Kodekey Electronics, Inc., Plaintiff-appellee, v. the Mechanex Corporation et al., Defendants-appellants, 486 F.2d 449 (10th Cir. 1973)

This is a civil diversity action seeking money damages and injunctive relief which would prohibit defendant from manufacturing, distributing, and selling a certain electronic speedometer and tachometer. The complaint charges (1) misappropriation of trade secrets, (2) breach of contract, and (3) unfair competition. Kodekey Electronics is a California corporation, and "defendant Mechanex is located in Colorado," and is a subsidiary of defendant Tenneco, a Delaware corporation.

Jurisdiction rests on 28 U.S.C. § 1332(a) (1) and the requisite amount in controversy exists. The District Court tried the issue of liability first, and found a basis for recovery, and granted judgment on the three charges above listed. It originally issued a restraining order, reserving its findings and conclusions with respect to damages, but thereafter fixed damages in the sum of $201,768.00, together with costs. The District Court thereafter signed an order modifying its opinion and order, and denied defendants' Motions to Reopen, for a Partial New Trial, and for a New Trial.

On June 9, 1966, Mr. Joseph Kramas, and one Erich Kaufmann, individually, and doing business as K & K Electronics, received an exclusive license to manufacture and market a new type of speedometer which had been developed by one Frank D. Neu and one John Foraker (Plaintiff's Exhibit C).

In November, 1966, Mr. Joseph Kramas, representing K & K Electronics, a partnership, and predecessor of Plaintiff Kodekey Electronics, Inc., approached Mr. Allen J. Stephens of the Mechanex Corporation, and suggested that Mechanex should market an electronic speedometer then being manufactured and sold by K & K Electronics. At that time Mr. Kramas felt that his offering was promising, but that his product needed marketing attention on a national scale (Tr. Vol. I, p. 25).

Mr. Neu and Mr. Foraker had been testing prototypes of their new speedometer with the Greyhound Corporation previous to the execution of the licensing agreement. Subsequent to the execution of the licensing agreement, Mr. Kramas was contacted by Freightliner Corporation (a manufacturer of trucks for Greyhound Moving Corporation), and was asked whether it would be possible to modify the speedometer, as installed in the Greyhound Buses, for use in trucks. Mr. Kramas then began investigating the speedometer plights of other trucking firms in the California area, and found that a serious problem existed with respect to speedometers in the trucking industry (Tr. Vol. I, p. 26). Mr. Kramas thereupon compiled a mailing list and sent inquiries to large and small trucking firms throughout the country, and received significant responses regarding the problems that the trucking industry was experiencing with regard to speedometers and tachometers.

After approaching the Mechanex Corporation in November, 1966, regarding the possibilities that Mechanex might market the instrument on a national scale, Mr. Kramas insisted that a secrecy agreement be signed by a corporate officer of Mechanex before a consignment speedometer would be sent to Mechanex for evaluation by the Mechanex Corporation (Plaintiff's Exhibit K). Mr. Allen J. Stephens signed the secrecy agreement for the Mechanex Corporation and returned it by mail to the Plaintiff on December 5, 1966 (Plaintiff's Exhibits L and M). The provision of said secrecy agreement is as follows:

The MECHANEX CORPORATION agrees to keep confidential all proprietary information regarding Electronic Speedometer furnished by K & K ELECTRONICS and not to use this information in any way detrimental to the interests of K & K ELECTRONICS. Further this information will not be distributed to a competitor of K & K ELECTRONICS or be used by MECHANEX to compete with K & K ELECTRONICS in the field of Electronic Speedometers.¹ 

Further details of the facts are set forth in the margin, for the convenience of the readers of this opinion. They are essential to a complete understanding of the issues ruled upon by the District Court, but not to an understanding of the controlling principles upon which this opinion is based.² 

