CHICAGO LOCK CO. v. FANBERG, 676 F.2d 400 (9th Cir. 1982)

  CHICAGO LOCK CO., A CORPORATION, PLAINTIFF-APPELLEE, v. MORRIS v. FANBERG
         AND VICTOR FANBERG, CO-PARTNERS, D/B/A A-ADVANCED LOCKSMITH,
                            DEFENDANTS-APPELLANTS.

                                 No. 80-5000.

                United States Court of Appeals, Ninth Circuit.

                     Argued and Submitted August 3, 1981.

                             Decided May 6, 1982.

                       Rehearing Denied July 14, 1982.
 

    Neil F. Martin, San Diego, Cal., for Chicago Lock.

    Bruno J. Verbeck, San Diego, Cal., for defendants-appellants.

    H. Chester Horn, Jr., Los Angeles, Cal., for intervenor.

    Appeal from the United States District Court for the Southern
  District of California.

    Before ELY and NORRIS, Circuit Judges, and PECKHAM,[fn*]
  District Judge.

  [fn*] The Honorable Robert F. Peckham, Chief Judge, Northern
  District of California, sitting by designation.

    ELY, Circuit Judge:

  The Chicago Lock Company ("the Company"), a manufacturer of
  "tubular" locks, brought suit against Morris and Victor Fanberg,
  locksmiths and publishers of specialized trade books, to enjoin
  the unauthorized dissemination of key codes for the Company's
  "Ace" line of tubular locks. The District Court granted summary
  judgment in favor of the Fanbergs as to the Company's federal
  claims of trademark infringement and unfair competition, but held
  trial on the common law claim of unfair competition under former
  Cal.Civ. Code § 3369.[fn1]

  The court concluded that the key codes for the Company's
  tubular locks were improperly acquired trade secrets and enjoined
  distribution of the Fanbergs' compilation of those codes. For the
  reasons set forth in this opinion, we reverse the District Court
  and order that judgment be entered in favor of the Fanbergs.

                             THE FACTS

  Since 1933 the Chicago Lock Company, a manufacturer of various
  types of locks, has sold a tubular lock, marketed under the
  registered trademark "Ace," which provides greater security than
  other lock designs. Tubular Ace locks, millions of which have
  been sold, are frequently used on vending and bill changing
  machines and in other maximum security uses, such as burglar
  alarms. The distinctive feature of Ace locks (and the feature
  that apparently makes the locks attractive to institutional and
  large-scale commercial purchasers) is the secrecy and difficulty
  of reproduction associated with their keys.

  The District Court found that the company "has a fixed policy
  that it will only sell a duplicate key for the registered series
  `Ace' lock to the owner of record of the lock and on request of a
  bona fide purchase order, letterhead or some other identifying
  means of the actual recorded lock owner." Finding of Fact No. 14,
  Excerpt of Record at 89. In addition, the serial number-key code
  correlations are maintained by the Company indefinitely and in
  secrecy, the Company does not sell tubular key "blanks" to
  locksmiths or others, and keys to Ace locks are stamped." Do Not
  Duplicate." See Excerpt at 86-91.

   If the owner of and Ace lock loses his key, he may obtain a
  duplicate from the Company. Alternatively, he may have a
  proficient locksmith "pick" the lock, decipher the tumbler
  configuration, and grind a duplicate tubular key. The latter
  procedure is quicker than the former, though more costly. The
  locksmith will, to avoid the need to "pick" the lock each time a
  key is lost, record the key code (i.e., the tumbler
  configuration) along with the serial number of the customer's
  lock. See Excerpt at 92. Enough duplicate keys have been made
  by locksmiths that substantial key code data have been compiled,
  albeit noncommercially and on an ad hoc basis.

  Appellant Victor Fanberg, the son of locksmith Morris Fanberg
  and a locksmith in his own right, has published a number of
  locksmith manuals for conventional locks. Realizing that no
  compilation had been made of tubular lock key codes, in 1975
  Fanberg advertised in a locksmith journal, Locksmith Ledger,
  requesting that individual locksmiths transmit to him serial
  number-key code correlations in their possession in exchange for
  a copy of a complete compilation when finished. A number of
  locksmiths complied, and in late 1976 Fanberg and his father
  began to sell a two-volume publication of tubular lock codes,
  including those of Ace locks, entitled "A-Advanced Locksmith's
  Tubular Lock Codes." In 1976 and 1977 Fanberg advertised in the
  manuals in the Locksmith Ledger for $49.95 and indicated that
  it would be supplemented as new correlations became known. See
  Excerpt at 95-98. About 350 manuals had been sold at the time of
  trial. The District Court found that Fanberg "had lost or
  surrendered control over persons who could purchase the books,"
  id. at 98, meaning that nonlocksmiths could acquire the code
  manuals.

