Opinion
Civil No. SA-98-CA-664-JWP.
December 20, 1999.
ORDER
In an attempt to explore a potential business relationship, the two parties in this case entered into a confidential relationship. That relationship was marked by confidentiality agreements and the disclosure of a body lotion in response to promises of large manufacturing and licensing revenues if a new body lotion could be developed to suit the defendant's criteria. In response to defendant's request, plaintiff provided defendant a body lotion formulation that defendant could sell as part of a test market. Defendant sent two bottles of that lotion to a laboratory with instructions to create a formula that duplicates the qualities of that lotion. Defendant ultimately entered into a manufacturing agreement with the laboratory that duplicated the formula for plaintiff's lotion.
Plaintiff's claims are all based on the misappropriation of its trade secret — the formula for the lotion it provided to defendant. The central dispute presented by defendant's motion for summary judgment (docket no. 103) is that plaintiff cannot establish that the lotion formula was a trade secret because it was in the public domain and it was readily ascertainable. Defendant contends that the lotion formula was readily ascertainable because plaintiff previously manufactured the lotion, which was mass-marketed by a third party under the name "Curity." Information that is generally known or readily ascertainably through proper means is not protectable as a trade secret. it acquisition of the information through an examination of a competitor's product would be difficult, costly, or time-consuming, then the information may be considered sufficiently inaccessible to qualify for protection as a trade secret. Additionally, when a defendant has engaged in egregious misconduct in order to acquire the information, the inference that the information is sufficiently inaccessible to qualify for protection as a trade secret is particularly strong. In consideration of the circumstances of the case, the Court believes that defendant engaged in egregious misconduct by copying the formula to plaintiff's lotion samples that defendant obtained only as a result of the parties' confidential relationship. Therefore, the formula for plaintiff's lotion qualifies for protection as a trade secret. Accordingly, the Court will deny defendant's motion for summary judgment.
Background
Plaintiff DPT Laboratories, Ltd. (DPT), with its principal place of business in San Antonio, develops and manufactures creams, lotions, gels, and other cosmetic and pharmaceutical products for outside companies. Defendant Bath Body Works, Inc. (BBW), with its principal place of business in Ohio, is a national retailer of bath and fragrance products, including body lotions.
The pertinent facts of this case, which do not appear to be in dispute, are as follows: In 1995, BBW contacted DPT to determine if DPT would be interested in assisting BBW in improving its body lotion product. As a result of BBW's request, Mark Iacobucci, of DPT's marketing department, had several telephone conversations with the head of BBW's research and development, Vera Stavroff, to discuss the potential project. In October 1995, Ms. Stavroff visited DPT's offices in San Antonio to meet with DPT personnel to further discuss the body lotion product. Early in their discussions, Mr. Iacobucci made Ms. Stavroff aware of DPT's concerns to keep its information and product confidential, sending Ms. Stavroff a proposed confidentiality agreement. Ms. Stavroff assured Mr. Iacobucci that BBW would keep confidential any information and product that DPT submitted and that BBW would not use that information or product for any purpose except to explore a potential business relationship between the two companies. Response, Exh. 1, Iacobucci Aff., p. 2. BBW sent a proposed confidentiality agreement to DPT on June 10, 1996. The parties eventually executed two written confidentiality agreements on July 1, 1996, and September 13, 1996.
The evidence in support of the response is attached to DPT's motion for partial summary judgment (docket no.).
In January 1996, Ms. Stavroff sent Mr. Iacobucci a "New Product Information Form," which contained a product profile of a body lotion that BBW was searching for to replace the body lotion it had been selling in its retail outlets. Ms. Stavroff invited DPT to review that product information form (PIF) and to submit one or more product samples in compliance with that product profile for the purpose of participating in a "competition" that BBW was conducting to replace its current body lotion. To induce DPT to send samples of its body lotion product for that "competition," BBW represented that DPT would, if its product was selected, receive substantial financial rewards from BBW in the form of licensing and manufacturing revenues. Response, Exh. 1, Iacobucci Aff., p. 3; Exh. 4, Stavroff Depo., pp. 56-57.
