673 F.2d 1045 (9th Cir. 1982), 78-1455, Forro Precision, Inc. v. International Business Machines Corp.

Docket Nº:78-1455, 78-1755.
Citation:673 F.2d 1045
Party Name:FORRO PRECISION, INC., Plaintiff-Appellant, v. INTERNATIONAL BUSINESS MACHINES CORP., Defendant-Appellee.
Case Date:April 05, 1982
Court:United States Courts of Appeals, Court of Appeals for the Ninth Circuit

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673 F.2d 1045 (9th Cir. 1982)

FORRO PRECISION, INC., Plaintiff-Appellant,



Nos. 78-1455, 78-1755.

United States Court of Appeals, Ninth Circuit

April 5, 1982

Argued and Submitted May 12, 1980.

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[Copyrighted Material Omitted]

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[Copyrighted Material Omitted]

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Joseph M. Alioto, Alioto & Alioto, San Francisco, Cal., for Forro Precision, Inc.

Henry C. Thumann, Los Angeles, Cal., argued, for Intern. Business Machines Corp.; James V. Selna, O'Melveny & Myers, Los Angeles, Cal., on brief.

Appeal from the United States District Court for the Northern District of California.

Before TRASK and FLETCHER, Circuit Judges, and MUECKE [*], District Judge.

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FLETCHER, Circuit Judge:

This action arises from a series of events in 1972 and 1973 that culminated in the search of the business premises of Forro Precision, Inc. (Forro) by the San Jose police, who were accompanied by and aided in the search by employees of the International Business Machines Corp. (IBM). 1 Forro brought suit against IBM on the basis of its participation in the search and other conduct damaging to Forro. IBM, in turn, counterclaimed against Forro.

After extensive pretrial proceedings, the claims by Forro were narrowed to contentions that IBM had intentionally interfered with prospective business advantage under California law and had monopolized and attempted to monopolize in violation of section 2 of the Sherman Act. 15 U.S.C. § 2 (1976). IBM's contentions were narrowed to a counterclaim under California law that Forro had misappropriated its trade secrets. A jury found in favor of Forro on the intentional interference claim and awarded actual damages in the amount of $2,739,010. It found in favor of IBM on the misappropriation claim and awarded actual damages in the sum of $260,777, but deadlocked on the antitrust claims and on both parties' claims for punitive damages.

The trial judge initially declared a mistrial on Forro's Sherman Act section 2 claims, but later entered judgment in favor of IBM on this aspect of the case. The trial judge further ordered that neither party recover punitive damages.

Both parties appeal, IBM from the judgment for Forro on the intentional interference claim and Forro from the judgment for IBM on the misappropriation claim. Forro also appeals from the dismissal of its antitrust claims. This court has jurisdiction under 28 U.S.C. §§ 1291 and 1294.



IBM designs, manufactures, and markets a complete line of electronic data-processing equipment. This lawsuit concerns disk drives and disk packs, which are one portion of the line. The function of disk drives and packs is to provide rapid storage and retrieval of data. The devices are components separate from the "main frame" of a computer, and, along with other modular equipment, are known as "peripheral equipment." Peripheral equipment designed to work with a manufacturer's main frame computer is termed "plug compatible." Companies other than IBM that manufacture such components are known as plug-compatible manufacturers, or "PCM's."

Forro is not a PCM, but rather is a manufacturer of precision metal parts purchased by PCM's for incorporation in peripheral equipment. Forro ordinarily manufactures components in accordance with drawings and specifications provided by its PCM customers. Forro has on occasion, however, offered parts manufactured under Forro's own "FP" designation.

During the late 1960's and early 1970's, IBM was developing a disk storage device called the 3330, or "Merlin." IBM announced the Merlin to the trade in June, 1970. The first customer shipment of the Merlin was set for August, 1971. Forro offered Merlin parts, under its own FP designation, in mid-1971, prior to IBM's shipment date. The date of shipment is significant because it is the first date upon which the devices could be acquired legitimately

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and "reverse engineered." Prior to that time, detailed technical specifications would necessarily originate in IBM's shop.

In late 1970 and early 1971, IBM became aware of rumors that its security had been breached and that its new Merlin design was "out." These rumors were substantiated on two occasions, when companies in the industry voluntarily turned over to IBM Merlin drawings that had come into their possession. At about the same time, during discovery in a trade secret lawsuit brought by IBM against Memorex Corporation, IBM acquired information that led it to suspect that Forro had supplied to Memorex parts manufactured from Merlin designs.

