FALL 2008

Trade Secrets

Course No. 9200-704 (and 804)-801 ID No. 16545	MW 3:00 - 4:30 p.m.	Room L-134
Professor Jay Dratler, Jr.	Room 231D (IP Alcove)	(330) 972-7972	dratler@uakron.edu

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)

Before Mansfield, Oakes and Newman, Circuit Judges. Judge Oakes concurs in part and dissents in part in a separate opinion.

[*1055] Mansfield, Circuit Judge:

Defiance Button Machine Company (Defiance-NY), a New York corporation, appeals . . . . from the dismissal of its claim of alleged conversion of its customer lists . . . . * * * We affirm . . . .

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]

Metal buttons and button parts are manufactured through use of dies and machines furnished by machinery suppliers according to specifications. Many buttons and button parts made by one manufacturer duplicate or are interchangeable with those made and sold by competitors. To the extent that a manufacturer does not have machinery capable of duplicating a competitor's product it can often obtain dies and machines that will do so. However, the wide variety in sizes and specifications of buttons and parts, coupled with the large number of different types sold, has led manufacturers to adopt as a common practice the procedure of purchasing a portion of their respective inventories from competitors for resale under the purchaser's trade name rather than requiring each manufacturer to make the entire line. During the period here involved, for instance, Defiance-NY sold approximately 3,000 different types of buttons and parts to some 1,500 customers. According to testimony at trial and at oral argument on appeal, it purchased approximately 1/4 to 1/3 of these for resale under the DEFIANCE trademark. These purchases were made from competitors . . . . Thus it may be possible for a company to make the merchandise offered for sale to its clientele, to purchase buttons and button parts from others for such resale, or to do both.

In the late 1970s Defiance-NY's business fortunes began to wane due to a downturn in the general economy, a decrease in demand for buttons, button parts and machinery, which was attributable to changes in furniture styles . . . .

* * *

[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.] * * *

[S]hortly after the auction sale, Defiance-NJ employed as its general manager Cecil F. Wirth, who had been employed by Defiance-NY for many years and has since brought suit against it for deferred salaries. When Defiance-NY ceased manufacture . . . Wirth [had been] left in charge of its premises, where that company's trade secrets, consisting of customer lists and price list groupings maintained in customer files, were stored in the memory bank of its computer and available on discs as backup records. The computer, but not the software, had been listed as an asset to be sold at auction. The discs were kept in a safe on the premises until it was removed with certain other property sold at the auction, whereupon they were placed in a locked room. During this period Mr. Chalfin of C&C was permitted to enter the premises for the purpose of removing property purchased by C&C that was still in custody of Defiance-NY. Mr. Chalfin, who did not know how to operate the computer, which his company C&C had purchased from Defiance-NY in the auction sale, communicated with the former Defiance-NY operator of the computer, Rita Colletto, who had left its employ in April 1982. He paid her on [*1058] two occasions, without any authorization from Defiance-NY, to demonstrate the use of the computer. During these demonstrations and possibly at Chalfin's request, Colletto printed out Defiance-NY's customer lists from Defiance-NY discs on the premises, which, according to Chalfin's testimony and that of Wirth, had been left lying around the premises after the auction. [Defiance-NY's former president], on the other hand, testified that he had placed the company's records in a locked room. The computer operator testified that at the times when she was called by Mr. Chalfin to operate the computer the discs containing the customer list information were in the computer room for billing and that copies were in a big safe. In order to have the computer print out the customer lists the computer operator was required to use the file name or code word "LSOLD," a term that could be found in source books located in the computer room.

* * * [*1063] * * *

[Defiance-NY sued C&C for trademark infringment and unfair competition, and this court reversed the judgment below and upheld the trademark claim..]

The Defiance-NY Customer Lists

A 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 means—paying Colletto, a former employee of Defiance-NY, to extract the information from the computer—any 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.

* * *

CONCLUSION

The district court's . . . dismissal of its claim of conversion of customer lists are affirmed. * * *

Oakes, Circuit Judge (concurring in part and dissenting in part);

I agree with all of Judge Mansfield's thorough and well-reasoned opinion except that part pertaining to the customer lists lifted, so to speak, from the Defiance-NY computer's memory. The lifting was done, it seems to me, by artifice. The diskettes containing the lists were kept in a safe in a locked room. While the lists were in the computer's memory, it was coded so that the password "LSOLD" had to be given to the computer to obtain a printout. Only the controller and the computer operator, Rita Colletto, knew the code, though it was [*1065] in the source book. She had been retired and did not even know about the auction when Chalfin contacted her to come in and operate the computer. Their testimony differed, he saying that she chose the customer list diskette, she that he asked her to run off the list of customers. Peel-off labels were not available, so she set up the machine for doing them, according to her testimony, and a day or two later Chalfin called her by telephone to ask her how to get it working and she told him. In essence C&C argues, and the court decides, that if a coded list is left in the computer's memory and the codeword is in a source book which is not under lock and key, the trade secret is abandoned, even if the codeword is obtained through an unwitting operator rather than the source book. I disagree, think it was obtained by improper means, Restatement of Torts § 757 (1939), and would reverse on this point accordingly.