Raven Indus. Inc v. Lee

783 N.W.2d 844

2010 S.D. 49

RAVEN INDUSTRIES, INC., Plaintiff and Appellee,v.Clark LEE and Integra Plastics, Inc., Defendants and Appellants.

No. 25393.

Supreme Court of South Dakota.

Considered on Briefs May 24, 2010.

Decided June 16, 2010.

COPYRIGHT MATERIAL OMITTED

Thomas J. Welk, Jason R. Sutton of Boyce, Greenfield, Pashby & Welk, LLP, Sioux Falls, South Dakota, Attorneys for plaintiff and appellee.

Lee A. Magnuson, Amy L. Arndt, Dana Van Beek Palmer of Lynn, Jackson, Shultz & Lebrun, PC, Sioux Falls, South Dakota, Attorneys for defendants and appellants.

GILBERTSON, Chief Justice.

[¶ 1.] Raven Industries (Raven) sued Integra Plastics, Inc. (Integra), a business competitor, and Clark Lee (Lee), a former employee of Raven, by complaint for injunctive relief, tortious interference with contract, and unfair competition. Raven alleged that Lee unfairly competed with Raven by using alleged secret, confidential, or proprietary information that he was contractually obligated not to disclose. Raven's complaint sought only injunctive relief. A bench trial was held and the circuit court entered findings of fact, conclusions of law, and a permanent injunction in Raven's favor. Integra and Lee appeal.

FACTS

[¶ 2.] Raven is a string-reinforced plastic film manufacturer in Sioux Falls, South Dakota. Integra is a manufacturing company in Madison, South Dakota. Lee was an engineer at Raven from 1991 until February 2006 when he was fired. In 1991, Lee signed an “Agreement for Execution by Employees of Raven Industries, Inc. Relating to Inventions, Secret Processes, Trademarks, Trade Names, Character Names and Other Similar Matters” (Proprietary Rights Agreement).¹ After being fired, Lee signed a “Severance Package/Agreement” (Severance Agreement). The Proprietary Rights Agreement and Severance Agreement will now collectively be referred to as the “non-disclosure agreements.” In the Severance Agreement, Lee agreed not to “[u]se or disclose to any third party any confidential or proprietary Company information or any confidential or proprietary knowledge about the Company obtained by [Lee] during the course of [Lee's] employment, including without limitation the terms and conditions of this Agreement.” Lee commenced employment with Integra in February 2006 after he was fired by Raven.

[¶ 3.] At Raven, Lee was on the engineering team that originally built Raven's string-reinforced plastic line (Line) in 1993.² Lee was initially responsible for operating the Line and modifying it to improve product quality. Raven experienced many problems with the Line after production began. Lee, as the lead engineer, worked to develop solutions to these problems. As a result, Lee was intimately familiar with the assembly and operation of Raven's Line. In sum, it took over thirteen years to perfect Raven's Line.

[¶ 4.] At Integra, Lee was the director of business development and worked to develop a manufacturing line to produce string-reinforced plastic film almost identical to Raven's. Although Integra considered building a production line for this product before Lee was hired, it did not. Once Integra employed Lee, Lee contacted an equipment manufacturer that built a component of Raven's Line to have the same modified component made for Integra. The modifications Lee requested were unique to Raven's Line and were not used by any other manufacturer in the industry. Within one month of receiving the necessary equipment, Integra was able to produce a product that was commercially comparable to Raven's.

[¶ 5.] Raven filed suit against Integra and Lee for injunctive relief, tortious interference with contract, and unfair competition. Raven alleged that Integra and Lee unfairly competed against Raven by using secret, confidential, or proprietary information-that Lee was contractually obligated not to disclose-to produce a product for Integra commercially comparable to Raven's. Raven's complaint sought only injunctive relief. A nine-day bench trial was held, and the circuit court found for Raven on all three claims. The circuit court subsequently entered findings of fact, conclusions of law, and a permanent injunction prohibiting Integra from operating its line for two years.

