Forest Laboratories, Inc. v. Pillsbury Company

• Decision Date: 10 December 1971
• Docket Number: No. 71-1318,71-1319.,71-1318
• Citation: 452 F.2d 621
• Parties: FOREST LABORATORIES, INC., Plaintiff-Appellee (Cross Appellant), v. The PILLSBURY COMPANY, Defendant-Appellant (Cross Appellee).
• Court: U.S. Court of Appeals — Seventh Circuit

452 F.2d 621 (1971)

FOREST LABORATORIES, INC., Plaintiff-Appellee (Cross Appellant), v. The PILLSBURY COMPANY, Defendant-Appellant (Cross Appellee).

Nos. 71-1318, 71-1319.

United States Court of Appeals, Seventh Circuit.

November 4, 1971.

Rehearing Denied December 10, 1971.

COPYRIGHT MATERIAL OMITTED

Ronald E. Lund, Minneapolis, Minn., C. Willard Hayes, Washington, D. C., Arthur H. Seidel, Milwaukee, Wis., Michael D. Ellwein, Minneapolis, Minn., for defendant-appellant-cross appellee; Quarles, Herriott, Clemons, Teschner & Noelke, Milwaukee, Wis., of counsel.

Arthur A. March, New York City, Maurice J. McSweeney, Milwaukee, Wis., Howard Solomon, New York City, James P. Brody, Foley, Sammond & Lardner, Milwaukee, Wis., for plaintiff-appellee-cross appellant.

Before DUFFY, Senior Circuit Judge, and CUMMINGS and PELL, Circuit Judges.

CUMMINGS, Circuit Judge.

Plaintiff, a corporation engaged in producing and packaging effervescent sweetener tablets, sued defendant Pillsbury Company, the well-known manufacturer of food products, alleging that Pillsbury had purloined certain Forest trade secrets.¹ Apart from an antitrust count that was subsequently dismissed, the complaint was based on diversity of citizenship, and the parties are in accord that Wisconsin law is governing.²

After hearing the testimony of various witnesses and considering the exhibits, the district court agreed with plaintiff that it had successfully developed a process for packing effervescent sweetener tablets so as to lengthen their shelf life, Forest Laboratories, Inc. v Formulations, Inc., 299 F.Supp. 202 (E.D.W.1969). One step of this packaging procedure was adjudged to be plaintiff's confidential trade secret.³ That step was described as follows: "Before packaging, the tablets are to be tempered in a room having 40% or less relative humidity for a period of between 24 to 48 hours."

In determining what is a trade secret, Wisconsin applies the rule of the Restatement of Torts. Abbott Laboratories v. Norse Chemical Corporation, 33 Wis.2d 445, 456, 147 N.W.2d 529 (1967). A trade secret is defined in Section 757, comment (b), of the Restatement as follows:

"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 * * * process of * * * treating or preserving materials * * *."

This definition is clearly broad enough to cover the above-described tempering step employed by Forest. The standards for determining trade secrets are well set forth in Cataphote Corporation v. Hudson, 422 F.2d 1290, 1293-1294 (5th Cir. 1970). It was there noted that uniqueness in the patent law sense is not an essential element of a trade secret, for the patent laws are designed to encourage invention, whereas trade secret law is designed to protect against a breach of faith. However, the trade secret must "possess at least that modicum of originality which will separate it from everyday knowledge." Cataphote Corporation v. Hudson, 444 F.2d 1313, 1315 (5th Cir. 1971). As stated in an authoritative treatise on this subject:

"As distinguished from a patent, a trade secret need not be essentially new, novel or unique; therefore, prior art is a less effective defense in a trade secret case than it is in a patent infringement case. The idea need not be complicated; it may be intrinsically simple and nevertheless qualify as a secret, unless it is in common knowledge and, therefore, within the public domain." 2 Callman, Unfair Competition, Trademarks and Monopolies § 52.1 (3d ed., 1968).

Before finally determining that this tablet-tempering step was a trade secret, the district court weighed the six factors prescribed by Abbott Laboratories, supra, and the Restatement. They are:

1. The extent to which the information is known outside of the claimant\'s business.

2. The extent to which it is known by employees and others involved in his business.

3. The extent of measures taken by him to guard the secrecy of the information.

4. The value of the information to him and his competitors.

5. The amount of effort or money expended by him in developing the information.

6. The ease or difficulty with which the information could be properly acquired or duplicated by others.

The evidence which was discussed in the district court's opinion (299 F.Supp. at 206-207) and will not be reiterated here satisfied the district court and satisfies us that these criteria were met by plaintiff until it had obtained a patent on March 16, 1965, disclosing the tablet-tempering step. Since the element of secrecy evaporated with the issuance of the patent, the district court properly held that Pillsbury should not be held liable after the issuance of the patent.⁴

Even though it allegedly started using Forest's trade secret in Omaha, Nebraska, commencing in January 1964, Pillsbury advances several contentions against liability. First, Pillsbury relies on the fact that its tempering was done in closed containers, whereas Forest's method utilized open containers. However, there was testimony that the tablets would still equilibrate in closed containers, and might do so in a day or two if the container were only in a dry environment. In any event, the user of another's trade secret is liable even "if he uses it with modifications or improvements upon it effected by his own efforts," as long as the substance of the process used by the actor is derived from the other's secret.⁵ The purpose of Forest's and Pillsbury's tablet tempering was to place the tablets in an ambient condition. In our opinion, there was insufficient difference in the two methods to absolve Pillsbury from liability.

