TRADE SECRETS- FURTHER ISSUES

IVAN HOFFMAN, B.A., J.D.


        Not everything that a party claims to be a trade secret is, in fact or in law, a trade secret.  Having another party sign a non-disclosure or confidentiality agreement will not, in itself, create trade secrets or other protectable materials if such materials do not otherwise exist.

        The Uniform Trade Secrets Act, adopted in one form or another in most states of the United States, provides this definition of a trade secret (I will use the California statute, Civil Code 3426 et. seq. as but one example):

d) "Trade secret" means information, including a formula, pattern, compilation, program, device, method, technique, or process ,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.

        There are several components of the definition, all of which are essential to any claim that some information is a trade secret.

        First: the information must have “independent economic value, actual or potential.”  This means that it is not merely information but information that has economic value even if such value has not yet been concretely demonstrated.

        Second: the claimant of such “trade secrets” must take steps to “maintain its secrecy.”

        Read “Trade Secrets” for a further discussion about what “misappropriation” means.

        A case out of the Seventh Circuit Court of Appeals serves to illustrate these issues.  In BondPro Corp. vs. Siemens Power Generation, Inc.  these were the facts in summary form as recited by the Court:

BondPro is a small company that manufactures products (it is still in business despite its scrape with the Wisconsin corporate authorities) that require the bonding of dissimilar materials. Siemens (a subsidiary of the German conglomerate), the defendant, makes electrical generators. The generators produce electrical power by spinning rotors over magnets. The rotors have slots into which copper coils are wedged. The outer layer of each coil consists of insulation material in the form of a U-shaped “slot cell.” Siemens manufactures slot cells by first placing the insulation material in a U-shaped (“female”) container and then pressing a “male” mold on top and applying heat. This process compresses the insulation into a rigid U-shaped material that can slide into the slots. The process resembles putting material into a bowl and pressing another, slightly smaller bowl into the first bowl to compress and harden the material inside that bowl.

The disadvantage of the process is that the slot cell may emerge with wrinkles in the insulation material that are difficult to smooth out.  BondPro developed (though it has never marketed) a process that dispenses with the female mold. Instead the insulating material is placed on the outside of the male mold and pressed against it by placing the mold and the insulation material in a vacuum bag so that air pressure compresses the material against the mold. Any remaining wrinkles are smoothed by hand.  The ensemble consisting of the mold and the insulation material pressed against it is then placed in an autoclave, a container in which high levels of heat and air pressure are applied to the contents. The heat and pressure compress the insulation coating the mold into the desired rigid shape and it is then removed from the male mold and slid into a rotor’s slot. [Emphasis added]

In 2001, Scott Wang, BondPro’s principal, explained and later demonstrated the process to Mark Miller, a materials engineer employed by Siemens. Though there were some negotiations, they resulted only in agreement (as we shall see) on confidentiality; Siemens didn’t seek a license from BondPro to use the process, even though BondPro had made clear in the course of the negotiations that it believed it had proprietary rights to it. Instead Miller filed a patent application on behalf of Siemens for a process similar to BondPro’s (more precisely, similar to the description of BondPro’s process in its appeal briefs) although among other differences it does not specify the use of an autoclave for the final step of hardening the insulation materials coating the male mold. There are other ways of applying heat and pressure; no particular way is specified in the patent application.

The Patent Office rejected Siemens’ application and Siemens has never used the process. Nor for that matter has BondPro, except to make some prototypes to show Siemens. There may have been some use of BondPro’s process by other companies, but if so there is no evidence of the value of such use.

Anybody other than Siemens can use the BondPro process without liability because, as BondPro acknowledges and indeed asserts, the process was disclosed to the world in Siemens’s patent application. A trade secret that becomes public knowledge is no longer a trade secret.  [Emphasis added]

        Thus the central issue in this case was whether, by virtue of having entered into the non-disclosure agreement, Siemens breached the same by disclosing the information.

        The Court discussed that neither Siemens nor BondPro had ever actually used the information or the process it discussed.  However, the Court added:

Even a trade secret that had never been used at all could have a market value, enabling damages from the destruction of the secret to be estimated. DSC Communications Corp. v. Next Level Communications, 107 F.3d 322, 329-30 (5th Cir. 1997); Metallurgical Industries, Inc. v. Fourtek, Inc., 790 F.2d 1195, 1208 (5th Cir. 1986); Precision Plating & Metal Finishing, Inc. v. Martin-Marietta Corp., 435 F.2d 1262, 1263-64 (5th Cir. 1970). Otherwise trade secrets could not be licensed before they were used.
        The Court went on to discuss the main issue, as to whether or not there was ever any trade secret:
Coming at last to the merits, we consider first whether BondPro’s process was ever a trade secret, and second whether if so it was improperly disclosed to the world by Siemens. It was not a secret from Siemens. BondPro disclosed it to Siemens in the hope of licensing it. Although it is awkward to license a trade secret because the negotiation necessarily reveals the secret to the prospective licensee, that revelation, as well as the revelation to suppliers and licensees, is obviously not the kind of disclosure that forfeits the protection of trade-secret law, Rockwell Graphic Systems, Inc. v. DEV Industries, Inc., 925 F.2d 174, 179 (7th Cir. 1991); Clark v. Bunker, 453 F.2d 1006, 1010 (9th Cir. 1972), as otherwise trade secrets could not be licensed. [Emphasis added]

