Trading Secrets : Trade Secrets Lawyers & Attorneys : Seyfarth Shaw Law Firm : Computer Fraud, Confidentiality Agreements, Corporate Espionage

A manufacturer engaged an independent contractor to improve the efficiency of certain machinery.   After the task was completed, the contractor did the same for a competitor of the manufacturer.   The manufacturer, claiming that the improvements were its trade secrets, sued the competitor in an Ohio state court for misappropriation. The case went to trial before a jury which returned a verdict of liability, answered special interrogatories consistent with that verdict, but awarded no damages. The trial judge entered judgment on the verdict and enjoined the competitor from using the trade secrets for five years unless the manufacturer was paid a specified royalty. On cross-appeals, the Ohio appellate court recently affirmed the judgment in all respects. Columbus Steel Castings Co. v. King Tool Co., 2013 Ohio 6826 (10th Appellate Dist. Court of Appeals, Dec. 30, 2011).

Columbus manufactures steel bolsters that support and stabilize railroad cars. In 2003, Columbus retained King Tool to build a new, more efficient machine. As a result, Columbus’ productivity increased three-fold. Then, Columbus’ competitor Alliance Castings retained King for the same purpose and achieved production six times its former output. Columbus, claiming that the improvements to its machine made it “unique as a whole” and afforded a competitive advantage, sued King and Alliance for misappropriation of trade secrets. The defendants sought and obtained summary judgment, but Columbus appealed. In 2008, the Ohio Court of Appeals identified genuine issues of material fact and, therefore, reversed and remanded for a trial.  

Columbus settled with King and tried, to a jury, the dispute with Alliance. The jury returned a general verdict in favor of Columbus on liability but awarded no monetary relief. In answers to special interrogatories, the jury found that (a) the “machine made by King Tool for Columbus Steel was not generally known to, or readily ascertainable by proper means by, someone who might obtain economic value from its use,” (b) Columbus “made reasonable efforts to maintain the secrecy of the design of the” machine, (c) the design was a trade secret of Columbus, and (d) Alliance misappropriated Columbus’ trade secret.   The trial court enjoined Alliance’s use of its new machine for five years but, as an alternative, established a royalty of $10.60 -- approximately 1% of the average sales price -- for Alliance to pay Columbus for each bolster manufactured on the machine during that period. Both parties appealed. 

Columbus argued that the jury’s zero damages verdict resulted from misleading jury instructions. The Court of Appeals determined, however, that the instructions “as a whole” did not mislead “the jury in a manner affecting [Columbus’] substantial rights.” 

Alliance maintained that the case should not have been submitted to the jury at all because there was no evidence to support Columbia’s claims that (a) the machinery design qualified as a trade secret, (b) Columbus took “reasonable steps to protect the secrecy of the design,” (c) Alliance misappropriated the design, and (d) “Alliance’s alleged misappropriation caused Columbus damage.” The appellate tribunal, reviewing de novo, rejected all of these contentions and affirmed the judgment in its entirety. The court held that it must affirm “if substantial evidence exists to support” the verdict and “reasonable minds could reach different conclusions on essential elements of the claim.” As to Alliance’s contentions:

            1.         Trade secret. The design qualified as a trade secret under the Ohio Uniform Trade Secrets Act, even though certain components “were readily ascertainable, because the machine as a whole was unique and afforded a competitive advantage to Columbus Steel.” 

            2.         Protection of confidentiality. There was some evidence that Columbus had told King that the design was to be kept confidential and not shared with Columbus’ competitors. Further, Columbus “had security guards, fences, and locked entryways, and that the sketches and engineering drawings for the new machine were kept in a locked office.”  Alliance claimed that the improvements were readily ascertainable by viewing the machine, but the appellate court pointed to evidence that Alliance’s representatives “obtained unauthorized access by means of false representation in order to view the new machine.”

            3.         Misappropriation. Alliance may have used improper means to acquire knowledge of the trade secrets. There was some evidence that an Alliance misrepresented to King that he was working for both Alliance and Columbus. The Court of Appeals said it was the province of the jury to determine whether there was a misrepresentation and whether Alliance had reason to know of it.

            4.         Damage. There was evidence from which a jury could have found that Columbus lost an indeterminate amount of profits due to misappropriation. In trade secret cases, “it is often difficult to prove money damages or lost profits” with certainty. The injunction provided “some relief for the misappropriation [because] the facts and circumstances of this case, particularly the zero damages verdict, lend themselves to a presumption of [irreparable] harm and a finding that money damages could not adequately compensate Columbus Steel.” 

