Course No. 9200-704 (& 804)-801
ID No. 85737 & 85736
Time: W 6:30 - 9:30 p.m.
Room Across from 231D (IP Alcove)
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In re Innovative Construction Systems, Inc.793 F.2d 875, 230 U.S.P.Q. (BNA) 94 (7th Cir. 1986)
Before Eschbach, Easterbrook, and Ripple, Circuit Judges.
Innovative Construction Systems, Inc. ("Innovative") is a Wisconsin corporation with its principal place of business in that state. Defendants Bowen Supply, Inc. ("Bowen Supply") and Sunbelt Brick Company, Inc. ("Sunbelt") are Georgia corporations with their principal places of business in Americus, Georgia. Defendant Harrold Bowen is president and chairman of the board of Bowen Supply and a director of Sunbelt. Both he and defendant Phillip Strand were at all times relevant to this appeal citizens of Georgia. (Hereinafter, unless otherwise indicated, the term "Bowen Supply" also refers to Sunbelt, Harrold Bowen, and Phillip Strand.)
In 1967, John Riley, an attorney, and Dorlen Hammon, a dentist, along with several others, formed Masonry Siding, Inc., to manufacture simulated brick panels for the home-building industry. Their product proved unmarketable, and Masonry Siding ultimately declared bankruptcy. In 1973, Riley and Hammon formed Innovative. Over the next several years they spent considerable time developing a new process for simulating brick paneling. The method they eventually developed required the application of three layers, composed of slag aggregate, cement, bonding agent, and slurry, to a four-by-eight-foot backing board. The resulting product was called "Panl Brick." The commercial value of the process consisted of the formulas that set forth the precise mixture of raw materials needed for each layer. These formulas were somewhat flexible in that the proportion of aggregate to water could be modified slightly to account for changes in temperature and humidity.
Hampered by insufficient operating capital, Innovative initially limited its marketing efforts to local home-improvement centers and to some outlets for national retailers. On November 15, 1977, Innovative entered into a distribution agreement with defendant Bowen Supply. The agreement gave Bowen Supply the exclusive right to sell Panl Brick to the manufactured housing market. Bowen Supply became, and remained, the only nationwide distributor of Panl Brick, and from late 1978 through 1981, sold virtually all the Panl Brick that Innovative could manufacture.
Bowen Supply was at one time interested in acquiring Innovative. On June 18, 1979, the parties met to discuss the matter. The course of their negotiations is disputed. According to Riley's testimony, Bowen Supply offered to purchase Innovative for royalties based on annual sales over a period of three to five years, the total amount of which was estimated to be $400,000.00. Bowen Supply claims that no offer based on royalties had been made. Duncan Knapp, executive vice-president for sales and marketing at Bowen Supply from 1973 to 1980, stated, however, that Bowen Supply did in fact make an offer based on royalties, and that it was disappointed when Innovative did not accept the offer.
In late September of 1979, Innovative employed defendant Strand, who eventually became plant manager. In the course of [*878] his duties, Strand was often in communication with Bowen Supply. In October of 1980, Bowen Supply told Strand that it was impressed with his abilities and would be interested in offering him a position should he leave Innovative. In mid-February of 1981, Strand went to Georgia to talk with Stewart Howell, a marketing officer for Bowen Supply at the time, and spent several hours discussing employment opportunities at Bowen Supply. Both Strand and Howell testified that they did not then discuss the possibility of Strand establishing a manufacturing facility to produce simulated brick for Bowen Supply in Georgia. Howell stated further that Bowen Supply at that time had also not entered into an agreement to employ Strand.
On the 15th or 20th of March 1981, Strand gave Innovative notice that he was leaving their employ. On March 31, Strand informed Howell that he would no longer be working for Innovative. Howell reiterated Bowen Supply's interest in setting up a manufacturing plant in Georgia under Strand's supervision or, if that proved unfeasible, of placing Strand in some other position. Strand indicated that he too was interested in organizing a facility for Bowen Supply. According to Howell's testimony, he had virtually given Strand a verbal guarantee of employment before Strand left for Georgia.
