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FLEMING SALES CO., INC. v. BAILEY

May 24, 1985

FLEMING SALES COMPANY, INC., PLAINTIFF,
v.
JOSEPH W. BAILEY AND UNLIMITED SALES OF AMERICA, INC., DEFENDANTS.



The opinion of the court was delivered by: Shadur, District Judge.

MEMORANDUM OPINION AND ORDER

Fleming Sales Company, Inc. ("Fleming") has filed a five-count Verified Complaint (the "Complaint") against Joseph Bailey ("Bailey") and Unlimited Sales of America, Inc. ("Unlimited"). Fleming charges Bailey (1) misappropriated Fleming's trade secrets, (2) interfered with Fleming's contractual relations, (3) slandered Fleming, (4) breached his fiduciary duty to Fleming and (5) unfairly competed against Fleming. Unlimited is alleged to be the vehicle through which Bailey engaged in some or all of that activity.

Facts*fn1

Fleming, a family-owned manufacturers' representative business, has an original equipment manufacturers ("OEM") division headquartered in Elkhart, Indiana. Through its OEM division, Fleming is engaged by recreational vehicle ("RV") component manufacturers ("Fleming's principals") to market their products to RV manufacturers ("Fleming's customers"). Bailey was hired as a salesman in the OEM division in March 1977. In July 1980 Bailey was made General Manager of the OEM division, and in August 1983 he was placed on the Fleming Board of Directors. In the meantime he had turned the OEM division into a substantially better business operation for Fleming.

Despite Bailey's relatively rapid rise at Fleming, he had for some time been dissatisfied over what he perceived as his limited freedom to run the OEM division without oversight by Fleming management (he had been promised a "free hand" in that respect) and his limited future prospects in its family-owned structure. On April 27, 1984 Bailey wrote to Fleming Board Chairman Jack Grady ("Grady") explaining his dissatisfactions and announcing his decision to resign from Fleming and the Board of Directors effective May 1, 1984 (Bailey Aff.Ex.). In fact Bailey continued as OEM division head until May 18 and continued to receive his salary and benefits until the end of May (Bailey Dep. 84-87). Bailey had entered into no written employment contract with Fleming, nor had he signed a restrictive covenant of any kind in Fleming's favor.

In late 1983, several months before his resignation from Fleming, Bailey joined with James Clipp ("Clipp") to form Unlimited for the manufacture of a rigid blind product to be sold as an accessory for RVs. Though formed in January 1984 Unlimited did not begin substantial operations before June 1984. It has yet to begin manufacture of the rigid blind product.

In late June Bailey and Clipp formed a second company, Unified Sales of America, Inc. ("Unified"), to compete with Fleming's OEM division in the representation of RV component manufacturers. Bailey hired several Fleming salesmen to work with him at Unified and began to develop Unified's business with Fleming's principals and customers. Soon thereafter (in August 1984) Fleming initiated this lawsuit.

Trade Secrets Claim

Fleming contends Bailey has misappropriated several kinds of information, learned in the course of his employment and protectible as trade secrets, that he is now using to compete with the OEM division:

    (1) the names and addresses of Fleming's
  customers;
    (2) other information about customers,
  including the names of contact people and the
  customers' prior purchasing and payment
  histories, projected needs and buying procedures;
  and
    (3) information as to Fleming's principals and
  other sources of supply, including the terms of
  principals' contracts with Fleming.

Defendants argue none of that information properly qualifies as a trade secret as a matter of law.

Before this opinion turns to the merits of Fleming's trade secrets claim, it must deal with a threshold question: whether Illinois' or Indiana's trade secrets law supplies the applicable substantive rule. Of course under Klaxon Corp. v. Stentor Electric Manufacturing Co., 313 U.S. 487, 496, 61 S.Ct. 1020, 1021, 85 L.Ed. 1477 (1941) this Court must look to Illinois conflict-of-law rules. Since Ingersoll v. Klein, 46 Ill.2d 42, 48, 262 N.E.2d 593, 596 (1970), Illinois has used the "most significant contacts" approach in torts cases. Applying the Ingersoll rule in the trade secrets context, the Illinois Appellate Court has concluded (Mergenthaler Linotype Co. v. Leonard Storch Enterprises, Inc., 66 Ill. App.3d 789, 803, 23 Ill.Dec. 352, 363, 383 N.E.2d 1379, 1390 (1st Dist. 1978), confirming Illinois' adoption of the position taken in the Restatement (Second) of Conflict of Laws 2d (1971) and quoting this passage from Restatement § 145 comment f):

  [T]he principal location of the defendant's
  conduct is the contact that will usually be given
  the greatest weight in determining the state
  whose local law determines the rights and
  liabilities that arise from false advertising and
  the misappropriation of trade values.

