Diodes, Inc. v. Franzen

• Citation: 260 Cal.App.2d 244,67 Cal.Rptr. 19
• Parties: DIODES, INCORPORATED, a California corporation, Plaintiff and Appellant, v. Gustav H. D. FRANZEN, Harvey Stump, Jr., et al., Defendants and Respondents. Civ. 30896.
• Decision Date: 20 March 1968
• Court: California Court of Appeals

Page 19

67 Cal.Rptr. 19

260 Cal.App.2d 244

DIODES, INCORPORATED, a California corporation, Plaintiff and Appellant, v. Gustav H. D. FRANZEN, Harvey Stump, Jr., et al., Defendants and Respondents.

Civ. 30896.

Court of Appeal, Second District, Division 5, California.

March 20, 1968

Norman H. Kirshman, Chatsworth, for plaintiff and appellant.

Walker, Wright, Tyler & Ward and Nilsson, Robbins & Anderson and W. A. Caldecott, Los Angeles, for defendants and respondents.

HUFSTEDLER, Associate Justice.

Plaintiff, Diodes, Incorporated ('Diodes'), appeals from a judgment in favor of defendants Franzen, Stump, Semtech Corporation ('Semtech') and Continental Device Corporation ('Continental'), entered after defendants' general and special demurrers to the third amended complaint were sustained without leave to amend. On appeal plaintiff contends that the third amended complaint pleaded facts sufficient to constitute a cause of action on the theories of 'fraud and conspiracy,' based upon claimed breach of fiduciary duties owed by the individual defendants to the plaintiff, for which the corporate defendants were vicariously liable, and that the cause of action was barred by neither limitations nor laches.

The third amended complaint and its predecessors, each of which was filed after demurrers had been sustained to the preceding complaint, alleged that plaintiff corporation, since its formation in 1959, has been engaged in the design and manufacture of diodes--semi-conductors rectifying electric current. Defendants Stump and Franzen were directors and officers, respectively president and vice president, of Diodes from its formation through about September 1960, and at the same time were salaried employees in complete control of Diodes' research and development program. During their association with Diodes and for some time thereafter, Stump and Franzen each owned 5,000 shares of Diodes stock. After Franzen and Stump left the plaintiff, they participated in forming Semtech.

Stump and Franzen unquestionably owed fiduciary duties to the plaintiff by reason of their positions as directors, of ficers and managing employees of the plaintiff. The question is whether the facts pleaded allege any actionable breach of duty by either of them. The facts relating to the claimed breach of duty fall into three categories: (1) misappropriation of plaintiff's 'secret process'; (2) nondisclosure to the plaintiff's board of directors of the details of the process developed by Stump and Franzen and nondisclosure of the individual defendants' plans to leave the corporation and to enter into competition with it; and (3) solicitation of plaintiff's employees to leave the plaintiff's employment.

Misappropriation of Trade Secrets

No case has been cited to us, and we have found none, which discusses the sufficiency of the allegations of a complaint in an action based upon a misuse or misappropriation of a 'secret process.' There are two reasons for the paucity of authority: Very few cases have been decided in state courts at the pleading stage, and a major portion of the litigation concerning trade secrets has been conducted in the federal courts exercising diversity jurisdiction. The federal cases since the adoption of the federal rules are not helpful on the pleading questions in an action brought in a state court in California, because federal cases use 'notice pleading,' whereas California uses 'fact pleading.' (Fed.Rules Civ.Proc., rule 8(a)(2); Code Civ.Proc. § 426. See discussion, 2 Witkin, Calif.Proc. (1954) §§ 161, 162, p. 1139 et seq.) The necessary elements of a cause of action are nevertheless discernible from many trade secret cases which have been fully tried in both the federal and state courts.

One who seeks protection against the use or disclosure of a trade secret must plead facts showing (1) the existence of subject matter which is capable of protection as a trade secret; (2) the secret was disclosed to the defendant, or to a person for whose conduct a defendant is liable, under circumstances giving rise to a contractual or other legally imposed obligation on the part of the disclosee not to use or disclose the secret to the detriment of the discloser; and (3) if the defendant is an employee or former employee of the plaintiff or if the defendant is charged with having received the secret from an employee or former employee, the facts alleged must also show that the public policy in favor of the protection of the complainant's interest in maintaining the secret outweighs the interest of the employee in using his knowledge to support himself in other employment. (Compare Futurecraft Corp. v Clary Corp. (1962) 205 Cal.App.2d 279, 285--288, 23 Cal.Rptr. 198, with Winston Research Corp. v. Minnesota Min. & Mfg. Co. (9 Cir. 1965) 350 F.2d 134, 137--138, 140.)

