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.

CPG Products Corp. v. Mego Corp.

1981 U.S. Dist. LEXIS 17657, 214 U.S.P.Q. (BNA) 206 (S.D. Ohio 1981)


[*1]  Spiegel, District Judge.  

I.

This is a civil action for patent infringement under Title 35, U.S.C., and for unfair competition under the statutory and common law of the State of Ohio.  The matter is before the Court on plaintiff's motion for a preliminary injunction based on its claim of unfair competition.  

Plaintiff, CPG Products Corporation ("CPG"), is a Delaware corporation having its principal place of business in Minneapolis, Minnesota.  Defendant, Mego Corporation ("Mego"), is a New York corporation having its principal place of business in New York City.  The subject matter of both the infringement and unfair competition claims is a stretchable toy figure or doll which consists of shaped, elastic skin filled with concentrated corn syrup.  

In its unfair competition claim, CPG charges Mego with having misappropriated [*2] trade secrets concerning the development of the commercial process by which the doll is manufactured, so that Mego could develop the same type of product and place it in competition with Kenner's product line.  CPG's development and manufacture of the doll, and Mego's alleged misappropriation of trade secrets from CPG concerning the doll, occurred primarily through the operations of CPG's Kenner Products Division which is headquartered in Cincinnati, Ohio.  

II.

In June and July of 1980, CPG received information that Mego was planning to export technology to Mexico which related to the manufacturing process which it used for its stretchable, toy figures.  As the instant action was then pending, CPG moved for and was granted by this Court a temporary restraining order which prohibited Mego from negotiating for the purpose of exporting or in any way transferring or conveying technical or financial information relating to the manufacturing process of Mego's elastic products, pending the outcome of the instant case.  

CPG subsequently filed the instant motion for a preliminary injunction seeking, in addition to the same restraints on Mego as outlined in the temporary restraining order, [*3] a broader prohibition against Mego which would ban it from manufacturing or selling elastic toy produces . . . .

The motion came on to be heard on July 10, 1980, on the testimony of witnesses, the numerous exhibits submitted by both parties, including the depositions of more witnesses, the memoranda, and the arguments of counsel.  

III.

The doll, which Kenner Products Division began marketing in 1976, is an elastic toy [*4] filled with concentrated corn syrup which can be stretched or moved from one position to another, and, when released, will slowly return to its original shape or position as the elastic skin reacts against the highly viscous filler.  Kenner marketed these toys, known as "Stretch armstrong," "Stretch Monster," "Stretch Octopus," "Stretch Serpent," and "Stretch X-Ray," from June 1976 to January 1979.  The toy was extremely successful commercially, accounting for sales of over fifty million dollars during that period.  Kenner manufactured these dolls through late 1979 and still offered them for sale in its 1980 catalogue, but it has since discontinued sales of these items.  An application for a patent on the toy was applied for in March of 1976 which finally issued in October, 1979 as U.S. Patent No. 4,169,336.  

In April 1979, Mego began marketing a line of elastic toy dolls which also consisted of shaped, stretchable skins filled with a concentrated corn syrup.  Mego's dolls were marketed in two categories: large dolls the same size as Kenner's, known as "Elastic Hulk," "Elastic Superman," "Elastic Plasticman," and "Elastic spiderman," and, beginning in the Spring of 1980, smaller [*5] dolls in the figures of elastic Disney characters and "Elastic Casper."  Through July 1980, Mego's net profit on these items has been in excess of [specifics deleted].  However, as of July, 1980, Mego had also considered the possibility of discontinuing the manufacturing of its elastic toys because of the performance of the product in the market place.


IV.

The original idea for Kenner's stretchable doll figures was conceived by a CPG employee named James O. Kuhn in January 1974.  He developed his idea through experimentation and design until he was able to present a prototype of the figure to Kenner for evaluation in February 1975.  Kenner accepted the item for commercial development and began working on the process by which it could manufacture such figures on a mass production scale in March 1975.  

Kenner's first consideration was to find a process by which it could concentrate the corn syrup filler in its commercial manufacturing process to get the desired feel and play value for the doll.  Kenner personnel experimented with Kenner then narrowed its search to two suppliers, thoroughly evaluating one before finally settling on.  Then, once a decision was made to use a particular [*6] model, Kenner worked further with the supplier to modify that model so that it would handle the particular requirements of Kenner's manufacturing process which involved the stretch figures.  

