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5 of 100 DOCUMENTS FRANK W. WINNE AND SON, INC. v. JARED B. PALMER, SR. and TWI-RO-PA MILLS AGENCY, INC. Civil Action No. 91-2239 UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA 1991 U.S. Dist. LEXIS 11183 August 7, 1991, Decided August 7, 1991, Filed COUNSEL: [*1] LESLIE M. GERSTEIN, FOX, ROTHSCHILD, O'BRIEN & FRANKEL, PHILADELPHIA, PENNSYLVANIA, FOR PLAINTIFF. M. KELLY TILLERY, LEONARD TILLERY & DAVISON, PHILADELPHIA, PENNSYLVANIA, FOR DEFENDANTS. JUDGES: Jay C. Waldman, United States District Judge. OPINION BY: WALDMAN OPINION MEMORANDUM This is an action for trade secret misappropriation and interference with contractual relations. Jurisdiction is premised on diversity of citizenship. Presently before the court is defendants' motion to dismiss pursuant to Fed. R. Civ. P. 12(b)(6). I. STANDARD In deciding a motion to dismiss for failure to state a cognizable claim, the court must accept as true all of plaintiff's factual allegations and draw from them all reasonable inferences. D.P. Enterprises, Inc. v. Bucks County Community College, 725 F.2d 943, 944 (3d Cir. 1984). A case should not be dismissed for failure to state a claim unless it appears that no relief can be granted under any set of facts that could be proved consistent with plaintiff's allegations. Hishon v. King & Spalding, 467 U.S. 69, 73 (1984). The pertinent facts, as alleged by plaintiff, are as follow. II. FACTS Plaintiff Winne has been in [*2] the business of manufacturing and selling rope since 1895. Defendant Jared Palmer is the president of defendant Twi-Ro-Pa which has engaged in a similar business since 1959. In 1981, defendants hired an employee to work as a salesman in the Philadelphia vicinity. In December 1982, defendant Palmer allegedly instructed that employee to collect the trash which plaintiff had "put out for collection" and to forward all office documents therein to Palmer. The employee retrieved and forwarded office documents including customer invoices, customer lists, copies of telex documents containing the names of factories with which plaintiff did business, purchase orders to suppliers and documents reflecting the cost and pricing of plaintiff's goods. Winne discovered that its trash had been taken sometime in 1984, and suspected Twi-Ro-Pa. A Winne official contacted Mr. Palmer who assured him that the theft was not authorized by Twi-Ro-Pa but may have been undertaken by defendant's employee acting on his own. In April of 1986, the employee in question left the employ of Twi-Ro-Pa which "lead [sic] Winne to believe that the thefts had ceased and that Twi-Ro-Pa did not have its confidential and proprietary [*3] information." Winne now alleges, however, that the information retrieved was used by Twi-Ro-Pa to expand its sales territory and that defendants have and continue to use the documents in question.

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Plaintiff claims that defendants' conduct constitutes an interference with their trade secrets and interference with plaintiff's contractual relationships with customers. Plaintiff seeks money damages and to enjoin further use of the information. Defendants contend that plaintiff did not have a property interest in their abandoned trash, that plaintiff's information was not a trade secret (for much the same reason), and that, in any event, the statute of limitations has run. Defendants argue that Pennsylvania law does not prohibit a person from taking items from another's trash. III. DISCUSSION A. Trade Secret Claim Pennsylvania, as most other jurisdictions, has adopted the Restatement of Torts 757. College Water Color Group, Inc. v. Newbauer, 468 Pa. 103, 112 (1976); Van Products Company v. General Welding and Fabricating Company, 419 Pa. 248, 258 (1965). The Restatement provides in pertinent part that: "One who . . . uses another's [*4] trade secret, without a privilege to do so, is liable to the other if (a) he discovered the secret by improper means. . . ." To make out a cause of action for misappropriation of a trade secret, plaintiff must show: (1) the existence of a trade secret; (2) disclosure of the trade secret to defendant in confidence, or the defendant's acquisition of the trade secret by improper means; and, (3) injury to the plaintiff resulting from the defendant's use of the trade secret. 