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Laff v. John O. Butler Co.

OCTOBER 6, 1978.




APPEAL from the Circuit Court of Cook County; the Hon. WALTER J. KOWALSKI, Judge, presiding.


Mr. JUSTICE MEJDA delivered the opinion of the court:

Opinion filed July 21, 1978. Opinion modified and supplemental opinion filed on denial of rehearing

Plaintiff, Robert M. Laff, a dentist, brought this action for breach of an alleged contract for royalties for the use of a trade secret. The trial court found that the defendant, John O. Butler Company, had agreed to pay royalties to plaintiff for the use of his formula in manufacturing a dental product. The trial court also found that the contract was still in effect and entered judgments against defendant, awarding damages to plaintiff for royalties due. Defendant's motion for a new trial was denied and defendant appealed.

On appeal defendant contends that: (1) the decision of the trial court was against the manifest weight of the evidence; (2) the trial court committed reversible error in sustaining an objection to a question asking a witness his opinion as to the ownership of the trade secret in question; (3) the trial court improperly refused defendant's offers of additional evidence in post-trial proceedings; (4) the trial court erred in denying defendant's motion for new trial; and (5) the damages granted plaintiff are excessive. We affirm. The pertinent facts follow.

Plaintiff, a practicing dentist, filed a complaint alleging that he had conducted research and developed a formula, not generally known and amounting to a trade secret, for a disclosant for use in determining the location of plaque on human teeth. Defendant, a corporation which manufactures dental care products for sale to the public and dental profession and which did not then market such a product, entered into an oral agreement with plaintiff in 1961, to allow defendant to use plaintiff's information in manufacturing a disclosant in tablet form. The agreement, as alleged in the complaint, was:

"Plaintiff would reveal his research, trade secrets, and information to the Defendant so that Defendant could manufacture a disclosing tablet that was useful in preventive dentistry, safe and profitable to sell.

The Defendant would manufacture and sell the Plaintiff's disclosing tablet for an indefinite period of time, and

The Defendant would pay to the Plaintiff five percent (5%) of the sales of said product as a royalty for its use of the product disclosed to it by the Plaintiff, and

The Defendant would have the right to terminate royalty payments only upon its discontinuance of the product and return of all information relating thereto to the Plaintiff."

Plaintiff alleged that production of the "disclosing tablet (known as `Red-Cote')" began after plaintiff gave defendant his information regarding the tablet and his research. *fn1 Defendant paid plaintiff royalties from 1962 to December 1972, when defendant informed plaintiff that he would no longer be paid. Plaintiff alleged further that he demanded the return of all materials relating to the product utilizing the formula and also demanded that defendant cease manufacturing the product. Defendant refused plaintiff's demands and plaintiff filed this action.

Defendant's answer alleged that the agreement was for plaintiff's services and was terminated when those services were no longer needed. Defendant denied that plaintiff is the owner of the Red-Cote formula, and claimed that the formula for the disclosing tablet had been developed without plaintiff's assistance and that the agreement between the parties was for plaintiff to assist defendant in further research and in promotion of sales of the final product. Defendant also claimed that the parties had later orally agreed to reduce the amount to be paid by defendant to three percent of the gross sales. Plaintiff, in his reply, specifically denied any agreement to reduce the payment from five percent to three percent.

At the trial, plaintiff testified that his first contacts with the defendant occurred in the 1950's when Emmanuel Tarrson, then the defendant's vice-president and now its president, came to plaintiff's office to demonstrate defendant's dental products. On one visit Tarrson noticed that plaintiff was using a product, which plaintiff said he had invented, to defog his dental hand mirror. Plaintiff and Tarrson entered into an oral agreement that defendant could manufacture the product, later called "Clear Dip," in return for the payment of a five percent royalty to plaintiff. Plaintiff patented the Clear Dip formula in 1962 and is still receiving payments from defendant.

Plaintiff began staining teeth to disclose plaque in 1959 and first discussed the disclosant with Tarrson in 1959 or 1960. Plaintiff said that the solution he was using was messy and caused stains on clothing and that a disclosant in pill form would probably be better. Plaintiff then testified: "He [Tarrson] said, `Well, would you develop it with the same deal that we had with Clear Dip,' which would be five percent of the gross and I said sure." Plaintiff began his work on the disclosant tablet in early 1961, with defendant supplying plaintiff's ingredients, and plaintiff experimenting with different formulas.

At the time he was working to develop the formula for the disclosant, plaintiff learned that a doctor in Texas, from whom plaintiff had taken a dentistry course, had begun to use a disclosant in wafer form. The doctor's formula used a red dye which was different from the stain-causing dye in the solution plaintiff had originally used. Plaintiff began experimenting with the Texas doctor's red dye adding a blue dye to make the coloring more vivid. He also experimented with flavorings to improve the taste of the formula. In early 1962, after having done all of the testing in his office, plaintiff informed Tarrson that he had found a satisfactory formula. Tarrson and plaintiff discussed packaging and naming the product. Tarrson suggested the name "Red-Cote" and arranged for packaging, while plaintiff developed the instructions for usage that would be printed on the packages. The pills were actually produced by the Savoy Drug Company with whom plaintiff was not involved, and defendant distributed and sold the tablets. Plaintiff tested the final batch before the product went on the market.

The royalty payments began in March 1962, and continued, every month, to December 1972. The check vouchers from the payments, which were admitted into evidence, described the payments as "royalties." Occasionally royalties for both Red-Cote and Clear Dip were paid with the same check, but were designated separately. Every year defendant provided plaintiff with a Federal tax form which referred to the payments as royalties. Plaintiff stated he was not required to perform any services in order to receive his payments, nor was he paid while he was developing the formula. Plaintiff periodically tried out new products given to him by Tarrson and also worked on a Red-Cote disclosant liquid in 1972. Plaintiff received no payments for these services other than the regular monthly payments from defendant.

