Bryan v. Kershaw

• Decision Date: 02 November 1966
• Docket Number: No. 23017.,23017.
• Citation: 366 F.2d 497
• Parties: John F. BRYAN, Jr. and Lester N. Hambrick d/b/a Trakwork Equipment Company, Appellants, v. Royce KERSHAW et al., Appellees. Royce KERSHAW et al., Appellants, v. John F. BRYAN, Jr. and Lester N. Hambrick, d/b/a Trakwork Equipment Company, Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

366 F.2d 497 (1966)

John F. BRYAN, Jr. and Lester N. Hambrick d/b/a Trakwork Equipment Company, Appellants, v. Royce KERSHAW et al., Appellees.

Royce KERSHAW et al., Appellants, v. John F. BRYAN, Jr. and Lester N. Hambrick, d/b/a Trakwork Equipment Company, Appellees.

No. 23017.

United States Court of Appeals Fifth Circuit.

September 27, 1966.

Rehearing Denied November 2, 1966.

D. Carl Richards, Richards, Harris & Hubbard, William D. Harris, Jr., Dallas, Tex., for John F. Bryan, Jr. and Lester N. Hambrick, doing business as Trakwork Equipment Co.

Fred Ball, Montgomery, Ala., Gordon H. Rowe, Jr., Dallas, Tex., Leachman, Gardere, Akin, Porter & DeHay, Dallas, Tex., for Kershaw Manufacturing Co.

Before GEWIN and THORNBERRY, Circuit Judges, and WEST, District Judge.

THORNBERRY, Circuit Judge:

This is an appeal from an order of the United States District Court for the Northern District of Texas enjoining appellants, Bryan and Hambrick, from duplicating or using to commercial advantage until September 21, 1966 a "railroad track undercutter of the type having a self-loading feature" which they had built. Appellee Kershaw Manufacturing Company, hereafter referred to as Kershaw, attacks by cross-appeal the limited duration of the injunction.

Kershaw is a manufacturer of railroad maintenance equipment. Prior to this action, it had developed a "railroad track undercutter with a special self-loading feature." At the time of such development, appellee Bryan was employed by Kershaw as chief engineer of research and development of railroad equipment and was familiar with the undercutter and all aspects of its development. The Kershaw undercutter is a sizeable, complex, and expensive machine that required four to five thousand man-hours for its development. In May, 1963, a subsidiary of Kershaw leased a number of the undercutters to various railroad companies. In early 1964, appellant Hambrick, having recently entered the railroad maintenance field, attempted unsuccessfully to purchase a Kershaw undercutter. Subsequently, Hambrick persuaded Bryan to come to work for him and to design similar machinery. Upon termination of his employment with Kershaw, Bryan agreed not to encroach upon Kershaw's developments in the off-track field, and in turn was told that he was free to pursue application of his "own ideas." Bryan immediately began the design of an on-track undercutter found by the district court to be "substantially and functionally the same as the Kershaw undercutter" although not a "Chinese copy."¹

Upon suit by Kershaw, the district court, sitting without a jury, found that the development and design of the Kershaw undercutter were trade secrets, that Bryan obtained knowledge of the same under circumstances from which he should have reasonably concluded that Kershaw desired such secrets to remain confidential, and that he made use of this knowledge in the development of the Hambrick undercutter in breach of confidence. From these facts, the Court concluded that Kershaw was entitled to relief and enjoined Bryan and Hambrick from duplicating, using or selling their undercutter until September 21, 1966, the injunction running for the time found necessary to remove the competitive advantage gained through the illegally used trade secrets. For the reasons set out below, we AFFIRM.

I.

Appellants raise objections to numerous findings of fact made by the court below. The evidence in the record reveals that all factual contentions raised were hotly contested and supported by considerable evidence on each side. It is a settled rule of appellate review that factual findings must stand on appeal unless clearly erroneous. Thus, the reviewing court should reverse only when, after a careful examination of the entire record, it is left with a firm conviction that a mistake has been committed and injustice done. Glasscock v. United States, 4th Cir. 1963, 323 F.2d 589; Cedillo v. Standard Oil Co., 5th Cir. 1961, 291 F.2d 246, cert. denied 368 U.S. 955, 82 S.Ct. 397, 7 L.Ed.2d 387; Squirrel Brand Co. v. Barnard Nut Co., 5th Cir. 1955, 224 F.2d 840, cert. denied 350 U.S. 995, 76 S.Ct. 545, 100 L.Ed. 860. Furthermore, the burden assumed by the party attempting to show such mistake is especially strong where the findings are primarily based upon oral testimony and the trial judge has viewed the demeanor and judged the credibility of the witnesses. Horton v. United States Steel Corp., 5th Cir. 1961, 286 F.2d 710; Galena Oaks Corp. v. Scofield, 5th Cir. 1954, 218 F.2d 217.

