Thursday, May 14, 2009

Royalty Injunction Not Appropriate for Knowing Misappropriation of Trade Secrets (Progressive Products v. Swartz)

The Court of Appeals of Kansas recently rendered an opinion on a somewhat obscure issue of law under the Uniform Trade Secrets Act. The question involved application of a royalty injunction, under which a party found to have misappropriated trade secrets can still utilize them as long as a reasonable royalty is paid to the non-infringing party.

The case arose out of a fairly typical departing employee fact pattern. Progressive Products is engaged in the manufacture and sale of Ceram-Back, a ceramic coating for pipe elbows that lengthens the life of a pipe. Several employees left to form a competitor which manufactured the identical product under a different name. The evidence adduced at trial indicated the defendants took the formula for Ceram-Back, its mixing process, a pricing method related to the sale of Ceram-Back, price lists, and customer lists. The court of appeals was unwilling to overrule the trial court's factual determination that the information taken constituted trade secrets and that Progressive Products demonstrated misappropriation under the uniform act.

The tougher issue concerned the remedy. The trial court did not award Progressive Products any damages and refused to issue a prohibitory injunction against the defendants. Instead, it issued a royalty injunction, which conditioned the defendants' future use of the trade secrets on payment of a 20 percent royalty to Progressive Products for three years.

This remedy is found in the uniform act, which varies slightly from state to state. The court of appeals reversed this aspect of the judgment and remanded for the trial court to determine the extent of a prohibitory injunction. In Kansas, the trade secrets law allows for a royalty injunction to issue under "exceptional circumstances." That has been interpreted to include either: (a) an overriding public interest; or (b) acquisition of a trade secret in good faith, with prejudice resulting to the innocent misappropriator should a prohibitory injunction issue.

In this case, the court found the defendants could not qualify as innocent misappropriators. It disagreed with the trial court's rationale that a royalty injunction was appropriate given the interest in competition, Progressive Products' culpability in failing to protect its secrets, and the need for some trade secret protection. As a matter of law, the trial court's rationale failed to meet the applicable standard.

Had the defendants acquired the formulas and other product information innocently or in good faith, perhaps from a party who had misappropriated them, a royalty injunction might have been appropriate. But it was not in a situation involving knowing misappropriation.

In Illinois, the uniform act is not as broad and only permits a royalty injunction to issue when there is an "overriding public interest."


Court: Court of Appeals of Kansas
Opinion Date: 4/17/09
Cite: Progressive Products, Inc. v. Swartz, 2009 Kan. App. LEXIS 167 (Kan. Ct. App. Apr. 17, 2009)
Favors: Employer
Law: Kansas

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