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Platinum Management, Inc. v. Dahms

April 11, 1995


Kole, J.A.D., Retired and Temporarily Assigned on Recall

The opinion of the court was delivered by: Kole


KOLE, J.A.D., Retired and Temporarily Assigned on Recall

[This is an abridged version of the opinion on file]

Platinum Management, Inc., d/b/a Embrace (PMI, Embrace or plaintiff), sued defendants Brian Dahms (Dahms), Great American Fun Corporation (GAF or GAF Ohio), and Morton M. Rosenberg (Rosenberg) for damages. The claims by PMI presently in issue are as follows:

1. Dahms breached his employment agreement with PMI, through soliciting PMI's customers and misappropriating PMI's confidential information after accepting employment with GAF.

2. Dahms failed to discharge his duty of loyalty to PMI, as an employee and an officer, in that he neglected his duties to PMI in the critical weeks before his resignation, which was timed on the eve of the most important sales event of PMI's year, the 1992 Hong Kong Toy Fair.

3. Dahms and GAF misused Dahms' inside knowledge and misappropriated PMI's confidential information, including its sales strategy, customer identities, and pricing policy to unfairly compete with PMI.

4. Dahms and GAF tortiously interfered with PMI's prospective economic advantage through the misuse of PMI's confidential information and the use of false and misleading statements about PMI's financial condition and ability to ship its products, to divert business from PMI's customers.

5. Rosenberg breached his duty of employee loyalty to PMI by inducing Dahms to accept employment with GAF prior to Rosenberg's own resignation from PMI, and by divulging confidential information entrusted to him by PMI to GAF.

6. GAF and Rosenberg tortiously interfered with Dahms' employment relationship with PMI by inducing Dahms to leave PMI without divulging Rosenberg's own association with GAF.

Dahms has counterclaimed against PMI for a bonus allegedly due him as computed under the employment agreement. It is PMI's contention that Dahms has forfeited any claim to this payment, as he has both breached the agreement upon which it is based and repudiated it.

Defendants have asserted a number of defenses which will be discussed during the course of this opinion.

Based on the credible evidence and reasonable inferences therefrom, I make the findings that follow.

PMI, with the trade name of Embrace, is a manufacturer, designer and seller of plush toys. Plush toys are three dimensional soft and squeezy products, which are cut, stuffed and sewn with or without accessories or with or without devices for music or sound. PMI's line includes musical toys which operate by way of an electronic pressure sensitive chip battery. PMI began its business through the introduction, in 1987, of its bear bag product. This became a very popular new product.

Jerry Auerbach (Auerbach) is the President of PMI and has been affiliated with it since he and his wife, Linda Auerbach, started the business out of their home in June 1986.

In its early years, the business of PMI focused on mass market direct import business. This business concentrated on selling to very large retailers on a letter of credit basis. In order to get the best and competitive price, these customers would take delivery in the Orient and assume the financial responsibility of bringing the merchandise over by ocean freight.

In 1991, PMI had almost 50 active mass market letter of credit customers. Most of PMI's customers have been purchasing from it for several years, in many cases since it began in 1986. Once a customer relationship is established, it is likely to continue for many years, provided, of course, the products sold by PMI are deemed to be saleable by the customer.

PMI utilizes both direct sales agents and independent sales agents to sell its products. It makes sales presentations to its customers by a telephone appointment or by arranging to meet with the customer at a trade show. The most important trade show is the Hong Kong Toy Fair, held in Hong Kong each January. On average, approximately fifty-five percent of PMI's annual sales revenue is derived from its presentations at the Hong Kong Toy Fair. An additional twenty to twenty-five percent is derived from presentations at the New York Toy Fair, held in February each year.

Dahms contacted PMI regarding a sales position after he had been dismissed from his prior employment at Spencer Gift.

In early 1988, Dahms was employed by PMI in the capacity of Vice President of Sales. He was the first full-time sales person hired by PMI. PMI considered this a significant move in the company's growth.

