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Remington Rand Corp. v. Business Systems Inc.

argued: June 23, 1987.


Appeal from the United States District Court for the District of New Jersey - Newark, D.C. Civil No. 84-0261.

Author: Aldisert


ALDISERT, Circuit Judge

Three appeals from a judgment of the district court in a typewriter trade secret misappropriation case filed by the Remington Rand Corporation as an adversary action in bankruptcy against Business Systems, Inc., B.V., a Dutch corporation (hereinafter BSI B.V.), and BSI Office Equipment, Inc., and affiliated United States corporation (hereinafter BSI U.S.), raise a plethora of issues, most with international overtones.*fn1 BSI B.V. and BSI U.S. are the appellants and they have challenged virtually every legal issue decided by the district court.

According to the appellants, the district court erred in: (a) concluding that there was a misappropriation of typewriter trade secrets, (b) failing to respect the act of state doctrine, (c) failing to extend comity to a Dutch court order, (d) imposing joint liability against both BSI B.V. and BSI U.S., (e) issuing an order for relief that required turning over documents relating to manufacturing know-how and imposed a constructive trust on proceeds derived from the know-how, (f) holding BSI B.V. in civil contempt, (g) awarding attorney's fees in general as part of the contempt order, and (h) awarding excessive fees in particular.


The nucleus of these appeals is the know-how to produce the SR-101, an electric typewriter similar to the International Business Machines Selectric II. The Remington Rand Corporation, now known as the Kilbarr Corporation (hereinafter Remington U.S.), acquired the know-how in 1978 and licensed its Dutch subsidiary, Remington Rand B.V. (hereinafter Remington B.V.), to use this know-how to produce the SR-101 at a plant in Den Bosch, Holland. On March 25, 1981, Remington B.V. entered "suspension of payments" proceedings in The Netherlands (surseance van betaling), the Dutch equivalent of reorganization under Chapter 11 of the United States Bankruptcy Code, 11 U.S.C. ยงยง 1101-1174. Three days later, Remington U.S. entered reorganization under Chapter 11 in the District of New Jersey. Remington B.V. was declared bankrupt in The Netherlands on May 26, 1981, but Remington U.S. was successfully reorganized.

On June 4, 1981, the Dutch trustees in charge of the Remington B.V. bankruptcy sold the Den Bosch plant as a going concern to BSI B.V.; this sale included the know-how to produce the SR-101 typewriter. On August 17, 1981, Remington U.S. filed an adversary action against BSI B.V. in the United States Bankruptcy Court for the District of New Jersey. Remington U.S. claimed that BSI B.V. misappropriated its trade secrets in the SR-101 when BSI B.V. bought the Den Bosch plant and sought to preliminarily enjoin BSI B.V.'s use of the secrets.

The bankruptcy judge denied preliminary relief to Remington U.S. On September 24, 1982, the judge held that because Remington U.S. did not demonstrate a likelihood of success on the merits of its know-how misappropriation claim, it was not entitled to a preliminary injunction. On January 23, 1984, however, the bankruptcy court issued an opinion after a final hearing on liability, in which it held that Remington U.S. had made out a misappropriation claim. On May 8, 1984, the bankruptcy court rendered an opinion on equitable relief in which it made recommendations to the district court.

In requesting equitable relief, Remington U.S. sought to restrain BSI B.V. from manufacturing or selling the SR-101 for two and one-half years, the time allegedly needed to develop the typewriter without the use of Remington's trade secrets. Remington U.S. also sought the imposition of a constructive trust on certain BSI assets to secure any damage recovery ultimately awarded to Remington. In making its recommendations to the district court, the bankruptcy court refused to recognize Remington U.S.'s request for a two and one-half year injunction. The court determined that any "headstart" BSI received on account of the misappropriated know-how was minimal; stated that BSI could recreate the essentials of the trade secrets from scratch within six months. BSI later tried to use this determination as a way to limit its possible tort liability flowing from the misappropriation of Remington U.S.'s trade secrets. Additionally, the bankruptcy court recommended that a constructive trust be imposed on BSI's assets that were derived from the sale of the typewriters using Remington U.S.'s know-how.

Two significant events took place in the interim between the bankruptcy court's preliminary injunction opinion and its opinion after the final hearing on liability. First, on May 11, 1983, Remington U.S. filed an amended complaint that named BSI U.S. as an additional defendant; the final determination of liability was made after the case was tried on that complaint. Second, on August 17, 1983, BSI B.V. entered suspension of payments proceedings in The Netherlands, with J.A.M. Banning, a Dutch citizen, as its court-appointed trustee.

On September 6, 1984, the New Jersey district court delivered an oral opinion adopting the bankruptcy court's recommendations on liability and equitable relief. That same day, the district court filed an order for interim equitable relief that, in relevant part, ordered BSI U.S. and BSI B.V. to turn over copies of know-how documents and derivatives therefrom; to account for products produced from the misappropriated know-how, and to hold in trust for Remington U.S. any such products or proceeds therefrom; and, in lieu of holding the products and proceeds in trust, to provide security equivalent to their value.

