EFF Question "General" 7. "What is the burden of proof standard regarding the weight of the
evidence needed to prove an initial misappropriation in a trade secret case? What is the burden
of proof (weight) needed to prove misappropriation by a republisher?"
maintained by Rob Warren
last updated 3/22/2000
Introduction
Notes
(Kindly provided by Ben Reeve)
SHORT ANSWERS:
To prevail, a plaintiff alleging misappropriation of a trade secret must
show, by a preponderance of the evidence, that the defendant had an
obligation not to use or disclose certain secret subject matter and that,
the obligation notwithstanding, did so. The plaintiff "has an unshifting
burden to prove that the defendant misappropriated and wrongfully used the
plaintiffs trade secret."
As to a "republisher" -- the central issue is whether the republisher has
the same obligations of secrecy. If so, the burden of proof is the same.
The essence of a successful claim is demonstration of the breach of a
confidential relationship concernin confidential subject matter, however
the relationship is established, whatever the subject matter.
Cribbed in material follows:
FROM:
Trade Secret Misappropriation:
A Review and Analysis of Massachusetts Law
BY LAURENCE H. REECE, III
This article was originally published in the December 1986
issue of the Massachusetts Law Review
The Restatement of Torts explains:
The suggestion that one has a right to exclude others from the use of his
trade secret because he has a right of property in the idea has been
frequently advanced and rejected. The theory that has prevailed is that
the protection is afforded only by a general duty of good faith and that
the liability rests upon breach of this duty; that is, breach of contract,
abuse of confidence or impropriety in the method of ascertaining the
secret.[7]
Consistent with these principles, once information qualifies as a trade
secret "any inquiry into the misuse of the trade secret must focus on the
conduct of the defendent."[8]
The duty owed to the holder of a trade secret may arise from a contract
or from a confidential relationship imposed by law. A nondisclosure
agreement whereby an employee agrees not to disclose the trade secrets of
his employer is a typical example of such a contract.[9] A non-competition
agreement is another type of contract which may provide trade secret
protection, albeit in a more limited form.[10] Most non-competition
agreements are limited to a fixed term of years and do not bar an employee's
disclosure of the trade secrets to a third party who may then use them in
competition with the employer. However, as the Appeals Court has
recognized, non-competition agreements may be employed to protect
confidential business information which does not qualify as a technical
trade secert.[11] Even in the absence of a nondisclosure or non-competition
agreement, trade secret protection is afforded where the defendent acquires
the secret as a result of a confidential relationship he enjoys with the
plaintiff. For example, the employer-employee relationship is uniformly
treated by the courts as a confidential one.[12]
B. Comparison with Patent and Copyright Protection
There are substantial differences between trade secret protection and
patent and copyright protection. Patents and copyrights are protected
pursuant to federal statute for fixed terms of years (generally, 17
years of patents and the author’s lifetime plus 50 years for copyrights),[13]
whereas trade secrets are protected under state law for as long as the
secret is maintained. Trade secret protection relates to the secrecy of the
information, while the patent safeguards the information itself and a
copyright protects the form of expression of the information. The owner
of a trade secret, as distinguished from the owner of a patent, has no
such right in the idea as will enable him to exclude others from using it.
Thus, if one acquires the secret by honest means he may use it.[14] A patent
is relatively costly to obtain and a greater degree of novelty and uniqueness
is required to obtain a patent than to create a trade secret. While the
formalities attendant to notice, registration and deposit of a copyrighted
work are relatively simple and inexpensive, trade secrets require no such
formalities.[15]
Trade secret protection is not preempted by other forms of intellectual
property protection. The landmark decisions of the United States Supreme
Court in Sears, Roebuck & Co. v. Stiffel Co. [16] and Compco Corp v. Day-Brite
Lighting, Inc.[17] raised significant questions concerning the continued
viability of the common law of trade secrets.[18] In these companion
cases, decided in 1964, the Supreme Court held that state unfair competition
actions, based upon products which lacked sufficient novelty to be patentable,
were preempted by federal patent law. However, any uncertainty regarding possible
federal preemption of trade secret law was conclusively resolved by the Supreme
Court in 1974 in Kewanee Oil Co. v. Bicron Corp.[19] There the Court held that
state trade secret laws are not preempted by federal patent law or circumscribed
by the Court’ prior decisions in Stiffel and Compco.[20]
More recently, the enactment of section 301(a) of the new Copyright Act has raised
anew the spectre of federal preemption of trade secret law.[21] While the cases
addressing the issue are not uniform, the emerging majority view is that section
301(a) does not preempt the common law of trade secrets. [22] To date, however,
the Supreme Court has not ruled on this precise issue.
