Infinity Products, Inc. v. Quandt

Attorneys for Appellant Attorneys for Appellee

Herbert Quandt

Arend J. Abel Karl Mulvaney

Ronald G. Sentman Nana Quay-Smith

Indianapolis, Indiana Indianapolis, Indiana

Attorneys For Appellee Fabri-Tech

Grover Davis

Indianapolis, Indiana

William Harrington

Danville, Indiana

In the

Indiana Supreme Court

_________________________________

No. 29S02-0305-CV-226

Infinity Products, Inc,

Appellant (Plaintiff below),

v.

Herbert Quandt and

Fabri-Tech, Inc.,

Appellees (Defendants below).

_________________________________

Appeal from the Hamilton Superior Court, No. 29D01-9610-CP-539

The Honorable Steven R. Nation, Judge

_________________________________

On Petition To Transfer from the Indiana Court of Appeals, No. 29A02-0105-

CV-280

_________________________________

June 29, 2004

Shepard, Chief Justice.

Four days after T.E. Scott, Inc. fired Herbert Quandt, he began

working for Fabri-Tech doing the same sort of work. Infinity Products,

T.E. Scott’s successor, eventually sued Quandt and Fabri-Tech alleging that

Quandt used stolen trade secrets to lure Infinity customers to Fabri-Tech.

The trial court held that Quandt was liable for misappropriating and

converting Infinity’s trade secrets and that Fabri-Tech was not.

We first address whether Fabri-Tech was directly liable under

Indiana’s Trade Secrets Act ("the Act"). Second, we examine whether Fabri-

Tech can be vicariously liable under the Act through the doctrine of

respondeat superior.

Facts and Procedural History

In 1985, T.E. Scott, a manufacturer of webbing and strapping products,

hired Quandt to develop its original equipment manufacturer (“OEM”)

division. The process of developing new products includes identifying

finished consumer products like car seats or baby swings that incorporate

webbing or straps. An OEM salesperson then contacts the consumer product

manufacturer and negotiates a price quote for the webbing or strap.

Pricing requires the OEM salesperson to determine the production cost of

the webbing or strap through an internal quotation process, prepare a price

summary, and then negotiate a final price with the consumer product

manufacturer. All internal pricing and cost analysis documentation is

confidential.

Quandt enjoyed ten successful years as an OEM salesperson for T.E.

Scott. In 1995, T.E. Scott entered into negotiations to sell its OEM

division. Linda Scott, the former controller for T.E. Scott, formed

Infinity Products to purchase the OEM division. The sales agreement

provided that Infinity would acquire all of T.E. Scott’s trade secrets

relating to the OEM division. Linda Scott required employees of T.E. Scott

desiring to work for Infinity to complete an application process. Quandt

refused to complete an application and indicated that Infinity would not be

able to afford his services.

During negotiation of the sales agreement, fellow employees suspected

Quandt of copying customer-specific documents and removing them from the

office. The documents included contact information for T.E. Scott’s

customers, manufacturing costs, and price summaries. Quandt kept all

information relevant to pricing and costing in three-ring binders in his

office. The information was confidential, and T.E. Scott used locked

offices, locked file cabinets, and computer passwords to secure it. Quandt

knew that all customer-specific information was confidential.

On October 5, 1995, four days before the sale was complete, T.E. Scott

fired Quandt. Quandt packed up his office and took several boxes and

file folders to his car before leaving. As he left, Quandt told T.E. Scott

employee Paul Seitzinger, “I built this company up. And as quickly as I

built this company up, I can tear it down.” Tr. at 637. Linda Scott

reported that customer-specific information was missing from several files

after Quandt left.

The next day, Quandt contacted Don Menchhofer, the president and chief

executive officer of Fabri-Tech Inc., to seek a sales position. Menchhofer

had never met Quandt, but he immediately granted him an interview. The two

did not discuss T.E. Scott’s customers, but Quandt indicated that he had

built a million dollar book of business for T.E. Scott. Quandt correctly

indicated that he was not bound by any non-compete agreement with Infinity

or T.E. Scott. Menchhofer hired Quandt that same day, paying a base salary

of $40,000 per year, plus $1,000 for the first $100,000 in sales and four

percent on all additional sales. Fabri-Tech did not provide Quandt with an

existing customer list, so Quandt had to generate business from new

customers.

