Progressive Products, Inc. v. Swartz (Supreme Court)

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IN THE SUPREME COURT OF THE STATE OF KANSAS

No. 99,550

PROGRESSIVE PRODUCTS, INC.,
Appellant/Cross-appellee,

v.

TOM SWARTZ, MARVIN ROBARTS, CALVIN BUNNEY,
and VIN MANUFACTURING, LLC,
Appellees/Cross-appellants.


SYLLABUS BY THE COURT

1.
The Kansas Uniform Trade Secrets Act, K.S.A. 60-3320 et seq., seeks uniformity
with other jurisdictions that have adopted the Act.

2.
The Uniform Trade Secrets Act operates in conjunction with patent law to protect
developers and legitimate users of new commercial ideas and technology. A key
difference between a trade secret and a patent is that the latter is open to public
inspection, while the former is maintained in secrecy.

3.
The law of trade secrets recognizes that private parties invest extensive sums of
money in certain information that loses its value when published to the world at large.
Trade secret law creates a property right that is defined by the extent to which the owner
of the secret protects that interest from disclosure to others.

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4.
Whether the record and factual findings relating to the existence of a trade secret
support the legal conclusion that the defendants misappropriated a trade secret presents a
mixed question of fact and law, which means that the reviewing court reviews the
underlying factual findings for substantial competent evidence and reviews the legal
conclusions based on those facts de novo.

5.
The existence of a trade secret is an issue for the trier of fact.

6.
An appellate court will defer to a district court's determination of whether
exceptional circumstances exist that warrant injunctive relief for misappropriation of a
trade secret, when substantial competent evidence contained in the record supports that
determination.

7.
K.S.A. 60-3321(b) allows for relief in the form of a royalty injunction when the
district court finds that exceptional circumstances justify such relief.

8.
There is no precise formula for determining whether exceptional circumstances
exist that justify a royalty injunction. The existence of exceptional circumstances must be
decided on a case-by-case basis.

9.
K.S.A. 60-3322(a) independently allows the imposition of royalties in lieu of
damages based on actual loss or unjust enrichment and does not require a showing of
exceptional circumstances.
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Review of the judgment of the Court of Appeals in 41 Kan. App. 2d 745, 205 P.3d 766 (2009).
Appeal from Crawford District Court; JOHN C. GARIGLIETTI, judge. Opinion filed August 26, 2011.
Judgment of the Court of Appeals reversing the district court is affirmed in part and reversed in part.
Judgment of the district court is affirmed in part and reversed in part, and the case is remanded with
directions to the district court.

Thomas E. Hayes, of The Spigarelli Law Firm, of Pittsburg, argued the cause, and Kala Spigarelli
and Lori Fleming, of the same firm, were on the briefs for appellant/cross-appellee.

David S. Brake, of Henshall, Pennington & Brake, of Chanute, argued the cause, and Troy A.
Unruh, of Wilbert & Towner, PA, of Pittsburg, was on the briefs for appellees/cross-appellants.

The opinion of the court was delivered by

ROSEN, J.: This is an appeal in an action brought under the Kansas Uniform Trade
Secrets Act, K.S.A. 60-3320 et seq. The defendants, former employees of the plaintiff
Progressive Products, Inc. (PPI), challenge the district court finding that they
misappropriated protected trade secrets, and, on review before this court, they
additionally challenge the remedial procedure that the Court of Appeals directed.

We summarize the facts as follows. In June 1980, Bob Allison approached Roger
Messenger about working with his firm, which coated elbow pipes for pneumatic
conveyance systems to prolong the lives of those systems. Allison came up with the
concept of coating the outside of the pipes instead of the inside in 1974, and, following 2
to 3 years of experimentation, he proved the feasibility of that process. The firm
originally used an after-market product that it purchased and applied to piping.
Messenger joined the firm as a partner, and he and Allison became the sole owners of PPI
after buying out a third owner in 1983.

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Enlisting the help of specialists at Pittsburg State University and other chemists,
Messenger developed a formula for making a coating compound called Ceram-Back. He
developed the formula in part by examining the ingredients list of an after-market product
and in part by experimenting with the components until he found a combination that
effectively protected the pipes. The formula consisted of ceramic beads, a catalyst, a
hardener, and a proprietary fume silica thickener. This combination proved to be much
more effective than the original after-market compound.

