Rapco Foam, Inc. v. Scientific Applications

• Decision Date: 08 November 1979
• Docket Number: No. 78 Civ. 2874.,78 Civ. 2874.
• Citation: 479 F. Supp. 1027
• Parties: RAPCO FOAM, INC., Plaintiff, v. SCIENTIFIC APPLICATIONS, INC., Defendant.
• Court: U.S. District Court — Southern District of New York

479 F. Supp. 1027

RAPCO FOAM, INC., Plaintiff, v. SCIENTIFIC APPLICATIONS, INC., Defendant.

No. 78 Civ. 2874.

United States District Court, S. D. New York.

November 8, 1979.

Aberman & Greene, New York City, for plaintiff by David Greene, Martin Lichter, New York City.

Pollack & Kaminsky, New York City, for defendant by T. Barry Kingham, Daniel Pollack, New York City.

SOFAER, District Judge:

This case is before the court on plaintiff's motion for a preliminary injunction.

Plaintiff Rapco Foam, Inc. ("Rapco") is a New York corporation in the business of manufacturing urea-formaldehyde foam, a product used in thermal and acoustical insulation in residential commercial premises, under the name Rapco Foam. Rapco Foam is manufactured in a two-step process. First, a urea-formaldehyde resin precondensate ("UF resin") is manufactured and packaged in 50-gallon drums. Second, the resin is combined, at the time of installation, with a foaming agent and air to produce the insulating foam.

In October, 1973, Rapco entered into a distributorship agreement with defendant Scientific Applications, Inc. ("Scientific"), an Iowa corporation. Under that contract, Rapco agreed to manufacture UF resin and the foaming agent at Scientific's facility in Mt. Pleasant, Iowa. Scientific was to sell and distribute the product in an exclusive territory. Scientific agreed, among other things, to supply the raw materials, utilities, and manufacturing space required to enable Rapco to manufacture the resin and foam.

Rapco began manufacturing its foam at Scientific's Mt. Pleasant facility in November 1973, and continued to do so until December 27, 1978. Precautions were taken by Rapco to keep its process secret from Scientific employees, and those who participated in manufacturing the resin signed secrecy agreements.¹ Between 1973 and 1978, Scientific distributed Rapco's product, and did no manufacturing. During that period, however, Scientific hired a chemist named Rila, allegedly to work on quality control, but in reality to develop a formula for resin that Scientific could itself produce. On December 27, 1978, Scientific began manufacturing a UF resin at its Mt. Pleasant plant, using its own equipment and raw materials. Rapco claims that Scientific's independent activities violate its contract with Rapco, and that Scientific's resin is in fact an unlawful appropriation of RAPCO's trade secret in Rapco Foam. It has moved the court to enjoin Scientific from using its trade secrets in the manufacturing of UF resin and from committing acts of unfair competition in the sale of UF resin.²

The standard governing motions for preliminary injunctions in this Circuit was recently reformulated in Dallas Cowboys Cheerleaders, Inc. v. Pussycat Cinema, Ltd., 604 F.2d 200 (2d Cir. 1979):

A preliminary injunction is proper where the plaintiff establishes possible irreparable harm and either (1) probable success on the merits or (2) sufficiently serious questions going to the merits to make them a fair ground for litigation and a balance of hardships tipping decidedly in the movant's favor.

See Selchow & Righter Co. v. McGraw-Hill Book Co., 580 F.2d 25, 27 (2d Cir. 1978); Triebwasser & Katz v. American Telephone & Telegraph Co., 535 F.2d 1356, 1359 (2d Cir. 1976); Mulligan, Preliminary Injunction in the Second Circuit, 43 Brooklyn L.Rev. 831 (1977).

On the basis of an evidentiary hearing on plaintiff's motion, it seems clear that plaintiff has proved probable success on the merits of its trade secrets claim, but has failed to show possible irreparable injury. As to its second asserted ground for preliminary relief, Rapco has failed at this stage to demonstrate that a substantial claim of unfair competition warranting preliminary injunctive relief exists.

I. Trade Secrets

In order to succeed on the merits of its trade secret claim, plaintiff must demonstrate that (1) it possessed a trade secret, and (2) defendant is using that trade secret in breach of an agreement, confidence, or duty, or as a result of discovery by improper means. Restatement of Torts § 757 (1937).

"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." Id., comment b. Among the factors to be considered in determining whether a particular process is a trade secret are the degree of secrecy surrounding the process both within and without the plaintiff's business, the efforts expended by the plaintiff to develop the process and to preserve its secrecy, the value of the process to the plaintiff and its competitors, and the difficulty with which the process could be duplicated by others. Id.

