Burg v. Miniature Precision Components, Inc.

• Decision Date: 01 March 1983
• Docket Number: No. 81-1111,81-1111
• Parties: Michael BURG, Robert Friermuth, Louis Burg, partners, d/b/a Precision Injection Molding and Assemblies, a partnership, Plaintiff-Respondents, v. MINIATURE PRECISION COMPONENTS, INC., a domestic corporation, Defendant-Appellant-Petitioner.
• Court: Wisconsin Supreme Court

Page 192

330 N.W.2d 192

111 Wis.2d 1

Michael BURG, Robert Friermuth, Louis Burg, partners, d/b/a

Precision Injection Molding and Assemblies, a partnership, Plaintiff-Respondents, v. MINIATURE PRECISION COMPONENTS, INC., a domestic

corporation, Defendant-Appellant-Petitioner.

No. 81-1111.

Supreme Court of Wisconsin.

Argued Jan. 5, 1983.

Decided March 1, 1983.

John C. Wickhem, argued, Mark A. Schulz and Wickhem, Consigny, Andrews & Hemming, S.C., Janesville, for defendant-appellant-petitioner.

Larry W. Barton, argued and Nowlan & Mouat, Janesville, for plaintiffs-respondents.

BEILFUSS, Chief Justice.

This is a review of a decision of the court of appeals ¹ which affirmed the judgment of the trial court in favor of the plaintiffs in an action to recover the cost of products sold to the defendant.

Miniature Precision Components, Inc., (MPC), the defendant, is a corporation engaged in the production of small precision-made plastic parts, primarily for sale to the automobile industry. In March of 1976, the plaintiff Michael Burg (Burg) began working for MPC and soon became manager of the thermoplastic molding department. As manager of this department, Burg was responsible for maintaining adequate production of the plastic parts in order to meet MPC's customer demands. Whenever in-house production was inadequate to meet demand, Burg was authorized to locate outside vendors to produce the needed parts.

On October 1, 1977, while employed by MPC in this managerial position, Burg formed a partnership with Robert Friermuth and Louis Burg known as Precision Injection Molding and Assemblies (PIMA). ² From PIMA's inception the three partners agreed to conceal Burg's interest in and involvement with PIMA from MPC. During the formative stages of the partnership, Burg discussed the possibility of PIMA becoming an outside vendor for MPC. In his capacity as manager of the molding department, Burg arranged for PIMA to manufacture parts as an outside vendor for MPC. PIMA began delivering parts to MPC as an outside vendor on October 6, 1977 and continued in this activity until February 3, 1978. ³

Burg was fired by the president of MPC on January 23, 1978, prior to the time MPC learned of Burg's involvement with PIMA. He was terminated for poor job performance as manager of the molding department and for absenteeism. MPC employees testified that while Burg was initially a satisfactory employee, during the last six months to a year his performance deteriorated. There was testimony that during this period Burg's attendance was sporadic, he failed to keep the machines in his department running properly and the molding department in-house production declined. This coincided with an increased use of outside vendors in the latter half of 1977. There was further testimony that four to five months after Burg's discharge the molding department was able to meet customer demand so that the use of outside vendors was no longer necessary. Burg testified that he was doing a good job and maintained complete loyalty to MPC during this period. He testified that he worked long hours, including weekends and that he was often away from MPC visiting outside vendors as required by his position. During this period MPC's gross sales steadily increased as they had done throughout Burg's employment. ⁴

Shortly after Burg's termination MPC learned of his interest in PIMA and discontinued using PIMA as an outside vendor. Prior to this time MPC paid PIMA $10,248.24 for products delivered between October and December 12, 1977. Upon obtaining knowledge of Burg's involvement in PIMA, MPC refused to pay PIMA for goods invoiced at $24,186.52 and delivered to MPC between December 12, 1977 and February 2, 1978. The evidence was sharply disputed as to whether PIMA actually produced, or could have produced all the parts for which it billed MPC, whether MPC needed all the parts allegedly delivered, and Burg's role in establishing the quantities and prices of these parts.