On October 9, 1995, T.E. Scott effectuated the sale of the OEM

division to Infinity. All of T.E. Scott’s OEM customers thus became

Infinity’s customers.

On that same day, Quandt began working for Fabri-Tech. That morning,

Quandt phoned five of Infinity’s newly-acquired customers and informed them

that he was with Fabri-Tech. During the following weeks, Quandt quoted

prices of existing products now produced by Infinity and sold to these

customers without the benefit of Fabri-Tech’s internal cost analysis. See

exhibits 14-21; Tr. at 312. Many of Quandt’s quotes were mere pennies less

than the price quoted by T.E. Scott for the identical product. See id.

Subsequent to Quandt’s telephone calls, five companies stopped ordering

from Infinity and began ordering from Fabri-Tech. In total, Fabri-Tech

received orders for seven products previously manufactured by Infinity.

In October 1996, Infinity sued Quandt and Fabri-Tech alleging

misappropriation of trade secrets and conversion. Fabri-Tech answered and

filed a counterclaim asserting that the misappropriated information did not

constitute a trade secret and that it had no knowledge of the

misappropriated information. In 1999, the trial court held that Infinity

had a protectable interest in the trade secrets transferred to it from T.E.

Scott. The parties tried the case to the bench in March 2000, and the

court found in relevant part as follows:

The Court also draws the reasonable, perhaps inescapable,

inference from Quandt’s behavior and the disappearance of

documents from his office at the time of his departure, the

absence, inconsistency and incompleteness of costing records of

Fabri-Tech for the disputed items, and the fact that Fabri-Tech

undercut Infinity's prices by just enough to secure sales of the

disputed items, that Quandt took product pricing and costing

information on his departure and that he used it to Infinity's

detriment.

Appellant’s App. at 35-36. The trial court also found that:

The Plaintiff presented circumstantial evidence to the Court

that Fabri-Tech may have or should have known of the

misappropriation and use of trade secrets. The Court finds,

though, that there was insufficient evidence to find that Fabri-

Tech, through its sales representative, misappropriated

Infinity's trade secrets and improperly obtained Infinity's

customers and sales, and Fabri-Tech's costing personnel assisted

in that effort.

That further, there was insufficient evidence presented to show

that Fabri-Tech should be held liable under the doctrine of

respondeat superior.

Id. at 40.

The trial court calculated Infinity’s losses based on two years of

projected profits for seven products as follows:

(1) Little Tikes Annie Swing Product: $84,894.60;

(2) Little Tikes Product No. 884637000: $12,455.50;

(3) Little Tikes Product No. 884309200: $19,943.48;

(4) Little Tikes Product No. 88434409200: $30,794.50;

(5) Gleason Product No. 860: $33,253.19;

(6) Old Dominion Product No.(s) 15200 & 15201: $10,529.40;

(7) Smart Products Product No. 7011: $23,296.12.

Compensatory damages totaled $215,166.79. The trial court also awarded

Infinity exemplary damages of $430,333.58 and attorney fees of $117,752.87.

As noted above, these damages were assessed against Quandt alone.

Quandt appealed the damages calculation, but the Court of Appeals

affirmed. Infinity appealed the determination that Fabri-Tech had no

liability. On this point the Court of Appeals reversed, on the basis of

respondeat superior, without addressing whether Fabri-Tech might have

direct liability under the Act. Infinity Products, Inc. v. Quandt, 775

N.E.2d 1144 (Ind. Ct. App. 2002). We granted transfer.

I. Direct Liability

Infinity first contends that the trial court erred in finding that

Fabri-Tech was not directly liable for misappropriation under Indiana’s

Trade Secrets Act.[1] At Infinity’s request, the trial court entered

special findings and conclusions pursuant to Trial Rule 52, so the standard

of review is two-tiered:

[W]e determine whether the evidence supports the trial court's

findings, and we determine whether the findings support the

judgment. We will not disturb the trial court's findings or

judgment unless they are clearly erroneous. Findings of fact

are clearly erroneous when the record lacks any reasonable

inference from the evidence to support them, and the trial

court's judgment is clearly erroneous if it is unsupported by

the findings and the conclusions which rely upon those findings.

