Summary
In Bump Pump Co. v. Waukesha Foundry Co. (1941), 238 Wis. 643, 300 N.W. 500, this court applied the exception of good faith as one of the grounds in relieving the defendants from the doctrine of "corporate opportunity" which the plaintiffs sought to invoke against them.
Summary of this case from Gauger v. HintzOpinion
October 7, 1941 —
November 4, 1941.
APPEAL from a judgment of the circuit court for Waukesha county: EDWARD J. GEHL, Circuit Judge. Affirmed.
For the appellant there were briefs by Jacobson Malone of Waukesha and Hale Skemp of La Crosse, and oral argument by D. B. Malone and Quincy H. Hale.
For the respondents there was a brief by Harvey J. Frame of Waukesha and Paul R. Newcomb of Milwaukee, attorneys, and Miller, Mack Fairchild of Milwaukee of counsel, and oral argument by Mr. Newcomb and Mr. Frame.
Action by the Bump Pump Company against Waukesha Foundry Company and C. C. Smith commenced October 15, 1938. From a judgment entered January 6, 1941, dismissing the complaint, the plaintiff appeals.
The case was tried to the court. The court found in substance as follows: The plaintiff is a corporation manufacturing pumps since its organization in 1932. The Waukesha Foundry Company, hereinafter referred to as the "Foundry Company," is a corporation located at Waukesha, engaged among other things in operating a foundry. The Foundry Company through a secret process developed a metal alloy which it manufactured and sold under the trade name of "Waukesha Metal." It began in 1914 to manufacture and sell castings of this metal. The alloy is corrosion resistant and is used extensively in metal equipment used in the handling and processing of food products. In 1930 such use of Waukesha metal fittings and castings was well established throughout the United States and the Foundry Company was well known in the dairy industry because of the successful and general use in such industry of its such equipment.
In 1930 the Foundry Company and the Waukesha Specialty Company, which were both engaged in selling to the dairy industry equipment made of Waukesha metal began by personal calls on the trade, exhibitions at dairy and other shows, and advertisements to acquaint the dairy and carbonated-beverage industries with a rotary pump of Waukesha metal manufactured for these companies by the Bump Manufacturing Company of La Crosse, predecessor of the plaintiff, and hereinafter referred to as the "Pump Company." These companies, through 1930, 1931, and 1932, continued diligently to follow this course and to develop a pump which would meet the demands of these industries.
The Foundry Company manufactured the Waukesha metal castings used in the Pump Company's pumps, and both the Foundry Company and the Specialty Company ordered the pumps they sold to these industries from the Pump Company and sold them at prices they themselves fixed. The pumps were manufactured by the Pump Company only as ordered by the Foundry Company and Specialty Company. The Pump Company billed the pumps ordered and the bills were paid by these respective companies, and these companies stood all losses resulting from defaults of customers.
In 1932 the Pump Company made an assignment to a trustee for the benefit of its creditors. The trustee continued the business for a time, and the Foundry Company and Specialty. Company continued to order from the trustee, and the trustee to manufacture and fill orders as theretofore. The assets of the Pump Company were thereafter sold to certain persons for $4,000. The plaintiff corporation was then organized and purchased these assets and the assets were transferred to the plaintiff for forty shares of its stock. The Foundry and Specialty Companies continued to deal with the plaintiff as they had theretofore dealt with the Pump Company and its trustee. The Foundry Company from its contacts with users of the pumps learned the different capacities of pumps suitable for use in the dairy and food industries and designated the various capacities and sizes to be manufactured for it. Each such capacity was designated by a number established by the Foundry Company, and the Foundry Company from time to time designated changes in the various numbers to improve them for use in the dairy and food industries.
In 1933 the Foundry Company had calls for high-pressure pumps for homogenizing. The Foundry Company made plans, specifications, and blue prints for such pumps for such purpose and sent them to the plaintiff for the manufacture of high-pressure pumps in accordance therewith. The plaintiff was unable to manufacture high-pressure pumps that would operate successfully. The Foundry Company paid the plaintiff for its work done in this behalf, and the plaintiff returned the plans, blue prints, and specifications and the castings sent to it by the Foundry Company for the manufacture of the high-pressure pump. The Foundry Company then engaged an engineer named Hansen, owning a plant at Cedarburg, to make a high-pressure pump for it. Hansen did not succeed in making such a pump to work successfully, but in prosecuting his efforts in that behalf developed a split shaft and rotary seal to be used in connection therewith suitable for use on the pumps the plaintiff was making for the Foundry Company. Hansen, at direction of the Foundry Company, applied for a patent on these devices. An application therefor was made in October, 1935, and granted in December, 1937, and the patent was assigned to the Foundry Company. The Foundry Company notified the plaintiff of the doings in this behalf in February, 1936. Neither plaintiff nor the Foundry Company has manufactured or sold high-pressure pumps.
