It is common within business to hire consultants, contract with manufacturers to make products and services, and to outsource research and development. Take for example the development of custom software. You hire an outside contractor to develop software for your business. Or maybe you hire a manufacturer to use your mold to produce a coupling. They work for hire, you pay the contractor for their work, and at the end of the day the product/service is yours.
What happens? The contractor or manufacturer takes the work for hire as their own. They sell it. They use it themselves. We have all heard the case of Apple v. Samsung. Apple successfully claimed that Samsung, a supplier for the Apple, copied Apples’ design and infringed upon the look of the iPhone and iPad. Samsung is a supplier of the Apple. Apple v. Samsung is not a unique case. There are other cases. It happens to others, too. Not just Apple and Samsung.
Take for example the case of Contour Design Inc. (Contour) v. Chance Mold Steel Company (Chance). Plaintiff Contour is in the business of selling computer mice. Contour hired Chance to manufacturer its computer mice. Contour gave Chance electronic prototype files, which Chance used to create molds and manufacture the computer mice for Contour. Contour and Chance entered into a nondisclosure agreement (NDA). The NDA identified the electronic prototype files as Contour’s confidential information. Under the NDA, Chance agreed not to disclose, copy, or use the electronic files. For 14 years Chance manufactured Contour’s computer mice. When Chance discontinued manufacturing computer mice for Contour, Chance sold the back stock of Contour’s computer mice to the public. Chance also began to selling its own competing product, the ErgoRoller.
Contour sued Chance. Contour claim that the sale of the back stock Contour computer mice was a breach of the NDA and misappropriation of the trade secrets under state law. Contour further claimed that the ErgoRoller was developed using Contour’s prototype electronic files, thereby it was a breach of the NDA and misappropriation of trade secrets under state law. The ErgoRoller was palpably similar to the Contour computer mice, the engineer who designed the ErgoRoller, had access the Contour’s prototype files, and there was limited development time for the ErgoRoller.
The court in this case said the selling of the back stocked computer mice was actable and awarded Contour $7.7 million in damages. However, the court rejected Contour’s arguments regarding the ErgoRoller. The court acknowledged that circumstantial evidence such as access to trade secrets can give rise to a breach of an NDA; however, the court found that design of the ErgoRoller, while palpably similar, it was not sufficiently similar and the engineer’s testimony that she did not use the prototype files in developing the ErgoRoller was sufficient to overcome a claim of misuse contrary to the NDA.
At the end of the day, business owners that outsource their business operations and share trade secrets are vulnerable. Often times the only evidence that trade secrets have been used improperly is circumstantial evidence, which can readily be dispelled by verbal denials of any wrongdoing. So as business owners, what can you do? Here are some basic safeguards:
- Enter into nondisclosure agreements with all suppliers and contractors.
- Make sure to state in the nondisclosure agreement that any research, methods, technologies or other confidential information generated pursuant to the agreement is yours.
- At the end of the business relationship demand return of all confidential and trade secret information.
- Demand that suppliers take reasonable safeguards to protect your confidential trade secrets up to and including limiting employee access and password protected files.
- When applicable register trademarks, patients and copyrights.
Lesson from the Court: “Ideas once placed before the public without protection are subject to unfavorable uses and misappropriation.”