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.