Course No. 9200-704 (and 804)-801
ID No. 16545
MW 3:00 - 4:30 p.m.
Room 231D (IP Alcove)
|Copyright © 2000, 2002, 2003, 2006, 2008 Jay Dratler, Jr. For permission, see CMI.|
Chicago Lock Co. v. Fanberg676 F.2d 400, 216 U.S.P.Q. (BNA) 289 (9th Cir. 1982)
Before Ely and Norris, Circuit Judges, and Peckham,* District Judge.
* The Honorable Robert F. Peckham, Chief Judge, Northern District of California, sitting by designation.
[*401] Ely, J.:
The Chicago Lock Company ("the Company"), a manufacturer of "tubular" locks, brought suit against Morris and Victor Fanberg, locksmiths and publishers of specialized trade books, to enjoin the unauthorized dissemination of key codes for the Company's "Ace" line of tubular locks. The District Court granted summary judgment in favor of the Fanbergs as to the Company's [*402] federal claims of trademark infringement and unfair competition, but held trial on the common law claim of unfair competition under former Cal.Civ.Code § 3369.(1) The court concluded that the key codes for the Company's tubular locks were improperly acquired trade secrets and enjoined distribution of the Fanbergs' compilation of those codes. For the reasons set forth in this opinion, we reverse the District Court and order that judgment be entered in favor of the Fanbergs.
THE FACTSSince 1933 the Chicago Lock Company, a manufacturer of various types of locks, has sold a tubular lock, marketed under the registered trademark "Ace," which provides greater security than other lock designs. Tubular Ace locks, millions of which have been sold, are frequently used on vending and bill changing machines and in other maximum security uses, such as burglar alarms. The distinctive feature of Ace locks (and the feature that apparently makes the locks attractive to institutional and large-scale commercial purchasers) is the secrecy and difficulty of reproduction associated with their keys.
The District Court found that the Company has a fixed policy that it will only sell a duplicate key for the registered series Ace lock to the owner of record of the lock and on request of a bona fide purchase order, letterhead or some other identifying means of the actual recorded lock owner. In addition, the serial number-key code correlations are maintained by the Company indefinitely and in secrecy, the Company does not sell tubular key "blanks" to locksmiths or others, and keys to Ace locks are stamped "Do Not Duplicate."
If the owner of an Ace lock loses his key, he may obtain a duplicate from the Company. Alternatively, he may have a proficient locksmith "pick" the lock, decipher the tumbler configuration, and grind a duplicate tubular key. The latter procedure is quicker than the former, though more costly. The locksmith will, to avoid the need to "pick" the lock each time a key is lost, record the key code (i.e., the tumbler configuration) along with the serial number of the customer's lock. Enough duplicate keys have been made by locksmiths that substantial key code data have been compiled, albeit noncommercially and on an ad hoc basis.
Appellant Victor Fanberg, the son of locksmith Morris Fanberg and a locksmith in his own right, has published a number of locksmith manuals for conventional locks. Realizing that no compilation had been made of tubular lock key codes, in 1975 Fanberg advertised in a locksmith journal, Locksmith Ledger, requesting that individual locksmiths transmit to him serial number-key code correlations in their possession in exchange for a copy of a complete compilation when finished. A number of locksmiths complied, and in late 1976 Fanberg and his father began to sell a two-volume publication of tubular lock codes, including those of Ace locks, entitled "A-Advanced Locksmith's Tubular Lock Codes." In 1976 and 1977 Fanberg advertised the manuals in the Locksmith Ledger for $ 49.95 and indicated that it would be supplemented as new correlations became known. About 350 manuals had been sold at the time of trial. The District Court found that Fanberg "had lost or surrendered control over persons who could purchase the books," meaning that nonlocksmiths could acquire the code manuals.
The books contain correlations which would allow a person equipped with a tubular key grinding machine to make duplicate keys for any listed Ace lock if the serial number of the lock was known. On some models, the serial numbers appear on the exterior of the lock face. Thus, Fanberg's manuals would make it considerably easier [*403] (and less expensive) for a person to obtain (legitimately or illegitimately) duplicate keys to Ace locks without going through the Company's screening process. This is what caused consternation to the Company and some of its customers. At no time did Fanberg seek, or the Company grant, permission to compile and sell the key codes. Nor did the individual locksmiths seek authorization from the Company or their customers before transmitting their key code data to Fanberg.
The Company filed a three-count complaint against the Fanbergs, alleging federal question jurisdiction and diversity of citizenship, on December 2, 1976. The complaint was predicated on theories of trademark infringement . . . federal unfair competition . . . and California common law unfair competition under former Cal.Civ.Code § 3369. On November 17, 1977, Judge Enright granted summary judgment for the Fanbergs on the federal claims, but left intact the state law claim. The complaint was amended, and a four-day bench trial was held before Judge Kerr on January 23-26, 1979. On November 28, 1979, Judge Kerr entered judgment in favor of the Company and filed findings of fact and conclusions of law.
