Rohm and Haas Co. v. Adco Chemical Co.

• Decision Date: 21 September 1982
• Docket Number: No. 82-5000,82-5000
• Citation: 215 USPQ 1081,689 F.2d 424
• Parties: ROHM AND HAAS COMPANY, a corporation, v. ADCO CHEMICAL COMPANY, a corporation, and the Thibaut & Walker Company, Inc., a corporation. Appeal of ROHM AND HAAS COMPANY.
• Court: U.S. Court of Appeals — Third Circuit

Page 424

689 F.2d 424

215 U.S.P.Q. 1081

ROHM AND HAAS COMPANY, a corporation, v. ADCO CHEMICAL COMPANY, a corporation, and the Thibaut &amp Walker Company, Inc., a corporation Appeal of ROHM AND HAAS COMPANY.

No. 82-5000.

United States Court of Appeals Third Circuit.

Argued July 29, 1982.

Decided Sept. 21, 1982.

Rudolf E. Hutz (argued), James M. Mulligan, Jr., Paul E. Crawford, Connolly, Bove & Lodge, Wilmington, Del., for appellant; George W. F. Simmons, Michael B. Fein, Rohm and Haas Co., Philadelphia, Pa., of counsel.

Lawrence F. Scinto (argued), Fitzpatrick, Cella, Harper & Scinto, New York City, for appellees; Edward E. Vassallo, Nels T. Lippert, New York City, of counsel.

Before GIBBONS, HUNTER, Circuit Judges and POLLAK, ^* District Judge.

OPINION OF THE COURT

JAMES HUNTER, III, Circuit Judge.

INTRODUCTION

This case involves a process which plaintiff uses in the manufacture of its "second generation" latex paint products. Plaintiff claimed below that its process was a trade secret which was misappropriated by the defendants. Plaintiff also claimed that defendants infringed Patent No. 2,795,564 dealing with plaintiff's "first generation" latex paint products. Defendants counterclaimed, charging plaintiff with unfair competition. The district court held the patent either invalid or not infringed, and denied all other claims of both parties. The only issue raised on appeal is the propriety of the district court's denial of relief on the trade secret claim.

We conclude that the district court erred in its application of law to the trade secret claim. We will reverse the court's decision, and remand solely for a determination of the appropriate relief.

FACTS

Prior to the development of the process claimed to be a trade secret, plaintiff had sold latex paint vehicles ¹ made using a process disclosed in Patent No. 2,795,564. In 1955 plaintiff embarked on a research campaign to develop a "second generation" latex paint vehicle "with improved qualities." App. at 1083-92. As the result of a seven year effort, plaintiff developed the process involved here (the "Process"), which plaintiff used in producing a paint vehicle with the desired qualities. ² Plaintiff used this vehicle in the manufacture of four highly successful products. Other manufacturers have tried to offer vehicles competitive with plaintiff's second generation vehicle, but failed. App. at 577-78. The defendants alone have been able to market vehicles with the same desirable qualities. App. at 362-65, 377, 579-81. Plaintiff contends that only revelations by one of plaintiff's former employees, Joseph Harvey, enabled defendants to produce these vehicles.

Joseph Harvey joined plaintiff in 1959 as a laboratory technician. From the outset of his employment, Harvey worked under plaintiff's scientists in the development of latex paints, including those incorporating the Process involved here. Plaintiff's laboratory notebooks in Harvey's handwriting contain repeated descriptions of the Process which Harvey carried out pursuant to plaintiff's instructions. Harvey's duties also gave him access to plaintiff's commercial process descriptions which detailed the Process.

In March 1967 Harvey signed an employment agreement in which he acknowledged that "any business or trade secrets, including secret processes of manufacture of Rohm and Haas Company, are the property of Rohm and Haas Company" and agreed "not to divulge such information to outsiders or other unauthorized persons either while employed by Rohm and Haas Company or afterwards." App. at 1416. During Harvey's tenure at Rohm and Haas, extensive security measures were in effect which Harvey acknowledged were intended to "keep the secrets in." App. at 1121-26, 1405-07. Harvey was reminded at his exit interview in June 1967 that he possessed confidential information and that he should contact plaintiff if he had any question concerning the extent of his obligation to preserve confidentiality. App. at 119-20. Harvey never contacted plaintiff. App. at 1122.

Defendants, Adco and Thibaut & Walker, are related corporations engaged in the manufacture and sale respectively of various chemicals. In 1968 defendants initiated a program to copy two of plaintiff's products which were made using the Process. App. at 344-47, 1214-15. To accomplish this task, defendants hired a Ph.D. chemist, Victor Meyer, whom defendants had retained as an independent consultant since 1963. App. at 406, 409-11.