On March 1, 1996, in reliance upon BBW's representations, DPT sent BBW two product formulation samples that DPT had selected as products that would match the product profile contained in the PIF. After BBW received those samples from DPT, Ms. Stavroff requested Mr. Iacobucci to submit approximately 200 two-ounce bottles of one of those formulations for a formal consumer screening contest. In reliance upon BBW's representations, DPT sent BBW the requested 200 two-ounce bottles on May 21, 1996.
In the summer of 1996, BBW notified DPT that BBW had selected DPT's body lotion entry as the winner of BBW's body lotion consumer screening contest. Response, Exh. 1, Iacobucci Aff., p. 3, Exh. 4, Stavroff Depo., p. 49. BBW also informed DPT that BBW would need to test market DPT's body lotion in 100 of BBW's stores prior to making the final decision to replace the old BBW lotion with the DPT lotion. At that time, BBW also told DPT that DPT needed to develop final formulas incorporating BBW's colors, scents, and additional ingredients to DPT's base lotion to prepare the product for the test market. DPT complied with BBW's request and incorporated the additional ingredients to develop the "test market lotion." On September 17, 1996, and October 25, 1996, DPT provided BBW ingredient lists for the lotion at issue. On November 15 and 20, 1996, BBW issued purchase orders to DPT for approximately 1.3 million units of the test market lotion. Mot. S/J, Exhs. 21, 22. BBW's 100-store test market began in February 1997, and it was a success.
Meanwhile, on December 19, 1996, BBW provided a sister company, Barlo Labs, two bottles of the test. market lotion along with its list of ingredients. Although BBW provided the list of ingredients, BBW did not have the percentages, source or suppliers of the ingredients because DPT never provided BBW the formula for the lotion. BBW instructed Barlo Labs to create a formula that duplicates the performance, texture and physical characteristics of DPT's lotion samples. Response, Exh. 10, Rosenstreich Depo., p. 116. BBW also instructed Barlo Labs to use DPT's lotion samples and the ingredient lists to develop a lotion formula for BBW.
On July 1, 1997, BBW informed DPT that it had decided against entering into a manufacturing agreement with DPT. Instead, BBW decided to use the Barlo Labs lotion, which BBW has been selling since November 1997.
Summary Judgment
Federal Rule of Civil Procedure 56(b) provides that a defending party may, at any time, move with or without supporting affidavits for a summary judgment in the party's favor. Summary judgment shall be rendered if the pleadings and evidence show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c). A party seeking summary judgment bears the initial burden of informing the court of the basis for its motion, and identifying those portions of the record which it believes demonstrate the absence of a genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 2553, 91 L.Ed.2d 265 (1986). The party opposing a motion must present affirmative evidence in order to defeat a properly supported motion for summary judgment. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 257, 106 S.Ct. 2505, 2514, 91 L.Ed.2d 202 (1986). An adverse party may not rest upon the mere allegations or denials of his pleadings, but his response, by affidavits or otherwise, must set forth specific facts showing that there is a genuine issue for trial; if he does not so respond, summary judgment, if appropriate, shall be entered against him. Fed.R.Civ.P. 56(e).
The mere existence of some alleged factual dispute between the parties will not defeat an otherwise properly supported motion for summary judgment; the requirement is that there be no genuine issue of material fact. Anderson, 477 U.S. at 247-248, 106 S.Ct. at 2510.
The dispute about a material fact is genuine if the evidence is such that a reasonable jury could return a verdict for the nonmoving party. Id . All of the evidence and conferences drawn from that evidence must be viewed in the light most favorable to the party opposing the motion for summary judgment;. Hibernia National Bank v. Carner, 997 F.2d 94, 97 (5th Cir. 1993)
Discussion
DPT asserts a contract claim under the Ohio Trade Secrets Act, Ohio Revised Code §§ 1333.61-1333.69, because the parties' agreed that Ohio law would govern any contract disputes. The contract claim seeks redress for breach of confidentiality agreements by means of the alleged misappropriate of DPT's trade secret — its lotion formula. DPT also asserts tort claims under Texas common law for unjust enrichment, misappropriation of trade secret, unfair competition, fraud, and breach of good faith and fair dealing, all of which are based on the alleged misappropriation of DPT's lotion formula. BBW contends that the contract claim cannot be proven because DPT's lotion formula does not qualify as a trade secret. BBW also contends that all of DPT's tort claims are displaced by the Ohio Trade Secrets Act.
