Structural Dynamics Research Corp. v.
Engineering Mechanics Research
Corp.
401 F. Supp. 1102, 1975 U.S. Dist. LEXIS 16275 (E.D. Mich. 1975)
Before Feikens, United States District Judge. [*1105]
MEMORANDUM OPINION
I.
Structural Dynamics Research Corporation (SDRC) brought this action against
three former employees, Kant Kothawala, Karan Surana and Robert Hildebrand,
for unfair competition, misappropriation and misuse of confidential and
trade secret material, breach of confidential disclosure agreements and
interference with SDRC's customer relations, and against Engineering Mechanics
Research Corporation (EMRC) for conspiring with the individual defendants
to accomplish the above purposes. It seeks both damages and
a permanent injunction.
SDRC is an Ohio corporation with its principal place of business at Cincinnati,
Ohio. EMRC is a Michigan corporation with its principal place of business
at Southfield, Michigan. Kothawala, Surana and Hildebrand are all residents
of Michigan. [*1106] This court has jurisdiction over the subject
matter and over all parties to this action. This case was tried before the
court sitting without a jury.
Both SDRC and EMRC are engaged in the business of structural analysis and
testing. They are also engaged in the development of computer programs for
such purposes for use in their business and for lease to other users.
Kothawala, Surana and Hildebrand were all formerly employed by SDRC in various
technical capacities. * * * Each signed an Employee Patent
and Confidential Information Agreement while so employed and, in
addition, Kothawala executed an Employment Agreement.
These three individuals are now employed by EMRC. Kothawala is the
President and sole shareholder. Surana is Vice-President of Engineering.
Hildebrand is Manager of Applications.
[The subject of the controversy was a computer program for structural
analysis, used "to obtain an approximation of the reaction of a physical
structure when forces are applied to it." Kothawala and Surana had
developed the program as a special project at SDRC, after Surana had conceived
the underlying ideas while at a conference and SDRC's expense. Surana
was given a budget for the project, and SDRC later hired Kothawala away
from General Motors, after a year of discussions, to work on it. Surana
was assigned to the project full time and worked on it with Kothawala;
the two produced a proposal and a technical report demonstrating the superiority
of the program's new techniques over conventional ones.
Kothawala, who lived in Detroit, came on board on the understanding that
SDRC would open a Detroit office that he would manage and wholly or partially
own. He submitted several plans for opening that office, but they
were unsatisfactory and led SDRC's management "to conclude that Kothawala
lacked the business experience to assume full management responsibility."
Although SDRC proposed a raise that would have made Kothawala the
second highest paid employee in the company, Kothawala asked to be released
from his contract, and SDRC did so, effective January 1, 1973. Kothawala
then returned to Detroit and established EMRC, bringing with him Hildebrand,
who had been hired on Kothawala's recommendation in 1972 and who had worked
on the same project. Surana left to joint EMRC on January 9, ostensibly
to take an academic position, but he began work for EMRC in February and
was formally hired as Vice President of Engineering at EMRC on March 1.
Shortly after arriving back in Detroit, Kothawala called upon American
Motors Corporation (AMC) and proposed development of a conventional structural
dynamics program. On February 27, 1973, before AMC could act on
that proposal, Kothawala and Surana, who had now joined EMRC, submitted
a new proposal for a program substantially the same that developed at
SDRC, which "contained a number of paragraphs and a drawing taken from
Kothawala's and Surana's [previous] formal proposal to SDRC." Kothawala's
undated letter, written between February 27 and mid-March, said that the
program offered to AMC was partially finished, making it clear that AMC
was being offered the results of 1200 hours of time spent by Kothawala
and Surana at SDRC. EMRC began work on this project for AMC in March,
received formal approval in June, and finished the project in November.
EMRC furnished AMC the program and its documentation in confidence
and refused to provide AMC with source code for the program. After
continuing developing and enhancing the program, EMRC began marketing
it generally in February 1974. Although EMRC's program was enhanced
with additional features and worked on additional computers as compared
to SDRC's, the two programs were "very similar," and the district court
found the enhancements were merely the culmination of the plan proposed
at SDRC.
