Shwayder Chemical Metallurgy Corp. v. Baum

45 Mich. App. 220 (1973) 206 N.W.2d 484

SHWAYDER CHEMICAL METALLURGY CORPORATION
v.
BAUM.

Docket No. 13521.

Michigan Court of Appeals.

Decided February 23, 1973.

Cullen, Settle, Sloman & Cantor and Alan P. Goldstein, for plaintiff.

Sugar, Schwartz, Silver, Schwartz & Tyler (by A. Albert Sugar and David L. Nelson) and McGlynn, Reising, Milton & Ethington (by Martin J. Adelman, Allen M. Krass, and Thomas N. Young), for defendants.

Before: McGREGOR, P.J., and QUINN and PETERSON,^[*] JJ.

Leave to appeal denied, 389 Mich. 817.

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 manufacturers 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.

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 December 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 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 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
    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
    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
    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

NOTES

[*] Circuit judge, sitting on the Court of Appeals by assignment