K-2 Ski Co. v. Head Ski Co., Inc., K-2

• Decision Date: 29 October 1974
• Docket Number: Nos. 72-2823 and 72-2497,K-2,s. 72-2823 and 72-2497
• Citation: 506 F.2d 471,183 USPQ 724
• Parties: SKI COMPANY, a corporation, Plaintiff-Appellant, v. HEAD SKI CO., INC., a Delaware corporation and William Crocker, Defendants-Appellees.SKI COMPANY, a corporation, Plaintiff-Appellee, v. HEAD SKI CO., INC., a Delaware corporation and William Crocker, Defendants-Appellants.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 471

506 F.2d 471

183 U.S.P.Q. 724

K-2 SKI COMPANY, a corporation, Plaintiff-Appellant, v. HEAD SKI CO., INC., a Delaware corporation and William

Crocker, Defendants-Appellees.

K-2 SKI COMPANY, a corporation, Plaintiff-Appellee, v. HEAD SKI CO., INC., a Delaware corporation and William

Crocker, Defendants-Appellants.

Nos. 72-2823 and 72-2497.

United States Court of Appeals, Ninth Circuit.

Oct. 29, 1974.

Theodore J. Collins (argued), Perkins, Coie, Stone, Olsen & Williams, Seattle, Wash., for appellant and cross-appellee.

Don Paul Badgley (argued), Bogle Gates, Dobrin, Wakefield & Long, Seattle, Wash., for appellees and cross-appellants.

Before MERRILL and WALLACE, Circuit Judges, and SKOPIL, ^* District judge.

OPINION

WALLACE, Circuit Judge:

K-2 Ski Company (K-2), a Washington corporation with its principal place of business in Washington, brought this action based upon diversity jurisdiction against Head Ski Company (Head), a Delaware corporation with its principal place of business in Maryland, and William Crocker, a citizen of Maryland, seeking damages and injunctive relief. K-2 alleged that subsequent to his employment by K-2, Crocker began working for Head and disclosed trade secrets. The district court issued a preliminary injunction against Head and Crocker in April, 1970. That action was reversed by us in July 1972. In the interim, the district court had appointed a special master to hear this case. The master made detailed findings of fact and concluded that Head had unlawfully used K-2 trade secrets. Accordingly, the district court issued a permanent injunction barring Head from using one of the K-2 trade secrets for one year and another secret for two years.

Head appeals contending (1) that K-2 is barred from claiming trade secret protection because it failed to take reasonable precautions to maintain secrecy, (2) that the duration of the injunction was excessive, (3) that the district court erred in awarding attorney's fees to K-2 and (4) that the district court erred in taxing the special master's fees against Head. K-2 cross-appeals contending that the court erred (1) in not finding the entire K-2 ski to be a trade secret and (2) in not awarding damages to K-2. We reverse the award of attorney's fees, remand the injunction and damage issues and affirm the remainder of the case.

I. THE FACTS

Head and K-2 are competing ski manufacturers. In the early 1960's, Head's metal-laminated skis dominated the quality ski market. By 1967, the new K-2 fiberglass skis had been marketed and the demand for the K-2 skis had grown significantly. Crocker was employed by K-2 from May, 1967, to February 13, 1970. Prior to Crocker's employment with K-2, he had no knowledge of the construction or production of skis nor had he had any background in engineering, manufacturing, shop practice or purchasing. Crocker had majored in political science in college and had been primarily involved in appliance and furniture retailing prior to joining K-2. By January 1, 1968, Crocker had advanced to the position of general superintendent of the K-2 manufacturing operations. In that position, he supervised all aspects of the production of skis, purchased all the materials and hired and fired employees. In July, 1969, Crocker's responsibilities were transferred to another employee and by the end of 1969, Crocker had become dissatisfied with his job at K-2 and contacted Head concerning employment. On January 26, 1970, after visiting the Head plant in Maryland, Crocker was offered a job at Head. Coupled with the offer of a base salary was a bonus which was contingent upon production of 5,000 skis with a wet-wrap process by the end of 1970. Crocker joined Head on February 16, 1970, but did not disclose to K-2 the name of his new employer. This action was filed on March 23, 1970.

II. SECRECY

Head argues that K-2 cannot claim trade secret protection because K-2 failed to take reasonable precautions to maintain the secrecy of its method of manufacturing its skis. In this diversity action we must look to state law for the substantive law of trade secrets. Since there is no Washington law on the issue before us and Maryland law relies on the Restatement of Torts 757, Servomation Mathias, Inc. v. Englert, 333 F.Supp. 9, 14 (M.D.Pa.1971); Space Aero Products Co. v. R. E. Darling Co., Inc., 238 Md. 93, 208 A.2d 74, cert. denied, 382 U.S. 843, 86 S.Ct. 77, 15 L.Ed.2d 83 (1965), we agree with the district court that there is no choice of law problem and the general common law and section 757 of the Restatement of Torts should apply.

