek will be held to those trade secrets, i.e., it will not be permitted to change or narrow them as the case progresses. If there is a more specific technology underlying the die or knowledge of producing the catalytic converter shells that Airtek desires to claim a trade secret, Airtek puts Combined Metals on notice of such technology now (by filing an amended counterclaim) or forfeit the right to claim such technology as a trade secret at a later time in this case. Moreover, the Court tends to agree with Combined Metals that the alleged trade secret regarding the knowledge of producing the catalytic converter shells is too broad. See Composite Marine Propellers, Inc. v. Van Der Woude, 962 F.2d 1263, 1266 (7^th Cir. 1992). Accordingly, the court expects an amended counterclaim for Airtek identifying specific, concrete secrets underlying the process of producing the catalytic converters."

TRADE SECRETS MUST BE PLED WITH PARTICULARITY IN THE COMPLAINT.

27. American Airlines, Inc. v. KLM Royal Dutch Airlines, Inc., 114 F.3d 108 (8^th Cir. May 16, 1997).

American Airlines (American) alleged that Northwest Airlines misappropriated its unique yield management system known as DINAMO ("Dynamic Inventory and Maintenance Optimizer"). This lawsuit also alleged these claims against KLM Royal Dutch Airlines whose business operations are alligned with Northwest’s business operations. Summary Judgment was granted in favor of KLM and American Airlines appealed.

In a deposition on August 2, 1993, Barry C. Smith, Vice President of American Airlines Decision Technologies testified that five elements—in unique combination—comprised American’s trade secret in the DINAMO system. In other words, these five elements (concepts or factors) -- in combination—created a unique yield management model that was not generally known in the trade and therefore was a trade secret under the Minnesota Uniform Trade Secrets Act.

American alleged that Northwest had obtained this proprietary information through hiring many Northwest employees (each supplying different pieces of the puzzle) and that this proprietary material then passed from Northwest KLM.

However, there was no allegation, nor any evidence, that any documents containing these alleged trade secrets (algorithms and formulae) passed from American to KLM. Also, there was no evidence that all five "elements" of this unique system passed to KLM. American could only show four out of five elements.

After taking the deposition of KLM officials, American concluded that KLM did not receive the detailed demand forecasting algorithms contained in the American documents that were allegedly misappropriated by Northwest, that (based on the information received from Northwest) that KLM could not develop a yield management system similar to DINAMO; that KLM had no knowledge how American’s system worked and that KLM changed its own demand functioning system in mid-1994 to one based on a third-party (Boring) model. After these depositions were completed, KLM’s lawyers demanded that American dismiss the suit with prejudice. American refused but said it would dismiss without prejudice. This was not acceptable to KLM and KLM moved for summary judgment on May 5, 1995.

After KLM’s motion for summary judgment was filed, and it was known that KLM, at most, had only four of the required five elements necessary for this unique yield management system. American’s expert witness, Barry C. Smith testified again that only "four elements, not including a specific alpha value, would constitute a trade secret."

On appeal, the Eighth Circuit Court of Appeals noted that the very purpose of summary judgment under Rule 56 is to prevent the assertion of unfounded claims or the interpretation of specious denials or sham defenses. If a party who has been examined at length on deposition could raise an issue of fact simply by submitting an affidavit contradicting his own earlier testimony, this would greatly diminish the utility of summary judgment as a procedure for screening out sham issues of fact. During sworn testimony, American’s expert testified that the specific combination of all five elements constituted a trade secret.

It is undisputed that KLM never received all five elements. The subsequent testimony by American’s expert, after KLM’s filing of a motion for summary judgment, that only four of those same five elements at the conceptual level constituted a trade secret was offered solely to avoid summary judgment. After careful examination of the testimony by American’s expert, the Court of Appeals agreed with the district court that American attempted to manufacture a material issue of fact just to evade the impact of summary judgment by inexplicably changing his testimony. Thus, the district court disregarded the subsequent manufactured contradictory testimony of American and concluded that no factual issue for trial existed for the reason that KLM never received any trade secret of American Airlines. Judgment affirmed.

"SHAM" EXCEPTION APPLIED TO BAR TRADE SECRETS; MISAPPROPRIATION CLAIM ON MOTION FOR SUMMARY JUDGMENT.

28. Camp Creek Hospitality Inns, Inc. v. Sheraton Franchise Corporation, 130 F.Supp. 1009 (11^th Cir. 1997).

In September, 1990, Camp Creek entered into a series of agreements with Sheraton that authorized Camp Creek to establish and operate a Sheraton Inn franchise (the "Inn") approximately 3.5 miles west of the Atlanta airport. Thereafter, in March, 1992, Sheraton began to consider acquiring another hotel property, then operating under the Hyatt flag, in the vicinity of the Atlanta airport. In April, 1993, ITT Sheraton consummated its acquisition project by purchasing the hyatt property. Sheraton Savannah became the owner of the new hotel and began operating it under the name "Sheraton Gateway Hotel, Atlanta Airport" on May 1, 1993. Camp Creek thereafter filed this lawsuit. The trial court granted summary judgment in favor of Sheraton and Camp Creek appealed to the Eleventh Circuit Court of Appeals.

