Opinion ID: 470034
Heading Depth: 1
Heading Rank: 3

Heading: defining a trade secret

Text: 15 We begin by reviewing the legal definition of a trade secret. Of course, to qualify as one, the subject matter involved must, in fact, be a secret; [m]atters of general knowledge in an industry cannot be appropriated by one as his secret. Wissman v. Boucher, 150 Tex. 326, 240 S.W.2d 278, 280 (1951); see also Zoecon Industries v. American Stockman Tag Co., 713 F.2d 1174, 1179 (5th Cir.1983) (a customer list of readily ascertainable names and addresses will not be protected as a trade secret). Smith emphasizes the absence of any secret because the basic zinc recovery process has been publicized in the trade. Acknowledging the publicity of the zinc recovery process, however, we nevertheless conclude that Metallurgical's particular modification efforts can be as yet unknown to the industry. A general description of the zinc recovery process reveals nothing about the benefits unitary heating elements and vacuum pump filters can provide to that procedure. That the scientific principles involved are generally known does not necessarily refute Metallurgical's claim of trade secrets. 16 Metallurgical, furthermore, presented evidence to back up its claim. One of its main witnesses was Arnold Blum, a consultant very influential in the decisions to modify the furnaces. Blum testified as to his belief that Metallurgical's changes were unknown in the carbide reclamation industry. The evidence also shows Metallurgical's efforts to keep secret its modifications. Blum testified that he noted security measures taken to conceal the furnaces from all but authorized personnel. The furnaces were in areas hidden from public view, while signs warned all about restricted access. Company policy, moreover, required everyone authorized to see the furnace to sign a non-disclosure agreement. These measures constitute evidence probative of the existence of secrets. One's subjective belief of a secret's existence suggests that the secret exists. Security measures, after all, cost money; a manufacturer therefore presumably would not incur these costs if it believed its competitors already knew about the information involved. In University Computing Co. v. Lykes-Youngstown Corp., 504 F.2d 518, 535 (5th Cir.1974), we regarded subjective belief as a factor to consider in determining whether secrecy exists. Because evidence of security measures is relevant, that shown here helps us conclude that a reasonable jury could have found the existence of the requisite secrecy. 17 Smith argues, however, that Metallurgical's disclosure to other parties vitiated the secrecy required to obtain legal protection. As mentioned before, Metallurgical revealed its information to Consarc Corporation in 1978; it also disclosed information in 1980 to La Floridienne, its European licensee of carbide reclamation technology. Because both these disclosures occurred before Bielefeldt allegedly misappropriated the knowledge of modifications, others knew of the information when the Smith furnace was built. This being so, Smith argues, no trade secret in fact existed. 18 Although the law requires secrecy, it need not be absolute. Public revelation would, of course, dispel all secrecy, but the holder of a secret need not remain totally silent: 19 He may, without losing his protection, communicate it to employees involved in its use. He may likewise communicate it to others pledged to secrecy.... Nevertheless, a substantial element of secrecy must exist, so that except by the use of improper means, there would be difficulty in acquiring the information. 20 Restatement of Torts, Sec. 757 Comment b (1939). We conclude that a holder may divulge his information to a limited extent without destroying its status as a trade secret. To hold otherwise would greatly limit the holder's ability to profit from his secret. If disclosure to others is made to further the holder's economic interests, it should, in appropriate circumstances, be considered a limited disclosure that does not destroy the requisite secrecy. The only question is whether we are dealing with a limited disclosure here. 21 Prior caselaw provides no guidance on what constitutes limited disclosure. Metallurgical cites Hyde Corp. v. Huffines, 158 Tex. 566, 314 S.W.2d 763, cert. denied 358 U.S. 898, 79 S.Ct. 223, 3 L.Ed.2d 148 (1958), and Sikes v. McGraw Edison Co., 665 F.2d 731 (5th Cir.), cert. denied 458 U.S. 1108, 102 S.Ct. 3488, 73 L.Ed.2d 1369 (1982), in contending that subsequent disclosure of a trade secret does not free one from the constraint of a prior confidential disclosure. In both of these cases, however, publication of the trade secret by its holder followed an improper use by one in whom the holder had confided. This factual difference renders these cases inapposite. 