CEMEN TECH, INC., an Iowa Corporation vs. THREE D INDUSTRIES, L.L.C., an Iowa Limited Liability Company, DEAN LONGNECKER, DANIEL E. JONES, BRADLEY J. LUHRS, JAMES YELTON, SCOTT LONGNECKER, MARK DORMAN, DANIEL POTHAST, and DAVID ENOS
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IN THE SUPREME COURT OF IOWA
No. 96 /03–1869
Filed May 2, 2008
CEMEN TECH, INC., an Iowa Corporation,
Appellant,
vs.
THREE D INDUSTRIES, L.L.C., an Iowa Limited Liability Company,
DEAN LONGNECKER, DANIEL E. JONES, BRADLEY J. LUHRS,
JAMES YELTON, SCOTT LONGNECKER, MARK DORMAN, DANIEL
POTHAST, and DAVID ENOS,
Appellees.
Appeal from the Iowa District Court for Warren County, John D.
Lloyd, Judge.
Plaintiff appeals from summary judgment against it in its suit
against former employees and others engaged in production of machine
competing with plaintiff’s. AFFIRMED IN PART, REVERSED IN PART,
AND REMANDED.
William B. Serangeli and CeCelia Ibson Wagner of Smith,
Schneider, Stiles & Serangeli, P.C., Des Moines, for appellant.
F. Richard Lyford and Joan M. Fletcher of Dickinson, Mackaman,
Tyler & Hagen, P.C., Des Moines, for appellees Three D Industries,
L.L.C., Dean Longnecker, Daniel E. Jones, Scott Longnecker, James
Yelton, Mark Dorman, Daniel Pothast, and David Enos.
John P. Roehrick and Curtis J. Krull, Des Moines, for appellee
Bradley J. Luhrs.
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LARSON, Justice.
When the defendants in this case began to manufacture a cement
mixer similar to one manufactured by Cemen Tech (CTI), CTI sued them,
alleging breach of contract, misappropriation of trade secrets, unfair
competition, and breach of fiduciary duty. The district court granted the
defendants’ motion for summary judgment on virtually all of the
plaintiff’s claims, and the plaintiff appealed. We affirm in part, reverse in
part, and remand for further proceedings.
I. Facts and Prior Proceedings.
CTI is a manufacturer of mobile volumetric concrete mixers—
machines designed to mix concrete components at job sites. Defendants
Dean Longnecker and David Enos, through their business, Three D
Company, L.L.C., were interested in purchasing CTI and, on October 25,
1999, sent a letter of intent to CTI requesting information regarding the
business.
After a number of letters of intent and nondisclosure and
confidentiality agreements, CTI provided Longnecker and Enos with
business
information,
including
organizational
charts;
employee
handbooks; a strategic plan; and information on customer deposits,
assets, accounts payable, accounts receivable, financial statements, and
lists of customers and suppliers.
By the spring of 2001, it became clear that Longnecker and Enos
were not going to purchase CTI.
On June 5, 2001, CTI terminated
Three D Company, L.L.C.’s latest letter of intent. Discussions continued,
however, between the parties regarding the possible purchase of a
portion of CTI’s business—its “sludge” division. On September 6, 2001,
Longnecker and Enos, through an entity they called “Clarke Industries,
L.L.C.,” submitted a letter of intent to CTI to purchase the sludge
division. CTI apparently ignored it.
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In July 2001 Brad Luhrs, an employee of CTI, contacted
Longnecker about the possibility of leaving CTI and going to work with
Longnecker and Enos to start their own mobile mixer business. By the
end of 2001, Dan Jones, Brad Luhrs, Mark Dorman, Dan Pothast, and
Scott Longnecker resigned from CTI and began working for Three D
Industries developing mobile volumetric concrete mixers in direct
competition with CTI.
In January 2002 the defendants exhibited a prototype cement
mixer at the World of Concrete show closely resembling CTI’s mixer. CTI
sued Three D Industries, L.L.C. and eight individual defendants for
breach of contract, misappropriation of trade secrets, unfair competition,
breach of fiduciary duty, and tortious interference with contract.
