Convolve, Inc. v. Compaq Computer Corp.

Addressing the status of alleged trade secrets exchanged between parties to a non-disclosure agreement (NDA), the U.S. Court of Appeals for the Federal Circuit affirmed a summary judgment ruling, finding that the disclosing party’s failure to follow the written confidentiality obligations of the NDA caused the information to lose its status as a trade secret, if it ever had such status. Convolve, Inc. v. Compaq Computer Corp., Case No. 12-1074 (Fed. Cir., July 1, 2013) (O’Malley, J.).

Convolve, Compaq and Seagate entered in NDAs in the context of negotiations to license Convolve’s technology relating to improved methods of manufacturing computer hard drives. The parties had three meetings to discuss Convolve’s technology. After the first meeting, the parties acknowledged in writing that any oral disclosure of confidential information during that meeting was covered by the NDAs. Convolve, however, did not state in writing that any of the disclosures during or in connection with the latter two meetings were confidential. The parties never reached a deal.

Later, Convolve and MIT sued Compaq and Seagate for, among other things, trade secret misappropriation and patent infringement. Convolve contended that Seagate manufactured drives and tools that infringed two of its patents and misappropriated Convolve’s trade secrets stemming from information presented by Convolve to Seagate and Compaq. Convolve also asserted that Compaq incorporated the Seagate drives into its computers, provided patent infringing tools and misappropriated certain trade secrets.

The district court entered summary judgment in favor of Seagate and Compaq on the trade secret misappropriation allegations. The district court also entered summary judgment in favor of Seagate and Compaq on all asserted claims of both patents. Convolve appealed.

As it relates to its trade secret claims, Convolve argued that the district court improperly granted summary judgment for three reasons: because it had presented evidence sufficient to create genuine issues of material fact that the trade secrets were disclosed in accordance with the NDA, because it presented evidence to support its argument that the parties’ course of conduct would demonstrate that the information should be protected and because the NDAs did not govern the entire relationship between the parties under California law. The Federal Circuit rejected all three arguments.

The Federal Circuit found that as a consequence of Convolve’s failure to comply with the confidentiality obligations of the NDAs, the information presented at the latter two meetings lost any trade secret status it might have had upon disclosure. The Court also rejected Convolve’s argument that the parties understood that all of their mutual disclosures were confidential, notwithstanding the marking requirements in the NDAs. The Federal Circuit found that the plain language of the NDA unambiguously required that, for any oral or visual disclosures, Convolve was required to confirm in writing, within 20 days of the disclosure, that the information was confidential. The Court concluded that the NDAs were not reasonably susceptible to Convolve’s interpretation, and that Convolve’s interpretation would have rendered the NDA “a dead letter.”

The Federal Circuit also rejected Convolve’s argument that the protection afforded to the exchange of information between the parties was broader than what was set forth in the terms of the NDAs. The Court stated that a written NDA supplants any implied duty of confidentiality that may have existed between the parties. The Federal Circuit found that this conclusion was consistent with California contract law and common sense.

Regarding the patent infringement allegations, the Federal Circuit reversed the lower court’s ruling of non-infringement of one of the patents, concluding that Convolve raised genuine issues of material fact precluding summary judgment on the issue of direct infringement, based on deposition testimony of fact and expert witnesses. Since the Federal Circuit found that Convolve may be able to demonstration direct infringement by Seagate, it reversed the district court on inducement as well, concluding that Convolve presented enough evidence to preclude summary judgment on its inducement claims.

The Federal Circuit affirmed the lower court’s ruling on lack of enablement, noting the inventor’s testimony that he was unable to implement his own method on disk drives until almost nine years after the filing date of the patent. The Court concluded that evidence was fatal as to enablement of the asserted method claims.