Elm City Cheese Co. v. Federico

• Decision Date: 26 October 1999
• Docket Number: (SC 15951)
• Court: Connecticut Supreme Court
• Parties: ELM CITY CHEESE COMPANY, INC., ET AL. v. MARK FEDERICO ET AL.

251 Conn. 59

752 A.2d 1037

ELM CITY CHEESE COMPANY, INC., ET AL. v. MARK FEDERICO ET AL.

(SC 15951)

Supreme Court of Connecticut.

Argued June 4, 1999.

Officially released October 26, 1999.

Borden, Berdon, Katz, McDonald and Peters, JS.¹ David T. Grudberg, for the appellants (defendants).

Barry J. Waters, with whom were Anthony J. Dolce and, on the brief, Rachel Snow Kindseth, for the appellees (plaintiffs).

Opinion

KATZ J.

The defendants, Mark Federico and Lomar Foods, Inc. (Lomar), appeal from a judgment enjoining them for a period of three years from disclosing, using or selling information found by the trial court to be a trade secret, which Federico learned throughout his association with the named plaintiff, Elm City Cheese Company, Inc. (Elm City),² and its owners, Richard and Suzanne Weinstein.³ The principal issue before us is whether the facts found establish a trade secret as that term is defined in General Statutes § 35-51 (d).⁴ We conclude that they do.

The trial court found the following facts, which are largely undisputed. The Weinsteins own Elm City, which has been manufacturing cheese since 1896, but has been making primarily grated cheese since the late 1950s. Elm City does not sell its products to the public; rather, it sells its Italian style grated cheese to three major customers that use Elm City's cheese as a "filler" to blend into their cheeses.⁵

Federico has known Richard Weinstein (Weinstein) since Federico was seven years old, and over the years, he developed a close social relationship with the Weinsteins. According to the trial court's findings, Federico "became [the Weinsteins'] most trusted adviser and confidant. Federico effectively became a member of the family, virtually the `number one son.'" When Federico, a certified public accountant, was not given a partnership in the firm for which he was working, Weinstein encouraged him to start his own firm and Elm City became one of his first clients. From 1982 to 1994, Federico served as both Elm City's accountant and the Weinsteins' personal accountant. When, in 1988, Weinstein learned that he had chronic lymphocytic leukemia, Federico became increasingly more involved in the operation of the business. He was also named executor of Weinstein's will.

The trial court found, further, that Federico's duties went beyond typical accounting work. For example, in the early 1980s, he was involved in efforts to solve an odor control problem in the plant. An engineer who was not an employee of Elm City eventually solved this problem by installing certain dehumidification equipment. This solution provided the additional and unexpected benefit of decreasing the time required to remove moisture from Elm City's cheese, thereby allowing Elm City to produce its product more quickly.

The trial court found that, eventually, Federico was given keys to the building and access to the alarm system. When the Weinsteins were away, Federico was placed in charge of operations and was given the authority to make decisions. In February, 1992, Federico was made a vice president of the company and was given signatory power over the company checkbook. Although he was involved in projects for Elm City that were outside of the accounting area, even after he became vice president, he nevertheless spent four days each week at his accounting firm. In October, 1993, he became a full-time employee of Elm City and was placed in charge of the day-to-day operations of the plant. He continued to serve as Elm City's accountant, however, and also serviced other clients of his accounting firm.

