Coca Cola and Air Brakes

The recipe for Coca Cola has famously been kept confidential since its initial formulation in 1886. An example of the long-term value of confidential information in engineering comes from a recent dispute between Faiveley and Wabtec in the field of air brakes for trains on the New York subway.

In the 1970s, Swedish company SAB Wabco developed a brake system for trains and, nearly two decades later in 1993, granted a licence to its US sister company, Wabco, to use its patents and confidential manufacturing drawings to supply brake systems for trains on the New York subway.

Ten years later, SAB Wabco was acquired by French company Faiveley which decided not to renew the licence with Wabco (since renamed “Wabtec”) but which instead sought to have itself substituted for Wabtec in a contract with the New York City Transit Authority for overhaul of subway trains.

When the Transit Authority refused to transfer the contract, Faiveley launched a legal action in the US courts, alleging that Wabtec was continuing to (mis)use the confidential manufacturing drawings provided under the now terminated licence. Faiveley sought an injunction preventing Wabtec from using the drawings in the overhaul contract together with financial compensation.

On 29th July this year, nearly forty years after the brake system was first conceived and long after the expiry of any patents, Faiveley were awarded damages of nearly $20 million.

As an aside, this matter previously went to appeal in 2008 where it inspired one of the judges to note in his decision that:

To the parties in this case, subway brakes are known as “Brake Friction Cylinder Tread Break Units” (“BFC TBU”). For the rest of us, BFC TBU are “that loud squeaking, sparking braking system that so reliably stops the New York City Transit subway system.” ... Twenty-four hours a day and 365 days a year, the City’s subway cars safely stop at 468 passenger stations—and, as any straphanger knows, many times in between—depositing riders of all classes and descriptions at homes, workplaces, ballparks, and every other destination imaginable. See generally MacWade v. Kelly, 460 F.3d 260, 264 (2d Cir. 2006) (“The New York City subway system … is an icon of the City’s culture and history, an engine of its colossal economy, a subterranean repository of its art and music, and, most often, the place where millions of diverse New Yorkers and visitors stand elbow to elbow as they traverse the metropolis.”). The subway is an indelible feature of the City’s culture. Its legend and lore fascinate locals and visitors alike. See, e.g., Carrie Melago, It’s the Rail Thing: Subway Ride Record is Official, N.Y. Daily News, Aug. 8, 2007, at 24 (reporting that six alumni of Regis High School set a new world record for stopping at all 468 stations on a single fare: 24 hours, 54 minutes, and 3 seconds). A point of personal pride for many New Yorkers, the City’s subterranean transit has appeared in song, on stage and screen. See, e.g., Leonard Bernstein, et al., “New York, New York,” from On the Town (“New York, New York—a helluva town, / The Bronx is up but the Battery’s down, / And the people ride in a hole in the ground; / New York, New York—It’s a helluva town[!]”), as quoted in The Oxford Dictionary of Humorous Quotations 329 (Ned Sherrin, ed., 1995) (attributed to Betty Comden and Adolph Green, lyricists). The subway’s rhythm and sound have also rumbled into the canon of American literature. See, e.g., Tom Wolfe, The Bonfire of the Vanities 36 (Farrar Straus Giroux 1998) (1987) (“On the subway, the D train, heading for the Bronx, Kramer stood in the aisle holding on to a stainless-steel pole while the car bucked and lurched and screamed.”). Moving forward, our next stop is the trade secret dispute concerning the distinctive brakes used by the New York City subway system.

Can One Contract Around a Trade Secret?

I begin a new teaching term next week and that means two sessions with my MBA students, setting out the basics of IP law, before we delve into the challenges of the IP-managerial interface. I have been teaching IP for a long time and that should mean that there is very little angst connected with this part of the course. Sadly--au contraire! There is one segment of the presentation--trade secrets--that I always approach with the "fear and trembling" usually associated with more existential issues.

Put briefly, at some time during the treatment of trade secrets there is always at least one thoughtful, attentive student who asks the ultimate question--"So why do we need trade secret protection as a separate and distinct right? Surely it can be subsumed into other rights--such as contract and tort--that handle the subject matter." Over the years, I have worked up an answer that seeks to point the advantages of having a separately protectable right for valuable secrets. I was recently pleased to find that my notions about trade secrets were supported as part of a much wider-ranging article by the distinguished IP scholar Mark Lemley, in his most interesting article, "The Surprising Virtues of Treating Trade Secrets as IP Rights", Stanford Law Review, vol. 61, Nov. 2008.

From time to time on this blog I will consider various aspects of Lemley's analysis, because I am firm believer that trade secrets should be viewed more centrally as part of anyone's bundle of IP rights. In this blog post, I want to consider one aspect that has practical as well as doctrinal significance, namely, whether one can contract around trade secrets law (similar, e.g., to the question that arises under copyright law whether one cannot contract away the right to reverse engineer).

Thus Lemley writes:

"In trade secret law, [the question] comes up in three significant contexts: efforts to contract around the requirement of secrecy itself, whether in business disputes or in restrictive employment covenants, efforts to ban reverse engineering by contract, and the question of whether a confidential relationship can be implied absent a contract" (footnotes omitted.)

The rationale for not allowing one to contract away a trade secret right is stated in a footnote to Lemley's article, where James Pooley argues as follows:

"The law relating to trade secrets reflects a balance of public and private interests in the encouragement of innovation, the preservation of ethics and the maintenance of a free marketplace of ideas and movements of labor. The balance should not be upset in any given transaction by private understandings between the parties."

Lemley is a bit more circumspect, stating that "... my inclination is to prevent parties from opting out of particular rules of trade secret law, at least to the extent they rely on trade secret rather than contract remedies."

Sadly, there does not seem to a dispositive answer to this question. In my view, the issue of whether one can contract around trade secrets is a "big thing". I encounter one or another of the three scenarios described by Lemley on a frequent basis and I am uncertain about what to advise if the client asks about the ultimate enforceability of the "contract around" provision. The underlying difficulty is always the same--if there is a broad right to "contract around" the trade secret right, why exactly should trade secrtes be placed in same pantheon as patents, copyright and trade marks"? And while I am still stammering to give a cogent answer on that question, there then follows the ultimate query--"If so why should we be mentioning trade secrets in the same breath?"

I have less than a week to prepare myself for this year's inevitable bout with uncertainty about the answers to these questions. Sharon Sandeen has characterized trade secrets as "the Cinderella of intellectual property law". I am not sure, however, that discussing trade secrets with challenging MBA students is exactly "the ball" that Sandeen has in mind. Any advice will be welcome.

Char Girl or IP Right?