Course No. 9200-704 (and 804)-801
ID No. 16545
MW 3:00 - 4:30 p.m.
Room 231D (IP Alcove)
|Copyright © 2000, 2002, 2003, 2006, 2008 Jay Dratler, Jr. For permission, see CMI.|
Van Products Co. v. General Welding and Fabricating Co.419 Pa. 248, 213 A.2d 769 (Pa. 1965)
Before Bell, C. J., Musmanno, Jones, Cohen, Eagen and O'Brien, JJ.
Opinion by Mr. Justice Eagen. Mr. Chief Justice Bell dissents. Mr. Justice Roberts took no part in the consideration or decision of this case. Concurring Opinion by Mr. Justice Cohen.
Eagen, J.: [*250] [**771]
This is an appeal by General Welding and Fabricating Company (General) and Vincent Q. Rapp (Rapp) [*251] (jointly referred to as appellants) from a final decree of the Court of Common Pleas of Erie County granting a permanent injunction against appellants, restraining them from making, advertising and selling deliquescent desiccant air driers, and directing that appellants account to Van Products Company (Van) for all profits realized from the previous sale of such air driers. The historical background may be summarized as follows:
Van was organized in 1944, and engaged in the making of air vises. In 1951, it was contacted by O. Clair Norton, who claimed to have invented a unique air drier that could be used profitably in many areas of industry and manufacturing to prevent and eliminate fouling, rusting and shortened life in tools and machinery operated by compressed air. Norton's brain child, following years of experimentation, was a deliquescent desiccant air drier. A desiccant is a substance which attracts and holds moisture; to deliquesce means to become liquid-like. Norton's idea was to channel the compressed air through a chemical mixture which would absorb the moisture in the compressed air lines and deliquesce in an orderly fashion. Only the chemical had to be replaced. This type of device was a substantial improvement over the expensive and cumbersome driers then in general use, which required regeneration and the use of alternate driers. The chemical compound used, to be known as "Dryolite", was in the form of a pellet consisting of 93 per cent sodium chloride impregnated with a small quantity of calcium chloride and sodium dichromate.
On June 23, 1953, the United States Patent Office issued a patent to Norton for the drier. These rights were then assigned to Van for the purpose of further development and for the sale of deliquescent desiccant air driers. In August 1957, Norton applied for a patent [*252] on the desiccant used in the drier. This was never issued.(1)
On September 1, 1953, Rapp was employed by Van. He had no previous experience in this field, and, at first, his duties involved handling Van's mail operation. As the development and sale of the air [**772] driers grew in volume and importance in the Van system, Rapp's position of importance and value increased, so that eventually he ran the gamut of tasks involved in this segment of Van's business to become the general manager of the entire operation. During the course of this employment, he was intimately involved with purchasing, selling, advertising, plan and blue prints drafting, training and conducting field experiments to overcome customer difficulties. In short, Rapp was thoroughly imbued, through his industrious application, with all the problems, processes and advantages involved in the production, sale, and maintenance of this type of drier. He learned everything there was to know about Van's drier, except the composition of the desiccant itself.
Beginning in 1952, General began to make, engineer and design parts for Van's drier; then from September, 1953, to February 1, 1958, General manufactured the entire drier on behalf of Van according to Norton's patent. It was in this connection that General and Rapp were introduced. Because of the complicated nature of the construction of these devices and the intimate knowledge of these matters possessed by Rapp, he began frequent visits to General to supervise construction. Then on February 1, 1958, suspecting that Rapp's loyalty lay more with General than with it, Van terminated Rapp's employment. One week later, Rapp was employed by General, and within days was actively planning the manufacture and sale of a [*253] deliquescent desiccant air drier on General's behalf. He broke down the secret of the composition of the chemical formula used in the Van drier. He substituted urea for sodium chloride which performed the same function. On April 1, 1958, General sold its first deliquescent desiccant air drier, which, while not an exact duplicate or physically similar to Van's, was practically identical in function and concept.
