Innovative Const. Systems, Inc., Matter of

• Decision Date: 09 July 1986
• Docket Number: No. 85-1142,85-1142
• Citation: 230 USPQ 94,793 F.2d 875
• Parties: In the Matter of INNOVATIVE CONSTRUCTION SYSTEMS, INC., Debtor-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 875

793 F.2d 875

230 U.S.P.Q. 94

In the Matter of INNOVATIVE CONSTRUCTION SYSTEMS, INC. Debtor-Appellant.

No. 85-1142.

United States Court of Appeals, Seventh Circuit.

Argued Sept. 17, 1985.

Decided June 17, 1986.

Rehearing Denied July 9, 1986.

Earl Munson, Jr., LaFollette, Sinykin, Anderson & Munson, Madison, Wis. for debtor-appellant.

Edwin J. Hughes, Stafford, Rosebaum, Rieser & Hansen, Madison, Wis., for appellee.

Before ESCHBACH, EASTERBROOK, and RIPPLE, Circuit Judges.

ESCHBACH, Circuit Judge.

The primary questions presented on appeal in this diversity action ¹ governed by Wisconsin law are whether (1) the defendants misappropriated the plaintiff's trade secrets, (2) the award of compensatory damages was excessive, and (3) the award of punitive damages was warranted by the evidence. The district court granted the defendants judgment notwithstanding the verdict, and in the alternative, a new trial on compensatory damages, and denied the award of punitive damages in its entirety. For the reasons stated below, we will reverse the judgment notwithstanding the verdict, and affirm the orders granting a new trial on compensatory damages and denying punitive damages.

I

Innovative Construction Systems, Inc. ("Innovative") is a Wisconsin corporation with its principal place of business in that state. Defendants Bowen Supply, Inc. ("Bowen Supply") and Sunbelt Brick Company, Inc. ("Sunbelt") are Georgia corporations with their principal places of business in Americus, Georgia. Defendant Harrold Bowen is president and chairman of the board of Bowen Supply and a director of Sunbelt. Both he and defendant Phillip Strand were at all times relevant to this appeal citizens of Georgia. (Hereinafter, unless otherwise indicated, the term "Bowen Supply" also refers to Sunbelt, Harrold Bowen, and Phillip Strand.)

In 1967, John Riley, an attorney, and Dorlen Hammon, a dentist, along with several others, formed Masonry Siding, Inc., to manufacture simulated brick panels for the home-building industry. Their product proved unmarketable, and Masonry Siding ultimately declared bankruptcy. In 1973, Riley and Hammon formed Innovative. Over the next several years they spent considerable time developing a new process for simulating brick paneling. The method they eventually developed required the application of three layers, composed of slag aggregate, cement, bonding agent, and slurry, to a four-by-eight-foot backing board. The resulting product was called "Panl Brick." The commercial value of the process consisted of the formulas that set forth the precise mixture of raw materials needed for each layer. These formulas were somewhat flexible in that the proportion of aggregate to water could be modified slightly to account for changes in temperature and humidity.

Hampered by insufficient operating capital, Innovative initially limited its marketing efforts to local home-improvement centers and to some outlets for national retailers. On November 15, 1977, Innovative entered into a distribution agreement with defendant Bowen Supply. The agreement gave Bowen Supply the exclusive right to sell Panl Brick to the manufactured housing market. Bowen Supply became, and remained, the only nationwide distributor of Panl Brick, and from late 1978 through 1981, sold virtually all the Panl Brick that Innovative could manufacture.

Bowen Supply was at one time interested in acquiring Innovative. On June 18, 1979, the parties met to discuss the matter. The course of their negotiations is disputed. According to Riley's testimony, Bowen Supply offered to purchase Innovative for royalties based on annual sales over a period of three to five years, the total amount of which was estimated to be $400,000.00. Bowen Supply claims that no offer based on royalties had been made. Duncan Knapp, executive vice-president for sales and marketing at Bowen Supply from 1973 to 1980, stated, however, that Bowen Supply did in fact make an offer based on royalties, and that it was disappointed when Innovative did not accept the offer.

In late September of 1979, Innovative employed defendant Strand, who eventually became plant manager. In the course of his duties, Strand was often in communication with Bowen Supply. In October of 1980, Bowen Supply told Strand that it was impressed with his abilities and would be interested in offering him a position should he leave Innovative. In mid-February of 1981, Strand went to Georgia to talk with Stewart Howell, a marketing officer for Bowen Supply at the time, and spent several hours discussing employment opportunities at Bowen Supply. Both Strand and Howell testified that they did not then discuss the possibility of Strand establishing a manufacturing facility to produce simulated brick for Bowen Supply in Georgia. Howell stated further that Bowen Supply at that time had also not entered into an agreement to employ Strand.