PIMA commenced this action to recover the unpaid balance of the goods it delivered. MPC counterclaimed alleging that Burg, as an agent of PIMA, converted goods belonging to MPC ⁵ and violated his duty of loyalty to MPC. A trial was held to the circuit court for Rock county, Judge Mark J. Farnum. The trial court determined that MPC failed to controvert PIMA's proof that it delivered all the invoiced parts and awarded PIMA $24,186.52, offset by MPC's damages due to Burg's breach of loyalty. MPC damages, as found by the trial court, totalled $19,894.87, and included the profit PIMA made on its sales to MPC, computed at 20 percent of $34,434.76 or $6,886.80. ⁶ This amount did not include the salary paid to Burg during the period of his disloyalty. ⁷ MPC moved the court to reconsider its decision and to award MPC the total amount of Burg's salary as further breach of duty damages. The trial court denied this motion and entered judgment in favor of PIMA for $4,291.65 plus costs and interest. The trial court held that MPC had not met its burden of proof to recover a disloyal agent's compensation as established in Hartford Elevator, Inc. v. Lauer, 94 Wis.2d 571, 586a-87, 289 N.W.2d 280 (1980).

MPC appealed, claiming that the court erred in awarding PIMA any amount for the cost of the goods sold to MPC and in failing to award MPC the amount of Burg's salary paid during the period he had an interest in PIMA. The court of appeals affirmed. It held that while PIMA must account to MPC for any profits made in its sales to MPC, MPC would be unjustly enriched if PIMA was not allowed to deduct its legitimate business expenses from its gross receipts in determining these profits. On the compensation issue the court deferred to the trial court assessment of credibility and agreed that MPC had not met its burden of proof. ⁸ We granted MPC's petition for review.

The first issue on review is whether MPC was entitled to recover the salary it paid to Burg during the period of his disloyalty. Because we believe the trial court misapplied the burden of proof that is on the employer in order to recover compensation paid to a disloyal employee, we therefore remand the record to the trial court for a new trial on this issue.

The trial court found, and the record conclusively demonstrates, that Burg breached his duty of loyalty to MPC by secretly maintaining an ownership interest in a competing business and engaging in profit-making transactions with his employer. Burg did not challenge these findings on appeal. The issue here is whether the employer met its burden of proof in order to recover the compensation paid to the disloyal employee.

This court recently addressed this issue in Hartford Elevator, Inc. v. Lauer, 94 Wis.2d 571, 289 N.W.2d 280 (1980). Hartford Elevator involved an employee who misappropriated funds belonging to the employer. The trial court held that as a matter of law an employee who breaches his or her duty of loyalty to the employer must return the compensation paid during the period of the breach. This court reversed, rejecting this per se rule of recovery of the compensation paid to a disloyal employee, and instead placed the primary burden of proof on the employer to prove that due to the disloyalty it did not receive value for the compensation paid.

The court adopted the following equitable test:

"We conclude that whether the agent should be denied all or any part of his compensation during the period in which he breached his duty of loyalty depends on consideration and evaluation of the relevant circumstances with a view to avoiding unjust enrichment of or unjust deprivation to either the employer or employee. The circumstances to be considered include, but are not limited to, the nature and extent of the employee's services and breach of duty; the loss, expenses and inconvenience caused to the employer by the employee's breach; and the value to the employer of the services properly rendered by the employee. Cf. Town Plan & Eng. Assoc. Inc. v. Amesbury Spec. Co. Inc., 369 Mass. 737, 342 N.E.2d 706, 711 (1971). A consideration of these and other relevant factors, we believe, is consistent with established principles of equity and justice." 94 Wis.2d at 586a-87, 289 N.W.2d 280.

The court then set out the burden of proof to be applied when an employer seeks the return of compensation from a disloyal employee:

"The burden of proof to establish a right of the employer to recover compensation paid to the employee as a result of the employee's breach of duty owed to the employer is upon the employer. The burden to go forward with evidence to establish mitigating circumstances which would limit the employer's recovery is upon the employee." Id. at 587, 289 N.W.2d 280.

Under the framework established in Hartford Elevator it is not sufficient for the employer to show that the employee was disloyal. Rather, in order to recover wages paid, the employer must prove that the disloyalty so affected the employee's on-the-job performance that it would constitute unjust enrichment to allow the employee to retain the compensation. While the ultimate burden of proof does not change, once the employer establishes this prima facie case then the burden shifts to the employee "to go forward with evidence to establish mitigating circumstances" which would reduce or defeat recovery. This shifting burden analysis is based on principles of equity and attempts to avoid unjust enrichment by either the employee or the employer. The goal is to require the employer to compensate the employee only for services that were of value to the employer.

We believe the very nature of the conflict of interest involved here leads to the conclusion that the disloyalty affected job performance and that MPC did not receive full value for the compensation paid Burg as manager of the molding department. One of Burg's primary duties as manager of the molding department was to insure adequate production of the plastic parts...