Incase Inc. v. Timex Corp.

• Decision Date: 24 May 2007
• Docket Number: No. 06-1578.,No. 06-1577.,06-1577.,06-1578.
• Citation: 488 F.3d 46
• Parties: INCASE INCORPORATED, Plaintiff, Appellant/Cross-Appellee v. TIMEX CORPORATION, Defendant, Appellee/Cross-Appellant.
• Court: U.S. Court of Appeals — First Circuit

488 F.3d 46

INCASE INCORPORATED, Plaintiff, Appellant/Cross-Appellee v. TIMEX CORPORATION, Defendant, Appellee/Cross-Appellant.

No. 06-1577.

No. 06-1578.

United States Court of Appeals, First Circuit.

Heard February 9, 2007.

Decided May 24, 2007.

Sandra J. Staub, with whom Allison, Angier & Bartmon LLP were on brief, for plaintiff-appellant/cross-appellee.

Timonth W. Mungovan, with whom Stephen M. LaRose and Nixon Peabody LLP were on brief, for defendant-appellee/cross-appellant.

Before TORRUELLA, Circuit Judge, STAHL, Senior Circuit Judge, and HOWARD, Circuit Judge.

STAHL, Senior Circuit Judge.

Incase, Inc. ("Incase"), won jury verdicts against Timex Corporation ("Timex") in the United States District Court for the District of Massachusetts on its claims of misappropriation of trade secret, breach of contract, and implied contract. The district court subsequently granted judgment as a matter of law to Timex on the trade secret and implied contract claims. In a subsequent bench trial, the district court also found that Timex had committed unfair and deceptive trade practices, but denied Incase punitive damages. Incase now appeals the judgment as a matter of law and the denial of punitive damages. Timex cross-appeals on the denial of its motions for judgment as a matter of law on the remaining claim, and the holding that it committed unfair and deceptive trade practices. Timex also appeals the denial of its motion for a new trial. We affirm the decisions in all respects.

I. Background

We recite the facts in the light most favorable to the jury's verdict. Azimi v. Jordan's Meats, Inc., 456 F.3d 228, 232 (1st Cir.2006).

Incase is a designer and manufacturer of injection-molded plastic packaging products, located in Hopedale, Massachusetts. In late 1997 and early 1998, Incase had discussions with Timex, a manufacturer of watches and other electronics based in Middlebury, Connecticut, about providing packaging for some of Timex's watches. Following these meetings, Incase began working on several packaging products for Timex, including the watch holders at issue here.

Incase's usual procedure is to provide design services in conjunction with its manufacturing. Incase does not charge directly for the design services, but their expectation is that, if the design is satisfactory to the client, then Incase would receive a contract to manufacture the product.

The products at issue in this case are two watch packages, known as the "S-4" and "S-5."¹ Each is comprised of a series of integrated plastic components, including a ring or collar (which functions like a wrist) on a fixed base. The whole package allows for secure retail display of the watch without having to remove it from its packaging. The S-4 and S-5 differed in the way the "price flag" was incorporated into the package. The price flag is a small plastic component attached to the base that can display the price, SKU,² or other information. In the S-4, the price flag is fixed, while in the S-5, the price flag is moveable and removable. The removable price flag was important to Timex, since it allowed for better use of its automated manufacturing and distribution system, and because it allowed retailers to use the same watch holder for both promotional and everyday display. Timex had used moveable and removable price flags before, but prior designs had only two positions, while the S-5's price flag had three, and later four. The removable price flag is the focus of Incase's misappropriation of trade secrets claim.

By May 1998, the S-4 design was complete and Timex wanted to move toward developing the molding and tooling required for manufacture. Incase, which contracts out the tooling for its products, asked Timex to pay for the cost of tooling. Timex agreed, but asked that Incase cover the cost up-front, with Timex reimbursing Incase later. Incase agreed, provided that Timex commit to purchasing a certain number of units. In a meeting in May 1998, Timex agreed to purchase two million units per year for three years, and Incase agreed to pay the up-front cost for the tooling, which was not to exceed $133,000.³ On July 6, 1998, Timex faxed to Incase a purchase order that said, in part:

Timex will purchase six million holders between January 1, 1999[,] and December 31, 2000.[⁴] However, this purchase is contingent upon Incase remaining competitive with the industry. The current piece prices are as follows: Large $0.1100, Small $0.1075.

