Opinion ID: 1730180
Heading Depth: 1
Heading Rank: 4

Heading: The Claim of Misappropriation of Trade Secrets.

Text: The principal issue in this case is whether CTI generated a genuine issue of material fact on its claim that the defendants misappropriated CTI's trade secrets, including information regarding the construction of its machines and general information about their manufacture and sale. CTI contends that Three D, Dean Longnecker, Enos, five former CTI employees, and James Yelton (a former CTI customer) wrongfully obtained CTI's trade secrets and used them to form a competing business. A. Legal Principles. Iowa Code chapter 550 (2001) is Iowa's version of the Uniform Trade Secrets Act. This chapter provides that the owner of a trade secret may enjoin an actual or threatened misappropriation of a trade secret or may request monetary damages for such misappropriation. Iowa Code §§ 550.3(1), 550.4(1). A trade secret is defined as information, including but not limited to a formula, pattern, compilation, program, device, method, technique, or process that is both of the following: a. Derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by a person able to obtain economic value from its disclosure or use. b. Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy. Iowa Code § 550.2(4). The Restatement (Third) of Unfair Competition (1995) [hereinafter Restatement] is intended to be consistent with the Uniform Trade Secrets Act, such as our Code chapter 550, and we rely on it here. See Restatement § 39 cmt. d. The Restatement provides what we consider to be the appropriate scope of Iowa Code section 550.2(4): A trade secret can consist of a formula, pattern, compilation of data, computer program, device, method, technique, process, or other form or embodiment of economically valuable information. A trade secret can relate to technical matters such as the composition or design of a product, a method of manufacture, or the know-how necessary to perform a particular operation or service. A trade secret can also relate to other aspects of business operations such as pricing and marketing techniques or the identity and requirements of customers. Id. Factors to consider when determining if information is a trade secret include: (1) the extent to which the information is known outside of [the] business; (2) the extent to which it is known by employees and others involved in [the] business; (3) the extent of measures taken . . . to guard the secrecy of the information; (4) the value of the information [to the business and its competitors]; (5) the amount of effort or money expended . . . in developing the information; (6) the ease or difficulty with which the information could be properly acquired or duplicated by others. Kendall/Hunt Pub'g Co. v. Rowe, 424 N.W.2d 235, 246 (Iowa 1988) (quoting Basic Chems., Inc. v. Benson, 251 N.W.2d 220, 226 (Iowa 1977) (a common-law case predating Iowa Code chapter 550)). The value of the information for which protection is sought must be substantial. A trade secret must be of sufficient value in the operation of a business or other enterprise to provide an actual or potential economic advantage over others who do not possess the information. The advantage, however, need not be great. It is sufficient if the secret provides an advantage that is more than trivial. Although a trade secret can consist of a patentable invention, there is no requirement that the trade secret meet the standard of inventiveness applicable under federal patent law. Restatement § 39 cmt. e. A trade secret need not be in writing; any secret acquired through an employee's job may be the subject of trade-secret protection. Sperry Rand Corp. v. Rothlein, 241 F.Supp. 549, 563 (D.C.Conn.1964) ([I]t does not matter whether a copy of a Sperry drawing came out in a defendant's hand or in his head. His duty of fidelity to his employer remains the same.); accord Ed Nowogroski Ins., Inc. v. Rucker, 137 Wash.2d 427, 971 P.2d 936, 940 (1999). During employment, an employee may acquire two classes of information. First, an employee may obtain information of a general nature simply by being on the job. An employer would have no reasonable expectation that such information would be treated as a trade secret. An employee is free to use or disclose this type of general information. The second class of information is that which the employer intends to keep secret by, for example, physically hiding it from view or, as CTI claims here, by requiring confidentiality. While the first class of information is not entitled to trade-secret protection, the second class may be entitled to it. Compare Restatement § 42 cmt. b (trade secrets), with id. § 42 cmt. d (general information). Whether an employee is subject to a covenant not to compete is not determinative of whether the information gathered through employment constitutes a trade secret. As a general rule, an employee who has not signed an agreement not to compete is free, upon leaving employment, to engage in competitive employment. In so doing, the former employee may freely use general knowledge, skills, and experience acquired under his or her former employer. However, the former employee, even in the absence of an enforceable covenant not to compete, remains under a duty not to use or disclose, to the detriment of the former employer, trade secrets acquired in the course of previous employment. Where the former employee seeks to use the trade secrets of the former employer in order to obtain a competitive advantage, then competitive activity can be enjoined or result in an award of damages. Ed Nowogroski Ins. Co., 971 P.2d at 941-42 (footnote omitted); see Restatement § 42 cmts. b, c. Additionally, nondisclosure and confidentiality agreements are relevant to determine whether information constitutes a trade secret. An agreement between the parties that characterizes specific information as a trade secret can be an important although not necessarily conclusive factor in determining whether the information qualifies for protection as a trade secret under this Section. As a precaution against disclosure, such an agreement is evidence of