Components for Research, Inc. v. Isolation Products, Inc.

• Decision Date: 28 April 1966
• Court: California Court of Appeals Court of Appeals
• Parties: COMPONENTS FOR RESEARCH, INC., a corporation, Plaintiff and Respondent, v. ISOLATION PRODUCTS, INCORPORATED, a corporation, Joseph Bianco, Colin Howard, Ralph Montall, and Hugh Ross, Defendants and Appellants. Civ. 22174.

Page 829

50 Cal.Rptr. 829

241 Cal.App.2d 726

COMPONENTS FOR RESEARCH, INC., a corporation, Plaintiff and Respondent, v. ISOLATION PRODUCTS, INCORPORATED, a corporation, Joseph Bianco, Colin Howard, Ralph Montall, and Hugh Ross, Defendants and Appellants.

Civ. 22174.

District Court of Appeal, First District,

Division 3, California.

April 28, 1966.

G. Joseph Bertain, Jr., San Francisco, Eugene W. Doyle, San Francisco, of counsel, for appellants Isolation Products, Inc., Joseph Bianco, Ernest Bianco and Ralph Montali.

Mass & Little, by James B. Little, San Jose, for appellant Hugh Ross.

Roger L. Mosher, McCloskey, Wilson, Mosher & Martin, Palo Alto, William Irwin Cohen, Palo Alto, of counsel, for respondent.

DRAPER, Presiding Justice.

Charged with misuse of plaintiff's trade secrets in a manufacturing process, defendant corporation and five individuals were enjoined from such use. Money damages also were awarded against them. All defendants appealed, but only the corporation and four individuals have filed briefs.

The court found that: Plaintiff corporation was organized in 1957, and began development of three basic lines of products for use in the electronics industry. Each involves use of metal conductors to transmit high electrical energy, using epoxy resin as an insulating material. The combination of like conductors and the same insulating material was known and had recognized value. But commercial production, by casting the metal conductor within the resin, presented substantial problems because of the differing expansion of the two materials under heat. Plaintiff spent an estimated $30,000 in experimentation and trial and error to solve this problem, and developed a technique for manufacture at costs which made the products marketable. Defendant Joseph Bianco was a director of plaintiff from its incorporation until January 1962. From May 20, 1960 to May 1, 1961, he was its sales manager. He had a dispute with the corporation as to its sales program and resigned as sales manager May 1. His brother, Ernest, was a director and production manager of plaintiff from January 17, 1957. He resigned as production manager September 15, 1961, and as director in January, 1963. Both Biancos, during their employment by plaintiff, participated in its experimental and development work, and became familiar with its production techniques, which were revealed only to employees. Upon termination of Joseph's employment as sales manager, although he remained a director of plaintiff, he began arrangements for the formation of defendant corporation as a competitor. He took with him drawings and customer lists of plaintiff. Ernest, after Joseph's departure but while he continued as plaintiff's production manager supplied Joseph with shop drawings of plaintiff, and advised and assisted him in organizing the new venture. Although Ernest remained a director of plaintiff, from September 15, 1961 he devoted full time to the new venture. Defendant Ross became a consultant for plaintiff about May, 1961, at the request of Joseph Bianco, although plaintiff had not authorized the employment. Ross' work had to do with testing of products. At about the same time, Joseph talked to Ross about assisting in formation of the competing business. Ross became a director and officer of defendant corporation in January, 1962. Defendant Montali became an officer and director of defendant corporation about the same time. He loaned the corporation some $10,000, which was its only financing, at least until issue of its stock in May, 1963. The corporation was incorporated October 31, 1961, and began operation that fall. In July, 1962, plaintiff sent to each defendant a notice that defendant corporation's manufacture of these products involved use of trade secrets disclosed in confidence to the Biancos, and a demand that they cease use of these trade secrets and of plaintiff's customer lists. Defendants' operations continued without change.

Much of defendants' argument is based upon the misconception that the essence of the trade secrets was the design of the three products. But it is clear that the developments made by plaintiff lay in the manufacturing process. New techniques permitted mass production and commercially feasible manufacture. Some modifications of basic design probably accompanied development of the efficient manufacturing process, but that process was the substantial development originated by plaintiff.

This production technique clearly falls within the definition of a trade secret (4 Rest., Torts, § 757, comment b; By-Buk Co. v. Printed Cellophane Tape Co., 163 Cal.App.2d 157, 166--167, 329 P.2d 147). Unlike the decision upon which defendants largely rely (Futurecraft Corp. v. Clary Corp., 205 Cal.App.2d 279, 23 Cal.Rptr. 198) this is a 'know-how' case, and the manufacturing process, unlike the design involved in Futurecraft, is not revealed by plaintiff's products themselves.

There is evidence to support the findings that plaintiff kept its process secret in the sense of limiting disclosure to its employees and in making even those disclosures confidential. There was some evidence to the contrary, but this fact issue was for the trial court (Ungar Electric Tools, Inc. v. Sid Ungar Co., Inc., 192 Cal.App.2d 398, 403, 13 Cal.Rptr. 268).

The Biancos cannot claim the right to use plaintiff's secrets because they participated, as employees, in the development of the process, rather than learning an already-developed process when they entered that employ. (Sequoia Vacuum Systems v. Stransky, 229 Cal.App.2d 281, 40 Cal.Rptr. 203; Daniel Orifice Fitting Co. v. Whalen, 198 Cal.App.2d 791, 797--799, 18 Cal.Rptr. 659.) Even in the absence of an express agreement against revelation of trade secrets, a director is under a fiduciary duty not to use or reveal them to the detriment of the corporation of which he is a director (Sequoia Vacuum Systems v. Stransky, supra, at pp. 285--286, 40 Cal.Rptr. 203.) Both Biancos continued as directors of plaintiff long after they became directly associated in the operations of defendant corporation. Each took drawings and other materials from plaintiff for use by the new corporation. The evidence fully sustains the conclusion that they violated their fiduciary duty to plaintiff. This violation is the essence of the tort, as demonstrated...