After nearly two years of work, Dr. Meyer advised defendants that he had successfully developed a match for plaintiff's products. Defendants, based on this report, prepared an advertising and promotional campaign for their matching products. In September 1970 Dr. Meyer attempted to implement the process he had developed on a commercial scale. This attempt failed. Nevertheless, defendants promoted their matching products at an October 1970 paint show. At this show and during this period, defendants represented to the trade that their matching products were available. In order to fill orders from customers based on these representations, defendants purchased plaintiff's products, repackaged them as their own, and sold them without informing customers of the substitution. App. at 429-41. Defendants made the acquisition of a "match" for plaintiff's products their highest priority. App. at 1240.

During the October 1970 paint show, defendants' president was referred by a former employee of the plaintiff to Joseph Harvey, who was seeking employment at the time. App. at 453, 1361. Defendants' president immediately contacted Harvey, and, after one interview, Harvey was hired by defendants to develop latex paint compounds including acrylics. App. at 1366-67. ³

Harvey began work on November 17, 1970. His first assignment was to duplicate one of plaintiff's products made using the Process which had been the object of Dr. Meyer's research efforts. App. at 459. During his first week at work and without assistance, Harvey prepared a laboratory replication of the product; the first entry in the laboratory notebook which Harvey maintained for the defendants was the complete Process which Harvey had learned for making plaintiff's products. App. at 1111-1114, 1382-87. Harvey stated in his deposition:

Q: This process that is referred to at pages 4 through 6 of your (Adco) notebooks, that process did not come from Dr. Meyer at all, did it?

Harvey: No.

Q: This was a Rohm and Haas process, Mr. Harvey?

Harvey: Yes.

App. at 1387. Later in his deposition Harvey made clear that the "Harvey process" was one he had learned at and brought from Rohm and Haas. App. at 1393, 1396-97.

Harvey soon revealed his process to defendants. Defendants never asked Harvey about the origin of the "Harvey process." App. at 1413. Within a few weeks defendants sent samples to prospective customers and ordered Harvey to duplicate the "Harvey process" on a commercial scale. App. at 481-83, 792, 1393. Harvey's attempt to do so proved unsuccessful due to his own mathematical errors. Because Harvey had no idea what was wrong, defendants called in Dr. Meyer and others to make the "Harvey process" work. One of those called in testified:

Q: In those discussions that you had with Mr. Harvey, was it apparent to you that Mr. Harvey knew a formula but knew nothing with respect to what made it work, or why it worked, or what its variances would be?

A: I'd agree with that.

App. at 554-57.

Defendants subsequently were successful in duplicating the "Harvey process" on a commercial scale, and the Meyer process was set aside. App. at 481-486, 1252-54. By mid-1971 defendants were selling duplicates of plaintiff's products using the "Harvey process." App. at 1396-98. Plaintiff filed suit in October, 1971.

THE DECISION BELOW

After a nine-day trial, the district court issued a seventy-five page opinion. 213 U.S.P.Q. (BNA) 723 (D.N.J.1981). The court devoted roughly seven pages to plaintiff's trade secret claim, the remainder being devoted to plaintiff's patent and defendants' unfair competition claims. The court rejected the trade secret claim, stating that plaintiff had failed to show that the Process was a trade secret. Id. 213 U.S.P.Q. (BNA) at 751-53. Plaintiff appeals.

DISCUSSION

A. The Choice of Law

Before this court considers plaintiff's contentions on appeal, we conclude that the district court erred in determining the applicable law. The district court concluded that federal common law governed the trade secret claim and looked to Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470, 94 S.Ct. 1879, 40 L.Ed.2d 315 (1976), for the content of that law. 213 U.S.P.Q. (BNA) at 750. The Supreme Court in Kewanee Oil, however, did not establish a federal common law governing trade secrets. It merely described the trade secret law of Ohio in the course of holding that law constitutional. 416 U.S. at 493, 94 S.Ct. at 1891. A trade secret claim in the federal courts is governed not by federal common law but by state law. This is true regardless of whether jurisdiction is based upon diversity of citizenship, Pecheur Co. v. National Candy Co., 315 U.S. 666, 667, 62 S.Ct. 853, 853, 86 L.Ed. 1103 (1942), or on pendency to a patent claim under 28 U.S.C. § 1338(b) (1976). Flexitized, Inc. v. National Flexitized Corp., 335 F.2d 774, 780-81 (2d Cir. 1964), cert. denied, 380 U.S. 913, 85 S.Ct. 899, 13 L.Ed.2d 799 (1965); Kemart Corp. v. Printing Arts Research Laboratories, 269 F.2d 375, 389-90 (9th Cir.), cert. denied, 361 U.S. 893, 80 S.Ct. 197, 4 L.Ed.2d 151 (1959). ⁴

Because of its error, the district court never considered the question of which state's law governs the trade secret claim in this case. To make this choice of law, a federal court whose jurisdiction over a state claim is based on diversity, Klaxon Co. v. Stentor Electric Manufacturing Co., 313 U.S. 487, 496-97, 61 S.Ct. 1020, 1021-1022, 85 L.Ed. 1477 (1941), or on pendency to a federal claim, Systems Operations,...