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.

Secure Services Technology, Inc. v. Time and Space Processing, Inc.

722 F. Supp. 1354, 12 U.S.P.Q.2d (BNA) 1617 (E.D. Va. 1989)


[*1356]  MEMORANDUM OPINION

Ellis, III, United States District Judge.

This copyright and trade secret dispute arises in the singular context of facsimile machines used by the government and its contractors in the receipt and transmission of classified material.  The questions presented, in general, are whether certain digital codes used by plaintiff's machines in communicating with other machines qualify for copyright or trade secret protection and, if so, whether plaintiff has taken the requisite steps to obtain and preserve that protection.

The matter came before the Court on defendant's motion for summary judgment on the copyright and trade secret claims and on plaintiff's cross-motion for summary judgment solely with respect to the trade secret claim.(1)  The absence of disputed material facts rendered the matter ripe for summary disposition.  For the reasons stated here, the Court entered summary judgment in favor of defendant on both the copyright and trade secret claims.(2)

Facts

In general, facsimile machines are devices that transmit and receive printed or pictorial matter on documents from one location to another, typically over telephone lines.  The facsimile devices in issue transmit the material by scanning input documents and producing a series of digital pulses electrically related to the scanned printed or pictorial images.  The digital pulses are sent via wire to a receiving machine which, when synchronized with the sending machine, is able to reproduce the transmitted document. [*1357]

This case does not involve ordinary facsimile machines.  Instead, the focus here is on so-called "TEMPEST" facsimile machines, i.e., machines especially equipped for the secure transmission and receipt of sensitive or classified documents.  TEMPEST machines are sold to American and NATO agencies and to qualified private government contractors.  Both plaintiff, Secure Services Technology, Inc. ("SST"), and defendant, Time and Space Processing, Inc. ("TSP"), manufacture and sell TEMPEST facsimile machines.  SST sells these machines only to the United States government.

In May 1987, TSP decided to enter the apparently lucrative TEMPEST facsimile machine market.  At that time, only three manufacturers inhabited the market—SST, Valutec and Ricoh Corporation.  A fourth manufacturer, Cryptek, Inc., was poised to enter the market.  Since the government had previously purchased TEMPEST machines from each of the manufacturers in the market, TSP's successful market entry depended on achieving interoperability(3) with the SST, Valutec and Ricoh machines.

Interoperability between TEMPEST machines is achieved by means of a handshake protocol.(4)  This protocol, the CCITT T.30,(5) governs the content, order, and timing of the digital signals transmitted between the sending and receiving machines.  The protocol covers the five phases of a document's transmission [namely, call set-up, pre-message procedure, message transmission, post-message procedure, and call release.]  Each phase serves a function in enabling TEMPEST machines to communicate with each other. . . .

TEMPEST facsimile machines also use the CCITT T.4 protocol for the actual message transmission process.  The T.4 protocol is not in issue here.

[The T.30 protocol specifies the content, length, order and timing of each of the binary signals needed to maintain communication between two secure fax machines. Strict adherence to these signal parameters as specified by the protocol was crucial for interoperability.  The protocol, however, did permit limited types of signal variations.  For example, it might specify all but the last bit of and eight-bit bite (say, 1010101X, where X could be either zero or one), where the last bit might represent a variable parameter chosen by the user.  For some complex operations, the protocol also permitted the use of signals that were entirely optional.]

* * *

SST took advantage of these limited opportunities to vary the content and timing of various signals within the constraints of the T.30 protocol.  SST claims that these variations in timing and content, collectively referred to as "protocol variations", deserve trade secret protection.  And because the content variations can be transcribed into alphanumeric form, SST also claims copyright protection.(6)

TSP spent over $ 800,000 in an apparently successful effort to achieve interoperability with the Ricoh and Valutec machines.  At that point, TSP also believed it had achieved interoperability with the SST-T1, the SST TEMPEST facsimile machine.  Thereafter, in March 1988, the Air Force expressed an interest in purchasing TSP's TEMPEST machines.  In this connection, government representatives requested that TSP demonstrate the interoperability of the SST and TSP machines. This demonstration was achieved through the transmission of test documents from an SST facsimile machine at a government facility to a TSP machine at TSP's plant.  At that time, TSP used a protocol analyzer(7) to verify that the SST machine was following the T.30 protocol and to adjust its machine's handshake protocol to achieve interoperability with the SST machine.  TSP also allegedly fixed in the memory of the protocol analyzer the digital code representing SST's handshake protocol, including the protocol variations.  Even so, it appears that TSP achieved only substantial, but not complete, interoperability.

