Kodekey Electronics, Inc. v. Mechanex Corporation

• Court: U.S. Court of Appeals — Tenth Circuit
• Writing for the Court: BREITENSTEIN, BARNES and BARRETT, Circuit
• Citation: Kodekey Electronics, Inc. v. Mechanex Corporation, 486 F.2d 449 (10th Cir. 1973)
• Decision Date: 11 October 1973
• Docket Number: No. 73-1303.,73-1303.
• Parties: KODEKEY ELECTRONICS, INC., Plaintiff-Appellee, v. The MECHANEX CORPORATION et al., Defendants-Appellants.

486 F.2d 449 (1973)

KODEKEY ELECTRONICS, INC., Plaintiff-Appellee, v. The MECHANEX CORPORATION et al., Defendants-Appellants.

No. 73-1303.

United States Court of Appeals, Tenth Circuit.

Argued and Submitted August 14, 1973.

Decided October 11, 1973.

Charles F. Brega, Denver, Colo., for plaintiff-appellee.

Harry L. Hobson, Graham M. Clark, Jr., and Thomas A. Faulkner, Denver, Colo., for defendants-appellants.

Before BREITENSTEIN, BARNES^* and BARRETT, Circuit Judges.

BARNES, Circuit Judge:

This is a civil diversity action seeking money damages and injunctive relief which would prohibit defendant from manufacturing, distributing, and selling a certain electronic speedometer and tachometer. The complaint charges (1) misappropriation of trade secrets, (2) breach of contract, and (3) unfair competition. Kodekey Electronics is a California corporation, and "defendant Mechanex is located in Colorado," and is a subsidiary of defendant Tenneco, a Delaware corporation.

Jurisdiction rests on 28 U.S.C. § 1332(a)(1) and the requisite amount in controversy exists. The District Court tried the issue of liability first, and found a basis for recovery, and granted judgment on the three charges above listed. It originally issued a restraining order, reserving its findings and conclusions with respect to damages, but thereafter fixed damages in the sum of $201,768.00, together with costs. The District Court thereafter signed an order modifying its opinion and order, and denied defendants' Motions to Reopen, for a Partial New Trial, and for a New Trial.

I. FACTS

On June 9, 1966, Mr. Joseph Kramas, and one Erich Kaufmann, individually, and doing business as K & K Electronics, received an exclusive license to manufacture and market a new type of speedometer which had been developed by one Frank D. Neu and one John Foraker (Plaintiff's Exhibit C).

In November, 1966, Mr. Joseph Kramas, representing K & K Electronics, a partnership, and predecessor of Plaintiff Kodekey Electronics, Inc., approached Mr. Allen J. Stephens of the Mechanex Corporation, and suggested that Mechanex should market an electronic speedometer then being manufactured and sold by K & K Electronics. At that time Mr. Kramas felt that his offering was promising, but that his product needed marketing attention on a national scale (Tr. Vol. I, p. 25).

Mr. Neu and Mr. Foraker had been testing prototypes of their new speedometer with the Greyhound Corporation previous to the execution of the licensing agreement. Subsequent to the execution of the licensing agreement, Mr. Kramas was contacted by Freightliner Corporation (a manufacturer of trucks for Greyhound Moving Corporation), and was asked whether it would be possible to modify the speedometer, as installed in the Greyhound Buses, for use in trucks. Mr. Kramas then began investigating the speedometer plights of other trucking firms in the California area, and found that a serious problem existed with respect to speedometers in the trucking industry (Tr. Vol. I, p. 26). Mr. Kramas thereupon compiled a mailing list and sent inquiries to large and small trucking firms throughout the country, and received significant responses regarding the problems that the trucking industry was experiencing with regard to speedometers and tachometers.

After approaching the Mechanex Corporation in November, 1966, regarding the possibilities that Mechanex might market the instrument on a national scale, Mr. Kramas insisted that a secrecy agreement be signed by a corporate officer of Mechanex before a consignment speedometer would be sent to Mechanex for evaluation by the Mechanex Corporation (Plaintiff's Exhibit K). Mr. Allen J. Stephens signed the secrecy agreement for the Mechanex Corporation and returned it by mail to the Plaintiff on December 5, 1966 (Plaintiff's Exhibits L and M). The provision of said secrecy agreement is as follows:

The MECHANEX CORPORATION agrees to keep confidential all proprietary information regarding Electronic Speedometer furnished by K & K ELECTRONICS and not to use this information in any way detrimental to the interests of K & K ELECTRONICS. Further this information will not be distributed to a competitor of K & K ELECTRONICS or be used by MECHANEX to compete with K & K ELECTRONICS in the field of Electronic Speedometers.¹