Messenger devoted about a year and a half to developing the proper formula and
amounts to apply to different piping requirements. Allison and Messenger kept the
ingredients away from public viewing. They testified that they would throw a tarp over
the materials when someone from the outside, such as a vendor, came to the plant.
Neither Messenger nor his colleagues ever pursued patenting their product, because
patents have a limited lifespan and become open to competitors at the expiration of the
patent protection.

Messenger established telephone contacts with potential purchasers and kept a
written record of PPI customers, which Allison later entered into a computer database.
Messenger also developed a pricing system based on the cost of materials and what the
market would bear, and Allison later developed computer programs to facilitate making
price quotations based on that system. When Messenger retired in 1999, he sold his
interest back to Allison and signed a confidentiality agreement and agreement not to
compete for 5 years.

Marvin Robarts worked as a welder for PPI from November 2002 to June 29,
2006. He then began a business called VIN Manufacturing, LLC (VIN), which he started
with Calvin Bunney. VIN also used a chemical compound to coat the outsides of elbow
pipes. Robarts got the idea for how to mix the coating and the ingredients from his own
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work at PPI and from Bunney, who had worked as a mixer at PPI. Instead of the
proprietary thickener that PPI used in its formula, VIN used a less expensive thickening
agent that Robarts found on the Internet. He testified that no one ever told him the PPI
formula and process were a secret, that the chemicals were lying around the PPI shop in
the open, and that no one covered up the chemicals when management took customers or
vendors on building tours. In fact, employees were allowed to take empty labeled barrels
of the materials that went into the PPI formula home for use as trash or burn barrels.

Bunney worked at PPI from January 2001 to June 29, 2006. Like Robarts, he also
learned what the Ceram-Back ingredients were from seeing them at the PPI plant. He
testified that no one told him that the mixing process was confidential or that the
components of Ceram-Back were confidential. He further testified that no measures were
taken to keep any employees out of areas where the chemicals were identified and stored
and that no measures were taken to conceal the ingredients and mixing supplies from
customers during plant tours.

Thomas Swartz worked at PPI as a salesman from March 23, 2003, to August 31,
2005. He testified that he helped with the mixing process four or five times a year, and no
one told him that the mixture was secret and confidential. He was, however, directed not
to give the Material Safety Data Sheets (MSDS) to customers; these sheets contained the
details of the Ceram-Back ingredients. He also testified that everyone at PPI had access
to the customer lists and the price lists. Swartz went to work for Robarts and Bunney at
VIN and relied on his memory and the Internet to contact customers with whom he had
worked at PPI.

William McGinnis, who worked as a temporary employee welder for PPI, and
Brenda Caruthers, a secretary/receptionist for PPI, were nondefendants who testified that
no one told them that the Ceram-Back materials or process were confidential and secret.
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They also testified that all the ingredients were left out in the open and were not covered
up during the customer tours that they witnessed. Furthermore, the welders were given
the work orders that contained pricing and customer information, and the welders were
allowed to watch the process of making the Ceram-Back, including the measuring of
materials and the application to the pipes.

On July 21, 2006, PPI filed a four-count petition in district court seeking damages
under theories based on the Kansas Uniform Trade Secrets Act, breach of fiduciary duty,
and intentional interference with existing and prospective business relationships. PPI
filed a separate motion requesting a restraining order and injunction preventing the
defendants from manufacturing or using the ceramic formula or using the customer and
pricing lists. On the same day, the district court granted the injunctive relief. The
defendants subsequently filed an answer in which they asserted counterclaims for abuse
of process, improper restraint, and tortious interference with a contract.

Following a bench trial, the district court entered judgment for PPI. The district
court determined that PPI possessed a protected trade secret. It did not enjoin the
defendants from continuing to market, manufacture, and apply the ceramic coating, but it
enjoined the defendants from divulging the formula to other parties for 3 years and
required the defendants to pay a 20 percent royalty to PPI for any sales to PPI customers
based on the use of the protected process. The court denied the defendants' claims for
damages and denied PPI's request for attorney fees.

