Iowa Appellate Court Sends Trade Secrets Case To Trial in Custom Machine Equipment Reverse-Engineering Case

Deimco is a Tampa-based company that designs and manufactures custom finishing equipment.  Pella Corporation makes and sells windows and doors.  Pella asked Deimco to build custom equipment for Pella.  Deimco did so but did not formally obtain an NDA contract from Pella.

Deimco’s quotation request form contained language that Deimco owned all custom modifications made to standard equipment.  Additionally, Deimco’s quotation and initial drawings included a legend that indicated the drawing was proprietary to Deimco and it required Pella to endorse that drawing and Pella did.  Deimco then built the equipment and sent it to Pella.

Pella later tried to change the original ownership language in the quotation request to read that Pella, not Deimco, owned the designs.  Deimco objected and Pella ultimately made a purchase order pursuant to the “Deimco owns the designs” language.  The relationship ended when Pella indicated that it had decided to design and produce its own finishing equipment.  Pella even asked Deimco to turn over some sub-assembly drawings to Pella so that Pella could properly maintain the Deimco designed machinery in its possession.  Deimco, probably smelling something fishy, declined.

Pella then disassembled and replicated the Deimco machine.  The alleged evidence apparently indicates some at Pella were concerned doing so would infringe on Deimco’s property interests in the machine.  But Pella went forward and successfully reverse-engineered the Deimco machine.  Deimco sued for trade secret misappropriation in Iowa state court as Pella is located in Iowa.  After discovery in the litigation concluded, Pella moved for summary judgment.  Pella convinced the trial court that Deimco had not made reasonable efforts under the circumstances to maintain the secrecy of the designs of the machine.  The trial court found it undisputed that Deimco had publicly disclosed the equipment at trade shows and through public sales and without confidentiality agreements in place or even seeking patent protection.  Summary judgment was granted to Pella.  Deimco appealed.

On appeal, the Court of Appeals of Iowa reversed.  The opinion was handed down April 8th.  The Court of Appeals noted that the reasonableness of Deimco’s efforts to preserve the secrecy of the designs of the machines was usually an issue of fact left to the fact-finder and it went on to note the substantial disputes in the evidence, including expert testimony, regarding the reasonableness of Deimco’s efforts to preserve the secrecy of the designs.  On the topics of trade shows and office tours where Deimco’s machines could be observed by the public and competitors and even Pella, the appellate court credited the testimony that indicated nothing specific as to the designs could be observed during these tours and shows.  As to drawings Deimco apparently published on its website, experts testified that even skilled designers could not take those drawings and derive the machine design in question.  As for the ease of reverse-engineering the machines, the appellate court noted Pella’s own evidence that it estimated it would take over 2300 hours to design and build a similar machine.

Lastly, and importantly for this discussion, the appeals court noted that the failure of Deimco to obtain an NDA from Pella was not, as Pella apparently argued, a per se unreasonable failure to preserve the secrecy of the designs.  The court noted the various legends and negotiated quote language as evidencing efforts by Deimco to preserve the secrecy of the designs.  It obviously didn’t help Pella that it had attempted to re-negotiate language that identified ownership and the proprietary nature of the drawings as belonging to Deimco.

This case is going back to trial.  This was a close one for Deimco.  The take-away from this opinion is that failure to obtain an NDA in a design scenario is not automatically fatal to the trade secrets claim  – but we suspect that Deimco is going to alter its behavior in the future in that regard.  It looks like the Court of Appeals of Iowa probably got this one right, too – failure to obtain an NDA is not automatically fatal to one disclosing a trade secret to another who values it in a commercial setting but there better be other efforts that are reasonable under the circumstances to preserve the secrecy of the information at issue.