Adolph Gottscho, Inc. v. American Marking Corp.

• Decision Date: 03 March 1958
• Docket Number: No. A--72,A--72
• Citation: 139 A.2d 281,67 A.L.R.2d 816,26 N.J. 229
• Parties: , 67 A.L.R.2d 816, 116 U.S.P.Q. 533 ADOLPH GOTTSCHO, Inc., a corporation, Plaintiff-Respondent, v. AMERICAN MARKING CORPORATION, a corporation, Defendant-Appellant.
• Court: New Jersey Supreme Court

Page 229

26 N.J. 229

139 A.2d 281, 67 A.L.R.2d 816, 116

U.S.P.Q. 533

ADOLPH GOTTSCHO, Inc., a corporation, Plaintiff-Respondent, v. AMERICAN MARKING CORPORATION, a corporation, Defendant-Appellant.

No. A--72.

Supreme Court of New Jersey.

Argued Jan. 20, 22, 1958.

Decided March 3, 1958.

Robert R. Daly and Ralph G. Mesce, Newark, argued the cause for appellant.

Jerome C. Eisenberg, Newark, argued the cause for respondent (Eisenberg & Spicer, Newark, attorneys; Ralph Neibart, Newark, on the brief).

The opinion of the court was delivered by

JACOBS, J.

The defendant American Marking Corporation appealed and the plaintiff Adolph Gottscho, Inc. cross-appealed from a judgment entered in the Chancery Division on March 8, 1957. We certified on our own motion. R.R. 1:10--1(a).

In 1951 the plaintiff Adolph Gottscho, Inc. instituted its action against its former employee Jackson and others, including the defendant American Marking Corporation; its complaint alleged that Jackson had in confidence learned the plaintiff's trade secrets while in its employ and that he and the others were improperly using them; and the relief it sought included an injunction and accounting. After a lengthy trial Judge Speakman found in the plaintiff's favor (35 N.J.Super. 333, 114 A.2d 19 (Ch.Div.1954)), we affirmed (18 N.J. 467, 114 A.2d 438 (1955)) and the United States Supreme Court denied certiorari (350 U.S. 834, 76 S.Ct. 69, 100 L.Ed. 744 (1955)). The judgment entered by Judge Speakman on March 1, 1954 provided, in addition to injunctive relief, that Jackson and the defendant American Marking Corporation account to the plaintiff for 'all avails or profits' received by them in the manufacture and sale of machines embodying the plaintiff's secrets. After the judgment was entered and an appeal and been taken, the defendant applied to the Appellate Division for permission to complete orders from 26 customers 'in which about 80 per centum or more of the work had been accomplished.' The Appellate Division granted permission on condition that all sums received in payment of such orders be placed in trust pending further order of the court. The many later proceedings relating to this item need not be detailed nor need we deal here with the judgment of April 8, 1957 which determined that the defendant American Marking Corporation and others had violated the judgment of March 1, 1954 and were guilty of contempt. We are concerned here only with the defendant's appeal and the plaintiff's cross-appeal from the judgment (dated March 8, 1957) directing the defendant American Marking Corporation (and Jackson) to account to the plaintiff in the sum of $31,727.31 plus interest from March 1, 1954, and costs.

On June 18, 1956 Judge Sullivan (to whom the matter had been assigned) directed the defendant American Marking Corporation (and Jackson) to prepare an account of all avails or profits made or received by them and directed the plaintiff to file such exceptions as it considered appropriate. An account was prepared and the plaintiff filed 11 exceptions. On September 7, 1956 a pretrial order was entered which provided that a hearing would be held by the court 'limited to a determination of the correctness of the account filed only insofar as excepted by the plaintiff.' The first exception filed by the plaintiff complained that the defendant American Marking Corporation (and Jackson) had not charged themselves with profits after March 1, 1954, and referred particularly to the machines which were the subject of the application to the Appellate Division for permission to complete. During the hearing the court indicated that it was not concerned with profits after March 1, 1954 except on the sales of the aforementioned machines and as to those a supplemental account was submitted and the plaintiff filed exceptions. Judge Sullivan took the position that the earlier proceedings had established that the machines completed pursuant to the permission of the Appellate Division actually embodied the plaintiff's trade secrets; as he put it 'there wouldn't have been any permission required if they had not.'

