Fail-Safe, LLC v. A.o. Smith Corporation

The Honorable Tanya Walton Pratt, District Judge for the å
Southern District of Indiana, is sitting by designation.
In the
United States Court of Appeals
For the Seventh Circuit
No. 11-1354
FAIL-SAFE, LLC,
Plaintiff-Appellant,
v.
A.O. SMITH CORPORATION,
Defendant-Appellee.
Appeal from the United States District Court
for the Eastern District of Wisconsin.
No. 2:08-cv-00310-JPS—J.P. Stadtmueller, Judge.
ARGUED DECEMBER 1, 2011—DECIDED MARCH 29, 2012
Before EASTERBROOK, Chief Judge, CUDAHY, Circuit
Judge, and PRATT, District Judge.å
CUDAHY, Circuit Judge. This case is about whether a
plaintiff can sustain a trade secret or unjust enrichment
claim when that plaintiff fails to take any protec-
tive measures to safeguard its proprietary information.

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2 No. 11-1354
Business relationships do not always develop under
formulaic circumstances. But where one company fails
to take any protective steps to shield its proprietary
information, it cannot then expect the law to protect it
when the relationship sours. For this reason, we affirm.
This case involves two companies, Fail-Safe, LLC (FS)
and A.O. Smith, Corp. (AOS) and their efforts to
develop a pump motor for pool suction entrapment
prevention technology. Pool suction entrapment occurs
when the suction created by a pool drain traps swimmers.
This problem has prompted an industry-wide effort to
develop drain entrapment release devices.
FS manufactures anti-entrapment devices for artificial
pool drains. AOS manufactures motors for pool and
spa pumps, and has also been developing anti-entrap-
ment technology since late 2000. In November 2000, one
of AOS’s engineers, William Mehlhorn, attended a trade
show where he first saw FS’s suction entrapment tech-
nology. Also during this time, Mike Metzler, AOS’s
marketing director, became aware of FS’s products
through an advertisement in a trade magazine. Intrigued
by FS’s Suction-Safe Pump, he and FS’s founder,
Joseph Cohen, soon began initial conversations about
entering into a development project whereby AOS
would develop a pump motor for FS’s pool suction en-
trapment prevention technology. The exact nature of
these talks is unclear, but it is undisputed that no
formal agreement materialized, nor did the parties
discuss confidentiality.
Cohen and Metzler continued to have a series of con-
versations through the fall of 2002. In November 2002,

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No. 11-1354 3
Cohen wrote a formal letter to AOS expressing
interest in having AOS develop a pump motor for
FS with various specific features. The letter did not men-
tion confidentiality. In response, Metzler suggested a
meeting date to begin development and stated that
he “look[ed] forward to setting a meeting date and begin-
ning the process.” After months of correspondence, in
early March 2003, Cohen sent a letter broadly describing
the project along with the test results from a previous
unsuccessful design by FS and FS’s desired features for
the motor. Neither the letter nor any correspondence
during that time mentioned confidentiality.
Later that month, Cohen traveled to Milwaukee to
meet with Metzler and several AOS engineers. During
their meeting, Cohen signed AOS’s standard one-way
confidentiality agreement, which stated that FS was a
supplier of research consulting services. FS did not simi-
larly require AOS to enter into a confidentiality agree-
ment despite having demanded such confidentiality
agreements in various other prior business relation-
ships. After signing the agreement with AOS, Cohen
proceeded to share what features he thought would
be important in the proposed device and details about
how to test the device. Not once during the meeting
with AOS did Cohen identify the information he pro-
vided as confidential.
Following the meeting, Cohen and Mehlhorn communi-
cated periodically to discuss technical standards and
deadlines for the project. Cohen shared test results from
a previous pump design and details on how to properly

