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

Citations: 689 F.2d 424; 215 U.S.P.Q. (BNA) 1081; 1982 U.S. App. LEXIS 25450Docket: 82-5000

Court: Court of Appeals for the Third Circuit; September 21, 1982; Federal Appellate Court

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Rohm and Haas Company, the plaintiff, alleged that its process for manufacturing "second generation" latex paint products constituted a trade secret that was misappropriated by defendants Adco Chemical Company and Thibaut & Walker Company, Inc. The plaintiff also asserted that the defendants infringed its Patent No. 2,795,564 related to "first generation" latex paints. The district court ruled the patent either invalid or not infringed and dismissed the claims from both parties, leading to an appeal focused solely on the trade secret issue.

The appeals court found that the district court erred in its handling of the trade secret claim and decided to reverse that ruling, remanding the case for determination of appropriate relief. The facts revealed that before developing the claimed trade secret, the plaintiff had marketed latex paint vehicles based on its patent. The company initiated a research campaign in 1955, culminating in the development of the Process over seven years, which led to four successful products. Other manufacturers struggled to compete, except for the defendants, who allegedly succeeded due to insights obtained from former employee Joseph Harvey.

Harvey, employed since 1959, had direct involvement in developing latex paints and was privy to confidential information, as demonstrated by his laboratory notebooks and access to commercial process descriptions. In 1967, he signed an agreement affirming that Rohm and Haas’s trade secrets belonged to the company and committing to confidentiality during and after his employment. Despite being reminded of his obligations upon his departure, Harvey never contacted the company regarding any confidentiality issues.

Defendants Adco and Thibaut, related corporations in chemical manufacturing and sales, initiated a project in 1968 to replicate two products from the plaintiff using a specific process. They engaged Dr. Victor Meyer, a consultant since 1963, who informed them in 1970 that he had developed a matching process. Despite initial failures in commercial application, defendants promoted their products at a trade show, misleading customers by repackaging and selling the plaintiff's products as their own.

In October 1970, defendants hired Joseph Harvey to develop latex paint compounds. Harvey, starting work shortly thereafter, independently replicated one of the plaintiff's products and recorded the entire process in a lab notebook. He confirmed that this process originated from his previous employment at Rohm and Haas, not from Dr. Meyer. Defendants did not inquire about the source of Harvey's process. Although Harvey faced challenges in commercial duplication, the defendants later succeeded in implementing his method, leading to sales of the replicated products by mid-1971.

The plaintiff filed a lawsuit in October 1971, which culminated in a nine-day trial. The district court issued a detailed opinion, dedicating only a portion to the plaintiff's trade secret claim, which it ultimately rejected, ruling that the plaintiff failed to establish the process as a trade secret. The plaintiff is now appealing the decision.

The district court incorrectly determined that federal common law governed the trade secret claim, citing Kewanee Oil Co. v. Bicron Corp. However, the Supreme Court in Kewanee did not establish a federal common law for trade secrets; it only addressed Ohio's law and affirmed its constitutionality. Trade secret claims in federal courts are governed by state law, regardless of whether jurisdiction is based on diversity of citizenship or related to a patent claim. The district court failed to assess which state's law applied, an essential step guided by the forum state's conflicts of law principles. New Jersey, the forum state, has moved away from the traditional rule that the law of the place of wrong applies, instead favoring the law of the jurisdiction with the most significant relationship to the occurrence and parties involved.

Both Pennsylvania and New Jersey have strong connections to the case: Pennsylvania is where the plaintiff's business is located and where the former employee learned the trade secret, while New Jersey is where the defendants are incorporated and allegedly exploited the secret. However, the choice of law between these two states may be unnecessary, as their trade secret laws yield the same outcome in this instance. Therefore, the case can be resolved without needing to choose between the laws of the two states.

The elements of a trade secret claim, as defined by both Pennsylvania and New Jersey, include: (1) the existence of a trade secret, (2) communication of the secret in confidence to the employee, (3) disclosure of the secret by the employee in breach of that confidence, (4) acquisition of the secret by the competitor with knowledge of the breach, and (5) use of the secret by the competitor to the detriment of the plaintiff.

New Jersey and Pennsylvania have differing requirements for establishing a trade secret claim. New Jersey mandates that plaintiffs demonstrate efforts to maintain the secrecy of the trade secret, as seen in cases like Sun Dial Corp. v. Rideout and Carver v. Harr. Conversely, Pennsylvania requires plaintiffs to prove that the trade secret holds value for their business and that they possess rights to it through discovery or ownership, illustrated by Van Products Co. v. General Welding, Fabricating Co. 

In the case at hand, the district court determined that the plaintiff did not establish the existence of a trade secret, although the plaintiff successfully proved all other necessary elements of the claim. Specifically, the plaintiff met the supplemental criteria of either state law by demonstrating the discovery and retention of a valuable Process that underpinned four successful products. The plaintiff also implemented extensive security measures to protect the Process.

