Idx Systems Corp. v. Epic Systems Corp.

• Decision Date: 01 April 2002
• Docket Number: No. 01-3228.,No. 01-3083.,01-3083.,01-3228.
• Citation: 285 F.3d 581
• Parties: IDX SYSTEMS CORPORATION, Plaintiff-Appellant, v. EPIC SYSTEMS CORPORATION, University of Wisconsin Medical Foundation, Mitchell Quade, and Michael Rosencrance, Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

285 F.3d 581

IDX SYSTEMS CORPORATION, Plaintiff-Appellant, v. EPIC SYSTEMS CORPORATION, University of Wisconsin Medical Foundation, Mitchell Quade, and Michael Rosencrance, Defendants-Appellees.

No. 01-3083.

No. 01-3228.

United States Court of Appeals, Seventh Circuit.

Argued January 24, 2002.

Decided April 1, 2002.

Kenneth W. Starr (argued), Kirkland & Ellis, Washington, DC, William A. Streff, Kirkland & Ellis, Chicago, IL, for Plaintiff-Appellant IDX Systems Corp. in No. 01-3083.

William A. Streff, Kirkland & Ellis, Chicago, IL, for Plaintiff-Appellant IDX Systems Corp. in No. 01-3228.

Anthony A. Tomaselli, Nicholas J. Seay (argued), Quarles & Brady, Barbara A. Neider (argued), Stafford Rosenbaum, Steven M. Streck, Axley Brynelson, Jon G. Furlow (argued), Michael, Best & Friedrich, Madison, WI, for Defendant-Appellees Epic Systems Corp., Mitchell Quade, Michael Rosencrance and University of Wisconsin Medical Foundation.

Michael P. Crooks, Peterson, Johnson & Murray, Madison, WI, for Defendant-Appellee Westfield Ins. Co.

Before EASTERBROOK, RIPPLE, and DIANE P. WOOD, Circuit Judges.

EASTERBROOK, Circuit Judge.

Both IDX Systems and Epic Systems make software for use in managing the financial side of a medical practice: billing, insurance reimbursement and other collections, and the like. During the 1980s IDX sold this software package to two medical groups that later merged into the University of Wisconsin Medical Foundation, which now comprises more than 1,000 physicians. The Foundation continued to use IDX software until December 2000, when it switched to software developed by Epic. IDX believes that Mitchell Quade and Michael Rosencrance, former employees of Epic who came to manage data processing at the Foundation, not only instigated this change but also used their new positions to transfer valuable information to Epic. According to IDX's complaint, over the course of a year Quade and Rosencrance personally, and with the aid of other Foundation employees, furnished Epic with details about how IDX's software works, enabling Epic to enhance its own package and ultimately take the Foundation's business — and to match up better against IDX in the competition for other customers.

IDX's complaint under the diversity jurisdiction of 28 U.S.C. § 1332 charges the Foundation, Quade, and Rosencrance with stealing IDX's trade secrets and breaking contractual promises of confidentiality; it charges Epic with tortiously inducing the other defendants to do these things. The district court dismissed the tort claims against Epic on the pleadings, observing that Wis. Stat. § 134.90(6)(a) overrides any theory that conflicts with the state's law of trade secrets. Later it pared all contract-based claims out of the case, ruling that the confidentiality agreements are invalid under Wisconsin law (which the parties agree governs) because they do not contain temporal and geographic limitations. Finally, the court granted summary judgment to the defendants on the trade-secret claim, after concluding that IDX had failed to identify with specificity the trade secrets that it accuses the defendants of misappropriating. 165 F.Supp.2d 812 (W.D.Wis.2001). We shall start where the district court ended: with the trade-secret claim.

Trade secrets are a subset of all commercially valuable information. Wisconsin has followed the Uniform Trade Secrets Act in defining "trade secret" this way:

"Trade secret" means information, including a formula, pattern, compilation, program, device, method, technique or process to which all of the following apply:

1. The information derives independent 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.

2. The information is the subject of efforts to maintain its secrecy that are reasonable under the circumstances.

Wis. Stat. § 134.90(1)(c). Thus to show that particular information is a trade secret, a firm such as IDX must demonstrate that it is valuable, not known to others who might profit by its use, and has been handled by means reasonably designed to maintain secrecy. Like the district judge, we think that IDX failed to do this. It has been both too vague and too inclusive, effectively asserting that all information in or about its software is a trade secret. That's not plausible — and, more to the point, such a broad assertion does not match up to the statutory definition. Reluctance to be specific is understandable; the more precise the claim, the more a party does to tip off a business rival to where the real secrets lie and where the rival's own development efforts should be focused. Still, tools such as protective orders are available to make this process less risky, and unless the plaintiff engages in a serious effort to pin down the secrets a court cannot do its job.

According to IDX, "a 43-page description of the methods and processes underlying and the inter-relationships among various features making up IDX's software package" is specific enough. No, it isn't. These 43 pages describe the software; although the document was created for this litigation, it does not separate the trade secrets from the other information that goes into any software package. Which aspects are known to the trade, and which are not? That's vital under the statutory definition. Likewise, IDX's tender of the complete documentation for the software leaves mysterious exactly which pieces of information are the trade secrets. As we remarked in Composite Marine Propellers, Inc. v. Van Der Woude, 962 F.2d 1263, 1266 (7th Cir.1992), a plaintiff must do more than just identify a kind of technology and then invite the court to hunt through the details in search of items meeting the statutory definition. See also AMP Inc. v. Fleischhacker, 823 F.2d 1199, 1203 (7th Cir.1987). What is more, many of the items that appear in the 43-page description, such as the appearance of data-entry screens, are exceedingly hard to call trade secrets: things that any user or passer-by sees at a glance are "readily ascertainable by proper means". Perhaps screen displays could be copyrighted, but no copyright claim has been advanced, and a trade-secret claim based on readily observable material is a bust. Minnesota Mining & Manufacturing Co. v. Pribyl, 259 F.3d 587 (7th Cir.2001), on which IDX principally relies, did not involve such self-revealing information. Other details, such as the algorithms that the software uses to do real-time error checking (a vaunted feature of IDX's software), may be genuine trade secrets, but IDX has not tried to separate them from elements such as its input and output formats. Nor does it contend that the defendants decompiled the object code or otherwise obtained access to the algorithms that power the program; it alleges only that Foundation transferred to Epic those details that ordinary users of the software could observe without reverse engineering.

Because (as what we have already written illustrates) it is hard to prove that particular information qualifies as a trade secret, many producers of intellectual property negotiate with their customers for additional protection. This is a step that Wisconsin permits. See ProCD, Inc. v. Zeidenberg, 86 F.3d 1447 (7th Cir.1996) (Wisconsin law). Following § 7 of the Uniform Trade Secrets Act, Wis. Stat. § 134.90(6) provides:

(a) Except as provided in par. (b), this section displaces conflicting tort law, restitutionary law and any other law of this state providing a civil remedy for misappropriation of a trade secret.

(b) This section does not affect any of the following:

1. Any contractual remedy, whether or not based upon misappropriation of a trade secret.

2. Any civil remedy not based upon misappropriation of a trade secret.

3. Any criminal remedy, whether or not based upon misappropriation of a trade secret.

IDX and the Foundation (through its predecessors in interest) agreed to the sort of contractual remedy preserved in § 134.90(6)(b)1. The Foundation promised not to allow the software and related materials "furnished by" IDX to be "examined... for the purpose of creating another system" and vowed in addition not to "use or disclose or divulge to others any data or information relating to" the system or "the technology, ideas, concepts, know-how, and techniques embodied therein." IDX has evidence (enough to survive summary judgment) that the Foundation, Quade, and Rosencrance broke these promises by describing IDX's system in detail to Epic and helping it duplicate those features that the Foundation liked. Nonetheless, the district judge held, the promises are unenforceable because they are unlimited in temporal and...