WR Grace & Co. v. Hargadine

• Decision Date: 27 March 1968
• Docket Number: No. 17518-17520.,17518-17520.
• Citation: 392 F.2d 9
• Parties: W. R. GRACE & CO., Plaintiff-Appellant, v. Clyde C. HARGADINE, Defendant-Appellee. W. R. GRACE & CO., Plaintiff-Appellant, v. INTERCONTINENTAL CHEMICAL CORPORATION and Universal Chemicals, Inc., Defendants-Appellants. W. R. GRACE & CO., Plaintiff-Appellant, v. Clyde C. HARGADINE, Intercontinental Chemical Corporation and Universal Chemicals, Inc., Defendants-Appellees.
• Court: U.S. Court of Appeals — Sixth Circuit

392 F.2d 9 (1968)

W. R. GRACE & CO., Plaintiff-Appellant, v. Clyde C. HARGADINE, Defendant-Appellee.

W. R. GRACE & CO., Plaintiff-Appellant, v. INTERCONTINENTAL CHEMICAL CORPORATION and Universal Chemicals, Inc., Defendants-Appellants.

W. R. GRACE & CO., Plaintiff-Appellant, v. Clyde C. HARGADINE, Intercontinental Chemical Corporation and Universal Chemicals, Inc., Defendants-Appellees.

Nos. 17518-17520.

United States Court of Appeals Sixth Circuit.

March 27, 1968.

COPYRIGHT MATERIAL OMITTED

Thomas D. Heekin, and Robert T. Keeler, Cincinnati, Ohio, for W. R. Grace & Co.; Robert T. Keeler, Cincinnati, Ohio, on brief; Taft, Stettinius & Hollister, Cincinnati, Ohio, of counsel.

John S. Stith and James G. Headley, Cincinnati, Ohio, for Clyde C. Hargadine-Intercontinental Chemical Corporation and Universal Chemicals, Inc.; Frost & Jacobs, Cincinnati, Ohio, of counsel.

Before O'SULLIVAN, EDWARDS and COMBS, Circuit Judges.

EDWARDS, Circuit Judge.

These appeals record the bitter struggle which ensued when one industrial giant (W. R. Grace & Co.) sought first to merge with and then to purchase all the assets of another company (DuBois Chemicals, Inc.). The merger was defeated by the fact that two-thirds of DuBois' stockholders failed to approve it. The purchase was finally accomplished with the approval of a majority of the stockholders of DuBois.

But the purchase of all assets of DuBois for approximately $76,000,000 was completed over the bitter opposition of the Executive Vice President and General Manager of DuBois (Clyde C. Hargadine) and an important minority of DuBois' directors, stockholders and employees. The dissenting minority of officers and employees then established an operating company (Universal Chemicals, Inc.) and a sales company (Intercontinental Chemical Corporation) to compete generally in the same industrial chemical fields in which DuBois had previously operated and was continuing to operate as a division of W. R. Grace & Co.

Grace then brought suit in the United States District Court for the Southern District of Ohio against Hargadine and the two new companies, Universal and Intercontinental. Jurisdiction was founded upon diversity of citizenship.

The complaint, filed in three counts, alleged three different although closely related causes of action.

The principal claim alleged that defendants, Universal, Intercontinental and Hargadine, conspired to and did unlawfully appropriate trade secrets and customer information previously the property of DuBois. Plaintiff sought compensatory and punitive damages, and injunctive relief from defendants' continued use of the information and formulas claimed to have been unlawfully appropriated.

Another count alleged that the same defendants unlawfully induced some of plaintiff's employees to breach employment contracts in order to go to work for defendant companies in competition with plaintiff.

The third count alleged that Hargadine personally breached a covenant not to compete which he had once signed with a predecessor company to DuBois Chemicals, Inc., and to which covenant plaintiff Grace claimed it acquired full rights.

The case was tried for over a month before a United States District Judge and a jury in the Western Division of the Southern District of Ohio.

The breach of covenant claim against Hargadine was decided in favor of Hargadine by the District Judge on cross-motions for summary judgment. The balance of Grace's claims against the defendants were submitted to the jury on special questions and decided as indicated below:

Inducement of Employees — The jury was unable to agree as to defendants Hargadine and Intercontinental. As to defendant Universal, it found no cause for action.

Illegal Appropriation of Trade Secrets — The jury found for plaintiff against defendant Universal; was unable to agree on a verdict as to defendant Hargadine, and found no cause for action as to defendant Intercontinental.

Illegal Appropriation of Customer Information — The jury found for plaintiff against defendant Intercontinental and found no cause for action against defendants Hargadine and Universal.

