Essex Group, Inc. v. Southwire Co.

• Decision Date: 29 June 1998
• Docket Number: No. S98A0505.,S98A0505.
• Citation: 269 Ga. 553,501 S.E.2d 501
• Parties: ESSEX GROUP, INC. et al. v. SOUTHWIRE COMPANY.
• Court: Georgia Supreme Court

501 S.E.2d 501

269 Ga. 553

ESSEX GROUP, INC. et al. v. SOUTHWIRE COMPANY.

No. S98A0505.

Supreme Court of Georgia.

June 29, 1998.

H. Lane Young, II, Stephen Melvin Lore, Lawrence J. Myers, W. Harrison Coleman, Jr., Hawkins & Parnell, LLP, Atlanta, Ralph T. Rader, Rader, Fishman & Grauer, P.L.C.C., Bloomfield Hills, MI, for Essex Group, Inc., et al.

James H. Bratton, Jr., Herbert M. Hanegan, Margo A. Bagley, Smith, Gambrell & Russell, Atlanta, J. Thomas Vance, Tisinger, Tisinger, Vance & Greer, Carrollton, for Southwire Company.

HUNSTEIN, Justice.

Southwire Company brought suit against its former employee, Richard McMichael, and his new employer, Essex Group, Inc., to enjoin McMichael from disclosing to Essex any Southwire trade secrets, particularly, trade secrets involving Southwire's logistics system. The matter was presented to a special master whose report and recommendations were adopted by the superior court. The court ruled that Southwire's logistics system as a whole constitutes a trade secret under OCGA § 10-1-761(4) and issued an injunction prohibiting McMichael from working in Essex's logistics department for five years or sooner if Essex independently develops its own logistics system. The court also entered an order appointing an impartial verifier to confirm Essex's compliance with the terms of the injunction and to determine when Essex had independently developed its own system.

Southwire and Essex are direct competitors in the cable and wire industry. Southwire's logistics system is a warehouse organizational system with components extending from architectural layout features to customized equipment and modified computer software. Southwire's logistics system was primarily designed over a three-year period, with a development cost exceeding $2 million, by a project team headed by McMichael. In addition to self-testing and a trial-and-error learning process, development of Southwire's logistics system also included modifications based on observation of logistics systems in other industries and the adaptation of commercially-available components. The special master found that the logistics system has resulted in substantial efficiencies to Southwire, with annual savings of $12 million; the special master further found that because Southwire and its competitors, such as Essex, produce basically identical goods for sale, the marketing advantage gained by the important efficiencies that have resulted from the new logistics system has proved especially valuable for Southwire.

1. Essex contends the superior court erred by holding that Southwire's logistics system is a trade secret. Under the Georgia Trade Secrets Act of 1990, OCGA § 10-1-760 et seq., "trade secret" is defined as

information, without regard to form, including, but not limited to, technical or nontechnical data, a formula, a pattern, a compilation, a program, a device, a method, a technique, a drawing, a process, financial data, financial plans, product plans, or a list of actual or potential customers or suppliers which is not commonly known by or available to the public and which information:

(A) Derives economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use; and

(B) Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

OCGA § 10-1-761(4). The Act supersedes previous Georgia law on trade secrets, OCGA § 10-1-767(a), although prior law consistent with the Act remains viable precedent. Avnet, Inc. v. Wyle Labs., Inc., 263 Ga. 615, 437 S.E.2d 302 (1993).

(a) Essex contends Southwire's logistics system cannot be a trade secret because it is composed primarily of matters within the public domain. We disagree. "The fact that some or all of the components of the trade secret are well-known does not preclude protection for a secret combination, compilation, or integration of the individual elements." Restatement of the Law 3d, Unfair Competition (1995), § 39(f), p. 432. Hence, courts have recognized that

"a trade secret can exist in a combination of characteristics and components, each of which, by itself, is in the public domain, but the unified process, design and operation of which in unique combination, affords a competitive advantage and is a protectible secret."

Water Services, Inc. v. Tesco Chemicals, Inc., 410 F.2d 163, 173 (5th Cir.1969).

A unique process which is not known in the industry "can be a trade secret even if all of its component steps are commonly known." [Cit.] In other words, "a trade secret process may be established even if known components are assembled and known techniques are combined to produce a useful process which is not known in the industry." [Cit.]

Salsbury Laboratories, Inc. v. Merieux Laboratories, Inc., 735 F.Supp. 1555, 1569(13) (M.D.Ga.1989), aff'd. 908 F.2d 706(III)(A) (11th Cir.1990).

[A] trade secret can include a system where the elements are in the public domain, but there has been accomplished an effective, successful and valuable integration of the public domain elements and the trade secret gave the [trade secret owner] a competitive advantage which is protected from misappropriation.

Rivendell Forest Products v. Georgia-Pacific Corp., 28 F.3d 1042, 1046 (10th Cir.1994). We find this legal precedent persuasive and consistent with the Georgia Trade Secrets Act.

In this case, the special master noted that notwithstanding the fact that most, if not all, of the computer hardware components and warehouse equipment in Southwire's logistics system are commercially available, Southwire had established that "its selection and arrangement of components and equipment are unique to the Southwire logistics system," and found that the entirety of Southwire's logistics system¹ was a "trade secret" under OCGA § 10-1-761(4) because it constituted a device, method, technique or process "which is not commonly known by or available to the public" and met the other requirements of the statute. The superior court adopted this finding by the special master.

Accordingly, because there was no legal error in the analysis of the issue and our review of the record supports the factual findings adopted by the superior court, we find no error in the court's ruling.

(b) We further reject the position that information is not protectable as a trade secret merely because it may be independently discovered or ascertained by others. Although information is accorded trade secret status under OCGA § 10-1-761(4) in part because it is not "readily ascertainable by proper means," id. at (A), Georgia law recognizes that trade secrets may be acquired by others either through independent development or by reverse engineering,² and that the acquisition of trade secret information by these means is not improper in the absence of any misappropriation. Id. at (1). Thus, the Act explicitly recognizes that trade secret information is protectable until it has been acquired by others by proper means. This position is consistent with that taken in the Restatement, supra at § 39(f), p. 432.

The theoretical ability of others to ascertain the information through proper means does not necessarily preclude protection as a trade secret. Trade secret protection remains available unless the information is readily ascertainable by such means. Thus, if acquisition of the information through an examination of a competitor's product would be difficult, costly, or time-consuming, the trade secret owner retains protection against an improper acquisition, disclosure, or use.... However, any person who actually acquires the information through an examination of a publicly available product has obtained the information by proper means and is thus not subject to liability. [Cit.] Similarly, the theoretical possibility of reconstructing the secret from published materials containing scattered references to portions of the information or of extracting it from public materials unlikely to come to the attention of the appropriator will not preclude relief against the wrongful conduct....

Accord Richardson v. Suzuki Motor Co., 868 F.2d 1226, 1243(IV)(B) (Fed.Cir.1989) (information can be trade secret even if it is something that could be "`discovered by others by their own labor and ingenuity'"); Telex Corp. v. International Business Mach. Corp., 510 F.2d 894, 929 (10th Cir.1975) (information constituted a trade secret even though it could have been procured by a competitor "given enough time and expense, by independent investigation, research or experience"). See also Water Services, Inc. v. Tesco Chemicals, Inc., supra, 410 F.2d at 163(II) (trade secret is protected only as long as competitors fail to...