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
Copyright © 2000, 2002, 2003, 2006, 2008   Jay Dratler, Jr.   For permission, see CMI.

Questions and Notes on Burten, Structural Dynamics, and Sierracin


1.  Because trade-secret law is tort law, trade-secret claims and contract claims are doctrinally independent. Courts adjudicating trade-secret cases, however, are hardly oblivious to the parties' contractual relations.  Already we have seen how agreements relating to competition, such as nonsolicitation and noncompetition covenants, may affect courts' decisions in trade-secret cases.

These three cases illustrate other aspects of the close relationship between trade-secret claims and contracts.  In particular, they demonstrate how contracts can, on the one hand, disclaim and, on the other, supplement and corroborate, trade-secret claims.  Burten involves an unsuccessful attempt to disclaim a confidential relationship.  Structural Dynamics involves the court's use of a nondisclosure covenant to provide a remedy where trade-secret law does not.  And in Sierracin the court affirms parallel trade-secret and contract claims.


2.  At first glance, Burten seems like a pedestrian "idea submission" case.  That is a case in which an individual—usually without experience in the industry of even in business generally—submits an idea to a major corporation for review, hoping that the corporation will like it, adopt it and pay the submitter for it.  The corporation's typical response to such unsolicited submissions is to return them to their senders with instructions that they sign agreements purporting to disclaim all their rights except, perhaps, their rights under a patent if their submission proves to be a patentable invention and patented.  (One reason for this exception is that a patent application requires the inventor's signature. See 35 U.S.C. §§ 111(a)(1), 116.)

Before judging business too harshly for this common practice, consider the consequences of a more generous approach.  Suppose a major business firm accepted thousands of idea submissions yearly, without such contractual protection.  Isn't it possible, indeed likely (depending upon the volume of submissions) that one or more unsolicited submissions will duplicate or suggest, in substance, a project under development in the firm's own laboratories, or one that the firm has purchased or may purchase from a third party?  Wouldn't the firm risk multiple lawsuits in which it would have to prove that its own project or the purchase of the third-party's assets, was under way before the submission was received?  To avoid that risk, most business firms have rather strict and uncompromising policies regarding idea submissions.

 The response of Milton-Bradley in this case is typical.  That is one reason why untutored laypeople need legal advice before submitting ideas to major corporations, especially if their ideas have commercial value and may not be patentable.

But was Burten really a typical case of this genre?  Were Burten and his partner really untutored and inexperienced laypeople?  Did Milton-Bradley, in a burst of altruism, spontaneously suggest the modifications to its standard agreement that were scribbled on it, and that the court relied on in its decision?  If not, the fact that even experienced persons could be nearly caught in the old disclaimer trap should be a cautionary tale both to idea submitters and those who advise or represent them.


3.  The main issue in Burten, of course, is whether a confidential relationship existed between Milton-Bradley and the plaintiffs.  The drafter of Milton-Bradley's standard form tried to disclaims "any relationship."  The court holds, however, that, under the circumstances, "any relationship" did not include a confidential relationship within the meaning of the tort law of trade secrets.

What was the chief rationale for the court's decision?  Was it the lack of specificity in the term "any relationship"?  Was it the scribbling on the form and the other terms, some of which suggested that at least a temporary relationship might exist under some circumstances, thereby undermining the generality of the disclaimer?  Was it the fact that disclaimers of tort liability are generally disfavored?  Was it all of the above?

Is it possible to tell from the court's decision under what other circumstances it might have reached the same result?  For example, suppose there had been no scribbling on the contract and no requirement to pay or return the submission within a certain time.  Would/should the court have reached the same result?  Does the court keep its card relatively close to its vest?


4.  More generally, how easy is it to predict when courts will strike down or refuse to enforce otherwise valid contracts on grounds of public policy?  In several cases, we have seen how courts have refused to enforce contractual "admissions" that certain information is a trade secret.  In other cases, we have seen how courts have refused to enforce noncompetition covenants, either because they were unreasonable or (in states such as California) because they did not fit into narrow categories of exceptions to a rule favoring competition.

Which types of agreements—idea-submission disclaimers, "this is a trade secret" covenants, and noncompetition covenants—are better candidates for harsh scrutiny generally under public policy?  Is one category or another less likely to contain agreements with legitimate uses and purposes?  Are all categories equally likely to contain agreements that, depending upon the circumstances, may have both reasonable and unreasonable consequences?  Are agreements in one category more likely than those in another to represent bald (and common) attempts to wipe away the general obligations of tort law with form contracts?