Both the Foundry Company and the Specialty Company continued to order pumps from the plaintiff until June 26, 1936, when the Specialty Company ceased to and thereafter the Foundry Company alone so ordered, and alone paid all expenses of exhibiting and advertising the pumps and circulating the catalogues and other sales material used in selling. It also paid all expenses of selling, fixed its own sale prices, assumed all credit risks, and from time to time had changes made in the pumps ordered from plaintiff to improve them for use in the dairy and food industries.
The defendant Smith, on solicitation by the plaintiff, became a director of the plaintiff corporation in 1935 by reason of his being an officer in the Foundry Company, which owned stock of the plaintiff corporation. Smith owned no stock in the plaintiff. He was one of the principal stockholders of the Foundry Company, president thereof and one of its directors. He was actively in charge of the Foundry Company's business and affairs and conducted a large part of the negotiations and correspondence of the Foundry Company with the plaintiff. All this was known to the plaintiff when Smith became one of its directors. Smith attended a number of meetings of the plaintiff's board of directors for the purpose mainly of informing the plaintiff of defects in the pumps it was buying from it, of improvements that could be made upon it, and of complaints of the trade relating to it, all which Smith as president of the Foundry Company rather than as director of the plaintiff, had discovered. Smith's participation in the general affairs of the plaintiff company was minor. Its general affairs were managed by the other directors.
The Foundry Company repeatedly endeavored to get the plaintiff to manufacture for it a rotary seal and split shaft with which to equip the pumps ordered by the Foundry Company because such equipment was insisted on by many of its customers and because the use of pumps without such equipment in the dairy and food industries was prohibited by the health departments in various cities. The rotary seal of the Foundry Company is a seal on the pump shaft which prevents leakage when the pump is operating. It uses packing superior to the fiber packing ordinarily used and renders the pump more sanitary. The split shaft can be pulled apart and removed from the pump and the bearings in the rotary seal on which it operates can thereby be more readily cleaned and rendered sanitary.
From 1933 to 1937 the Foundry Company repeatedly requested of the plaintiff a written contract covering its relations with it. The plaintiff refused to enter into a written contract. In January, 1937, defendant Smith, representing the Foundry Company at a directors' meeting of the Pump Company demanded a written contract covering the manufacture of pumps by the plaintiff for the Foundry Company. During the discussion Smith was told that the plaintiff was contemplating selling pumps directly to the dairy and food industries, and although this had not been decided upon the plaintiff for this reason did not wish a written contract. Because of this statement Smith feared that if plaintiff sold direct to these industries the Foundry Company would lose the trade with these industries that it had developed at great expense. To prevent this the Foundry Company decided to develop a pump for itself so as to be able to supply its trade in case the plaintiff should refuse to manufacture pumps for it. Therefore in February, 1937, the Foundry Company began experimental work on a pump with a rotary seal and split shaft which it could sell if plaintiff refused to supply it. This fear was justified because the plaintiff during 1937 made plans to sell pumps directly to the dairy and food industries in competition with the Foundry Company.
The Foundry Company continued the experimental work stated until a meeting of the directors of the plaintiff on November 12, 1937. Defendant C. C. Smith and R. F. Smith attended this meeting representing the Foundry Company. They told the directors of plaintiff that the Foundry Company had developed a new pump in which a split shaft and rotary seal were used which were covered by a patent held by the Foundry Company. They also informed the directors that the Foundry Company did not want to go into the business of manufacturing pumps, but did want to continue in the business of selling pumps manufactured for it by the plaintiff, and wanted the plaintiff to manufacture the rotary seal and split shaft it had developed because these were required by a large number of its customers and certain health authorities. The Smiths then submitted to the directors of plaintiff a form of written contract which they proposed. The directors requested to submit this proposed contract to their attorney who was then out of the city. During November arrangement was made to have some of the old-style pumps changed to use the defendant's rotary seal, the Foundry Company to make the changes.
On November 26th the plaintiff sent the Foundry Company two copies of a contract redrafted by the plaintiff, with which the Foundry Company was not satisfied. Because of this, R. F. Smith, vice-president and sales manager of the Foundry Company, attended a directors' meeting of the plaintiff on December 20, 1937, in order to adjust differences. It was agreed at this meeting that the existing arrangement should be continued, with certain modifications, one of which was that the plaintiff should manufacture a pump for the Foundry Company, using that company's rotary seat and split shaft. On December 23d, the Foundry Company sent to the plaintiff a letter stating its understanding of this agreement. The parties entered upon the carrying out of the agreement thus made and evidenced. The arrangement provided for the use of all material on hand into the old-style pump, and the sale of the pumps so manufactured, after which the new-style pump comprising the rotary seal and split shaft should be put on the market.
