Flotec, Inc. v. Southern Research, Inc.

Decision Date09 June 1998
Docket NumberNo. IP 97-1367-C H/G.,IP 97-1367-C H/G.
Citation16 F.Supp.2d 992
PartiesFLOTEC, INC., Plaintiff, v. SOUTHERN RESEARCH, INC., Inovo Inc., and Laing International Corporation, Defendants.
CourtU.S. District Court — Southern District of Indiana

Kyle S. Brant, Indianapolis, IN, and John L. Stewart, Cohen & Malad, Indianapolis, IN, for Plaintiff.

John L. DuPré, Rodney D. Johnson, Hamilton, Brook, Smith & Reynolds, Lexington, MA, John L. Maley, Barnes & Thornburg, Indianapolis, IN, for Defendants.

ENTRY ON PLAINTIFF'S MOTION FOR PRELIMINARY INJUNCTION

HAMILTON, District Judge.

Plaintiff Flotec, Inc. manufactures and sells oxygen regulators for medical uses. In this action Flotec seeks a preliminary injunction against a competitor for alleged misappropriation of its trade secrets and for infringement of the trade dress of its regulators. The court held an evidentiary hearing on Flotec's motion on March 18-19, 1998, and the parties submitted post-hearing briefs. The court now states its findings of fact and conclusions of law pursuant to Fed. R.Civ.P. 52 and 65. The findings are of course based on the record developed at this time and are subject to revision after a trial on the merits. As explained below, the court concludes that Flotec has not shown a likelihood of succeeding on the merits of its claims. The alleged trade secrets consist of information that is readily ascertainable by reverse engineering Flotec's product, which has been on the market for several years. In addition, Flotec failed to take reasonable steps to protect the secrecy of the supposedly valuable information, and the weight of the evidence shows that defendants derived their product through a process of reverse engineering from Flotec's product and a number of competing products rather than by copying Flotec's technical drawings. Finally, Flotec's trade dress is not inherently distinctive, and the similarities between Flotec's and defendants' products are not likely to cause confusion about the source of a product. Accordingly, the court denies Flotec's motion for a preliminary injunction.

Findings of Fact

Plaintiff Flotec, Inc. is an Indiana corporation with its principal place of business in Indiana. Its principal business is the manufacture and sale of high pressure gas regulators that are used primarily for oxygen tanks for medical uses. Flotec's regulators fit onto the valves of tanks containing oxygen under high pressure. The regulators reduce the pressure of compressed oxygen (at pressures as high as 3000 pounds per square inch) down to much lower pressure (about 50 pounds per square inch) so that the oxygen flow can be adjusted in a way that is safe and reliable for patients who use the oxygen to help them breathe. Flotec manufactured regulators for other companies from about 1983 to 1993. In 1993 Flotec chairman Gilbert Davidson and others in the company designed Flotec's own version of a regulator and began selling it in the market in early 1994. Flotec's basic regulator design has been commercially successful, having sold more than 100,000 units in less than four years. Flotec is one of about 30 competitors in the market for similar regulators. Flotec estimates its own market share at roughly 4 to 8 percent of the total. Since 1993, Flotec has continued to refine and improve its products, but the basic concept remains essentially intact. Flotec's product is not patented.1

Defendant Southern Research, Inc. (SRI) is a Delaware corporation with its principal place of business in Florida. After dealings with Flotec in late 1995 and early 1996 that are at the core of this dispute, SRI developed in 1996 and early 1997 a competing line of oxygen regulators that are now manufactured by defendant Inovo (a successor to SRI) and distributed by defendant Laing International Corporation. Laing International is a Florida corporation with its principal place of business in Florida. The record does not reflect the citizenship of Inovo.

SRI was a small manufacturing firm with sophisticated machining equipment and personnel skilled in specialized precision manufacturing. In late 1995, SRI was in financial trouble and was looking for new business. In November 1995 SRI vice president Stan Sheridan attended a trade show in Atlanta where he met Gilbert Davidson and others from Flotec. There was some discussion of the possibility of having SRI manufacture key components of Flotec's oxygen regulators. During the discussions, Flotec chairman Gilbert Davidson learned that SRI's chairman was LeNoir Zaiser. Although Davidson had known Zaiser for some thirty years, they were casual acquaintances who had seen one another only rarely in recent years.

