Ed Nowogroski Ins., Inc. v. Rucker

• Decision Date: 13 October 1997
• Docket Number: No. 37893-7-I,37893-7-I
• Citation: 944 P.2d 1093,88 Wn.App. 350
• Court: Washington Court of Appeals
• Parties: ED NOWOGROSKI INSURANCE, INC., a Washington corporation, Appellant, v. Michael RUCKER and Monica Rucker, and their marital community; Defendants, Darwin Rieck and Mary Rieck, and their marital community; Appellants, Jerry Kiser and Jana Kiser, and their marital community; Defendants, and Potter Leonard and Cahan, Inc., a Washington corporation, Appellants.

Page 350

88 Wn.App. 350

944 P.2d 1093

ED NOWOGROSKI INSURANCE, INC., a Washington corporation, Appellant, v. Michael RUCKER and Monica Rucker, and their marital community; Defendants Darwin Rieck and Mary Rieck, and their marital community; Appellants Jerry Kiser and Jana Kiser, and their marital community; Defendants and Potter Leonard and Cahan, Inc., a Washington corporation, Appellants.

No. 37893-7-I.

Court of Appeals of Washington,

Division 1.

Oct. 13, 1997.

Steven H. Winterbauer, Winterbauer & Associates, Seattle, for Appellants.

Charles E. Watts, Oseran Hahn Van Valin & Watts, Bellevue, for Respondent.

COLEMAN, Judge.

Ed Nowogroski Insurance sued former employees for soliciting its clients with confidential information. The trial court ruled that the employees had misappropriated Nowogroski's trade secrets by retaining and using client lists and other documents. But it awarded no damages for one individual's solicitation of clients with memorized information. Because there is no legal distinction between written and memorized information under the Uniform Trade Secrets Act (UTSA), we hold that the memorized information also constituted trade secrets and remand for a recalculation of damages.

Nowogroski sells and services personal and commercial insurance lines. Donald Rupp and his wife, Joan, built a lucrative business as Nowogroski's owners. Donald hired Darwin Rieck as an insurance promoter in 1982 and later sold Rieck a 5.14 percent shareholder's interest in Nowogroski. In 1986, Donald hired Jerry Kiser. Kiser joined Nowogroski "with the understanding that Darwin Rieck and I will be in line to succeed [Donald] with the ownership of the agency." But the details of this agreement were never worked out.

Donald died in 1988, but Nowogroski continued to flourish under Rieck and Kiser's management. In 1989, they hired Michael Rucker as an agent. Rucker wrote a memo of understanding stating that if he terminated his employment, he could purchase his accounts for 1.5 times their annual commissions.

As producers and servicers of Nowogroski's insurance accounts, Rieck, Kiser, and Rucker developed strong personal relationships with their clients. The three employees had access to Nowogroski's customer lists and other confidential information. Rieck never signed a noncompete agreement. And while Kiser recognized that he should have some obligation not to compete with Nowogroski after his employment, he never negotiated the details with Donald. Rucker, by contrast, signed a two-year noncompete agreement, acknowledging that Nowogroski's customer lists and related information were trade secrets.

In 1991, Joan Rupp brought her daughter, Michelle, into Nowogroski's management. This caused tension in the agency. Rieck felt that Michelle was too inexperienced and lacked management skills. He believed that Joan wanted to oust him from management. Joan did not give discretionary bonuses to Rieck or Kiser that year. In the spring of 1992, Joan asked Rieck and Kiser to purchase their commercial accounts and leave the company. The two offered to purchase all their accounts at 0.4 times the commissions. Joan rejected the offer and made no counteroffer.

When attempts to restore peace at the agency failed, Rieck and Kiser began exploring other employment opportunities. On August 18, 1993, they informed Joan and Michelle that they anticipated leaving Nowogroski at the end of the month. They offered to purchase their accounts at 0.6 times the commissions. On August 25, 1993, after failing to attend scheduled negotiation meetings, Joan rejected this offer and accepted Rieck and Kiser's resignations.

Rieck, Kiser, and Rucker went to work for Potter, Leonard and Cahan, Inc. (PLC). Rieck sent letters to his clients stating:

I am pleased to announce that two associates and myself from Nowogroski ... have merged with Potter, Leonard and Cahan Insurance Brokers of Seattle.

....

To transfer your insurance account to our new firm, it is necessary to have you complete and sign the enclosed appointment letter(s).

Nowogroski demanded that Rieck and Kiser stop sending these letters because they suggested that it had merged with PLC. It also asked them to return confidential client information. Rieck and Kiser deleted the word "merged" from their letters, but they did not return any client lists or summaries. Instead, they claimed to have destroyed them.