22 Looking instead to the policy considerations involved, we glean two reasons why Metallurgical's disclosures to others are limited and therefore insufficient to extinguish the secrecy Metallurgical's other evidence has suggested. First, the disclosures were not public announcements; rather, Metallurgical divulged its information to only two businesses with whom it was dealing. This case thus differs from Luccous v. J.C. Kinley Co., 376 S.W.2d 336 (Tex.1964), in which the court concluded that the design of a device could not be a trade secret because it had been patented--and thus revealed to all the world--before any dealing between the parties. Second, the disclosures were made to further Metallurgical's economic interests. Disclosure to Consarc was made with the hope that Consarc could build the second furnace. A longstanding agreement gave La Floridienne the right, as a licensee, to the information in exchange for royalty payments. Metallurgical therefore revealed its discoveries as part of business transactions by which it expected to profit. 23 Metallurgical's case would have been stronger had it also presented evidence of confidential relationships with these two companies, but we are unwilling to regard this failure as conclusively disproving the limited nature of the disclosures. Smith correctly points out that Metallurgical bears the burden of showing the existence of confidential relationships. Contrary to Smith's assertion, however, confidentiality is not a requisite; it is only a factor to consider. Whether a disclosure is limited is an issue the resolution of which depends on weighing many facts. The inferences from those facts, construed favorably to Metallurgical, is that it wished only to profit from its secrets in its business dealings, not to reveal its secrets to the public. We therefore are unpersuaded by Smith's argument. 24 Existing law, however, emphasizes other requisites for legal recognition of a trade secret. In Huffines, 314 S.W.2d 763, a seminal case of trade secret law, Texas adopted the widely-recognized pronouncements of the American Law Institute's Restatement of the Law. The Texas Supreme Court quoted the Restatement's definition of a trade secret: 25 A trade secret may consist of any formula, pattern, 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 it. It may be a chemical compound, a process of manufacturing, treating or preserving materials, a pattern for a machine or other device or a list of customers. 26 Id. at 776, quoting Restatement of Torts, Sec. 757 Comment b (1939). From this the criterion of value to the holder of the alleged secret arises, a criterion we have noted before. In Zoecon Industries, 713 F.2d at 1179, we concluded that a customer list was a trade secret in part because the list gave to its owner an advantage over competitors who did not have this information. See also Lykes-Youngstown Corp., 504 F.2d at 535 ([e]vidence was adduced at trial that [the product in question] had unique capabilities and features which made it a valuable competitive product). 27 Metallurgical met the burden of showing the value of its modifications. Lawrence Lorman, the company's vice president, testified that the zinc recovery process gave Metallurgical an advantage over its two competitors by aiding in the production of the highest quality reclaimed carbide powder. The quality of the powder, in fact, makes it an alternative to the more costly virgin carbide. Lorman testified that customers regarded Metallurgical's zinc reclaimed powder as a better product than that reclaimed by the coldstream process used by others. This evidence clearly indicates that the modifications that led to the commercial operation of the zinc recovery furnace provided a clear advantage over the competition. 28 Another requisite is the cost of developing the secret device or process. In Huffines' companion case, K & G Oil, Tool & Service Co. v. G & G Fishing Tool Service, 158 Tex. 594, 314 S.W.2d 782, 790 (1958), the court recognized the cost involved in developing the device in question; [t]he record shows ... that much work and ingenuity have been applied to the development of a practical and successful device. See also Zoecon Industries, 713 F.2d at 1179 (even if the names and addresses were readily ascertainable through trade journals as the defendants allege, the other information could be compiled only at considerable expense). No question exists that Metallurgical expended much time, effort, and money to make the necessary changes. It clearly has met the burden of demonstrating the effort involved in making a complex manufacturing process work. 29 That the cost of devising the secret and the value the secret provides are criteria in the legal formulation of a trade secret shows the equitable underpinnings of this area of the law. It seems only fair that one should be able to keep and enjoy the fruits of his labor. If a businessman has worked hard, has used his imagination, and has taken bold steps to gain an advantage over his competitors, he should be able to profit from his efforts. Because a commercial advantage can vanish once the competition learns of it, the law should protect the businessman's efforts to keep his achievements secret. As is discussed below, this is an area of law in which simple fairness still plays a large role. 30 We do not say, however, that all these factors need exist in every case. Because each case must turn on its own facts, no standard formula for weighing the factors can be devised. Secrecy is always required, of course, but beyond that there are no universal requirements. In a future case, for example, should the defendant's breach of confidence be particularly egregious, the injured party might still seek redress in court despite the possibility that the subject matter was discovered at little or no cost or that the object of secrecy is not of great value to him. The definition of trade secret will therefore be determined by weighing all equitable considerations. It is easy to recognize the possibility of a trade secret here, however, because Metallurgical presented evidence of all three factors discussed above. 