FALL 2010

Trade Secrets

 

Course No. 9200-704 (& 804)-801

ID No. 85737 & 85736

Time:  W 6:30 - 9:30 p.m.
Room:  W-215
Professor Jay Dratler, Jr.
Room Across from 231D (IP Alcove)
Home: 330-835-4537
Copyright © 2000, 2002, 2003, 2006, 2008, 2010   Jay Dratler, Jr.   For permission, see CMI.


Acuson Corp. v. Aloka Co.

209 Cal. App. 3d 425, 1989 Cal. App. LEXIS 317,

257 Cal. Rptr. 368, 10 U.S.P.Q.2D (BNA) 1814 (1989)


[*371] Brauer, Acting P. J.:

Plaintiff Acuson Corp. (Acuson) sued its competitor, defendant Aloka Co., Ltd. (Aloka) for misappropriation of alleged trade secrets . Aloka had purchased and studied an example of Acuson's product.  Despite uncontroverted evidence that hundreds of the product had already been sold on the open market, the trial court granted broad injunctive relief to prevent Aloka from using any information learned through its examination of Acuson's product.  Since it is fundamental that things publicly disclosed cannot be trade secrets, we reverse.

I. FACTS AND PROCEDURAL HISTORY

Acuson and Aloka both manufacture ultrasonic imaging equipment, a widely used medical diagnostic tool.  That device uses sound waves to produce moving images of the inside of a patient's body.  It works much like sonar: A transducer emits and directs inaudible, high frequency sound waves.  Tissues in the body reflect the sound.  The transducer detects the echoes, and a computer processes them into an image.  Finally, a video monitor displays the image.

While Aloka has been manufacturing ultrasonic imaging equipment much longer than Acuson, neither is a newcomer to the business.  Aloka, a Japanese company, was formed in 1950 and has been manufacturing ultrasonic equipment since 1960.  Acuson, a Delaware corporation, was formed in 1981 and first sold ultrasonic equipment in 1983.

Acuson's product is the Acuson 128, apparently so named because it simultaneously uses 128 ultrasonic channels.  Aloka makes different models.  One of these, the SSD-650, also uses 128 channels but in staggered bursts of 32 channels at a time.  The parties seem to agree that the Acuson 128 provides finer resolution.  But the Aloka SSD-650 is less expensive.

In November 1985 Aloka decided to buy an Acuson 128.  The parties disagree on Aloka's motives.  Aloka compared the Acuson 128 with its own product and claims that comparison was its reason for the purchase.  According to Acuson, Aloka also planned to copy Acuson's product.

Acuson attaches much significance to the way in which Aloka obtained an Acuson 128.  Aloka, of course, had no reason to expect that Acuson would want to assist its competitor by selling it an Acuson 128 directly.  And Aloka did not bother to ask. Instead it asked its American distributor, Johnson & Johnson Ultrasound (Johnson & Johnson), to purchase the unit.  Johnson & Johnson arranged to buy one through Northeastern Medical Equipment Co. (Northeastern).

Northeastern's representative, Bruce Gallit, ordered the machine from Acuson.  He also asked for service manuals and a crate suitable for export.  Gallit explained that the equipment was going overseas and [*372] could not be serviced by Acuson's technicians.  Acuson delivered the unit to Northeastern as requested on May 5, 1986.  Aloka received it on May 12, 1986, and paid Johnson & Johnson's invoice in full.  Johnson & Johnson paid Northeastern.

At Aloka's plant in Tokyo, Aloka's engineers operated the Acuson 128 and compared it with their own product.(1) Although the engineers partially dismantled the Acuson unit, they did not read the machine's software.  The engineers recorded their observations in notebooks.  The parties do not say how long Aloka's engineers spent examining the Acuson 128, but the evidence suggests that they spent only 11 days on the entire project.

Meanwhile, back in the United States, Northeastern failed to forward Aloka's payment to Acuson.  Acuson sued Northeastern to collect the balance due.  When Acuson discovered that Aloka was the purchaser, Acuson dismissed the collection action and demanded the unit's return.  Aloka declined.

