BANCROFT WHITNEY COMPANY v. GLEN

Reset A A Font size: Print

District Court of Appeal, First District, Division 2, California.

BANCROFT-WHITNEY COMPANY, a corporation, Plaintiff and Appellant, v. Ada GLEN, Special Administratrix of the Estate of Judson B. Glen, deceased, Matthew Bender and Company, Inc., a corporation, John T. Bender, Jr., as President of Matthew Bender and Company, Inc., and John T. Bender, Jr., individually, Defendants and Respondents.

Civ. 21884.

Decided: June 25, 1965

Charles E. Hanger, Brobeck, Phleger & Harrison, San Francisco, for appellant. Bronson, Bronson & McKinnon, Edgar H. Rowe, San Francisco, Gibson, Dunn & Crutcher, Dean C. Dunlavey, Los Angeles, for respondents.

Plaintiff Bancroft-Whitney Company brought this action against defendants Judson Glen; Matthew Bender and Company, Inc. (hereafter referred to as ‘Bender Company’); and John Bender, Jr., both individually and in his capacity as president of Bender Company.1

The complaint alleged, inter alia, that defendants, by using misrepresentations and half-truths, intentionally interfered with plaintiff's advantageous contractual relationships and surreptitiously sought to entice away carefully selected members of plaintiff's executive staff and working force; that defendant Glen, while he continued to occupy a position of trust with plaintiff, furnished information which permitted defendants to do this; and, further, that defendant Glen disclosed to defendant Bender Company certain of plaintiff's trade secrets; that the acts performed by defendant Glen constituted a violation of his fiduciary duty as an officer and director of plaintiff; and that the acts performed by all the defendants were done for the purpose of crippling and destroying plaintiff and constituted unfair competition. Plaintiff sought compensatory damages in the amount of $750,000, punitive damages in the amount of $750,000, and a permanent injunction restraining defendants from further solicitation of its employees and further solicitation or disclosure of its trade secrets or confidential business information.

Defendants answered, denying the material allegations of the complaint. Defendants Bender Company and John Bender, Jr., also filed a counterclaim, which was dismissed without prejudice prior to trial.

Following a trial by the court, sitting without a jury, judgment was for the defendants. Plaintiff appeals therefrom.

Glen died pending appeal, and by order of November 19, 1964, Ada Glen, as the special administratrix of his estate, was substituted as defendant and respondent in his place.

The factual summary hereafter set forth is taken largely from findings of fact made by the trial court and conceded by all the parties to be amply supported by the evidence.

Appellant Bancroft-Whitney Company is a California corporation which has its principal place of business in San Francisco, and which is engaged in the business of publishing lawbooks and related treatises. At all times relevant to this action, the majority of appellant's stock was owned by Lawyers Co-operative Publishing Company (hereafter referred to as ‘LCP’), a New York corporation which is in a similar business. Respondent Bender Company is a New York corporation which is likewise engaged in the same type of business, is qualified to do business in California, and since January 2, 1962, has had its principal place of business for its western division in San Francisco.

From 1949 until December 15, 1961, respondent Judson Glen served as appellant's editor-in-chief. From June 1958 until December 15, 1961, he was also appellant's president, a member of its board of directors, and chairman of its executive committee. He also served as chairman of the product planning committee for LCP and its associated companies. Glen's employment by appellant was terminable at will, and he had no written contract which required him to resign from or give notice to appellant or its officers, directors or shareholders before negotiating for or signing an employment contract with any other company.

At all times relevant to this action, Jules Kalishch, Arno Lahti and Gordon Baker were employed by appellant and were members of its board of directors. Kalisch was one of appellant's four managing editors, Lahti was appellant's treasurer, and Baker was appellant's assistant sales manager and regional director of its Los Angeles sales office. None of the three men had written contracts with appellant, and their employment was terminable at will in the same manner as Glen's.

In April 1960, Thomas Gosnell took office as president of LCP. Under his direction, LCP began to exercise direct control and domination over much of appellant's actual business operation. As a result of this change in LCP policy, Glen, Kalisch, Lahti and Baker all became dissatisfied with their employment by appellant.