Defendants Dean Longnecker and Scott Longnecker filed defamation
counterclaims against CTI. All defendants moved for summary judgment
on CTI’s claims. The district court granted the defendants’ motion for
summary judgment in part and denied it in part, and CTI appealed.
Dean Longnecker and Scott Longnecker dismissed their defamation
counterclaim without prejudice. CTI dismissed, without prejudice, all of
its claims remaining after the district court’s ruling on the defendants’
summary judgment motion. The issues remaining before this court are
those raised by CTI in its appeal from the district court’s summary
judgment ruling.
II. Standard of Review.
Review of a ruling on a motion for summary judgment is for
correction of errors at law. Iowa R. App. P. 6.4; Clinkscales v. Nelson
Sec., Inc., 697 N.W.2d 836, 840–41 (Iowa 2005). Summary judgment is
proper only if “the pleadings, depositions, answers to interrogatories, and
admissions on file, together with the affidavits, if any, show that there is
4
no genuine issue as to any material fact and that the moving party is
entitled to a judgment as a matter of law.” Iowa R. Civ. P. 1.981(3). A
question of fact exists “if reasonable minds can differ on how the issue
should be resolved.”
2004).
Walker v. Gribble, 689 N.W.2d 104, 108 (Iowa
In reviewing the district court’s ruling, the evidence presented
must be viewed in the “light most favorable to the party opposing the
motion for summary judgment.” Kelly v. Iowa Mut. Ins. Co., 620 N.W.2d
637, 641 (Iowa 2000); Gen. Car & Truck Leasing Sys., Inc. v. Lane &
Waterman, 557 N.W.2d 274, 276 (Iowa 1996).
However, the opposing
party “may not rest upon the mere allegations of his pleading but must
set forth specific facts showing the existence of a genuine issue for trial.”
Hlubek v. Pelecky, 701 N.W.2d 93, 95 (Iowa 2005); see also Iowa R. Civ.
P. 1.981(5). Speculation is insufficient to create a genuine issue of
material fact. Hlubek, 701 N.W.2d at 96.
III. The Contract Claims.
In count I of CTI’s petition, it alleged that Dean Longnecker and
Enos breached a contractual nondisclosure agreement dated October 25,
1999, which provided that any information disclosed in the course of the
negotiation process would be used solely to evaluate the possible
purchase of CTI and would remain confidential.
The district court
concluded as a matter of law that the October 25, 1999 nondisclosure
agreement had been superseded by a January 6, 2000 confidentiality
agreement, and we agree. The January 6, 2000 agreement stated: “This
Agreement comprises the entire agreement and supersedes all prior
understandings and representations (oral or written) between the parties
concerning the subject matter of this Agreement.” In fact, Gary Ruble,
president of CTI, stated it was his understanding that the January 6,
2000 confidentiality agreement had superseded the October 25, 1999
5
nondisclosure agreement. The district court properly entered summary
judgment on this count.
In count II, CTI contends that Dean Longnecker, Enos, and
Three D Industries breached a letter of intent dated January 15, 2001.
The district court concluded that Enos had not signed the agreement and
that Longnecker signed only in a representative capacity (on behalf of
Three D Company, L.L.C.). Further, Three D Industries, L.L.C., the entity
sued by CTI, was not a party to the agreement.
We agree with the district court that Enos cannot be held liable for
breach of the January 15, 2001 letter of intent because he did not sign it.
While Longnecker signed this letter of intent, he did so as a
representative of Three D Company, L.L.C. and not in his individual
capacity.
Of course, “[c]entral to corporate law is the concept a
corporation is an entity separate from its owners.” Briggs Transp. Co. v.
Starr Sales Co., 262 N.W.2d 805, 809 (Iowa 1978). Because Longnecker
entered into the letter of intent only as a representative of Three D
Company, L.L.C., he cannot be held personally liable for any breach
committed by the corporation.
