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.|
Defiance Button Machine Co. v. C & C Metal Products Corp.759 F.2d 1053, 225 U.S.P.Q. (BNA) 797 (2d Cir.), cert. denied, 474 U.S. 844 (1985)
Prior to the events giving rise to this lawsuit Defiance-NY, beginning
in 1886, had been continuously engaged in the production and sale of metal
buttons, button parts, button-making machines, dies and items of a similar
nature. Until the mid-1970s it was a highly successful and growing
manufacturer in the button and button parts field and had expanded its
business into production of buttons and parts for use in the furniture
industry and developed excellent customer relations and goodwill. Its
trademark DEFIANCE was well known in the field, as was its trade name,
and during almost 100 years of its operation substantial goodwill attached
to the mark, name, and business associated with them. [*1056]
* * *
[One Silberman, a co-conservator for a 50% shareholder named Bauer, precipitated a crisis by demanding payment of dividend checks that Bauer had not cashed "over the years." To pay her, mangagement obtained a secured loan. Later management decided to sell the company. Silberman refused to approve various offers, and Defiance-NY decided to cease manufacturing and to sell its inventory, goodwill and reputation in an effort to continue its business. Later, the secured lender foreclosed, and the Defiance-NY sold its assets at auction.
For about $300,000, the defendant C & C bought assets of the Defiance-NY on a list. The purchased assets excluded, inter alia, the company's customer lists, trademark, trade name, goodwill, and accounts receivable. The purchased assets included machinery, office equipment, and a computer. The sale proceeds allowed the Defiance-NY to pay off the secured loan with some funds left over.
Following the auction Defiance-NY's president approached each of Defiance-NY's competitors to determine whether it would be interested in purchasing Defiance-NY's trademark, trade name, customer lists and trade information. Defiance-NY's president left the company and joined Handy Button, which offered to purchase those assets for $10,000. The offer was refused, and Defiance-NY decided to resume business. Eventually, over Silberman's opposition, Handy bought out the stock of Bauer and the other shareholders in Defiance-NY for $162,287, and Defiance-NY became a subsidiary of Handy. With $325,000 of new capital (apparently provided by Handy), Defiance-NY began to resume business, purchasing buttons and parts from Handy Button and other former suppliers for resale under its own trademark.]
* * * [*157] * * *
[After Defiance-NY refused C&C's $10,000 offer for its trademark, trade
name and goodwill, and within two weeks after the auction, C&Cformed the
defendant Defiance Button Machine Company, Inc. (Defiance-NJ) under the
laws of New Jersey and began using nearly identical letterhead, labels,
and logos.] * * *
* * * [*1063] * * *
[Defiance-NY sued C&C for trademark infringment and unfair
competition, and this court reversed the judgment below and upheld the
The Defiance-NY Customer ListsA customer list developed by a business through substantial effort and kept in confidence may be treated as a trade secret and protected at the owner's instance against disclosure to a competitor, provided the information it contains is not otherwise readily ascertainable. However, the owner is entitled to such protection only as long as he maintains the list in secrecy; upon disclosure, even if inadvertent or accidental, the information ceases to be a trade secret and will no longer be protected. Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470, 475-76, 94 S.Ct. 1879, 40 L.Ed.2d 315 (1974); Fisher Stoves, Inc. v. All Nighter Stove Works, Inc., 626 F.2d 193, 196 (1st Cir. 1980) . . . .
Accordingly, "the courts require that the possessor of a trade secret take reasonable measures to protect its secrecy." 1 R. Milgr[i]m, Milgr[i]m on Trade Secrets § 2.04, at 2-36 (1984) . . . . Absent such measures, a customer list will cease to be a trade secret and will lose the protections of trade secret law. See, e.g., Fisher Stoves, Inc., supra, 626 F.2d at 196 (holding unprotected a dealer list found by a competitor on the counter of a store); McCann Const. Specialities Co. v. Bosman, 44 Ill. App. 3d 1020, 358 N.E.2d 1340, 1342, 3 Ill. Dec. 655 (2d Dist. 1977) (refusing to hold a customer list to be a trade secret when it was "not under lock and key, and there [was] no evidence of any effort on the part of the plaintiff to insure that [the] list should be considered secret or confidential").
In the present case, Judge Goettel found that Defiance-NY's customer lists lost their character as trade secrets because the company failed, upon selling most of its tangible assets (including its computer), to take reasonable steps to protect the lists from coming into C&C's hands. Since that finding is not clearly erroneous we accept it and affirm the district court's dismissal of the claim alleging conversion of the lists. Fed. R. Civ. P. 52(a); see 1 R. Milgr[i]m, supra, § 2.03 at 2-32 to 2-33 ("Existence of a trade secret is a question of fact for the determination of the trier of fact, secrecy being a basic element.") (Footnotes omitted).
The record reveals that Defiance-NY did not intend to disclose the lists to C&C and that it did keep the confidential data on discs in a locked room. However, the information was also left in the memory of the computer sold by Defiance-NY to C&C, from which it could be retrieved by using a file name or password readily available in source books to which C&C had access. In failing to segregate the source books and to erase the lists from the computer, [*1064] ownership of which was transferred to C&C, Defiance-NY did not take adequate measures to ensure the secrecy of the lists. Hence, even though C&C may have obtained the lists by improper meanspaying Colletto, a former employee of Defiance-NY, to extract the information from the computerany such impropriety does not create liability for use of a trade secret, since by failing to protect the lists from ready access by C&C independent of Colletto's assistance, Defiance-NY had forfeited the protections of trade secret law.
* * *
The district court's . . . dismissal of its claim of conversion of customer
lists are affirmed. * * *
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