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.

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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