Saforo & Associates, Inc. v. Porocel Corp.

• Decision Date: 27 May 1999
• Docket Number: No. 98-1193,98-1193
• Citation: 337 Ark. 553,991 S.W.2d 117
• Court: Arkansas Supreme Court
• Parties: SAFORO & ASSOCIATES, INC., GEO Specialty Chemicals, Inc., and William Evans, Appellants, v. POROCEL CORPORATION, Appellee.

Page 117

991 S.W.2d 117

337 Ark. 553

SAFORO & ASSOCIATES, INC., GEO Specialty Chemicals, Inc. and William Evans, Appellants, v. POROCEL CORPORATION, Appellee.

No. 98-1193.

Supreme Court of Arkansas.

May 27, 1999.

Friday, Eldredge & Clark, Little Rock, for appellants.

Rose Law Firm, by: Richard T. Donovan, Little Rock, for appellee.

W.H. "DUB" ARNOLD, Chief Justice.

This is a case involving the toll processing (i.e., processing for a fee) by appellee of raw material owned by appellant Saforo & Associates and alleged misappropriations by Saforo, as well as appellee's former plant manager, appellant Williams Evans, and appellant GEO Specialty Chemicals, Inc., of trade secrets regarding the wash water system designed for that toll processing, in this case the washing step, of a raw material referred to as "Bayer Scale," which is an alumina residue that has been used for various applications in the past and is currently being used in the refrigerate core industry, as well as other applications.

Appellant Saforo had originally entered into an arrangement with appellee Porocel whereby appellee would perform the washing step of the Bayer Scale. At the time the wash water system ultimately used by appellee was constructed, appellant William Evans supervised the construction and operation of the wash system at Porocel. Within a short time, the business relationship between appellee and Saforo deteriorated, and Saforo began looking for an alternative processor of his Bayer Scale. Ultimately, appellant GEO Specialty Chemicals was contracted by Saforo to process the Bayer Scale.

Appellee brought an action in Pulaski County Chancery Court seeking to enjoin the appellants from processing the Bayer Scale at the GEO facility in Little Rock utilizing the specific wash water system which had been utilized at Porocel. Appellee also sought damages for the misappropriation of a trade secret, as well as contract damages from Saforo & Associates for failure to pay for the processing completed by appellee.

On March 31, 1997, the trial court conducted a hearing on appellee's motion for temporary injunction and found, in an order dated April 10, 1997, that the appellants had misappropriated appellee's trade secret; the court issued an injunction. The trade secret at issue is limited to the wash step of the processing of the Bayer Scale. The wash step consisted of a tank and a separate component referred to by the parties as a Sweco screen. Appellants contended that the wash water system was not unique and had been utilized in processing of aluminum products throughout the industry for a long period of time.

On March 13 and March 17, 1998, the trial court conducted a trial to determine the following: whether appellee should be granted a permanent injunction; whether appellee was entitled to damages for the misappropriation of the trade secret; and, whether appellee was entitled to damages from Saforo & Associates, Inc., for breach of contract. In an order dated April 1, 1998, the court reaffirmed its earlier finding that the appellants had misappropriated appellee's trade secret. The court further found that appellee had been damaged in the amount of $88,092.73 by the misappropriation of the trade secret and awarded appellee $63,500.00 against Saforo & Associates, Inc., on a theory of an implied contract. Additionally, the court found that the misappropriation was willful and malicious and awarded appellee attorney's fees in the amount of $15,000.00, but declined to award prejudgment interest.

Appellants appeal from the court's order and judgment and assert the four following points as the basis for their appeal:

1) The trial court erred in finding that the appellee's wash water system constituted a trade secret under Ark.Code Ann. § 4-75-601;

2) The trial court erred in finding that the appellants willfully misappropriated a trade secret;

3) The trial court erred in the determination of appellee's damages sustained as a result of the misappropriation of trade secrets;

4) The trial court erred in its determination of damages owed by appellant Saforo & Associates, Inc., for breach of an implied contract.

We agree with appellant that the trial court erred in its determination of appellee's damages sustained as a result of the misappropriation of the trade secret, but affirm the trial court on each of the other points asserted by appellants.