Acuson filed this action against Aloka on October 6, 1987, claiming that Aloka had misappropriated its trade secrets.  Six months later Acuson moved for a preliminary injunction, and the court issued an injunction in the form proposed by Acuson.

The injunction as issued does not refer to trade secrets and is not limited to preventing their exploitation. Instead, to summarize its most important terms, it broadly prohibits Aloka from "[u]sing in any manner whatsoever including, but not limited to . . . the manufacture or improvement of any ultrasound sonography system, the information derived from its study of the Acuson 128 system . . . ."  The injunction also bars Aloka from "[d]esigning, fabricating, or delivering any ultrasound sonography system, or any drawings, plans or description of any ultrasound sonography system . . . modeled upon or derived from in any way the design of the Acuson 128."  Aloka is also ordered not to permit nine engineers who had access to the Acuson 128 "to work in Aloka's Research and Development and Manufacturing Divisions."  Finally, the injunction requires Aloka to deliver to Acuson, without compensation, both its Acuson 128 and any materials which reflect information derived from its study of the machine.

II. DISCUSSION

On appeal, Aloka makes four contentions, any one of which if valid would require us to vacate the preliminary injunction: (1) Acuson's product cannot contain trade secrets since hundreds have been sold on the open market; (2) Acuson has failed to identify its alleged trade secrets;(2) [*373] (3) Acuson has failed to satisfy certain traditional prerequisites for injunctive relief (a probability of success on the merits, irreparable harm, diligence);(3) and (4) the injunction is overly broad.(4)

While each of Aloka's contentions has substantial merit, it will be necessary to consider only the first.

A. Standard of Review

* * *

[W]hat constitutes a trade secret is a question of law, not a finding of fact.  And conclusions of law do not bind a reviewing court.  So, while we defer to those necessarily implicit findings of fact that have the support of substantial evidence and resolve conflicts in the evidence to favor the prevailing party, we also decide for ourselves whether the facts support the legal conclusion that a trade secret exists.  If it can be said as a matter of law that no trade secrets exist, injunctive relief cannot have been proper in this case.

B. Does the Acuson 128 Contain Trade Secrets?

Aloka's main contention is that the Acuson 128 cannot contain trade secrets since hundreds of the machine have been sold.  The argument rests on two well-established principles.  First, a trade secret loses its secrecy, and thus its protection under state law, after being disclosed to the public.  Second, state law may not prohibit the copying of objects in the public domain.(5) Bonito Boats, Inc. v. Thunder Craft Boats, Inc., 489 U.S.   , , 109 S.Ct. 971, 980-986, 103 L.Ed.2d 118, 137-145 (1989) . . . .

The concept of public disclosure is embodied in the statutory definition of "trade secret."  Under the California Uniform Trade Secret[s] Act,
    "[t]rade secret' means [*374] information, including a formula, pattern, compilation, program, device, 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 ."
[Uniform Trade Secrets Act § 1(d).]

While the point may be obvious, it bears emphasis that the term "secret" has a literal meaning in the context of trade secret law.  The character of the secret if important to the business is not material but it must, as the term implies, be kept secret by the one who claims it.  In particular, information and goods publicly disclosed cannot be trade secrets.

The other important principle that affects this case derives from federal law.  Patent and copyright law provide the exclusive means of obtaining a monopoly on a product that has been disclosed to the public.  In contrast, ownership of a trade secret does not give the owner a monopoly in its use, but merely a proprietary right which equity protects against usurpation by unfair means.  If federal law leaves an object in the public domain, state law may not prohibit its copying.

These principles, applied to the uncontradicted facts of this case, compel the conclusion that Aloka is free to examine and even to copy the Acuson 128 to the extent it lacks protection under federal patent or copyright law.

1. Public disclosure

Uncontradicted evidence shows that the Acuson 128 has been disclosed to the public.  At least hundreds of the product have been sold since it was introduced in 1983.  If the term "hundreds" is vague, it is because the record demonstrates an understandable reluctance on Acuson's part to disclose actual sales figures.  The company has admitted, however, that virtually all of its revenues derive from sales of the Acuson 128, and one can divide sales revenue by unit price to obtain an approximate figure.  Acuson does not contest Aloka's assertion that it sold about 400 units in 1984 in the United States alone.