For many years prior to 1961, respondent Bender Company had wanted to expand its operations in the State of California. Since 1959 and in furtherance of this objective, it had been in the course of expanding and hiring additional personnel. In May 1961, respondent John Bender, Jr., directed William Vanneman, a vice-president of Bender Company, to call upon Judson Glen in San Francisco and attempt to verify certain rumors that Glen was dissatisfied with his position at appellant. On May 12, 1961, Vanneman reported orally and in writing to Bender that he had been unable to confirm the rumors during his discussion with Glen. He did report, however, that he had talked with James McCann, who was the president of Bender-Moss Company, a wholly-owned subsidiary of LCP. Vanneman stated that his discussion with McCann had led him to believe that Bender Company could create a substantial western operation using appellant's personnel. Vanneman's written report stated, more specifically, that ‘It is my judgment that it would not take much to crack the whole West Coast Coop organization wide open. I think we should consider at once the possibility of creating a really big time westerm operation out of disgruntled Coop personnel.’

On July 10, 1961, Bender instructed his assistant, Joseph Billo, to contact Glen in San Francisco and privately explore further the possibilities reported by Vanneman. Billo met with Glen at the latter's office on July 27, 1961. On August 10, 1961, Billo reported to Bender that Glen had reached retirement age, that his pension had vested, and that he was open to offers; that he would consider a change of employment if he could build up his estate and direct the new operations himself; that increased salary was not a problem but that he wanted stock options; that he had been asked to stay on with appellant for five to seven years; that although he had feelings of loyalty to appellant, he could be swayed; that he would meet Bender in San Francisco at any time after September 18, 1961.

By means of letters addressed to Glen's home, Bender arranged to meet Glen at a hotel in San Francisco on the afternoon of September 19, 1961. Glen had reached 65 years of age in July 1961, and the two men accordingly discussed his possible employment by Bender Company. They also discussed the financing of the proposed western operation and agreed that one million dollars was a reasonable figure. Glen suggested Gordon Baker as a candidate for the job of sales manager for the proposed western operation. He also indicated that if he left appellant, a dozen of it editors might come with him out of personal loyalty and dissatisfaction with their present employment. Glen stated that he wanted a five-year contract, stock optins, and freedom from interference if he were to head the proposed western operation.

On September 25, 1961, Bender met with Gordon Baker pursuant to arrangements previously made by Glen, and asked Baker if he might be interested in serving as sales manager for Bender Company's proposed western operation. Baker indicated that he might be interested, but only if Glen also joined Bender Company.

On October 10, 1961, Thomas Gosnell and Robert Kimbrough, who were directors and president and vice-president, respectively, of LCP, learned that Bender was interested in hiring Glen and Baker. After they had discussed the matter with another director by the name of Briggs, it was decided that Gosnell should meet Glen in San Francisco and discuss the plans of Glen and Baker and the possibility that Bender Company might raid appellant's personnel. It was also decided that salary increases should be given to appellant's editorial personnel in order to help insure against such a raid. Gosnell notified Glen that he planned to be in San Francisco the week beginning October 23, 1961, and that he would like to review the salaries of appellant's editorial personnel at that time.

On October 18, 1961, Bender wrote Baker, sending a copy of the letter to Glen's home, and scheduled a meeting in Los Angeles on October 28, 1961. Bender's proposed agenda included ‘Glen and Baker contracts,’ ‘organizational setup,’ and ‘planned publications.’

Sometime prior to October 23, 1961, Glen contacted Jules Kalisch and Allen Solie, two of appellant's four managing editors, and asked them whether they would be intersted in coming with him if he joined Bender's proposed western operation. Both men expressed interest in the proposition.

On October 23, 1961, Gosnell arrived in San Francisco and met with Glen on successive days. During the course of their discussions, Glen had occasion to comment upon an advertisment for editors which Commerce Clearing House had placed in one of the local papers. When Gosnell remarked that appellant might lose some editors to that company, Glen stated that if there was a raid on appellant's editorial staff, he would be the first to know it and would report it immediately. Glen testified that when he made this remark, he was not referring to a raid by any company with which he might be connected because in that case, ‘I wouldn't be there * * * to notify anyone.’ He further stated that in the case of a raid by a company other than Bender Company, it would be his job to do all in his power to prevent it. Glen denied that Gosnell specifically asked him about the possibility of a raid by Bender Company. Although Glen knen that he might be seeking to bring some of appellant's editors into Bender Company's proposed western operation and also knew that he, Baker, Kalisch and Solie were already considering such a move, he failed to mention these matters to Gosnell because it was his intention ‘to keep my business secret.’