While still at SDRC, Kothawala and Hildebrand were assigned to a "Ford
Door Project," for which SDRC had contracted before the two came on board.
Beginning in November 1972, Kothawala informed Ford employees "in
an increasingly pessimistic vein" of his lack of agreement with SDRC on
the Detroit office and his willingness to undertake the project on his
own. Before leaving SDRC, the two disparaged the ability of SDRC
to complete the project both orally and by letter. At about the
same time, Kothawala wrote his superiors at SDRC that the Ford project
"was in excellent condition and that Kothawala and Hildebrand's presence
was not necessary for completion of the work." The court "place[d]
particular emphasis on what these events reveal as to Kothawala's
character and credibility."]
* * * [*1110] * * *
II.
Plaintiff SDRC makes three basic arguments:
(a) Breach of trust on the part of the individual defendants (formerly
employees of plaintiff) who used for their own advantage trade secrets
owned by plaintiff and acquired by the individual defendants in a confidential
relationship with plaintiff;
(b) Breach of contractual duty not to use or disclose confidential
information;
* * *
In any consideration of the policy underpinning the law of trade secrecy
one is aware of the need that useful knowledge should be disclosed. In
open societies such as ours this need is clearly recognized. It may
be that in controlled societies one reason for the apparent lack of development
of technology is the restriction on disclosure. But it is also true
that some protection favors innovation and that this encouragement to a
discoverer or developer enhances a basic human motivation for inventiveness.
What is the law and its policy as to an employee who is himself the discoverer
or developer of a claimed trade secret? Here one argument is that
such an employee's skill, experience and knowledge should be protected.
Some scholars point out . . . that relief [to a former employer] may
be denied in cases where the secret has become such an important part of
an employee's job skills that he will have difficulty in obtaining a new
position if he cannot take it with him. They say that courts should balance
the [*1111] competing interests. In Manos v. Melton,
358 Mich. 500, 100 N.W.2d 235 (1960) one court did so and concluded that
defendant Melton, an experienced plater, was not to be enjoined from using
his knowledge and skill in subsequent employment with plaintiff's competitor.
It appears he did disclose valuable techniques to his new employer
which he and plaintiff Manos had developed earlier while associated together
in business. The court not only found that the techniques were not
of sufficient originality so as to be trade secrets, but it also rested
its decision on the point that this was a part of Melton's skill and knowledge.
It noted that Melton had specifically excluded this matter of his
skill from incorporation into a non-competition clause in a contract by
which he sold his stock in the business to his former associate, Manos.
* * *
In this case Surana and Kothawala did not obtain the claimed trade secrets
through improper means. In substantial measure they were the developers
and innovators of a general purpose isoparametric computer program. They
were hired by SDRC for research and development activity in this very field,
and the manner of their acquisition of knowledge of this technology can
in no sense be said to have been obtained improperly.
Does their subsequent use or disclosure of this technology, assuming it
to be a trade secret, breach a duty of trust owed by these individual defendants
to plaintiff? The Restatement [ of Torts § 757 (1939)], . . . suggests
this question by its comment: "apart from breach of contract, abuse of confidence
or impropriety in the means of procurement, trade secrets may be copied
as freely as devices which are not secret".
The relationship giving rise to a duty is not necessarily dependent upon
contract; it may be based on agency principles or on specific dealings between
parties in which a situation of trust arises and out of which sought-to-be-protected
knowledge is acquired. Vital to a consideration of the creation of
duty in such situations is the key question as to how the person acquiring
such trade secret knowledge obtained it. If the subject matter of
the trade secret is in being and an employee learns about it in the course
of his employment in a relationship of confidence, the duty not to use or
disclose trade secret knowledge adversely to his employer arises. On
the other hand, if the subject matter of the trade secret is brought into
being because of the initiative of the employee in its creation, innovation
or development even though the relationship is one of confidence, no duty
arises since the employee may then have an interest in the subject matter
at least equal to that of his employer or in any event, such knowledge is
a part of the employee's skill and experience. In such a case, absent
an express contractual obligation by the employee not to use or disclose
such confidential information acquired during his employment adverse to
his employer's interest, he is free to use or disclose it in subsequent
employment activity.