Acuson argues that wide sales of its product have not resulted in public disclosure since it "restricts the sale of its product to doctors and hospitals . . ."  It may well be that, with the rare exception of competitors like Aloka, only doctors and hospitals are interested in the machine since it is, after all, a medical diagnostic tool.  But to say that one sells only to those who want to buy is an irrelevant tautology.

According to Acuson, if a product is normally sold only to the medical community, then that means the product "is not available to the general public." (Italics added.) This purely semantic argument depends upon uncritical acceptance of the term "general public," which Acuson has invented in its brief.  The term is an argumentative derivation from the statutory phrase: "generally known to the public or to other persons who can obtain economic value from its disclosure or use."  The invented term "general public" suggests that a product must be a household appliance to lose trade secret protection.  But the drafters' comment to the Uniform Trade Secret[s] Act expressly refutes the argument:

    "The [statutory] language 'not being generally known to the public or to other persons' does not require that information [*375] be generally known to the public for trade secret rights to be lost.  If the principal person who can obtain economic benefit from information is aware of it, there is no trade secret.  A method of casting metal, for example, may be unknown to the general public but readily known within the foundry industry."(6)
In the case of the Acuson 128, it is precisely physicians and hospitals who have an economic interest in the product and whose demand for the product encourages manufacturers to supply it.  Disclosure to them is, for all relevant purposes, disclosure to the world.

2. Efforts to maintain secrecy

Under California law a trade secret loses protection either when disclosed to the relevant public or when its owner does not make "efforts that are reasonable under the circumstances to maintain its secrecy."  In view of the Acuson 128's wide distribution, Acuson cannot even satisfy the first part of this test.  But, for the sake of completeness, we will address Acuson's arguments on the second part as well.

a. Acuson's software license

A software license represents the first of Acuson's claimed efforts to maintain secrecy.  The software covered by the license is required to operate the Acuson 128.  The license consists of a single paragraph in a one-page document entitled "Terms and Conditions," a form contract which purports to set out the standard terms of sale for an Acuson 128.  The relevant paragraph provides as follows:

    "Buyer agrees that the Equipment [the Acuson 128] contains software which is proprietary to the Seller.  Buyer is granted a license to use Seller [sic] proprietary software in connection with this Equipment only in the matter and in the form originally delivered by Seller.  Any other use or disclosure to others of the software is prohibited.  Buyer is granted a right to transfer this license to any subsequent purchaser of the Equipment who agrees to be bound by these terms in the same manner as the Buyer."
The practical effect of the software license is to make commercial duplication of the Acuson 128 difficult for someone who has agreed to the "Terms and Conditions."(7) Having replicated the machine one would still need software to operate it, and the licensing provision would bar the software's copying and "disclosure to others."

Digressing from its defense of the injunction under trade secret law, Acuson argues that the injunction can also be justified as a remedy for a breach of the software license.  But we reject this argument since the trial court did not find that Aloka breached or participated in a breach of the software licensing agreement and since the preliminary injunction, which does not even refer to software, is not predicated upon such a breach.  Thus, we infer no such finding. [*376]

Accordingly, in evaluating the software license's impact on this case we are concerned only with its effectiveness as a method to maintain the confidentiality of any trade secrets that might exist in the Acuson 128's hardware.  The narrow question we face is this: Assuming for the sake of argument that any alleged trade secrets contained in the Acuson 128 had survived the machine's public sales, would the software license represent a reasonable effort to protect any such secrets? The answer can only be no, since the license does not purport to prevent a buyer from operating the machine, disassembling its hardware, studying its functions, and comparing it with other machines.  As we have already discussed, nothing that such an examination reveals can be a trade secret.

Acuson challenges this conclusion, arguing that the license does not permit use of the software to operate the machine if the licensee's purpose in operating the machine is to learn how the system works.

