Opinion
No. CV 03-0181029-S
February 10, 2004
MEMORANDUM OF DECISION
I
The plaintiff, Crown-Risdon USA, Inc. f/k/a Risdon-AMS (USA), Inc. (hereinafter Risdon), a manufacturer of cosmetics packaging, has filed a six-count amended complaint against defendants Steven Levine and Thomas Holloway, both of whom are former Risdon employees, and HCP Packaging USA, Inc., a competing company for whom Levine and Holloway now work. In count one of the amended complaint, the plaintiff alleges a "breach of duty of loyalty" arising from Levine's actions in forming HCP Packaging USA, Inc., while Levine was still a Risdon employee. In count three, which Risdon entitles "breach of fiduciary duty," Risdon alleges that Levine's failure to require HCP, the Chinese parent company of HCP Packaging USA, Inc., to sign a nondisclosure agreement during negotiations between Risdon and HCP concerning a joint undertaking violated both Levine's "fiduciary duty of care to Risdon and his fiduciary duty of loyalty to Risdon." (Amended Complaint, third count, ¶ 17.) Risdon then alleges that Levine "also violated his fiduciary duty of loyalty to Risdon by virtue of his double-dealing conduct . . ." as alleged in count one.
Contrary to the manner in which the plaintiff has organized its complaint, our appellate courts have not explicitly recognized breach of a duty of loyalty as a separate cause of action from breach of fiduciary duty. In Town Country House Homes Service, Inc. v. Evans, 150 Conn. 314, 189 A.2d 390 (1963), a case similarly involving an employee who started his own business in competition with that of the plaintiff, our Supreme Court observed that the defendant employee, as an agent of the plaintiff, was a fiduciary with respect to matters within the scope of his agency. Id., 316-17. "The very relationship implies that the principal has reposed some trust or confidence in the agent and that the agent or employee is obligated to exercise the utmost good faith, loyalty, and honesty toward his principal or employer." Id., 317. It thus appears that breach of the duty of loyalty may be a subset of breach of fiduciary duty, as alleged in the third count, rather than a separate cause of action, as alleged in the first count. See also Foodcom International v. Barry, 328 F.3d 300, 303 (7th Cir. 2003) (employee breached his "fiduciary duty of loyalty"); In re Andrews' Appeal from Probate, 78 Conn. App. 429, 437, 826 A.2d 1260 (2003) (citing "the special duty of loyalty" that a fiduciary owes as the beneficiary of a trust).
The court acknowledges some uncertainty on this point. The Town Country court applied § 393 of the Restatement (Second) of Agency (1958), which provides that "[u]nless otherwise agreed, an agent is subject to a duty not to compete with the principal concerning the subject matter of his agency." Town Country House Homes Service, Inc. v. Evans, supra, 150 Conn. 317. Section 393 is contained within a part entitled "Duties of Loyalty" without any apparent reference to fiduciary duties. See Restatement (Second) of Agency, chapter 13, topic 1, title C (1958). See also Jet Courier Service, Inc. v. Mulei, 771 P.2d 486, 492 n. 10 (Colo. 1989) (reserving decision on whether the duty of loyalty is a fiduciary duty in employment context); note 2 infra.
Levine indisputably owed a fiduciary duty to Risdon as one of its vice presidents during the relevant time period and also as Risdon's key player in its efforts to find an Asian manufacturer for its products. See Elm City Cheese Co. v. Federico, 251 Conn. 59, 99, 752 A.2d 1037 (1999) (Berdon, J., concurring and dissenting); Town Country House Homes Service, Inc. v. Evans, supra, 150 Conn. 317; see also Electric Associates, Inc. v. Automatic Equipment Development Corp., 185 Conn. 31, 35, 440 A.2d 249 (1981) ("As a matter of law, parties to joint ventures undertake fiduciary duties to each other concerning matters within the scope of the joint venture"). As a fiduciary, Levine bears the burden of proving that he did not breach his fiduciary duty by clear and convincing evidence. See Konover Development Corp. v. Zeller, 228 Conn. 206, 229-30, 635 A.2d 798 (1994). The central issue is whether Levine engaged in permissible preparations to leave employment or impermissible actions to compete with his employer. See Jet Courier Service, Inc. v. Mulei, supra, 771 P.2d 492-93; Town Country House Homes Service, Inc. v. Evans, supra, 150 Conn. 317.