In June 1988, TSP again demonstrated its machine's interoperability with the SST machine at the Armed Forces Communication Electronics Association ("AFCEA") trade show.  Here again, substantial, but not complete interoperability was achieved.  Nonetheless, TSP began marketing its TEMPEST facsimile machine as interoperable with SST's TEMPEST machines.  Among those who purchased the TSP facsimile machine was the Air Force Logistics Command (AFLC).  In early 1989, the AFLC Special Projects Officer discovered [*1359] that an interoperability problem still existed between the TSP and SST facsimile machines.  In February 1989, he asked TSP to remedy this.  To this end, TSP was loaned a government-owned SST-T1 to allow TSP to make whatever adjustments might be required to achieve complete interoperability with the SST machine.  In this effort, TSP technicians again analyzed the timing of the SST machine's handshake protocol.  TSP then took the SST facsimile machine to another AFCEA trade show and was now able to demonstrate complete interoperability with the SST machine.  At this trade show, SST's representatives discovered, for the first time, that TSP had somehow gained possession of an SST TEMPEST facsimile machine.

SST's marketing practices are central to the resolution of this dispute.  SST sells its TEMPEST facsimile machines only to government agencies.  From October 1985, when sales of the SST-T1 machine began, the United States government purchased all right, title, and interest in these machine.  The sales contracts contained no reservation of proprietary rights.  There were no contract provisions prohibiting the government from supplying the SST facsimile machines to third parties.   Moreover, neither the facsimile machine, nor the operator's manual, contained any restrictive or proprietary legends or any copyright notices.  Nor did SST notify the government prior to the sale that SST claimed or might claim proprietary rights in the SST-T1 TEMPEST facsimile machine.

SST claims that it chose not to take these precautions because the government and the other TEMPEST machine manufacturers generally understood that the information contained in the handshake protocol was proprietary information.  SST also claims that it took sufficient measures to ensure that its handshake protocol remained secret in its dealings with other TEMPEST machine manufacturers.  And, as might well be expected of a manufacturer of TEMPEST facsimile machines, all of SST's facilities are guarded by a complex security system.  Since the inception of this dispute, SST has begun placing proprietary legends and copyright marks on all of its facsimile machines.

On February 14, 1989, this suit was filed alleging claims of trade secret misappropriation and of conversion.  On May 3, 1989, SST filed a registration request for copyright protection with the United States Copyright Office.  Two days later, SST amended its complaint and added a claim of copyright infringement.  The Copyright Office has not, as yet, issued a copyright registration certificate to SST for its handshake protocol.

Analysis

I.  Trade Secret Protection

SST argues that its protocol variations are a trade secret entitled to protection under the California Uniform Trade Secrets Act ("the Act"). Cal. Civ. Code 3426.1 to 3426.10 (West 1989).  In California, what constitutes a trade secret is a question of law.  Acuson Corp. v. Aloka Co., 209 Cal. App. 3d 425, 257 Cal. Rptr. 368, 373, 10 U.S.P.Q.2d (BNA) 1814 (6th Dist. 1989) . . . .  Summary judgment is particularly appropriate, where, as here, the data or information claimed to be protected is not disputed.

The Act defines a trade secret in the following manner:
    "'Trade Secret' means 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."

[*1360] Cal. Civ. Code 3426.1(d) (West 1989).  It seems clear that SST's protocol variations satisfy the prefatory paragraph of the Act's definition.  The variations fit well within the purposefully broad scope of the term "information."   Less clear, however, is whether the protocol variations also satisfy subsection (d)(1).(8)

In any event, even assuming subsection (d)(1) is met, it is plain beyond dispute that subsection (d)(2) is not; SST failed to take reasonable steps to maintain the secrecy of the protocol variations.  SST sold to the government all right, title, and interest in the SST-T1 machines.  No rights were reserved.  No notification was given, as required by regulation, that the SST-T1 machine included any proprietary information.  See 48 C.F.R. 227.473-1.  No markings were placed on the machine or in the related instructional material to indicate the presence of proprietary information. See 48 C.F.R. 227.473-3.  Significantly, this silence on the presence of proprietary information occurred despite the purchase order's reference to 48 C.F.R. 252.227-7013, which allows sellers of goods to the military to claim protection for proprietary information.  SST, for whatever reason, failed to do so.  The government, therefore acquired unlimited rights in the TEMPEST SST-T1 machines.

