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Learning Curve Toys, Incorporated, Plaintiff-Counter-Defendant-Appellee v. Playwood Toys, Incorporated, Defendant-Counter-Plaintiff-Appellant v. Roy Wilson, Harry Abraham, and John Lee, Counter-Defendants-Appellees
Citations: 342 F.3d 714; 67 U.S.P.Q. 2d (BNA) 1801; 2003 U.S. App. LEXIS 16847Docket: 18-2519
Court: Court of Appeals for the Seventh Circuit; August 18, 2003; Federal Appellate Court
PlayWood Toys, Inc. secured a jury verdict for misappropriation of a trade secret against Learning Curve Toys, Inc. and its representatives under the Illinois Trade Secrets Act, resulting in an 8% royalty award for a hypothetical license. Despite substantial evidence of misappropriation, the district court granted judgment in favor of Learning Curve, ruling that PlayWood did not possess a protectable trade secret. PlayWood appealed this decision. The appellate court reversed the district court's ruling, reinstated the jury's verdict, and remanded the case for a jury trial on exemplary damages and to consider PlayWood’s request for attorneys' fees. In 1992, PlayWood was founded by Robert Clausi and Scott Moore to create high-quality wooden toys. Lacking their own production facility, they partnered with Mario Borsato under a confidentiality agreement for prototype manufacturing. They first showcased their toys at the Toronto Toy Fair, receiving positive feedback, which led them to exhibit at the New York Toy Fair. During this event, they met Learning Curve representatives, including Roy Wilson, who expressed interest in a potential collaboration to produce Thomas the Tank Engine products. Clausi and Moore engaged in discussions with Learning Curve representatives at the Toy Fair, concluding on February 14. During these talks, Lee proposed a visit from two Learning Curve employees, Abraham and Wilson, to PlayWood in Toronto to explore potential manufacturing arrangements for wooden toys. Clausi requested a brief postponement to familiarize himself with Learning Curve's products, leading to an agreement for the visit on February 18, 1993. On that date, Abraham and Wilson toured Borsato's woodworking facility and then proceeded to a conference room where Clausi and Moore agreed to keep discussions confidential. Abraham emphasized the confidentiality of the information they would disclose, including designs that could be detrimental if accessed by competitors like Brio. Clausi reciprocated, asserting that he also had confidential production ideas to share. Following this agreement, Wilson revealed confidential drawings and product volume information from Learning Curve, which Clausi acknowledged as sensitive due to their unreleased nature and implications on projected costs and profits. The meeting also involved discussions on manufacturing methods, including Clausi's suggestion to use a CNC machine for creating trains from single pieces of wood. The parties shifted their discussion from train production to track design, where Wilson presented Learning Curve's track drawings and product samples. Abraham revealed that Learning Curve faced challenges with track sales, attributing poor performance to its track being nearly identical to competitor Brio's, which dominated the market. As a result, Learning Curve's track was often not displayed in stores. Following this, Abraham sought Clausi's advice on differentiating the track. Clausi suggested that making the track more realistic and functional could enhance its appeal and encourage retailers to stock the product. He proposed adding features like noise and a realistic appearance to distinguish it from Brio's offering. Clausi demonstrated this by modifying a piece of Learning Curve's track, initially cutting shallow grooves to improve realism, which did not produce sound. After adjusting the depth of the grooves, the track generated a "clickety-clack" sound but caused the train to run unevenly. Clausi then suggested that if PlayWood secured a contract with Learning Curve, they could market the track as "Clickety-Clack Track." Abraham and Wilson recognized Clausi's innovative idea of cutting grooves into the track to create a clacking sound. However, Abraham emphasized the need to secure a contract for the basic product before discussing improvements, noting the lengthy approval process by their licensor. The meeting concluded without further discussion on Clausi's concept. Before departing, Wilson requested and received a piece of track cut by Borsato, which was the only item taken from the meeting. Clausi and Moore did not require a receipt or confidentiality agreement to protect PlayWood's alleged trade secret. Following the meeting, Clausi updated PlayWood's confidentiality agreement to ensure the protection of materials discussed and marked several documents from Learning Curve as confidential. In March 1993, PlayWood and Learning Curve held three meetings regarding the potential manufacturing of Learning Curve's Thomas products, during which PlayWood submitted a proposal that was rejected. Learning Curve indicated a preference for U.S. manufacturing. Later, in October 1993, Abraham approached Clausi again about another manufacturing contract due to issues with Learning Curve's secondary supplier. This proposal