The District Court, in its Memorandum Opinion of June 2, 1972, found that a valid and binding contract existed between the Plaintiff and Defendant for the distribution and sale by Defendant of a specific product of the Plaintiff; that the Defendant Mechanex had engaged in self dealing with the product in violation of contractual provisions (the electronic speedometer manufactured by the Defendant Mechanex being similar in appearance, operation and design and of the same general kind of product manufactured by Kodekey); that the manufacture of electronic speedometers by Defendant Mechanex was a clear violation and breach of the contractual agreement between Plaintiff and Defendant; that the Defendant Mechanex had engaged in unfair competition against Kodekey and had placed Kodekey in a disadvantageous position of marketing its electronic speedometer; that Plaintiff Kodekey was entitled to damages for the breach of contract and unfair competition; that the manufacture and merchandizing of the speedometer developed by the Defendant Mechanex violated the trust, confidence and fiduciary responsibilities imposed on Defendant Mechanex to the detriment and irreparable damage of Plaintiff Kodekey; and that an adequate remedy at law to protect the contractual rights of the Plaintiff against actions not being present, and the Plaintiff having sustained its burden of proving the reasonableness of the restrictive covenants, that enforcement of the restrictive noncompetitive agreements by injunction was reasonable, and would not unduly injure the Defendants in their overall manufacturing operation.

Appellant urges seven errors. We will consider each in turn:

I. Did any information given to Mechanex by Kodekey constitute a "trade secret"?

II. Assuming one or more "trade secrets" were given to Mechanex, did Kodekey fail to take secrecy precautions essential to maintain such trade secret status?

III. If no "trade secrets" were given to Mechanex, did any other relationship exist between it and Kodekey which prevented Mechanex "from selling the speedometer developed by Mechanex"?

IV. Does the statute of frauds in Colorado prohibit the enforcement of the oral non-competition agreement found by the District Court to exist?

V. Is there sufficient evidence properly in the record to support the award of damages?

VI. Was injunctive relief appropriate?

VII. Was denial of a new trial error?

(Appellants Alleged Errors I, II & III)

Appellants base their first three alleged errors on an assumption that a "trade secret"³  disclosure by Kodekey to Mechanex was the sole content of their signed contract delivered to Appellee on December 5, 1966; and that there were no other obligations subsequently created between the parties. This is not correct. The December 5, 1966 agreement was also an agreement not to compete and not to detrimentally use the information obtained (See Note 1, supra). But more important, the District Court found that the parties also entered into an operating contract, had subsequent oral conversations, written correspondence, and reciprocal commitments and actions, including voluntary representations to third parties. Mechanex Corporation obtained the exclusive right to purchase and sell, and did purchase and sell, in great quantities, Appellee's superior product. Mechanex was given the right to cancel the contract after the purchase of 3000 units, but was required to buy speedometers exclusively from Appellee during the term of the agreement, and within two years thereafter. This provision was reciprocal: Kodekey was required to accept or fill any purchase order, and if it did not, it would not offer to sell or sell to any other customer, foreign or domestic, for a similar period of two years. Mechanex further had a first right of refusal to market other new products of Kodekey during the terms of the contract. Under these contractual provisions, Mechanex purchased, between 1966 and 1970, some 12,000 speedometers.

In view of these facts, and the findings of the District Court which went far beyond the suggestion of Appellants that the court was merely dealing with trade secrets,⁴  we find the first three arguments of Appellant untenable. In this connection we point out the court's specific findings.

"Damages awarded herein are assessed against Defendants for breach of contractual duties, breach of fiduciary responsibilities imposed on Mechanex, unfair competition, and for the breach of a secrecy agreement." (Tr. Vol. VI, p. 535.)

Thus, were we to find there was no breach of a secrecy agreement relating to "trade secrets", that does not invalidate the other facts, findings, and conclusions establishing liability of Defendants-Appellants on other grounds.

However, Appellants insist "the electronic speedometer . . . was a combination of generally known elements and components of electronic circuitry. Accordingly, whether or not the design should be accorded the status and the protection of a trade secret depends upon the uniqueness and value of the combination of elements . . . ."

The Restatement of Torts Sec. 757, comment b at 6-7 (1939) is to the contrary. "Novelty and invention are not requisite for a trade secret as they are for patentability . . . (here a discussion of patent law). But such is not the case with a trade secret. Its protection is not based on a policy of rewarding or otherwise encouraging the development of secret processes or devices. The protection is merely against breach of faith and reprehensible means of learning anothers secret." (emphasis added).

