Can you use a trade secret to manufacture a competing product in violation of a written agreement, so long as you don’t disclose it? Remarkably, in New York, the answer may be “yes.” The case that led to this holding is back in the news, as a May 13, 2011 opinion by the Southern District of New York has ordered the parties in that case to proceed to trial on claims that were not resolved in a Swedish arbitration.
Two years ago, the U.S. Court of Appeals for the Second Circuit caused an imbroglio in the trade secret and IP community when it issued its holding in Faiveley Transport Malmo AB v. Wabtec Corporation, 559 F.3d 110 (2d Cir. 2009). In Faiveley, the Second Circuit took the remarkable step of reversing the district court’s preliminary injunction pending that Swedish arbitration and holding that the defendant could continue to use the trade secrets at issue in its manufacturing operations so long as it did not “disclose” the trade secrets to anyone else.
Faiveley arose in a situation involving an expired license for air brake technology. The defendant, Wabtec, had continued to use confidential information and trade secrets granted to it under that expired license to manufacture braking components for subway rail cars over the objection of the licensor, Faiveley. The Second Circuit reasoned that because Wabtec was benefiting from the confidential information in connection with its unlicensed use, it therefore had no incentive to “disclose” the information, and, consequently, the risk of improper disclosure was not present. Of course, in so ruling, the Second Circuit ignored the central goal underpinning confidentiality agreements and trade secret law – the ability to control, limit and/or exclude others from utilizing one’s property in the form of confidential information and trade secrets.
As you might expect, this decision resulted in disbelief within the trade secret and IP legal community, with one leading commentator concluding that the decision amounted to a “license to steal”. Ironically, it appears that the plaintiff Faiveley ultimately was able to persuade the Swedish arbitration panel within the ICC to impose an injunction at a permanent injunction hearing. Unfortunately, those practicing in New York or using New York law still have to contend with the holding, which has been followed by both state and federal courts applying New York law.
The good news is that New York has not adopted the Uniform Trade Secrets Act, and, as a result, the damage inflicted by Faiveley has been largely confined to the New York trade secret community. The bad news is that this case remains a dangerous precedent because many commercial agreements have New York choice of law provisions, which are frequently a default or compromise choice because of the perceived strength of the commercial federal and state court bench. Thus, lawyers and clients should be wary of agreeing to New York law in a NDA or trade secret context. If one is going to agree to New York law, it would be prudent to include language specifically forbidding any kind of use, such as manufacture or improvements, in addition to language forbidding disclosure. This would hopefully preserve a breach of contract claim and strengthen any trade secret claim in any future dispute.