In Wexler v. Greenberg, 399 Pa. 569, 160 A.2d 430 (1960), the Pennsylvania
Supreme Court held that in the absence of a contractual obligation not to
use or disclose, no duty arose from the [*1112] employment relationship
itself that would prevent a chemist from using and disclosing secret chemical
formulae developed by him in the course of his former employment. The
court distinguished the cases in which an employer discloses to his employee
a preexisting trade secret from those in which the employee himself develops
the trade secret sought to be protected. A further distinction was
then drawn within the category of employee-developed secrets. Where the
employer assigns the employee to a specific development task and commits
considerable resources and supervision to the project, a confidential relationship
arises that prevents the employee from using or disclosing the fruits of
his research. When, on the other hand, the developments are the product
of the application of the employee's own skill, "without any appreciable
assistance by way of information or great expense or supervision by [the
employer], outside of the normal expenses of his job", he has "an unqualified
privilege" to use and disclose the trade secrets so developed. . . .
.
While the question is concededly a close one, the court holds that the isoparametric
program developed on the initial encouragement—and under the supervision—of
Surana and Kothawala falls within the latter category.
Surana and Kothawala do not owe SDRC a duty not to use or disclose its trade
secrets by reason of a relationship of confidence in employment. As
the substantial developers and innovators of this technology they have an
interest in it and unless they expressly contracted with SDRC not to use
or disclose such knowledge or information in future employment activity,
there is no duty imposed upon them by reason of their employment relationship
with SDRC. Nor is such a duty created by any equitable doctrine of
quasi-contract; i.e., a contract implied in law.
Accordingly, the court turns to the remaining question. Are there
obligations imposed on the individual defendants not to use or disclose
confidential information acquired in and during the course of their employment
at SDRC because of express contractual agreements into which they entered?
III.
Here, all three individual defendants entered into an Employee Patent and
Confidential Information Agreement. In it they agree:
"(d) At no time either during his employment, on either a part or
full-time basis with the Company or subsequent to termination of such
employment will Employee divulge to any person, firm or corporation, or
use (other than as required by the Company in the course of his employment)
any privileged or confidential information, trade secret or other proprietary
information including but not limited to information relating to the experimental
and research work of the Corporation, its methods, processes, tools, machinery,
formulae, drawings, or appliances imparted or divulged to, gained or developed
by or otherwise discovered by Employee during his employment with the
Company."
* * *
"(f) Employee will not during the term of his employment directly
or indirectly enter into employment or render services to any person,
firm or corporation rendering services or handling products competitive
with the Company's services or products or engage as a principal in any
such business, and for a further period of six (6) months following the
termination hereof, engage as a principal in any business of or with any
person, firm or corporation in the United States, one of the major business
activities of [*1113] which is to render services or handle products
competitive with the services or products of the Company. To engage
as a principal in any business, as used in this paragraph, is defined
as owning or having a contractual right to own in the future a profit
sharing interest of 5% or more of any such business entity, or acting
as an officer, manager or other comparable executive position or serving
on the Board of Directors or similar governing body of said entity."
Kothawala also executed a separate employment contract. He himself
drafted some of its terms. SDRC had submitted a proposed contract
to him. He found it unacceptable, insisted on modifications and then submitted
his draft which was executed. It contains the following provisions:
"1. Commencing with the date of this contract and continuing for
two (2) years thereafter, Kothawala will devote his entire business time,
skill, labor and attention to this employment and will not participate
as a consultant, or as a part-time employee in any other business during
such time except with the express written permission of SDRC. The
services which he will perform for SDRC will be those which are prescribed
by SDRC. Such services will be performed in such locations as may
be required. Kothawala will not for a period of one (1) year after
his termination hereunder directly, or indirectly enter into employment
or render services to any person, firm or corporation, which, as one of
its business activities, engages in competition with SDRC or distributes
products in substantial competition with SDRC anywhere in the United States,
nor will Kothawala enter into or become interested in any such competitive
business as a principal, which for the purposes of the contract, is defined
as owning or controlling in excess of 3% of the capital stock or other
earning-sharing interest in any such business."
