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PREFERRED ELEC. & WIRE CORP. v. KATZ

November 28, 1978

PREFERRED ELECTRIC & WIRE CORP., and Replacement Parts Sales Corp., Plaintiffs,
v.
Harold KATZ, John Bucy, Dorothy Killaly, Joe Doe and Jane Roe, one through thirty-five, the names John Doe and Jane Roe being fictitious names, the names of said persons being not presently known, Excel Industries, Inc. and General Replacement Parts, Inc., Defendants



The opinion of the court was delivered by: PLATT

MEMORANDUM AND ORDER

Plaintiffs, Preferred Electric & Wire Corp. ("Preferred") and Replacement Parts Sales Corp. ("Replacement"), commenced this action for damages in November of 1977 in the Kings County Supreme Court and it was thereafter removed by the defendants to this Court. Defendants then moved to dismiss the action for want of personal jurisdiction renoticing such motion for a hearing on February 17, 1978, and plaintiffs filed on February 9, 1978, an amended complaint seeking not only damages but also injunctive relief and on February 17, 1978 obtained an order to show cause from this Court, returnable March 1, 1978, containing a temporary restraining order which provided in pertinent part as follows:

 
"pending determination of plaintiffs' motion for a preliminary injunction, the defendants, their officers, agents, servants, employees, and all parties in active concert or participation with any of them, jointly and severally, hereby are enjoined and restrained from (a) utilizing in any manner plaintiffs' trade secrets including plaintiffs' customer lists and the information contained therein and depositing forthwith all such lists and other written information and all copies thereof with the Clerk of this Court, the same to be sealed; (c) advising plaintiffs' customers that plaintiffs have ceased to do business or have been taken over by any other company or commenting on or disparaging in any way plaintiffs' products and (d) advising plaintiffs' customers concerning the matters revealed in connection with the instant action; . . ."

 By the order to show cause plaintiffs also moved for a preliminary injunction enjoining defendants from

 
"(a) utilizing in any manner plaintiffs' trade secrets including plaintiffs' customer lists and the information contained therein;
 
(b) contacting plaintiffs' customers concerning the sale to such customers of any product competitive with plaintiffs' product line;
 
(c) advising plaintiffs' customers that plaintiffs have ceased to do business or have been taken over by any other company or communicating or disparaging in any way plaintiffs' products;
 
(d) advising plaintiffs' customers concerning the matters revealed in connection with the instant action; and
 
(e) granting such other and further relief as to the Court seems just and proper."

 Plaintiffs argue that they are entitled to such relief because (i) defendants are in breach of contractual provisions containing restrictive covenants and (ii) regardless of such contractual provisions, defendants are in breach of fiduciary obligations owed as a matter of law to the plaintiffs.

 Following considerable pretrial discovery on the foregoing issues of jurisdiction and plaintiffs entitlement to a preliminary injunction, the parties requested a hearing which was accorded to them by this Court on July 10, 11, 12 and thereafter they submitted excerpts from the pretrial depositions, affidavits, exhibits and memoranda in support of their respective positions.

 The facts with respect to the issues involved herein are as follows:

 Preferred is and has been for fifty years or more engaged in the sale of automotive, marine and snowmobile parts to small garages, general repair shops and transmission shops throughout the country. Replacement is a corporation which acts as the sales arm of Preferred. Both plaintiffs are fully owned by their President, John F. Poster, who purchased Preferred at the end of 1967 from the original owner who founded the same in 1919.

 Prior to 1972 the plaintiffs sold their product through door-to-door "commission salesmen" and by that year the plaintiffs had achieved gross sales of approximately.$ 1.2 million per year.

 The door-to-door sales personnel (of whom the defendant Katz was one during the six-month period in 1971) prior to 1972, kept 5 X 8 customer cards on which they entered the name, the address, credit information, product information and personal information of plaintiffs' customers, were assigned particular territorial regions in the United States and in those years were engaged primarily in the sale of electrical and rebuilder parts.

 In the period since September, 1976, plaintiffs have also engaged in selling transmission parts and high energy ignition parts.