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4 No. 11-1354
test the developing AOS motor with a special test stand.
During these conversations, confidentiality was never
discussed.
In September 2003, almost one year after beginning
working with AOS, Cohen wrote to AOS executive
Steve O’Brien summarizing his view of the relationship
between the two companies up until that point. The
letter stated that if AOS were interested in marketing
the pump as a life-saving device, FS would support
that decision. Cohen concluded with a proposal for a
formal agreement to move forward and commercialize
the motor, recognizing that no formal agreement
relating to the motor currently existed between the
two companies.
Cohen’s proposal produced no practical results and
no agreement was ever reached between the two compa-
nies. In January 2004, however, Cohen sent a letter to
seventeen different pump manufacturers claiming to
have solved the suction entrapment problem in a joint
effort with AOS. O’Brien responded by letter to the
same pump manufacturers to correct FS’s inaccurate
reference to a joint relationship between the two com-
panies. O’Brien also sent a letter to Cohen restating the
position taken in his letter to the industry and accusing
Cohen of breaching AOS’s confidentiality agreement.
The dialogue became contentious, but the two com-
panies continued to correspond through the spring of
2004. No resolution was made of their relationship by a
formal agreement or by acknowledging intellectual prop-
erty rights, and correspondence eventually stopped by

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No. 11-1354 5
October 2004. Later, AOS introduced two pump motors
that FS claims incorporated its trade secrets: the “eMod”
and the “Guardian,” both offered for sale in May 2006.
Nearly two years later, in April 2008, FS filed this suit
for misappropriation of trade secrets and unjust enrich-
ment under Wisconsin law.
The district court granted summary judgment in
favor of AOS on both claims. The district court found
that the misappropriation of trade secrets claim was
barred under the three-year statute of limitations. It
further found, in the alternative, that FS failed to take
reasonable steps to protect the secrecy of its claimed
trade secret, and thus failed on the merits. FS’s voluntary
disclosure of its information, the court found, also
defeated its unjust enrichment claim. FS timely ap-
pealed. As a final judgment from the district court,
we note jurisdiction under 28 U.S.C. § 1291.
We review the district court’s judgment on the
pleadings and its grant of summary judgment de novo.
Moss v. Martin, 473 F.3d 694, 698 (7th Cir. 2007) (“We
review a district court’s ruling on a Rule 12(c) motion
de novo.”); O’Rourke v. Palisades Acquisition XVI, LLC,
635 F.3d 938, 941 (7th Cir. 2011) (grant of summary judg-
ment reviewed de novo). We construe facts favorably
to the nonmoving party and grant the nonmoving party
“all reasonable inferences” in its favor. Ogden v. Atterholt,
606 F.3d 355, 358 (7th Cir. 2010).
FS makes four arguments on appeal. Primarily, FS
argues that the district court erred in granting sum-
mary judgment on its misappropriation of trade secret

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6 No. 11-1354
Nor must we decide on whether the information was in 1
the public domain. As we explain below, FS failed to take
any steps to protect its trade secrets.
claim because there was ample evidence to find that a
confidential relationship existed and its disclosure of
secret information in that relationship was reasonable.
Secondly, FS claims that the district court erroneously
added a “wrongfulness” element to the requirements
for Wisconsin unjust enrichment claims. Finally, FS
contends that the district court abused its discretion in
applying quantum meruit to FS’s unjust enrichment
claims and excluding FS’s damages experts.
We agree with the district court that FS failed to take
reasonable precautions to protect its trade secrets. This
failure vitiates FS’s claim of misappropriation. Further,
because the material FS conveyed to AOS was without
any intellectual property protection or contractual agree-
ment for confidentiality, AOS could not profit unjustly
from the use of that voluntarily disclosed information.
For this reason, FS’s unjust enrichment claim must also
fail. The district court initially found, however, that
the misappropriation suit was barred by laches, since
FS knew or should have discovered AOS’s initial alleged
misappropriation more than three years before filing
suit. Because we affirm on the merits, we need not
address the district court’s analysis of laches. For the
same reason, the related issues of correct damages
model and exclusion of FS’s expert witnesses are mooted.1

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No. 11-1354 7
1.
FS failed to take reasonable protective measures for
its claimed trade secret under the circumstances, and
thus cannot claim trade secret protection. To qualify as a
trade secret under Wisconsin law, the claimed trade
secret—that is, the proprietary information—must be
the “subject of efforts to maintain its secrecy that are
reasonable under the circumstances.” Wis. Stat. § 134.90
(2011). “[F]ailure to take reasonable steps to prevent
gratuitous disclosure” of the alleged trade secret forfeits
any protection. Bondpro Corp. v. Siemens Power Generation,
Inc., 463 F.3d 702, 708 (7th Cir. 2006). Though absolute
secrecy is not required, see Rockwell Graphics Sys., Inc. v.
DEV Indus., Inc., 925 F.2d 174, 177 (7th Cir. 1991), “one
who claims a trade secret must exercise eternal vigilance
in protecting its confidentiality.” RTE Corp. v. Coatings,
Inc., 267 N.W.2d 226, 233 (Wis. 1978). Even “[t]he
existence of a confidentiality agreement is not always
enough.” ECT Int’l, Inc. v. Zwerlein, 597 N.W.2d 479, 484
(Wis. Ct. App. 1999).
We agree with the district court that FS failed to
take reasonable steps under the circumstances to
maintain the secrecy required for trade secret protec-
tion. Indeed, FS failed to take any steps to protect its
information. None of the information provided by FS
to AOS was marked confidential, nor did FS make it
known that it expected this information to remain confi-
dential. Rather, FS volunteered information and willingly
cooperated with AOS. Indeed, FS signed AOS’s one-way
confidentiality agreement, yet failed to obtain similar

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8 No. 11-1354
protection despite having protected itself with similar
confidentiality agreements in the past. If the information
FS provided was confidential, then FS should have re-
quested reciprocal confidentiality in its communica-
tions and exchanges with AOS. FS failed to make a modi-
cum of effort to protect the confidentiality of its infor-
mation, a failure that was not reasonable under these
circumstances.
On appeal, FS relies on this court’s decision in
Learning Curve Toys, Inc. v. PlayWood Toys, Inc., 342 F.3d
714 (7th Cir. 2003), to claim that summary judgment,
based on the reasonableness of FS’s belief that it was in
a confidential relationship, was inappropriate. FS main-
tains that it reasonably believed it had entered into a
joint venture with AOS and, as a result, AOS was under
a duty of confidentiality. If such a relationship existed,
FS maintains, its lack of independent precautionary
measures was reasonable because the duty of confiden-
tiality protected the information shared in the relation-
ship. Learning Curve, however, is readily distinguishable
from the present case because Learning Curve centered
on the existence of an oral confidentiality agreement
between unsophisticated parties that was adopted
before any information was exchanged. Id. at 717.
Moreover, in Learning Curve we noted that the plain-
tiffs were a small business, consisting of only two people.
Id. at 724. There, we found that Illinois courts have “recog-
nized on several occasions that the expectations for en-
suring secrecy are different for small companies than
for large companies.” Id. (citing Jackson v. Hammer, 653

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No. 11-1354 9
N.E.2d 809, 815 (Ill. App. Ct. 1995) (“The determination
of what steps are reasonably necessary to protect infor-
mation is different for a large company than for a small
one.”)). The reasonableness of the plaintiff’s steps in
Learning Curve to protect its trade secrets was held to
a looser standard, yet even there, that unsophisticated
business used a confidentiality agreement (even though
oral). Id.
Here, there is no evidence that a confidential relation-
ship existed. The parties never concluded a binding
agreement before disclosing information. FS’s mere
subjective belief that it had entered into a joint venture
does not warrant protection. Even if this court were
to agree with FS that cooperation alone may impose a
duty of confidentiality between two sophisticated
parties, the degree of cooperation in this case is not so
great as to indicate the parties could reasonably
believe they were in a joint venture with reciprocal con-
fidentiality. AOS and FS discussed potentially creating
a product and FS, perhaps wary of alienating AOS,
did not press the issue of confidentiality or inquire as
to reciprocal duties. Moreover, when FS attempted to
formalize the agreement more than one year after they
first began working together, the working relationship
fell apart. When FS unilaterally announced in a letter
to members of its industry that it was in a develop-
ment relationship with AOS, AOS immediately repu-
diated FS’s claim. Indeed, perhaps in an effort to
motivate AOS to come to the bargaining table, FS re-
minded AOS that the two companies had no formal
relationship.

