Sixth Circuit Reinstates Trade Secret Claim By Lowering Evidentiary Burden for Small Companies.

Last week, the Sixth Circuit reinstated a trade secret claim by lowering the evidentiary burden for small companies who have to show the existence of a statutory trade secret. Niemi v. NHK Spring Co., 07-3536 (6th Cir. 9/19/08). In that case, the plaintiff father-son partnership created “machines and tools to manufacture stabilizer bars for automobiles,” and often conducted business on a handshake. Despite not having written confidentiality agreements, the Court held that a dispute of material fact existed as to whether the plaintiff had taken reasonable steps under the circumstances to protect the secrecy of its alleged trade secret and remanded the case to be decided by a jury.

The plaintiff signed a standard purchase order with the defendant which contained “a statement of standard terms and conditions providing that ‘no other or different terms or conditions shall apply to this order unless specifically agreed to in writing’” by the buyer. The plaintiff company did not insist on a written confidentiality agreement protecting the exclusivity of their designs or processes because he claimed that the defendant buyer assured him “that the new method ‘would remain confidential’ even before he disclosed it. and because plaintiff trusted the defendant-buyer for being “honorable people of integrity I’ve dealt with for thirty years.” A few years later, the plaintiff claimed that the defendant-buyer asked for a written exclusivity agreement (and promise not to share the design with other manufacturers) and he signed the agreement in exchange for a verbal assurance that he would continue to be the exclusive designer of the defendant company and would also receive the opportunity to bid on design work for the defendant’s parent company. A few years later, the plaintiff learned that a new engineering manager at the defendant company was using other designers (in violation of the verbal exclusivity agreement) and sharing details of the trade secret design (in violation of the verbal confidentiality agreement). When the dispute could not be resolved, the plaintiff brought suit for, among other things, violation of Ohio’s trade secret statute and promissory estoppel.

Under the Ohio statute, “trade secret” means “information, including the whole or any portion or phase of any scientific or technical information, design, process, procedure, formula, pattern, compilation, program, device, method, technique, or improvement, or any business information or plans, financial information, or listing of names, addresses, or telephone numbers, that satisfies both of the following: (1) It 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) It is the subject of efforts that are reasonable under the circumstances to maintain its secrecy” It is the second prong of the test which was at issue in the litigation.

While the district court did not believe that the plaintiff took reasonable efforts to protect the secrecy of its designs, the Sixth Circuit found there to be a disputed issue of fact on that issue. In particular, the plaintiff presented evidence that “he maintained complete control over his drawings and blueprints for the new manufacturing process in a secret, locked location in his house . . .. [and] did not disclose them to anyone other than his son and partner . . . , and agents of [defendant]—and to them only after receiving assurances of confidentiality.” Moreover, “[w]hen drawings were transported to and from [defendant’s] place of business in Toledo, they were always personally hand-delivered either by [plaintiff] or his son or by [defendant’s] personnel, who were required to sign for them. . . . No trade secret information was ever communicated by [plaintiff] via electronic media. . . . In addition, [plaintiff] was well aware of the security measures consistently employed by [defendant] at its facility.” The plaintiff also produced evidence “that he created standardized drawings of standardized manufacturing machine parts. This enabled [defendant] to order the fabrication of different tools by different manufacturing or ‘build’ shops without needing to disclose the complete set of prints to any one shop, thereby preserving the secrecy of the trade secret method.” Importantly for the Court, although the defendant attempted to minimize the importance of these facts, it did not present any evidence to refute or contradict them. When the defendant argued that plaintiff was careless in not marking the drawings “confidential,” the plaintiff explained that it was not necessary since no individual drawing alone disclosed the entire process. “Hence, this standardizing technique is said to represent a reasonable and effective effort to preserve secrecy even without labeling the individual drawings ‘confidential.’”

In addition, the plaintiff produced “deposition testimony detailing the conversation he had with [defendant’s manager] in 1993 or ‘94, when he remembers signing the exclusivity agreement and [the manager] reportedly assured him that [defendant] would continue to direct its design needs to him as long as he maintained the secrecy of his new method” In turn, the manager “testified that he is unaware of any such written agreement and he doesn’t recall agreeing that [plaintiff] would be [defendant’s] exclusive designer. However, [the manager] acknowledged that [plaintiff] had been [defendant’s] ‘primary, if not exclusive designer.’ Hence, although [the manager’s] testimony does not directly corroborate [plaintiff’s evidence] that there was an exclusivity agreement, his recollection of the parties’ relationship and course of dealing from 1991 to 1997 affords de facto corroboration.”

The plaintiff also produced expert testimony that “that it is customary in the automotive industry for small companies such [plaintiff] to rely on oral assurances of confidentiality regarding proprietary information when dealing with large automotive companies. . . . . Absent such evidence of customary practice in the industry, reliance on an oral promise could well be deemed not to represent a ‘reasonable effort’ to maintain secrecy.”

The plaintiff also argued that the Sixth Circuit should follow the Seventh Circuit opinion in Learning Curve Toys, Inc. v. PlayWood Toys, Inc., 342 F.3d 714 (7th Cir. 2003) applying Illinois’ version of the Uniform Trade Secrets Act (with an identical definition of trade secret). “Learning Curve teaches simply that whether efforts taken to maintain the secrecy of a trade secret are reasonable under the circumstances depends on the circumstances; that what is reasonable for a small company may be different from what is reasonable for a large company; and that the determination ordinarily represents a question for the jury. Id. at 724-25. The court observed that “only in an extreme case can what is a ‘reasonable’ precaution be determined as a matter of law, because the answer depends on a balancing of costs and benefits that will vary from case to case.” Id. at 725.” In that case, the “court upheld the jury’s verdict based on evidence of an oral confidentiality agreement, coupled with evidence that oral confidentiality agreements were customarily relied on. Id. at 725-26. The court readily acknowledged that PlayWood could and should have done more to protect its secret, but concluded the evidence was sufficient for the jury to determine that PlayWood, the smaller and less sophisticated of the parties, took reasonable precautions under the circumstances. Id.”

In short, the Court concluded that, “except where the evidentiary showing of reasonable efforts could not conceivably support a judgment in favor of the plaintiff, the reasonableness of the efforts is a question for the trier of fact. Because, depending on the credibility of the witnesses, it is conceivable, based on the present record, that a reasonable jury could find that [plaintiff’s] efforts to maintain the secrecy of his trade secret were reasonable, in light of his long term relationship with [defendant] and the relative sophistication of the parties, we conclude that the district court’s summary judgment ruling on the claim for misappropriation of trade secret was in error.”

The Court also found that the plaintiff’s promissory estoppel claim should survive summary judgment and be resolved by a jury.

Insomniacs can read the full decision at http://www.ca6.uscourts.gov/opinions.pdf/08a0349p-06.pdf.


NOTICE: This summary is designed merely to inform and alert you of recent legal developments. It does not constitute legal advice and does not apply to any particular situation because different facts could lead to different results. Information here can change or be amended without notice. Readers should not act upon this information without legal advice. If you have any questions about anything you have read, you should consult with or retain an employment attorney.