This decision provides insights with respect to proper jury instructions and special interrogatories in trade secret misappropriation cases. It shows that appellate courts will strive to reconcile all aspects of a jury’s verdict and a trial court’s judgment.

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I start by warning you that this case is old, over 5 years old, in fact.  However, when it arrived in my regular e-mail of case synopses, I thought I would take a look, and given the long, slow holiday week, I thought it might have a nugget to share and to keep in mind as we go into 2010. 

The case, The Newark Group, Inc. v. Sauter, Civ. Action No. C2:01-CV-1247, 2004 WL 5782100 (S.D. Ohio), was pending back in 2004.  This particular opinion, on Defendants' motion to strike Plaintiff's jury demand, was decided in April 2004.  Nevertheless, I think the point the court makes may be helpful. 

The question before the court on Defendant's motion was whether the plaintiff was entitled to a trial by jury on its claims for damages in a trade secrets case under a theory of unjust enrichment.  Defendants argued that under a trade secret case, an unjust enrichment claim was nothing more than a claim in equity, not triable to a jury. 

The court easily rejected the claim under Ohio's Trade Secret Misappropriation Act.  In explaining its decision, the court noted that the trade secret statute provides several methods by which to calculate damages, including unjust enrichment.  And, that the statute

acknowledges that calculating monetary damages for trade secret misappropriation may be difficult to ascertain, it therefore provides specific methods by which to calculate monetary damages.  One method for measuring damages is by calculating the amount of unjust enrichment caused by such misappropriation.  The fact that the statute contemplates different means of calculating damages does not transform the statutorily created legal theory of recovery . . . to become an equitable claim to relief. 

The other two methods of calculating damages:  actual loss caused by the misappropriation and imposition of a reasonable royalty also are not equitable relief, just other methods of calculating the monetary damages available to a successful plaintiff.  Even though the statute refers to "equitable," it means fair.  The damages remedies are legal in nature and thus triable to a jury -- even if difficult to ascertain.

Happy New Year to all!

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The Ohio 12th District Court of Appeals recently upheld a lower court’s injunction against two former employees and their new employer in light of defendants’ apparent breach of duty of loyalty, misappropriation of trade secrets, and tortious interference with business relations. DK Prods., Inc. v. Miller, Case No. CA2008-05-060, 2009 WL 243089 (Ohio Ct. App. 12 Dist. Feb. 2, 2009)

System Cycle, a branch of DK Products, Inc., located in Springboro, Ohio, distributes BMX bicycles, parts and accessories to bicycle retailers throughout the United States. System Cycle employed Matthew Miller and Charles Johantges until System Cycle learned that Miller and Johantges had disclosed sensitive financial information to vendors and attempted to broker distribution deals on behalf of Two Zero Distribution, Inc., a company created by Miller while Miller and Johantges were still employed by System Cycle (“Two Zero”). Per a Dayton Daily News article discussing the case, System Cycle learned about Miller and Johantges’s activities by intercepting an e-mail from the defendants to one of System Cycle’s customers.  

 The Ohio courts granted System Cycle ’s request for injunctive relief on each of the counts in the complaint, rejecting each and everyone of defendants’ counter-arguments. With respect to System Cycle’s tortious interference claim that defendants improperly interfered with System Cycle’s existing business relationships through improper disclosure of financial information, defendants argued that System Cycle had not showed evidence of malice on their part, but the Court of Appeals declined to find that malice is a necessary showing for a claim of tortious interference. Additionally, there was ample evidence of irreparable harm to System Cycle. Even defendant Miller admitted that his disclosure of confidential financial information regarding System Cycle was “pretty devastating.”

The courts also rejected Defendants’ challenge to the injunction as it related to the trade secret misappropriation claim. Defendants had asserted that the injunction was improper because System Cycle did not proffer evidence that they used System Cycle’s trade secrets Yet, the Court of Appeals pointed to Defendant Miller’s admission that he had discussed certain trade secret information with a vendor, which falls within the definition of “misappropriation” under the Ohio Uniform Trade Secret Act. 

Defendants’ final challenge was to the injunction as a remedy for the apparent breach of defendants’ duties of good faith and loyalty. The defendants contended that System Cycle failed to show irreparable injury in connection with this claim, but the defense fell on deaf ears. The Court of Appeals deflected that criticism by pointing to the very real potential for irreparable injury in connection with the other two claims.

