Dicks v. Jensen

Dicks v. Jensen (2000-102); 172 Vt. 43; 768 A.2d 1279

[Filed 09-Feb-2001]


       NOTICE:  This opinion is subject to motions for reargument under
  V.R.A.P. 40 as well as formal  revision before publication in the Vermont
  Reports.  Readers are requested to notify the Reporter of  Decisions,
  Vermont Supreme Court, 109 State Street, Montpelier, Vermont 05609-0801 of
  any  errors in order that corrections may be made before this opinion goes
  to press.


                                No. 2000-102


James Dicks and Condotel Properties, Inc.	   Supreme Court

                                                   On Appeal from
     v.	                                           Windham Superior Court


Cary and Brenda Jensen	                           December Term, 2000



Richard W. Norton, J.

Kristen P. Swartwout of Crispe & Crispe, Brattleboro, for Plaintiffs-Appellants.

Kirsten A. Peske, Potter Stewart, Jr. Law Offices, Brattleboro, for 
  Defendants-Appellees.


PRESENT:  Amestoy, C.J., Dooley, Morse, Johnson and Skoglund, JJ.


       Johnson, J.  Plaintiff James Dicks appeals from an order of the
  Windham Superior Court  granting summary judgment to defendants Cary and
  Brenda Jensen.  Plaintiff claims that defendants  violated the Vermont
  Trade Secrets Act, 9 V.S.A.§§ 4601-4609, when they left plaintiff's employ
  at  the Lodge at Mount Snow and solicited the Lodge's bus tour customers to
  start their own lodge in  Bennington, Vermont.  Plaintiff also alleges that
  defendants breached a fiduciary duty, the covenant  of good faith and fair
  dealing, and intentionally interfered with business relations.  We affirm.

 

       Plaintiff has owned the Lodge at Mount Snow (Lodge) in Dover, Vermont
  since 1971.   During the non-winter months, the Lodge relies heavily on
  business from bus tours of senior citizen  groups.  These tours are run by
  organizers who return to the Lodge year after year.  The bus tour  industry
  is highly competitive with various hotel owners in the region aggressively
  soliciting  business from the tour groups.  In 1991, plaintiff hired
  defendants to manage the Lodge and market  and run a bus tour business at
  the Lodge.  The defendants worked without an employment agreement  and ran
  most aspects of the Lodge's business.  They were responsible for
  advertising, soliciting, and  organizing the Lodge's bus tours.  Securing
  tour groups to visit the Lodge involved mass mailings to  lists of senior
  citizen tour groups collected through chambers of commerce, agencies on
  aging, and  mail order catalogs throughout the Eastern United States. 
  Because these mass mailings typically  have a very low response rate,
  defendants had to send additional promotional material, followed by  direct
  telephone solicitation.  The telephone solicitations resulted in twenty to
  sixty actual bookings  from an initial mailing of ten to fifteen thousand. 
  Booking a tour required about six months of lead  time.

       In 1997, defendants left the Lodge to open their own competing lodge,
  the Autumn Inn, in  Bennington.  Defendants contacted Lodge customers to
  inform them of the move.  They also  solicited business from the Lodge's
  regular bus tour customers.  Nine of eleven tours booked by  defendants
  their first season were with customers who had reservations booked at the
  Lodge who   canceled their reservations and rebooked with defendants.

       Plaintiff filed suit alleging, inter alia, that defendants had
  misappropriated the Lodge's  customer list, violating the Vermont Trade
  Secrets Act; that, in soliciting the Lodge's customers,   defendants had
  breached their fiduciary duty and the covenant of good faith and fair
  dealing to 

 

  plaintiff; and that defendants had tortiously interfered with the Lodge's
  business relations.  The trial  court, on a motion for summary judgment by
  defendants, ruled that defendants did not violate the  Trade Secret Act. 
  The court noted that a customer list could not be a trade secret if the
  content was  readily ascertainable from publically available sources. 
  Because the court found that the Lodge's  customer list was not developed
  by "extraordinary effort," it was, therefore, readily ascertainable and 
  not protected.  As to the breach of fiduciary duty claim, the court held
  that this claim was more  properly analyzed as a matter of tortious
  interference with business relations, and these claims were  tried,
  resulting in a verdict for defendants.

       On appeal, plaintiff alleges that summary judgment on the trade secret
  claim was  inappropriate because there were genuine issues of material fact
  as to whether the list is a trade  secret.  Plaintiff also claims that the
  court erred in treating his claim for breach of fiduciary duty,  good faith
  and fair dealing as substantially the same as his claim for tortious
  interference with  business activity.

                        I. Vermont Trade Secrets Act

       The Vermont Trade Secrets Act, 9 V.S.A. §§ 4601-4609, was enacted in
  1996 to prevent the  misuse of business information.  The statute allows
  injunctive relief and damages for  misappropriation of trade secrets.  9
  V.S.A. §§ 4602, 4603.  The Act was explicitly designed to  displace other
  common law remedies for misappropriation of trade secrets.  Id. § 4607.  A
  "trade  secret" is defined as:

    [I]nformation, including a formula, pattern, compilation, program, 
    device, method, technique, or process, that: (A) derives
    independent  economic value, actual or potential, from not being
    generally known  to, and not being readily ascertainable by proper
    means by, other  persons who can obtain economic value from its
    disclosure or use;  and (B) is the subject of efforts that are
    reasonable under the  circumstances to maintain its secrecy.

 

  Id. § 4601(3).

  We have not yet had occasion to consider the extent of trade secret
  protection in this context.  The  statute, however, is based on the Uniform
  Trade Secrets Act (amended 1985), 14 U.L.A 437 (1990),  which has been
  adopted in some form in forty-one states.  See, e.g., S.D. Codified Laws §
  37-29-1(4)  (2000) (definition of trade secret); Wash. Rev. Code
  §19.108.010(4) (2000) (same).  Thus, in  interpreting this statute we draw
  from the decisions of our sister states.  See 9 V.S.A. § 4608 (the act 
  shall be "construed to effectuate its general purpose to make uniform the
  law . . . among states  enacting it").  Further, because the Uniform Act
  codifies the basic principles of common law trade  secret protection, see
  Ed Nowogroski Ins. Inc. v. Rucker, 971 P.2d 936, 942 (Wash. 1999), cases 
  decided in the absence of a statute are also relevant.

       As indicated by the statutory definition of trade secret, there are
  two components to the test  for whether some information deserves trade
  secret protection.  The first is whether the information  has independent
  economic value that is not readily ascertainable to others; the second is
  whether  reasonable efforts were made to maintain the information's
  secrecy.  American Credit Indem. Co. v.  Sacks, 262 Cal. Rptr. 92, 97 (Cal.
  Ct. App. 1989).  Although the trial court based its decision  primarily on
  the first element, plaintiff must satisfy both elements for his list to be
  protected under  the statute.

       It is not disputed that the customer list has independent economic
  value.  Brenda Jensen  admitted that at the time defendants opened their
  inn, they did not have the money to extend their  marketing.  By directly
  soliciting the Lodge's customers, defendants saved themselves the six
  months  lead time that all parties agree is required to book a tour 'from
  scratch.'  The issue between 

 

  the parties on the first prong of the test is over the availability of the
  information.  Defendants claim  that because all the customers' names were
  available in public documents, the information was  readily ascertainable. 
  Plaintiff counters that securing an actual paying customer required 
  considerable time and expense that defendants saved when they solicited the
  Lodge's customers.

       A customer list can be a protected trade secret.  As the Ninth Circuit
  recognized, a list of  people who have already purchased a product is
  substantially more valuable than a list of people who  might only be
  interested in purchasing.  Hollingsworth Solderless Terminal Co. v. Turley,
  622 F.2d 1324, 1333 (9th Cir. 1980).  The process of parsing a customer
  list from a directory of potentially  profitable customers from entries not
  worth pursuing injects that list with value.  See id. at 1332.   But, the
  threshold amount of time and money that must be invested before a customer
  list is accorded  statutory protection varies considerably.  See Republic
  Sys. & Program. Inc. v. Computer Assistance,  Inc., 322 F. Supp. 619, 627
  (D. Conn. 1970) (list of software purchasers must result from years of 
  business effort and advertising and expenditure of time and money to be
  protected); Lincoln Towers  Ins. Agency v. Farrell, 425 N.E.2d 1034, 1038
  (Ill. App. Ct. 1981) (discussing cases where customer  lists are protected
  because they have been developed over many years or at considerable
  expense).