C. The Prima Facie Case
The "essence" of an action for the wrongful use of trade secrets is "the breach
of the duty not to disclose or to use without permission confidential information
acquired from another." [23] The Restatement of Torts describes the generally
recognized common law rule in Massachusetts for misappropriation of trade secrets:
One who discloses or uses anothers trade secret, without a privilege to do so, is
liable to the other if
(a) he discovered the secret by improper means, or
(b) his disclosure or use constitutes a breach of confidence reposed in him by the
other in disclosing the secret to him, or
(c) he learned the secret from a third person with notice of the facts that it
was a secret and that the third person discovered it by improper means or that
the third persons disclosure of it was otherwise a breach of his duty to the
other, or
(d) he learned the secret with notice of the facts that it was a secret, and that
its disclosure was made to him by mistake.[24]
The plaintiff must establish three elements in order to prove tortious
misappropriation of a trade secret: (1) it possesses a trade secret; (2) it took
reasonable steps to preserve the secrecy of the trade secret; and (3) the defendant
misappropriated or used the trade secret in breach of its duty.[25] The plaintiff
"has an unshifting burden to prove that the defendant misappropriated and
wrongfully used the plaintiffs trade secret." [26]
D. Trade Secret Defined
The Supreme Judicial Court has adopted the definition of a trade secret appearing
in the Restatement of Torts:
A trade secret may consist of any formula, pattern, device or compilation of
information which is used in one's business, and which gives him an opportunity
to obtain an advantage over competitors who do not know or use it. It may be a
formula for a chemical compound, a process of manufacturing, treating or
preserving materials, a pattern for a machine or other device for a list of
customers . . . . A trade secret is a process or device or continuous use in
the operation of the business.[27]
Excluded from the Restatement definition is "information as to single or ephemeral
events in the conduct of the business."[28] For example, the amount of a secret
bid for a contract, the salary of certain employees or the date fixed for
bringing out a new product are generally not considered trade secrets.[29]
Nevertheless, such information may qualify as confidential business information
which is entitled to protection.[30]
While an exact definition of a trade secret is not possible[31] and "no general
and invariable rule can be laid down, "[32] the Supreme Judicial Court has considered
the following six factors:
(1) The extent to which the information is known outside of plaintiffs
business;[33]
(2) The extent to which it is known by employees and others involved in
plaintiff's business;
(3) The extent of measures taken by plaintiff to guard the secrecy of the
information;
(4) The value of the information to plaintiff and its competitors;
(5) The amount of effort or money expended by plaintiff in developing the
information; and
(6) The ease or difficulty with which the information could be properly acquired
or duplicated by others. [34]
A trade secret need not be a patentable invention.[35] It can be a "combination
and adaptation of old principles to new purposes" so long as it accomplishes
a result which gives the holder "a competitive advantage due to his own
ingenuity, research and development."[36] The fact that a secret is easy to
duplicate "does not militate against its being a trade secret."[37] A minor
improvement is sufficient.[38] However, a trade secret "must possess at least
that modicum of originality which will separate it from everyday knowledge."[39]
A "jargonization of the obvious" is insufficient to create a trade secret.[40]
The definition of trade secret which appears in the proposed Uniform Trade
Secrets Act, approved for enactment by the American Bar Association in
February, 1980 but not yet adopted by the Massachusetts Legislature, contains a
significant departure from the Restatement definition.[41] Whereas the
Restatement definition requires that a trade secret be used continuously in
ones business, the broader definition of the proposed Act extends protection
to a plaintiff who has not yet had an opportunity or acquired the means to put
the trade secret to use.[42] This definition includes, for example, the
results of lengthy and expensive research which proves that a certain process
will not work.[43] Although the broader definition proposed by the Act may remedy
an apparent limitation of the Restatement definition, Massachusetts courts
have not applied the Restatement definition so restrictively. Thus, in Jet Spray
Cooler, Inc. v. Crampton [44] ("Jet Spray I"), the Supreme Judicial Court
afforded protection to a trade secret which was never actually used in the
plaintiffs business.[45]
The reported decisions in Massachusetts illustrate the wide variety of
processes and information which may be considered trade secrets. A process to
manufacture two-tone sinks, [46] engineering information contained in a
corporate report, [47] a machine used to produce rivets,[48]
lists of customers and suppliers,[49] and even a recipe for chocolate
chip cookies[50] have all been held to constitute trade secrets warranting
judicial protection. The list of potential trade secrets is literally
endless.[51] Indeed, only two important types of subject matter cannot be
maintained as trade secrets: abstract ideas or general principles which are not
embodied in a specific form,[52] and information used in a business which is
nevertheless considered to belong to the firms employees.[53]
It is well settled that computer software may be considered a trade secret,[54]
although there are no Massachusetts appellate decisions on point. In Dickerman
Associates, Inc. v. Tiverton Bottled Gas Co.,[55] a decision by Judge Rya
Zobel in the United States District Court for the District of Massachusetts,
certain of the defendants were found to have misappropriated the plaintiffs
computer software in violation of a confidentiality agreement. The Court noted
the special difficulties in applying the general law of trade secrets to
computer software.[56] The Court concluded, however, that the software did
constitute a trade secret as it reflected a complex, but coherent program for
a specific market, it was developed at substantial expense, the particular
combination of procedures used in the plaintiffs program were not obvious or
easily duplicated, and they gave the plaintiff a competitive advantage.[57]
Since patent and copyright protection for computer software is often inadequate,
companies that seek to protect their computer software are increasingly turning
for protection to trade secret law.[58] We can expect, therefore, increasing
litigation in this area.