The Ohio Trade Secrets Act is Ohio's codification of the Uniform Trade Secrets Act.
1. Contract Claim Under Ohio Trade Secrets Act
BBW contends that summary judgment is appropriate because information that is publicly available or is readily ascertainable cannot be regarded as a trade secret. Under the Ohio Trade Secrets Act, a "trade secret" is:
information that "derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use.
Ohio R.C. § 1333.61(D)(1). Thus, BBW is correct that information that is publicly available or is readily ascertainable cannot be regarded as a trade secret. BBW contends that DPT's claimed trade secret — its lotion formula — was publicly available because the lotion BBW obtained from DPT was the same lotion that DPT made for Kendall-Futuro, Inc. in 1994 and sold under the brand name "Curity." BBW concludes that summary judgment is appropriate because both Curity and its ingredients were in the public domain when they were disclosed to BBW. It is the formula for DPT's lotion that is subject matter of DPT's trade secret, and there is no evidence that the formula was ever in the public domain. The Court finds that the lotion formula was not in the public domain. See Reingold v. Swiftships, Inc., 126 F.3d 645, 652 (5th Cir. 1997) (the court noted that even though preexisting boat hulls were in the public domain, the mold used to make those hulls could still be a trade secret). BBW's motion concedes that the formula (proportions of each ingredient used to make the product) is protectable as a trade secret, whereas a simple list of ingredients is not. See Mot. S/J, p. 12, n. 13. Therefore, the focus of the contract claim is whether the trade secret information — the lotion formula — was readily ascertainable.
Under the Ohio Trade Secrets Act, information is considered a trade secret if it is not readily ascertainable by proper means. Ohio R.C. § 1333.61(D)(1). Thus, if the evidence shows that the DPT's lotion formula was readily ascertainable by BBW by proper means, then DPT's lotion does not qualify for protection as a trade secret. Information is considered readily ascertainable if acquisition of the information through an examination of a competitor's product (through reverse engineering) would not be difficult, costly, or time-consuming. The theoretical ability of others to ascertain DPT's lotion formula from Curity lotion that was previously available on the market does not preclude protection as a trade secret. Instead, the issue is whether the evidence shows either that the information was not readily ascertainable through proper means or that BBW engaged in improper means to ascertain DPT's lotion formula. See Reingold, 126 F.3d at 652 (interpreting Louisiana's version of the Uniform Trade Secrets Act, the Fifth Circuit held that "protection will be accorded to a trade secret holder against disclosure or unauthorized use gained by improper means, even if others might have discovered the trade secret by legitimate means.")
The Restatement (Third) of Unfair Competition notes that the prohibition against acquisition by improper means is codified in the Uniform Trade Secrets Act, which was adopted by Ohio. Restatement (Third) of Unfair Competition § 43 cmt. d. "Circumstantial evidence is admissible to establish that information is not readily ascertainable through proper means and hence is eligible for protection as a trade secret." Restatement (Third) of Unfair Competition § 39 cmt. f. The resort by a defendant to improper means of acquisition is probative of the relative accessibility of the information. Id . "When a defendant has engaged in egregious misconduct in order to acquire the information, the inference that the information is sufficiently inaccessible to qualify for protection as a trade secret is particularly strong." Id . As noted by the Supreme Court, trade secret law does not offer protection against discovery by fair and honest means such as independent invention, accidental disclosure, or reverse engineering; however, protection will be awarded to trade secret holder against disclosure or unauthorized use by those to whom secret has been confided, either under express or implied restriction of non-disclosure or by one who has gained knowledge by improper means. Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470, 475, 94 S.Ct. 1879, 40 L.Ed.2d 315 (1974). Similarly, the Texas Supreme Court has held that "[t]he fact that a trade secret is of such nature that it can be discovered by experimentation or other fair and lawful means does not deprive its owner of the right to protection from those who would secure possession of it by unfair means." K G Oil Tool Serv. Co. v. G G Fishing Tool Serv., 158 Tex. 594, 314 S.W.2d 782, 788 (1958)
The evidence in the record supports a finding that BBW fraudulently induced DPT to enter the "competition" that BBW was conducting to replace its current body lotion. The parties' had a confidential relationship evidenced by confidentiality agreements, BBW made various representations to DPT about future business that enticed DPT to enter the "competition," and BBW selected DPT's lotion for a formal screening contest and 100-store test market. Despite that, DPT surreptitiously contracted with Barlo Labs to copy DPT's formula so that BBW could get a lower price by having a sister company make the lotion using the copied formula. BBW's actions simply do not pass the "sniff test."