* * *
"4. Neither during the period of employment nor at any time thereafter
will Kothawala disclose to anyone any confidential information or trade
secrets concerning the business affairs of SDRC, including but not limited
to information relating to the experimental and research work of SDRC,
their methods, processes, tools, machinery, formulae, drawings, or appliances
imparted or divulged to, gained or developed by or otherwise discovered
by Kothawala during his employment with SDRC. Upon termination of
his employment, Kothawala will return to SDRC all objects, materials,
devices or substances including notes, records, drawings, sketches, recordings,
descriptions, samples, specimens, prototypes, models, blueprints, analyses,
programs, or the like, and including any facsimile, replica, photograph
or reproduction thereof, belonging to SDRC or relating to their respective
business."
These contracts were entered into in Ohio.
The agreements not to disclose confidential information impose obligations
by their clear terms since these undertakings do not exclude information,
technology or knowledge which the employee himself discovers, develops or
contributes. See Winston Research Corp. v. Minnesota Mining and
Manufacturing Co., 350 F.2d 134, 140 (9th Cir. 1965). Thus, if
the contracts are valid and enforceable, defendants are under obligations
not to use or disclose confidential information gained while employed at
SDRC.
Some courts have held that such express contracts create a confidential
relationship between employer and employee, breach of which results in liability.
They use the doctrine of trade secrets in the decisional process.
This court finds such an approach too restrictive, especially in an
area of knowledge and rapid technological change such as the computer field.
[*1114] The express contracts in issue apply not only to trade
secrets but also to privileged, proprietary and confidential information.
In this they are analogous to the breadth of coverage recognized under
agency principles. In Shwayder Chemical Metallurgy Corp. v. Baum,
45 Mich. App. 220, 206 N.W.2d 484 (1973) it was held that while the process
plaintiff sought to protect was not a trade secret, defendant stood in a
fiduciary and confidential relationship to plaintiff, that he breached the
duties and obligations arising from that relationship and was therefore
liable for damages. See Restatement (Second) of Agency § § 395 and
396.
These considerations apply to the express contracts
in issue. Defendants are liable for breach of their contracts and
are answerable in damages if they used or disclosed confidential information,
knowledge or technology gained while employed at SDRC. This is so
even though such information, knowledge or technology is not itself a trade
secret. See Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470,
498-499, 40 L. Ed. 2d 315, 94 S. Ct. 1879 (1974), dissenting opinion of
Justice Douglas.
The contracts in issue are valid in toto if governed by Ohio law
and valid in part if severable under Michigan law.(1)
Ohio permits its courts to enforce covenants not to use or disclose
confidential information as well as reasonable covenants not to compete.
Raimonde v. Van Vlerah, 42 Ohio St.2d 21, 325 N.E.2d 544 (1975).
In Michigan a statute, M.C.L.A. 445.761, declares that covenants not
to compete, whether reasonable or unreasonable, are against public policy
and are illegal and void. Michigan, however, does recognize and enforce
covenants not to use or disclose confidential information. Glucol Manufacturing
Co. v. Schulist, 239 Mich. 70, 214 N.W. 152 (1927).
Whether Michigan or Ohio law applies is a question of
conflict of laws. A United States District Court in exercising diversity
jurisdiction must follow the forum state's rules. Klaxon Co. v.
Stentor Electric Manufacturing Co., 313 U.S. 487, 61 S.Ct. 1020, 85
L.Ed. 1477, (1941). Michigan follows the general rule expressed in
the Restatement of Conflict of Laws § 332 that the nature, validity, effect
and obligation of a contract are governed by the law of the place where
the contract was made. . . .
There does not seem to be any dispute as to the place of the making of the
contracts and in any event the court finds that they were entered into in
Ohio.
Michigan has also adopted an additional rule, a departure from the Restatement,(2)
that the validity of a contract made in one state but intended by the parties
to be performed in another state is governed by the law of the place of
performance. . . .
Defendants assert that this rule controls. They argue that the evidence
regarding the proposed establishment of a Detroit business entity indicates
that the parties intended Michigan to be the place of performance. This
argument has some merit as to Kothawala and possibly Hildebrand, but fails
to include Surana, the principal developer of [the defendant's program,]
since he was never involved in the proposed Detroit entity.
