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VELO-BIND, INC. v. SCHECK

October 31, 1979

VELO-BIND, INCORPORATED, Plaintiff, against ELEANOR SCHECK and ELLIEGRAPHICS, LTD., Defendants.


The opinion of the court was delivered by: MOTLEY

This is an unfair competition action brought by plaintiff Velo-Bind, Inc. (Velo-Bind), a California corporation, against defendant Eleanor Scheck, a New York resident, and the corporation of which she is sole owner, defendant Elliegraphics, Ltd., a New York corporation. It is brought pursuant to this court's diversity jurisdiction. 28 U.S.C. § 1332. Defendants are charged with appropriation of confidential proprietary information and customer lists from Velo-Bind, defendant Scheck's former employer. Defendants are also charged with wrongful solicitation of plaintiff's customers. Defendants are further charged with unfair competition in using the allegedly purloined material and information to establish a pricing structure for products sold by the corporate defendant to plaintiff's former customers. The matter is now before the court on plaintiff's motion for a preliminary injunction restraining defendants from soliciting or doing business with persons and entities who were plaintiff's customers before defendant Scheck left its employ on October 5, 1978; from using or disclosing the confidential data and proprietary information allegedly stolen by defendants; and from committing other acts of unfair competition against Velo-Bind.

The court finds that plaintiff is entitled to preliminary injunctive relief, having shown a probability of success on the merits and a possibility of irreparable harm flowing to it as a result of defendants' activities. The court holds that defendant Scheck breached the fiduciary obligation inherent in her relationship of employment with plaintiff by making use of plaintiff's customer list, which is entitled to trade secret protection, to establish a competing enterprise based predominately on the solicitation of plaintiff's customers.

 FACTS

 Velo-Bind is in the business of manufacturing and selling document-binding machines for use in offices and, after making such sales, providing binding supplies for purchasers of such equipment on a regular and continuing basis. The Velo-Bind binding system is patented. The essential economics of the Velo-Bind business is to sell basic binding machines for the purpose of obtaining ready-made customers for the repeat sale of consumable binding supplies used in conjunction with such machines.

 Velo-Bind's present revenues are slightly in excess of $ 10 million annually, of which approximately 70 percent are made up of sales of binding supplies, which represent the more profitable side of the business. The balance of Velo-Bind's sales volume comes from the initial sale of machines, the sale price of which is kept low in order to obtain supply customers.

 Velo-Bind's efforts to develop its business are conducted both at the national and branch office levels, and encompass virtually all aspects of company operations. Since the commencement of its operations in 1971, Velo-Bind's development expenditures have been in excess of $ 27 million, of which in excess of $ 16 million has been devoted solely to marketing expenditures. As a result of those substantial expenditures, Velo-Bind has incurred a $ 10 million deficit in retained earnings since 1971, experiencing its first profitable year in 1977.

 Velo-Bind sells its machines through local representatives throughout the country, including branch offices in key cities, such as New York. There are also two authorized distributors of Velo-Bind machines and supplies, the A. B. Dick Company (A. B. Dick) and the Gestetner Corporation (Gestetner).

 Velo-Bind's primary sales method is mail solicitation by salespersons (Equipment Representatives) of potential likely customers whose names are obtained from public and commercial directories and from information furnished by Velo-Bind's marketing staff headquartered in the company's main office in Sunnyvale, California. The corporate marketing staff supports the field sales effort through extensive market and customer based analysis, media advertising, providing sales materials, public relations programs and national lead generation programs. (The corporate lead generation programs are directed at identifying prequalified prospective customers for the field salesforce to call on.) Other specific corporation programs include participation in national trade shows and mail campaigns based on an analysis of Velo-Bind's existing customer base.

 In the New York branch office, in an effort to show the desirability and reliability of Velo-Bind machines to potential new customers, names of satisfied lawyer customers (vertical lists) are sent to other lawyers and the same is done in the accounting and stock brokerage fields. Such reference selling is essential for the marketing of Velo-Bind machines as the product and the company are new.

 The New York branch office succeeds in selling equipment to three (3) percent of its pre-screened targets, achieving a considerably better success rate than the national average.

 Velo-Bind's marketing costs for the placement of one of its binding machines is in excess of $ 600. This placement cost excludes all other costs including manufacturing costs.

 In the years since Velo-Bind commenced operations in 1971, it has placed 6,000 binding machines directly, and another 6,000 machines have been placed with end-users by the company's two authorized distributors, Gestetner and A. B. Dick. After a customer purchases a machine, Velo-Bind makes continuous sales to such customers of supply products for use in connection with the machine. The supply salespersons are located in Velo-Bind's branch offices.

 Velo-Bind supply products consist of patented binding strips, "custom" covers, standard hard and composition covers, and paper, which are pre-punched for use with the machines. Graphic arts services are also provided to customers after the initial machine purchase. Except for the patented binding strips, the raw materials comprising Velo-Bind's supply products are purchased from public sources.

 Prior to October 6, 1978, no one other than Velo-Bind, or one of its two authorized distributors offered a complete line of supplies to Velo-Bind machine owners. In order for anyone to effectively market a line of supply products to a Velo-Bind machine owner, that person would have to know the identity of those owners. Additionally, data as to a particular customer's needs and special requirements, which had been developed by Velo-Bind through its continuing relationships with its various customers, is very valuable in servicing such customers. Velo-Bind does not direct any of its marketing efforts of supply products to those persons or firms who have purchased machines from its distributors, A. B. Dick and Gestetner, because it does not know who those customers are as a group.

 During the last fiscal year, ending December 31, 1978, the New York branch had supply revenues of $ 686,000 and equipment revenues of $ 202,000. Revenues derived from the sale of supply products in the New York branch reflect sales made by both Account Representatives and Equipment Representatives.

 Velo-Bind maintains, inter alia, the following data concerning the special needs and requirements of its supply customers at the branch level; account (customer) record sheets, which contain the customer's name, address, telephone number and "contact person," the type of industry in which the customer is involved, customer number, type of equipment each has, dollar volume of sales by month and year and purchase history. Velo-Bind provides access to this customer information to ...


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