Metallurgical Industries Inc. v. Fourtek, Inc.

• Decision Date: 02 June 1986
• Docket Number: No. 84-1773,84-1773
• Parties: , 229 U.S.P.Q. 945 METALLURGICAL INDUSTRIES INC., Plaintiff-Appellant, v. FOURTEK, INC., Irving Bielefeldt, Norman Montesino, Gary Boehm, Michael Sarvadi & Smith International, Inc., Defendants-Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 1195

790 F.2d 1195

55 USLW 2040, 229 U.S.P.Q. 945

METALLURGICAL INDUSTRIES INC., Plaintiff-Appellant, v. FOURTEK, INC., Irving Bielefeldt, Norman Montesino, Gary

Boehm, Michael Sarvadi & Smith International,

Inc., Defendants-Appellees.

No. 84-1773.

United States Court of Appeals, Fifth Circuit.

June 2, 1986.

Hubbard, Thurman, Turner & Tucker, John Feather, Geary, Stahl & Spencer, Gerald P. Urbach, Dallas, Tex., Carella, Byrne, Bain & Gilfillan, John N. Bain, Richard E. Kummer, Roseland, N.J., for plaintiff-appellant.

Christie, Parker & Hale, Richard D. Seibel, E. Roderick Cline, Pasadena, Cal., Richards, Harris & Medlock, V. Bryan Medlock, Jr., Martin Korn, Dallas, Tex., for Smith Intern Crutsinger & Booth, John Booth, Monty L. Ross, Stinson, Mag & Fizzell, William Frank Carroll, Dallas, Tex., for Bielefeldt.

Vernon, McKinley & Lybrand, James L. Schutza, Dallas, Tex., for Montesino, Boehm & Sarvadi.

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

Before GEE, RANDALL and GARWOOD, Circuit Judges.

GEE, Circuit Judge:

Today's case requires us to review Texas law on the misappropriation of trade secrets. Having done so, we conclude that the district court misconceived the nature and elements of this cause of action, a misconception that led it to direct a verdict erroneously in favor of appellee Bielefeldt. We also conclude that the court abused its discretion in excluding certain evidence. Accordingly, we affirm in part, reverse in part, and remand the case for a new trial.

I. FACTS OF THE CASE

We commence with a brief description of the scientific process concerned. Tungsten carbide is a metallic compound of great value in certain industrial processes. Combined with the metal cobalt, it forms an extremely hard alloy known as "cemented tungsten carbide" ¹ used in oil drills, tools for manufacturing metals, and wear-resistent coatings. Because of its great value, reclamation of carbide from scrap metals is feasible. For a long time, however, the alloy's extreme resistence to machining made reclamation difficult. In the late 1960's and early 1970's, a new solution--known as the zinc recovery process--was devised, a solution based on carbide's reaction with zinc at high temperatures. In the crucibles of a furnace, molten zinc will react with the cobalt in the carbide to cause swelling and cracking of the scrap metal. After this has occurred, the zinc is distilled from the crucible, leaving the scrap in a more brittle state. The carbide is then ground into a powder, usable in new products as an alternative to virgin carbide. This process is the generally recognized modern method of carbide reclamation.

Metallurgical Industries has been in the business of reclaiming carbide since 1967, using the more primitive "cold-stream process." In the mid-1970's, Metallurgical began to consider using the zinc recovery process. In that connection, it came to know appellee Irvin Bielefeldt, a representative of Therm-O-Vac Engineering & Manufacturing Company (Therm-O-Vac). Negotiations led to a contract authorizing Therm-O-Vac to design and construct two zinc recovery furnaces, the purchase order for the first being executed in July 1976.

The furnace arrived in April 1977. Dissatisfied with its performance, Metallurgical modified it extensively. First, it inserted chill plates in one part of the furnace to create a better temperature differential for distilling the zinc. Second, Metallurgical replaced the one large crucible then in place with several smaller crucibles to prevent the zinc from dispersing in the furnace. Third, it replaced segmented heating elements which had caused electrical arcing with unitary graphite heating elements. Last, it installed a filter in the furnace's vacuum-pumps, which zinc particles had continually clogged. These efforts proved successful and the modified furnace soon began commercial operation.

In the market for a second furnace in mid-1978, Metallurgical provided to Consarc, another furnace manufacturer, all its hard-won information about zinc-recovery furnace design. Apparently allowed to watch the first furnace operate, Consarc employees learned of its modifications. Because Consarc proved unwilling or unable to build what Metallurgical wanted, however, the agreement fell through, and Metallurgical returned to Therm-O-Vac for its second furnace. A purchase order was signed in January 1979, and the furnace arrived that July. Further modifications again had to be made, but commercial production was allegedly achieved in January 1980.

