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.

Syntex Ophthalmics, Inc. v. Tsuetaki

701 F.2d 677, 219 U.S.P.Q. (BNA) 962 (7th Cir. 1983)


Bartels, J.:  [*678]

In consolidated appeals Nick N. Novicky, George F. Tsuetaki and Fused Kontacts of Chicago, Inc. appeal from a preliminary injunction issued on May 26, 1982, by the United States District Court for the Northern District of Illinois restraining use of certain trade secrets and from a subsequent order, issued on September 8, 1982, interpreting and delineating the scope of the preliminary injunction.


Prior Proceedings

This action was brought by Syntex Ophthalmics, Inc. and Arapahoe Chemicals, Inc. (collectively referred to as "Syntex") [*679] against Novicky, a former employee, and George F. Tsuetaki and Fused Kontacts of Chicago, Inc. (collectively referred to as "Tsuetaki"), Novicky's subsequent employer, for misappropriation of trade secrets and patent infringement.  The complaint alleged that Syntex was entitled to certain patents owned by Novicky and Tsuetaki and sought injunctive and monetary relief for patent infringement and misappropriation of trade secrets.  * * *  After reviewing the voluminous record, the district court . . . . granted Syntex the preliminary injunction.

The preliminary injunction order enjoined defendants from using certain silicone monomers (chemical compounds) used in the formulation of rigid gas permeable contact lenses ("silicone-PMAA contact lenses") and certain process steps contained in the so-called "Arapahoe process sheets."  Recognizing that certain information incorporated in those process sheets could be obtained from publicly held information, the court specified in the order that defendants would be entitled, with leave of court, to use any information "described but not claimed in any patent or publication," since such information was not subject to trade secret protection.(1)

* * *

[*680]   Background

For a thorough analysis of the factors necessary to support the preliminary injunction, a detailed background is appropriate.  In 1977 Syntex bought two patents, U.S. Patent No. 3,808,178 and U.S. Patent No. 4,120, 570, designated as the "Gaylord patents," which formed the basis for a research project, named the "Polycon project," the purpose of which was to develop a contact lens material from which rigid (or "hard") gas permeable contact lenses could be made.  Up until that time hard contact lenses were made from a plastic material called polymethyl methacrylate ("PMMA") that did not allow the transmission of oxygen to the wearer's cornea.  Because of the lenses' lack of oxygen permeability, the user could not wear them for extended periods, and sometimes the wearer developed a condition known as corneal edema.  It was believed that a gas permeable lens would allow the user extended lens wear and would lower the incidence of corneal edema.

Contact lenses are made by reacting certain chemical compounds ("monomers") into plastics ("copolymers") by a process called "polymerization."  The lens material is then formed into rods, which are subsequently sliced into discs ("buttons") which are then ground into the lenses themselves.  The purpose of the Polycon project was commercial development of specific monomers which, when polymerized with PMMA and other compounds, would yield an oxygen permeable lens material.  Applying the information embodied in the Gaylord patents, Syntex estimates that it spent more than an additional one million dollars and twenty man-years of time to develop and obtain Federal Drug Administration ("FDA") approval for its commercially feasible oxygen permeable polycon lens material ("Polycon").

Novicky, a chemist employed by Syntex since 1973, was assigned to the Polycon project in May, 1977, and he worked in the project until he quit his employment at Syntex on May 12, 1978.  Throughout Novicky's tenure at Syntex, the terms of his employment were governed by a written agreement in which he agreed to disclose and assign all ideas and inventions he developed to Syntex and to keep all Syntex ideas and developments confidential.  On November 15, 1977, Novicky prepared a patent disclosure statement concerning certain silicone monomers he had developed, which he claimed produced a material five to ten times more permeable than the Polycon lens material Syntex was developing.  These compounds, and the processes Novicky developed for preparing the desired chemical reactions, form the basis for two patents Novicky later obtained in 1980 and 1981, U.S. Patent No. 4,242,483 and U.S. Patent No. 4,248,989.

On May 16, 1978, four days after Novicky terminated his employment at Syntex, he [*681] prepared a second patent disclosure statement revealing the discovery of additional chemical compounds for use in making gas permeable lens material.  One of these was later designated the "S-9" monomer and patented under U.S. Patent No. 4,216,303.  Novicky claims that the development of his new monomers was independent of his earlier work at Syntex.  Syntex contends that the May 16 discovery was actually conceived and developed by Novicky during his employment there.