Furthermore, the plaintiff disclosed the Process to Harvey under confidentiality, supported by evidence of security protocols, an employment agreement, and warnings about the secretive nature of his work. This undisputed evidence indicated that Harvey had an obligation to maintain confidentiality regarding the Process. Finally, the plaintiff demonstrated that Harvey violated this duty by revealing the Process to defendants, as his admissions indicated that his "Harvey process" notes were merely recollections of the Process learned while employed by the plaintiff, constituting a breach of trust.

Plaintiff successfully demonstrated that defendants acquired a secret with knowledge that its disclosure was wrongful. Defendants contended they were unaware that Harvey's revelation breached his confidentiality with plaintiff and argued that the burden of proof was on the plaintiff. While the plaintiff did not provide direct evidence of defendants' bad faith, the circumstances warranted an inference of knowledge due to the weight of the evidence. Defendants were aware that plaintiff uniquely produced a superior latex paint vehicle and had previously attempted to replicate this without success. They hired an ex-employee of plaintiff and obtained the Process almost immediately, aware of its confidential nature. The lack of inquiry from defendants regarding the source of the "Harvey process" implied they were responsible for any knowledge that such inquiry could have revealed.

Furthermore, the plaintiff established that defendants used the secret to their detriment by marketing products mimicking plaintiff's offerings, continuing this practice up until the lawsuit was filed. The remaining issue was whether the Process constituted a trade secret. The district court concluded that the plaintiff failed to prove this, despite acknowledging the competitive advantage the Process provided. According to the definitions adopted in New Jersey and Pennsylvania, a trade secret must be proprietary to a specific employer and not generally known in the industry. The plaintiff proved its use of the Process conferred a distinct competitive advantage, but the court ultimately ruled it was a matter of general knowledge within the industry, a conclusion lacking legal support.

Plaintiff demonstrated the uniqueness of its Process for producing latex paint vehicles, establishing it as a trade secret by showing that competitors were unaware of it and had failed to replicate it. Plaintiff was the only manufacturer using the Process, allowing it to produce four superior products, while defendants' attempts, led by Dr. Meyer, to develop competing products without the Process were unsuccessful. Defendants acknowledged that relevant publications about the Process were unknown to them prior to litigation, suggesting they could not independently replicate it. Only after acquiring the "Harvey process" could defendants compete effectively. 

Under New Jersey and Pennsylvania law, these facts sufficiently proved the existence of a trade secret specific to the plaintiff, not general industry knowledge. However, the district court incorrectly concluded that the Process was general knowledge, citing two reasons: a lack of adequate definition of the trade secret and the belief that most elements were widely known. The appellate court found the district court's reasoning inadequate, as it failed to cite relevant legal standards for defining trade secrets and did not consider that "general knowledge, skill, and experience" acquired by employees cannot be claimed as trade secrets. The court preferred to directly address the inquiry instead of relying on perceived inadequacies in definition and did not find evidence that the Process fell within the general knowledge of employees.

In Schultz v. Wheaton Glass Co., the court ruled it is not bound by evidence that lacks the status of a finding of fact, nor by legal inferences drawn from facts. It found the district court's legal conclusion contradicted facts established in the case, particularly that Harvey's realization of the "Harvey process" stemmed from memory rather than any unique expertise. The district court also incorrectly maintained that individual elements of the plaintiff's Process being known in the trade rendered the Process itself general knowledge. Pennsylvania and New Jersey law establish that even if elements are known, their combination can constitute a trade secret if it yields a superior product. The plaintiff demonstrated that their Process produced such a product, thus invalidating the district court's reasoning.

The district court's denial of the plaintiff's claim was based on flawed legal standards regarding trade secret secrecy. Consequently, the court deemed it appropriate to reverse the district court's decision and remand for judgment in favor of the plaintiff. Upon remand, the district court is instructed to determine appropriate relief, which includes a permanent injunction against defendants from using or disclosing the trade secret, as permitted under New Jersey and Pennsylvania law. Furthermore, the plaintiff seeks an accounting for damages and profits obtained by defendants through wrongful appropriation, which both states allow for recovery.

Defendants present two arguments to limit the plaintiff's relief: first, they claim that a foreign patent issued after Harvey's disclosure, which they were unaware of prior to the lawsuit, invalidates the plaintiff's right to relief; second, they assert that they made a "good faith effort" to alter their process post-suit based on information from Harvey. The plaintiff disputes both the factual and legal bases of these claims.

Under New Jersey law, the publication of a trade secret in patents issued after a defendant's misappropriation does not negate the plaintiff's existing cause of action or their entitlement to full injunctive and monetary relief, as established in Adolph Gottscho, Inc. v. American Marking Corp. Moreover, New Jersey principles dictate that a company misappropriating a trade secret cannot fully benefit from subsequent independent developments due to the complexities of attributing improvements to either legitimate efforts or wrongful acquisition of information, which applies to both injunctive relief and damages.

Similarly, Pennsylvania law indicates that defendants may only produce products using a new process that is entirely different from the secret process. The use of a "practically similar process" is prohibited, with doubts typically resolved against the wrongdoer.

