Sinclair v. Aquarius Electronics, Inc.

• Decision Date: 02 October 1974
• Citation: 116 Cal.Rptr. 654,42 Cal.App.3d 216
• Court: California Court of Appeals Court of Appeals
• Parties: , 184 U.S.P.Q. 682 John G. SINCLAIR, Jr., Plaintiff and Respondent, v. AQUARIUS ELECTRONICS, INC., a corporation, Defendant and Appellant. Civ. 31700.

Page 654

116 Cal.Rptr. 654

42 Cal.App.3d 216, 184 U.S.P.Q. 682

John G. SINCLAIR, Jr., Plaintiff and Respondent, v. AQUARIUS ELECTRONICS, INC., a corporation, Defendant and Appellant.

Civ. 31700.

Court of Appeal, First District, Division 2, California.

Oct. 2, 1974.

Warren, Rubin & Chickering, Oakland, Patrick, Buchanan & Phillips, Peter S. Buchanan, San Francisco, for defendant-appellant.

Petersen, Lonergan & Larson, James L. Larson, Fort Bragg, for plaintiff-respondent.

KANE, Associate Justice.

Defendant Aquarius Electronics, Inc. ('Aquarius') appeals from a judgment obligating it to make payments to plaintiff under a royalty agreement.

In November 1969 Frank Bakerich ('Bakerich'), the majority shareholder of Aquarius, approached plaintiff at his home in Little River, California. Bakerich had heard that plaintiff, an electronics researcher and consultant, was working with brain waves and was interested in the commercial exploitation of his experiment. Plaintiff demonstrated the workability of the idea on a large device which converted brain waves into audible form. Bakerich, who listened to his own brain waves on this device, was impressed and was most anxious to implement plaintiff's idea of creating and putting into commercial production miniaturized battery operated devices which would convert brain waves into audible form.

In addition to the foregoing, the parties also discussed other matters during the preliminary negotiations. Thus, Bakerich advised Mr. Sinclair that Aquarius had only $5,000 capital for the contemplated production. In countering plaintiff's suggestion to form a partnership or to pay him in cash for the idea, Bakerich recommended that the payments be in the form of royalties based on net sales. The question of patentability was also discussed prior to the execution of the contract. Although it appeared to both parties that the idea was probably not patentable, Bakerich expressly represented to plaintiff that patenting was expensive and unnecessary in order to enter into the type of agreement contemplated by the parties.

The agreement embodying the understanding of the parties was entered into on December 5, 1969. It emphasized that Aquarius wished to encourage people to submit their scientific ideas to Aquarius for adoption even though such ideas were not patentable and were well known to others or Aquarius and provided that the subject matter of the agreement constituted a confidential disclosure; moreover Aquarius agreed to pay the inventor a royalty of 4 percent of the net sales price received for all devices embodying the subject matter of the contract. ¹

In compliance with the provisions of the agreement, on December 28, 1969, plaintiff submitted to Aquarius Exhibit A, consisting of 'a battery operated electronic device for converting the brain signal known as alpha rhythm to audible form for the purpose of self training of voluntary control of the alpha rhythm' and a schematic diagram of its circuitry. The device was tested by Bakerich and was accepted by him for Aquarius. After several days of experimentation, certain difficulties developed in the operation of the device. Plaintiff was asked to, and did, make additional improvements (engineering changes in the circuitry and components, etc.) to make the device suitable for mass commercial production. The changes were accepted by Aquarius.

The first devices embodying plaintiff's idea were sold by Aquarius as Alpha phone No. 101. Subsequently, Aquarius effected minor changes in the instrument and sold them as Alpha phone Nos. 102, 102--A, 102--B, and 102--T. The idea of converting brain waves into audible form by way of a portable device proved to be a smashing success arousing international interest. Up to the time of trial Aquarius had sold about $50,000 worth of Alpha phones. Nonetheless in a flagrant violation of the royalty provisions of the agreement, Aquarius paid only $36 in royalties to plaintiff and the sum of $604.05 for his engineering services. It is also uncontradicted that while plaintiff has not filed a patent application for his device, Aquarius, in the face of its prior representation that the subject matter was not patentable, filed a design patent application on January 18, 1971, for the basically same deivce incorporating plaintiff's idea.

In this action brought for accounting and damages the trial court found that the disclosure of the idea to Aquarius constituted a trade secret and that the agreement providing for royalty payments was valid and enforceable. Accordingly, Aquarius was ordered to pay plaintiff the sum of $1,964 representing the 4 percent royalties accrued on the net sales made up to the time of trial, and to render quarterly accounting and payment of the 4 percent royalties upon all devices to be sold in the future.