Finally, the January 15, 2001 letter of intent was signed by
Longnecker as a representative of Three D Company, L.L.C.
However,
CTI did not bring this breach-of-contract claim against Three D
Company, L.L.C.; rather, it brought it against Three D Industries, L.L.C.
It is true, as CTI points out, that Longnecker and Enos created a number
of corporations at different times, referring to them as Three D Holding
Company, Three D Industries, L.L.C., Three D Company, and Three D
Industries.
While that complicates the facts of this case, it does not
change our analysis of this issue. Three D Company, L.L.C. and Three D
Industries, L.L.C. were created as separate and distinct entities and must
6
be treated as such.
Just as individuals cannot be held liable on a
contract to which they were not parties, neither can a corporation. The
district court appropriately granted Three D Industries’ motion for
summary judgment on count II of the petition.
Alternatively, CTI argues we can “pierce the corporal veil” to hold
Longnecker and Enos individually liable on the letter of intent because
any corporations named were merely their alter egos. The requirements
for doing so, however, are substantial:
The burden is on the party seeking to pierce the
corporate veil to show the exceptional circumstances
required. Factors that would support such a finding include
(1) the corporation is undercapitalized; (2) it lacks separate
books; (3) its finances are not kept separate from individual
finances, or individual obligations are paid by the
corporation; (4) the corporation is used to promote fraud or
illegality; (5) corporate formalities are not followed; and (6)
the corporation is a mere sham.
In re Marriage of Ballstaedt, 606 N.W.2d 345, 349 (Iowa 2000) (citations
omitted). CTI showed no evidence to generate a genuine issue of fact to
support its piercing-the-veil argument.
We affirm the district court’s
grant of summary judgment on the plaintiff’s breach-of-contract claims.
IV. The Claim of Misappropriation of Trade Secrets.
The principal issue in this case is whether CTI generated a genuine
issue of material fact on its claim that the defendants misappropriated
CTI’s trade secrets, including information regarding the construction of
its machines and general information about their manufacture and sale.
CTI contends that Three D, Dean Longnecker, Enos, five former CTI
employees, and James Yelton (a former CTI customer) wrongfully
obtained CTI’s trade secrets and used them to form a competing
business.
7
A. Legal Principles.
Iowa Code chapter 550 (2001) is Iowa’s
version of the Uniform Trade Secrets Act. This chapter provides that the
owner
of
a
trade
secret
may
enjoin
an
actual
or
threatened
misappropriation of a trade secret or may request monetary damages for
such misappropriation. Iowa Code §§ 550.3(1), 550.4(1). A trade secret
is defined as
information, including but not limited to a formula, pattern,
compilation, program, device, method, technique, or process
that is both of the following:
a. Derives independent economic value, actual or
potential, from not being generally known to, and not being
readily ascertainable by proper means by a person able to
obtain economic value from its disclosure or use.
b. Is the subject of efforts that are reasonable under
the circumstances to maintain its secrecy.
Iowa Code § 550.2(4).
The Restatement (Third) of Unfair Competition (1995) [hereinafter
Restatement] is intended to be consistent with the Uniform Trade Secrets
Act, such as our Code chapter 550, and we rely on it here.
See
Restatement § 39 cmt. d. The Restatement provides what we consider to
be the appropriate scope of Iowa Code section 550.2(4):
A trade secret can consist of a formula, pattern, compilation
of data, computer program, device, method, technique,
process, or other form or embodiment of economically
valuable information. A trade secret can relate to technical
matters such as the composition or design of a product, a
method of manufacture, or the know-how necessary to
perform a particular operation or service. A trade secret can
also relate to other aspects of business operations such as
pricing and marketing techniques or the identity and
requirements of customers.
Id.
Factors to consider when determining if information is a trade
secret include:
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“(1) the extent to which the information is known outside of
[the] business; (2) the extent to which it is known by
employees and others involved in [the] business; (3) the
extent of measures taken . . . to guard the secrecy of the
information; (4) the value of the information [to the business
and its competitors]; (5) the amount of effort or money
expended . . . in developing the information; (6) the ease or
difficulty with which the information could be properly
acquired or duplicated by others.”