As a result, the Court of Appeals affirmed the trial court’s order enjoining Defendants from solicitng System Cycle’s customers and from misappropriating System Cycle’s confidential information for the benefit of Two Zero. The case now returns to the trial court, where System Cycle may pursue a permanent injunction and money damages.

The key to System Cycle’s success likely had much to do with the early interception of the e-mail from Miller to a System Cycle customer. Procedures designed to prevent the loss of trade secrets through electronic means are becoming more commonplace and more important to protecting a company’s intellectual property. 

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The Sixth Circuit Court of Appeals recently held that whether a trade secret is a protectable interest is an equitable question not affected by the lack of a written instrument. Niemi v. NHK Spring Company, --- F.3d ---, 2008 WL 4273123 (6th Cir. Sept. 19, 2008).

Richard Niemi is an individual engineer who provides various automobile company manufacturers with designs related to stabilizer bars for automobiles. In the early 1990s, Niemi had an idea for a new method of stabilizer-bar manufacturing, which interested his long term client, New Mather Metals (a subsidiary of Defendant NHK Spring Co.) Although the purchase order through which New Mather ordered the manufacturing tooling, which Niemi claimed to be a “trade secret,” included the clause that “no other or different terms or conditions shall apply to this order unless specifically agreed to in writing. . .”, Niemi claimed that he had assurances that his new method would be kept “confidential.” In order to protect itself from Niemi’s selling his designs to its competitors, New Mather requested that Niemi enter into a “exclusivity agreement,” which Niemi described as “reciprocal” despite any language in the instrument to that effect. “No further writing was needed, in Niemi’s estimation, because New Mather’s obligation represented a continuation of an arrangement that had been in place for 25 or 30 years . . . .” 

Niemi learned a few years later that New Mather had disclosed his stabilizer manufacturing trade secret to other designers, and he brought an action against New Mather and its parent companies for misappropriation of trade secrets, as well as for other claims. The district court ultimately granted summary judgment to Defendants on the trade secrets claim, finding that Niemi had not taken sufficient steps to keep his designs secret. 

In reviewing Niemi’s appeal of judgment against his trade secrets claim, the Sixth Circuit considered Ohio’s adopted Uniform Trade Secrets Act, particularly focusing on the factor requiring “reasonable” efforts to maintain secrecy. Ultimately, it concluded that there were direct, disputed material facts sufficient to warrant reversal of the district court.

The decision is most significant, however, for the reasoning underlying its rejection of one of Defendants’ arguments; namely, that Niemi’s “oral reciprocal exclusivity agreement” was barred by the statute of frauds. In rejecting that argument, the court quoted Ohio law in noting that “protection afforded by trade secret laws is not a function of property interests or contract rights, but of ‘equitable principles of good faith applicable to confidential relationships.’” In other words, whether there is a contract or property interest in the trade secrets is “irrelevant” because trade secret protection derives from equity.

The progenitor of the principle quoted by the Sixth Circuit was Justice Oliver Wendell Holmes’ opinion in Masland, where he observed that, in “explaining the nature of a trade secret . . . trade secret laws are not those of property but the equitable principles of good faith applicable to confidential relationships.” Valco Cincinnati v. N & D Machining Service, Inc., 492 N.E.2d 814, 817 (Ohio 1986) (citing E.I. Du pont de Nemours Powder Co. v. Masland, 244 U.S. 100 (1917) (Holmes, J.)). 

In any event, although the fundamental character of a trade secret may be one of confidence protected by equity, there is some dispute among the states regarding whether a trade secret is a property right. Compare Envirotech Corp. v. Callahan, 872 P.2d 487, 494 (Utah App. 1994) (trade secret is a property right) with ConFold Pacific, Inc. v. Polaris Industries, Inc., 433 F.3d 952, 959 (7th Cir. 2006) (holding that, under Wisconsin law, a trade secret is not a property right but instead an interest protectable by contract).

The Sixth Circuit is correct that the lack of a written instrument does not itself negate a claim under the Uniform Trade Secrets Act. Certainly, if the existence of a written agreement – such as the “oral” mutual exclusivity and confidentiality agreement present in Niemi – would tend to increase the likelihood of a protectable trade secret, then its absence should mitigate against it.  But the Sixth Circuit seemed to go a step further in concluding that because a trade secret’s nature is one of equity, the lack of a contractual or property claim renders wholly “irrelevant” the lack of a written instrument. 

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