The trial court also found that Federico learned the different aspects of Elm City's operation at various times during his association with Weinstein. For example, he first learned the identity of Elm City's biggest customer when he was a young boy. Later, in the late 1970s, before he became a certified public accountant, he did some payroll work for the company. He and Weinstein would talk about the business. During this time, Federico learned that Elm City used "return milk"⁶ as its principal raw material for cheese production. According to the trial court, "Federico had learned long before he became [a full-time] employee ... all aspects of Elm City's business including its method of cheese production, its customers and suppliers, its methods for drying cheese, and the prices it paid for supplies and charged for finished product." The court found: "Because of his role as Elm City's `right hand man,' which grew out of his role as [accountant], Federico learned every financial aspect of Elm City's business. He knew, for example, what [Elm City] paid [its suppliers] for return[ed] milk and what [Elm City] charged its three customers ... for Italian style grated cheese. He also became involved in every aspect of Elm City's business, including, but not limited to: its unique processes and techniques in making grated cheese; its pricing and cost structures; and its suppliers and customer relationships. He did financial projections, he kept journals on the milk suppliers and tracked the amount of milk [Elm City] ordered (and the price it paid) in Elm City's milk logs and accounts payable journal. Before Federico assumed these responsibilities, only the Weinsteins themselves were privy to these financial aspects of the business, as the financial recordkeeping was primarily [Suzanne Weinstein's] job, with some assistance from Weinstein." (Internal quotation marks omitted.) The court noted that "[a]lthough Federico may have learned some aspects of Elm City's methods of production, etc., while an employee, all the important intricate components of Elm City's business became fully known to Federico when he served as [an accountant] for Elm City and the Weinsteins." Federico prepared monthly statements for Elm City from 1982 to 1994. According to the trial court, these statements, which Federico prepared both before and after he had become an employee of Elm City in October, 1993, contained the type of information that a client would expect an accountant to keep confidential, particularly from potential competitors of Elm City.

The trial court found that, by 1994, the relationship between Federico and Weinstein had started to deteriorate. Weinstein became increasingly unhappy with Federico's indulgence of his family, several members of which Elm City employed at Federico's request.⁷ Federico, by contrast, claimed that his ultimate decision to leave Elm City was because Weinstein had reneged on an agreement to sell Elm City to Federico. Weinstein denied that they ever had a contract for the sale of the business.

The trial court found further that, in mid-December, 1994, Weinstein told Federico that he would divide Elm City's profits evenly with Federico, as Weinstein's father had done with him. Shortly thereafter, in late December, Federico assured Weinstein that he intended to stay in the business. Nevertheless, on January 3, 1995, shortly after profits had been distributed, Federico gave Weinstein two letters of resignation, one as his employee and the other as his accountant. The trial court found that Federico then returned to his accounting practice for a brief period. In October, 1995, he attended a four day course in cheesemaking. In November of that same year, he attended a conference in Chicago that was attended by two of Elm City's three largest customers. Soon thereafter, Federico applied to a bank for a loan to start Lomar, the other defendant in this appeal. The business plan submitted to the bank by Federico, developed in November, 1995, duplicated Elm City's business, including the process for making the cheese, which Weinstein had developed over several years. According to the trial court, Lomar intended to manufacture the same product that Elm City manufactures, by the same process, and sell it to Elm City's customers.

In November, 1996, Lomar began operations at the site of a former dairy located in Providence, Rhode Island. At trial, Federico admitted that Lomar followed the basic production method used by Elm City. It bought its supplies from some of the same suppliers used by Elm City, and it sold its finished products to the same customers that Elm City did. Additional facts will be set forth as needed.

On December 20, 1996, Elm City brought an action seeking temporary and permanent injunctions, as well as damages.⁸ At trial, Elm City alleged five causes of action: (1) breach of fiduciary duty; (2) misappropriation of trade secrets;⁹ (3) violation of the Connecticut Unfair Trade Practices Act (CUTPA);¹⁰ (4) misrepresentation; and (5) conversion. The trial court found for Elm City on the first, second and third counts, and for the defendants on the two remaining counts. The court concluded, however, that Elm City's claims were governed by General Statutes § 35-57 (a), which provides in relevant part that, "[u]nless otherwise agreed by the parties, the provisions of [the Uniform Trade Secrets Act (trade secrets act); General Statutes § 35-50 et seq.] supersede any conflicting tort, restitutionary, or other law of this state pertaining to civil liability for misappropriation of a trade secret."¹¹ Therefore, the court enjoined the defendants, under the second count—the trade secret count—for a period of three years, "from disclosing, using or selling any of [Elm City's] confidential customer information, trade secrets, procedures, technical data or know-how relating to the products, processes, methods, research and development plans, equipment or business operations of [Elm City]."

In addition to the injunctive relief, the trial court awarded Elm City compensatory damages in the amount of $461,239, and, based upon its finding that the defendants had wilfully and maliciously misappropriated Elm City's trade secrets, the court awarded Elm City $300,000 in punitive damages, pursuant to General Statutes § 35-53 (b).¹² Subsequently, the trial court, in a...