Kendall/Hunt Pub’g Co. v. Rowe, 424 N.W.2d 235, 246 (Iowa 1988)
(quoting Basic Chems., Inc. v. Benson, 251 N.W.2d 220, 226 (Iowa 1977)
(a common-law case predating Iowa Code chapter 550)).
The value of the information for which protection is sought must
be substantial.
A trade secret must be of sufficient value in the operation of
a business or other enterprise to provide an actual or
potential economic advantage over others who do not
possess the information. The advantage, however, need not
be great. It is sufficient if the secret provides an advantage
that is more than trivial. Although a trade secret can consist
of a patentable invention, there is no requirement that the
trade secret meet the standard of inventiveness applicable
under federal patent law.
Restatement § 39 cmt. e.
A trade secret need not be in writing; any secret acquired through
an employee’s job may be the subject of trade-secret protection. Sperry
Rand Corp. v. Rothlein, 241 F. Supp. 549, 563 (D.C. Conn. 1964) (“[I]t
does not matter whether a copy of a Sperry drawing came out in a
defendant’s hand or in his head.
His duty of fidelity to his employer
remains the same.”); accord Ed Nowogroski Ins., Inc. v. Rucker, 971 P.2d
936, 940 (Wash. 1999). During employment, an employee may acquire
two classes of information. First, an employee may obtain information of
a general nature simply by being on the job. An employer would have no
reasonable expectation that such information would be treated as a trade
secret.
An employee is free to use or disclose this type of general
9
information. The second class of information is that which the employer
intends to keep secret by, for example, physically hiding it from view or,
as CTI claims here, by requiring confidentiality. While the first class of
information is not entitled to trade-secret protection, the second class
may be entitled to it. Compare Restatement § 42 cmt. b (trade secrets),
with id. § 42 cmt. d (general information).
Whether an employee is subject to a covenant not to compete is
not
determinative
of
whether
the
information
gathered
through
employment constitutes a trade secret.
As a general rule, an employee who has not signed an
agreement not to compete is free, upon leaving employment,
to engage in competitive employment. In so doing, the
former employee may freely use general knowledge, skills,
and experience acquired under his or her former employer.
However, the former employee, even in the absence of an
enforceable covenant not to compete, remains under a duty
not to use or disclose, to the detriment of the former
employer, trade secrets acquired in the course of previous
employment. Where the former employee seeks to use the
trade secrets of the former employer in order to obtain a
competitive advantage, then competitive activity can be
enjoined or result in an award of damages.
Ed Nowogroski Ins. Co., 971 P.2d at 941–42 (footnote omitted); see
Restatement § 42 cmts. b, c.
Additionally, nondisclosure and confidentiality agreements are
relevant to determine whether information constitutes a trade secret.
An agreement between the parties that characterizes
specific information as a “trade secret” can be an important
although not necessarily conclusive factor in determining
whether the information qualifies for protection as a trade
secret under this Section.
As a precaution against
disclosure, such an agreement is evidence of the value and
secrecy of the information, and can also supply or contribute
to the definiteness required in delineating the trade secret.
The agreement can also be important in establishing a duty
of confidence. However, because of the public interest in
preserving access to information that is in the public
10
domain, such an agreement will not ordinarily estop a
defendant from contesting the existence of a trade secret.
Restatement § 39 cmt. d (citations omitted).
It is not only the nature of the information itself that is significant;
the manner of its acquisition is also significant in determining whether
information constitutes a trade secret.
“The subject matter 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.”
However, the interest protected by this branch of the law is
not secrecy as such. “The protection is merely against breach
of faith and reprehensible means of learning another’s secret.”
Accordingly, “a substantial element of secrecy must exist, so
that, except by the use of improper means, there would be
difficulty in acquiring the information.”
