Edwards v. Gramling Engineering Corp.

CHASANOW, Judge. During the period 1972 to 1978, William Gramling (Gramling) and Denver Roberts (Roberts) developed an invention called an “Autoswab,” a self-propelled device used to extract oil from oil wells. The Autoswab forces oil and water out of oil wells. The device is placed in the well casing, it travels below the surface of the oil, and a rubber seal is engaged.

Natural gas, which is normally present in an oil well, is trapped below the device and pressure from the gas pushes oil to the surface where it can be put into a tank. In 1978, Ronald Edwards (Edwards) joined the team as a promoter to market the invention. In 1980, Gramling Engineering Corporation (the Corporation), a close corporation, was formed with Gramling a 3772% shareholder, Roberts a 3772% shareholder, and Edwards a 25% shareholder. All three shareholders were designated as directors and officers of the Corporation at that time.

A primary purpose of the Corporation was the development, with the aid of a Department of Energy grant, of a more effective seal. By 1982, the Corporation had developed an improved, though allegedly imperfect, seal design. At that point, the principals seem to have diverged in their goals for the Corporation. It appears that Gramling, with Roberts’ assent, was engaged in an effort to sell the Corporation and its technology; Edwards’ ambition was to perfect the seal and pursue the production and marketing of the invention.

Up to this time, the seals used in the Autoswab had been manufactured from a single-cavity experimental mold, which created one seal at a time. When Edwards proposed to build a four-cavity production mold and further improve the seal design, Gramling advised him that the seal was satisfactory and that the Corporation would not pay for a ⁵⁴⁰ new mold. Knowing that the Corporation was short of cash, Edwards decided to finance the production of the four-cavity mold himself in the hope that the Corporation would later agree to reimburse him for the costs. Although the Corporation used seals created from the new four-cavity production mold in the Autoswab from September 1983 to September 1985, it did not reimburse Edwards for the costs of the production mold.

Sometime in 1983, without the knowledge or consent of the Corporation, Edwards, in his own name, secretly applied for a patent on the seal being used by the Corporation in the Autoswab. The patent, Patent No. 4,528,896, was granted July 16, 1985, in Edwards’ name. On July 29, 1985, Gramling called a meeting of the shareholders of the Corporation to discuss a proposal that he had negotiated to sell the Corporation for $2.6 million. At that meeting, Gramling refused to divulge specific information about the sale to Edwards, who refused to vote in favor of the proposal.

After the meeting, Edwards revealed to the other shareholders for the first time that he had secretly obtained a patent on “his design of the seal.” Gramling immediately demanded that Edwards assign the patent to the Corporation, and Edwards refused. The proposed sale could not be consummated unless the patent was assigned to the Corporation and included in the deal. Thereafter, relations among the principals steadily declined. Edwards was removed as secretary-treasurer of the Corporation, although he continued to occupy a seat on the board of directors.

Gramling demanded that Edwards return the Corporation’s books and records, and Edwards complied. Gramling also demanded Edwards turn over all molds. After building the four-cavity mold, Edwards had used the Corporation’s single-cavity mold to attempt to design yet another seal. The single-cavity mold was returned, but as a result of Edwards’ alteration of the mold, it was no longer usable by the Corporation to produce the seal.

Edwards refused to turn over the four-cavity mold ,to the Corporation. ⁵⁴¹ Edwards advertised in trade journals for sale of the seals and, ultimately, his corporate stock. In 1987, Edwards demanded a statement of the affairs of the Corporation which Gramling refused to provide. Edwards filed suit for wrongful denial of a corporate statement of affairs. The Corporation counterclaimed alleging (1) breach of fiduciary duty, (2) tortious interference with a valid business expectancy, (3) conversion, (4) intentional interference with advantageous contractual arrangements, and (5) defamation.

In addition to compensatory and punitive damages, the Corporation sought an injunction directing Edwards to assign the patent at issue and all present and future patent applications and patents related to the Autoswab to the Corporation, to refrain from interfering with the sale of the Corporation or its assets, and to return all corporate property in Edwards’ custody or control to the Corporation. Edwards demanded a jury trial in his answer to the counterclaim. The intentional interference with advantageous contractual arrangements count was dismissed, and the defamation claim was withdrawn. By the time the case came on for trial, the Corporation had provided Edwards with a statement of affairs.

The issue of damages for wrongful denial of a corporate statement of affairs was tried to the court, and the court dismissed the complaint because most of the issues were moot and no damages had been proved. The remaining three counts of the counterclaim were tried before a jury, which rendered a special verdict on the following questions: “1. Did Ronald Edwards breach his fiduciary duty to Gramling Engineering Corporation? 2. Did Ronald Edwards tortiously interfere with a valid business expectancy of Gramling Engineering Corporation? ... 3.

