Smith v. Dravo Corp.
203 F.2d 369, 97 U.S.P.Q. (BNA) 98 (7th Cir.1953)
Before Duffy, Lindley and Swaim, Circuit Judges.
Lindley, Jr. [*370]
* * * [*371] * * *
In the early 1940s Leathem D. Smith, now deceased, began
toying with an idea which, he believed, would greatly facilitate the
ship and shore handling and transportation of cargoes. As he was
primarily engaged in the shipbuilding business, it was quite natural
that his thinking was chiefly concerned with water transportation and
dock handling. Nevertheless his overall plan encompassed rail
shipping as well. He envisioned construction of ships especially
designed to carry their cargo in uniformly sized steel freight containers.
These devices (which, it appears, were the crux of his idea) were:
equipped with high doors at one end; large enough for a man to enter
easily; weather and pilfer proof; and bore collapsible legs, which (1)
served to lock them (a) to the deck of the ship by fitting into recesses
in the deck, or (b) to each other, when stacked, by reason of receiving
sockets located in the upper four corners of each container, and (2)
allowed sufficient clearance between deck and container or container
and container for the facile insertion of a fork of a lift tractor,
and (3) were equipped with lifting eyelets, which, together with a specially
designed hoist, made possible placement of the containers upon or removal
from a ship, railroad car or truck, while filled with cargo. The
outer dimensions of the devices were such that they would fit compactly
in standard gauge North American railroad cars, or narrow gauge South
American trains, and in the holds of most water vessels.
World War II effectually prevented Smith from developing his conception
much beyond the idea stage. Nevertheless blue prints were drawn
in 1943, and in 1944, as a result of considerable publicity in trade
journals and addresses delivered by Smith before trade associations,
Agwilines, one of the principal New York ship operators, displayed
great interest in the proposals. Certain refined features, particularly
in dimensions and folding legs, were the result of discussions between
Smith and Agwilines' officials.
In 1945 production started, and in the fall of that year twelve containers
were used by Agwilines in an experimental run. Relative success
was experienced, with the result that, by the spring of 1946, Brodin
Lines, Grace Lines, Delta Lines and Stockard, in addition to Agwilines,
were leasing Safeway containers. (Leathem D. Smith Shipbuilding
Company was the owner of the design and manufactured the containers.
Safeway Container Corporation purchased the finished containers
from the shipbuilding company and leased them to shippers.)
During this period the containers were occasionally seen on the docks.
However, in view of their limited number (100) this was far from
an every day occurrence. Further more, the details of their construction
could not be ascertained by casual, distant appraisal. But, in
the quest for acceptance, some minor construction details were revealed
in the publicity material distributed throughout the shipping trade,
including: the outer dimensions, cubic and [*372] weight capacities,
placement of the lifting lugs, stacking sockets, double doors and the
fact that the legs were folding. Three dimensional perspective
illustrations demonstrated the use of the containers.
Up until this time the devices were of a "knock-down" variety, i.e.,
they could be taken apart when not in use, thus enabling the user to
conserve storage space when hauling a cargo for which they were not
adapted. However, in the spring of 1946, having determined that
return cargoes for which the containers could be employed were generally
available, and that the cost of erecting and dismantling an empty "knock-down"
was greater than the cost of the hold space occupied by an empty container,
the design was altered slightly so that future containers would be rigidly
constructed. The first of the rigid type was placed in use in
early 1947.
On June 23, 1946, Smith died in a sailing accident. The need for
cash for inheritance tax purposes prompted his estate to survey his
holdings for disposable assets. It was decided that the container
business should be sold. Devices in process were completed but
no work on new ones was started.
Defendant was interested in the Safeway container, primarily,
it appears, for use by its subsidiary, the Union Barge Lines. In
October 1946 it contacted Agwilines seeking information. It watched
a loading operation in which Agwilines used the box. At approximately
the same time, defendant approached the shipbuilding company and inquired
as to the possibility of purchase of a number of the containers. It
was told to communicate with Cowan, plaintiffs' eastern representative.
This it did, and, on October 29, 1946, in Pittsburgh, Cowan met
with defendant's officials to discuss the proposed sale of Safeways.
But, as negotiations progressed, defendant demonstrated an interest
in the entire container development. Thus, what started as a meeting
to discuss the purchase of individual containers ended in the possible
foundation for a sale of the entire business.
Based upon this display of interest, Cowan sent detailed information
to defendant concerning the business. This included: (1) patent
applications for both the "knock-down" and "rigid" crates; (2) blue
prints of both designs; (3) a miniature Safeway container; (4) letters
of inquiry from possible users; [and] (5) further correspondence with
prospective users. In addition, defendant's representatives journeyed
to Sturgeon Bay, Wisconsin, the home of the shipbuilding company, and
viewed the physical plant, inventory and manufacturing operation.
