Cataphote Corporation v. Hudson, 30810.

• Citation: 444 F.2d 1313
• Decision Date: 01 July 1971
• Docket Number: No. 30810.,30810.
• Parties: CATAPHOTE CORPORATION, Plaintiff-Appellant, v. Cecil W. HUDSON and Hudson Industries, Inc., Defendants-Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (5th Circuit)

444 F.2d 1313 (1971)

CATAPHOTE CORPORATION, Plaintiff-Appellant, v. Cecil W. HUDSON and Hudson Industries, Inc., Defendants-Appellees.

No. 30810.

United States Court of Appeals, Fifth Circuit.

July 1, 1971.

L. Arnold Pyle, Jackson, Miss., William A. Marshall, Chicago, Ill., for plaintiff-appellant; Merriam, Marshall, Shapiro & Klose, Chicago, Ill., Watkins, Pyle, Edwards, Ludlam, Winter & Stennis, Jackson, Miss., of counsel.

Robert W. King, Jackson, Miss., for defendants-appellees.

Before JOHN R. BROWN, Chief Judge, and COLEMAN and CLARK, Circuit Judges.

CLARK, Circuit Judge:

The second sojourn of this trade secret litigation in this court questions whether the district court properly complied with the mandate which ended its first visit. Determining that the overall substance of the district judge's order comports with our previous opinion and that he did not abuse his discretion in denying injunctive relief, we affirm.

Plaintiff-appellant Cataphote Corporation, a manufacturer of microscopic glass beads, originally instituted the present case against Cecil W. Hudson and Hudson Industries, Incorporated, to enjoin them from using certain alleged trade secrets claimed to have been acquired by Hudson as a Cataphote employee.¹ While it is conceded that Hudson had substantial mechanical ability and skill in the manufacture of glass at the time he was first employed by Cataphote, he did not have experience with the production of glass beads. When Cataphote employed him it was engaging in trial and error efforts to devise a method to manufacture such beads with commercial success. Hudson was a trusted employee of Cataphote. During his employment, Hudson was instrumental in helping Cataphote perfect the production of glass beads by the vertical up-draft furnace method. This process is not a patent protected art, but rather employs principles which are in the public domain. After eight years as Cataphote's plant manager, Hudson left its employ and worked for seven years in unrelated industries. After this seven year period, Hudson, through Hudson Industries, Incorporated, started construction of a plant to manufacture glass beads in competition with Cataphote.

Cataphote sought injunctive relief, asserting that approximately 55 of its processes which it claimed to be trade secrets, were about to be improperly appropriated by Hudson and Hudson Industries. Hudson denied these charges. After an initial hearing, the plant was allowed to be constructed so the validity of charges could be examined in actuality rather than in theory. The plant was built and full details of its construction were supplied under court order to Cataphote. This process reduced the claimed violations to six. After a trial on the merits the district court, in an unreported opinion, held that Cataphote had failed to establish that its claimed trade secrets qualified as such. It also found that Hudson's equipment and techniques were not mechanical equivalents but were substantially dissimilar; and it ruled that Hudson should not be barred from using his plant as constructed and operated.

On appeal, a panel of this court was unable to decide whether in making its determinations the district court had used an improper standard. This doubt was based principally upon a statement by the district court that it had concluded that "plaintiff Cataphote has not convinced the court that its techniques and apparatus are in any way unique or novel. To qualify as trade secrets they must have elements of uniqueness as to amount to discovery." In support of this conclusion, the district court had cited a number of patent cases.

Our prior panel pointed out that "The standards giving rise to protectability are different for patents than for trade secrets. And, while knowledge in the trade is an important area of inquiry, uniqueness in the patent law sense is not an essential element of a trade secret." In detailing the distinctions between trade secrets and patents, we noted that patent laws are designed to encourage invention and the arts while trade secret law is designed to protect against a breach of faith and reprehensible means of learning another's secrets. For this latter, limited protection, novelty in the patent law sense of a substantial advance over prior art is an improper standard.

Faced with the possibility that the district court may have improperly considered patent required uniqueness and novelty as a condition precedent to the classification of Cataphote's processes as trade secrets, the prior panel remanded the case so that the district court might make specific findings and conclusions under correct standards as to (1) whether Cataphote's claims were in fact trade secrets and (2) if they were, whether Hudson and Hudson Industries, Inc. illegally appropriated them.

On remand the district court determined it did not need to hold additional hearings and explained that its prior findings were based upon the premise that the processes and techniques in dispute were common and necessary to all vertical type furnaces and known to the trade. It concluded that the six techniques which Cataphote now delineated as appropriated by Hudson in his new plant were not such as warranted protection as trade secrets, and additionally, after weighing the competing interests of both parties, the lower court came to the same ultimate conclusion — that Cataphote was not entitled to injunctive relief against Hudson's activities.

In contending that the district court failed to follow the previous panel's instructions on remand and incorrectly decided the cause, Cataphote argues (a) that the district court failed to make new findings on whether Cataphote possessed trade secrets, (b) that the district court applied improper standards of uniqueness and novelty and a weighing of competing interests in deciding that Cataphote did not possess trade secrets, and (c) that the district court erred in not extending trade secrets protection to it and enjoining Hudson's use of these secrets.²

At the outset, we did not undertake to lay down any precise legal parameters for determining trade secrets. We only condemned the use of an improper standard that might have been applied, and required the district court to be more specific in showing it had not employed this legal premise or correcting its error, if it had made one.

In one phase of its opinion on remand the lower court repeated the terms "unique and novel" which we had questioned. However, as we read the words in their overall context, they do not show a disregard for our mandate but rather they undertake to explain that part of the district court's prior ruling as meaning that the claimed trade secret processes were simply too basic and commonly known to be protectable as trade secrets.

While the previous panel's mandate declared that uniqueness and novelty were not correct standards to apply to the determination of what does or does not constitute a trade secret, it is clear that the panel spoke only of uniqueness and novelty in the patent sense of improvement over prior art. 2 Callman, Unfair Competition, Trademarks and Monopolies § 52.1 (3d ed., 1968) states:

As distinguished from a patent, a trade secret need not be essentially new, novel or unique; therefore, prior art is a less effective defense in a trade secret case than it is in a patent infringement case. The idea need not be complicated; it may be intrinsically simple and nevertheless qualify as a secret, unless it is in common knowledge and, therefore, within the public domain. (Footnotes omitted. Emphasis added.)

Although a trade secret need not be so unique or novel as to be patentable, it must possess at least that modicum of originality which will separate it from everyday knowledge. In the words of our own prior opinion: "The subject matter of a trade secret must be secret. An item or process of public or general knowledge in an industry cannot be...