Vigoro Industries v. Cleveland Chemical

___________
No. 95-1589
No. 95-1648
___________
Vigoro Industries, Inc., *
*
Plaintiff - Appellant/ *
Cross-Appellee, *
*
v. *
*
Kenneth Crisp, *
* Appeals from the United States
Defendant - Appellee/ * District Court for the
Cross-Appellant, * Eastern District of Arkansas.
*
Cleveland Chemical Company of *
Arkansas, Inc.; James M. *
Sanders; Michael W. Sanders; *
Dennis E. Cavette; Don *
Scarbrough, Jr.; Donald R. *
Washburn, *
*
Defendants - Appellees, *
___________
Submitted: November 17, 1995
Filed: April 29, 1996
___________
Before McMILLIAN, WOLLMAN, and LOKEN, Circuit Judges.
___________
LOKEN, Circuit Judge.
Vigoro Industries, Inc., commenced this unfair competition action
against former employees of its farm supply store in Marvell, Arkansas, and
the competitor that hired them away, Cleveland Chemical Company. Vigoro's
former manager, Kenneth Crisp, counterclaimed for money allegedly owing
under Vigoro's incentive compensation plan. Following a one-week bench
trial, the
district court1 awarded Vigoro $75,000 against Crisp for breach of his
employee's duty of loyalty. The court dismissed Vigoro's claims against
the other defendants and awarded Crisp $36,788.40 on his counterclaim.
Vigoro appeals, arguing primarily that clearly erroneous findings of fact
have produced a grossly inadequate damage award. Crisp cross appeals. We
affirm the disposition of Vigoro's claims, reverse the award in favor of
Crisp on his counterclaim, and remand for entry of an amended final
judgment.
I. Background.
We will only briefly summarize the relevant facts, which are set out
in detail in the district court's thorough published opinion, Vigoro
Industries, Inc. v. Cleveland Chemical Co., 866 F. Supp. 1150 (E.D. Ark.
1994).
Crisp managed a successful farm supply store in rural Marvell for
twenty-four years. After Vigoro acquired the store in 1986, Crisp often
considered leaving. Finally, in late 1992, he approached Cleveland
Chemical, a wholesale supplier that had expressed an interest in entering
the retail market in the Marvell area. In February 1993, Crisp purchased
commercial property in Marvell. In May, he committed to join Cleveland
Chemical, offered his property as the site for a new Cleveland Chemical
store, and began detailed discussions concerning facilities, equipment, and
personnel. Crisp provided Cleveland Chemical with estimated salaries and
wages, drawing on his knowledge and experience as a Vigoro farm store
manager.
On July 16, 1993, Crisp sent a letter of resignation to Vigoro
management, advising that he would stay on for a short time to ease the
transition. Shortly before resigning, Crisp invited the other
1
The HONORABLE GARNETT THOMAS EISELE, United States District
Judge for the Eastern District of Arkansas.
-2-
Marvell employees to join him at the new Cleveland Chemical store. His co-
workers responded favorably, and Crisp stated in his resignation letter
that all of the Marvell employees would be leaving with him. Critical
among the dozen who left were three salesmen, appellees Dennis Cavette, Don
Scarbrough, and Donald Washburn, who had valuable relationships with nearly
all of Vigoro's farmer-customers. On July 28, 1993, Crisp sent a letter
to the farmers he considered Vigoro's best customers. Addressed to "our
valued customers," the letter advised that the employees would soon leave
Vigoro for Cleveland Chemical, apologized for any inconvenience, and
stated, "we feel this change will enable us to offer you better services
in the future. As always, we look forward to serving any needs you might
have."
Crisp left Vigoro on August 7, 1993, and began working for Cleveland
Chemical. The other Marvell employees joined him later that month. Though
Vigoro brought in a new manager and sales force as quickly as possible, it
lost some seventy percent of its Marvell customers to its new competitor,
and the Marvell Farmarket began operating at a substantial loss. Vigoro
sued the former employees, Cleveland Chemical, and Cleveland Chemical's
principal officers, asserting claims for misappropriation of trade secrets,
breach of fiduciary duties, conspiracy to breach those duties, and
intentional interference with business expectancies. On appeal, Vigoro
challenges the inadequate damage award against Crisp and the dismissal of
its claims against the Cleveland Chemical defendants and former salesmen
Cavette, Scarbrough, and Washburn.2
II. Claims Against Kenneth Crisp.
Crisp was an at-will employee at Vigoro. He signed no agreement or
covenant not to compete with Vigoro if he left.