One of the claims involved an alleged violation of the Georgia Trade Secrets Act. See O.C.G.A. Section 10-1-760 et seq. The court noted that the GTSA defines trade secrets broadly to include non-technical and financial data that derives economic value from not being generally known and is the subject of reasonable efforts to maintain its secrecy. Whether a particular type of information constitutes a trade secret is a question of fact. See Salsbury Lab. v. Merieux Lab, 908 F.2d 706, 712 (11^th Cir. 1990). The Court of Appeals concluded that Camp Creek had provided evidence upon which a reasonable jury could find that the information in this case meets the Georgia statutory definition of a trade secret.

The record shows that Tom Faust, the manager of Gateway Hotel, improperly came into possession of information concerning occupancy levels, average daily rates, discounting policies, rate levels, long-term contracts, marketing plans and operating expenses relating to the Camp Creek Hotel. Camp Creek also presented evidence that Faust used the information to propose the ejection of Camp Creek from the Sheraton system and that he may have used it to compete against Camp Creek for the customers. Further, Camp Creek presented expert testimony suggesting that this information was closely guarded in the hotel industry, that a competitor could not easily derive the information through other means, and that a competitor could make use of such information to the detriment of the owner. The Court of Appeals concluded that this evidence shows that the information is valuable and not of the type any intelligent competitor could have compiled by legitimate alternative means. With respect to reasonable security measures, the Court noted that although Camp Creek provided the information to Sheraton, the information was provided pursuant to the Reservation Agreement with the apparent mutual understanding that it would be kept confidential. The Court of Appeals also concluded that Camp Creek’s evidence would also support a finding that Sheraton misappropriated the information from Camp Creek. A defendant misappropriates a trade secret by knowingly acquiring it through improper means. Camp Creek provided the data in question to Sheraton Reservations with the understanding that its use would be limited and that it would be kept confidential. Sheraton contends that it came into possession of the information by legitimate means, either compiling the data itself or receiving it pursuant to the Reservations Agreement. Although this may accurately describe Sheraton Reservations initial receipt of the information, Sheraton has all but admitted that the Gateway’s possession and use of the data, as one of Camp Creek’s competitors, was improper and in violation of Sheraton’s own policy.

With respect to the damage issue, Sheraton argued that Camp Creek had failed to provide evidence of damages on its trade secrets claim. Camp Creek’s generalized evidence on damages does not isolate losses directly attributable to any particular misuse of confidential information. Nevertheless, the GTSA expressly provides for the award of a reasonable royalty in the event that the plaintiff cannot prove damages or unjust enrichment by a preponderance of the evidence. Moreover, the district court may determine then injunctive relief is appropriate to the extent that the Gateway continues to make use of Camp Creek’’ confidential information to compete for guests. Judgment as a matter of law, therefore, is inappropriate at this time on the trade secrets claim.

MOTION FOR SUMMARY JUDGMENT REVERSED; HOTEL INFORMATION RELATING TO OCCUPANCY LEVELS, ETC. CAN QUALIFY AS TRADE SECRETS.

29. Winklevoss Consultants, Inc. v. Federal Insurance Co., 1998 WL 32174 (N.D. Ill. Jan. 23, 1998).

In March, 1995, Lynchval Systems, Inc. filed an eight-count complaint in the Northern District of Illinois against Winklevoss and an actuarial consulting firm, Chicago Consulting Actuaries, Inc. ("CCA"). The causes of action were premised on Lynchval’s allegations that Winklevoss and CCA misappropriated trade secrets from Lynchval’s actuarial software programs, developed a competing product, and then promoted it to some of Lynchval’s customers. Winklevoss tendered the Lynchval complaint to Federal Insurance Co. ("Federal"). Federal refused to defend the complaint.

On March 10, 1997, Winklevoss filed a two-count compliant seeking a declaratory judgment that Federal had a duty to defend Winklevoss against the original Lynchval complaint and that its refusal to defend the original complaint breached Winklevoss’ insurance contract. Winklevoss claimed that Federal’s "advertising injury" provisions activated defense obligations. The court granted Federal’s motion for summary judgment.

The trial court (Judge Castillo) noted that all the allegations of trade secret misappropriation are limited to Winklevoss’ development of a competing product—conduct that took place lone before Winklevoss began its promotional effort. Consequently, even if trade secret misappropriation were a covered defense, the misappropriation alleged here did not occur in the course of advertising.

To meet the "in the course of advertising" requirement, the advertising activity must be the source of the offense, that the covered wrongdoing must at the very least relate to the marketing not to the manufacture of production of a product.

The trial court concluded that trade secret misappropriation is not misappropriation of advertising ideas or style of doing business. Although "misappropriation of advertising ideas or style of doing business" is a common CGL policy advertising offense, few courts have explored its meaning in depth. All agree that the phrase really comprises two offenses—misappropriating "advertising ideas" and misappropriating "a style of doing business"—either of which, if shown, is sufficient. See Advance Watch Co. v. Kemper Nat’s Ins. Co., F.3d 795, 800 (6^th Cir. 1996).