E. Preserving the Secrecy of a Trade Secret
The "essential characteristic" of a trade secret is secrecy.[59] One who
possesses a trade secret must exercise "eternal vigilance"[60] and take active
steps to preserve its secrecy.[61] As the Supreme Judicial Court has explained:
"[I]f the person entitled to a trade secret wishes to have its
exclusive use in his own business, he must not fail to take all proper
and reasonable steps to keep it secret."[62] A policy of nonaction precludes
protection by the court.[63]
Where the plaintiff has actively sought to protect the trade secret
"the question then becomes whether the protective measures are reasonable."[64]
There is no general rule as to what security precautions are reasonable.[65]
"The question whether the plaintiff has taken 'all proper and reasonable steps'
depends on the circumstances of each case, considering the nature of the
information sought to be protected as well as the conduct of the parties."[66]
Certain information, by its nature, is generally recognized as being confidential
and therefore periodic warnings and constant admonishments by the employer may not
be required. For example, blueprints and detailed manufacturing drawings are
considered prima facie trade secrets. [67] It is not fatal to the plaintiffs case
that such blueprints and drawings are not labeled "confidential" or that the
plaintiff does not expressly inform its employees that they are considered
secret.[68] On the other hand, other information is not so clearly confidential,
and an employer will be required constantly to remind its employees of the informations
confidential nature.[69]
In assessing the reasonableness of the plaintiffs security precautions, the court
should consider the following factors:
(1) The existence or absence of an express agreement restricting disclosure;
(2) The nature and extent of security precautions against acquisition by
unauthorized third parties;
(3) The circumstances under which information is disclosed to employees, to
the extent that it may be inferred that further disclosure, without the
consent of the possessor, is prohibited; and
(4) The degree to which information is in the public domain or rendered
"readily ascertainable" by third parties through patent application or
unrestricted product marketing.[70]
In addition to the above factors, the court should balance the plaintiffs conduct
in maintaining its security measures against the conduct of the defendant in acquiring
the information.[71]
"Heroic measures" are not required to preserve the secrecy of at trade secret.[72]
As the Supreme Judicial Court has noted: "Reasonable precautions against predatory
eyes we may require, but an impenetrable fortress is an unreasonable requirement,
and we are not disposed to burden industrial inventors with such a duty in order
to protect the fruits of their efforts."[73] Industrial security procedures "need
to be optimized rather than maximized. "[74] But there is no hard and fast
rule as to what constitutes an "optimum" program to protect trade secrets.[75]
USM Corp. v. Marson Fastener Corp. [76] ("USM I") provides a good illustration of
the Supreme Judicial Courts application of these general principles. There, the
plaintiff employee required supervisory, technical and research personnel
(including the defendant-former employee) to sign nondisclosure agreements;
the defendants knew or should have known that detailed parts drawings and
blueprints were considered confidential by the employer; and the general
public was excluded from production areas. The Court found these precautions
were sufficient even though the nondisclosure agreements did not list the
particular information the plaintiff considered secret, the subject blueprints
and parts drawings were not labeled "confidential" or "secret," and the plaintiff
had occasionally allowed escorted plant tours for employees families and the
plaintiffs product distributors. Even though the plaintiff could unquestionably
have done more to protect its trade secrets, the "reasonableness" standard
was satisfied. The Court seemed particularly persuaded by the fact that, until
the defendants acquired a set of the plaintiff's machine parts drawings and
one of the plaintiff's former employees, the defendants' efforts to construct a
satisfactory blind rivet assembly machine had been unsuccessful. The
plaintiffs "efforts at secrecy, like the process itself, met the basic
criterion of success."[77]
Other decision provide additional guidance as to what constitute sufficient
measures to preserve secrecy. In Eastern Marble Products Corp. v. Roman
Marble, Inc.,[78] a manufacturing process for two-tone sinks was afforded
trade secret protection where the plaintiff not only enforced a separation
of the manufacturing area of the plant from the public area, but also required
all manufacturing employees to sign nondisclosure agreements. In Peggy Lawton
Kitchens, Inc. v. Hogan,[79] the recipe for chocolate chip cookies was
protected where the plaintiff secured copies of the recipe, did not divulge
the recipe to customers who inquired about it, broke down the formula into
baking ingredients and limited access to the recipe cards. The absence of
admonitions about secrecy and the failure to emphasize secrecy in employment
contracts were not considered controlling factors by the Court.
