Trade Secrets II Intro to IP – Prof Merges

Agenda Misappropriation – “Reasonable precautions” – Rockwell Graphics – Improper means: DuPont v. Christopher – Confidential relationship: Smith v. Dravo – Reverse engineering: Kadant v. Seeley

Elements of a Trade Secret Action Eligible Subject Matter – Information that derives economic value from being kept secret – Must be secret Reasonable Precautions to Keep Secret [IPNTA 5 th P. 36, UTSA; compare Rest. 3d IPNTA 5 th p. 54] Misappropriation

Rockwell Facts Posner opinion

Prof/Judge Richard Posner

Goss Graphic Systems, Inc. (formerly Rockwell) designs, manufactures, and markets Web offset printing press systems. The company offers newspaper press systems for newspaper publishers; commercial press systems for brochures, books, etc. It also provides after sales service and replacement parts for its equipment. Founded, 1885, based in Illinois.

Rockwell facts Piece part drawings Assembly drawings Vendors (subcontractors); customers

Why no patents? Parts difficult to reverse engineer without detailed guidance of drawings Also: many individual parts, would be very expensive to patent them all

Piece Part Drawing

Assembly Drawing

Elements of a Trade Secret Action Eligible Subject Matter – Information that derives economic value from being kept secret – Must be secret Reasonable Precautions to Keep Secret Misappropriation

Trial Court Held: Drawings did not contain trade secrets No “reasonable efforts” to maintain secrecy

Trial court rationale Thousands of drawings in hands of vendors (outsourced parts suppliers) This demonstrates inadequate efforts to maintain the trade secrets in the parts

Posner view Reviews precautions Rockwell did take – Vault: signout procedure – Confidentiality agreements – employees, vendors Nonenforcement of “destroy or return” provision

Conclusion: “The mere fact that Rockwell gave piece part drawings to vendors... Did not forfeit trade secret protection” – IPNTA 5 th p. 51

Evidentiary force of reasonable precautions Tends to establish that the the only way the defendant could have obtained the information/TS is through improper means Reasonable precautions makes acquisition through “proper means” very unlikely

Role of precautions Shows that info must have been taken wrongfully – evidence of bad acts by defendant Evidence of real value; shows info is worth protecting through legal system

Rockwell Graphics “Secrecy Continuum” Perfect Secrecy No Secrecy Tell No One Publication Don’t Publish/ No Efforts Share with Confidentiality

Compare facts: Electro Craft Corp. p. 54 Less stringent security measures (less control over access; less consistent about requiring confidentiality agreements; no locked “vault” for machine drawings; less security concerning disposal of drawings) “Notice function” of reasonable precautions: put others on notice of TS status

Disclosure in the course of business Common situation: the “secret sauce” Data General v. Digital Computer

The handwritten recipe that launched a fast-food dynasty and made Colonel Harland Sanders world famous is locked away at KFC headquarters—its contents so guarded that not even the chain’s top executive knows the ingredients.... Only a few people know the recipe and are sworn to secrecy. The employees have access to the recipe because of their roles making sure suppliers and KFC live up to Sanders’ culinary legacy. Two companies supply the herbs and spices, but their knowledge of the recipe is limited. Each supplier formulates only part of the ingredients... and neither supplier knows the other’s identity. The Colonel’s own handwritten recipe is tucked away in a safe at KFC headquarters. As a backup, KFC has portions of the recipe locked away in safety deposit boxes at undisclosed places elsewhere around the country.

Data General v. Digital Computer Extent of use Reasonable precautions?

IPNTA 5 th at 59 Design drawings made available to customers are furnished subject to the terms of a non- disclosure clause contained in a paper which accompanies a purchase agreement. Furthermore, all drawings bear a legend to the effect that they contain proprietary information of the plaintiff which is not to be used by a purchaser for manufacturing purposes.

IPNTA 5 th at 59 Plaintiff argues... that disclosure of the design drawings to purchasers of the computer is necessary properly to maintain its device, that such disclosure was required by the very nature of the machine, and that reasonable steps were taken to preserve the secrecy of the material released.

I conclude at this preliminary stage of the case that it cannot be held as a matter of law that such precautions were inadequate, a factual dispute as to the adequacy of such precautions having clearly been raised. Defendants’ motion for summary judgment must accordingly be denied.

IPNTA 5 th p. 59: Injunction “Head Start” period injunction Common in TS cases The remedy is a good measure of the value of the TS right to a plaintiff

Disclosure of Trade Secret: IPNTA 5 th p. 60 Publication Revealed when sell product Disclosure by third party Inadvertent disclosure Government-required publication

Improper means DuPont v. Christopher Overflight not per se illegal BUT: Was it wrongful?

DuPont Tests difference between 2 conceptions of TS law mentioned by Posner – Tort/ethics – Property/incentive

DuPont holding Overflight is “improper means” TS law in Texas supports “higher standards of commercial morality in the business world”

Confidential Relationship Smith v. Dravo

Dravo Classic “squeezeout” case Interested buyer obtains info from would-be seller; then squeezes that seller out by entering the business/making the product themselves

Confidential relationship Why necessary? – Secrecy; reasonable precautions: duty Established here? – Implied duty: Steel Car Co. case – Compare Omnitech p. 70; Rest 3d.

It is clear that no express promise of trust was exacted from defendant. There is, however, the further question of whether one was implied from the relationship of the parties....

IPNTA 5th at 73 Here plaintiffs disclosed their design for one purpose, to enable defendant to appraise it with a view in mind of purchasing the business. There can be no question that defendant knew and understood this limited purpose. Trust was reposed in it by plaintiffs that the information thus transmitted would be accepted subject to that limitation.

Reverse Engineering Kadant v. Seely Machine

Kadant - facts Corlew’s work history Reverse engineering of nozzles and other items 1.7 years to duplicate?

Lack of evidence No DIRECT evidence of access to part designs Inference of copying/misappropriation of designs – only from short time to get to market

Restatement of Torts § 757 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 chemical compound, a process of manufacturing, treating, or preserving materials, a pattern for a machine or other device or a list of customers.