The purchase order also stated, "Tooling cost not to exceed $133,000." The parties continued to negotiate over tooling costs after this purchase order, ultimately settling on a tooling price of $126,000.⁵

After completing the tooling negotiation, Timex issued a new purchase order on October 26, 1998, that recited the same per-unit prices for the S-4 holders, but stated a quantity of only two million holders, rather than six million. Incase began manufacturing S-4 holders under the purchase order in October 1998. Timex ordered 300,000 units between October and December 1998, but the orders gradually declined until finally ceasing entirely in August 2000. Ultimately, Incase delivered a total of 2,731,500 S-4 units to Timex.

In the meantime, Incase and Timex had begun working on the S-5 design, with the removable price flag. Over the course of 1998, the parties went back and forth with specifications, design ideas, and at least twenty prototypes. The design was largely complete by May 1999, but Timex never placed any orders or entered into a contract for the manufacturing of the units.

By August 1999, Timex, unbeknownst to Incase, was in discussions with Yuhing, a Philippines manufacturing concern, with a view toward their producing the S-5. In its dealings with Yuhing, Timex relied on Incase's drawings and prototypes of the S-5. The S-5 that Yuhing ultimately produced differed in some minor respects from the S-5 that Incase had developed, though each incorporated the removable price flag.⁶ By May 2000, Yuhing was manufacturing S-5 units for Timex. Ultimately, Timex purchased 3,569,000 S-5 units from Yuhing.

Timex never notified Incase that it had given the manufacturing work for the S-5 to a different company. In March 2001, Frank Zanghi, vice president of Incase, was in a Target store when he noticed Timex products displayed in Yuhing's S-5 package, with the price flag derived from Incase's price flag design. Incase subsequently brought suit in Massachusetts state court against Timex, alleging breach of contract to purchase six million S-4 holders, misappropriation of trade secrets for the S-5 price flag, unjust enrichment/implied contract⁷ for use of Incase's S-5 design, and unfair and deceptive trade practices in violation of Mass. Gen. Laws ch. 93A, § 11 ("Chapter 93A").⁸ Timex removed the case to United States District Court based on diversity of citizenship.

Following trial on the contract, implied contract, and trade secret claims, a jury returned a verdict for Incase on all claims.⁹ Timex moved for a judgment as a matter of law, and the district court granted the motion with respect to the trade secret and S-5 implied contract claims, but allowed the S-4 breach of contract verdict to stand. Timex also moved for a new trial on the basis of unfair surprise, because Incase had changed its damages theory shortly before trial. The district court denied the new trial motion.

The district court then conducted a bench trial on the Chapter 93A claim. The court found that Timex had violated Chapter 93A, Incase, Inc. v. Timex Corp., 421 F.Supp.2d 226, 240-41 (D.Mass.2006), but that it had not done so "wilfully" or "knowingly" under the statute, and therefore that Incase was not entitled to punitive damages, id. at 242. The reasons for the court's various rulings are discussed in detail below.

Both parties appeal. Incase appeals from the court's judgment as a matter of law on the trade secret and implied contract claims, and the finding of no willful or knowing violation of Chapter 93A. Timex cross-appeals the failure of the court to enter judgment as a matter of law on the breach of contract claim, and also on the finding of a Chapter 93A violation. Timex also appeals the denial of its motion for a new trial.

II. Discussion

A. Misappropriation of Trade Secrets

We review de novo a district court's grant of a post-verdict motion for judgment as a matter of law. See Quiles-Quiles v. Henderson, 439 F.3d 1, 4 (1st Cir.2006). "Our review is `weighted toward preservation of the jury verdict' because a verdict should be set aside only if the jury failed to reach the only result permitted by the evidence." Id. (quoting Crowley v. L.L. Bean, Inc., 303 F.3d 387, 393 (1st Cir.2002) (emphasis in original)).

To prevail on a claim of misappropriation of trade secrets, a plaintiff must show: 1) the information is a trade secret; 2) the plaintiff took reasonable steps to preserve the secrecy of the information; and 3) the defendant used improper means, in breach of a confidential relationship, to acquire and use the trade secret. Data Gen. Corp. v. Grumman Sys. Support Corp., 36 F.3d 1147, 1165 (1st Cir. 1994).¹⁰ In issuing its judgment as a matter of law, the court held that Incase had not presented any evidence that the information was secret or that it had taken reasonable steps to preserve the secrecy of the information. Timex also argues here that there was no confidential relationship formed between the parties, and that the trade secret was not even the property of Incase in the first place.¹¹

The appeal on this claim turns on the second element of the misappropriation cause of action: whether Incase took reasonable steps to preserve the secrecy of the price flag design.¹² The district court noted that no documents were marked "confidential" or "secret"; there were no security precautions or confidentiality agreements; Incase had not told Timex the design was a secret; and Incase's principal designer on the project, ...