On September 6, 1960, the United States Patent Office granted Rapp a patent for his desiccant. On March 16, 1965, Letters Patent were granted to Rapp and General for their drier.
On September 5, 1958, Van instituted this action for injunctive relief and an accounting. After prolonged hearings, the chancellor entered a decree in favor of Van. The court en banc subsequently made the decree final. This appeal followed.
[Appellants contested the state courts' jurisdiction on the ground that the action "basically involve[d] patent rights," over which federal courts have exclusive jurisdiction.]
* * * [*254]
[I]t is our considered conclusion that patent rights are only indirectly involved and that, under the circumstances, jurisdiction is properly in the courts of this Commonwealth.
The gravamen of the action is the abuse of confidence by Rapp who, as a trusted employee, allegedly misappropriated secret information of Van and used it to produce and market a competing product manufactured by General. That the state courts have the power to enjoin the use of a trade secret in a proper case, there can be no doubt. And while patent laws may be involved, if they are purely incidental and collateral to the main issue of the case, and if jurisdiction exists over the parties and the subject matter in all other respects, our courts are not precluded from acting under their general equity powers . . . .
This, in our opinion, is such a case. The pivotal and main issue here presented is whether or not the appellants caused damage to Van's business through the use of confidential material misappropriated by Rapp while he was in its employ.
Moreover, appellants' jurisdictional contention seems to be based upon a misconception of the nature [*255]of a patent monopoly, i.e., that, in being issued Letters Patent, a patentee is thus granted an exclusive right to use and exploit his invention. In fact, the patent monopoly is a negative right. 35 U.S.C. § 154 provides that a patentee has "the right to exclude others from making, using, or selling the invention throughout the United States. . . ." The right to make, use or sell, though a logical corollary, is dependent upon natural or common law. The issuance of Letters Patent gives the patentee no more right to use his invention than he enjoyed before. Therefore, viewed in this light, the existence of patent rights is not controlling. Infringement actions may be prosecuted in the federal courts, and existing patent rights may be unchallengable in a state court; however, appellants' right to manufacture and sell the drier involved depends upon how the knowledge in connection therewith was obtained. This is the issue here. It is not a "patent case".
We now come to the merits of the case.
In its adjudication, the trial court made certain findings of fact, including the following:
"A. The idea and the original concept of the deliquescent type of air drier.
"B. The intimate knowledge of the need, use and demand for deliquescent desiccant air driers; namely, that this was a ‘hot product'.
"C. Information derived from building up and maintaining intimate card files on [**774] customers and their peculiar problems and needs, and in servicing such customers.
"D. Van Products' know-how in manufacturing of these driers which it only achieved after years of success and failure, mistakes and corrections, testing and retesting, field testing, experimentation, study and analysis of problems in actual operation.
"E. Van Products' know-how in selling, which was an evolutionary process of direct-mail and finally to distributors and direct company contacts.
"F. Van Products material sources and costs.
"G. Results of and intimate knowledge concerning Van Products' research and development and experimentation in the field, dew point testing, analysis of ratios of the parts involved and the solved mechanical problems contained in their blueprints.
"H. Van Products' labor costs.
"I. The secret of the desiccant, namely, the impregnation of a soluble pellet holding material with other hydroscopic [sic: hygroscopic] materials.
"J. Van Products' suppliers and accounts payable.
"K. Van Products' customers and accounts receivable.
"L. Mechanical secrets of the Van drier involving peculiar knowledge of design, material, dimensions and [*257] positioning of baffles, orifices, screens, and supports other than those disclosed in sales literature or patents or otherwise in the public domain.
It is our considered judgment that the lower court erred in concluding that the facts established a misappropriation [*258] of a legally protectible trade secret. The decree, therefore, must be reversed.
