Delaware Chemicals, Inc. v. Reichhold Chemicals, Inc.

• Decision Date: 07 February 1956
• Citation: 121 A.2d 913,35 Del.Ch. 493
• Parties: DELAWARE CHEMICALS, Inc., a corporation of the State of Delaware, Plaintiff, v. REICHHOLD CHEMICALS, Inc., a corporation of the State of Delaware, Defendant.
• Court: Court of Chancery of Delaware

Page 913

121 A.2d 913

35 Del.Ch. 493

DELAWARE CHEMICALS, Inc., a corporation of the State of Delaware, Plaintiff, v. REICHHOLD CHEMICALS, Inc., a corporation of the State of Delaware, Defendant.

Court of Chancery of Delaware, New Castle County.

Feb. 7, 1956.

Howard L. Williams and Edmund Lyons (of Morris, James, Hitchens & Williams), Wilmington, for plaintiff.

James R. Morford (of Morford & Bennethum), Wilmington, Albert G. Goetz (of Goetz & Goetz), Detroit, Mich., and Harry C. Bierman, New York City, for defendant.

SEITZ, Chancellor.

This is the decision on defendant's motion for summary judgment dismissing the entire complaint or, alternatively, a certain portion thereof ¹. It is also the decision on plaintiff's motion seeking judgment on its affirmative defense that defendant's counterclaims should be dismissed because of the statute of limitations.

Plaintiff's complaint contains two causes of action, one sounding in contract and the other in tort. The basic facts applicable to both causes of actions are the same. While certain facts are in dispute I believe the facts material to the decisions on the pending motions are undisputed. Plaintiff and defendant are Delaware corporations. Plaintiff has been engaged in the manufacture and sale of a chemical known as pentaerythritol ('penta') since August, 1947. Defendant corporation used and now uses large quantities of penta in the production of chemicals and chemical products.

On October 27, 1950, plaintiff and defendant executed the written contract which is the genesis of this lawsuit. Its terms must be set forth at some length. The agreement contains the following recitals:

'Whereas, Delaware [plaintiff] is in possession of certain chemical and engineering information, formulation, know how and other knowledge which the parties to this agreement understand to be a trade secret for the manufacture of Pentaerythritol and related Pentaerythritol products, hereinafter called P. E.; and

'Whereas, Delaware is willing for the consideration hereinafter set forth to sell the information and data in connection with the manufacture of P. E., together with providing the necessary services and instruction of Reichhold personnel in the method of production of P. E.; and

'Whereas, Reichhold [defendant] is willing to acquire such data and information and to undertake to enter into the production of P. E. at as early a date as possible. * * *'

The agreement then provided that plaintiff would forthwith impart to defendant all engineering and chemical information, formulation, know-how, data and other knowledge in its possession or to be developed by or for it pertaining to the manufacture and sale of penta. Plaintiff's employee, Spiller, was to be released from his contract with plaintiff so as to be able to enter defendant's employment in order to assist defendant in the training of personnel and in the construction of a plant to make penta. It was agreed that Spiller was not released from his contract with plaintiff so far as divulging trade secrets, except to defendant, was concerned. It was agreed that plaintiff would permit a staff of defendant's technicians and employees to enter its plant for training in the manufacture of penta, where they would have the assistance of Spiller and plaintiff's employees.

Plaintiff agreed to assist defendant in obtaining equipment and raw materials for the manufacture of penta and to perform any reasonable act to assure defendant of the successful manufacture of penta. Plaintiff agreed to continue to manufacture penta at full capacity at least until defendant commenced its manufacture; plaintiff to supply and defendant to buy at the prevailing market price all penta not contracted for by or committed to plaintiff's other customers.

As compensation for plaintiff's performance of the contract, defendant agreed to pay plaintiff as an advance royalty $17,000 at the execution data of the contract, $17,000 by note payable 30 days after date, and $16,000 by note payable 60 days after date. Defendant agreed to pay plaintiff a 'royalty' on all penta produced at rates set forth in the agreement. The payments were to begin when defendant started production and to continue for ten years. When the sum of the payments reached $275,000, defendant would take credit for the $50,000 advance made by the cash and notes.