2
Vigoro dismissed claims against the non-sales employees at
the close of its case at trial.
-3-
Therefore, the district court ruled that Crisp had a right to leave and was
free to notify his fellow workers and Vigoro customers of his intent to
leave. However, before leaving, Crisp had a duty of loyalty which
precluded him from soliciting other employees or customers to leave Vigoro
with him. We agree with this analysis. Arkansas law strikes a careful
balance between an employer's right to employee loyalty, and an employee's
right -- absent contrary contractual commitment -- to resign and pursue his
career with a competing employer. See Witmer v. Arkansas Dailies, Inc.,
151 S.W.2d 971, 973-74 (Ark. 1941). Even corporate officers and directors,
who have fiduciary duties to the corporation beyond those of less essential
employees, are free to resign and go into competition, so long as they
remain loyal prior to resigning. As the court said in Raines v. Toney, 313
S.W.2d 802, 809 (Ark. 1958) (citations omitted):
It is, however, a common occurrence for corporate fiduciaries
to resign and form a competing enterprise. Unless restricted
by contract, this may be done with complete immunity because
freedom of employment and encouragement of competition
generally dictate that such persons can leave their corporation
at any time and go into a competing business. They cannot
while still corporate fiduciaries set up a competitive
enterprise . . . or resign and take with them the key personnel
of their corporations for the purpose of operating their own
competitive enterprise. But they can, while still employed,
notify their corporation's customers of their intention to
resign and subsequently go into business for themselves, and
accept business from them when offered to them.
See also Evans Lab., Inc. v. Melder, 562 S.W.2d 62, 64 (Ark. 1978), which
struck down a two-year covenant not to compete because it created "undue
interference with . . . the public's right to the availability of a
serviceman it prefers to use."
Applying this standard, the district court found that Crisp had
breached his duty of loyalty to Vigoro in two respects. First,
-4-
his July 28 letter to key Vigoro customers "crosse[d] the line from simple
notification to an active solicitation at a time when Mr. Crisp was still
working for Vigoro." 866 F. Supp. at 1165. Second, Crisp interfered with
Vigoro's relations with its other Marvell employees by securing commitments
from them to join him at Cleveland Chemical while he was still a Vigoro
employee.
Vigoro of course takes no issue with these findings that Crisp
breached his duty of loyalty, though it casts Crisp's conduct in a far more
sinister light than did the district court. Crisp, on the other hand,
argues that the district court's findings of breach of duty are clearly
erroneous. We disagree. The findings that Crisp's pre-resignation
solicitation of co-workers and Vigoro customers breached his duty of
loyalty are well supported in the record. That brings us to the crucial
issue on this appeal, the district court's award of $75,000 damages for
that breach.
III. Damages for Crisp's Misfeasance.
Vigoro attacks the district court's damage award at three levels.
First, claiming that Crisp's breach of duty decimated Vigoro's workforce
and purloined seventy percent of its customer base, Vigoro argues that the
court should have adopted one of Vigoro's "uncontested" five-year damage
estimates -- $2.19 million lost going concern value, $3.5 million unjust
enrichment to Cleveland Chemical, or $4.7 million lost profits to Vigoro.
Second, Vigoro argues that the court should have assessed additional
damages because Crisp misappropriated trade secrets and confidential
customer information. Third, Vigoro argues that the district court
improperly ignored specific additional items of damage. We will take up
these points in that order.
A. Lost Profit Damages for Breach of Duty. The district court
rejected Vigoro's damage theories as without factual support. The court
found that the other Marvell employees were loyal to Crisp
-5-
and would have left Vigoro to join him at Cleveland Chemical if Crisp had
waited until after he resigned before soliciting them. After carefully
surveying competitive conditions in the Marvell local market, the court
further found that most of Vigoro's customers would have chosen to do
business with Crisp at Cleveland Chemical if he had not solicited them
before leaving Vigoro. Thus, the court found that Vigoro's damages should
be limited to the harm caused immediately after Crisp's departure by his
pre-resignation soliciting. The court estimated this damage at $75,000.
See 866 F. Supp. at 1172.