As noted before, Van prosecuted this action upon the theory that Rapp, as a trusted employee, learned of these secrets while in a confidential relationship, to wit, employee-employer, and misappropriated and used them after the termination of his employment with Van for the benefit and with the consent and knowledge of General.(2) [**775]
The concept of trade secret is at best a nebulous one and has been variously defined by case and text authority. Restatement, Torts, § 757, comment b, states that "a trade secret may consist of any formula, pattern, [*259] device or compilation of information which is used in one's business, and which gives him an opportunity to obtain an advantage over competitors who do not know or use it." To be entitled to equitable relief [in a trade secret case the employer must] show; (1) that there was a trade secret, or, as in the case at bar, a secret process of manufacture; (2) that it was of value to the employer and important in the conduct of his business; (3) that by reason of discovery or ownership the employer had the right to the use and enjoyment of the secret; and, (4) that the secret was communicated to [the employee] while he was employed in a position of trust and confidence under such circumstances as to make it inequitable and unjust for him to disclose it to others, or to make use of it himself, to the prejudice of his employer.(3) The essential elements of a cause of action for breach of confidence are (i) possession by the plaintiff of knowledge or information which is not generally known, (ii) communication by the plaintiff to the defendant under an express or implied agreement limiting its use or disclosure by the defendant, and (iii) use or disclosure by the defendant to the injury of plaintiff. [*260]
The opinion of the court below renders the decision of this case quite [**776] difficult by stating that the "trade secret" here involved is "all embracing" and "the whole picture". One rather salient point runs steadfastly throughout decisions in this area in most jurisdictions, and that is that the employee, upon terminating his employment relationship with his employer, is entitled to take with him "the experience, knowledge, memory, and skill, which he gained while there employed. A man's aptitude, his skill, his dexterity, his manual and mental ability, and such other subjective knowledge as he obtains while in the course of his employment, are not the property of his employer and the right to use and expand these powers remains his property unless curtailed through some restrictive covenant entered into with the employer[.] There is no restrictive covenant involved in the present case.
Levine v. E. A. Johnson & Co., 107 Cal. App. 2d 322, 237 P. 2d 309 (1951), is interestingly parallel to the instant case. There the employee left his high position [*261] with plaintiff after 35 years of service in the field of constructing wooden tanks and cooling towers. Immediately thereafter, in partnership with his son, he went into competition with his former employer, who sought an injunction to restrain the use of trade secrets. Failing to find any real trade secrets, the court refused an injunction, saying that the former employee had built up a wealth of experience and skill during his employment and that to deny him the right to exploit it would wipe out his means of livelihood. No doubt the employee there was just as thoroughly embued with the intricacies and "secrets" of his employer's business as was Rapp here. The question still remains to be answered whether the information is such here that we must act as a judicial eraser to blot out Rapp's knowledge and skill. Certain of the elements of the "trade secret" enunciated by the trial judge in Paragraph 14 of his opinion certainly fall within this category of "general knowledge, skill and experience" and are not thus proper subjects for a mental purge. For instance, 14B: "the intimate knowledge of the need, use and demand" for this product could not be a trade secret. It is something that would be learned in any productive industry, as are the "material sources and costs" (14F), "labor costs" (14H), the "suppliers and accounts payable" (14J), "customers and accounts receivable" (14K), and "advertising methods and material" (14M).
A further extension of this concept of "general knowledge" includes the little nuances and refinements developed by Rapp himself while not engaged in specific product research. For instance, 14E: the "knowhow in selling, . . . an evolutionary process of direct mail" was a process that Rapp was hired to conduct and of which he made a viable selling process. 14G: "results of . . . research and development and experimentation in the field . . . [etc.]" would not seem, upon [*262] considered analysis, to be trade secrets in this case, and even if they were Van could not prove exclusive ownership since Rapp was the experimenter and tester. At most, Van can claim co-authorship on the basis that Rapp was paid to do this work; but much of the initiative and creative questioning [**777] was the product of Rapp's own ambition. It would seem, then, that this generalized knowledge in the field of deliquescent desiccant air driers was a labor asset which Rapp was privileged to carry with him to his new employer. Perhaps the fact that this was a new and unique field might tend to persuade that these were secrets, but they are matters which any industrious person would learn in a developing field in Rapp's position. They are not of such character as to be classified as trade secrets.
