Paint Brush Corp. v. Neu

• Decision Date: 01 September 1999
• Docket Number: No. 20716, No. 20701, No. 20760, No. 20715, No. 20766., No. 20755
• Citation: 1999 SD 120,599 N.W.2d 384
• Parties: PAINT BRUSH CORPORATION, Parts Brush Division, Plaintiff and Appellant, v. John NEU, James Neu, and Neu Realty Company, d/b/a Walton Brush, Defendants and Appellees.
• Court: South Dakota Supreme Court

599 N.W.2d 384

1999 SD 120

PAINT BRUSH CORPORATION, Parts Brush Division, Plaintiff and Appellant, v. John NEU, James Neu, and Neu Realty Company, d/b/a Walton Brush, Defendants and Appellees.

Nos. 20701, 20715, 20716, 20755, 20760, 20766.

Supreme Court of South Dakota.

Argued April 28, 1999.

Decided September 1, 1999.

Martin Weeks of Bogue, Weeks, Collier & Reed, Vermillion, South Dakota, Raymond C. Ortman, Jr. of Ortman & Associates, Deephaven, Minnesota, John Simko and William G. Beck of Woods, Fuller, Shultz & Smith, Sioux Falls, South Dakota, Attorneys for plaintiff and appellant.

Cheryle Wiedmeier Gering and Michael J. Schaffer of Davenport, Evans, Hurwitz & Smith, Sioux Falls, South Dakota, Attorneys for appellees John Neu & Neu Realty.

David A. Pfeifle and Lon J. Kouri of May, Johnson, Doyle & Becker, Sioux Falls, South Dakota, Attorneys for appellee James Neu.

JOHNSON, Circuit Judge.

[¶ 1.] Paint Brush Corporation, Parts Brush Division, filed suit against James Neu, John Neu, and Neu Realty Company d/b/a Walton Brush, alleging: 1) violation of the South Dakota Uniform Trade Secrets Act; 2) fraud; 3) breach of duty of loyalty; and 4) breach of contract. John Neu, and Neu Realty Company d/b/a Walton Brush, (Walton Brush), filed a separate answer and counterclaim asserting defamation, disparagement, and tortious interference with business relationships or expectancy. Without providing any rationale as to its decision, the trial court granted summary judgment on all claims. We affirm, in part, and reverse and remand, in part.

FACTS AND PROCEDURAL HISTORY

[¶ 2.] Paint Brush Corporation (PBC) was founded in 1946, by Douglas Rose, who is the president and principal shareholder of PBC. The business, located in Vermillion, designs, manufactures, and distributes paint brushes and parts cleaning brushes. It is the manufacturing process of the parts brushes and their customer and supplier lists that PBC claims are a trade secret.

[¶ 3.] In the second half of 1994, James Neu approached Rose and the two began discussions concerning the potential sale of PBC. James was interested in locating a business to provide his son, John Neu, with a stable and profitable future.

[¶ 4.] According to Rose, the parties continued negotiations and Rose furnished James with some of PBC's financial information. Rose also asserts the parties reached an agreement as to price and an approximate date of sale. He further claims the parties discussed the potential pre-sale employment of John, as James wished for his son to learn the business prior to taking over since the sale was not to commence until the spring of 1995.

[¶ 5.] Apparently in December 1994, James Neu decided he was no longer interested in purchasing the business. He did not, however, convey that to Rose. In January 1995, PBC hired John as its bookkeeper. John was employed there until June 30, 1995, when he was terminated for unacceptable performance and after Rose learned that James no longer planned on buying PBC. [¶ 6.] In July 1995, after John's termination, Walton Brush was organized by John and James Neu to compete with PBC in the manufacturing of parts cleaning brushes. During the six-month period John worked at PBC, James purchased some equipment similar to that used by PBC in its manufacturing process of the parts brushes. Before John left PBC's employ, either Neu Realty or James made contact with some of PBC's suppliers and had received correspondence in return. PBC avers James received this information from John while he was still employed with them.

[¶ 7.] Rose learned about Walton Brush's parts brushes operation when one of PBC's customers forwarded an advertisement to PBC that they had received from Walton Brush. In response, PBC sent a "Warning" letter to its customers.¹ This letter is the basis of Walton Brush's counterclaims.

[¶ 8.] In February 1997, PBC brought an action seeking money damages and an injunction to prevent Neus from using or disclosing confidential information and trade secrets belonging to PBC. Walton Brush counterclaimed, asserting defamation, disparagement, and tortious interference with business relationships or expectancy. PBC and Neus moved for summary judgment. The trial court granted their motions, stating only that no genuine issues of material fact exist. Both parties appeal.