"In a bench trial, ascertaining the plaintiff's damages is a form of
factfinding that can be set aside only if clearly erroneous." Hall v. Gus
Constr. Co., 842 F.2d 1010, 1017 (8th Cir. 1988). Here, the district court
was clearly correct in rejecting Vigoro's extravagant lost profit theories,
which irrationally attributed all of Vigoro's competitive losses to the
fact that Crisp had jumped the gun by three weeks in soliciting Vigoro's
employees and customers. That left the district court with the difficult
task of estimating what damage in fact flowed from Crisp's limited breach
of duty. While we might have been inclined to assign more financial
significance to the fact that Crisp took all of Vigoro's work force, with
advance notice to customers but inadequate warning to Vigoro, the question
for an appellate court "is not whether it would have made the findings the
trial court did, but whether on the entire evidence [it] is left with the
definite and firm conviction that a mistake has been committed." Zenith
Radio Corp. v. Hazeltine Research, Inc., 395 U.S. 100, 123 (1969)
(quotation omitted). Applying this standard, we conclude that the breach-
of-duty damages found by the district court are not clearly erroneous.
B. Damages for Misappropriation of Confidential Information. Vigoro
claims that Crisp is liable under the Arkansas Theft of Trade Secrets Act,
Ark. Code Ann. § 4-75-601 et seq., and the
-6-
common law doctrine that protects an employer's confidential business
information, see Tlapek v. Chevron Oil Co., 407 F.2d 1129, 1134-35 (8th
Cir. 1969), for misappropriating the following types of customer
information: (1) the identity of Vigoro's farmer customers; (2) each
farmer's planting history, types of products purchased, and credit history;
and (3) whether the farmer allows a farm store salesman to "scout" the farm
for insects and to perform soil analyses. The district court concluded
that this information is not entitled to trade secret protection because
it is "readily ascertainable." See Ark. Code Ann. § 4-75-601(4)(A). We
agree. The identity of Vigoro's two hundred farm store customers could be
easily discovered because they farm in a small geographic area. Interested
farmers would readily provide the other types of information because that
helps them purchase the most appropriate farm supplies.
Although confidential and valuable customer information that would
be costly and time consuming to duplicate qualifies for trade secret
protection, readily ascertainable customer information does not. Compare
Allen v. Johar, Inc., 823 S.W.2d 824, 827 (Ark. 1992), and United
Centrifugal Pumps v. Cusimano, 9 U.S.P.Q.2d 1171, 1173-74 (W.D. Ark. 1988),
with Hi-Line Elec. Co. v. Moore, 775 F.2d 996, 997 (8th Cir. 1985). The
issue is fact intensive. In this case, neither Crisp nor the salesmen took
any written customer information when they left Vigoro. They brought to
Cleveland Chemical only their sales experience and their knowledge of the
local customers. Absent an enforceable covenant not to compete, a former
employer may not prevent a former employee from exploiting this kind of
knowledge with a new employer. The former employer should not be permitted
to achieve this anticompetitive objective indirectly through an overly-
expansive definition of customer trade secrets. As the court said in
Fleming Sales Co. v. Bailey, 611 F. Supp. 507, 514-15 (N.D. Ill. 1985):
-7-
All the information [plaintiff] tries to wrap in the [Trade
Secret] Act's mantle is nothing more than the kind of knowledge
any successful salesman necessarily acquires through
experience. In the Act's terms, it is information 'readily
ascertainable by proper means' . . . . Nothing prevents such
an employer from guarding its interests by a restrictive
covenant. But it would really be unfair competition to allow
the employer without such a covenant to obtain trade secret
status for the fruits of ordinary experience in the business,
thus compelling former employees to reinvent the wheel as the
price for entering the competitive market.
We affirm the district court's determination that Crisp did not
misappropriate trade secrets or confidential customer information.
C. Miscellaneous Damage Claims. Vigoro's remaining damage
contentions do not warrant extended discussion. First, Crisp's breach of
his duty of loyalty does not require him to forfeit compensation already
earned. See Baldwin v. Prince, 578 S.W.2d 240, 243 (Ark. 1979). Second,
the district court properly rejected Vigoro's claim for $94,000 in bad debt
losses allegedly caused by Crisp during his final months with the company
because Vigoro failed to raise this issue in its pleadings or at trial.
Third, Vigoro's damages for Crisp's breach of duty were not capable of
exact determination, so prejudgment interest may not be awarded. See
Lovell v. Marianna Fed. Sav. & Loan Ass'n, 589 S.W.2d 577, 578 (Ark. 1979);
Red Lobster Inns of Am. v. Lawyers Title Ins. Corp., 656 F.2d 381, 386-87
(8th Cir. 1981). Fourth, Crisp did not act with the malice that would
support an award of punitive damages, see Stein v. Lukas, 823 S.W.2d 832,
834 (Ark. 1992), and there is no basis for an award of attorneys' fees, see
Security Pac. Hous. Servs., Inc. v. Friddle, 866 S.W.2d 375, 379 (Ark.