Did Ronald Edwards convert corporate property to his own use?” The jury answered question 1 in favor of the Corporation and questions 2 and 3 in favor of Edwards. In accordance with that verdict, the court entered an order dismissing the ⁵⁴² tortious interference and conversion counts. The court also issued an injunction requiring that Edwards assign Patent No. 4,528,896 to the Corporation, enjoining Edwards from engaging in any activity related to the patent or products covered thereby, and requiring that Edwards turn over the four-cavity mold used to produce the patented seal to the Corporation. Edwards appealed to the Court of Special Appeals, and we granted certiorari while the case was pending before that court.

On appeal, Edwards claims that the circuit court erred in granting injunctive relief because that relief is inconsistent with the jury’s verdict, thereby depriving him of the benefit of the jury trial. He further claims that the trial judge erred in granting injunctive relief on the special verdict without making specific findings of fact. Edwards also contends that, because of federal preemption, the trial court was without subject matter jurisdiction to determine entitlement to the patent and to order him to assign it to the Corporation. We will take each of these contentions in turn.

I. GRANTING INJUNCTIVE RELIEF We examined the impact of the merger of law and equity on the right to jury trial in Higgins v. Barnes, 310 Md. 532 , 530 A.2d 724 (1987). In that case, we observed, “Maryland Rule 2-301, abolishing the separation of law and equity states: ‘There shall be one form of action known as “civil action.” ’ Federal Rule of Civil Procedure 2, accomplishing the same purpose, provides: ‘There shall be one form of action to be known as “civil action.” ’ The essentially identical language of the two rules is not coincidental. The commentary to Md. Rule 2-301 specifically notes that the rule ‘is derived’ from the Federal Rule. For this reason, and because Maryland courts have traditionally relied on the federal courts’ interpretations of analogous rules as persuasive authority, East v. Gilchrist, 293 Md. 453, 459 , 445 A.2d 343 (1982); Edmonds v. Lupton, 253 Md. 93, 99 , 252 A.2d 71 (1969), we turn to ⁵⁴³ the federal case law for guidance in defining the scope of the right to jury trial in Maryland.” 310 Md. at 543 , 530 A.2d at 729 .

Federal courts have supplied guidance that assists us in our review of the instant case. First, federal courts have held that, where equitable claims are to be resolved by the court and legal claims are to be resolved by the jury, the judge is “ ‘without power’ to reach a conclusion inconsistent with that of the jury.” Gutzwiller v. Fenik, 860 F.2d 1317, 1333 (6th Cir.1988); accord, Dybczak v. Tuskegee Institute, 737 F.2d 1524, 1526-27 (11th Cir.1984), cert. denied, 469 U.S. 1211 , 105 S.Ct. 1180 , 84 L.Ed.2d 328 (1985). See also 5 J. Moore & J. Lucas, Moore’s Federal Practice, para. 38.13 (2d ed. 1988). Second, as the Supreme Court has recognized, “Where there is a view of the case that makes the jury’s answers to special interrogatories consistent, they must be resolved that way.

For a search for one possible view of the case which will make the jury’s finding inconsistent results in a collision with the Seventh Amendment.” Atlantic & Gulf Stevedores, Inc. v. Ellerman Lines, 369 U.S. 355, 364 , 82 S.Ct. 780, 786 , 7 L.Ed.2d 798, 807 (1962). See also 5A J. Moore & J. Lucas, Moore’s Federal Practice, para. 49.03[4] at 39 (1990). Edwards claims that the relief granted for his breach of fiduciary duty, i.e., ordering him to assign the patent and turn over the four-cavity mold to the Corporation, is inconsistent with the jury’s finding in his favor on the tortious interference and conversion counts. It is Edwards’ position that “the jury found that Edwards did not interfere with any of [the Corporation’s] business expectations, and that he did not convert [the Corporation’s] property to his own use.