In determining whether the findings or judgment are clearly

erroneous, we consider only the evidence favorable to the

judgment and all reasonable inferences to be drawn therefrom.

Bussing v. Ind. Dept. of Transportation, 779 N.E.2d 98, 102 (Ind. Ct. App.

2002) (citations omitted), trans. denied. Because Infinity appeals from a

negative judgment, it must:

demonstrate that the trial court's judgment is contrary to law.

A judgment is contrary to law only if the evidence in the

record, along with all reasonable inferences, is without

conflict and leads unerringly to a conclusion opposite that

reached by the trial court. In conducting our review, we cannot

reweigh the evidence or judge the credibility of any witness,

and must affirm the trial court's decision if the record

contains any supporting evidence or inferences.

Dimizio v. Romo, 756 N.E.2d 1018, 1021 (Ind. Ct. App. 2001) (citations

omitted), trans. denied.

The analysis of Infinity’s direct claim against Fabri-Tech begins with

Indiana Code Section 24-2-3-2, which defines a “trade secret” as:

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.

The Act defines “misappropriation” in relevant part as the “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.” Id. Finally, “improper

means” is defined as “theft, bribery, misrepresentation, breach or

inducement of a breach of a duty to maintain secrecy, or espionage through

electronic or other means.” Id.

In addition to 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.” Ind. Code Ann. §

24-2-3-4(a) (West 1995). Additionally, for willful or malicious

misappropriation, “the court may award exemplary damages in an amount not

exceeding twice any award[.]” Ind. Code Ann. § 24-2-3-4(c).

The trial court found that Quandt misappropriated Infinity’s trade

secrets when he used Infinity’s “customer lists, pricing, labor rates,

overhead costs, suppliers, designs, blueprints, and specific needs of

customers.” Appellant’s App. at 38-39; see Amoco Prod. Co. v. Laird, 622

N.E.2d 912 (Ind. 1993) (for a discussion of trade secrets).

It found insufficient evidence to support Infinity’s claim that Fabri-

Tech was also liable under the Act because it knew or should have known of

Quandt’s misappropriation.

The record reveals that Quandt acquired all of the misappropriated

information before seeking employment with Fabri-Tech. Before his

dismissal from T.E. Scott, Quandt had never met Menchhofer. During

Quandt’s initial interview with Menchhofer, the two discussed Quandt’s

success as a salesperson, his experience in the OEM industry, and his

connections with potential customers. Menchhofer asked Quandt if he was

bound by a non-compete agreement to which Quandt responded in the negative.

Fabri-Tech then hired Quandt for the purpose of soliciting new customers

for its OEM division.

At trial, Menchhofer indicated that he was aware that Quandt contacted

Infinity’s customers. Indeed, during his first morning on the job, Quandt

contacted several of Infinity’s customers and informed them that he was now

working for Fabri-Tech. Fabri-Tech’s phone records indicate that Quandt

used the buyer's direct numbers of Infinity’s customers. In subsequent

calls, Quandt quoted prices for existing products currently produced by

Infinity to Infinity’s customers without completing Fabri-Tech’s pricing

procedure. Five of Infinity’s customers placed orders with Fabri-Tech

during the following months. Appellant’s App. at 29-32.

While Quandt’s disregard of Fabri-Tech’s pricing procedure is

suspicious, the state of the evidence was such that the trial court could

respectably regard it as inadequate to demonstrate that Fabri-Tech knew or

should have known of the misappropriation. As Quandt was not prevented

from contacting Infinity’s customers, Fabri-Tech was not prevented from

authorizing him to do so. There is no evidence indicating that Fabri-Tech

instructed Quandt to use trade secrets to lure Infinity customers away.

Based on these facts, neither the trial court’s findings nor judgment is

erroneous. The court’s judgment is not contrary to law, and we affirm the

trial court on this issue.

Vicarious Liability

The trial court held that Fabri-Tech was not liable for Quandt’s acts

under the doctrine of respondeat superior. Infinity contends this was

error, as Quandt made use of Fabri-Tech’s information while acting within

the scope of his employment with Infinity, thus creating liability for his

principal under the common law of torts. Fabri-Tech replied that

respondeat superior is unavailable in an action covered by the Trade

Secrets Act.

