Opinion ID: 1924519
Heading Depth: 1
Heading Rank: 5

Heading: Trade Secret Status.

Text: The Uniform Trade Secrets Act, Minn.Stat. §§ 325C.01-325C.08 (1982) [3] allows the protection of certain types of information through an action for misappropriation. Misappropriation is defined as improper acquisition, disclosure, or use of a trade secret. Minn.Stat. § 325C.01, subd. 3. Without a proven trade secret there can be no action for misappropriation, even if defendants' actions were wrongful. [4] 1. In defining the existence of a trade secret as the threshold issue, we first focus upon the property rights in the trade secret rather than on the existence of a confidential relationship. 12 Business Organizations, Milgrim, Trade Secrets § 1.09 at 1-42 (1981). We recognize that the confidential relationship is also a prerequisite to an action for misappropriation, Jostens, Inc. v. National Computer Systems, Inc., 318 N.W.2d 691, 701 (Minn.1982), and that the elements of trade secret status and the confidentiality of the relationship should not be artificially separated for purposes of analysis since, in a significant sense, they are interdependent. Id. at 701, quoting 1 Milgrim, Trade Secrets § 7.07(1) at 95. However, without the finding of a trade secret, we cannot grant relief to ECC. Otherwise this court would come dangerously close to expanding the trade secrets act into a catchall for industrial torts. [5] 2. In order to determine the existence of trade secrets, we must first determine what trade secrets are claimed by ECC and what trade secrets were found by the district court. CMI claims that neither ECC nor the district court were specific enough in defining ECC's trade secrets. CMI also claims that ECC's definition of its trade secrets changed during the course of the litigation. Therefore, according to CMI the district court should be reversed due to lack of specificity. Regarding the brushless motor, we agree with CMI that ECC did not specify its trade secrets at trial. Nor did ECC even introduce the dimensions, tolerances, etc. of the brushless motor into evidence. The trial court found trade secrets in the general design procedures for the brushless motor. The court then enjoined CMI with respect to duplication of only the dimensions of the brushless motors. This lack of clarity is fatal to ECC's claim. On the record before us, ECC did not meet its burden of showing that certain features of the brushless motor were protectable trade secrets which might be misappropriated in the future. Furthermore, given ECC's lack of specificity, it was impossible for the district court to fashion a meaningful injunction which would not overly restrict legitimate competition for the IBM project. With respect to the moving coil motors, however, ECC claims that the dimensions, tolerances, adhesives, [6] and manufacturing processes of the ECC XXXX-XX-XXX motor are trade secrets. [7] The thrust of ECC's claim is that the specific combination of details and processes for the 1125 motor is a trade secret, and the evidence of the specific features of the 1125 motor sold to Storage Technology adequately identifies the information which ECC claims constitutes a trade secret. [8] We believe that ECC's claim was specific enough in identifying its trade secrets to support a misappropriation action with respect to the 1125. 3. In determining whether ECC has proven the existence of a trade secret in the 1125 motor, we look to the common law and the Uniform Trade Secrets Act, Minn. Stat. §§ 325C.01-325C.08 (1982). The Act, which became effective on August 1, 1980, carries forward, explains, and clarifies many of the rules of the common law of trade secrets. [9] To the extent, however, that the Act modifies the common law, we are constrained to give effect to the statutory language. The common law of trade secrets in Minnesota has been defined by two recent pre-Act cases. In Cherne Industrial, Inc. v. Grounds & Associates, Inc., 278 N.W.2d 81 (Minn.1979), we adopted the four-point test of Restatement, Torts § 757: to be a trade secret the information must (1) not be generally known or readily ascertainable, (2) provide a competitive advantage, (3) have been developed at plaintiff's expense, and (4) be the subject of plaintiff's intent to keep it confidential. 278 N.W.2d at 90. In Jostens, Inc. v. National Computer Systems, 318 N.W.2d 691 (Minn.1982), we applied the above test to a case quite similar to the one at bar. In Jostens plaintiff used a computer system for designing student class rings. Defendant company hired a former employee of plaintiff to design similar computer systems. The programs were written for defendant by the company which had written plaintiff's programs. This court used the first and fourth Cherne factors to uphold the trial court's finding that plaintiff had no protectable trade secrets: the system was readily ascertainable because it was not novel, and plaintiff did not show an intent to keep the system secret. 