National Texture Corp. v. Hymes

• Decision Date: 03 August 1979
• Docket Number: No. 48691.,48691.
• Citation: 282 NW 2d 890
• Parties: NATIONAL TEXTURE CORPORATION, formerly Clemco, Inc., Respondent, v. Richard H. HYMES, Appellant.
• Court: Minnesota Supreme Court

282 N.W.2d 890 (1979)

NATIONAL TEXTURE CORPORATION, formerly Clemco, Inc., Respondent, v. Richard H. HYMES, Appellant.

No. 48691.

Supreme Court of Minnesota.

August 3, 1979.

Orrin Haugen, Kressel & Cecere, Minneapolis, for appellant.

Merchant, Gould, Smith, Edell, Welter & Schmidt and Alan G. Carlson, Minneapolis, for respondent.

Heard before YETKA, WAHL, and MAXWELL, JJ., and considered and decided by the court en banc.

YETKA, Justice.

This is an appeal from an order of Hennepin County District Court, denying various post-trial motions, including defendant Richard Hymes' motion for disqualification of plaintiff National Texture Corporation's counsel, and from the district court's judgment, holding that National Texture Corporation is the owner of U. S. Patent No. 3,897,577, covering roll-on texture, that Hymes shall assign it to the company, and that Hymes' counterclaim should be dismissed. We reverse and remand.

The questions presented by this appeal are:

1. Did the trial court err in denying Hymes' motion to disqualify plaintiff National Texture Corporation's counsel?

2. Did the trial court err in restricting certain pretrial discovery and in limiting cross-examination of plaintiff's witnesses at trial?

3. Were certain findings of fact clearly erroneous?

4. Were the conclusions of law supported by established precedent?

5. Did the trial court improperly deny Hymes' motion to amend his answer to conform to the evidence adduced at trial, pursuant to Rule 15.02, Rules of Civil Procedure?

National Texture Corporation (National)¹ was started by Mary Rae Clement's husband and father-in-law and eventually specialized in drywall products, textured coatings, and the finishing of sheetrock. After her husband died, Mary Rae continued to run the business. In December 1971, she married Richard Hymes, who was made president of the company and a member of the board of directors.

Hymes was brought into the financially troubled company primarily to improve its financial condition and to plan the business. Prior to that, his business experience included selling auto parts, constructing homes and apartments, and managing and maintaining units in the apartment buildings. He claims that he developed roll-on texture during this time. Shortly before he married Mary Rae, he sold his apartment properties.

While he was president of National, neither he nor Mary Rae received a salary, but withdrew money when it was available. According to Mary Rae, in April of 1973, Hymes was dejected after losing a considerable amount of money in the stock market. She testified that he said he would have to look for employment elsewhere because National could not support both of them. She suggested instead that he try to develop new products and new markets so that the company could support them. As a result, Hymes developed several new products. National asserts that roll-on texture was developed at this time. Roll-on texture is a material that can be applied to ceilings or wall textures by the use of a paint roller. It is designed primarily for the do-it-yourself market. It created a new market for National and by 1974 accounted for about 75 percent to 85 percent of National's business.

In September 1973, Hymes met with a patent attorney from the law firm representing National then and in this action. At the September meeting, Hymes gave the attorney some company literature and also discussed roll-on texture. There was a subsequent meeting on November 29, 1973, at which Hymes, using a company check, gave the attorney a deposit for the patent applications for roll-on texture and another product. When the attorney asked whether Hymes wanted to assign the patent applications, he responded that he did not.

The patent for roll-on texture was initially executed on March 11, 1974. Mary Rae testified that she reviewed a draft of the patent application and saw that Hymes' name and address were on it. When she asked him about this, he allegedly told her that the application must be made out to an individual, but that they both knew the company owned it.

Because the initial draft of the application was mislaid, a substitute application was prepared on April 17, 1974, and again Hymes stated he did not want to assign the patent application. In November of that year the patent office rejected the application and the attorney notified Hymes by mail.

In March 1974, Mary Rae and Hymes drew up an employment agreement that required employees to assign ideas, patent applications, or patents in connection with product development to the company. Most of the employees signed this agreement. Hymes maintains that he did not sign the agreement, although several witnesses contradict his testimony.

During the middle and latter part of 1974, Mary Rae and Hymes' relationship deteriorated as they argued about the management of the business. Because of such disputes, Bruce Pedersen, national sales manager, was elected to the board of directors to act as a tie-breaker. On December 30, 1974, Pedersen and Mary Rae voted to remove Hymes as president, and subsequently removed him from the board.

In January 1975, the attorney contacted National with respect to further patent applications or trade secret considerations concerning roll-on texture. Mary Rae authorized an amendment to the patent application and its further prosecution. This effort proved successful and the application was approved. Hymes telephoned the attorney in April or May 1975 to discuss the roll-on texture patent application and another patent that he was considering, but the attorney declined to advise Hymes because, as the attorney testified, he represented National.

National then brought suit in January 1976 to quiet title and to compel Hymes to convey title to the patent to National. Hymes counterclaimed for damages due to National's representing that it owned the patent and disparaging Hymes' business activities. During pretrial discovery, Hymes attempted to depose the attorney as to discussions he had with the officers of National concerning ownership and royalty rights in the patent. The trial court did not permit such inquiry, finding the matters were protected by the attorney-client privilege.

1. Hymes argues that because the attorney represented him during the patent prosecution and Hymes shared certain confidences and secrets with him, Hymes was prejudiced by the attorney's law firm's representation of National in this suit.

An attorney should not use information he received in the course of representing a client to the disadvantage of that client. In this regard, the attorney should exercise care to prevent disclosure of confidences and secrets of one client to another and decline employment that would require such disclosure. ABA Code of Professional Responsibility EC 4-5. See, also, id. DR 4-101. This obligation to preserve the secrets and confidences imparted by a client continues even after the termination of employment. ABA Code of Professional Responsibility EC 4-6. An attorney should similarly refrain from representing a party in an action against the former client where there is an appearance of a conflict of interest or a possible violation of confidence, even if such may not be true in fact. 2 American Bar Association Committee on Ethics and Professional Responsibility, Informal Ethics Opinions 23 (1975). The purpose for disqualification of an attorney in such situations is to ensure the attorney's absolute fidelity and to guard against inadvertent use of confidential information. Ceramco, Inc. v. Lee Pharmaceuticals, 510 F.2d 268, 271 (2 Cir. 1975).

The test generally applied to determine the existence of a conflict of interest is whether there is a substantial relationship between the subject matters of a pending action and those matters in which the attorney is alleged to have previously represented the client. Redd v. Shell Oil Co., 518 F.2d 311 (10 Cir. 1975); T. C. Theatre Corp. v. Warner Bros. Pictures, 113 F.Supp. 265 (S.D.N.Y.1953). Once the substantial relationship test is met, it will be assumed that confidences bearing on the subject matter of the current representation were disclosed. Richardson v. Hamilton International Corp., 469 F.2d 1382, 1385 (...