Clark v. Bunker, 453 F.2d 1006, 1009–10 (9th Cir. 1972) (quoting
Restatement of Torts § 757 cmt. b (1939)) (emphasis added). In the case
of an employee leaving a business with trade secrets, the employer might
“find[] itself in the position of a coach, one of whose players has left,
playbook in hand, to join the opposing team before the big game.”
PepsiCo, Inc. v. Redmond, 54 F.3d 1262, 1270 (7th Cir. 1995).
B. Evidence Presented in Resistance to the Motion for
Summary Judgment.
In this case, CTI contends that its cement
volumetric mixer, component parts, manufacturing processes, and
supplier and customer information constitute trade secrets. A CTI officer
identified numerous processes and design features developed by CTI that
were
unique,
features
that
CTI
had
sought
to
protect
by
its
confidentiality agreements and which it claimed as trade secrets. This
evidence is sufficient to generate a fact question regarding the economic
value of the information CTI argues is trade-secret protected.
Evidence in the record shows that CTI took steps to keep such
information confidential.
CTI required its employees to acknowledge
11
receipt of an employee handbook.
Included in the handbook were
nondisclosure agreements providing:
The protection of confidential business information and
trade secrets is vital to the interests and the success of CTI.
Such confidential information includes, but is not limited to,
the following examples:
*compensation data
*customer lists
*financial information
*marketing strategy
*new materials research
*pending projects and proposals
*proprietary production processes
*research and development strategies
*technological data
Employees who improperly use or disclose trade secrets or
confidential business information will be subject to
disciplinary action, up to and including termination of
employment and legal action, even if they do not actually
benefit from the disclosed information.
In addition, employees were required to sign a “patent” agreement
providing, in part:
All inventions, whether patentable or not, developed by
employee in the course of or arising out of the performance
of his or her duties as an employee, shall be owned by
Employer.
Employer shall also own any inventions
developed by Employee during the period of his or her
employment which relate to the products, services, or other
business activities of Employer regardless of whether or not
such inventions were developed on or off of company time
and on or off of company premises.
Confidentiality agreements such as these may constitute reasonable
steps to insure secrecy of information, as required by the Uniform Act.
MAI Sys. Corp. v. Peak Computer, Inc., 991 F.2d 511, 521 (9th Cir. 1993).
Further, though the district court found the fact that the employees were
not required to sign a noncompete agreement persuasive, we do not. As
noted
above,
the
absence
of
a
noncompete
determinative of the existence of a trade secret.
agreement
is
not
12
The defendants argue that information regarding CTI’s volumetric
mixer is not a trade secret because it is “readily ascertainable.”
This
argument is based, in large part, on the concept of reverse engineering.
(“ ‘Reverse engineering is the process by which a completed process is
systematically broken down into its component parts to discover the
properties of the product with the goal of gaining the expertise to
reproduce the product.’ ” Revere Transducers, Inc. v. Deere & Co., 595
N.W.2d 751, 775 n.8 (Iowa 1999) (quoting Christianson v. Colt Indus.
Operating Corp., 870 F.2d 1292, 1295 n.4 (7th Cir. 1989))). However, the
fact that information may be obtained by lawful means, including reverse
engineering, is not necessarily dispositive of the trade-secret issue.
The theoretical ability of others to ascertain the
information through proper means does not necessarily
preclude protection as a trade secret.
Trade secret
protection remains available unless the information is
readily ascertainable by such means. Thus, if acquisition of
the information through an examination of a competitor’s
product would be difficult, costly, or time-consuming, the trade
secret owner retains protection against an improper
acquisition, disclosure, or use . . . .
Restatement § 39 cmt. f (emphasis added).
In CTI’s resistance to the defendants’ motion for summary
judgment, it provided a report by Dr. Bruce Johnson, who holds a Ph.D.
in mechanical engineering and who has considerable experience in
design and development engineering.
Dr. Johnson evaluated the
defendants’ reverse engineering claim—he inspected the defendants’
prototype machine; he inspected CTI’s, as well as the defendants’,
manufacturing facilities; he inspected the drawings of both CTI and the
defendants; and he reviewed witness depositions.