Evidence submitted in regard to the initial discovery dispute in this case shows that George Ziets of BBW denied that he or anyone under him made any effort to replicate the DPT's lotion. DPT's Mot. Compel at docket no. 23, Exh. C6, Ziets Depo., p. 65. Mr. Ziets also stated that he was not aware of any information exchanged between BBW and Barlo Labs relative to the development of BBW's new lotion. Id . at p. 68. A December 29, 1996 memo to Mr. Ziets contact at Barlo Labs states: "Please create a formula that duplicates there performance, texture and physical characteristics of the samples provided." Mot. S/J, Exh. 28, Morgan memo; Response, Exh. 11, Depo. Exh. 728. That memo states that Mr. Ziets was provided a copy of the memo. Id . That memo provides an inference that Mr. Ziets prevaricated about that matter. The document containing the ingredient list on the DPT lotion was provided to Barlo Labs, but the "confidential" stamp on the document had been obliterated by BBW before it was sent to Barlo Labs. Response, Exh. 10, Rosenstreich Depo., pp. 124-25; Exh. 11, Morgan Depo., p. 212.
Other evidence presented during the initial discovery dispute shows that BBW instructed its employees not to ask for the formula for DPT's lotion. DPT's Mot. Compel at docket no. 23, Exh. C6, Frances Lee Depo., pp. 49-53. That evidence could support a finding that BBW intended from the start to copy DPT's lotion or whichever lotion that won BBW's "competition." That evidence also could support a finding that BBW thought that, by neither asking for nor obtaining the formula for the lotion maker, BBW could use all other information to its benefit and copy the formula without consequences. There is evidence that the formula could not have been duplicated without Barlo Labs having been provided samples of the lotion, which BBW was able to obtain as a result of the confidential relationship between the parties. Upon consideration of all the circumstances of the case, it is the opinion of the Court that the evidence supports a finding that BBW engaged in egregious misconduct in order to acquire DPT's lotion formula. As a result of BBW's improper means of obtaining DPT's formula, the evidence supports a finding that DPT's lotion formula was not readily ascertainable. Thus, the Court finds that DPT's formula deserves protection as a trade secret.
BBW contends that it did not violate the terms of the confidentiality agreement. The basis for BBW's argument is that the lotions samples were not provided to Ms. Stavroff, who BBW contends was one of the two parties to the contract as she is one of the two that signed the confidentiality agreement. BBW is a corporation and can only act through its employees. Ms. Stavroff may have signed on behalf of BBW, but that did not make her a party to the confidentiality agreement. Thus, the delivery of the lotion samples to someone with BBW other than Ms. Stavroff does not mean that DPT failed to provide lotion samples to BBW pursuant to the parties' confidential relationship. BBW also contends that DPT did not own the disputed lotion formula, but there is evidence showing that DPT owned the formula out right as of April 10, 1996, which was well before BBW contacted Barlo Labs with instructions to copy DPT's lotion formula. BBW further contends that there was no language in the purchase orders for the 1.3 million units of the test market lotion that would have made it inappropriate for BBW to give Barlo Labs some lotions samples for use in discovering DPT's formula. The Court considers BBW's view to be too narrow. BBW has provided no reasonable basis as to why the lack of restrictive language on the purchase orders is dispositive of the nature of the parties' relationship. The Restatement counsels against taking a key-hole view toward the issues in this case as BBW has done:
The acquisition of a trade secret can be improper even if the means of acquisition are not independently wrongful. The propriety of the acquisition must be evaluated in light of all the circumstances of the case, including whether the means of acquisition are consistent with accepted principles of public policy . . ."