The two men also discussed the salaries of appellant's editorial personnel, and Gosnell suggested that the managing editors' salaries be raised $2,000, that the assistant managing editors' salaries be raised $1,500, and that the salearies of some of the other editors be raised in lesser amounts. Glen recommended that Solie be given the full $2,000 increase, but suggested that the other three managing editors, Kalisch, Davis and Keesey, be given only $1,500. He also suggested that the raises be given in two steps rather than all at once. Gosnell agreed with these suggestions.

On October 27, 1961, Glen went to Los Angeles, and on the following day he and Baker met with Bender and several of his associates. On November 9, 1961, the board of directors of Bender Company authorized Bender to sign employment contracts with Glen and Baker.

On November 16, 1961, Glen mentioned to two LCP directors, Billo and Williams, that he was negotiating with Bender Company concerning employment. Neither man objected or criticized Glen concerning his activities in investigating other employment opportunities. On the same day, Glen and Baker met Bender in New York City, and, on the following day, signed employment contracts whereby each agreed to commence work on January 1, 1962. Glen's contract obligated him to ‘set up as soon as feasible an editorial staff of not less than two experienced managing editors and such additional experienced editors as he believes necessart to carry out the proposed expansion * * *’ Both Glen and Bender expected to obtain most of these experienced editors from appellant.

Upon his return from New York, Glen attempted to locate a suitable building which could be leased by Bender Company's proposed western division. On November 28, 1961, he wrote Bender and informed him that he had found such a building. Glen also made certain arrangements in connection with a meeting to be held at Carmel, California, for the purpose of recruiting managing editors.

On November 27, 1961, Glen received a call from Williams, a LCP director. He informed Williams that he and his staff would provide two additional volumes of a specified series in 1962, but made no mention of the fact that he would no longer be working for appellant in 1962. He also indicated that Solie would be able to meet a 1962 deadline on a particular manuscript, although he admittedly presumed that Solie would sign a contract with the Bender Company at the Carmel meeting.

On December 1, 2 and 3, 1961, Bender, his attorney, Glen, and Baker, met with Lahti, Solie and Kalisch at Carmel, California. On December 2, 1961, Lahti, Solie and Kalisch signed employment contracts which had been prepared by Glen. Lahti and Kalisch agreed to commence work on December 16, 1961, and Solie on December 31, 1961. After the contracts had been executed, Glen produced cards containing the names and salaries of the various editors employed by appellant. Glen, Solie and Kalisch then proceeded to evaluate each editor. They ultimately compiled a list of 14 editors, to which Glen subsequently added a 15th. The list contained the names of the editors, their current salaries, and the salaries which they were to be offered by Bender Company. Bender's attorney advised the group that further solicitation of appellant's personnel by anyone still employed by appellant would not be advisable.

From December 10 through 12, 1961, a representative of Bender Company contacted individually by telephone approximately 13 of the editors on the list. Each of the editors subsequently met with the representative, was interviewed relative to employment with Bender Company, and was offered a position at a salary which was based upon existing Bender Company wage scales and which was higher than the salary which he was presently paid by appellant. Although none of the editors accepted job offers during this initial interview, ten of them subsequently agreed to enter Bender Company's employ after they had resigned their jobs with appellant on December 15, 1961. The others ultimately declined and remained with appellant. None of the editors who entered Bender Company's employ had any written contract with appellant, and the employment of each was terminable at will in the same manner as that of Glen, Kalisch, Lahti and Baker.

On December 4, 1961, Glen, Bender, and the latter's attorney, negotiated a lease of the property which had previously been selected by Glen. Glen also offered employment with Bender Company to Keesey, the third of appellant's four managing editors, and Marquis, who was employed by appellant as an assistant managing editor and head indexer. Marquis rejected the offer. Keesey signed an employment contract, but the same was cancelled on or about December 12, 1961, when Keesey informed Glen that he had changed his mind.

On the morning of December 15, 1961, Glen went to his office as usual, and, at approximately 9 a. m., had occasion to talk with Schumacher, Gosnell's assisant. Although Glen informed Schumacher that he was fed up with the interference from LCP, he admitted that he ‘deliberately concealed’ the fact that appellant was shortly to lose a considerable number of its employees.