The court does not address the defendants' arguments on appeal, leaving them for consideration by the district court upon remand. The district court's judgment is reversed, and the case is remanded for entry of judgment in favor of the plaintiff, ensuring they receive all entitled relief.

Defendants were aware at the time of hiring that Harvey lacked a college degree, had been terminated from one of his two prior jobs, and had experienced significant unemployment. Harvey had previously worked for the plaintiff in research on acrylic latex technology, which was the only relevant experience he had in that area. Defendants offered him a position with a salary nearly 25% higher than his previous earnings. The district court established jurisdiction over the plaintiff's trade secret claim under 28 U.S.C. § 1338(b), allowing consideration of unfair competition claims linked to patent law, regardless of the patent's validity or infringement status. The court found that the plaintiff's amended complaint also asserted subject matter jurisdiction based on diversity of citizenship, as the plaintiff was incorporated in Delaware and based in Pennsylvania, while the defendants were incorporated and based in New Jersey, with the amount in controversy exceeding $10,000.

Harvey admitted he had not consulted any publication that he believed disclosed the process before sharing it with the defendants, suggesting that only someone knowledgeable about the process could select appropriate literature references. The district court made credibility findings, accepting Harvey's belief that his disclosures were not trade secrets but noted that this belief didn't negate the factual circumstances. The trial court favored the credibility of the defendants' expert over the plaintiff's. The plaintiff had provided detailed descriptions of the process in evidence, which were acknowledged by the defendants' expert. The district court found no legal requirement for defining trade secrets in relevant case law, and Harvey's belief that the process was publicly disclosed did not serve as a defense against misappropriation claims.

The district court did not establish that the Process, as a whole, was widely known in the industry, nor did the defendants claim it was. Defendants' expert conceded during cross-examination that the cited publications only disclosed elements of the Process, not its entirety. The plaintiff raised a second point for reversal, arguing a lack of findings violated Fed. R. Civ. P. 52(a), but this issue remains unaddressed due to the current case disposition. The plaintiff's amended complaint also requests punitive damages, attorneys' fees, and costs, which are remanded for district court consideration.

Under Pennsylvania law, defendants' argument regarding public disclosure of trade secrets lacks merit. Previous cases suggest that public disclosure by a plaintiff eliminates their right to relief. However, it remains unclear how the Pennsylvania Supreme Court would rule in a scenario where a third party's patent allegedly disclosed a secret without the plaintiff compromising their claim against a wrongdoer who previously misappropriated the information. Defendants may use a different process to produce a competing product, but a practically similar process is prohibited. The judgment of the district court will be reversed, and the case remanded for entry of judgment for the plaintiff and further proceedings to grant all entitled relief.

The confidentiality of the claimed trade secret restricts detailed discussion of the Process in the opinion. Defendants were aware of Harvey's lack of a college degree, previous employment issues, and his history with the plaintiff, where he worked on acrylic latex technology, which was unique to the plaintiff. They offered him a job at a significantly higher salary. The district court asserted jurisdiction over the trade secret claim under 28 U.S.C. § 1338b, indicating that jurisdiction persists despite the patent claim's potential failure, provided the claims are substantially related. The plaintiff's jurisdictional basis also included diversity of citizenship under 28 U.S.C. § 1332a, as the plaintiff is incorporated in Delaware with its principal place of business in Pennsylvania, while the defendants are New Jersey entities, with the amount in controversy exceeding $10,000. Harvey admitted to not consulting relevant publications before disclosing the Process to the defendants, which suggests he was not fully aware of the trade secret's nature. The district court found two credibility issues: it believed Harvey's claim of ignorance regarding the trade secret's status and favored the defendants' expert over the plaintiff's expert. The plaintiff introduced detailed descriptions of the Process, which were supported by testimony, and the defendants' expert acknowledged understanding the claimed trade secret. The cited case by the district court did not establish a legal standard for defining trade secrets, and no Pennsylvania or New Jersey case mandates a minimum level of definition. Harvey expressed that he did not consider the Process a trade secret due to its assumed disclosure in literature.

The district court found the credibility of Harvey's statement questionable, suggesting that his disclosures did not include information he consciously recognized as unknown to others. Harvey's good faith belief does not provide a defense against misappropriation of trade secrets. The court did not determine whether the Process itself, as opposed to its individual elements, was widely known in the industry, nor did the defendants claim it was. The defendants' expert conceded that the cited publications did not disclose the complete Process, and Harvey could not identify any source that fully revealed it. The plaintiff argued that the lower court's decision lacked factual findings, violating Federal Rule of Civil Procedure 52(a); however, this issue was not addressed due to the case's disposition. The plaintiff's amended complaint also seeks punitive damages, attorneys' fees, and costs, which are remanded for consideration by the district court. Pennsylvania case law indicates that public disclosure of a trade secret by the plaintiff negates their right to relief, but existing cases do not clarify how the Pennsylvania Supreme Court would rule in a scenario involving third-party disclosure of a patent that allegedly revealed the secret, especially where the plaintiff had not compromised their claim against a prior wrongdoer who profited from stolen information.