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.

Religious Technology Center v. Wollersheim

796 F.2d 1076 (9th Cir. 1986)


Before Pregerson, Poole, and Thompson, Circuit Judges.   [*1077]

Pregerson, Circuit Judge.  

The Church of the New Civilization ("new church") is a splinter from the Church of Scientology ("Church"). The Church alleged that certain scriptural materials offered by the new church were copies of materials stolen from the Church.  Recognizing federal jurisdiction under the Racketeer Influenced and Corrupt Organization Act ("RICO"), the district court held that the Church's materials constituted a trade secret and granted the Church a preliminary injunction ordering the new church to desist from using or disseminating the disputed materials.  

We reverse the district court's order granting a preliminary injunction.  Pursuant to this court's order, the district court advised that it issued its preliminary injunction "on both the plaintiffs' . . .("RICO") claim and on plaintiffs' state law trade secrets claim."  We resolve the appeal, therefore, under both these theories.  We hold that injunctive relief is not available to a private plaintiff in a civil RICO action.  Additionally, we hold that the California courts would conclude that sacred scriptures do not meet the definition of a trade secret under California law.  

FACTS

The Church of Scientology teaches that a person's behavior and well-being are improved by removing "engrams" from the unconscious mind.  Engrams are impressions recorded by the unconscious mind in times of trauma in this life or in previous lives.  Engrams return in moments of similar stress to the detriment of the person's behavior.  Removing engrams from the unconscious permits the person's analytical mind to function unhindered.  

Engrams are located and purged through "auditing."  Auditing uses the "technology" and "advanced technology" of the Church.  An "auditor" directs a set of structured questions and drills ("rundowns") at the Church adherent.  The adherent's responses are measured on a "Hubbard E-meter" which reflects changes in "skin voltage."  The auditor's aim is to detect the "buttons" which indicate a conscious or subconscious response to the rundown and enable the adherent to identify his or her engrams.  The adherent must proceed through a series of increasingly sophisticated technologies of closely structured questions and answers to reach "a higher spiritual existence."  

The Church asserts that the unsupervised, premature exposure of an adherent to these materials will produce a spiritually harmful effect.(1)  The Church keeps the [*1078] higher level materials in secure places, and makes the materials available only to adherents who agree in writing to maintain their confidentiality.  The Church stated to the district court that it does "not safeguard these materials from any commercial consideration."

Defendant David Mayo was apparently at one time a close associate of Church founder L. Ron Hubbard, and assisted in the preparation of the Church's higher level materials.(2)  Following an acrimonious dispute between Mayo and other senior Church officers, Mayo left the Church and, in July 1983, established the Church of the New Civilization.  The new church embraces beliefs and provides counseling and training to its adherents which are essentially identical to those offered by the Church.

In December 1983, Robin Scott, and two others (all of whom are unrelated to this action) stole certain higher level materials from Church offices in Copenhagen, Denmark.  Danish authorities subsequently convicted Scott of burglary. While the stolen materials were returned, the Church maintains that copies were made and that the new church later acquired these copies.  The district court found that the higher level materials offered to its adherents by the new church are "essentially identical" to the stolen Church materials.(3)

The present suit was filed on November 4, 1985.  The Church states that, in late October 1985, it learned that the new church intended to disseminate the contents of the materials stolen by Scott "in a non-confidential setting."  Counsel for defendant Larry Wollersheim, a former Church adherent who has a pending California state tort action against the Church, had obtained copies of the higher level materials during the deposition of defendants Margaret Singer and Richard Ofshe.  Singer [*1079] had obtained the materials from defendant Leta Schlosser.  Schlosser testified that she had received the materials from an adherent of the new church.  On November 1, 1985, the Los Angeles Superior Court hearing Wollersheim's suit against the Church refused a Church request to seal its records including the Church's higher level materials.  Three days later, the Church brought this suit in federal court against the new church, its principal officers, Wollersheim, his counsel, and those allegedly involved in passing the materials to Wollersheim's counsel. The suit based jurisdiction on the RICO claim and stated six pendent California state law claims including misappropriation of trade secrets.

The district court first granted a temporary restraining order preventing the state court plaintiff and the new church from disclosing the confidential materials.  The court then conducted an evidentiary hearing lasting two days, and, on November 23, 1985, granted the Church the preliminary injunction that prompted this appeal.  

The injunction prohibited the new church, its officers "and those persons in active concert or participation with them or who are acting at their request or insistence . . . from using, distributing, exhibiting or in any way publicly revealing" any version of certain enumerated higher level Church materials.  The enjoined parties were required to return all such material in their possession to the court under seal. The court also required the Church to post a bond of $100,000.  

