Futurecraft Corp. v. Clary Corp.

• Decision Date: 29 June 1962
• Parties: FUTURECRAFT CORPORATION, a corporation, Plaintiff and Appellant, v. CLARY CORPORATION, a corporation, and Roderick Koutnik, Defendants and Respondents. Civ. 25602.
• Court: California Court of Appeals Court of Appeals

Page 198

23 Cal.Rptr. 198

205 Cal.App.2d 279

FUTURECRAFT CORPORATION, a corporation, Plaintiff and Appellant, v. CLARY CORPORATION, a corporation, and Roderick Koutnik, Defendants and Respondents.

Civ. 25602.

District Court of Appeal, Second District, Division 1, California.

June 29, 1962.

Gibson, Dunn & Crutcher, Julian O. von Kalinowski, Charles H. Phillips, Los Angeles, for appellant.

Lyon & Lyon, Lewis E. Lyon, R. Douglas Lyon, Los Angeles, for respondent Clary Corp.

Whyte & Schifferman, John Whyte, Robert P. Schifferman, Los Angeles, for respondent Koutnik.

FOURT, Justice.

This is an unfair competition action brought by Futurecraft Corporation (hereinafter referred to as Futurecraft) for an injunction, damages and an accounting against a former employee, Roderick Koutnik (hereinafter referred to as Koutnik) and Koutnik's new employer, Clary Corporation (hereinafter referred to as Clary), for the wrongful use and disclosure of certain valve designs claimed to be confidential to and the trade secrets of Futurecraft. Futurecraft appeals from a judgment in favor of both defendants entered by the court below after a trial limited by that court to the following issue:

'What, if any, trade secret, embraced within the issues as established by the pleadings, stipulations and pretrial order, became entrusted to the defendant Roderick Koutnik while he was an employee of the plaintiff?' (Emphasis added.)

The trial of the matter was protracted, extending over a period of 14 weeks, and the reporter's transcript of the proceeding is over 5200 pages.

On February 23, 1960, the trial judge filed his notice (i. e. memorandum) of decision. ¹ The findings of fact and conclusions of law, ² and judgment ³, were filed August 8, 1960.

Before making any reference to the facts it will be helpful to bring the problems presented into sharp focus. Plaintiff's case does not involve a claim of a trade secret alleged to exist in the know-how; nor the process under which the valves were made; nor any machine; nor the tools used in the process of manufacture of the valve. This is not a know-how case or a case arising out of alleged trade secrets which underlie the manufacture of the valves in issue. Nor does plaintiff complain of any improper disclosure by Koutnik of assertedly confidential information while he was in the employ of plaintiff. The basis of plaintiff's calim for relief is, as set forth in the opening brief, '(1) that the various design features are protectible trade secrets, as such, and (2) that, at any rate, Koutnik had expressly agreed that he would not utilize these designs (and particularly the paragraph V design) in competition with Futurecraft.' (Emphasis added.)

Futurecraft and Clary are, and since at least 1953 or early 1954 have been, competitors in the design, manufacture and sale of valves and valve components for guided missiles and rockets for the defense program of the United States. Koutnik was employed by Futurecraft during three separate periods (part-time from 1949 to 1951, and full-time from July 1, 1951, to April 25, 1952, and from January 31, 1953, to March 17, 1956) for the purpose of inventing, designing and developing such valves and valve components.

Koutnik had been employed by the California Institute of Technology at its Jet Propulsion Laboratory from September 15, 1947, to May 11, 1951, and from April 28, 1952, to January 25, 1953.

The trial court stated in his memorandum of decision (footnote 1, para. IX) that when Koutnik entered the employ of Futurecraft 'he carried with him a good deal of knowledge concerning the art, science and mechanics of valve design and manufacture, and a good deal of skill in the application of that knowledge * * * [and that] [m]uch, probably most, of that knowledge had been acquired at the Jet Propulsion Laboratory of the California Institute of Technology * * * *.' (See finding 2, footnote 2.)

The particular valve designs forming the subject matter of this action are described in paragraphs V, VI, VII and IX of the first amended and supplemental complaint as amended. Essentially these consist of two types of valve mechanisms. The socalled Paragraph V valve is a high-pressure valve mechanism embodying an arrangement of resilient entrapped O-rings, annular shoulders and stop means. It is used in the propellant system of rockets and guided missiles. The Paragraph IX valve is an adjustable pressure regulator valve in combination with a pressure relief valve. The Paragraphs VI and VII mechanisms are modifications of the basic Paragraph V valve. Plaintiff had filed patent applications on certain features of its Paragraphs V and IX valves, both of which applications were still pending at the time judgment was entered below. ⁴ The information alleged by Futurecraft to be confidential to it consists of a number of specific design features of the respective valves.

