A recent court case illuminates the importance of holding your mix designs and manufacturing techniques in confidence.
By Christopher L. Grant
A manufacturer of concrete products won a sweet victory in the recent decision of a court in California. The lawsuit involved trade secrets consisting of its color formulas, its mold sequence and cycle, and its sequential face color application techniques and processes. Eldorado Stone LLC is a manufacturer of architectural stone veneers for residential and commercial use. Its manufactured stone veneers offer an alternative to real stone on the exterior of homes, buildings, fireplaces, fences and other applications. Prefabricated molds form the products, and then they are colored using a proprietary method and filled with a pre-colored concrete mix. Additional color enhancements are applied by hand; custom application techniques and other proprietary methods make Eldorado Stone’s products attractive to its customers. The company’s core product line includes 60 distinct stone types.
Eldorado Stone employed Alfonso Alvarez as a Process Quality Assurance Manager at its San Marcos, Calif., plant starting in January 2002. Alvarez’s job gave him access to trade secrets: valuable proprietary information consisting of color formulas, color application processes, and production information that had been developed by Eldorado Stone over time. The court found: “This proprietary information was confidential, known by each defendant to be confidential, and became the core and code for the manufacture of Eldorado’s stone veneer products, considered to be among the leading products in the field of manufactured stone. This information was, in a word, the essence of these superior products and served to distinguish Eldorado’s products from others in the industry. It was this proprietary information, in combination with the management, sales and production skills of Eldorado, that allowed it to capture up to 50-60 percent of market share in the markets in which it competed.”
The court found that, while an employee of Eldorado Stone, Alvarez downloaded trade secret information maintained in secure computer files for use by a new company being formed by him in collaboration with others in order to compete with Eldorado Stone; that he in fact used the misappropriated information by allowing the new company, Renaissance Stone Inc., to create identical or nearly identical stone veneer products with product names confusingly similar to Eldorado Stone’s product names; that Renaissance Stone copied Eldorado Stone’s Web site, installation guides and product brochures; and that Renaissance Stone targeted Eldorado Stone’s customers as purchasers of its own products. Finally the court found that Alvarez had “(e)ngaged in a cover-up of his theft of trade secret information by destroying or attempting to destroy evidence of his wrong-doing.” Renaissance Stone sold millions of dollars of its products. The court found that the “reprehensibility of the conduct of all these defendants … in their premeditated and wholesale misappropriation of Eldorado’s trade secret information, was stunning in its brazenness and scope.”
The members of the jury must have been upset by what they heard, because they rendered a verdict of $15 million in compensatory damages, which, the judge found, “far exceeds any evidentiary basis for an award of compensatory damages, including the highest damage figure given by Eldorado’s damage expert.” The judge found that compensatory damages did not exceed $2,620,213.92. The judge used that figure as the basis, however, of an award of exemplary damages in substantial amounts. The court also enjoined the defendants from further use of Eldorado Stone’s trade secrets.
Here are the lessons that I see in this very interesting case. Your concrete mix designs, manufacturing techniques and processes may constitute trade secrets of enormous value and should be protected with vigilance. Protecting them means, among other things, to share them only with managers whose trustworthiness has been demonstrated, and to require all employees who have access to trade secrets to sign a written agreement of confidentiality before they receive the information. With or without a written agreement, employees who gain access to proprietary information must recognize that they owe a duty of loyalty to their employers as well as an obligation to protect specific confidential information. Formation of a company to compete with a former employer is a delicate matter that requires careful attention to ensure that the rights of that employer are honored. Failure to do so can give rise to enormous consequences.
Christopher L. Grant practices law in Washington, D.C., and serves as general counsel to NPCA. Visit www.lawgrant.com for more information. © Copyright Christopher L. Grant 2007