the value and secrecy of the information, and can also supply or contribute to the definiteness required in delineating the trade secret. The agreement can also be important in establishing a duty of confidence. However, because of the public interest in preserving access to information that is in the public domain, such an agreement will not ordinarily estop a defendant from contesting the existence of a trade secret. Restatement § 39 cmt. d (citations omitted). It is not only the nature of the information itself that is significant; the manner of its acquisition is also significant in determining whether information constitutes a trade secret. The subject matter of a trade secret must be secret. Matters of public knowledge or of general knowledge in an industry cannot be appropriated by one as his secret. However, the interest protected by this branch of the law is not secrecy as such. The protection is merely against breach of faith and reprehensible means of learning another's secret. Accordingly, a substantial element of secrecy must exist, so that, except by the use of improper means, there would be difficulty in acquiring the information. Clark v. Bunker, 453 F.2d 1006, 1009-10 (9th Cir.1972) (quoting Restatement of Torts § 757 cmt. b (1939)) (emphasis added). In the case of an employee leaving a business with trade secrets, the employer might find[ ] itself in the position of a coach, one of whose players has left, playbook in hand, to join the opposing team before the big game. PepsiCo, Inc. v. Redmond, 54 F.3d 1262, 1270 (7th Cir. 1995). B. Evidence Presented in Resistance to the Motion for Summary Judgment. In this case, CTI contends that its cement volumetric mixer, component parts, manufacturing processes, and supplier and customer information constitute trade secrets. A CTI officer identified numerous processes and design features developed by CTI that were unique, features that CTI had sought to protect by its confidentiality agreements and which it claimed as trade secrets. This evidence is sufficient to generate a fact question regarding the economic value of the information CTI argues is trade-secret protected. Evidence in the record shows that CTI took steps to keep such information confidential. CTI required its employees to acknowledge receipt of an employee handbook. Included in the handbook were nondisclosure agreements providing: The protection of confidential business information and trade secrets is vital to the interests and the success of CTI. Such confidential information includes, but is not limited to, the following examples: compensation data customer lists financial information marketing strategy new materials research pending projects and proposals proprietary production processes research and development strategies technological data Employees who improperly use or disclose trade secrets or confidential business information will be subject to disciplinary action, up to and including termination of employment and legal action, even if they do not actually benefit from the disclosed information. In addition, employees were required to sign a patent agreement providing, in part: All inventions, whether patentable or not, developed by employee in the course of or arising out of the performance of his or her duties as an employee, shall be owned by Employer. Employer shall also own any inventions developed by Employee during the period of his or her employment which relate to the products, services, or other business activities of Employer regardless of whether or not such inventions were developed on or off of company time and on or off of company premises. Confidentiality agreements such as these may constitute reasonable steps to insure secrecy of information, as required by the Uniform Act. MAI Sys. Corp. v. Peak Computer, Inc., 991 F.2d 511, 521 (9th Cir.1993). Further, though the district court found the fact that the employees were not required to sign a noncompete agreement persuasive, we do not. As noted above, the absence of a noncompete agreement is not determinative of the existence of a trade secret. The defendants argue that information regarding CTI's volumetric mixer is not a trade secret because it is readily ascertainable. This argument is based, in large part, on the concept of reverse engineering. (`Reverse engineering is the process by which a completed process is systematically broken down into its component parts to discover the properties of the product with the goal of gaining the expertise to reproduce the product.' Revere Transducers, Inc. v. Deere & Co., 595 N.W.2d 751, 775 n. 8 (Iowa 1999) (quoting Christianson v. Colt Indus. Operating Corp., 870 F.2d 1292, 1295 n. 4 (7th Cir. 1989))). However, the fact that information may be obtained by lawful means, including reverse engineering, is not necessarily dispositive of the trade-secret issue. The theoretical ability of others to ascertain the information through proper means does not necessarily preclude protection as a trade secret. Trade secret protection remains available unless the information is readily ascertainable by such means. Thus, if acquisition of the information through an examination of a competitor's product would be difficult, costly, or time-consuming, the trade secret owner retains protection against an improper acquisition, disclosure, or use . . . . Restatement § 39 cmt. f (emphasis added). In CTI's resistance to the defendants' motion for summary judgment, it provided a report by Dr. Bruce Johnson, who holds a Ph.D. in mechanical engineering and who has considerable experience in design and development engineering. Dr. Johnson evaluated the defendants' reverse engineering claimhe inspected the defendants' prototype machine; he inspected CTI's, as well as the defendants', manufacturing facilities; he inspected the drawings of both CTI and the defendants; and he reviewed witness depositions. Dr. Johnson stated that a representative of the defendant company told him they did not start construction on their machine until November 2001, and the defendants exhibited their fully functioning machine at a trade show in March 2002. Dr. Johnson concluded: It