Cherne Indus., Inc. v. Grounds & Associates

Decision Date06 April 1979
Docket NumberNo. 48046.,48046.
Citation278 NW 2d 81
PartiesCHERNE INDUSTRIAL, INC., Respondent, v. GROUNDS & ASSOCIATES, INC., et al., Appellants.
CourtMinnesota Supreme Court

Oppenheimer, Wolff, Foster, Shepard & Donnelly and Elmer B. Trousdale, St. Paul, for appellants.

Lapp, Lazar, Laurie & Smith and Gerald T. Laurie, Minneapolis, for respondent.

Heard before ROGOSHESKE, PETERSON, and YETKA, JJ., and considered and decided by the court en banc.

YETKA, Justice.

This is an appeal by defendants Grounds, Watkins, Peterson, and Grounds & Associates, Inc., from judgment ordered by Ramsey County District Court on June 10, 1977, and entered on July 28, 1977, awarding plaintiff Cherne Industrial, Inc., a permanent injunction restraining defendants from rendering services for a period of 2 years to Cherne's former or prospective customers, compensatory damages in the amount of $39,322.50, and punitive damages in the amount of $10,000 (against Grounds and Grounds & Associates, Inc.). The injunction was amended on July 7, 1977 to include only seven specifically named firms. Plaintiff-respondent filed a notice of review concerning the district court's denial of attorneys fees. We affirm.

The legal issues raised on this appeal are as follows:

1. Did the defendants breach their employment agreements by competing with plaintiff after termination of their employment?

2. Did the trial court err in finding that defendant had used confidential data and trade secret data taken from plaintiff?

3. May an injunction to enforce a covenant not to compete be issued after the contractual period of the covenant has expired?

4. May an injunction forbidding future conduct be used as a remedy for past use of confidential information where that information has lost its confidential character?

5. May an injunction forbidding future conduct be granted without a specific finding of irreparable injury?

6. Does an injunction limiting future preparation of operations and maintenance manuals operate as a prior restraint on defendants' First Amendment rights of free speech and expression?

7. Were the compensatory damages awarded to plaintiff consistent with the law and supported by the evidence?

8. Was the award of punitive damages against two of the defendants consistent with the law and supported by the evidence?

9. Was plaintiff entitled to attorneys fees as part of its recovery?

Plaintiff Cherne Industrial, Inc., was incorporated in 1960 and is involved in producing and distributing various products and services related to the sewage treatment industry. In 1969, after a Federal law was enacted requiring all newly constructed sewage treatment plants to have an operations and maintenance manual ("O & M manual"), Cherne began to develop the business of producing and marketing these manuals. It was one of the first entrants into this business on a national basis.

Cherne developed its own general format for the O & M manuals and internal standards for production. Federal regulations at that time were only one page in length. Cherne drafted a sample specification for its manuals and distributed it to consulting engineers, who purchased the manuals for the sewage treatment plants they designed.

To market O & M manuals, Cherne relied on its national network of independent representatives to compile lists of consulting engineers who might purchase an O & M manual from Cherne. Over a number of years, Cherne isolated and categorized engineers who were customers or prospective customers for O & M manuals.

Cherne was in the O & M manual business about 2 years before receiving its first order. During each of its first 5 years in the O & M manual business, from 1970 through 1974, Cherne lost money; its total loss was $141,224.12. Not until 1975 did Cherne make a profit in its O & M manual division.

In August or September of 1971, Cherne hired defendant Harry C. Grounds as a part-time consultant on various matters, including O & M manuals. Grounds is an engineer, registered in Minnesota and in three other states, and has a Bachelor of Science degree in civil engineering. Prior to working for Cherne, Grounds had never prepared an entire O & M manual and had never been in the specific business of preparing O & M manuals. On January 8, 1972, Grounds began working full-time for Cherne as an engineer and eventually became a vice president in charge of the O & M manuals division. Grounds' full-time employment at Cherne lasted until February 4, 1974, when he went into his own business; he served as a part-time consultant to Cherne on O & M manuals until June 20, 1974.

