10th Circuit Finds Trade Secrets Can Be in the Combination of Known Elements

In Hertz v. Luzenac Group, 576 F.3d 1103; 91 USPQ2d 1801 (10th Cir. 2009), Luzenac, a leading seller of talc, has sold various formulations of vinyl silane-treated talc from 1994 to 2002 under the name Mistron 604AV.  From 2002 onwards, Luzenac licensed the production of 604AV to Van Horn, Metz & Co., Inc. (VHM), one of Luzenac’s distributors, wherein Luzenac sold the raw talk used in the 604AV product to VHM.  Luzenac hired Hertz in 1994 to head the technical development and marketing of products that were to become 604AV and hired Lighthart to market and sell the 604 AV product to companies using such coatings.  Luzenac fired Hertz in 1998, however, Hertz won suit against Luzenac under Title VII for firing him in retaliation for his objecting to Luzenac’s religious discrimination.  Lighthart, who left Luzenac in 2001, testified in the case on Hertz’s behalf. 

Several years after Hertz was fired from Luzenac, IMI Fabi contracted Hertz’s consulting company to develop and market a vinyl silane-treated talc to be called “Genera.”  Hertz, in turn, contracted Lighthart to develop a list of prospective customers of Genera and to help market the product.  Luzenac, upon hearing of IMI Fabi’s contracting of Hertz, it sent a cease-and-desist letter to Hertz.  IMI Fabi, upon hearing of Luzenac’s actions, reduced efforts to market Genera.  Soon after, Hertz sought declaratory and injunctive relief against Luzenac, and Luzenac alleged counterclaims including interference with contract and with prospective business advantage, misappropriation of trade secrets, conversion, civil theft and breach of contract.  Hertz amended his complaint to include claims of unlawful retaliation under Title VII, defamation, tortious interference with contract and prospective business advantage.  Subsequently, Luzenac removed the case to federal district court and joined Lighthart in the suit and added claims of unjust enrichment and conspiracy.

In reviewing the District Court’s dismissal of Luzenac’s claims for misappropriation of trade secrets, breach of contract, and conspiracy, the 10th Circuit reviewed summary judgment decision as per whether there was any issue as to material fact and whether the movant (Hertz) was entitled to judgment as a matter of law. 

First, the 10th Circuit looked to whether the production process of 604AV was a trade secret.  Luzenac alleged that Hertz violated the Colorado Uniform Trade Secrets Act (UTSA) by disclosing Luzenac’s entire formula and process of manufacturing 604AV to IMI Fabi.  The 10th Circuit and the District Court both focused on whether the production process qualifies as a trade secret.  According to the UTSA, a trade secret is “any scientific or technical information, design, process, procedure, formula, [or] improvement…which is secret and of value.”  Colo. Rev. Stat. Ann. §7-74-103(4).  The 10th Circuit stated that the test for determining whether something is capable of protection as a trade secret is recited in Colorado Supply Co. v. Stewart, 797 P.2d 1303, 1306 (Colo. Ct. App. 1990), the factors being:

(1) the extent to which the information is known outside the business;

(2) the extent to which it is know to those inside the business, i.e. by the employees;

(3) the precautions taken by the holder of the trade secret to guard the secrecy of the information;

(4) the savings effected and the value to the holder in having the information as against competitors;

(5) the amount of effort or money expended in obtaining and developing the information; and

(6) the amount of time and expense it would take for others to acquire and duplicate the information.

The 10th Circuit noted that the District Court, in applying the above noted test, acknowledged that the last three factors could weigh in favor of Luzenac, and even stated, with respect to the fourth factor, that “a reasonable jury might find that, despite the plurality of comparable products competitive to Mistron 604AV, Luzenac’s position was unique as a result of the information and expertise it developed.”  Aplt. App. Vol. IX, at 3002-03.  Furthermore, the District Court stated that “[a] reasonable jury might determine that Mr. Hertz and IMI Fabi saved time and expense in developing Genera by virtue of the expertise and information Mr. Hertz obtained and discovered during his time at Luzenac.”  Id. at 3002.  However, in granting Hertz summary judgment, the District Court stated that “secrecy is the sine qua non of the claim and there can be no genuine dispute that the process for manufacturing 604AC was not a secret.”  Id. at 3003. 