In supplementary findings of fact, the district court stated that it "views this as a stolen document case."  The court recognized that both parties accepted that adherents must be exposed to the materials in strict progression.  On this basis, the court concluded that Church adherents may suffer irreparable harm from the unsupervised dissemination of the materials, thus justifying preliminary injunctive relief.  In additional comments from the bench, the district court held the materials to constitute a misappropriated trade secret but noted that the Church was not arguing commercial disadvantage as an injury.  * * *

* * * [*1089]

[The court decided that civil RICO claims provide no basis for injunctive relief and therefore vacated the injunction, insofar as basede upon RICO, on jurisdictional grounds.]

II.  Can Religious Materials Constitute a Protectible Trade Secret?

The Church's complaint included several pendent California state law claims, including misappropriation of trade secrets.  Even though the Church is not entitled to injunctive relief under RICO, we must also decide whether it is entitled to the same relief under state law.

"The maintenance of standards of commercial ethics and the encouragement of invention are the broadly stated policies behind trade secret law." Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470, 481, 40 L. Ed. 2d 315, 94 S. Ct. 1879 (1974); Chicago Lock Co. v. Fanberg, 676 F.2d 400, 404-05 (9th Cir. 1982).  States may regulate trade secrets only to the extent that state law does not conflict with federal copyright and patent laws.   Kewanee, 416 U.S. at 479. * * *

Before 1985, California trade secrets law was based on Restatement of Torts § 757, comment (b) (1939).  The leading California case prior to the present legislation adopted verbatim the Restatement's definition of trade secret:
    "It is now settled that a trade secret may consist of any formula, pattern, device or [*1090] 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."
Sinclair v. Aquarius Electronics, Inc., 42 Cal. App. 3d 216, 221, 116 Cal. Rptr. 654, 658 (1974) (emphasis omitted) . . . .

The Restatement (Second) of Torts omitted section 757 and any reference to trade secrets.  In response, a Uniform Trade Secrets Act was drafted.  California adopted this uniform Act, with minor changes, in 1985.  See 14 U.L.A. 537, 538-40 (1980 and 1985 Supp.); M. Jager, Trade Secrets Law, § 3.04 (1985); 3 R. Milgrim, Milgrim on Trade Secrets App. AA (1985).(4)

California law now defines a trade secret as:
    "information, including a formula, pattern, compilation, program, devise, method, technique, or process, that:

      "(1) Derives independent economic value, actual or potential, from not being generally known to the public or to other persons who can obtain economic value from its disclosure or use; and

      "(2) Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy."

Cal. Civ. Code § 3426.1(d) (West Supp. 1986).

The district court held that the Church's higher level materials were a trade secret.  The court relied heavily on the Church's concededly elaborate efforts to maintain the secrecy of its materials.  However, the Church's contention that the disputed materials are "religious scripture" was not reconciled with the California statute's reference to "economic value" as an element of a protectible trade secret.  

To be protectible as a trade secret under either Restatement section 757 or the new California statute, the confidential material must convey an actual or potential commercial advantage, presumably measurable in dollar terms.  We do not accept that a trade secret can be based on the spiritual advantage the Church believes its adherents acquire over non-adherents by using the materials in the prescribed manner.  Former Restatement § 757 defines trade secrets as 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." (Emphasis added).  See also 1 Milgrim § 2.02 ("An element common to the definitions [of trade secret] is actual use of the secret in a trade or business.") (emphasis added); Klitzke, Trade Secrets: Important Quasi-Property Rights, 41 Bus. Lawyer 555, 559 (1986) ("Information that can have no commercial value cannot be the subject of trade secret protection."); Commissioners' Comment to § 1 of Uniform Act, 14 U.L.A. at 543 ("The definition includes information that has commercial value from a negative viewpoint. . . . (A) trade secret need not be exclusive to confer a competitive advantage. . . .") (emphasis added).  

No published California decision has yet construed Civ. Code § 3426.1(d)'s definition of trade secret.  In the only significant effort by any state court to construe the Uniform Act's definitional reference to "independent economic value," the Minnesota Supreme Court stated: "This statutory element carries forward the common law requirement of competitive advantage. . . .  This does not mean . . . that the owner of the trade secret must be the only one in the market. . . .  If an outsider would obtain a valuable share of the market by gaining certain information, then that information may be a trade secret if it is not known or readily ascertainable."  Electro-Craft Corp. v. Controlled Motion, Inc., 332 N.W.2d 890, 900 (Minn. 1983) (emphasis added).  We think it probable that the California courts will follow the Minnesota Supreme Court's view because of the wording of the California criminal law equivalent of Civ. Code § 3426.1(d).  Cal. Penal Code § 499c(a)(9) (West Supp. 1986) states: [*1091] "‘Trade secret' means . . . information . . . which is secret and which is not generally available to the public, and which gives one who uses it an advantage over competitors who do not know of or use the trade secret." (Emphasis added)  See People v. Serrata, 62 Cal. App. 3d 9, 22, 133 Cal. Rptr. 144, 152 (1976) ("The phrase ‘advantage over competitors' [in Cal. Pen. Code § 499c] refers to any form of commercial advantage." (emphasis added)).  

