August 2, 2022

Seventh Circuit Opinion Reminds of Need to Identify Trade Secrets with Particularity

Holland & Knight Trade Secrets Blog
Charles A. Weiss
Trade Secrets Blog

Actuators are remotely operated mechanized devices used in a variety of applications, such as opening and closing valves. They are often operated hydraulically, which requires them to have their own valves. Maintaining the actuator in a fixed position, e.g., holding the controlled valve open or closed, typically requires continuous operation of the hydraulic system to maintain the position of the actuator's internal valve.

In 2002, engineer Mark Chester was tasked by his then-employer Koso America Inc. with designing a new actuator valve. The goal of this project was to redesign one of the company's existing products to avoid paying royalties on a third-party patent under which the company was licensed. The pre-specified design goals of the project were not met, but Chester and a colleague in the course of their work developed a different actuator in which the valve was supplemented with solenoids, which are electromagnetic devices in which a plunger is moved back and forth in response to electric current flowing through a surrounding coil. The solenoids could maintain a fixed position, e.g., opened or closed, with more efficiency than the actuator's hydraulic valve. Another Koso employee wrote code to control operation of the solenoids, and the team made a prototype. However, the project was discontinued, the prototype was disassembled, and no further work was done. The entirety of the project — from inception to termination — spanned less than two full months.

The following year, Chester left Koso and was, during the ensuing years, employed by several of Koso's competitors. Among them was a company founded by his former supervisor at Koso that also employed several other former Koso employees. The evidence showed that Koso management knew of this company and considered it a competitor. At no time, however, did Koso allege that Chester was in breach of any obligations he owed it.

In 2012, Chester joined MEA Inc. as a senior engineer and began work on a new solenoid-operated actuator. The MEA actuator was prototyped in 2013, and the company filed a patent application in 2014 naming Chester as sole inventor.

In 2017, REXA Inc., which had never employed Chester but claimed to be the owner by assignment of Koso's relevant intellectual property, sued Chester and MEA for misappropriation of trade secrets under the Illinois Trade Secrets Act, contending that both the patent application and the new MEA actuator were based on, or incorporated, trade secrets belonging to REXA that Chester had obtained during his employment at Koso. It sought, among other things, ownership of the MEA patent application.

District Court Proceedings

After the close of discovery, the U.S. District Court for the Northern District of Illinois granted Chester and MEA's motions for summary judgment. Referring to the MEA device by its brand name "Hawk," the district court contrasted the failure of the Koso project with the Hawk's success:

The . . . undisputed and undeniable fact is that the experimental Koso device was an operational failure and deemed unworthy of further attempts to produce a workable and functional actuator. No further attempts to do so were ever made by Koso or REXA when it later came into existence.

In addition to the components of the Hawk differing from Koso's experimental device, the fact that it never worked sufficiently enough to go forward with the experiment suggests material differences in its composition, abilities, and operational efficiencies when compared with the Hawk. There can be no material dispute that Koso's less than two-month experiment did not describe or produce an invention the equal of or substantially similar to MEA's Hawk.

There is no factual basis to conclude that the [2002] project which was aborted within a couple of months is the same, or substantially the same, as the Hawk actuator. Although both projects reflected the use of some common components well known in the industry, the Hawk actuator presents a number of parts different from, and greater than, those reflected in Koso's prototype. . . . The time and expertise devoted to the Hawk's development . . . clearly reflects the investment in ideas which were consummated in the Hawk. Contrast these efforts with the relative paucity of time and expense devoted to the [2002 Koso] prototype.

Rexa, Inc. v. Chester, 17 C 8716, 14-15 (N.D. Ill. Sept. 10, 2020)

The district court also awarded Chester and MEA more than $2.3 million in attorneys' fees incurred in defending the case, finding among other things that REXA had falsified exhibits and engaged in other litigation misconduct. Those facts are not directly relevant to the substantive trade secret issues discussed in the post, but the district court's opinion awarding fees illustrated further its view of the merits of REXA's case:

The fundamental premise of the Plaintiff's lawsuit is that a failed experiment . . . produced an idea and device which was the essential equivalent of an actuator designed and developed more than ten years later by the Defendants. The developed actuator, named the Hawk, has proved its efficacy and commercial worth in the marketplace. The 2002 experiment lasted no more than two months, and the device constructed in pursuit of the theories being tested was disassembled.

Stated thusly, the Plaintiff's contention in this lawsuit is that Chester stole secrets from a failed experiment which became the essential equivalent of a successful commercial product developed more than ten years later. The contention is so devoid of merit that it borders on the ludicrous.

Rexa, Inc. v. Chester, 17 C 8716, 5 (N.D. Ill. March 2, 2021)

REXA appealed both the district court's grant of summary judgment to the defendants and its award of attorneys' fees.

Court of Appeals Decision

The U.S. Court of Appeals for the Seventh Circuit affirmed the district court's grant of summary judgment to the defendants. In addition to agreeing with the district court's determination that REXA had not come forward with facts sufficient to defeat summary judgment on the issue of misappropriation, the Seventh Circuit also relied on REXA's failure to prove the existence of a trade secret in the first place.

The Seventh Circuit's discussion of REXA's failure to prove the existence of a trade secret serves as a reminder that trade secret claimants should not expect to carry their burden on this issue by relying on generalities. Rather, existence of a trade secret is very difficult to prove absent the claimant's identification of specific and concrete elements that distinguish the trade secret from the general body of knowledge in the relevant field of endeavor.

