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American Institute of Chemical Engineers v. Reber-Friel Co.

decided: June 28, 1982.

AMERICAN INSTITUTE OF CHEMICAL ENGINEERS, PLAINTIFF-APPELLANT,
v.
REBER-FRIEL COMPANY, DEFENDANT-APPELLEE



Appeal from judgment entered in the United States District Court for the Southern District of New York, Lawrence Pierce, J., dismissing, on defendant's motion for summary judgment, a complaint charging noncompliance with a restrictive convenant contained in a trade show management contract and from a prior order denying plaintiff's motion for a preliminary injunction.

Feinberg, Chief Judge, Mansfield, Circuit Judge, and Jacob Mishler, District Judge.*fn* Feinberg, Chief Judge, concurring. Mansfield, Circuit Judge, dissenting.

Author: Mishler

MISHLER, District Judge

Plaintiff American Institute of Chemical Engineers ("AIChE"), a New York corporation, is the sponsor of two chemical industry trade expositions. Defendant Reber-Friel Company ("Reber-Friel"), a Pennsylvania exposition management corporation, managed AIChE's trade shows from 1961 until April 1981 pursuant to a series of written agreements between the parties. As of April 1981 Reber-Friel was terminated as managing agent. On August 21, 1981 AIChE commenced this action seeking, inter alia, to enjoin Reber-Friel from conducting its own chemical processing exposition, the conduct of which is claimed to be in breach of a covenant not to compete contained in their agreement. A hearing on a motion by AIChE for a preliminary injunction was held before Judge Pierce on September 22 through 24. Five days prior to the hearing Reber-Friel cross-moved for summary judgment and for an order dismissing the complaint for lack of subject matter jurisdiction.

After plaintiff's presentation at the hearing, Judge Pierce, in an oral opinion, denied the motion for an injunction*fn1 and dismissed as moot AIChE's claim for return of documents accumulated by Reber-Friel in connection with the management of its shows. The court also denied Reber-Friel's motion to dismiss for lack of subject matter jurisdiction but reserved decision on the motion for summary judgment. On November 24, 1981, Judge Pierce issued a Memorandum Opinion and Order granting Reber-Friel's summary judgment motion and judgment was entered thereon. This appeal followed.*fn2

FACTS

The undisputed facts are as follows:

AIChE is a not-for-profit educational and scientific corporation organized under New York law for the purpose of the advancement of chemical engineering. AIChE grants funds to universities for research and advancement in the field of chemical engineering, sponsors committees to do research and write technical articles and papers, sponsors conferences and seminars, issues various publications and conducts educational programs. In furtherance of its efforts to raise funds to support such programs AIChE sponsors two major chemical expositions commonly known as the Petrochemical and Refining Exposition ("Petro Expo") and the Chemical Plant and Equipment Exposition ("CPE"). Petro Expo has been held every other year since 1961 and has an established reputation, the most recent show in April 1981 drawing about 700 exhibitors and producing a gross profit of over one million dollars. CPE is a relatively new show; the first show took place in 1978 and a second in 1980.

Reber-Friel has been actively engaged in the management and servicing of industry trade shows since 1939. Over the course of its history in business Reber-Friel consistently has managed and serviced trade shows for at least ten industry associations. From 1961 until 1981 Reber-Friel was the managing agent for AIChE's trade shows. It served as AIChE's managing agent pursuant to successive agreements containing substantially similar conditions. The agreement which is the subject of this litigation was for a term of three years, beginning September 1978, terminable prior thereto by either party upon proper notice. Under the agreements Reber-Friel had total responsibility over the planning and conduct of the shows "subject to the direction and control" of AIChE. Reber's duties included developing for AIChE a mailing list of prospective exhibitors, renting exhibit space, developing and distributing promotional material, developing a floor plan and rules and regulations, handling registration, servicing exhibitors, et cetera.*fn3 All correspondence pertaining to the expositions was required to be on AIChE stationery and all contracts for leasing exhibit space were required to be made in the name of AIChE or Reber-Friel as agent for AIChE. Reber-Friel was responsible for all expenses incurred in performing its duties under the contract. AIChE was responsible for leasing suitable exposition space after consulting with Reber-Friel as to its physical space requirements.

The agreements in effect before 1978 provided that as full compensation for its management services Reber-Friel would receive 40% of the "rental fees actually paid by commercial exhibitors at each exposition." In 1978 Reber-Friel, at the request of the new management of AIChE, agreed to accept 25% of the rental fees as full compensation for its services and the 1978 contract so provided. Over the past six years, management of AIChE's trade shows has accounted for 30% of Reber-Friel's gross profit. Of that approximately one-third was derived from commissions on rental income from exhibitors and two-thirds from service contracts with exhibitors.*fn4

By letter dated October 30, 1980 to Mr. H. Grebe, president of Reber-Friel, AIChE's executive director notified Reber-Friel that after the next Petro Expo, scheduled to run through April 9, 1981, AIChE would terminate its agreement with Reber-Friel, stating that the termination was not related to Reber-Friel's performance but because the shows had achieved a level of maturity which made in-house management more profitable. The AIChE director suggested a future meeting with Grebe to set a schedule for the new manager to work with Grebe on the upcoming show in order to meet many of the exhibitors and "learn your procedures from sales to service, etc.," and hoped during the interim period to arrange for the "orderly transition and transfer of customer lists, promotional lists and other necessary records." Thereafter, Grebe tried without success to negotiate a continued relationship with AIChE by suggesting first in November and December 1980 that Reber-Friel serve as the general contractor for exhibitor services and finally by letter dated January 21, 1981, by offering its management services for only 20% of the rental income with a maximum of $115,000 per exposition.