Another major area of process design and development at Kenner involved the selection of equipment and procedures for filling the skins with the concentrated corn syrup.  Again, after much consideration and evaluation, Kenner selected [specifics deleted] as its supplier of filler equipment.  In conjunction with the filling process, Kenner decided to use a. [specifics deleted].  Thus, the development of Kenner's doll and its commercial manufacturing process, from the inception of the idea to actual commercial production, covered a period of two-and-a half years.  January 1974 to June 1976.  

* * *  [*8]  * * *
    [Kenner claimed thirty-four items in combination as trade secrets or confidential information, but Mego argued that most production-line components were standard equipment, commercial information on the use of which known outside of Kenner, so that the items "individually or in combination did not rise to the level of trade secrets."  Mego also argued that it took Kenner only eleven months, from July of 1975 until June of 1976, to develop and implement the production line.]
[I]t is possible that a new combination of known steps or processes can be entitled to trade secret protection. . . .  Although Kenner used standard equipment in its process for manufacturing the stretch doll, it used this equipment in a combination of steps and for a purpose which it had not previously been envisioned.  The manufacturers of the equipment Kenner utilized were each appointed by Kenner for information regarding the ability and capacity of a machine to be used in the manner necessary to make a stretch toy, and the companies Kenner considered before deciding on the ones used were evaluated on their ability to aid Kenner in the design of a production line for the specific toy, the stretch doll, and to solve problems in regard to that line.  Thus, the equipment was utilized in a manner and for an ultimate purpose which had not previously been contemplated, [*9] with adjustments to accommodate it to Kenner's specific project.  Kenner solved problems in the process itself by designing [specifics deleted] all compatible with the production requirements.

The key to the production line was not the equipment utilized but finding equipment which would do the job at each stage of the process.  The Court finds that Kenner's cost data, [specifics deleted] the combination of the equipment comprising the production line to produce a stretch doll were not matters of common knowledge at the time Mego appropriated and used them.  * * *

Furthermore, Kenner itself considered the production process and the combination of equipment used in it to be confidential.  Kenner's Oakley facility where the production [*10] line was housed has been fenced in at all relevant times.  Access to the facility has been restricted to a limited number of gates; "no trespassing" signs have been posted on the premises; and up to fourteen guards have been employed at the facility, and Kenner's hourly employees have been provided with written rules and regulations which prohibit them from being on the premises except for work, require them to stay at their assigned duty station, and prohibit unauthorized possession of company property.  Kenner's salaried employees have been required to sign employment agreements whereby they agree to safeguard Kenner's confidential information.  Kenner employees have been required to wear or carry identification cards.  Access to the plant by non-employees has been restricted to visitors who state that they have business with a particular Kenner employee, and guards have screened those persons seeking to enter the plant to ascertain that they do have business there.  

Those suppliers or prospective suppliers who have been shown Kenner's production line or been informed of aspects of Kenner's process have been so shown or so informed for valid business reasons and have been cautioned [*11] that the information and process constitute confidential information of Kenner.  Kenner purchase orders used to purchase items of equipment, [specifics deleted] recite that all information disclosed pursuant to the order is confidential and shall not be disclosed to any third party.  

The entire production line, processes, and equipment have been considered confidential by those persons responsible for it and have been treated as confidential information.  The operating manual was reproduced in very limited quantities and distributed only to persons entitled to know its contents as part of their job responsibilities.  

The Court finds that these measures taken by Kenner were reasonable and appropriate to protect its confidential information.  

* * *  [*12]  * * *

In addition to the facts just discussed concerning the novelty and the confidentiality of Kenner's production line, Kenner has established facts which persuade the Court that Mego went to great pains to acquire this information from Kenner to aid in the production of Mego's own stretch toys, rather than acquire the information as Kenner did, through trial and error in the marketplace.

V.

