Scharmer v. Carrollton Mfg. Co.

• Decision Date: 28 October 1975
• Docket Number: No. 74-2148,74-2148
• Parties: , 1975-2 Trade Cases 60,562 George SCHARMER, Plaintiff-Appellant, v. CARROLLTON MANUFACTURING COMPANY et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 95

525 F.2d 95

187 U.S.P.Q. 736, 1975-2 Trade Cases 60,562

George SCHARMER, Plaintiff-Appellant, v. CARROLLTON MANUFACTURING COMPANY et al., Defendants-Appellees.

No. 74-2148.

United States Court of Appeals, Sixth Circuit.

Argued June 17, 1975.

Decided Oct. 28, 1975.

Albert L. Ely, Jr., Ely & Golrick, Cleveland, Ohio, George H. Mortimer, New York City, for plaintiff-appellant.

Alan P. Buchmann, Squire, Sanders & Dempsey, Cleveland, Ohio, William T Before PHILLIPS, Chief Judge, and WEICK and EDWARDS, Circuit Judges.

Allmon, Carrollton, Ohio, Bernard J. Cantor, Jerold I. Schneider, Cullen, Settle, Sloman & Cantor, Detroit, Mich., for defendants-appellees.

WEICK, Circuit Judge.

Appellant Scharmer has appealed from a judgment of the District Court dismissing his five count substitute complaint following the granting of three successive motions of the defendants for summary judgment.

In his complaint, filed in 1970, Scharmer asserted claims for infringement of two patents owned by him and three claims for unjust enrichment, unfair competition, and violation of the antitrust laws.

In three Memorandum Opinions and Orders the District Court held that U.S.Patent No. 2,884,649 relating to stainless sheet metal work surfaces was not infringed; that U.S.Patent No. 3,235,886 relating to kitchen sinks and methods of manufacture was invalid because of sales made of the patented article more than one year prior to the filing date of the application for the patent. With respect to Scharmer's claims for unjust enrichment, unfair competition, and antitrust violation, the Court held that he had no standing to assert claims, the right of action to which was vested in his bankrupt corporation, New Milford Construction and Repair Company; that a 1973 assignment purportedly executed after bankruptcy by an officer of the bankrupt company, to Scharmer, was not effective to transfer to him any asset or chose in action which belonged to the bankrupt company; and that plaintiff's claim for violation of a trade secret is without merit because of public disclosure thereof in his patent and sales of the article prior to the patent. We will take up these claims in the order in which they were treated by the District Judge.

I

UNFAIR COMPETITION, UNJUST ENRICHMENT, TRADE SECRET AND

ANTITRUST VIOLATIONS, COUNTS III, IV AND V OF COMPLAINT

Scharmer was an officer, director and owner of all of the issued and outstanding capital stock of New Milford Construction and Repair Company (a New Jersey corporation), except qualifying shares. New Milford was engaged in the manufacture, sale and installation of stainless steel sink bowls, sink tops, scullery sinks, and self rimming sinks. Carrollton Manufacturing Company was also engaged in the manufacture and sale of kitchen sinks.

The District Court found that in 1959 New Milford and Carrollton had engaged in discussions which contemplated that New Milford would purchase stainless steel sink bowls from Carrollton, to be used in the making of completed sinks, and Carrollton would buy back the completed sinks from New Milford.

During the negotiations Scharmer claimed that he disclosed to a representative of Carrollton a method which he conceived for joining the stainless steel bowl to the drainboard, which method he asserted was a trade secret.

As a result of the negotiations very few orders were given: in 1960 only 181 bowls were purchased by New Milford, processed into sinks and sold back to Carrollton. The total amount of business transacted between the companies in 1960 amounted to only $5,000, and there were no additional sales between them since that time.

On July 5, 1962 New Milford was adjudicated bankrupt on its voluntary petition. Scharmer was one of its creditors and he received a dividend of 3%, which was the amount paid on the claims of all general creditors. The schedules filed in the bankruptcy proceeding did not list any claims of the bankrupt against Carrollton, and no such claims were administered in the bankruptcy proceeding.

Although New Milford had paid no franchise taxes to the state of New Jersey since 1963, Scharmer contended that its corporate existence continued under New Jersey law for the purpose of winding up its affairs.

On January 23, 1973, during the pendency of the present suit, a resolution was adopted by the directors of New Milford, which resolution purported to recite that at the time when New Milford's business was discontinued by bankruptcy it was understood and agreed by the directors "that George A. Scharmer would succeed to any and all right, title and interest in and to property, choses in action, and other things of value owned by New Milford . . . " and undertook to authorize Evelyn Scharmer, vice-president of New Milford, to execute an assignment and transfer to Scharmer, which she did on the same day.

Also during the pendency of the present suit Carrollton defaulted on secured obligations which it owed to Union Commerce Bank and Cummings Bank. The banks foreclosed on their security which consisted of real and personal property, and they later sold the foreclosed assets to a subsidiary of Brass-Craft Manufacturing Company for use in its manufacturing operations. Defendant Yanowitz represented the subsidiary in the acquisition. As a result Carrollton has ceased doing business, but it apparently has continued its existence as a corporate entity.

