USM Corp. v. Marson Fastener Corp.

Decision Date28 June 1984
Citation467 N.E.2d 1271,392 Mass. 334
PartiesUSM CORPORATION v. MARSON FASTENER CORPORATION et al. 1
CourtUnited States State Supreme Judicial Court of Massachusetts Supreme Court

Harold Hestnes, Boston (David Weild, III, New York City, of New York with him), for Marson Fastener Corp. et al.

James F. Ryan, Boston, for Frank Lahnston.

Before HENNESSEY, C.J., and WILKINS, ABRAMS, NOLAN, LYNCH and O'CONNOR, JJ.

WILKINS, Justice.

In USM Corp. v. Marson Fastener Corp., 379 Mass. 90, 393 N.E.2d 895 (1979) (USM Corp. I ), we concluded that USM Corporation (USM) had taken sufficient, reasonable steps to preserve the secrecy of trade secret information contained in a machine used in the manufacture of blind rivets so that the trade secret was entitled to protection. We remanded the case for further proceedings which appeared likely to involve (a) consideration of the master's accounting of profits as to the defendants' operations in Massachusetts from January 1, 1964, to December 31, 1972, and (b) consideration of the defendants' Massachusetts operations subsequent to the period covered by the master's report and out-of-State operations not covered by his report. Id. at 105 n. 17, 393 N.E.2d 895.

A judge of the Superior Court modified and confirmed the master's report and, following twenty-four days of hearings in March and April, 1981, he made findings and rulings and entered an order for judgment in August, 1981. The judgment, as amended, (a) assessed liability on the Marson defendants in the approximate amount of $4,362,000, representing the corporate defendants' accountable profits from all their blind rivet manufacturing operations through December 31, 1979 (in Australia through June 30, 1980), (b) required the parties to determine accountable profits from those dates to the date of the judgment, (c) assessed punitive damages against the Marson defendants in the approximate amount of $2,181,000 (50% of the accountable profits), and (d) assessed liability in the amount of approximately $15,800 against the defendant Lahnston, based on the proportion of the accountable profits accruing through the date on which his employment by the Marson defendants terminated in February, 1965, and assessed punitive damages against Lahnston at 50% of his liability. The judgment also enjoined all defendants, including Lahnston, from the use or communication of USM's trade secret for a period of five years.

The defendants have appealed from this judgment challenging various aspects of the determination of the accountable profits and challenging the issuance of the injunction. Lahnston by his appeal argues that, because (as the judge found) he earned no profits from the misappropriation of USM's trade secret, USM is not entitled to a money judgment against him. USM in turn has appealed challenging the judge's failure to award it prejudgment interest and attorneys' fees. USM also argues on appeal that Lahnston should be held jointly and severally liable with the Marson defendants for all the accountable profits. We allowed applications for direct appellate review. We affirm the judgment except that the award of punitive damages against all defendants and the assessment of damages against Lahnston should be struck.

The facts supporting liability can be stated briefly. The Marson defendants undertook in 1961 to manufacture blind rivets in competition with USM. Dissatisfied with the performance of their own blind rivet assembly machines, they undertook to construct an assembly machine like the USM machine using improperly obtained USM drawings and the services of Lahnston, a former USM junior engineer, who was acquainted with the USM trade secret, a unique and effective combination of features incorporated in the USM machine. The Marson defendants made use of the trade secret in manufacturing blind rivets in Massachusetts, Canada, and Australia and earned profits from the sale of blind rivets from 1965 to 1980, inclusive, as set forth in the master's report (as modified) or as found by the judge. 2 Only by use of the trade secret were the Marson defendants able to engage in the profitable manufacture and sale of blind rivets.

