Safety vacuum release system producer Fail-Safe lost its second round in court against A.O. Smith Corp. when the Seventh Circuit Court of Appeals upheld a lower-court decision.
“We’re pleased with the result, but disappointed that it did take company time and money to vindicate ourselves ... ,” said Mark Petrarca, senior vice president of human resources and public affairs at Milwaukee-based A.O. Smith Corp.
“At the end of the day, we’re happy with the outcome and we believe the truth prevailed.”
In 2008, Denver-based Fail-Safe filed a lawsuit against the parent company of motor producer A.O. Smith Electrical Products Co. (which was sold last year to Regal Beloit Corp.)
The case was filed in District Court, Eastern District of Wisconsin, and charged misappropriation of trade secrets and unjust enrichment. The suit alleged that A.O. Smith’s eMod pool pump motor was developed using technology devised by Fail-Safe.
According to the claim, A.O. Smith approached Fail-Safe and expressed interest in marketing the firm’s pump with built-in technology to prevent entrapment. Fail-Safe said it shared proprietary information in good faith, believing a collaboration would take place. At one point, company officials sent a sample product to the motor manufacturer, along with testing data and ideas for possible features.
The claim went on to state that when Fail-Safe sought to formalize the collaboration, A.O. Smith ended talks and, the following year, went on to launch the eMod.
A.O. Smith denied the allegations, saying its own engineers designed the technology. It counter-sued Fail-Safe, claiming the company breached a confidentiality agreement and falsely told third parties of a collaboration.
The case didn’t receive a full trial, but was decided in favor of A.O. Smith on a summary judgment.
“We are very disappointed in the ruling...,” said Joe Cohen, president of Fail-Safe, LLC, in a statement.
“We felt we had a strong case, as did our lawyers. ... Our biggest disappointment was that we did not get the opportunity to present our case to a jury,” Cohen said. “We have suffered a great loss as a consequence.”
In its decision, the lower court stated that Fail-Safe took no precautions to protect its own trade secrets. “... Information is within the public domain unless that information is protected by some ‘body of law’ that creates an intellectual property right,” the court said.
The court added that to prevent intellectual property law from stifling competition, the burden is placed on the holder of trade secrets to protect them. Without patents or a contract stipulating confidentiality, it was not considered a trade secret. And without a financial arrangement in writing, the defendant had no obligation to pay the plaintiff for the information.
In its appeal, Fail-Safe said it believed a collaboration was taking place, making it reasonable to assume confidentiality between the parties to protect both their interests. Fail-Safe cited a previous case between two small toy manufacturers in which the court decided that a verbal confidentiality agreement was binding.
But in this case, Fail-Safe had not secured a spoken arrangement, nor one on paper, the court found.
The issue of trade-secret protection aside, A.O. Smith’s attorney, J. Donald Best, said his client did not incorporate Fail-Safe’s technology into any of its products. “The design of the A.O. Smith product is vastly different than the design that the plaintiff had on his product,” said Best, of Madison, Wis.-based Michael Best & Friedrich. “[A.O. Smith] never used Fail-Safe’s intellectual property.”
No appeal was filed by the deadline, according to Fail-Safe’s attorney, G. Stephen Long.