Kehoe Component Sales Inc. v. Best Lighting Prods., Inc.

• Citation: 796 F.3d 576,115 U.S.P.Q.2d 1900
• Decision Date: 05 August 2015
• Docket Number: No. 14–3347.,14–3347.
• Parties: KEHOE COMPONENT SALES INC., dba Pace Electronic Products ; Pace Technology Co. Ltd.; Estate of Frank Patrick Kehoe, Plaintiffs–Appellants, v. BEST LIGHTING PRODUCTS, INC., Defendant–Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (6th Circuit)

796 F.3d 576

115 U.S.P.Q.2d 1900

KEHOE COMPONENT SALES INC., dba Pace Electronic Products ; Pace Technology Co. Ltd.; Estate of Frank Patrick Kehoe, Plaintiffs–Appellants

v.BEST LIGHTING PRODUCTS, INC., Defendant–Appellee.

No. 14–3347.

United States Court of Appeals, Sixth Circuit.

Argued: June 18, 2015.

Decided and Filed: Aug. 5, 2015.

Rehearing Denied Sept. 14, 2015.

ARGUED:Ronald G. Hull, Underberg & Kessler LLP, Rochester, New York, for Appellants. Gregory P. Barwell, Wesp Barwell, Columbus, Ohio, for Appellee. ON BRIEF:Ronald G. Hull, Underberg & Kessler LLP, Rochester, New York, James D. Colner, Shumaker, Loop & Kendrick, LLP, Columbus, Ohio, for Appellants. Gregory P. Barwell, E. Joel Wesp, Quinn Schmiege, Wesp Barwell, Columbus, Ohio, for Appellee.

Before: GRIFFIN and DONALD, Circuit Judges; and TARNOW, District Judge.^*

OPINION

GRIFFIN, Circuit Judge.

This appeal stems from a manufacturer's decision to copy a former collaborator's products and market the cloned products as its own. After Best Lighting Products, Inc. (“Best”) brought to appellants (collectively, “Pace”) the idea to manufacture certain specialized lighting products for Best, Pace agreed to do so. But after Pace manufactured enough units to fill Best's product orders, Pace used the same molds (or “tooling”) to manufacture thousands of additional units of exactly the same products. Pace then began selling these cloned products under its own name to several of Best's customers, urging them to buy the identical product directly from Pace rather than from Best. The parties eventually sued each other, and, after a bench trial, the district court found Pace liable to Best for misappropriation of trade secrets under Ohio law, “reverse passing off” and false advertising in violation of the Lanham Act, breach of contract, tortious interference, conversion, and breach of warranties, and awarded compensatory and punitive damages, attorneys' fees, and injunctive relief.

Pace appeals. Although we agree with Best that the district court did not err in finding Pace liable for breach of contract and tortious interference, we agree with Pace that the district court erred in its resolution of the trade secrets claim, the Lanham Act claims, the conversion claim, and the warranties claim. We therefore affirm in part, reverse in part, vacate in part, and remand.

I.

Best designs and markets exit signs and emergency lighting products for commercial buildings. Since its beginnings in 1987, Best's modus operandi generally has been to model its products on other companies' patented products and then alter the products' design in order to make “something unique or different” about them and to produce them at a lower cost than competitors.

In 2000, Best began purchasing some of the parts for their products from Pace. Soon afterward, Pace began making fully assembled products for Best, to Best's specifications. Before this time, Pace had never manufactured any emergency lighting products. Because Pace had never before made these types of products, Best's founder, Alvin Katz, spent a significant amount of effort instructing Pace on how to manufacture the tooling necessary to make the particular products that Best wanted Pace to manufacture.

During the initial years of the companies' business relationship, there was no contract prohibiting Pace from competing with Best. As Katz put it, “In my world, if a guy shook hands and you promised to do something, you did it.... [I]s there a piece of paper? No, there was never a contract. We didn't do that.”

But Katz soon began to suspect that his confidence in his business partner's integrity had been misplaced. In August 2004, Katz emailed Pace's president complaining that Pace not only had begun selling products that were identical to the products that it made for Best, but also that Pace had begun selling them to Best's established customers. Apparently, Pace was filling orders for Best and then using the same tooling to manufacture additional units of exactly the same products. Pace then sold these cloned products as its own, bypassing Best.

The companies' interactions soon became filled with strife. In 2005, Best complained that some of the products that had been manufactured for it by Pace were defective. The parties negotiated an agreement referred to as “the Big Wash” in which Pace transferred to Best ownership of some of the tooling that was used to manufacture the products in question. In 2006, Best refused to pay for a substantial number of products that Pace had delivered to it, and Pace stopped shipments to Best.