Thereafter, time not stated in the findings, the plaintiff by prearrangement sent its manager and chief engineer to the Foundry Company's plant. The Foundry Company gave to them instructions and all information it possessed relating to the manufacture of the rotary-seal and split-shaft pump, and gave them blue prints, patterns, specifications, castings, and one of the Foundry Company's new pumps in order to assist them in the new pump's manufacture. The Foundry Company agreed that the plaintiff might use its rotary seal and split shaft in any style of pump it might wish to manufacture. The plaintiff then ordered Waukesha metal castings for use in manufacture of the new pumps for the Foundry Company.
The pump developed by the Foundry Company differed from the pump the plaintiff was manufacturing for it in having the rotary seal and split shaft which the plaintiff's pump did not have. These parts would not fit into the pump of plaintiff and required a differently constructed pump. The plaintiff did not manufacture the new-style pump until late in 1938.
On January 25, 1938, the plaintiff wrote to the Foundry Company terminating their agreement. The plaintiff thereupon notified all Foundry Company's customers that it would sell direct all pumps manufactured by it and solicited their trade. The Foundry Company requested the plaintiff to reconsider its decision not to manufacture pumps for it. The plaintiff refused, and informed the Foundry Company that it was equipped to sell pumps and would not longer manufacture for the Foundry Company.
The customers purchasing pumps from the Foundry Company whom the Foundry Company had acquired through its own efforts and at its own expense during the years 1930 to 1937, inclusive, were the Foundry Company's own customers and not customers of the plaintiff, and the Foundry Company in selling the rotary-seal and split-shaft pump did not enter into competition with the plaintiff in a business which it had established prior to January 25, 1938. Prior to that time the plaintiff had no customers in the dairy and food industries to whom it sold pumps and had no business of selling pumps to such industries.
During 1937 there were no patents covering a rotary pump similar to the pump plaintiff manufactured for the Foundry Company. These pumps could be manufactured and sold by anyone. The sizes of the intake and outlet of the pumps used in the dairy and food industries were universal. The sizes of the pumps sold by the Foundry Company for use in those industries were established by the Foundry Company and not the plaintiff.
Immediately after January, 1938, the plaintiff attempted to injure the Foundry Company's business by soliciting its customers and notifying them it was no longer manufacturing pumps for the Foundry Company, all which was part of the plan to sell the plaintiff's pumps to defendant's customers formed early in 1937 and developed during that year and culminated on January 25, 1938, when the plaintiff terminated its contract with the Foundry Company.
The defendant Smith received no notice of directors' meetings of the plaintiff after January 25, 1938, and attended none. The plaintiff purchased no Waukesha metal castings from the Foundry Company after that date, except such as were necessary to fill orders thereto fore given by the Foundry Company, nor was such metal used by the plaintiff in manufacturing any pumps other than those so ordered.
The pumps manufactured and sold by the Foundry Company after January 25, 1938, were sold on their merits, because manufactured of Waukesha metal and because they comprised the Foundry Company's rotary seal and split shaft, and were not sold on the basis of imitation of any pump manufactured by plaintiff. The Foundry Company made its own patterns, drawings, and castings, and used none of the patterns, drawings, or advertising matter of the plaintiff's pumps.
Neither the Foundry Company nor the defendant Smith acted at any time with intent to injure the plaintiff or its business, nor in experimenting with and developing its rotary seal and split shaft did it do so with intent to sell pumps in competition with the plaintiff. They acted in good faith in all their dealings with plaintiff and did not conspire to injure or destroy the plaintiff. All done in developing the rotary seal and split shaft was done in good faith and solely for the purpose of protecting its established business in selling pumps to the dairy and food industries, which had become established before the defendant Smith became a director of the plaintiff. The plaintiff had established no business in the sale of pumps to the dairy and food industries on January 25, 1938, and the defendant's sale to such industries after said date in no way interfered with any business conducted by plaintiff prior thereto.
The plaintiff by its complaint claims damages from the defendants, both compensatory and exemplary, and asks the court to enjoin the defendants from manufacturing pumps in competition with the plaintiff, and for an accounting of profits made in their competing pump business. The contended basis of the action is that the defendant Smith, a director of the plaintiff corporation, contrary to his duties and obligations as such director, conspired with the Foundry Company to and did develop and patent a competing pump and secretly erected a plant for its manufacture and in 1938 commenced the manufacture and sale of its pump in competition with the pump of plaintiff. The Foundry Company filed a counterclaim wherein it demanded judgment for damages done to it by the plaintiff. The basis of this claim is that an oral contract existed between the two companies whereby the Foundry Company was to have the exclusive agency for the sale of the plaintiff's pump in the dairy and food industries, and lulled the defendant into developing a large sale of plaintiff's pumps in such industries on the understanding that the contract would be continued indefinitely, and after procuring the names of the Foundry Company's customers in said industries wrongfully terminated the contract. The court dismissed both the complaint and the counterclaim on the merits. The Foundry Company does not by appeal or by motion for review contest the dismissal of the counterclaim.