 In December of 1971 the defendant Katz called Mr. Poster and advised him that he had been selling certain auto replacement parts for Windsor by use of the telephone and that he would like to set up a telephone sales operation for the plaintiffs using the Yellow Pages in the telephone books throughout the country. His proposal was that he would hire additional personnel whom he would manage and that plaintiffs would install and pay for all the telephone services (using their credit with the telephone company) and pay him commissions based on the net revenue from the sales made by Katz' personnel. In March 1972 Mr. Katz and one or two associates hired by him commenced selling for the plaintiff and by the end of that month they had achieved sales of approximately $ 6600 with telephone expenses amounting to approximately $ 2200. Mr. Poster complained to Mr. Katz of this ratio of expenses to sales who replied that such ratio was necessary at the outset of canvassing for sales and that the same would come down as new accounts were opened. In the beginning no pre-existing accounts of the plaintiffs were turned over to Mr. Katz and his organization and they were required to make solicitations to new customers found by use of the Yellow Pages in the various telephone books. In or about the early part of 1973, plaintiffs' road salesman for the Ohio territory, terminated his arrangements with the plaintiffs and his cards and territory were turned over to the Katz organization who were from the outset and from time instructed in sales methods and techniques by plaintiffs' general manager, Milton Steiner.

 Such instruction or training in sales techniques was extensive and was given to the Katz' personnel beginning in 1972 and continuing thereafter as new salesmen were added by Mr. Katz to his organization.

 By the winter of 1973 the sales attributable to the Katz organization had increased to approximately 22% Of plaintiffs' business and Messrs. Poster and Katz agreed that they should reduce the arrangement between them to writing. Accordingly, an agreement was made in February 1973 which was shortly thereafter amended by a written agreement dated March 12, 1973, which provides in pertinent part *fn1" that:

 
"6. Harold Katz agrees that he will not, during the course of this agreement or for one year after termination, (no matter who causes the termination) disclose to any person, firm, corporation, association or other entity for any reason or purpose whatsoever, any information that he receives as a result of his association with the company.
 
"7. Harold Katz agrees not to engage in the sale or marketing to any of Preferred's customers of any products sold by Preferred or competing therewith for a period of two years after date of termination of this contract.
 
"8. Harold Katz agrees that the information on documentation he receives is a valuable and unique asset and therefore all books, records, sales literature and other documents and records that come into Harold Katz's possession by virtue of the association are confidential and remain the property of the company and will be returned to the company promptly upon termination of this agreement.
 
"9. Harold Katz recognizes that a breach of the two previous provisions will result in irreparable harm to the company and in the event of a breach or threatened breach thereof Harold Katz agrees that the company is entitled to an injunction restraining Harold Katz from such breach of contract. Nothing herein shall prevent Preferred from pursuing any other remedy available to it."

 The negotiations with respect to the written agreement between the parties took place both in New York and in New Jersey.

 On March 12, 1973, Mr. Katz had enlarged his organization to include six salesmen and thereafter from time to time plaintiffs turned over additional areas and customer cards to Mr. Katz as their own salesmen terminated their particular arrangements with the plaintiffs. By 1977 plaintiffs had turned over approximately 2500 customers to the Katz organization and such organization accounted for approximately 90% Of plaintiffs sales. Also by 1977, the Katz organization had increased to approximately thirty sales persons who were receiving from the plaintiffs through Mr. Katz sums aggregating approximately $ 26,000 per month. Moreover, it was understood between the plaintiffs and Mr. Katz that these individuals would devote their full time toward the sale of plaintiffs products and would not engage in any other sales activities. In such year plaintiffs were providing telephone services for each of the sales persons, including approximately 14 WATS lines at an approximate monthly cost to the plaintiffs of $ 17,000.

 By reason of the increased sales generated by the Katz group Preferred was required to increase its warehouse space by approximately 50%, its investment in its inventory, its account receivables, a $ 105,000 computer, additional shelving for storage, materials for new product lines, and its office and warehouse staff, and was required to borrow up to approximately $ 350,000 to finance all of the foregoing. At the urging of the Katz group in 1976, the plaintiffs expanded their product line to include transmission parts and the Katz group, in turn, was increased by some six salesmen who had been selling transmission parts for other transmission suppliers but who had theretofore never sold any other automotive products.

 In the fall of 1975 the plaintiff and Katz agreed that they should attempt to amend the written contract between them and there ensued an exchange of drafts of agreements, none of which however were ever signed.

 In the meanwhile and thereafter Preferred continued to turn over new territories given up by road salesmen, including Pennsylvania, Florida and Texas, to the Katz group and the parties ...


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