Not surprisingly, Fleming and defendants agree Indiana law should supply the substantive rule. Bailey's operational site since resigning from Fleming has been Elkhart, Indiana. Both Unlimited and Unified*fn2 are Indiana operations with their principal bases of operations in Elkhart. And because Bailey has entered into competition with Fleming's Elkhart-headquartered OEM division, the harm to Fleming of any misappropriation of trade secrets is focused in Indiana. Accordingly this Court will look to Indiana trade secrets law.*fn3

In 1982 Indiana adopted the Uniform Trade Secrets Act, Ind.Code §§ 24-2-3-1 to 24-2-3-8 (the "Act"), which authorizes injunctive relief, damages and recovery for unjust enrichment in trade secret misappropriation cases. Where the misappropriation was willful and malicious, the Act also allows an award of exemplary damages. Section 2 defines the Act's operative terms:

  "Improper means" includes theft, bribery,
  misrepresentation, breach or inducement of a
  breach of a duty to maintain secrecy, or
  espionage through electronic or other means.

"Misappropriation" means:

    (1) acquisition of a trade secret of another by
    a person who knows or has reason to know that
    the trade secret was acquired by improper
    means; or
    (2) disclosure or use of a trade secret of
    another without express or implied consent by a
    person who:
    (A) used improper means to acquire knowledge of
    the trade secret;
    (B) at the time of disclosure or use, knew or
    had reason to know that his knowledge of the
    trade secret was:
    (i) derived from or through a person who had
    utilized improper means to acquire it;
    (ii) acquired under circumstances giving rise
    to a duty to maintain its secrecy or limit its
    use; or
    (iii) derived from or through a person who owed
    a duty to the person seeking relief to maintain
    its secrecy or limit its use; or
    (C) before a material change of his position,
    knew or had reason to know that it was a trade
    secret and that knowledge of it had been
    acquired by accident or mistake.
  "Person" means a natural person, corporation,
  business trust, estate, trust, partnership,
  association, joint venture, government,
  governmental subdivision or agency, or any other
  legal or commercial entity.
  "Trade secret" means information, including a
  formula, pattern, compilation, program, device,
  method, technique, or process, that:
    (1) derives independent economic value, actual
    or potential, from not being generally known
    to, and not being readily ascertainable by
    proper means by, other persons who can obtain
    economic value from its disclosure or use; and
    (2) is the subject of efforts that are
    reasonable under the circumstances to maintain
    its secrecy.

What the parties' dispute really boils down to is whether or not the items of information defendants allegedly misappropriated qualify as "trade secrets" under the Act. If they do not, Fleming has no action against defendants for their use of the information, for Fleming did not elect to bind Bailey by a restrictive covenant of any kind. See Steenhoven v. College Life Insurance Co. of America, 460 N.E.2d 973, 975 n. 7 (Ind. App. 1984).

After extensive discovery defendants assert there is no reasonable predicate for inferring the information (1) derives independent economic value by virtue of its confidentiality or (2) was the subject of efforts reasonably calculated to maintain its secrecy. Defendants contend each item of information was rather (1) general business knowledge bred of experience (and consequently lacking "independent economic value") or (2) information "readily ascertainable by proper means" or (3) both. In addition defendants say Fleming did not make reasonable efforts to maintain the secrecy of the information. Fleming retorts genuine fact issues exist as to each of those contentions.

This opinion will consider the parties' arguments as to each item of information in turn, but it is first worth taking a step backward to gain a perspective that might otherwise get lost in the welter of citations to cases, affidavits and depositions the parties have set out against one another. Trade secrets law in general and the Act in particular were never intended "to act as a blanket post facto restraint on trade." Steenhoven, 460 N.E.2d at 975 n. 7. Thus the identity of a business' customers is no doubt a legitimate business interest protectible by a restrictive covenant (see American Hardware Mutual Insurance Co. v. Moran, 545 F. Supp. 192, 195-96 (N.D.Ill. 1982), aff'd, 705 F.2d 219 (7th Cir. 1983)), and the same may perhaps be true of other knowledge a company has amassed simply by virtue of having been in a particular line of business for a long period of time. But that right to impose contractual restraints does not render the same knowledge "trade secrets" in the absence of such restraints. Knowledge derived from experience does not automatically carry with it the ability to forestall others who have shared that experience (and thus that knowledge).

In other words, a court called on to define boundaries in this area must take care to strike a balance between (1) the underlying purposes of trade secrets law (to maintain standards of commercial ethics and to encourage research and innovation, see M. Jager, 1982 Trade Secrets Law Handbook §§ 1.01-1.02) and (2) the equally strong policy against inhibiting competition in the marketplace.*fn4 Analysis of Fleming's claims discloses it has sought to stifle legitimate competition rather than to resist unwarranted encroachment on its property rights.

1. Customer Lists

Fleming says Bailey, through his employment as general manager of its OEM division, had access to a comprehensive list of Fleming's customers. While there is no allegation — and no evidence — Bailey took a copy of the list with him when he left his employment,*fn5 Fleming does assert he took with him knowledge of the customers' names — knowledge he later used to compete (unfairly) against Fleming. Defendants do not deny Bailey came away from Fleming with a knowledge of who its customers were, but defendants argue (1) Fleming did ...


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