Omega Optical, Inc. v. Chroma Technology Corp.

Omega Optical, Inc. v. Chroma Technology Corp. (1999-566); 174 Vt. 10; 
800 A.2d 1064

[Filed 12-Apr-2002]
[Motion for Reargument Denied 10-May-2002]


       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. 1999-566


Omega Optical, Inc.	                         Supreme Court

                                                 On Appeal from
     v.	                                         Windham Superior Court


Chroma Technology Corporation, 	                 January Term, 2001 
Richard Stewart, et al. 


Robert Grussing III, J.

Bernard D. Lambek and Patricia K. Turley of Zalinger Cameron & Lambek, P.C., 
  Montpelier, and R. Mark Halligan, Philip D. Segrest, Jr. and Steven E. 
  Feldman of Welsh & Katz, Ltd., Chicago, Illinois, for Plaintiff-Appellant.

Craig Weatherly of Gravel & Shea, Burlington, Richard H. Munzing of Weber, 
  Perra & Munzing, P.C., Brattleboro, and Heidi E. Harvey, Blair L. Perry, 
  Jolynn M. Lussier and Michael E. Zelinger of Fish & Richardson P.C., 
  Boston, Massachusetts, for Defendants-Appellees.


PRESENT:  Dooley, Morse, Johnson and Skoglund, JJ., and Allen, C.J. (Ret.), 
          Specially Assigned


       MORSE, J.  Omega Optical appeals from a judgment of the superior court
  in favor of  defendant Chroma Technology Corporation and several other
  named defendants in Omega's action  for trade secret misappropriation,
  conversion, breach of loyalty, tortious interference with business 
  relations, unfair competition, conspiracy and breach of contract.  Omega
  argues on appeal: (1) the  court erred in its determination of the proof
  necessary to demonstrate trade secret misappropriation,  and it is entitled
  to judgment as a matter of law on that claim; (2) the court similarly erred
  on each 

 

  of its remaining claims, with the exception of its claims for breach of
  contract and conversion, and it  is entitled to judgment in its favor on
  each of the claims; (3) the court erroneously determined that  Omega's
  proof of damages was not sufficiently definite so as to allow for an award
  without resorting  to speculation or conjecture; (4) Omega is entitled to
  an award of punitive damages as a matter of  law; and, finally, (5) the
  court failed to make adequate findings regarding its crediting of the 
  individual defendants' testimony in light of Omega's theory and requested
  findings that a joint  defense agreement undermined the credibility of that
  testimony.  We affirm.

       This case arises out of events spanning several months starting in
  early 1991, in which a  number of Omega Optical employees left the company
  and went into business together under the  name of Chroma Technology
  Corporation.  Chroma began making thin-film optical interference  filters
  used in fluorescence microscopy, a product that Omega had developed and
  also produces.  On  October 1, 1996, Omega brought suit against Chroma and
  ten of its employees.  Following a twenty-two-day bench trial, the trial
  court issued a 111-page decision finding in favor of defendants on all of 
  Omega's claims. 

       Omega's appeal centers on its argument that, because defendants
  acquired substantial  amounts of information that the court found was
  "protectible as a trade secret," it is entitled to  judgment as a matter of
  law, notwithstanding the trial court's extensive findings that Omega failed
  to  take reasonable steps to protect the information.  The court concluded
  under the evidence that  defendants owed no duty of confidentiality with
  regard to the information.

       As a preliminary matter, and as Omega points out, because the
  operative facts of this case  occurred before July 1, 1996, the effective
  date of the Vermont Trade Secret Act, the common law  predating the act
  applies to this case.  See 9 V.S.A. § 4609 (providing the VTSA does not
  apply to 

 

  misappropriation occurring before its effective date); see also McClary v.
  Hubbard, 97 Vt. 222, 229,  122 A. 469, 473 (1923) (recognizing right of
  action for misappropriation of a trade secret).  But as  the trial court
  noted, the act and the Restatement (Third) of Unfair Competition provide
  guidance  with regard to Omega's common law claim for misappropriation of
  trade secrets. 