PPI filed a motion to reconsider, which the court denied. PPI filed a timely notice
of appeal challenging the relief it received, and the defendants filed a timely notice of
cross-appeal challenging the finding that they had misappropriated a protected trade
secret.
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The Court of Appeals held that sufficient evidence supported a finding that PPI
owned protected trade secrets relating to the formula and the calculation of batch
amounts, that the price lists were not trade secrets as a matter of law, and that no
evidence supported a finding that the customer lists were a trade secret. The Court of
Appeals then concluded that the royalty injunction was not supported by the district
court's factual findings and did not comport with the available statutory remedies.
Progressive Products, Inc. v. Swartz, 41 Kan. App. 2d 745, 205 P.3d 766 (2009). This
court granted review as to all issues.

Discussion

Kansas enacted the Kansas Uniform Trade Secrets Act in 1981. L. 1981, ch. 214,
sec. 1. The Act is short and has been subject to little amendment or appellate litigation. In
relevant part, the Act reads as follows:

"K.S.A. 60-3320. As used in this act, unless the context requires otherwise:

"(1) 'Improper means' includes theft, bribery, misrepresentation, breach
or inducement of a breach of a duty to maintain secrecy, or espionage through
electronic or other means.

"(2) 'Misappropriation' means:

(i) acquisition of a trade secret of another by a person who knows or has
reason to know that the trade secret was acquired by improper means; or

(ii) disclosure or use of a trade secret of another without express or
implied consent by a person who

(A) used improper means to acquire knowledge of the trade secret; or
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(B) at the time of disclosure or use, knew or had reason to know that his
knowledge of the trade secret was

(I) derived from or through a person who had utilized improper
means to acquire it;

(II) acquired under circumstances giving rise to a duty to
maintain its secrecy or limit its use; or

(III) derived from or through a person who owed a duty to the
person seeking relief to maintain its secrecy or limit its use; or

(C) before a material change of his position, knew or had reason to know
that it was a trade secret and that knowledge of it had been acquired by accident
or mistake.

"(3) 'Person' means a natural person, corporation, business trust, estate, trust,
partnership, association, joint venture, government, governmental subdivision or agency,
or any other legal or commercial entity.

"(4) 'Trade secret' means information, including a formula, pattern, compilation,
program, device, method, technique, or process, that:

(i) derives independent economic value, actual or potential, from not
being generally known to, and not being readily ascertainable by proper means
by, other persons who can obtain economic value from its disclosure or use, and

(ii) is the subject of efforts that are reasonable under the circumstances to
maintain its secrecy."

"K.S.A. 60-3321.

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"(a) Actual or threatened misappropriation may be enjoined. Upon
application to the court, an injunction shall be terminated when the trade secret
has ceased to exist, but the injunction may be continued for an additional
reasonable period of time in order to eliminate commercial advantage that
otherwise would be derived from the misappropriation.

"(b) In exceptional circumstances, an injunction may condition future use
upon payment of a reasonable royalty for no longer than the period of time for
which use could have been prohibited. Exceptional circumstances include, but
are not limited to, a material and prejudicial change of position prior to acquiring
knowledge or reason to know of misappropriation that renders a prohibitive
injunction inequitable.

"(c) In appropriate circumstances, affirmative acts to protect a trade
secret may be compelled by court order."

"K.S.A. 60-3322.

"(a) Except to the extent that a material and prejudicial change of
position prior to acquiring knowledge or reason to know of misappropriation
renders a monetary recovery inequitable, a complainant is entitled to recover
damages for misappropriation. Damages can include both the actual loss caused
by misappropriation and the unjust enrichment caused by misappropriation that is
not taken into account in computing actual loss. In lieu of damages measured by
any other methods, the damages caused by misappropriation may be measured by
imposition of liability for a reasonable royalty for a misappropriator's
unauthorized disclosure or use of a trade secret.

"(b) If willful and malicious misappropriation exists, the court may
award exemplary damages in an amount not exceeding twice any award made
under subsection (a)."


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"K.S.A. 60-3323. If (i) a claim of misappropriation is made in bad faith, (ii) a
motion to terminate an injunction is made or resisted in bad faith, or (iii) willful and
malicious misappropriation exists, the court may award reasonable attorney's fees to the
prevailing party."

"K.S.A. 60-3324. In an action under this act, a court shall preserve the secrecy of
an alleged trade secret by reasonable means, which may include granting protective
orders in connection with discovery proceedings, holding in-camera hearings, sealing the
records of the action, and ordering any person involved in the litigation not to disclose an
alleged trade secret without prior court approval."

"K.S.A. 60-3326.