In June 1981 Reber-Friel notified potential exhibitors of its sponsorship of a new chemical processing trade show, the Chem Pro Show, to be held on September 28-30, 1982 in the Convention Center in Pittsburgh, Pennsylvania (A.135), and a mailing of the Chem Pro Show brochure followed in July 1981. In May, Grebe had visited Pittsburgh and rented exhibition space and secured hotel rooms. Grebe had previously surveyed and recommended the Pittsburgh area as a possible location for AIChE's CPE shows which had been rejected.

AIChE seeks to enjoin Reber-Friel from conducting the September 1982 Chem Pro Show through enforcement of a covenant not to compete contained in the 1978 agreement which provides in pertinent part as follows:

4. Ownership. The Institute shall (insofar as Reber-Friel or any person, firm or corporation claiming through it or one of its officers is concerned) be, and remain during the term of this Agreement and thereafter, the sole owner of any and all AIChE Expositions and the terminology "Petrochemical and Refining Expositions" and "Chemical Plant and Equipment Expositions", and for a period of three years after the end of the term of this Agreement Reber-Friel agrees that (unless the Institute otherwise agrees in writing) neither it nor any of its officers will manage or have any connection with any exposition or show the principal subject matter of which is chemical plant equipment, petrochemicals and/or the refining of petroleum products. (Emphasis added).

AIChE asserts that during the term of the restrictive covenant Reber's Chem Pro Show in Pittsburgh in 1982 will compete for exhibitors with AIChE's CPE show scheduled for June 1982 in Anaheim, California and its Petro Expo in April 1983 in Houston, Texas. To justify enforcement of the covenant, AIChE claims that in securing exhibitors for its show Reber-Friel has and continues to use information about exhibitors gathered and relationships with exhibitors established during its twenty years as AIChE's agent to unfairly compete with AIChE. AIChE also asserts separate claims for breach of fiduciary duty, conversion and unfair competition based on Reber-Friel's failure promptly to supply to AIChE all information and documents relating to its expositions and Reber-Friel's use of that information to promote its competing Chem Pro Show.

I. The Restrictive Covenant

New York courts*fn5 adhere to a strict approach to enforcement of restrictive covenants because their enforcement conflicts with "the general public policy favoring robust and uninhibited competition," and "powerful considerations of public policy which militate against sanctioning the loss of a man's livelihood."*fn6 American Broadcasting Companies, Inc. v. Wolf, 52 N.Y.2d 394, 404, 438 N.Y.S.2d 482, 487, 420 N.E.2d 363 (1981) (quoting Purchasing Assocs., Inc. v. Weitz, 13 N.Y.2d 267, 272, 246 N.Y.S.2d 600, 604, 196 N.E.2d 245 (1963)). Thus, a restrictive covenant will be "rigorously examined", American Broadcasting Companies, supra, 52 N.Y.2d at 403, 438 N.Y.S.2d at 486, 420 N.E.2d 363, and enforced "only to the extent necessary to protect the employer from unfair competition which stems from the employee's use or disclosure of trade secrets or confidential customer lists," Columbia Ribbon & Carbon Mfg. v. A-1-A Corp., 42 N.Y.2d 496, 499, 398 N.Y.S.2d 1004, 1006, 369 N.E.2d 4 (1977), or "confidential customer information", Reed, Roberts Assocs., Inc. v. Strauman, 40 N.Y.2d 303, 308, 386 N.Y.S.2d 677, 680, 353 N.E.2d 590 (1976), to protect the "good will of the employer's business, or perhaps when the employer is exposed to special harm because of the unique nature of the employee's services." American Broadcasting Companies, supra, 52 N.Y.2d at 403, 438 N.Y.S.2d at 486, 420 N.E.2d 363. Only after determining that a restrictive covenant would serve to protect against such "unfair and illegal" conduct and not merely to insulate the employer from competition, does the reasonableness of the covenant in terms of its "time, space or scope," or the oppressiveness of its operation become an issue. American Broadcasting, supra, 52 N.Y.2d at 403-04, 438 N.Y.S.2d at 486-87, 420 N.E.2d 363. In the case before us we need not reach the question of the reasonableness of the scope of the covenant because legitimate interests of the employer are not implicated.