Customer information such as that embraced in item 14C has been the subject of varied litigation. It is clear that this jurisdiction affords protection to an employer's confidential customer information . . . . And . . . a distinction often drawn in the cases to the effect that an injunction will not issue unless an actual physical list has been taken (as opposed to a list carried away in the employee's memory) is not really meaningful, being based upon the [*263] manner of taking, rather than the character of the information taken. Nor is the fact that it was the employee himself who compiled the list. As with any other trade secret, for customer information to be protectible it must be a particular secret of the business, of value to the employer and wrongfully appropriated by the employee. In the present case, the actual lists were merely distillations of commercial lists created from the very general knowledge that users of compressed air are potential customers for air driers. In this respect, these customer lists are in no way secret . . .: The further assertion is that extensive data was also stored in an elaborate card-file system (a system devised and set up by Rapp). This data was accumulated by Rapp during his field trips and from experimentation designed to meet customer requests and problems. We are convinced that Van has failed to show that this information was any more than the recorded results of Rapp's acquisition of general knowledge and skill in this field.
The key to the lower court's thinking seems to be contained in Paragraph 14D: "know-how in manufacturing . . . which [Van] only achieved after years of success and failure, mistakes and corrections . . . [etc.]." Along with "trade secret", the concept of "know-how" is also a very fuzzily defined area, used primarily as a short-hand device for stating the conclusion that a process is protectible. It covers a multitude of matters, [*264] however, which in the broad sense are not protectible, e.g., an employee's general knowledge and skill. A manufacturing company is merely the sum of its producing units, including the skills of its employees. Granted that Van had a very precise knowledge of the field of air driers, but it was mainly derived from Norton's inventiveness and Rapp's industrious experimentation. We think that, in [**778] the present case, Van's "know-how" was not protectible from exploitation by Rapp.
Paragraphs 14A and L: "The idea and the original concept" and the "mechanical secrets of the Van drier" present a question which has produced a conflict of authority among the jurisdictions: to wit, whether prior public disclosure is permitted to be raised as a defense by a defendant charged with violating a confidence in business. In the first place, the "idea and original concept" of a deliquescent desiccant air drier was conceived by Norton many years ago, and was finally patented by him in 1953, prior to the time Rapp began to work for Van. 35 U.S.C. § 112 provides that
The result of this section [*265] and the
very nature of the patent publication have been consistently interpreted
to work a destruction of any trade secret disclosed therein. The
inventor is put to his election; he can keep his secret hidden and run
the risk of independent discovery by others, or he can disclose his secret
to the world by Letters Patent and receive in return from the government
a monopoly for 17 years. Further, these air driers were sold on
the open market and described and covered extensively in the trade literature
and Van's own advertising media. And there is considerable authority
to the effect that [**779] public sale [*266] of the article
in question or the description thereof in literature available to the
public will destroy any trade secret which the inventor might have had.(4)
2. [court's footnote 3] Restatement, Torts,
§ 757, provides, i.a., that "one who discloses or uses another's
trade secret, without a privilege to do so, is liable to the other if
(a) he discovered the secret by improper means, or (b) his disclosure
or use constitutes a breach of confidence reposed in him by the other
in disclosing the secret to him. . . ." This Court has long
recognized such a right in the employer[.] The right is also recognized
generally in other jurisdictions[.]
4. [court's footnote 16] It is true, however,
that regardless of the fact that an article's individual components are
part of the prior art or are ascertainable by inspection of sold articles,
a secret may obtain in the composite or in the process of manufacture
(providing, of course, that the process itself is a secret one). See
. . . Tabor v. Hoffman, 118 N.Y. 30, 23 N.E. 12 (1889). But,
in the present case there was no claim, nor does it seem possible to make
out one, that there was a secret in the process of manufacture of the
air drier, nor could there be any part of the composition not "in the
public domain", since the entire composition was discernible by inspection
of the articles sold to the public.