S. Jarvis Adams Co. v. Knapp

SEVERENS, Circuit Judge, having made the foregoing statement of the case, delivered the opinion of the court. The ground upon which this demurrer was sustained was that the contract of November 12, 1900, upon which the bill ultimately rests, had for its sole purpose the restraint of competition, and that it was therefore void because it was opposed to public policy. Still other [38] grounds are taken by the appellee in support of the decree. One, which reaches to the whole bill, is that' the stipulations of the defendant, the violation of which is complained of, do not rest upon a legally sufficient consideration; and the other, which extends only to the stipulation not to disclose, sell, or use the complainant’s methods and processes, is that it is not sufficiently alleged that they were trade secrets; and, further, that it is only vaguely stated what the methods and processes are. We shall take these questions up in the following order: First, was there a sufficient legal consideration for the defendant’s stipulation? By the terms of the contract, Knapp, after the end of the first year, was entitled to the following rights and privileges: He had the right to resign from his employment. In case of his resignation, he was entitled to receive the proper proportion of his salary of $2,500 per annum. He was bound to assign his interest in the $25,000 of stock, and was thereupon entitled to receive such sum as the books should then show the stock to be worth, less the amount which remained unpaid upon it. If, however, he should resign for the purpose of going into a competing business, he would be entitled to receive his salary and the amount he had been credited upon his stock, which he would thereupon be required to transfer to the company. He could at that time become the absolute owner of the stock by completing the payment for it, and could have required certificates therefor, and would have held it “free from the contract.” If he continued to perform his duty according to the contract, the company, having no valid reason for forfeiting his right, could not prevent him from exercising it. In this situation, he gave notice of his intention to resign. The company believed he did so for the purpose of going into a competing business, and insisted on settling upon that basis, which would require that he be paid only his salary and what he had credited upon his purchase of stock. He denied that he had the purpose imputed to him, and demanded, in addition to his salary, the value of the stock as shown by the books, less the amount remaining unpaid upon it. They compromised their differences by making the contract of November 12, 1900, whereby the company agreed to pay Knapp the sum of $6,-480.95; and in consideration thereof he agreed that he would not, directly or indirectly, enter into the manufacture or sale, or disclose or sell or use, any of the processes or methods used by the company in the manufacture of any of certain specialties, for the period of 10 years, within the described territory. And he thereby assigned and released to the company all right in or claim to the stock, and authorized the return thereof to the treasury of the corporation. We cannot see any reason for doubting that his agreement not to enter into competition, and not to disclose,'sell, or use the company’s processes and methods, was supported by a sufficient consideration; and certainly the agreement to pay the money, and thereby compromise their differences, is not open to any legal objection. Second, a further question is whether these stipulations were valid. It is said that the stipulation not to enter into competition was void because it was contrary to public policy. It may be admitted as [39] claimed, and as held by the court below, that “a bald covenant in restraint of trade, for which there is no other consideration than the payment of money for the obligation itself, without any purchase of the business, products, trade, or plant of the covenantor, is void.” Assuming this to be a correct proposition, it is contended by the appellee that the consideration for this agreement “was a cash sum of money, part of which it is conceded was a debt owed by the_ complainant.” But the stipulation in question was not the only object of the contract. We must look to the whole contract, and see whaj was the object and purpose of it, and what relation this particular stipulation bears to its other parts. The defendant had not yet sundered his relation to the company. He had, it is true, indicated his purpose to leave its service; but he still held the right to purchase the stock, and would continue to hold it until some adjustment was made which would result in its relinquishment. That result was effected by the stipulation in this contract that “the said Sanford A. Knapp doth hereby assign and release to The S. Jarvis Adams Co. all right, title, interest in, or claim upon any of the stock of The S. Jarvis Adams Co. and doth authorize the return of the said stock to the treasurer of the corporation.” The recital, “Sanford A. Knapp having resigned from the employ of The S. Jarvis Adams Co.,” means no more than that he had taken a step which required a settlement of their relations; and the settlement made was not upon the terms of the old contract, though the new one