Kadant, Inc. v. Seeley Machine, Inc

Brief Fact Summary.

Kadant, Inc. (Plaintiff) claimed that its former employee, Corlew, stole design specifications for its products, which, it claimed, were trade secrets, and that Corlew gave the trade secrets to his new employer, Seeley Machine, Inc. (Defendant), which then used them to develop a new line of products.

Synopsis of Rule of Law.

Trade secret protection is not appropriate where a plaintiff does not provide evidence showing that the defendant improperly obtained and reverse engineered its products.

Facts.

Corlew was employed at Kadant, Inc. (Plaintiff) in its AES division.  The products made by Plaintiff were used in the pulp and papermaking industry.  At AES, Corlew had access to both Plaintiff’s design specifications for its products, and its entire computer system.  Through his employment with AES, Corlew was subject to a signed confidentiality agreement, in which he agreed not to disclose or use to his benefit any confidential information, including information about AES customers.  Plaintiff eventually terminated Corlew’s employment, and then Corlew went to work for Seeley Machine, Inc. (Defendant), one of Plaintiff’s competitors.  At Seeley (D), Corlew was responsible for developing and marketing a new line of Seeley (Defendant) products for sale to the pulp and papermaking industry.  This new line came out soon after Defendant employed Corlew.  Plaintiff brought suit in federal district court, alleging, inter alia, that Corlew and Seeley (Defendant) had misappropriated its trade secrets.  Plaintiff claimed the only way Defendant could have developed and placed for sale this new line of products so quickly was by Corlew’s theft of AES’s trade secrets including its design specifications and customer databases.  Defendant claimed that it had reverse engineered the products from existing products that were freely available in the public domain and unprotected by published patent applications, in-force patents, or trade secrets.  Plaintiff argued that it was not possible for Defendant to have reverse engineered its products, claiming that reverse engineering is time consuming, expensive, and requires technical skill.  Specifically, Plaintiff claimed that, using Defendant’s own expert as a frame of reference, it would take Defendant 1.7 years to reverse engineer all of Plaintiff’s products.  However, Defendant maintained that only a small fraction of Kadant’s products were reverse engineered.

Issue.

Is trade secret protection appropriate where a plaintiff does not provide evidence showing that the defendant improperly obtained and reverse engineered its products?

Held.

(Hurd, J.)  No.  Trade secret protection is not appropriate where a plaintiff does not provide evidence showing that the defendant improperly obtained and reverse engineered its products.  If secrecy is lost when a product is placed on the market, there is no trade secret protection.  Therefore, trade secret law does not offer protection against reverse engineering where the means used were “honest†(in the public domain) and not obtained by virtue of a confidential relationship with an employer.  In this case, Kadant (Plaintiff) has failed to present evidence that the means used by Seeley (Defendant) to obtain the alleged trade secret were improper or dishonest.  Basically, it has no evidence Corlew actually stole the design specifications.  Instead, it relies upon an inference, that the only way Defendant could develop, market, and sell its products in such a short time is if Corlew stole the design specification information.  However, as far as the evidence to this point shows, such an inference is unjustified.  Plaintiff does not seem to argue that reverse engineering is impossible, just that it would take a great deal of time, skill, and expense, and that the lack thereof demonstrates that the design specification must have been stolen.  Defendant has argued that Plaintiff’s products were simple and made of nontechnical and few parts, requiring little time for reverse engineering, for the few products that were.  Plaintiff failed to sufficiently rebut these contentions.  Therefore, since Plaintiff has failed to clearly show that Defendant improperly obtained and reverse engineered its products, trade secret protection is improper at this stage of the litigation.

Discussion.

Some courts have held that even where a product is out in the public domain, and is therefore subject to being reverse engineered by a purchaser, trade secret status remains intact because the defendant’s former employment with the plaintiff was the only basis for the defendants being “able to select particular items from a vast sea of public information.â€Â  The court in this case rejected such a view because it “would effectively eviscerate any benefit reverse engineering would provide in the preliminary injunction analysis as applied to trade secrets, forestall healthy notions of commercial competitiveness, and heavily contribute to an inert marketplace where products can only be developed and sold under an impenetrable cloak of originality.&rdquo.