Pillsbury purchased the assets of Tidy House Corporation on June 1, 1960. The district court found that the trade secret had been divulged by Forest to Tidy House on a confidential basis and that as Tidy House's successor, Pillsbury was bound by the confidential disclosure to Tidy House. On the state of this record⁶ we cannot sustain the district court's conclusion. The well settled rule of American jurisdictions, including Wisconsin, is that a corporation which purchases the assets of another corporation does not, by reason of succeeding to the ownership of property, assume the obligations of the transferor corporation. 15 Fletcher, Cyclopedia of the Law of Private Corporations, § 7122 (1961 Rev. Vol.); Pennison v. Chicago, Milwaukee & St. Paul Ry. Co., 93 Wis. 344, 67 N.W. 702 (1896); Kloberdanz v. Joy Mfg. Co., 288 F.Supp. 817, 820 (D.Colo.1968); International Ass'n of Machinists and Local Lodge No. 954 v. Shawnee Indus., Inc., 224 F.Supp. 347, 352 (W.D.Okl.1963). Exceptions to this rule exist where (a) the purchasing corporation expressly or impliedly agrees to assume the liabilities of the seller, (b) the transaction amounts to a consolidation or merger of the two companies, (c) the purchasing corporation is merely a continuation of the selling corporation, or (d) the transaction is entered into fraudulently to escape liability. Fletcher, supra, at 191-195; Kloberdanz v. Joy Mfg. Co., supra; International Ass'n of Machinists and Local Lodge No. 954 v. Shawnee Indus., Inc., supra.

There is no evidence that Pillsbury expressly agreed to assume all the liabilities and obligations of Tidy House, and in the absence of the purchase agreement⁷ or any evidence of conduct or representations by Pillsbury that could support it, we cannot find an implied assumption of liabilities. Cf. Bouton v. Litton Indus., Inc., 423 F.2d 643 (3d Cir. 1970). Since no new corporation emerged from the transaction, a consolidation did not occur. 15 Fletcher, op. cit. § 7041, at 6-8. Contrary to the district court's statement, what evidence there was indicated that not all the assets of Tidy House were sold to Pillsbury.⁸ Apparently Tidy House, Inc. continued its corporate existence after the sale and leased to Pillsbury the buildings housing the facilities it had sold. There is no indication of the financial situation or the extent of the corporate activity of Tidy House following the transaction. Consequently, again on the strength of this record, we cannot conclude that the sale of assets amounted to a merger. Kloberdanz v. Joy Mfg. Co., supra, 288 F.Supp. at 821; see Copease Mfg. Co. v. Cormac Photocopy Corp., 242 F.Supp. 993, 1013 (S.D.N.Y.1965). Pillsbury can hardly be said to be a mere continuation of Tidy House since the transfer of assets was not a part of a reorganization. 15 Fletcher, op. cit. §§ 7122 at 195-196, 7205 at 391-394. And finally there is no suggestion whatever that Pillsbury was acting in bad faith when it purchased the Tidy House business. In sum, we are not convinced that Pillsbury subjected itself to the obligation of secrecy as Tidy House's "successor." Moreover, the knowledge of Tidy House's employees cannot properly be imputed to Pillsbury just because they went to work for Pillsbury. Conmar Products Corp. v. Universal Slide Fastener Co., Inc., 172 F.2d 150, 156-157 (2d Cir. 1949). See Ferroline Corp. v. General Aniline & Film Corp., 207 F.2d 912, 923 (7th Cir. 1953).

Section 757(b) of the Restatement of Torts provides:

"One who discloses or uses another\'s trade secret, without a privilege to do so, is liable to the other if

* * * * * *

"(b) his disclosure or use constitutes a breach of confidence reposed in him by the other in disclosing the secret to him * * *."

Since Pillsbury does not stand in the shoes of Tidy House, plaintiff's confidant, Pillsbury's use of the secret does not come within the confines of § 757(b).

Nevertheless, even though Pillsbury is not liable under § 757(b) of the Restatement of Torts for using Forest's trade secret as Tidy House's successor, the evidence shows that Pillsbury acquired actual knowledge of the confidentiality of the disclosure made by Forest to Tidy House. Thus Mr. Richard Egan, a...