was also rejected, as Learning Curve opted to produce the product in China. Despite a lack of success at the 1994 New York Toy Fair, Clausi and Moore continued refining the noise-producing track concept, choosing not to approach other toy companies, believing they were bound by confidentiality. In December 1994, Moore discovered that Learning Curve was marketing a similar noise-producing track called "Clickety-Clack Track," which featured parallel grooves like Clausi's design and was touted as a significant innovation in wooden train systems. Moore expressed shock upon discovering Learning Curve's Clickety-Clack Track™, believing it was a direct theft of PlayWood's concept, which they had discussed confidentially. Clausi, also involved, echoed Moore's sentiments, feeling that Learning Curve had closely replicated their design. In response, PlayWood sent a cease and desist letter to Learning Curve, accusing them of misappropriating their concept disclosed during a manufacturing proposal. Learning Curve countered by seeking a declaratory judgment of ownership over the design, which they patented on October 3, 1995, featuring grooves that produce a clacking sound. Learning Curve's Clickety-Clack Track™ significantly boosted their sales, reaching $20 million by early 2000. When PlayWood counterclaimed, alleging trade secret misappropriation, the jury ruled in favor of PlayWood. However, the trial court later granted Learning Curve's motion for judgment as a matter of law, concluding that PlayWood failed to prove it had a protectable trade secret under the Illinois Trade Secrets Act. The court identified several reasons: PlayWood did not demonstrate the concept was unknown in the industry, it could be easily replicated, they did not maintain its secrecy, it lacked economic value, and no significant resources were invested in developing it. The district court's decision is reviewed de novo, considering evidence favorably for PlayWood, with the inquiry focused on whether reasonable evidence existed for the jury to find in PlayWood’s favor. The dispute is governed by the Illinois Trade Secrets Act, requiring the plaintiff to prove that the information is a trade secret, was misappropriated, and utilized in the defendant's business. A trade secret is defined as information that derives economic value from its secrecy and is subject to reasonable efforts to maintain confidentiality. The Act's requirements stress the importance of secrecy, with the first requirement emphasizing that the information must not be generally known in the industry, while the second mandates that plaintiffs take reasonable measures to protect the information. Illinois courts also consider six common law factors in determining the existence of a trade secret, including the information's knowledge outside the plaintiff's business, its familiarity among employees, the measures taken to ensure secrecy, its value, the investment in its development, and the ease of acquisition by others. The current issue is whether sufficient evidence exists for the jury to conclude that PlayWood's concept for a noise-producing toy railroad track constituted a trade secret when disclosed to Learning Curve on February 18, 1993. The court clarifies that the six factors commonly referenced in trade secret cases are not strict requirements but rather guidelines for determining trade secret status under the Act. The Act does not specify these factors as independent criteria, and Illinois case law does not mandate that each factor must favor the plaintiff for a trade secret to be recognized. The definition of a trade secret varies by case, and its determination typically requires a factual evaluation of all circumstances. The court criticizes the district court for treating the Restatement factors as essential elements and for overriding the jury's role. Evidence presented by PlayWood supported the jury's conclusion that its noise-producing toy railroad track concept was not generally known beyond its business. Testimony indicated that no similar product was available until Learning Curve's Clickety-Clack Track™ was released over a year after PlayWood's conception. Additionally, the jury heard that Learning Curve struggled to distinguish its product from competitors, and an expert witness attested to the uniqueness of PlayWood's concept, highlighting its distinct sensory attributes that set it apart in the toy market. PlayWood provided evidence that Learning Curve obtained a patent for a noise-producing track, highlighting that patent and trade secret protections differ significantly. A trade secret does not require novelty; it only needs to be confidential and not common knowledge. If an invention is novel enough for patent protection, it is also likely protectable as a trade secret. The court rejected Learning Curve's claim that no rational jury could find that PlayWood's concept was unknown beyond its business. The district court did not analyze how widely known PlayWood's concept was among its employees and associates. However, evidence indicated that only key individuals, Clausi (the toy designer) and Moore (the officer), along with Borsato (who created the prototype), were aware of the concept. Given PlayWood's small size, Illinois courts recognize that