would be impossible for anyone, even a trained and experienced engineer, to complete the design process of a complex piece of machinery such as involved in this instance, to the point of having a perfectly functioning prototype, in less than six months without having at his disposal a vast amount of information. In the context of this case, it is my opinion that it would have been impossible for the Defendants collectively to complete the process without access to the proprietary information of Cemen Tech, regardless of whether that information was in written or other form. Dr. Johnson's report is strong evidence that, though CTI's machine and component parts could be reverse engineered, the difficulty in doing so may not defeat CTI's trade-secret claim. Even though CTI conceded that the defendants, if given sufficient time, could produce a machine similar to CTI's based on reverse engineering, a fact finder could reasonably conclude that the delay in production of the machine would give CTI a temporal advantage. Even if the period of that advantage would be short, this would not deny trade-secret protection to CTI because neither Iowa Code section 550.2(4) nor section 1(4) of the Uniform Trade Secrets Act include[s] any requirement relating to the duration of the information's economic value. Restatement § 39 cmt. d. Presumably, the extent of this temporal advantage would be reflected in any damage award. Finally, the defendants' means of obtaining the information at issue lends credence to CTI's claim that the information was intended to be confidential. Generally, [i]nformation that is readily ascertainable by proper means is not protectable as a trade secret, and the acquisition of such information even by improper means is therefore not actionable. . . . However, the accessibility of information, and hence its status as a trade secret, is evaluated in light of the difficulty and cost of acquiring the information by proper means. In some circumstances the actor's decision to employ improper means of acquisition is itself evidence that the information is not readily ascertainable through proper means and is thus protectable as a trade secret. Because of the public interest in deterring the acquisition of information by improper means, doubts regarding the status of information as a trade secret are likely to be resolved in favor of protection when the means of acquisition are clearly improper. Restatement § 43 cmt. d (citations omitted). A jury could reasonably find that the employee-defendants took advantage of their positions at CTI to obtain proprietary information that was then used for Three D's benefit. All employee-defendants signed confidentiality and patent agreements in the course of their employment with CTI, indicating their understanding that CTI meant for information gathered during the course of employment to remain confidential. Yet, a jury could find that defendants Mark Dorman and Daniel Pothast used the knowledge and skill obtained through their employment with CTI to develop products for Three D Industries that were similar to those they produced for CTI. CTI's employment of Scott Longnecker (Dean Longnecker's son), at the apparent request of Dean Longnecker, could also suggest an intent to obtain information from the inside. Additionally, a jury could find that Dan Jones and Brad Luhrs gave Three D Industries information they gathered from CTI in the course of strategy and production meetings, including new products ideas, CTI's engineering data, computations, and calculations, and other innovations. In fact, evidence in the record suggests that Luhrs and Jones copied files from a CTI computer onto CDs that were not returned to CTI upon their resignations. The actions of these defendants could reasonably be considered to be improper and, therefore, evidence that the information is not readily ascertainable through proper means and . . . thus protectable as a trade secret. Restatement § 43 cmt. d. Viewing the evidence in the light most favorable to CTI, we believe there was sufficient evidence to generate a fact question on the trade-secret issue with respect to the employee-defendants. We also believe CTI presented sufficient evidence to generate a fact question on the trade-secret issue with respect to Three D, Longnecker, and Enos. A jury could find that these defendants improperly used their positions as potential buyers to obtain CTI's proprietary information for their own benefit. There is evidence in the record that the information disclosed during the due-diligence process was not returned to CTI, and there is evidence that these defendants encouraged the employee-defendants to jump ship to join Three D. A fact finder could infer from the evidence that these defendants induced or knowingly accepted trade secrets from CTI. Under the Restatement, a person who obtains a trade secret by inducing or knowingly accepting a disclosure from a third person who has acquired the secret by improper means, or who induces or knowingly accepts a disclosure from a third person that is in breach of a duty of confidence owed by the third person to the trade secret owner, also acquires the secret by improper means. Id. § 43 cmt. c. Finally, we believe CTI has failed to generate a fact question on the trade-secret issue with respect to defendant James Yelton. Yelton was a former CTI customer, but was never an employee, so he was never bound by a handbook or confidentiality agreement. While there is some evidence Yelton became a part of Three D, there is no evidence he encouraged CTI employees to obtain trade secrets. In fact, the evidence presented shows the extent of Yelton's involvement in the development of Three D's machine was apparently to furnish photos of CTI's product obtained by him when he was a customer of CTI. This evidence is simply not sufficient to generate a fact question as to Yelton on the plaintiff's trade-secret claim, and the court's grant of summary judgment as to him was proper. In summary, we conclude it was error to enter summary judgment on CTI's trade-secret claim, except as to James Yelton. We remand for further proceedings on this issue.