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.

Van Products Co. v. General Welding and Fabricating Co.

419 Pa. 248, 213 A.2d 769 (Pa. 1965)

Before Bell, C. J., Musmanno, Jones, Cohen, Eagen and O'Brien, JJ.

Opinion by Mr. Justice Eagen.  Mr. Chief Justice Bell dissents.  Mr. Justice Roberts took no part in the consideration or decision of this case.  Concurring Opinion by Mr. Justice Cohen.  

Eagen, J.: [*250] [**771]

This is an appeal by General Welding and Fabricating Company (General) and Vincent Q. Rapp (Rapp) [*251] (jointly referred to as appellants) from a final decree of the Court of Common Pleas of Erie County granting a permanent injunction against appellants, restraining them from making, advertising and selling deliquescent desiccant air driers, and directing that appellants account to Van Products Company (Van) for all profits realized from the previous sale of such air driers. The historical background may be summarized as follows:

Van was organized in 1944, and engaged in the making of air vises.  In 1951, it was contacted by O. Clair Norton, who claimed to have invented a unique air drier that could be used profitably in many areas of industry and manufacturing to prevent and eliminate fouling, rusting and shortened life in tools and machinery operated by compressed air.  Norton's brain child, following years of experimentation, was a deliquescent desiccant air drier.  A desiccant is a substance which attracts and holds moisture; to deliquesce means to become liquid-like.  Norton's idea was to channel the compressed air through a chemical mixture which would absorb the moisture in the compressed air lines and deliquesce in an orderly fashion.  Only the chemical had to be replaced.  This type of device was a substantial improvement over the expensive and cumbersome driers then in general use, which required regeneration and the use of alternate driers.  The chemical compound used, to be known as "Dryolite", was in the form of a pellet consisting of 93 per cent sodium chloride impregnated with a small quantity of calcium chloride and sodium dichromate.

On June 23, 1953, the United States Patent Office issued a patent to Norton for the drier.   These rights were then assigned to Van for the purpose of further development and for the sale of deliquescent desiccant air driers.  In August 1957, Norton applied for a patent [*252] on the desiccant used in the drier.  This was never issued.(1)

On September 1, 1953, Rapp was employed by Van.  He had no previous experience in this field, and, at first, his duties involved handling Van's mail operation.  As the development and sale of the air [**772] driers grew in volume and importance in the Van system, Rapp's position of importance and value increased, so that eventually he ran the gamut of tasks involved in this segment of Van's business to become the general manager of the entire operation.  During the course of this employment, he was intimately involved with purchasing, selling, advertising, plan and blue prints drafting, training and conducting field experiments to overcome customer difficulties.  In short, Rapp was thoroughly imbued, through his industrious application, with all the problems, processes and advantages involved in the production, sale, and maintenance of this type of drier.  He learned everything there was to know about Van's drier, except the composition of the desiccant itself.

Beginning in 1952, General began to make, engineer and design parts for Van's drier; then from September, 1953, to February 1, 1958, General manufactured the entire drier on behalf of Van according to Norton's patent.  It was in this connection that General and Rapp were introduced.  Because of the complicated nature of the construction of these devices and the intimate knowledge of these matters possessed by Rapp, he began frequent visits to General to supervise construction.  Then on February 1, 1958, suspecting that Rapp's loyalty lay more with General than with it, Van terminated Rapp's employment.  One week later, Rapp was employed by General, and within days was actively planning the manufacture and sale of a [*253] deliquescent desiccant air drier on General's behalf.  He broke down the secret of the composition of the chemical formula used in the Van drier.  He substituted urea for sodium chloride which performed the same function.  On April 1, 1958, General sold its first deliquescent desiccant air drier, which, while not an exact duplicate or physically similar to Van's, was practically identical in function and concept.

On September 6, 1960, the United States Patent Office granted Rapp a patent for his desiccant.  On March 16, 1965, Letters Patent were granted to Rapp and General for their drier.

On September 5, 1958, Van instituted this action for injunctive relief and an accounting.  After prolonged hearings, the chancellor entered a decree in favor of Van.  The court en banc subsequently made the decree final.  This appeal followed.

[Appellants contested the state courts' jurisdiction on the ground that the action "basically involve[d] patent rights," over which federal courts have exclusive jurisdiction.]

* * * [*254]

[I]t is our considered conclusion that patent rights are only indirectly involved and that, under the circumstances, jurisdiction is properly in the courts of this Commonwealth.