After numerous Nowogroski clients purchased insurance with PLC, Nowogroski sued Rieck, Kiser, Rucker, and PLC. Nowogroski alleged that its former employees had used confidential documents to obtain an unfair advantage in soliciting its business. It sought damages and injunctive relief for wrongful disclosure, use, and retention of confidential information, breach of contract and fiduciary duties, and trade secret misappropriation under the UTSA.

The trial court dismissed Nowogroski's tort claims on partial summary judgment, ruling that they were displaced by the UTSA. After a bench trial, the court found Rieck, Kiser, Rucker, and PLC liable for misappropriating Nowogroski's trade secrets. The court also found that Kiser had entered a noncompete agreement for a reasonable term. As for Rucker, the court found that he had breached his noncompete agreement and his contract to purchase his accounts for 1.5 times their commissions. Rucker is not a party to this appeal. PLC was held liable for aiding and abetting the wrongful client solicitations.

The court ruled that Nowogroski's client information constituted trade secrets only to the extent that it was in writing:

I find that insurance summaries, customer lists and other documents containing customer names, expiration dates, coverage information and related information produced by the agency or by the insurance company and kept by the agency, as opposed to information retained in their heads, are trade secrets.

Accepting Rieck's testimony that he knew his fifty largest clients by memory, the court awarded no damages for his solicitation of those accounts.

In awarding damages, the court rejected Nowogroski's expert evaluation of its lost business. It found that this $770,000 appraisal was based on the unreasonable premise that the policies would be renewed even though the promoters had departed:

A key part of such an expectation is obtaining the cooperation of the producer in communicating with the customers in a way which creates a smooth transition. If the producer, as here, is not likely to cooperate in attempting to get the customer to renew, plaintiff's expert's approach is flawed. If a buyer has the prospect of competing with the producers or others for renewals, if the agency doesn't have the personal contacts with the customers that create loyalty, and therefore renewals, the market value of the book is seriously diminished.

A defense expert had testified that Nowogroski's lost accounts were worth nothing but conceded that a buyer might be persuaded to pay $100,000. The court concluded:

Given the fact that the producers would be competing, and a willing buyer could not be found, I determine the value to plaintiff of what was lost as calculated by using a multiple of 0.5 against the commissions.

Excluding the commissions for Rieck's top fifty clients from its calculations, the court awarded damages at 0.5 times Rieck and Kiser's commissions.

The court denied Nowogroski's unjust enrichment claim, ruling that Nowogroski had unclean hands for cutting off the defendants' reasonable expectation of ownership interests. It also denied Joan's claims for emotional distress, exemplary damages, and attorney fees.

We first decide whether the UTSA allows an individual to solicit a former employer's clients by using confidential information that the employee has committed to memory. Rieck and PLC do not dispute that the documents containing Nowogroski's client information are trade secrets. But they claim that the UTSA displaces the common law rule that a person may not use memorized confidential information to solicit his or her former employer's business. Because nothing in the UTSA supports the conclusion that memorized information cannot constitute a trade secret, the trial court erred by awarding no damages for Rieck's solicitation of his fifty largest clients.

To establish a trade secret misappropriation claim, a plaintiff must first show that a legally protected trade secret exists. Precision Moulding & Frame, Inc. v. Simpson Door Co., 77 Wash.App. 20, 25, 888 P.2d 1239 (1995). The UTSA provides:

"Trade secret" means information, including a formula, pattern, compilation, program, device, method, technique, or process that:

(a) Derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use; and

(b) Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

RCW 19.108.010(4). We review matters of statutory interpretation de novo.

The parties agree that under common law, a person could not use confidential knowledge of his or her former employer's customers to actively solicit their business. See John Davis & Co. v. Miller, 104 Wash. 444, 449, 177 P. 323 (1918); J.L. Cooper & Co. v. Anchor Securities Co., 9 Wash.2d 45, 64, 113 P.2d 845 (1941). The fact that the former employee memorized the information, rather than reducing it to writing, made no difference. Davis, 104 Wash. at 449, 177 P. 323; Cooper, 9 Wash.2d at 55, 113 P.2d 845. The dispute here is limited to whether the UTSA displaces this common law rule. See RCW 19.108.900(1) (the UTSA "displaces conflicting tort, restitutionary, and other law of this state pertaining to civil liability for misappropriation of a trade secret.").

We hold that the common law rule prohibiting the solicitation of a former employer's customers with memorized confidential...