In August, 1978, Novicky contacted Tsuetaki and subsequently made available to Tsuetaki the formulae and processes contained in the May 16 disclosure, a sample rod Novicky had made using his S-9 monomer, and some of the Arapahoe process sheets Novicky had prepared while he was with Syntex.  After reviewing this material, Tsuetaki agreed to purchase Novicky's new technology for $20,000 and to hire Novicky as a chemist whose job would be developing commercially marketable gas permeable contact lenses.  Among other services for his new employer, Novicky prepared process sheets describing the processes for formulating his chemical compounds, which the district court found were copied almost verbatim from approximately 100 pages of the Arapahoe process sheets Novicky had appropriated from Syntex.

In May, 1982, Novicky resigned from Tsuetaki, and two months later Tsuetaki sued him in Cook County Circuit Court for breach of his employment contract and of an agreement for the assignment of inventions to Tsuetaki.  That suit resulted in a judgment on January 13, 1981, in favor of Tsuetaki.  Meanwhile, Syntex became aware that Tsuetaki was manufacturing non-FDA approved gas permeable lens material resembling Polycon, and it initiated the instant litigation.  As previously mentioned, the district court, after reviewing a voluminous record, concluded that the requirements for a preliminary injunction were met and granted Syntex injunctive relief.  * * *


Discussion

The gravamen of the appellants' claim is that the district court abused its discretion in various respects in issuing the preliminary injunction.  Our review of the broad discretion residing in the district court in granting a preliminary injunction is extremely limited, and accordingly we do not adjudge its issuance on a de novo basis. . . .  [I]n order to justify the district court's exercise of discretion in issuing the preliminary injunction, the plaintiff must show: (1) it has at least a reasonable likelihood of success on the merits, (2) it has no adequate remedy of law and will otherwise be irreparably harmed, (3) the threatened injury to it outweighs the threatened harm the preliminary injunction may cause the defendants, and (4) the granting of the preliminary injunction will not disserve the public interest. . . . [*682] . . .  Having in mind the above principles, we proceed to the analysis of appellants' challenges to the district court's findings.


I

Appellants contend, first, that the district court abused its discretion in granting the preliminary injunction inasmuch as it was impossible for it to comply with the above requirements without holding an evidentiary hearing properly to determine the credibility of witnesses on disputed facts.  * * *

Of course, it is an established principle that where issues of fact are conflicting, an injunction pendente lite normally should not issue without an evidentiary hearing.  Under the circumstances of this case, however, an evidentiary hearing was unnecessary because the evidence already in the district court's possession enabled it to conclude that the plaintiff had a reasonable likelihood of success on its claim of trade secret misappropriation.  The critical disputed fact as to this claim was the date on which Novicky conceived of the S-9 monomer in his May 16 disclosure.  According to Novicky's deposition testimony, he conceived of it when he was reviewing a German article on silicone chemistry four days after he left Syntex.  Appellants complain that no direct documentary evidence or testimony contradicts Novicky, and the court, before disbelieving Novicky's deposition testimony, should have held an evidentiary hearing in order accurately to assess his credibility.  Other substantial evidence, however, enabled the district court to conclude that Syntex was reasonably likely to prevail on this claim notwithstanding Novicky's statement.  For example, the district court had before it documentary evidence showing that Novicky had willfully misappropriated the Arapahoe process sheets, a transcript of a trial in which the Illinois state court had held that Tsuetaki was entitled to trade secret protection from Novicky for much of the same information that is at issue here, the inherent improbability of Novicky's story that he conceived of the monomer four days after he left Syntex, and the close structural similarity between the S-9 monomer and the monomers Novicky had developed at Syntex.  In this context it was not unreasonable for the district court to conclude, without a hearing, that Syntex was likely to succeed in establishing that Novicky had developed the S-9 monomer while employed at Syntex. * * *


II

Appellants further allege that the district court made erroneous rulings on critical legal questions in granting the injunction.  Their first argument is that the court erred in refusing to consider the fact that Syntex no longer uses the process sheets and never used the chemical compounds developed by Novicky, for under Illinois law, information not used in the plaintiff's business is not entitled to trade secret status.  An early Illinois case [*683] supports appellants' argument that a plaintiff must be employing a trade secret before he can maintain a suit for its misappropriation . . . .

