Potter v. Hilemn Laboratories, Inc., COA01-399.

• Decision Date: 21 May 2002
• Docket Number: No. COA01-399.,COA01-399.
• Citation: 564 S.E.2d 259,150 NC App. 326
• Court: North Carolina Court of Appeals
• Parties: Paul W. POTTER and Mirror Tech, Inc. v. HILEMN LABORATORIES, INC., Now Known As Hilemn Silvering Solutions, Valspar Mirror Coatings Division of the Valspar Corporation, v. Salem Distributing Co., Inc., Robert A. Long, and Arthur J. Lockhart.

564 S.E.2d 259

150 NC App. 326

Paul W. POTTER and Mirror Tech, Inc. v. HILEMN LABORATORIES, INC., Now Known As Hilemn Silvering Solutions, Valspar Mirror Coatings Division of the Valspar Corporation, v. Salem Distributing Co., Inc., Robert A. Long, and Arthur J. Lockhart.

No. COA01-399.

Court of Appeals of North Carolina.

May 21, 2002.

Bell, Davis & Pitt, P.A., by William K. Davis and Alan M. Ruley, Winston-Salem, for plaintiffs-appellants.

Adams & Osteen, by William L. Osteen, Jr., for plaintiffs-appellants.

Smith Helms Mulliss & Moore, L.L.P, by Bynum M. Hunter, Gregory G. Holland, and Allison Van Laningham, Greensboro, for defendant-appellee.

THOMAS, Judge.

Plaintiffs, Paul W. Potter and Mirror Tech., Inc., appeal the trial court's judgment finding that they violated a consent decree by using a certain silvering solution (Substance X) in making mirrors. Plaintiffs contend the trial court erred in four ways: (1) in concluding that, as between the parties, this is a trade secrets case; (2) in reversing by written order its prior oral ruling that Substance X is not a trade secret; (3) in holding that plaintiffs knowingly and willfully violated the consent judgment; and (4) in determining the type of relief available to defendants.

For reasons discussed herein, we reverse in part and affirm in part.

The facts are as follows: From 1979 until 1990, Potter was employed by defendant, Hilemn Laboratories, Inc., now known as the Hilemn Silvering Coatings Division of the Valspar Corporation (Hilemn). In 1991, Potter left Hilemn and became president of Mirror Tech., which also manufactures and sells silvering solutions used in making mirrors. It directly competes with Hilemn.

Potter and Mirror Tech filed a complaint in 1991 for declaratory relief against Hilemn, primarily seeking two declarations: (1) that a non-competition agreement executed between Potter and Hilemn in 1979 was invalid; and (2) that Hilemn possessed no trade secrets which plaintiffs could be enjoined from using under the North Carolina Trade Secrets Protection Act or other relevant law. Hilemn counterclaimed. It sought to restrain plaintiffs from using or divulging Hilemn's trade secrets and from manufacturing or selling any mirroring solutions similar to Hilemn's solutions, particularly its silvering solutions. Hilemn's pleadings were based in part on the Trade Secrets Protection Act, N.C. Gen.Stat. §§ 66-152 to 66-157 (1999), and alleged breach of fiduciary duty, breach of implied contract, and unfair and deceptive trade practices. Hilemn then filed motions for a temporary restraining order, accelerated discovery, and a preliminary injunction, all of which the trial court granted.

Hilemn also brought a third-party complaint against Salem Distributing Company, Inc., and its president and vice-president Robert A. Long and Arthur J. Lockhart, respectively. Hilemn contended they contacted Potter in an effort to appropriate Hilemn's trade secrets and confidential information.

The terms of the preliminary injunction were lengthy. The trial court found that Hilemn, through its research, had developed silvering solutions, and that two basic high efficiency concentrated solutions were made from Hilemn's own secret chemical formulations and processes: (1) Hilemn's three-part silvering solution; and (2) Hilemn's two-part silvering solution. The trial court further determined that "even though some of the elements used in Hilemn's trade secrets are known to chemists and to the industry ... it is the combination of the various elements and their processing which make[s] them a trade secret." Potter, the court found, breached his duty to his former employer not to use such secret information.

The trial court made an effort to protect the interests of Hilemn while still allowing Potter to work in the mirror silvering industry. It first listed the substances and processes that plaintiffs were forbidden to use or divulge. Among the prohibitions was one banning the use of Substance X in making silvering solutions until 28 September 1993. Provided plaintiffs did not violate this or any other prohibition, however, they were permitted to manufacture, use, or sell silvering solutions which did not contain Substance X. Those included some solutions developed by London Labs, Inc., Hilemn's only significant competitor, solutions not substantially similar to Hilemn's, and some solutions developed independently of Hilemn prior to 1 November 1990.