The only ideas Winklevoss is accused of stealing are mathematical formulas and raw data input questions from Lynchval’s software. These are not ideas about getting more business, or how to promote a product, or even how to approach customers. These are ideas about how to develop a computer program that can determine the cost of employee benefit programs. To squeeze these allegations into the "misappropriation of advertising ideas" aperture would be to transgress the parties’ reasonable expectations. Indeed, such an interpretation would read the last two words right out of the phrase, condoning coverage for any wrongful taking, just because the claim happens to use the "misappropriation" nomenclature.

"ADVERTISING INJURY" CLAUSE DOES NOT APPLY TO TRADE SECRET MISAPPROPRIATION CLAIM.

30. Carboline Company v. Lebeck, 1997 WL 817353 (E.D. Mo. Dec. 22, 1997).

Carboline Company manufactures high performance protective coatings. Defendant Mark Lebeck began his employment with Carboline in 1990 as a General Manager of Sales in the power industry division. With the advent of industry deregulation and a reduction in the construction of new power plants. Carboline’s power division sales declined. On April 17, 1997, Lebeck declined a transfer to a sales position in Los Angeles, California. On September 19, 1997, Lebeck accepted an employment offer from PPG Industries for a sales manager position in its high performance coatings division. As a PPG employee, Lebeck accompanied PPG dealers on calls to customers, many of whom also purchased from Carboline and whom Lebeck had worked with as a Carboline employee. Carboline sued Lebeck and PPG Industries on November 25, 1997 and moved for the entry of a preliminary injunction. The trial court found that the plaintiff did not have a likelihood of success under the Missouri Uniform Trade Secrets Act. In seeking to enjoin a former employee’s current work, plaintiff must do more than assert that a skilled employee is taking his abilities to a competitor. PepsiCo, Inc. v. Redmond, 54 F.3d 1262, 1269 (7^th Cir. 1995).

Carboline contended that Lebeck was entrusted with trade secrets, including pricing and demonstration strategies, research and development projects, the strengths and weaknesses of Carboline products, upgrade schedules, Carboline’s competitive strategy with respect to PPG, customer lists and preferences, and specialized price margins and strategies. In addition, Carboline contends that the documents that Lebeck kept after his termination were all trade secrets. Those documents have all now been returned to Carboline, and Lebeck testified that he retained no copies. While plaintiff may choose to pursue damages with respect to Lebeck’s retention of documents in the first instance, that is a matter for trial, not for preliminary equitable relief.

Defendants argued that any information Lebeck possessed was of the sort that quickly becomes stale. For instance, plaintiff submits a power industry marketing plan that Lebeck created for fiscal year 1997, which ended May 30, 1997. Plaintiff has not presented evidence that Lebeck helped compose the 1998 plan. The trial court also found that plaintiff did not present convincing evidence that it took measures to maintain the secrecy of its documents. For example, the multi-Gard testing data included results from outside laboratories. Plaintiff did not indicate that it entered confidentiality agreements with these labs. The data sheets were sent to "qualified" customers, but plaintiff did not indicate how it determined who was qualified nor did it present evidence that it kept track of which customers received the data. The data sheets do not contain a label limiting distribution. Salespeople had access to the data sheets, and plaintiff did not establish that it had in any way restricted their use of the information.

MOTION FOR PRELIMINARY INJUNCTION DENIED; LACK OF REASONABLE SECURITY MEASURES.

31. APAC Teleservices, Inc. v. McRae, 1997 WL 781685 (N.D. Iowa) (Nov. 19, 1997).

Shawn McRae was hired by APAC Teleservices, Inc. (APAC) in September, 1996. McRae worked at APAC. He was primarily responsible for two major projects. The first project involved the development of an Advanced Technology Platform (ATP) for AT & T. The ATP Project that McRae helped develop for AT & T was for outbound telemarketing services. The second project that McRae worked on involved Computer Technology Integration (CTI), which is basically an interface that allows phone systems to talk with computer systems. For example, using the telephone to check the balance of a bank account is one kind of CTI: the customer places a telephone call, and that telephone call connects with a computer where bank account information is located. CTI allows computer systems to launch, transfer, route, or receive telephone calls. It also allows computer applications to receive and use data from telephone systems, such as caller-ID or punched-in numbers. CTI is capable of capturing and reporting the number, type, and results of calls received or launched. When McRae worked at APAC, he spent approximately 6 weeks evaluating vendors, testing different off-the-shelf products, and participating in the selection for APAC’s CTI. This work was primarily geared toward inbound services.

In September, 1997, McRae left APAC to work for Access Direct Telemarketing, Inc. (Access Direct). Access Direct is a direct competitor of APAC in the outsource telemarketing industry. APAC thereafter filed a lawsuit against McRae alleging various breach of contract claims, including breach of a non-competition agreement and breach of a nondisclosure agreement, as well as violations of the Iowa Trade Secrets Act and tortious interference. APAC then moved for a preliminary injunction. At the hearing on the motion for a preliminary injunction, McRae testified that none of his responsibilities at Access Direct are similar to what he did at APAC.

