Franke v. Wiltschek

CLARK, Circuit Judge.

This action seeking an injunction and an accounting of profits received is based upon the alleged misappropriation by defendants of trade secrets learned during and in consequence of a confidential relationship existing between them and the plaintiffs.

From 1943 to 1951, plaintiffs, citizens óf New Jersey, manufactured certain compressed cotton bath sponges for Schiaparelli. The finished product was a pellet which when dropped into water expanded into a piece of cotton about four inches wide by six inches long. The process and utility of thus compressing sheets of unwoven fiber had been known to the art since at least 1913.

In early 1951, plaintiffs commenced experiments with the similar compression of woven fibers, and by September of that year had produced the product here in issue, a perfumed face cloth, compressed into the shape of a small drum which when immersed in water opened up to its original shape. The product was put on the market in October, under the name “Quettes,” and sales multiplied rapidly thereafter.

In December of that year defendant Wiltschek, having seen the product in a New York store, called plaintiffs and sought an interview, representing that he and his partner, defendant Blatt, were interested in selling the item. Plaintiffs initially were not interested, but Wiltschek persisted and after several more calls a meeting was arranged between plaintiffs and Wiltschek and Blatt. The latter came to the plant and discussed the question of representing plaintiffs. In order to persuade plaintiffs of the desirability of the arrangement they claimed a sales force of thirteen men, though in fact they had none other than themselves. As the parties neared agreement, these defendants, at their own solicitation, were shown the process (thereby also learning its cost), the capacity of the plant, and some of plaintiffs’ sales records in order to help them in effecting sales and assure them that supply would be adequate and the product attractive. Shortly thereafter, in late December, an agreement was reached whereby Wiltschek and Blatt were .to represent plaintiffs for a trial period while they tested the appeal of the product with their clientele. Compensation was agreed upon and they were given samples, displays, and signs.

By mid-February these defendants had terminated the agreement and returned some of the sales equipment, stating that the line would not sell. It is doubtful whether they ever in good faith intended to sell plaintiffs’ product, but the trial court found on ample evidence that by the end of January they had resolved to copy the product and market it for their own profit. In March, defendant Betti Pearson, Inc., a Massachusetts corporation of which Blatt and Wilts-chek were directors and vice-presidents (their wives holding half of the issued stock), resolved by its board of directors to copy and market plaintiffs’ product. The first lot of the product was put on the market in April under the name “Facelettes” at a lower price than “Quettes.” This action was instituted in June, 1952, against the corporation and the individuals both as such and under three different trade names under which they had- done business.

Our jurisdiction rests upon diversity of citizenship, 28 U.S.C. § 1332, and accordingly we must draw the controlling principles of substantive law from the law of the forum, New York, Pecheur Lozenge Co. v. National Candy Co., 315 U.S. 666, 62 S.Ct. 853, 86 L.Ed. 1103; Erie R. Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188, 114 A.L.R. 1487; Smith v. Dravo Corp., 7 Cir., 203 F.2d 369, 373, including New York’s rules of the conflict of laws. Klaxon Co. v. Stentor Electric Mfg. Co., 313 U.S. 487, 61 S.Ct. 1020, 85 L.Ed. 1477; Smith v. Dravo Corp., supra, 7 Cir., 203 F.2d 369. Happily we need not attempt answer to the troublesome question whether a New York court would look to the law of New Jersey, where the confidential relationship arose, the law of Massachusetts, where the accused product was manufactured, or that of New York, where it was sold,¹ or would merely content itself in any event with its own law of remedies, for all three jurisdictions subscribe to the same general principle. Where defendants obtain secret information by means of a confidential relationship, they shall be held accountable for its use to their own advantage at the expense of the rightful possessor. See authorities collected below.

