Friday, January 30, 2009

Texas Court Predicts Pennsylvania Will Adopt Inevitable Disclosure Doctrine (Industrial Insulation v. Sproule)

The "inevitable disclosure" theory of trade secrets misappropriation continues its journey through the courts, this time making a stop in Pennsylvania.

Actually, the stop was in Texas, but the court decided to apply Pennsylvania law. In this particular case, Industrial Insulation Group v. Sproule, the dispute arose out of a business sale that occurred over 20 years ago in the business of perlite pipe coverings. At the time, Gary Sproule's company was the only U.S.-based manufacturer of perlite pipe insulation. He sold the assets of his company to Calsilite Manufacturing (later succeeded by Industrial Insulation) and transferred all intellectual property to Calsilite in the sales agreement.

Sproule also received a license back to use the transfered IP for his pipe fitting cover business. The parties entered into various restrictive covenant agreements, none of which is relevant to the case.

In 2008, a competitor of Industrial Insulation, ITW Insulation Systems, issued a press release announcing a strategic alliance with Sproule to construct a perlite facility in Texas. Immediate concerns arose within the IIG ranks about the affiliation. ITW had just acquired two facilities overseas.

IIG filed a motion for preliminary injunction, contending that Sproule could not consult with ITW without disclosing trade secret information sold to IIG many years back. In granting the injunction, the court noted that the application of the inevitable disclosure theory of misappropriation was unclear in Pennsylvania. Still, it determined that, based on prior cases, courts there would apply the doctrine.

The court held that even though certain aspects of the perlite manufacturing process were known by some in the industry and were in the public domain, the totality was not. This is the "unified process" theory of trade secret protection that many courts have spoken of in rejecting similar defense arguments. The court stated: "Although portions of both the formula and the process may be publicly accessible at this time, the combination of the formula and the process which enables the producer to consistently manufacture ... perlite remains a valuable trade secret."

Because ITW was attempting to develop similar perlite technology, and sought to hire Sproule in a research and development capacity, an injunction was proper under the inevitable disclosure theory.

The case illustrates the difficulty of applying inevitable disclosure. Generally, four approaches are taken by courts in applying the rule: (a) a fact intensive inquiry; (b) bad faith of the employee; (c) the level of technical skill required of the position; and (d) an objective look at the position and nature of the competition. The approach in this case clearly fell within (c) - the technical skill of Sproule had to be the determining factor.


Court: United States District Court for the Southern District of Texas
Opinion Date: 1/28/09
Cite: Industrial Insulation Group, LLC v. Sproule, 2009 U.S. Dist. LEXIS 5746 (S.D. Tex. Jan. 28, 2009)
Favors: Employer
Law: Pennsylvania

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