Magazine article Security Management

Trial of the Trade Secret

Magazine article Security Management

Trial of the Trade Secret

Article excerpt

WHAT CONSTITUTES A TRADE secret? This article presents a case study concerning company secrets and how the court ruled in a case dealing with "stolen" secrets, Electro-Craft Corporation v. Controlled Motion, Inc. (1) The facts and rationale are without significant paraphrasing so as not to diminish the import of the decision.

The Electro-Craft Corporation (ECC), a Minnesota-based company, employed about 500 people in four plants, three of which manufactured moving-coil and brushless servo motors and motor parts, among other products. These motors were used in high-technology applications, such as computer disk drives and printers and industrial robots.

ECC was one of only three major producers of moving coil motors, and although seven companies produced brushless servo motors, ECC had more than half of the private sector domestic market. ECC's share of military, foreign, and overall servo motor markets was substantial. Projected market growth for a five-year period from 1980 to 1985 was 25 to 30 times the 1980 market share figure.

ECC spent considerable time and money increasing the performance of its motors through design and by building prototypes and workable models. ECC worked with IBM to develop a motor for an IBM printer, and the motor was very successful. ECC became the only known source of motors for the IBM project.

Also, for about five years ECC had worked with Ford Motor Company on a new application for brushless motors. ECC had produced several prototypes for Ford and hoped to begin production in 1983.

In 1980, five ECC employees left ECC to work for a new company, Controlled Motion Inc. (CMI), which was formed by an ECC employee while still working for ECC. The prospectus for CMI proposed competition with ECC in its applications to IBM and Ford and indicated that prototypes for IBM would be completed within 12 weeks.

The former ECC employees had the following experience while employed at ECC:

* Ex-employee number one guided the development of the IBM and Ford projects.

* Ex-employee number two was a mechanical engineer who had worked on the design of the moving coil and brushless motors.

* Ex-employee number three was a quality assurance manager and acting plant manager.

* Ex-employee number four was a technician.

* Ex-employee number five was a buyer's assistant with knowledge of ECC's vendors and motor parts

All five employees had signed confidentiality agreements. However, none of the agreements contained a noncompetition clause. Four of the employees were given exit interviews, and only one signed a form acknowledging confidentiality.

In September 1980, ECC sued CMI, claiming CMI had misappropriated ECC's trade secrets. ECC sought temporary and permanent injunctions as well as compensatory and punitive damages.

On October 1, 1980, the district court granted a temporary restraining order enjoining CMI from accepting orders from ECC's principal customer for brushless motors. On April 16, 1981, the court issued a temporary injunction in favor of ECC, enjoining CMI from directly or indirectly selling or soliciting sales of any low-inertia electric servo motors.

On July 9, 1981, CMI was held in contempt for continuing to produce and sell motors after April 16, 1981, and was ordered to pay ECC $50 for each motor sold after that date as damages.

On October 19, 1981, the court found that CMI had misappropriated ECC's trade secrets and judgment was entered enjoining CMI for 12 months from producing or selling any brushless or low-inertia electric motor or tachometer with dimensions within 10 percent of ECC's brushless motors produced for IBM.

The decision was appealed to the Supreme Court of Minnesota, which adopted the four-point test of the Restatement of Torts No. 757. To be a trade secret the information claimed to be secret must: not be generally known or readily ascertainable; provide a competitive edge; have been developed at the plaintiff's expense; and be the subject of the plaintiff's intent to keep it confidential. …

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