On appeal appellant attacks the judgment of the trial court on three grounds. It contends that the judgment below is erroneous because (1) the disclosure of plaintiff's idea does not constitute a trade secret within the meaning of the law; (2) the devices produced by Aquarius do not directly conform to plaintiff's invention and therefore the royalty provisions of the contract are inoperative; and (3) the agreement is unenforceable under prevailing federal law. (Sears, Roebuck & Co. v. Stiffel Co. (1964) 376 U.S. 225, 84 S.Ct. 784, 11 L.Ed.2d 661; Compco Corp. v. Day-Brite Lighting (1964) 376 U.S. 234, 84 S.Ct. 779, 11 L.Ed.2d 669; Lear, Inc. v. Adkins (1969) 395 U.S. 653, 89 S.Ct. 1902, 23 L.Ed.2d 610. ²

Appellant's first contention that plaintiff's idea did not constitute a trade secret, requires just brief consideration. It is now settled that A trade secret may consist of any formula, pattern, Device or compilation of information Which is used in one's business, and which gives him an opportunity to obtain an advantage over competitors who do not know or use it. It may be a formula for chemical compound, a process of manufacturing, treating or preserving materials, a pattern for a machine or other device or list of customers (4 Rest., Torts, § 757, com. b; see also: By-Buk Co. v. Printed Cellophane Tape Co. (1958) 163 Cal.App.2d 157, 166, 329 P.2d 147; Ungar Electric Tools, Inc. v. Sid Ungar Co. (1961) 192 Cal.App.2d 398, 403, 13 Cal.Rptr. 268 (disapproved on other grounds in Nichols v. Hast (1965) 62 Cal.2d 598, 601, 43 Cal.Rptr. 641, 400 P.2d 753). The cases emphasize that although a trade secret may be a device or process which is patentable, patentability is not a condition precedent to the classification of a trade secret. Thus, it has been said that a trade secret may be a device or process which is clearly anticipated in the prior art or one which is merely a mechanical improvement on a machine or device. Novelty and invention are not requisite for a trade secret as they are for patentability (Futurecraft Corp. v. Clary Corp. (1962) 205 Cal.App.2d 279, 290, 23 Cal.Rptr. 198). In harmony with these precepts, it has been held that a trade secret in the broad sense consists of any unpatented idea which may be used for industrial and commercial purposes (Painton & Company v. Bourns, Inc. (1971) 442 F.2d 216, 222).

The instant case makes it unquestionable that plaintiff's idea clearly qualifies as a trade secret under either or both of the foregoing definitions. The portable device converting brain waves to audible form was, to say the least, a mechanical improvement on the previous stationary equipment used in laboratories. In addition, the device was put to mass commercial production in appellant's business providing it opportunity to gain advantage over its competitors. Under these circumstances, appellant's claim that the inventor did not utilize the device in His own business is entirely immaterial and has no bearing whatsoever on the issue at hand.

Appellant's next argument, that the contract provisions are ineffective because the devices produced by appellant display some minor variations, is likewise ill-founded. Although undeniably some minor changes were effected on alpha phones Nos. 102, 102--A, 102--B and 102--T, the record is clear that all the devices produced and sold by appellant functioned substantially the same way and accomplished substantially the same result. As the contract itself emphasized, the subject matter of the agreement was the Idea submitted to the accepted by Aquarius, Not the form in which the idea was carried out. Thus, what was said in Graver Mfg. Co. v. Linde Co. (1950) 339 U.S. 605, 607, 70 S.Ct. 854, 856, 94 L.Ed. 1097, is equally applicable here: 'One who seeks to pirate an invention, like one who seeks to pirate a copyrighted book or play, may be expected to introduce minor variations to conceal and shelter the piracy. Outright and forthright duplication is a dull and very rare type of infringement. To prohibit no other would place the inventor at the mercy of verbalism and would be subordinating substance to form.'

However, appellant's assertion that the royalty agreement at bar is unenforceable because it is violative of the federal patent law and policy enunciated in Sears, Roebuck & Co. v. Stiffel, Compco Corp. v. Day-Brite Lighting, and Lear, Inc. v. Adkins, all supra, is a serious question which requires detailed attention and analysis.

As has been pointed out, at the core of the dispute are the competing demands of the common law of contracts and the federal law of patents. While the law of contracts forbids a purchaser from repudiating his promises simply because he later becomes dissatisfied with the bargain, the federal law requires that All ideas in general circulation be dedicated to the common good, unless they are protected by a valid patent (Lear, Inc. v. Adkins, supra, 395 U.S. at p. 668, 89 S.Ct. 1902, 23 L.Ed.2d 610; see also: Sears, Roebuck & Co. v. Stiffel Co.; Compco Corp. v. Day-Brite Lighting; both supra).

In resolving these conflicting interests, we must draw a careful distinction...