       In general, liability for trade secret misappropriation in the
  employment context requires  proof of both the existence of a trade secret
  as well as unauthorized disclosure or use of the secret in  breach of a
  duty of confidence.  Aries Info. Sys., Inc. v. Pacific Mgmt. Sys. Corp.,
  366 N.W.2d 366,  368 (Minn. Ct. App. 1985); Restatement (Third) of Unfair
  Competition §§ 40, 42 (1995).   Employees, whether current or former, have
  a duty not to use or disclose confidential information  imparted to them by
  their employer.  Restatement (Second) Agency § 396(b) (1958); see also 
  Restatement (Third) of Unfair Competition § 42 cmt. b (former employee's
  duty of loyalty includes  duty not to disclose employer's confidential
  information to others).  The former employee's duty of  confidence attaches
  to any information the employee knows or has reason to know is
  confidential.   Restatement (Third) of Unfair Competition § 42 cmt. c; see
  also A.F.A. Tours, Inc. v. Whitchurch,  937 F.2d 82, 89 (2d Cir. 1991)
  (employer must take appropriate precautions to alert employee of  need to
  maintain confidentiality of information subject to trade secret
  protection); Mercer v. C.A.  Roberts Co., 570 F.2d 1232, 1238 (5th Cir.
  1978) (agreement to keep employer's confidences  implied where employee
  knows or should know based on particular circumstances that employer 
  desired information to remain secret); Aries Info. Sys., 366 N.W.2d  at 369
  ("A duty of  employer/employee confidentiality can arise at common law if
  the employee is given notice of what  material is to be kept
  confidential."); Electro-Craft Corp. v. Controlled Motion, Inc., 332 N.W.2d 890, 903 (Minn. 1983) ("[A] common law duty of confidentiality arises out
  of the employer-

 

  employee relationship only as to information which the employer has treated
  as secret.").  Whether  an employee knows or should know certain
  information obtained from the employer is confidential  can be implied from
  the totality of the circumstances; no explicit notice to the employee is 
  necessarily required.  In re Innovative Constr. Sys., Inc., 793 F.2d 875,
  883 (7th Cir. 1986); Standard  Brands, Inc. v. Zumpe, 264 F. Supp. 254, 262
  (E.D. La. 1967); Sun Dial Corp. v. Rideout, 102 A.2d 90, 96 (N.J. Super.
  Ct. App. Div. 1954); see also Restatement (Third) of Unfair Competition §
  42  cmt. c ("If an employer establishes ownership of a trade secret and
  circumstances sufficient to put  the employee on notice that the
  information is confidential, the employment relationship will  ordinarily
  justify the recognition of a duty of confidence.") (emphasis added).  It is
  a fact-specific  inquiry.

       Omega argues, however, that employees who acquire valuable information
  in the course of  their employment owe a duty of confidentiality to the
  employer merely by virtue of their status as  employees, regardless of
  whether the employer has done anything either to protect the information or 
  to communicate to the employees the confidential and proprietary nature of
  the information.  This  argument is simply at odds with the case law, which
  requires something more than the mere  employer-employee relationship to
  establish a duty of confidentiality.  See, e.g., Mercer, 570 F.2d  at  1238
  (noting "not all employment relationships are confidential," and
  determining that, although  employee acquired intimate knowledge of his
  employer's operations, he owed no duty of  confidentiality because he had
  not been informed that the information was secret and under the 
  circumstances could have reasonably assumed it was not); Aries Info. Sys.,
  366 N.W.2d  at 369;  Electro-Craft Corp. v. Controlled Motion, Inc., 332 N.W.2d  at 903.  As noted above, whether a duty  of confidence attaches is a
  factual inquiry.  Furthermore, our decision in McClary v. Hubbard makes 

 

  plain that the party claiming a trade secret must demonstrate that it has
  taken steps to ensure the  information's secrecy to prevail on a claim for
  trade secret misappropriation.  McClary, 97 Vt. at  232-33, 245, 122 A.  at
  473, 479.

