Trade Secrets II

Intro to IP – Prof Merges

4.12.2010

Agenda

• Misappropriation

– “Reasonable precautions” – Rockwell Graphics

– Improper means: DuPont v. Christopher

– Confidential relationship: Smith v. Dravo

– Reverse engineering: Kadant v. Seeley

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

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

Posner opinion

• Reviews precautions Rockwell did take– Vault, confidentiality agreements

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

Two conceptions of TS law: IPNTA 5th p. 51

• Tort-oriented/commercial ethics: deter efforts at “sterile” wealth redistribution – i.e., theft

• Encourage inventive activity: incentive, “property”-like orientation

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”

PerfectSecrecy

NoSecrecy

Tell No One Publication

Don’t Publish/No Efforts

Share withConfidentiality

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 5th P. 36, UTSA; compare Rest. 3d IPNTA 5th p. 54]

• Misappropriation

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 5th 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 5th 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 5th 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 5th 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

• 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.

A Transactional View of Property Rights, 20 Berkeley Tech. L.J.

1477 (2005)

Robert P. Merges

Property Rights Create a Legal “Field” Around an Information Asset (i), Protecting Seller (S)

During Buyer’s (B) Precontractual Evaluation

BS i

Reverse Engineering

• Kadant v. Seely Machine

• Corlew’s work history

• Reverse engineering of nozzles and other items

• 1.7 years to duplicate?

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.