In J. T. Healy & Son, v. James A. Murphy & Son, Inc.,[80] however, the Supreme
Judicial Court held that certain manufacturing processes and dyes employed by the
plaintiff in the jewelry findings business should not be afforded protection
as trade secrets since the plaintiff had failed to take reasonable steps to
keep them secret. Among other things, the plaintiff had issued no written notice
or admonishment to its employees against discussing the processes outside the
plant, the plaintiff had not required employees to sign nondisclosure agreements,
and the plaintiff had not taken effective steps to separate the manufacturing employees
engaged in the "secret" processes from the other employees.[81] The Court also
found it significant that there was considerable turnover in the labor force.[82]
In summary, the owner of a trade secret must take reasonable steps to preserve
its secrecy. While "heroic measures" are not required, reasonable precautions
under all of the circumstances are essential. The plaintiff must establish at a
minimum that it took some of the following steps: restricted outside visitors
from the business areas where the trade secret is used; limited access to the
secret to those with a "need to know"; maintained the secret in a secure location;
and advised those who have access to the secret that it is confidential.[83]
Depending upon the particular circumstances in each case, including the conduct
of the defendant, the plaintiff may be required to take additional steps.
F. Wrongful Acquisition or Disclosure of a Trade Secret
The wrongful acquisition or disclosure of a trade secret is an essential element
of the plaintiffs prima facie case.[84] It arises in two general ways. First,
an "insider," i.e., an employee, partner, joint venturer or licensee, may properly
obtain the trade secret, but then use or disclose the information in breach of
contract or abuse of confidence.[85] Most of the reported decisions in Massachusetts
involve this situation. For example, in Jet Spray I, [86] former employees of the
plaintiff sought to use valuable engineering information contained in a confidential
report for the benefit of a competing business. Similarly, in Peggy Lawton Kitchens
Inc. v. Hogan,[87] a former employee of the plaintiff sought to use the plaintiffs
secret cookie recipe in competing business.
Second, an "outsider" i.e., one who does not already know the trade secret as a
result of employment or other business relationship, may use improper means to
discover the trade secret and then unlawfully use or disclose the information.[88]
Examples of such improper means include theft, trespass, bribing or otherwise
inducing employees or others to reveal information in breach of duty, fraudulent
misrepresentation, threats of harm by unlawful conduct, wiretapping and
procuring ones own employees or agents to become employees of the other for
purposes of espionage.[89] It is well established that acquisition of a trade
secret by such "independently unlawful" means satisfies the requirement of
improper conduct.[90]
This form of trade secret misappropriation is less frequently encountered in
the reported Massachusetts cases. However, our appellate decisions do discuss
a few examples of such "independently unlawful" means. In Commonwealth v.
Robinson,[91] the criminal defendant fraudulently obtained certain customer and
price lists and other tangible information owned by a competitor by purporting
to become a dealer. In USM I,[92] the subject blueprints were apparently stolen
by the defendant.[93]
Of course, an "outsider" may use all proper means to discover a trade secret.[94]
These include discovery by independent invention, observation of the item in
public use or on public display or obtaining the trade secret from published
literature.[95] An "outsider" may also properly discover the trade secret by
"reverse engineering," that is, starting with the known product and working
backward to find the method by which it was developed.[96]
Proving improper use or disclosure can often be "an extraordinarily difficult
task."[97] Usually, the plaintiff must rely upon circumstantial evidence to
demonstrate that it is more probable than not that the trade secret was
improperly used or disclosed.[98] One form of circumstantial evidence
that is frequently relied upon to establish improper use is "similarity."