The court upon trial made findings of fact and conclusions of law which are stated preceding this opinion. It is believed that the above brief statement of the issues, the findings made by the court, determination whether they are supported by the evidence, and consideration of the law applicable thereto, will suffice to explain and justify the dismissal of the complaint.
The findings of fact referred to above are in large part in themselves evidentiary and in all respects are clearly supported by the evidence. As to the law applicable, the plaintiff in its brief relies for the most part on quotations from standard texts. These quotations and the conduct of the plaintiff both seem to us to show that the plaintiff "is hoist with its own petard."
Plaintiff quotes from 19 C.J.S. p. 160, § 785: "A director or managing officer may in good faith engage in a business competing with that of the corporation." Under this statement the plaintiff is manifestly out of court. It seeks to get back into court by continuing the quotation as follows: "But he cannot lawfully enter into a competing business which is of such nature as to injure the corporation; nor can he divert to himself a business which should properly belong to the corporation." The statements last quoted do not help the plaintiff. Neither Director Smith nor the Foundry Company is entering into a competing business. The Foundry Company is only continuing a business in which it had been engaged for eight years, in which the plaintiff was not in competition with the Foundry Company, but in which the plaintiff entered into competition with the Foundry Company. True, the plaintiff was manufacturing pumps, and selling pumps outside but not inside the dairy and food business, but the Foundry Company is not selling pumps outside those industries and is only itself manufacturing pumps for use inside said industries because the plaintiff refuses to manufacture them for it. And neither Smith nor the Foundry Company diverted any business to itself that properly belonged to the corporation; on the other hand the plaintiff endeavored to convert to itself a business that properly belonged to the defendant.
The plaintiff's brief continues the quotation from 19, C.J.S. p. 160, § 785:
"When acting in good faith, a director or officer is not precluded from engaging in distinct enterprises of the same general class of business as the corporation is engaged in."
This rule would justify the Foundry Company in manufacturing pumps even though it should sell them to the general trade. As if obviating this rule so far stated, plaintiff continues the quotation from C.J.S. as follows: "But he may not wrongfully use the corporation's resources therein." The defendant is not using the corporation's resources. The quotation continues: "Nor may he enter into an opposition business of such a nature as to cripple or injure the corporation." As above stated, neither Smith nor the Foundry Company is entering into an opposition business. The Foundry Company as above stated is only continuing a business it has been conducting for eight years. The plaintiff is in fact entering into a business in opposition to the Foundry Company.
Plaintiff's brief also quotes from 13 Am. Jur. p. 953, § 999, as follows:
"Generally, it is held that the directors or officers of a corporation are not, by reason of the fiduciary relationship they bear toward the corporation and stockholders thereof, precluded from entering into and engaging in a business enterprise independent from, though similar to, that conducted by the corporation itself, provided in doing so they act in good faith and do not interfere with the business enjoyed by the corporation.
"The directors or officers of a going, solvent corporation cannot, however, engage in a competing business to the detriment of the corporation which they represent."
The quotation next above, down to the proviso respecting good faith, justifies the conduct of Smith and the Foundry Company complained of. And the proviso is out of the picture because of the good faith of Smith and the Foundry Company. And the last sentence of the quotation is also out because the Foundry Company did not engage in the business the plaintiff was conducting in the manufacture and sale of pumps to the general public, but merely manufactured for sale in its own business because the plaintiff refused to continue to manufacture such pumps for it.
Plaintiff's brief also quotes at length from 3 Fletcher, Cyc. Corp. pp. 168, 170, § 856, with the same result of justifying the conduct of Smith and the Foundry Company of which it complains because the Foundry Company or Smith did not commit the excepted acts stated in the matter quoted.
We consider that the above sufficiently covers the instant case. With the finding of good faith on the part of defendant Smith as a director the whole case falls as the Foundry Company committed no wrong merely by accepting or receiving advantage from the acts of Smith which were not wrongful. The defendant's brief cites many cases more or less directly supporting the conduct of defendant Smith while a director of the plaintiff. Of these Barr v. Pittsburgh Plate Glass Co. (C. C.) 51 Fed. 33, (C.C.A. 3d Cir.), 57 Fed. 86; New York Automobile Co. v. Franklin, 49 Misc. 8, 97 N.Y. Supp. 781; Detroit Testing Laboratory v. Robison, 221 Mich. 442, 191 N.W. 218, 220; Gear Grinding Mach. Co. v. Stuber, 282 Mich. 455, 276 N.W. 514; American Stoker Co. v. Underfeed Stoker Co. (C. C.) 182 Fed. 642, are most closely in point and support the view above taken.
By the Court. — The judgment of the circuit court is affirmed.