Water Services, Inc. v. Tesco Chemicals, Inc.

• Decision Date: 07 July 1969
• Docket Number: No. 25578.,25578.
• Citation: 410 F.2d 163
• Parties: WATER SERVICES, INC. and Farris Chemical Company, Appellants, v. TESCO CHEMICALS, INC., et al., Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

410 F.2d 163 (1969)

WATER SERVICES, INC. and Farris Chemical Company, Appellants, v. TESCO CHEMICALS, INC., et al., Appellees.

No. 25578.

United States Court of Appeals Fifth Circuit.

April 18, 1969.

Rehearing Denied July 7, 1969.

Nolan B. Harmon, Atlanta, Ga., for appellants.

Trammell E. Vickery, Francis M. Bird, Jr., Jones, Bird & Howell, Atlanta, Ga., for appellees.

Before WISDOM and AINSWORTH, Circuit Judges, and JOHNSON, District Judge.

WISDOM, Circuit Judge:

Clyde A. Farris developed the first successful, fully automatic system for purifying water for industrial purposes. He sold this system through Water Services, Inc. and Farris Chemical Company under the name "TREAT-A-MATIC".¹

This diversity case involves the validity of the defendant Philip S. Glad's covenant not to compete against his former employer, Farris Chemical Company. Contrary to the district court's holding, we hold that under Georgia law the covenant was a reasonable restraint. We hold also that the defendants, Glad and his present employer, Tesco Chemicals, Inc., misappropriated Farris's trade secrets: Glad breached his confidential relationship with Farris by disclosing to Tesco the design and composition of the TREAT-A-MATIC system and the identity of the suppliers of the components Farris used in producing the TREAT-A-MATIC. Glad will not be allowed to bite the hand that fed him his expertise.

* * *

Since 1953 Farris has engaged in the business of supplying chemicals and equipment for the treatment of water circulated through boilers and large air conditioning systems such as are found in office buildings. The purpose of the treatment is to maintain this water in as near a pure form as possible to minimize injury to the circulating pipes, storage tanks, and other parts of the heating or cooling system caused by corrosion, scale, and algae, wasting as small an amount of water as possible.

The water purification industry is highly competitive. There are between 100 and 150 companies in the business in the southeastern area of the country, with 20 to 25 in Atlanta alone. In this industry, as in many others, the increase in labor costs has accentuated the demand for automation.

Farris Chemical has its headquarters in Knoxville, Tennessee, but employs nine or ten field engineers for the southeastern area, one of whom is responsible for sales and services in the State of Georgia. Farris Chemical has had a substantial growth and now has some 25 employees in management, sales, and the mixing or producing of chemicals sold to the trade. The district court found that the company's success is attributable to the ingenuity, industry, and drive of Clyde Farris, president and founder of the company.

The evaporation of water in air conditioning leaves damaging solids in the system. Until 1960, the "bleeding" of these damaging solids, the testing of acidity and alkalinity by pH content, and the mixture of control chemicals had to be done manually with inferior measuring devices. Various companies experimented with automatic devices to perform these functions, but the first models were expensive and required considerable manpower. In 1960, after four years of trial-and-error experimentation with pumps, timers, and electronic devices, and the expenditure of $18,000 for materials, Farris perfected the TREAT-A-MATIC system.

The district court described the system as made of two basic units: "one has a 30-minute timing device at 15 second intervals with a low volume pump for the injection of chemicals direct from shipping containers on the `rust and scale side'; the other has a 24-hour timer with a skipper wheel up to 12 days and high volume pump for the injection of chemicals direct from shipping containers on the `algae side'. The system is activated by a conductivity device which measures the pH factor for automatic bleeding. All of the devices, together with the electrical control box (which must be specially wired to turn off when the air conditioning system is not in use) are attractively mounted on a single panel board as the TREAT-A-MATIC system."

Farris did not patent the TREAT-A-MATIC: All of the components of the system were available on the open market. The district court found:

"Its originality lies in the arrangement of the devices in combination and the knowledge of the supply source of the component parts. The functions performed were being performed by similar devices in the trade prior to TREAT-A-MATIC, but not in combination and not in as easy and incumbersome a manner.