The court, however, would reach the same result in this case even if an employee's duty of loyalty were not part of his fiduciary duty and the burden of proof rested on the plaintiff by a preponderance of the evidence.
The evidence establishes, and the court concludes, that Levine did not meet his burden and that he, in fact, did breach his fiduciary duty. Indeed, it was improper in the first place for Levine to pursue with HCP the possibility of forming an American subsidiary that would compete with Risdon, and in which Levine would be a well-compensated top executive, while at the same time purporting to further Risdon's interest in retaining HCP as an Asian manufacturing partner. The situation presents an obvious conflict of interest. Indeed, the labeling by Levine and HCP officials of their plans as "option one," referring to the possibility of a Risdon-HCP undertaking, and "option two," referring to a Levine-HCP undertaking, reveals the inherent conflict. These labels virtually confirm that failure of a Risdon-HCP deal was necessary for a Levine-HCP arrangement to succeed. Levine thus had a strong personal incentive to make the Risdon-HCP deal fail. While the deal may have failed for other reasons, that fact does not negate the reality that Levine put himself in a position in which he would not be completely loyal to his employer.
The management of Risdon's parent company, Crown, Cork Seal, Inc., had requested that HCP sign a nondisclosure agreement that required Risdon and HCP to "refrain from direct or indirect approaches to officers and employees of the other party with regard to offers of employment while evaluating the Confidential Business Information and for 12-months thereafter." It is true that HCP never signed the nondisclosure agreement. Levine, however, testified that he had read the proposed agreement and was aware of the twelve-month restriction on employment discussions. Further, as the key Risdon official in its Asian initiative, it was his duty to adhere to his company's policy on the matter, whether or not endorsed by HCP, and thus to refrain from making approaches to HCP about offers of employment.
It is also true that it was Jeff Chen of HCP who initiated the matter by approaching Levine about a joint undertaking without Risdon and that Levine reported this initial contact to Risdon president Stephen Pearlman. Levine nonetheless violated the quoted language in the nondisclosure agreement by continuing the dialogue and taking the initiative to send Chen various detailed personal business plans during 2003. These detailed business plans were clearly "approaches to officers and employees of the other party with regard to offers of employment." Thus, while the court does not find that the plaintiff proved its allegation that "Levine's failure to require HCP to sign this agreement violates both his fiduciary duty of care to Risdon and his fiduciary duty of loyalty to Risdon . . ." (Amended complaint, third count, ¶ 17), Levine's failure to adhere to the important company policy embodied in the agreement also amounts to a breach of his fiduciary duty.
In addition, Levine solicited Raymond Legassie and defendant Holloway, two key employees of Risdon, to leave Risdon and join with him in starting up the new rival company. Levine effected this solicitation by approaching Legassie and Holloway with the opportunity to become affiliated with HCP in the United States, proposing that they receive salary increases, helping them fill out visa applications for a trip to China to meet with Jeff Chen and other HCP officials, paying for their trips, and drafting their resignation letters. These activities took place while all three were still employed with Risdon. Although none of the three had employment contracts, Levine's duty of loyalty nonetheless required him to abstain from efforts to undercut his employer by enticing key employees to leave. See Jet Courier Service, Inc. v. Mulci, supra, 771 P.2d 494-97; id. 496 ("By virtue of the agency relationship, the duty of loyalty and noncompetition placed on the agent is necessarily greater than the duty imposed on all persons by tort law to refrain from wrongful interference with contract relations.")
Levine went so far as to instruct Legassie to make the false statement in his visa application that he was an employee of "HL Associates," which in itself was a fictitious entity. Legassie used poor judgment in acquiescing to this request. The visa application required that the applicant declare that the information contained therein was "true, correct and complete . . ." and that the application "may be declined if the applicant fails to provide . . . true and complete information in the form." The false statement suborned by Levine and written by Legassie is undoubtedly an affront to the Chinese government. To the court, it demonstrates Levine's lack of complete honesty.