There are two common law doctrines on secrecy: (1) absolute secrecy and (2) relative secrecy. The better view, and the one we think both Washington and Maryland would espouse, ¹ is the majority view of relative secrecy which has been adopted by the Restatement of Torts 757. 12 Business Organizations, Milgrim, Trade Secrets 2.07(2) at 2-48 (1974). ² This view requires a substantial element of secrecy, Clark v. Bunker, 453 F.2d 1006, 1009 (9th Cir. 1972), and that reasonable measures under the circumstances be taken to protect the secret. 12 Business Organizations, Milgrim, Trade Secrets 2.04, at 2-16 (1974). The necessary determination of 'whether such a degree of secrecy existed in a particular case is a question of fact(,)' Clark v. Bunker, supra, 453 F.2d at 1010, accord, Milgrim, supra, 2.07, at 2-44, and the trier of fact must consider 'the entirety of circumstances surrounding use' of the secret. Milgrim, supra, 2.04, at 2-16. Thus, the clearly erroneous standard of review applies to this issue. Fed.R.Civ.P. 52(a).

Two particular instances which Head cites as examples of the lack of secrecy by K-2 merit brief attention. The Pellon Corporation, which supplied K-2 with a material which was vital to the production of K-2 skis, sought to exhibit K-2 skis in its display at a conference in Washington, D.C. Crocker agreed to send the skis. The conference was held the same month Crocker left K-2 to go to work for Head. K-2 sent a 'competition' model ski which was intact and a 'holiday' model which had been cut lengthwise. None of the Head personnel attended the conference and there is no evidence of attendance by any other ski manufacturer. The district court found that this did not constitute a public disclosure and this finding is not clearly erroneous. See Clark v. Bunker, supra, 453 F.2d at 1009-1010.

Occasionally, limited tours of the K-2 plant were conducted but personnel from competitor ski manufacturers were not permitted to view the ski manufacturing operation. The district court found that during these tours it was impossible to discover the K-2 procedure. The district court also found that even though the security at the plant was not tight, this did not destroy secrecy because the plant was located in a remote area. None of these findings are clearly erroneous.

III. THE INJUNCTION

The district court found that K-2 had established two trade secrets and that Head had unlawfully utilized them in its production of skis. Relying upon winston Research Corp. v. Minnesota Mining & Manufacturing Co., 350 F.2d 134, 141-142 (9th Cir. 1965), and Plant Industries, Inc. v. Coleman,287 F.Supp. 636, 645 (C.D.Cal.1968), the district court enjoined Head from using the base subassembly trade secret for two years and the surfacing veil secret for one year. We are satisfied that the appropriate duration for the injunction should be the period of time it would have taken Head, either by reverse engineering or by independent development, to develop its ski legitimately without use of the K-2 trade secrets. ³ The district court properly determined the period for injunctive relief but, in issuing its permanent injunctions, apparently did not take into account the period of time that Head had already been under the preliminary injunction.

Head argues that since the preliminary injunction lasted for 27 months, the two- and one-year injunctions are barred because Head has already been enjoined beyond the appropriate period of time necessary to deprive it of the benefits of using the K-2 trade secrets. This issue was not raised before the trial judge. While the general rule prohibits an appellate court from considering issues not urged before the lower court, we have said:

This (restraint) is essential in order that parties may have the opportunity to offer all the evidence they believe relevant to the issues which the trial (forum) is . . . to decide (and) in order that the litigants may not be surprised on appeal by final decision there of issues upon which they have had no opportunity to introduce evidence. Hormel v. Helvering, 312 U.S. 552, 556, 61 S.Ct. 719, 721, 85 L.Ed. 1037.

There is, however, no rigid and undeviating judicially declared practice under which courts of review invariably and under all circumstances decline to consider all questions which have not previously been specifically urged. Indeed there could not be without doing violence to the statutes which give federal appellate courts the power to modify, reverse or remand decisions 'as may be just under the circumstances.' 28 U.S.C.A. 2106. Exceptional cases or particular circumstances may prompt a reviewing court, where justice might otherwise result or where public policy requires, to consider questions neither pressed nor passed upon below. The power to raise and decide questions sua sponte is, however, to be exercised sparingly and with full realization of the restrictions and limitations inherent in its employment. Nuelsen v. Sorensen, 293 F.2d 454, 462 (9th Cir. 1961). Because the record does not contain any transcript of proceedings before the special master, we do not know whether Head argued there that the permanent injunctions should not issue because the preliminary injunction had already been in effect for over two years. The record does reflect that the trial judge read the master's report.

In Nuelsen, we stated:

Rather...