After the meeting in Atlanta, SRI's Zaiser, Sheridan, and Brooks Moore visited Flotec's facility in Indianapolis in December 1995. Davidson and other Flotec personnel met with the SRI personnel and showed them the Flotec plant and product. Zaiser asked for the opportunity to submit quotations for manufacturing several key components. Davidson was doubtful because SRI's facility in Florida was much farther away than other Flotec vendors, and he thought the logistics would make it difficult to use SRI as a major supplier. Nevertheless, he agreed to give SRI the opportunity to quote prices for components. During the tour, Flotec personnel showed the SRI personnel some of Flotec's manufacturing techniques. Most important, Davidson gave Zaiser copies of several Flotec engineering drawings for the components. The drawings contain a host of dimensions and tolerances for the components. The drawings do not contain any explicit warnings that the information on them is confidential. They have a legend saying: "Property of Flotec All Rights Reserved." Davidson did not tell Zaiser that Flotec considered the drawings confidential. Davidson also did not ask Zaiser to sign any confidentiality agreement. By way of explaining the omission, Davidson said that he did not want to offend Zaiser. At the hearing Davidson described this omission as an "egregious error."

SRI took the drawings and product samples back to Florida. SRI personnel then undertook a substantial effort to gather information about prices and quantities for materials and some outside processing that SRI would need to provide a price to Flotec. See Ex. 147. Sometime during the next couple of months, SRI orally submitted a "ballpark" number to Flotec for three key components as a set. Flotec wanted written quotations for separate components, but SRI never provided written separate quotations. In any event, Flotec thought the quoted price for the set was too high. Flotec never asked SRI to return its technical drawings at any point after the negotiations had stalled. Although there is some conflict and ambiguity in the evidence on this point, the court finds that the negotiations between Flotec and SRI were essentially dead by the end of February 1996. This finding is based primarily on the testimony of Jeff Wyant, a former vice president and general manager of SRI who left the company unhappily and who did not go out of his way to testify favorably to SRI. Wyant testified that the Flotec deal was dead by the end of February, and that in March 1996, Zaiser told Sheridan to buy as many regulators as he could on the market. Tr. 195-96. Zaiser also testified that he told Sheridan to buy as many regulators as he could, and that he did so after SRI had given up "serious hope" of getting a contract to produce parts for Flotec. Flotec has not shown that SRI was planning to build its own regulators while it was still in active negotiations with Flotec.2

LeNoir Zaiser, the chairman of SRI and Inovo, is the key person involved in developing the SRI regulator. Although his academic credentials are no match for plaintiff's expert's, Zaiser is an engineer with extensive practical and entrepreneurial experience in some of the most sophisticated and exacting portions of the defense industry. That experience includes, for example, manufacturing components for the guidance systems of Sidewinder air-to-air missiles and other Navy and Army missiles. Tr. 380-81. Zaiser did the engineering on those defense products. He has extensive experience with precision engineering and manufacturing. He also has substantial skill in reverse engineering and bringing products quickly to the stage of efficient production, as shown in part by some of the testimony taken under seal in this case.

After SRI's Sheridan bought as many regulators as he could in March 1996, Zaiser took them all apart and, in his words, "went to work deciding who had the best idea, best mousetrap." Tr. 394. Based on this reverse engineering of many regulators, not only Flotec's, Zaiser made a number of judgments about design to come up with a good product. Zaiser developed his own design of the flow disk, which he described as "the heart of the unit." Tr. 397. Zaiser correctly pointed out that many features of regulators are generic: all the regulators have to be nearly the same size and shape to fit on the standard valve on the standard pressure tank; all regulators have to reduce pressure down to about 50 pounds per square inch; and most regulators allow the user to select from about eleven different flow rates for the oxygen. Zaiser did the principal engineering on the SRI product in the summer of 1996. Zaiser also concluded from his study of competing products that the manufacturing techniques used by Flotec and other competitors were less advanced than SRI's capabilities, "at least one generation behind in manufacturing technology." Tr. 400. Zaiser and SRI were able to develop a good, operable regulator very quickly, going from initial design work to manufacturing for production in a period of roughly six to eight months. Flotec argues that very speed shows that SRI must have used Flotec's drawings, but the court does not draw the same inference. SRI's reverse engineering process began...

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