"Restatement (Third) of Unfair Competition § 23 cmt. c. When all the circumstances of the case are considered, it is apparent to the Court that the actions of BBW were not consistent with public policy.
BBW's narrow view toward the scope of the parties' understanding toward confidentiality ignores the fact that misappropriation can be based on implied confidentiality. The Fifth Circuit has held that confidentiality may be implied when the recipient actively solicits the disclosure. Phillips v. Frey, 20 F.3d 623, 632 (5th Cir. 1994); See also Smith v. Dravo Corp., 203 F.2d 369, 376 (7th Cir. 1953). This raises the issue of whether BBW, as the recipient of the information, knew or should have known that the information was a trade secret and that the disclosure was made in confidence. Evidence showing that (1) BBW initiated contact with DPT, (2) BBW promised substantial revenues if DPT's product was selected to replace BBW's lotion, and (3) the parties executed confidentiality agreements, supports a finding that BBW should have known that the lotion samples it received from DPT must be held in confidence and could not be used to copy DPT's lotion formula. Therefore, the limitation on BBW's actions is not determined solely by the specific terms of the confidentiality agreements.
It is possible that an analysis of DPT's lotion and the lotion that BBW is currently selling are different is some manner. The question is not whether there are differences, but whether there are similarities that were substantially derived from Barlo Labs' analysis of the lotion samples it provided to BBW during the course of the parties' confidential relationship. As the Fifth Circuit noted in Reingold, "the user of another's trade secret is liable even if he uses it with modifications or improvements upon it effected by his own efforts." 126 F.3d at 651. The Fifth Circuit reasoned that trade secret law would be hollow if it were not flexible enough to encompass modified or new products that were substantially derived from a misappropriated trade secret. Reingold, 126 F.3d at 651. As a result, DPT does not need to show that its lotion is exactly like BBW's current lotion.
For these reasons, BBW's motion for summary judgment should be denied as to the contract claim under the Ohio Trade Secrets Act.
2. Common Law Claims
BBW contends that the common law tort claims asserted under Texas law are displaced by the Ohio Trade Secrets Act. BBW points out that the Ohio Act displaces "conflicting tort, restitutionary, and other laws of this state providing civil remedies for misappropriation of a trade secret." Ohio Revised Code § 1333.67. First, that statute only applies to claims under the laws of Ohio, not Texas. Second, it is undisputed that a federal court must follow the choice-of-law rules of the state in which it sits. BBW contends that Ohio law should govern the tort claims in this case because the parties agreed to use Ohio law as to contract claims and the tort claims are based on the same facts.
Texas has adopted the "most significant relationship" test to determine what law should apply to tort claims. Under that test, a court is to consider: (1) the place where the injury occurred; (2) the place where the conduct causing the injury occurred; (3) the domicile, residence, nationality, place of incorporation, and place of business of the parties; and (4) the place where the relationship between the parties, if any, is centered. Snydergeneral Corp. v. Great Amer. Ins. CO., 928 F. Supp. 674, 677 (N.D.Tex. 1996), aff'd 133 F.3d 373 (5th Cir. 1998). The Court agrees with and adopts DPT's analysis of these factors. The Court finds that Texas has the most significant relationship to the occurrence and the parties. Therefore, Texas law should govern the tort claims.
BBW also contends that summary judgment is appropriate as to the tort claims because they are premised upon the existence of a trade secret. Since the Court has found that the evidence supports a finding of a trade secret, BBW's argument is without merit. For these reasons, the motion for summary judgment should be denied as to the tort claims.
Conclusion
For all the reasons set forth above, BBW's motion for summary judgment should be DENIED in its entirety. This case shall proceed to trial as scheduled.
It is so ORDERED.