A recital of the conduct of the Appellant Mechanex which began very shortly after the original contact and contracts took place between the litigants is here extremely revealing.⁵ 

Appellee very properly relies on the law as to what constitutes a trade secret is a question of fact for the trial court. (See Note 3, supra.) We cannot say the court's conclusions on the facts herein are clearly erroneous. E. I. DuPont de Nemours & Co. v. United States, 288 F.2d 904, 911, 153 Ct. Cl. 274 (1961); Imperial Chemical Industries, Ltd. v. National Distillers & Chemical Corp., 342 F.2d 737, 742 (2d Cir. 1965) modified, 354 F.2d 459 (2d Cir. 1965); Head Ski Co. v. Kam Ski Co., 158 F. Supp. 919, 923 (D.C.Md.1958); Compare, Callman: Unfair Competition, Trade & Monopolies, Sec. 52.1, pp. 371-73, and Sec. 52.2, pp. 380-81, 390 (1968).

And as to the uniqueness of the speedometer, we note that the court found (Tr. Vol. VI, n. 8, p. 385), among other findings, that when Mechanex Corporation desired to merge with Defendant Tenneco, Inc., in 1968, Mechanex stated that "there was no similar speedometer" on the market.

Finally, as to whether trade secrets were here involved.

"A trade secret may consist of any formula, patent, device, plan, or compilation of information which may be used in one's business and which gives a person an opportunity over his competitor. The economic report in the case at bar is a study of the costs involved in the water transportation of LPG; its underlying contribution is to demonstrate the comparative advantage of such transportation over other methods of transportation. This report is manifestly integrated into the [Defendant's] plans . . . . The [Defendant's] plans palpably constituting a trade secret.

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. . . . [T]he proofs support the contention the economic report and the [Defendant's] plan were trade secrets or, at least, plaintiff's proprietary interest in them should, in law and equity, be treated the same as trade secrets; disclosure was made to the defendant in confidence . . . ." International Industries Inc., v. Warren Petroleum Corp., 99 F. Supp. 907, 914-915 (D.C.Del.1951) (emphasis added).

We find little merit in Appellants position that secrecy precautions were allegedly not taken by Kodekey. It took the primary and essential precaution in requiring a "secrecy-plus" agreement from Appellant prior to any disclosure.

As Callman, supra, states:

"An employee's express agreement 'not to disclose any of the processes and methods' of his employer is a positive acknowledgement of the fact that some of such processes and methods are secret; the stipulation would otherwise be meaningless." (Appellee's Brief, p. 31 and Callman, p. 390.)

Such an interpretation applies with stronger reason to an agreement between a secret-holder and a non-employee than between owner and employee.

We think we are not required to discuss all cases cited by either side.⁶  We note we have a problem with some of Defendants' references to their legal position.⁷  But we are satisfied that the Appellants' first three alleged errors do not constitute error.

Here the Appellant states that "the agreement" between the parties included the provision that Mechanex agreed not to compete with Kodekey in the manufacture or sale of electronic speedometers for a period of two years following the termination of the agreement-an agreement which obviously cannot be performed within a year. This was an oral agreement best set forth in the answer of Plaintiff to Defendant, Interrogatory No. 90 (Defendants' Exhibit 202). Cf. Court's Memorandum Opinion, p. 7.

Appellant relies upon Colo.Rev.Stats. Sec. 59-1-12(1) (b) which states that any contract which cannot be performed within a year of the time of making, must be in writing and signed by the party sought to be charged. (Op.B. p. 28.) The holding below, says Appellants, flies in the face of "the only applicable Colorado law on this issue"; DeBord v. Holcomb, 13 Colo.App. 161, 57 P. 548 (1899). That case does hold, as Appellant suggests, that the general rule therein expressed "that the statute of frauds invalidates a two year contract not to compete, even though consideration has passed between parties for the sale of a business" is good law. But it also found that the violation of the oral agreement between the parties was the only wrongful act of the Defendant.

Then DeBord went on to say:

". . . the principle upon which courts of equity will sometimes enforce specific performance of contracts, notwithstanding the formalities required by the statute of frauds have not been complied with, is not applicable to this class of cases. It is where the statute, which was designed to prevent fraud, is sought to be used for the purpose of a commission of a fraud, that equity affords relief. But the fraud against which equity will relieve notwithstanding the statute must consist of something more than the mere wrong of disavowing the contract; and, as the act of the defendants amounted only to a violation of their agreement, it does not constitute a fraud of such a nature as would authorize a court of equity to disregard the statute. Browne, Stat. Frauds, Sec. 437 et seq. . . ." DeBord, supra, 13 Colo.App., at 163, 57 P. at 549.

Here the facts of the case clearly show that Defendant did "far more than the mere disavowing of the contract." Cf. Findings & Conclusions in "Memorandum Opinion & Order."⁸ 

We agree with the District Court that the Colorado law does not bar recovery herein because of Colorado's Statute of Frauds.

Appellant argues the District Court committed error in using figures which "were not properly in evidence"; because they were in Mechanex' response to a "Motion to Produce" (VI R. 509-10), filed by Defendants over their objections and protest. The principal objection made by Defendants was that "the figures furnished require explanation to be properly understood." (Op. Br. p. 31, et seq.) The explanation, as we understand Defendants' brief, is that "a sales figure of 5,532 units" during the six months period between June 2, 1972 through November 1972, "were made during a period of time when Defendants did not know whether their sale of electronic speedometers and tachometers could be continued or not." Mechanex made every effort to deplete their stock on hand, and "sales were made, not to ultimate consumers, but to Mechanex distributors, on a 'forced' basis"; that "but for the threat of the enforcement of the announced injunctive relief, such sales would never have been made at that volume." (Op.Br. p. 32.) Also, that the court should have considered the sales of Kodekey during the same 1972 period in mitigation of damages.

Appellee relies strongly on two cases, i. e., Julius Hyman & Co. v. Velsicol Corp., 123 Colo. 563, 233 P.2d 977 (1951), which involved the wrongful use of trade secrets under a contractual and fiduciary relationship, and Grange Mutual Fire Ins. Co. v. Golden Gas Co., 133 Colo. 537, 298 P.2d 950, 955 (1956).

The first case emphasizes the duty of the trial judge "when the issues of unfair competition, breach of contract, and violation of confidential and fiduciary relationship" are issues once determined in favor of plaintiff, the court in equity will retain jurisdiction to give complete relief.⁹ 

Were we to assume that the court should not have considered the evidence produced by Defendants in answer to the Plaintiff's Motion to Produce on the issue of damages, Plaintiff suggests there was ample evidence otherwise to support the District Court's decision in Plaintiff's Exhibits WWWWW and XXXX, and Defendants' Exhibits 207 and 210A, 210B and 210C. While that may well be true, we are not required to determine that point, because we are not convinced it was error for the trial judge to consider Defendants' response to the said Motion to Produce, hereinabove discussed. In fact, it is the better practice. Sinclair Refining Co. v. Jenkins Petroleum Processing Co., 289 U.S. 689, 53 S. Ct. 736, 77 L. Ed. 1449 (1933).¹⁰ 

VI. WAS INJUNCTIVE RELIEF APPROPRIATE?

Appellants urge the grant of damages against them, plus the injunctive relief granted against them, result in double damages. This may well be the result if the damages in a case are limited solely to breach of contract. Thus the citation in Milgrem, Trade Secrets Sec. 7.08 [a] at page 7-59, is applicable to a simple breach of contract case, both by case law and logic, and usually by its express terms, but a different rule is expressed where other principles are involved, as here exist. Milgrem, Trade Secrets, Sec. 7.08 [b] -Misappropriation of Trade Secrets:

" [b]-Injunction Against Process or Product. Misappropriation of a process, formula or other trade secret matter used in the manufacture or preparation of a product is generally sanctioned by a restraint on the use of the process, formula or other trade secret. If, however, the secret is unextricably connected with defendant's manufacture of the product the court may enjoin defendant from making the product itself."

Cf. also Julius Hyman v. Velsical, supra; 38 A.L.R.3d 572, 574 (1971).

We find the injunctive relief granted was permissibly appropriate.

We are satisfied the trial court committed no error in denying Appellants' Motion for a New Trial, or a Partial New Trial, on the ground of Newly Discovered Evidence. Such a determination is not particularly favored by the courts, and rests largely and almost wholly within the sound judicial discretion of the trial court. Whether the newly discovered evidence would be likely to change the result of the District Court's decision is one peculiarly within the determination of but one man-the trial judge. The mere fact one Brown did not consider the Kodekey design "in any way secret or unique" would not necessarily be material evidence for and by the court under the facts of this case. (See (a) discussion supra under alleged errors I, II and III; (b) Callman, supra at Sec. 53.3(e) p. 404, and (c) Fairchild Engine & Airplane Corp. v. Cox, 50 N.Y.S.2d 643, 657 (Sup.1944) at key paragraph 19, p. 656, 657.)¹¹ 

The judgment against Defendants is in all respects

Affirmed.