Court Opinion

ID: 9689644
Source: CourtListenerOpinion
Date Created: 2023-08-24 18:41:57.343009+00
Date Added: 2024-06-11T18:18:51.058604
License: Public Domain

HENDERSON, Justice
(dissenting).
This case, involving a commercial tort of an alleged unauthorized disclosure and use of a trade secret, is one of first impression for this court. I dissent from the majority opinion on the grounds that: (1) Plaintiff’s idea to improve the design and function of an electrically heated bonnet used in the industry to facilitate chemical processing of human hair was of sufficient novelty and secrecy to conform to the definition of a trade secret; (2) implicit in the confidential relationship that existed between plaintiff and defendant-appellant, Dakota Industries, Inc., was a duty not to disclose that trade secret to plaintiff’s detriment; and (3) Dakota, in breach of its confidential relationship with plaintiff, disclosed the trade secret to LaMaur, which they both conspired to and did appropriate for their own use.
A well-stated summary of trade secret protection, recognized in a number of jurisdictions, is contained in a 1954 opinion of the Supreme Court of New Jersey:
A trade secret may consist of a formula, process, device or compilation which one uses in his business and which gives him an opportunity to obtain an advantage over competitors who do not know or use it. Its subject matter must not be a matter of public knowledge or general knowledge within the industry. . . . Although a substantial measure of secrecy must exist, the secrecy need not be absolute and disclosure to employees involved in its use will not ordinarily result in loss of employer’s protection. . . . Novelty and invention are not essential for the trade secret as *427they are for patentability. . . And the fact that every ingredient is known to the industry is not controlling for the secret may consist of the method of combining them which produces a product superior to that of competitors.
Sun Dial Corporation v. Rideout, 16 N.J. 252, 257, 108 A.2d 442, 445 (1954), aff’d 29 N.J.Super. 361, 102 A.2d 90 (1954). (emphasis added)
Trade secrets need not rise to the level of novelty and invention in the patent law sense. Koehring Company v. E. D. Etnyre & Company, 254 F.Supp. 334 (N.D.Ill.,1966). A trade secret may consist of a “device or process which is clearly anticipated in the prior art or one that is merely a mechanical improvement.” Futurecraft Corp. v. Clary Corp., 205 Cal.App.2d 279, 23 Cal.Rptr. 198 (1962). The information in formulating it need not be entirely unknown, or, as one court stated it, the field need not be virginal. Fairchild Engine & Airplane Corp. v. Cox, Sup., 50 N.Y.S.2d 643, 657 (1944). It matters not that every ingredient of the formula, process, device, or compilation is known to the industry. A trade secret may consist of a method of combining any such ingredients as to produce a product superior to that of competitors. Bolt Asso., Inc. v. Alpine Geophysical Asso., Inc., 244 F.Supp. 458, 463 (D.N.J. 1965).
This case does not depict a situation where the device or process is so widely known that it could be considered to be in the public’s general store of information. This is evidenced by the simple fact that the products then on the market were not designed nor capable of performing, providing the benefits, or solving the problems that this bonnet could. Plaintiff conceived the idea for an electrically heated bonnet which would, within a totally enclosed environment, apply an even distribution of heat and moisture at that temperature best suited to break down the hair and process the applied chemicals during all of the various types of beauty treatments. LaMaur, a company engaged solely in the manufacturing and nationwide sale of products for use in the beauty industry, acknowledged this in its own advertising. So enthusiastic was LaMaur about the novelty and benefits of the bonnet, that it was advertised in a national beauty magazine as a “scientific” and “dynamic breakthrough.” Although LaMaur later denied that there was anything novel or inventive about the bonnet, dismissing its own advertising as “poetic license,” the court in Schonwald v. F. Burkart Mfg. Co., 356 Mo. 435, 202 S.W.2d 7, 13 (1947), addressed such similar contentions on advertising to the contrary:
Although the abstract idea was not new, we think that the evidence warrants a finding that plaintiff had conceived and developed a specific concrete method of his own for the use and application of this abstract idea to accomplish a definite result, namely: to use available ingredients to make a certain type of canvas shoe sole. Defendant showed that it believed this method and product was something new, useful and novel by widely advertising it as a “sensational new sole,” and “an original creation,” and [“] definitely an improvement.” It is hardly in a position now to claim that the evidence conclusively shows that it was exactly the same plan and product known to and made by many others. (Emphasis supplied.)