Upon concluding his discussion with Schumacher, Glen met with Rose, Davis and Taft, the three men whom he had selected to take over the general management of appellant. All three men were members of appellant's board of directors. Rose was sales manager, Taft was assistant secretary, and Davis was a managing editor. Glen informed them of his plan to retire and also stated that a new slate of officers would be elected and that they (Rose, Taft and Davis) would assume management of appellant.

At 11 a. m. on December 15, 1961, a meeting of appellant's board of directors convened. Glen, Kalisch, Lahti, Keesey, Rose, Davis and Taft were present. Glen announced that as a result of prior negotiations with Bender Company, he, Baker, Kalisch, Lahti and several other editors, had decided to accept employment with that company. None of the directors expressed any criticism of Glen. After Glen, Kalisch and Lahti had resigned as officers of appellant, a new slate of officers was nominated and elected. Glen, Kalisch and Lahti then resigned as directors. Baker, who was not present at the meeting, resigned from his position with appellant and from its board of directors by letters dated December 13 and 15, 1961. Glen resigned as director of LCP by letter of December 15, 1961. Solie and the ten other editors who had signed contracts with Bender Company also resigned on December 15, 1961. Several of appellant's other employees subsequently contacted representatives of Bender Company and, at their request, were offered employment.

Baker, Kalisch, Lahti, Solie, and the other ten employees who resigned on December 15, 1961, were subsequently contacted by representatives of appellant and of LCP, and were asked to return to appellant. On December 18, 1961, Solie decided to return to appellant's employ and reported back to work on the following Monday.

In addition to these evidentiary findings, the trial court also found that: the proper performance by Glen, Baker, Kalisch, Lahti and the other ten editors of their obligations and duties as employees of appellant was not impaired because of their negotiations and acceptance of employment with Bender Company; the only adverse effect on appellant from its loss of personnel to Bender Company was solely a contribution to an overall delay within the year 1962 only in the preparation, shipment and publication of some of appellant's editorial work product scheduled for shipment under a 1962 schedule which was prepared prior to the time that Glen accepted employment with Bender Company; that the decreases in appellant's 1962 sales and gross margin below those predicted for 1962 were not caused by the loss of appellant's personnel to Bender Company, and were more than accounted for by decreases from budgeted figures of certain publications which were in no way affected by any shortage of editors or by the other matters at issue in the lawsuit; although Glen did not resign from appellant before signing his contract with Bender Company, appellant and its remaining officers, directors and shareholders did have such notice of his plans as set out in the preceding findings; although respondents did offer employment to certain of appellant's employees during November and December 1961, it is not true that Glen, while employed by appellant, joined in a concerted effort with any other respondent or that any of respondents undertook in any improper manner to obtain a staff of reserchwers, writers, editors or other personnel for the proposed western division of Bender Company; Glen did not interfere with appellant's contactual relationships nor did he in any way entice away any of appellant's employees who joined Bender Company; neither Bender nor Bender Company interfered with appellant's contractual relationships nor sought to entice away any of appellant's employees by the use of misrepresentations or half-truths or anything else improper; it is not true that any of respondents, by using misrepresentations or half-truths or in any other surreptitious or wrongful way, sought to entice away or did entice away any member of appellant's executive staff or working force; Glen never solicited any officer, director or employee of appellant who joined Bender Company; no respondent solicited any officer, director or employee of appellant by using inside knowledge or confidential business information of appellant; no person who left appellant's employ to enter the employ of Bender Company was required by the terms or particular circumstances of his employment by appellant to give notice before doing so; it is not true that appellant has any closely kept secret or trade secret or confidential business information consisting of publishing schedules, dates of publication, customer lists, relative value of customers, or other methods and techniques of doing business; appellant's evidence as to closely kept secrets and trade secrets and confidential business information was as to its planned future publications, which included only 16 separate proposed publications and consisted of the bare ideas for such publications, plus certain written materials which had been prepared with regard to some of them; appellant's bare ideas with regard to said planned future publications, to the extent that they encompass anything other than that which has been reduced to concrete form, are the same ideas which are matters of public knowledge, and publications disclosing each and all such ideas already have been placed on public sale by others than any respondent; at no time has there been any copying or plagiarizing or use by any respondent of appellant's ideas or written materials or of any concrete form to which any of said ideas have been reduced or of anything else which is or is claimed to be the closely kept secret, trade secret, confidential business information or property of appellant; it is not true that any employee of appellant has disclosed any closely kept secret, trade secret or confidential business information of appellant to Bender Company or to any other respondent; Glen did not violate any fiduciary duty owed to appellant, whether as an officer or as a director or otherwise; it is not true that any of respondents has performed any act for the purpose of crippling or destroying appellant or for the purpose of wrongfully advantaging himself at the expense of appellant; it is not true that any respondent threatens to impart any trade secret or any confidential information of appellant to any other respondent or to any one else; it is not true that any respondent threatens to entice away any employee of appellant in an improper manner; it is not true that Bender or Bender Company used any officer, director or employee of appellant to raid appellant's staff or to entice away any employee of appellant; it is not true that any respondent staffed or operated Bender Conpany's western division using any method or act of unfair competition; appellant has not been damaged in any amount by any tortious act of any respondent; no respondent has performed any act with malice, fraud or oppression or with any disregard of appellant's rights.