"(a) Except as provided in subsection (b), this act displaces conflicting
tort, restitutionary and other law of this state providing civil remedies for
misappropriation of a trade secret.

"(b) This act does not affect:

(1) Contractual remedies, whether or not based upon misappropriation of
a trade secret;

(2) other civil remedies that are not based upon misappropriation of a
trade secret; or

(3) criminal remedies, whether or not based upon misappropriation of a
trade secret."

"K.S.A. 60-3327. This act shall be applied and construed to effectuate its general
purpose to make uniform the law with respect to the subject of this act among states
enacting it."

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As it relates to the present appeal, the Act tells us that it seeks uniformity with
other jurisdictions that have adopted the Uniform Trade Secrets Act. In order for PPI to
prevail, it was required to show that the defendants employed theft or breached a duty to
maintain secrecy in order to acquire trade secrets that had an independent economic value
and that these secrets were not readily ascertainable by proper means by the defendants.
PPI would also have had to demonstrate that it made reasonable efforts under the
circumstances to maintain the secrecy of the trade secrets. If PPI succeeded in meeting
these burdens, the question then became whether the district court made findings,
supported by substantial competent evidence, necessary to impose the relief that it
granted, most significantly, a royalty injunction.

The Uniform Trade Secrets Act operates in conjunction with patent law to protect
developers and legitimate users of new commercial ideas and technology. A key
difference between a trade secret and a patent is that the latter is open to public
inspection, while the former is maintained in secrecy:

"A patent owner acquires a time limited monopoly over the patented technology, and
patent infringement can occur through the use of that technology by any means. The
owner of a trade secret, on the other hand, is protected only against improper
appropriation of the secret and subsequent use of a secret wrongly acquired. An owner of
a trade secret may forgo resort to patent protection, but this choice risks the loss of the
secret by voluntary use and disclosure or through legitimate, good faith means, such as
reverse engineering." Evans v. General Motors Corp., 51 Conn. Supp. 44, 55-56, 976
A.2d 84 (2007).

Trade secrets are not protected against independent invention. Instead, the law of
trade secrets recognizes that private parties invest extensive sums of money in certain
information that loses its value when published to the world at large. Based on this logic,
trade secret law creates a property right that is defined by the extent to which the owner
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of the secret protects that interest from disclosure to others. In doing so, the law allows
the trade secret owner to reap the fruits of its labor and protects the owner's moral
entitlement to these fruits. Trade secret law encourages the development and exploitation
of lesser or different inventions than might be accorded protection under the patent laws,
but which still play an important part in technological and scientific advancement.
Without trade secret protection, organized scientific and technological research could
become fragmented, and society as a whole could suffer. By restricting the acquisition,
use, and disclosure of another's valuable, proprietary information by improper means,
trade secret law minimizes the inevitable cost to the basic decency of society when one
steals from another. In doing so, trade secret law recognizes the importance of good faith
and honest, fair dealing in the commercial world. (Paraphrasing DVD Copy Control
Assn., Inc. v. Bunner, 31 Cal. 4th 864, 880-81, 4 Cal. Rptr. 3d 69, 75 P.3d 1 [2003], and
the sources cited and quoted therein.)

We now turn to the first issue before us: Did the district court commit reversible
error in holding that the defendants misappropriated PPI's trade secrets? In order to
resolve this issue, we must determine whether the record and factual findings relating to
the existence of a trade secret support the legal conclusion that the defendants
misappropriated a trade secret. This presents a mixed question of fact and law, which
means that this court reviews the underlying factual findings for substantial competent
evidence and reviews the legal conclusions based on those facts de novo. Boldridge v.
State, 289 Kan. 618, 622, 215 P.3d 585 (2009). When reviewing whether substantial
evidence supports a factual finding, this court does not reweigh the evidence, resolve
conflicts within the evidence, or pass on the credibility of witnesses. In re Care &
Treatment of Williams, 292 Kan. 96, 104, 253 P.3d 327 (2011).

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PPI alleged that the defendants misappropriated three trade secrets: the formula
and mixing process of the ceramic backing, the computerized customer lists, and the
computer pricing program. The district court, while not clearly articulating which secrets
it considered misappropriated, made several findings that suggested that it agreed with all
three parts of the PPI claim:

"10. The most demonstrative act was Swartz obtaining the price sheet for
Defendant Robarts at Robarts' request prior to leaving the company and in anticipation
and with knowledge that he was going to start his own business known as VIN in direct
competition with his employer PPI and in anticipation of contracting known customers of
PPI through Swartz's knowledge and contacts and that he gained also working at PPI.