Dr. Johnson stated that a representative of the defendant company
told him they did not start construction on their machine until November
13
2001, and the defendants exhibited their fully functioning machine at a
trade show in March 2002. Dr. Johnson concluded:
It would be impossible for anyone, even a trained and
experienced engineer, to complete the design process of a
complex piece of machinery such as involved in this
instance, to the point of having a perfectly functioning
prototype, in less than six months without having at his
disposal a vast amount of information. In the context of this
case, it is my opinion that it would have been impossible for
the Defendants collectively to complete the process without
access to the proprietary information of Cemen Tech,
regardless of whether that information was in written or
other form.
Dr. Johnson’s report is strong evidence that, though CTI’s machine and
component parts could be reverse engineered, the difficulty in doing so
may not defeat CTI’s trade-secret claim.
Even though CTI conceded that the defendants, if given sufficient
time, could produce a machine similar to CTI’s based on reverse
engineering, a fact finder could reasonably conclude that the delay in
production of the machine would give CTI a temporal advantage. Even if
the period of that advantage would be short, this would not deny tradesecret protection to CTI because neither Iowa Code section 550.2(4) nor
section 1(4) of the Uniform Trade Secrets Act “include[s] any requirement
relating
to
the
duration
Restatement § 39 cmt. d.
of
the
information’s
economic
value.”
Presumably, the extent of this temporal
advantage would be reflected in any damage award.
Finally, the defendants’ means of obtaining the information at
issue lends credence to CTI’s claim that the information was intended to
be confidential. Generally,
[i]nformation that is readily ascertainable by proper means is
not protectable as a trade secret, and the acquisition of such
information even by improper means is therefore not
actionable . . . . However, the accessibility of information,
and hence its status as a trade secret, is evaluated in light of
14
the difficulty and cost of acquiring the information by proper
means.
In some circumstances the actor’s decision to
employ improper means of acquisition is itself evidence that
the information is not readily ascertainable through proper
means and is thus protectable as a trade secret. Because of
the public interest in deterring the acquisition of information
by improper means, doubts regarding the status of
information as a trade secret are likely to be resolved in favor
of protection when the means of acquisition are clearly
improper.
Restatement § 43 cmt. d (citations omitted).
A jury could reasonably find that the employee-defendants took
advantage of their positions at CTI to obtain proprietary information that
was then used for Three D’s benefit.
All employee-defendants signed
confidentiality and patent agreements in the course of their employment
with CTI, indicating their understanding that CTI meant for information
gathered during the course of employment to remain confidential. Yet, a
jury could find that defendants Mark Dorman and Daniel Pothast used
the knowledge and skill obtained through their employment with CTI to
develop products for Three D Industries that were similar to those they
produced for CTI.
CTI’s employment of Scott Longnecker (Dean
Longnecker’s son), at the apparent request of Dean Longnecker, could
also suggest an intent to obtain information “from the inside.”
Additionally, a jury could find that Dan Jones and Brad Luhrs gave
Three D Industries information they gathered from CTI in the course of
strategy and production meetings, including new product ideas, CTI’s
engineering data, computations, calculations, and certain innovations.
In fact, evidence in the record suggests that Luhrs and Jones copied files
from a CTI computer onto CDs that were not returned to CTI upon their
resignations.
The actions of these defendants could reasonably be
considered to be improper and, therefore, “evidence that the information
is not readily ascertainable through proper means and . . . thus
15
protectable as a trade secret.”
Restatement § 43 cmt. d.
Viewing the
evidence in the light most favorable to CTI, we believe there was
sufficient evidence to generate a fact question on the trade-secret issue
with respect to the employee-defendants.
We also believe CTI presented sufficient evidence to generate a fact
question on the trade-secret issue with respect to Three D, Longnecker,
and Enos. A jury could find that these defendants improperly used their
positions as potential buyers to obtain CTI’s proprietary information for
their own benefit. There is evidence in the record that the information
disclosed during the due-diligence process was not returned to CTI, and
there is evidence that these defendants encouraged the employeedefendants to jump ship to join Three D. A fact finder could infer from
the evidence that these defendants induced or knowingly accepted trade
secrets from CTI. Under the Restatement,
a person who obtains a trade secret by inducing or
knowingly accepting a disclosure from a third person who
has acquired the secret by improper means, or who induces
or knowingly accepts a disclosure from a third person that is
in breach of a duty of confidence owed by the third person to
the trade secret owner, also acquires the secret by improper
means.