2 Callman, The Law of Unfair Competition, Trademarks and Monopolies 58.1 (3d ed. 1968). Whether a particular matter or process is a trade secret generally is a question of fact. See Valco Cincinnati, Inc. v. N & D Machining Service, Inc., 24 Ohio St. 3d 41, 47 (1986). The law provides no precise definition or litmus test of what constitutes a trade secret. Anaconda Company v. Metric Tool & Die Company, 485 F. Supp. 410, 421 (E.D. Pa. 1980). The most comprehensive definition is set out in the Restatement and provides, in pertinent part: A trade secret may consist of any formula, pattern, device or compilation of information which is used in one's business, and which gives [*5] him an advantage over competitors who do not know or use it. It may be a formula for a chemical compound, a process of manufacturing, treating or preserving materials, a pattern for a machine or other device, or a list of customers . . . Generally it relates to the production of goods, as, for example, a machine or formula for the production of an article. . . . Restatement of Torts 757 comment b. It must be shown that the subject matter of the alleged trade secret is protectible as such. 1 Factors to be considered in determining

whether something is a trade secret include: (1) the extent to which the information is known outside of the claimant's business; (2) the extent to which it is known by employees and others involved in his business; (3) the extent of measures taken by him to guard the secrecy of the information; (4) the value of the information to him and to his competitors; (5) the amount of effort or money expended by him in developing the information; (6) the ease or difficulty with which the information could be properly acquired or duplicated by others. S.I. Handling Systems, Inc. v. Heisley, 753 F.2d 1244, 1256 (3d Cir. 1985). 1 See generally, M. Hutter, Protecting Trade Secrets: Legal Theories, 269 Practicing Law Institute/Patents 9 (1989); Annotation, What is a Trade Secret?, 59 A.L.R. 4th 629 (1988). [*6] The courts have denied trade secret protection to information that could be obtained by competitors using proper means. See, e.g., Van Products, 419 Pa. at 263 (material sources and costs as well as information about the need, use and demand for a product are not protected); Tyson Metal Products, Inc. v. McCann, 376 Pa. Super. 461, 467 (1988) (prices charged by one's suppliers not protected). In certain circumstances, Pennsylvania courts do accord trade secret protection to a company's confidential customer information. See Van Products, 419 Pa. at 262-63; Morgan's Home Equipment Corp. v. Martucci, 390 Pa. 618 (1957); West Mountain Poultry Company v. Gress, 309 Pa. Super. 361, 365 n.2 (1982). See also Spring Steels, Inc. v. Molloy, 400 Pa. 354, 358 (1960) (customer lists not protected where they are "not the product of any special work" and were not held in confidence). Defendants appear not to dispute that plaintiff has sufficiently alleged at least some subject matter which may receive trade secret protection upon an appropriate showing. Defendants contend [*7] that by placing its alleged trade secrets in the trash for collection, plaintiff failed as a matter of law to take reasonable precautions to maintain secrecy. Plaintiff maintains that it was "reasonable for Winne to believe that no business or individual would go through its trash looking for trade secrets" and that in doing so, defendant acted improperly. Secrecy is the single most important factor in the law of trade secrets. See M. Jager, Trade Secrets Law 3.01, at 3-2 (1991). The holder need not take every conceivable measure to ensure secrecy, but must take reasonable precautions. 2 "The secrecy in which a purported trade secret is shrouded need not be absolute but reasonable precautions under the circumstances must be taken to prevent disclosure to unauthorized parties." Anaconda, 485 F. Supp. at 422. Whether such a degree of secrecy existed in a particular case generally is a ques-

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tion of fact. Clark v. Bunker, 453 F.2d 1006, 1010 (9th Cir. 1972). 2 One commentator has stated that the requirement of reasonable precautions "demands proof by the plaintiff that reasonable steps were taken to protect and preserve the secrecy of the matter" and that plaintiff must show, at the very least, that some of the following were initiated: restricting outside visitors from the manufacturer's plant where the alleged trade secret is used; limiting access to it only to those who have a need to know; maintaining it in a secure location; and advising those who have access to it that it is confidential." See M. Hutter, Protecting Trade Secrets: Legal Theories, 269 Practicing Law Institute/Patents 9 (1989). [*8] Whether defendant's conduct is improper for purposes of 757 is determined under the "existing standards of the business