Shwayder Chemical Metallurgy Corp. v. Baum

Quinn, J. In 1963, defendant Baum graduated from Michigan State University School of Accounting. His formal education did not cover chemicals, metallurgy, or engineering. In 1968, he was employed by a certified public accounting firm which plaintiff employed to make a financial study and analysis of its operation. The firm assigned defendant Baum to this job. Prior to this assignment, Baum had no knowledge of or experience with the manufacture of tungsten products, grit, safe plates, or powdered tungsten-carbide products. Since about 1956, plaintiff has been in the business of processing scrap tungsten carbide into tungsten-carbide grit. One of the uses plaintiff makes of grit is in a patented process of manufacturing safe plates, a product used by safe manufac *222 turers to protect safe lock mechanisms and bolts from burglar tools and equipment. The process involves imbedding the grit in a metal matrix within a steel envelope. Defendant Baum left his employment with the certified public accounting firm during 1968 and formed his own consulting business. He was hired by plaintiff to make a thorough in-depth study of the financial, cost accounting, and general production operation of plaintiff’s business. January 15, 1969, plaintiff hired Baum full time as business manager. January 18, 1969, Baum signed an agreement to maintain secrecy of secret or confidential information learned in his full-time employment by plaintiff and not to use such information adversely to plaintiff. Baum resigned his position with plaintiff October 10, 1969 and left this employment. He took or had in his possession quantities of files, papers, and reports of plaintiff without permission of plaintiff and unbeknown to plaintiff. (A complete list of the items taken appears in the appendix to this opinion.) Within a few weeks of his resignation from plaintiff, defendant Baum began to organize a new business to manufacture and sell grit and safe plates in competition with plaintiff. December 18, 1969, plaintiff filed this action against Baum for injunctive relief (ex parte and permanent), for return of all documents obtained from plaintiff, accounting for all profits realized by Baum and lost by plaintiff by reason of Baum’s breach of duties and obligations, and damages, actual and exemplary. An order to show cause and temporary restraining order entered the same day and a preliminary injunction entered December 29, 1969. On the latter date, an order entered requiring Baum to produce all documents obtained from the plaintiff. *223 December 4, 1969, Baum issued a prospectus for Permanence Corporation to be formed for the purpose of manufacturing and selling tungsten-carbide products, including grit and safe plates. This corporation was formed and articles of incorporation were filed February 2, 1970. By stipulation of the parties, an order entered February 16, 1970 in the Baum litigation adding Permanence Corporation as a party defendant. March 18, 1970, plaintiff filed an amended complaint seeking the same relief against Permanence Corporation as was sought in the original complaint against Baum. Following trial, the trial judge filed a comprehensive opinion in which he made the following findings of fact in addition to those facts found in the preceding factual background statement: 1. From the time defendant Baum first worked at plaintiff’s business as an employee of the certified public accounting firm through the period that he was business manager of plaintiff, defendant Baum obtained intimate knowledge of all facets of plaintiff’s business. 2. All of the information given by plaintiff to Baum or obtained by Baum from his contacts with plaintiff was given or obtained in confidence, and Baum was acting in a fiduciary and confidential capacity at all times. 3. Baum had no right to take from plaintiff the items detailed in the appendix and much of the information those items contained was useful to competitors of plaintiff and was used by Baum in organizing Permanence Corporation. 4. After leaving plaintiff, Baum contacted a number of employees, present and former, of plaintiff to induce them to join Permanence Corporation. Stuart, an officer of plaintiff through De *224 cember 31, 1969, commenced work for Permanence Corporation as a vice-president January 1, 1970. The prospectus of December 4, 1969 listed Stuart as a vice-president of Permanence Corporation. Wendler, a former employee of plaintiff, worked with Baum before and after the incorporation of Permanence. The personal secretary of plaintiff’s president worked part time for Baum. 5. Baum contacted plaintiff’s scrap sources and bid competitively against plaintiff for scrap. Baum contacted plaintiff’s safe-plate customers and offered to sell them his safe plate at a price below plaintiff’s price to these customers. 6. Baum was the majority stockholder of Permanence Corporation and he made a calculated effort to enter a business similar to plaintiff’s business by compiling and accumulating data and information concerning plaintiff’s business while he stood in a confidential relation to plaintiff. As conclusions of law, the opinion held: 1. Baum stood in a fiduciary and confidential relationship with respect to plaintiff, and he breached the duties arising from that relationship. 2. The making of grit and safe plates is not a trade secret. 