The court concluded that appellant was not entitled to injunctive relief or to compensatory or punitive damages from any respondent. Judgment was accordingly entered.

The first and major issue on appeal is whether there is any evidentiary support for the court's findings that respondents did not engage in any act of unfair competition and that respondent Glen did not breach his fiduciary duty to appellant.

It is settled law that a director or officer of a corporation may not enter into a competing enterprise which cripples or injures the business of the corporation of which he is an officer or director. (Daniel Orifice Fitting Co. v. Whalen (1962) 198 Cal.App.2d 791, 800, 18 Cal.Rptr. 659; Hall v. Dekker (1941) 45 Cal.App.2d 783, 786–787, 115 P.2d 15; Xum Speegle, Inc. v. Fields (1963) 216 Cal.App.2d 546, 31 Cal.Rptr. 104.) Since an officer or director is an agent of the corporation, he may not undertake or participate in activities adverse to the interests of his principal during the course of his agency. (Sequoia Vacuum Systems v. Stransky (1964) 229 A.C.A. 340, 345–346, 40 Cal.Rptr. 203.) In the absence of an agreement to the contrary, an agent is free to engage in competition with his principal after termination of his employment and may plan and develop his competitive enterprise during the course of his agency as long as the particular activity engaged in is not against the best interests of his principal. However, protection of the principal's interest requires a full disclosure of acts undertaken in preparation for entering into competition. (Sequoia Vacuum Systems v. Stransky, supra, at pp. 345–346, 40 Cal.Rptr. 203; Daniel Orifice Fitting Co. v. Whalen, supra, at pp. 800–801, 18 Cal.Rptr. 659.)

In the instant case, the undisputed activities of Glen clearly establish that he breached his fiduciary duty to appellant by deliberately failing to disclose that he was planning and developing a competitive enterprise which was not in the best interests of his principal. The evidence also establishes that Bender, while acting as a representative of Bender Company, actively encouraged Glen to breach his fiduciary duty to appellant. In a letter written to Glen shortly before the Carmel meeting, Bender stressed the importance of complete secrecy and stated, ‘* * * having in mind that until you actually resign from your present position and the fact of the new organization is known, we will have to be very deft and at least not overlook the possibility of a Fifth Columnist.’ Bender admitted at the trial that he actively attempted to maintain secrecy, at least in connection with the Carmel meeting, and that he was also well aware that Gosnell had asked Glen about the possibility of a raid and had received the latter's assurance that no such danger existed. Under such circumstances, Bender and Bender Company, having aided and encouraged Glen in breaching his fiduciary duty to appellant, are jointly liable for any damages resulting from said breach. (Lomita Land and Water Co. v. Robinson (1908) 154 Cal. 36, 45–46, 97 P. 10, 18 L.R.A., N.S., 1106; Anderson v. Thacher (1946) 76 Cal.App.2d 50, 72, 172 P.2d 533; Prince v. Harting (1960) 177 Cal.App.2d 720, 731, 2 Cal.Rptr. 545.)

