Optic Graphics, Inc. v. Agee

ALPERT, Judge. In this case we are asked to decide (1) whether internal operating information (internal business facts) consisting of marketing strategy and pricing information are trade secrets under Maryland’s Uniform Trade Secrets Act (the Act), and (2) under what circumstances a trial court appropriately may impose sanctions under section 11-1204 of the Act and Maryland Rule 1-341 for bad faith in conducting litigation. FACTS AND PROCEEDINGS Optic Graphics, Inc. (appellant) is a Maryland corporation located in Glen Burnie, Maryland, which engages in the graphic arts business. Optic primarily operated as a printing company from its inception in the early 1900’s until about 1980, when it began to manufacture vinyl looseleaf binders.

The company is a family business that currently is run by the founder’s grandson, David Kinlein. Kinlein, a thirty-six-year-old business graduate, is the company’s president and chief executive officer. His mother, Carolyn Wilder, is the personnel director. The company employs about 375 ⁷⁷⁵ people.

In 1989, its gross revenues approached 27 million dollars. In July 1987, Optic hired Ross Agee (appellee) to work as an estimator for its printing department. Optic had solicited Agee in April 1987 while he still was employed by Sheridan Press. Sheridan terminated Agee in June 1987, after a reorganization.

Seeking employment, Agee contacted a number of printing companies. Three, including Optic, extended him offers of employment. Of these, Optic was the only company that manufactured vinyl looseleaf binders. On or about July 27, 1987, Agee began work with Optic as an estimator in its printing department.

When the company reorganized its corporate structure in January 1988, it gave Agee responsibility for all of Optic’s estimating functions, i.e., both the printing and looseleaf binder divisions. Agee estimated the cost of materials and labor required to complete those jobs on which Optic planned to submit a bid. The method by which he did so “consisted of matching job specifications to a plan to produce a product in terms of production standards 1 and budgeted hourly rates.” 2 To perform this function, Optic necessarily had to give Agee access to certain information that the company considered to be confidential: pricing, material cost, markups, profit margins, machine cost rates, production rates, and marketing strategies. Agee had a long-time friend, Michael Zanella (appellee), whom he had met when they both were employees at Port City Press, another graphic arts company engaged primarily in printing.

The two had discussed starting their own printing business on and off for a number of years. In 1980, Bindagraphics Corporation — one of Optic’s competi ⁷⁷⁶ tors — hired Zanella to work in its vinyl looseleaf manufacturing business where he remained until his resignation in December 1989. When Sheridan terminated Agee in June 1987, he and Zanella resumed their informal discussions about starting a business. They contacted a business broker that year and asked the broker to be on the lookout for a small printing company.

Early in 1988, Agee and Zanella learned that Specialties Binder, a looseleaf bindery business, was for sale. They held a number of informal discussions with the owner, a Mr. Ridgeway, but failed to reach an agreement for the purchase of the business. In December 1988, Ridgeway informed them that he had sold the business to a Canadian printing company. The pair lost their momentum until they again contacted Ridgeway in the spring of 1989.

Ridgeway indicated that although he had completed the sale, he had retained the vinyl division and its equipment, and wanted to resume negotiations. In June 1989, Agee and Zanella agreed to purchase the vinyl looseleaf binder manufacturing business. The pair then formed “A to Z Enterprises, Inc.” 3 (appellee), a Maryland corporation, to conduct the business. The corporation apparently had neither assets nor customers at that time.

From June through August 1989, Agee and Zanella researched and prepared a formal business plan to secure financing for the business. Agee and Zanella continued to work for their respective employers through December 1989, working on their new business venture at night and on the weekends. ⁷⁷⁷ Early in 1989, Optic developed a formal marketing plan for its future growth; Agee received a copy of the plan, and had this information available when he and Zanella prepared their financing proposal that summer. In its complaint, Optic alleged, inter alia, that Agee and Zanella had incorporated a portion of its marketing strategy into A to Z’s financing proposal. 4 It further alleged that the two then disclosed this marketing strategy, as well as other confidential information, to various third parties without Optic’s knowledge or consent. 5 In October 1989, Agee and Zanella tentatively secured financing through a Small Business Administration (SBA) loan; settlement was scheduled for early February 1990. Agee tendered his resignation to Optic’s treasurer, John Strauss, on December 26, 1989, informing Strauss that he was going into his own business with Zanella.