Id. § 43 cmt. c.
Finally, we believe CTI has failed to generate a fact question on the
trade-secret issue with respect to defendant James Yelton. Yelton was a
former CTI customer, but was never an employee, so he was never bound
by a handbook or confidentiality agreement.
While there is some
evidence Yelton became “a part of” Three D, there is no evidence he
encouraged CTI employees to obtain trade secrets. In fact, the evidence
presented shows the extent of Yelton’s involvement in the development of
Three D’s machine was apparently to furnish photos of CTI’s product
16
obtained by him when he was a customer of CTI. This evidence is simply
not sufficient to generate a fact question as to Yelton on the plaintiff’s
trade-secret claim, and the court’s grant of summary judgment as to him
was proper.
In summary, we conclude it was error to enter summary judgment
on CTI’s trade-secret claim, except as to James Yelton. We remand for
further proceedings on this issue.
V. The Unfair Competition Claim.
In count V of its petition, CTI alleged the defendants engaged in
unfair competition by “palm[ing] off the products and services sold by
them to the public as derivatives of Cemen Tech, which . . . caused a
likelihood or probability of confusion as to the source of Defendants’
products and services.”
The district court concluded that a genuine
issue of material fact existed as to whether Three D, Longnecker, Enos,
and the employee defendants engaged in unfair competition by palming
off CTI’s products and services as their own. However, the district court
ruled that CTI could not pursue a claim of reverse palming off because it
had not pled that theory in its petition.
“Palming off” occurs when a defendant sells its product under the
plaintiff’s name.
Walker Mfg., Inc. v. Hoffmann, Inc., 261 F. Supp. 2d
1054, 1069 (N.D. Iowa 2003). On the other hand, “reverse palming off”
occurs when a defendant sells the plaintiff’s product under the
defendant’s name. Id. Both are legal theories a plaintiff may assert to
prove unfair competition. Basic Chems., Inc., 251 N.W.2d at 231–32.
The court granted Yelton’s motion for summary judgment on the
palming-off claim, concluding that CTI failed to present any evidence that
Yelton was an owner or employee of Three D or that he participated in
the engineering, design, or manufacture of the Three D machine.
17
However, any shortcomings in the evidence regarding Yelton’s status as
an owner or employee do not preclude his liability for improper actions in
the representations of the machine to potential buyers.
Viewing the
evidence in the light most favorable to CTI, we believe a jury could find
that Yelton was involved in the marketing of Three D’s machine and
made representations about the relative qualities of the competing
machines. We believe it was error for the trial court to sustain Yelton’s
summary-judgment motion on this issue.
On appeal, CTI contends the district court erred in refusing to
allow it to argue reverse palming off as a basis for its unfair-competition
claim. Under our rules of civil procedure, a party need not conform to
technical forms of pleading. Rather, “[e]ach averment of a pleading shall
be simple, concise, and direct.”
Iowa R. Civ. P. 1.402(2)(a).
In Iowa,
“notice pleading” is all that is required. Under notice pleading, a petition
need only give notice of the incident giving rise to the claim and the
general nature of the claim. Roush v. Mahaska State Bank, 605 N.W.2d
6, 10 (Iowa 2000). A plaintiff is not required to set forth specific legal
theories for recovery. Id. at 9.
We conclude the district court erred in refusing to allow CTI to
pursue its claim of reverse palming off. CTI’s claim in general was that
the defendants wrongfully marketed their machine in unfair competition
with CTI by fraudulently representing the pedigree of the machines. CTI
was not required to identify a particular variety of fraud—palming off or
reverse palming off.