Defendant Paul R. Watkins was hired by Cherne on February 3, 1973, and became national sales coordinator for the O & M manual business. As national sales coordinator, Watkins was involved in supervising approximately 35 independent representatives of Cherne who were involved in selling O & M manuals. Watkins went with the representatives to call on customers and developed and taught methods of merchandising the O & M manuals. During the course of his employment, Watkins had extensive contacts with customers, Cherne representatives, and state and Federal regulatory agencies with approval authority over O & M manuals. Prior to working for Cherne, Watkins had no experience in the O & M manual business. Watkins voluntarily terminated his employment at Cherne on or about October 1, 1974, and went to work for Grounds on or about November 12, 1974.

Defendant Bruce Peterson was employed at Cherne Industrial, Inc., from October 16, 1972. He was hired as a coordinator for the O & M manual department at Cherne, and at the time of his termination he was a project manager of the technical production of O & M manuals. Peterson had no prior experience in the O & M manual area before going to work for Cherne. Peterson went to work for Grounds on or about March 12, 1975.

It was Cherne's policy to have its key employees sign an employment agreement requiring them never to use or disclose any confidential information, prohibiting them from taking such information from Cherne upon termination of employment, and restricting their right to compete with Cherne for 2 years with respect to its products or services. All three defendants signed such an agreement. These agreements were identical, except that Grounds' included an exception covering services rendered as a consulting engineer. The clause containing this exception was written by Grounds' attorney. Grounds signed the agreements of Watkins and Peterson as a witness.

While employed at Cherne, Watkins, Peterson, and Grounds had access to all of the records pertaining to Cherne's O & M manual business. All three took information from Cherne when they left.

Grounds testified that he had the following documents in his office from Cherne: a list of Cherne customers, a list of Cherne representatives, letters, memoranda, slides, two Cherne O & M manuals, territory evaluations, representative evaluations, and letter and phone reports pertaining to Cherne customers. Some of the memos written by Grounds were labeled "confidential."

When Watkins left Cherne, he took with him customer lists, lists of representative evaluations stamped "confidential," lists of territorial evaluations stamped "confidential," price lists stated to be confidential, costs and pricing data, technical data, correspondence and phone memoranda concerning customers, advertising materials, and an extensive chronological file of letters and documents, statistical information, financial data, a personal list of representatives of Cherne and other materials. Some or all of this confidential information was used by Watkins while soliciting business for Grounds. Watkins stated that he would not want certain confidential matters, such as prices, to fall into the hands of a competitor or a regulatory agency.

When Peterson left Cherne, he took a large volume of material such as correspondence with customers, regulatory agencies, and others, memoranda, age analysis of Cherne's accounts receivable, technical data, his chronological file, and other documents. Peterson testified that he had used some or all of this information while employed at Grounds. No one at Cherne authorized Peterson to take any information from Cherne.

Grounds and his employees developed a mailing list to solicit their own O & M manual business. Watkins used his Cherne contacts and other sources to develop this list. After joining Grounds, Peterson added to this list the names of firms and people with whom he had worked while employed at Cherne, taking these names from his chronological files. Peterson said that he, Watkins, or Grounds had contacted some of the firms on the list.

Early in 1975, a list of planned projects for which O & M manuals might be needed became available from the EPA. Defendant Watkins stated that he used such a list to compile lists of customer prospects.

On June 19, 1973, Grounds and Watkins, while both employed at Cherne, entered into a written "memorandum of understanding." The memorandum, signed by Watkins and Grounds, said, in part:

"We the undersigned, therefore mutually agree to collect and interchange data of any nature that will protect our positions and reputation should the use of such data become necessary. It is understood that such data shall not be used unless the undersigned both so agree."

Watkins said that he and Grounds had two discussions reminding each other to be conscientious about collecting data under the memorandum.

While still employed full-time at Cherne, Grounds was hired, without Cherne's knowledge or consent, to serve in a part-time capacity as an expert witness in environmental litigation that Grounds admitted could have proved embarrassing to Cherne. Grounds subcontracted some of the litigation work to his subordinate, Watkins. Some of this work may have been done by Grounds and Watkins at Cherne's office facilities at night. Grounds also did other unauthorized...

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT