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Rycoline Products, Inc. v. Walsh

334 N.J. Super. 62, 756 A.2d 1047 (App. Div. 2000)

TRADE SECRETS—There is no requirement that a trade secret owner establish that a competitor used secret information to make a product which is identical to the product which is a trade secret.

A chemical manufacturer produced a product known as ACFS 276 which it had developed by reverse engineering of a competitor’s product known as MXEH. It entered into a confidentiality agreement with a long-time employee which provided that the employee agreed not to reveal to others “during and after my employment . . . so long as any such information may remain confidential, secret or otherwise wholly or partially protectable, [the manufacturer’s] formulas, processes, methods, manufacturing techniques, discoveries, mixes compounds or other such matter including production or sales activities.” Thereafter, the employee and several others left their employment and joined a competitor. Within eight days of the employee starting employment with the competitor, the competitor began purchasing the ingredients used in the manufacture of ACFS 276 and thereafter marketed a product known as Safe 200+. The manufacturer sued its former employee, the competitor, and others for employee piracy, misappropriation of trade secrets, breach of the employee’s confidentiality agreement and breach of the duty of loyalty, and conspiracy. The lower court dismissed these claims under R. 4:37-2(b). The manufacturer appealed and the Appellate Division reversed the involuntary dismissal of its claims. The Appellate Division began by holding that motions to dismiss under R. 4:37-2(b) must be denied “if the evidence, together with the legitimate inferences therefrom, could sustain a judgment in plaintiff’s favor.” With respect to the claim for misappropriation of a trade secret, the Appellate Division pointed out that a trade secret owner must establish that: (1) a trade secret exists, (2) the information comprising the trade secret was communicated in confidence by plaintiff to the employee, (3) the secret information was disclosed by that employee and in breach of that confidence, (4) the secret information was acquired by a competitor with knowledge of the employee’s breach of confidence, (5) the secret information was used by the competitor to the detriment of plaintiff, and (6) the plaintiff took precautions to maintain the secrecy of the trade secret. “There is no requirement that a trade secret owner establish that the competitor used the secret information to make a product which is identical to the product which is a trade secret.” In this light, the Appellate Division held that the lower court’s “determination that ACFS 276 and Safe 200+ are not identical is not dispositive of the issue as to whether there was a misappropriation of a trade secret.” The Appellate Division held that the lower court erred in it’s analysis of determining that the manufacturer did not hold a trade secret on ACFS 276. The lower court relied on the fact that ACFS 276 was developed by reverse engineering MXEH. The Appellate Division however relied on case law and excerpts from the Uniform Trade Secrets Act which conclude that “if reverse engineering is lengthy and expensive, a person who discovers a trade secret through reverse engineering can have a trade secret in the information obtained from reverse engineering.” The Appellate Division also rejected the lower court’s conclusion that ACFS 276 was not novel enough to merit protection as a trade secret relying on case law which supports the proposition that “novelty and invention are not essential for the trade secret as they are for patentability.” On these and other criteria, the Appellate Division held that “the formula for ACFS 276 could constitute a trade secret. Thus we conclude that the trial judge erred in finding that there was insufficient ‘meritorious discovery’ in ACFS 276 to support a finding of a trade secret.” “Because the evidence and the inferences which could be drawn therefrom presented a jury question as to whether the formula for ACFS 276 constituted a trade secret, [the Court held] that the trial court erred when he granted defendant’s motion pursuant to R. 4:37-2(b).”

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