"11. It took PPI years to develop the formula, batching system, the pricing and
the ability to interpolate or price any elbow knowing just the size of the elbow.

"12. It took several years for the original owners of PPI to get where they are and
to acquire a customer base.

. . . .

"14. That PPI did have a trade secret under K.S.A. 60-3320, and that it included
information, a formula, a program, some method or technique of batching, and the
quantification of the eight units and the exact formula as pointed out by plaintiffs with
regard to the mixture and the ingredients, the pricing method established by them and
contained within their computer program, and the price sheet.

"15. Defendant Swartz misappropriated the price sheet at the request of
Defendant Robarts during the time when he was employed in anticipation of beginning
another business.

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"16. VIN is in possession of this trade secret, or at least very important portions
of the trade secret, including the exact formula, and all this information was gained
during the Defendants' employment at PPI."

The defendants maintain that the district court found only that they had
misappropriated the price sheet. Although paragraphs 15 and 16 are ambiguous, in the
context of the other factual findings and the remedy, it is evident that the district court
included in the misappropriated secrets the price sheet, the formula, and the customer
lists.

The critical trade secret is the ceramic formula and the process of applying it to the
elbow pipes. The trial testimony indicated that the defendants made little, if any, use of
the pricing program or the customer lists, because those were areas of information that
they were able to figure out on their own.

The defendants rely on Webster Engineering and Mfg. Co., Inc. v. Francis, No.
Civ. A. 89-1416-FGT, 1993 WL 406025 (D. Kan. 1993) (unpublished opinion), that
declined to find a trade secret when employees had not been informed which information
the employer considered confidential. The Webster court cited Electro-Craft Corp. v.
Controlled Motion, 332 N.W.2d 890, Syl. ¶ 6 (Minn. 1983), which discussed the
procedures that an employer must use to "signal" the nature of information to its
employees. The Minnesota court concluded that if an employer wants to prevent its
employees from revealing manufacturing procedures, it has "an obligation to inform its
employees that certain information was secret." Electro-Craft Corp., 332 N.W.2d at 902.

While this requirement appears reasonable, the record in the present case contains
evidence that PPI made some effort to notify its employees that the Ceram-Back formula
was a secret. Although his testimony was countered by defense witnesses, Pat Damman,
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PPI president, testified that he informed the defendants that they could not divulge the
ingredients to third parties. Damman also testified that the Ceram-Back ingredients,
"especially the [proprietary thickener]," were "covered up" when outsiders visited the
plant.

The existence of a trade secret is an issue for the trier of fact. See Universal
Engraving, Inc. v. Duarte, 519 F. Supp. 2d 1140, 1151 (D. Kan. 2007). The statute does
not require a particular means of protecting a secret; rather, it requires only that the secret
"is the subject of efforts that are reasonable under the circumstances to maintain its
secrecy." K.S.A. 60-3320(4)(ii). It was for the district court, and is not for us to decide
whether PPI made reasonable efforts to protect the secrecy of the formula and the process
for making Ceram-Back.

We have no difficulty agreeing with the Court of Appeals that the evidence
supported the district court's findings that the formula for Ceram-Back was a protected
trade secret. PPI President Damman testified that he told employees that the formula was
confidential. PPI sales personnel were instructed not to give MSDS to customers or
potential customers. Damman also testified that personnel were instructed to conceal key
ingredients, especially the proprietary thickener, from visitors to the plant. Although there
was some testimony that the measures taken were loose and not uniformly enforced, the
evidence was sufficient to find that the formula was a protected trade secret. The
defendants admitted that they did not reverse-engineer the formula and that they based
their own formula on what they had learned from PPI. Even though the defendants may
not have used the proprietary thickener in their product, the district court could properly
find that the Ceram-Back formula itself was a secret and its formulation provided the
defendants with the necessary information for producing their own formula. We therefore
conclude that the district court did not err in finding that the formula was a protected
trade secret. This was the essential trade secret that was misappropriated; it was this
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formula that allowed the defendants to start a competing business without investing in the
years of experimentation and research that PPI principals had carried out.