Strand's last day of employment with Innovative was April 2, 1981. He knew then that he would soon assume a position with Bowen Supply, and that, if he were to establish a manufacturing plant for Bowen Supply, Innovative would lose its only customer. Nevertheless, Strand did not tell Innovative of his plans. In fact he apparently told Innovative that he would be seeking employment in Colorado. After completing his duties that day, Strand loaded his furniture onto a waiting Bowen Supply delivery truck, and headed south to Georgia.
Shortly after arriving in Americus, Georgia on April 3, Strand began assessing the feasibility of manufacturing simulated brick paneling there. By April 8 or 9, he had located the raw materials necessary to begin operations. Strand testified that he intended to produce paneling almost identical to Panl Brick. Sunbelt was formed by Harrold Bowen, Harrold's brother Frank, and Strand in May of 1981, and it commenced production of brick paneling by June, with the first shipments made in July. Strand became vice-president of Sunbelthis annual salary at Sunbelt was $24,000.00 as compared to the approximately $17,000.00 he received from Innovative.
At trial, Bowen Supply conceded that it used virtually the same manufacturing techniques which Innovative had developed for the production of Panl Brick. It did, however, modify the formulas Strand had acquired while employed by Innovative. These modifications were necessitated by differences in climate between Wisconsin and Georgia, as well as by the availability of slag aggregate. Innovative testified that the time Bowen Supply needed to develop workable variations to its formulas was insignificant compared to the effort it had expended developing the original formulas.
On May 12, 1981, Bowen Supply cancelled its distribution agreement with Innovative. Shortly thereafter, Innovative went out of business. On September 1, 1981, Innovative filed a petition in the United States Bankruptcy Court for the Western District of Wisconsin requesting relief under Chapter 11 of the Bankruptcy Code, 11 U.S.C. §§ 1101-1174. The adversary proceedings forming the basis of this appeal were filed against Bowen Supply on March 28, 1982, and were transferred to federal district court for trial on August 26, 1983. * * * [*879] * * * [The trial court granted summary judgment against Innovative on all claims except the trade secret claim.]
The jury returned a verdict against all defendants on liability for misappropriation of Innovative's production formulas . . . . On December 21, 1984, the district court granted the defendants judgment notwithstanding the verdict . . . This appeal followed.(1)
A. Wisconsin Law of Trade SecretsThis is an action in diversity, and the parties agree that Wisconsin law governs the substantive issues presented. * * *
The doctrine of trade secrets arose out of efforts to "deal with a particular problem in American industryemployee mobility among key employees of an industrial concern." Abbott Laboratories v. Norse Chemical Corp., 33 Wis. 2d 445, 453, 147 N.W.2d 529, 532 (1967). In deciding whether to protect information, a balance must be struck between the competing interest of an employer in precluding others from exploiting specialized knowledge developed during the course of an employment relationship, and that of the former employee in the general use of his skills or training. Employers seek to protect information that they have spent time and effort gathering, and that gives them an advantage over competitors. Employees, however, quite understandably do not want such information protected if doing so would restrict their ability to find another position in the field in which they have developed expertise. To the degree that according trade secret status to information affects the willingness of employers to undertake valuable research, or the willingness of others to hire a competitor's former employee, and hence, to make use of such information, third-party interests are implicated as well.
The Wisconsin Supreme Court has drawn narrowly the scope of trade-secret protection "to effectuate the public policies of encouraging business competition and facilitating worker mobility." Wisconsin Electric Power Co. v. Public Service Commission of Wisconsin, 110 Wis. 2d 530, 537, 329 N.W.2d 178, 182 (1983); see also . . .Gary Van Zeeland Talent, Inc. v. Sandas, 84 Wis. 2d 202, 214, 267 N.W.2d 242, 248 (1978). It is essential that the information in question is disclosed to the employee in confidence, . . . [*880] . . . and that it is kept genuinely secret from others in the industry. "So long as a departing employee takes with him no more than his experience and intellectual development . . ., and no trade secrets or processes are wrongfully appropriated, the law affords no recourse." Gary Van Zeeland, 84 Wis. 2d at 214, 267 N.W.2d at 248. Thus, the determination whether to protect information in a particular case depends upon a detailed examination of the facts and the nature of the information involved.