There were several other respects in which Levine breached his duties to Risdon. In pursuing the option two plan, Levine provided HCP with confidential information, consisting of customer lists, Holloway's and Legassie's salary levels, and Risdon's market share for various products. See Allen Manufacturing Co. v. Loika, 145 Conn. 509, 514, 144 A.2d 306 (1958). Levine also made some use of his Risdon telephone credit card, his Risdon computer, and his work time to further his personal business venture. While this misuse of time did not have a significant cost impact on Risdon, and Levine did do Risdon work at home and on his home computer, his misuse of Risdon property nonetheless illustrates that Levine did not maintain the high standards and complete loyalty expected of fiduciaries of large corporations. See Foodcom International v. Barry, supra, 328 F.3d 303; Town Country House Homes Service, Inc. v. Evans, supra, 150 Conn. 317.
The court credits the testimony of Stephen Pearlman, president of Risdon, that although a knowledgeable person could develop a rough list of customer contacts quickly, it would take years of work at Risdon to develop knowledge of customer contacts similar to Levine's. Further, although Levine did not reveal Holloway's and Legassie's exact salaries, Levine nonetheless sent several option two business plans to HCP containing proposed salaries for Holloway and Levine that reflected their current earnings. With regard to market share, Levine estimated the market share of other competitors, which knowledgeable persons in the industry could do, but provided HCP the actual share for Risdon, which only someone in Levine's position could do.
There is authority in Connecticut and elsewhere for the forfeiture of the entire salary of an employee who has proven radically unfaithful to his trust or willfully breached his fiduciary duty of loyalty, even without proof of specific damages to the employer. See Breen v. Larson College, 137 Conn. 152, 157, 75 A.2d 39 (1950); Chelsea Industries, Inc. v. Gaffney, 389 Mass. 1, 449 N.E.2d 320, 326-28 (1983); Restatement (Second) of Agency § 469 (1958). The court finds these standards met and invokes this authority as a fair measure of damages here. Levine's salary and company benefits for the period from January 1, 2003 until September 1, 2003, which was the day before Levine resigned, amounted to $131,559. The court accordingly awards this amount to the plaintiff as damages for defendant Levine's liability on counts one and three.
II CT Page 3589
Count two alleges that defendant Holloway breached his duty of loyalty by conspiring with Levine to present the option two business plan to HCP officials in China, and in assisting Levine in executing that plan. The court finds that Holloway became involved in option two approximately one month before he resigned from Risdon and that he was essentially engaged in permissible preparations to leave his employer. See Jet Courier Service, Inc. v. Mulci, supra, 771 P.2d 492-93. Accordingly, the court concludes that there was insufficient evidence that Holloway breached his duty of loyalty to Risdon.
Holloway testified that he did not remember what he stated in his application for a visa to travel to China. To the extent that there was a possibility that, with Levine's encouragement, Holloway included the same false statement concerning his occupation as did Legassie, Holloway should heed in the court's comments in footnote 3 of this decision.
The complaint does not name Raymond Legassie as a defendant.
III
Counts four, five, and six of the amended complaint respectively allege violations of the Connecticut Uniform Trade Secrets Act, General Statutes § 35-50 et seq., against defendants Levine, Holloway, and HCP Packaging USA, Inc. The plaintiff initially seeks compensatory damages, unjust enrichment recovery, punitive damages, and attorneys fees pursuant to General Statutes § 35-53. The plaintiff concedes that it did not prove that the defendants took a specific trade secret. Instead, the plaintiff argues that the defendants took trade secrets in the form of a bundle of confidential information or a business method, as in Elm City Cheese Co. v. Federico, supra, 251 Conn. 70-78.
Section 35-53 provides:
(a) In addition to or in lieu of injunctive relief, a complainant may recover damages for the actual loss caused by misappropriation. A complainant also may recover for the unjust enrichment caused by misappropriation that is not taken into account in computing damages for actual loss.
(b) In any action brought pursuant to subsection (a) of this section, if the court finds wilful and malicious misappropriation, the court may award punitive damages in an amount not exceeding twice any award made under subsection (a) and may award reasonable attorneys fees to the prevailing party.