       For example, the New York Court of Appeals was confronted by two
  different cases with  very similar fact patterns involving customer lists
  and reached contradictory results.  In Town &  Country House & Home Serv.
  v. Newberry, 147 N.E.2d 724 (N.Y. 1958) the plaintiff had  established a
  personalized house cleaning business in which a team of workers cleaned
  each house.   The plaintiff discovered prospective customers through random
  telephone solicitations in a selected  neighborhood.  Several hundred
  telephone calls yielded about a dozen customers.  The defendants,  who had
  been previously employed by the plaintiff, started a competing house
  cleaning business and 

 

  solicited the plaintiff's customers.  Id. at 727.  In enjoining the
  defendants from soliciting the  plaintiff's customers, the court emphasized
  that these customers were not readily ascertainable  because they "had been
  screened by [the plaintiff] at considerable effort and expense."  Id.

       Although Town & Country appears analogous to the instant controversy,
  the court held that  another similarly culled customer list was not
  protected.  In Leo Silfen, Inc. v. Cream, 278 N.E.2d 636 (N.Y. 1972), the
  plaintiff sold building maintenance supplies to area businesses.  The
  plaintiff  contacted potential customers via mass mailings of about one
  million pieces annually.  From that  only .6% replied, and of the replies
  only 25% became customers.  The defendant was discharged  from the
  plaintiff's business and set up his own competing business, soliciting the
  plaintiff's  customers.  Id. at 638.  The court found that because the
  plaintiff's customers were engaged in  business at advertised locations,
  their names and addresses were readily ascertainable.  Id. at 640.   
  Despite the significant culling that these names underwent before becoming
  customers, the court  held that the customer list was not a protected trade
  secret.  Id. at 641.  The court distinguished Town  & Country by noting
  that the business in that case was attempting to "create a market for a new
  type  of service."  Id. at 640.

       In determining that the Lodge's customer list was readily
  ascertainable, the trial court relied  on two cases: Stampede Tool
  Warehouse, Inc. v. May, 651 N.E.2d 209 (Ill. App. Ct. 1995), and  Unistar
  Corp. v. Child, 415 So. 2d 733 (Fla. Dist. Ct. App. 1982).   There,
  customer lists were  protected trade secrets because each of the lists in
  question involved information that was extremely  difficult to ascertain. 
  See Stampede Tool, 651 N.E.2d  at 216 (list of "tool jobbers" requires 
  expensive "prospecting" from end users of the product); Unistar, 415 So. 2d 
  at 734 (list of financial  planners who sell investment grade diamonds
  requires extensive and costly "distilling").  These cases 

 

  are not particularly helpful, however, because they concerned unique,
  highly specialized and narrow  markets where we would expect the
  development of customer lists to require serious effort and  expense.  In
  other words, these cases do not present a close question on the issue of
  whether the list  was "readily ascertainable."  It clearly was not.  As a
  consequence, the standard of "extraordinary  efforts" applied in Stampede
  and Unistar is much more stringent than courts have applied in cases 
  involving more pedestrian markets such as the ones at issue in Town &
  Country, 147 N.E.2d  at 727  (house cleaners) and Cream, 278 N.E.2d  at 637
  (maintenance supplies).  See also Zoecon Indus. v.  American Stackman Tag
  Co., 713 F.2d 1174, 1179 (5th Cir. 1983) (farming and livestock equipment 
  customer list protected when gathered at "considerable expense"); Newton
  Garment Carriers, Inc. v.  Consolidated Carriers Corp., 673 N.Y.S.2d 631,
  632 (N.Y. App. Div. 1998) (trucking company  customer list not protected
  where information was available in "public domain").

       These cases demonstrate that in a trade secret case "no general and
  invariable rule can be laid  down," but rather we must look to the conduct
  of each party and the particular information at issue.   Jet Spray Cooler,
  Inc. v. Crampton, 282 N.E.2d 921, 925 (Mass. 1972).  Indeed, several courts
  have  held that whether information such as a customer list is a trade
  secret is a question for the trier of  fact.  E.g., Hollingsworth, 622 F.2d 
  at 1335; Frantz v. Johnson, 999 P.2d 351, 358 (Nev. 2000); Fred  Siegal
  Co., L.P.A. v. Arter & Hadden, 707 N.E.2d 853, 862 (Ohio 1999).  As we have
  stated  repeatedly, "summary judgment is appropriate only when the record
  clearly shows that there is no  genuine issue of material fact and that the
  movant is entitled to judgment as a matter of law."  Bacon  v. Lascelles,
  165 Vt. 214, 218, 678 A.2d 902, 905 (1996).  Given the lack of a standard
  benchmark  for "readily ascertainable" and the extremely factual nature of
  the inquiry, we cannot say that, as a  matter of law, the Lodge's customer
  list is not a trade secret.  Therefore, summary judgment on this 

 

  issue was error.  Because we can decide this case based on the second
  statutory element of trade  secret, however, we affirm summary judgment on
  an alternate ground.