Scharmer made the banks, the subsidiary, and Yanowitz parties defendant to his suit.

THE ASSIGNMENT

The alleged assignment, under which Scharmer claimed title to sue for New Milford's damages, was executed during the course of the company's bankruptcy proceedings and was to take effect following entry of the final order in bankruptcy.

Under the provisions of 11 U.S.C. § 110(a)(5) the trustee of the estate of the bankrupt was vested with title to all of the bankrupt's property, including rights and choses in action. See Gochenour v. Cleveland Terminals Bldg. Co., 118 F.2d 89 (6th Cir. 1941).

The trustee in bankruptcy, with the approval of the bankruptcy court, may elect to abandon assets of the bankrupt. Following abandonment title revests in the bankrupt. In re Thomas, 204 F.2d 788 (7th Cir. 1953); Rosenblum v. Dingfelder, 111 F.2d 406 (2d Cir. 1940). However, this doctrine has no application to unscheduled assets of which the trustee was ignorant and had no opportunity to make an election. First Nat'l Bank of Jacksboro v. Lasater, 196 U.S. 115, 118, 25 S.Ct. 206, 49 L.Ed. 408 (1905).

Nor does this doctrine apply when the bankruptcy court has never authorized the abandonment of such assets.

When new assets are discovered following the close of a bankruptcy case the proper procedure is to apply to the bankruptcy court to reopen the case pursuant to Bankruptcy Rule 515, for administration of the assets. ¹ I Collier on Bankruptcy, P 2.49 (1974). See Tuffy v. Nichols, 120 F.2d 906 (2d Cir.), cert. denied, 314 U.S. 660, 62 S.Ct. 113, 86 L.Ed. 528 (1941); In re Mirsky, 124 F.2d 1017 (2d Cir.), cert. denied, 317 U.S. 638, 63 S.Ct. 29, 87 L.Ed. 514 (1942); In re Dacus, 34 F.Supp. 841 (E.D.Tenn.1940). This procedure should have been employed by Scharmer if he desired to acquire title to the unscheduled assets of his bankrupt corporation. I Collier on Bankruptcy, P 2.50 (1974). The bankruptcy court could then have exercised its discretion as to whether to reopen or decline to reopen the case. In re Perlman Instead, Scharmer chose a more circuitous route. The result was that New Milford was never revested with title to the rights of action alleged in Scharmer's complaint, and the alleged assignment to Scharmer was a nullity. See Constant v. Kulukundis, 125 F.Supp. 305 (S.D.N.Y.1954); Grauman v. City Co. of New York, 113 F.Supp. 437 (S.D.N.Y.1941). Scharmer does not have standing to sue in his own behalf for any claim for damages owned by New Milford. Former Stockholders of Barr Rubber Prods. Co. v. McNeil Corp., 325 F.Supp. 917 (N.D.Ohio 1970), aff'd, 441 F.2d 1169 (6th Cir. 1971).

116 F.2d 49 (2d Cir. 1940). If the case is reopened the bankruptcy court would then have an opportunity to appraise the unscheduled assets and decide whether they should be administered or abandoned. But this procedure was not followed.

II

A. TRADE SECRET

The property right in a trade secret ceases to exist after the secret has become public property through general disclosure. If a trade secret is patented there is no further right to secrecy. The patent is a legal disclosure with the right to a limited, temporary monopoly granted as the reward for disclosure. Sandlin v. Johnson, 141 F.2d 660 (8th Cir. 1944); Newport Industries, Inc. v. Crosby Naval Stores, Inc., 139 F.2d 611, 612 (5th Cir. 1944). See Grant v. Raymond, 31 U.S. 218, 242, 6 Pet. 218, 8 L.Ed. 376 (1832).

Scharmer's application for a patent, dated June 24, 1963, was not a disclosure of, nor a dedication of, his secret to the public. This is evidenced by the practice of the United States Patent Office of maintaining all applications in secrecy pending disposition. A. O. Smith Corp. v. Petroleum Iron Works Co., 73 F.2d 531, 537 (6th Cir. 1934); 37 C.F.R. § 1.14, 35 U.S.C.A. App. I, at 653.

When the patent was granted on February 22, 1966, Scharmer's property right in the trade secret ceased prospectively. Thus, he had no right of action for misuse of a trade secret subsequent to that date. Sandlin v. Johnson, supra.

The fact that the patent was subsequently declared invalid negates only the inventor's right to a limited monopoly and not the public disclosure which attends issuance of the patent.

But there was public disclosure of the alleged trade secret prior to the issuance of the patent. It occurred when Scharmer's company, New Milford, in 1960 resold the units back to Carrollton. The alleged trade secret became plainly visible merely by looking at the units. This was shown by uncontroverted evidence. It was no longer a secret.

Furthermore, the...