Direx Israel, Ltd. v. Breakthrough Medical Corp.

• Decision Date: 07 January 1992
• Docket Number: No. 90-1498,90-1498
• Citation: 952 F.2d 802
• Parties: DIREX ISRAEL, LTD.; Direx, Incorporated, Plaintiffs-Appellees, v. BREAKTHROUGH MEDICAL CORPORATION; ZVI Porath; Avner Spector, Defendants-Appellants.
• Court: U.S. Court of Appeals — Fourth Circuit

Page 802

952 F.2d 802

21 U.S.P.Q.2d 1355

DIREX ISRAEL, LTD.; Direx, Incorporated, Plaintiffs-Appellees, v. BREAKTHROUGH MEDICAL CORPORATION; ZVI Porath; Avner

Spector, Defendants-Appellants.

No. 90-1498.

United States Court of Appeals,

Fourth Circuit.

Argued Dec. 5, 1990.

Decided Dec. 24, 1991.

As Amended Jan. 7, 1992.

Edward P. Henneberry, Howrey & Simon, Washington, D.C., argued (Alan M. Grimaldi, John R. Alison, Howrey & Simon, Washington, D.C., on the brief), for defendants-appellants.

John Mel Walker, Kirkland & Ellis, Washington, D.C., argued (L. Mark Wine, Robert S. Ryland, Kirkland & Ellis, Washington, D.C., Robert Friedman, Zur & Friedman, Ramat Gan, Israel, on the brief), for plaintiffs-appellees.

Before RUSSELL and WILKINS, Circuit Judges, and TILLEY, District Judge for the Middle District of North Carolina, sitting by designation.

OPINION

DONALD RUSSELL, Circuit Judge:

This is an appeal from a grant of a preliminary injunction in favor of the plaintiffs in a trade secrets case. The subject of the controversy is a portable, relatively inexpensive medical device for dissolving kidney and gall stones without surgery. ¹ The plaintiffs Direx, Inc., a California corporation, and its affiliate Direx, Ltd., an Israeli corporation (hereafter collectively referred to as Direx), ² began, in 1987, to research the development of such a machine. They allege that the defendants Breakthrough Medical Corporation, a Delaware corporation with its principal place of business in Gaithersburg, Maryland (hereafter referred to as Breakthrough), its founder and president Zvi Porath, an Israeli citizen, Avner Spector, an Israeli citizen who was until February 1, 1989 the chief engineer of the plaintiffs, but who later became the engineer for Breakthrough, and Kopel Lifschitz, an Israeli citizen who was in charge of marketing for the plaintiffs from January 1987 until January 1989 when he was discharged, illegally appropriated and exploited the plaintiffs' trade secrets, and were using such trade secrets to manufacture, with intent to market, a machine competitive with the plaintiffs' product. The plaintiffs Direx sought to enjoin Breakthrough from these efforts and to require an accounting. Applying the hardship test formulated in Blackwelder Furniture Co. v. Seilig Manufacturing Co., 550 F.2d 189 (4th Cir.1977), the district court granted plaintiffs a preliminary injunction. The district court found that the balance of hardships, though not decidedly in favor of the plaintiffs nonetheless weighed in favor of the plaintiffs, and that it appeared that Direx had "clearly" shown the likelihood of success on the merits by the preponderance of the evidence. On that finding, the court granted interim relief in favor of Direx. The defendants appealed that decision. We stayed such injunction until the hearing of this appeal. We now reverse the grant of the preliminary injunction without prejudice to the right of the plaintiffs to renew such motion on the basis of any new or additional facts that may have occurred since the grant under review.

I.

Before any party to this litigation entered the lithotriptic field, other researchers made significant advances in the technology of dissolving kidney and gall stones in the urinary or biliary tracts through the use of externally created electric shockwaves. Specifically, the German conglomerate Dornier Corporation (now Dornier Mercedes), a pioneer in the field of lithotriptic research, had manufactured a lithotripter which the United States Food and Drug Administration (FDA) approved for sale in December, 1984. Dornier's lithotripter required considerable space and gas and water connections, was immovable, and, more importantly, was quite expensive. Only larger hospitals could afford such a medical instrument or provide the facilities and personnel necessary for its operation. This left an unsatisfied need in the marketplace for the development of a smaller machine for use in clinics and smaller hospitals, which would require minimum space for operation and which would be easily portable, simple in operation, and saleable at a fraction of the price of the larger Dornier machine. Dr. Ein-Gal, who obtained a Ph.D. in electrical engineering from Stanford University, had been engaged for a number of years in developing advanced medical devices in the "Silicon Valley" area of California. He recognized and sought to take advantage of the opportunities for the production of such a small, relatively inexpensive lithotripter.