31 Appellees posit two other reasons why Metallurgical's modification process cannot be defined as a trade secret. The first is premised on characterizing the process in question as the installation of various devices all well known to modern manufacturing. This being so, the argument runs, the process itself can be no secret, either. The technologies of chill plates, multiple crucibles, pump filters, and unitary graphite heating elements are all said to be public knowledge. This may well be so, but it does not prevent Metallurgical from seeking legal protection. Ventura Manufacturing Co. v. Locke, 454 S.W.2d 431 (Tex.Civ.App.1970), involved a process of finding and cleaning small yet valuable titanium scraps lost during the manufacturing of airplanes. Appellee Locke refined a previously unsuccessful process by implementing new procedures, none of which was innovative. The court nevertheless found that his efforts could constitute a trade secret: 32 Obviously, the basic proposition involved in the cleaning of dirty parts by commercial detergents involves no trade secret. Also, the use of production line techniques as such must be considered as a matter of general knowledge. On the other hand, we cannot say that the details of the procedure followed in the cleaning of these fasteners are matters of general knowledge. To the contrary, the record demonstrates that such details as the types and amounts of chemicals to be used and the times and temperatures for cleaning the fasteners were developed by Ventura through extensive trial and error and at considerable expense. 33 Id. at 434. Similarly, in Sikes, 665 F.2d 731, 736, we quoted with approval the following passage from Water Services, Inc. v. Tesco Chemicals, 410 F.2d 163, 173 (5th Cir.1969). 3 34 It is clear that the theory of the Treat-A-Matic was not new to the industry. The court also found that the design was apparent from inspection, and that the system had been sold and advertised without restriction. These findings are supported by the evidence. But these findings are not conclusive. The trade secret here was the application of known techniques and the assembly of available components to create the first successful system in the industry.... As the Second Circuit stated in Imperial Chemical, Ltd. v. National Distillers & Chemical Corp. (2 Cir.1965) 342 F.2d 737, 742, 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 protectible secret. 35 We believe these cases cogently refute appellees' assertions to the contrary. 36 The second defense advances a supposed concept of negative know how in reliance on one sentence from Hurst v. Hughes Tool Co., 634 F.2d 895 (5th Cir.) cert. denied 454 U.S. 829, 102 S.Ct. 123, 70 L.Ed.2d 105 (1981). The court there ruled that Hughes Tool Company did not really use the information Hurst provided; Hurst's information, while of some benefit, provided only negative, 'what not to do,' input to Hughes. Id. at 899. Both the district court and Smith interpret this to mean that negative know-how cannot constitute a trade secret. The sentence in Hurst, however, has nothing to do with whether the information was a trade secret. It is not found in the section of the opinion dealing with the existence of a trade secret; rather, we were determining whether Hughes Tool Company could be found to have used commercially any secrets Hurst conveyed. 37 Regardless of this misreading, the argument that negative know-how is involved here is unpersuasive. We do not understand how the changes that we have described can be seen as only showing what not to do. Metallurgical's evidence shows that it encountered many problems with the furnaces Therm-O-Vac delivered. Striving to solve these problems, Metallurgical took several steps to modify the furnaces. Installing unitary heating elements, chill plates, multiple crucibles, and pump filters are all positive steps resulting from conclusions on what to do. These changes allegedly turned unuseuable furnaces into ones fit for commercial operation. One may say, of course, that these actions result from realizations of what not to do; but so does every human process: the selection of one action at a given moment involves the rejection of every other conceivable one that might have been chosen. Using multiple crucibles, for example, stems from the conclusion that a single large crucible should not be used. This characterization, however, can always describe the invention or modification of a device. Knowing what not to do often leads automatically to knowing what to do. Although we decline to hold that this distinction will always be unavailing, in this case at least we regard the distinction between positive and negative knowledge to be unintelligible. Because this final claim of Smith is unpersuasive, we conclude that the evidence which was presented at trial could have led a reasonable jury to believe a trade secret existed.