Sokol Crystal Products, Inc. v. DSC Communications Corp.

• Decision Date: 09 February 1994
• Docket Number: 93-2060,Nos. 93-1989,s. 93-1989
• Citation: 15 F.3d 1427
• Parties: SOKOL CRYSTAL PRODUCTS, INC., Plaintiff/Appellee, Cross-Appellant, v. DSC COMMUNICATIONS CORPORATION, f/k/a Digital Switch Corporation, Defendant/Appellant, Cross-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1427

15 F.3d 1427

29 U.S.P.Q.2d 1756

SOKOL CRYSTAL PRODUCTS, INC., Plaintiff/Appellee, Cross-Appellant, v. DSC COMMUNICATIONS CORPORATION, f/k/a Digital Switch

Corporation, Defendant/Appellant, Cross-Appellee.

Nos. 93-1989, 93-2060.

United States Court of Appeals, Seventh Circuit.

Argued Nov. 9, 1993.

Decided Feb. 9, 1994.

Harry E. Van Camp (argued), Louderman, Hayes, Vancamp, Priester, Strother & Schwartz, Madison, WI, for plaintiff-appellee.

Allen A. Arntsen, Mark Langenfeld, Joan L. Eads, Foley & Lardner, Madison, WI, Michael P. Erhard (argued), Foley & Lardner, Milwaukee, WI, for defendant-appellant.

Before, CUDAHY and ROVNER, Circuit Judges, and WILL, District Judge. ^*

CUDAHY, Circuit Judge.

In 1986 Granger Associates (now owned by the defendant, DSC Communications Corporation ("DSC"), a Texas-based corporation) designed specifications for a telecommunications switching device known as the ECS-3 System. The ECS-3 is a switching device that was intended to be used to route telephone calls in long-distance communications. A crucial component of the ECS-3 is the voltage controlled crystal oscillator, also known as the "VCXO".

The VCXO is a particular type of oscillator, which is a device designed to produce electrical or mechanical vibrations. A VCXO has two defining characteristics. First, it is a crystal oscillator, which means that the principal factor that determines the frequency of the vibrations is the resonance of a piezoelectric crystal. Second, it is voltage controlled, which means that the frequency can be adjusted by varying the voltage of an electrical current that is applied to a metal overlay (or "spot") on the surface of the crystal.

The VCXO itself is a relatively common component. But the ECS-3 required a VCXO with a higher frequency than had been previously available. Each ECS-3 required over 1,000 VCXOs, which served as timing devices. The VCXOs essentially allowed the various components of the ECS-3 to work together, as well as to coordinate communications between the ECS-3 and the rest of the telecommunications system.

Granger attempted to find a company that could design and manufacture the VCXOs it needed for the ECS-3. Originally a California corporation called Monitor Products agreed to supply the VCXOs, but, while it developed a working prototype, it was unable to achieve production quantities within the agreed-to price range, and therefore withdrew from the project.

After Monitor withdrew, Granger asked one of its subsidiaries, Advanced Filter Devices ("AFD") to begin work on a VCXO for use in the ECS-3. But Robert Crawford, the President of AFD, thought the project impracticable in light of the cost and space restrictions and therefore declined to work on the project. Granger then went out looking for other suppliers, and in February 1987 Sokol (a relatively small Wisconsin concern) submitted a proposal to supply the VCXOs for the ECS-3. In March 1987 Granger issued a purchase order to Sokol for sample VCXOs, and in May 1987 Sokol and Granger entered into a confidential information agreement. The agreement, in substance, prohibited Granger from using Sokol's confidential information for any purpose other than that for which it was received.

In the meantime, despite Crawford's protestations, Granger ordered AFD to try to develop a suitable VCXO. By February 1988, Crawford finalized a VCXO design. But while Crawford and AFD were working on their own VCXO, Sokol was supplying Granger with these devices. DSC contends that these VCXOs were failing at an unacceptable rate and that Granger engineers examined them in order to help Sokol produce a better product. To that end, one of Granger's design engineers, Robert Lee (who was working with Crawford to develop AFD's VCXO), "reverse engineered" a Sokol VCXO and made schematic drawings of the Sokol VCXO circuit. In November 1988 Granger told Sokol to cease delivery of the VCXOs. Thereafter, Granger used VCXOs produced by AFD, and in May 1988 AT & T also began shipping VCXOs to Granger.

