Mid-America Marketing Corp. v. Dakota Industries, Inc.

• Court: South Dakota Supreme Court
• Writing for the Court: WOLLMAN; MORGAN; FOSHEIM; FOSHEIM; DUNN; HENDERSON
• Citation: Mid-America Marketing Corp. v. Dakota Industries, Inc., 281 N.W.2d 419 (S.D. 1979)
• Decision Date: 05 July 1979
• Docket Number: MID-AMERICA,No. 12085,12085
• Parties: MARKETING CORPORATION, Plaintiff and Respondent, v. DAKOTA INDUSTRIES, INC., and LaMaur, Inc., Defendants and Appellants.

Page 419

281 N.W.2d 419

207 U.S.P.Q. 37

MID-AMERICA MARKETING CORPORATION, Plaintiff and Respondent, v. DAKOTA INDUSTRIES, INC., and LaMaur, Inc., Defendants and Appellants.

No. 12085.

Supreme Court of South Dakota.

July 5, 1979.

Rehearing Granted Aug. 16, 1979.

David V. Vrooman, Sioux Falls, David J. Vickers, of Boyce, Murphy, McDowell & Greenfield, Sioux Falls, for plaintiff and respondent.

Deming Smith, of Davenport, Evans, Hurwitz & Smith, Sioux Falls, Charles A. Mays, of Leonard, Street & Deinard, Minneapolis, Minn., for defendants and appellants.

WOLLMAN, Chief Justice.

In an action by plaintiff-respondent Mid-America Marketing Corporation for damages for the unauthorized disclosure and use of a trade secret in breach of confidence and implied contract, the jury found for respondent in the amount of $270,000, of which $20,000 represented an award of punitive damages. This is an appeal by defendants-appellants Dakota Industries, Inc. (Dakota) and LaMaur, Inc. (LaMaur) from that judgment. We reverse.

Respondent's founder, Anthony Bachmeier (Bachmeier), has been associated with the beauty industry since 1959. In late 1974, Bachmeier and others struck upon an idea to improve the design and function of electrically heated bonnets used in the industry to facilitate the chemical processing of human hair. In December 1974, Bachmeier took an electrically heated cap manufactured by the TIZ Company to Dakota and discussed with them his ideas concerning improvements in the design of the cap. Bachmeier knew nothing of electrical design or theory and Dakota knew nothing of human hair processing or the theories thereof. Bachmeier indicated that the bonnet should be larger than the TIZ model and should fit snugly about the face in order to block out the outside air; that the material should be lightweight and feminine; that the temperature in the bonnet should be 180o (a figure arrived at by measuring the operating temperature of a hair processing device manufactured by Helene Curtis Co.); and that the heat should be uniformly distributed throughout the interior of the bonnet. Dakota suggested that a snowmobile suit hood manufactured by Dakota would be a good basis for the bonnet. Bachmeier agreed. At the conclusion of this initial meeting, Dakota committed itself to producing a working prototype of the bonnet. No non-disclosure agreement was signed by the parties; however, Bachmeier did inform Dakota that he did not want his idea "spread around town."

Dakota then dismantled the TIZ cap to determine the method by which the heating circuitry had been produced. Following this examination, Dakota procured a heating pad, removed the heating elements (consisting of resistance wire, thermostat, control switch and power cord), and placed them intact into a snowmobile suit hood. The first prototype bonnet was delivered to Bachmeier on January 13, 1975, at which time he signed a receipt stating that the "design etc. (was) proprietary to Dakota Ind. subject to release for engineering development, funding."

Subsequent prototypes produced by Dakota incorporating suggestions made by Bachmeier and others convinced Bachmeier that they were making progress toward a marketable product. Therefore, on February 18, 1975, respondent gave Dakota $10,000 as advance payment toward 1,000 of the bonnets to be known as the ThermoChem Processing System. On February 21, 1975, Dakota and respondent entered into an agreement that provided that Dakota would produce the bonnets and would sell them only to respondent and that respondent would buy them only from Dakota. This agreement also acknowledged that Dakota had developed the ThermoChem Processing System with the advice of respondent. Dakota has never returned respondent's $10,000 nor has it delivered any bonnets to respondent. On March 19, 1975, respondent received by assignment from Bachmeier and others all interests held by them in the electrically heated bonnet. Respondent did not receive an assignment of any interest held by Dakota.