Further details of the facts are set forth in the margin, for the convenience of the readers of this opinion. They are essential to a complete understanding of the issues ruled upon by the District Court, but not to an understanding of the controlling principles upon which this opinion is based.²

The District Court, in its Memorandum Opinion of June 2, 1972, found that a valid and binding contract existed between the Plaintiff and Defendant for the distribution and sale by Defendant of a specific product of the Plaintiff; that the Defendant Mechanex had engaged in self dealing with the product in violation of contractual provisions (the electronic speedometer manufactured by the Defendant Mechanex being similar in appearance, operation and design and of the same general kind of product manufactured by Kodekey); that the manufacture of electronic speedometers by Defendant Mechanex was a clear violation and breach of the contractual agreement between Plaintiff and Defendant; that the Defendant Mechanex had engaged in unfair competition against Kodekey and had placed Kodekey in a disadvantageous position of marketing its electronic speedometer; that Plaintiff Kodekey was entitled to damages for the breach of contract and unfair competition; that the manufacture and merchandizing of the speedometer developed by the Defendant Mechanex violated the trust, confidence and fiduciary responsibilities imposed on Defendant Mechanex to the detriment and irreparable damage of Plaintiff Kodekey; and that an adequate remedy at law to protect the contractual rights of the Plaintiff against actions not being present, and the Plaintiff having sustained its burden of proving the reasonableness of the restrictive covenants, that enforcement of the restrictive noncompetitive agreements by injunction was reasonable, and would not unduly injure the Defendants in their overall manufacturing operation.

II. ERRORS CLAIMED

Appellant urges seven errors. We will consider each in turn:

I. Did any information given to Mechanex by Kodekey constitute a "trade secret"?

II. Assuming one or more "trade secrets" were given to Mechanex, did Kodekey fail to take secrecy precautions essential to maintain such trade secret status?

III. If no "trade secrets" were given to Mechanex, did any other relationship exist between it and Kodekey which prevented Mechanex "from selling the speedometer developed by Mechanex"?

IV. Does the statute of frauds in Colorado prohibit the enforcement of the oral non-competition agreement found by the District Court to exist?

V. Is there sufficient evidence properly in the record to support the award of damages?

VI. Was injunctive relief appropriate?

VII. Was denial of a new trial error?

III. THE "TRADE SECRET" ARGUMENTS

(Appellants Alleged Errors I, II & III)

Appellants base their first three alleged errors on an assumption that a "trade secret"³ disclosure by Kodekey to Mechanex was the sole content of their signed contract delivered to Appellee on December 5, 1966; and that there were no other obligations subsequently created between the parties. This is not correct. The December 5, 1966 agreement was also an agreement not to compete and not to detrimentally use the information obtained ( See Note 1, supra ). But more important, the District Court found that the parties also entered into an operating contract, had subsequent oral conversations, written correspondence, and reciprocal commitments and actions, including voluntary representations to third parties. Mechanex Corporation obtained the exclusive right to purchase and sell, and did purchase and sell, in great quantities, Appellee's superior product. Mechanex was given the right to cancel the contract after the purchase of 3000 units, but was required to buy speedometers exclusively from Appellee during the term of the agreement, and within two years thereafter. This provision was reciprocal: Kodekey was required to accept or fill any purchase order, and if it did not, it would not offer to sell or sell to any other customer, foreign or domestic, for a similar period of two years. Mechanex further had a first right of refusal to market other new products of Kodekey during the terms of the contract. Under these contractual provisions, Mechanex purchased, between 1966 and 1970, some 12,000 speedometers.

In view of these facts, and the findings of the District Court which went far beyond the suggestion of Appellants that the court was merely dealing with trade secrets,⁴ we find the first three arguments of Appellant untenable. In this connection we point out the court's specific findings.

"Damages awarded herein are assessed against Defendants for breach of contractual duties, breach of fiduciary responsibilities imposed on Mechanex, unfair competition, and for the breach of a secrecy agreement." (Tr. Vol. VI, p. 535.)

Thus, were we to find there was no breach of a secrecy agreement relating to "trade secrets", that does not invalidate the other facts, findings, and conclusions establishing liability of Defendants-Appellants on other grounds.

However, Appellants insist "the electronic speedometer . . . was a combination of generally known elements and components of electronic circuitry. Accordingly, whether or not the design should be accorded the status and the protection of a trade secret depends upon the uniqueness and value of the combination of elements . . . ."

The Restatement of Torts § 757, comment b at 6-7 (1939) is to the contrary. "Novelty and invention are not requisite for a trade secret as they are for patentability . . . (here a discussion of patent law). But such is not the case with a trade...