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H. & S. Mfg. Co. v. Benjamin F. Rich Co.

Court of Chancery of Delaware, New Castle County

May 18, 1962

BENJAMIN F. RICH CO., Richard J. Guyer, and Frank Chaiken, Defendants.

[40 Del.Ch. 305] Edmund N. Carpenter, II and William E. Wiggin, of Richards, Layton & Finger, of Wilmington, for plaintiff.

Daniel L. Herrmann and John T. Gallagher of Herrmann, Bayard, Brill & Gallagher, of Wilmington, for defendants.

MARVEL, Vice Chancellor.

This litigation is basically concerned with damages allegedly caused a small aluminum and storm window and door business known as H. & S. Manufacturing Co. as a result of the successful attempt of one of its employees, Richard J. Guyer, with the assistance of others, to set up a competing business incorporated under the name of Benjamin F. Rich Co. Injunctive relief was prayed for at the onset of the case, however, purely pecuniary relief, including punitive damages based on a claim of alleged trade defamation, is now sought after final hearing.

Plans for the rival business here under attack are claimed to have had their origin in discussions between Guyer, his fellow employee, Benjamin Spiller, and other H. & S. employees. Later, the defendant Frank Chaiken joined in the discussions, and ultimately agreed to supply most of the financial backing needed for the establishment of a storm window and door business designed to compete with the trade. The end result of this activity was the incorporating of H. & S. Manufacturing Co., which was formed by Guyer, Spiller and Chaiken at the end of August, 1957.

At the time of the matters complained of and up until the time Guyer and Spiller left H. & S. early in September 1957, the affairs of the company were managed by an office force of four persons, including the president, John J. Halko, while the production part of the [40 Del.Ch. 306] business, except for occasional help from certain members of the office staff, was performed by nine or ten artisans working in the shop. Plaintiff's principal stockholder and chief executive officer at all times during the period covered in the complaint was John J. Halko.

Page 432

The complaint, as originally framed, charged that the defendant Richard J. Guyer, while an officer of the plaintiff, '* * * illegally conspired with another officer of the plaintiff and with defendant Frank Chaiken and others to organize the defendant corporation and launch it in the same business as the plaintiff in the same area as that in which plaintiff was operating * * *.' The original complaint then went on to charge that the defendant Chaiken '* * * knew that his actions in organizing and launching the defendant corporation required defendant Richarl J. Guyer as well as another officer of plaintiff to breach their duty of loyalty to the plaintiff as officers thereof * * *.'

Other allegations of the complaint were that defendants on going into business pursuant to their conspiracy, sold their products to plaintiff's customers and purchased from plaintiff's suppliers. Finally, in the remaining undismissed portions of the original complaint [1] plaintiff charged that '* * * defendants unlawfully interfered with plaintiff's business and slandered plaintiff by knowingly and falsely telling and causing others in their behalf to tell plaintiff's employees, customers and suppliers that plaintiff was insolvent and bankrupt and inducing a large number of plaintiff's employees to leave plaintiff and become employees of the defendant corporation'.

Allegations concerning the planting of newspaper stories during an early phase of this litigation as well as charges that defendants had attempted to injure plaintiff's relationships with its customers and employees by maliciously giving out false information concerning plaintiff's intentions, operations and production, were set forth in two [40 Del.Ch. 307] supplemental complaints filed on April 8, and June 8, 1959. In the latter supplemental complaint, specific persons, [2] who, it is claimed, were improperly persuaded to leave plaintiff's employ, are named, and complaint is made of defendants' alleged efforts to persuade customers not to trade with plaintiff as well as efforts to divert away from plaintiff opportunities for business profits which rightfully belonged to plaintiff.

Prior to hearings on those portions of the original complaint which have been dismissed, defendants had moved for summary judgment with particular emphasis on the case made out for Chaiken as a mere investor in the defendant corporation, which motion was denied (see opinion reported in Del.Ch., 164 A.2d 447), and this is the opinion of the Court after final hearing at which defendants moved for dismissal after plaintiff had rested.

The issues remaining in the case are basically concerned with charges pertaining to derogatory comments allegedly made by the individual defendants about plaintiff's financial condition, defendants' alleged improper solicitation of plaintiff's customers and suppliers, and the taking over or attempted taking over by defendants of certain business opportunities, which, according to plaintiff, could have with reasonable diligence been secured for plaintiff if Guyer and his fellow employee, Spiller, had in fact been loyal to their employer. Plaintiff's contention is that the evidence in the case establishes that until a date early in September 1957, the defendant Guyer and Benjamin Spiller were ostensibly loyal employees of plaintiff but that secretly during the course of that year such persons were not only making plans for the establishment of a competing business but were doing so on plaintiff's time and at plaintiff's expense. There is no doubt but that these two persons did early in September 1957 abruptly leave plaintiff's employ without prior notice

Page 433

of their then completed plans to enter into a business enterprise with the defendant Frank Chaiken in direct competition with plaintiff. The basic question remaining to be decided is whether or not such change was lawfully accomplished.

Plaintiff contends that pursuant to a conspiracy which the defendant Guyer and Spiller developed largely during the first eight [40 Del.Ch. 308] months of 1957, and which the defendant Chaiken ultimately joined, defendants made preparations for and embarked on their own business venture in September of that year, proceeding thereafter not only to sell to plaintiff's customers but also to purchase from plaintiff's suppliers. It is further contended that while the planning for this move was necessarily carried out in large part on plaintiff's business premises, preparations were made in such a secret manner that knowledge of defendants' purposes was not brought home to plaintiff's president, Halko, until the new business known as Benjamin F. Rich Co. was ready to enter into production.

Plaintiff at trial stressed what it deemed to be the unfair and surreptitious aspects of the scheming engaged in by Spiller and Guyer as they worked out details for a competing business, which, when fully organized, they hoped would cripple plaintiff's ability to compete effectively with such former employees and with the trade in general. Some of the actions claimed to have been taken were allegedly perpetrated in an individual capacity, others jointly by Spiller and Guyer, later joined in by Chaiken upon his becoming a part of the allegedly unlawful competitive moves against plaintiff. Plaintiff contends that those actions complained of which it has proven make up a pattern which in its totality clearly establishes in Guyer's case a violation of the principle of agency set ...

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