Judge Sullivan allowed some of the exceptions and disallowed others; the defendant's present appeal is confined (1) to the court's allowance of exception No. 8 insofar as it related to the 20% Paid to National Machine Products Corporation on sales from American Screw Products Company (through National) to the defendant American Marking Corporation during the period from July 7, 1953 to March 1, 1954; (2) to the court's action in compelling an account for profits on sales of ink, type and solvents (exception No. 11); and (3) to the court's application of its rulings on the main account to the supplemental account. The plaintiff's cross-appeal is confined to its contention that the court erred in permitting the defendant American Marking Corporation to offset its losses in 1951 against its profits during ensuing years; on this issue, the appellant's briefs are silent although its reply brief does urge that the plaintiff's cross-appeal is barred by its acceptance of the sum awarded to it in the judgment of March 1, 1954 and its delivery of a satisfaction of judgment.

From July 7, 1953 to March 1, 1954 the defendant American Marking Corporation purchased machines amounting to $60,933.53 from National Machine Products Corporation which had in turn purchased them from American Screw Products Company. Half of the sales price received by the defendant was remitted by it to National which retained 20% Of the sum it received and remitted the balance to American Screw Products Company. The evidence indicates that National was simply a paper conduit which performed no significant functions, and the plaintiff persuasively urges that the sole reason for its creation was to siphon off part of the profits of the defendant American Marking Corporation. The dominating influence in the participating entities is John A. Cozzone. He and other members of his family are the partners in American Screw Products Company and his children are the stockholders, officers and directors of National Machine Products Corporation and the defendant American Marking Corporation. Judge Sullivan was satisfied that the dominating influence of John A. Cozzone, not only over American Screw Products Company and National Machine Products Corporation but also over defendant American Marking Corporation, existed throughout the period in question; he made the following finding which should not be disturbed on the record before us:

'The evidence also shows that out of total purchases some $60,933.53 represented purchases from or through National Machine Products Corp., another Cozzone family corporation.

'Without going into too much detail, it might be apropos to point out that, except for a short period of time, which is not material here, the defendant corporation did not manufacture any of the machines it sold, but simply ordered them from a manufacturing concern, as for example American Screw Products or Gus Reinke Machinery & Tool Company.

'Neither was the National Machine Products Corporation a manufacturing concern and on the sixty thousand-odd dollars' worth of orders it obtained from the defendant corporation, the National Machine Products Corporation merely placed the orders with American Screws Products which made and shipped the machines.

'When we consider that all three corporations were owned and controlled by the same family, no reasonable basis appears for placing this sixty thousand-odd dollars' worth of orders through National Machine Products instead of directly with American Screws Products, where the orders end up eventually anyway. The only tangible result was that the middle corporation added twenty per cent onto the cost of the machine to the defendant corporation, without rendering any adequate functions or service in return. The effect was to divert some of the profits which American Marking would otherwise make to National Machine Products. This is unjustified, according to the evidence, and the item of $60,933.53, representing purchases from National Machine Products, will only be allowed to the extent of eighty per cent thereof, or $48,746.83. * * *'

The appellant's brief asserts that exception No. 8 challenged 'only the fairness of the prices charged to American Marking Corporation' and that there was no proof submitted by the plaintiff as to what were fair prices. But the plaintiff's contention does not rest on the unfairness of the charge to the defendant; it rests primarily on the ground that actual profits of the defendant were diverted to the paper conduit, National Machine Products Corporation, and should for purposes of the accounting be considered as profits of the defendant. The exception was phrased broadly and was adequate to encompass the plaintiff's contention; thus it charged that American Screw Products Company, National Machine Products Corporation and defendant American Marking Corporation constituted one economic unit 'by reason of their relationship and their intercompany transactions and interests'; that defendant American Marking Corporation was required to pay to National Machine Products Corporation (and American Screw Products Company) such sums as were fixed by John A. Cozzone without regard to market value; and that the payments to National Machine Products Corporation (and American Screw Products Company) should not be allowed as deductions in calculating the net profits of the defendant American Marking Corporation. See Restatement, Torts, § 748, comment (b) (1938).

The judgment of March 1, 1954 does not in terms refer to ink, type and solvents, but it does provide that the defendant American Marking Corporation account for 'all avails or profits' received by it in the manufacture and sale of machines embodying the plaintiff's secrets. The machines will not operate without ink, type and solvents and the defendant sold these items...