       In analyzing the facts of this case, the trial court applied the
  Restatement's approach to  Omega's claim for trade secret misappropriation. 
  In other words, it determined that the body of  knowledge necessary to
  produce the thin-film optical interference filters was "sufficiently
  valuable,  and not generally well known, that it [was] protectible as a
  trade secret."(FN1)  Consistent with  McClary, the court went on, however,
  to conclude that Omega had failed to take measures toward  protecting the
  information, and the circumstances under which the employees acquired the 
  information failed to indicate to them that the information was
  confidential.  Therefore, the  defendants owed no duty of confidentiality
  to Omega, and their use of the valuable information in  their new venture
  did not constitute misappropriation of that information.

       Specifically with respect to the circumstances under which the
  defendants acquired the  information, the trial court found that while
  defendants were employed at Omega, the company had  "no internal policies
  concerning confidentiality, nondisclosure or noncompetition."  The court
  found 

 

  that an open atmosphere prevailed in which employees were encouraged to
  share information about  the development and production of filters.  In
  contrast, during this same time, the company did have  confidentiality
  policies with regard to proprietary information belonging to Omega's
  customers.  The  court found that Omega failed to convey during the
  defendants' course of employment the  confidential nature of the
  information it now seeks to protect and, when Omega did institute a policy 
  of confidentiality, the defendants still employed with the company refused
  to sign onto it and  resigned.  The court also found that Omega had few
  security measures in place prior to defendants  leaving the company and the
  few security measures that did exist, such as signing out keys, were not 
  enforced or even monitored.  For a significant period of time, members of
  the public had access to  work areas.  The court also noted that many of
  the measures cited by Omega as security measures in  the course of the
  trial actually evolved for different purposes and Omega's claims, such as
  its  location as a security measure, were post hoc rationalizations.   

       These findings are supported by the record.  For instance, Robert
  Johnson, Omega's founder,  testified the company had no lock on the door of
  its first facility, and at the next facility, the doors  connecting Omega
  to other businesses were not locked.  He testified that Omega avoided
  traditional  security measures, and that the company was relying on the
  fact that its employees were "intelligent  people" who would intuit that
  the information they worked with should be kept confidential.  He also 
  testified that he expected employees to know that information acquired in
  the course of their  employment was proprietary and confidential simply
  based on the nature of the information.  He  indicated that Omega did not
  mark any of its own documents "confidential" because it would have 
  undercut the fact that all documents at Omega were confidential.  Cf. J.T.
  Healy & Son, Inc. v. James  A. Murphy & Son, Inc., 260 N.E.2d 723, 730
  (Mass. 1970) (concluding that employer's claimed 

 

  security measure of doing nothing in order not to "excite undue interest"
  in information was likely  only an afterthought and was "at variance with
  the rule that individuals must be constantly  admonished that a process is
  secret and must be kept so").   

       There was also testimony and other documentary evidence that (1) Omega
  had no written  policy of confidentiality; (2) just prior to the time
  defendants were contemplating leaving Omega,  the company recognized the
  need to establish guidelines to help employees distinguish between 
  confidential and nonconfidential information; (3) very little awareness
  existed among employees as  to what the company considered proprietary; and
  (4) record keeping at Omega was sloppy, in some  cases nonexistent, and the
  company's technical information was not kept in an organized or 
  centralized, controlled manner.  In one instance, defendant Kebbel
  testified that after Omega donated  one of its computers to a local daycare
  center, Dr. Johnson asked Kebbel if the company still had the  computer
  because it contained information that Dr. Johnson needed.  In light of this
  and other  evidence available to the trial court, we find no error in the
  court's finding that Omega failed to take  steps to put its employees on
  explicit or implicit notice that certain information conveyed to them 
  during their employment was to be kept confidential.  Hence, defendants did
  not receive the  information in confidence and, therefore, did not breach
  their duty of confidence to Omega, their  former employer.