LaMaur was aware of the competitive advantage that this product would have over others in the industry. There can be no doubt that this bonnet was of sufficient novelty and invention to conform to the definition of a trade secret.
The next area to be examined is whether there was sufficient evidence to indicate that plaintiff communicated such information for the design and production of this bonnet to the defendant, Dakota, under an express or implied agreement limiting its use or disclosure. Confidential disclosures include disclosures to a person who is capable of manufacturing the device invented. Becher v. Contoure Laboratories, 279 U.S. 388, 49 S.Ct. 356, 73 L.Ed. 752 (1929). Plaintiff met with Dakota’s representative to determine if Dakota had the capacity to manufacture the product that he had con*428ceived. With these representatives, he disclosed his sketches, specifications, and drawings. These included: the size of the bonnet; the required electrical wiring which would provide even heat distribution throughout the bonnet, including specific wiring along the hairline, a definite problem area in processing chemicals; the temperature to be maintained inside of the bonnet; a thermostat capable of preventing the fluctuation of temperatures; the shape of the bonnet necessary to provide the enclosed environment and seal off the outer air; and the heavy insulation necessary to allow heat maintenance and prevent dissipation. At the time Bachmeier * disclosed this to Dakota, he informed the representative that “he did not want this matter spread around town.”
It is not necessary for plaintiff to show that Dakota expressly agreed not to use information disclosed to it by plaintiff; the dealings between the parties may imply an agreement as to confidentiality. Brown v. Fowler, 316 S.W.2d 111 (Tex.Civ.App.1958). In this case, the relationship between plaintiff and Dakota was such that an obligation not to disclose the information known to the two of them about the bonnet can readily be inferred.
For example, after the disclosures about the bonnet were made to Dakota by Bach-meier, plaintiff and Dakota on February 21, 1975, executed an agreement under which Dakota agreed that it would manufacture and sell the ThermoChem Processing System (the bonnet) only to plaintiff and plaintiff agreed that it would buy that system only from Dakota. That agreement created a mutuality of interest and obligation between those two parties. Dakota admitted that by this agreement they took plaintiff into their confidence and that it created “mutual trust” between the parties at that point. Over two months later, pursuant to a second contract entered into between the parties on May 2, 1975, that situation of mutual trust, by Dakota’s own admission, had not changed. By the terms of that subsequent agreement, Dakota agreed to market the system “only through plaintiff” and plaintiff was to act as “sole” marketing agent for the system.
Additionally, the confidentiality of their relationship may be implied from what transpired preparatory to Dakota’s trip to Minneapolis to visit LaMaur on May 27, 1975. At a meeting between plaintiff and Dakota on May 23, in recognition of and in an effort to see that their mutual interests were protected, plaintiff imposed a number of restrictions, conditions, or limitations upon Dakota in its May 27 negotiations with LaMaur, which Dakota accepted and to which both parties agreed. Those items included that no agreement was to be reached; LaMaur was not to be granted exclusive distribution rights; plaintiff’s marketing representatives were to be provided for; plaintiff was to be compensated for its orders turned over to LaMaur; and there was to be no discussion of the technical details of the bonnet.