       The second part of the definition of trade secret requires the party
  seeking protection to make  reasonable efforts to ensure the information's
  secrecy.  9 V.S.A. § 4601(3)(B).  See also McClary v.  Hubbard, 97 Vt. 222,
  232, 122 A. 469, 473 (1923).  It would be anomalous for the courts to
  prohibit  the use of information that the rightful owner did not undertake
  to protect.   Other jurisdictions have  used several factors to determine
  the reasonableness of efforts to maintain the information's secrecy, 
  including whether parties had a written agreement not to compete, Zoecon
  Industries, 713 F.2d  at  1178, whether knowledge was confined to any
  restricted group of employees, Jet Spray Cooler, 282 N.E.2d  at 926; and
  the extent of measures to guard access to the information, Augat, Inc. v.
  Aegis,  Inc., 565 N.E.2d 415, 418 (Mass. 1991).  Thus the burden is on the
  plaintiff to demonstrate that he  "pursued an active course of conduct
  designed to inform his employees that such secrets and  information were to
  remain confidential."  Jet Spray Cooler, 282 N.E.2d  at 925.  See also
  Republic  Sys. & Program., 322 F. Supp at 627-28 (denying trade secret
  claim because information was not  protected by "substantial element of
  secrecy" so that not obtainable without improper means).  If the  owner of
  the information has attempted to protect information, however, others who
  have access to it  are under an obligation to respect those measures. 
  Lincoln Towers Ins., 425 N.E.2d  at 1038 (inquiry  includes whether employee
  acted in manner inconsistent with employer's interest by copying or 
  memorizing the information).

       In this case, there is no evidence in the record that plaintiff took
  any measures to indicate that  the customer list was confidential. 
  Plaintiff does not identify any agreement between the parties,  written or
  oral, that encompasses an understanding that the customer list was
  confidential.  Nor does 

 

  plaintiff identify any procedures or measures taken to ensure that the
  customer list was secure and  access to it restricted.  In fact, defendant
  provided statements that the names of tour groups were  posted on a large
  reservation board in an office where all employees and any office visitor
  could see.  The customer names were not locked and were available to all
  employees.  Plaintiff's response was  only that at some point the Lodge
  stopped putting the full names of tours on the reservation board,  and that
  the full names of the customers were kept in defendant's office.  Absent
  any attempt by  plaintiff to maintain the customer list's secrecy,
  enforcing just the first part of the statute would  protect all business
  information that had independent economic value, without regard to the
  parties'  own actions to protect it.  This interpretation would render the
  second part of the statutory test  superfluous.  See In re Margaret Susan
  P., 169 Vt. 252, 263, 733 A.2d 38, 47 (1999).

       Moreover, to hold for plaintiff on this theory would convert the
  statute into an implied  covenant not to compete.  This Court has upheld
  such agreements in accord with basic contract law.   Fine Foods, Inc. v.
  Dahlin, 147 Vt. 599, 602-03, 523 A.2d 1228, 1230 (1986).  When enforcing a 
  covenant not to compete, however, "we will proceed with caution . . .
  'favoring the right of  individuals to freely engage in desirable
  commercial activity.'" Roy's Orthopedic, Inc. v. Lavigne,  142 Vt. 347,
  350, 454 A.2d 1242, 1244 (1982) (quoting Vermont Elec. Supply Co. v.
  Andrus, 132  Vt. 195, 198, 315 A.2d 456, 458 (1974)).  Here no such
  agreement was signed.  Given the restraint  with which we enforce explicit
  covenants not to compete, we decline to imply a contract where the  parties
  chose not to avail themselves of the legal device that offers the
  protection plaintiff seeks.

