Court Opinion

ID: 2995607
Source: CourtListenerOpinion
Date Created: 2015-09-24 19:21:17.928165+00
Date Added: 2024-06-11T11:38:52.891527
License: Public Domain

In the
United States Court of Appeals
For the Seventh Circuit

Nos. 01-3083 & 01-3228

IDX Systems Corporation,

Plaintiff-Appellant,

v.

Epic Systems Corporation, University of
Wisconsin Medical Foundation, Mitchell Quade,
and Michael Rosencrance,

Defendants-Appellees.

Appeals from the United States District Court
for the Western District of Wisconsin.
No. 01-C-0037-S--John C. Shabaz, Judge.

Argued January 24, 2002--Decided April 1, 2002

  Before Easterbrook, Ripple, and Diane P.
Wood, Circuit Judges.

  Easterbrook, Circuit Judge. Both IDX
Systems and Epic Systems make software
for use in managing the financial side of
a medical practice: billing, insurance
reimbursement and other collections, and
the like. During the 1980s IDX sold this
software package to two medical groups
that later merged into the University of
Wisconsin Medical Foundation, which now
comprises more than 1,000 physicians. The
Foundation continued to use IDX software
until December 2000, when it switched to
software developed by Epic. IDX believes
that Mitchell Quade and Michael
Rosencrance, former employees of Epic who
came to manage data processing at the
Foundation, not only instigated this
change but also used their new positions
to transfer valuable information to Epic.
According to IDX’s complaint, over the
course of a year Quade and Rosencrance
personally, and with the aid of other
Foundation employees, furnished Epic with
details about how IDX’s software works,
enabling Epic to enhance its own package
and ultimately take the Foundation’s
business--and to match up better against
IDX in the competition for other
customers.
  IDX’s complaint under the diversity
jurisdiction of 28 U.S.C. sec.1332
charges the Foundation, Quade, and
Rosencrance with stealing IDX’s trade
secrets and breaking contractual promises
of confidentiality; it charges Epic with
tortiously inducing the other defendants
to do these things. The district court
dismissed the tort claims against Epic on
the pleadings, observing that Wis. Stat.
sec.134.90(6)(a) overrides any theory
that conflicts with the state’s law of
trade secrets. Later it pared all
contract-based claims out of the case,
ruling that the confidentiality
agreements are invalid under Wisconsin
law (which the parties agree governs)
because they do not contain temporal and
geographic limitations. Finally, the
court granted summary judgment to the
defendants on the trade-secret claim,
after concluding that IDX had failed to
identify with specificity the trade
secrets that it accuses the defendants of
misappropriating. 165 F. Supp. 2d 812
(W.D. Wis. 2001). We shall start where
the district court ended: with the trade-
secret claim.

  Trade secrets are a subset of all
commercially valuable information.
Wisconsin has followed the Uniform Trade
Secrets Act in defining "trade secret"
this way:

"Trade secret" means information,
including a formula, pattern,
compilation, program, device, method,
technique or process to which all of the
following apply:

1. The information 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.
2. The information is the subject of
efforts to maintain its secrecy that are
reasonable under the circumstances.

Wis. Stat. sec.134.90(1)(c). Thus to show
that particular information is a trade
secret, a firm such as IDX must
demonstrate that it is valuable, not
known to others who might profit by its
use, and has been handled by means
reasonably designed to maintain secrecy.
Like the district judge, we think that
IDX failed to do this. It has been both
too vague and too inclusive, effectively
asserting that all information in or
about its software is a trade secret.
That’s not plausible--and, more to the
point, such a broad assertion does not
match up to the statutory definition.
Reluctance to be specific is
understandable; the more precise the
claim, the more a party does to tip off
a business rival to where the real
secrets lie and where the rival’s own
development efforts should be focused.
Still, tools such as protective orders
are available to make this process less
risky, and unless the plaintiff engages
in a serious effort to pin down the
secrets a court cannot do its job.

  According to IDX, "a 43-page description
of the methods and processes underlying
and the inter-relationships among various
features making up IDX’s software
package" is specific enough. No, it
isn’t. These 43 pages describe the
software; although the document was
created for this litigation, it does not
separate the trade secrets from the other
information that goes into any software
package. Which aspects are known to the
trade, and which are not? That’s vital
under the statutory definition. Likewise,
IDX’s tender of the complete
documentation for the software
leavesmysterious exactly which pieces of
information are the trade secrets. As we
remarked in Composite Marine Propellers,
Inc. v. Van Der Woude, 962 F.2d 1263,
1266 (7th Cir. 1992), a plaintiff must do
more than just identify a kind of
technology and then invite the court to
hunt through the details in search of
items meeting the statutory definition.
See also AMP Inc. v. Fleischhacker, 823
F.2d 1199, 1203 (7th Cir. 1987). What is
more, many of the items that appear in
the 43-page description, such as the
appearance of data-entry screens, are
exceedingly hard to call trade secrets:
things that any user or passer-by sees at
a glance are "readily ascertainable by
proper means". Perhaps screen displays
could be copyrighted, but no copyright
claim has been advanced, and a trade-
secret claim based on readily observable
material is a bust. Minnesota Mining &
Manufacturing Co. v. Pribyl, 259 F.3d 587
(7th Cir. 2001), on which IDX principally
relies, did not involve such self-
revealing information. Other details,
such as the algorithms that the software
uses to do real-time error checking (a
vaunted feature of IDX’s software), may
be genuine trade secrets, but IDX has not
tried to separate them from elements such
as its input and output formats. Nor does
it contend that the defendants decompiled
the object code or otherwise obtained
access to the algorithms that power the
program; it alleges only that Foundation
transferred to Epic those details that
ordinary users of the software could
observe without reverse engineering.