expectations for maintaining secrecy differ from those for larger companies. The only disclosure to Borsato was necessary for developing the trade secret, and this disclosure did not undermine its confidential status. Borsato was bound by a written confidentiality agreement, which Clausi amended to ensure confidentiality after a specific meeting. Additionally, the jury found sufficient evidence that PlayWood took reasonable steps to protect the secrecy of its concept. The law requires trade secret owners to maintain confidentiality through reasonable actions, which is a factual determination for the jury. The reasonableness of the measures taken must balance costs and benefits, with only extreme cases being resolvable as a matter of law. The jury was instructed to find by a preponderance of the evidence that PlayWood's trade secrets were shared with Learning Curve due to a confidential relationship. By ruling in favor of PlayWood, the jury concluded that Learning Curve was bound by a confidentiality pledge. Testimonies from Clausi and Moore confirmed an oral confidentiality agreement with Abraham and Wilson prior to discussions on February 18, 1993. Clausi specifically indicated the confidentiality of certain ideas he shared. The jury also learned that Learning Curve disclosed sensitive information to PlayWood during their meeting, suggesting that such disclosure would not occur without a confidentiality agreement. Additional testimonies indicated that Learning Curve routinely engaged in oral confidentiality agreements. Despite PlayWood's lack of formal protections, such as a written agreement when providing its prototype to Wilson, the jury could reasonably find that PlayWood's reliance on the oral agreement was justified. The law establishes that a confidential relationship obliges the recipient to maintain secrecy, and unauthorized use of trade secrets can lead to tort actions. Clausi and Moore believed PlayWood had a genuine opportunity to collaborate with Learning Curve and did not foresee a breach of the confidentiality agreement. The jury's assessment also considered the size and experience of both companies, concluding that PlayWood's actions to protect its concept's secrecy were reasonable under the circumstances. PlayWood's concept of noise-producing track was deemed valuable by substantial evidence presented at trial, including expert testimony from Michael Kennedy. He asserted that the unique design of the track, with its "cross-cuts and changes in the surface," allowed PlayWood to differentiate itself from competitors and would command a premium royalty in licensing negotiations. Despite the district court's conclusion that PlayWood's concept had no economic value due to imperfections in its prototype, the evidence supported the opposite view. Kennedy testified that the prototype's issues did not affect the concept's value, as most design work was already complete, and it was standard practice in the industry to negotiate licenses based on prototypes. The court's focus on "actual use" was misguided; rather, the relevant criterion under Illinois law is whether the trade secret is of value to the company. Additionally, PlayWood's lack of a patent was not detrimental, as the concept could remain a trade secret without public disclosure. Ultimately, it was PlayWood's prerogative to decide when and how to disclose the concept. PlayWood invested minimal time and money in developing its toy design concept, with costs reported at under one dollar and time spent at less than half an hour. The district court ruled that such a small investment does not meet the threshold for establishing a trade secret under Illinois law. While Illinois courts generally reference the Restatement factors for determining trade secret status, the relevant statutory criteria include whether the information is secret enough to provide economic value, and whether reasonable efforts were made to maintain its confidentiality. Although significant expenditure can indicate value, Illinois law does not mandate it in all scenarios. The district court noted that prior Illinois cases emphasizing developmental costs typically involved compilations of data, where substantial investment is justifiable due to the lack of originality. In contrast, PlayWood's innovative toy design, described as a major advancement in track design, does not lend itself to such a requirement. The court reasoned that the creative process behind the design does not inherently differ in value based on the time or money spent. Furthermore, there was adequate evidence for the jury to conclude that PlayWood's concept was not easily replicable. Expert testimony highlighted the complexity of the product, which integrates sound and aesthetics, making it more sophisticated than it initially appears. Additionally, the jury learned that Learning Curve had invested significant time trying to differentiate its product from Brio's tracks before being introduced to PlayWood's concept, suggesting that if the idea were obvious, Learning Curve would have developed it sooner. The district court determined that PlayWood's concept was not a trade secret, asserting its potential for easy duplication. The court noted that if PlayWood had successfully marketed the notched track, the