To resolve the impasse, the parties negotiated a Supply Agreement effective January 10, 2007, and lasting one year. Best agreed to pay its outstanding debt to Pace and to purchase a minimum of $7 million worth of products from Pace annually, and Pace agreed to a variety of provisions, including to warrant the quality of the goods, not to “use any tooling owned by Best other than for the manufacture of products for sale to Best,” to “assign[ ] to Best all designs and intellectual property ... for products developed or to be developed at or by Pace for Best,” and neither to “sell emergency lights or exit signs nor ballasts, nor solicit sales of these items to any party in North America without Best's prior written consent.”

Pace received several purchase orders for cloned products from North American companies before the Supply Agreement came into effect, and it shipped products to fill these orders after the agreement came into effect.

Best continued to complain that Pace was manufacturing defective products, and by April 2008, Best told Pace that “we are at a point where we both know we will not be doing any more business.” Best requested that Pace return the tooling that Best owned, especially to prevent Pace from “using our tooling to make product for other customers.”

By the time the parties stopped their ongoing commercial relationship, Pace was in possession of all of the tooling that had been used to manufacture both Best's products and the cloned products, and Best owed Pace almost $900,000 for products delivered but not yet paid for.

In August 2008, Pace filed a diversity action against Best in federal district court, alleging that Best had breached its contractual obligations by failing to pay for the $900,000 worth of products that Pace had delivered to it. See Kehoe Component Sales, Inc. v. Best Lighting Prods., Inc., No. 2:08–cv–00752–EAS–TPK, DE 2, PgID 4–5 (S.D.Ohio). Best requested a setoff of damages for breach of warranty and counterclaimed for breach of contract, tortious interference, misappropriation of trade secrets, conversion, and fraud. See id. at DE 8, PgID 30, 37–45.

The parties were still litigating the case two years later in August 2010 when Pace filed a separate action against Best in Ohio state court, alleging that Best's counterclaims had it entirely backward: according to Pace, Best had misappropriated Pace's trade secrets and Best had tortiously interfered with Pace's contracts. Best removed the suit to federal court and responded in September 2010 not only with the same counterclaims that it had previously alleged in 2008, but also with many new ones, including several claims under the Lanham Act and for patent infringement. (These counterclaims were later amended.) The removed case was consolidated with the parties' still-pending federal-court litigation.

The parties eventually filed cross-motions for summary judgment, which the district court granted in part and denied in part. After a bench trial on the remaining claims and counterclaims, the district court found that Best had breached its contractual obligations by failing to pay for the products that Pace had delivered, but that Pace was liable to Best for breach of warranties, breach of contract, tortious interference, misappropriation of trade secrets, conversion, and both false designation of origin and false advertising under the Lanham Act. (Best previously conceded that its patent infringement claims were without merit.) The district court awarded Best $1,133,697.10 in compensatory damages, $200,000.00 in punitive damages, and $851,102.85 in attorneys' fees. The district court also entered an order permanently enjoining Pace from manufacturing the cloned products in question and from using or referencing products that “originated with Best” in its marketing materials.

Pace appeals.

II.

The first issue in this appeal is a question of timing: Pace argues that Best's trade secrets claims were time-barred by the statute of limitations. The district court disagreed. Its interpretation of the statute of limitations is a question of law that we review de novo. Peabody Coal Co. v. Dir., Office of Workers' Comp. Programs, 718 F.3d 590, 593 (6th Cir.2013).

Ohio's Uniform Trade Secrets Act (“OUTSA”)—under which Best's claims arose—requires that “[a]n action for misappropriation shall be commenced within four years after the misappropriation is discovered or by the exercise of reasonable diligence should have been discovered. For the purposes of this section, a continuing misappropriation constitutes a single claim.” Ohio Rev.Code § 1333.66. The district court found that “the actual injury that started the clock came in August of 2004,” when Best's founder, Alvin Katz, learned that Pace was selling to Best's customers products that were facsimiles of Best's wares and confronted Pace about it. Best, however, did not file its OUTSA counterclaims against Best until more than four years later—in October 2008. See Kehoe Component Sales, Inc. v. Best Lighting Prods., Inc., No. 2:08–cv–00752–EAS–TPK, DE 8, PgID 41–42 (S.D.Ohio).

Despite the fact that Best filed its OUTSA claims more than four years after learning that Pace was using Best's purported trade secret—its “know-how” about the emergency lighting design and manufacturing process—to compete with Best, the district court concluded that Best's filing was timely because “Pace misappropriated Best's...