  The books contain correlations which would allow a person
  equipped with a tubular key grinding machine to make duplicate
  keys for any listed Ace lock if the serial number of the lock was
  known. On some models, the serial numbers appear on the exterior
  of the lock face. Thus, Fanberg's manuals would make it
  considerably easier (and less expensive) for a person to obtain
  (legitimately or illegitimately) duplicate keys to Ace locks
  without going through the Company's screening process. This is
  what caused consternation to the Company and some of its
  customers. At no time did Fanberg seek, or the Company grant,
  permission to compile and sell the key codes. Nor did the
  individual locksmiths seek authorization from the Company or
  their customers before transmitting their key code data to
  Fanberg.

  The Company filed a three-count complaint against the Fanbergs,
  alleging federal question jurisdiction and diversity of
  citizenship, on December 2, 1976. The complaint, see Excerpt at
  1-12, was predicated on theories of trademark infringement under
  15 U.S.C. §§ 1051 et seq., federal unfair competition under 15
  U.S.C. §§ 1125(a), and California common law unfair competition
  under former Cal.Civ. Code § 3369. On November 17, 1977, Judge
  Enright granted summary judgment for the Fanbergs on the federal
  claims, but left intact the state law claim. See Excerpt at
  32-34. The complaint was amended, see Excerpt at 38-46, and a
  four-day bench trial was held before Judge Kerr on January 23-26,
  1979. On November 28, 1979, Judge Kerr entered judgment in favor
  of the Company and filed findings of fact and conclusions of law.
  See Excerpt at 75-121.

  The court found that the Company's high security policy for its
  Ace tubular locks, of which the confidential key code data were a
  part, was a "valuable business or trade secret-type asset" of the
  Company, and that the Fanbergs' publication of their compilation
  of these codes so undermined the Company's policy as to
  constitute "common law unfair competition in the form of an
  unfair business practice within the meaning of Section 3369 of
  the Civil Code of the State of California," as broadly
  interpreted in Barquis v. Merchants Collection Association, 7
  Cal.3d 94, 496 P.2d 817, 101 Cal.Rptr. 745 (1972). Excerpt at
  118-120. The court enjoined the Fanbergs from publishing or
  distributing any lists of key code correlations for the Company's
  registered series Ace tubular locks. See Excerpt at 121.

  On this appeal the Fanbergs argue that the District Court erred
  on three grounds: (1) that the injunction against publication of
  their book constitutes a prior restraint prohibited by the First
  Amendment to the United States Constitution; (2) that the statute
  under which the injunction issued, former Cal.Civ. Code § 3369, is
  unconstitutionally vague; and (3) that the District Court applied
  erroneously the common law doctrine of trade secrets in
  concluding that the Fanbergs had committed an "unfair business
  practice" under Section 3369.

                       THE TRADE SECRETS CLAIM

  Appellants argue that the District Court erroneously concluded
  that they are liable under Section 3369 for acquiring appellee's
  trade secret through improper means. We agree, and on this basis
  we reverse the District Court.

  Although the District Court's Findings of Fact and Conclusions
  of Law are lengthy, the thrust of its holding may be fairly
  summarized as follows: appellants' acquisition of appellee's
  serial number-key code correlations through improper means, and
  the subsequent publication thereof, constituted an "unfair
  business practice" within the meaning of Section 3369. See
  Excerpt at 119-20. Even though the court did not make an explicit
  finding that appellee's serial number-key code correlations were
  protectable trade secrets, both appellants and appellee premise
  their appeal on such an "implicit" finding. See Brief of
  Appellee at 13-14. We think it clear that the District Court
  based its decision on a theory of improper acquisition of trade
  secrets, and in the following discussion we assume arguendo
  that appellee's listing of serial number-key code correlations
  constituted a trade secret.[fn2]