Sokol sued DSC, claiming that its trade secret had been misappropriated in violation of Wisconsin's version of the Uniform Trade Secrets Act (the parties agree that Wisconsin's substantive law governs this diversity action). Wis.Stat. Sec. 134.90. While there was no direct evidence that anyone at DSC used Sokol's confidential information in the making of its own VCXO, the jury apparently inferred from the fact that DSC had access to Sokol's confidential information and from the similarity between the two devices that DSC misappropriated Sokol's trade secret and that the AFD VCXO was derived from that trade secret. The jury therefore awarded Sokol $2,492,000 in damages. DSC appeals, asserting primarily that the suit is barred by the statute of limitations and that the jury was instructed erroneously. Sokol cross-appeals, claiming that the trial court erred in refusing to submit to the jury whether DSC's conduct was willful or malicious.

I. Statute of limitations.

Under Wisconsin law, an action claiming misappropriation of a trade secret "shall be commenced within 3 years after the misappropriation of a trade secret is discovered or should have been discovered by the exercise of reasonable diligence." Wis.Stat. Sec. 893.51(2). Sokol brought this action on November 15, 1991; so the claim is within the statutory period only if the misappropriation occurred (or should reasonably have been discovered) after November 15, 1988. DSC contends that, if there was a misappropriation, it took place in July 1988, and therefore that Sokol's claim is barred by the statute of limitations.

This analysis hinges on the definition of a "misappropriation." Under Wisconsin law, a misappropriation is defined as either (1) acquiring a trade secret by improper means, Wis.Stat. Sec. 134.90(2)(a), or (2) "disclosing or using ... a trade secret of another," id. at Sec. 134.90(2)(b). Granger acquired Sokol's trade secret by lawful means. Ascertaining the date of the misappropriation therefore requires us to determine the date on which the trade secret was "disclosed or used" (in this case "used").

The questions therefore are (1) what is the date of the misuse and (2) when did Sokol know (or should it reasonably have known) of it. Pinpointing the date of "misuse" is difficult because there was no direct evidence that DSC ever used Sokol's confidential information in developing its own VCXO. Instead, the jury inferred the misuse from the fact that DSC had access to this information and from the similarity between Sokol's and DSC's products. But the difficulty in defining the date of misuse turns out not to matter, because regardless of when DSC began to misuse Sokol's trade secret, the statute of limitations does not begin to run until Sokol knew or should have learned of it. Because it is not alleged that Sokol failed to exercise reasonable diligence in determining whether DSC was misappropriating its trade secret, the question ultimately becomes what did Sokol know and when did it know it.

In this connection, DSC argues that Sokol's cause of action accrued no later than July 1988 when Sokol allegedly believed that AFD was using Sokol's trade secret in making its own VCXOs. Sokol, however, insists that it did not know that DSC was misusing its trade secret until DSC sold an ECS-3 system (containing the AFD VCXO that resembled its own) to a third party.

While it is clear that Sokol was concerned all along that DSC might be misappropriating its trade secret, the district court found that the statute should not be construed to require Sokol to bring suit based only on this abstract concern. On this point, the district court relied on the analysis in Intermedics, Inc. v. Ventritex, Inc., 775 F.Supp. 1258, 1266 (N.D.Cal.1991). There, the court observed that it "cannot apply statute of limitations law in a way that pressures litigants to file suits based merely on suspicions and fears. At least in the commercial setting at issue here, suspicion and fear are not sufficient predicates for launching a lawsuit, and to file an action with no other basis would offend norms articulated in rules like Federal Rule of Civil Procedure 11."

DSC responds by suggesting that Sokol had a stronger suspicion that DSC was misappropriating its trade secret than the plaintiff had in Intermedics. While this is perhaps true, we do not find the difference to be decisive. In July 1988, AFD sent Sokol twelve samples of its VCXO boards. While Sokol knew at that time that the AFD board was similar to its own, it did not yet know the use to which these boards were going to be put. Seeing these boards surely led Sokol to be concerned that its trade secrets were going to be misappropriated. But, while these concerns and suspicions were perhaps stronger than those in Intermedics (where the plaintiff's initial concerns that the defendant had misappropriated its trade secret were assuaged by the report of an independent auditor), these apprehensions were still just concerns and suspicions rather than knowledge of misuse. They therefore do not start the clock of the statute of limitations. Sokol did not know that DSC was misusing (and therefore misappropriating) its trade secret until DSC sold an ECS-3 system (containing a VCXO that resembled Sokol's) to a third party. That being the case, the filing of the complaint, on November 15, 1991, was within the three-year statutory limit.

II. Laches.

DSC next argues that even if the claim was brought within the statutory limit, it is nonetheless barred by the equitable doctrine of laches. In this context, the laches doctrine essentially requires that the plaintiff mitigate damages. DSC alleges that Sokol, by sitting on its hands even though it allegedly knew that DSC was misappropriating its trade secret, in effect ran up the damages caused by the misuse. But this question essentially collapses into the statute of limitations analysis. Just as with the...