Mangren Research & Development v. Nat. Chemical Co.
87 F.3d 937 (1996)
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Rule of Law:
Under the Illinois Trade Secrets Act, a product formula is a protectable trade secret if it is sufficiently secret to derive economic value and is subject to reasonable efforts to maintain its secrecy. Misappropriation of such a secret occurs when a new, non-identical product is created that is substantially derived from the secret information, especially when that information is acquired from a former employee.
Facts:
- In the mid-1970s, Mangren Research and Development Corporation ('Mangren'), founded by Ted Blackman and Peter Lagergren, developed a unique and highly effective mold release agent for its customer, Masonite.
- After 18 months of research, Mangren discovered that a specific type of polytetrafluoroethylene (PTFE) — one that was highly degraded, had a low molecular weight, and low tensile strength — could be used as the key ingredient, contrary to prevailing industry knowledge.
- Mangren took measures to protect its formula, including requiring employees to sign confidentiality agreements, restricting access to its laboratory, and replacing ingredient labels with internal code names.
- In 1986 and 1988 respectively, Mangren hired Rhonda Allen, who became sales manager, and Larry Venable, a chemist who worked with the secret PTFE formula.
- Mangren terminated Allen and Venable in 1989.
- In 1990, Venable disclosed Mangren's secret formula concept to William Lerch of National Chemical Company, who, despite acknowledging the risk of a lawsuit, formed a new company with Venable to create a competing product.
- Venable developed a mold release agent for National Chemical that used the same type of unique PTFE as Mangren's product.
- National Chemical then hired Allen, who used her knowledge of Mangren's customers and pricing to market the new, slightly cheaper product to Mangren's existing client base, including Masonite.
Procedural Posture:
- Mangren Research and Development Corporation sued National Chemical Company, Inc., in federal district court, alleging misappropriation of trade secrets under the Illinois Trade Secrets Act.
- The case was tried before a jury, which returned a verdict in favor of Mangren.
- The jury awarded Mangren $252,684.69 in compensatory damages and $505,369.38 in exemplary damages, finding the defendants' misappropriation was 'willful and malicious'.
- The district court entered judgment on the jury's verdict.
- Defendants filed a renewed motion for judgment as a matter of law or, alternatively, for a new trial, which the district court denied.
- The district court also awarded Mangren attorney's fees based on the jury's finding of willful and malicious conduct.
- The defendants (appellants) appealed the district court's judgment to the U.S. Court of Appeals for the Seventh Circuit.
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Issue:
Under the Illinois Trade Secrets Act, does a company misappropriate a trade secret when it develops and sells a substantially similar, but not identical, competing product using the original company's key secret ingredient, which was learned from the original company's former employees?
Opinions:
Majority - Rovner, J.
Yes, a company misappropriates a trade secret under these circumstances. The court affirmed that liability for misappropriation does not require the new product to be an exact copy of the original; it is sufficient if the new product is substantially derived from the trade secret. The court reasoned that Mangren's formula was a protectable trade secret because it met both prongs of the Illinois Trade Secrets Act (ITSA) test: 1) it was sufficiently secret to derive economic value, as evidenced by its uniqueness and profitability, and 2) Mangren undertook reasonable efforts to maintain its secrecy. The defendants misappropriated this secret by 'using' it, which includes creating a modified product that could not have been developed without knowledge of the secret ingredient. The fact that Venable, a former employee, brought this secret knowledge to the defendants was central to the finding of misappropriation. The court also upheld the exemplary damages award, finding that Lerch's conversation with Venable, where he laughed off the threat of a lawsuit, was sufficient evidence for a jury to find the misappropriation was 'willful and malicious'.
Analysis:
This decision reinforces that trade secret protection is not easily circumvented by making minor modifications to a stolen formula. The court's focus on whether a new product is 'substantially derived' from a trade secret provides a more robust standard that protects innovators. The ruling clarifies that the 'use' of a trade secret is interpreted broadly, preventing competitors from exploiting the core concept of a secret while changing superficial details. Furthermore, the case serves as a strong warning to companies that hire employees from competitors, highlighting that a cavalier attitude toward potential infringement can lead to findings of 'willful and malicious' conduct, resulting in significantly enhanced damages and attorney's fees.
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