25 Jun

The Pepsi Challenge: Suing To Disclose Trade Secrets Is The Choice Of A New Generation

By Kevin J. Palmersheim

June 25, 2012

Thomas Jefferson once paraphrased the English philosopher John Locke, by declaring that we all had the unalienable right to life, liberty and property. In the final draft of the Declaration of Independence property was changed to pursuit of happiness, perhaps because TJ ran the brand by the marketing department, or he recognized the latter phrase would make a much better title for a Hollywood movie (after movies were invented, that is). Regardless, state and federal law generally protects ones property rights, and allows property owners to receive the full benefit of the assets they own. There are exceptions, however, when the property rights of one person conflict with those of another.

A perfect example of these conflicting property rights was recently made public when the heirs of the man who developed the Pepsi formula sued PepsiCo for the right to do what they wish with the deceased developers papers, which happened to include the written recipe for that Lip-smackin, Thirst-quenchin Pepsi.

According to PepsiCos website, a North Carolina pharmacist named Caleb Bradham used pepsin and cola nuts to create the cola in the 1890s. Evidently, not enough customers caught the Pepsi Spirit by the end of World War I, because Bradham filed for bankruptcy. The new owners decided that it wasnt just the business plan that was flat, and hired candy maker Richard Ritchie to reformulate the cola so customers would Gotta Have It.

The lawsuit filed by Ritchies children alleges that Pepsi knew that good old dad kept the original document for himself. Although the senior Ritchie died in 1985, his children did not discover the document in dads boxes until 2008, which should either make us all feel a little bit better about procrastinating on spring cleaning, or induce us to dive into the recesses of our storage rooms to search for similar treasures. The family notified PepsiCo of the documents, and they sent a Pepsi historian out to subject the documents to the Pepsi Challenge. The historian evidently looked at the documents and declared, You Got The Right One, Baby. However, the aftermath was more than a burp, as Pepsi sent a not-so-soothing letter to the family declaring that not only were the contents of the documents trade secrets, but that the documents themselves belonged to the company.

The facts of this case present an interesting battle between ownership rights of tangible and intangible assets. First, even though Ritchie created the documents at issue, he may not have owned those documents. As an employee or independent contractor, if someone is hired for the purpose of accomplishing a task, whether it be developing new software or tweaking a tasty beverage, then the company doing the hiring may own the creation in what is called a “work for hire.”

But for the sake of argument, lets assume that the Ritchie family does own the physical papers. Pepsi still owns the intangible assets of its trademark and, more importantly, its trade secret–the Pepsi formula. A trade secret is information, including a formula, pattern, compilation, program, device, method, technique or process. Wis. Stat. 134.90(1)(c). In order to be protectable, the information must derive independent economic value from not being generally known to, or readily ascertainable by, the competitors or the public. In addition, for an owner to have a legally protectable right, the owner must use reasonable efforts to maintain the secrecy of the information.

So although a trade secret falls under the same umbrella of intangible assets as trademarks and trade names, they are completely opposite in how they derive value. Trademarks and trade names derive value by being readily known and recognized on sight, creating an instant good will in the product or service being offered. If the trade name Pepsi is affixed to any type of beverage it is instantly recognizable, and carries with it commercial credibility backed by decades of consumer popularity and company marketing dollars (not to mention Britney Spears spangles).

The Pepsi formula, on the other hand, is a trade secret that derives its value for not being readily known. If a competitor were able to exactly duplicate the Pepsi recipe, they may not be able to match Pepsi in advertising dollars but they likely would receive a boost in the marketplace by being able to provide an identically flavored product.

The secrecy element is what is at stake in this battle by the heirs to assert control over dads documents. The Ritchie family argues that it not only has ownership of the physical papers, but that they have a first amendment free speech right to share the documents and disclose the contents. I think it is fair to question the plaintiffs Jeffersonian motives to uphold the Constitution, and to suspect the kids want a little hush money simply to make the Ritchies richer. In any event, it is hard to imagine that there are too many people who could assert a stronger claim to protect trade secrets than companies such as Pepsi and Coke who have recipes for astronomically valuable beverages that are protected with more ardent fervor than the President is by the Secret Service (um, perhaps that MAY not be the best analogy right now).

The secrecy involved is also why I don’t think this dispute will ever see the inside of a courtroom. Even with sealed files and other protective litigation measures, I dont think Pepsi wants its trade secrets in anyone elses hands even if it is only court staff and jurors. But if this trade secret case were to be decided by a judge or jury, my guess is that PepsiCo will prevail in keeping the source of its elixir quite elusive. And even if the Ritchies were able to retain the documents, the judge will make sure that the only Pepsi products that flow from them will come out of a little blue can with a founding-father-friendly red, white and blue ball.