Chelsea Industries, Inc. v. Gaffney

• Decision Date: 29 April 1983
• Citation: 389 Mass. 1,449 N.E.2d 320
• Parties: CHELSEA INDUSTRIES, INC. v. Lawrence A. GAFFNEY et al. 1
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

Page 320

449 N.E.2d 320

389 Mass. 1

CHELSEA INDUSTRIES, INC. v. Lawrence A. GAFFNEY et al. ¹

Supreme Judicial Court of Massachusetts Suffolk.

Argued Nov. 5, 1982.

Decided April 29, 1983.

Blair L. Perry, Boston (George Donovan, Boston, with him), for defendants.

Arthur M. Gilman, Boston (Michael Eby, Boston, with him), for plaintiff.

Before HENNESSEY, C.J., and LIACOS, ABRAMS, LYNCH and O'CONNOR, JJ.

ABRAMS, Justice.

The defendants appeal from a judgment of the Superior Court adopting and confirming the report of a master. The master found that the defendants were liable in damages to the plaintiff for setting up a competing business in violation of the fiduciary duty the defendants owed the plaintiff. The judgment ordered and adjudged the defendants to be "jointly and severally [liable to the plaintiff] in the amount of $496,009.72, together with costs." Essentially, the defendants claim that they "had the right to plan and prepare for creation of a competing business while carrying on the normal duties of their employment ... without disclosing their plans to the plaintiff." The defendants also assert that there is error in the awarding of damages. The case was transferred to this court on our own motion. We conclude that there are no errors of law, but that there are some computation errors which require that we remand this matter to the Superior Court for correction.

We summarize the master's subsidiary findings of fact. ² The defendants, Gaffney and McElroy, were executives of Ideal Tape Co. (Ideal), ³ one of twenty-six manufacturing divisions of Chelsea Industries, Inc. (Chelsea), a publicly held corporation. Ideal manufactures pressure sensitive tapes, ⁴ principally for sale to the shoe industry. The pressure sensitive tape business is highly competitive with annual sales of approximately one billion dollars. Ideal has accounted for approximately 70% of the sale of pressure sensitive tape to the shoe industry, and approximately 75% of its sales have been to the shoe industry.

Ideal's management offices and laboratory are located in Lowell, Massachusetts. In December, 1977, there were approximately 110 people working at the Lowell plant. Sales were made through salesmen employed by Ideal or through independent sales representatives. Ideal operates with a great deal of autonomy, but with general oversight from Chelsea's "shoe group" management.

Gaffney was hired by Ideal in 1970 and became its president and general manager in 1973, with complete responsibility for all operations, subject to Chelsea's limited supervision. ⁵ McElroy, a chemist, was hired by Ideal in 1964 and in 1976 became its vice president for research, development, and engineering. McElroy was responsible for Ideal's plant layout, machine design, product development, quality control and specification of raw materials. McElroy also was in charge of Ideal's laboratory.

The two other employees of Ideal who participated in the defendants' joint venture to set up a competing business were David Wormwood and Gerald Graff. Wormwood was vice president for manufacturing, responsible for production at Ideal's United States plants. ⁶ Graff, who had worked for Ideal for many years, became its United States shoe industry sales manager in 1975 and its vice president for domestic shoe sales in 1977. In both positions Graff was responsible for marketing Ideal's products to the domestic shoe industry, and for customer and sales personnel relations. None of the four executives had either a written employment, noncompetition, or nondisclosure agreement with Ideal, or was an officer or director of Chelsea. Ideal had two other executive employees, the comptroller and an individual in charge of international sales who spent most of his time outside the United States.

In December, 1975, Gaffney and McElroy decided to become "associated together in a joint venture" to form their own competing business and leave Ideal. ⁷ The defendants consulted an attorney relative to procedures to be followed in setting up a competing business. They commissioned persons to find a location on which to build a factory, and to help them find equipment substantially similar to that used by Ideal.

Gaffney and McElroy were joined by Graff in April or May of 1976, and by Wormwood in December, 1976. During 1976 and 1977, the defendants, assisted at times by Graff and Wormwood, began to establish the new company. One of their transactions involved the purchase of equipment suitable for making adhesives. Gaffney learned that Lightning Adhesive Company wanted to sell five pieces of mixing equipment as a unit for $31,000. Gaffney wanted to buy one piece of this equipment for Ideal. The market value of that piece was approximately $9,000. The defendants wanted another mixer for their own business. However, Lightning Adhesive Company would not sell the mixers individually. Using an equipment broker as a "straw" ⁸ to buy the equipment, Gaffney arranged for Ideal to purchase the one piece it needed for $14,000, paying $5,000 in excess of what he knew to be its fair market value and arranged for the defendants to purchase the remaining mixers for $17,000.

