Sarkes Tarzian, Inc. v. Audio Devices, Inc.

• Decision Date: 23 October 1958
• Docket Number: No. 1237-57.,1237-57.
• Citation: 166 F. Supp. 250
• Court: U.S. District Court — Southern District of California
• Parties: SARKES TARZIAN, INC., a corporation, Plaintiff, v. AUDIO DEVICES, INC., a corporation, et al., Defendants.

166 F. Supp. 250

SARKES TARZIAN, INC., a corporation, Plaintiff, v. AUDIO DEVICES, INC., a corporation, et al., Defendants.

No. 1237-57.

United States District Court S. D. California, Central Division.

September 8, 1958.

Findings and Judgment October 23, 1958.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Dryden, Harrington, Horgan & Swartz, by Jacob Swartz, Los Angeles, Cal., Dutton & Kappes, by C. B. Dutton, Indianapolis, Ind., Mason Kolehmainen, Rathburn & Wyss, by M. Hudson Rathburn, Chicago, Ill., for plaintiff.

Birnbaum & Hemmerling, by Harold F. Birnbaum, Los Angeles, Cal., Pennie, Edmonds, Morton, Barrows & Taylor, by Thomas F. Reddy, Jr., Fritz L. Schweitzer, Jr., Merton S. Neill, New York City, Richards, Birnbaum, Watson & Smith, Los Angeles, Cal., for defendants.

YANKWICH, Chief Judge.

The Complaint in this case is denominated "Unfair Competition; Piracy of Trade Secrets and Labor". In essence it seeks relief, to be more particularized hereinafter, for alleged violation by the defendants of alleged trade secrets consisting of methods of production of silicon rectifiers.¹

I The Issues As Framed By The Pleadings

The plaintiff, Sarkes Tarzian, Inc., to be referred to as Tarzian, is an Indiana corporation with its principal offices and facilities at Bloomington, Indiana. It is engaged in the operation of local radio and television stations and the manufacture and sale of components for electronic equipment, including silicon rectifiers.

The defendants include Audio Devices, Inc., to be referred to as Audio, a New York corporation, the second largest manufacturer of recording tape and accessories and recording discs in the United States with its principal office in New York City and manufacturing plants in Connecticut. Audio also engaged in the manufacture and sale of an electronic component known as a silicon rectifier at its office and plant in Santa Ana, California. Eight individual employees of Audio's Rectifier Division, formerly employed by Tarzian, are also named as defendants.

The Complaint filed November 1, 1957, alleges, in substance, that the plaintiff, as the result of a large expenditure of money, acquired by purchase and development confidential, restricted and secret data, production know-how and information which it utilized in its business of manufacturing and selling silicon rectifiers; that each of the individual defendants had knowledge of such trade secrets; that Audio "conspired" with the individual defendants by employing them, to deprive plaintiff of such trade secrets and to deprive plaintiff of the advantage which it had over its competitors.

In view of the discussion to follow it is well to note the names and positions occupied at Tarzian by its former employees who are named in the Complaint: George J. Eannarino was Director and Manager; Robert C. Parsons was Research Engineer; Frank Olesky was Production Supervisor; Hubert G. Dohmen was Technical Supervisor, Products Crystal Group; Charles C. L. Smith was Chief Quality Control Engineer; Clarence William Chesnut was Mechanical Technician; Frederick G. Schuller was Division Cost Accountant; Ernest C. Fries was Purchasing Agent.

The relief asked by the plaintiff is as follows:

1. That the defendants be enjoined from utilizing any of the information mentioned in paragraph VIII of the Complaint in connection with the manufacture, sale, development or other exploitation of selenium or silicon rectifiers;

2. That defendants be enjoined from disclosing to any person whomsoever any of the restricted, confidential and secret information mentioned in paragraph VIII of the Complaint;

3. For an accounting of all profits resulting from the manufacture, use or sale of silicon rectifiers;

4. For money damages in the amount of $1,000,000;

5. For $1,000,000 by way of punitive damages; and

6. Costs of suit.

The answer, filed December 11, 1957, denied that Audio in any way "conspired" to hire plaintiff's employees or to deprive plaintiff of its alleged trade secrets and alleges that silicon rectifiers, which are manufactured by more than two dozen companies in the United States in a great variety of structures and characteristics for almost every known electrical application, are well-known devices in the art and the trade. The Answer asserts that the materials and methods, as well as the products, developed at Audio, by its personnel, including the individual defendants, are generally well known in the industry by plaintiff's competitors and are described in numerous publications and documents, including text books, periodicals, lectures, patents and government reports, all widely circulated in the trade and available to the public.