Here, for example, REXA identified as its purported trade secret the "2002 Designs," and the use of solenoids (which were known in the art) "in conjunction with other components to create a new and previously unknown actuator." REXA, Inc. v. Chester, No. 21-2033, slip op. at 10 (7th Cir. July 29, 2022). However, REXA had to admit that the 2002 prototype was largely a modification of Koso's commercial product (the Xpac actuator) with elements that were also known in the field:

REXA broadly contends that the "2002 Designs" were trade secrets that Chester and MEA misappropriated. REXA tells us that Koso kept a sketch of the 2002 actuator prototype (contained within the design file), the source code, and testing results—though not the prototype itself. Without greater specificity, REXA has not identified the trade secrets. . . . As REXA acknowledges, the Xpac actuator is publicly available and therefore not a trade secret, as anyone is permitted to copy it. And REXA further admits that the use of solenoid valves to hold an actuator in place was known in the industry before 2002. So, neither the Xpac actuator nor the use of solenoid valves to hold an actuator in place under load qualifies as a trade secret.

No other aspect of the 2002 actuator prototype has been identified with sufficient specificity to defeat summary judgment. . . . REXA does not dispute that the actuator prototype was an Xpac actuator with two solenoid valves and modifications to the manifold, tubing, circuit board, and coding. At the same time, REXA fails to identify evidence showing that the manifold, tubing, or circuit board were part of any purported trade secret. That leaves only the source code . . . . As the defendants note, REXA does not argue the source code was the key ingredient supporting the existence of a trade secret within the prototype. So, we conclude that no reasonable jury could find that REXA has identified a trade secret under the [Illinois Trade Secret Act].

Id., slip op. at 11-13 (citations omitted)

The court further considered — assuming arguendo the existence of a trade secret — if REXA had made a showing that MEA had wrongfully used (misappropriated) the putative trade sufficient to carry REXA's burden on summary judgment. On this issue, REXA argued that there had been two instances of misappropriation, one when MEA filed its patent application with claims that purportedly embraced the 2002 prototype, and a second when it incorporated features of the 2002 prototype into MEA's commercial product, the Hawk actuator.

REXA's contention with respect to the patent application turned on an amendment to the claims that MEA had made during prosecution in order to overcome the patent examiner's rejection of them based on the prior art. Specifically, MEA amended its claims to require that the actuator's motor could "accelerate from zero to maximum revolutions per minute (RPM) under full load." Slip op. at 5. According to REXA, Chester had admitted at his deposition that this was also a feature of the 2002 prototype. The Seventh Circuit rejected this argument, observing that Chester's actual testimony was that he speculated that the 2002 prototype had this capability, but did not know if it actually did because it had never been tested. Id. at 14.

Further, the court held, REXA would not have carried its burden even if Chester had testified as it contended, i.e., that the 2002 prototype in fact had the same performance under load as claimed in the patent. As to this point, the court held that no inference could be drawn that Chester had used his knowledge of the 2002 prototype given the passage of time, compounded by the fact that he had not retained any Koso documents and would have to have maintained knowledge of the specifics of the 2002 prototype solely in his memory:

[E]ven if the 2002 prototype had met every limitation of the patent application's allowed claim 3, REXA's allegations of misappropriation would still rest on a series of untenable inferences. Critically, it is undisputed that eleven years passed between when Chester first worked on the actuator prototype for Koso, and when he started work at MEA on the designs that would later underlie the patent application. As we noted earlier, there is also no dispute that Chester did not see [his co-worker's] sketch of the 2002 prototype, the source code, or the test results. Chester never saw or physically took any documentation with him. But REXA asks the court to infer that he somehow retained and preserved for eleven years the knowledge from his work on the shelved 2002 actuator prototype.

Although Chester would have recognized that this knowledge was commercially valuable, according to REXA he chose to do nothing with it for the entire period before 2013. . . . Then, in 2013, Chester supposedly decided to misappropriate his encyclopedic knowledge of the 2002 actuator prototype. Simply put, these inferences are barely "conceivable" and certainly not "reasonable," so they will not be drawn at summary judgment. REXA has not directed us to a case where a court inferred that the misappropriation of trade secrets could plausibly have occurred despite a lack of evidence concerning the defendant's seizure or possession of documents. We also have not located such a case. Even more, the eleven-year gap renders the inferences that REXA asks us to draw exceptionally unreasonable.

Id. at 15-16 (citations omitted)

Having rejected REXA's argument concerning performance of the motor under full load in its argument concerning the patent application, the Seventh Circuit made short work of REXA's contention based on the design of the Hawk, which included this feature as a "central innovation." Id. at 16. The court also pointed to REXA's lack of evidence to contradict Chester's testimony that he had developed the Hawk based on his experience in the field dating back to 1976:

Asked when he first conceived of the invention described in the patent application, he responded that the Hawk was "based on a lifetime of work in hydraulics" and was an "incremental process" dating back to 1976. REXA does not point to anything that contradicts Chester's assertions about the way in which the idea for the Hawk came together.

Id. at 18

Finally, having stated above that the district court awarded the defendants their attorneys' fees, this post would be remiss if it left the reader wondering about the Seventh Circuit's disposition of that aspect of REXA's appeal. As to the fee award, it held that the district court 1) did not err in awarding fees as a sanction for REXA's litigation misconduct, but 2) fell short of adequately justifying its decision to award the entirety of the defendants' fees without explaining its rejection of every objection that REXA had made to the specifics of the defendants' fee application. Accordingly, the Seventh Circuit vacated the fee award and remanded the case to the district court to explain its decision as to the amount of fees. Slip op. at 33-35.

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