When Dahms joined PMI, he had no direct experience selling toys to retailers. From the beginning of his association with PMI, he was given a broader scope of responsibility for the running of PMI than any other employee. He was a key person, privy to the innermost secrets of the company.

For the first year of his employment with PMI as Vice President of Sales, Dahms lived in the Auerbachs' home. Auerbach undertook to train Dahms so that he could make effective sales presentations. Auerbach also introduced Dahms to PMI's customers and familiarized him with their buying habits and personal attributes. This customer information was considered by PMI to be confidential.

Dahms was advised by PMI of the need to keep all of the foregoing information in confidence.

When Dahms joined PMI, he executed an employment agreement (the Agreement), which included an unusual non-competition covenant to meet Dahms' suggested changes in the original draft. It provided that, during its term and, for one year after its termination for reasons other than its mere expiration, Dahms would not solicit or accept business from any PMI customers for anyone other than PMI; or disclose the names of any such customers to any other person. The Agreement commenced on April 18, 1988 and was to continue for three years. It would automatically be renewed for additional one-year periods unless either party elected not to renew by notifying the other in writing thereof at least sixty days prior to commencement of a renewal period. A resignation would trigger the applicability of the non-competition provision. The Agreement also required Dahms to devote his entire business time and attention to PMI's business and to serve PMI faithfully.

In September 1989, Auerbach and Dahms agreed to a written amendment to the Agreement by providing for the computation of a sales override bonus for Dahms on certain PMI sales. Dahms did not receive his 1991 override bonus.

On March 13, 1991, Auerbach received a memorandum dated March 1, 1991, from Dahms which stated:

Per section 9 of... the [Agreement], I am notifying you that I do not wish to renew this specific agreement for an additional one-year period. However,... do not interpret that this means I am self-terminating our employer-employee relationship on April 18, 1991. I think we would both feel much better with an agreement, effective April 18, 1991, that just details compensation for the upcoming year and is renewable by both parties each year .... I will submit my proposal to you on or about April 1, 1991 for your review. Hopefully, we can agree on something by April 18, 1991.

Auerbach understood this memorandum to mean that Dahms wanted more money. In the past, Dahms and Auerbach resolved questions concerning Dahms' compensation under the Agreement when they met in Hong Kong in January.

Immediately after receiving the memorandum, Auerbach had a telephone call from Dahms in which Dahms indicated that he wanted to continue his employment under a new package and asked Auerbach not to consider the memorandum as a resignation.

The Agreement does not provide for its termination unless Dahms' employment were also to be terminated. Auerbach reasonably did not understand the memorandum to be either a termination of Dahms' employment or of the Agreement.

The Agreement requires sixty days' advance notice of nonrenewal before April 18, 1991--the commencement of its renewal date. Dahms did not send the March 1 memorandum to Auerbach sixty days in advance of such renewal date.

After sending the notice purporting to terminate the Agreement, in memoranda to Auerbach Dahms nevertheless continued to rely on it for the payment of his override bonus.

Dahms contended that he later resigned by reason, among others, of the fact that the 1991 line of PMI was "weak" and bear bags were "tired." Notwithstanding this assertion, soon after he resigned from PMI, Dahms presented GAF's bear bags to the customers he saw at the 1992 Hong Kong Toy Fair.

By late 1991, Dahms had principal responsibility for overseeing the mass market division or trade at PMI. Part of his duties involved prodding PMI's sales representatives to make appointments with the buyers for the Toy Fair.

Prior to January 1992, Dahms attended the Hong Kong Toy Fair with Auerbach. Auerbach relied upon Dahms to make the appointments for the Fair and to handle the necessary paperwork to prepare quotes for the buyers. Dahms frequently also would make the presentations to the buyers on behalf of PMI.

In mid-1990, PMI employed defendant Rosenberg as Vice President of Marketing. His contract contained no covenant not to compete. Among other things, Rosenberg had responsibility to make Toy Fair appointments for a group of customers.

I find that Rosenberg was treated shabbily by PMI while he was employed there. He properly felt that PMI was not using his talents, did not appreciate his efforts for the company, and had treated him unfairly when it fired him in April 1991, (after a leg injury) and then rehired him part time at a substantially reduced salary.