[¶ 6.] Integra and Lee appeal, raising the following issues: ³

1. Whether the circuit court erred in concluding that the Uniform Trade Secrets Act did not preempt Raven's tort claims.

2. Whether the circuit court erred in concluding that Raven and Lee's non-disclosure agreements were enforceable.

3. Whether the circuit court erred in concluding that Integra engaged in unfair competition.

4. Whether the circuit court erred in granting the permanent injunction.

ANALYSIS AND DECISION

[¶ 7.] 1. Whether the circuit court erred in concluding that the Uniform Trade Secrets Act did not preempt Raven's tort claims.⁴

[¶ 8.] Integra and Lee initially argued that the circuit court erred in concluding that the Uniform Trade Secrets Act (UTSA) did not preempt Raven's claims for injunctive relief,⁵ tortious interference with contract, and unfair competition. Integra and Lee concede in their reply brief, however, that a breach of contract claim would not be preempted by the UTSA. See SDCL 37-29-7(b)(1) (specifically excluding from the UTSA “contractual remedies, whether or not based upon misappropriation of a trade secret”). Integra and Lee instead maintain that the non-disclosure agreements (or contracts) entered into by Lee were unenforceable. Integra and Lee therefore argue that the allegedly invalid and unenforceable non-disclosure agreements could neither support a contract claim nor provide a contractual basis to support the tortious interference with contract claim. As Integra and Lee have presented this issue, their appeal hinges on whether Integra and Lee can demonstrate that the circuit court erred in ruling that the non-disclosure agreements were enforceable. This issue is addressed below.⁶

[¶ 9.] 2. Whether the circuit court erred in concluding that Raven and Lee's non-disclosure agreements were enforceable.

[¶ 10.] Integra and Lee argue the circuit court erred in holding that Raven and Lee's non-disclosure agreements were valid and enforceable. As noted above, if the non-disclosure agreements are unenforceable, Raven's tortious interference with contract claim must also fail because that claim was premised on a valid and enforceable contract.

[¶ 11.] Non-disclosure agreements are unenforceable if: “(1) a trade secret or confidential relationship does not exist; (2) the employer discloses the information to others not in a confidential relationship; or, (3) it is legitimately discovered and openly used by others.” 1st Am. Sys., Inc. v. Rezatto, 311 N.W.2d 51, 57 (S.D.1981). Integra and Lee argue the non-disclosure agreements in this case were unenforceable because “Lee was not informed about what information Raven considered secret, confidential, or proprietary”; “Raven disclosed the alleged secret, confidential, [or] proprietary information to others not in a confidential relationship”; and, the “alleged secret, confidential, [or] proprietary information was legitimately discovered and openly used by others.”

Confidential Relationship

[¶ 12.] Integra and Lee contend that while “Raven and Lee may have been in a confidential relationship as employer and employee, Raven's claimed secret process does not constitute a trade secret[.]” The first requirement in assessing whether a non-disclosure agreement is enforceable is whether a trade secret or confidential relationship exists. Id. In this case, the circuit court found that Raven and Lee had a confidential relationship. See Walling Chemical Co. v. Bigner, 349 N.W.2d 647, 650 (S.D.1984) (recognizing that an employer-employee relationship was a confidential relationship). Integra does not assert that this finding was clearly erroneous. Instead, Integra and Lee argue that because Lee was never informed about what information Raven considered secret, confidential, or proprietary, “Lee could not have known that he was violating the non-disclosure agreements.” Integra and Lee argue that the circuit court erred by ignoring this fact in its findings of fact and conclusions of law. Raven, however, was not required to inform Lee of this information under Rezatto. 311 N.W.2d at 57. Furthermore, the circuit court was free to disregard testimony it found to lack credibility. See Osman v. Karlen & Assocs., 2008 SD 16, ¶ 30, 746 N.W.2d 437, 446. Therefore, the circuit court did not err in determining that the first Rezatto factor was not satisfied.

Disclosure of Information

[¶ 13.] Integra and Lee next argue that the circuit court erred in concluding that Raven did not disclose secret, confidential, or proprietary information to others not in a confidential relationship. Integra and Lee cite Rezatto for the proposition that the test for whether secret, confidential, or proprietary information was disclosed, which would render the non-disclosure agreements unenforceable, requires determining if this information was disclosed to others “at all.” See 311 N.W.2d at 57. Integra and Lee point out that Raven often had people, other than those in a confidential relationship with Raven, observe the process that Raven asserts was secret, confidential, or proprietary. These instances, among many others, included Raven permitting one of its competitors to tour its facilities, allowing consultants who were not required to sign confidentiality agreements to observe the Line, and not requiring contractors who assisted in the Line's installation to sign confidentiality agreements.

[¶ 14.] In response, Raven argues Rezatto does not stand for the proposition that any dissemination of information invalidates a non-disclosure agreement. Raven asserts that only reasonable efforts to maintain secrecy are required. See Centrol, Inc. v. Morrow, 489 N.W.2d 890 (S.D.1992). In Morrow, this Court, relying on Rezatto, concluded that general dissemination would...