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 Smith v. Dravo Corp. and

Water Services, Inc. v. Tesco Chemicals, Inc.


1.  Like Moss, the Smith case predates the Uniform Trade Secrets Act.  Yet, it, too, focuses on what is "generally known" or "readily ascertainable."  Since 500 of plaintiff's shipping containers had been sold, and since they had been widely advertised, their general shape and construction (including the foldable legs used for "stacking" them) appeared to be readily ascertainable, if not generally known in the shipping industry.  Therefore the court focuses on details disclosed to the defendant in the patent application and the blueprints.

At the time of the Smith decision, there was no pre-patent publication of patent applications, and all patent applications (even abandoned ones) were kept secret by the Patent and Trademark Office.  Thus, both the patent application and the blueprints would not have been publicly disclosed, and information in them therefore could have qualified as trade secrets.

We can assume that the patent never issued because, if it had issued, the defendant would have cited the public disclosure of the patent as another basis for negating trade secrecy.  In addition, the patent application could not have been deemed a trade secret, except to the extent that it differed from the issued patent.


2.  What was not publicly disclosed, says the Smith court, was "the structural design, the engineering details, of either the container as a whole or its various working parts."  The court, however, does not mention any specific trade secret.  At the same time, it notes, "[t]he outward dimensions were revealed, and the fact that the container employed large double doors, lifting eyelets, stacking sockets and folding legs was publicized."  In other words, all the key features that made the container novel and especially useful were public, but some unspecified details of its design and construction were not.

The court says the defendants copied these things, but it mentions nothing specific.  The court also says that the defendants took great pains to "design around" the patent application, reverting to the foldable leg structure for stacking (which was publicly disclosed) only when the industry demanded it.  The court also implies that the defendants deliberately made their containers incompatible with plaintiffs' by changing a key dimension by four inches.  Are you persuaded that defendants' actually copied unspecified nonessential but secret aspects of the patent application and/or blueprints?


3.  Modern courts normally ask trade-secret plaintiffs to identify the specific trade secrets misappropriated, except in cases in which misappropriation of many trade secrets is obvious or inevitable.  The purpose of this requirement is to make sure that specific claims meet the legal requirements for trade secrecy.  Did the Smith court identify alleged trade secrets with sufficient specificity to determine whether they were "generally known" or "readily ascertainable"?  Did the Water Services court?


4.  Note how both court's discussions whether there was a trade secret blends into their discussion whether it was misappropriated.  Assuming there was a trade secret, as each court holds, was there good evidence of misappropriation in each case?  If so, what was the "improper means"?


5.  How egregious was the misappropriation in each case?  Were there any "malodorous" facts?  Did the "smell test" on the issue of misappropriation influence the court's decision on whether a trade secret existed?  If so, is that good legal analysis?  Is it good justice?


6.  The Water Services decision illustrates the majority view of states on noncompetition covenants. Like most states, Georgia has a statutory prohibition against general or unreasonable restraints of trade, but the prohibition is much less specific and restrictive than California's.  California's statute flatly prohibits noncompetition covenants, with narrow exceptions, including one for protecting trade secrets.  In contrast, Geogia's statute, as construed by its courts, prohibits only unreasonble covenants not to compete and considers a legitimate need to protect trade secrets as one factor tending to show that a noncompetition covenant is reasonable.  In this respect Georgia reflects the approach of the vast majority of states.

The difference is subtle but practically important.  In California, the noncompetition covenant is unenforceable except to the extent necessary to protect trade secrets.  The covenant itself therefore adds little to the plaintiff's case, except to the extent that it may provide additional remedies, such as attorneys' fees.  In contrast, in Georgia and most other states, the trade-secret claim is a separate and independent cause of action, success in which helps to support enforcement of the covenant not to compete.  As a result, in states like Georgia the trade-secret claim can bolster a completely separate claim to enforce the covenant, which can provide much broader relief, i.e., a prohibition upon competition beyond that necessary to protect trade secrets.

Another important difference between California's approach and the majority approach is that, in Georgia and the majority of states, no trade-secret claim is required to support a covenant not to compete.  A legitimate need to protect trade secrets may help to validate a noncompetition convenant but is not required.  Without regard to trade secrets, a covenant not to compete is valid in "rule-of-reason" states if it is reasonable in time, territory, and scope of operation.

What is reasonable?  The rules vary from state to state.  A rough rule of thumb is that a duration more than five years risks being found unreasonble, while one of three three years or less is often found reasonable.  (The two-year covenant here is in the mainstream of those found reasonable.) Territorial extent and scope are often found reasonable if limited to the employer's actual trade area in which the employee works.  Where the covenant moves beyond these limits, however, even courts in "rule-of-reason" states often perceive an attempt to deprive the employee of all means of livelihood and strike the covenant down.


7.  The Water Services case is also illustrative in another respect.  It demonstrates that, in trade secret law, the whole may be greater than the sum of the parts.  What the court protected was a combination of disclosed components, mostly made by third-party suppliers, with no apparent "tricks" in manufacture or assembly.  None of the parts was a trade secret separately, but their combination was.  Does this result make sense?  Aren't most, if not all, mechanical contraptions combinations of other things (e.g., components, parts, fasteners, etc.)?


8.  The defendant in Water Services argued that novelty is required for a trade secret, and the court rejected that argument.  Is there any basis in the text of the Uniform Trade Secrets Act for imposing a novelty requirement?

Note that there was no patent lurking in Water Services..  The water-treatment system at issue was not the subject of a patent or patent application and was probably unpatentable.

 A patentable invention must be novel, in addition to being useful and nonobvious.  See 35 U.S.C.§§ 101, 102, 103.  Did the court, by protecting a contraption that was not novel, and therefore could never be patented, violate patent policy, which seeks to keep things not patented in the public domain?  Or do the difference in strength between patent and trade secret protection avoid an irreconcilable conflict?


9.  Were third-party interests at stake in Water Services?  If so, whose?  Did the court's remedy adversely affect those interests, and, if so, was the effect justified by good policy?

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