Defendant undertook to commence preparation promptly for the erection of a plant to produce at least 1,000,000 pounds of penta per month. The plant was to be ready for operation in the first quarter of 1952. Defendant agreed to operate the plant for at least five years at the maximum possible productive rate consistent with defendant's best efforts and ability to use and sell penta, provided prevailing conditions did not render the production uneconomical.

It was agreed that if defendant did not perform in accordance with the foregoing provisions and had not paid plaintiff $275,000 in royalties (presumably in five years) plaintiff could freely use and divulge the information forming the subject matter of the contract.

Plaintiff agreed after receipt of $275,000 in payments to discontinue, at defendant's request, the manufacture of penta and to transfer its assets (with some exceptions) to defendant, presumably without further payment. Paragraphs 7 to 10 of the Agreement follow:

'7. Delaware [plaintiff] will not make, directly or indirectly, a similar arrangement with any other company or individual, and particularly will not give any information to an outsider about their process, trade secrets, know-how developed so far or to be developed in the future. This obligation remains in force for a period of ten years after the expiration of this agreement.

'Reichhold [defendant] shall not give any information about the process, know-how and trade secrets to any unauthorized person, firm or corporation outside the Reichhold organization.

'8. If this contract should be terminated due to a default by either party before the term herein provided, then that party in default shall not thereafter in any way or manner make known, disclose or communicate any information obtained through the terms of this contract to any person, firm or corporation, nor will they commit any act detrimental to the interest of the other party in the manufacture of sale of P. E.

'9. Delaware agrees that except as set forth in paragraph 3 during the term of this contract and for ten years thereafter not to directly or indirectly enter or continue in the manufacture of P. E., nor in any way or manner make known, disclose or communicate any information which is the subject matter of this contract to any person, firm or corporation.

'10. Reichhold may upon written notice delivered to Delaware prior to January 1, 1951, withdraw from the terms of this contract. If this agreement is terminated by virtue of the provisions of this paragraph, Reichhold will forfeit the payment of $50,000.00 made in accordance with paragraph 4 hereof. * * *'

Plaintiff alleges that after the execution of the agreement it disclosed to defendant all its engineering and chemical information, formulation, know-how and data and all other knowledge in its possession to enable defendant to commence the manufacture and production of penta on a commercial basis. Defendant admits that information, etc., was conveyed by plaintiff to it but denies that such information, etc., was valuable 'know-how'. This issue need not now be resolved.

Plaintiff permitted defendant to send its officers and employees to plaintiff's office and plant and permitted them complete access to all records and data in plaintiff's possession relating to the production of penta. Plaintiff permitted photographs to be taken and allegedly answered fully and completely all questions by defendant's officers and employees and in every way co-operated to the fullest extent possible in relaying to defendant all plaintiff's trade secrets relating to the manufacture and production of penta. Defendant has denied that a full disclosure was made or that plaintiff disclosed valuable trade secrets to defendant. I need not decide this now.

Plaintiff released George Spiller from his employment with plaintiff and permitted him to enter the employ of defendant to assist defendant in training its personnel in the techniques for the manufacture and production of penta and to assist in the construction of a plant to be used in such manufacturing.

By letter dated December 29, 1950, defendant elected to terminate the agreement pursuant to Paragraph 10 thereof.

After receipt of the termination notice, plaintiff through its agent discussed the agreement and termination thereof with the chairman of the board of directors of defendant and the said chairman stated, 'that defendant would always honor such contract and that the terms of said contract would at all times apply to the manufacture or production of pentaerythritol by defendant' (Para. 13). Defendant's answer denies this allegation but, once again, I need not now resolve this conflict.

In May 1954, plaintiff, acting upon information and belief, notified defendant in writing that it had reason to believe that the defendant intended to violate both the express and implied conditions of the agreement and the statement of the chairman of the board, and enter the business of manufacturing and producing penta.

Plaintiff alleges that defendant in willful violation of its agreement is now manufacturing penta or is manufacturing penta using a process which it obtained from plaintiff under the terms of the agreement, or is manufacturing penta by a process derived from the engineering and chemical information, formulation, know-how, data and other secret knowledge supplied by the plaintiff in trust and in confidence. Defendant denies these allegations and they are therefore in dispute. At this time they do not affect the pending motions.

Under its first cause of action plaintiff prays for...