The act, with exceptions not pertinent here, defines "trade secret" to mean: "information, including a formula, pattern, compilation, program, device, method, technique, process, drawing, cost data or customer list 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." General Statutes § 35-51(d). The evidence of a statutory violation is closest concerning whether Levine and HCP Packaging, USA, Inc. took the plaintiff's customer list but, in view of the plaintiff's concession that there was no specific violation, the court will not address the issue further. See Town County House Homes Service, Inc. v. Evans, supra, 150 Conn. 319-20.
The court finds that, while Levine took confidential information and two specialized and talented Risdon executives with him to HCP Packaging, USA, Inc., Risdon's business method was not completely unique. Cf. id., 76-78. Risdon did not "[occupy] a specialized niche in the . . . industry," id., 77, but instead has several large competitors producing the same types of products. The evidence also revealed that the cosmetics packaging industry was characterized by reverse engineering of products that can be purchased at any shopping center and by somewhat unregulated piracy of product plans nominally marked "confidential" or "proprietary." Further, Levine, Holloway, and Legassie were not bound by any written agreements not to compete or not to disclose confidential information. Thus, there are uncertainties whether Risdon took "efforts that are reasonable under the circumstances to maintain [the] . . . secrecy [of any trade secrets]." General Statutes § 35-51(d). See Elm City Cheese Co. v. Federico, supra, 251 Conn. 78-86. For all these reasons, the court concludes that Risdon did not prove liability on counts four, five, and six and is not entitled to compensatory damages, unjust enrichment recovery, punitive damages, or attorneys fees. General Statutes § 35-53.
The plaintiff also seeks injunctive relief pursuant to General Statutes § 35-52. Section 35-52(a) provides that "actual or threatened misappropriation may be enjoined upon application to the court." "Misappropriation" refers to "[a]cquisition of a trade secret . . ." General Statutes § 35-51(b). The court finds that, while the plaintiff did not prove an actual misappropriation of trade secrets, the threat of misappropriation still exists. Levine himself testified that he shared confidential information with HCP during negotiations on option one. Levine, Holloway, and HCP still or now have that information and could potentially use it, through their HCP Packaging USA, Inc. subsidiary, against Risdon. Accordingly, the plaintiff is entitled to injunctive relief against all three defendants. See Elm City Cheese Co. v. Federico, supra, 251 Conn. 94-97.
In full, the definition provides that "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; or (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, including but not limited to disclosures made under section 1-210, sections 31-40j to 31-40p, inclusive, or subsection (c) of section 12-62; 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. General Statutes § 35-51(b).
The court also bases injunctive relief against Levine on his breach of duty of loyalty. See Town Country House Homes Service, Inc. v. Evans, supra, 150 Conn. 318.
The plaintiff seeks several types of injunctive relief. (Amended Complaint, prayer for relief, ¶¶ 1, 2.) It first requests an injunction prohibiting the defendants from performing any services in connection with the design or manufacture of cosmetics products that the plaintiff makes. This injunction would essentially put the defendants out of business. In a market that allows for fairly rapid entry of new competitors, such an injunction is too harsh. The plaintiff's second request is for an injunction prohibiting the defendants from using the plaintiff's trade secrets and confidential information. Such an injunction is fully appropriate. Finally, the plaintiff requests an injunction prohibiting the defendants from performing any service in competition with the plaintiff. Such an injunction is not necessary if the defendants adhere to the injunction against using trade secrets or confidential information. The plaintiff, again, did not require its executives to sign noncompete agreements. The court will permit competition not barred by statute, the common law, or agreement. Finally, the court grants the plaintiff's request for an injunction requiring the defendants to return any improperly obtained computer data and documents.
IV
Accordingly, judgment shall enter for the plaintiff against defendant Levine in the total amount of $131,559 on counts one and three. Judgment shall enter for defendant Holloway on count two.
Pursuant to counts one, three, four, five, and six, the court permanently enjoins defendants Levine, Holloway, and HCP Packaging USA, Inc. from using the plaintiff's trade secrets and confidential information. In addition, the court orders defendants Levine, Holloway, and HCP Packaging USA, Inc. to return to the plaintiff any unlawfully obtained or reproduced computer data and any documents, including but not limited to drawings, that reveal the plaintiff's trade secrets and confidential business information.
The court commends Attorneys Barry Waters and Theodore Heiser for their skill and professionalism in trying this case.
Carl J.Schuman Judge, Superior Court