318 N.W.2d at 698-701. The test used in Cherne and Jostens is now more or less embodied in the Act, Minn.Stat. § 325C.01, subd. 5 (1982): Trade secret means information, including a formula, pattern, compilation, program, device, method, technique, or process, that: (i) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and (ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy. (Emphasis added). Applying the statutory test, we hold that, like the plaintiff in Jostens, ECC has not met its burden of proving the existence of any trade secrets. Therefore, we must reverse the district court's order even though the district court in this case found trade secrets to exist and made specific findings leading up to that ultimate conclusion. Because we do not lightly reverse the district court, we feel compelled to discuss all three elements of trade secret status under the Act as they relate to the evidence and the findings of the district court. (a) Not generally known, readily ascertainable. The trial court found the information regarding the ECC XXXX-XX-XXX to be secret. This finding was not clearly erroneous. First, the trial court found on conflicting evidence that CMI could not readily (i.e. quickly) reverse engineer a motor with exactly the same dimensions, tolerances, and materials as the ECC XXXX-XX-XXX. This finding was not clearly erroneous. Reverse engineering time is certainly a factor in determining whether information is readily ascertainable. ILG Industries, Inc. v. Scott, 49 Ill.2d 88, 94, 273 N.E.2d 393, 396 (1971); Kubik, Inc. v. Hull, 56 Mich.App. 335, 359-60, 224 N.W.2d 80, 92-93 (1974). The complexity and detail of dimensional data also bears on its ascertainability. A.H. Emergy Co. v. Marcan Products Corp., 389 F.2d 11, 16 (2d Cir.1968) ([I]t is well settled that detailed manufacturing drawings and tolerance data are prima facie trade secrets.); Henry Hope X-Ray Products, Inc. v. Marron Carrel, 674 F.2d 1336, 1340-41 (9th Cir.1982) (configuration of gear system and tolerances was secret). Second, the district court found that the exact combination of features of the XXXX-XX-XXX is unique, even though none of the processes or features are unique in the industry and the XXXX-XX-XXX is not the only way to achieve the required performance. Novelty is not a requirement for trade secrets to the same extent as for patentability. E.g., Clark v. Bunker, 453 F.2d 1006, 1009 (9th Cir.1972). On the other hand, some novelty is required; mere variations on widely used processes cannot be trade secrets. Thus, in Jostens, a type of computer system was held not to be secret where it merely combined known subsystems (and where defendant had produced a different system). [10] In the present case the exact combination of features of the XXXX-XX-XXX could be characterized as a unique solution to the needs of one customer in the industry. The district court's findings as to ascertainability and uniqueness are supported by the record. ECC introduced testimony that ECC's particular combination of production techniques is unique and that only general design principles circulate in the industry. Further, expert testimony conflicted on how readily ascertainable are the features of the motor by reverse engineering, (although the evidence does contradict the trial court's finding that the adhesives are not ascertainable). Therefore, the finding of the trial court, that the features of the motor are not generally known or readily ascertainable, is supported by substantial evidence and is not clearly erroneous. [11] This is not to suggest that ECC could make out a claim for trade secret status for the entire class of ECC moving coil motors, or even for the ECC 1125 in general. If a new customer devised an application for the ECC 1125 and CMI modified its 440 motor to meet those new specifications, ECC could not object. In that case ECC would be trying to protect, not a specific combination of features, but the design process of trial and error, (including the talent of ECC's employees), by which those features are adapted to a given use. The law of trade secrets will not protect talent or expertise, only secret information. See, Dynamics Research Corp. v. Analytic Sciences Corp., 9 Mass.App. 254, 274-75, 400 N.E.2d 1274, 1286 (1980) (engineering management system really involved talent of consultants, not information, so not a trade secret), and cases cited therein. (b) Independent economic value from secrecy. This statutory element carries forward the common law requirement of competitive advantage. The trial court found ECC to have a competitive advantage in the ECC XXXX-XX-XXX, not over all