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Schulenburg v. Signatrol Inc.

JULY 23, 1964.

EDWARD J. SCHULENBURG, ET AL., CO-PARTNERS D/B/A TIME-O-MATIC, COMPANY, AND TIME-O-MATIC, INC., A CORPORATION, AND E-S INDUSTRIES, INC., PLAINTIFFS-APPELLEES,

v.

SIGNATROL INC., A CORPORATION, JOHN W. SUTPHIN, ET AL., DEFENDANTS-APPELLANTS.



Appeal from the Circuit Court of Vermilion County; the Hon. HARRY I. HANNAH, Judge, presiding. Affirmed. SMITH, J.

Plaintiffs manufacture and sell devices for automatically making and breaking electrical circuits. Such devices known in the trade as flashers are used in display signs where changing light patterns or a flashing effect is thought desirable. Plaintiffs were first in the field, at least they were there before defendants, all of whom are former employees who left to form their own competing company, Signatrol, also a defendant. For our purposes we can group defendants as one as we can the various plaintiffs. The lower court issued an injunction restraining defendants from the further manufacture and sale of competing flashers, in effect, putting them out of business and they appeal. Damages, if any, are postponed pending the outcome here.

Plaintiffs say that their manufacturing "know-how" is a trade secret which was imparted in confidence to defendants while employees and that such secret has been used by them in manufacturing a competing product. Defendants deny utilization by them of any such secret, in fact, they deny its very existence. All they used, they answer, were acquired skills and such general knowledge of the operation as the law permits them to take away.

Plaintiffs' trade secret, if it is, is to be distinguished from the product itself in which they have no property right, being devoid of patent protection. The electrical principle involved is well known and plaintiffs' product is for sale and anybody can buy it. For that matter anybody can duplicate it if they want to and can and go into business. Competition is considered a very good thing (in the flasher business), but those who choose to go, must use fair means, not foul. If fair means are used the field is wide open to all comers for the owner of a trade secret as distinguished from the owner of a patent has no right as such to exclude others from using it. Relief is only granted when someone attempts to use the secret in violation of some general duty of good faith such as an abuse of confidence. Such an abuse results in unfair competition and equity will then intervene if called upon.

Assuming possession of a trade secret by plaintiffs, assuming its disclosure in confidence to defendants while employees, assuming its profitable use thereafter by them to plaintiffs' financial detriment, is this unfair competition? Posited thusly, the answer is immediately apparent. Misuse of confidential information by erstwhile employees as a weapon on of attack upon their former employer is indeed unfair competition for it shocks one's sense of fair play. Even in times gone by, when the law took a less jaundiced view, such conduct was not defended upon the ground that it was fair. Lord Kenyon in Nichols v. Martyn (2 Esp 732) characterized such conduct as "not handsome," but yet for his time not contrary to law. It is for ours without meaning to cast aspersions on a more freewheeling age. Other courts and writers are of this consensus. In Franke v. Wiltschek, 209 F.2d 493, it was stated:

"But the tendency of the law, both legislative and common, has been in the discretion of enforcing increasingly higher standards of fairness or commercial morality in trade. The tendency still persists. The present case surely is not one where we are disposed to attempt to reverse the trend."

Misuse of confidential information, because it can result in unfair competition, is said to be violative of an implied condition that "he will not after the service is determined use information which he has gained while the service has been subsisting to the detriment of his former employer." Essex Trust Co. v. Enright, 214 Mass. 507, 102 N.E. 441. To sum up — misuse of confidential information or breach of an implied condition are but text in the larger context of unfair competition and such competition can run afoul of the equitable doctrines which condemn fraud and over-reaching. For our context the rule is, that an employee lawfully entering upon a competing business may be enjoined from using trade secrets of his employer's business obtained during the course of his employment.

Obviously all knowledge acquired by an employee does not partake of a trade secret. His relationship to his employer may be confidential, but not the knowledge. That which by experience has become a part of a man's general knowledge cannot and ought not to be enjoined from further and different uses. Again, in Junker v. Plummer, 67 N.E.2d 667 (Mass. 1946) the rule is stated thusly:

"The law is well settled that an employee upon terminating his employment may carry away and use the general skill or knowledge acquired during the course of the employment. (Citing cases.) But it is equally well established that out of the `relationship of employer and employee certain obligations arise, including that which precludes an employee from using, for his own advantage or that of a rival and to the harm of his employer, confidential information that he has gained in the course of his employment.'"

All would agree that equity should not restrict the subsequent use of general skills and knowledge and this for the reason that such use simply does not shock one's sense of fair play. But the line between the useable and the nonuseable is hard to draw. Overstrict, we create a monopoly of first users — a very bad thing in our society, if we acknowledge the desirability of encouraging individual business enterprise and initiative which we do. Plaintiffs agree:

"We do not question or dispute this right (to enter into a competing business) in the defendants. However, there was a legal and an illegal method open for adoption by defendants in preparing to enter into such competing business and producing products in competition with their former employer and defendants deliberately chose the illegal method."

This method, they say, took the form of either copying or memorizing their "know-how" on blueprints during the time they were employed and putting it to use in manufacturing a competitive product.

We thus come to grips with the central question presented by this appeal. Was there a "trade secret"? In defining these two words we need not be concerned, as we are elsewhere, with searching for some esoteric meaning for none exists, though for a play on words, the information to be "secret" must be "esoteric" in the sense of being restricted to an inner circle. As there are two words there are two aspects. It must be secret and the secret must relate to business (trade). Formulae, lists, patterns and blueprints are examples. To be secret means that a blueprint, for example, is not in the public domain through divulgence and that it is not too easily discoverable; that is, apparent to all without too much hard work.

Was plaintiffs' blueprinted "know-how" a secret? Well, they considered it a secret and attempted reasonably to keep it so (without much success), and their intent and attempt, we suppose, are of importance in answering the question. It was imparted privately to a select few — defendants among them. That the secret was spied out does not make it any less a secret nor does the fact that their finished product was on the market amount to either a divulgence or an abandonment of such secret. In Smith v. Dravo, 203 F.2d 362, it was said:

"But this (publicity material) was not equivalent to a disclosure of the structural design, the engineering details, of either the container as a whole or its various working parts. This could only be obtained ...


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