3. Plaintiff was entitled to damages in the amount of $35,000 against defendant Baum only. Judgment entered December 7, 1971 awarding plaintiff $35,000 damages, costs, and attorney fees against Baum, dismissing the complaint against Permanence Corporation, and denying damages, costs, and attorney fees to Permanence Corporation. Defendant Baum appeals from that judgment. Plaintiff cross-appeals contending it is entitled to the injunctive relief requested and that Permanence Corporation should be liable for damages as *225 well as Baum and that the injunctive relief should also apply to Permanence Corporation. Our review of the record discloses ample support for all factual findings of the trial judge. The legal conclusions of the trial court that Baum stood in a fiduciary and confidential relationship to plaintiff and that Baum breached the duties and obligations arising from that relationship are sustained by 2 Restatement Agency 2d, § 396(b), p 223; New England Overall Co, Inc v Woltmann, 343 Mass 69; 176 NE2d 193 (1961). The making of grit by crushing scrap is a process well known in the industry and it is not a trade secret. Plaintiff’s process of making safe plates is not a trade secret because the process is patented, Glucol Manufacturing Company v Schulist, 239 Mich 70, 75 (1927). We find no support in the record for the $35,000 damage award. Plaintiff asked for an accounting of profits made by defendants and lost by plaintiff by reason of the confidential material Baum took from plaintiff as a basis for damages. The record contains no evidence of such an accounting. If the award was for exemplary damages, the basis therefor is not indicated. The damage award is reversed and plaintiff shall be afforded the opportunity to establish its damages, actual and exemplary. As to injunctive relief, with respect to the safe-plate manufacturing process, none is or should be granted. As a patented process, it is fully protected and suit for infringement is adequate relief. On the basis of New England Overall Co and Glucol Manufacturing Co, supra, defendants should be enjoined from competing with plaintiff as to customers they obtained from plaintiff’s customer lists and from manufacturing any product in competition with plaintiff which defendants are able to *226 manufacture because of information obtained from plaintiff by Baum. Whatever damages plaintiff may establish should be assessed against both defendants, Sperry Rand Corp v Electronic Concepts Inc, 325 F Supp 1209 (ED Va, 1970). Affirmed in part, reversed in part and remanded for further proceedings consistent with this opinion. Neither party has prevailed and no costs are awarded. All concurred. APPENDIX List of Compilations and Files Taken by Baum from Shwayder, Without Permission Plaintiff’s Exhibit No. Description 1 140 Page, Computerized Scrap Mailing List 2 248 Page, Computerized Raw Material Status Report of about 3700 Selected Scrap Sources 3 50 Page, Master Copy of Operations Analysis (January 1, 1968) 4 75 Page, Report on Operations— Phase III 5 121 Page, Operations Manual 6 54 Page, Hiring Procedure Manual 7 8 Page, Progress Report on Operations Phase I 8 9 Page, Original of: Progress Report on Operations — Phase II 9 9 Page, Carbon Copy of: Progress Report of Operations — Phase II *227 10 9 Page, Carbon Copy of: Progress Report of Operations — Phase II 11 10 Page, Current Customer Lists 12 5 Page, Customer Identification— 1968 13 3 Page, Customer Data — Mosler Pricing Data 14 13 Page, Customer Data — Alloy Metals 15 5 Page, Customer Data — Firth 16 10 Page, Compilation of Foreign Sales and Purchases 17 33 Page, Report — European Sales Trip and Market Survey 18 30 Page, Reports on Purchases of Carbide Scrap 19 9 Page, Current Weekly Recaps of Scrap Purchases 20 10 Page, Step-by-Step Process Analysis Compilations 21 6 Page, Pricing Data — Maxalloy— Customer Prices 22 29 Page, Pricing Data Compilation 23 15 Page, Product Cost Analysis 24 30 Page, Cost Analysis of Each Production Step 25 3 Page, Labor Cost Data — Plates 26 63 Page, Cost Studies and Pricing Structure 27 15 Page, Accounting Department and Standard Cost Accounting System 28 13 Page, Analysis Reports on Computer Direct Mail Scrap Purchases *228 29 1 Page, Competition Price Data 30 95 Page, Study for Operations Manual 31 14 Page, Budget and Expense Forecast Analysis 32 6 Page, Sales and Expense Forecast Data — 1969 33 2 Page, Shwayder Personnel Names & Addresses 34 12 Page, Shwayder Personnel Employment Agreements 35 7 Page, Job Descriptions of Shwayder Personnel 36 16 Page, Shwayder Sales Commission Data 37 1 Page, Chemical Code Identifications 38 1 Page, Pelletizing Analysis 39 37 Page, Inventory Records 40 7 Page, Index to Accounting Records 41 22 Page, Accounting Journal Pages 42 5 Page, Computer Accounting Information 43 8 Page, Office Operation Procedures 44 36 Page, Production Problems 45 17 Page, Memos on Production Problems 46 12 Page, Outlines of Administrative Problems 47 12 Page, Memos on Commissions & Payments 48 49 Page, Management Report and Analysis *229 49 18 Page, Memos on Management Planning 50 18 Page, Management Reports, Analysis & Recommendations 51 4 Page, Management Reports 52 13 Page, Rectangular Tube Sources 53 79 Page, Miscellaneous Administrative Memos 54 25 Page, Miscellaneous Forms 55 5 Page, Shwayder Bank Account Records 56 3 Photographs Relating to Mill Installation and Water Damage Claim 57 12 Page, Miscellaneous Notes 58 18 Page, Shwayder Incentive Plans 59 19 Pages, Miscellaneous Shwayder Letters Returned by Baum on January 30, 1970, During Discovery Deposition