       Omega argues, however, that the court erred by examining the
  circumstances surrounding the  acquisition of the information when
  determining whether the defendants owed a duty of  confidentiality.  Omega
  contends that it is the time of use that is determinative regarding whether 
  former employees owe a duty of confidentiality to a former employer.  Omega
  confuses the relevant  times for determining whether a duty exists and
  whether the duty has been breached, that is, whether 

 

  the information has been misused or misappropriated.  To determine whether
  a duty of confidentiality arises, courts examine whether the information
  was acquired under circumstances that would indicate to an individual that 
  the information is confidential, while courts look to the time of use to
  determine whether the  individual knows that the information being used is
  subject to a duty of confidentiality such that the  use constitutes a
  breach of that duty and, thus, misappropriation.  Compare Restatement
  (Third) of  Unfair Competition § 41(b)(1) (noting person owes other party a
  duty of confidentiality with respect  to a trade secret if the trade secret
  was disclosed to that person under circumstances that would  justify the
  conclusion that, "at the time of the disclosure, the person knew or had
  reason to know that  the disclosure was intended to be in confidence")
  (emphasis added), with id. at § 40(b)(1) (stating  that individual is
  liable for appropriation of a trade secret if, among other things, "the
  actor uses or  discloses the other's trade secret without the other's
  consent and, at the time of the use or disclosure,  the actor knows or has
  reason to know that the information is a trade secret that the actor
  acquired  under circumstances creating a duty of confidence owed by the
  actor to the other") (emphasis  added); see also Electro-Craft Corp., 332 N.W.2d  at 901 ("Trade secret protection . . . depends upon  a continuing
  course of conduct by the employer, a course of conduct which creates a
  confidential  relationship.") (emphasis added).

       The trial court's findings are supported by the record, and the trial
  court correctly applied the  governing law.  Consequently, we discern no
  error in the trial court's judgment on the claim for trade  secret
  misappropriation that would require either reversal or entry of judgment in
  Omega's favor.   See Highgate Assocs. v. Merryfield, 157 Vt. 313, 315-16,
  597 A.2d 1280, 1281-82 (1991) ("Where  the trial court has applied the
  proper legal standard, we will uphold its conclusions of law if  reasonably
  supported by its findings.").
								
 

       On its related claims of breach of loyalty, tortious interference with
  business relations, unfair  competition and conspiracy, Omega asserts that
  the trial court made errors of law that not only  require de novo review,
  but that, once remedied, entitle Omega to judgment in its favor on each of 
  the claims.  As we noted in Dicks v. Jensen, the Vermont Trade Secrets Act
  explicitly supplants  common law tort claims that provide civil remedies
  for the misappropriation of trade secrets. ___ Vt.  at ___, 768 A.2d  at
  1285; see also 9 V.S.A. § 4607.  Therefore, if the VTSA governed this case, 
  arguably at least some of Omega's claims would be eliminated.  As noted
  above, however, the acts  in question in this case took place before the
  effective date of the VTSA, and therefore the common  law still governs.

       With regard to its assertion that the trial court's decision on each
  of these claims should be  reviewed de novo, Omega fails to point to any
  individual error of law by the trial court on any of the  claims and
  instead reargues the evidence before the trial court on each claim,
  cataloguing the  evidence in its favor.  The standard of review in such
  circumstances is a determination whether the  court's findings of fact are
  supported by the record and whether those findings reasonably support its 
  conclusions.  Highgate, 157 Vt. at 315-16, 597 A.2d  at 1281-82.  In making
  that determination, we  disregard any mitigating evidence and view the
  record in the light most favorable to the trial court's  findings.  Id. at
  315, 597 A.2d  at 1281 ("A finding will not be disturbed merely because it
  is  contradicted by substantial evidence; rather, an appellant must show
  there is no credible evidence to  support the finding.").