A customer list is not confidential where the past or prospective customers are "readily ascertainable" from sources outside the employer's business. Columbia Ribbon & Carbon, supra, 42 N.Y.2d at 499, 398 N.Y.S.2d at 1006, 369 N.E.2d 4 (citing Leo Silfen, Inc. v. Cream, 29 N.Y.2d 387, 392, 328 N.Y.S.2d 423, 427, 278 N.E.2d 636 (1972)). However, a court will prevent the solicitation by a former employee of customers "who are not openly engaged in business in advertised locations" or whose "availability as patrons cannot readily be ascertained but 'whose trade and patronage have been secured by years of business effort and advertising, and the expenditure of time and money, constituting a part of the good will of a business which enterprise and foresight have built up.'" Town & Country House & Home Serv., Inc. v. Newbery, 3 N.Y.2d 554, 558, 170 N.Y.S.2d 328, 331, 147 N.E.2d 724 (1958) (quoting Witkop & Holmes Co. v. Boyce, (1909)). Town & Country and Leo Silfen, Inc. v. Cream, supra, 29 N.Y.2d 387, 328 NY.S.2d 423, 278 N.E.2d 636, illustrate the qualities of a protectable customer list. In Town & Country, plaintiff corporation was engaged in providing a somewhat unique home cleaning service and after three years of operation and thousands of telephone calls and visits to homeowners to discuss price and services had compiled a list of about two hundred and forty customers. The court found the requisite expenditure of time and money to prevent defendant, a former employee, from soliciting those customers. In contrast, in Leo Silfen, Inc. v. Cream, plaintiffs were engaged in the business of supplying building maintenance materials. To procure customers plaintiffs employed mailing houses which provided lists of prospects to whom brochures and business reply cards were forwarded. The court refused to enjoin defendant from soliciting plaintiffs' customers. "Although plaintiffs have demonstrated an investment of time and money in developing a patronage of approximately 15,000 enterprises, the investment was not an attempt to create a market for a new type of service as was the case in the Town & Country case. Rather, that investment reflected simply widespread canvassing of an obvious and highly competitive market." 29 N.Y.2d 387, 394, 328 N.Y.S.2d at 429, 278 N.E.2d 636.

The list of exhibitors in this case was gathered from publicly available sources, and for the most part consists of well-known national corporations in the petroleum industry. In addition, the names of the exhibitors, the addresses and their primary products is information which has been made available to the public through the distribution of exposition directories at each AIChE show. Other relevant information about each exhibitor has also been made publicly available. For instance, the floor plan of each AIChE show indicating the relative sizes of exhibits and their location in the exposition hall is distributed to the public at each show. Plaintiff has made no allegation and submitted no proof that Reber-Friel by virtue of its position as manager of AIChE's shows has in its possession any confidential information or information acquired at substantial expense which is not also available to the general public.*fn7 Under these circumstances Reber-Friel cannot be precluded from using that same information on the theory that it is an asset of AIChE. As stated in the case of Abdallah v. Crandall, 273 App. Div. 131, 133, 76 N.Y.S.2d 403, 406 (3d Dep't. 1948), in determining whether a customer list was a protectable asset: "A trade secret, like any other secret, is nothing more than private matter; something known to only one or a few and kept from the general public; and not susceptible to general knowledge." AIChE's frequent references to Reber-Friel's important position is also unavailing. New York cases make clear that a former employee should not be penalized for having held an executive position in a company if disclosure or use of confidential information is not threatened. Reed, Roberts Assocs., Inc. v. Strauman, supra, 40 N.Y.2d 303, 386 N.Y.S.2d 677, 353 N.E.2d 590; Purchasing Associates, Inc. v. Weitz, supra, 13 N.Y.2d 267, 246 N.Y.S.2d 600, 196 N.E.2d 245; Leo Silfen, Inc. v. Cream, supra, 29 N.Y.2d 387, 328 N.Y.S.2d 423, 278 N.E.2d 636; compare Bradford v. N.Y. Times Co., 501 F.2d 51 (2d Cir. 1974).

AIChE's claim that the covenant should be enforced to prevent Reber-Friel from profiting from relationships with exhibitors established while in its position as AIChE's trade show manager is also without merit. New York courts have upheld covenants prohibiting employees from soliciting former customers to the extent necessary to protect the good will of the employer. E.g., Karpinski v. Ingrasci, 28 N.Y.2d 45, 320 N.Y.S.2d 1, 268 N.E.2d 751 (1971); Bates Chevrolet Corp. v. Haven Chevrolet, Inc., 13 A.D.2d 27, 213 N.Y.S. 2d 577 (1st Dep't 1961), aff'd, 13 N.Y.2d 644, 191 N.E. 2d 290, 240 N.Y.S.2d 759 (1963). In USA Chem, Inc. v. Goldstein, 512 F.2d 163, 167 (2d Cir. 1975) this court, upholding such a covenant, quoted the reasoning of the Texas Court of Appeals in Grace v. Orkin Exterminating Co., 255 S.W.2d 279, 284 (Tex.Civ.App. 1953), in further explaining the purpose of the rule:

Covenants in favor of the former employer, restricting competition by a former employee after the employment has terminated, which lasted for a reasonable time and which operated over a reasonable area, have been specifically enforced by injunction in cases where the good will of the employer's customers had attached to the employee during the latter's employment and the employee thus had acquired during his employment a special ...


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