The messy intersection of copyright, trade secret, and false advertising

PrecisionFlow Technologies, Inc. v. CVD Equipment Corp., 2007 WL 844893 (N.D.N.Y.)

Plaintiff PFT, which makes custom gas and chemical delivery systems and provides computer chip fabrication services, sued CVD for false advertising and commercial disparagement under the Lanham Act and related state law claims. In essence, PFT claimed that CVD falsely told others in the industry that PFT’s goods and services infringed CVD’s IP rights, causing PFD damage. For example, when PFT bid on a job for Lucent, with which it had an ongoing business relationship, CVD told Lucent that PFT’s performance would infringe CVD’s rights. CVD got the contract instead.

CVD countersued PFT and PFT’s president, the former employee of a company CVD bought, alleging that he stole the company’s IP, including copyrighted technical drawings, software, and operations manuals. CVD has applied for registrations and registered copyrights covering some of the IP it purchased, including technical drawings for the “Silane Delivery System.” CVD claimed that PFT copied substantial portions of the Silane Delivery System and other works, and that PFT misappropriated confidential information, wrongfully disclosed that information to customers, and interfered with CVD’s business relations with Lucent by falsely informing Lucent that PFT was entitled to sell competing goods. Thus, CVD’s counterclaims alleged copyright infringement, unfair competition, unjust enrichment, and tortious interference with prospective business relations.

PFT’s defense to the copyright claims was that the relevant information wasn’t created by the predecessor company and that whatever protectable rights it may have had were abandoned, transferred, or licensed to third parties. This also affects the analysis of whether the information embodied in the works was a trade secret.

The works at issue were identified as: Lucent Silane Delivery System Drawings; four Emcore standard gas panel drawings; Lucent and IBM wiring diagrams and drawings; Silane Delivery System Software; IBM Silane Systems Software; Lucent Gas Cabinet Software; IBM Gas Cabinet Software; and IBM Touch Screen Software. As the names indicate, PFT argued that many of the drawings were provided by customers free of charge, given that customers in this industry typically provide detailed specifications for the equipment they want built, including schematic and/or conceptual drawings and even specifying component manufacturers. PFT’s president said in a declaration that his former employer did little or no independent engineering.

CVD submitted a declaration from its employee, the former president of the predecessor company, who stated that the company would sometimes develop schematic drawings, and that in any event it would prepare detailed proprietary manufacturing, assembly and layout drawings, because the schematic drawings were insufficient for manufacturing purposes. If the customer ordered standard equipment, the company would use and if necessary modify standard detailed drawings it previously created. He added that the company did perform extensive design work, much of which was billed to customers. (Even so, are these copyrightable derivative works? Or do they flow so naturally from the schematic drawings that no independent copyright can subsist, either because of the originality requirement for derivative works or because of merger and related doctrines? Because of the undeveloped posture of the case, and because of the court’s focus on trade secret issues, these questions are unaddressed.)

PFT also argued that the works weren’t kept confidential, submitting declarations that it was common practice for works like the drawings, operations manuals, and software at issue to be freely exchanged in the industry and given to customers without restriction; products and equipment were regularly shown at trade shows and made available for unrestricted inspection at public auction. CVD submitted conflicting evidence, including evidence that the company used nondisclosure agreements with customers (though the agreements don’t seem to have specified what counted as confidential information, raising the question of whether the drawings, manuals, etc. were actually covered).

Given these factual disputes, the court declined to grant summary judgment to the counterdefendants. On the state law counterclaims, the court rejected PFT’s preemption defense because the extra element of breach of duty was allegedly present – even with respect to the unjust enrichment state-law claims. That holding seems shaky, given that unjust enrichment doesn’t require that extra element, unlike the trade secret claims. The elements of unjust enrichment are that the defendant benefited at the plaintiff’s expense and that in equity and good conscience the defendant should make restitution – that’s a tort that can be committed just by copying, in the absence of preemption. Adding in breach of duty in this specific case to avoid preemption is transforming the tort.

The court also rejected PFT’s claims for false advertising under New York law, because CVD’s conduct wasn’t consumer-oriented and didn’t affect the public at large, given the highly specialized goods and services at issue. The Lanham Act has no such limit, and the court found disputed issues of fact on the federal claims and the state-law tortious interference claims.