Defendant GAF, an importer and wholesaler of toys, was founded by H. Brian Haney (Haney) in October, 1981. Haney remains the sole owner and president of GAF Corp. He is also the sole owner of Great American Fun Hong Kong Limited (GAF Hong Kong) an exporter of toys located in Hong Kong.

There is a history of a bad relationship between PMI and GAF. Sometime in 1988, PMI entered into an exclusive distribution agreement with GAF granting exclusive distribution rights for PMI's designs for domestic sales, with some exclusions. Under the agreement, PMI manufactured products which were sold by GAF. When the exclusive distribution agreement was entered into, the primary focus of GAF had been mechanical battery-operated toys. GAF had few plush toys and did not sell bear bags.

In the spring of 1989, Auerbach discovered that GAF was using an Indonesian factory to manufacture bear bags designed and copyrighted by PMI without PMI's authorization. PMI brought a federal court action against GAF. It was settled in April 1991 pursuant to a written agreement. Under the settlement, GAF continued to sell its own bear bags but agreed to change the design thereof.

Haney appears to have had actual animosity toward PMI and Auerbach. This may have stemmed from the federal litigation or may have been the result of personal dislike or of competitiveness.

In June or July 1991, Haney raised the possibility of hiring Dahms to work at GAF in order to assist in creating an increase in the direct import business of GAF. Haney viewed Dahms as having significant knowledge of customers with whom GAF had no previous substantial involvement and, thus, as able to add to GAF's business.

It should be noted that until 1991, GAF's growth in the development of mass market accounts, comprising a significant portion of PMI's business, in Haney's words, had been "stifled." Its business basically related to gift accounts, since the person in charge of sales, was of the view that selling to discounters or mass market type of accounts would have a serious deleterious effect on GAF's other business.

Before submitting their resignations to PMI in December 1991, Dahms and Rosenberg attended meetings at GAF in Ohio which, I find, included Discussions of PMI accounts that Dahms and Rosenberg might be able to bring in to GAF for the purpose of increasing its business, particularly its mass market letter of credit operation. In October, November and December 1991, Haney aggressively pursued Rosenberg and Dahms and finally, in December, they were employed by GAF pursuant to written agreements. Rosenberg assisted in inducing Dahms to be employed by GAF.

Rosenberg was hired by GAF pursuant to a letter from GAF dated December 2, 1991. Dahms was hired on December 5, 1991. Neither had informed PMI of his intention to resign prior to any of their meetings with GAF or his employment by GAF.

GAF requires virtually all its employees to sign very restrictive confidentiality and noncompetition agreements. Despite Haney's testimony to the contrary, I find that he did not ask Dahms during any interview whether he had such an agreement with PMI. In view of GAF's own employee restrictive covenants practice, the failure to ask can reasonably be interpreted as intentional or at least a form of recklessness--namely, a desire to hire Dahms, irrespective of any such agreement with PMI. It was a form of willful blindness. Haney and GAF are chargeable with knowledge of the existence of Dahms' restrictive covenant with PMI and that he was violating it when he disclosed PMI customer information to GAF and sold to such customers for GAF. *fn1

On or around December 12, 1991, Dahms called Ronald Banafato (Banafato), a sales agent at PMI, and advised him that he was terminating his employment with PMI. In that conversation, Dahms indicated that he called Banafato instead of Auerbach, because Auerbach was on a plane en route to the Hong Kong Toy Fair at the time. At Dahms' suggestion, Banafato called Rosenberg, who advised him that he, too, was submitting his resignation to PMI.

When Auerbach arrived in Hong Kong on December 14, 1991, he received an emergency message from his office, as a result of which he learned that both Dahms and Rosenberg had tendered their resignations to PMI.

Dahms formally tendered his written resignation to PMI by letter dated December 12, 1991, the day after he started at GAF, effective that same day.

Neither Dahms nor Rosenberg could offer a plausible reason for the delay in informing PMI after they had ...

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