In 1983, Dr. Ein-Gal incorporated Direx as a California corporation. Sometime later he secured a corporate charter for Direx Israel, Ltd., with its principal place of business in Israel, for the purpose of developing and producing a reasonably priced, smaller and modular lithotripter. Progress on the device was slow at first, largely because the initial efforts were apparently financed and carried on solely by Dr. Ein-Gal. In 1985, Dr. Ein-Gal filed on behalf of Direx Israel an application for a research and development grant from the Israeli Government. On December 4, 1985, the Israeli Government issued approval for the first stage of a two-year funding program for research and development by Direx of the proposed small lithotripter. The program's financial allocation was in the range of $300,000, which was to include some compelled contribution by Direx.

Upon approval of a grant by the Israeli government, progress upon the Direx lithotripter began in earnest. Operations were established in what Dr. Ein-Gal described as a sort of "kitchen," or what Spector, whose involvement in the project is detailed hereinafter, described as

a house, about 500 square feet small. The bedroom was EinGal's office; ... and the kitchen was the lab. There was nothing more to it. Direx stayed in that small house until mid-1987, after we sold the first few machines. In other words, the Tripter X1 was designed, developed and produced in two rooms and a kitchen.

(J.A. at 1742.) These facilities, though small, were adequate at the time, since the process on which Direx was working "involved," in the words of the district judge, "a fairly unsophisticated R & D effort." (J.A. at 11.)

Immediately after receiving approval of the grant, Dr. Ein-Gal interviewed Avner Spector, a graduate in mechanical engineering at Ben Gurion University, who had recently been released after six years from military service, where he had engaged in research on military hardware with some success. This research, according to Spector, "involved many of the same technologies and areas of electronics and physics that are involved in the development of sparkgap lithotripters...." (J.A. at 1781.) In this first interview, Dr. Ein-Gal told Spector, again according to Spector and without any contradiction by Ein-Gal, that he wanted to design an inexpensive spark-gap lithotripter, based to a large extent on the technology illustrated in the Dornier lithotripter. ³ Dr. Ein-Gal obviously thought Spector was qualified to assist him in that endeavor, for, when he hired him, Spector was the only full-time employee of Direx other than Dr. Ein-Gal, and at that time he was given the office in the house where Direx and its operations were located right next to his (Dr. Ein-Gal's) own office. Spector's office also connected with Direx's laboratory. Dr. Ein-Gal explained to Spector that Direx had limited funds and was restricted in what it could pay Spector in cash at the time to $12 per hour. He said that payment would be supplemented by a share in the profits (to be measured by sales) if the project were successful. Spector accepted the offer. The oral agreement of employment was subsequently incorporated in a written contract, in which it was provided that, in addition to his pay at $12 per hour, Spector would receive a fixed percentage of all sales of Tripter X1. This contract also had a "Proprietary Disclosure and Non-Compete Agreement" under which Spector agreed "not to disclose to others any information (technical, business, legal or other) which has been received from Direx, Inc." (J.A. at 91.)

As we have said, activity on the project accelerated after the Israeli grant was approved and Direx employed Spector. The district judge found that "Spector worked very closely with Dr. Ein-Gal in developing the prototypes." (J.A. at 12.) Ein-Gal and Spector began their activity with the inspection of the Dornier lithotripter at the Hadassah Hospital in Jerusalem. The parties then proceeded with their research and development at the facility already described. Spector, it seems, was in immediate charge of the laboratory and the actual assembling of the "off-the-shelf" components which were included in Direx's lithotripter. By mid-1986--approximately six months after the accelerated effort had begun--Direx had produced a prototype Tripter X1 and had begun treating patients in clinical tests. The simplicity of the machine and its components is demonstrated by its production cost of $15,000, even though the sale price of the machine was later fixed at $250,000 to $300,000. Direx obtained approval from the Israeli Government in early 1987 for the sale of its Tripter X1 in Israel and other areas, but not in the United States. It made its first commercial sale of Tripter X1 in mid-1987. At the time of the suit, it had sold some 100 machines at prices ranging from $250,000 to $300,000.

The United States, however, remained the untapped market where Direx's device was not approved for marketing and the one with the greatest sales potential. Direx determined to pierce this market. In 1988, it applied to the Federal Drug Administration and secured, as a preliminary matter essential to approval for sale in the United States, an Investigational Device Exemption for United States-based clinical trials of its machine. At the time of hearing on the motion herein, these clinical tests were complete. Direx anticipated that, upon completion of...