       To the degree that the additional claims are premised on Omega's claim
  that defendants  misappropriated Omega's trade secrets, the trial court's
  disposition of that claim also disposes of the  additional claims. 
  Furthermore, as the trial court noted with regard to Omega's breach of
  loyalty 

 

  claim, courts have generally held that at-will employees may plan to
  compete with their employer  even while still employed there and may freely
  compete with the employer once they are no longer  employed there.  See
  Augat, Inc. v. Aegis, Inc., 565 N.E.2d 415, 419 (Mass. 1991); Metal
  Lubricants  Co. v. Engineered Lubricants Co., 411 F.2d 426, 429-30 (8th
  Cir. 1969) (noting that employees may  plan to compete with their employer
  while still in its employ, and "absent [a] covenant not to  compete or
  breach of a confidential relationship, an employee is free to leave his
  employment and  enter into competition with his former employer").  This
  behavior does not constitute a breach of a  duty of loyalty.  Such at-will
  employees are restricted, however, from misappropriating trade secrets  and
  soliciting customers for their new venture while still employed at the
  former employer.  See  Augat, 565 N.E.2d  at 419 (noting that an at-will
  employee may plan to go into competition with his  or her employer while
  still employed, but that the employee may not solicit the employer's 
  customers while still employed there and may not appropriate the employer's
  trade secrets or other  confidential information).  The trial court
  specifically found that, while defendants did formulate  plans for the
  creation of Chroma while still working at Omega, they did not solicit
  Omega's  customers while still employed there and continued to perform
  their duties at Omega in good faith.   As these findings are supported by
  the record, we will not disturb them on appeal.

       Omega argues, however, that competition for Omega customers by
  defendants following  their departure from the company constitutes a breach
  of the duty of loyalty as a matter of law.  But  as we noted with respect
  to customer lists in Dicks, when an employer does not take steps to protect 
  information such as customer lists, competition for those customers by a
  former employee after that  employee has left the company is legitimate. 
  Dicks, ___ Vt. at ___, 768 A.2d  at 1285.

 

       Omega also makes a more general argument that "[a]s former employees
  of Omega, the  individual defendants each . . . continued to owe Omega a
  duty of loyalty, which included the duty to  refrain from acting for their
  own benefit or the benefit of Chroma to the detriment of Omega."  
  (Emphasis added.)  Omega cites no authority for the proposition that
  at-will employees continue to  owe a duty of loyalty to a former employer,
  even after they have left that employment, that  constrains them from ever
  acting to the detriment of that employer.  Such a common law duty would 
  prevent an employee from ever going to work for a competitor even in the
  absence of an agreement  not to do so, an anomalous result.  Cf. Dicks, ___
  Vt. at ___, 768 A.2d  at 1285 (given restraint with  which this Court
  enforces explicit non-compete agreements, we declined to imply one).

       On Omega's claim for tortious interference with business relations,
  the trial court concluded  that, although defendants may have used
  aggressive sales techniques, Omega failed to demonstrate  that the
  defendants acted with the sole purpose of harming Omega, used improper
  means in  competing with Omega for customers, or used criminal or
  fraudulent means to advance their own  competitive interests.  See Gifford
  v. Sun Data, Inc., 165 Vt. 611, 613, 686 A.2d 472, 474-75 (1996)  (mem.)
  (noting proof necessary to prevail on claim for tortious interference with
  prospective  contractual relations and stating "[c]ompetitive business
  practices are not tortious").  The trial court  also concluded that Omega
  had failed to establish a causal connection between any of defendants' 
  practices and a loss of business at Omega.  Although Omega cites to
  evidence it argues demonstrates  that defendants used improper means in
  competing for customers, its brief fails to address the trial  court's
  conclusion that it failed in its proof on the causal element of the tort. 
  Accordingly, we will  not reverse the trial court on this claim.