* * *

Actual use is unnecessary.  Under current Illinois law the proper criterion is not "actual use" but whether the trade secret is "of value" to the company.  The district court's finding that the compounds and process sheets are of value to Syntex is amply supported by the evidence.  Accordingly, since this finding is "not clearly erroneous," it will not be disturbed by this court.

Appellants' second argument is that Novicky's wrongful patent application of Syntex trade secrets deprives Syntex of its trade secret protection and permits appellants to use those secrets.  In support of their argument, they cite Sears Roebuck & Co. v. Stiffel Co., 376 U.S. 225 (1964), and Compco Corp. v. Day-Brite Lighting, Inc., 376 U.S. 234 (1964), which stand for the proposition that an owner of a trade secret who voluntarily discloses his trade secret makes an election to seek federal patent protection.(2)

That situation, though, is not present in the instant case.  See Water Services Inc. v. Tesco Chemicals, Inc., 410 F.2d 163, 171 (5th Cir. 1969); . . . Schulenburg v. Signatrol, Inc., 33 Ill.2d 379, 212 N.E.2d 865 (1965), cert. denied, 383 U.S. 959 (1966).  Here the holder of the trade secret did not make an election to obtain a patent, but instead it was appellants who had misappropriated the trade secrets and secured the patent.  In 1936 we held in Shellmar Products Co. v. Allen-Qually Co., 87 F.2d 104 (7th Cir. 1936), cert. denied, 301 U.S. 695 (1937), that a wrongdoer who has made an unlawful disclosure of another's trade secrets cannot assert that publication to escape the protection of trade secret law.  We believe that principle to be equally vital today.  To hold otherwise in the instant case would be to permit appellants to profit from their own wrong.

III

Appellants also argue that the preliminary injunction is vague and [*684] indefinite in violation of Federal Rule of Civil Procedure 65(d) in that, as shown by the September proceedings, expert testimony is needed to interpret it, and defendants are required to ask the court's permission to use publicly available information.  We disagree.  Rule 65(d) is satisfied if the injunction "fairly inform[s] defendants of the restrained acts relating to plaintiff's trade secrets," and its terms need not disclose trade secrets.  Dekar Industries Inc. v. Bisset-Berman Corp., 434 F.2d 1304 (9th Cir. 1970), cert. denied, 402 U.S. 945 (1971).  Moreover, a trade secret can be comprised of both public and novel information.  As the Second Circuit noted:
    "[A] trade secret can exist in a combination of characteristics and components, each of which, by itself, is in the public domain, but the unified process, design and operation of which, in unique combination, affords a competitive advantage and is a protectable secret."
Imperial Chemical Industries, Ltd. v. National Distillers & Chemical Corp., 342 F.2d 737, 742 (2d Cir. 1965) . . . .  The district court's order placed defendants on notice of the restrained acts, and where any possible confusion existed, the court provided an acceptable procedure for interpreting and applying the injunction and for distinguishing between Syntex trade secrets and information in the public domain.  The scheme devised afforded the parties a pragmatic tool for interpreting and applying the injunction, which appellants successfully utilized in September.  Accordingly, we must reject appellants' attack on the scope of the injunction.

* * * [*685]

In sum, we find nothing in the record which justifies the conclusion that the district court abused its discretion in granting the injunction.  Accordingly, we affirm.
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Footnotes

1.   [court's footnote 1]  The order in pertinent part reads as follows:

    "[Defendants] are hereby enjoined, pending a trial on the merits of this controversy or further order of court, from using or disclosing or causing or inducing others to use or disclose the procedure for manufacturing silicone monomers or casting copolymer rods using silicone monomers, as set forth in Appendix B to Plaintiff's Memorandum in Support of Renewed Motion for Preliminary Injunction, for the fabrication of gas permeable contact lenses.  The above restriction shall not be construed to enjoin the defendants from using any Safety Information which is included in Appendix B at pages 2-3 of Exhibits 190 and 191, which are a part thereof.  With leave of court, the defendants will also be entitled to use any information described but not claimed in any patent or publication, including but not limited to the Gaylord patents 3,808,178 and 4,120,570.  Where the defendants seek to use such information, they are instructed to furnish the plaintiff and the court with a short plain statement of the information they seek to use and also the column and line reference of the applicable U.S. patent or page of the publication."
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2.   [court's footnote 4]  Syntex had an option to patent the same, and while losing trade secret protection, thus obtain a monopoly, or alternatively it could have retained the advantage of trade secrecy protection.


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