The cases have made clear the principle that such dealings between parties may by implication give rise to a confidential relationship. This principle is a legal conclusion recognizing the need for ethical practices in the commercial world. Telechron, Inc. v. Parissi, 197 F.2d 757 (2nd Cir. 1952); Schreyer v. Casco Products Corp., 190 F.2d 921 (2nd Cir. 1951); Seismograph Service Corp. v. Offshore Raydist, 135 F.Supp. 342 (E.D.La.1955); Kamin v. Kuhnau, 232 Or. 139, 374 P.2d 912 (1962).
The next point to be addressed is whether Dakota used or disclosed this trade secret in violation of the confidence and to the injury of plaintiff. The defendants argue that the displaying of the bonnet at a number of industrial shows constitutes a publication, which bars any action thereafter from misappropriation of the claimed trade secret. Publication of a trade secret, however, does not affect the liability of one who misappropriates the information during the course of *429a confidential relationship. Franke v. Wilt-schek, 209 F.2d 493 (2nd Cir. 1953). Further, it matters not whether LaMaur could have gained its knowledge from the study of the bonnet on display. The fact is that it did not. Rather, LaMaur gained it from Dakota via Dakota’s confidential relationship with plaintiff. As a result of Dakota’s confidential relationship, Dakota incurred a duty not to use the trade secret information to plaintiff’s detriment. Dakota not only turned over the technical specifications of the bonnet to LaMaur, but, in addition, continued to manufacture them for sale by LaMaur. Plaintiff has never received any compensation for its interests in the bonnet. This is the duty Dakota breached.
According to the great weight of authority, the plaintiff in an actión for breach of confidence involving a trade secret has the burden of proving three elements: (1) Possession of knowledge or information which is novel and not generally known, i. e., a trade secret; (2) Communication of this knowledge or information to the defendant under an express or implied agreement limiting its use or disclosure by the defendant; and (3) Use or disclosure of the knowledge or information so obtained in violation of the confidence and to the injury of the plaintiff. Wilkin v. Sunbeam Corporation, 377 F.2d 344, 346 (10th Cir. 1967); Venn v. Goedert, 319 F.2d 812 (8th Cir. 1963); E. W. Bliss Company v. Struthers-Dunn, Inc., 408 F.2d 1108 (8th Cir. 1969); Mann v. Tatge Chemical Co., 201 Kan. 326, 440 P.2d 640, 645 (1968); Basic Chemicals, Inc. v. Benson, 251 N.W.2d 220 (Iowa 1977).
The essence of disclosing a trade secret is a breach of faith. Franke v. Wiltsehek, supra. It is necessary to emphasize at this point that plaintiff elected to sue in tort under this theory, not in contract. As such, the contracts entered into between plaintiff and Dakota are of consequence only in so far as they tend to prove a necessary element of such tort: that there was an express or implied agreement between the parties, which limited Dakota’s disclosure or use of this information concerning the bonnet. Once plaintiff has properly alleged and proved an actionable tort for breach of confidence in disclosing a trade secret, the court is not empowered to resolve the issue under principles of contract.
The majority opinion states, however, that the eventual sale of the bonnet to third parties was included within the terms of an appendix to the May 2, 1975 contract between plaintiff and Dakota, theorizing that recovery under implied contract will not lie. It must be pointed out, however, that this provision referred to in the majority opinion only came into play upon termination of said contract between the parties. At the time Dakota misappropriated plaintiff’s trade secret, the contract had not been terminated as defined by its terms. The majority opinion states that termination was triggered when plaintiff did not fulfill the requisite number of orders in the calendar quarter, i. e., 12,500. The calendar quarter, however, had not elapsed between the May 2 agreement and Dakota’s betrayal on June 20, 1975, when Dakota disclosed the bonnet specifications to LaMaur. Nor would it have elapsed by July 25, 1975, the time at which Dakota and LaMaur finally entered into a written agreement providing for the manufacture and sale of the bonnet, making no provision for compensation to plaintiff nor acknowledgment of its interest in it.