design would have revealed the concept, allowing for reverse engineering, which PlayWood's expert acknowledged could occur without patent or copyright protection. However, the court overlooked that PlayWood's concept had not been publicly disclosed and was only shared with Learning Curve under a confidential relationship, which prohibited reverse engineering. The legal distinction emphasized by Professor Milgrim highlights that a trade secret is protected until disclosed through sale, regardless of its potential for duplication afterward. Regarding exemplary damages under the Illinois Trade Secrets Act, which allows for up to twice the compensatory damages in cases of "willful and malicious misappropriation," the jury was not instructed on this due to the district court granting Learning Curve's motion for judgment before closing arguments. PlayWood argued that the jury should have been allowed to assess whether Learning Curve's actions warranted exemplary damages. Although Illinois case law does not define "willful and malicious misappropriation," precedents suggest it encompasses intentional misappropriation and conscious disregard for another's rights. The court found that a rational jury could conclude that exemplary damages were warranted in this case. A jury could reasonably conclude that Learning Curve intentionally misappropriated PlayWood's trade secret related to a noise-producing track, subsequently attempting to disguise this act by fabricating evidence of prior independent development. The case is remanded to the district court for a jury trial regarding exemplary damages, while the court will also consider PlayWood's request for attorneys' fees, as permitted under Illinois law for willful and malicious misappropriation. The district court's prior judgment is reversed, and the jury's verdict is reinstated. PlayWood may recover its costs incurred in this court. In its amended counterclaim, PlayWood presented eight causes of action, including misappropriation of trade secrets, fraud under the Illinois Consumer Fraud Act, and deceptive trade practices, among others. The district court granted summary judgment against PlayWood on all claims except for misappropriation of trade secrets, which PlayWood does not appeal. The proper evaluation focuses on whether PlayWood's efforts to maintain the secrecy of its trade secrets were adequate, rather than whether they were deemed reasonable by independent judgment. Testimony indicated that inventors often presented prototypes that lacked polish, suggesting a variety of forms in which inventions are submitted. An inventor typically presents a preliminary product or prototype rather than a finished product during discussions about potential licensing. The distinction between a prototype and a finished product is not crucial for licensing decisions, as these depend on factors such as the manufacturer’s capabilities and production costs, which may be uncertain. Licensing agreements in the toy industry generally encompass the prototype, any enhancements or improvements (regardless of their source), and potential line extensions, allowing for broader application of the invention. Both the Uniform Trade Secrets Act and the Restatement (Third) of Unfair Competition do not require prior use of information as a condition for trade secret protection. The proposed Act expands this protection to plaintiffs who have not yet utilized a trade secret, recognizing that imposing a prior use requirement can hinder innovators during research and development phases. Professor Milgrim critiques the notion of a per se requirement for developmental costs, asserting that costs should be viewed as incidental to fundamental elements like secrecy. Various case law examples illustrate that customer lists can be deemed trade secrets if they are developed over time with significant effort and expense, and maintained under strict confidentiality, as demonstrated in cases such as Delta Medical Systems and Strata Marketing. Under Illinois law, confidential information, including customer lists, must be developed through considerable investment in time, effort, and security. Customer lists, pricing information, and business techniques may qualify as trade secrets if developed by an employer over several years at significant expense and maintained under strict security. Illinois courts recognize that a customer list constitutes a protectable trade secret under similar conditions. Exemplary damages may be awarded for torts involving fraud, malice, deliberate violence, oppression, or gross negligence indicating disregard for others' rights. In this case, PlayWood's argument regarding the exclusion of an ink expert's testimony was not considered because they failed to include the relevant Daubert hearing transcript in the appeal record, which is required for challenging findings unsupported by evidence. Although the court has the authority to order the supplementation of the record, it declined to do so, noting that PlayWood had ample opportunity to rectify the issue but did not. Consequently, PlayWood's request for de novo review and reversal of the trial court's ruling on the admissibility of the expert testimony was not actionable, as they did not provide necessary evidence for review.