Plaintiffs quoted a price of $150,000 plus a royalty of $10 per unit.
This was rejected. Subsequent offers of $100,000 and $75,000
with royalties of $10 per container were also rejected. Negotiations
continued until January 30, 1947, at which time defendant finally rejected
plaintiffs' offer.
On January 31, 1947 defendant announced to Agwilines that it "intended
to design and produce a shipping container of the widest possible utility"
for "coastal steamship application * * * (and) use * * * on the inland
rivers and * * * connecting highway and rail carriers." Development
of the project moved rapidly, so that by February 5, 1947 defendant
had set up a stock order for a freight container which was designed,
by use of plaintiffs' patent applications, so as to avoid any claim
of infringement. One differing feature was the use of skids and
recesses running the length of the container, rather than legs and sockets
as employed in plaintiffs' design. However, Agwilines rejected
this design, insisting on an adaptation of plaintiffs" idea. In short
defendant"s final product incorporated many, if not all, of the features
of plaintiffs' design. So conceived, it was accepted by the trade
to the extent that, by March 1948, defendant had sold some 500 containers.
Many of these sales were made to firms who had shown considerable
prior interest in plaintiffs' design and had been included in the prospective
users disclosed to defendant.
One particular feature of defendant's container differed from plaintiffs:
its width was four inches less. As a result plaintiffs' product
became obsolete. Their container could not be used interchangeably
with defendant's; [*373] they ceased production. Consequently
the prospects of disposing of the entire operation vanished.
The foregoing is the essence of plaintiffs' cause of action. Stripped
of surplusage, the averment is that defendant obtained, through a confidential
relationship, knowledge of plaintiffs' secret designs, plans and prospective
customers, and then wrongfully breached that confidence by using the
information to its own advantage and plaintiffs' detriment.
Our jurisdiction of count 1 rests on the diverse citizenship of plaintiffs
. . . . Therefore, under Erie R. Co. v. Tompkins, 304 U.S. 64,
58 S.Ct. 817, 82 L.Ed. 1188, the law of the forum, Illinois, is determinative
of the substantive issues raised. And this includes the Illinois
law of conflict of laws. Count 1 sounds in tort—the misappropriation
of trade secrets obtained through breach of a confidential relationship,
the liability for which the courts of Illinois ascertain by the law
of the place of the wrong. This is Pennsylvania, for it was
there that the breach of confidence occurred by reason of defendant's
employing the information acquired to its benefit and plaintiffs' detriment.
Therefore, we look to the law of Pennsylvania.
* * * [T]he Supreme Court of Pennsylvania has painted, in broad strokes,
the general picture of a claim of this nature, holding the essential
elements to be: (1) existence of a trade secret, (2) communicated to
the defendant (3) while he is in a position of trust and confidence
and (4) use by the defendant to the injury of the plaintiff. This,
then, is our broad basis for decision.
(1) The Existence of a Trade Secret
* * *
* * * That which has become public property cannot be recalled to privacy.
However, this does not mean that the product must reach the stature
of invention. All that is required is that the information or knowledge
represent in some considerable degree the independent efforts of its claimant.
Clearly plaintiffs' plans and customer lists fall within this broad
field of knowledge and may properly be the subject matter of a trade secret.
We do not understand that defendant seriously contends otherwise. Rather
its position is that the structural designs of plaintiffs' containers
were disclosed by (1) public use of the containers and (2) publicity material
freely circulated. Thus, defendant says, at the crucial time of
communication, plaintiffs' knowledge was no longer secret, it had been
publicly disclosed. As to the customer lists, defendant denies their
very existence.
The second of these assertions can be disposed of readily. The evidence
is undisputed [*374] that plaintiffs had in their possession, at
the time of their negotiations with defendant, original letters of inquiry
from numerous shipping companies and a consequential number of files of
further correspondence between plaintiffs and the inquirers. Together
these comprised a valuable prospective customer list, the existence of
which can in no way be challenged.
The continued secrecy of the construction plans presents a different question.
The District Court entered the following finding of fact:
" * * *[T]he record shows that Plaintiffs had published to the world,
through public uses of the containers and unrestricted publications by
circulars and in trade magazines, complete information concerning the
subject-matter with which the material (the patent applications and plans)
* * * was concerned."
From this the court concluded that no secrets were confidentially disclosed
to defendant.
The publicity material did not, in any way, disclose plaintiffs' design.