competitors, but over any company which has not, through its own efforts or through license, obtained similar information. CMI claims that ECC was required to show a competitive advantage over all competitors, including those competitors already successfully producing motors. The statute requires that a trade secret [derive] independent economic value . . . from not being generally known. . . and not being readily ascertainable. . . . Minn.Stat. § 325C.01, subd. 5(i). This does not mean, as CMI contends, that the owner of the trade secret must be the only one in the market. Several developers of the same information, for example, may have trade secret rights in that information. Uniform Trade Secrets Act § 1, Commissioner's Comment, 14 U.L.A. 542-43 (1979). If an outsider would obtain a valuable share of the market by gaining certain information, then that information may be a trade secret if it is not known or readily ascertainable. It is true that, as CMI contends, the trial court's stated reasons for its finding of a competitive advantage are not valid as to the XXXX-XX-XXX. First, the court cited a dearth of effective competitors for its principal customer as evidence of advantage. The trial court could only have meant brushless motors customer IBM, since Honeywell is an approved source for the 1125 motor sold to Storage Technology. Second, the court cited the time and money ECC reasonably expended in developing its motors. That ECC expended time and money between 1966 and 1975 in the development of the 1125 motor and its predecessors does not support a finding of competitive advantage unless, under the present state of the art, a prospective competitor could not produce a comparable motor without a similar expenditure of time and money. [12] The trial court found, however, that such time and money would be required of a prospective competitor today, and that finding was supported by some evidence. The ECC 1125, therefore, did provide ECC with economic value from its secrecy, as the statute requires  value that ECC would lose if any prospective competitor could enter the market (cutting into ECC's market share) without a substantial development expense. (c) Reasonable efforts to maintain secrecy. It is this element upon which ECC's claim founders. The district court found that, even though ECC had no meaningful security provisions, ECC showed an intention to keep its data and processes secret. This finding does not bear upon the statutory requirement that ECC use efforts that are reasonable under the circumstances to maintain . . . secrecy. Minn.Stat. § 325C.01, subd. 5(ii). The intention language used by the district court comes from the common law test for trade secret status. Cherne Industrial, Inc. v. Grounds & Associates, supra, 278 N.W.2d at 90. However, even under the common law, more than an intention was required  the plaintiff was required to show that it had manifested that intention by making some effort to keep the information secret. Id. at 91; Jostens, supra, 318 N.W.2d at 700. This element of trade secret law does not require maintenance of absolute secrecy; only partial or qualified secrecy has been required under the common law. Radium Remedies Co. v. Weiss, 173 Minn. 342, 347-48, 217 N.W. 339, 341 (1928). What is actually required is conduct which will allow a court acting in equity to enforce plaintiff's rights. In speaking of the requirement, one commentator has stated: It would appear, from the standpoint of a broad overview, that the policy goal of the doctrine is to preclude employee liability unless the employer can establish that his treatment of the knowledge in issue has been adequate to indicate a breach of the confidential relationship. It might also be said that the goal is to preclude vindictive employers from placing employees in mental-bondage. Sloan, Trade Secrets: Real Toads in a Conceptual Garden, 1 W.St.U.L.Rev. 113, 145 (1973). To put it another way, the employer must come into court with clean hands; the employer cannot complain of the employee's use of information if the employer has never treated the information as secret. It is this aspect of trade secret law which truly sets it apart from the other two means through which employers can protect information  patents, and employment contracts containing a non-competition clause. The latter two remedies depend on only a single act by the employer. Trade secret protection, on the other hand, depends upon a continuing course of conduct by the employer, a course of conduct which creates a confidential relationship. This relationship, in turn, creates a reciprocal duty in the employee to treat the information as confidential insofar as the employer has so treated it (see discussion of misappropriation, section B., infra ). In the present case, even viewing the