community." College Watercolor Group, Inc. v. Newbauer, 468 Pa. 103, 113 (1976). Improper means are "means which fall below the generally accepted standards of commercial morality and reasonable conduct." Restatement of Torts 757 comment f. Examples of such means are "fraudulent misrepresentations to induce disclosure, tapping of telephone wires, eavesdropping or other espionage." Id. The failure to take adequate precautions to protect a trade secret precludes recovery even against one who may have used improper means to obtain it. Defiance Button Machine Co. v. C & C Metal Products Corp., 759 F.2d 1053, 1064 (2d Cir. 1985). "Upon disclosure, even if inadvertent or accidental, the information ceases to be a trade secret." Id. at 1063. Plaintiff relies on Tennant Company v. Advance Machine Company, 355 N.W.2d 720 (Ct. App. Minn. 1984), in which the plaintiff had disposed of documents in sealed trash bags and placed them into a covered dumpster that was used solely by plaintiff. [*9] The court determined that the documents were not abandoned. The court in Tennant was applying California law and relied on People v. Krivda, 5 Cal. 3d 357, 486 P.2d 1262, 96 Cal. Rptr. 62 (1971), which held that an owner retains a reasonable expectation of privacy in the contents of a dumpster "until the trash [has] lost its identity and meaning by becoming part of a large conglomeration of trash elsewhere." Id. at 367, 486 P.2d at 1268, 96 Cal. Rptr. at 68. Krivda was decided, however, prior to California v. Greenwood, 486 U.S. 35 (1988). Plaintiff also cites Drill Parts & Service Company v. Joy Manufacturing Company, 439 So. 2d 43 (App. Ct. Ala. 1983) in which the court concluded that it was not a "plain and palpable abuse of discretion" for a lower court sitting without a jury to find a misappropriation of a trade secret al-

though evidence was presented that plaintiff's drawings had been found in a trash bin. There are a number of cases, however, in which a plaintiff's failure to take reasonable precautions to insure secrecy precluded recovery. [*10] See, e.g., Defiance, supra (plaintiff neglected to erase customer list form computer prior to sale); Business Trends Analysts, Inc. v. The Freedonia Group, Inc., 700 F. Supp. 1213, 1236 (S.D.N.Y. 1988) (plaintiff had no security or sign-out procedures regarding customer lists which had been left in hallway and loading dock); Cadillac Gage Company v. Verne Engineering Corp., 203 U.S.P.Q. 473, 477 (Mich. Cir. Ct. 1978) (blueprints and drawings left in trash containers). There are a number of Fourth Amendment cases holding that there is no reasonable expectation of privacy in trash which is placed out for collection. See California v. Greenwood, supra; United States v. Reicherter, 647 F.2d 397 (3d Cir. 1981); Commonwealth v. Perdue, 387 Pa. Super. 473, 564 A.2d 489 (1989). In Greenwood, the Supreme Court stated that: It is common knowledge that plastic garbage bags left on or at the side of a public street are readily accessible to animals, children, scavengers, snoops, and other members of the public. Moreover, respondents placed their refuse at the [*11] curb for the express purpose of conveying it to a third party, the trash collector, who might himself have sorted through respondents' trash or permitted others, such as the police, to do so. Accordingly, having deposited their garbage 'in an area particularly suited for public inspection and, in a manner of speaking, public consumption, for the express purpose of having strangers take it,' United States v. Reicherter, 647 F.2d 397, 399 (CA3 1981), respondents could have no reasonable expectation of privacy in the inculpatory items that they discarded. 486 U.S. at 40-41. The court finds the reasoning in Greenwood, Reicherter and Perdue to be persuasive, and believes that the Pennsylvania Supreme Court would as well. The court finds unpersuasive plaintiff's argument quoting at length from and relying on the dissenting opinion in Greenwood. While these are not commercial trade secret cases, it is rather difficult to find that one has taken reasonable precautions to safeguard a trade secret when one leaves it in a place where, as a matter of law, he has no reasonable expectation of privacy from prying eyes. It is also rather difficult [*12] to find that plaintiff exercised reasonable precautions to guard against the dissemination and use of its trade secrets when learning that they had