GENERAL CONSIDERATIONS

Because all the issues argued on appeal concern the relief to which USM is entitled, we first set forth the general principles that guide the determination of the money judgment in favor of USM. USM has waived any damage claim based on its losses, if any, from the trade secret violation and claims instead the profits the defendants realized from their tortious conduct. See Jet Spray Cooler, Inc. v. Crampton, 377 Mass. 159, 169-170, 385 N.E.2d 1349 (1979) (Jet Spray II ). Once a plaintiff demonstrates that a defendant made a profit from the sale of products produced by improper use of a trade secret, the burden shifts to the defendant to demonstrate those costs properly to be offset against its profit and the portion of its profit attributable to factors other than the trade secret. Id. at 174 n. 14, 385 N.E.2d 1349. See 17 U.S.C. § 504(b) (1982) (copyright act). If a defendant cannot meet its burden as to costs and profits, the defendant must suffer the consequences. Jet Spray II, supra at 183, 385 N.E.2d 1349. The over-all object is to render "the ultimate recovery a sound reflection of [the defendants'] unjust enrichment due to the exploitation of the secret, and no more." See USM Corp. I, supra 379 Mass. at 105 n. 17, 393 N.E.2d 895; Jet Spray II, supra 377 Mass. at 183 n. 22, 385 N.E.2d 1349. Of course, such a process may result in the plaintiff's recovering far more than its actual loss. Id. at 182-183, 385 N.E.2d 1349.

With these principles in mind, we turn to several arguments the defendants advance, challenging the determination of the profits allocable to the use of the trade secret. The fact that the trade secret may have been, as the defendants argue, only a "minor improvement" and one made by USM at a low cost of development is irrelevant. It was this improvement alone, even if it was "minor," that, as the master and the judge warrantably found, permitted the defendants to make a profit from the manufacture of blind rivets. Although the defendants' use of the trade secret was involved in only a portion of the entire process of manufacturing and selling blind rivets, the defendants failed to prove a contribution to profits from any element other than the use of the trade secret, such as management skill or capital investment. See USM Corp. I, supra 379 Mass. at 105 n. 17, 393 N.E.2d 895; Jet Spray II, supra 377 Mass. at 183 n. 23, 385 N.E.2d 1349. The availability of other machines to manufacture blind rivets without the use of the trade secret cannot aid the defendants because the use of the trade secret alone was the reason for the defendants' profitability.

The fact that use of the trade secret was the sole reason for the defendants' profitability makes it appropriate to measure USM's recovery by consideration of the defendants' profits from the manufacture and sale of blind rivets and inappropriate to consider only the value, or cost saving, to the defendants arising from the use of the trade secret. See Jet Spray II, supra at 172, 385 N.E.2d 1349. Obviously, in some other situation, the use of a trade secret might well not be the sole source of a defendant's profits and thus the defendant's entire profits from the sale of a product manufactured by use of the trade secret would not be a just measure of the restitution owed. 3 The guiding principle is to order the wrongdoing defendant to give up all gain attributable to the misuse of the trade secret and to measure that gain as accurately as possible.

LAHNSTON'S APPEAL

The defendant Lahnston makes a straightforward, unassailable argument that, because he received no profit from the sale of blind rivets manufactured by use of USM's trade secret, he is not liable in damages. If USM were making a claim of its lost profits because of the tortious appropriation and use of its trade secret, Lahnston could well be viewed as jointly and severally liable with the other defendants. Here, however, Lahnston has not been unjustly enriched by the use of USM's trade secret. He was not a corporate insider who, with others, might be obliged to pay damages because of "their mutual enjoyment of the benefits of those secrets as stockholders, officers and directors." Jet Spray Cooler, Inc. v. Crampton, 361 Mass. 835, 844, 282 N.E.2d 921 (1972). See Jet Spray II, 377 Mass. at 181, 385 N.E.2d 1349; Clark v. Bunker, 453 F.2d 1006, 1012 (9th Cir.1972). 4 There is no showing that Lahnston received any gain from the misappropriation and use of USM's trade secret or that he was in a position with others to decide how to divide the spoils. Thus, although Lahnston is a tortfeasor because of his misappropriation of USM's trade secret and is, as he concedes, subject to the injunction contained in the judgment, he is not liable for money damages.

ALLOCATION OF EXPENSES: THE INCREMENTAL COST APPROACH

Turning then to USM's recovery of monetary relief against the Marson defendants we consider first whether the judge was correct, as a matter of law, in allowing as deductions from gross profit only those costs that wer eshown to have been incurred because of the production and sale of blind rivets. Certainly the cost of labor and materials directly related to the manufacture of blind rivets was allowable, and there is no dispute about the recognition of such items of cost in measuring the defendants' net profits. The defendants argue that selling, general, and administrative (SG&A) expenses should have been allocated on the basis of the sales ratios of tainted and untainted products. The master accepted this approach. USM argues, on the contrary, that SG&A expenses should be determined on an incremental cost approach so that only...

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