Cataphote Corporation v. Hudson
| Decision Date | 20 February 1970 |
| Docket Number | No. 27947.,27947. |
| Citation | 422 F.2d 1290 |
| Parties | CATAPHOTE CORPORATION, Plaintiff-Appellant, v. Cecil W. HUDSON and Hudson Industries, Inc., Defendants-Appellees. |
| Court | U.S. Court of Appeals — Fifth Circuit |
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L. Arnold Pyle, Jackson, Miss., William A. Marshall, Chicago, Ill., for appellant.
Robert W. King, Jackson, Miss., for appellees.
Before JONES, BELL and GODBOLD, Circuit Judges.
This is a trade secret case based on diversity jurisdiction. Cataphote sued Hudson and Hudson Industries, Inc. seeking to enjoin them from utilizing designs, techniques and equipment the knowledge of which allegedly was acquired by Hudson while employed by Cataphote. The District Court, sitting without a jury, found for the defendants. We vacate the judgment and remand for new findings of fact and conclusions of law.
Cataphote is engaged in the manufacture of glass beads of microscopic size. Hudson is a skilled mechanic with inventive talent and a native ability to design and manufacture devices which he wants or needs. When Hudson was employed by Cataphote in 1950 that company was struggling by trial and error to devise a plant for the profitable manufacture of glass beads in commercial quantities.
Previously Hudson had many years of machine shop experience with other employers. For four years he had been employed by a glass company in designing, making, installing and maintaining machines for the making of glass, burners for glass-making furnaces, and crushing equipment. He also worked with gas, gas regulators and mixing valves. But he had no prior experience in making glass beads.
Hudson worked with Cataphote as a trusted employee. In part through his efforts, a successful gas-fired furnace was devised for making glass beads of the desired size. Subsequently Hudson became plant manager of Cataphote's glass bead making facility at Jackson, Mississippi, where the furnace was used. He remained in that capacity for eight years.
The manufacture of glass beads is not a protected art. Several different methods are economically feasible, and several companies in the United States are engaged in the business. Patents relating to processes and devices for manufacturing glass beads have expired and are in the public domain.
Hudson left Cataphote in 1958. At no time had he agreed not to use trade secrets of Cataphote or agreed not to compete. Such duties as he may have relating to Cataphote's processes and equipment come not from express contract but from the implied contract springing from his confidential relationship to Cataphote.
After seven years in unrelated industries Hudson organized Hudson Industries, Inc., of which he is principal stockholder and chief executive officer. He set about to construct for this company a furnace for the manufacture of microscopic glass beads in competition with Cataphote. Before construction was completed Cataphote sued for, and was granted, a temporary injunction. After hearing the court dissolved the injunction and treated the case as one for declaratory judgment. The court directed Hudson to file, 30 days before his plant was put into operation, a report revealing in detail the processes and procedure to be used in the plant. The District Court retained jurisdiction but designated the order to be final and appealable under Fed.R.Civ.P. 54(b). No appeal was taken. We discuss below the differing views of the effect of this order.
The defendants completed their plant and filed a report with the court. Cataphote asserted that certain trade secrets were violated by the plant as constructed. After a hearing on the merits the District Court held that Cataphote had failed to establish that its claimed trade secrets qualified as such and that the Hudson equipment and techniques were not mechanical equivalents but substantially dissimilar and that the defendants should not be barred from using their plant.
It seems to us, though we cannot say with complete assurance, that the trial court may have employed a partially incorrect standard in determining if the equipment, techniques and processes claimed to be trade secrets actually were trade secrets.1 In its opinion the court referred to a contention by Hudson that the claims of Cataphote "do not qualify as trade secrets in being so unique as to be unknown in the trade." Hudson, and the court, cited Rex Chainbelt, Inc. v. General Kinematics Corp., 363 F.2d 336 (7th Cir. 1966), a patent case. As we point out below, the standards giving rise to protectibility 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.
After considering each of the claimed secrets the trial court concluded that In its judgment entry the court decreed that "the Plaintiff has failed to establish that its claimed trade secrets are sufficiently novel or unique to qualify as trade secrets."
Consideration of the trial court's language requires comparison of trade secrets and patents and the requirements of each.
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 a chemical compound, a process of manufacturing, treating or preserving materials, a pattern for a machine or other device, or a list of customers. * * * A trade secret is a process or device for continuous use in the operation of the business. Generally it relates to the formula for the production of an article. It may, however, relate to the sale of goods or to other operations in the business, such as a code for determining discounts, rebates or other concessions in a price list or catalogue, or a list of specialized customers, or a method of bookkeeping or other office management.
Water Services, Inc., v. Tesco Chemicals, Inc., 410 F.2d 163, 171 (5th Cir. 1969), quoting from Restatement of Torts (1939) § 757, Comment b, p. 5. The patent laws establish a monopoly for the purpose of encouraging invention and the arts. Protection of trade secrets is a form of protection against use by others, focusing upon inequitable use by another — by breach of contract not to reveal, or abuse of confidence, or impropriety in obtaining the secret. Restatement, supra, § 757, Comment a, p. 4; Developments — Competitive Torts, 77 Harv.Law Rev. 888, 948 (1964). The patent is totally exclusionary for the period for which granted. The trade secret is protected only so long as competitors fail to duplicate it by legitimate, independent research. Water Services, Inc., supra. The trade secret is protected by being kept secret. The patent is protected after being spread on the public records for all to see.
The subject matter of a trade secret must be secret. An item or process of public or general knowledge in an industry cannot be appropriated by one as his own secret.2
"As distinguished from a patent, a trade secret need not be essentially new, novel or unique." 2 Callman, Unfair Competition, Trademarks and Monopolies (3rd ed., 1968) § 52.1, p. 373. 3 Restatement, supra, § 757, Comment b, pp. 6-7. This Circuit, in a case governed by Georgia law, and making an Erie guess, has rejected the requirement of "novelty." Water Services, Inc., v. Tesco Chemicals, Inc., supra.See also, 77 Harv.L.Rev. at 949, rejecting the necessity of "novelty" in the sense of "a substantial advance over prior knowledge." We make the same Erie guess as to Mississippi.4
If the District Court considered uniqueness and novelty as conditions precedent to existence of Cataphote trade secrets, we think it erred.5 Despite the foregoing, the decision below would be due to be affirmed if the District Court had held, under appropriate standards, that the matters claimed to be trade secrets were not being utilized by defendants, or, if utilized, that the use by defendants was not an illegal appropriation. Its holdings in this respect are not entirely clear. In discussing this issue the court held "that Hudson is using a furnace of different measurements to which he has applied his skill and knowledge in working out the process and equipment he deems most adaptable to it and which are different from those of Cataphote." Earlier in its opinion the court had noted, "although Hudson's...
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