Precisely this situation was considered in the official comment to the Act.(9) There, it is acknowledged that "public disclosure of information through . . . carelessness can preclude protection."  The Uniform Trade Secrets Act 1 comment, 14 U.L.A. 369, 373 (Supp. 1989).  Here, SST was careless by not properly reserving its rights to the protocol.  An express statement of proprietary interest was required.  48 C.F.R. 227.473-1, 252.227-7013(b).  None was made prior to TSP's discovery of the information.  Since SST failed to indicate in any way that it retained proprietary interest in information contained in its facsimile machine, it waived trade secret protection in the protocol variations.  See Conax Fla. Corp. v. United States, 263 U.S. App. D.C. 144, 824 F.2d 1124, 1130-31 (D.C. Cir. 1987) (in sale to government, failure to identify information for which proprietary interest was claimed constituted a waiver of the manufacturer's rights in that information).

A comparison of this case with the precautions taken by the Acuson Corporation (Acuson) in Acuson Corp. v. Aloka Co., 209 Cal. App. 3d 425, 257 Cal. Rptr. 368, 10 U.S.P.Q.2d (BNA) 1814 (1989) is instructive.  In that case, Acuson claimed trade secret protection in processes used in its ultrasonic imaging equipment, a non-invasive medical diagnostic tool.  Acuson took several precautions to prevent disclosure of these imaging processes: [*1361]
    (i) the equipment was sold under a limited license for the internal software,
    (ii) sales persons and dealers were required to sign confidentiality agreements, and,
    (iii) internal padlocks were included in the equipment making it more difficult to examine the machinery.
Even so, the Acuson court concluded that, while the precautions taken by Acuson were examples of what a manufacturer might do to prevent or inhibit others from reverse engineering(10) its product, these precautions were not adequate under the Act to provide the ultrasonic imaging equipment with trade secret protection.  Notwithstanding those precautions, reverse engineering remained an effective means of discovering Acuson's ultrasonic imaging process.  The Court explained that once a trade secret is disclosed to "others who are under no obligation to protect the confidentiality of the information, or [is] otherwise publicly disclose[d] . . ., [the] property right is extinguished."  The same is true here, as no precautions taken by SST precluded reverse engineering of the protocol variations; SST, through its own carelessness, failed to adequately protect its rights.

SST's reliance on a general, implied understanding with the government that the protocol variations were proprietary information, and that the government had a concomitant duty to protect them, is misplaced; SST's evidence that the government considered the protocol variations to be proprietary, rests on too slender a reed.  In its memorandum, SST relies on a single government document which states that "proprietary protocols are now being used by various secure facsimile machines" and continues that the various TEMPEST facsimile machines contain "ten different, non-compatible proprietary protocols."   There is, of course, a significant difference between the government referring to handshake protocols as "proprietary protocols" in a document studying interoperability problems and recognizing that the TEMPEST facsimile machines it purchased were sold under a limitation of proprietary rights.  And this is particularly true when the seller failed to inform the military that it claimed proprietary rights in the handshake protocols as required by the Federal Acquisition Regulations.  See 48 C.F.R. 227.473-1.

In this case, by selling its machine without reserving proprietary rights, SST effectively disclosed its protocol variations.  Because the government owned all the rights to the machine, TSP's acquisition of the SST machine was entirely proper.  TSP's subsequent successful reverse engineering of the protocol variations to achieve interoperability,(11) therefore, was no less proper.  The Act expressly permits reverse engineering as a method of discovering what would otherwise constitute a trade secret as long as the product was not acquired by improper means.  Cal. Civ. Code 3426.1(a) (West 1989) ("reverse engineering . . .  alone shall not be considered improper means"); Acuson Corp., 257 Cal. Rptr. at 379-80; see also Kewanee Oil Co. v. Bicron Corp, 416 U.S. 470, 476, 94 S.Ct. 1879, 40 L.Ed.2d 315 (1974) (construing Ohio law based on Restatement of Torts 757(a) (1939)) . . . .  Accordingly, the Court concludes that even assuming the protocol variations are protectible proprietary information, SST's failure to take the necessary, minimal precautions to safeguard this information when it sold the TEMPEST machines to the government [*1362} renders the information ineligible for trade secret protection.

II. Copyright Infringement

* * *


[On the copyright claim, the court decided, inter alia, that SST's variations in the standard protocol were insufficiently original to merit copyright protection.  In reaching this conclusion, the court relied on the fact that "the protocol specifies which bit to vary, what the variation means, and when the variation can occur."  Id. at 1363.]