  California courts have adopted the theory of trade secret
  protection set out in the Restatement (First) of Torts, § 757,
  and the comments thereto, in resolving disputes involving trade
  secrets. See Sinclair v. Aquarius Electronics, Inc., 42
  Cal.App.3d 216, 116 Cal.Rptr. 654 (1974); Uribe v. Howie, 19
  Cal.App.3d 194, 96 Cal.Rptr. 493 (1971); Cal Francisco
  Investment Corp. v. Vrionis, 14 Cal.App.3d 318, 92 Cal.Rptr. 201
  (1971). Commission of this common law tort is enjoinable under
  the purview of "unfair competition" and "unlawful" or "unfair
  business practice" under Section 3369. See Barquis v. Merchants
  Collection Association, 7 Cal.3d 94, 496 P.2d 817, 101 Cal.Rptr.
  745 (1972); Hesse v. Grossman, 152 Cal. App.2d 536, 313 P.2d 625,
  627 (1957).

  The pertinent portion of Section 757 of the Restatement
  provides:

      One who discloses or uses another's trade secret,
    without a privilege to do so, is liable to the other
    if

      (a) he discovered the secret by improper means, or

      . . . .

      (c) he learned the secret from a third person with
    notice of the facts that it was a secret and that the
    third person discovered it by improper means . . .

      . . . .

  Trade secrets are protected, therefore, in a manner akin to
  private property, but only when they are disclosed or used
  through improper means. Trade secrets do not enjoy the absolute
  monopoly protection afforded patented processes, for example, and
  trade secrets will lose their character as private property when
  the owner divulges them or when they are discovered through
  proper means. "It is well recognized that a trade secret does not
  offer protection against discovery by fair and honest means such
  as by independent invention, accidental disclosure or by
  so-called reverse engineering, that is, starting with the known
  product and working backward to divine the process." Sinclair,
  42 Cal.App.3d at 226, 116 Cal.Rptr. at 661.

  Thus, it is the employment of improper means to procure the
  trade secret, rather than mere copying or use, which is the basis
  of liability. Restatement (First) of Torts, § 757, comment a
  (1939). The Company concedes, as it must, that had the Fanbergs
  bought and examined a number of locks on their own, their reverse
  engineering (or deciphering) of the key codes and publication
  thereof would not have been use of "improper means." Similarly,
  the Fanbergs' claimed use of computer programs in generating a
  portion of the key code-serial number correlations here at issue
  must also be characterized as proper reverse engineering. Excerpt
  at 96, 100-01; Brief of Appellee at 29-30. The trial court found
  that appellants obtained the serial number-key code correlations
  from a "comparatively small" number of locksmiths, who
  themselves had reverse-engineered the locks of their customers.
  See Excerpt at 96-97. The narrow legal issue presented here,
  therefore, is whether the Fanbergs' procurement of these
  individual locksmiths' reverse engineering data is an "improper
  means" with respect to appellee Chicago Lock Company.

  The concept of "improper means," as embodied in the
  Restatement, and as expressed by the Supreme Court, connotes the
  existence of a duty to the trade secret owner not to disclose the
  secret to others. See Restatement (First) of Torts, § 757,
  comment h (1939). "The protection accorded the trade secret
  holder [i.e., in this case the Company] is against the
  disclosure or unauthorized use of the trade secret by those to
  whom the secret has been confided under the express or implied
  restriction of disclosure or nonuse." Kewanee Oil Co. v. Bicron
  Corp., 416 U.S. 470, 475, 94 S.Ct. 1879, 1883, 40 L.Ed.2d 315
  (1974) (emphasis added).

  Thus, under Restatement § 757(c), appellants may be held liable
  if they intentionally procured the locksmiths to disclose the
  trade secrets in breach of the locksmiths' duty to the Company
  of nondisclosure. See Restatement (First) of Torts, § 757,
  comment h (1939). Critical to the District Court's holding,
  therefore, was its conclusion that the individual locksmiths,
  from whom the Fanbergs acquired the serial number-key code
  correlations, owed an implied duty to the Company not to make the
  disclosures. See Excerpt at 116.

  We find untenable the basis upon which the District Court
  concluded that the individual locksmiths owe a duty of
  nondisclosure to the Company. The court predicated this implied
  duty upon a "chain" of duties: first, that the locksmiths are in
  such a fiduciary relationship with their customers as to give
  rise to a duty not to disclose their customers' key codes without
  permission, see Excerpt at 116; and second, that the lock
  owners are in turn under an "implied obligation [to the Company]
  to maintain inviolate" the serial number-key code correlations
  for their own locks, see id.