This debate turns in the first instance on the scope of the act as

adopted by the General Assembly in 1982. The legislature has left us some

direction on this point.

Indiana’s statute is based on the Uniform Trade Secrets Act and we

are one of some forty states that have adopted it. The legislature

announced its purpose in adopting the uniform act and provided some

guidance on its general construction: “This chapter shall be applied and

construed to effectuate its general purpose to make uniform the law with

respect to the subject matter of this chapter among states enacting the

provisions of this chapter.” Ind. Code Ann.

§ 24-2-3-1(b) (West 1995). The General Assembly has also told us: “The

chapter displaces all conflicting law of this state pertaining to the

misappropriation of trade secrets, except contract and criminal law.” Ind.

Code Ann. § 24-2-3-1(c). Our legislature’s statement about displacement of

conflicting law is somewhat stronger than the one contained in the uniform

act as it existed at the time the General Assembly acted.[2] And the

commentary to the uniform act made plain then, as it does now, that the act

was designed to cover “duties imposed by law,” as opposed to duties that

arise from agreements, for example.[3] Illinois courts, following similar

provisions in that state’s law, have held that common law remedies are

supplanted by the act. See, e.g., Pope v. Alberto-Culver Co., 296 Ill.

App.3d 512, 694 N.E.2d 615 (1998); AutoMed Technologies, Inc. v. Eller, 160

F.Supp.2d. 915 (N.D. Ill. 2001).[4]

As Infinity correctly points out, respondeat superior is a common law

doctrine under which liability is imposed by law upon the master for acts

done by the servant, regardless of the master’s complicity in the acts.

Indeed, it may impose liability even when the master directed the servant

to the contrary. Appellant’s Br. at 22.[5] Surely, this doctrine must be

thought of as conflicting with the uniform act’s requirements that a

claimant demonstrate that the defendant “knows or has reason to know” that

the trade secret at issue was acquired by improper means. Ind. Code Ann. §

24-2-3-2 (West 1988).[6] It is thus displaced by the provisions of the

uniform act.

Of course, the uniform act affords fulsome avenues of relief for

persons who believe that secrets belonging to them have wrongly been

misappropriated. It supplies a remedy for money damages under a standard

of proof that is, at first blush, less onerous that the common law usually

requires. It also authorizes injunctive relief both to shut down actual

misappropriation and to thwart threatened misappropriation. Ind. Code Ann.

§ 24-2-3-3. And it authorizes the award of attorney’s fees upon conditions

more liberal than most parts of our code. Ind. Code Ann. § 24-2-3-5.

We conclude that the trial court correctly held that Fabri-Tech could

not be held liable absent the proof of scienter required by the uniform

act.

Conclusion

We affirm the trial court’s judgment for Infinity against Quandt and

its judgment for Fabri-Tech against Infinity.

Sullivan and Boehm, JJ., concur.

Dickson, J., dissents with separate opinion in which Rucker, J., concurs.

Dickson, Justice, dissenting.

The majority opinion acknowledges that the legislature's purpose in

adopting the Uniform Trade Secrets Act (UTSA) was "to make uniform the law

with respect to the subject matter of this chapter among states enacting

the provisions of this chapter." Majority opinion at 9, quoting Ind. Code

§ 24-2-3-1(b). By holding that the Uniform Act displaced the common law

principle of respondeat superior liability, however, the majority creates a

lack of uniformity. As noted by our Court of Appeals, two other

jurisdictions, applying nearly identical trade secret statutes, have held

that an employer may be vicariously liable for its employee's

misappropriation of trade secrets. Infinity Products, Inc. v. Quandt, 775

N.E.2d 1144, 1153 (Ind. Ct. App. 2002), citing Newport News Indus. v.

Dynamic Testing, Inc., 130 F. Supp 2d 745, 751 (E.D.Va. 2001) (permitting

respondeat superior liability for violation of Virginia Uniform Trade

Secrets Act); Hagen v. Burmeister & Assoc., Inc., 633 N.W.2d 497, 504

(Minn. 2001) (applying unpublished Minnesota Court of Appeals holding that

employer can, as a matter of law, be vicariously liable for an employee's

UTSA violation). Cf. Sheltry v. Unum Life Ins. Co. of America, 247 F. Supp

2d 169, 181 (D.Conn. 2003) (permitting vicarious liability claim against

insurance company for broker's violation of Connecticut's Unfair Trade

Practices Act); Chanay v. Chittenden, 563 P.2d 287, 293-94 (Ariz. 1977)

(permitting claim of vicarious liability of insurance company for unfair

trade practices1 of its general agent).