5.  Structural Dynamics is an important case for a number of reasons.  First, it is a case in which the two principal defendants, Kothawala and Surana, themselves developed the complex computer program that is the focus of the case.  They did so in a relatively short time, but they did so while employed by the plaintiff.  Following Wexler v. Greenberg, the court finds that this fact obviates a confidential relationship.  What are the facts and policies that, in the court's view, justify that result?  In this regard was the court right to ignore all the odoriferous facts relating to the timing of the employees' departure from SDRC, their lack of candor, and their disparagement of SDRC's work?  Try to analogize or distinguish Wexler on its facts, as precisely as you can, with regard to the existence of a confidential relationship and therefore trade-secret misappropriation.


6.  The second salient point of Structural Dynamics is equally important.  After rejecting the trade-secret claim, the court goes on to uphold a contract claim based on quite similar facts and analysis.  Is that result correct?  on the law?  on the facts?  Didn't the court's analysis of the contractual claim sound much like trade-secret doctrine, down to demonstrating that the plaintiff took reasonable effort to preserve the confidential information?  Does it make sense to have two such precisely parallel bodies of law, one where there is a nondisclosure agreement and on one where there is not?

Note that the court virtually ignores Kothawala's noncompetition covenant.  Was its doing so appropriate?  Why or why not?


7.  A third point of Structural Dynamics was its focus on the choice of law.  Sometimes the choice of law is unimportant because the laws of all the potentially relevant states are substantially congruent.  Yet that was not the case here. Why?  How and in what respects did the relevant law and public policy of Michigan and Ohio differ, and how would you have expected that difference to affect the result?

In choosing the appropriate law, the court does what most courts do in such circumstances: it consults the Restatement of Conflict of Laws.  That source suggests several tests, which the court works through.  What are the tests is tries, and why does it ultimately rely on the "lex loci contractus" (Latin for place where the contract was made)?  Why doesn't it just follow the choice of law stated in the contract—namely, Ohio's?


8.  The final point of interest in Structural Dynamics is the remedy: damages for the "head start" period but not injunction.  Marshall the arguments—factual, legal, and equitable—for and against these remedies; i.e., marshall the arguments for these remedies or, in the alternative, for a "head start" injunction without damages, a perpetual injunction without damages, or perpetual damages measured by a reasonable royalty.  As you consider the legal arguments, take a look at Section 2(b) of the UTSA.  Is the court's remedy consistent with that section?


9.  Sierracin is also an interesting case, particularly when juxtaposed to Structural Dynamics.  In Structural Dynamics the court found a breach of contract but no misappropriation based upon virtually the same facts.  In Sierracin, the Supreme Court of Washington upheld both trade secret and contract claims based on the same facts.  Moreover, it underscored the separate viability of those claims by rejecting an argument that the claims should have been consolidated below.

What does it mean to say that both trade-secret and contract claims exist and are separately viable?  If one claim is good, what practical or legal difference does it make that there is another based upon the same facts and similar doctrine?  Do the two types of claims provide potentially different remedies?  Did they in this case.


10.  The Sierracin court grants a permanent, perpetual injunction, which we haven't often seen since Wohlgemuth (the space-suit case).  Sierracin apparently had argued for no injunction and a royalty of 5% on Sierracin's sales of 7/7/7 cockpit windows for a period of four months, with no remedy at all thereafter.  Marshall your arguments for both sides.  Would you come to the same conclusion if asked to judge?  Which result would better comport with Section 2(b) of the UTSA?

Now analogize Wohlgemuth on its facts.  Should the same perpetual, permanent injunction apply here?  for the same reasons?

Although it made a point of rejecting the defendant's argument for consolidating the trade-secret and contract claims, it make no mention of the contract action in connection with the principal remedy.  Would/should the contract claim provide justification for a perpetual, permanent injunction even if the trade-secret claim did not?


11.  The court also awarded Boeing enhanced damages and attorneys' fees.  Were these awards justified?  What is the legal standard for each award under the UTSA, and was it satisfied here?  (Regarding the amount of fee awards, the case of  Hensley v. Eckerhart, 461 U.S. 424, 434, 437, 103 S.Ct. 1933, 76 L.Ed.2d 40 (1983), which the court cites, is a classic case on the issue.)


12.  Finally, the court rejects claims that Boeing's trade-secret action was pre-empted by federal copyright law.  What was the basis for the defendant's claim that the action was pre-empted?  Was it related to the tangible matter in which the plaintiff's trade secrets were embodied?  What was the rationale for the court's rejection of the pre-emption argument.  We will return to this issue when we study pre-emption after Spring Break.

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