Maryland Metals, Inc. v. Metzner

• Decision Date: 01 February 1978
• Docket Number: No. 100,100
• Citation: 282 Md. 31,382 A.2d 564
• Parties: MARYLAND METALS, INC. v. Sidney S. METZNER et al.
• Court: Maryland Court of Appeals

Page 31

282 Md. 31

382 A.2d 564

MARYLAND METALS, INC. v. Sidney S. METZNER et al.

No. 100.

Court of Appeals of Maryland.

Feb. 1, 1978.

John J. Sweeney, Jr., Baltimore (Lynn F. Meyers, Hagerstown, on the brief), for appellant.

Emanuel H. Horn, Baltimore, and Jacob B. Berkson, Hagerstown (Richard F. McGrory, Hagerstown, on the brief), for appellees.

Argued before SMITH, DIGGES, LEVINE and ELDRIDGE, JJ., and JOHN P. MOORE and ANSELM SODARO, Special Judges.

LEVINE, Judge.

In this appeal we consider the extent to which officers and high-level managerial employees may, prior to termination of the employment relationship, make preparations to compete with their corporate employer without violating fiduciary obligations running to the corporation. The chancellor (Rutledge, J.), sitting in the Circuit Court for Washington County, denied the request of appellant, Maryland Metals, Inc., for injunctive relief and damages against two former employees and corporations formed by them (appellees here), ruling that the individual appellees had not acted wrongfully in merely preparing to form and finance a competitive enterprise before severing their ties with appellant. Upon issuance of an order dismissing its amended bill of complaint, appellant noted an appeal to the Court of Special Appeals, but we granted certiorari in advance of oral argument in that court. We now affirm.

I

Appellant, located in Hagerstown, is engaged in the business of buying, processing and selling scrap metal obtained from automotive, industrial and miscellaneous sources. Prior to its incorporation in 1955, the company had been operated as a sole proprietorship by the late Harry Kerstein (Harry), who founded the business in the 1930's and later became the corporation's sole stockholder. On his death in June 1973, he was succeeded as president by his son Robert Kerstein (Robert), a graduate of the University of Pennsylvania, Wharton School of Finance.

In 1951, Harry engaged, at a starting salary of $85 per week, appellee Sidney S. Metzner (Metzner), who was then recently graduated from college with a degree in business administration and had been employed by a national retail chain in its management training program. With Metzner playing a major role, the business grew and prospered in the ensuing years. On formation of the corporation in 1955, he was named secretary. By June 1974, when he resigned, Metzner had risen to the position of executive vice president and was earning in excess of $80,000 a year. In 1970, appellant employed appellee George W. Sellers, III (Sellers), on Metzner's recommendation, at a starting annual salary of $20,000. Initially Sellers occupied the position of operations manager because of his proven talents in maintaining heavy machinery. He gradually demonstrated managerial capability as well and at the time of his dismissal in late May 1974, held the position of vice president in charge of operations, earning in excess of $31,000 a year.

Rapid technological advances in the design and manufacture of scrap processing machinery contributed significantly to the genesis of this dispute. In 1966, appellant purchased at a total cost of some $400,000 a piece of equipment described in the trade as a guillotine shear. ¹ Even as it was awaiting delivery of the shear, appellant was already studying the potential of a newer and more revolutionary machine known as a "shredder." ²

Between 1966 and 1973, Metzner was dispatched on several assignments to inspect shredding operations in other parts of the country. On returning from certain key inspection trips, he submitted recommendations urging the acquisition of a shredder. His last such report and recommendation was dated May 1, 1974, only four weeks before he tendered his resignation.

In September 1970, appellant's board of directors authorized Harry Kerstein to purchase a shredding machine from Newell Manufacturing Company of San Antonio, Texas, one of two leading manufacturers of such machines, for the sum of $384,000. Appellant thereupon entered into a cancellable purchase agreement with Newell and also acquired an option to purchase some 40 acres of land in the Hetzler Industrial Park near Hagerstown, which was suitable for a shredding operation from both a physical and a zoning standpoint. Several weeks later, however, appellant's board of directors voted to defer purchase of the shredding machine, citing several reasons, including a downward trend in the market price for shredded scrap, which apparently proved to be temporary, and some uncertainty as to the proficiency of the machine. Consequently the order was cancelled and the option on the land allowed to expire without being exercised.