Subsequently, in December, 1971, as part of its discovery in the Memorex lawsuit, IBM deposed Forro's president, Fowler, and its general sales manager, Knisely. At these depositions, Fowler and Knisely produced drawings of Merlin parts. They testified at the depositions in the Memorex case, and later at trial in this case, that Forro acquired the drawings in May of 1971 from a Mr. Shinn, an employee of another company, Sigma Technology. Shinn had submitted the drawings, which bore the Sigma Technology logo, to Forro as part of a request for a quote on the machining of certain of the parts. After verifying that the documents were authentic Merlin drawings, Forro intentionally submitted a very high bid and lost the Sigma Technology business. Forro copied the drawings prior to returning them to Shinn, and changed the Sigma Technology logo to a Forro logo. Forro subsequently offered for sale under its own FP designation Merlin parts manufactured from these drawings.

The Fowler and Knisely depositions in the Memorex litigation were taken under a stipulation that the depositions would be subject to a protective order and that the originals of all documents produced pursuant to subpoena would be returned to Forro. Within a week of the taking of the depositions, IBM returned the Merlin documents to Forro without restriction.

IBM became convinced that leaks of the Merlin drawings came from its San Jose laboratory. IBM initiated an investigation in 1972. In the course of this investigation, an informant told IBM that he had heard a rumor that Forro had technical information on the 3340, or "Winchester," Data Module. The first shipment of the Winchester device was not scheduled until November, 1973. IBM persuaded the informant to visit Forro and attempt to confirm the rumor. The informant contacted Forro but was unable to verify the rumor.

At trial, IBM introduced testimony of Fritz Damm, the former general manager of Damm and Zoon, a Dutch precision machine firm that produced Winchester parts for IBM. Damm testified that Fowler had contacted him several times in late 1972 and early 1973, attempting to acquire Winchester drawings and specifications from Damm. Fowler implied that Forro was already making certain Winchester parts. Although Damm testified at trial that he had delivered Winchester drawings to Fowler two weeks before the search of Forro, none of the drawings were uncovered in the search.

Forro began selling FP Winchester parts shortly after IBM's first shipment in November, 1973. Fowler testified that the specifications for Forro's FP Winchester parts were acquired through reverse engineering that took place immediately after the Winchester's first shipment date, and that he had not acquired any proprietary Winchester information through Damm. Fowler's testimony was belied by testimony of Forro's general sales manager, Knisely, that he had seen a copy of the Winchester specifications in Fowler's office almost a year before the alleged reverse engineering could have taken place. Fowler's testimony was also placed in question by the fact that one of Forro's parts exhibited characteristics peculiar to the European-made versions of the part. The European version of the Winchester parts were not shipped until after the date of the drawing that Fowler claimed was created by reverse engineering.

By March, 1973, IBM had arranged through an undercover agent to buy from a man named Steckel an entire set of illicit

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Winchester drawings for $75,000. At that time, IBM had still not discovered the source within IBM. IBM decided to seek the aid of local Santa Clara County law enforcement officials in order "to find the path back into the lab, and also to produce a thunderclap" of adverse publicity for the firms implicated in the illicit trade.

In late March and early April, 1973, IBM officials met with representatives of the California Attorney General's office and Santa Clara County law enforcement officials to discuss what actions to take to discourage trade secret thievery. The San Jose Police Department, with the involvement and consent of the Santa Clara County District Attorney, agreed to take over the investigation. The investigation thenceforth became a cooperative effort between the police and IBM. An IBM undercover agent continued his work under police supervision. Funding for the investigation came from IBM in the form of cash payments totalling $24,300.

In June, 1973, warrants were issued for the search of eight locations, including the Forro facility. Probable cause to search Forro's place of business was predicated on the suspected presence of unlawfully acquired Merlin drawings. The police affidavits offered in support of the warrants were based in part on the 1971 Memorex depositions of Fowler and Knisely, and on IBM assertions that the documents produced by Forro had been IBM documents. IBM neglected to tell the police that IBM had returned the documents to Forro after the depositions.

Forro's Los Angeles plant was searched on June 29, 1973. The search lasted approximately twelve hours. Five IBM employees accompanied the police...

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