Consequently, at the time this cause of action arose, it cannot be said that this type of sale to third parties was expressly included within the terms of the May 2, 1975 contract. To interpret it as such negates an element necessary in proving the offense. Plaintiff’s allegation of an implied contract must be considered within the context under which the action was brought: that at the time Dakota breached its confidential relationship involving the trade secret, there was an understanding, either express or implied, limiting Dakota from using such information to plaintiff’s detriment. The record reveals that Dakota knew or should have known that the information concerning the bonnet was not to be freely disclosed to other sources. Dakota, by providing such information to LaMaur, breached its confidential relationship with plaintiff.
*430Plaintiff also contends that LaMaur and Dakota conspired to misappropriate the trade secret. The record indicates that LaMaur was aware of plaintiff’s interest in the bonnet. On several occasions LaMaur had negotiated with plaintiff to get exclusive distribution rights to the bonnet. In fact, LaMaur’s acknowledgment of plaintiff’s interest is seen from its inclusion in its proposed June 13 contract between itself and Dakota, a provision calling for the written consent of plaintiff to the agreement. Plaintiff did not consent to the proposed contract which contained many of the same provisions which plaintiff had on earlier occasion rejected. The contract made no provision whatsoever for compensation to plaintiff for its interest in the bonnet acquired by reason of its efforts and the bonnet’s conception and development. Notwithstanding plaintiff’s refusal to sign said contract, Dakota forwarded the manufacturing specifications to LaMaur. By late June, without the consent of plaintiff, La-Maur had tested the bonnet; written and printed an instruction pamphlet on the customer’s use of its bonnet; and arranged for the placement of an advertisement in a national beauty magazine announcing its new bonnet. Pursuant to a contract entered into between Dakota and LaMaur on July 25, 1975, by late August, LaMaur had already sold 13,623 bonnets. No compensation has ever been paid to plaintiff.
LaMaur did not receive the manufacturing specifications from an untainted source. It knew of plaintiff’s interests in the bonnet. Third parties, who use a trade secret with knowledge of a breach of confidence, are equally liable with that person who disclosed such information. A. H. Emery Co. v. Marcan Products Corporation, 268 F.Supp. 289 (S.D.N.Y.1967). See also, Stone v. Goss, 65 N.J.Eq. 756, 55 A. 736, 63 L.R.A. 344 (Ct.Err. & App. 1903); Lamont, Corliss & Co. v. Bonnie Blend Chocolate Corp., 135 Misc. 537, 238 N.Y.S. 78 (Sup.Ct.1929); Friedman v. Stewarts Credit Corp., 26 N.Y.S.2d 529 (Sup.Ct.1939), aff’d, 261 App.Div. 990, 26 N.Y.S.2d 533 (2d Dept. 1941); Minnesota Mining & Mfg. Co. v. Technical Tape Corp., 23 Misc.2d 671, 192 N.Y.S.2d 102 (Sup.Ct.1959), aff’d, 15 A.D.2d 960, 226 N.Y. S.2d 1021 (2d Dept. 1962).
The jury resolved the complex issues in favor of the plaintiff. The trial court’s instructions, although not framed in the exact phraseology above, were sufficient for the jury to adequately determine: that the plaintiff had a confidential relationship with Dakota; that through their mutual endeavors, plaintiff and Dakota developed a trade secret within the framework of that confidential relationship; and that Dakota breached its confidential relationship with the plaintiff by disclosing the trade secret to LaMaur. In addition, the trial court’s instructions were proper with respect to whether LaMaur, together with Dakota, conspired to indeed appropriate that trade secret to their own use.
In reviewing the record and the authorities regarding trade secret protection, I feel that plaintiff has met the burden of proving the three elements required in a breach of confidence involving a trade secret. It is for this reason I would affirm the judgment of the trial court based upon the jury verdict awarding $270,000 for the unauthorized disclosure and use of a trade secret belonging to plaintiff.

 President of Mid-America Marketing Corporation, who assigned his rights to said corporation.