A separate trial was held on the issue of damages to be awarded plaintiff Grace against defendants Universal and Intercontinental on the verdicts against them. The jury awarded plaintiff $240,000 compensatory damages and $95,000 punitive damages. The District Judge also entered an injunction forbidding Universal and Intercontinental from any continued use of the trade secret formulas or customer lists and requiring turnover of such documents. Following the jury verdicts the District Judge also granted defendants' motions to dismiss in relation to the appropriation of the trade secrets claim against Hargadine and the inducement issue against Intercontinental and Hargadine, holding that the evidence adduced at trial was insufficient to establish liability as to those counts and those defendants.

The three appeals styled and numbered above followed. A one sentence summary of the appellate posture might be that each party who lost on any issue appealed.

The contending parties press their assertions of error in fact and law upon us with much vigor. We shall deal with the appellate issues under four headings: The Damage Awards; The Directed Verdicts; The Hargadine Covenant, and Subsidiary Issues.

The Damage Awards

The competitive relationship between the contending parties is conceded. No appeal is taken as to the amount of damage. A pretrial stipulation recited these agreed facts:

"The plaintiff is engaged in manufacturing and selling specialized cleaning and processing compounds to industrial and institutional customers, principally manufacturing plants, hospitals, meat packers, dairies, hotels, restaurants, and the transportation industry, and is also engaged in the manufacture of and sale of chemicals and in the transportation of petroleum, agricultural and food processing products in the United States, and elsewhere.

"The defendant Intercontinental is engaged in the business of marketing and selling commercial soaps and detergents in competition with plaintiff.

"The defendant Universal Chemicals, Inc., is authorized to do business in the State of California. On September 16, 1964, it acquired ownership of the assets of Continental Chemical Company, located in Sacramento, California, and since that date defendant Universal has been manufacturing commercial soaps and detergents for sale to defendant Intercontinental, and others.

"The defendants, and those acting in concert with them, are actively engaged in the manufacture, sale and distribution of commercial and industrial soaps and detergents substantially competitive with those produced by plaintiff.

"The defendant Mr. Hargadine and his associates caused the defendant X.Y.Z., now known as Universal, to be organized July 9, 1964 for the purpose of manufacturing and marketing said competitive products, and the defendant Mr. Hargadine caused Intercontinental to be organized August 12, 1964 for the purpose of manufacturing and marketing said competitive products, although Intercontinental does no manufacturing of competitive products."

These incorporation dates cited above were approximately two and three months, respectively, after the sale of DuBois' assets to Grace, which had been consummated on May 6, 1964. And the principal incorporators, officers and salesmen for the two new companies were the former officers and salesmen of DuBois Chemicals, Inc., who had opposed first the merger and then the sale.

Conceding all of this, appellants Universal and Intercontinental contend, however, that they did nothing illegal. They argue that the jury damage awards against them must be set aside because there is no substantial proof that they illegally appropriated any of plaintiff's protectable trade secrets or customer information.

Since this case is brought under federal diversity jurisdiction and the alleged misappropriations took place principally in Ohio, we start with appellant's own trade secret tests drawn from Ohio law. In Cincinnati Bell Foundry Co. v. Dodds, 10 Ohio Dec.Rep. 154, 19 Weekly L. Bull. 84 (Super.Ct. 1887), Judge William Howard Taft provided this classic if simplified test:

"1st. Was the process a secret one?

"2d. Did John B. Dodds acquire knowledge of it in confidence, and under an implied obligation not to use or disclose it?" Cincinnati Bell Foundry Co. v. Dodds, supra at 156.

In discussing the facts from this lengthy record, appellee emphasizes primarily those which tend to establish defendants' obligation not to disclose, while appellants emphasize primarily those portions of the record which tend to reflect DuBois' lack of secrecy.

We believe that the proofs of important violations by agents of defendants of previously existing confidential relationships are overwhelming. Hargadine, himself, had been both Executive Vice President and General Manager of DuBois Chemicals, Inc. As such he had obvious access to all of the most important information upon which DuBois had built its undisputed success as the "Tiffany of the trade." If he did not himself have the product formulas and detailed customer information, he knew who did.

Dr. Edward B. Tooper was Vice President in Charge of Research and Development for DuBois Chemicals, Inc. He joined forces wth Hargadine and the group of ex-DuBois employees on July 30, 1964 — the day after severing his relationship with DuBois. He brought to the meeting with him notes of 150 of the DuBois formulas. There is repeated testimony that Hargadine in urging DuBois personnel to join the new venture referred frequently to the fact that "we have the DuBois formulas."

Joining in the July 29-30 meeting, and others which resulted in the foundation of the two defendant companies, were a considerable number of former DuBois salesmen and sales managers. Many of them, according to undisputed testimony, retained DuBois customer books and DuBois...