Following Harry's death in June 1973, appellant resumed its interest in a shredding operation. Once again Metzner, now assisted by Sellers, was instructed to conduct an appropriate investigation in the summer and fall of 1973, and to report the outcome of those efforts to the corporation. Metzner and Sellers complied with these instructions in some detail and urged Robert to acquire a shredder immediately.

What transpired beginning in November 1973, is the subject of some dispute in the testimony. Metzner maintains that he had a discussion with Robert in November during which he expressed his unwillingness to continue with appellant unless he could own some equity in the corporation. Robert replied that this was impossible because his father, as sole stockholder, had transferred his holdings to a testamentary trust. According to his testimony, Metzner then proposed that a new corporation be formed to acquire and operate a shredder in which he, Sellers and Robert (or appellant) would each own a one-third interest, with the necessary initial capital investment of some $300,000 being advanced by Robert or appellant. Robert acknowledges the substance of this discussion, but beyond this point the Metzner-Sellers version of what occurred differs in one material respect from Robert's account. Metzner testified that he then flatly advised Robert that if he would not join with Metzner and Sellers in the equal ownership of a shredder, they would purchase and operate one without his participation. This was corroborated by Sellers who had held his own independent discussion with Robert.

Conceding the first part of the discussion, Robert maintained that he never received explicit notice of any intention on the part of Metzner or Sellers to leave Maryland Metals and to start their own competing business. He testified that he had merely offered to consider the possibility of a profit-sharing plan for both Metzner and Sellers. Robert further claims to have informed them unequivocally in November that he would not consider any arrangement in which he or Maryland Metals did not own the entire shredding operation.

In the meantime Metzner and Sellers had initiated in November a series of steps preparatory to the establishment of a shredding facility independent of Maryland Metals. These measures, which we shall recount later, are the basis for the present dispute. Professing to be unaware of the preparations being made by Metzner and Sellers, Robert raised Sellers' salary in March 1974 from $25,000 to $31,200. Despite the plans being made by Sellers and Metzner in 1974, they both continued until the very last day of their employment, as they had throughout their careers, to apply their considerable talents and to work long hours in behalf of Maryland Metals.

II

Appellant's principal contention on appeal is that by deliberately failing to disclose in detail their preliminary arrangements to enter into competition with Maryland Metals, while serving as appellant's officers and employees, appellees committed a "gross breach of their fiduciary duty" of loyalty, thereby entitling appellant, as a matter of law, to an injunction restraining further operation of appellees' rival scrap metal processing business.

In defining the scope of the right of an employee or corporate officer to enter into competition with his former principal and in delimiting the countervailing right of an employer to restrain his agent's competitive endeavors both before and after termination of employment, the law seeks to harmonize two important and ofttimes conflicting policies. The first of these policy considerations is that commercial competition must be conducted according to basic rules of honesty and fair dealing. As we stated in Edmondson Vil. Theatre v. Einbinder, 208 Md. 38, 44, 116 A.2d 377 (1955), the tendency of the law, both legislative and common, has been in the direction of enforcing increasingly higher standards of fairness or commercial morality in trade. In policing the ethics and conventions of the marketplace, courts have paid particular attention to problems associated with competition between employees and their former employers. Because corporate managerial personnel enjoy a high degree of trust and confidence in performing their assigned functions, a potential exists for serious abuse of confidentiality whenever personnel attempt to aggrandize their own economic interests at the expense of the employer. Fairness dictates that an employee not be permitted to exploit the trust of his employer so as to obtain an unfair advantage in competing with the employer in a matter concerning the latter's business. Kademenos v. Equitable Life Assurance Soc. of U. S., 513 F.2d 1073, 1076 (3d Cir. 1975); Restatement (Second) of Agency § 387, Comment b (1957).

This concern for the integrity of the employment relationship has led courts to establish a rule that demands of a corporate officer or employee an undivided and unselfish loyalty to the corporation. See Guth v. Loft, Inc., 23 Del.Ch. 255, 5 A.2d 503, 510 (S.Ct.1939). Thus, we have read into every contract of employment an implied duty that an employee act solely for the benefit of his employer in all matters within the scope of employment, avoiding all...