361 F.2d 260 (1st Cir. 1966), 6692, Rogen v. Ilikon Corp.

Docket Nº:6692.
Citation:361 F.2d 260
Party Name:Neil ROGEN, Plaintiff, Appellant, v. ILIKON CORPORATION et al., Defendants, Appellees.
Case Date:June 02, 1966
Court:United States Courts of Appeals, Court of Appeals for the First Circuit

Page 260

361 F.2d 260 (1st Cir. 1966)

Neil ROGEN, Plaintiff, Appellant,


ILIKON CORPORATION et al., Defendants, Appellees.

No. 6692.

United States Court of Appeals, First Circuit.

June 2, 1966

Page 261

Robert J. Hallisey, Boston, Mass., and Louis Loss, Cambridge, Mass., with whom Richard M. Harter and Bingham, Dana & Gould, Boston, Mass., were on brief, for appellant.

Robert W. Meserve, Boston, Mass., with whom Alan R. Trustman, Laurence M. Johnson and Nutter, McClennen & Fish, Boston, Mass., were on brief, for appellee.

Before ALDRICH, Chief Judge, and McENTEE and COFFIN, Circuit Judges.


COFFIN, Circuit Judge.

This appeal tests the propriety of the district court's action in granting defendant's motion for summary judgment in a suit brought to recover damages for non-disclosure of material facts in connection with the sale of plaintiff's stock to defendant corporation. The pertinent section of the Securities Exchange Act of 1934, 10(b), 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5, promulgated thereunder, are set forth in the margin. 1

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Defendant corporation (Ilikon) was organized in 1960 by several doctoral candidates at the Massachusetts Institute of Technology (plaintiff and defendants Bonis and Sandven), and a business associate of the underwriter, defendant Wong. They were soon joined as both directors and stockholders by defendants Scott and Ansell. The purpose of the corporation was to do research and development work in materials engineering and science. Plaintiff had earlier formed an engineering and consulting firm which became a subsidiary of Ilikon. He was the key insider in Ilikon's promotion, and became president, secretary, and its largest single stockholder. 2

Plaintiff had conceived the idea of developing products of aluminum by blowing gas under pressure through a nozzle submerged in molten aluminum, producing aluminum bubbles. Work on developing this concept was turned over to Ilikon where a metallurgist consultant, Dr. Witt, working immediately under defendant Bonis and under plaintiff's general supervision, proceeded to adapt the general concept and work toward the production of an aluminum container suitable for commercial exploitation.

Experimentation went forward with molds of various materials, sizes, and shapes, different mixtures and pressures of gases, different alloys, temperatures, refinement of the nozzle, and a machine to lower and raise dies. By June 1961, an aluminum can had been 'blown' with the use of hand-operated machinery.

Subsequently monthly progress reports were made for July, September, October, November, and December. The December report outlined the work for January 1962, which included putting together or 'mating' the parts of the mechanized system. At this point the reports were terminated, apparently because of the consultant's dislike for excessive paper work.

On October 25, 1961, plaintiff wrote a sales letter to Reynolds Metals Company stating that Ilikon had developed a feasible method of fabricating aluminum cans and that it was time to consider commercial use. After an interim acknowledgement, the Reynolds Product Development Director replied, saying that Reynolds was 'always happy to hear from people who are interested in aluminum and our company' and enclosing a form for Illikon to fill out, which would release Reynolds from liability in connection with its use of any idea submitted. On receiving this letter, plaintiff took no further action.

Meanwhile, defendants and other Ilikon personnel were becoming dissatisfied with plaintiff's performance. Several extended absences, a progressive shortening of plaintiff's working day, an embarrassing consultation with a client, and disproportionate stock ownership were cited as specific reasons. An informal meeting was held to discuss the problem. A day later, January 19, 1962, the board dismissed plaintiff as president and secretary, and terminated his employment as of February 28. Defendant Bonis was elected president. Defendant Scott proposed that plaintiff sell 30,000 of his shares for $30,000 to help the company obtain needed financing, which offer plaintiff refused. The meeting adjourned, plaintiff and his father remaining as directors.