At that time, A to Z Looseleaf, Inc. was not yet operational. The company had no assets, contracts, customers, or prospective customers. Neither Agee nor Zanella had contacted any vendors. On January 24, 1990, Optic filed suit against Agee, Zanella, and A to Z Looseleaf, Inc., asking for damages and ex ⁷⁷⁸ parte injunctive relief. 6 In its complaint, Optic alleged that Agee and Zanella had misappropriated Optic’s trade secrets, that Optic as a result had sustained damages, the nature and extent of which were not yet known, and that Agee had breached his confidentiality agreement with Optic when he used and disclosed Optic’s trade secrets.

Optic attached and incorporated into its complaint a faxed copy of the “Confidentiality Agreement” that Agee allegedly executed in July 1987. 7 The suit effectively impeded Agee’s and Zanella’s plans to move forward with their business. 8 Agee and Zanella waived the hearing, scheduled for February 2, 1990, on Optic’s request for an ex parte injunction. The parties held four meetings in late January and early February to discuss settlement. These negotiations ultimately failed. At the final meeting, Agee returned to Optic a number of confidential documents that included pricing information for one of Optic’s largest customers, raw material costs, and information about the machines that it used in its manufacturing process. 9 ⁷⁷⁹ On February 13, 1990, Agee and Zanella filed a motion to dismiss the complaint.

The circuit court scheduled the matter for trial on March 16, 1990. At his deposition on March 6, 1990, Agee for the first time questioned whether the signature on the photocopied confidentiality agreement in the personnel file that Optic produced was his. Agee had requested the opportunity to view the original document about one month prior to his deposition. Optic’s personnel director, Carolyn Wilder, allegedly sent the original to 20 South Charles Street, Agee’s counsel’s former address.

No one ever found the letter. On March 8, 1990, Agee and Zanella retained a handwriting expert, Gary Girton of the Maryland State Crime Laboratory, to examine the documents, i.e., the photocopy and the faxed copy. He concluded that the signature on the documents was an imitation forgery. 10 On March 9, 1990, Agee and Zanella withdrew their motion to dismiss and answered Optic’s complaint. On March 13, 1990, by faxed letter dated March 12, 1990, Agee’s counsel advised Optic’s counsel that Girton would testify that the signature was an “imitation forgery,” and provided opposing counsel with the expert’s written report and conclusions.

On March 14, 1990, Agee amended his answer to include a negative defense, in which he denied that he had signed the “Confidentiality Agreement.” Optic’s counsel attempted to settle the case on March 14, 1990. Optic’s terms included a dismissal with prejudice and a mutual release. Agee and Zanella agreed to execute the ⁷⁸⁰ releases if Optic paid them $150,000. Optic declined to do so.

On the day of trial, Agee and Zanella reduced their demand to a dismissal with prejudice, but reserved the right to request sanctions. Optic rejected the offer and proceeded to a trial on the merits. After a two and one-half day trial, the trial court rejected Optic’s claims for injunctive relief and damages and found in favor of Agee, Zanella, and A to Z Looseleaf, Inc. On March 26, 1990, the trial court entered final judgment, which reserved the right of Agee and Zanella to request attorneys’ fees and costs. On March 30, 1990, the pair applied for attorneys’ fees and costs pursuant to Maryland Rule 1-341 and section 11-1204 of Maryland’s Uniform Trade Secrets Act, asserting that Optic had pursued the suit in bad faith.

Optic moved the court to alter or amend its ruling that there was no misappropriation of trade secrets. The circuit court held a hearing on Optic’s motion to alter or amend the judgment and on the motion of Agee and Zanella for sanctions. The court denied Optic’s motion to alter or amend. After hearing argument on the motion for sanctions, the trial court assessed attorney’s fees and expenses for Optic’s continuance of its action after March 13, 1990 — the date that Optic’s president learned by faxed letter dated March 12, 1990 that someone had forged Agee’s signature on the confidentiality agreement.

It is not clear, however, whether the court also found that Optic had initiated the action in bad faith. See discussion infra in part II of this opinion. The court ordered Optic to pay Agee’s and Zanella’s attorneys’ fees and costs of $25,000. Both sides had stipulated to this figure as representing all of their legal fees and expenses from March 14, 1990 through April 30, 1990.

The court entered final judgment on May 21, 1990. Optic filed an appeal from that judgment. At the same time, Agee and Zanella filed a cross-appeal from the trial ⁷⁸¹ court’s refusal to award sanctions from January 24, 1990, the date the action commenced. On appeal, Optic asks us whether: I. The trial court erred when it found that Optic had failed to establish the existence and misappropriation of trade secrets.