* * *  [*19]  * * *
    [The court describes in detail how Mego acquired the idea and production technology for its own dolls.  The project began when Nagel-Kennedy & Associates, an independent "idea house" that worked for Mego and other toy makers, suggested that Mego make stretchable dolls, instead of its existing unstretchable dolls, in the form of superheroes.  Mego had no free personnel to design the production line, so Nagel-Kennedy promised, in exchange for royalties, to find others to design it.
    Neither Mego nor Nagel-Kennedy ever "seriously tried to locate an independent consulting engineer."  Nagel-Kennedy first approached an existing employee of Kenner, who refused.  Then it found Boegli, an ex-employee of Kenner who had left under "unpleasant circumstances" and had no job.  Boegli accepted, ultimately producing a detailed memo describing Kenner's production line and costing in detail..  Boegli charged $1,500 for his memo, then later wrote a second memo based on information from Woodward, his contact inside Kenner.
    One Abbat also served Boegli as a source of information from Kenner, but it was not clear whether he was the source of the information in Boegli's initial memo.  Rotenberg , the Mego executive who worked with Boegli and used his information, was aware that it came from Kenner and "never instructed [Boegli to get the information] only by appropriate methods."
    Boegli continued to furnish Mego information on Kenner's production line and costing for a period of about one-half year, going so far as to try to obtain a copy of Kenner's patent application for the stretchable dolls.  When he was unsuccessful, Rotenberg asked him why he had not provided the application.  (This all occurred at a time when there was no pre-issue publication of U.S. pending patent applications, which were required by statute to be kept secret.   See 35 U.S.C. 122 (1990).)
    At one point Mego tried to hire Boegli and Abbot to supervise Mego's production of the stretchable dolls.  Abbott refused for personal reasons but appeared willing to continue to cooperate while a Kenner employee.  Boegli continued to work for Mego another month or so, being paid directly, until he quit or was fired.  During that time, Boegli produced a detailed and highly confidential cost sheet on Kenner's production, which was circulated among a number of Mego executives.]
Based on this evidence, the Court finds that Mr. Boegli intentionally sought out and improperly obtained important and valuable confidential information of Kenner's which related to its manufacture of its stretchable toy figures.  Mr. Boegli acted as a conduit [*20] by which this information, as well as information he received while he was employed by Kenner, was improperly conveyed to Mego.  Both Messrs. Woodward and Abbat, who provided information to Mr. Boegli knowing he was working on Mego's stretch project, had signed employment agreements prohibiting such conduct, and Mr. Boegli knew this.  Mr. Boegli himself was concerned about the possibility that Kenner would sue him as a result of his activities on Mego's behalf.  The Court further finds that Mego's purpose in associating itself with Mr. Boegli was that it believed he knew or could obtain Kenner's confidential information, and that Mego knew that Mr. Boegli was passing on to it confidential information of Kenner which had been obtained improperly.  Therefore, the Court finds that the Kenner information referred to which was obtained by Mego as previously set forth was knowingly and willfully misappropriated by Mego.


VI.

One of Mego's first objectives in producing its stretch doll was to determine generally a method of manufacture for its stretchable toy figures and to determine roughly whether the capital costs were within its capacity.  Although this information could have been [*21] obtained by conducing its own engineering studies, Mego did not do that.  Instead Mr. Rotenberg told Mr. Boegli to provide the information, believing that Mr. Boegli knew or could find the requested information on the basis of what he had done for or who his contacts were with Kenner.  Mr. Boegli did promptly provide this information in the form of memoranda.  The memoranda provided two essentials of Kenner's manufacturing process, the major items of equipment used, the identification of important suppliers and the capital cost date for the items of equipment.

Mego made use of this information to its competitive advantage.  For example, [specifics deleted] CPG submitted comparative photographs of their filing system and of Mego's and the two systems appear extremely similar, the only exception being [specifics deleted]

Mego also received information from Mr. Boegli regarding Kenner's material costs.  Kenner's cost sheet, which was found in Mego's files during the course of discovery for this litigation, contained Kenner's actual unit cost figure for the entire unit as well as a breakdown of material costs for packaging, sub-assemblies and individual components.  Mr. Rotenberg [*22] readily admitted use of this cost data.  

It appears that Mego's process for the manufacture of its stretchable toy figures in several of its essential aspects was derived from or based on information received from Kenner.  This information was confidential and was knowingly and intentionally obtained from Kenner by improper means.  The information was used to Mego's competitive advantage.  

Thus plaintiff has established facts which persuade the Court that it is likely to succeed on the merits of this case on its unfair competition count.  The Court finds that plaintiff has also established that it will be irreparably injured if a preliminary injunction does not issue.  

Plaintiff showed that, following the introduction of Kenner's line of stretchable toy figures in 1976, it entered into license agreements with a number of corporations in foreign countries which conveyed the rights to manufacture and sell the stretch toy figures along with the information as to how to manufacture them.  In 1978, a Mexican corporation located in Mexico, Lili Ledy S.A. de C.V., began manufacturing and selling stretch toys in Mexico under the license.  It has agreed to maintain Kenner's manufacturing [*23] information about the dolls in confidence and to pay Kenner a royalty.  

Mego began manufacturing its competing stretch toy figures in April 1979 at its Bretwood, New York, plant, where all of its stretch figures sold to date have been manufactured.  However, Mego has been negotiating with a Mexican firm concerning the producton of Mego's stretch dolls in Mexico.  Mego is willing to and intends to transfer the technical information used by it in its manufacturing process to the Mexican firm.  The parties agree that there is no remedy in Mexico for misappropriation of the trade secrets.  