In Abbott Laboratories, the Wisconsin Supreme Court adopted § 757 of the Restatement (First) of Torts (1939) as the "correct state[ment] of the general law of trade secrets." 33 Wis. 2d at 456, 147 N.W.2d at 534. The Restatement lists six factors as relevant to the determination whether given information is a trade secret:
In [a prior decision,] the Wisconsin Supreme Court declared that "each of the six factors should indicate that a trade secret exists if the information is to be afforded legal protection." Relying on this statement, Bowen Supply claims that, under Wisconsin law, a plaintiff must establish each of the six factors in order to prevail on a trade secrets claim. Innovative contends that this position inaccurately characterizes the court's holding. The special verdict submitted to the jury in the instant case required an affirmative finding on each of the six factors before a finding of liability could be made. The jury found that Innovative established the existence of each factor. Because we hold that the record supports the jury's answer to each, we express no opinion whether the coincidence of all these factors is a necessary, as well as sufficient, condition for a trade-secrets claim under Wisconsin law.
B. Judgment Notwithstanding the Verdict
1. Standard of ReviewIn reviewing the jury's verdict on a motion for judgment notwithstanding the verdict under Fed. R. Civ. P. 50(b), a federal district court sitting in diversity applies the [*881] standard of the forum state. Furthermore, on appeal, as would a state appellate court, we owe deference to the jury, not the district court. Under Wisconsin rules of civil procedure, a post-verdict evidentiary challenge must be brought under § 805.14(1), which provides:
* * *
2. The Special Verdict FormBefore turning to a review of the jury's verdict, we shall address a procedural point raised by the parties. Bowen Supply contends that our review in the instant case should be less deferential to the jury than otherwise suggested by the [discussion] above. This is so, it argues, because under Wisconsin law the issue whether a trade secret exists is a mixed question of law and fact. In particular, the issue, as Bowen Supply puts it, of "what actually happened is a question of fact," properly submitted to the jury, whereas the issue of "whether those facts as a matter of law fulfill a particular legal standard is a question [*882] of law," and hence, falls outside the province of the jury.
It is true that, under Wisconsin law, a trade-secrets claim presents issues of both law and fact. In particular, the ultimate question whether certain information constitutes a trade secret is one of law for the court. Nevertheless, the special verdict form at issue was drafted by Bowen Supply and submitted at its request, and over Innovative's objection.(2) * * * Bowen Supply has hence waived on appeal whatever objection it might have had to submitting the special verdict interrogatories to the jury, even were these mixed questions of law and facta matter upon which we express no opinion. Furthermore, by failing at trial to object to the wording of the special interrogatories it waived any objections it might have had thereto. * * *
The special verdict in the instant case required the jury to answer interrogatories modeled on the six factors listed in the Restatement. A finding of liability of misappropriation of trade secrets was predicated upon an affirmative answer to each. That is, once the jury found that Innovative established each factor, the existence of a protectable trade secret followed as a matter of law. This approach is fully consistent with Wisconsin law.
In granting Bowen Supply judgment notwithstanding the verdict,
the district court found that there was insufficient evidence to support
an affirmative answer to the second, third, and sixth interrogatories,
i.e., (1) did Innovative take reasonable precautions to limit knowledge
of the formulas [*883] among its employees; (2) did Innovative
adopt reasonable measures to guard the secrecy of its formulas from potential
competitors; and (3) would such a competitor have had difficulty in acquiring
or developing duplicate or comparable formulas without resorting to improper
means.(3) We shall consider each of these in
An indispensable element of a trade-secrets claim is that the information,
for which legal protection is sought, be genuinely secret. The
law affords no protection against a person who learns the trade secret
legitimately and where no duty of confidence is imposed. However,
"it is not requisite that only the proprietor of the business know it.
He may, without losing his protection, communicate it to employees
involved in its use. He may likewise communicate it to others pledged
to secrecy. . . ." Abbott Laboratories, 33 Wis. 2d at 457,
147 N.W.2d at 535 (quoting from Restatement (First) of Torts § 757 comment
b (1939)). Thus, where what is thought to be a trade secret is disclosed,
the question posed is whether . . . the recipient of the information knew
or should have known that the information is a trade secret and that the
disclosure was made in confidence.