Plaintiff testified that Tarrson did not discuss the two percent reduction in Red-Cote payments with him and he had received no documents relating to the reduction. The payments continued until December 1972, when Tarrson told plaintiff that defendant was terminating payments of all Red-Cote royalties. Plaintiff objected to defendant's action and filed this suit shortly thereafter.

Plaintiff called Tarrson as an adverse witness under section 60 of the Civil Practice Act. (Ill. Rev. Stat. 1975, ch. 110, par. 60.) Tarrson stated that he first learned of the patent of the Clear Dip formula in 1969, seven years after it was patented, but that payments to plaintiff still continue and have never been reduced from the original five percent rate. Payments for both Clear Dip and Red-Cote were designated as royalties in defendant's books. Defendant now pays Northwestern University for research and field work formerly done by plaintiff, but those payments are not on a percentage basis as were the payments to plaintiff. Tarrson testified that he had discussed the two percent reduction in Red-Cote payments with plaintiff, but that there is no written record of the reduction. The reduction was not noted on the checks to plaintiff. Tarrson also said he had never published the Red-Cote formula, nor did he ever intend to make it public.

Defendant then called Tarrson as its first witness. Tarrson related that defendant had begun work on developing disclosing tablets in 1958 after hearing about them from one of defendant's sales representatives. Defendant worked with John Cermak of the Savoy Drug Company and in 1961 told plaintiff that they were "working on a disclosing tablet." Savoy Drugs and Tarrson had worked on improving the taste of the tablet between 1958 and 1961 and in 1961 the product was, in Tarrson's estimation, at about 80 percent of the stage at which it was marketable. Tarrson asked plaintiff to do the field testing for the product and offered to pay "a royalty" to plaintiff "to compensate you for your efforts." The agreed amount was five percent of the sales and payments to plaintiff started in 1962, as production of the Red-Cote disclosant began. According to Tarrson, plaintiff's only work was in conducting taste tests and helping with the wording on the label of the package. Plaintiff had also sent Tarrson a copy of the letter from the Texas dentist who was working on disclosing wafers. Tarrson contacted the doctor to discuss combining their efforts in producing the disclosant. A royalty was offered to the doctor but no deal was made between them.

Tarrson testified that he had discussed the reduction of Red-Cote payments with plaintiff and plaintiff had agreed. He explained the reduction was necessitated by payments to defendant's founder, which amounted to two percent of all of defendant's gross sales. The founder had since died and no more such payments were being made, Tarrson said, but the payments for Red-Cote had not been increased. In 1972, Tarrson informed plaintiff in a phone conversation that all Red-Cote payments to plaintiff would be terminated. Tarrson said that the Red-Cote formula had been changed four to six times since 1962, plaintiff was no longer doing research, and broader testing for the product was needed. Tarrson stated that he had never considered stopping payments on Clear Dip because plaintiff had come to him with the formula.

John Cermak, formerly of Savoy Drugs, next testified that he had met Tarrson in the latter part of the 1950's or early 1960's when Tarrson came to him with an idea for a disclosing tablet that would stain plaque on teeth. The first formulation of the disclosant was in March 1959 and the first production batch was made in February 1962. The trial court sustained plaintiff's objection to a question asking Cermak his opinion as to ownership of the formula and defense counsel did not examine the witness further. On cross-examination Cermak stated he had spoken with plaintiff, but only after a formula had been approved by Tarrson. Cermak stated that there had been formula changes in the product. The "carrier," which serves as a binding agent to hold the tablet together and also assists in dissolving the tablet, had been changed. Quantitatively, the amount of dye had been changed, but this change was caused by the fact that different batches of dye have different strengths, and although the dye "chemically is still the same dye," quantities must be varied to maintain the same qualities.

The trial court also considered the evidence deposition of Barbara DePeyster, who was formerly a detail person for defendant. She had first learned of the idea for disclosing tablets when a Detroit periodontist suggested that tablets would be less messy than the solutions that were then available. This occurred sometime between 1956 and 1958, and Ms. DePeyster made the suggestion to Tarrson in a meeting with him in 1957 or 1958. Ms. DePeyster had made notes of the meeting and references to the disclosing tablet in a notebook, which she had also used in preparation for her testimony. Plaintiff's demand for the notebook was refused at the deposition, and the notebook was not offered into evidence at the trial.

The trial court on September 28, 1976, entered a judgment order which, inter alia, found in paragraph B that defendant sells a line of products designed to disclose the presence of dental plaque on teeth which "line of products is called by the trade-name `Red-Cote' and is sold both as a tablet and in liquid form. This `Red-Cote' product line is the subject matter of the agreement between the parties." In subsequent paragraphs it further found:

"C. * * * the royalty to which the parties agreed was five percent (5%) of the gross sales of the `Red-Cote' product line. * * *.

E. * * * Defendant is still offering and selling the `Red-Cote' line of products to the public. The `Red-Cote' line now offered and sold is the line of products contemplated by the original agreement between the parties. All of the current sales of the `Red-Cote' line are included within the agreement of the parties.

G. The Defendant is liable to the Plaintiff to the extent of five percent (5%) of the gross sales of `Red-Cote' from March, 1962, until Defendant terminates the production of said product line, by reason of the agreement between the parties. * * *.

H. The formula for `Red-Cote' consists * * * of a combination of dyes, which combination has [since 1962], * * * remained qualitatively consistent. * * *.

I. * * * The formula, as commercially used, is a trade secret which belonged to the plaintiff and which Plaintiff disclosed to the Defendant in return for Defendant's agreement to pay Plaintiff five ...

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