Mego's contemplated transfer of information to Mexico will include transfer of confidential information it misappropriated from Kenner.  Mego is also contemplating manufacturing the stretch toys in Taiwan, Hong Kong, and/or Korea, which would also include transfer of Kenner's confidential information.  Once transfer of this information out of this country occurs, the information could be published and Kenner would have no legal recourse.   Any trade secrets of Kenner's which now exist would be destroyed.  

The Court finds that exportation of the technology for making Mego's stretchable toy figure [*24] is likely to place such information in the public domain, and that such an occurrence would cause plaintiff irreparable harm.  

The Court finds that an injunction against Mego from further manufacture or sale of the product in the United States under these circumstances to be unnecessary.  Plaintiff has an adequate remedy at law should defendant manufacture or sell more stretch toy figures which were or are developed by a process which makes use of information improperly derived from plaintiff.  Defendant is enjoined, however, from disseminating information regarding its production line or its methods of production used in manufacturing the elastic figures, and is further enjoined from selling the production equipment for the stretch toy as an entity such that it could be used again for the purpose of producing stretch figures.  

The consideration of the public interest favors the injunction sought, since Ohio law actively discourages unauthorized use of trade secrets by making such activity criminal.  

With respect to enjoining Mego against exporting technology relating to the stretchable toy figures, or otherwise further disclosing it here or abroad, the balance weighs in plaintiff's [*25] favor because failure to grant the injunction would permit the irrevocable destruction of the confidentiality of plaintiff's information.  Entry of such injunction, on the other hand, would at most delay Mego's exportation or negotiations therefor.


Conclusions of Law

The Court has jurisdiction over the parties in respect to plaintiff's unfair competition claim, and venue is properly laid in the Southern District of Ohio.  

* * *

An action for trade secret misappropriation raises under and is controlled by state substantive law.  Kewanee Oil Company v. Bicron Corporation, 416 U.S. 470, 181 U.S.P.Q. (BNA) 673 (1974).  A federal court must apply the substantive law of the state in which it is sitting, including the choice of law rules applied by the forum state.  Erie Railroad Company v. Thompkins, 304 U.S. 64 (1938); Klaxon Co. v. Stentor Electric Manufacturing Co., 313 U.S. 487 494, 49 U.S.P.Q. (BNA) 515, 515-516 (1941). [*26]

While Ohio generally ascribes to the rule of lex loci delecti, it does not do so automatically. . . .  Considerations of public policy should accopany the judicial decision making process in conflict of laws cases. . . .  Factors to be considered, besides the place where the injury occurred, are such things as the parties' residences and the plaintiff's selection of the forum state, . . . and the balancing of government interests as to the respective public policies involved and how they would best be served. . . .

In the instant case, the trade secrets which defendant allegedly misappropriate[d] were developed and maintained in plaintiff's Kenner facility located in Ohio.  Although the planning of the misappropriation of this information and its utilization were carried out by [*27] defendants largely in New York, the physical misappropriation and the transmittal of the information took place in Ohio.  Plaintiff, a resident of Minnesota, chose to bring this action in Ohio, against defendant, a New York corporation, notwithstanding that both states have a substantial inteest in policing trade secret misappropriation.  A consideration of all of these factors leads to the conclusion that the trade secrets issues in this action are governed by Ohio law, the place where plaintiff chose to bring the action, where its facility is located where the information that is the subject of this action was developed and maintained, and from where the information was actually taken.  

In any event, the courts of both New York and Ohio have adopted 757 of the Restatement of Torts and the definition of trade secrets found therein.  See, e.g., Kewanee Oil Company v. Bicron Corp., supra at 474-75 . . . . [*28] . . .

* * *

Trade secret law is based upon protection against breach of faith and reprehensible means of learning another's secret and thus does not require the kind of novelty, uniqueness and invention which is a requisite of patentability. . . .  Structural Dynamics Research Corp. v. Engineering Mechanics Research Corp., 401 F. Supp. 1102, 1117-18 (E.D. Mich. 1975).  While novelty in a patent law sense is not required for a trade secret, some novelty is required in the sense of showing that the process is not common general knowledge. [*29]  Kewanee Oil Company v. Bicron Corp., 416 U.S. 470, 476, 181 U.S.P.Q. (BNA) 673, 676 (1974).  A new combination of known stpes or processes can be entitled to trade secret protection.  See . . .  Structural Dynamics Research Corp. v. Engineering Mechanics Research Corp., supra, at 1117-18; Clark v. Bunker, 453 F.2d 1006, 1009, 172 U.S.P.Q. (BNA) 420, 422-423 (9th Cir. 1972).  Thus, trade secret protection can and should be extended to information which, even though known per se, is put into combined final useful form by the trade secret holder to his competitive advantage.  Structural Dynamics Research Corporation v. Engineering Mechanics Research Corporation, supra at 1117-18; Clark v. Bunker, 453 F.2d 1006, 1009, 172 U.S.P.Q. (BNA) 420, 422-423 (9th Cir. 1972).  