The court found that the Company's high security policy for its Ace tubular locks, of which the confidential key code data were a part, was a "valuable business or trade secret-type asset" of the Company, and that the Fanbergs' publication of their compilation of these codes so undermined the Company's policy as to constitute "common law unfair competition in the form of an unfair business practice within the meaning of Section 3369 of the Civil Code of the State of California" . . . . The court enjoined the Fanbergs from publishing or distributing any lists of key code correlations for the Company's registered series Ace tubular locks.
On this appeal the Fanbergs argue that the District Court erred on three grounds: (1) that the injunction against publication of their book constitutes a prior restraint prohibited by the First Amendment to the United States Constitution; (2) that the statute under which the injunction issued, former Cal.Civ.Code § 3369, is unconstitutionally vague; and (3) that the District Court applied erroneously the common law doctrine of trade secrets in concluding that the Fanbergs had committed an "unfair business practice" under Section 3369.
THE TRADE SECRETS CLAIMAppellants argue that the District Court erroneously concluded that they are liable under Section 3369 for acquiring appellee's trade secret through improper means. We agree, and on this basis we reverse the District Court.
Although the District Court's Findings of Fact and Conclusions of Law are lengthy, the thrust of its holding may be fairly summarized as follows: appellants' acquisition of appellee's serial number-key code correlations through improper means, and the subsequent publication thereof, constituted an "unfair business practice" within the meaning of Section 3369. Even though the court did not make an explicit finding that appellee's serial number-key code correlations were protectable trade secrets, both appellants and appellee premise their appeal on such an "implicit" finding. We think it clear that the District Court based its decision on a theory of improper acquisition of trade secrets, and in the following discussion we assume arguendo that appellee's listing of serial number-key code correlations constituted a trade secret.(2) [*404]
California courts have adopted the theory of trade secret protection set out in the Restatement (First) of Torts, § 757, and the comments thereto, in resolving disputes involving trade secrets. [California has since adopted the Uniform Trade Secrets Act.] Commission of this common law tort is enjoinable under the purview of "unfair competition" and "unlawful" or "unfair business practice" under Section 3369.
The pertinent portion of Section 757 of the Restatement provides:
"(a) he discovered the secret by improper means, or
* * *
Trade secrets are protected, therefore, in a manner akin to private property,
but only when they are disclosed or used through improper means. Trade
secrets do not enjoy the absolute monopoly protection afforded patented
processes, for example, and trade secrets will lose their character as
private property when the owner divulges them or when they are discovered
through proper means. "It is well recognized that a trade secret
does not offer protection against discovery by fair and honest means such
as by independent invention, accidental disclosure or by so-called reverse
engineering, that is, starting with the known product and working backward
to divine the process." Sinclair [v. Aquarius Electronics, Inc.,
42 Cal. App.3d [216,] 226, 116 Cal. Rpt. 654, 661 [(1974).]
1. [court's footnote 1] Former Section 3369
was recodified virtually verbatim in 1977 as Cal. Bus. & Prof. Code §
§ 17200-17203 (West). For simplicity this opinion will refer to
the statute throughout as "Section 3369."
2. [court's footnote 2] Both parties devote
much of their argument to whether the Company's key code data properly
constitutes a "trade secret" within the meaning of Restatement (First)
of Torts § 757, comment b (1939). Although for purposes of our
holding we may assume arguendo that the correlations do constitute a trade
secret, we think it clear that because the correlations are an unpatented
compilation of information, they constitute a "trade secret" within the
meaning of the Restatement as adopted by California courts. . . . Restatement
(First) of Torts § 757, comment b (1939).
3. [court's footnote 3] The Company premised
its complaint on a violation of its own rights under trade secret law;
the Company did not allege violations of the lock owners' rights. Cf.
Barquis v. Merchants Collection Ass'n, 7 Cal.3d 94, 110, 101 Cal.
Rpt. 745, 756, 496 P.2d 817 (1972) (Section 3369 permits members of the
public to sue on behalf of the public generally); Hernandez v. Atlantic
Finance Co. of Los Angeles, 105 Cal. App.3d 65, 72-73, 164 Cal. Rpt.
279, 284 (1980) (statute authorizes suits for injunction by individuals
on behalf of the general public).
4. [court's footnote 4] If a group of lock
owners, for their own convenience, together published a listing of their
own key codes for use by locksmiths, the owners would not have breached
any duty owed to the Company. Indeed, the Company concedes that
a lock owner's reverse engineering of his own lock is not "improper means."