Rapco has demonstrated that its process for manufacturing UF resin, insofar as it encompasses its formula and preparation procedures, is a trade secret. Rapco purchased the process from a German corporation in 1972 pursuant to a licensing agreement made exclusive in 1973. Rapco agreed orally to keep the process secret and has taken a number of steps to preserve its secrecy including requiring all Rapco employees to sign secrecy agreements and restricting access to plants at which UF resin is manufactured (Tr. 5-11). Rapco's expert, Dr. Graham Allen, testified that the process remains secret and no evidence has been introduced to show that the process is being used by any Rapco competitor other than Scientific. Furthermore, it is clear from Dr. Allan's testimony that reproducing Rapco's process, without first obtaining information in Rapco's possession, would be time-consuming and expensive. (Tr. 60-82).

Defendant claims that the cooking procedures for UF resin are a matter of public knowledge and are therefore not trade secrets. This argument is unconvincing. First, in making this claim, defendant carefully refers to "general cooking procedures," not to the specific ones developed by plaintiff. Second, the trade secret status of Rapco's process has, from the beginning, been recognized by Scientific. On November 23, 1973, J. D. Schimmelpfenig, Scientific's Chairman and Executive Vice President, signed a letter sent by Charles Stillman, Rapco's President, agreeing to "keep our formulations, (which you recognize as secret and proprietary) confidential and secret. . . ." (Pltf's Exh. 4). Significantly, Scientific's recognition of Rapco's trade secret was not limited to this agreement concerning chemical "formulations." In June 1974, Schimmelpfenig sent a letter to Rapperswill Corporation, Rapco's parent, in which he stated that "the manufacturing process remains your trade secret." (Pltf's Exh. 6).³

The evidence presented in this proceeding supports plaintiff's contention that defendant has wrongfully appropriated its trade secret and is currently using it in the production of UF resin. Plaintiff's expert, Dr. Allan, testified that the ingredients, formula, and procedures used by Scientific in manufacturing its resin are identical to those contained in the Rapco trade secret. He convincingly explained how extremely likely it is that Scientific personnel essentially copied Rapco's process in developing what they now sell as their own product. (Tr. 60-79).

Defendant's argument that its process was developed independently by its employee, Dr. Clinton Rila, is untenable. Dr. Rila was hired by Scientific ostensibly to perform services in the area of quality control of UF resin. From the beginning, however, Rila worked on developing a formula and process for the production of UF resin. (E. g., Rila Dep. 77-79). This was never revealed to Rapco. The record shows that Rila exploited his access to the Mt. Pleasant facility to gather information about the production of Rapco Foam. Rila's own deposition testimony reveals many of his various investigations into Rapco's formula and process, including, among other things, conversations with a former Rapco employee then employed by Scientific (e. g., 77-79); conversations with Rapco's plant manager (e. g., 75, 79); observation of important steps in the Rapco process (e. g., 40, 226, 234); detailed analyses of finished resin and raw resin (cooked resin before the addition of additives) (e. g., 217-18, 254, 262, 268, Pltf's Exh. 23); and observation and copying of "cook sheets" that were used by Rapco to record information about each reaction in the preparation of UF resin (e. g., 68, 311-12).

Taken alone, Rila's deposition may be less than conclusive as to the extent to which the information he gathered about Rapco's process contributed to his development of Scientific's virtually identical process. Dr. Allan's testimony, however, based on his review of Rila's deposition and its exhibits, makes clear what happened. Allan explained, without effective contradiction, the enormous difficulty a scientist of Dr. Rila's background would encounter in independently arriving at Rapco's process. He explained in detail how the information gathered by Dr. Rila at the Mt. Pleasant plant could have been (and undoubtedly was) used in reproducing Rapco's trade secret.⁴ Rila's persistent and repeated failure to sign a secrecy agreement during this period tends to confirm that his activities were consciously aimed at exploiting Rapco's secrets. (Tr. 21-22).

Plaintiff having shown the substantial identity of defendant's process to its trade secret, and having shown convincingly the means by which defendant could have appropriated that secret, the burden falls on defendant to demonstrate its independent development of the process. See, e. g. Droeger v. Welsh Sporting Goods Corp., 541 F.2d 790, 793 (9th Cir. 1976); 2 Milgrim, Trade Secrets § 7.072 (1978). But defendant has thus far offered nothing substantial to controvert plaintiff's case. Dr. Rila's assertions are unconvincing, given his relative inexperience, and given the objective and uncontroverted evidence establishing his repeated efforts to uncover...