To prove that McRae was untrustworthy, APAC cited several examples of outright lies that McRae told Access Direct while he was negotiating for his new job, such as telling Access Direct that he was making $120,000 and he had three weeks of vacation per year at APAC when none of these alleged "facts" were true. Several APAC employees also testified at the preliminary injunction hearing that when McRae left APAC he told them he was becoming Chief Information Officer of Access Direct. In contrast, Access Direct and McRae testified at the hearing that McRae had never been offered that position.

In reviewing the issue of the threatened misappropriation of trade secrets, the Iowa district court observed that the 7^th Circuit in PepsiCo noted that PepsiCo was likely to prevail on its statutory trade secret misappropriation claim because of the combination of "the demonstrated inevitability that Redmond would rely on...trade secrets in his new job [and] the district court’s reluctance to believe that Redmond would refrain from disclosing these trade secrets in his new position (or that Quaker would ensure that Redmond did not disclose them)." 54 F.3d at 1271. Here, APAC has not succeeded in showing that such a combination exists. Even though APAC had demonstrated that McRae was deceitful in negotiating his job with Access Direct, APAC has failed to show any inevitability that McRae will relay APAC trade secrets at his new job, that McRae will disclose trade secrets in his new position, or that Access Direct will allow McRae to disclose them.

Further, the PepsiCo district court did not enjoin Redmond from assuming any duties at Quaker. Redmond was enjoined only from assuming duties related to beverage pricing, marketing, and distribution --the areas with which Redmond had been most intimately involved when he worked at PepsiCo. Here, APAC asks this Court to enjoin McRae from working in any capacity at all for Access Direct, even though all of McRae’s work at APAC was in information technology, and even though McRae was primarily focused on APAC’s outbound department and had minimal exposure to APAC’s inbound department.

The court therefore concluded that APAC had not proven that a threat of inevitable disclosure exists or that McRae’s job responsibilities at Access Direct are in a similar capacity to his former job, APAC is not likely to succeed in proving that the covenant not to compete should be enforced. The trial court therefore declined to examine the four criteria relevant to the enforceability of the covenant not to compete, because McRae’s position at Access Direct does not violate either the "similar capacity" or "likely to disclose" subsections which are necessary to trigger such an analysis.

The court next considered the nondisclosure agreement on the contract. Applying the Iowa Trade Secrets Act, the Court reviewed a list of alleged trade secrets prepared by the plaintiff and concluded that five of those specific items were likely to prove constitute trade secrets under the Iowa Trade Secrets Act: (1) Design and other proprietary information about the ATP G-Prime Project for AT & T; (2) APAC’s future business direction—e.g., the development and introduction of the Consulting and Professional Services division that McRae developed and that McRae was going to direct; (3) All proprietary programming and configuration of off-the-shelf products that McRae programmed or configured, or assisted in programming or configuring, or otherwise supervised or participated (in any capacity) while working for APAC as either a consultant or full-time employee; (4) Knowledge of the architecture for and portfolio of hardware, network, applications, and development that APAC has used, is currently using, or has recently acquired, and what kind of architecture for and portfolio of hardware, network, applications , and development that APAC intends to use in the future to remain competitive; and (5) Any specific programming, design, or other proprietary work McRae did to tailor CTI to the specific needs of clients (e.g. Comp-U-Serve) when he worked on inbound or outbound projects for APAC.

However, the Court concluded that the remaining five items were not likely to constitute trade secrets under the Iowa Trade Secrets Act: (1) McRae’s professional knowledge of how to adapt off-the-shelf products to meet specific needs, insofar as that skill might be applicable to his position in Operations; (2) McRae’s general knowledge and skill of how to overcome obstacles and "engineer blind alleys", insofar as that skill might be applicable to his position in Operations; (3) The general knowledge base that McRae has acquired of different products that are currently available on the market; (4) General knowledge of APAC’s strategy for bringing new products to market; and (5) General knowledge of how APAC proposed to clients.

After reaching this conclusion, the Court entered a preliminary injunction enforcing the nondisclosure agreement with respect to those items of information that were likely to constitute trade secrets under the Iowa Trade Secrets Act because such relief was necessary to protect APAC from the irreparable harm that would occur if McRae would disclose those secrets to Access Direct. Accordingly, the Court entered an injunction ordering McRae during the pendency of the litigation not to disclose any information regarding the specific trade secrets which the Court has identified a likelihood at trial but allowed McRae to continue in his new position as Vice President of inbound at Access Direct.

NON-COMPETE CLAUSE NOT ENFORCED; NONDISCLOSURE CLAUSE ENFORCED REGARDING SPECIFIC TRADE SECRETS UPON MOTION FOR PRELIMINARY INJUNCTION.