recognized that under the old contract Knapp had rights to the stock which by the new one he “assigned and released” to the company. The whole matter was in fieri until it was closed by the new contract of November 12, 1900. The substance of that contract was that the company was to pay to Knapp $6,480.95 for what it owed him for services, the surrender of his interest in the stock, and his agreement not to enter into competition with the complainant’s business or to disclose or use its processes and methods. If Knapp had fully paid for his stock and had acquired the legal title to it, we think there could be no doubt that upon the purchase of it by the corporation, assuming this to be permissible, the latter might lawfully obtain a stipulation from the seller not to do anything to depreciate.its value, as by entering into competition or exposing the secret processes of its business. And we can perceive no difference in principle between such a case and one where the purchase is of a right to obtain its stock under an executory contract already partly performed. In the first instance, the thing purchased would be a legal title; in the latter, an equitable interest; but the right to purchase protection would rest upon the same ground in either case. The underlying principle upon which the modern cases upon this subject are grounded is that, although one cannot stifle competition by a bargain having that purpose only, yet when he purchases something, or acquires some right, the value of which may be affected by the subsequent' conduct of the seller, the purchaser may lawfully obtain the stipulation of the seller that he will refrain from such conduct. In the present case the stipulation would increase the value of the benefit purchased by the corporation, and it was associated with that contract in its essence and in its purpose. These consid [40] erations seem to us to bring the case within the principle of those in which the validity of such stipulations has been maintained. The subject was elaborately discussed in the opinion of this court'delivered by Judge Taft in the case of the United States v. Addyston Pipe & Steel Co., 29 C. C. A. 141, 85 Fed. 271, 46 L. R. A. 122, and we have no occasion to go over the ground covered by that opinion. That case did not call for an opinion, nor was any opinion expressed, upon precisely such circumstances as are found in this; but it seems to us that the principles there laid down upon much consideration are broad enough to affect and control the decision we ought to render here, and that they are not consistent with the conclusion reached by the Circuit Court upon the subject we are considering. The learned judge of the Circuit Court did not question the principles indicated as sound in the opinion in the Addyston Pipe & Steel Co. Case, but held that they were inapplicable for the reason that the contract in which the stipulations in question were embodied did not show that any interest was transferred which those stipulations supported. In this we think he erred. In respect to the stipulation not to disclose, sell, or use the methods and processes of the complainant, we think the allegations of the bill, taken in connection with the contract of November 12, 1900, which by. reference is made part of this bill, are sufficient to show that those methods and processes were trade secrets which he had no right to disclose or use. The allegations of the bill are that the defendant “had theretofore been in the employ of said S. Jarvis Adams & Co., and knew and understood the use of certain processes and methods employed by said firm in the manufacture of said specialties, which said processes were not generally known or understood by other manufacturers of said products, or by the public,” and that the defendant was employed “partly by reason of his said knowledge.” We think that'this contains a fair implication that such processes and methods — which are substantially synonymous terms — were secrets of the business which the complainants took over, and that, when it is said that they were not generally known to the public, it was intended to distinguish between the knowledge of the company and its employés and the knowledge of the rest of the public. Especially do we think this the proper construction in view of the language of the contract to which the defendant was a party, wherein he expressly agrees that he will “not disclose any of the processes and methods” of the company. This is an admission of a positive character that such processes and methods were secret. Otherwise the stipulation was nugatory. As against a general demurrer for want of equity, it must be held that it sufficiently appeared that the processes were business secrets. Story’s Eq. Plead. § 528. Then, as to the suggestion that it is not stated what those processes were, we think the complainant was not required to state them. We know of no precedent for holding that a party must make public the secrets of his business in order to obtain protection against their unlawful disclosure. He would lose his right in endeavoring to save it. [41] The decree will be reversed, and the case remanded, with directions to allow the defendant to answer and to take further proceedings not inconsistent with this opinion. DAY, Circuit Judge, participated in the decision of this case.