II

The trial court erred when it imposed sanctions against Optic. On cross-appeal, Agee and Zanella ask us whether: III. The trial court erred when it refused to award sanctions from the date that Optic commenced its action. I. Optic contends that appellees misappropriated its trade secrets.

Specifically, Optic asserts that the information which Agee retained — pricing information, raw material costs, and marketing strategy — constitutes trade secrets protected by the State’s Uniform Trade Secrets Act. Optic also contends that Agee misappropriated this information when he wrongfully retained it and subsequently disclosed it to Zanella and to potential lenders without Optic’s knowledge or consent. We begin by noting the conspicuous absence of an enforceable covenant to restrict competition. Recently we observed that the Court of Appeals held absent an enforceable covenant restricting competition, an employee may make arrangements to compete with his former employer before termination of his services, but he may not solicit customers or directly compete while still employed.

The right to prepare to compete is limited only where the employee ‘has committed some fraudulent, unfair or wrongful act’ in the course of his preparation. Moreover, an employee is not required ‘in all cases [to] tell his employer of his future plans to become a competitor.’ Once the employment relationship is terminated, the employee may solicit his former employer’s ⁷⁸² business absent an enforceable covenant restricting competition, misuse of trade secrets, or misuse of confidential information. Dworkin v. Blumenthal, 77 Md.App. 774, 779 , 551 A.2d 947 (1989) (citations omitted). Courts for the most part have adopted one of two views as to what constitutes a trade secret. 11 See Annotation, What Is “Trade Secret” So As To Render Actionable Under State Law Its Use or Disclosure By Former Employee, 59 A.L.R. 4th 641 , 652 (1988).

One view is found in the Restatement of Torts, see Restatement of Torts § 757 (1939); the other is found in the Uniform Trade Secrets Act, see Unif. Trade Secrets Act, 14 U.L.A. 433 (1985). The Court of Appeals adopted the Restatement definition of “trade secret” in Space Aero Products Co., Inc. v. R.E. Darling Co., Inc., 238 Md. 93, 110 , 208 A.2d 74 , cert. denied, 382 U.S. 843 , 86 S.Ct. 77 , 15 L.Ed.2d 83 (1965). Under the Restatement view, ‘[a] trade secret may consist of any formula, pattern, device or compilation of information which is used in one’s business, and which gives him an opportunity to obtain an advantage over competitors who do not know or use it.

It may be a formula for a chemical compound, a process of manufacturing, treating, or preserving materials, a pattern for a machine or other device, or a list of customers.’ Id., at 105, 208 A.2d 74 (quoting Restatement of Torts § 757 comment b (1939)); see also Note, Maryland Uniform ⁷⁸³ Trade Secrets Act, 49 Md.L.Rev. 1056, 1060 (1990) [hereinafter Note]. The court also adopted the Restatement’s list of factors to be used in determining whether particular information qualifies as a trade secret: ‘(1) the extent to which the information is known outside of his business; (2) the extent to which it is known by employees and others involved in his business; (3) the extent of measures taken by him to guard the secrecy of the information; (4) the value of the information to him and to his competitors; (5) the amount of effort or money expended by him in developing the information; (6) the ease or difficulty with which the information could be properly acquired or duplicated by others.’ Id. at 110, 208 A.2d 74 (quoting Restatement of Torts § 757 comment b (1939)); see also Note, supra, at 1060-61. On July 1, 1989, Maryland adopted the Uniform Trade Secrets Act (the Act). 12 See Act of July 1, 1989, ch. 598, 1989 Md. Laws 3642 ; see also Md.Com.Law Code Ann. § 11-1201 to -1209 (1990). To the extent that the Restatement presents a narrower view, the Act pre-empts that definition.

See Note, supra, at 1061 n. 36 & 1061-66. Maryland’s Uniform Trade Secrets Act defines “trade secret” as follows: ‘Trade Secret’ means information, including a formula, pattern, compilation, program, device, method, technique or process, that: (1) Derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons ⁷⁸⁴ who can obtain economic value from its disclosure or use; and (2) Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy. Md.Com. Law Code Ann. § ll-1201(e)(l) & (2) (1990).

This definition clearly “is based on the Restatement comment____” 13 Note, supra, at 1061. Although all of the Restatement’s factors no longer are required to find a trade secret, those factors still provide helpful guidance to determine whether the information in a given case constitutes “trade secrets” within the definition of the statute. See Minuteman, Inc. v. Alexander, 147 Wis.2d 842 , 434 N.W.2d 773, 777 (1989). There are two types of trade secrets: technological developments and internal operating information.