32. EFCO Corp. v. Aluma Systems, USA, Inc., WL 679922 (S.D. Iowa) (Oct. 30, 1997).

EFCO sued Aluma inter alia for violation of the Iowa Uniform Trade Secrets Act. EFCO and Aluma are two of the three most significant competitors in the world for customized-construction-forms used in the construction industry to support and form concrete structures of all types—from tunnels to high-rise buildings. The dispute between the parties arose when EFCO allegedly discovered that Aluma had obtained the EFCO database from former Iowa employees of EFCO and then used the database to submit a bid for the construction of Ravens Stadium in Baltimore, Maryland. The alleged misconduct was apparently committed by the Canadian branch—"Aluma Canada."

Aluma moved to dismiss the complaint for lack of personal jurisdiction. The Court denied the motion to dismiss for lack of personal jurisdiction. The physical art of theft is certainly aimed at the place of the theft. The reasonable expectation and understanding in the mind of the thief is that if he takes something that belongs to someone else, the effect of his theft will be where that someone is located. In this case, the thing belonged to EFCO and both the person who physically took the information and the company that used it knew who and where EFCO was. EFCO’s headquarters and principal place of business is in Iowa, and therefore the Iowa forum, was clearly the focal point of the alleged misappropriation. Finally, the court found that the "maintenance of the suit does not offend ‘traditional notions of fair play and substantial justice’." International Shoe v. Washington, 326 U.S. 310, 316 (1945). Aluma, in all of its manifestations appears to do substantial business in the United States. Requiring it to defend this suit in Iowa is fair play and substantial justice.

CANADIAN CORPORATION SUBJECT TO PERSONAL JURISDICTION IN IOWA FOR ALLEGED THEFT OF IOWA COMPANY’S TRADE SECRETS.

33. Bell Helicopter Textron, Inc. v. Tridair Helicopters, Inc., WL 677493 (D. Del.) (Oct. 20, 1997).

Bell and Tridair executed a license agreement in which Tridair granted Bell certain rights to information relating to kits designed and manufactured by Tridair which convert certain Bell single engine helicopters into twin engine helicopters. In exchange for these rights, Bell agreed to pay Tridair $60,000.00 for each new Bell helicopter manufactured using Tridair’s conversion kit. On December 20, 1994, Bell and Tridair enter into a second licensing agreement whereby Tridair granted a license to Bell to utilize the technical data previously received to manufacture, have manufactured, use, sell and lease a twin engine Bell Model 407L(T) helicopter. Bell agreed to pay Tridair a royalty of $54,000.00 for each 407L(T) helicopter sold by Bell.

The commercial venture was not successful. Bell scrapped plans to manufacture and sell the 407L(T) helicopter because of high costs and consequent lack of market demand. Instead, Bell began developing its own helicopter, allegedly using Tridair’s technical data, in partnership with another company, Samsung. Tridair filed a lawsuit inter alia for trade secret misappropriation and Bell moved to dismiss the trade secret misappropriation claim.

Bell argued that it did not "wrongfully gain access" to Tridair’s alleged trade secrets and therefore it had not acquired the trade secrets by improper means in violation of the Delaware Uniform Trade Secrets Act. The court rejected this argument. No where in the DUTSA, nor in any other supporting case law, does the "wrongfully gained access" language appear. If taken literally, no current employee or licensee could ever "wrongfully gain access" to a trade secret because they could have gained access tightfully as an employee or licensee. Followed to its logical extreme, only those who are not an employee or licensee would be liable if a trade secret were misappropriated. This is not the law.

Bell next contended that it did not have a duty to maintain secrecy under the licensing agreement and therefore, could not have misappropriated Tridair’s trade secrets. The court rejected this argument too. Under the "improper disclosure or use" branch of the Delaware Trade Secrets Act, one method of setting forth a trade secret misappropriation cause of action is by alleging that a person used a trade secret of another in circumstances where the person knew or had reason to know that the knowledge of the trade secret was acquired under circumstances where there was a duty o limit the use of the secret. Although Delaware courts have not had an occasion to construe this language, other courts have construed the "limit its use" language to apply to a scenario where a plaintiff, the owner of a trade secret, voluntarily disclosed it to a defendant under confidential circumstances and the defendant subsequently used the secret in breach of an agreement with the plaintiff. See Pulsecard, Inc. v. Discover Card Services, Inc., 1996 WL 137819 (D. Kan. March 5, 1996).

Citing the "economic loss doctrine" Bell also moved to dismiss the trade secrets claim arguing that the breach of contract remedy was the sole remedy available to the plaintiff. The court also rejected this argument too. The misappropriation of trade secrets does not hurt the product itself, but rather injures Tridair by increasing Tridair’s competition and by causing Tridair to be deprived of the return of the money it expended in deriving the proprietary technical data. Further, the economic loss doctrine has only been applied by Delaware courts where the "parties to the transaction have allocated the risk of product non-performance through the bargaining process." No such allocation of risk has occurred between Bell and Tridair. Tridair never bargained for Bell to allegedly misuse its trade secrets. It is therefore understandable that Bell could not cite any case in the country that has applied the economic loss doctrine to trade secret misappropriation.

MOTION TO DISMISS TRADE SECRET MISAPPROPRIATION CLAIM BY LICENSEE DENIED.

