Heyman v. AR. Winarick, Inc.

• Decision Date: 24 December 1963
• Docket Number: Docket 27856.,No. 50,50
• Citation: 325 F.2d 584
• Parties: Everett HEYMAN d/b/a Pleasure Products Co., Plaintiff-Appellant, v. AR. WINARICK, INC., AR. Winarick, Inc., Dura-Gloss Division, Jules Winarick and Hugo L. Bell, Defendants-Appellees.
• Court: U.S. Court of Appeals — Second Circuit

325 F.2d 584 (1963)

Everett HEYMAN d/b/a Pleasure Products Co., Plaintiff-Appellant, v. AR. WINARICK, INC., AR. Winarick, Inc., Dura-Gloss Division, Jules Winarick and Hugo L. Bell, Defendants-Appellees.

No. 50, Docket 27856.

United States Court of Appeals Second Circuit.

Argued October 14, 1963.

Decided December 24, 1963.

Bass & Friend, New York City (Solomon H. Friend, New York City, of counsel), for plaintiff-appellant.

Blackman & Willner, New York City (Harold J. Blackman, New York City, of counsel), for defendants-appellees.

Before WATERMAN, HAYS and MARSHALL, Circuit Judges.

WATERMAN, Circuit Judge:

In this case plaintiff seeks damages, an injunction, and an accounting of profits. He claims an alleged wrongful appropriation of trade secrets obtained in the course of a confidential relationship and joins as defendants AR. Winarick, Inc., Jules Winarick, the defendant corporation's president, and Hugo Bell, its sales manager. Plaintiff alleges that during negotiations with defendants over the possible purchase by defendant corporation of a business owned by plaintiff, he revealed to defendants confidential information about the business which defendants ultimately used for their own benefit. The case was tried below by a court without a jury.¹ After a full trial of the issues the United States District Court for the Southern District of New York, Cooper, J., dismissed the complaint. The opinion below is reported at 207 F.Supp. 78. We affirm.

In 1956, plaintiff organized in California a business called Pleasure Products Company, devoted to the manufacture and marketing of a non-patented liquid fingernail hardener called "It's a Pleasure." The product, designed to strengthen fingernails through daily immersion in a prepared solution of the product with water, was sold at drugstores, beauty shops, and cosmetic counters throughout the country. The business resulted from plaintiff's accidental discovery, in 1955, that a chemical compound he was then testing at home for detergent properties had the remarkable effect of hardening fingernails. Unfortunately the compound, so discovered, which plaintiff referred to below as a "quaternary" or "surface active agent," was toxic. Consequently plaintiff devoted much time in succeeding months to the testing of various chemical compounds in an attempt to find a non-toxic substitute. At last he discovered a satisfactory substitute and combined it with water and coloring to form his product. Apparently marketing efforts proved successful and plaintiff's business began to grow.

In September of 1957, plaintiff placed an advertisement in the West Coast edition of the Wall Street Journal offering his business for sale at $80,000. A broker for defendant AR. Winarick, Inc., a large cosmetics firm with a multimillion dollar annual volume of business, contacted plaintiff and indicated that his client might be interested in purchasing.

Plaintiff thereafter met with the defendant corporation's representatives on three separate occasions in Los Angeles. On October 18 and November 7 or 8 plaintiff met with the corporation's sales manager, Hugo Bell, one of the individual defendants in this case, and on November 8 or 9 he met with Bell and the other individual defendant, Jules Winarick, the corporation's president. The testimony below was in sharp conflict as to just what information plaintiff divulged during the meetings. Plaintiff claimed that he disclosed to defendants certain trade secrets, both the formula for his product and important information as to the marketing of it. On November 13 defendants sent plaintiff a telegram indicating that they were no longer interested in purchasing his business and five months later defendant AR. Winarick, Inc. began marketing its own liquid fingernail hardener under the name of "Dura-Gloss Finger-Nail Hardener," the purchase price of which was approximately one third that of plaintiff's. Plaintiff then commenced this suit.

In a case such as this the plaintiff must show that a confidential relationship existed between plaintiff and defendant, that disclosures of what amounted to trade secrets were made by plaintiff to defendant, and that defendant made use of those disclosures. Speedry Chemical Prods., Inc. v. Carter's Ink Co., 306 F.2d 328, 331 (2 Cir. 1962); Restatement, Torts, § 757 (1938).