Plaintiff ultimately agreed to sell his stock in a document executed on April

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4, 1962. 3 The period of alleged misrepresentation and nondisclosure of facts material to such sale is that between January 19 and April 4. The areas of defendants' conduct complained of by plaintiff are three: nondisclosure of the reviving of Ilikon's negotiations with Reynolds; nondisclosure of the continuing technological progress on the aluminum can project; and defendants' allegedly false representations as to the market, made to depress the price plaintiff sought for his stock. The defendants, in addition to denying any material representation and the materiality of any nondisclosure, claim that the plaintiff, by his action and non-action in this period, conclusively demonstrated that he did not rely on any representations or lack of disclosure on the part of defendants.

Reynolds Negotiations

Five days after the directors' meeting discharging plaintiff, defendant Bonis, having discovered the exchange of correspondence between plaintiff and Reynolds, wrote Reynolds, enclosing the requested release. This led to a meeting in late February and an expression of interest by Reynolds in exploring outright purchase of Ilikon's rights, an exclusive license, and joint development by the two corporations.

A special meeting of Ilikon's board of directors was held on March 2, of which plaintiff had notice, but which he did not attend. Defendant Bonis reported to this meeting his discussions with Reynolds as to possible purchase, license, or joint development.

On March 8, Reynolds wrote Ilikon requesting specific proposals for sale, license, and joint development. This news was conveyed by letter from Bonis to Ilikon's directors with the admonition to treat it confidentially. A second meeting with Reynolds took place on March 23. Defendant Bonis had prepared an exclusive license proposal for which Reynolds would pay an initial license fee of $100,000, and minimum royalties reaching $1,000,000 a year in the fourth year. This was not shown to Reynolds but the general terms were discussed without reference to amounts. Subsequent meetings, correspondence, and telephone conversations followed until July 11, 4 when Reynolds, insisting on a permanently exclusive license, unacceptable to Ilikon, terminated the negotiations.

Plaintiff did not learn about any of these negotiations until some time after he signed the agreement of sale on April 4. On April 26 counsel for Ilikon, in response to a question from plaintiff's counsel as to rumors of Ilikon-Reynolds negotiations, confirmed the fact but said they were in a very preliminary stage. He agreed to keep plaintiff's counsel informed.

At some point after August 27, the closing date for completion of the transfer of plaintiff's stock, Ilikon made an approach to American Can Company and in December executed a license agreement with it, which is still operative, although commercial production has not yet been reached.

Technological Progress

The evidence of technological progress by Ilikon between January 19 and April 4 is as follows. Defendant Bonis testified to improving quality and control, with mechanization enabling the die to be lowered and raised and the nozzle to be centered more accurately. He said that the feasibility of the technique was observed by Reynolds in February and that there was some additional improvement before the March meeting. He admitted that some improvements were incorporated

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in a second patent application prepared on March 22. But he did not feel that any technical advances in the spring of 1962 were 'substantial'.

Ilikon's consultant, Witt, also felt that the advances made after June of 1961 were solutions of engineering problems rather than research. Ilikon's patent attorney said in an affidavit that one of his associates, who had started to revise the patent application in the fall of 1961, finally was able to visit Witt at Ilikon on March 22 to complete it, and that had there been any material developments in the interim he would have known of them.

On the other hand, the revised patent application reveals a substantially different mixture of gases. An affidavit of a metallurgist, offered as expert opinion by plaintiff, set forth the importance of 'a very large number of engineering details' to 'economic feasibility and the realization of automated commercial reproduction'. The affidavit, after asserting that in research of this type 'often some factor, believed to be of minor significance, turns out to be critical', concluded that the development of an automated or semi-automated machine and the discovery of the optimum ratio of oxygen to hydrogen constituted 'substantial and material' developments and 'would be of considerable interest and importance to any one trained in metallurgy and familiar with the goal of this project'. Plaintiff testified that consultant Witt had told him that the automatic machine, together with the 'new gas', developed since plaintiff left Ilikon, was responsible for the 'improved cans' and the 'great interest' that was displayed by Reynolds.

Plaintiff had not seen machinery used on the project since September or October of 1961. His last progress report was given to him orally by defendant Bonis in December. Between January 19 and April 4 he talked to no person associated with Ilikon concerning the progress of work. In an affidavit opposing summary judgment, he stated that, in December and...

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