34. McDonnell Douglas Corporation v. National Aeronautics & Space Administration, 981 F.Supp. 12 (Dist. of Col.) (Oct. 14, 1997).

On February 27, 1996, McDonnell Douglas Aerospace (MDA) entered into a contract with NASA for medium light expandable launch vehicle services ("Med-Lite"). Thereafter, NASA received a Freedom of Information Act ("FOIA") request for the Med-Lite contract. NASA requested comments from MDA with regard to the FOIA request and received these comments on September 23-24, 1996. After reviewing MDA’s comments, NASA issued a "Notice of Intent to Release Information" letter on November 8, 1996. On November 16, 1996, MDA responded to NASA’s "Notice of Intent to Release Information" letter. MDA further explained its previous objections, asserted new objections requested reconsideration by NASA.

MDA claimed that the information at issue is protected from disclosure by exemption four of FOIA. Exemption four of FOIA excludes from disclosure "trade secrets and commercial of financial information obtained from a person [which are] privileged or confidential." 5 U.S.C. Section 552(b)(4).

The dispute involved the release of pricing information relating to the contract. MDA argued that it voluntarily produced the pricing information (i.e., not required for the bid) and therefore the Critical Mass test should apply. On the other hand, MDA argued that the specific price elements and other information provided by MDA were mandated to be submitted before NASA would award the contract. Under these circumstances, the National Parks test governs the application of FOIA exemption 4.

Under the National Parks test, FOIA exemption 4 applies only if the FOIA disclosure is likely to (1) impair the Governments ability to obtain necessary information in the future or (2) cause substantial harm to the competitive position of the person from whom the information was obtained. National Parks, 498 F.2d at 770.

Although MDA contends that release of this pricing information will impair the Governments ability to procure future participants in government contracts, this position lacks merit. Government contracting involves millions of dollars and it is unlikely that release of this information will cause NASA difficulty in obtaining bids in the future. See Martin Marietta Corp. v. Dalton, 974 F.Supp. at 37, 39-40 (D. D.C. 1997).

The more substantial question is whether release of this information will cause substantial harm to MDA. MDA argued that this pricing information will cause substantial competitive injury in three ways: (1) domestic competitors in U.S. government bidding situations will be able to underbid MDA, (2) foreign competitors will be able to underbid MDA, and (3) future commercial contractors will be able to negotiate more effectively with MDA due to their knowledge of MDA’s past prices.

NASA disputed many of MDA’s contentions arguing that (1) bidders compete on a variety of factors other than price, (2) foreign competitors are not likely to be substantially aided by release of this data, and (3) any difficulty MDA may face in future commercial contract negotiations does not qualify as a substantial competitive injury and should be viewed as the cost of doing business with the government.

Contrasting this case to McDonnell l (895 F.Supp. at 318) the court found that NASA has replied in detail to MDA’s affidavits and comments disputing many of the claims in these affidavits with extensive replies by experienced NASA personnel, and based upon this record, the court found that NASA has not acted arbitrarily and capriciously. Accordingly, NASA’s motion for summary judgment was granted.

PRICING INFORMATION OF GOVERNMENT CONTRACTOR NOT PROTECTED BY EXEMPTION 4 OF FREEDOM OF INFORMATION ACT.

35. DB Riley, Inc. v. AB Engineering Corp. et al., 1997 WL 586062 (D. Mass. 1997).

Riley manufactures, sells and installs large industrial/commercial boiler systems as well as replacement parts for its boiler units. AJEC is a manufacturer of replacement parts for Riley Equipment.

In 1996, Riley learned that AJEC had built up a substantial inventory of Riley parts. Riley claims that AJEC threatened to sell those parts in competition with Riley if Riley did not agree to pay AJEC’s prices. In May, 1996, Riley notified AJEC that Riley was revoking AJEC’s authority to manufacture and inventory Riley parts and reminded AJEC that the Riley parts it possessed were proprietary and should not be sold to Riley’s customers without Riley’s consent. Riley thereafter filed suit because AJEC continued to hold itself out as a parts manufacturer for Riley.

Riley moved for a preliminary injunction. With respect to the trade secrets claim, Riley argued that the drawings and specifications which AJEC had access to constituted trade secrets. The court noted that Riley’s drawings and specifications contained the kind of information generally considered to be a trade secret if secrecy has been maintained. See e.g. USM Corp. v. Marson Fastener Corp., 379 Mass. 90, 100 (1979) (recognizing that it "is well settled that detailed manufacturing drawings...are prima facie trade secrets"). However, with respect to the issue of the reasonableness of steps taken to preserve secrecy, AJEC argued that the information it uses to manufacture Riley replacement parts are in the public domain and that the proprietary statements on Riley’s design drawings are largely ignored according to industry standards, citing Combustion Engineering v. Murray Tube Works, 222 U.S.P.Q. 239 (E.D. Tenn. 1984).