  The court's former conclusion is sound enough: in their
  fiduciary relationship with lock owners, individual locksmiths
  are reposed with a confidence and trust by their customers, of
  which disclosure of the customers' key codes would certainly be a
  breach. This duty, however, could give rise only to an action by
  "injured" lock owners against the individual locksmiths, not by
  the Company against the locksmiths or against the Fanbergs.[fn3]

  The court's latter conclusion, that lock owners owe a duty to
  the Company, is contrary to law and to the Company's own
  admissions. A lock purchaser's own reverse-engineering of his own
  lock, and subsequent publication of the serial number-key code
  correlation, is an example of the independent invention and
  reverse engineering expressly allowed by trade secret doctrine.
  See Sinclair, 42 Cal.App.3d at 226, 116 Cal.Rptr. at 661.[fn4]
  Imposing an obligation of nondisclosure on lock owners here would
  frustrate the intent of California courts to disallow protection
  to trade secrets discovered through "fair and honest means." See
  id. Further, such an implied obligation upon the lock owners in
  this case would, in effect, convert the Company's trade secret
  into a state-conferred monopoly akin to the absolute protection
  that a federal patent affords. Such an extension of California
  trade secrets law would certainly be preempted by the federal
  scheme of patent regulation. See Kewanee Oil Co. v. Bicron
  Corp., 416 U.S. 470, 94 S.Ct. 1879, 40 L.Ed.2d 315 (1974);
  Compco Corp. v. Day-Brite Lighting, Inc., 376 U.S. 234, 84
  S.Ct. 779, 11 L.Ed.2d 669 (1964); Sears, Roebuck & Co. v.
  Stiffel Co., 376 U.S. 225, 84 S.Ct. 784, 11 L.Ed.2d 661 (1964).

  Appellants, therefore, cannot be said to have procured the
  individual locksmiths to breach a duty of nondisclosure they owed
  to the Company, for the locksmiths owed no such duty. The
  Company's serial number-key code correlations are not subject to
  protection under Restatement § 757, as adopted by the California
  courts, because the Company has not shown a breach of any
  confidence reposed by it in the Fanbergs, the locksmiths, or the
  lock purchasers - i.e., it has failed to show the use of
  "improper means" by the Fanbergs required by the Restatement.

  The District Court's conclusion that the Fanbergs committed an
  "unfair business practice" under Section 3369, therefore, must be
  reversed, and judgment should be entered in favor of appellants.
  In view of the foregoing we find it unnecessary to reach
  appellants' First Amendment and vagueness claims.

  REVERSED AND REMANDED with instructions that judgment be
  entered in favor of defendants-appellants.

  [fn2] Both parties devote much of their argument to whether the Company's key code data properly constitutes a "trade secret" within the meaning of Restatement (First) of Torts § 757, comment
  b (1939). See Brief of Appellants at 30-33; Brief of Appellees at 13-20. Although for purposes of our holding we may assume arguendo that the correlations do constitute a trade secret, we think it clear that because the correlations are an unpatented compilation of information, they constitute a "trade secret"
  within the meaning of the Restatement as adopted by California courts. See Sinclair v. Aquarius Electronics, Inc., 42 Cal.App.3d 216, 222, 116 Cal.Rptr. 654, 658 (1974); Restatement (First) of Torts § 757, comment b (1939).

  [fn3] The Company premised its complaint on a violation of its own rights under trade secret law; the Company did not allege violations of the lock owners' rights. Cf. Barquis v. Merchants Collection Ass'n, 7 Cal.3d 94, 110, 101 Cal.Rptr. 745, 756 (1972) (Section 3369 permits members of the public to sue on
  behalf of the public generally); Hernandez v. Atlantic Finance Co. of Los Angeles, 105 Cal.App.3d 65, 72-73, 164 Cal.Rptr. 279, 284 (1980) (statute authorizes suits for injunction by individuals on behalf of the general public).

  [fn4] If a group of lock owners, for their own convenience, together published a listing of their own key codes for use by locksmiths, the owners would not have breached any duty owed to the Company. Indeed, the Company concedes that a lock owner's reverse engineering of his own lock is not "improper means."   See Brief of Appellee at 24.