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10 No. 11-1354
Even assuming some sort of informal relationship
existed that hinted at confidentiality, FS still failed to
take any steps to maintain its secrecy, which was unrea-
sonable under these circumstances. No information
was ever marked confidential. Nor did FS take any
steps to protect its claimed proprietary information, con-
tractually or otherwise. FS volunteered its informa-
tion to AOS. And, unlike in Learning Curve, the topic of
confidentiality was never even broached by FS, a sophisti-
cated party familiar with such agreements. AOS, with
its one-way confidentiality agreement, was the
only party that took any protective steps. Under these
circumstances, FS’s efforts (or lack thereof) to maintain
secrecy of its claimed trade secrets were not reasonable.
We agree with the district court that this is an “extreme
case.” FS failed to take any precautionary measures
to protect its claimed trade secrets. Therefore, FS’s
actions were not reasonable under these circumstances
and cannot sustain FS’s misappropriation of trade
secrets claim.
II.
Because we find that FS’s trade secret claim fails, it
follows that FS’s unjust enrichment claim must also fail.
FS willingly volunteered information to AOS, and thus
there is nothing unjust about AOS’s later use of, and
benefit from, that information.
Under Wisconsin law, an unjust enrichment claim
requires a plaintiff prove that: (1) a benefit was “conferred

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No. 11-1354 11
upon the defendant by the plaintiff”; (2) there was an
“appreciation by the defendant of the fact of such a bene-
fit”; and (3) there was “acceptance and retention of
the benefit by the defendant under circumstances such
that it would be inequitable to retain the benefit without
payment of the value thereof.” Seegers v. Sprague, 236
N.W.2d 227, 230 (Wis. 1975). In the context of trade
secrets, “Wisconsin law denies recovery for unjust en-
richment if all the defendant has done is use (to his profit)
an idea of the plaintiff that is not a trade secret.” Confold
Pac., Inc. v. Polaris Indus., 433 F.3d 952, 957 (7th Cir.
2006) (citing Abbott Labs v. Norse Chemical Corp., 147
N.W.2d 529, 541 (Wis. 1967) (“[If] no trade secrets were
appropriated by the defendants, there was no unjust
enrichment . . .”)). Simply put, one cannot steal free advice.
On appeal, FS argues that the district court erred by
adding a “wrongfulness” or fault element to Wisconsin
unjust enrichment law. True, fault is not an element.
But the district court did not add a fault element;
the district was merely looking for some independent
protection that was violated to make AOS’s enrichment
unjust or inequitable under the third element. The district
court made clear in its analysis that “fault indeed does
not need to exist in order for a plaintiff to assert an
unjust enrichment claim.” Instead, the court’s discussion
of cases, some of which involved wrongfulness, focused
on the inequitable retention of a benefit by a defendant.
Wrongfulness is not a necessary condition, but it is suf-
ficient to show that circumstances warrant that, be-
cause of defendant’s conduct, she must compensate the
plaintiff for the value of the benefit conferred. See Abbott

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12 No. 11-1354
Labs, 147 N.W.2d at 541 (“Unjust enrichment . . . requires
a wrongful taking or appropriation of others’ property
to one’s own use.”).
Far from creating a new wrongfulness requirement, the
district court correctly noted that inequitable retention
must come from an independent violation of FS’s rights
under some “body of law.” Confold Pac., Inc., 433 F.3d
at 959. Such a violation may arise from a defendant’s
use of information protected by an intellectual property
right, a confidential relationship or a contract. But none
of those protections are present in this case. Because FS
and AOS were not in a confidential relationship, because
FS never sought to safeguard its information through
contract and because AOS did not misappropriate any
of FS’s trade secrets, this court cannot, in equity, grant
relief based on AOS’s conduct.
We agree with the district court that FS “courted
[its] own disaster” by failing to take any protective mea-
sures. RTE Corp., 267 N.W.2d at 233. Because AOS’s use
of FS’s information did not violate some independent
protection, AOS could not profit unjustly from the infor-
mation FS disclosed.
For the foregoing reasons, the judgment is AFFIRMED.
3-29-12

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