The gravamen of the action is the abuse of confidence by Rapp who, as a trusted employee, allegedly misappropriated secret information of Van and used it to produce and market a competing product manufactured by General.  That the state courts have the power to enjoin the use of a trade secret in a proper case, there can be no doubt.  And while patent laws may be involved, if they are purely incidental and collateral to the main issue of the case, and if jurisdiction exists over the parties and the subject matter in all other respects, our courts are not precluded from acting under their general equity powers . . . .

This, in our opinion, is such a case.  The pivotal and main issue here presented is whether or not the appellants caused damage to Van's business through the use of confidential material misappropriated by Rapp while he was in its employ.

Moreover, appellants' jurisdictional contention seems to be based upon a misconception of the nature [*255]of a patent monopoly, i.e., that, in being issued Letters Patent, a patentee is thus granted an exclusive right to use and exploit his invention.  In fact, the patent monopoly is a negative right.  35 U.S.C. § 154 provides that a patentee has "the right to exclude others from making, using, or selling the invention throughout the United States.  . . ."  The right to make, use or sell, though a logical corollary, is dependent upon natural or common law.  The issuance of Letters Patent gives the patentee no more right to use his invention than he enjoyed before.   Therefore, viewed in this light, the existence of patent rights is not controlling.  Infringement actions may be prosecuted in the federal courts, and existing patent rights may be unchallengable in a state court; however, appellants' right to manufacture and sell the drier involved depends upon how the knowledge in connection therewith was obtained.  This is the issue here.  It is not a "patent case".

We now come to the merits of the case.

In its adjudication, the trial court made certain findings of fact, including the following:
    "13. General got direct from Van through Rapp the "know-how" of the manufacture, operation and functioning of Van's deliquescent desiccant air drier and from no other source. [*256]
    "14. Defendant Rapp wrongfully appropriated to his own use and that of Defendant, General Welding, the following trade secrets and confidential information and ideas:

      "A.  The idea and the original concept of the deliquescent type of air drier.

      "B.  The intimate knowledge of the need, use and demand for deliquescent desiccant air driers; namely, that this was a ‘hot product'.

      "C.  Information derived from building up and maintaining intimate card files on [**774] customers and their peculiar problems and needs, and in servicing such customers.

      "D.  Van Products' know-how in manufacturing of these driers which it only achieved after years of success and failure, mistakes and corrections, testing and retesting, field testing, experimentation, study and analysis of problems in actual operation.

      "E.  Van Products' know-how in selling, which was an evolutionary process of direct-mail and finally to distributors and direct company contacts.

      "F.  Van Products material sources and costs.

      "G.  Results of and intimate knowledge concerning Van Products' research and development and experimentation in the field, dew point testing, analysis of ratios of the parts involved and the solved mechanical problems contained in their blueprints.

      "H.  Van Products' labor costs.

      "I.  The secret of the desiccant, namely, the impregnation of a soluble pellet holding material with other hydroscopic [sic: hygroscopic] materials.

      "J.  Van Products' suppliers and accounts payable.

      "K.  Van Products' customers and accounts receivable.

      "L.  Mechanical secrets of the Van drier involving peculiar knowledge of design, material, dimensions and [*257] positioning of baffles, orifices, screens, and supports other than those disclosed in sales literature or patents or otherwise in the public domain.

      "M.  Van Products' advertising methods and material.
    "15.  The misappropriation and use of said trade secrets, confidential information and ideas thus enumerated gave the Defendants an opportunity to achieve a competitive position in a field otherwise devoid of competition and thus to gain an unconscionable advantage and thereby become unjustly enriched at the expense of Plaintiffs."
These findings are further amplified (or condensed, as the case may be) in the court's "Discussion":
    "The trade secret here involved . . . is all embracing rather than confined to any one particular item . . . or to any particular phase of its functioning.  . . . It is not any one of these features or any others which constitute the trade secret contended for by Van but rather the whole picture combining the original idea or theory as worked up mechanically by Van into a tangible and marketable product and the know-how all along the line.  . . ."
It is fundamental that the findings of fact of a chancellor which are approved by the court en banc have the weight of a jury's verdict, and will not be disturbed on appeal if there is adequate evidence in the record to sustain the findings . . . .  On the other hand, it is equally well established that the chancellor's conclusions, whether of law or fact, being no more than his reasoning from the underlying facts, are reviewable . . .