The Answer also contained a counterclaim for unfair competition. As it was discussed at the trial, its contents are omitted.

The facts proved will be discussed further on in the opinion.

One fact, however, may be adverted to now. Each of the former employees, except Frederick S. Schuller, at some time during the course of his employment signed an agreement relating to trade secrets. A typical one signed by Eannarino is reproduced in the margin.²

None of the employee-defendants had, at the time of their separation from Tarzian's employ, August 8, 1957, a term contract, all being employed from month to month.^*

II Trade Secrets And Unfair Competition

This is a diversity action.³ Although for unfair competition, it is not pendent to a patent, copyright or trademark infringement.⁴ There is a disagreement among the writers and courts as to whether a federal action for unfair competition has been created by the Lanham Act⁵. In view of the decision of the Supreme Court in Erie Railroad Co. v. Tompkins,⁶ it is certain that the type of unfair competition for which recovery is sought in this action is, under the law of the Ninth Circuit, concededly governed by state law.⁷

In California, unfair competition is proscribed by statute.⁸ Because the California statute refers disjunctively to unfair or fraudulent business practices,⁹ the courts have held that it is not necessary to prove fraud.¹⁰

Unfair competition, under the law of California, may arise from unauthorized disclosure of secret practices.¹¹ This accords with the general law. The Restatement says:

"Unless otherwise agreed, after the termination of the agency, the agent;

"(a) has no duty not to compete with the principal; and

"(b) is subject to a duty to the principal not to use or disclose to third persons, on his own account or on account of others, in competition with the principal or to his injury, trade secrets, written lists of names, or other similar confidential matters given to him only for the principal's use or acquired by the agent in violation of duty. The agent may use general information concerning the method of business of the principal and the names of the customers retained in his memory, if not acquired in violation of his duty as agent."¹²

The concomitant to this rule is given in another Restatement:

"One who discloses or uses another's trade secret, without a privilege to do so, is liable to the other if

"(a) he discovered the secret by improper means, or "(b) his disclosure or use constitutes a breach of confidence reposed in him by the other in disclosing the secret to him, or

"(c) he learned the secret from a third person with notice of the fact that it was a secret and that the third person discovered it by improper means or that the third person's disclosure of it was otherwise a breach of his duty to the other, or

"(d) he learned the secret with notice of the facts that it was a secret and that its disclosure was made to him by mistake."¹³

In the comment on this section two definitions are contained which are pertinent to the discussion to follow. The first is the definition of a trade secret:

"A trade secret may consist of any formula, patterns, device or compilation of information which is used in one's business, and which gives him an opportunity to obtain an advantage over competitors who do not know or use it. It may be a formula for a chemical compound, a process of manufacturing, treating or preserving materials, a pattern for a machine or list of customers."¹⁴

As to secrecy, the same comment states:

"The subject of a trade secret must be secret. Matters of public knowledge or of general knowledge in an industry cannot be appropriated by one as his secret. Matters which are completely disclosed by the goods which one markets cannot be his secret. Substantially, a trade secret is known only in the particular business in which it is used. It is not requisite that only the proprietor of the business know it. He may, without losing his protection, communicate it to others pledged to secrecy. Others may also know of it independently, as for example, when they have discovered the process or formula by independent invention and are keeping it secret. Nevertheless, a substantial element of secrecy must exist, so that, except by the use of improper means, there would be difficulty in acquiring the information.¹⁵

California has for many years recognized the right of the employer to customer lists. This was established in the laundry route cases, the earliest of which dates to 1913¹⁶ and the latest of which were decided in 1957 and 1958.¹⁷ But in enforcing the rule, California courts have insisted that the list be of a character which is secret,— that is names of customers who have been acquired, through solicitation, over a particular period of time. So that where it appeared that the buyers are persons, such as wholesalers, whose names are readily known to the trade through directories, trade catalogues or otherwise, an employer's list which duplicates them is not necessarily secret or confidential.¹⁸ However, if the employee, through long association with them, learns of their buying habits, he will not be allowed to use such additional information to the disadvantage of the former employer.¹⁹

...