We also agree with the Court of Appeals that the district court properly found that
the "batch method," or means of calculating the amount of the compound to make up and
the cost of that compound, was protected, because PPI had developed a computer
program for this purpose that was password protected. The evidence sufficed for a trier of
fact to find that the program for calculating material quantities was a trade secret. The
formula itself is a mathematical calculation of the area of the pipe to be covered and the
number of coats of ceramic protection to be added. Although it may have been nothing
more than a spreadsheet for generating numbers from a simple calculation, the program
constructed to carry out the calculation was a trade secret because it was a means that PPI
developed specifically for calculating production amounts based on its secret formula.
The defendants misappropriated this protected trade secret.

The Court of Appeals held that the record contained insufficient evidence to
support a finding that the mixing process and the price lists were protected trade secrets.
We agree. In particular, the facts that the mixing process was carried out in the open, the
marked mixing containers were left in public view, and employees were not specifically
instructed that the process was confidential undermined any claims to secrecy about the
process. Prices were available to customers, and these customers were free to
communicate with each other how much they were paying for certain work.

Having affirmed the district court's determination that the defendants
misappropriated the Ceram-Back formula and the batch calculation program, we next
must address whether the district court committed reversible error when it ordered a
remedy consisting of a 3-year royalty period coupled with other short-term relief. The
relief allowed the defendants to continue to operate an elbow-coating business, subject to
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the conditions that they not divulge the formula to third parties, that they not advertise
that they were using a product similar to Ceram-Back, and that they pay PPI a 20 percent
royalty for sales made to PPI customers for a period of 3 years.

The Court of Appeals reversed this award, holding that the statutory language and
the specific factual findings by the district court did not allow for such injunctive relief.
The Court of Appeals concluded that the record contained no evidence of an overriding
public interest against broader injunctive relief, no evidence that the defendants acquired
the secrets in good faith, and no evidence of other exceptional circumstances that would
support a royalty injunction.

Appellate courts will defer to trial courts' determination of whether exceptional
circumstances exist that would warrant injunctive relief, because the trial court is in the
best position to observe the behavior and demeanor of the witnesses and to gauge their
credibility. See Chilcutt Direct Marketing, Inc. v. A Carroll, 239 P.3d 179, 183 (Okla.
Civ. App. 2010). The decision whether to grant royalty relief once exceptional
circumstances are found is subject to review as an abuse of discretion. Chilcutt, 239 P.3d
at 184. An exercise of discretion, however, must be based on a correct interpretation of
the law in order to be protected on appeal. In re M.F., 290 Kan. 142, 150, 225 P.3d 1177
(2010).

K.S.A. 60-3321(b) allows for relief in the form of a royalty injunction. Such an
injunction may lie when the district court finds "exceptional circumstances"; those
circumstances "include, but are not limited to, a material and prejudicial change of
position prior to acquiring knowledge or reason to know of misappropriation that renders
a prohibitive injunction inequitable."

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The district court made no express finding of exceptional circumstances and did
not explicitly rely on K.S.A. 60-3321(b). The Court of Appeals examined the record and
concluded that the evidence was insufficient as a matter of law to establish exceptional
circumstances under K.S.A. 60-3321(b). We cannot agree with this conclusion under the
clear statutory language. See State v. Sellers, 292 Kan. 117, 128, 253 P.3d 20 (2011)
(courts give effect to plain and unambiguous statutory language).

It is unclear what factors might have led the district court to find that exceptional
circumstances existed, but three possibilities stand out. First, as the district court noted in
its journal entry, PPI was "a bit lax" in protecting the trade secret and in informing its
employees "to what extent they would not allow that information to be transmitted to
third parties or anyone else." Evidence in the record certainly supports this finding. No
written instructions were given to employees that the formula and process were a secret;
there was testimony that the ingredients and mixing containers were left in plain sight of
visitors and employees, including those not immediately involved in the mixing process;
and employees were not asked to sign confidentiality agreements. Evidence was
conflicting on whether employees were orally informed that they were not to reveal the
components to third parties. Second, the formula that the defendants used in their process
was not identical to the PPI formula. In fact, PPI considered the proprietary thickener to
be the "secret ingredient" that made its formula so effective, but the defendants did not
use that thickener in their own ceramic-backing compound. Third, evidence was
introduced showing that other companies engaged in the pipe-coating business, although
it was unknown to what extent their formulae resembled the Ceram-Back formula.
Finally, PPI President Damman testified that he did not think that the defendants had
taken any business from PPI or cost PPI any revenues during the some 8 months that the
defendants marketed their competing services. One measure of monetary relief for
misappropriation may be the award of the plaintiff's profit loss. See K.S.A. 60-3322;
Mid-Michigan Computer Systems, Inc. v. Marc Glassman, Inc., 416 F.3d 505, 510 (6th
19



