Ashland Management Inc. v. Janien

• Citation: 624 N.E.2d 1007,604 N.Y.S.2d 912,82 N.Y.2d 395
• Parties: , 624 N.E.2d 1007, 29 U.S.P.Q.2d 1059 ASHLAND MANAGEMENT INCORPORATED, Appellant, v. C. Christopher JANIEN, Respondent. and (a Third Party Action.)
• Decision Date: 22 November 1993
• Court: New York Court of Appeals

Page 912

604 N.Y.S.2d 912

82 N.Y.2d 395, 624 N.E.2d 1007, 29

U.S.P.Q.2d 1059

ASHLAND MANAGEMENT INCORPORATED, Appellant, v. C. Christopher JANIEN, Respondent. and (a Third Party Action.)

Court of Appeals of New York.

Nov. 22, 1993.

Paul, Hastings, Janofsky & Walker, New York City (Lawrence I. Weinstein, Lisa M. Buckley and Roger M. Milgrim, of counsel), for appellant.

Davis & Gilbert, New York City (Michael C. Lasky, Bruce M. Ginsberg and Howard Weingrad, of counsel), for respondent.

OPINION OF THE COURT

SIMONS, Judge.

This litigation involves a dispute between an investment management firm and a former employee. The employee developed a mathematical model for determining investment strategy and sought unsuccessfully to sell it to the firm. A dispute arose during the negotiations and plaintiff, Ashland Management Inc., instituted this action seeking to foreclose defendant from using his model. It alleged that the model is based upon trade secrets defendant misappropriated from the firm. Defendant claims he and plaintiff had agreed upon a contract for the use of the model and that plaintiff breached the contract. Defendant, therefore, counterclaimed seeking damages.

After a nonjury trial, Supreme Court found that the parties had entered into a contract and that plaintiff had breached it. Accordingly, the court awarded defendant damages of $625,000 for lost profits. It held further that the information available to defendant did not constitute a trade secret of Ashland and therefore defendant was not guilty of misappropriation. The Appellate Division, after a minor modification, affirmed the judgment, 190 A.D.2d 591, 593 N.Y.S.2d 790.

The principal legal questions presented concern the availability of damages for lost profits under the rule stated in our two decisions in Kenford Co. v. County of Erie, 67 N.Y.2d 257, 502 N.Y.S.2d 131, 493 N.E.2d 234 [Kenford I ]; and 73 N.Y.2d 312, 540 N.Y.S.2d 1, 537 N.E.2d 176 [Kenford II ] and whether the court applied the correct legal standard for trade secrets in determining the misappropriation claim.

I.

Ashland Management Inc. is a successful investment advisory company which manages over $1 billion in client funds. As part of its investment strategy, Ashland relies on a computerized mathematical stock selection model, known as Alpha, to analyze selected financial information and make an initial determination of which stocks should be bought and sold. Alpha is based on six selected financial criteria which are then evaluated according to various mathematical calculations. In its promotional materials Ashland discloses these criteria, but does not disclose the underlying mathematical calculations used to evaluate them. A decision to purchase or sell a stock selected by Alpha is made only after a detailed analysis by Ashland's money managers.

Charles Hickox is Ashland's chairman. Defendant Janien is Hickox's brother-in-law and was briefly employed by Ashland in 1981 after his graduation from college. Janien left plaintiff to attend the University of Pennsylvania's Wharton School of Business. He returned to Ashland as a consultant after completing his studies there. While at Wharton, Janien wrote a thesis which investigated the ability of various financial criteria, including the six criteria used by Alpha, to identify undervalued stocks. Based on his research he concluded that one particular model, which Janien named Eta, performed exceptionally well.

In 1985 Hickox and Janien entered into discussions about the development of a second investment model to be used by Ashland. Eta appeared to fit Ashland's needs for a long-term growth model to supplement Alpha's short-term characteristics and the parties entered into extensive negotiations to fix their rights and liabilities in its development and ultimate use. Five draft agreements were exchanged before they settled on a sixth writing, denominated Proposal 6. Proposal 6 provided that Janien was to construct a new stock selection model, that upon completion the model would be reviewed by an independent third party, and, if found satisfactory, ownership of the model would then be transferred to an Ashland subsidiary which would employ Janien and in which he was to have an equity interest.

Paragraph C(12) of the Proposal projected the minimum sums expected to be under management by the Eta model for each year between 1988 and 1992. It also provided that if these minimum objectives were not achieved, Ashland could terminate Janien's employment. Finally, paragraph C(21) provided that if "for any reason" Janien left Ashland's employment he was entitled to "a royalty of the higher of $50,000 or 15% of gross revenues per annum of any and all existing or future accounts" using the Eta model or "any derivative thereof". The gross revenue was the 1% fee charged customers by Ashland for the funds under management. In June of 1989, after the parties had settled on Proposal 6, Janien approached Hickox with the draft of a nondisclosure agreement. Hickox refused to sign or discuss the agreement, however, and terminated Janien's employment with Ashland.

