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

Questions and Notes on K-2 Ski Co. v. Head Ski Co. and Bond v. Polycycle, Inc.

1.  Like the Winston case, the K-2 Ski case illustrates how important injunctions can be in trade secret cases.  In Winston, the appellate court affirmed a 24-month injunction, fourteen months of which had already run.  It awarded no damages because the injunction came in time to prevent the defendant from producing a product based on the misappropriated trade secrets.  In K-2 Ski Co., the court affirmed a one-year and a two year injunction, respectively, to protect two different trade secrets but remanded the case for the lower court to determine the effect of the 27-month preliminary injunction.  The parties were so intent on arguing over injunctive relief that apparently they never asked the trial court to rule definitively on the issue of damages.

In both cases, the parties appeared to have been oblivious to the attractions of filthy lucre, while allowing their counsel to run up prodigious legal bills.  Is this behavior economically irrational?  If not, how do you explain it?  Do the concept of "lead time" in marketing and production help?

2.  In K-2 Ski Co. the preliminary injunction period—i.e., the period between the preliminary injunction hearing and trial—was longer than either of the permanent injunctions the trial court granted.  Due to the fast and accelerating pace of developments in industry and the increasing crowding of court dockets, this situation is likely to become more and more common.  As a result, in many trade secrets cases, as in many intellectual property cases generally, the hearing on the preliminary injunction may become not just a prelude, but the main event.  In the next session we will look at two cases involving preliminary injunctions and briefly study the standards for them.

(Note that term "permanent" injunction is procedural.  It refers to a temporary injunction granted before a full trial on the merits, regardless of its duration, not to a perpetual injunction.  Both of the permanent injunctions in K-2 Ski Co. were temporary.)

3.  An important issue in K-2 Ski Co. was the scope of the injunctive relief.  This issue is commonly neglected by litigants. The lower court had granted permanent injunctions prohibiting defendant from using the "base subassembly trade secret for two years and the surfacing veil secret for one year."  Although the court does not describe these secrets in detail (probably to preserve their secrecy), they appear to be manufacturing techniques.  On appeal the plaintiff argued for a broader injunction prohibiting the defendant from making a certain type of ski.  Like any good appellate court, the Ninth Circuit defers to the lower court's discretion in remedial matters and denies the plaintiffs request.

Suppose you had argued the scope of injunctive relief to the district court.  What arguments could you have made for defendant, to restrict the scope of the injunction to the two specific manufacturing techniques?   for plaintiff, to broaden the injunction?  As judge, what evidence would you like to see before agreeing to broaden the injunction?

4.  In Winston, the appellate court affirmed a permanent injunction of limited duration but made clear that time already passed would be deducted.  In K-2 Ski Co., the district court granted one- and two-year permanent injunctions apparently without specifying whether the 27-month duration of preliminary injunction period should be deducted.  If so, the defendants could begin using the protected trade secrets immediately.  They Ninth Circuit remands the case to the trial court to handle this issue.

Other than to clarify a confusing order below, why might the trial court, on remand, not deduct time already lapsed under the preliminary injunction?  If the "head start" periods (for two distinct secrets) are one and two years, are there any circumstances under which it would be inequitable for the defendant to use the secrets after 27 months have elapsed?  What evidence would you ask for as trial judge on remand to resolve this issue?  Might the relative scope of the preliminary and permanent injunctions make a difference?

5.  Both K-2 Ski Co. and Bond v. Polycycle involved liability for attorneys' fees under UTSA § 5.  In general, courts in the United States follows the so-called "American rule," under which each party must pay its own attorneys' fees.  See Alyeska Pipeline Service Co. v. Wilderness Society, 421 U.S. 240, 247, 95 S.Ct. 1612,44 L. Ed. 2d 141 (1975) ("In the United States, the prevailing litigant is ordinarily not entitled to collect a reasonable attorneys' fee from the loser"); id., 421 US at 254-255 (affirming "American rule" and declining to create general judicial exception to it).  Although the rule can be modified by contract and is riddled with specific statutory exceptions, it generally still prevails in tort cases.  Section 5 of the UTSA represents one of the many statutory exceptions that modify the American rule.

Like preliminary injunctions, attorneys'-fee awards can have decisive practical importance in litigation.  The cost of litigation is so high today that often the "reasonable" fees of counsel are comparable to or exceed damage awards in intellectual property cases.  Where the litigation focuses on injunctive relief alone, as in many trade-secret cases, the only direct financial risk is potential liability for costs and attorneys' fees.  That risk can be decisive in both litigation and settlement negotiations.

6.  Under the so-called "British rule," the loser in litigation pays not only its own attorneys, but the winner's.  See Alyeska, 421 US at 247.  Section 5 of the UTSA is not so generous.  It does permit fee awards to the prevailing party in trade-secret cases, but it does not require them, and it does so only under three specific conditions, when: "(i) a claim of misappropriation is made in bad faith, (ii) a motion to terminate an injunction is made or resisted in bad faith, or (iii) willful and malicious misappropriation exists[.]" The Bond court finds that last of these three conditions satisfied and awards the successful plaintiff attorneys' fees.  Bond said he relied on the advice of counsel in doing what he did, but he apparently interpreted that advice liberally, to say the least.  On what specific facts did the court rely in awarding attorneys' fees against Bond?  Was its award consistent with the statutory standard?  Was Bond's taking files and erasing computer files part of his misappropriation, or was it a separate act of mischief?  Did the court stretch the statute's precise language, and was it justified in doing so?

In K-2 Ski Co., the court found that no fee award was warranted.  On what facts did the court base that decision?  Does that result suggest that recovering fees will be easy or hard for prevailing plaintiffs?

7.  These two cases illustrate two other points of interest.  In K-2 Ski Co., the court found a trade secret although skis apparently demonstrating the trade-secret process had been displayed at a conference at a supplier's location (although one not attended by any other ski maker), and although plaintiff conducted tours of its plant (although apparently not of the manufacturing area). Do these fact belie "reasonable effort" to keep the secrets?  What are the arguments pro and con?  In general, should unrestricted disclosures to a supplier or customer automatically vitiate trade secrecy?  What if the supplier or customer has a natural business incentive to keep the secret?

The Bond case illustrates the point that legal duties under trade secret law cannot be voluntarily and unilaterally dissolved.  Bond tried to escape from his duties of confidentiality to Polycycle simply be resigning his positions.  Was there any merit to his contentions?  Could he nevertheless have dissolved his legal duties by agreement?  How might he have done that?

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