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fallen into defendants' clutches, plaintiff sat on its hands for over five years and took no action to retrieve them or prevent their use. Thus, it appears doubtful that plaintiff can sustain its cause of action. What is before the court, however, is a motion to dismiss and not a motion for summary judgment. Confining itself to the four corners of the complaint, the court cannot conclude that it is impossible for plaintiff to sustain a cause of action. For example, it does not appear from the complaint whether the documents placed in the trash were intact or shredded and then reconstructed, or whether they were retrieved from an area generally accessible to others or exclusively under plaintiff's ownership and control. Thus, the record must be more fully developed regarding how the trash was stored, where it was placed and what other precautionary measures may have been taken. 3 3 Whether plaintiff took reasonable precautions or has a protectible trade secret, like all questions of fact, may be determined by the court when based on the evidence, no reasonable person could determine the issue in any way but one. [*13] B. Statute of Limitations and Laches As the parties acknowledge, Pennsylvania's two year statute of limitations is applicable. 42 Pa. Cons. Stat. Ann. 5524. Defendants argue that because plaintiff became aware of the alleged misappropriation in 1984, plaintiff's claims are barred. Under Pennsylvania law, however, wrongful use of a misappropriated trade secret is a continuing tort, and thus the statute of limitations begins to run anew with each wrongful use. Anaconda, 485 F. Supp. at 426. Plaintiff alleges that defendants continue to use the information allegedly misappropriated. Thus, the statute of limitations does not bar plaintiff's claim on its face. Anaconda, 485 F. Supp. at 426. Plaintiff's potential recovery, however, is limited to any damages sustained as a result of any wrongful use by defendant of trade secrets during the statutory period. Id. Defendants also assert that plaintiff's claim is barred by the equitable doctrine of laches. The essential elements of laches are inexcusable delay in instituting suit and prejudice resulting to the defendant from such delay. Gruca v. United States Steel Corp., 495 F.2d 1252, 1258 (3d Cir. 1974); [*14] Anaconda, 485 F. Supp. at 427. If laches is invoked by a defendant who is determined to be a conscious wrongdoer, he can prevail only if plaintiff's delay "'is so prolonged and inexcusable that it amounts to a virtual abandonment of the right by the plaintiff for a long period of time.'" Anaconda, 485 F. Supp. at 427 (quoting John Wright, Inc. v. Casper Corp., 419 F. Supp. 323 (E.D. Pa. 1976), aff'd in part and rev'd in part on

other grounds, 587 F.2d 602 (3d Cir. 1978)). The viability of a laches defense depends on the particular equitable circumstances of each case, and is a question primarily addressed to the discretion of the court. Burke v. Gateway Clipper, Inc., 441 F.2d 946, 949 (3d Cir. 1971); Anaconda, supra. For purposes of a laches defense, plaintiff's delay in bringing suit is measured from the time plaintiff knew or should have known of defendant's wrongdoing. If the delay is shorter than the applicable statute of limitations, then the burden of proving laches is on the defendant. If the delay is longer than the applicable statute of limitations, then [*15] the defendant is entitled to a rebuttable presumption of both elements of laches. Anaconda, supra. It appears that plaintiff knew about the alleged misappropriation in 1984. Plaintiff's contention that it believed that its trade secrets were secure from misuse after 1986 when the Twi-Ro-Pa employee who took them left defendant's employ is naive if not incredible. Thus, plaintiff will have the burden of showing that its claim should not be barred by laches. See Anaconda, 485 F. Supp. 427 n.13. Plaintiff will be given a reasonable opportunity to develop the record to attempt to do so. C. Tortious Interference with Contract Plaintiff alleges that because of defendants' misappropriation and misuse of its trade secrets, plaintiff "lost" contracts and clients. It is unclear whether plaintiff is claiming tortious interference with existing contracts or tortious interference with prospective contractual relations, two distinct torts. Defendant contends that, in either event, plaintiff has failed to state a cause of action. Plaintiff argues that it has sufficiently alleged a cause of action in Count II for both torts. The Restatement (Second) [*16] of Torts 766 has been adopted by the Pennsylvania Supreme Court. Adler, Barish, Daniels, Levin and Creskoff v. Epstein, 482 Pa. 416 (1978), cert. denied 442 U.S. 907 (1979). Section 766 provides: One who intentionally and improperly interferes with the performance of a contract . . . between another and a third person by inducing or otherwise causing the third person not to perform the contract, is subject to liability to the other for the pecuniary loss resulting to the other from the failure of the third person to perform the contract. It is fundamental that to set forth a cause of action for tortious interference with contract, plaintiff must allege the existence of a contractual relationship. See U.S. Healthcare, Inc. v. Blue Cross of Greater Philadelphia, 898 F.2d 914, 925 (3d Cir. 1990); Thompson Coal Com-