Mindful of Justice Holmes's statement that the determination of the existence of a confidential relationship is the "starting point" in a case like this, E. I. Du Pont de Nemours Powder Co. v. Masland, 244 U.S. 100, 102, 37 S.Ct. 575, 61 L.Ed. 1016 (1917), we begin by examining the relationship which developed between the parties in the case at bar. While there is no indication that plaintiff extracted from defendants a promise of trust with respect to information disclosed during their negotiations, an express agreement is not a prerequisite to the establishment of a confidential relationship. Speedry Chemical Prods., Inc. v. Carter's Ink Co., supra; Underhill v. Schenck, 238 N.Y. 7, 143 N.E. 773, 33 A.L.R. 303 (1924); Biltmore Publishing Co. v. Grayson Publishing Corp., 272 App.Div. 504, 71 N.Y.S.2d 337 (1st Dep't 1947). A relationship of trust and confidence may naturally result from the circumstances surrounding the dealings between the parties.

Where, as here, the parties are a seller and a prospective purchaser, certain disclosures will usually be made about the thing which is for sale so that the purchaser may rationally assess the merits of concluding the bargain. If the information disclosed is of such a nature as to otherwise qualify as a trade secret, we think the prospective buyer is bound to receive the information in confidence. Speedry Chemical Prods., Inc. v. Carter's Ink Co., supra; Smith v. Dravo Corp., 203 F.2d 369 (7 Cir. 1953); Schreyer v. Casco Prods. Corp., 190 F.2d 921 (2 Cir. 1951), cert. denied, 342 U.S. 913, 72 S.Ct. 360, 96 L.Ed. 683 (1952); Hoeltke v. C. M. Kemp Mfg. Co., 80 F. 2d 912 (4 Cir. 1935). As the prospective buyer is given the information for the limited purpose of aiding him in deciding whether to buy, he is bound to receive the information for use within the ambit of this limitation. He may not in good conscience accept the information; terminate negotiations for the sale; and then, using vital data secured from the would-be seller, set out on a venture of his own. Whatever conduct courts should countenance when parties bargain at arm's length, we think parties should be expected to comply with these essentials of fair dealing.

The view that a confidential relationship arises when a seller and buyer negotiate for a sale is not new to this Circuit. In Schreyer v. Casco Prods. Corp., supra, the plaintiffs, developers of an electric steam iron, had entered into negotiations looking toward the manufacture and sale of their product by the defendant under a license. During negotiations plaintiffs turned over to defendant blue prints and other detailed information, and revealed the "know-how" of the product's manufacture. Apart from the seller-buyer relationship which called for the finding that a confidential relationship had been established, no special facts were said to exist. Nevertheless, the court found that although there was "no express agreement to hold the information in confidence and not to use it if the negotiations for a license were not successful, there was a confidential relationship created between the parties by the disclosures which restricted the right of Casco to use them to the purposes for which the disclosures were made. Hoeltke v. C. M. Kemp Mfg. Co., 4 Cir., 80 F. 2d 912. The breach of this confidential relationship, enabling Casco to invade the plaintiffs' market, was unfair competition." 190 F.2d at 924. More recently, in Speedry Chemical Prods., Inc. v. Carter's Ink Co., supra, this court, citing the Schreyer case, also found a confidential relationship where the parties bargained at arm's length with respect to a licensing agreement. See also Matarese v. Moore-McCormack Lines, Inc., 158 F.2d 631, 170 A.L.R. 440 (2 Cir. 1946). Therefore, we conclude that the parties here, in their negotiations looking toward defendant's purchase of plaintiff's business, entered into a confidential relationship with respect to disclosures which plaintiff may have made about that business.²

The next problem, that of determining whether plaintiff actually disclosed to defendants trade secret information, raises questions of both fact and law. There is the initial question, purely factual, of what information was revealed to defendants; and there is also the question whether whatever information that was divulged should be entitled to protection under the law of trade secrets.

At the trial, a sharp conflict in testimony developed relative to what plaintiff disclosed to defendants during negotiations. The testimony was particularly conflicting with respect to whether plaintiff had revealed the ingredients of his product. Plaintiff testified that during his first meeting with defendant Bell he explained to Bell the details of the discovery of his product, and had revealed that the active ingredient in his fingernail hardener was a "quaternary" or a "non-toxic surface agent."³ Plaintiff also testified that in his final meeting with both Bell and Winarick he had reiterated this, and had spelled out the product's composition in more detail.⁴ Defendants, on the other hand, both testified that plaintiff had not revealed the ingredients of his product,⁵ though Bell did admit on cross-examination that he could not definitely remember whether plaintiff had recounted his story of how the product had been discovered. Moreover, defendants put on the stand one Kaye, a chemist, who testified that during a period of several months subsequent to the California conferences he had worked for defendant corporation on the laboratory development of a liquid fingernail hardener. He testified that he had received...