This argument also ignores the nature of the performance
required by the contracts. The parties intended that defendants would
refrain from using or disclosing confidential information in the several
states in which SDRC did business including Ohio and Michigan. [*1115]
Ohio is as much the place of performance as Michigan since the parties
did not focus on any state in particular as the place of performance. Thus
this Michigan rule would not be applicable.
In this type of case, where the place of performance is not focused in any
particular state, courts have held that in the absence of evidence to the
contrary, the parties intended that the law of the place where the contract
was made should govern questions of validity.(3) St.
Regis Paper Co. v. Stuart, 214 F.2d 762 (1st Cir. 1954), cert. denied,
348 U.S. 915, 75 S. t. 296, 99 L.Ed. 717 . . . .
This being so, the law of Ohio would govern questions of validity. A
number of factors indicate this to be the correct result: (a) It is
in accord with principles stated in the Restatement of Conflict of Laws
which were recently so forcefully upheld in Michigan in the area of torts.
. . . (b) The contracts in issue were made, executed and delivered
in Ohio. (c) It would further the presumed intent of the parties,
in accordance with traditional contract doctrine, to enter into a valid
contract. (d) The employment relationship arose and centered in Ohio.
(e) The defendants acquired the confidential information while employed
at SDRC's principal place of business in Ohio.
The extent to which an Ohio contract will be enforced in Michigan depends
upon the doctrine of judicial comity. . . . Defendants argue that
even though the contracts are valid where made, the inclusion of a non-competition
clause in each, void under M.C.L.A. 445.761, invalidates the contracts and
precludes their enforcement.
This court is unable to perceive any reason why contracts, valid in toto
where made, should not be enforced as a matter of comity to the extent their
provisions do not contravene the public policy of the forum. In Glucol
Manufacturing Company v. Schulist, 239 Mich. 70, 214 N.W. 152 (1927)
the Michigan Supreme Court, in discussing the enforceability of non-disclosure
provisions, stated:
"But we agree with the trial court that this statute [M.C.L.A. 445.761]
has no application in the instant case. The reason is obvious. Defendant
did not agree not to engage in a similar business, but only that he would
not use the formulae of his employer, which, he was given to understand,
were the property of plaintiff."
The public policy of Michigan does not preclude enforcement of use or non-disclosure
provisions. The presence of the non-competition provision, while itself
unenforceable, does not make the other logically distinct and separate provisions
of these contracts unenforceable when these provisions, standing alone,
are valid in both states.
This brings the court to the issue of breach. [*1116] It is
true that initial recognition of the importance of isoparametric elements
in a new program, and the feasibility of development of such a program,
must be credited to Surana and, to a lesser extent, to Kothawala. However,
this information was acquired in the course of their employment and a fulfillment
of their specific assigned responsibilities. This information had
business value and SDRC had the sole right because of the express contracts
to exploit the advantage. SDRC's possession of this information gave
it an opportunity to gain an advantage over its competitors who did not
have the information. The August 23, 1972 proposal by Kothawala is
a significant compilation of marketing and technical planning for the program
and this document was therefore proprietary and confidential. The
court finds that SDRC relied on the representations of Kothawala and Surana
including those contained in the August 23, 1972 document in its decision
to devote its resources to the program. SDRC reasonably anticipated
that part of its business advantage would flow from its early entry in the
market—an advantage recognized by both sides. SDRC did not anticipate
that the very employees who extolled the merits of the program and caused
SDRC to undertake its development would use the same information to develop
a competitive product and achieve the advantage of being first in the market.
These actions by defendants breached their contractual obligations
not to use or disclose confidential information.
The technical planning and development of [SDRC's program] to its stage
of development in January, 1973, including the selection of elements, solver
routine, organization of sub-routines, coding, and other factors contributing
to the efficiency and effectiveness of the program constituted important
and confidential information, particularly prior to public release of the
program. The technical accomplishments of Surana and Kothawala reflected
in their work on [this program] amounted to a compilation of information
which gave SDRC a competitive advantage. The existence or availability
of abstract technical data does not detract from the confidentiality of
the combination of such parts and data into a program of the type under
consideration. This was conceded by Kothawala and confirmed by defendants'
actions in dealing with the trade when great emphasis was placed by the
defendants on the confidential nature of the [EMRC program] and the competitive
importance to EMRC in protecting such confidentiality.