 

       Omega also claims that the trial court ignored its evidence of
  customer confusion with regard  to its claim of unfair competition, citing
  a single incident in which a representative of a company that  distributes
  microscopes indicated that he thought Omega was a trade name for Chroma's
  product,  leading him to contact Chroma when he meant to contact Omega
  about ordering a filter set.  Omega  points out the trial court failed to
  address its proposed findings regarding this incident and its  proposed
  finding regarding Chroma's failure to dispel the representative's confusion
  about the  companies.  The trial court, however, explicitly acknowledged
  that "[s]ome confusion [of the  companies] was inevitable" given that both
  manufactured the same product and were located in  Brattleboro.  It went on
  to conclude, though, that defendants had not acted with a conscious object
  of  fostering confusion, the names of the two companies were not so similar
  as to inevitably lead to  customer confusion and Omega had failed to
  establish the existence of "any significant level of  confusion" among the
  companies' customers.  Omega's citation to evidence of the isolated
  incident  above does not undermine these conclusions.

       Omega's argument that it is entitled to judgment on its conspiracy
  claim rests on its argument  that the defendants acted in concert in
  engaging in the behavior giving rise to its other claims,  including that
  for trade secret misappropriation.  As these other claims are without
  merit, so is its  claim for conspiracy.  In sum, we decline Omega's
  invitation to reverse the trial court's judgment on  each of the claims for
  breach of loyalty, tortious interference with business relations, unfair 
  competition and conspiracy, and enter judgment in its favor.

       Because of our disposition, we need not address Omega's arguments on
  the damages issues.   Finally, with respect to Omega's argument that the
  trial court failed to make adequate findings on the  credibility of each of
  the individual defendants and erred by failing to adopt instead Omega's 

 

  proposed findings on the issue of their credibility, we discern no
  reversible error.  Determinations of  credibility are solely the province
  of the factfinder, Cabot v. Cabot, 166 Vt. 485, 497, 697 A.2d 644,  652
  (1997) (noting it is the province of the trial court to make determinations
  of witness credibility);  Mullin v. Phelps, 162 Vt. 250, 261, 647 A.2d 714,
  720 (1994) (noting that in reviewing findings by a  trial court, this Court
  is not to "reweigh evidence or . . . make findings of credibility de
  novo"), and  the failure to adopt a party's proposed findings on the issue
  of witness credibility is not grounds for  reversal, see McCormick v.
  McCormick, 150 Vt. 431, 435, 553 A.2d 1098, 1101 (1988) (noting that 
  failure of court to adopt party's proposed findings is not cause for
  reversal because court is free to  choose the evidence it finds
  persuasive).  Furthermore, the trial court is not obligated to explain to a 
  party why it is not adopting the party's proposed findings.  Thus, the
  trial court's failure to adopt  Omega's theory that defendants' joint
  defense agreement rendered their testimony  not worthy of  belief or to
  explain why the joint defense agreement did not undermine their credibility
  does not  constitute grounds for reversal.

       Affirmed. 


                                       FOR THE COURT:


                                       _______________________________________
                                       Associate Justice



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                                  Footnotes


FN1.  Although similar, the VTSA and the Restatement take somewhat
  different approaches to  analyzing a claim for misappropriation of trade
  secrets.  As we noted in Dicks v. Jensen, ___ Vt.  ___, ___, 768 A.2d 1279,
  1282 (2001), the VTSA includes in its definition of "trade secret" a 
  requirement that the information be the subject of reasonable efforts to
  maintain its secrecy.   9 V.S.A. § 4601(3)(B).  If such efforts have not
  been made, the information is not a "trade secret."   On the other hand,
  the Restatement's definition does not incorporate such a requirement.  
  Restatement (Third) of Unfair Competition § 39.  Rather, its definition
  merely parallels the first part  of our statutory definition.  Compare id.,
  with 9 V.S.A. § 4601(3)(A).  Under the Restatement,  information is a
  "trade secret" if it is used and valued in the operation of a business and
  is  sufficiently secret, i.e., not generally well known, that it affords
  economic advantage to the business.  Restatement (Third) of Unfair
  Competition § 39.  Notably, the "secret" element of the Restatement 
  definition addresses itself only to the question of whether the information
  bestows any competitive  advantage on the employer.