We do not think that the license is reasonably susceptible to this interpretation.  Under the license, the "Buyer is granted a license to use Seller [sic] proprietary software in connection with this Equipment only in the matter and in the form originally delivered by Seller."  Requiring the software to be used "in the matter and in the form originally delivered by Seller" would probably prevent a licensee from transferring the software to other storage media or modifying the software itself.  But there is no plausible reference in the license to the licensee's purpose in operating the machine.  If the parties had wanted to limit use of the software to "medical diagnostic purposes" they could easily have drafted language to achieve that end.

b. Acuson's confidentiality agreements

Acuson requires employees and dealers to sign confidentiality agreements and argues that these agreements maintain the Acuson 128's secrecy.  The agreements in evidence are of a type commonly used to express an employee's obligation to maintain the employer's confidences and to assign to the employer the rights to inventions developed during the employment relationship.  Such agreements may preserve the secrecy of information that is not disclosed to the public, such as manufacturing processes.  But they are not designed to prevent, and cannot prevent, the public from examining equipment that has been sold on the open market.  Thus, even if the Acuson 128 could contain trade secrets, such agreements could not represent a reasonable effort to maintain their secrecy.

c. The Acuson 128's internal padlocks

The Acuson 128 contains padlocks which make it more difficult to examine certain parts.  Aloka's engineers broke two of them in order to study the machine.  While "breaking padlocks" has a dishonest sound, one must bear in mind that a buyer buys the locks along with the machine and is free to cut them.  The "Terms and Conditions" of sale do not mention the locks, and Acuson does not claim that buyers have any obligation to leave them intact.

Because the locks belong to the person who buys the machine, they cannot maintain the machine's secrecy.  Indeed, they probably are not even intended to do so.  Aloka plausibly speculates that the locks' intended function is to show Acuson that unauthorized personnel have provided maintenance service. Acuson's maintenance personnel have the keys to the locks, and a warranty provision in the "Terms and Conditions" provides that "[a]djustments will be contingent upon Seller's examination disclosing that defects have not been caused by . . . incorrect repair or servicing not performed or authorized by Seller."(8)

[*377] Indeed, it appears that Acuson can expect the locks to be opened whenever a customer decides to perform his own maintenance.  Acuson publishes a service manual designed "to familiarize the Customer Engineer with the system's basic operation for maintenance and troubleshooting purposes." * * *

In summary, the Acuson 128 lost any trade secrets it may have contained when sold in large numbers to buyers who were free to resell to whomever they chose.  Neither Acuson's software license, its confidentiality agreements with employees and distributors, nor its internal padlocks actually serve to protect the secrecy of a machine that has been disclosed to the public.  Accordingly, nothing that an examination of the machine discloses can be a trade secret.(9)

C. Trade Secrets Are Lost When Disclosed

* * * [*378]

* * * Acuson next argues that a "line of decisions upholds trade secrets, even when objects could theoretically be reverse engineered, if the complexity of the product makes the reverse engineering itself a difficult and time consuming project." Thus, to complete the argument, even wide sales of a product do not result in a loss of secrecy if the product is sufficiently complex.

Before we examine the decisions Acuson cites, we examine the proposition itself.  If we held that a publicly disclosed [*379] product were not available for examination and copying, even if copying were lengthy and expensive, we would be giving Acuson an unconstitutional state-law monopoly on its product.  As the United States Supreme Court has recognized, federal patent and state trade secret law can coexist, but only because trade secret law does not confer monopoly rights to objects in the public domain: "By definition a trade secret has not been placed in the public domain." Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470, 484, 94 S.Ct. 1879, 40 L.Ed.2d 315, 327 (1974). When an article is unprotected by a patent or a copyright, state law may not forbid others to copy that article. To forbid copying would interfere with the federal policy, found in Article I, § 8, clause 8, of the United States Constitution and in the implementing federal statutes, of allowing free access to copy whatever the federal patent and copyright laws leave in the public domain.