Defendants argue that the heart of plaintiffs’ process was revealed by an expired patent, and that the improvements thereon were unpatentable applications of mechanical skill. This totally misconceives the nature of plaintiffs’ right. Plaintiffs do not assert, indeed cannot assert, a property right in their development such as would entitle them to exclusive enjoyment against the world. Theirs is not a patent, but a trade secret. The essence of their action is not infringement, but breach of faith. It matters not that defendants could have gained their knowledge from a study of the expired patent and plaintiffs’ publicly marketed product. The fact is that they did not. Instead they gained it from plaintiffs via their confidential relationship, and in so doing incurred a duty not to use it to plaintiffs’ detriment. This duty they have breached. Junker v. Plummer, 320 Mass. 76, 67 N.E.2d 667, 165 A.L.R. 1449, citing 4 Restatement, Torts § 757 and comment a (1939); Peabody v. Norfolk, 98 Mass. 452; Vulcan Detinning Co. v. American Can Co., 72 N.J.Eq. 387, 67 A. 339, 12 L.R.A..N.S., 102; Tabor v. Hoffman, 118 N.Y. 30, 23 N.E. 12, 16 Am.St.Rep. 740; Spiselman v. Rabinowitz, 270 App.Div. 548, 61 N. Y.S.2d 138, appeal denied 270 App.Div. 921, 62 N.Y.S.2d 608; Extrin Foods, Inc. v. Leighton, 202 Misc. 592, 115 N.Y. S.2d 429. See also Smith v. Dravo Corp., supra, 7 Cir., 203 F.2d 369; Schreyer v. Casco Products Corp., 2 Cir., 190 F.2d 921, certiorari denied 342 U.S. 913, 72 S.Ct. 360, 96 L.Ed. 683; 4 Restatement, Torts § 757 and comment a (1939); Nims, The Law of Unfair Competition and Trade-Marks §§ 141, 143a, 148 (4th Ed. 1947); Note, Protection and Use of Trade Secrets, 64 Harv.L.Rev. 976, 979, 982; cases collected in annotated note 170 A.L.R. 449, 488-490.

As was stated by Vann, J., in Tabor v. Hoffman, supra, 118 N.Y. 30, 36, 37, 23 N.E. 12, 13, 16 Am.St.Rep. 740:

“If a valuable medicine, not protected by patent, is put upon the market, any one may, if he can by chemical analysis and a series of experiments, or by any other use of the medicine itself, aided by his own resources only, discover the ingredients and their proportions. If he thus finds out the secret of the proprietor, he may use it to any extent that he desires without danger of interference by the courts. But, because this discovery may be possible by fair means, it would not justify a discovery by unfair means, such as the bribery of a clerk who, in course of his employment, had aided in compounding the medicine, and had thus become familiar with the formula.

“The fact that one secret can be discovered more easily than another does not affect the principle. Even if resort to the patterns of the plaintiff was more of a convenience than a necessity, still, if there was a secret, it belonged to him, and the defendant had no right to obtain it by unfair means, or to use it after it was thus obtained. We think that the patterns were a secret device that was not disclosed by the publication of the pump, and that the plaintiff was entitled to the preventive remedies of the court.”

To the same effect is the opinion of Garrison, J., speaking for the Court of Errors and Appeals of New Jersey in reversing a defendants’ decree, in Vulcan Detinning Co. v. American Can Co., supra, 72 N.J.Eq. 387, 67 A. 339, 343, 12 L.R.A.,N.S., 102:

“Looking, now, a little more closely at the nature of the relief called for * * * we shall see, I think, that too much emphasis has perhaps been placed upon the element of absolute secrecy in the process, and that not enough stress has been laid upon the inequitable character of the defendants’ conduct in making a use of such process that was inimical to the complainant’s interests. * * * It is proper to say here that the plea that absolution should be granted by courts of equity from the observance of such private obligations whenever the public will thereby be the gainer cannot for a moment be entertained. The language of Justice Brown, cited in the brief of counsel, namely, ‘It is as important to the public that competition should not be repressed by worthless patents as that the pat-entee of a really valuable invention should be protected in his monopoly,’ has, as I read the case of Pope Manufacturing Company v. Gormully, 144 U.S. 224, 12 S.Ct. 632, 36 L. Ed. 414, no such import in the context in which it stands in Mr. Justice Brown’s opinion. The notion that the multiplication of worthless patents inflicts as great an injury upon the public as the multiplication of worthless citizens would do, can never, I fancy, be accepted by a court of equity as a sound proposition on which to base a doctrine absolving trustees from the observance of their trusts.”

It is clear that these principles apply to the case at bar, and plaintiffs are entitled to relief.

The court below after making appropriate findings of fact granted an-injunction and ordered an accounting by defendants of the profits received. D.C.. S.D.N.Y., 115 F.Supp. 28. The authorities cited supra show that this relief, in both its branches, is appropriate and' indeed compelled by the facts proven and found by the court below. Although the point was not made or briefed by counsel, it is now suggested that relief should be limited either to damages or to> an injunction only during the period until the trade by legitimate means has caught up with the plaintiffs and their secret has become general. And the-reason assigned is that the novelty here-is said to be slight and discoverable by a good mechanic. But even if defendants should seek it, the authorities do not justify the award of such uncertain, but. presumably limited, relief.