1993).
For the foregoing reasons, the district court's award of $75,000
damages against Kenneth Crisp is affirmed.
-8-
IV. Claims Against the Cleveland Chemical Defendants.
Vigoro argues that the Cleveland Chemical defendants conspired with
Crisp to breach his duty of loyalty to Vigoro and tortiously interfered
with Vigoro's customer and employee expectancies. The district court found
expressly to the contrary -- that Crisp's breach of duty was not done in
concert with any other defendant, and that the actions of the Cleveland
Chemical defendants in hiring Crisp and the other Vigoro employees and in
opening a retail farm store in Marvell constituted proper competition
rather than tortious interference with Vigoro's expectancies. These
findings are not clearly erroneous. Vigoro's claims against the Cleveland
Chemical defendants were properly dismissed. See Fisher v. Jones, 844
S.W.2d 954, 959 (Ark. 1993); Walt Bennett Ford, Inc. v. Pulaski County
Special Sch. Dist., 624 S.W.2d 426, 429 (Ark. 1981); Restatement (Second)
of Torts §§ 767-68 (1977).
V. Claims Against Cavette, Scarbrough, and Washburn.
Vigoro claims that Cavette, Scarbrough, and Washburn also
intentionally interfered with Vigoro's customer expectancies. Like Crisp,
these salesmen were at-will employees of Vigoro, and none had signed a
covenant not to compete. The district court found that they had a right
to leave Vigoro and join Cleveland Chemical, that they did not induce or
participate in Crisp's pre-resignation breach of duty, that they did not
disclose any confidential Vigoro information to Cleveland Chemical, and
that they merely made proper use of their business skills and experience
in competing with Vigoro. These findings are not clearly erroneous and
required dismissal of Vigoro's claims against these defendants.
VI. Crisp's Counterclaim.
Because of Crisp's success as a Vigoro store manager, Vigoro provided
him the most lucrative incentive compensation plan of any
-9-
Vigoro farm store manager. However, his 1993 incentive plan permitted
Vigoro to deduct "amounts Management deems appropriate as a penalty for
mismanagement of total assets of the Farmarket." After Crisp left, Vigoro
refused to pay him a bonus for the year in which he resigned, citing this
mismanagement provision. Crisp asserted a counterclaim for the bonus that
would otherwise have been owing. The district court ruled that Vigoro
could not properly refuse to pay a bonus because Crisp had managed the
Farmarket assets in Vigoro's best interests. The court awarded Crisp
$36,788.40 in 1993 incentive compensation.
On appeal, Vigoro argues that the incentive compensation plan left
this mismanagement issue to its discretion (Vigoro may deduct "amounts
Management deems appropriate"); therefore, the district court erred in
reviewing de novo Vigoro's decision to pay no bonus. We agree. When a
contract term leaves a decision to the discretion of one party, that
decision is virtually unreviewable. See Amant v. Kidde, Inc., 756 F.2d
685, 686 (8th Cir. 1985). At most, courts will step in "when the party who
would assume the role of sole arbiter is charged with fraud, bad faith, or
a grossly mistaken exercise of judgment." Golden v. Kentile Floors, Inc.,
512 F.2d 838, 847 (5th Cir. 1975) (involving pre-ERISA plan benefits).
In this case, Vigoro's management decided that Crisp deserved no
incentive bonus in a year in which he breached his duty of loyalty by
soliciting employees and customers to join him in a competing venture.
This cannot be called a bad faith or grossly mistaken exercise of judgment.
Cf. O'Madigan v. General Motors Corp., 202 F. Supp. 190, 193 (E.D. Mo.
1961), aff'd, 312 F.2d 250 (8th Cir. 1963). Accordingly, the district
court erred in awarding Crisp $36,788.40 on his counterclaim.
-10-
VII. Conclusion
We reverse the district court's award of $36,788.40 in favor of
Kenneth Crisp on his counterclaim. We otherwise affirm the district
court's Amended and Substituted Judgment. The case is remanded for entry
of an amended final judgment consistent with this opinion, with interest
on that judgment under 28 U.S.C. § 1961 to run from November 4, 1994. See
Fed. R. App. P. 37. We award costs on appeal to appellees.
A true copy.
Attest:
CLERK, U. S. COURT OF APPEALS, EIGHTH CIRCUIT.
-11-