Russell Gasket Co. v. Phoenix of Hartford Ins. Co., 74-1555

• Decision Date: 28 February 1975
• Docket Number: No. 74-1555,74-1555
• Parties: RUSSELL GASKET COMPANY, Plaintiff-Appellee, v. The PHOENIX OF HARTFORD INSURANCE COMPANY, Defendant-Appellant.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 205

512 F.2d 205

RUSSELL GASKET COMPANY, Plaintiff-Appellee, v. The PHOENIX OF HARTFORD INSURANCE COMPANY, Defendant-Appellant.

No. 74-1555.

United States Court of Appeals Sixth Circuit.

Feb. 28, 1975.

John E. Martindale, Arter & Hadden, Cleveland, Ohio, for defendant-appellant.

Hahn, Loeser, Freedheim, Dean & Wellman, Forrest B. Weinberg, Neil K. Evans, Cleveland, Ohio, for plaintiff-appellee.

Before PHILLIPS, Chief Judge, ENGEL, Circuit Judge, and McALLISTER, Senior Circuit Judge.

McALLISTER, Senior Circuit Judge.

Russell Gasket Company is a corporation in Ohio, engaged in the manufacture of nonmetallic gaskets and washers out of various flexible materials-cork, rubber, plastics, and the like. In the manufacture are used punch presses, book presses, and frame presses, and with this equipment are made valve-cover gaskets and oil-pan gaskets, and similar articles. The Company has hundreds of suppliers and its primary customers are those engaged in the automotive industry. Much of its business depends on information which it keeps confidential-as to what material sources were used for particular customers; who such customers were, and much other valuable information which the Company had gathered and was esteemed highly valuable in its business and, accordingly, kept confidential.

The Russell Gasket Company appears, since 1951, to be a successful, flourishing company of which Robert S. Stone was President, and the holder of 58 per cent of the stock.

In 1963, Mr. Stone hired Ed Grass as General Manager of the Company, and a contract was entered into in which Grass agreed that any confidential information, trade secrets, or improvements, unique to the Company's operation, whether or not Grass took part in, or was the sole developer thereof, "are the property of the Company, to be held by him in trust and solely for the Company's benefit, and the same shall not be used or disclosed to others, either during or after his employment, without the Company's written consent, unless the said confidential information, trade secrets, * * * become public knowledge through no fault of the employee."

As mentioned, Ed Grass started as General Manager of the Russell Gasket Company in 1963. He was fired on September 18, 1970, when it was discovered that he had been violating every provision of his contract with the Russell Company. This was found out when Mr. Edward Hammond called Mr. Stone and told him a man in Russell's employ owned 40 per cent of the stock in the R.P.I. Company, a smaller gasket company, and that he had recently received dividends of $12,000.00 from the R.P.I. Company. Mr. Stone immediately made an appointment with Mr. Hammond, who told him in the presence of Russell's counsel that the man who had received the dividends from R.P.I. was Ed Grass, who had given R.P.I. all sorts of records of the Russell Company and quotes prepared by him, as well as many documents stolen from the Russell Company, together with lists of sources of raw materials and lists of customers.

Mr. Hammond told Mr. Stone he would take him into the R.P.I. plant at night, where Mr. Stone found much of the Russell Company's property, consisting of dies of various kinds, and punch-press type dies, tool-ruled dies, and compound dies. Russell afterward received from Hammond many other documents, quotations, purchaser orders that belonged to Russell and were stolen by Ed Grass, and given to R.P.I.

Shortly after the discovery of the frauds, embezzlements and defalcations, on September 23, 1970, Mr. Stone, in writing, notified his insurance agent and representative of The Phoenix Insurance Company of the defalcations and the legal action the Russell Company had taken. Of course, at that time-thirteen days after Mr. Stone first was told that the thievery and fraud were going on-the Russell Company had no idea of the extent of the loss. There had been insufficient time to do more than ascertain the principal acts of defalcation and to speculate on the possible extent of the loss.

A year and a half later, on March 20, 1972, after extensive investigations and legal proceedings, Russell Gasket Company was awarded judgment against the tortfeasors, Grass, one Freebairn, and the R.P.I. Company, in the Common Pleas Court of Cuyahoga County. Russell had been insured by The Phoenix of Hartford Insurance Company against losses arising from employee fraud and dishonesty under fidelity bonds issued by Phoenix which afforded coverage of $50,000 against such losses.

Mr. Stone had immediately told Phoenix of his discovery of what turned out to be a gigantic larceny and embezzlement on September 23, 1970, and thereafter John Smeritt, the claims adjuster for Phoenix, called on Mr. Stone to discuss the claim of the Russell Company. Smeritt at once told Mr. Stone that he felt this was not a valid claim that would fall within the...