Franke v. Wiltschek
Decision Date | 09 December 1953 |
Docket Number | Docket 22843.,No. 96,96 |
Citation | 209 F.2d 493 |
Parties | FRANKE et al. v. WILTSCHEK et al. |
Court | U.S. Court of Appeals — Second Circuit |
Sidney J. Leshin, New York City, for defendants-appellants.
William D. Burrows, New York City (Eyre, Mann & Burrows, New York City, on the brief), for plaintiffs-appellees.
Before CHASE, Chief Judge, and CLARK and FRANK, Circuit Judges.
This action seeking an injunction and an accounting of profits received is based upon the alleged misappropriation by defendants of trade secrets learned during and in consequence of a confidential relationship existing between them and the plaintiffs.
From 1943 to 1951, plaintiffs, citizens of New Jersey, manufactured certain compressed cotton bath sponges for Schiaparelli. The finished product was a pellet which when dropped into water expanded into a piece of cotton about four inches wide by six inches long. The process and utility of thus compressing sheets of unwoven fiber had been known to the art since at least 1913.
In early 1951, plaintiffs commenced experiments with the similar compression of woven fibers, and by September of that year had produced the product here in issue, a perfumed face cloth, compressed into the shape of a small drum which when immersed in water opened up to its original shape. The product was put on the market in October, under the name "Quettes," and sales multiplied rapidly thereafter.
In December of that year defendant Wiltschek, having seen the product in a New York store, called plaintiffs and sought an interview, representing that he and his partner, defendant Blatt, were interested in selling the item. Plaintiffs initially were not interested, but Wiltschek persisted and after several more calls a meeting was arranged between plaintiffs and Wiltschek and Blatt. The latter came to the plant and discussed the question of representing plaintiffs. In order to persuade plaintiffs of the desirability of the arrangement they claimed a sales force of thirteen men, though in fact they had none other than themselves. As the parties neared agreement, these defendants, at their own solicitation, were shown the process (thereby also learning its cost), the capacity of the plant, and some of plaintiffs' sales records in order to help them in effecting sales and assure them that supply would be adequate and the product attractive. Shortly thereafter, in late December, an agreement was reached whereby Wiltschek and Blatt were to represent plaintiffs for a trial period while they tested the appeal of the product with their clientele. Compensation was agreed upon and they were given samples, displays, and signs.
By mid-February these defendants had terminated the agreement and returned some of the sales equipment, stating that the line would not sell. It is doubtful whether they ever in good faith intended to sell plaintiffs' product, but the trial court found on ample evidence that by the end of January they had resolved to copy the product and market it for their own profit. In March, defendant Betti Pearson, Inc., a Massachusetts corporation of which Blatt and Wiltschek were directors and vice-presidents (their wives holding half of the issued stock), resolved by its board of directors to copy and market plaintiffs' product. The first lot of the product was put on the market in April under the name "Facelettes" at a lower price than "Quettes." This action was instituted in June, 1952, against the corporation and the individuals both as such and under three different trade names under which they had done business.
Our jurisdiction rests upon diversity of citizenship, 28 U.S.C. § 1332, and accordingly we must draw the controlling principles of substantive law from the law of the forum, New York, Pecheur Lozenge Co. v. National Candy Co., 315 U.S. 666, 62 S.Ct. 853, 86 L.Ed. 1103; Erie R. Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188, 114 A.L.R. 1487; Smith v. Dravo Corp., 7 Cir., 203 F.2d 369, 373, including New York's rules of the conflict of laws. Klaxon Co. v. Stentor Electric Mfg. Co., 313 U.S. 487, 61 S.Ct. 1020, 85 L.Ed. 1477; Smith v. Dravo Corp., supra, 7 Cir., 203 F.2d 369. Happily we need not attempt answer to the troublesome question whether a New York court would look to the law of New Jersey, where the confidential relationship arose, the law of Massachusetts, where the accused product was manufactured, or that of New York, where it was sold,1 or would merely content itself in any event with its own law of remedies, for all three jurisdictions subscribe to the same general principle. Where defendants obtain secret information by means of a confidential relationship, they shall be held accountable for its use to their own advantage at the expense of the rightful possessor. See authorities collected below.
Defendants argue that the heart of plaintiffs' process was revealed by an expired patent, and that the improvements thereon were unpatentable applications of mechanical skill. This totally misconceives the nature of plaintiffs' right. Plaintiffs do not assert, indeed cannot assert, a property right in their development such as would entitle them to exclusive enjoyment against the world. Theirs is not a patent, but a trade secret. The essence of their action is not infringement, but breach of faith. It matters not that defendants could have gained their knowledge from a study of the expired patent and plaintiffs' publicly marketed product. The fact is that they did not. Instead they gained it from plaintiffs via their confidential relationship, and in so doing incurred a duty not to use it to plaintiffs' detriment. This duty they have breached. Junker v. Plummer, 320 Mass. 76, 67 N.E.2d 667, 165 A.L.R. 1449, citing 4 Restatement, Torts § 757 and comment a (1939); Peabody v. Norfolk, 98 Mass. 452; Vulcan Detinning Co. v. American Can Co., 72 N.J.Eq. 387, 67 A. 339, 12 L.R.A.,N.S., 102; Tabor v. Hoffman, 118 N.Y. 30, 23 N.E. 12, 16 Am.St.Rep. 740; Spiselman v. Rabinowitz, 270 App.Div. 548, 61 N. Y.S.2d 138, appeal denied 270 App.Div. 921, 62 N.Y.S.2d 608; Extrin Foods, Inc. v. Leighton, 202 Misc. 592, 115 N.Y. S.2d 429. See also Smith v. Dravo Corp., supra, 7 Cir., 203 F.2d 369; Schreyer v. Casco Products Corp., 2 Cir., 190 F.2d 921, certiorari denied 342 U.S. 913, 72 S.Ct. 360, 96 L.Ed. 683; 4 Restatement, Torts § 757 and comment a (1939); Nims, The Law of Unfair Competition and Trade-Marks §§ 141, 143a, 148 (4th Ed. 1947); Note, Protection and Use of Trade Secrets, 64 Harv.L.Rev. 976, 979, 982; cases collected in annotated note 170 A.L.R. 449, 488-490.
As was stated by Vann, J., in Tabor v. Hoffman, supra, 118 N.Y. 30, 36, 37, 23 N.E. 12, 13, 16 Am.St.Rep. 740:
To the same effect is the opinion of Garrison, J., speaking for the Court of Errors and Appeals of New Jersey in reversing a defendants' decree, in Vulcan Detinning Co. v. American Can Co., supra, 72 N.J.Eq. 387, 67 A. 339, 343, 12 L.R.A.,N.S., 102:
It is clear that these principles apply to the case at bar, and plaintiffs are entitled to relief.
The court below after making appropriate findings of fact granted an injunction and ordered an accounting by defendants of the profits received. D.C. S.D.N.Y., 115 F.Supp. 28. The authorities cited supra show that this relief, in both its branches, is appropriate and indeed compelled...
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