The patent to the seal and the four cavity mold used to make the seals were the only properties at issue: The jury found no misconduct on Edwards’ part with respect to either.” Edwards evades the fact that the jury did find misconduct in his breach of fiduciary duty to the Corporation. He admits in his brief: ⁵⁴⁴ “There is evidence that Edwards did the following, any one of which could have been the act upon which the jury based its finding: Did not place the Gramling Engineering corporate name on the mold and seal; ordered the four cavity mold in his own name, and insisted on removing [the Corporation’s] name from the purchase order; disregarded the instructions of the other officers in ordering the new mold; obtained the patent; ... attempted to sell his patent ...; wrote to [a corporate distributor] to tell him to stop selling Autoswabs because of his patent on the seals, and in 1986, took out advertisements in trade papers advertising the sale of the seals and his stock____” (Emphasis added.) Edwards argues that it is not clear from the verdict which activity may have formed the basis for the jury’s finding. Therefore he surmises that, to be consistent, the jury’s finding of a breach of fiduciary duty must have been independent of the activities concerning the mold and the seal. Edwards’ argument depends on the assumption that the jury verdict in his favor on the conversion count is tantamount to a finding that he owned the patent.

This assumption is erroneous. We may not conclude that Edwards rightfully owns the patent simply because the jury returned a verdict in Edwards’ favor on the conversion count. The finding of the jury may merely indicate that the Corporation failed to meet its burden of proof on that count. On the conversion claim, the trial judge, without objection, instructed the jury, in part, as follows: “Count Number Three is a count for conversion, and conversion, just in lay language, means to convert.

In legal language, a conversion occurs when a person, without authority or permission, intentionally takes the personal property of another person or corporation. To constitute a conversion, the acts must be positive and tortious; that is, there must be a taking without the ⁵⁴⁵ corporation’s consent, either expressed or implied.” (Emphasis added.) There are at least two possible scenarios under which a jury could find there was no conversion. The scenario which forms the basis of Edwards’ contention is that there was no conversion because he was the rightful owner of all property in question. It is equally possible, however, that the jury found that there was no conversion because he did not tortiously take any property even though he wrongfully applied for and obtained the patent in his own name without the Corporation’s consent.

The mere fact that Edwards applied for the patent in his own name may not have amounted to a conversion and may not initially have been improper. It is generally recognized that “[corporations ... cannot apply as such for a patent.” 5 A. Deller, Deller’s Walker on Patents § 439 at 59 (2d ed. 1972); 3 E. Lipscomb III, Lipscomb’s Walker on Patents § 9:43 at 75 (3d ed. 1985). Patents are freely assignable. 35 U.S.C. § 261 (1988). Therefore, Edwards could have obtained the patent in his fiduciary capacity and held it for the benefit of the Corporation or assigned it to the Corporation once it was issued.

Under the second scenario, the jury’s verdict for Edwards on conversion is consistent with the verdict for the Corporation on breach of fiduciary duty. The counterclaim for breach of fiduciary duty in this case alleged that “Edwards, with full knowledge that the development of a commercially viable improved seal was entirely a corporate undertaking and opportunity, breached his fiduciary duty to [the Corporation] by filing a patent application and obtaining Patent No. 4,528,896 solely in his own name for the improved seal that had been developed by and through [the Corporation]. Edwards’ patent application was based entirely on knowledge obtained while serving as an officer and director of [the Corporation].” “Edwards thus subordinated the interests of the corporation to his own personal interests and by obtaining a ⁵⁴⁶ patent on the improved seal took for himself an opportunity which belonged to the corporation.” “Edwards has further breached his fiduciary duty to [the Corporation] by purporting to use Patent No. 4,528,-896 to impede and block a proposed sale of the corporation or its assets, and to prohibit [the Corporation] from manufacturing and marketing seals covered by the patent, and by attempting to sell the patent for his own personal gain. As a result, the proposed sale of the corporation or its assets has not been possible and [the Corporation] has suffered substantial injury to its reputation and good will in the business community.” “By reason of Edwards’ wrongful conduct, [the Corporation] has suffered damages in an amount as yet undetermined, and unless his continued wrongful conduct is restrained [the Corporation] will suffer further irreparable injury.” (Emphasis added.) There is ample evidence in this case to show that Edwards embarked on the development of the improved seal and manufacture of the four-cavity mold on behalf of the Corporation and in his capacity as an officer and director of the Corporation in the hope that the Corporation would ultimately reimburse him for his expenditures.

He so states in his testimony at trial: “Q Who, in fact, paid for that four cavity mold to be manufactured? A I did. Q And at the time you placed the order, what were your feelings in terms of who you wanted to own that four cavity mold and that design? A Gramling Engineering.

Q In regard to payment for the work that needed to be done, they had told you they weren’t going to pay before you entered— A That’s true. Q Did you have a belief as to whether or not their position in regard to payment would change or a hope? ⁵⁴⁷ A Yes. Q And what was that belief or hope? A Well, sometimes people come around, you know.

That’s an expression you use, you know, when people come to their senses as to whether or not, you know, it was proper.” It was only later, when the Corporation persisted in its refusal to pay for this