The time-honored common law principle of an employer's respondeat

superior liability for the acts of an employee done in the scope of

employment is not "conflicting law of this state pertaining to the

misappropriation of trade secrets." Ind. Code § 24-2-3-1(c). The Uniform

Act's requirement that a claimant demonstrate the wrongdoer's scienter does

not "conflict" with the imposition of vicarious liability of the

wrongdoer's employer. To the contrary, the risk of such liability serves

as an incentive for employers to discourage their employees from using

misappropriated trade secrets. The doctrine of respondeat superior thus

does not conflict with, but rather fosters, the purposes of the act.

The majority avers that the Uniform Act "affords fulsome avenues of

relief," but in reality, the relief is meager indeed when as here it is

limited to the assets of the individual employee wrong-doer, and the

employer who benefits from an employee's misappropriation is immunized from

its customary common law responsibility for the wrongful acts of its

employees. Sword v. NKC Hospitals, Inc., 714 N.E.2d 142, 148 (Ind. 1999).

I would reverse the trial court and find that Fabri-Tech can be held

vicariously liable for Quandt's misappropriations done in the scope of

employment.

Rucker, J., concurs.

-----------------------

[1] Infinity also contends that Fabri-Tech is directly liable for criminal

conversion. See Ind. Code Ann. § 35-43-4-3 (West 1998). Infinity fails to

make a cogent argument in support of this contention. We therefore do not

address it. See Ind. Rules of App. Proc. 46(A)(8)(a) (“The argument must

contain the contentions of the appellant on the issues presented, supported

by cogent reasoning. Each contention must be supported by citations to the

authorities, statutes, and the Appendix or parts of the Record on Appeal

relied on, in accordance with Rule 22.”)

[2] The uniform act then provided that it “displaces conflicting tort,

restitutionary, and other law of this State pertaining to civil liability

for misappropriation of a trade secret.” Unif. Trade Secrets Act § 7, 14

U.L.A. 463 (1990).

[3] Id.

[4] Infinity has also relied on the criminal conversion statute, Ind. Code

Ann. § 35-43-4-3 (West 1988). While the uniform act declares that it does

not displace “criminal law,” Ind. Code § 24-2-3-1, we leave open the

question whether civil provisions for treble damages based on certain

criminal acts is covered by this declaration. It is unclear that the

answer to the question would matter. To prove criminal conversion, one

must establish a knowing or willing state of mind. The trade secrets act

requires showing that the perpetrator “knows or has reason to know.” Ind.

Code § 24-2-3-2. It requires willful or malicious acts to support

exemplary damages. Ind. Code § 24-2-3-4. As the trial court concluded on

the principal claim, Fabri-Tech did not itself possess any of these levels

of knowledge.

[5] To be sure, corporations act through their officers and employees.

Here, the finder of fact found inadequate scienter by the relevant

corporate actors to warrant a judgment against the corporation.

[6] In apparent contradiction is Newport News Industrial v. Dynamic

Testing, 130 F.Supp.2d 745, 751 (E.D. Va. 2001), in which a federal court

opined that under Virginia law respondeat superior was available, saying:

Respondeat superior is not an independent conflicting tort, civil

claim, or remedy. Rather, it is a legal precept that presupposes the

existence of an underlying claim and assesses liability not because of

the act giving rise to the claim but because of a certain status.

Thus, one cannot bring a claim of “respondeat superior,” instead one

simply relies on this theory as a vehicle for imposing on the

principal liability for the underlying wrongful acts of the agent.

Virginia had adopted the uniform act’s displacement provisions as written

(“conflicting tort, restitutionary and other law…providing civil remedies

for misappropriation of a trade secret”). As we observed above, this

language was rejected by our legislature in favor of a broader

displacement.

1 This claim, however, appears to have been a common law claim of

unfair trade practice under the Restatement of Torts §§ 757, 759, rather

than under the Uniform Trade Secrets Act.