I. Whether appellee's wash water system constituted a trade secret.

It is well settled that chancery cases are reviewed de novo on the record, but we do not reverse a finding of fact by the chancellor unless it is clearly erroneous. Slaton v. Slaton, 336 Ark. 211, 983 S.W.2d 951 (1999). A finding is clearly erroneous when, although there is evidence to support it, the reviewing court on the entire evidence is left with a definite and firm conviction that a mistake has been committed. Id.; RAD-Razorback Ltd. Partnership v. B.G. Coney Co., 289 Ark. 550, 713 S.W.2d 462 (1986).

Ark.Code Ann. § 4-75-601 et seq. (Repl.1996) is the Arkansas Trade Secrets Act and is based upon the Uniform Trade Secrets Act. It defines a trade secret as "a ... process ... that: [d]erives 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; and [i]s the subject of efforts that are reasonable under the circumstances to maintain its secrecy." Ark.Code Ann. § 4-75-601(4). (Subsection divisions omitted.)

When applying the six factors articulated in Vigoro Industries, Inc. v. Cleveland Chemical Co. of Arkansas, Inc., 866 F.Supp. 1150 (E.D.Ark.1994), to the evidence in this case, as the trial court correctly did, it is clear that Porocel's wash water system constituted a trade secret. We hereby adopt the Vigoro factors as the controlling analysis for determining whether any particular information constitutes a trade secret.

The first factor is the extent to which the information is known outside the business. It was uncontested that the Bayer Scale industry is very limited, given that Reynolds Metal is the only producer of Bayer Scale and purchasers of same are few. Saforo has the exclusive right to that Bayer Scale. The evidence showed that only three companies have ever processed Bayer Scale--Porocel, GEO, and Alcoa. Several industry experts testified that in all their years of experience in the aluminum/bauxite industry, they had never seen a wash water system like the Porocel wash water system.

Appellants contend that the Porocel wash water system is within the public domain. However, the evidence adduced at trial indicated that the Porocel wash water system was a unique solution to the needs of one customer in the industry. It is a combination of components, each of which by itself is in the public domain, but the unified process has afforded a competitive advantage. The competitive advantage was evidenced by the fact that appellant GEO hired appellant Evans to set up the Porocel wash water system at GEO. It is telling that with all the engineering expertise available at GEO, it nevertheless hired Evans, a former Porocel employee, to oversee the installation of the wash water system at GEO, which was almost identical to the unique Porocel wash water system.

The second factor is the extent to which the information is known by employees and others involved in the business. The trial court found, and its finding remains unrebutted, that the specific washing system involved was not generally known by either appellee's or appellants' employees. The court further found that there was no testimony that the information was known to others outside the business.

The third factor is the extent of measures taken by appellee to guard the secrecy of the information. The evidence showed that Saforo had entered into a confidentiality agreement with AluChem, which eventually purchased Porocel, and that Evans had entered into one with Porocel, through Englehard Corporation--Porocel being a wholly owned subsidiary of Englehard. Further, while Porocel did not have a confidentiality agreement with Saforo, the evidence is clear that Porocel took sufficient measures to guard the configuration of the washing system since it was only revealed to Evans, who was under a duty to maintain its secrecy under his confidentiality agreement with Porocel through Englehard, regardless of whether he had signed a confidentiality agreement with AluChem. In an attempt to prove that Porocel's measures to guard the secrecy of the configuration were inadequate, it was argued by appellants that Ron Bell's sketch design of the Porocel wash water system had been shown to Saforo; however, when questioned regarding the subject, Mr. Saforo testified that he had never before seen the sketch.

Mike Sharp of Porocel described the measures taken by Porocel to maintain the secrecy of its wash water system:

1) Secrecy agreement between Saforo and AluChem;

2) Secrecy agreement between AluChem and Englehard;

3) Secrecy agreements signed by all Porocel employees when Englehard owned Porocel;

4) Secrecy agreements signed by all Porocel employees after acquisition by the AluChem owners; and

5) Secrecy agreements as a condition of employment for all new Porocel hires.

The Arkansas Trade Secrets Act requires reasonable measures to maintain secrecy. We hold that appellee employed reasonable measures to guard the configuration of the washing system.

The fourth factor is the value of the information to appellee and to its competitors. The apparent value of the Porocel wash water system was its efficiency and inexpensive installation. The testimony revealed that the cost of installing Porocel's system was approximately $17,000.00, whereas, an alternative system of vacuum filtration would have cost approximately $200,000.00 to install. Even William Evans admitted that he saved GEO thousands of...