In examining the authorities governing the remedies, we are again met with the situation earlier noted, namely, some doubt as to the appropriate law to be-followed, but no controversy as to the ultimate result. Remedies might be held procedural and thus subject to the law of forum except for the reminder that the question is not merely that, but rather “does it significantly affect the result of a litigation for a federal court to disregard a law of a State that would be controlling in an action upon the same claim by the same parties in a State court?” Guaranty Trust Co. of New York v. York, 326 U.S. 99, 109, 65 S.Ct. 1464, 1470, 89 L.Ed. 2079, 160 A.L.R.. 1231. And there is obvious truth in this observation in Restatement, Conflict of Laws, ch. 12, Introductory Note (1934): “The means provided for compulsion, or limitation upon the compulsion, which may be brought against the alleged wrongdoer are, in many cases, of almost equal practical importance to the declaration of the validity of a plaintiff’s claim.” ²

It appears, however, that the New York courts have not expressly considered whether local or foreign law should determine the propriety of an injunction in a given case. Nevertheless they have granted injunctions on foreign causes without discussion of the foreign rule, e. g., Niagara Falls International Bridge Co. v. Grand Trunk R. Co. of Canada, 212 App.Div. 705, 209 N.Y.S. 79, affirmed on this point 241 N.Y. 85, 148 N.E. 797; Madden v. Ros-seter, 114 Misc. 416, 187 N.Y.S. 462, affirmed without opinion 196 App.Div. 891, 187 N.Y.S. 943, and there is every indication in their discussion of related issues that the issuance of an injunction should be treated as relating to the remedy, and hence governed by the lex fori, e. g., Reilly v. Steinhart, 217 N.Y. 549,112 N.E. 468, reargument denied 218 N.Y. 660, 112 N.E. 749; Buffalo Forge Co. v. Fidelity & Casualty Co. of New York, 142 Misc. 647, 651, 256 N.Y.S. 329, 333. And if New York does apply its own rule it appears that we are bound; for a local rule which itself holds a legal principle to be procedural may for us be binding as substantive. Sampson v. Channell, 1 Cir., 110 F.2d 754, 128 A. L.R. 394, certiorari denied Channell v. Sampson, 310 U.S. 650, 60 S.Ct. 1099, 84 L.Ed. 1415, as approved in Palmer v. Hoffman, 318 U.S. 109, 63 S.Ct. 477, 87 L.Ed. 645, 144 A.L.R. 719.

It would appear, therefore, that New York law governs on this point. But the question'remains largely academic; for the only way in which New York law seems at all unique is in the number and force of the pertinent decisions. The leading case not only for that jurisdiction, but — in view of its extensive citation — for the country, is still Tabor v. Hoffman, supra, 118 N.Y. 30, 37, 23 N.E. 12, 13, 16 Am.St.Rep. 740, where the court held a plaintiff “entitled to the preventive remedies of the court,” without respect to whether “one secret can be discovered more easily than another” or that a defendant’s resort to the secret “was more of a convenience than a necessity.” That decision is particularly in point because there defendant’s counsel and a dissenting opinion took special exception to the grant of an injunction, as distinguished from the award of damages at law. See 118 N.Y. 30, 32, 33, 38, 23 N.E. 12. Among recent cases which follow and apply it the following may be cited: Spiselman v. Rabinowitz, supra, 270 App.Div. 548, 61 N.Y.S.2d 138, appeal denied 270 App.Div. 921, 62 N.Y. S.2d 608; Biltmore Pub. Co. v. Grayson Pub. Corp., 272 App.Div. 504, 71 N.Y. S.2d 337; Petnel v. American Tel. & Tel. Co., 280 App.Div. 706, 117 N.Y.S.2d 294, 295; Sachs v. Cluett, Peabody & Co., 177 Misc. 695, 31 N.Y.S.2d 718, per Shientag, J.; Smith v. Dravo Corp., supra, 7 Cir., 203 F.2d 369; Schreyer v. Casco Products Corp., D.C.Conn., 97 F.Supp. 159, 168, affirmed on this issue, 2 Cir., 190 F.2d 921, certiorari denied 342 U.S. 913, 72 S.Ct. 360, 96 L.Ed. 683; International Industries, Inc. v. Warren Petroleum Corp., D.C.Del., 99 F.Supp. $07, 914; Schavoir v. American Rebonded. Leather Co., 104 Conn. 472, 133 A. 582, 583; and see also Nims, The Law of Unfair Competition and Trade-Marks §§ 141, 143a, 148 (4th Ed. 1947); Note, Protection and Use of Trade Secrets, 64 Harv.L. Rev. 976, 982. Thus apt in its facts and citation, of authorities is the late case of Extrin Foods, Inc. v. Leighton, supra, 202 Misc. 592, 115' N.Y.S.2d' 429, where Justice Hart enjoined the use of a discoverable formula for the preparation of certain flavoring products and ordered an accounting of profits.