[99] If the defendants machine or process is "substantially similar" to or
in "essential conformity" with the machine or process incorporating a protected
trade secret, the plaintiff is entitled to relief.[100] Modifications in the
process do not relieve a defendant of liability if the defendants
process is substantially derived from the trade secret.[101]
-----------------------------------------------------
FROM R, MARK HALLIGAN, ESQ:
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 Plaintiffs 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 plaintiffs 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 (7th Cir. 1995); MAI Systems Corp. v. Peak Computer,
Inc., 991 F.2d 511, 521-22 (9th Cir. 1993).
INSURANCE CUSTOMER INFORMATION PROTECTIBILITY AS A TRADE SECRET AGAINST
MISAPPROPRIATION BY FORMER AGENTS.
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
Plaintiffs confidential machine design for producing these high quality foam
applicators. Trey Marks and other defendants thereafter built a machine
using the Plaintiffs 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 Plaintiffs 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 Plaintiffs 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 plaintiffs trade secrets.
LENDERS LIABLE FOR TRADE SECRET MISAPPROPRIATION.
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
FRANCHISORS CONFIDENTIAL INFORMATION.
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 Airteks 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
Airteks 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 (7th 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.
307. Electro Optical Industries, Inc. v. White, 1999 WL 1986467
(Cal.App. 2 Dist.) (November 30, 1999).
Electro Optical Industries, Inc. (EOI) appealed the trial court's order
denying its application for a preliminary injunction to prevent the
misappropriation of its trade secrets by respondent Stephen White (White),
EOI's former sales manager who is now employed as sales manager of Santa
Barbara Infrared, Inc. (SBIR), a competitor of EOI. The California Court
of Appeals affirms.
EOI is a supplier of infrared devices including test equipment sold to the
military and defense contractors. Worldwide, only about 100 entities
purchase this equipment. EOI and SBIR are among the three to six
firms that supply it. Sales are driven by technology and the ability
to adapt it to the customers' specific needs and preferences.
For about 15 years, White was the sales manager of EOI's
infrared test equipment division. Because he was the key sales contact
between EOI and its customers, White knew about EOI's sources of supply,
production costs, customer lists and requirements, sales prices
and volume, marketing plans and finances. Although White is not an
engineer, he also acquired technical information about the design and
manufacture of EOI's existing and future products.
In late April 1999, White saw a newspaper advertisement for a
sales manager position at SBIR. White interviewed for the job and
told SBIR that he was responsible for sales and marketing at EOI and had a
significant role in product development. He also told SBIR that he
had "knowledge of the market and customer base" and knew "the applications
and requirements of the manufacturers and users of [infrared]
sensors and sensor systems."
SBIR offered White the job in early May 1999. White's duties
at SBIR would include developing a marketing plan for SBIR,
developing a profile of SBIR's competitors, "including strengths,
weaknesses and relative market position" and attempting to increase SBIR's
customer base.
The UTSA defines a trade secret as information that, "(1)
Derives independent economic value, actual or potential, from not being
generally known to the public or to other persons who can obtain economic
value from its disclosure or use; and (2) Is the subject of efforts
that are reasonable under the circumstances to maintain its secrecy." (
3246.1, subd. (d)). The UTSA permits a trial court to enjoin any
actual or threatened misappropriation of trade secrets. ( 3426.2, subd.
(a).)
Courts in other jurisdictions have adopted the "inevitable
disclosure" rule which permits a former employer to enjoin an employee
from working for a direct competitor where the "new employment will
inevitably lead [the employee] to rely on the [former employer's] trade
secrets." (PepsiCo Inc. v. Redmont (7th Cir. 1995) 54 F.3d 1262, 1269.)
In other words, an injunction against the new employment may
issue where the new employment is "likely to result" in the disclosure of a
former employer's trade secrets, or where it would be "impossible"
for an employee to perform his or her new job without using or disclosing
those secrets. (Air Products and Chemicals, Inc. v. Johnson
(1982) 296 Pa.Super. 405, 416, 425, 442 A.2d 1114; see also Continental
Group Inc. v. Kinsley (D.Conn. 1976) 422 F.Supp. 838, 845
[injunction available "if the second employer's work is sufficiently
similar to the that of the first employer to make likely the risk of
disclosure by the employee in the course of his subsequent employment."].)