It is our considered judgment that the lower court erred in concluding that the facts established a misappropriation [*258] of a legally protectible trade secret.  The decree, therefore, must be reversed.

As noted before, Van prosecuted this action upon the theory that Rapp, as a trusted employee, learned of these secrets while in a confidential relationship, to wit, employee-employer, and misappropriated and used them after the termination of his employment with Van for the benefit and with the consent and knowledge of General.(2)  [**775]

The concept of trade secret is at best a nebulous one and has been variously defined by case and text authority.  Restatement, Torts, § 757, comment b, states that "a trade secret may consist of any formula, pattern, [*259] device or compilation of information which is used in one's business, and which gives him an opportunity to obtain an advantage over competitors who do not know or use it."  To be entitled to equitable relief [in a trade secret case the employer must] show; (1) that there was a trade secret, or, as in the case at bar, a secret process of manufacture; (2) that it was of value to the employer and important in the conduct of his business; (3) that by reason of discovery or ownership the employer had the right to the use and enjoyment of the secret; and, (4) that the secret was communicated to [the employee] while he was employed in a position of trust and confidence under such circumstances as to make it inequitable and unjust for him to disclose it to others, or to make use of it himself, to the prejudice of his employer.(3) The essential elements of a cause of action for breach of confidence are (i) possession by the plaintiff of knowledge or information which is not generally known, (ii) communication by the plaintiff to the defendant under an express or implied agreement limiting its use or disclosure by the defendant, and (iii) use or disclosure by the defendant to the injury of plaintiff. [*260]

The opinion of the court below renders the decision of this case quite [**776] difficult by stating that the "trade secret" here involved is "all embracing" and "the whole picture".  One rather salient point runs steadfastly throughout decisions in this area in most jurisdictions, and that is that the employee, upon terminating his employment relationship with his employer, is entitled to take with him "the experience, knowledge, memory, and skill, which he gained while there employed.  A man's aptitude, his skill, his dexterity, his manual and mental ability, and such other subjective knowledge as he obtains while in the course of his employment, are not the property of his employer and the right to use and expand these powers remains his property unless curtailed through some restrictive covenant entered into with the employer[.]  There is no restrictive covenant involved in the present case.

Levine v. E. A. Johnson & Co., 107 Cal. App. 2d 322, 237 P. 2d 309 (1951), is interestingly parallel to the instant case.  There the employee left his high position [*261] with plaintiff after 35 years of service in the field of constructing wooden tanks and cooling towers.  Immediately thereafter, in partnership with his son, he went into competition with his former employer, who sought an injunction to restrain the use of trade secrets.  Failing to find any real trade secrets, the court refused an injunction, saying that the former employee had built up a wealth of experience and skill during his employment and that to deny him the right to exploit it would wipe out his means of livelihood.  No doubt the employee there was just as thoroughly embued with the intricacies and "secrets" of his employer's business as was Rapp here.  The question still remains to be answered whether the information is such here that we must act as a judicial eraser to blot out Rapp's knowledge and skill.  Certain of the elements of the "trade secret" enunciated by the trial judge in Paragraph 14 of his opinion certainly fall within this category of "general knowledge, skill and experience" and are not thus proper subjects for a mental purge.  For instance, 14B: "the intimate knowledge of the need, use and demand" for this product could not be a trade secret.  It is something that would be learned in any productive industry, as are the "material sources and costs" (14F), "labor costs" (14H), the "suppliers and accounts payable" (14J), "customers and accounts receivable" (14K), and "advertising methods and material" (14M).

A further extension of this concept of "general knowledge" includes the little nuances and refinements developed by Rapp himself while not engaged in specific product research.  For instance, 14E: the "knowhow in selling, . . . an evolutionary process of direct mail" was a process that Rapp was hired to conduct and of which he made a viable selling process.  14G: "results of . . . research and development and experimentation in the field . . . [etc.]" would not seem, upon [*262] considered analysis, to be trade secrets in this case, and even if they were Van could not prove exclusive ownership since Rapp was the experimenter and tester.  At most, Van can claim co-authorship on the basis that Rapp was paid to do this work; but much of the initiative and creative questioning [**777] was the product of Rapp's own ambition.  It would seem, then, that this generalized knowledge in the field of deliquescent desiccant air driers was a labor asset which Rapp was privileged to carry with him to his new employer.  Perhaps the fact that this was a new and unique field might tend to persuade that these were secrets, but they are matters which any industrious person would learn in a developing field in Rapp's position.  They are not of such character as to be classified as trade secrets.