What does forfeit protection is a failure to take reasonable steps to prevent gratuitous disclosure. Wis. Stat. § 134.90(1)(c)(2); IDX Systems Corp. v. Epic Systems Corp., 285 F.3d 581, 583 (7th Cir 2002); see also ECT Int’l, Inc. v. Zwerlein, supra, 597 N.W.2d at 482. Failure to take such steps is persuasive evidence that the secret has no real value. Courts are entitled, moreover, to economize on their scarce resources of time and effort by refusing to help a secret holder who failed to take minimum steps to protect his secret before running to court. Rockwell Graphic Systems, Inc. v. DEV Industries, Inc., supra, 925 F.2d at 179. Failure to take protective steps also sets a trap, since a company that ferrets out information that the originator does not think special enough to be worth incurring any costs to conceal will have no reason to believe that it is a trade secret. Id. [Emphasis added]

But BondPro did take measures to conceal its process that a reasonable jury could find sufficient. They included negotiating confidentiality agreements with employees, customers, and suppliers (including Siemens, with which it had two such agreements) and assuring that the process itself and documents describing it were kept under lock and key. Id. at 177, 180; Hicklin Engineering, L.C. v. Bartell, supra, 439 F.3d at 350; Valco Cincinnati, Inc. v. N & D Machining
Service, Inc., 492 N.E.2d 814, 819 (Ohio 1986). But because a trade secret is not a property right in anything like the sense in which copyright law and patent law create property rights, a would-be “thief” may be able to “steal” your secret without liability, for example if he copies it by reverse engineering or stumbles on it innocently (maybe you mislaid the document that describes it). ConFold Pacific, Inc. v. Polaris Industries, Inc., 433 F.3d 952, 958-59 (7th Cir. 2006). In general, it is only when the theft is accomplished by a tort or a breach of contract that there is liability. So it is critical to consider whether Siemens violated its contractual undertaking not to use or disclose information that BondPro conveyed to it as part of a negotiation for a possible sale or license of BondPro’s process.

        Again, read “Trade Secrets” for a further discussion about what “misappropriation” means.
In the course of a negotiation the parties are sure to convey all sorts of information to each other that either has no commercial value or is already known to the receiving party from some other source. To use or disclose such information without the permission of the informing party is not a breach of a confidentiality agreement. Cf. IDX Systems Corp. v. Epic Systems Corp., supra, 285 F.3d at 586. Anyway the agreements in this case expressly exclude information that is generally known, or known to Siemens before the disclosure to it by BondPro, or was developed by Siemens independently of the disclosure. BondPro’s Wang described and demonstrated to Siemens’ Miller the process and in so doing conveyed information. But how much of it was information at once previously unknown to Miller, unlikely to be discovered by him shortly, and commercially valuable? These questions are intertwined because a conveyance of information that is already common knowledge has no commercial value. That is why a suit for the appropriation of a trade secret requires proof that the information constituting the secret “derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use.” Wis. Stat. § 134.90(1)(c)(1); ECT Int’l Inc. v. Zwerlein, supra, 597 N.W.2d at 482; Hogan Systems, Inc. v. Cybersource Int’l, Inc., 158 F.3d 319, 325 (5th Cir. 1998). [Emphasis added].
        The Court then discussed whether what was claimed as a trade secret by BondPro was in fact anything that was secret or instead, was already known, in whole or in part, by others in the trade.  The Court concluded that the information presented at trial and on appeal did not sustain any finding of such secrets.
One expects a trade secret to be rich in detail, because a process described in general terms (squeeze insulation materials draped on the male mold with heat and air pressure rather than pressing the male mold into a female mold containing the materials) will usually be widely known and thus not worth incurring costs to try to conceal and so not a trade secret. See IDX Systems Corp. v. Epic Systems Corp., supra, 285 F.3d at 583-84; Composite Marine Propellers, Inc. v. Van Der Woude, 962 F.2d 1263, 1266 (7th Cir. 1992) (per curiam); ECT Int’l, Inc. v. Zwerlein, supra, 597 N.W.2d at 482-83; cf. Trandes Corp. v. Guy F. Atkinson Co., 996 F.2d 655, 661-62 (4th Cir. 1993). In its reply brief BondPro acknowledges that “many of the elements of the BondPro slot cell manufacturing process were in the public domain” but states that “the precise execution of each element, in conjunction with the precise execution of each additional element, renders BondPro’s process a secret.” But BondPro has not told us what those details of execution or implementation are. For example, in the list of nine components the temperature and the duration of the application of heat are stated as a broad range rather than as specific numbers—and anyway Wang obtained the range from Siemens! And a broad range was all that Siemens’s patent application disclosed—so if BondPro’s trade secret resides in specifics that have not been disclosed to us, Siemens is not responsible for their disclosure. [Emphasis added]
Conclusion

As indicated, merely declaring something to be a “trade secret” does not make it so.

Copyright © 2006 Ivan Hoffman.  All Rights Reserved.

****************

This article is not legal advice and is not intended as legal advice.  This article is intended to provide only general, non-specific legal information.  This article is not intended to cover all the issues related to the topic discussed.  The specific facts that apply to your matter may make the outcome different than would be anticipated by you.  This article is based on United States law.  You should consult with an attorney familiar with the issues and the laws of your country.  This article does not create any attorney client relationship and is not a solicitation.

****************

No portion of this article may be copied, retransmitted, reposted, duplicated or otherwise used without the express written approval of the author.

FOR MORE INFORMATION INCLUDING IF YOU WOULD LIKE TO BE PLACED ON MY MAILING LIST TO RECEIVE NOTICES OF NEW ARTICLES AND OTHER RELATED INFORMATION:


MAIL

Where Next?





Ivan Hoffman Attorney At Law || More Articles About Being An Entrepreneur || Home