See 2 R. Call-man, The Law of Unfair Competition, Trademarks, and Monopolies § 14.06, at 35 (4th ed. 1982 & Supp.1991). Technological developments are “independent of any connection with a particular company.” Id. Internal operating information (internal business facts) “relat[es] to a particular business organization.” Id. At issue in this case are internal business facts peculiar to Optic and whether these are “trade secrets” within the meaning of the Act.

In determining whether the information constituted “trade secrets,” the trial court relied on the Restatement factors enumerated supra. As to the pricing information, the court made the following findings: The extent to which the information is known outside of the business; some of that might be known, some of it might not be. ⁷⁸⁵ The extent to which it is known by employees; some employees know, some don’t. The extent to which measures are taken to guard the secrecy; the plaintiffs certainly have fallen very short of that in many ways, because they didn’t get these things [the Confidentiality Agreement] signed by the key employees that they should have, and the ones that they had, at least the most important one in this case[,] was lost.[ ] The value of the information to him or his competitors. That is always subject — that cannot be an objective test.

It is sort of always a subjective test. Amount of effort or money expended in developing the information; that comes through the years. That probably costs a lot of money, and the test has been met by the plaintiffs, but that will continue to cost money, because things do change. [] The ease or difficulty with which the information could be promptly acquired or duplicated by others. I don’t think it could ever be duplicated by others in this particular shop.

The question, I think, is whether or not this information is of such importance it is meaningful to the defendants, and I cannot say that it indeed is meaningful to the defendants, because it is, number one, subject to change; number two, subject to the market; number three, subject to machinery, cost of living increases and employees running machinery. There are so many variables, it is hard to say whether this will be in place one day, one year, or one century. The court believes that the pricing information is not a trade secret. With respect to the marketing strategy, the court said I can see where the plaintiffs might believe that that is a trade secret, but it is nothing more than a strategy, which if one goes into the marketplace, you could find that salespeople call on you or not by simply going to people who are purchasers and saying did Optics call you, ⁷⁸⁶ did A to Z call you, or did anybody call you.

So the information is available, and it’s always subject to change[.] Also, because with the profitability that Optics has encountered, some twenty-three million back in 1988, maybe twenty-seven million in ’89, their objectives are different, and obviously from what the evidence has produced, the objectives of the defendants in this case, A to Z, are different. Whether or not that information is used or could be used is certainly not before this court. All I can tell you is that Mr. Agee has said I will not use that information, and how one determines whether or not he uses it as an impossible question that this court nor any other court can answer. Nor maybe a psychiatrist or psychologist could answer, because one would have to look into the mind of Mr. Agee and figure the intent out from a pricing number that he gives to his future purchasers. ---- The marketing numbers are variable also, and I don’t think that they could be ascertained to be a trade secret.

I find from the evidence that there are no trade secrets. The court concluded by making additional comments about the evidence. Number One, there is no use of this information. Even if it were found to have been a trade secret, there is no use to the detriment of the plaintiff at this time shown by the evidence.

There is no evidence that there is a violation of a contract which was allegedly signed by Mr. Agee, but which the court has to find was not signed by Mr. Agee. There is no original and no evidence that it was ever signed by Mr. Agee. In fact, it is emphatically denied. So there is no signature on that other than someone who, apparently at Optics, whoever that might be, signed that.

There is no evidence of use or misuse. There is no evidence of damages to the plaintiffs at this time. ⁷⁸⁷ The court has found that even if these items are trade secrets, they’re peculiar to the plaintiff, and that is who can use these to the best advantage. Maryland Rule 8-131(c) delineates the scope of our review in this case. See Operations Research, Inc. v. Davidson & Talbird, Inc., 241 Md. 550, 556 , 217 A.2d 375 (1966); Space Aero Products Company, Inc. v. R.E. Darling Co., Inc., 238 Md. 93, 106 , 208 A.2d 74 (1965).

The rule provides that [w]hen an action has been tried without a jury, the appellate court will review the case on both the law and the evidence. It will not set aside the judgment of the trial court on the evidence unless clearly erroneous, and will give due regard to the opportunity of the trial court to judge the credibility of the witnesses. Md.R. 8-131(c). Pricing information and marketing strategy are protectable as “trade secrets.” See, e.g., S.I. Handling Systems, Inc. v. Heisley, 753 F.2d 1244 , 1260 (3d Cir.1985) (pricing information); Air Products & Chemicals, Inc. v. Johnson, 296 Pa.Super. 405 , 442 A.2d 1114, 1122 (1982) (marketing strategy).

As noted supra, there are two