A unanimous Supreme Court emphatically reaffirmed these principles inBonito Boats, Inc. v. Thunder Craft Boats, Inc., 489 U.S. 141, 109 S. Ct. 971, 103 L.Ed.2d 118 (1989).. * * *

* * *

[E]ven if it were not clear before, it is clear after Bonito that trade secret law cannot confer monopoly rights to objects in the public domain.  Trade secret law only gives protection against the misuse of confidential information when the owner has made reasonable efforts to maintain secrecy.  Acuson turns this principle on its head by arguing that state law prohibits lengthy and expensive reverse engineering.  The official comment to the Uniform trade secret Act supports precisely the opposite result. To quote:
    "Often, the nature of a product lends itself to being readily copied as soon as it is available on the market.   On the other hand, if reverse engineering is lengthy and expensive, a person who discovers the trade secret [*380] through reverse engineering can have a trade secret in the information obtained from reverse engineering."
Thus, Acuson is completely wrong when it argues that the law prohibits lengthy and expensive reverse engineering.(10) To the contrary, state law encourages such efforts by giving to the competitor who invests substantial resources in reverse engineering the opportunity to hold in legally protected confidence the results of its labor.  In other words, both the original inventor and the reverse engineer may claim protection for their labors. In addition, federal law encourages reverse engineering because it "may act as a spur to the inventor, creating an incentive to develop inventions which meet the rigorous requirements of patentability." Bonito Boats, supra, [109 S.Ct. at 982, 103 L.Ed.2d at 140-141].)

* * * [*381]

D. Acquisition of a Product Through Improper Means

Our conclusion that the Acuson 128 has been disclosed to the relevant public effectively disposes of this appeal: Acuson cannot demonstrate any probability of success on the merits of its action.

For clarity's sake, however, we must discuss a challenge to this conclusion.  Even if a competitor is free to examine a publicly available machine, Acuson argues, the law nevertheless prohibits reverse engineering if the competitor obtains the product through improper means.  The official comment to the Uniform trade secrets Act appears but only at first glance to support Acuson's argument: "The acquisition of the known product must of course, also be by a fair and honest means, such as purchase of the item on the open market for reverse engineering to be lawful . . . ."

"[F]air and honest means" are the converse of "improper means" the statutory term that the Uniform Act's drafters chose to encompass an unforeseeably broad range of ethically objectionable behavior.   As the drafters noted, "[o]ne of the broadly stated policies behind trade secret law is ‘the maintenance of standards of commercial ethics'" and that "[a] complete catalogue of improper means is not possible."  Official Comment to Uniform Trade Secrets Act and Restatement of Torts § 757, comment (f) (1939).   To be sure, the concept of "improper means" has always been very broad.  A comment to the earlier restatement observed that "means may be improper . . .  even though they do not cause any other harm than that to the interest in the trade secret." Restatement of Torts, § 757, comment f, at 10-11.

But unless a defendant has harmed the plaintiff's interest in a trade secret there is no basis for liability under trade secret law.  It is this principle that makes sense of the Uniform Act's comment that lawful reverse engineering is predicated upon acquisition of a product by "fair and honest means."  Someone who, for example, knowingly uses the stolen design for a yet-unreleased product will be liable under trade secret law even though the product is later sold to the public.  There is liability because the product was still secret at the time; actual trade secrets were compromised by unethical behavior.  But to obtain a product by ethically questionable means will not create secrets where there were none in the first place.  To illustrate, one who obtains a shipment of ordinary paper clips by fraudulently promising to pay may be liable for their value, but trade secret law will not prevent him from copying the paper clips.

Acuson has not cited any case and we have found none holding that a competitor's concealment of its identity to obtain a publicly available product will create liability under trade secret law. * * *

To accept this conclusion one need not deny that Acuson's "improper means" argument appeals to ethical sensibilities: perhaps a company should not conceal its identity to obtain a sample of its competitor's product.  But trade secret law does not create an open-ended cause of action for every arguable breach of commercial ethics.  Only when an ethical breach results in a compromise of actual trade secrets does that body of law have something to say.

DISPOSITION


The order granting a preliminary injunction is reversed.  Appellant Aloka shall recover its costs on appeal.

Capaccioli, J., and Cottle, J., concurred.

