Leo Silfen, Inc. v. Cream

• Decision Date: 12 January 1972
• Citation: 328 N.Y.S.2d 423,29 N.Y.2d 387,278 N.E.2d 636
• Parties: , 278 N.E.2d 636 LEO SILFEN, INC., et al., Respondents, v. Maurice C. CREAM et al., Appellants, et al., Defendant.
• Court: New York Court of Appeals Court of Appeals

Page 423

328 N.Y.S.2d 423

29 N.Y.2d 387, 278 N.E.2d 636

LEO SILFEN, INC., et al., Respondents, v. Maurice C. CREAM et al., Appellants, et al., Defendant.

Court of Appeals of New York.

Jan. 12, 1972.

Alvin I. Goidel, New York City, for appellants.

Martin L. Conrad and Herbert L. Finkelstein, New York City, for respondents.

BREITEL, Judge.

In an action for damages and to enjoin a discharged employee from soliciting his former employers' customers, defendants appeal. The issue is whether the employers' investment of time and money in accumulating a list of approximately 15,000 customers, most being readily ascertainable in the trade as likely users of plaintiffs' services, entitles the list to trade secret protection.

After a nonjury trial, the court concluded that the list of customers and catalogue of customer data were trade secrets, and enjoined defendants from doing business with any of plaintiffs' customers. The Appellate Division 37 A.D.2d 721, 323 N.Y.S.2d 1018, affirmed with two Justices dissenting.

The judgment should be reversed and the complaint dismissed. Plaintiffs have failed to prove a physical appropriation or copying of confidential information, or wrongful disclosure or use of a trade secret. In particular, no trade secret protection is warranted since plaintiffs' customers are likely, if not known, users of the employers' merchandise and engaged in business at advertised locations.

Plaintiff corporations are engaged in selling building maintenance supplies to industrial and commercial users. Plaintiffs purchase their inventory from independent supply houses and then, at a substantial markup, resell to customers under their own label. Plaintiff Silfen sells soaps, polishes, waxes, finishers, and disinfectants, while plaintiff Formula 33 Corporation specializes in ice and snow melting compounds.

In 1949 defendant Cream joined Silfen, then engaged only in the paper and twine business. Cream was assigned and became solely responsible for the development of a cleaning and maintenance chemical supply division. During its formative years Cream interviewed and hired salesmen, developed products, and found suppliers. Initial customer solicitation consisted of direct contact and media advertising. Meeting little success he employed the services of mailing houses which provided lists of prospects to whom brochures and business reply cards were forwarded. Eventually, an average of one million mailings were made annually with a reply rate of 0.6%. Of those replying 25% Became customers at an average cost per new customer in 1967 of $45. Over the years, some 15,000 customers were obtained.

For each customer a separate file was kept containing: name of purchasing agent and other personnel at customer's office; temperament of purchasing agent; gratuities given; particular requirements; and past purchases. In 1961 these customer profiles were consolidated into a central filing system and measures were taken to insure that each salesman had access only to that portion of the files containing his customers. So concerned were plaintiffs in the protection of this information that in the employment agreement with each salesman hired after 1961 it was provided: '(The salesman) acknowledges that the list of the Corporations' customers is a unique asset of their respective businesses, and * * * will not, during or after the term of his employment, appropriate to his own use or disclose to others for any purpose, any names on such list or any confidential information obtained by him during his employment.' Vigilance is also demonstrated by a form required to be signed by each salesman after contact with a customer: 'The names of all the company customers ever called by me, and those appearing on the face of this telephone report sheet, were obtained from leads furnished by the company and remain the property of the company and will not be disclosed to any unauthorized persons in violation of the trust placed in me by the company.'

In 1965, on the death of the principal of Silfen and the taking of control by his widow, Cream was named executive vice-president and general manager of plaintiff corporations for a term of 12 years. The written agreement between the parties provided for a base salary of $26,000 plus 25% Of the aggregate net profits. The corporations reserved the right to discharge Cream if the aggregate net profits in any one year failed to exceed $35,000. It was also provided that if Cream terminated the agreement he would 'not, for one year thereafter * * * engage in the sale to the corporations' customers of any products competing with the corporations' products.' Since Cream was discharged this restriction is not controlling. The agreement contained no comparable provision to cover Cream's discharge.

On November 17, 1967, Cream was discharged purportedly because of a decline in net profits. Cream, however, urges that he was discharged in order to make room for the new husband of the widow, the former Mrs. Silfen. Thirteen days after his discharge he set up Real Estate Maintenance Chemical Specialty Corporation and engaged in the same business as plaintiffs except limited to building owners and building managers. About three months later, in March, 1968, plaintiffs brought this action to enjoin defendants' solicitation of plaintiffs' customers. The complaint alleged that defendants had been soliciting plaintiffs' customers, that Cream had made copies of plaintiffs' secret and confidential customer files, and was using such information in his solicitation. Cream admits that of a list of 1,100 customers submitted by plaintiffs defendants had solicited 47. Defendants, however, contend that the names of these customers were procured from available commercial lists compiled by commercial list houses. Defendants allege in their answer and assert in their testimony that the customers are openly engaged in business at advertised locations and their names are well known to plaintiffs' competitors.