Customer information such as that embraced in item 14C has been the subject of varied litigation.  It is clear that this jurisdiction affords protection to an employer's confidential customer information . . . . And . . . a distinction often drawn in the cases to the effect that an injunction will not issue unless an actual physical list has been taken (as opposed to a list carried away in the employee's memory) is not really meaningful, being based upon the [*263] manner of taking, rather than the character of the information taken.  Nor is the fact that it was the employee himself who compiled the list.  As with any other trade secret, for customer information to be protectible it must be a particular secret of the business, of value to the employer and wrongfully appropriated by the employee.  In the present case, the actual lists were merely distillations of commercial lists created from the very general knowledge that users of compressed air are potential customers for air driers.  In this respect, these customer lists are in no way secret . . .: The further assertion is that extensive data was also stored in an elaborate card-file system (a system devised and set up by Rapp).  This data was accumulated by Rapp during his field trips and from experimentation designed to meet customer requests and problems.  We are convinced that Van has failed to show that this information was any more than the recorded results of Rapp's acquisition of general knowledge and skill in this field.

The key to the lower court's thinking seems to be contained in Paragraph 14D: "know-how in manufacturing . . . which [Van] only achieved after years of success and failure, mistakes and corrections . . . [etc.]."  Along with "trade secret", the concept of "know-how" is also a very fuzzily defined area, used primarily as a short-hand device for stating the conclusion that a process is protectible.  It covers a multitude of matters, [*264] however, which in the broad sense are not protectible, e.g., an employee's general knowledge and skill.  A manufacturing company is merely the sum of its producing units, including the skills of its employees.  Granted that Van had a very precise knowledge of the field of air driers, but it was mainly derived from Norton's inventiveness and Rapp's industrious experimentation.  We think that, in [**778] the present case, Van's "know-how" was not protectible from exploitation by Rapp.

Paragraphs 14A and L: "The idea and the original concept" and the "mechanical secrets of the Van drier" present a question which has produced a conflict of authority among the jurisdictions: to wit, whether prior public disclosure is permitted to be raised as a defense by a defendant charged with violating a confidence in business.  In the first place, the "idea and original concept" of a deliquescent desiccant air drier was conceived by Norton many years ago, and was finally patented by him in 1953, prior to the time Rapp began to work for Van.  35 U.S.C. § 112 provides that
    "the specification [required to be appended to a patent application] shall contain a written description of the invention, and of the manner and process of making and using it, in such full, clear, concise, and exact terms as to enable any person skilled in the art to which it pertains . . . to make and use the same . . . ."

The result of this section [*265] and the very nature of the patent publication have been consistently interpreted to work a destruction of any trade secret disclosed therein.  The inventor is put to his election; he can keep his secret hidden and run the risk of independent discovery by others, or he can disclose his secret to the world by Letters Patent and receive in return from the government a monopoly for 17 years.  Further, these air driers were sold on the open market and described and covered extensively in the trade literature and Van's own advertising media.  And there is considerable authority to the effect that [**779] public sale [*266] of the article in question or the description thereof in literature available to the public will destroy any trade secret which the inventor might have had.(4)

As above noted, there is a split of authority upon the question of the effect of public disclosure (either prior or subsequent) of the matters alleged to be trade secrets through patent application and grant, descriptive literature, intentional disclosure, advertising and/or sale of the product embodying the secret. [*267] Smith v. Dravo Corp., 203 F. 2d 369, 374 (7th Cir. 1953), concluded that "Pennsylvania will not deny recovery merely because the design could have been obtained through inspection.  Rather, the inquiry in that jurisdiction appears to be: How did defendant learn of plaintiffs' design?" (Emphasis in original.)  In Dravo, the defendant was attempting to purchase plaintiffs' company, and in the course of negotiations received detailed plans, models and patent applications.  Thereafter, defendant refused to buy and began competitive manufacture, which put plaintiffs out of business.  The Seventh Circuit concluded, reversing the District Court's judgment for the defendant, that defendant did not obtain any of its information from the "publicity material" (which was general in nature) or from the some 100 articles (metal shipping containers) which had been publicly sold, but rather from the communications and negotiations consummated during the abortive attempt to effect a sale of the company. * * * [*268] * * * [**780] * * *

We feel that the authorities holding that public disclosures destroy plaintiff's right to maintain a cause of action to preserve his trade "secret" as against a competing former employee who has violated a duty of confidence are more sound in theory and practice than those continuing to look to the relationship of the parties as a basis for the action.  While recognizing that limited publication and experimental usages are not incompatible with secrecy, we feel that the widespread publication and advertising in this case and the public sale of the air driers destroyed Van's right to maintain a cause of action upon a breach of duty not to disclose its "trade secrets".  The starting point in every case of this sort is not whether there was a confidential relationship, but whether, in fact, there was a trade secret to be misappropriated[.]