Approximately a year later, on 17 March 1992, the parties entered into a consent judgment. Significantly, it amended and strengthened the preliminary injunction's provision forbidding plaintiffs from divulging or using Substance X in making silvering solutions by deleting any time limit on the prohibition.

In 1999, Hilemn became aware of possible violations of the consent judgment by plaintiffs. Based on affidavits submitted by Hilemn, the trial court determined that plaintiffs may have been violating the judgment and permitted defendant to test Mirror Tech's formulas. The tests revealed that plaintiffs were using Substance X in its two-part silvering system. Hilemn requested that the court, as the language provides in the consent judgment, "determine the appropriate remedy for said violation."

At the hearing, Potter testified that following the entry of the injunction, he had begun to search for other mirroring solutions. On 15 April 1991, he purchased a two-part and a three-part mirroring solution formula from Mirror Labs. Mirror Lab's two-part formula called for the use of Substance X. Believing the use of Substance X in the Mirror Labs formula violated a London Labs patent, Potter used a different chemical until July of 1998, when the London Labs patent expired. He then started using Substance X. Potter said he believed he was allowed to use Substance X after the expiration of the patent since others in the industry could.

The trial court determined, however, that Substance X is a trade secret as between plaintiffs and defendant because of their agreement. It further found that, beginning in July of 1998, plaintiffs knowingly and willfully, but not maliciously, violated the consent order by using Substance X in its two-part silvering solutions.

The trial court concluded that: (1) Hilemn is entitled to recover from plaintiffs $233,499.17, the amount of plaintiffs' profits derived from using Substance X; (2) Hilemn is entitled to attorneys' fees for plaintiffs' bad faith misappropriation of a trade secret in the amount of $43,594.25, but is not entitled to punitive damages; and (3) Hilemn is not entitled to nominal damages for unfair and deceptive trade practices because it suffered indirect, not actual, injury. Plaintiffs appeal.

Where the plain language of a consent judgment is clear, the original intention of the parties is inferred from its words. Bicket v. McLean Securities, Inc., 124 N.C.App. 548, 552-53, 478 S.E.2d 518, 521 (1996), disc. review denied, 346 N.C. 275, 487 S.E.2d 538 (1997). The trial court's determination of original intent is a question of fact. Id. On appeal, a trial court's findings of fact have the force of a jury verdict and are conclusive if supported by competent evidence. Foster v. Foster Farms, Inc., 112 N.C.App. 700, 706, 436 S.E.2d 843, 847 (1993). The trial court's determination of whether the language in a consent judgment is ambiguous, however, is a question of law and therefore our review of that determination is de novo. Bicket, 124 N.C.App. at 553,

478 S.E.2d at 521. "An ambiguity exists where the language of a contract is fairly and reasonably susceptible to either of the constructions asserted by the parties." Glover v. First Union National Bank, 109 N.C.App. 451, 456, 428 S.E.2d 206, 209 (1993).

By plaintiffs' first assignment of error, they argue the trial court erred in determining this to be a trade secrets case. Looking to the consent judgment for guidance, the court found: "Substance X is a trade secret under the unique circumstances of this case." While recognizing that the chemical has not been a trade secret since the "Peacock Lab patent expired in 1993 and the London Lab[s] patent expired in 1998," the court held that, "as between the plaintiffs ... and the defendant Hilemn, the use of Substance X as a reducer in two-part silvering solutions was a trade secret." We agree with the trial court's conclusion that, regardless of whether Substance X is technically a trade secret, plaintiffs are bound by their agreement that they would treat it as one. See Lampley v. Bell, 250 N.C. 713, 716, 110 S.E.2d 316, 318 (1959)

(a consent judgment is binding on the parties thereto).

We also reject plaintiffs' second assignment of error, by which they contend the trial court erred in reversing by written order its earlier oral ruling that Substance X is not a trade secret. Although the trial court did find that, due to "the unique circumstances of this case" it "explicitly reverses its earlier ruling that Substance X is not a trade secret," plaintiffs failed to show that they suffered prejudice. See, e.g., Reed v. Abrahamson, 108 N.C.App. 301, 309, 423 S.E.2d 491, 495 (1992)

(an erroneous ruling requires reversal only when the objecting party demonstrates it has suffered resulting prejudice), cert. denied, 333 N.C. 463, 427 S.E.2d 624 (1993). They were not prevented from introducing evidence as a result of the order. In fact, the primary focus of their case at trial was to show that the use of Substance X in silvering solutions was not a trade secret.

By plaintiffs' third assignment of error, they contend the trial court erred in finding a violation of the consent judgment in that the conduct constituting the alleged violation was not willful and fell within listed exceptions. The consent judgment provides in pertinent part:

8. [Plaintiffs] shall not divulge or use [Substance X] in making silvering solutions.

....

12. Except as provided in Paragraphs 1-11 above:

a. The

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