In 1980, after Therm-O-Vac went bankrupt, Bielefeldt and three other former Therm-O-Vac employees--Norman Montesino, Gary Boehm, and Michael Sarvadi--formed Fourtek, Incorporated. Soon thereafter, Fourtek agreed to build a zinc recovery furnace for appellee Smith International, Incorporated (Smith). The furnace Fourtek provided incorporated the modifications Metallurgical had made in its furnaces; chilling systems, pump filters, multiple crucibles, and unitary heating elements. Smith has been unable to use this furnace commercially, however, because a current shortage of carbide scrap prevents its economically feasible operation.

Metallurgical nevertheless brought a diversity action against Smith, Bielefeldt, Montesino, Boehm, and Sarvadi in November 1981. ² In its complaint, Metallurgical charged the defendants with misappropriating its trade secrets. Other causes of action, not brought forward on appeal, were breach of contract, interference with business relations, conversion, and unfair competition. Trial began on June 4, 1984, and Metallurgical spent the next ten days presenting its case in chief. During this time, testimony indicated Metallurgical's frequent notices to Bielefeldt that the process was a secret and that the disclosures to him were made in confidence. Another witness recounted meetings in which the modifications were agreed to; Bielefeldt was allegedly unconvinced about the efficacy of these changes and contributed little to the discussion. Metallurgical also presented evidence that it had expended considerable time, effort, and money to modify the furnaces.

Such evidence apparently did not impress the trial court; at the close of Metallurgical's case, it granted the defendants' motions for directed verdicts. Ruling from the bench, the court provided an array of reasons for its order. The principal reason advanced was the court's conclusion that no trade secret is involved. At trial, Metallurgical acknowledged that the individual changes, by themselves, are not secrets; chill plates and pump filters, for example, are well-known. Metallurgical's position instead was that the process, taken as a whole, is a trade secret in the carbide business. The court, however, refused to recognize any protection Texas law provides to a modification process. It also concluded that the information Bielefeldt obtained from working with Metallurgical is too general to be legally protected. Finally, it ruled that "negative know-how"--the knowledge of what not to do--is unprotected. All these findings seem to have coalesced into a general conclusion by the court that this case involves no trade secret. The trial court went on to provide further rationales for its decision; it ruled that there was evidence of neither Bielefeldt's improper use nor disclosure of any secret, nor of Metallurgical's having been damaged by any improper misappropriation. Metallurgical appeals all these conclusions against Bielefeldt and Smith only. It also contends that the court erred in excluding certain evidence.

II. RULES OF REVIEW

We begin our discussion by noting the applicable standard of review. In Boeing Co. v. Shipman, 411 F.2d 365, 374 (5th Cir.1969) (en banc), we enounced the standard for deciding whether a directed verdict is proper:

[T]he [trial] court should consider all of the evidence--not just that evidence which supports the non-mover's case--but in the light and with all reasonable inferences most favorable to the party opposed to the motion. If the facts and inferences point so strongly and overwhelmingly in favor of one party that the Court believes that reasonable men could not arrive at a contrary verdict, granting of the motions is proper. On the other hand, if there is substantial evidence opposed to the motions, that is, evidence of such quality and weight that reasonable and fair-minded men in the exercise of impartial judgment might reach different conclusions, the motions should be denied, and the case submitted to the jury.

The standard of review on appeal is the same. See, e.g., Bobb v. Modern Products, Inc., 648 F.2d 1051, 1057 (5th Cir.1981). We must therefore consider all evidence and inferences most favorably to Metallurgical.

Because the district court provided so many reasons for its order, we feel compelled to discuss the law of trade secrets in detail. Our discussion concentrates on Texas law, despite a clause in both purchase order agreements that their interpretation is to be made under New Jersey law. This stems from the nature of this case; as will be explained below, we are dealing with a cause of action sounding in tort, not one based on contract.

Individual attention to the various elements of this tort is necessary to provide an easily-understood analysis, but we can here briefly summarize the discussion. A plaintiff must certainly show that a "trade secret" is involved; the definition of this term is therefore crucial and must be based on several factors. If the trial court concludes that a trade secret exists, it then must determine whether the defendant committed any wrongdoing. One who breaches the confidence reposed in him by the holder of a trade secret and one who obtains the secret can be held accountable. No defendant may be liable, however, unless he has "disclosed" or "used" the secret improperly; again, defining these terms is required. These considerations are the sum...