Energy Resources Corp., Inc. v. Porter

• Decision Date: 05 August 1982
• Citation: 14 Mass.App.Ct. 296,438 N.E.2d 391
• Parties: ENERGY RESOURCES CORPORATION, INC. v. James H. PORTER et al. 1
• Court: Appeals Court of Massachusetts

Page 391

438 N.E.2d 391

14 Mass.App.Ct. 296

ENERGY RESOURCES CORPORATION, INC. v. James H. PORTER et al. ¹

Appeals Court of Massachusetts Middlesex.

Argued April 22, 1982.

Decided Aug. 5, 1982.

Thomas J. Dougherty, Boston, for plaintiff.

Gordon T. Walker, Boston (Judith G. Dein, Boston, with him), for defendants.

Before BROWN, PERRETTA and KASS, JJ.

KASS, Justice.

From 1976 to 1979, James H. Porter was vice-president and chief scientist of Energy Resources Corporation, Inc. (ERCO). On October 5, 1979, he resigned and organized Energy & Environmental Engineering, Inc. (EEE). The first business EEE undertook was a research project, to be done in collaboration with Howard University, for the United States Department of Energy concerning a method of burning high sulfur coal which would produce little air pollution. ERCO complains that Porter diverted a corporate opportunity, violated his employment agreement with ERCO and misappropriated trade secrets. A Superior Court judge sitting without a jury heard the case and entered judgment for the defendants.

We have the benefit of excellent findings of fact by the judge. Mass.R.Civ.P. 52(a), 365 Mass. 816 (1974). On those findings we rely for the factual setting of the case, with some fleshing out on the basis of undisputed matter in the record.

ERCO is a science and engineering company, located in Cambridge, which provides products and services in energy and environmental fields. Among its areas of investigation was staged fluidized bed combustion of coal. By that process, coal mixed with limestone could be burned so as to capture sulfur as a solid, rather than allowing it to escape into the atmosphere as a gas. To the end of developing a commercially efficient coal-fired furnace which harnessed that process, ERCO operated a fluidized bed combustor pilot plant and a full-scale fluid bed combustor test facility.

Porter had come to ERCO from the Massachusetts Institute of Technology, from which he held a doctoral degree and where he had been an associate professor in the department of chemical engineering. Fluidized bed combustion was a subject to which Porter had given attention at M. I. T. and about which he had written as early as 1963. At ERCO, research and development concerning application of the fluidized bed combustion process was under Porter's general direction. As to royalties earned by ERCO from his inventions, Porter, under his employment agreement, was to receive 18% in addition to his annual salary (which was $52,000 in 1979).

In December, 1977, Porter went to Washington, D. C., to deliver a paper on fluidized bed combustion at a fifth annual meeting on that subject sponsored by the United States Environmental Protection Agency and the Department of Energy (DOE). While in Washington Porter looked up two colleagues at Howard University, Professors Cannon and Jackson, with whom he had been earlier acquainted. Cannon is chairman of the department of chemical engineering at Howard and Jackson is director of its fossil fuel laboratory.

This encounter led in due course to a joint proposal to DOE by Howard and ERCO for a development grant involving staged fluidized bed combustion of coal. Jackson had told Porter that DOE would be favorably disposed to a proposal from a "minority institution." Howard, traditionally, has a black student body, and Cannon and Jackson are black. So is Porter. Howard was to be the primary applicant and ERCO would be the subcontractor. ERCO's participation was approved by other executives of ERCO. During the first five months of 1979, Cannon, Jackson and Porter worked on the submission to DOE; Porter wrote most of the technical section. The draft proposal listed ERCO as a proposed subcontractor and included biographical information about ERCO personnel, notably, of course, about Porter.

In early May, 1979, during the course of a ride from Washington National Airport to DOE, Jackson advised Porter of a change of heart about working with ERCO. Jackson had become apprehensive that ERCO would claim the entire enterprise as its idea and that because "we are just little black people at a black university everybody was going to believe them." Moreover, Jackson said, he didn't want to be a part of something that might be seen as "blacks serving as sort of fronts for white firms getting minority money." Finally, he thought that in the long run more money would flow from DOE if there were a minority subcontractor in the picture. Porter attempted to persuade Jackson to continue to work with ERCO.