In its supplementary findings of fact, the district court noted that the new church offers its services to its adherents at a price "substantially less than that charged by the Church."  However, the Church alleged no competitive market advantage from maintaining the secrecy of its higher level materials.  Indeed, to do so would raise grave doubts about its claim as a religion and a not-for-profit corporation.  Rather, the Church alleges that its precepts require adherents to be audited in a structured manner with exposure to higher level materials only when the auditor considers the adherent ready.  The injury inflicted on the Church by the new church's misappropriation of its "secret" is the "religious harm" that would be suffered by Church adherents from premature unsupervised exposure to the materials.  The value of the confidential materials is thus spiritual not commercial, and the materials cannot be said to have the "independent economic value" necessary to qualify as a protectible trade secret.(5)

III.  Conclusion

The Church was not entitled to an injunction either under civil RICO or under California trade secrets law.  We therefore dissolve the injunction forthwith.
REVERSED.

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Footnotes



1.   [court's footnote 1] The new church, which follows essentially identical religious precepts and practices to those of the Church, does not dispute this assertion.


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2.   [court's footnote 2] The new church asserts that Mayo authored the disputed higher level materials.  The Church vigorously disputes this, maintaining that Hubbard created all Church materials.  

Hubbard apparently assigned the materials, together with other materials forming the technology and advanced technology of "Scientology" and "Dianetics," to the Religious Technology Center.  Hubbard apparently intended the Center to be the "trustee of the scriptures" of Scientology.  The Center makes available the higher level materials of the advanced technology to Church offices around the world in the form of "packs."  Apparently the advanced technology packs at issue here are only available at six Church offices in the world.  

Many lower level materials are copyrighted, and these copyrights apparently passed to the Religious Technology Center in Hubbard's will.  The trademarks "Dianetics" and "Scientology" are now similarly held by the Center.  The higher level materials at issue in this suit have neither copyright nor trademark protection.


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3.   [court's footnote 3] The new church states that it began using its higher level materials in August 1983, before the Scott theft.  It claims that Mayo, as the principal original author of the Church's materials, wrote the new church's materials from memory.  It also asserts that the new church's materials differ from the Church's materials because they reflect "improvements" recently added by Mayo.  The district court rejected Mayo's testimony as not credible.

    "The court does not believe that anyone, even Mr. Mayo, could have reproduced from memory materials substantially identical to those stolen in Denmark from the church.  The documents are too voluminous, too detailed and too nearly identical in substance and wording to have been created by Mr. Mayo without reference to the stolen documents."
The new church asserts that there is no evidence to link the new church to the Scott theft.  The Church offered evidence to the district court of international phone calls by new church members around the time of the theft, and produced a handwritten memorandum in which defendant Harvey Haber, then a new church officer, referred to a conversation with a person alleged to be Ron Lawley, a colleague of Scott.  The memo then records what appears to be a continuing series of negotiations involving an offer and counteroffer.  The memo does not refer to any agreement between the negotiating parties.  The Church's complaint alleges that the new church obtained the materials from Scott's colleagues in February 1984.  

Because we dissolve the injunction on jurisdictional grounds, we express no view whether the new church's materials are copies of the Church materials stolen by Scott.
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4.   [ [court's footnote 16] Because the new church's alleged trade secrets' misappropriation spanned the effective date of the California statute, both old and new law must be applicable to sustain the injunction.  See Cal. Civ. Code § 3426.10.


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5.   [court's footnote 17] The Church relies heavily on language in Purcell v. Summers, 145 F.2d 979, 985 (4th Cir. 1944) which states that unfair competition law applies fully to religious and not-for-profit organizations.  That case involved an injunction under South Carolina law for the improper use of a church's name by a splinter church.  The Methodist Episcopal Church South had merged with two other churches to form the United Methodist Church.  Dissident members who opposed the merger formed their own church using the former name.  The Fourth Circuit held that the property and charitable gifts of the merged church would be threatened by the use of its former name by a different church.  

Purcell does not involve trade secrets.  Rather, it is an example of "the common law of trademark infringement and unfair competition [which] is replete with cases holding that benevolent, religious, charitable or fraternal organizations are entitled to injunctive relief protecting against the continued use of their name by local chapters which disaffiliate." United States Jaycees v. San Francisco Junior Chamber of Commerce, 354 F. Supp. 61, 71 (N.D. Cal. 1972) (citing numerous cases), aff'd 513 F.2d 1226 (9th Cir. 1975) (per curiam).

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