Appellants claim that the trial court erred in finding that Bryan breached an obligation of confidence owed to appellee. Furthermore, appellants assert that this determination is a conclusion of law and not a finding of fact, and therefore it is not protected by the clearly erroneous standard upon review. Notwithstanding this contention, we feel that the finding of a breach of confidence is one of ultimate fact and that the finding made is neither clearly erroneous, nor based upon an incorrect view of the Texas law.

Appellant Bryan, during the development of the Kershaw undercutter, was head of research and development at Kershaw, took part in all phases of the machine's development, and was familiar with its market potential. Evidence was presented showing that Bryan orally agreed as a condition of employment that all ideas developed while he was an employee would be the property of Kershaw. It is also clear from the record that Bryan was aware of Kershaw's willingness to protect his development rights through resort to the courts. From such evidence the trial judge reasonably found that Bryan knew or should have known that Kershaw considered his knowledge of the undercutter confidential.

The other contested findings of fact made by the trial judge likewise find ample support in the record. Being ever mindful of the proper function of the Courts of Appeal when reviewing fact findings of the trial court, we cannot say that any here subject to attack are clearly erroneous.

II.

Because of the view we take concerning the correctness of the judgment as to each appellant, it will aid clarity if we discuss separately the cases against Bryan and Hambrick. It is important to note that this controversy is in the federal courts solely by virtue of our diversity jurisdiction. The duty thus rests upon us to decide the substantive issues under the applicable local law — in this case the law of Texas. 28 U.S.C. § 1652; Erie R. Co. v. Tompkins, 1938, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188; Ruhlin v. New York Life Insurance Co., 1939, 304 U.S. 202, 58 S.Ct. 860, 82 L.Ed. 1290.

The Injunction Against Bryan

As stated earlier, the trial court was warranted in finding that Bryan knew or should have known that the information acquired by him while in Kershaw's employ was confidential. Appellants assert, however, that Bryan's duty to refrain from making use of this information ceased when the Kershaw undercutter was made public. Thus, they reason, there was no breach of confidence and no basis for injunctive relief. This, we conclude after thorough research, is not the Texas law. We hold that where an employee has in confidence gained information concerning a machine incorporating trade secrets and has divulged or attempts to divulge the same after the device has become public by some other means, the Texas law labels such conduct a breach of confidence and will enjoin the reaping of benefits therefrom. While the Supreme Court of Texas has not been faced with this exact fact situation, a Court of Civil Appeals has decided a case in point, Atlas Bradford Co. v. Tuboscope Co., Tex.Civ.App. 1964, 378 S.W.2d 147. In holding the employee vulnerable to injunctive relief, the court stated:

Where one, as a result of a confidential relationship, gains knowledge of the "trade secret" of another, prior to its being patented, and while it is still a "trade secret"; and after the matter has been patented, uses or discloses the information, our courts deny him resort to the patent on the theory that a person\'s wrongful acts may deprive him of the right which he would otherwise have as a member of the public (emphasis in the original). Id. at 149.

A federal court is not compelled in all instances to follow the decisions of an intermediate state court on questions of local law. However, in the absence of strong indications that the state's highest court will not adopt the same view, such holdings are to be considered determinative. Fidelity Union Trust Co. v. Field, 1940, 311 U.S. 169, 61 S.Ct. 176, 85 L.Ed. 109; National Surety Corp. v. Bellah, 5th Cir. 1957, 245 F.2d 936.

Language in recent Texas Supreme Court cases further supports the view that appellant Bryan was properly enjoined. Hyde Corporation v. Huffines, 158 Tex. 566, 314 S.W.2d 763, and K & G Oil Tool and Service Co. v. G & G Fishing Tool Service, 158 Tex. 594, 314 S.W. 2d 782, are companion cases decided by the Texas court in 1958. In K & G Oil Tool, the defendant licensee gained confidential information through the licensing relationship and later appropriated such knowledge to its own use. Whether the information thus appropriated constituted a trade secret was hotly contested. The Texas Supreme Court, however, clearly stated that the breach of confidence and the damage caused thereby, not a continuing existence of complete secrecy of the information, was the controlling issue. In support of this view, the court cited with approval an opinion of the United States Court of Appeals for the Seventh Circuit.²

How did defendant learn of plaintiffs\' design?

And this, we regard as the proper test.

* * * * *

It is unquestionably lawful for a person to gain possession, through proper means, of his competitor\'s product and, through inspection and analysis, create a duplicate, unless, of course, the item is patented. But the mere fact that such lawful acquisition is available does not mean that he may, through a breach of

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