504 F.2d 518 (5th Cir. 1974), 73-2688, University Computing Co. v. Lykes-Youngstown Corp.

Docket Nº:73-2688.
Citation:504 F.2d 518
Party Name:183 U.S.P.Q. 705 UNIVERSITY COMPUTING COMPANY, Plaintiff-Appellee-Cross-Appellant, v. LYKES-YOUNGSTOWN CORPORATION, Lykes-Youngstown Computer Services Corp., andOliver F. Shinn, Defendants-Appellants-Cross-Appellees.
Case Date:November 15, 1974
Court:United States Courts of Appeals, Court of Appeals for the Fifth Circuit
 
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504 F.2d 518 (5th Cir. 1974)

183 U.S.P.Q. 705

UNIVERSITY COMPUTING COMPANY, Plaintiff-Appellee-Cross-Appellant,

v.

LYKES-YOUNGSTOWN CORPORATION, Lykes-Youngstown Computer

Services Corp., andOliver F. Shinn,

Defendants-Appellants-Cross-Appellees.

No. 73-2688.

United States Court of Appeals, Fifth Circuit

November 15, 1974

Rehearing and Rehearing En Banc Denied Dec. 17, 1974.

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Charles F. Clark, Ted R. Manry, III, Tampa, Fla., R. Byron Attridge, Atlanta, Ga., for defendants-appellants-crossappellees.

Hugh M. Dorsey, Jr., W. Lyman Dillon Atlanta, Ga., for plaintiff-appellee-cross-appellant.

Before BROWN, Chief Judge, TUTTLE, Circuit Judge, and YOUNG, District judge.

TUTTLE, Circuit Judge:

I. FACTS

This case involves three separate claims for damages arising out of a complicated series of transactions between four corporations and a number of their executive officers. The trial lasted three weeks and the record is correspondingly lengthy and complex. We begin by briefly summarizing the critical facts.

a. Joint Venture Agreement Between UCC and LYC.

University Computing Company (UCC), a Texas corporation, and Lykes-Youngstown Corp. (LYC), a Delaware corporation, entered into a written agreement on July 1, 1969 to create jointly a new corporation, to be called Lykes-University Computing Company (Lykes/UCC), which was to offer computer

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services 1 in the southeastern United States. This enterprise was a new venture for LYC, which is a large diversified holding company active in insurance, shipping and other manufacturing enterprises. UCC was active in other parts of the country, particularly in the southwest, offering essentially the same services as Lykes/UCC was to offer. The joint venture was designed to open new markets for the sale of UCC's computer systems. 2

As part of their agreement and pursuant to it, UCC funded early operations of the new corporation, including payrolls, equipment purchases and other expenses. These expenditures totalled $66,647.45. 3 Several UCC employees were hired by the new corporation, including defendant Oliver Shinn who became President of Lykes/UCC. 4 The joint venture agreement provided UCC was to sell computer 'hardware' (i.e., computer equipment) and 'software' to the new corporation. UCC was further to receive 10% Of the gross disbursements of the new corporation for the first year for 'management services.' LYC agreed to have its various controlled subsidiaries (with the exception of Youngstown Sheet and Tube Co.) purchase computer services from the new corporation. The agreement did not set forth in any greater detail the manner in which the corporation was to be managed, or by whom.

The new corporation, Lykes/UCC, was chartered in Delaware, and its articles of incorporation provided for a Board of Directors to be composed of four individuals, who then had the option of electing a fifth. This was pursuant to the terms of the joint venture agreement which provided that UCC and LYC would each select two members of the Board of Directors of Lykes/UCC.

By October, 1969, before either party had contributed capital and before stock had been issued, the two original members of the joint venture came to disagree over the day-to-day management of Lykes/UCC. The original intent of the parties is now in dispute, with UCC pointing to the fee for 'management services' and other terms of the contract as evidence that it was intended to make operational management decisions, while LYC points to the terms of

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the contract, provisions of the Delaware Corporation Act and other extrinsic evidence to support its claim that the new corporation was to be wholly independent.

The parties aired their disagreements at a meeting held on September 30, 1969. The outcome of this meeting is now also in dispute. LYC claims UCC agreed to make a final decision, prior to October 7, about remaining in the joint venture and that in a telephone conversation on October 6 both sides agreed to terminate the joint venture. UCC claims the matter was left open at the meeting and thereafter, and that while both sides understood UCC would likely wish to withdraw, the terms of that withdrawal and the amount of compensation for initial expenditures and loss of prospective profits were left unsettled.