The "secrecy" requirement in trade secret law is not a demand of absolute secrecy.  Basically, the courts are concerned with whether the trade secret owner has taken "reasonable measures" to protect his confidential information.  E.I. duPont deNemours & Co., Inc. v. Christopher, 431 F.2d 1012, 1017, 166 U.S.P.Q. (BNA) 421, 425 (5th Cir. 1970), cert. denied, [*30] 400 U.S. 1024 (1971); K-2 Ski Co. v. Head Ski Co., Inc., 506 F.2d 471, 474, 183 U.S.P.Q. (BNA) 724, 726 (9th Cir. 1974).  If a supplier is given access to a purchaser's trade secrets for the purpose of permitting the supplier to better fill the purchaser's needs, such secrets are deemed to be received in confidence by the supplier and the supplier is under a duty not to disclose the purchaser's trade secrets to another or to apply those secrets to manufacture the products of another. . . .  The promotion of commercial ethics is a theme running throughout the cases in the area of trade secret law, including in the determination of the nature of plaintiff's trade secrets and whether they are protectible. . . . Kewanee Oil Company v. Bicron Corp., supra at 487. . .  When information in the nature of a trade secret is procured by improper means, the fact that the information [*31] conceivably could have been obtained by lawful means is irrelevant. . . .

On the basis of the applicable law, and the facts found by the Court, the Court further finds that plaintiff's information pertaining to its cost data, its [specifics deleted] filling operation for the stretch figures, and the combination of all of the factors involved in its production line were trade secrets in the sense that they were not common knowledge in the industry, that plaintiff maintained this information under measures reasonably designed to protect it so that plaintiff could continue to use it to its competitive advantage, and that defendant wrongfully procured this information in order to achieve a competitive advantage in producing its own line of stretch [*32] figures.  The Court further finds that defendant did use the information wrongfully procured in the manufacture of its stretch toys.  

There are four factors which should be considered in deciding a motion for a preliminary injunction: (1) the likelihood of success on the merits at trial; (2) the irreparability of harm to the plaintiff; (3) the balance of injury between the parties; and, (4) the impact of the ruling on the public interest. . . .  No one of these factors is controlling, nor is each necessarily to be given equal weight.  Rather, the Court must balance all of these factors in arriving at its determination. . . .

With respect to the requirement that plaintiff show a likelihood or succeeding on the merits,
    "[I]t is not necessary that the plaintiff's right to a final decision, after a trial, be absolutely certain, wholly without doubt; if the other elements are present (i.e., the balance of hardships tips decidedly toward plaintiff), it will ordinarily be enough that the plaintiff has raised questions going to the merits so serious, substantial, difficult and doubtful, [*33] as to make them a fair ground for litigation and thus for more deliberate investigation."
Hamilton Watch Co. v. Benrus Watch Co., 206 F.2d 738, 740 (2nd Cir. 1953). . . .  Threat of disclosure, destruction or dilution of plaintiff's trade secrets constitutes irreparable injury justifying injunctive relief. . . .

In the instant case, the defendant is no longer using the information appropriated from plaintiff in its manufacture or sale of the stretch figures in the United States, since its manufacturing and selling of these items has virtually ceased due to lack of market demand.  Even if the defendant should manufacture or sell more stretch toys, the Court does not find that injunctive relief is proper, since plaintiff would have an adequate remedy at law in damages.  However, the Court does find that should defendant export any of the technical material it misappropriated from plaintiff or impart [*34] any of this information to foreign corporations, plaintiff's trade secrets would be threatened with destruction, for which it would have no adequate remedy.  In view of this threat of irreparable harm to the plaintiff, the fact that plaintiff has demonstrated a substantial likelihood of success on the merits at trial, and the strong public interest against misappropriation of trade secrets, Ohio Rev. Code 1333.51 and 1333.99, and the fact that the balance of injury between the parties weighs heavily in favor of the plaintiff, this Court finds that defendant must be enjoined from exporting technology relating to the stretchable toy figures or otherwise disclosing it here or abroad.

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