For a product to be “derived from” another, it must copy novel aspects of the original product

Evaluating claims of a breach of a non-disclosure agreement, the U.S. Court of Appeals for the First Circuit reversed a district court’s issuance of an injunction as to certain products, finding that violation of a non-disclosure agreement (NDA) required appropriation of a novel aspect of the underlying technology.  Contour Design, Inc. v. Chance Mold Steel, Co., Case Nos. 12-1110, -1185 (1st Cir., Sept. 4, 2012) (Dyk,  J., sitting by designation). 

In 1995, plaintiff Contour and defendant Chance entered into contract negotiations for Chance to manufacture ergonomic computer mice for Contour.  The parties executed a non-disclosure agreement in which Chance agreed not to disclose Contour’s confidential information related to ergonomic computer mice and not to duplicate, produce, manufacture or otherwise commercially exploit products derived from Contour’s products.  From 1995 to 2009, Chance manufactured products for Contour.  As part of the product development, Chance would work from a prototype supplied by Contour to create electronic files that could be used to create molds for mass production.  Contour stopped placing orders with Chance in 2009 after Chance began to sell its own competing product, the ErgoRoller.  Contour alleged that Chance’s ErgoRoller product violated the terms of the NDA and that Chance misappropriated Contour’s trade secrets.

At trial, the jury found for Contour on its trade secret misappropriation and contract claims, awarding $7.7 million in compensatory damages.  The district court also entered a permanent injunction for the breach of the NDA, barring Chance from selling any products, including the ErgoRoller, derived from Contour’s products until the expiration of the NDA in 2015.  Chance appealed.

The 1st Circuit reversed the injunction as applied to Chance’s ErgoRoller, finding it did not violate the terms of the NDA.  The 1st Circuit considered district court’s finding that the ErgoRoller was “derived from” a Contour product, which was the sole basis of the injunction.  The 1st Circuit, looking to patent law to determine the meaning of the term “derived from” as used in the NDA, found that it was clear that the ErgoRoller is not simply a copy of Contour’s product.  The size, shape and number of buttons were different, and the parties had stipulated that the software, electronics and electrical design were independently developed by Chance.  The court found that, absent more explicit language in the NDA, for a product to be “derived from” confidential information at the very least requires appropriation of some novel property of Contour’s products.  The 1st Circuit found that Contour failed to introduce any evidence of a novel property that had been incorporated into Chance’s ErgoRoller product, and, accordingly, failed to prove that the ErgoRoller was derived from a Contour product in violation of the NDA.