As the several cases cited earlier in this opinion show, there is nothing singular in this aspect of New York law. In citing a multitude of cases to the point that an inventor or discoverer “will ordinarily be granted an injunction” against use of a formula or trade secret, the editors of a lengthy annotation of eases in 170 A.L.R. 449, 488-490, say that in fact “most of the cases are injunction cases” and cite only two insignificant or inapposite cases to the contrary. See to like effect Spiselman v. Rabinowitz, supra, 270 App.Div. 548, 61 N.Y.S.2d 138, appeal denied 270 App. Div. 921, 62 N.Y.S.2d 608. We have found no case authority to throw doubt on this law. So, indeed, if a search be made for “federal law” so-called, the result must be the same on existing authorities, as we have pointed out above; see, for example, the discussion below and in our court in Schreyer v. Casco Products Corp., supra.

The suggestion for a more limited remedy appears to come from a single sentence at the end of comment 6 of 4 Restatement, Torts § 757 (1939). There, after a lengthy discussion of protection for trade secrets in unexceptional form and definitely in accord with the cases cited above, with indeed stress upon the protection as “against breach of faith” rather than “reward to the inventor,” as in the case of the “patent monopoly,” the suggestion is added that, if “the secret consists of mechanical improvements that a good mechanic can make without resort to the secret, the wrongdoer’s liability may be limited to damages, and an injunction against future use of the improvements made with the aid of the secret may be inappropriate.” The tentative and conditional nature of the suggestion is obvious on its face. Though its precise meaning is not clarified by reference'to any precedent, we are convinced that it is pressed beyond its intent if employed to restrict or limit relief on facts such as are disclosed in this record.

We have already called attention to the earlier precise statement of principles in both comments a and 5 of 4 Restatement, Torts § 757, with their careful and discriminating contrast between the protection for an invention, where novelty and inventiveness are requisite, and for a trade secret, where breach of faith and reprehensible conduct justify the relief. It could hardly have been the intent of the restaters to take back 'or nullify this careful formulation by an offhand repudiation at its end. And the language seems but the statement of the rather obvious principle that equity will not attempt an injunction when it would be vain and foolish, when in truth the supposed secret is known or knowable to the world. See also Note, Protection and Use of Trade Secrets, supra, 64 Harv.L.Rev. 976, 983.³

There may, it seems, be considerable danger in stressing in this branch of the law the assumed ability of a “good mechanic,” a concept often useful in highlighting the lack of novelty of an alleged patent. Even as to patents the capability of that ubiquitous genius has been questioned and his destructive effect on the law of inventions somewhat deplored. Be that as it may, there is positive danger in resort to the same device to justify the marauding instincts of trust violators, since thereby the carefully built law of trade secrets may be destroyed as a practical matter and such business assets be left open to hijacking from all sides. In practice the complicated and novel device is likely to be patented, leaving protection of simpler devices wrongly exploited to this branch of the law.⁴ And since the ability of a “good mechanic” is quite an imprecise concept, its destructive potentialities in this area under the natural tendency of restrictive precedents to accumulate can be forecast. So here the idea of pressing a face cloth into a small mass by use of an hydraulic or other press may seem (and perhaps be) a simple idea, easily conceivable. But actual experience demonstrated that the idea was not so readily understood, even with the teaching at hand of an expired patent as to the compressing of sponges. The entire conception, involving the type, size, and actual method of compressing the cloths, together with the apparently attractive touch of adding some perfume at a chosen stage of the process, was obviously not apparent to such markedly interested observers as the defendants until they obtained all the details by pretending to be ready to market the product for plaintiffs. Also no more apparent to them were either the low cost of production or plaintiffs’ sales records, knowledge of which may well have been primary factors in defendants’ decision to violate their duty.

