When a defendant, sued by a former employer for misappropriating a manufacturing process that allegedly constituted a trade secret, denies that the process is confidential and files a counterclaim alleging that the plaintiff is engaged in sham litigation in order to stifle competition, is it appropriate for the court to instruct the jury that the evidence shows plaintiff does not have a valid trade secret? In a recent case, the trial judge gave such an instruction which led to a multi-million dollar jury verdict for the defendant. The appeal that followed is reported in Whitesell Int’l Corp. v. Whittaker, 2010 WL 3564841 (Mich. App., Sept. 14, 2010) (affirming the judgment below; 2-1 ruling that the instruction was appropriate), vacated on reconsideration, 2011 WL 165405 (Mich. App., Jan. 18, 2011) (vacating the judgment below and remanding for a new trial; unanimous decision that the instruction was inappropriate).

The sole manufacturer of interconnected “pierce nuts” filed a trade secret misappropriation lawsuit in Wayne County, Michigan, against an ex-employee who allegedly was using the plaintiff’s manufacturing process in a competing business. Pierce nuts affix materials to sheet metal.

Responding to the lawsuit, which was the third one between the parties, the ex-employee successfully moved to dismiss the claim on the ground of res judicata. In a counterclaim for tortious interference with a business relationship and expectancy, he denied that the process was confidential, and he demonstrated that the process was readily visible to plant visitors and was disclosed in detail in an old, expired patent. He also proved that the plaintiff’s employees were not required to sign confidentiality agreements and that no document referred to the process as confidential. Accordingly, he maintained that the plaintiff was engaging in sham litigation which was a “flagrant violation” of the Michigan Antitrust Reform Act and part of an unlawful effort to preserve a monopoly. Insisting that it had acted reasonably in filing the lawsuit, the plaintiff produced witnesses who testified to their understanding that the process was confidential.

Immediately prior to the start of deliberations following a 25-day trial, the jury was instructed that the manufacturing process did not constitute a trade secret. Naturally, the jury then decided the counterclaim for the defendant. Including attorneys’ fees and pre-judgment interest, the counterclaimant was awarded more than $8 million.

The manufacturer appealed with interesting results. Initially, the Michigan Court of Appeals affirmed, 2-1. The dissent insisted that the claim should not have been dismissed on res judicata grounds and that the counterclaim instruction was improper and highly prejudicial. On reconsideration, the panel vacated the judgment and remanded for a new trial, concluding that the dissent had been correct in saying that the judge below should have let the jury decide the trade secret question. However, the ruling in the initial opinion regarding res judicata was left unchanged. The judge who initially had dissented now concurred in the portion of the decision on reconsideration remanding because of the improper trade secret instruction, but he continued to dissent with respect to the reiterated ruling on res judicata.

As this case illustrates, in trade secret misappropriation litigation a party alleging that a manufacturing process is confidential has an uphill battle to obtain a sustainable directed verdict where there is a dispute concerning whether the process constitutes a trade secret.