The 10th Circuit agreed with the District Court in that the matter being a secret is indispensible to there being a trade secret.  However, the 10th Circuit stated that the District Court committed three mistakes in evaluating the secrecy of the Luzenac production process:  (1) failing to consider the process in the aggregate; (2) failing to view the evidence in the light most favorable to Luzenac; and (3) focusing on steps Luzenac failed to take to protect the secrecy of 604AV rather than the steps Luzenac did take and whether such steps were reasonable.

In considering the process in the aggregate, the 10th Circuit noted that Luzenac asserted that the trade secret comprises nine elements and conceded that some of those elements may be in the public domain.  However, Luzenac also asserted that the District Court should have considered the aggregate production process, and not looked at each component of production separately.  The 10th Circuit agreed with Luzenac as per considering the production process in total.  Instead, the District Court reviewed evidence with respect to each one of the nine elements of production, and concluded that “the process as a whole [does not] constitute a trade secret.  Each and all of the elements of the process for manufacturing 604AV are known outside of Luzenac.”  Aplt. App. Vol. IX, at 3003.  Furthermore, in responding to Luzenac’s argument that the aggregate production process cannot be found in a single location, the District Court stated that Luzenac’s assertion was “both true and irrelevant.”  Aplt. App. Vol. X, at 3270.  As per the District Court’s analysis, the 10th Circuit stated that “the district court did not engage in any substantive analysis of the production process as a whole.”  The 10th Circuit went on to state the District Court applied the incorrect standard and that the holding in Rivendell should have been followed, which states that “a trade secret can include a system where the elements are in the public domain, but there has been accomplished an effective, successful and valuable integration of the public domain elements and the trade secret gave the claimant a competitive advantage which is protected from misappropriation.”  Rivendell Forest Prods., Ltd. V. Ga.-Pac. Corp., 28 F.3d 1042, 1045 (10th Cir. 1994). 

The 10th Circuit went on to review the District Court’s finding that each of the nine elements of the 604AV aggregate production process was publicly disclosed, and stated that “[w]hile the finder of fact is required to consider the claimed trade secret a whole, it may, in addition, consider whether the individual components are publicly known.”  In reviewing whether the amount of vinyl silane in 604AV was publicly known, the 10th Circuit stated that “[v]iewing all of the evidence as a whole, there is significant support for Luzenac’s position that it has kept the amount of vinyl silane a secret.  The ultimate weighing of that evidence will have to be done by a jury.”  As per the type of vinyl silane, the 10th Circuit stated that there was a genuine question of material fact coming from assessment of relevant documentation and witness testimony.  Additionally, as per a quality control test used in the production process, the 10th Circuit, in finding the two parties’ witnesses’ testimonies incongruent, stated that they can not resolve the conflict without assessing the credibility of the parties’ witnesses.  In summary, the 10th Circuit stated that “the production process of 604AV is not contained as a whole within the four documents to which Mr. Hertz refers; nor can it be indisputably discovered though the consideration of additional documents available to us…Mr. Hertz cannot win on summary judgment simply by saying that a good mechanic could assemble various pieces of public information…” 

Next, the 10th Circuit went on to review the precautions taken by Luzenac to protect the alleged trade secret.  The 10th Circuit notes that the District Court focused on precautions not taken by Luzenac rather than the focusing on whether the precautions taken by Luzenac were reasonable.  As an owner of a trade secret must take measures to prevent the secret from those not authorized to have access to such, such measures must be “reasonable under the circumstances to maintain its secrecy.”  Colo. Supply, 797 P.2d at 1306.  The 10th Circuit noted that Luzenac took a series of steps to protect the secrecy of the production of 604AV, such as posting signs to maintain confidentiality and having key employees and contractors such as VHM sign confidentiality agreements.  However, the District Court found such measures “ceremonial,” and noted that Luzenac did not have all its customers sign confidentiality agreements and that Luzenac failed to control VHM’s disclosures of the production process of 604AV.  Aplt. App. Vol. X, at 3271.  In response, the 10th Circuit stated that “there are always more security precautions that can be taken.  Just because there is something else that Luzenac could have done does not mean that their efforts were unreasonable under the circumstances,” and as such, whether the precautions were reasonable was a matter for a jury to decide.