       On the record before us, therefore, there is no dispute of material
  fact and summary judgment  is appropriate for this statutory element.  See
  Granger v. Town of Woodford, 167 Vt. 610, 611, 708 A.2d 1345, 1346 (1998)
  (mem.); V.R.C.P. 56(c).  Because plaintiff has adduced no evidence that 

 

  he took reasonable efforts to maintain the secrecy of the customer
  information, we hold, as a matter  of law, that this customer list is not a
  trade secret.  Compare NovaCare Orthotics & Prosthetics E.,  Inc. v.
  Speelman, 528 S.E.2d 918, 922 (N.C. Ct. App. 2000) (customer list not
  protected under  similar statute when "plaintiff has not come forward with
  any evidence to show that the company  took any special precautions to
  ensure the confidentiality of its customer information"); with A.M.  Skier
  Agency, Inc. v. Gold, 747 A.2d 936, 941 (Pa. Super. Ct. 2000) (customer
  list was protected  when information was password protected on computer);
  see also Augat, Inc., 565 N.E.2d  at 418  (granting securities analysts
  access to information compromises secrecy of list); cf. Stampede Tool,  651 N.E.2d  at 216 (customer list was protected when information was physically
  locked, subject to  computer codes, and surveyed with security cameras).

       Finally, plaintiff argues that even if his customer list does not meet
  the statutory definition of  a trade secret, defendants were under a common
  law duty not to solicit the Lodge's customers.  This  argument fails
  because it is explicitly contravened by the Trade Secrets Act.  Section
  4607 states  "this chapter displaces conflicting tort, restitutionary, and
  any other law of this state providing civil  remedies for misappropriation
  of a trade secret."  9 V.S.A. § 4607.  Thus the statute plainly bars a 
  common law remedy on this theory.

    II. Breach of Fiduciary Duty; Covenant of Good Faith and Fair Dealing

       Plaintiff next claims that the court erred in treating his claim for
  breach of fiduciary duty, and  the covenant of good faith and fair dealing
  as co-extensive with his claim for tortious interference  with business
  relations.  The court allowed the tort claim to proceed to trial, and
  plaintiff lost.  To  prevail here, plaintiff must establish an independent
  cause of action for breach of fiduciary duty and  the covenant of good
  faith and fair dealing.  In support of this claim, plaintiff argues that
  defendants 

 

  "left the Lodge with a one day notice . . . the Lodge was not prepared for
  the Defendant's abrupt  departure . . .[and] work that should have already
  been done by the date Defendants left was  unfinished."

       Essentially, plaintiff is contending that defendants breached a duty
  of good faith and fair  dealing implied in defendants' employment contract. 
  Here, however, the contract at issue is an at-will employment arrangement. 
  An at-will employment agreement is flexible, "terminable at any  time, for
  any reason or for none at all."  Sherman v. Rutland Hosp., Inc., 146 Vt.
  204, 207, 500 A.2d 230, 232 (1985).  Just as the employer is free to
  terminate the employee absent a clear and  compelling public policy reason
  against doing so, see Payne v. Rozendaal, 147 Vt. 488, 491, 520 A.2d 586,
  588 (1986), so may the employee end the relationship as he or she chooses. 
  That is  precisely the case that confronts us here.  Plaintiff's argument
  amounts to no more than an objection  to the freedom of his employees to
  avail themselves of the at-will arrangement.  Defendants did not  breach
  any duty because "we decline to recognize the implied covenant of good
  faith and fair dealing  as means of recovery where the employment
  relationship is unmodified and at-will."  Ross v. Times  Mirror, Inc., 164
  Vt. 13, 23, 665 A.2d 580, 586 (1995).  See also Gadbois v. Rock-Tenn Co.,
  984 F. Supp. 811, 820 (D. Vt 1997). 

       Plaintiff's reliance on Carmichael v. Adirondack Bottled Gas Corp.,
  161 Vt. 200, 635 A.2d 1211 (1993), is not persuasive.  In Carmichael, the
  duty that was breached arose from a written  contract for a petroleum gas
  distributorship.  Id. at 202, 635 A.2d  at 1213.  Thus, Carmichael is 
  completely inapposite.  As we explained, the duty of good faith "is a
  concept that varies . . . with the  context in which it is deemed an
  implied obligation."  Carmichael, 161 Vt. at 208, 635 A.2d  at 1216.  In
  this context, there simply is no implied obligation of good faith and fair
  dealing.  Therefore, we 

 

  affirm the trial court's judgment on this issue.  See Hudson v. Town of
  East Montpelier, 161 Vt. 168,  170, 638 A.2d 561, 563 (1993) (we need not
  adopt trial court's rationale in affirming its conclusion).

       Affirmed.



                                       FOR THE COURT:


                                       _______________________________________
                                       Associate Justice