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Trading Secrets A Law Blog on Trade Secrets, Non-Competes, and Computer Fraud

Seventh Circuit Rejects Pool Technology Company’s Trade Secrets Claim

Posted in Trade Secrets

On March 29, 2012, the Seventh Circuit upheld summary judgment in favor of a defendant on plaintiff’s claims for trade secrets misappropriation and unjust enrichment, holding that plaintiff failed to take any measures, let alone reasonable measures, to protect its alleged trade secrets during joint marketing negotiations with defendant. Fail-Safe LLC v. A.O. Smith Corp., No. 11-1354 (7th Cir. Mar. 29, 2012). The decision highlights the need for written confidentiality agreements signed, sealed, and delivered before people explore doing business with each other.

Fail-Safe developed an anti-entrapment pump which prevents pool drains from trapping swimmers. After A.O. Smith representatives learned of Fail-Safe’s pump at a trade show and in a magazine ad, the two companies had several meetings and extensively negotiated A.O. Smith’s possibly marketing and selling the pump for Fail-Safe. Never during the negotiations did Fail-Safe require A.O. Smith to sign a confidentiality agreement not to use or disclose the alleged secret technology, nor did Fail-Safe even raise confidentiality during any meeting or correspondence, even though it had done so in the past with other potential marketing partners. The only confidentiality obligation was on Fail-Safe, which signed a one-way confidentiality agreement without asking for a reciprocal obligation from A.O. Smith. The Seventh Circuit held that the failure to take any precaution to protect the technology precluded Fail-Safe’s trade secrets claim as a matter of law, rejecting Fail-Safe’s argument that whether its protective measures were sufficient was a question to be decided by the jury. The court went so far as to say “you can’t steal free advice,” and that “Fail-Safe courted its own disaster by failing to take any protective measures.”

On the same grounds, the court upheld the district court’s summary judgment on plaintiff’s unjust enrichment claim, holding that defendant could not have been unjustly enriched if plaintiff did not seek to protect the information. Notably, the court did not address any preemption argument; that is, whether an unjust enrichment claim would be preempted by Section 7 of the Trade Secrets Act.

Missing from the court’s opinion was any comment on A.O. Smith’s ostensibly suspect conduct in bringing a competing pump to market after Fail-Safe provided A.O. Smith with the necessary know-how. A.O. Smith sought out Fail-Safe to market the pump, not vice versa, and the parties appeared to closely engage each other regarding joint marketing possibilities. Fail-Safe disclosed its alleged secret technology apparently in good faith, and with hopes for future mutual profit. After Fail-Safe sought to commit the parties’ relationship to writing, A.O. Smith called everything off, and less than two years later (after a reportedly contentious letter-writing campaign with Fail-Safe regarding their alleged rights in the pump), began selling its own pump. Fail-Safe should have at least asked for a non-disclosure agreement, to be sure, and the court noted that Fail-Safe waited nearly two years after A.O. Smith began selling its alleged copycat pump before bringing suit – perhaps an inexplicable lapse of time to enforce rights in alleged proprietary assets. Nevertheless, A.O. Smith’s alleged betrayal of Fail-Safe’s trust appeared to be irrelevant to the court, and the Seventh Circuit’s decision may mean that district courts in the circuit can properly condone allegedly underhanded conduct in the absence of a confidentiality agreement or other demonstrable security measures.