After dismissing Janien, Ashland sought a permanent injunction which would bar Janien from using Eta. It asserted that Alpha was a trade secret of Ashland that formed an integral part of Eta. Ashland claimed, therefore, that any attempt by Janien to use Eta commercially would result in misappropriation of its trade secrets. Janien denied that Alpha was a trade secret or that he had misappropriated it and counterclaimed for damages, asserting that Ashland had breached the contract between the parties and that he was entitled to recover lost profits.

Supreme Court held that: (1) the parties orally agreed to be bound by the terms of Proposal 6; (2) Proposal 6 was a joint venture agreement; (3) defendant's proposed nondisclosure agreement was consistent with the terms of Proposal 6; (4) Hickox's refusal to negotiate the terms of the nondisclosure agreement and his termination of Janien constituted a breach of fiduciary duty under the joint venture agreement; (5) Janien was entitled to damages for lost profits based on the projections set forth in paragraph C(12) of Proposal 6; and (6) Alpha was not a trade secret and, therefore, Janien had not misappropriated Ashland's trade secrets.

The Appellate Division modified the judgment, concluding that since Proposal 6 did not contain an agreement to share losses, it could not be classified as a joint venture. The Court held that defendant was entitled to recover, nonetheless, because the parties had intended to be bound by Proposal 6 and Ashland had breached the agreement's implied duty of good faith and fair dealing by using the nondisclosure issue as an excuse for failing to implement the contract.

II.

Plaintiff first disputes that the parties had a contract or that Ashland breached it. It is a settled principle of contract construction, however, that when "the intent [of parties to be bound by an agreement] must be determined by disputed evidence or inferences outside the written words of the instrument * * * a question of fact [is] presented" (Mallad v. County Fed. Sav. & Loan Assn., 32 N.Y.2d 285, 291, 344 N.Y.S.2d 925, 298 N.E.2d 96 [citing O'Neil Supply Co. v. Petroleum Heat & Power Co., 280 N.Y. 50, 56, 19 N.E.2d 676]. Proposal 6 was the product of six months of detailed negotiations between the parties. The testimony surrounding these efforts, and of the parties' eventual satisfaction with its terms, provides support for the finding of the trial court, affirmed by the Appellate Division, that the parties intended to be bound by it. Accordingly , our power to review the question is at an end.

Plaintiff contends, however, that even if it is assumed there was an agreement, the Appellate Division erred in determining that it breached an implied covenant of good faith and fair dealing by its refusal to negotiate a nondisclosure agreement (see, Kirke La Shelle Co. v. Armstrong Co., 263 N.Y. 79, 87, 188 N.E. 163; see also, Ely-Cruikshank Co. v. Bank of Montreal, 81 N.Y.2d 399, 403, 599 N.Y.S.2d 501, 615 N.E.2d 985; see generally, Restatement [Second] of Contracts § 205; 2 Farnsworth, Contracts § 7.17[a] [2d ed 1990]. Plaintiff's position is that an implied covenant of good faith and fair dealing cannot create duties which are inconsistent with other terms of the contractual relationship and that here the nondisclosure agreement was inconsistent with the terms of Proposal 6 (see, Murphy v. American Home Prods. Corp., 58 N.Y.2d 293, 304, 461 N.Y.S.2d 232, 448 N.E.2d 86).

The contract provisions dealing with the transfer of ownership of Eta make clear that the parties considered confidentiality and determined that Janien was to retain some of the benefits of his work. Paragraph C(27) provided that no proprietary information associated with Eta would be disclosed without the consent of both the board of directors of Ashland and Janien and stated that all research performed before and after acceptance of the model, except as to proprietary information inherent in the model, remained the property of Janien. Under the terms of Proposal 6, Janien was required to present Ashland with detailed information concerning Eta, information which until then had been seen only by Janien and a professor at Wharton. Before doing so, Janien understandably wanted some agreement on the rights to his research. Thus, he requested Hickox to prepare a letter detailing those rights and implementing the confidentiality provisions of Proposal 6. Hickox agreed to prepare such a letter but neglected to do so. Accordingly, Janien brought the draft nondisclosure agreement with him to the meeting at which his research was to be disclosed to Hickox. Janien had based the agreement on a form book example, and told Hickox that it was intended only as a preliminary proposal. Nonetheless, Hickox rejected the draft out of hand and fired Janien.

Supreme Court...