Although no California court has yet adopted it, the inevitable
disclosure rule is rooted in common sense and calls for a fact specific
inquiry. We adopt the rule here.
However, to prevail on appeal from the denial of a preliminary
injunction, EOI must demonstrate as a matter of law that the trial court
could only have found that White would inevitably make a disclosure, i.e.,
that it is "likely to result" or "impossible" not to result from White's
employment at SBIR. EOI has not done so.
The trial court did not abuse its discretion when it factually
found that White would not inevitably disclose EOI trade secrets to SBIR.
White lacks the training to pass on technical information, and SBIR stated
it had no desire or need for that information. EOI presented no
contrary evidence. The trial court was well within the bounds of reason
when it factually found that White had not threatened to
misappropriate and would not misappropriate EOI's technical trade secrets.
Similarly, the trial court factually found that White did not
threaten to misappropriate EOI's claimed "non-technical" trade secrets.
Much of the information EOI refers to as "nontechnical trade secrets"
appears not to qualify as a trade secret. Other information, while
confidential, appears to lack economic value to SBIR. In other instances,
EOI failed to demonstrate that the disclosure of this information
would cause it irreparable harm sufficient to justify injunctive relief
that would necessarily end White's employment.
EOI contends its customer list is a trade secret that White
will inevitably use in finding new customers for SBIR. A customer list may
be considered a trade secret where the identity of customers has economic
value. For example, where many firms are potential customers for
a product but only a few actually purchase it, their identities have
economic value to all of the product because compiling a list of actual
customers requires an investment of time and money. The UTSA protects that
investment. (Morlife Inc. v. Perry (1977) 56 Cal.App.4th
1514, 1521-1522, 66 Cal.Rptr.2d 731; Courtesy Temporary Service, Inc. v.
Camacho (1990) 222 Cal.App.3d 1278, 1286-1287, 272
Cal.Rptr. 352; American Credit Indemnity, Co. v. Sacks (1989) 213
Cal.App.3d 622, 630-631, 262 Cal.Rptr. 92.) By contrast, a customer
list does not achieve trade secret status where the identity of actual
customers is common knowledge in the market at issue. (ABBA Rubber
Co. v. Seaquist (1991) 235 Cal.App.3d 1, 18-19, 286 Cal.Rptr. 518; American
Paper & Packaging Products, Inc. v. Kirgan (1986) 183
Cal.App.3d 1318, 1326, 228 Cal.Rptr. 713).
Here, the market for EOI and SBIR's products is small and is
not difficult or expensive to learn the identity of actual customers.
Suppliers know which customers buy from which suppliers. They routinely
solicit all available customers, and larger customers purchase from
more than one supplier. Under these circumstances, EOI's customer list is
not a trade secret.
Nor can we agree that information regarding the requirements,
preferences and specifications of EOI's customers constitutes a trade
secret of EOI. The information can, of course, be disclosed by the
customer to any EOI competitor. If it is a trade secret, it belongs to the
customer, not EOI. (Metro Traffic Control Inc. v. Shawdow Traffic Network,
supra, 22 Cal.App.4th at p. 863, 27 Cal.Rptr.2d 573).
EOI presented no evidence that its sales prices constitute a
trade secret. The evidence was, instead, that suppliers can obtain sales
prices by calling their competitors. Moreover, there was no evidence that
EOI and SBIR products compete on price. To the contrary, EOI
claimed that sales are driven by technology. SBIR agreed, presenting
evidence that its prices are higher than EOI's.
EOI's claim that an injunction is needed to protect information
about its production costs is also unpersuasive. Although its cost
information appears to be confidential, EOI failed to show that the
information has independent economic value to SBIR. (See, e.g., Union
Carbide Corp. v. UGI Corp. (5th Cir. 1984) 731 F.2d 1186, 1191 [production
cost determining lowest price at which supplier could sell
product a trade secret].) Because the two firms do not appear to compete
based on price, the trial court reasonably concluded that the threat
White would disclose cost information to SBIR was insufficient to merit
injunctive relief.
The trial court did not abuse its discretion when it concluded
that the marketing plans at issue are not trade secrets. These strategies
are matters of common knowledge, not the confidential proprietary ideas of
EOI.
INEVITABLE DISCLOSURE DOCTRINE RECOGNIZED IN CALIFORNIA; FAILURE OF
PLAINTIFF TO MEET BURDEN OF PROOF.
Conclusion
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