After reversing the District Court’s decision regarding summary judgment on the trade secret and remanding the issue of whether the production process in aggregate was a trade secret, the 10th Circuit next looked at whether Luzenac’s customer information was a protectable secret.  The 10th Circuit notes that Hertz conceded that he received a document from Lighthart, who prepared the document while employed with Luzenac.  However, a second document that was prepared by Lighthart, allegedly just for IMI Fabi, contained information on 33 potential Genera customers.  However, the 10th Circuit stated that it was unclear whether the information was misappropriated from Luzenac’s customer information.  In analyzing whether the customer information was a trade secret, the 10th Circuit applied the Colorado Supply factors in conjunction with the Colorado Statutory definition of a trade secret, which includes “listing of names, addresses, or telephone numbers, or other information relating to any business or profession which is secret and of value.”  Colo. Rev. Stat. Ann. §7-74-102(4).  The District Court, in finding that the customer list was not a trade secret, relied upon the fact that the customer information came from public sources. 

However, the 10th Circuit stated that the District Court did not consider conflicting testimony indicating that the customer information lists were of limited circulation in the company, and that the District Court dismissed Luzenac’s instruction to employees to keep all information confidential as impracticable and because such a blanket prohibition does not qualify as a reasonable attempt to maintain secrecy.  The 10th Circuit believed that the District Court made determinations, like those noted above, that should have been made by a jury and that their review of the record shows that answers to questions at hand are disputed issues of fact that can’t be easily determined from the record at hand.  For example, although the 10th Circuit found that some information on Luzenac’s customer list may not be publicly available, much information on potential customers of vinyl silane-treated talc is available from a variety of sources.  With there being dispute regarding a number of facts concerning the customer lists, such should be resolved by a jury, according to the 10th Circuit. 

On remand, the 10th Circuit instructed the District Court to consider factors enumerated in Colo. Supply, 797 P.2d at 1306-07, which are:  (1) whether proper and reasonable steps were taken by the owner to protect the secrecy of the information; (2) whether access to the information was restricted; (3) whether employees knew customers’ names from general experience; (4) whether customers commonly dealt with more than one supplier; (5) whether customer information could be readily obtained from public directories; (6) whether customer information is readily ascertainable from sources outside the owner’s business; (7) whether the owner of the customer list expended great cost and effort over a considerable period of time to develop the files; and (8) whether it would be difficult for a competitor to duplicate the information.  Additionally, the 10th Circuit cited Sonoco Prods. Co. v. Johnson 23 P.3d 1287, 1290 in noting “there is no requirement in Colorado’s [UTSA] that there be actual use or commercial implementation of the misappropriated trade secret for damages to accrue.  Misappropriation consists only of the improper disclosure or acquisition of the trade secret.”  Thus, the 10th Circuit dismissed Hertz’s argument that that there was no evidence that IMI Fabi benefitted from Luzenac’s customer information as it was irrelevant according to the above.  The only relevant matters presently are whether Hertz misappropriated of Luzenac’s customer list and whether such information is a trade secret, and that such should be decided by a jury.

In addressing whether Hertz committed a breach of contract with respect to a confidentiality agreement he signed, the 10th Circuit noted that even if Luzenac fails as per claims under the UTSA, it may nonetheless succeed in claiming breach of contract.  The 10th Circuit found the confidentiality agreement unspecific as to what information was confidential.  In remanding the claim for further proceedings, the 10th Circuit stated that the relevant factual questions include: “(1) whether Luzenac made it clear that the manufacturing process for 604AV and Luzenac’s customer information were confidential, and (2) whether the information used by Mr. Hertz was exclusively in the public domain or known to him prior to his employment with Luzenac.”  Similarly to the breach of contract claim, the 10th Circuit stated that the conspiracy claim depends on the factual findings of the claim for misappropriation of trade secrets.  As such, if a jury found that the production process for 604AV and Luzenac’s customer list were trade secrets, then Hertz and Lighthart could be charged with conspiracy as well.