The outward dimensions were revealed, and the fact that the container
employed large double doors, lifting eyelets, stacking sockets and folding
legs was publicized. But this was not equivalent to a disclosure of
the structural design, the engineering details, of either the container
as a whole or its various working parts. These could be obtained only
by careful inspection of the article and the drawings. Therefore,
in this respect the finding of fact that plaintiffs had, through unrestricted
publications in trade magazines and circulars, "Published * * * complete
information concerning the subject", was clearly erroneous and must be set
aside.
There is no dispute that 100 of plaintiffs' products had been in public
use at the time of the communication. There is, however, serious
debate over the legal consequences of this fact. The lower court,
in refusing plaintiffs recovery, applied the following conclusion of law:
"There can be no confidential disclosure where, as here, the alleged novel
container was being manufactured and sold. . . . * * * and all information
concerning its construction was available from an inspection of the container."
Certain cases appear to give support to this broad statement.
But, close examination reveals that the inquiry is much deeper than whether
"all information * * * was available from an inspection of the containers."
As a starting point we must look again to Pennsylvania for our guide. In
Pressed Steel Car Co. v. Standard Steel Car Co., 210 Pa. 464, 60
A. 4, 7, plaintiff sought to protect its secret construction design for
railroad cars. These plans had been obtained by defendant through
a known breach of confidence. It was urged by defendant that because
it could have obtained the design from an inspection of the car (which was
in public use) its use of knowledge gained through improper means would
be condoned. In short, defendant suggested, as does defendant here,
that the existence of a lawful means of acquiring the information precluded
recovery for the employment of unlawful means. The court said:
" * * *[T]hese engineers and draftsmen * * * should have been able to
measure the cars made by the company, and to produce in a short time detailed
and practical drawings from which the cars could be constructed. They
did not do this, for the obvious reason that blue prints of drawings were
available and were accurate."
The court then affirmed recovery for the plaintiff.
Thus, Pennsylvania will not deny recovery merely because the design could
have been obtained through inspection. Rather, the inquiry in that
jurisdiction appears to be: How did defendant learn of plaintiffs" design?
And this, we regard as the proper test. It recognizes the very
nature of the type of wrong with which we are here concerned. Confidential
business information is not given protection merely as a reward to its accumulator.
If the creator is entitled to reward it is available to him in the
patent and copyright statutes. [*375] Instead our function is that
of condemning "the employment of improper means to procure the trade secret."
Restatement, Torts, Sec. 757, comment. Those who gain their
information improperly are brought to book in recognition of the general
principle that intentionally inflicted harm is actionable unless privileged.
It is unquestionably lawful for a person to gain possession, through proper
means, of his competitor's product and, through inspection and analysis,
create a duplicate, unless, of course, the item is patented. But the
mere fact that such lawful acquisition is available does not mean that he
may, through a breach of confidence, gain the information in usable form
and escape the efforts of inspection and analysis. "The fact that
a trade secret is of such a nature that it can be discovered by experimentation
or other fair and lawful means does not deprive its owner of the right to
protection from those who would secure possession of it by unfair means."
Nims, Unfair Competition and Trade Marks, Sec. 148.
This text citation is the distillate of many judicial decisions. Thus,
in A. O. Smith Corp. v. Petroleum Iron Works Co., 6 Cir., 73 F.2d
531, 538, the court said: "The mere fact that the means by which a discovery
is made are obvious * * * cannot * * advantage the competitor who by unfair
means, or as the beneficiary of a broken faith, obtains the desired knowledge
without himself paying the price in labor, money, or machines expended by
the discoverer." And in Shellmar Products Co. v. Allen-Qualley
Co., 7 Cir., 36 F.2d 623, 625, this court announced: "Whether it would
have been possible to have discovered and purchased the Olsen patent, without
the information disclosed to appellant in confidence, it is not necessary
to determine, because it is clear from the record that by a breach of confidence
the information was disclosed and used as a basis for the search that was
made." And in Tabor v. Hoffman, 118 N.Y. 30, 23 N.E. 12, 13,
this is the language: "But, because this discovery may be possible by fair
means, it would not justify a discovery by unfair means * * * ."
It is, therefore, our conclusion, that the District Court applied an erroneous
conclusion of law to the facts at hand. Here was no simple device,
widely circulated, the construction of which was ascertainable at a glance.
If such were the case our problem would be simple. Instead we
are concerned with a relatively complex apparatus; designed to carry large
and heavy amounts of cargo; proper inspection of which was, perhaps, accessible
to defendant but, in no way shown to have been made. Under such circumstances
the District Court's conclusion that plaintiffs no longer possessed a trade
secret at the time of their negotiations with defendant was erroneous.
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