During the conversation at DOE which followed, Jackson broached the subject of dealing with a subcontractor other than ERCO and was told by a DOE official that the key man was Porter, whether he was at ERCO or elsewhere. Cannon and Jackson came up to Cambridge a week later to see Porter at M. I. T. and suggested that if he were to form his own company, they would be pleased to substitute it for ERCO in the proposal to DOE. Porter agreed to do so. Cannon and Jackson deleted references to ERCO and substituted EEE, a corporation to be formed by Porter. Thereafter, although he continued to work at ERCO, Porter cut himself off from the Howard submission to DOE. "I knew I was in a ticklish position, sought advice of counsel and decided it best I just not do anything on that proposal."

About three weeks later, Richard H. Rosen, the president of ERCO, Robert S. Davis, an executive vice-president, and Porter met for a routine review of pending ERCO projects. At that meeting Rosen asked Porter, "How about the Howard proposal?" Porter responded, "We're not going to get that." Rosen and Davis made no further inquiry and went on to the next item of business. Davis asked Porter about the Howard proposal on a later occasion and, once again, was told, without further elaboration, that ERCO wasn't going to get a subcontract from Howard.

Toward the end of September or the beginning of October, 1979, DOE awarded a grant to Howard and on or about October 5, 1979, Porter resigned his offices at ERCO on one day's notice. He told Davis and Rosen that his reason for leaving was to organize a corporation which would work in the area of computerized cars. Rosen, still unaware of Porter's participation in the Howard project, hired Porter as an independent consultant to ERCO for a period of sixty days.

1. The corporate opportunity. None of the parties debates that exploitation of the fluidized bed combustion process was squarely within ERCO's corporate activity and that, without more, an officer of ERCO had a fiduciary duty not to divert that opportunity for his own benefit. See Durfee v. Durfee & Canning, Inc., 323 Mass. 187, 198-199, 80 N.E.2d 522 (1948); BBF, Inc. v. Germanium Power Devices Corp., 13 Mass.App. 166, 172, 430 N.E.2d 1221 (1982), and cases cited. Indeed, Porter used his time as an employee of ERCO and the time of other employees of ERCO, as well as certain graphics, in preparing a draft of the submission to DOE which ultimately reeled in a grant. Contrast Lincoln Stores, Inc. v. Grant, 309 Mass. 417, 421-422, 34 N.E.2d 704 (1941); Black v. Parker Mfg. Co., 329 Mass. 105, 112-113, 106 N.E.2d 544 (1952).

Porter's defense is that the staged fluidized bed combustion project with Howard ceased being a corporate opportunity for ERCO when Jackson refused to deal with ERCO. When a corporation is unable to avail itself of an opportunity, its employee, officer or director is free to exploit it. Miller v. Miller, 301 Minn. 207, 225, 222 N.W.2d 71 (1974); 3 Fletcher, Cyclopedia of The Law of Private Corporations § 862.1 (rev. perm. ed. 1975). ² It was a defense which the trial judge thought convincing: "[N]o amount of persuasion," he wrote, "could alter Dr. Jackson's resolve that the subcontractor be a minority concern." Porter was not to be asked for "performance of fiduciary duty even to the point of futility." The difficulty with the judge's reasoning is that the unalterability of Jackson's resolve can by no means be certain so long as Porter, by keeping Jackson's position and his reasons for it a secret, never afforded ERCO a chance to test it. Had Porter told ERCO about Howard University's desire (as manifested by Jackson) to deal with a subcontractor controlled by persons who were black, the matter might have taken a variety of turns. Other officers of ERCO might have persuaded Jackson and Cannon--or others at Howard--that the status of Porter with ERCO was such that their unease about ERCO was not warranted. It might have been possible to organize a corporation in which Porter had a majority position and ERCO had a minority position. These are but two of many possibilities.

For the reason that the firmness of a refusal to deal cannot be adequately tested by the corporate executive alone, it has not been favored as a defense unless the refusal has first been disclosed to the corporation. Without full disclosure it is too difficult to verify the unwillingness to deal and too easy for the executive to induce the...