The evidence in the record revealed that design drawings are distributed liberally, and often without confidentiality agreements, to Riley’s customers and third parties who AJEC alleges, redistribute them without restriction, sometimes through publicly advertised auctions. Although Riley’s formal written policies for the protection of its trade secrets, if followed, would have been sufficient, the court found that there was an unwritten, informal policy which overrode the formal policy. Consequently, design drawings were distributed haphazardly to both customers and parts suppliers for years. That being the case, the relatively weak proprietary statement on the Riley drawings does not preserve the trade secrecy of the information in the drawings.

The Supreme Judicial Court of Massachusetts held that "one who claims that he has a trade secret must exercise external vigilance." This calls for constant warnings to all persons to whom the trade secret has become known and obtaining from each an agreement, preferably in writing, acknowledging its secrecy and promising to respect it. JT Healy, 357 Mass. at 738. Applying this standard, the court found that the record lacked sufficient evidence to show Riley had not met this standard and denied the preliminary injunction on the trade secrets claim.

PRELIMINARY INJUNCTION DENIED; LACK OF REASONABLE STEPS TO PRESERVE SECRECY OF DETAILED DRAWINGS.

36. Martin Marietta Corporation v. Dalton, 974 F.Supp. 376 (D. D.C. Aug. 8, 1997).

The trade secrets act, 18 U.S.C. § 1509 prohibits the governments discretionary disclosure of information in its possession "not [otherwise] authorized by law," i.e. FOIA. The scope of the Trade Secrets Act is deemed to be co-extensive with Exemption 4 of FOIA. See CNA Financial Corp. v. Donovan, 830 F.2d 1132, 1151 (D.C. Cir. 1987). In this case, Martin Marietta sought to prevent the Department of the Navy’s Naval Air Systems Command ("NAVAIR") from disclosing certain pricing information, technical and management information including subcontracting plans, asset allocation charts, and statements of the work necessary to accomplish certain system conversions.

Two D.C. Circuit precedents, National Parks and Critical Mass establish two different legal tests to govern Exemption 4 cases. In Critical Mass, the court of appeals held that, when the submission of financial or commercial information to the government is voluntary, the information is "confidential" within the meaning of Exemption 4 and should not be disclosed if the information "would customarily not be released to the public by the person from whom it was obtained." 975 F.2d at 878. On the other hand, National Parks held that if commercial or financial information submitted to the government is legally required of the party submitting it, then, in response to a FOIA request, the government is obliged to treat commercial or financial information as "confidential" for the purposes of Exemption 4, and should not reveal it only if its disclosure would be likely (1) to impair the government’s ability to obtain such information in the future, or (2) to cause substantial harm to the competitive position of the submitting source. See National Parks, 498 F.2d at 770. The court concluded that the National Parks test applies.

The Federal Acquisition Regulations are replete with words of command like "shall" and "must". Whether to compete for NAVAIR’s business at all was, of course, its option, but having elected to do so it was required to submit the information NAVAIR insisted on having to win the contract. Applying the National Parks test, the court concluded that it is highly unlikely the NAVAIR’s ability to obtain such information in the future would be impaired in the least if it releases the contracts at issue and Martin Marietta does not argue that it will. Government contractors, including Martin Marietta, will continue bidding for NAVAIR contracts despite the risk of revealing business secrets if the price is right. Martin Marietta claims, however, that release of the contracts will cause it substantial competitive harm.

With respect to the pricing information, Martin Marietta argued that possession of such data would enable Martin Marietta’s competitors to predict its costs and profit margin, significantly enhancing their ability to underbid. With respect to the technical and management information, Martin Marietta argued that if disclosed to its competitors, they would gain significant insight into its "internal operations, its winning subcontracting strategies, [and] its overall approach to overhead costs." Competitors might also be able to "reverse-engineer" its products.

In response, NAVAIR argued that it had already released two previous contracts without General Electric Aerospace’s knowledge or consent (with whom Martin Marietta has merged) and therefore the prior release of the information is now in the public domain. The second argument was that the basic policy of FOIA is one of disclosure. FOIA is to be construed broadly and in favor of disclosure; statutory exemptions are correlatively given a narrow construction. In this case, NAVAIR concluded that neither the relevation of cost and pricing data nor proprietary management strategies were likely to result in such egregious injury to Martin Marietta as to disable it as an effective competitor for NAVAIR’s business in the future. The court affirmed the decision by NAVAIR finding that it was not arbitrary or capricious, or an abuse of its discretion. Martin Marietta has not shown NAVAIR or this Court, on the basis of this record, that it will in fact be unable to duplicate those successes unless NAVAIR acquiesces in keeping the competition in the dark.

GOVERNMENT CONTRACTOR LOSES FOIA SECTION 4 EXEMPTION CLAIM.

37. AmeriGas Propane, L.P. v. T-Bo Propane, Inc., 972 F.Supp. 685 (S.D. Ga.) (Aug. 20, 1997).

AmeriGas sued defendants for alleged violations of various non-competition and non-disclosure covenants. Both parties moved for summary judgment. The court found that the non-competition covenants were invalid and unenforceable under Georgia law. With respect to the trade secrets claim, the court noted that only customer lists are protectable under the Georgia Trade Secrets Act of 1990 citing the decision of the Georgia Supreme Court in Avnet, Inc. v. Wyle Laboratories, Inc., 263 Ga. 615, 437 S.E.2d 302 (1993). In Avnet, the Georgia Supreme Court held that the trial court did not err in limiting the scope of injunctive relief to tangible customer lists. Since the Georgia Trade Secrets Act’s definition of trade secret included a list of actual potential "customer information" the Act did not alter the prior common law which protected only tangible customer lists.