Beginning in February 1975, respondent began holding demonstrations of the ThermoChem Processing System throughout South Dakota and Iowa. Prototypes were given to various beauty salon operators as a method of gaining experience in the actual operation of the device. No particular attempt was made to maintain secrecy. During the first week of March 1975, respondent's employees attended a national beauty trade show in Chicago, Illinois. Respondent's ThermoChem Processing System was on public display and demonstrations of its operation were given. Vic Born, Inc., a regional sales representative organization, was engaged by respondent to solicit orders for the ThermoChem Processing System; a prototype of the device was given to Born and was never returned. In conjunction with the Chicago show, respondent prepared brochures and purchased advertising which pictured the ThermoChem Processing System. These pictures and accompanying text disclosed all of the unique features of the ThermoChem Processing System (its size, feminine appearance, close fit about the face, purpose, ability to retain moisture and maintain constant, even heat) except the details of its electrical circuitry and construction, about which respondent had no knowledge.

At the Chicago show, respondent made its first contact with LaMaur. As a result of LaMaur's interest in the ThermoChem Processing System, respondent withdrew the prototypes from public display. On March 2, 1975, LaMaur signed a memo indicating interest in acquiring exclusive rights to distribution of the ThermoChem Processing System. (This memo does not indicate from whom these rights were to be acquired. It was, however, signed by Bachmeier and another of respondent's stockholders but not as agents of respondent.) LaMaur invited Bachmeier to demonstrate the ThermoChem Processing System at another beauty industry show in New York City in mid-March 1975; simultaneously, respondent displayed the ThermoChem Processing System at still another show in Iowa.

Negotiations between respondent and LaMaur did not lead to a contract. Following this breakdown, LaMaur began negotiations with the KAZ Company to produce a hair processing bonnet that would incorporate the ideas openly disclosed by respondent namely, full head coverage with heat and moisture control. Neither KAZ nor LaMaur, nor for that matter respondent, possessed the technical expertise developed by Dakota to actually construct an appropriate bonnet. Therefore, KAZ had to start at the beginning with original engineering. When Dakota approached LaMaur, as discussed infra, LaMaur realized that a marketable product could be procured from Dakota much sooner than from KAZ; hence, the contract with KAZ was terminated.

Respondent meanwhile decided to undertake national distribution of the ThermoChem Processing System through its own network of sales representatives. Several of these representatives handled LaMaur's beauty product line and there was evidence that respondent became aware of these representatives through its negotiations with LaMaur. To establish this distribution network, respondent on May 2, 1975, entered into a contract with Dakota whereby Dakota agreed, among other things, to sell ThermoChem Processing Systems only to respondent and respondent agreed to produce orders for 12,500 ThermoChem Processing System units each calendar quarter. Dakota's project manager testified that by calendar quarters they meant each ninety days beginning May 2, 1975. Respondent produced no testimony to challenge this understanding. Respondent did not possess sufficient financial resources to underwrite the credit of cosmotologists ordering the bonnets; therefore, Dakota agreed to underwrite that risk for those customers Dakota found to be credit worthy and that only those orders would count against the 12,500 units respondent was required to sell each quarter in order to avoid default on the contract.

Pursuant to this contract, from May to July of 1975 respondent submitted orders to Dakota for 3,632 units. Of these, only 930 were deemed to be credit worthy by Dakota; however, none of these orders were filled.

On May 23, 1975, respondent and Dakota met and decided that Dakota should attempt to reestablish the negotiations with LaMaur. Respondent attempted to place the following restrictions upon Dakota's negotiation with LaMaur: no agreement was to be reached during the initial meeting; LaMaur was not to be granted exclusive distribution rights; respondent was to be relieved of any obligations to sales representatives; price of the units was not to be discussed; and technical aspects of the ThermoChem Processing System were not to be revealed. The record reveals an unsupported statement by Bachmeier that Dakota agreed to these restrictions. On May 27, 1975, Dakota and LaMaur met and conferred. An agreement in principle was reached at this meeting. On May 29, 1975, Dakota submitted a proposed agreement to LaMaur and turned over to LaMaur the orders for ThermoChem Processing Systems that respondent had placed with Dakota. LaMaur submitted a counter-offer on June 13, 1975; this offer called for respondent's consent to the agreement but did not make respondent a party to the contract and made no provision for respondent's compensation.

On June 20, 1975, Dakota submitted a contract to respondent intended to supplant the May 2 agreement. Under this proposal respondent would receive 18% of all revenues on sales of bonnets made by Dakota and sold to LaMaur. This offer also required respondent to consent to the June 13 contract between Dakota and LaMaur. Along with this new contract, Dakota provided respondent a copy of Appendix A to the contract between appellants, which purports "(t)o identify the proprietary aspect of the Electric Bonnet Processing System, Dakota Industries Inc. Part No. 57822." The document also describes all the materials and assembly steps required to produce a...