  Because (as what we have already written
illustrates) it is hard to prove that
particular information qualifies as a
trade secret, many producers of
intellectual property negotiate with
their customers for additional
protection. This is a step that Wisconsin
permits. See ProCD, Inc. v. Zeidenberg,
86 F.3d 1447 (7th Cir. 1996) (Wisconsin
law). Following sec.7 of the Uniform
Trade Secrets Act, Wis. Stat.
sec.134.90(6) provides:

(a) Except as provided in par. (b), this
section displaces conflicting tort law,
restitutionary law and any other law of
this state providing a civil remedy for
misappropriation of a trade secret.

(b) This section does not affect any of
the following:

1. Any contractual remedy, whether or
not based upon misappropriation of a
trade secret.

2. Any civil remedy not based upon
misappropriation of a trade secret.

3. Any criminal remedy, whether or not
based upon misappropriation of a trade
secret.

IDX and the Foundation (through its
predecessors in interest) agreed to the
sort of contractual remedy preserved in
sec.134.90(6)(b)1. The Foundation
promised not to allow the software and
related materials "furnished by" IDX to
be "examined . . . for the purpose of
creating another system" and vowed in
addition not to "use or disclose or
divulge to others any data or information
relating to" the system or "the
technology, ideas, concepts, know-how,
and techniques embodied therein." IDX has
evidence (enough to survive summary
judgment) that the Foundation, Quade, and
Rosencrance broke these promises by
describing IDX’s system in detail to Epic
and helping it duplicate those features
that the Foundation liked. Nonetheless,
the district judge held, the promises are
unenforceable because they are unlimited
in temporal and geographic scope, and
thus unduly restrain trade.

  In reaching this conclusion, the
district court relied on decisions
requiring restrictive covenants limiting
competition between employers and their
ex-employees to be reasonable, a
limitation that in Wisconsin entails some
restrictions on time and scope. See Farm
Credit Services v. Wysocki, 243 Wis. 2d
305, 627 N.W.2d 444 (2001); Tatge v.
Chambers & Owen, Inc., 219 Wis. 2d 99,
579 N.W.2d 217 (1998); Streiff v.
American Family Mutual Insurance Co., 118
Wis. 2d 602, 348 N.W.2d 505 (1984); Wis.
Stat. sec.103.465. Rules limiting the
extent of no-compete clauses are based on
the fact that they tie up human capital
and, if widely adopted, may have the
practical effect of preventing horizontal
competition in economically significant
markets. See Paul H. Rubin & Peter Shedd,
Human Capital and Covenants Not to
Compete, 10 J. Legal Studies 93 (1981).
But neither rationale applies to
contracts that restrict the use of
particular information between businesses
that have vertical (supplier-to-customer)
rather than horizontal (competitor-to-
competitor) relations. See Benjamin E.
Hermalin & Michael L. Katz, Judicial
Modification of Contracts Between
Sophisticated Parties: A More Complete
View of Incomplete Contracts and Their
Breach, 9 J.L. Econ. & Org. 230 (1993);
Robert Unikel, Bridging the Trade Secret
Gap, 29 Loyola U. Chi. L.J. 841 (1998).
IDX did not contract for limitations on
Epic’s ability to compete; contracts
between IDX and the Foundation are
vertical in nature and protect
intellectual property without affecting
competition. They may compel rivals such
as Epic to do more work to develop
software independently, but this promotes
rather than restricts competition.
Kewanee Oil Co. v. Bicron Corp., 416 U.S.
470 (1974), holds that trade-secret law
is compatible with antitrust law; the
same can be said for contracts protecting
intellectual property that, though not
demonstrably a trade secret, is
commercially valuable. Rivals such as
Epic, as non-parties to the vertical
arrangements, remain entitled to discover
and use the information independently and
to compete vigorously. Nothing in the
antitrust laws gives one producer a right
to sponge off another’s intellectual
property, even when the producer of that
knowledge has a market share much larger
than IDX’s. See United States v.
Microsoft Corp., 253 F.3d 34 (D.C. Cir.
2001) (en banc).