On October 7, 1969, a fourth corporation, Lykes-Youngstown Computer Services Corp. (LYCSC) was formed as a wholly owned subsidiary of LYC. Oliver Shinn became President of this corporation; all property formerly owned by Lykes/UCC was taken over by LYCSC, and the new subsidiary of LYC proceeded to enter into the business planned for Lykes/UCC. UCC had no part in the decision to create this fourth corporation, and UCC now claims it wasn't aware of the existence of LYCSC until a story on it appeared in the Wall Street Journal on October 14, 1969. It is undisputed that UCC did not authorize the creation of the new corporation, nor did UCC authorize the seizure of all Lykes/UCC's property.

While a draft of a rescission and termination agreement was prepared by UCC following the October 6 telephone conversation, and a copy was sent to LYC for its consideration, it is undisputed that the terms of UCC's withdrawal were unsettled and the parties remained in substantial disagreement over the amount of compensation UCC was to receive. The draft agreement was not signed.

During the period between July 1 and September 30, while the disagreement over the management of Lykes/UCC was developing, Oliver Shinn met twice with executive officers of LYC. UCC claims to have been unaware that these meetings were taking place. In any event, it is undisputed that UCC certainly was unaware of the matters discussed at these meetings. Among these topics discussed were the desirability of Lykes/UCC being independent of UCC and LYC, the burden of paying the 10% Management fee owed UCC under the joint venture agreement, and the fact that Shinn was confident the UCC name was unlikely to further sales efforts in the southeast where UCC was virtually unknown. Although one of the meetings Shinn had with LYC executives took place when he was still a Vice President of UCC, Shinn made it clear at the beginning of the meeting that he was there solely on his own behalf, and he felt no loyalty to his employer, UCC.

In preparation for the September 30 meeting between UCC and LYC, Shinn prepared a report which he made available only to LYC on a confidential basis. In that report Shinn demonstrated that for $688,000 LYC could fund a wholly owned subsidiary which would have substantially the same chances for success as the joint venture corporation, to which LYC had committed $500,000 for only half ownership. These secret meetings and the confidential Shinn memo were the primary evidence of LYC bad faith in terminating the joint venture agreement introduced at trial.

B. Misappropriation of AIMES III By LYCSC.

Among the computer systems Lykes/UCC was to market was a retail inventory control system owned by UCC called 'AIMES III.' (Automated Inventory Management Evaluation System). This system was designed to maintain information on inventory in

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retail department stores. 5 UCC had previously sold the system to Leonard's Department Store in Fort Worth, Texas, subject to a restrictive use agreement which limited Leonard's to private and confidential use of the system. Leonard's paid $41,700 for the rights to restricted use of AIMES III. Lykes/UCC was to offer this system, as well as several others designed and owned by UCC, to customers in the southeast. The joint venture agreement provided for discount sales of these systems to Lykes/UCC at no more than 20% Of UCC's development costs.

Following the incorporation of LYCSC (the newly created subsidiary of LYC), the new corporation proceeded to offer AIMES III to customers. Rather than purchase unrestricted rights to the system from UCC, LYCSC elected to steal the system from Leonard's. In December, 1969, LYCSC bribed an employee of Leonard's for $2500 to deliver a suitcase filled with computer tapes and other materials to an employee of LYCSC. In February, 1970, this same Leonard's employee was paid to fly to Atlanta from Dallas with additional tapes and documents once the materials originally obtained were found to be insufficient to run the system. With the new materials and the help of the Leonard's employee in installing the system in the LYCSC in-house computer, LYCSC was able to run the system in its entirety. 6

After receiving these materials in December, LYCSC attempted to market the AIMES III system. This marketing effort continued until April of the following year. Salesmen for LYCSC made offers to department stores in Atlanta, New Orleans and Tampa, Florida. In addition the system was offered to another computer services firm in Atlanta. While none of these offers was accepted, in several cases detailed sales presentations were made by sales representatives of LYCSC. A brochure was printed by LYCSC to assist the sales effort. 7

C. Judgment in District Court.

UCC brought this suit against LYC, LYCSC and Oliver Shinn claiming damages under seven Counts. Counts 1 and 2 were combined at trial into a single count against LYC for breach of the joint venture agreement. Count 3 charged a conspiracy among the three defendants to misappropriate UCC's trade secret, AIMES III; Count 4 charged a conspiracy among the three defendants to convert...

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