The district court concluded that the jury's finding that Innovative
adopted reasonably adequate measures to protect the secrecy of its formulas
was unsupported by the evidence. In analyzing this issue, we shall
consider whether there is sufficient evidence of (a) Innovative's efforts
to impress upon its employees the need to keep the formulas secret, (b)
the measures it adopted to restrict access of non-employees to the formulas,
and (c) the steps it took to guard the secrecy of its formulas when discussing
the possible sale of its business to others.
(3)The district court found that the formulas for Panl Brick "were clearly unsophisticated," and "represented no great advance in technology." Apparently assuming that Wisconsin law requires "[a] palpable advance of the prior art," the court concluded that there was insufficient evidence to support the jury's findings that Innovative's competitors would not be able to duplicate the formulas without resorting to improper means.
Uniqueness in the patent-law sense is not an essential element of a trade secret. Forest Laboratories, Inc. v. Pillsbury Co., 452 F.2d 621, 624 (7th Cir. 1971) (applying Wisconsin law). Nonetheless, a trade secret must possess at least that modicum of originality that will separate it from everyday knowledge. However, "the idea need not be complicated; it may be intrinsically simple and nevertheless qualify as a secret, unless it is common knowledge and, therefore, within the public domain." Id.; see also Abbott Laboratories, 33 Wis. 2d at 467, 147 N.W.2d at 538 ("alleged trade secrets were published and were commonly known in the trade and readily discernible in the chemical engineering field").
In answering the first special verdict interrogatory, the jury found that the formulas used by Innovative in the production of Panl Brick were generally unknown outside of its business. The district court found that there was sufficient evidence to support this finding, and Bowen Supply, on appeal, has not challenged the jury's finding. Furthermore, Innovative introduced evidence that Panl Brick was a unique product in the industry. Bowen Supply's contention, even if true, that "anyone knowledgeable in the field would have [no] difficulty in developing mixtures comparable to those of" Innovative's is beside the point. As we noted in an earlier decision], "[a] few sophisticated competitors may have had the resources to analyze and reproduce the [product] by fair means. [The defendant], however, obtained the formulae pursuant to a confidential relationship. The fact that someone else might have discovered the secret by fair means does not protect him."
Bowen Supply argues that affording trade-secret protection to Innovative's formulas, irrespective of what it characterizes as their unremarkable nature, conflicts with the policy concern that a departing employee should be able to take with him the "experience and intellectual development that has ensued while being trained by another." See, e.g.,Gary Van Zeeland, 84 Wis. 2d at 214, 267 N.W.2d at 248. This point is not well taken. In adopting the Restatement, the Wisconsin Supreme Court understood it to strike a proper balance between the competing policy considerations, including that of employee mobility. It is not the function of a federal court sitting in diversity to restrike that balance.
Finally, Bowen Supply contends that, because Strand modified Innovative's formulas before using them at Sun Belt, it [*887] should not be held liable for their use. Bowen Supply's contention misapprehends the purpose of affording trade-secret protection. The "modifications" in question here were necessitated by differences in the climate of Wisconsin and Georgia, and by the availability of certain raw materials. As we stated in Forest Laboratories, 452 F.2d at 625, "the user of another's trade secret is liable even if ‘he uses it with modifications or improvements upon it effected by his own efforts,' so long as the substance of the process used by the actor is derived from the other's secret." Were the law of trade secrets not flexible enough to reach the modifications in the instant case, when it is evident that the formulas were substantially derived from Innovative's, it would indeed be hollow.
In conclusion, we hold that there was sufficient evidence to support the jury's finding that a competitor would have had difficulty replicating the formulas without resorting to improper means.
* * * [*889]
For the reasons stated above, we (1) REVERSE the judgment notwithstanding the verdict . . . .
1. [court's footnote 3] Innovative has abandoned
its appeal from the district court's grant of partial summary judgment
on its trade-secret claim relating to the production process as opposed
to the formulas.
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4. [court's footnote 8] Apparently some of
the other businesses who had expressed a tentative interest in acquiring
Innovative never visited the production plant, and Innovative testified
that confidential information was not disclosed to them.
5. [court's footnote 9] We note also that
John Riley, president of Innovative, testified that his notes of a conference
between Bowen Supply and Innovative reveal that no further negotiations
would be conducted between the two parties regarding a possible acquisition
until a non-disclosure agreement was entered into.
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