If CTI’s evidence at trial supports both theories,
presumably it would be allowed to amend its pleadings to conform to the
proof.
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We reverse the district court’s ruling on this issue insofar as it
sustained Yelton’s motion for summary judgment and the court’s refusal
to allow a claim of reverse palming off.
VI. The Claim of Breach of Fiduciary Duty.
In count VI of its petition, CTI contends the defendants breached
their fiduciary duty to CTI. The district court concluded that Three D
Industries, Longnecker, and Enos were not in a fiduciary relationship
with CTI because their relationship was based on the potential purchase
of CTI, and they were acting solely for their own benefit, not that of CTI.
The district court further concluded that Yelton was not in a fiduciary
relationship with CTI because there was no evidence that Yelton was
anything more than a customer and a salesman for CTI’s equipment. We
agree with the trial court’s conclusions as to any fiduciary relationship
between CTI and Three D Industries, Longnecker, Enos, or Yelton.
The district court also concluded that the employee-defendants did
not have a fiduciary relationship with CTI because CTI failed to present
any evidence suggesting that the employee-defendants were anything
more than traditional employees. On appeal, CTI contends a jury could
reasonably find that the employee-defendants owed a duty of loyalty and
a fiduciary duty to CTI arising out of the employee-defendants’
representation of CTI to potential customers and suppliers, as well as the
trust CTI
placed in these employee-defendants to maintain the
confidentiality of its proprietary information.
It is true, as the district court noted, that the question of whether a
fiduciary relationship exists in a given case may, in some cases, be
decided by the court in a summary-judgment proceeding.
See, e.g.,
Weltzin v. Cobank, ACB, 633 N.W.2d 290, 292 (Iowa 2001). We do not
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believe, however, that this is such a case.
In Kurth v. Van Horn, 380
N.W.2d 693 (Iowa 1986), we recognized that “fiduciary duty” is
“[a] very broad term embracing both technical fiduciary
relations and those informal relations which exist wherever
one man trusts in or relies upon another. One founded on
trust or confidence reposed by one person in the integrity
and fidelity of another. A ‘fiduciary relation’ arises whenever
confidence is reposed on one side, and domination and
influence result on the other; the relation can be legal,
social, domestic, or merely personal. Such relationship
exists when there is a reposing of faith, confidence and trust,
and the placing of reliance by one upon the judgment and
advice of the other.”
Kurth, 380 N.W.2d at 695–96 (quoting Black’s Law Dictionary 564 (5th
ed. 1979) (citations omitted)).
The present case is distinguishable from both Kurth and Weltzin
because here the employees executed confidentiality and nondisclosure
agreements. A jury could find that the relationship between CTI and the
employee-defendants is, therefore, one based “on trust or confidence
reposed by one person in the integrity and fidelity of another.” Kurth,
380 N.W.2d at 695.
We believe the question of whether a fiduciary relationship has
been established turns on the facts of the case and does not lend itself to
disposition by summary judgment. We therefore reverse the judgment of
the district court regarding the claim of breach of fiduciary duty on the
part of the employee-defendants and remand on that issue.
VII. Summary.
We affirm the district court’s grant of summary judgment as to the
plaintiff’s contract claims under counts I, II, and III. We also affirm the
district court’s grant of summary judgment in favor of defendant Yelton
on the trade-secret issue raised in count IV. We reverse the summary
judgment under count IV as to all other defendants.
We affirm the
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district court’s denial of summary judgment on count V, the unfaircompetition claim, as to defendants Three D, Longnecker, and Enos, as
well as the employee-defendants.
We reverse the summary judgment
entered on behalf of defendant Yelton under count V and reverse the
court’s ruling that CTI could not pursue a claim of reverse palming off.
We affirm the summary judgment under count VI, breach of fiduciary
duty, as to Three D, Longnecker, Enos, and Yelton, but reverse it as to all
other defendants.
We remand for further proceedings consistent with this opinion.
AFFIRMED IN PART, REVERSED IN PART, AND REMANDED.
All justices concur except Appel, J., who takes no part.
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