On the 15th or 20th of March 1981, Strand gave Innovative notice that he was leaving their employ. On March 31, Strand informed Howell that he would no longer be working for Innovative. Howell reiterated Bowen Supply's interest in setting up a manufacturing plant in Georgia under Strand's supervision or, if that proved unfeasible, of placing Strand in some other position. Strand indicated that he too was interested in organizing a facility for Bowen Supply. According to Howell's testimony, he had virtually given Strand a verbal guarantee of employment before Strand left for Georgia.

Strand's last day of employment with Innovative was April 2, 1981. He knew then that he would soon assume a position with Bowen Supply, and that, if he were to establish a manufacturing plant for Bowen Supply, Innovative would lose its only customer. Nevertheless, Strand did not tell Innovative of his plans. In fact he apparently told Innovative that he would be seeking employment in Colorado. After completing his duties that day, Strand loaded his furniture onto a waiting Bowen Supply delivery truck, and headed south to Georgia.

Shortly after arriving in Americus, Georgia on April 3, Strand began assessing the feasibility of manufacturing simulated brick paneling there. By April 8 or 9, he had located the raw materials necessary to begin operations. Strand testified that he intended to produce paneling almost identical to Panl Brick. Sunbelt was formed by Harrold Bowen, Harrold's brother Frank, and Strand in May of 1981, and it commenced production of brick paneling by June, with the first shipments made in July. Strand became vice-president of Sunbelt--his annual salary at Sunbelt was $24,000.00 as compared to the approximately $17,000.00 he received from Innovative.

At trial, Bowen Supply conceded that it used virtually the same manufacturing techniques which Innovative had developed for the production of Panl Brick. It did, however, modify the formulas Strand had acquired while employed by Innovative. These modifications were necessitated by differences in climate between Wisconsin and Georgia, as well as by the availability of slag aggregate. Innovative testified that the time Bowen Supply needed to develop workable variations to its formulas was insignificant compared to the effort it had expended developing the original formulas.

On May 12, 1981, Bowen Supply cancelled its distribution agreement with Innovative. Shortly thereafter, Innovative went out of business. On September 1, 1981, Innovative filed a petition in the United States Bankruptcy Court for the Western District of Wisconsin requesting relief under Chapter 11 of the Bankruptcy Code, 11 U.S.C. Secs. 1101-1174. The adversary proceedings forming the basis of this appeal were filed against Bowen Supply on March 28, 1982, and were transferred to federal district court for trial on August 26, 1983. In its complaint Innovative alleged four grounds for relief: (1) misappropriation of trade secrets under Wisconsin law; (2) restraint of trade in violation of the Sherman Act, 15 U.S.C. Sec. 1; (3) breach of an implied covenant of good faith under Wisconsin law; and (4) unfair competition in violation of the Lanham Trade-Mark Act, 15 U.S.C. Sec. 1125. On February 6, 1984, the district court dismissed Innovative's Sherman Act claim, and that for breach of an implied covenant of good faith. On August 9, 1984, the court granted summary judgment for Bowen Supply on Innovative's unfair competition claim, and granted partial summary judgment against Innovative on that portion of its trade-secrets claim relating to the manufacturing process. The only claim remaining for trial was that under Count I in which Innovative asserted that the formulas used in the production of Panl Brick were trade secrets.

The jury returned a verdict against all defendants on liability for misappropriation of Innovative's production formulas, and following a hearing on damages, awarded Innovative $225,000.00 in compensatory, and $100,000.00 in punitive damages. On December 21, 1984, the district court granted the defendants judgment notwithstanding the verdict, ² and in the alternative, denied the award of punitive damages and ordered a new trial on compensatory damages. This appeal followed. ³

II

A. Wisconsin Law of Trade Secrets

This is an action in diversity, and the parties agree that Wisconsin law governs the substantive issues presented. We see no reason to disturb that stipulation. Republic Steel Corp. v. Pennsylvania Engineering Corp., 785 F.2d 174, 178 (7th Cir.1986); Prudential Insurance Co. v. Sipula, 776 F.2d 157, 161 (7th Cir.1985). The doctrine of trade secrets arose out of efforts to "deal with a particular problem in American industry--employee mobility among key employees of an industrial concern." Abbott Laboratories v. Norse Chemical Corp., 33 Wis.2d 445, 453, 147 N.W.2d 529, 532 (1967). In deciding whether to protect information, a balance must be struck between the competing interest of an employer in precluding others from exploiting specialized...