This in any practical sense is not the type of “improvement” possible “without resort to the secret” to which the restaters had reference. At any rate there is nothing in the precedents suggesting that this breach of trust is legally permissible upon payment of limited damages assessed for a time by a court. However “roguish” equity may have been in the past,⁵ in modern law, courts of equity sit, as do courts of law, to protect rights and enforce duties by means of the remedies which they administer. Pomeroy, Specific Performance § 46 (3d Ed. 1926) ; 5 Corbin on Contracts § 1136 (1951); Walsh on Equity §§ 8, 53 (1930); 4 Restatement, Torts §§ 933, 938 (1939).⁶ It is to be noted that we do not have here the issue as to a trial judge’s power, on occasion, to withhold injunctive relief; rather the issue is whether we should force the judge to the exercise of a “discretion” which his opinion shows he would abhor; see 115 F.Supp. 28, 30, 31.

At the outset of their restatement of this subject, the distinguished authors made an acute observation on the trend of the law which has since been often quoted. They said: “But the tendency of the law, both legislative and common, has been in the direction of enforcing increasingly higher standards of fairness or commercial morality in trade. The tendency still persists.” 3 Restatement, Torts, ch. 35, p. 540 (1938), quoted with approval in Q-Tips, Inc. v. Johnson & Johnson, 3 Cir., 206 F.2d 144, 145, per Goodrich, J., and Ross-Whitney Corp. v. Smith Kline & French Laboratories, 9 Cir., 207 F.2d 190, 196 note 17, per Stephens, J. The present case surely is not one where we are disposed to attempt to reverse the trend.

Affirmed.

1 . From the record it might be inferred, though it is quite unclear, that it was sold in other jurisdictions as well. But no claim has been made that any applicable local law is materially different from that of the jurisdictions considered. Cf. Kellogg Co. v. National Biscuit Co., 805 U.S. 111, 113, note 1, 59 S.Ct. 109, 83 L.Ed. 73.

2 . Of course it has long been clear that the current rule, pressed to its dryly logical extreme, might have a vastly deleterious effect on the operation of the federal rules; this has been discussed at considerable length by many text writers, including the author of this opinion. See, e.g., Clark, State Law in the Federal Courts, in Jurisprudence in Action 59, 89-93, 106-109, with articles and texts cited in notes 138-144 (1953). But the solution of this problem is for the Supreme Court; and we cannot turn our backs upon the result, particularly when it has been strongly re-emphasized in the late cases, Ragan v. Merchants Transfer & Warehouse Co., 337 U.S. 530, 69 S.Ct. 1233, 93 L.Ed. 1520; Woods v. Interstate Realty Co., 337 U.S. 535, 69 S.Ct. 1235, 93 L.Ed. 1524, and Cohen v. Beneficial Indus. Loan Corp., 337 U.S. 541, 69 S.Ct. 1221, 93 L.Ed. 1528, with only Justice Rutledge dissenting on the point at all pertinent here, 337 U.S. 557, 69 S.Ct. 1231. And certainly there is little reason to expect a reversal of current trends in a case where the issue is, as noted below, substantially academic because of lack of difference in the underlying law.

3 . If an injunction actually proves useless in practice or becomes out of date, that situation can be taken care of through the ordinary processes of equity, without need of insertion of any confusing caveat in the original decree. See F.R. 60(b), subd. (5); United States v. Swift & Co., 286 U.S. 106, 114, 115, 52 S.Ct. 460, 76 L.Ed. 999; Moore & Rogers, Federal Relief from Civil Judgments, 55 Yale L.J. 623, 643, citing cases.

4 . “Indeed, the fact that the discoverer of a process -or formula may not be able to secure property rights in it by means of the patent law may be the very reason why he seeks the protection of secrecy. He must have a secret, that is, something not known to the public or in his trade; and the character of the article produced might make so obvious the process or formula by which it is made that the very putting of it upon the market destroys the secret of its production. But this does not mean that the possibility of its discovery, by chemical analysis or experimentation, will itself put an end to the rights of the originator.” Schavoir v. American Rebonded Leather Co., 104 Conn. 472,133 A. 582, 583.

5 . The reference is to Seldon’s Table Talk, quoted in 1 Holdsworth, Hist.Eng.L. 467, 468 (5th Ed.1931), and Walsh on Equity § 8 (1930).

6 . In the single modern instance of “balancing the equities” in awarding injunction to nuisances against real property, the courts are most hesitant in granting grace to a conscious wrongdoer. See, e. g., Smith v. Staso Milling Co., 2 Cir., 18 F.2d 736; 4 Restatement, Torts § 941, comment 6 (1939); Walsh on Equity § 56 (1930).