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pany v. Pike Coal Company, 412 Pa. 466, (1979); Adler, supra, at 431. Plaintiff alleges only that it "lost contracts." Generally speaking one does not "lose" an existing contract. A party to a contract has rights which may be injured if another party fails to perform but the [*17] contract is not "lost." Plaintiff has failed to allege an existing contract or that any client failed to perform under any existing contract; whether induced by defendant or otherwise. Plaintiff has failed sufficiently to set forth a claim for tortious interference with an existing contractual relationship. To state a cause of action for intentional interference with prospective contractual relations, four elements must appear: (1) a prospective contractual relation; (2) the purpose or intent to harm the plaintiff by preventing the relation from occurring; (3) the absence of privilege or justification on the part of the defendant; and (4) actual damage resulting from the defendant's conduct. Thompson Coal, 288 Pa. at 208. Plaintiff's allegations suggest some form of bidding or other competitive process which might reasonably involve prospective contractual relationships. Relying on 768 of the Restatement, defendants argue that since Twi-Ro-Pa was a competitor, their conduct was not improper. Section 768 provides: One who intentionally causes a third person not to enter into a prospective contractual relation with another who is his competitor . . . does not interfere [*18] improperly with the other's relation if (a) the relation concerns a matter involved in the competition between the actor and the other and (b) the actor does not employ wrongful means and (c) his action does not create or continue an unlawful restraint of trade and (d) his purpose is at least in part to advance his interest in competing with the other. Restatement (Second) of Torts 768. The effect of this rule is more fully explained in comment (b) as follows:

The rule stated in this Section is a special application of the factors determining whether an interference is improper or not, as stated in 767. One's privilege to engage in business and to compete with others implies a privilege to induce third persons to do their business with him rather than with his competitors. In order not to hamper competition unduly, the rule stated in this Section entitles one not only to seek to divert business from his competitors generally but also from a particular competitor. And he may seek to do so directly by express inducement as well as indirectly by attractive offers of his own goods or services. The only limitations upon this are those stated in Clauses (a) to (d). Applying 768, [*19] Pennsylvania courts have held that it is not improper for a former employee to take and use customer information unless it breaches an express contract, violates some confidence or involves an element of fraud or trade secrecy. See Spring Steels, Inc. v. Molloy, 400 Pa. 354, 359 (1960); Gilbert v. Otterson, 379 Pa. Super. 481, 489-90 (1988). Here, plaintiff alleges that its trade secrets were misappropriated and used by defendants to attract prospective clients away from plaintiff. While defendants were competitors of plaintiff, it is alleged that they employed wrongful means to attract prospective clients. Plaintiff has stated a cause of action for interference with prospective contractual relationships which is not barred on its face by 768. Again, however, if plaintiff cannot demonstrate that the information in question constituted trade secrets which it took reasonable precautions to protect and which defendants used wrongful means to obtain, as well as causation and damages within the statutory period, then plaintiff cannot prevail on this claim either. An appropriate order will be entered. ORDER AND NOW, this 7th day of August, [*20] 1991, upon consideration of defendants' Motion to Dismiss and plaintiff's response thereto, consistent with the accompanying Memorandum, IT IS HEREBY ORDERED that said Motion is DENIED.