The status report prepared for SDRC by Kothawala and Surana in October includes
such information and it is likewise confidential and proprietary. This
information had value and was confidential to SDRC. Surana's use of
this information for defendants' benefit was a breach of his contract. This
also holds true with respect to Kothawala who hired Surana and participated
in the unlawful use of information obtained at SDRC, and who, as sole shareholder
of EMRC, is presently the primary beneficiary of the illicit information.
Confidentiality of information can be determined from the manner in which
defendants themselves treated the information prior to the litigation. .
. . Here the record is replete with statements by the defendants
both to SDRC and to AMC as to the value, uniqueness and confidentiality
of the program.
A quantity of documents belonging to SDRC were also found in possession
of defendants when this action was commenced. These included:
Internal SDRC documents pertaining to work on the Ford Door Project.
Internal SDRC documents pertaining to the [SDRC] program including the
[*1117] August 23 and October 25 documents, customer information
and prospective research and development activities.
Surana's notes prepared as part of his development work on [the SDRC program].
The court finds these notes to have significant value both in the case of
[both programs].
The court does not credit defendants' explanation that these documents were
permitted to be taken from SDRC's office. The court finds that they
were taken without permission.
At a pretrial conference the court directed defendants to make a copy of
the static portion of the [EMRC program] code available to plaintiff's counsel
and experts pursuant to a protective order. The code which was furnished
was dated December, 1974, and reflected many revisions made subsequent to
defendants' initial code. Defendants have represented that no prior
version of the [EMRC program] code remained. Portions of the [EMRC
program] code were compared to the [SDRC program] code as it existed in
January, 1973. On the basis of this comparison, plaintiff's experts,
Dr. Anderson of the Department of Aerospace Engineering at the University
of Michigan, and Michael Coble, a computer programmer also affiliated with
the University, concluded that defendants must have copied from the [SDRC
program] code. They made a careful analysis of the two programs and
found not only similarity in the overall structure and organization (some
of which might be explainable on functional grounds) but they found identical
segments of code which were solely arbitrary and, most significantly, deviations
or quasi-mistakes which, in their judgment, could only be explained by copying.
Victor Nicholas, who completed the development of [the SDRC program]
at SDRC, testified that the input data cards prepared by Surana for [the
SDRC program] were taken verbatim into [the EMRC program].
Except for cross-examination, defendants did not address these specifics
relied on by the experts, but attributed such similarities as existed to
Surana's memory. The court does not accept this explanation. Memory
alone cannot explain the specifics which according to the experts do not
make sense but are explainable only by copying. The court finds that
defendants copied from the physical [SDRC program] code.
The technical and business information which the court has found to have
been misappropriated by defendants was treated by SDRC in a manner
consistent with the preservation of its confidentiality. Although
SDRC did not use the ultimate in policing measures, the professional calibre
of its employees, and the nature of its development work made heavy-handed
measures unnecessary. Moreover, the confidential nature of development
work was specifically called to each employee's attention in his individual
confidential disclosure agreement. The court finds that defendants
Kothawala and Surana knew that information pertaining to [the SDRC program]
was confidential and proprietary to SDRC.
SDRC did not disclose confidential information to outside parties in a manner
inconsistent with preservation of confidentiality. To the extent that
limited disclosure may have been made to representatives of United States
Steel Corporation, that company's relationship to SDRC as its largest shareholder
and a business partner was not inconsistent with the preservation of confidentiality.
The defendants' main legal defense was that all the information which is
included in a computer program such as [the SDRC program] is found in the
literature and therefore the program was not unique, was not novel, was
not an invention and could not rise to the level of protectable confidential
information and/or trade secrets. The court disagrees with the defendants'
position. An overwhelming majority of authorities on the subject have
ruled that novelty and uniqueness are not a requirement for trade secret
protection. . . . [*1118] . . . These principles apply with
equal force to contractual provisions not to disclose or use confidential
information. It is unnecessary for the court to determine whether
all the ingredients making up the [SDRC p[rogram] program and the [EMRC]
program are found in the literature, for the combining of all the essential
elements into a program which is primarily and exclusively an isoparametric
element program was and is a unique and valuable program in the software
industry and is within the definition of confidential information.