evidence most favorably to the findings below, we hold that ECC did not meet its burden of proving that it used reasonable efforts to maintain secrecy as to the ECC XXXX-XX-XXX. We acknowledge that ECC took minimal precautions in screening its Handbook and publications for confidential information and by requiring some of its employees to sign a confidentiality agreement, [13] but these were not enough. First, ECC's physical security measures did not demonstrate any effort to maintain secrecy. By security we mean the protection of information from discovery by outsiders. Security was lax in this case. For example, the main plant had a few guarded entrances, but seven unlocked entrances existed without signs warning of limited access. Employees were at one time required to wear badges, but that system was abandoned by the time of the events giving rise to this case. The same was generally true of the Amery, Wisconsin plant where ECC 1125 and brushless motors were manufactured. One sign was posted at each plant, however, marking the research and development lab at Hopkins and the machine shop at Amery as restricted to authorized personnel. Discarded drawings and plans for motors were simply thrown away, not destroyed. Documents such as motor drawings were not kept in a central or locked location, although some design notebooks were kept locked. The relaxed security by itself, however, does not preclude a finding of reasonable efforts by ECC to maintain secrecy. Other evidence did not indicate that industrial espionage is a major problem in the servo motor industry. Therefore, security measures may not have been needed, [14] and the trial court could have found trade secrets if ECC had taken other reasonable measures to preserve secrecy. However, ECC's confidentiality procedures were also fatally lax, and the district court was clearly in error in finding ECC's efforts to be reasonable. By confidentiality in this case we mean the procedures by which the employer signals to its employees and to others that certain information is secret and should not be disclosed. [15] Confidentiality was important in this case, for testimony demonstrated that employees in the servo motor business frequently leave their employers in order to produce similar or identical devices for new employers. ECC has hired many employees from other corporations manufacturing similar products. [16] If ECC wanted to prevent its employees from doing the same thing, it had an obligation to inform its employees that certain information was secret. [17] ECC's efforts were especially inadequate because of the nonintuitive nature of ECC's claimed secrets here. The dimensions, etc., of ECC's motors are not trade secrets in as obvious a way as a secret formula might be. ECC should have let its employees know in no uncertain terms that those features were secret. Instead, ECC treated its information as if it were not secret. None of its technical documents were marked Confidential, and drawings, dimensions and parts were sent to customers and vendors without special marking. Employee access to documents was not restricted. ECC never issued a policy statement outlining what it considered to be secret. Many informal tours were given to vendors and customers without warnings as to confidential information. Further, two plants each had an open house at which the public was invited to observe manufacturing processes. The district court relied on certain contrary evidence to show ECC's intention, but this evidence does not demonstrate reasonable efforts to maintain confidentiality. There was no showing that a 1977 memo from the president of ECC to its managerial employees, warning them to restrict unannounced laboratory tours in the interests of protecting secrets, had ever been enforced. The confidentiality agreements signed by the employees were too vague to apprise the employees of specific secrets. ( See note 1, supra ). The exit interviews also did not constitute reasonable efforts to maintain secrecy. The exit interviews, a procedure initiated by ECC only after it became clear that the employees were about to work for Mahoney, occurred a mere ten days before the commencement of this litigation. These interviews were little more than attempts to intimidate or threaten employees, to prevent them from leaving ECC and engaging in legitimate competition using their skill and expertise. Such thinly-veiled threats certainly do not qualify as ongoing efforts to maintain the secrecy of specific information. The law of trade secrets does not condone, and this court certainly will not reward, ECC's conduct. In summary, ECC has not met its burden of proof in establishing the existence of any trade secrets. The evidence does not show that ECC was ever consistent in treating the information here as secret.