It was stipulated that the valves which are the subject of the action are sold by plaintiff to rocket and missile contractors and subcontractors of the United States government for use in, or in conjunction with, rockets, missiles and airplanes and/or components thereof, and that the government has been the ultimate purchaser of these items.

All of the parties to this action have presented scholarly dissertations on the law of trade secrets--what a trade secret is and the tests which should be utilized to ascertain whether a trade secret exists.

It is appropriately stated in appellant's opening brief:

'* * * this Court will be presented with two basically divergent approaches, or viewpoints, on this definitional problem. The defendants successfully urged the trial court to adopt a rigidly narrow and absolutist view, based upon a concept that a trade secret must be 'an item of private property' and that one can have no 'property rights' in an idea if someone else--anyone else--knows about it.

'In contrast to defendants' property rights concept, plaintiff urged below and urges here a more realistic, equitable and common sense approach (which is widely accepted and applied in other jurisdictions), based upon the Restatement view that a trade secret may consist of anything 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 * * *' (Emphasis added.) Rest., Torts, § 757, Comment b.'

Before turning to the 'definitional problem' of what constitutes a trade secret, it is well to mention a basic underlying problem, namely, the legal basis upon which plaintiff predicates its right to relief. This problem stems from the fact that ownership of a trade secret does not give the owner a monopoly in its use, but merely a proprietary right which equity protects against usurpation by unfair means. (See Wexler v. Greenberg, 399 Pa. 569 ; I Nims, Unfair Competition and Trade-Marks § 141 et seq. (4th ed. 1947); 2 Callman, Unfair Competition and Trade-Marks § 51 et seq. (2d ed. 1950); Ellis, Trade Secrets § 1 (1953). See also, comment (a), Restatement, Torts § 757.) It is stated by Justice Musmanno in Spring Steels, Inc. v. Molloy, 400 Pa. 354 quoting from Wexler v. Greenberg, supra, 160 A.2d 430, 434, that:

"* * * The employer thus has the burden of showing two things: (1) a legally protectable trade secret; and (2) a legal basis, either a covenant or a confidential relationship, upon which to predicate relief." (Emphasis added.)

The case of Wexler v. Greenberg, supra, 160 A.2d 430, deals primarily with the 'legal basis * * * upon which to predicate relief' problem. In many respects the Wexler case aptely illustates the situation presented in the case at bar.

In Wexler, defendant Greenberg was a qualified chemist in the sanitation and maintenance field. In March of 1949 he was employed by plaintiff as its chief chemist and continued there for approximately eight years. In the performance of his duties he spent approximately half of his working time in plaintiff's laboratory where he would analyze and duplicate competitor's products and then use the resulting information to develop various new formulas. In August 1957 defendant Greenberg left plaintiff and went to work for defendant corporation. Plaintiff sought to enjoin the defendants from disclosing and using certain formulas and processes pertaining to the manufacture of certain sanitation and maintenance chemicals which plaintiff claimed to be its trade secrets. The Chancellor found that the formulas constituted trade secrets and that their appropriation was in violation of the duty that Greenberg owed to plaintiff by virtue of his employment and the trust reposed in him.

The Supreme Court of Pennsylvania assumed that certain of the formulas were trade secrets of the plaintiff but reversed and stated in pertinent part as follows:

' We are initially concerned with the fact that the final formulations claimed to be trade secrets were not disclosed to Greenberg by the appellees during his service or because of his position. [Italics shown.] Rather, the fact is that these formulas had been developed by Greenberg himself, while in the pursuit of his duties as Buckingham's [i. e. plaintiff] chief chemist, or under Greenberg's direct supervision. We are thus faced with the problem of determining the extent to which a former employer, without the aid of any express covenant [italics shown], can restrict his ex-employee, a highly skilled chemist, in the uses to which this employee can put his knowledge of formulas and methods he himself developed during the course of his former employment because this employer claims these same formulas, as against the rest of the world, as his trade secrets. This problem becomes particularly significant when one recognizes that Greenberg's situation is not uncommon. In this era of electronic, chemical, missile and atomic development, many skilled technicians and expert employees are currently in the process of developing...