The court has held that the . . . program of EMRC was developed through
the use of the plaintiff's confidential information regarding the [SDRC
program] projects. The fact that the [EMRC] program is at a later
stage of completion than the status of [the SDRC program] at the time that
Surana left SDRC or the fact that EMRC may have modified and added additional
capabilities than those existing at the time that Surana left is not a defense
to this action. There is no requirement that the defendants use the
information in exactly the form in which they received it. Furthermore,
the court finds that the later stage of development of [EMRC program] is
directly attributable to the head start that the use of SDRC's confidential
information gave to EMRC in its pursuit of the [EMRC program] project.
The defendants also contend that SDRC breached its contract of employment
with Kothawala by not offering him a job as the manager of an SDRC office
in Detroit, and that this breach entitled defendants to use whatever information
they had in regard to the [SDRC] program in developing the [EMRC] program.
The court finds that SDRC acted in good faith in an effort to accommodate
their business interests with Kothawala's ambitions and the pertinent provisions
of the contract. SDRC did not guarantee Kothawala a management position
at any time and certainly not within five months of the execution of the
contract.
Finally, the court finds that EMRC, the corporation of which defendant Kothawala
is sole shareholder, is the entity through which this confidential information
is being purveyed in the marketplace; it is liable with the individual defendants
for agreeing with them to carry out this improper purpose.
In view of these findings, it is unnecessary to consider plaintiff's contention
as to unfair competition.
IV.
* * * [*1119]
[The court found that Kothawala, Hildebrand and EMRC were liable
for interfering with SDRC's contract with Ford and were jointly and severally
liable for SDRC's losses resulting from Ford's transfer of the contract
from SDRC to EMRC.]
SDRC is also entitled to damages for breach of the express contracts. In
University Computing Co. v. Lykes-Youngstown Corp., 504 F.2d 518
(5th Cir. 1974), the court considered in detail the approaches used in this
area. It concluded that when a defendant had destroyed the value of
the information, courts generally attempted to measure the loss suffered
by the plaintiff. However, when the secret had not been destroyed,
as here, courts attempted to measure the value of the secret to the defendant.
This value is measured by the "reasonable royalty" standard. In explaining
the standard, the court stated:
"The type of measure [of damages] used by the Court, based on actual sales,
has taken many different forms. As the term is presently understood,
the ‘reasonable royalty' measure of damages is taken to mean more than
simply a percentage of actual profits. The measure now, very simply,
means ‘the actual value of what has been appropriated'. . . . When
this is not subject to exact measurement, a reasonable estimate of value
is used."
Here the court notes that defendants have not made a profit. However,
this does not preclude SDRC from recovering damages, for when defendants
misused confidential information as outlined herein, they bore this risk
of failure and must refund for their breaches. . . .
In determining the measure of damages the court should consider the commercial
setting of the injury, the likely future consequences of the breach and
the nature and extent of the use.
Here EMRC is in direct competition with SDRC in the development and transfer
on a commercial basis of computer software and specifically EMRC's offering
of its . . . program in competition with SDRC's . . . program. EMRC,
in offering its . . . program to the market, is offering a computer program
which had been planned and partially completed at SDRC; additionally, EMRC
used extensive confidential information regarding SDRC's . . . program in
developing [its program]. EMRC is using SDRC's confidential information
for:
(a) Internal solution of its customers' structural problems which
is known in the trade as applications work; and
(b) Transfer, on a commercial basis, of the program for use by third parties
either on an in-house or vendor installation basis.
These uses are without SDRC's permission and without compensation to SDRC.
Additionally, EMRC was successful in transferring the use of [the
EMRC program] to a number of potential SDRC customers. The court finds
that [the two programs] are so similar that if a customer had [EMRC's] it
would not need [SDRC's]. Accordingly, SDRC has been damaged and this
same type of competition presently continues.