  The parties have not cited, and we have
not found, any Wisconsin statute or
decision subjecting non-disclosure
agreements between suppliers and users of
intellectual property to the rules that
govern non-competition clauses between
employers and employees. To the contrary,
Fullerton Lumber Co. v. Torborg, 270 Wis.
133, 139, 70 N.W.2d 585, 588 (1955),
tells us that Wisconsin allows "a much
greater scope of restraint in contracts
between vendor and vendee than between
employer and employee." Section
134.90(6)(b)1 implies that contracts
about intellectual property are valid,
even when they exceed the domain of trade
secrets. Restrictions on disclosure may
make intellectual property more valuable
to its producer, and thus promote both
the creation of knowledge and
competitions against other firms in the
same industry. No one doubts this with
physical property: General Motors is
entitled to control 100% of its own
output of mufflers, without handing any
of them over to Ford or Toyota or
Volkswagen. Permitting a producer the
full return on its investment in mufflers
(or any other product) is essential to
promote investment in productive assets
and rivalry with other producers. Just so
with knowledge, an increasingly vital
input into production. Why should IDX or
any other maker of intellectual property
be placed under legal rules that
effectively entitle its rivals to a chunk
of that asset’s value?

  No Wisconsin decision of which we are
aware requires temporal or geographic
limits as a condition to the enforcement
of a non-disclosure agreement for
intellectual property. It is impossible
to understand how a non-disclosure
agreement could place "geographical"
limits on the dissemination of
intellectual property comparable to those
restricting the locale where a salesman
may try to drum up customers for a new
employer. If the Foundation were
forbidden to disclose the details to Epic
in Wisconsin, but allowed to do so in
Indiana, that would be the same thing as
permitting disclosure everywhere (and
thus nixing all contractual limits)--for
Epic could sell worldwide any software
derived from what it learned in Indiana.
Knowledge does not respect borders.
ProCD, a case that the district court did
not mention, enforced as a matter of
Wisconsin law a contract placing
worldwide restrictions on the use of
intellectual property embedded in
software.
  Temporal limitations could make more
sense. Perhaps Wisconsin’s courts would
deem contracts such as those between IDX
and the Foundation to cover only
information that is not generally known.
What would be the point of forbidding the
Foundation to talk in public about
features of IDX’s system that had been
the subject of a review in a trade
publication? But it is too early in this
litigation to decide whether Wisconsin
would curb the unqualified scope of this
contractual language--and, if some limits
would be interpolated into the text,
whether these would shelter the actual
disclosures that the Foundation made to
Epic. (The Foundation contends, for
example, that it had customized IDX’s
software extensively and disclosed to
Epic details about its own additions
rather than any information "furnished
by" IDX and of which Epic was unaware
before the disclosures. It also contends
that IDX cannot establish damages. But
these and other factual arguments must be
developed through discovery rather than
decided at the complaint stage.)

  Because further proceedings must be held
on IDX’s contractual claims against the
Foundation and its employees, we must
consider the contention that Epic
tortiously induced the Foundation to
break its promises (and that Quade and
Rosencrance were in cahoots with Epic in
this endeavor). Because this claim was
dismissed on the pleadings, we assume
that Epic did what IDX alleges. The
district court held that Epic was free to
induce the Foundation to dishonor its
promises in light of sec.134.90(6)(a),
which "displaces conflicting tort law,
restitutionary law and any other law of
this state providing a civil remedy for
misappropriation of a trade secret." That
ruling suffers from two problems.

  First, paragraph (a) begins with the
words "[e]xcept as provided in par. (b)",
and paragraph (b)2 carves out of
paragraph (a) "[a]ny civil remedy not
based upon misappropriation of a trade
secret." The tort of inducing breach of a
non-disclosure contract (the sort of
contract independently protected by
paragraph (b)1) is "not based upon
misappropriation of a trade secret." It
is based on interference with the
contract.

  Second, even when read apart from
paragraph (b), paragraph (a) deals only
with "conflicting tort law" (emphasis
added). Enforcement of a non-disclosure
agreement does not conflict with trade-
secret law, and thus preventing third
parties from inducing breach of such an
agreement does not conflict with trade-
secret law. The district court did not
cite any Wisconsin case holding that the
tort of interference with contract (or
interference with economic advantage more
generally) conflicts with trade-secret
law for purposes of sec.134.90(6)(a). In
diversity litigation, our task is to
implement state law as state courts would
implement it, and we cannot think of any
reason why the Supreme Court of Wisconsin
would find such a conflict. The claims
against Epic, Quade, and Rosencrance
growing out of the Foundation’s breach of
its contracts with IDX therefore should
not have been dismissed.

  The judgment of the district court is
affirmed to the extent it granted
judgment to the defendants on IDX’s
trade-secret claims. The remainder of the
judgment is reversed, and the case is
remanded for further proceedings
consistent with this opinion.