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.

Questions and Notes on Forest Laboratories and Fourtek

1.  The two decisions in Forest Laboratories and the decision in Fourtek deal, inter alia, with so-called "third-party misappropriation.  In each case an important defendant was not the direct misappropriator but a firm that received the secret from the direct misappropriator and then used it in business.

Third-party misappropriation often occurs in cases involving employees' misappropriation.  In those cases, a later employer, who uses the secret disclosed by the ex-employees, is the indirect misappropriator.  It uses secrets that the ex-employees took, but it did not itself take the secrets from their owner.  In such cases there is usually little question whether the later employer should share liability with the employees.  Direct or circumstantial evidence usually suggests that the later employer knew full well of the employees' misappropriation and in fact hired them in order to acquire the secret.  (The Plant Industries case (involving the citrus-peel processing secret) is a good example of a case of this sort.  There the corporate defendant hired the individual defendant, Coleman, precisely for the purpose of acquiring the plaintiff's trade secrets.)

What makes the two cases here interesting is that no employee served as "intermediary" in the misappropriation.  Rather, a defendant firm got the secret (or its benefit) from another firm that directly misappropriated it.  Moreover, the circumstances of the acquisition at least allow that defendant to argue that it was unaware of the trade secret at the time of the relevant transaction.

What subsection of the UTSA applies when a defendant credibly claims lack of awareness of the trade secret at the time of the relevant transaction?  Can you describe precisely the transaction by which the allegedly "innocent" defendant acquired the secret from the third party in each case?

2.  The district court in Forest Laboratories makes short work of the question of the defendant's liability.  It applies a theory of "successor liability," reasoning that the defendant, as corporate successor to Tidy House, the direct misappropriator, should be liable as its corporate successor.

The theory of successor liability is simple in essence.  It holds that a business entity should not be able to shed liability through a mere change of form (such as a name change, merger, consolidation, or other reorganization), thereby leaving creditors and claimants without recourse.  The trick in applying the theory is distinguishing a mere change of form from a transaction that in fact creates a new entity.  One goal of the theory is to make sure that either (1) the new form succeeds to the liability, or (2) there is something left from the old form that can satisfy the liability.  Otherwise, debtors and tort-feasors could escape their obligations through a sort of corporate "shell game."

Why did the appellate court decline to apply the theory of successor liability in Forest Laboratories?   Was the appellate court right to reject it?  What consquences might have resulted from a contrary decision on these facts?

3.  In addessing defendant's liability, the appellate court in Forest Laboratories relied on § 758(b) of the First Restatement of Torts.  Read over that provision, as quoted in the appellate court's decision.  To what provision of the UTSA does it correspond?  Are there any significant differences between the two provisions, insofar as this case is concerned?

4.  The Fourtek court focuses on the issue of the defendant's knowledge of trade secrecy.  In contrast, the appellate court in Forest Laboratories, although finding knowledge, focuses on whether the defendant specifically paid value for the trade secret.  What factual difference between the two cases explains the difference in approach?

Was the appellate court in Forest Laboratories right in interpreting § 758(b) of the First Restatement of Torts as requiring a specific showing of payment for the trade secret in order to absolve the defendant of liability?  What consquences would have flowed from a contrary decision?  Would plaintiffs in Forest Laboratories' position still have someone from whom to collect in cases of routine mergers or acquisitions in which trade secrets change hands as just part of a long list of assets?  Would the language of the UTSA make any difference in answering these questions?

5.  The law generally recognizes at least four kinds of "knowledge."  First, there is actual knowledge.  Evidence may show, for example, that the defendant received certain records or had them in his possession, and the law may presume that he read and understood them.  Since technology has not yet learned to read minds, proof of actual knowledge—in the absence of admission—usually relies on such presumptions.  It also may rely on circumstantial evidence, such as a defendant's statements or other behavior.

The second type of knowledge is constructive knowledge, i.e., knowledge inferred from circumstances or "reason to know."  This sort of knowledge is hard to distinguish from so-called "actual knowledge" inferred from circumstances, unless actual knowledge is based upon an admission or presumptions arising from the the receipt or possession of records.

The third type of knowledge is constructive knowledge arising by operation of law.  For example, everyone is presumed to have constructive notice of certain recorded documents related to copyright, see 17 U.S.C. § 205(c) and of trademark registrations on the principal register, see Lanham Act § 22, 15 U.S.C. § 1072.  Unlike "actual knowledge" presumed from the receipt or possession of documents, or inferred from circumstances, this kind of knowledge is not based upon actual receipt or possession of anything.  Rather, it requires a defendant to investigate the public records and presumes that she has done so.

The fourth type of knowledge, known as "inquiry knowledge" is similar to constructive knowledge arising by operation of law.  In certain cases, the law charges the defendant with knowledge, regardless of direct or circumstantial evidence of actual knowledge, if the circumstances would put a reasonable person "on inquiry" and a reasonable inquiry would have discovered facts from which knowledge could be inferred. This type of knowledge can be conceptualized as a "weaker" from of constructive knowledge, in which reasonable suspicion, sufficient to provoke a reasonable person to investigate, implies knowledge of what the investigation would reveal.

Which type of knowledge does the Fourtek court say gives rise to liability for receipt of a trade secret from a third party?  Was the court right in so saying?  Does the UTSA support using that type of knowledge to assess liability for third-party misappropriation?  Does good policy?

6.  The Fourtek case illustrates another important facet of the origins of trade-secret law in tort.  As a matter of contract law, certain nondisclosure covenants had been extinquished by an "integration" or "entire agreement" clause in the purchase contract for the furnace.  Yet the Fourtek court does not ignore arguments based upon those covenants in analyzing the trade-secret claim.

What was the legal rationale for the court recognizing "extinguished" convenants?  Did itsdoing so make sense from a doctrinal standpoint?  from a policy standpoint?  Is recognizing "extinguished" covenants as evidence of a confidential relationship any different from recognizing a confidential relationship based upon circumstances in the absence of any contract at all?

7.  Another point of interest in both cases is the issue of use.  In both cases, some defendants did not use the trade secret(s) in exactly the same form as did the plaintiff.  By what standard did each court judge whether a trade secret used in modified form has been "used" for purposes of a misappropriation claim?  Is/are the standards appropriate?  How much modification, if any, should allow a trade secret misappropriator to escape liability?  Does good policy suggest a broad or narrow interpretation of "use"?

8.  In Fourtek there was an additional use issue: one defendant (Smith International) had not been able to use the furnace embodying the trade secrets in its business due to prevailing international conditions.  The court denied a present remedy although allowing for remedies based on possible future use.  Was the court right in so doing?  Should the court at least have granted a nondisclosure injunction if the plaintiff had asked for one?

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