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Midland-Ross Corp. v. Yokana

July 31, 1961


Author: Goodrich

Before GOODRICH, McLAUGHLIN and KALODNER, Circuit Judges.

GOODRICH, Circuit Judge.

This is an appeal from a judgment of the District Court for the District of New Jersey denying the plaintiff an injunction but retaining jurisdiction for such further proceedings as are necessary. The interlocutory appeal is timely and allowable.*fn1 Federal jurisdiction is based on diversity. The plaintiff is an Ohio corporation. The defendants are an individual citizen of New Jersey and a New Jersey corporation. All the operative facts occurred in New Jersey. New Jersey law governs the substantive rights of the parties.

The plaintiff is a successor to a corporation called Hartig Engine & Machine Co. The defendant was employed by Hartig and upon its acquisition by Midland-Ross Corporation remained in the employ of that corporation for a time and then set out on business of his own through the codefendant, Sterling Extruder Corporation, a corporation which he caused to be formed. This new corporation is in competition with the plaintiff company and the latter seeks an injunction based upon an alleged breach of confidential relationship which it is claimed existed between the plaintiff corporation and its predecessor and the defendant Yokana. Yokana was, in the words of the trial judge, "a trusted employee of the plaintiff." At the termination of his employment he had in his possession a good many documents such as customer lists, lists of suppliers and pricing data. He also had drawings of various parts of the extruding machines manufactured by the plaintiff and which are now also being manufactured by the defendant. The plaintiff claims a violation of confidential relationship involved in Yokana's employment by it and demands an injunction against defendants, restraining them from manufacturing plastic extruding machines embodying designs or dimensions derived by defendants from drawings now belonging to the plaintiff and from disclosure of any of plaintiff's trade secrets. It also asks for an accounting, punitive damages and so on. The trial judge directed the return of documents held by Yokana at the termination of his employment by the plaintiff. The parties do not dispute the propriety of this part of the district court's order and the question now presented is whether further injunctive relief should be given against Yokana and the corporation he formed upon leaving the plaintiff's employ. This problem was fully discussed by the trial judge who concluded that except for the return of documents belonging to the plaintiff in the defendants' possession further injunctive relief was inappropriate. He reserved jurisdiction for the other phases of the case involving among other things a claim for damages. D.C.N.J.1960, 185 F.Supp. 594.

We have before us in this case two perfectly well established principles. One is that an employee after leaving the service of an employer may carry on the same business on his own and use for his own benefits the things he has learned while in the earlier employment. If this were not so an apprentice who has worked up through the stages of journeyman and master workman could never become an entrepreneur on his own behalf. Any such system of quasi-serfdom has long since passed away. Necessarily the former employee may use what he learned in the former employer's business while engaged in business for himself or some business competing with the former employer. All this is set out in the Restatement of Agency, Second, §§ 396 and 393, especially in comment e (1958).

Equally clear is the proposition that the employee owes a duty of loyalty to the employer. He must not, while employed, act contrary to the employer's interests and, in general terms, owes a duty of loyalty as one of the incidents of the employer-employee relationship. Restatement of Agency, Second, § 387. These two general propositions are well settled and, in the broad terms just stated, could not be successfully disputed by anyone. The question is on which side of the line the present case falls.

The appellant makes much of a series of things which Yokana was said to have done while he was still in the employ of Midland-Ross. They may be summarized as follows:

A. A proposal to customers named Moss which eventually resulted in the Mosses joining up with Yokana in his new enterprise;

B. Yokana's attorney submitted a proposed agreement for the formation of the competing organization;

C. Yokana accepted orders to be filled by his new corporation for business,*fn2

D. He copied drawings of the employer in his possession;

E. The defendant ordered some castings for his new enterprise;

F. He ordered some machinery for it;

G. He asked delivery specifying a ...

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