To capture the chemical sales where the highest profit lies, the TREAT-A-MATIC has been a successful tool. Being fully automated, it appeals to the industry. In addition, by furnishing it on a sale, lease-purchase, or contract basis (wherein the system plus chemicals are furnished for a stated time), Farris has been able to obtain the more lucrative chemical business from a wide range of customers. As stated at trial, Farris undoubtedly `built a better mouse-trap\' and beat the competition to the market place with it."

Farris protected the composition of the TREAT-A-MATIC system by concealing the identity of the components and their suppliers.² The company maintained rigid internal security, and required each employee to sign a non-competition covenant as a condition of employment.

Tesco Chemicals is a direct competitor of Farris. At least as early as April of 1962, Tesco Chemicals, Inc. realized the absolute necessity for automated equipment in order to survive. Tesco began in the business of swimming pool treatment. It hired Mr. Frank Parker to establish and develop an Industrial Division. Parker immediately began to work on automating, but in late 1965 he was writing to component suppliers for any information they could give on equipment "packages", despite having had a TREAT-A-MATIC system in the Tesco laboratory for detailed inspection and disassembly in early 1965.

In 1963, Farris hired Philip Glad as a field engineer and sales representative. At the time, Farris stressed the highly competitive nature of the industry and the need for tight secrecy on all information concerning equipment, chemicals, and prices. Glad signed a contract containing a two-year non-competition provision covering the northern third of Georgia and a few towns on the Tennessee side of the line. Despite Glad's formal education in electrical engineering, the great bulk of his present expertise was obtained from his experience and training with Farris (for 3 months under close supervision, then seminars three or four times a year). Farris gave Glad the names of the component suppliers, the wiring method, the design detail, and other confidential information. Indeed, he became privy to all construction and sales information concerning the TREAT-A-MATIC system.

After two years with Farris, Glad telephoned Parker and arranged to meet with him to discuss the possibility of Tesco's employing him.³ By that time Parker had experimented with various components in an attempt to create an automated system similar to TREAT-A-MATIC but had met with no success. He had lost several sales for lack of such a system. Parker had seen TREAT-A-MATIC installations at the sites of customers and, as noted earlier, on at least one occasion had disassembled a TREAT-A-MATIC unit. Tesco hired Glad. The district court found that the "hiring of Glad was with the specific intent of acquiring for Tesco the skill and knowledge necessary to create a fully automated system similar to the TREAT-A-MATIC". Glad began immediately to work on reproducing for Tesco the TESCOMATIC system, based on his knowledge of the TREAT-A-MATIC system. The district court commented:

The similarity between the two systems is striking. Without going into detail, suffice it to say that they are as near identical as possible for Parker and Glad to construct. The components are the same, with the exception of the conductivity device (the source of which apparently was unknown to Glad) and minor changes in the electrical terminal strip and service switch. The grouping and panel mounting are practically the same."

On March 1, 1967, Water Services and Farris brought this suit against Tesco and Glad, asking for injunctive relief and damages. The district court, sitting without a jury, entered judgment in favor of the defendants. We reverse and remand.

I.

Philip Glad, like all other Farris employees, signed the following covenant:

It is agreed and understood that for a period of two (2) years after the termination of this contract, regardless of the reason of cause of such termination or cancellation, the Employee will not engage, either directly or indirectly, on his own account or as agent, servant or employee of any person, firm or corporation, in any business which could reasonably be considered to be in competition with Water Services, Inc., in any territory in which he has performed services under this contract.

The threshold question is whether this covenant is reasonable and therefore enforcible under Georgia law. The parties agree that Georgia law controls the construction of the covenant.⁴ See The Day Companies v. Patat, 5 Cir. 1968, 403 F. 2d 792; Budget Rent-A-Car Corp. v. Fein, 5 Cir. 1965, 342 F.2d 509.

As the district court observed, "The problem of noncompeting covenants in Georgia is one which has caused great difficulty for the courts and practitioners over a long period of time". Under Georgia law, covenants not to compete are upheld if they are limited as to time and territory and definite as to the nature, kind, and character of the activities prohibited. Bennett v. Georgia Indus. Catering Co., 1966, 222 Ga. 127, 149 S.E.2d 81; Shirk v. Loftis Bros., 1918, 148 Ga. 500, 97 S.E. 66; Rakestraw v. Lanier, 1898, 104 Ga. 188, 30 S.E. 735. Georgia, like most states, has a public policy prohibiting contracts in "general restraint of trade". See Georgia Code § 20-504. But, "While public policy forbids any agreement...