Cir. 2005); Restatement (Third) of Unfair Competition § 45, comment d (1995). Some of
these factors may go to the existence of a protected trade secret, but they may also have
contributed to the district judge's finding on whether exceptional circumstances were
present that justified a limited-term royalty injunction.

There are no set rules for what constitutes "exceptional circumstances." The
comment to § 2 of the Uniform Trade Secrets explains:

"Section 2(b) deals with the special situation in which future use by a
misappropriator will damage a trade secret owner but an injunction against future use
nevertheless is inappropriate due to exceptional circumstances. Exceptional
circumstances include the existence of an overriding public interest which requires the
denial of a prohibitory injunction against future damaging use and a person's reasonable
reliance upon acquisition of a misappropriated trade secret in good faith and without
reason to know of its prior misappropriation that would be prejudiced by a prohibitory
injunction against future damaging use." 14 Uniform Laws Annot., § 2, comment, p. 620
(2000).

In A & H Sportswear Co. v. Victoria's Secret Stores, 967 F. Supp. 1457, 1477
(E.D. Pa. 1997), the court concluded that "the essence of the codification is the need to
balance harm to the plaintiff with the other equities in a particular case in order to award
appropriate relief." The court went on to allow the defendant to continue to use a
"Miracle Bra" trademark on swimwear, even though the plaintiff had a preexisting
trademark in "Miraclesuit" swimwear on which the defendant's mark impinged, subject to
payment of royalties. See also Newport News Industrial v. Dynamic Testing, Inc., 130 F.
Supp. 2d 745, 752 (E.D. Va. 2001) (statute requires "case-by-case" analysis of equities to
determine appropriate relief); Electronic Data v. Heinemann, 268 Ga. 755, 756-57, 493
S.E.2d 132 (1997) (trial court did not abuse discretion in imposing royalty injunction
20



because of public interest in competition, plaintiff's delays in bringing matter to
resolution, and adequacy of royalty to protect parties' respective interests).

In the alternative, the district court may have based its decision on K.S.A. 60-
3322(a). The district court did not specify the statutory basis of its royalty injunction.
K.S.A. 60-3322(a) allows the imposition of royalties in lieu of damages based on actual
loss or unjust enrichment. In the present case, PPI conceded that it had not suffered any
actual loss, and the defendants testified that they had made a minimal profit of perhaps
$400-$450. Under those circumstances, the royalty relief may have been appropriate, and
the equitable grounds stated above may have justified the limited injunctive period.

We cannot determine from the record on what factors, if any, the district court
relied in finding extraordinary circumstances or on which statutory provision the district
court grounded its relief. Ordinarily, absent a proper objection to insufficient factual
findings below, this court presumes that the district court found the necessary facts to
supports its conclusion. Hodges v. Johnson, 288 Kan. 56, 65, 199 P.3d 1251 (2009).
When the record on appeal does not support such a presumption, however, this court
must remand for additional factual findings and legal conclusions. Dragon v. Vanguard
Industries, 282 Kan. 349, 356, 144 P.3d 1279 (2006).

Because the district court's findings are incomplete, they do not permit meaningful
appellate review. We accordingly reverse the Court of Appeals' opinion reversing the
remedy that the district court ordered. We remand the case to the district court for the
limited purpose of entering an order specifically correlating legal conclusions to facts
found in the trial record in a manner consistent with this opinion and relating to the basis
for imposing the royalty injunction and other short-term injunctive relief.

21



The judgment of the Court of Appeals reversing the district court is affirmed in
part and reversed in part. The judgment of the district court is affirmed in part and
reversed in part, and the case is remanded with directions to the district court.

MORITZ, J., not participating.

DAVID L. STUTZMAN, District Judge, assigned.
1

1
REPORTER'S NOTE: District Judge Stutzman was appointed to hear case No. 99,550
vice Justice Moritz pursuant to the authority vested in the Supreme Court by Art. 3, § 6(f)
of the Kansas Constitution.