SDRC submitted evidence of the prices it currently charges to its customers
and the profit factors SDRC generally experienced in these lines of business.
While the court does not doubt that they are reasonable, it finds
the profit factor of 20% used by SDRC to be too high for this purpose. The
reason is that, while defendants went so far in their misuse of SDRC's confidential
information as to copy from [SDRC's program,] they also used in some measure
their own skill, knowledge and experience in completing the development
of [EMRC's program]. [The SDRC program] was only partially completed
at the time defendants left SDRC. The evidence does not reveal that any
significant work had been done on the dynamic or heat conduction analysis
capabilities of [that program]. At EMRC, defendants completed the
work on the static analysis [*1120] capability of [that program and
then added additional capabilities].
The court finds that while defendants used their own experience, skill and
knowledge, this was commingled with the confidential information taken from
SDRC. Since the defendants through their own actions placed themselves
in this position, the court finds that (a) SDRC is entitled to a recovery
of a percentage of all EMRC's sales; (b) a "reasonable royalty" in this
case is 15% of EMRC's gross sales; (c) this will include, but is not limited
to EMRC's use of [the EMRC program] for the internal solution of its customers'
structural problems and use of the program by EMRC's customers on an in-house
or vendor installation basis.
This royalty is imposed for the period of time necessary for a competitor
to duplicate the program by independent research rather than through the
use of confidential information. SDRC presented expert testimony that
this period would be two and one-half to four years. The court finds that
three years is a reasonable period and will adequately protect SDRC. The
period shall begin to run from the time defendants first used SDRC's confidential
information. This occurred when they began developing [the EMRC program]
at AMC. The testimony indicated that defendants began its program
informally with AMC in mid-March, 1973 and received formal approval in June
of 1974. The court concludes that the period for which such damages
as herein defined may be collected shall be calculated from March 15, 1973
and continue to March 15, 1976.
SDRC also seeks a license fee of $45,000 for use of its program on an in-house
basis by EMRC and AMC for which there are no billings or sales figures.
EMRC was permitted the use of AMC's computer facilities free of charge
for program development and independent commercial use in return for which
EMRC supplied AMC its . . . program without charge.
Ordinarily, an estimate of a reasonable billing could be made from evidence
of the expenditures EMRC incurred for development of [its program]. EMRC
asserted that it had spent $96,986 for salaries of EMRC personnel, $2,145.88
for other expenditures and $223,000 for use of AMC's computer facilities
for a total of $322,131.88. But this is not a completely realistic
measure due to unusually high start-up costs. The court concludes
that SDRC's license fee, which is reasonable, provides a sounder basis for
the award of damages. Therefore, the court concludes that EMRC is
also liable to SDRC for $45,000 for the installation of [the EMRC program]
at AMC.
No injunction will be issued since the court finds that compensatory damages
are an adequate remedy.
Accordingly, the court herein enters judgment for compensatory damages in
favor of the plaintiff as follows:
(a) Defendants EMRC, Kothawala and Hildebrand are jointly and severally
liable [for interference with contract] for plaintiff's loss of profits
from the termination of the Ford Door Project which the court has found
to be in the amount of $3,107.
(b) Defendants EMRC, Kothawala and Surana are jointly and severally
liable for their unauthorized use of SDRC's confidential information in
the [EMRC] program for damages of 15% on all sales of EMRC for a period
of three years as hereinbefore defined, and additionally for damages of
$45,000 as heretofore stated. Costs to be taxed.
An appropriate order may be presented.
* * *
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Footnotes
1. [court's footnote 7] The court does
not reach this issue of severability due to its resolution of choice of
law principles governing validity.
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2. [court's footnote 8] See Restatement
of Conflict of Laws § 358.
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3. [court's footnote 9] The court is
unable to find any Michigan authority on this point. However, the
factual background of a number of decisions of the United States Court
of Appeals for the Sixth Circuit dealing with cases arising in Michigan,
which hold that the lex loci contractus controls questions of validity,
suggests Michigan follows this rule. . . . The later case
cites St. Regis Paper Co. v. Stuart, [supra,] which clearly
follows this rule.
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