Although appellant also contends that the evidence established its right to punitive damages as a matter of law, this argument cannot be sustained. Appellant concedes that any right to recover punitive damages from Glen terminated upon his death, and that general damages only are recoverable from his estate. (Prob.Code, § 573; Code Civ.Proc., § 385.) With regard to Bender and Bender Company, the trial court found, as above noted, that they were not motivated by an intent to cripple or destroy appellant and did not act out of malice, fraud or oppression. Punitive damages are not a favorite of the law and should be granted with the greatest caution and only in the clearest of cases. (Gombos v. Ashe (1958) 158 Cal.App.2d 517, 526, 322 P.2d 933.) We cannot say that the court's finding that appellant was not entitled to recover such damages was wholly without support in the record.

Appellant contends that its right to recover compensatory damages was so clearly established by the evidence that this court should undertake, pursuant to Code of Civil Procedure, section 956a, to make its own findings on the damages issue and thereby dispose of the case on a single appeal. Respondents, on the other hand, assert that appellant's evidence as to damages consisted entirely of speculation, surmise and conjecture and that this court ought to affirm the judgment in their favor on the ground that appellant sustained no damages whatever.

An examination of the record discloses that Seymour Fogel, the controller of LCP, testified that no attempt had been made to compute the damages attributable to the loss of Glen, Baker, Lahti and certain clerical personnel. Appellant limited its proof to the damages allegedly resulting from the loss of Kalisch, the ten editors who resigned on December 15, 1961, and one Parnell, an editor who joined the staff of Bender Company in January 1962. It would serve no useful purpose to summarize in detail all of the evidence offered to demonstrate the damages allegedly resulting from the loss of these employees. It suffices to state that appellant utilized a number of approaches. One such approach was to determine, by various different means, the average value of each editor in terms of his contribution to appellant's profits. Another approach was to project appellant's sales line into the future and attempt to demonstrate the effect of the decrease in the number of editors in its employ upon such projected sales. Appellant also attempted to show that its 1962 income fell short of expectations due to the loss of the 12 editors. In addition, appellant offered evidence of actual out-of-pocket expenses totaling $11,079.78, which were purportedly occasioned by the loss of the 12 editors and appellant's attempts to persuade them to return to its employ, and to obtain other editors to replace them. During cross-examination of appellant's witnesses, respondents' counsel attempted to demonstrate that the claimed losses and expenses were not in fact attributable to the loss of the 12 editors.

The evidence bearing upon the damages issue thus gives rise to a number of factual questions. The case is accordingly not one in which this court may make new or additional findings, as requested by appellant. (Altadena Escrow Corp. v. Beebe (1960) 181 Cal.App.2d 743, 746, 5 Cal.Rptr. 530.) On the other hand, it is equally apparent that the judgment for respondents may not be affirmed on the ground that the trial court correctly determined that the loss of the 12 employees did not result in any damages to appellant. At the very least, certain of the out-of-pocket expenses occasioned by the defection of these employees was established by uncontradicted evidence. Moreover, it may well be doubted that the trial court did in fact find that appellant sustained no damages whatever. The court found only that appellant was not damaged by any tortious act of any respondent, that the loss of its personnel did not result in any loss of sales or gross margin in 1962, and that the only adverse effect upon appellant from its loss of personnel was solely a contribution to an overall delay in the year 1962. There is no finding that such overall delay resulted in no financial detriment to appellant. Under such circumstances, the damages issue must be resolved by the trial court.

The record contains ample evidence in support of the court's finding that none of appellant's employees had disclosed any closely kept secret, trade secret or confidential business information. Since the record is devoid of any evidence that any of respondents had ever threatened to do so in the future, the court was correct in denying appellant an injunction.

That portion of the judgment denying appellant compensatory damages against respondents is reversed, with directions to the trial court to determine the amount of compensatory damages to which appellant is entitled. In all other respects, the judgment is affirmed.

FOOTNOTES

1.  The original complaint apparently named Lawyers Co-operative Publishing Company as an additional plaintiff, and Jules Kalisch, Arno Lahti and Gordon Baker as additional defendants. However, prior to trial, Lawyers Co-operative Publishing Company withdrew as a plaintiff and the action was dismissed without prejudice as against the three above-named defendants.

SHOEMAKER, Presiding Justice.

AGEE and TAYLOR, JJ., concur.