* * * [*1365]

But the flaws in TSP's other arguments do not change the Court's conclusion that SST's handshake protocols do not deserve copyright protection because they lack the requisite authorship and originality.  On the contrary, the Court is persuaded that SST's remedy, if any, to protect its protocol variations was through the trade secret protections afforded by California.  Summary judgment on the copyright claim is, therefore, appropriate.

* * *

Back to Top

Footnotes


1.   [court's footnote 1] The Amended Complaint originally included four counts—a common law conversion claim, a copyright violation claim and two claims for trade secret misappropriation, one under Virginia law and one under California law.  Plaintiff withdrew the Virginia trade secret claim and the conversion claim, leaving for this Court's resolution the copyright claim and the claim of misappropriation of a trade secret under California law.

Back to Text


2.   [court's footnote 2] Also before the Court was defendant's motion for sanctions pursuant to Rule 11, Fed. R. Civ. P, based on plaintiff's filing of the copyright infringement claim.  Although the copyright claim failed, it cannot be said that it was not "well founded in fact and . . . warranted by . . . a good faith argument for the extension, modification, or reversal of existing law."  Rule 11, Fed. R. Civ. P.  Given this, Rule 11 sanctions are unwarranted.

Back to Text


3.   [court's footnote 4] Interoperability, simply put, is the ability of one TEMPEST facsimile machine to send to and receive documents from another TEMPEST machine.

Back to Text


4.   [court's footnote 5] All facsimile machines communicate in accordance with handshake protocols.  In fact, the title of the protocol in issue here, the CCITT T.30, is "Procedures for Document Facsimile Transmission in the General Switched Telephone Network".  This indicates that all facsimile machines connected via telephone lines use this protocol.

Back to Text


5.   [court's foofnote 6] CCITT is the standard abbreviation for the International Telephone and Telegraph Consultative Committee of the International Communications Union ("CCITT").

Back to Text


6.   [court's foonote 10] SST's handshake protocol is generated by a computer program apparently copyrighted by Jacob Keilsohn, who licensed the software to SST.  Keilsohn and SST dispute the ownership of this software. This dispute is not directly relevant to the case at bar.

Back to Text


7.   [court's footnote 11] Handshake protocol signals are transmitted at a very rapid rate.  A protocol analyzer slows down the transmission so that the protocol signals can be analyzed.

Back to Text


8.   [court's footnote 14] In order to satisfy subsection (d)(1), SST's protocol variations must "derive[] independent economic value" from not being "generally known" by its competitors.  To satisfy this test's first prong, the variations must provide SST a competitive advantage.  See Religious Technology Center v. Wollersheim, 796 F.2d 1076, 1090 (9th Cir. 1986), cert.  denied, 479 U.S. 1103 (1987).  The record is insufficiently developed on this point to permit summary judgment consideration.  Worth noting, however, is that SST's success on the trade secret claim may actually be a competitive disadvantage.  If SST's trade secret hinders interoperability, purchasers seeking machines that can communicate with the other types of machines in use may be discouraged from buying the SST-T1.

Additionally, SST's protocol variations may fail the second prong of the subsection (d)(1) test.  Since SST's handshake protocol follows the T.30 protocol, it is debatable whether this information was "not . . . generally known".  Generally known information is not protectible under the Act.  Acuson Corp. v. Aloka Co., 209 Cal. App. 3d 425, 257 Cal. Rptr. 368, 374, 10 U.S.P.Q.2d (BNA) 1814 (6th Dist. 1989); Kirgan, 228 Cal. Rptr. at 718.  In any event, the Court's resolution of this case on other grounds makes consideration of these issues unnecessary.

Back to Text


9.   [court's footnote 15] The official comment to the Uniform Trade Secrets Act has been adopted as the California Senate Legislative Committee's Comment to California's version of the Act.  Cal. Civ. Code 3426.1 comment (West Supp. 1989)

Back to Text


10.   [court's footnote 16] Reverse engineering is the process of starting with a finished product and working backwards to analyze how the product operates or how it was made.

Back to Text


11.   [court's footnote 17] TSP's actions in this case constitute reverse engineering in perhaps its simplest form.  There is no evidence to suggest that TSP ever opened the SST machine or examined its internal parts or software in any manner; TSP merely connected a protocol analyzer and a break out box to the SST machine and analyzed the output signal.  TSP then adjusted its handshake protocol to allow its machine to communicate with the SST machine.

Back to Text