One final item was listed by the court below as a trade secret (14I): "The secret of the desiccant, namely, the impregnation of a soluble pellet holding material with other hydroscopic [sic: hygroscopic] materials."  However, this is in direct contradiction to the following discussion in the court's opinion: "[A]t no time was the secret formula of Norton's desiccant . . . ever revealed to [Rapp].  This was a secret of the highest order . . . .  [Rapp] never did secure [the exact chemical formula.]"  Of course, the idea and the practical functioning of such a deliquescent desiccant could not be a secret, in itself, since the product [*269] was advertised, described, and sold on the open market.  Its remarkable characteristics, vaunted in sales literature, were the exact factor which made the Van drier desirable (i.e., it was a desiccant which did not require regeneration).   Therefore, it was only the composition which was secret, and remained so after Rapp's departure.  It was only Rapp's industriousness which enabled him to come up with an acceptable formula for a desiccant to use in the drier which he was privileged to construct.  And the United States Patent Office recognized his inventiveness by issuing him Letters Patent on his desiccant.  Furthermore, the trial court did not rule upon the prayer to require assignment of the Rapp patent to Van, from which failure Van did not appeal.  We therefore decline comment on the question.

We do not consider the result herein reached as harsh or out of tune with accepted commercial morality as it may, at first blush, appear.  Van has either sold its secret to the public or has traded it, through its agent, Norton, to the public for a 17 year monopoly.  We are statutorily(5) declared to be unqualified to determine whether General's drier is infringing upon Norton's patent, and any relief thereupon must come from the federal court system which has exclusive jurisdiction of such questions.

Concurring Opinion by Mr. Justice Cohen:

While I need not reach the merits of this litigation, I concur in and join with the majority of this Court in its determination and result. [*270] [**781]

I have great difficulty in concluding from the evidence that there were trade secrets and that the plaintiff-appellee met the burden imposed upon it to maintain substantial secrecy in the protection of the alleged trade secrets.

But I need reach no conclusion on the merits because I find that the lower court lacked jurisdiction to enjoin the appellants from making, manufacturing and selling their patented desiccant and dryer.  Relief may not be granted in this case because of the inextricable involvement of the alleged trade secrets with plaintiff's and defendant's patents thereby creating a possibility of conflict between state concepts of unfair competition and the uniform application of the patent law and patent policy.  This field has been occupied exclusively by the Federal Patent Law. * * *

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1.   [court's footnote 1] It appears that the patent would have issued for the desiccant as constituted, but Norton kept insisting on broader rights.

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2.   [court's footnote 3]  Restatement, Torts, § 757, provides, i.a., that "one who discloses or uses another's trade secret, without a privilege to do so, is liable to the other if (a) he discovered the secret by improper means, or (b) his disclosure or use constitutes a breach of confidence reposed in him by the other in disclosing the secret to him. . . ."  This Court has long recognized such a right in the employer[.]  The right is also recognized generally in other jurisdictions[.]

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3.   [court's footnote 5]  See . . . Wexler v. Greenberg, 399 Pa. 569, 160 A. 2d 430 (1960) . . . .

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4.   [court's footnote 16]  It is true, however, that regardless of the fact that an article's individual components are part of the prior art or are ascertainable by inspection of sold articles, a secret may obtain in the composite or in the process of manufacture (providing, of course, that the process itself is a secret one).  See . . . Tabor v. Hoffman, 118 N.Y. 30, 23 N.E. 12 (1889).  But, in the present case there was no claim, nor does it seem possible to make out one, that there was a secret in the process of manufacture of the air drier, nor could there be any part of the composition not "in the public domain", since the entire composition was discernible by inspection of the articles sold to the public.

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5.   [court's footnote 20]  28 U.S.C. § 1338(a) [giving federal courts exclusive jurisdiction over patent disputes].

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