Application of Trade Secret Law in Chemical Formula Cases

June 23, 2008 / By Robert Wood

A recent case from the Dallas Court of Appeals explains several concepts that frequently come up in trade secret theft cases. In Global Water Group, Inc. v. Atchley, No. 05-06-00709-CV, 2008 WL 384436 (Tex. App.–Dallas 2008, no pet. h.), the plaintiff had created a water purification system. When the plaintiff’s president resigned and formed a competing company, the plaintiff filed suit and contended that its trade secrets had been misappropriated and were being used by the competitor. The jury found in the plaintiff’s favor, but the trial court reversed the verdict.

The court of appeals’ opinion affirming the trial court contained a useful discussion of the proof needed to support a misappropriation of trade secrets claim.

At the outset, the court noted that to constitute a trade secret, the information in question must actually be secret. The court referenced the Texas Supreme Court’s 1958 holding in the K&G case that “the mere fact that knowledge of a product or process may be acquired through inspection, experimentation, and analysis does not preclude protection from those who would secure that knowledge by unfair means.” But then the court added this key point: “A trade secret must nevertheless be secret.” In other words, even if one obtains his former employer’s information by unfair means, for the employer to be able to make a misappropriation of trade secrets claim, the information must, the court says, still be secret.

This concept, while seemingly obvious, could be very important in a case in which a former employee allegedly steals a customer list. The employer, citing K&G, could argue, “Because the former employee improperly acquired the information, he is precluded from arguing that he could have obtained the information by fair means.” However, the employee, citing this case from the Dallas Court of Appeals will be able to respond, “Even if I obtained the information unfairly, the employer must, as a threshold matter, prove that the information is in fact secret.”

Of course, the employer might have other claims (e.g., conversion) even if it couldn’t prove that the information were secret. But one of the advantages of making a trade secret as opposed to a conversion claim is the increased likelihood of getting injunctive relief with the former claim.

The court discussed at length whether the plaintiff’s water purification formula constituted a trade secret. According to the court, the plaintiff claimed “no secret in any discrete formula, but rather in an approximate 10:90 ratio of KDF (a water purification substance) to carbon. Global asserts this approximate formula is entitled to trade secret protection because it was different from what others in the industry were using.” The court was skeptical of this being a trade secret:

Finally, the imprecise nature of the information weights heavily against it being a trade secret. There is no discrete secret formula at issue, but only an approximate mix of two well-known substances commonly used together. Given the imprecise nature of formula, we question what information Atchley and Aspen should be prohibited from using. For example, should they be prohibited from using a 20:80 ratio, 30:70, 40:60? It thus becomes apparent, it would be difficult to protect such a “formula,” without prohibiting fair competition.

Based upon this reasoning, the court of appeals also held that the plaintiff failed to prove “use” of its alleged trade secret:

Global does not contend that Aspen used the same formula, but only that its formula was similar. While two products need not be identical for an inference of use to arise, we nevertheless conclude that similarity under these circumstances is not sufficient to raise such an inference. The similarity lie in the ratio of only two of the components of the mixed media pod, KDF and carbon. As noted above, it is not disputed that others in the industry used canisters with KDF and carbon. Aspen alleged “used Global’s trade secret because its product, like Global’s, used much more carbon than KDF. While the two products were similar in this regard, there were also differences in the contents of the mixed media pods. For example, Aspen’s product contained “separator pads” that kept the KDF and carbon separate. Global’s product on the other hand used another purifying substance, PM 1000, as well as gravel. In light of these differences, and the fact that the similarity lie only in the percentages of two commonly used ingredients, no inference of use arises.

The language above could be useful in defending against a claim that one has stolen another’s chemical formula. On the one hand, the defendant can challenge whether the formula is sufficiently distinctive to warrant trade secret protection. Moreover, in the absence of direct evidence of use by the defendant, the defendant can argue that mere similarity between its product and the plaintiff’s is not conclusive evidence of use.

The court of appeals also explained that the plaintiff’s proof was largely conclusory:

Global presented evidence that it guarded its formula, limited access, and required employees to sign confidentiality clauses. There is no evidence however regarding whether or not Global’s efforts were successful—specifically whether or not its formula was nevertheless known outside its business.

Further, Global directs us to no evidence of the value of its formula to its business. Global suggests the formula was necessarily valuable because Global had developed the first successful self-contained water purification unit. However, there is no evidence the formula itself was related to the success of the unit. Specifically, Global directs us to no evidence the formula was in any way related to the mobility of the unit or other supposedly novel features of the unit. Weiss did testify that Global’s formula removed more contaminates and performed better than anyone else’s. This testimony was however largely conclusory and Weiss did not attempt to articulate or explain how Global’s formula created better water or how its particular blend gave it a competitive advantage. Nor did he explain how the Global product performed differently than any other product on the market. Indeed, when asked about products that could remove contaminants from water, Weiss responded that he was not an engineer, scientist, or biochemist. Further, there is no expert testimony that the quality of Global’s water was superior or that Global’s process was cheaper or more efficient. Global has thus failed to point to any evidence to show its formula was valuable. Likewise, Global has not shown the formula gave it a competitive advantage.

This case is a good primer on what a plaintiff in a theft of trade secrets case must prove. Neither secrecy nor use can be assumed; both must be proved. Moreover, conclusory statements of harm are insufficient. The case is particularly informative with respect to trade secret theft cases involving chemical formulas.

Global Water Group, Inc. v. Atchley, No. 05-06-00709-CV, 2008 WL 384436 (Tex. App.–Dallas 2008, no pet. h).

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About the Author

Robert Wood has been a Texas trial lawyer since 1993. During that time, he has represented small, mid-sized, and Fortune 100 companies in business and employment litigation matters all over Texas and the United States. He has also advised and represented hundreds of individuals in employment litigation matters. Read more about Robert Wood