Labor Logic

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John D. Finerty, Jr.

Wisconsin’s version of the Uniform Trade Secrets Act, Wis. Stat. § 134.90, provides statutory protections for a business’s proprietary information from which the business derives economic value by virtue of the information not being generally known to competitors. Competitors are the most likely suspects to misappropriate a trade secret, but another source of competition can come from within a company. That is, employees and vendors may be in a position to start competing enterprises and steal trade secrets.

The recent case of Hicklin Engineering v. R.J. Bartell, et al., Case Nos. 05-2282 and 05-2302 (Feb. 22, 2006), demonstrates how the Trade Secrets Act operates when an independent contractor starts a competing business. The case held that Hicklin Engineering should be allowed to take its trade secrets case to a jury because Bartell, an independent contractor, might have wrongly used Hicklin’s trade secrets for his own benefit.

Background

R.J. Bartell was an engineer who worked part-time as an independent contractor at Axi-Line, a division of Hicklin Engineering. Axi-Line makes testing equipment for automobile and truck transmissions. Axi-Line did not require Bartell to sign a restrictive covenant or confidentiality agreement.

Bartell had access to Axi-Line’s trade secrets in the course of performing his work as an engineer. Bartell did not, however, promise to avoid future competition with Axi-Line, nor did he promise in writing not to use his drawings or ideas for any other entity. Nevertheless, when Bartell started a competing business selling transmission testing equipment, Hicklin Engineering sued him on the theory that Bartell used Hicklin’s secret drawings and equipment designs.

The Trial Court Decision

At the district court level, the court granted summary judgment to Bartell based on the premise that, because Bartell did not sign a restrictive covenant or confidentiality agreement, any information that Axi-Line provided him was Bartell’s to do with as he pleased. The district court also awarded a portion of fees and costs to Bartell because Hicklin would not admit that Bartell was purely an independent contractor; it took the position that he was an employee. Both sides appealed.

Trade Secret Law Applied

When a business hires an independent contractor, the contractor is presumed to retain ownership in his or her work product. In fact, as the Seventh Circuit noted, “In the absence of an agreement, non-exclusivity is the norm,” just as a lawyer is not precluded from applying his or her experience for one client to a case that involves a different client. That means an independent contractor is free to sell his or her services to any of his or her clients, unless otherwise agreed upon.

The issue in Hicklin Engineering was whether Bartell took some of Axi-Line’s proprietary information, that he previously used in performing engineering services for Axi-Line, to sell products as a competing business. The case turned on the issue of whether or not Bartell knew or should have known that information Axi-Line provided him was a trade secret and that the disclosure to him was made in confidence. Wisconsin does not require an express, written contract of confidentiality; but there must be some notice to the vendor that information provided to it is secret.

The court held that a jury could conclude that Bartell should have known Axi-Line’s designs were secrets. The court of appeals wrote that Hicklin Engineering took all the “standard precautions” such as perimeter fences around its facility, excluding unescorted visitors and keeping its data under lock and key. In fact, Bartell himself suggested to Axi-Line that its plans be labeled confidential. Design models were also kept secret from customers and competitors.

Based on those facts, the court of appeals held that the record would permit a reasonable jury to find that Bartell knew that Axi-Line treated at least some of the data it provided him as a trade secret. The court also noted, “an implied undertaking to abide by the trade’s norms of confidentiality suffices” as an agreement to keep information given to a contractor secret. Thus, a breach of such an implicit promise to hold information for the client’s sole benefit violates the Trade Secret Act. Bartell, therefore, could have held Axi-Line’s confidential information for Axi-Line’s benefit only and was not privileged to use it as his own, or so a reasonable jury could have found.

Analysis

Restrictive covenants and confidentiality agreements were the norm when employers hired technical employees, scientists, computer programmers, research and development employees or outside vendors to perform the same functions. Restrictive covenants, however, are usually difficult to enforce. In fact, if there is one defect in the restrictive covenant, the entire covenant fails. See Wis. Stat. § 103.465. To protect important business information, therefore, companies have turned to the Trade Secrets Act.

Hicklin Engineering provides an example of how businesses, using even rudimentary security procedures, can protect business assets effectively. Password protected computer systems, labeled designs and drawings, and restricted access areas within the business are some protections. Importantly, although not required, confidentiality agreements with vendors are certainly advisable to establish that the vendor understands it has been given confidential information that it may not share with its other customers.

Had Hicklin Engineering implemented a simple vendor confidentiality agreement, its trade secret case would have been much stronger and it could have, perhaps, avoided an appeal and the corresponding delay in protecting its proprietary information.

Two Procedural Issues

Because this was a trade secrets
case, Axi-Line wanted its confidential designs and drawings protected from public view. In fact, it filed two versions of its appeal brief: one version redacted trade secret information; a second version was filed under seal and included confidential information. The court of appeals noted this was acceptable. There was, however, a different problem with the proceedings below: the district court sealed its entire decision.

In other cases, both the U.S. Supreme Court and the Seventh Circuit have issued public opinions in cases dealing with: state secrets, New York Times Co. v. United States, 403 U.S. 713 (1971); construction plans for building a hydrogen bomb, United States v. Progressive Inc., 467 F. Supp. 990, dis’d, 610 F.2d 819 (7th Cir. 1979); and attorney-client privileged information, A Sealed Case, 890 F.2d15 (7th Cir. 1989).

In light of those decisions, the court found no justification for issuing a secret opinion in a dispute about transmission testing equipment. In fact, the owner of the trade secret, Hicklin Engineering, conceded that the district court’s opinion did not disclose its trade secrets. Therefore, the court ordered the opinion published and then wrote, “We hope never to encounter another sealed opinion.”

The second procedural issue involved subject matter jurisdiction. Because this case arose under Wisconsin law, the statutory diversity jurisdiction standards applied.

Hicklin Engineering was a limited liability corporation. The citizenship of a limited liability company is that of its members, even if its members include partnerships, corporations or other entities with multiple citizenships. See, e.g., Cosgrove v. Bartolotta, 150 F.3d 729 (7th Cir. 1989). Federal courts need to know each member’s citizenship to determine diversity.

R.J. Bartell & Associates, LLC was a single member LLC with its citizenship in Wisconsin. Hicklin’s members, however, included citizens of Alaska, Iowa, North Dakota, Minnesota and Missouri, but none were Wisconsin citizens. Another complicating factor was that its members included trusts, of which national banks were trustees.

The citizenship of a trust is that of a trustee. Under the rule of Wachovia Bank v. Schmidt, 126 S. Ct. 941 (2006), however, national banks are citizens of the states in which their main offices are located; thus, diversity existed because none of the trustee banks were headquartered in Wisconsin.

For more information on this case, or for assistance in devising trade secrets strategies, contact John D. Finerty, Jr. at Michael Best & Friedrich LLP at (414) 225-8269 or on the Internet at [email protected].