ISSUES

[¶ 9.] PBC appeals, raising the following issues:

Did the trial court err in granting summary judgment and dismissing PBC's trade secret claim?

Did the trial court err in granting summary judgment and dismissing PBC's fraud claim?

Did the trial court err in granting summary judgment and dismissing PBC's breach of duty of loyalty claim?

Did the trial court err in granting summary judgment and dismissing PBC's breach of contract claim?

[¶ 10.] Walton Brush filed notice of review, raising the following issues:

Did the trial court err in granting summary judgment and dismissing Walton Brush's defamation claim?

Did the trial court err in granting summary judgment and dismissing Walton Brush's disparagement claim?

Did the trial court err in granting summary judgment and dismissing Walton Brush's claim of tortious interference with business relationships or expectancy?

Whether the trial court erred by failing to rule on, and then dismissing Walton Brush's Motion to Compel Discovery?

[¶ 11.] James Neu and Walton Brush filed notice of review, raising the following issue:

Whether the trial court erred in denying Neus' motion for attorney's fees and taxation of costs and disbursements?

STANDARD OF REVIEW

[¶ 12.] Our review of a trial court's order granting summary judgment is well established:

In reviewing a grant or a denial of summary judgment under SDCL 15-6-56(c), we must determine whether the moving party demonstrated the absence of any genuine issue of material fact and showed entitlement to judgment on the merits as a matter of law. The evidence must be viewed most favorably to the nonmoving party and reasonable doubts should be resolved against the moving party. The nonmoving party, however, must present specific facts showing that a genuine, material issue for trial exists. Our task on appeal is to determine only whether a genuine issue of material fact exists and whether the law was correctly applied. If there exists any basis which supports the ruling of the trial court, affirmance of a summary judgment is proper.

Coffee Cup Fuel Stops & Convenience Stores, Inc., v. Donnelly et al., 1999 SD 46, 17, 592 N.W.2d 924 (citing Walther v. KPKA Meadowlands Ltd. Partnership, 1998 SD 78, 14, 581 N.W.2d 527, 531).

ANALYSIS AND DECISION

[¶ 13.] The trial court erred in granting summary judgment to the Neus on PBC's trade secret claim.

[¶ 14.] SDCL 37-29-1(4) sets forth the definition of what constitutes a trade secret. It provides as follows:

(4) "Trade secret," information, including a formula, pattern, compilation, program, device, method, technique or process, that:

(i) Derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use; and

(ii) Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

The existence of a trade secret is a mixed question of law and fact. Weins v. Sporleder, 1997 SD 111, 16, 569 N.W.2d 16. "The legal part of the question is whether the information in question could constitute a trade secret under the first part of the definition of trade secret." Id. (citation omitted). Our question on review is whether or not what PBC claims to be a trade secret consists of "information, including a formula, pattern, compilation, program, device, method, technique or process" that could constitute a trade secret. SDCL 37-29-1(4). The factual part of the question is determined, however, from a review of the remaining statutory provisions found in the subdivisions of SDCL 37-29-1(4). Id.

[¶ 15.] We consider questions of law under a de novo standard of review. Moss v. Guttormson, 1996 SD 76, ¶ 10, 551 N.W.2d 14, 17. "Accordingly, the issues are fully reviewable and we afford no deference to the conclusions reached by the trial court." Kent v. Lyon, 1996 SD 131, ¶ 15, 555 N.W.2d 106, 110. The trial court's extremely brief memorandum opinion made no mention of a conclusion regarding any questions of law, it merely stated there were no genuine issues of material fact. We are left to determine the question of law as to whether a trade secret could exist under these facts.

[¶ 16.] Neus argue the parts brushes could simply be duplicated by viewing and by dissection, and, as a result, cannot be a trade secret. Rose disputes this and argues the process utilized by PBC to manufacture the parts brushes is not readily apparent by taking the brushes apart.² PBC claims the trial court erred in granting summary judgment. It argues Neus could not have duplicated the parts cleaning brushes without some other knowledge of the manufacturing process. PBC claims that process could constitute a trade secret under the legal analysis of SDCL 37-29-1(4). We agree.

[¶ 17.] Viewing the facts most favorably to the nonmoving party, PBC, requires us to accept as true the process outlined within Rose's affidavit. "Until defendants gained access to plaintiff's secrets through John Neu's employment with the company, plaintiff's parts cleaning brush had never been duplicated." (Rose Affidavit, p. 7). The process or method described in Mr. Rose's affidavit, which we must accept as true under summary judgment review, fits the definition of what could constitute a trade secret. The ring gauge (designed by Rose) is used to measure the necessary bulk or volume of filaments for each brush head to ensure a proper fit within the ferrule. Use of this ring gauge is unique within the industry as others use weight to measure the amount of filaments to use. The means of...