In the summer of 1996, the Georgia Legislature amended the Act’s definition of a trade secret (apparently to respond to the Avnet decision) by adding the new language "without regard to form" to the definition of a trade secret ["trade secret" means information, without regard to form, including, but not limited to, technical or non-technical data...].

Plaintiff argued that the "without regard to form" verbiage renders the Avnet tangible/intangible distinction meaningless while Defendants argued that Avnet is unaffected by the recent amendment. The Court ruled in favor if the Defendants. The Court determined that, as a matter of law, the "in whatever form" simply refers to any of a variety of tangible forms upon which customer lists can be created. Companies may create customer lists on notebook paper, parchment, computer disk, microfiche, or on the back of a napkin; such tangible lists are protected by the Trade Secrets Act. However, the former employee’s personal knowledge of the information on these lists, however, can only be curtailed from use through restrictive covenants. Though Plaintiff took the step of having its employees sign the restrictive covenants, none of the covenants were legally valid. As a result, the only information that may be protected as a trade secret is the actual tangible customer list which Plaintiff claims Defendants misappropriated,

INTANGIBLE CUSTOMER INFORMATION NOT PROTECTABLE ABSENT A VALID RESTRICTIVE COVENANT IN GEORGIA.

38. The Mutual Life Insurance Company of New York v. Veselik, WL 30672 (N.D. Ill.) (Jan. 23, 1998).

The Mutual Life Insurance Company of New York (MONY) sued former insurance agents on a variety of claims including alleged trade secret misappropriation. Defendants moved to dismiss the trade secret misappropriation count.

MONY claims that the Defendants actions in contacting Mutual of New York policyholders to persuade them to procure insurance policies elsewhere violates the Illinois Trade Secrets Act, 765 ILCS 1065/1 et seq. ("ITSA") because the policyholder information is a trade secret. The court granted Defendants motion to dismiss because, in this case, MONY has not sufficiently alleged that it made a reasonable effort to maintain the secrecy and confidentiality of the policyholder information. In fact, MONY avers no facts that it even treated the policyholder information as confidential so as to constitute a protectable trade secret. Instead, MONY simply makes boilerplate allegations without facts and support thereof. The only facts of MONY alleges in support of its allegations relates to the defendants career contracts and the letter agreement signed by Raymond Veselik. MONY’s contention that it took reasonable steps to protect its trade secret by requiring the defendants to sign career contracts is not enough to support a claim for trade secret misappropriation. The career contracts require the field underwriters to return all "books, forms, solicitation material and files with reference to persons insured in the Company." The contracts do not state that such information is confidential, nor do they specify the manner in which such information should be treated to ensure that its secrecy is maintained.

Moreover, the fact that Raymond Veselik signed a letter agreement that specifically prohibits the disclosure of policyholder information is not enough to support the allegation against him. Although it can be argued that this supports the claim that MONY took reasonable steps to maintain the secrecy of the policyholder information with respect to Raymond Veselik, it does not cure the deficiency in pleading that the policyholder information is a trade secret. MONY cannot state a claim for trade secret misappropriation against one employee when all other employees were not prohibited from keeping the information confidential.

MOTION TO DISMISS TRADE SECRET CLAIM INVOLVING ALLEGED POLICYHOLDER INFORMATION GRANTED.

39. Reynolds and Reynolds Company v. Hardee, 1997 WL 794127 (Ct. App. 4^th Cir.) (Dec. 30, 1997).

On March 9, 1988, Hardee signed an employment agreement with Jordan Graphics, Inc., as a sales representative. Thereafter, on January 23, 1996, Reynolds acquired Jordan Graphics, Inc. and Reynolds purchased substantially all of Jordan’s assets and goodwill, including the employment agreements between Jordan and its sales representatives. On the day of the sale, Hardee was terminated. Simultaneously, Reynolds offered to rehire Hardee under a different employment agreement. This new agreement contained a more restrictive non-competition covenant that extended both the duration and the territory covered. Hardee rejected the new agreement, but offered to work for Reynolds under the terms of his prior agreement with Jordan. Reynolds would not accept those terms, and informed Hardee that it intended to enforce the original covenant.

Reynolds sued Hardee for breach of the restrictive covenant and the misappropriation of trade secrets. The district court dismissed the suit on summary judgment and Reynolds appealed.

On appeal, the 4^th Circuit affirmed the district court’s decision: (1) Reynolds lacked standing to sue under the employment agreement because Jordan could not assign the agreement, or the noncompetition covenant therein, to Reynolds; and (2) Reynolds failed to produce evidence sufficient to prove that Hardee actually misappropriated any artwork.