To this end, Gaffney had Ideal's comptroller prepare the necessary requisition to Chelsea and directed the straw to pay the comptroller a $500 "kickback" or bribe. The defendants gave the straw the $14,000 from Ideal and two bank cashier's or treasurer's checks totaling $17,000. Because these checks indicated that the defendants were the sources of the funds, the straw took the checks back to the banks and had new checks issued. He did this to conceal the defendants' participation. Ideal's equipment was delivered to it, and all the other equipment was shipped to the premises of a trucker engaged by Gaffney.

During 1976 and 1977, Gaffney, McElroy and Wormwood searched for, examined or evaluated equipment, which they wanted for their new business. They also attended auctions or other sales where such equipment could be bought. At some sales they were accompanied by the straw, and bids would be placed for Ideal and for the defendants' own business. Gaffney decided which equipment would be bid for Ideal, and which for the defendants' business, and the amounts to be bid. ⁹

In 1976 or 1977, Graff prepared and presented to Gaffney a list of prospective customers to whom, Graff indicated, he could sell pressure sensitive tapes for the new business. They subsequently destroyed the list. Graff and Gaffney had numerous discussions during 1977 with reference to potential sales of such tapes to specific users in the shoe industry, including companies then purchasing such products from Ideal. ¹⁰

With the defendants' knowledge, Wormwood, who had never before been interested, attended an equipment fair in Europe and visited Ideal's Belgium plant at Ideal's expense. The master found that this trip was designed to provide the defendants with information for their new business. During the trip Wormwood took extensive photographs of Ideal's plans and equipment in Belgium. The master found that this trip by Wormwood was not in the interests of Ideal.

The defendants also kept Phillip Dube, a dissatisfied maintenance mechanic who wanted to resign from Ideal, on Ideal's payroll for a few months, until September, 1977, when he went to work on the construction of the defendants' factory pursuant to an agreement with Gaffney. They replaced Dube with his son as a part-time maintenance mechanic. ¹¹ The master found that the defendants subordinated Ideal's interest by keeping Dube on Ideal's payroll until such time as they could put him to work on their own project.

In 1977, the defendants, Wormwood, and Graff, met at Ideal, at restaurants, and at their homes, to discuss the proposed new business. Every effort was made by the four men to keep their plans and activities secret. In the spring of 1977, the four men agreed that if one of them was discovered, all would leave Ideal at once. ¹²

In 1977, the only salesman working out of Ideal's home office was Frank DeMartino, a very competent salesman, who had established good personal relationships with major customers of Ideal in his area. DeMartino's sales had increased steadily during his four years with Ideal. In April, 1977, DeMartino complained to Graff of an excessive workload. Graff proposed turning several of the salesman's major accounts over to Gaffney's eighteen year old son, who had no sales experience. DeMartino refused to turn over the accounts even though Graff subsequently ordered him to do so. At Gaffney's request, DeMartino discussed the situation with Gaffney, who urged DeMartino to stay with Ideal, but did not countermand Graff's order. DeMartino resigned, and for several months thereafter, Ideal had no New England salesman. After the defendants, Graff, and Wormwood left Ideal, DeMartino returned to Ideal in an executive sales capacity.

Also during 1976 and 1977, Graff and Gaffney continued to travel extensively throughout the United States at Ideal's expense, visiting and entertaining Ideal's major customers and sales personnel. ¹³ In the master's general findings, he determined that their intent was to facilitate their own business's future sales.

In August, 1977, Gaffney, with some information supplied by his other joint venturers, applied for a Small Business Administration guaranteed bank loan for their new business, which he later received. As part of the application, he listed the equipment the company expected to use, including the mixers bought through the straw, and prospective sales and customers, most of whom were current customers of Ideal. In preparing this application, Gaffney informed some of these customers that he was planning to compete with Ideal, and discussed the potential of selling to them in the future.

Gaffney was responsible for recommending the rate of compensation for Ideal's other personnel, including recommending bonuses in accordance...