Notably, plaintiffs did not attempt to sustaintheir allegation that Cream had made copies of plaintiffs' secret and confidential files or used the recorded detail in those files with respect to each customer's 'profile'. The solicitation of plaintiffs' customers was at most the product of casual memory, or, as defendants would have the court believe, coincidence. ¹ If there has been a physical taking or studied copying, the court may in a proper case enjoin solicitation, not necessarily as a violation of a trade secret, but as an egregious breach of trust and confidence while in plaintiffs' service (Scott & Co. v. Scott, 186 App.Div. 518, 524--525, 174 N.Y.S. 583, 586--587; Ann., Customer List--As Trade Secret--Factors, 28 A.L.R.3d 7, pp. 120--124; 36 N.Y.Jur., Master and Servant, § 75; cf. Duane Jones Co. v. Burke, 306 N.Y. 172, 187--188, 117 N.E.2d 237, 244--245; Bruno Co. v. Friedberg, 21 A.D.2d 336, 339--340, 250 N.Y.S.2d 187, 190--191; former Penal Law, § 553, subd. 6). Nor is there any allegation or evidence of other wrongful or fraudulent tactics employed by Cream in connection with the solicitation of plaintiffs' customers. If there had been, a court might award damages and enjoin further similar conduct as constituting unfair competition. (Scott & Co. v. Scott, Supra, 186 App.Div. at p. 525, 174 N.Y.S. at p. 587; Ann., 28 A.L.R.3d, Supra, at pp. 128--129; 60 N.Y.Jur., Trademarks, Tradenames, and Unfair Competition, § 127.) All that remains, therefore, on the theory alleged in the complaint or developed on the trial is whether plaintiffs' customer list, exclusive of the recorded detail about each customer, classifies as a trade secret rendering defendants' solicitation of customers on that list improper, sufficient to warrant injunction and damages.

Generally, where the customers are readily ascertainable outside the employer's business as prospective users or consumers of the employer's services or products, trade secret protection will not attach and courts will not enjoin the employee from soliciting his employer's customers (Boosing v. Dorman, 148 App.Div. 824, 827, 133 N.Y.S. 910, 911, affd. 210 N.Y. 529, 103 N.E. 1121; Tepfer & Sons v. Zschaler, 25 A.D.2d 786, 787, 269 N.Y.S.2d 552; Hudson Val. Propane Corp. v. Byrne, 24 A.D.2d 908, 909, 264 N.Y.S.2d 416, 417; Abdallah v. Crandall, 273 App.Div. 131, 133--134, 76 N.Y.S.2d 403, 405--406; Goldberg v Goldberg, 205 App.Div. 435, 438--439, 200 N.Y.S. 3, 6--7; Scott & Co. v. Scott, Supra, 186 App.Div. at pp. 524--525, 527, 174 N.Y.S. at pp. 586--587, 588; McLean v. Hubbard, 24 Misc.2d 92, 96--97, 194 N.Y.S.2d 644, 648--649, affd. 11 A.D.2d 1084, 208 N.Y.S.2d 443; 60 N.Y.Jur., Trademark, Tradenames and Unfair Competition, § 113; 2 Callmann, Unfair Competition, Trademarks and Monopolies (3d ed.), § 54.2(c)(2), pp. 434--449, esp. 443; Ann., Customer List--As Trade Secret--Factors, 28 A.L.R.3d 7, § 10, subd. (b), Supra; as to trade secrets generally see Restatement, Torts, § 757). Conversely, where the customers are not known in the trade or are discoverable only by extraordinary efforts courts have not hesitated to protect customer lists and files as trade secrets. This is especially so where the customers' patronage had been secured by years of effort and advertising effected by the expenditure of substantial time and money (Town & Country House & Home Serv. v. Newbery, 3 N.Y.2d 554, 558--559, 170 N.Y.S.2d 328, 331--332, 147 N.E.2d 724, 726--727; Cupid Diaper Serv. v. Adelman, 27 Misc.2d 1095, 1096, 211 N.Y.S.2d 813, 814; 2 Callmann, Op. cit., supra, p. 447 and cases cited; 36 N.Y.Jur., Master and Servant, § 76, p. 505, cf. Hudson Val. Propane Corp. v. Byrne, Supra, 24 A.D.2d at p. 909, 264 N.Y.S.2d at p. 417; Witkop & Holmes Co. v. Boyce, 61 Misc. 126, 131, 112 N.Y.S. 874, 877, affd. 131 App.Div. 922, 115 N.Y.S. 1150).

The customers solicited by defendants, as apparently found by the trial court, are openly engaged in business...