The 10th Circuit next addressed Hertz’s attempt to amend his complaint with claim of abuse of process, which the District Court denied because the District Court found that Hertz failed to allege improper use of process by failing to meet the requirements to allege such a claim, and thus Hertz’s attempt to amend his complaint was useless.  The 10th Circuit stated that an abuse of process claim requires a showing of: “(1) an ulterior purpose for the use of a judicial proceeding; (2) willful action in the use of that process which is not proper in the regular course of the proceedings, i.e. use of a legal proceeding in an improper manner; and (3) resulting damage.”  Lauren Corp. v. Century Geophysical Corp., 953 P.2d 200, 202 (Colo. Ct. App. 1998).  With ulterior purposes being a coercive goal or some collateral advantage, whereas the 10th Circuit states that “Mr. Hertz’s claim of abuse stems from Luzenac filing counterclaims against him for misappropriation of trade secrets.  Any ulterior motives Luzenac might have had are insufficient to support an inference of improper use. “  The 10th Circuit went on to state that “Luzenac is entitled to protect its trade secrets.  Its counterclaims are an appropriate means of accomplishing that goal…” and that “Mr. Hertz has not identified any “collateral advantage” to be gained by Luzenac.”  Thus, the 10th Circuit affirmed the District Court’s denial of Hertz’s motion to amend his complaint. 

Lastly, the 10th Circuit addressed Hertz’s tortious interference with contract and with prospective business advantage.  Hertz was contracted with IMI Fabi to receive a percentage of the profits from the sale of Genera.  The 10th Circuit states that for a claim of intentional interference with contract, the plaintiff must show that the defendant “(1) was aware of the existence of the contract; (2) intended that one of the parties breach the contract; (3) induced the party to breach the contract or make it impossible for him or her to perform; and (4) acted “improperly in causing the breach.”  Krystkowiak v. W.O. Brisben Cos.,  90 P.3d 859, 871 (Colo. 2004).  In  Hertz’s claim, he alleges that Luzenac’s claims and litigation caused IMI Fabi to halt sales of Genara, and thus, Hertz’s contract resulted in less performance that it would have had Luzanac not acted.  However, the 10th Circuit noted that “Mr. Hertz concedes that IMI Fabi did not breach its contract,” because IMI Fabi wasn’t required to make any sales of Genera.  Essentially, Hertz argues that IMI Fabi would have more fully performed on it’s contract with Hertz had Luzenac not acted as it did.  In rejecting such a premise for tortious interference, the 10th Circuit notes cites Radiology Prof’l Corp. v. Trinidad Area Health Ass’n, 577, P.2d 748, 749-751, and notes that a contract must be breached, and that realizing less profit is not sufficient grounds for Hertz to support a claims of tortious interference with contract. 

With regards to intentional interference with prospective business relations, the 10th Circuit states that “the plaintiff must show that there is “a reasonable likelihood or probability that a contract would have resulted; there must be something beyond a mere hope.” Klein, 44 F.3d at 1506,” however, “Mr. Hertz cannot prove that he had more than “a mere hope” of entering into any future business deals with IMI Fabi.”  Thus, the 10th Circuit found that no reasonable jury could conclude from Hertz’s evidence that Hertz had a reasonable probability of having a future contract with IMI Fabi.  Thus, the 10th Circuit upheld the District Court’s dismissal of Hertz’s claim of tortious interference with prospective business advantage.

In summary, the 10th Circuit reversed and the District Court’s summary judgment in dismissing Luzenac’s claims for misappropriation of trade secrets because it found that there were issues of material fact to be decided by a jury.  However, the 10th Circuit affirmed both the District Court’s denial of Hertz’s motion to amend his complaint with an abuse of process claim and the District Court’s dismissal of Hertz’s tortious interference claims.

Significance for trade secret owners

Hertz presents a reminder that the bar for what constitutes a trade secret can be very low.  Any collection of information, including a collection of already-known information, is eligible for trade secret protection.  Thus, while trade secret owners must show and plead with particularity in defining their trade secret during litigation, defendants cannot merely point to the well known nature of the elements of the trade secret without accounting for the value of the collection itself.

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