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Footnotes



1.   [court's footnote 3] Aloka had already exhibited its SSD-650 to the public on May 7, 1986, shortly before it received the Acuson 128.


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2.   [court's footnote 6] A plaintiff who seeks relief for misappropriation of trade secrets must identify the trade secrets and carry the burden of showing that they exist.  While Acuson asserts repeatedly that it does have trade secrets, the voluminous record in this case contains only one attempt by Acuson in the form of admissible evidence to identify the trade secrets that Aloka is said to have misappropriated. And that one attempt is sorely deficient.  It is contained in the declaration of Acuson's Director of Research, who states in conclusory fashion that the secrets "include, but are not limited to, information concerning both Acuson's 128 channel and doppler technology."

But it is not a secret that the Acuson 128 uses 128 channels; the product's name advertises that important feature. Nor is it a secret that Acuson's product makes use of the doppler effect (a shift in observed wavelength due to a reflecting object's motion) to provide information about the speed and direction of blood flow.  Although Acuson may accomplish this in a different way from other manufacturers, the undisputed evidence shows that doppler capability is a standard feature.

Perhaps Acuson has information related to doppler technology and the simultaneous use of 128 channels that it has not disclosed to the public.  But, as our discussion will show, whatever can be learned through examination of a publicly available product is not a trade secret.  Conversely, if Acuson had trade secrets which were not discoverable by examination of Acuson's product, they were not acquired by Aloka.


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3.   [court's footnote 7] Delay in seeking relief is one factor which the trial court should take into consideration. After learning that Aloka had an Acuson 128, Acuson waited 10 months to file suit and another 6 months before moving for injunctive relief.


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4.   [court's footnote 8] The injunction may be overly broad in several respects.  As we have mentioned, one major flaw is that it does not refer to trade secrets and is not limited to preventing their exploitation. Instead, it broadly prohibits Aloka from using any "information derived from its study of the Acuson 128 system," regardless whether the technology was already in the public domain or known to Aloka.


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5.   [court's footnote 10] There is no evidence that Aloka has copied the Acuson 128.  But if the law permits copying, it will of necessity permit preparations for copying, such as detailed study.


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6.   [court's footnote 12] The Commissioners' Comment to the Uniform trade secrets Act has been adopted in California as the Legislative Committee comment (Senate) to [California's version of the Uniform Trade Secrets Act].


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7.   [court's footnote 13] Of course, Aloka never signed a document containing the software license agreement.  Instead, Acuson alleged that Aloka had notice of license because Gallit, the president of Northeastern, had signed a two-page "Quotation" which included the "Terms and Conditions."  Northeastern, however, claimed that the "Quotation" was not authentic.  This factual dispute does not affect the disposition of this appeal since, as discussed below, the preliminary injunction is not predicated upon a finding that the software license was ever breached.


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8.   [court's footnote 15] In response to Aloka's explanation, Acuson suggested for the first time in oral argument that the locks are intended to detect attempts to reverse-engineer the system.  Of course, a cut lock does not tell Acuson whether the owner's purpose was maintenance or reverse engineering.

But even if Acuson's explanation of the locks were correct, the locks still would not convert lawful reverse engineering into a tort.  Unless a buyer has made an enforceable promise not to examine the machine, a lock protects trade secrets about as effectively as a sign reading "Please don't look inside."


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9.   [court's footnote 16] There may still be secrets related to the design or manufacture of the Acuson 128 that an examination of the product itself does not reveal.  If so, Acuson might still properly invoke trade secret law to prevent a competitor from inducing Acuson's employees to disclose such proprietary information.  But that is not the case before us.


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10.   [court's footnote 19] As the Supreme Court observed in Bonito, prohibition of "reverse engineering of a product in the public domain" is "clearly one of the rights vested in the federal patent holder, but has never been a part of state protection under the law of unfair competition or trade secrets." Bonito Boats, Inc. v. Thunder Craft Boats, Inc., 489 U.S. 141, 109 S.Ct. 971, 982, 103 L.Ed.2d 118, 140 (1989).


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