Facts have been pleaded, sufficient to withstand a general demurrer, to impose a duty upon Stump and Franzen not to use or to disclose the plaintiff's trade secrets, if any. A director, officer, or employee who, by reason of his relationship to his corporation, acquires trade secrets of his employer during his employment, cannot thereafter use nor disclose to another his employer's secret to the detriment of his employer. (E.g., E. I. DuPont de Nemours Powder Co. v. Masland (1917) 244 U.S. 100, 102, 37 S.Ct. 575, 61 L.Ed. 1016; Bancroft-Whitney Co. v. Glen (1966) 64 Cal.2d 327, 350--351, 49 Cal.Rptr. 825, 411 P.2d 921; Langendorf United Bakeries, Inc. v. Phillips (1936) 5 Cal.2d 150, 153, 53 P.2d 363; By-Buk Co. v. Printed Cellophane Tape Co. (1958) 163 Cal.App.2d 157, 164--165, 329 P.2d 147.)

'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.' (4 Rest., Torts, § 757, comment b; Futurecraft Corp. v. Clary Corp., supra, 205 Cal.App.2d at p. 289--290, 23 Cal.Rptr. 198; see also Winston Research Corp. v. Minnesota Min. & Mfg. Co., supra, 350 F.2d at pp. 139--140; Sarkes Tarzian, Inc. v. Audio Devices, Inc. (S.D.Cal.1958) 166 F.Supp. 250; Sperry Rand Corp. v. Rothlein (D.Conn.1964) 241 F.Supp. 549, 560; Turner, The Law of Trade Secrets (1962) § 1, p. 160.)

The difficulty with the third amended complaint is the failure of plaintiff to plead facts showing that it ever had any trade secret to protect. The complaint does not directly aver that Stump and Franzen, or any other employee of plaintiff, developed any secret process or possessed any allied confidential information during the association of Stump and Franzen with the plaintiff. The plaintiff's third amended complaint speaks in circumlocutions and innuendoes. The subject matter of the socalled 'secret process' is not stated, except to hint that it had something to do with the manufacture of diodes. The allegations amount to this: Stump and Franzen told the board of directors of plaintiff that they had developed a metallurgical process in manufacturing diodes, but did not tell the board the details of that process. Plaintiff never found out whether or not Stump and Franzen were telling the truth about their work, because they concealed their knowledge from the board of directors and removed all information about their 'secret process' when they left the plaintiff. ¹

One who seeks to protect his trade secrets from wrongful use or disclosure does not have to spell out the details of the trade secret to avoid a demurrer to a complaint. To so require would mean that the complainant would have to destroy the very thing for which he sought protection by making public the secret itself. (E.g., Eastman Kodak Co. v. Powers Film Prod's, Inc. (1919) 189 App.Div. 556, 561, 179 N.Y.S. 325.)

The plaintiff must nevertheless allege the ultimate facts showing the existence of a trade secret or other confidential data to state such a cause of action. An averment simply that the plaintiff has a 'secret process' is a bare legal conclusion. (Show Management v. Hearst Pub. Co. (1961) 196 Cal.App.2d 606, 620, 16 Cal.Rptr. 731.)

Before a defendant is compelled to respond to a complaint based upon claimed misappropriation or misuse of a trade secret and to embark on discovery which may be both prolonged and expensive, the complainant should describe the subject matter of the trade secret with sufficient particularity to separate it from matters of general knowledge in the trade or of special knowledge of those persons who are skilled in the trade, and to permit the defendant to ascertain at least the boundaries within which the secret lies. If the subject matter of the claimed trade secret is a manufacturing process, the plaintiff must not only identify the end product manufactured, but also supply sufficient data concerning the process, without revealing the details of it, to give both the court and the defendant reasonable notice of the issues which must be met at the time of trial and to provide reasonable guidance in ascertaining the scope of appropriate discovery. No more comprehensive rules for pleading can be generally enunciated because no inclusive definition of trade secrets is possible. Examining all of the averments of the third amended complaint with that degree of charity which must be accorded pleadings, the third amended complaint fails to meet the most minimal requirements for stating a claim based upon misuse or misappropriation of trade secrets. ²

Nondisclosures

The nondisclosures are of two kinds: the failure to disclose to the board of directors the details of any process or processes developed by Stump and Franzen, and the failure to disclose the individual defendants...