On February 6, 1985, the district court found BSI B.V. and Banning in civil contempt of the September 6 equitable relief order and accordingly imposed sanctions upon them. In addition to several remedial sanctions, the court imposed three coercive sanctions on BSI B.V. and Banning; second, the court enjoined BSI B.V. from transferring any single element electromechanical typewriters or parts, or any proceeds derived therefrom; third, the court ordered that any defense based on the "head start" value of the know-how be stricken from defendants' pleadings with regard to recovery of damages. On February 13, 1985, BSI B.V. was declared bankrupt under Dutch law and Banning was appointed administrator of BSI B.V.'s estate.

On June 27, 1986, the district court rendered a final judgment on damages. Pursuant to the court's imposition of sanctions, that judgment did not take into account any limitation on damages which might have followed from BSI's alleged headstart or lead time defense. The judgment awarded Remington U.S. $210,879,481 against BSI B.V. and BSI U.S., jointly and severally; this judgment later was increased under Rule 60(a), F. R. Civ. P., to $221,409,481. On September 24, 1986, the district court adjudged BSI B.V. and Banning liable to Remington U.S. for $82,685.20 in attorneys' fees incurred by Remington U.S. in pursuing BSI B.V. and Banning's contempt. On November 14, 1986, BSI U.S. filed for reorganization in the United States.


BSI first challenges the district court's determination that it is liable for misappropriating Remington U.S.'s trade secrets in the SR-101.*fn2 After conducting hearings at which all sides introduced extensive expert testimony on Dutch law, the bankruptcy court concluded that the elements by which BSI's liability should be measured were: (1) some inappropriate act by Remington B.V.'s Dutch trustees, and (2) some inappropriate act by or imputed to BSI. The district court adopted this formulation and no party disputes it on appeal. BSI contends, however, that neither element was established. We shall address each element in turn.


This district court adopted the bankruptcy court's determination that the propriety of the Dutch trustees' acts should be measured by reference to Dutch law; this determination, too, is not disputed on appeal. The question presented is whether the Dutch trustees committed an inappropriate act under Dutch law. As a question of foreign law, this issue receives plenary review. F. R. Civ. P. 44.1.

BSI constructs its argument on a syllogism based on the following logical progression: (1) Remington B.V.'s trustees were duty-bound under Dutch bankruptcy law to sell all of Remington B.V.'s assets in order to create a fund from which its creditors could be paid; (2) the know-how in the SR-101 was one such asset; (3) proceeds from the sale of Remington B.V.'s assets were to be paid only to verified claims filed against its estate, on a pro rata basis; (4) Remington U.S. was required to file a verified claim in order to recover for the trustees' sale of the know-how; (5) because Remington U.S. did not file such a claim, the trustees had no duty to pay it for the know-how; (6) therefore, the trustees did not violate Remington U.S.'s rights by selling the know-how to BSI. Although most of BSI's assertions appear to be borne out by the Dutch authorities to which they cite, minor premise (2) is not so supported. Notwithstanding that the trustees were bound to sell all of Remington B.V.'s assets, no Dutch authority cited to or discovered by this court suggests that the trustees were bound to commit torts in order to enlarge Remington B.V.'s estate.

Remington B.V. manufactured the SR-101 with know-how acquired from Remington U.S. pursuant to a licensing agreement. The licensing agreement contained a confidentiality clause that provided: "All information received by [Remington B.V.] shall be treated with reasonable confidence consistent with the purposes of the Agreement. [Remington B.V.] will not permit such information to be disclosed to third persons . . . ."App. at 1688-89. Without question, this clause imposed a duty of confidentiality upon Remington B.V.; the issue is whether it imposed a correlative duty upon Remington B.V.'s trustees.*fn3

Article 1401 of The Netherlands Civil Code provides: "Each wrongful act, by which damage is done to another, imposes upon him by whose fault that damage was caused the obligation to reimburse the same." Netherlands Civil Code, art. 1401, reprinted in addendum to br. of BSI at 5. As stated by the Dutch Supreme Court, article 1401 proscribes any act that

either infringes upon another's rights, or is contrary to the legal duty of the actor, or conflicts with either the bonos mores or the duty of good care to be observed in social intercourse with regard to another's person or or goods . . . .

Lindenbaum v. Cohen, 1919 N.J. 161 (HR), reprinted in app. at 1752. Article 1401 provides a recognized tort action for trade secret misappropriation. See W. Drucker & G. Bodehausen, Summary Understanding of the Law With Respect to Intellectual Property 207 (6th ed. 1984), reprinted in addendum to br. of BSI at 57 ("Article 1401 can be called on against a person who contrary to his duty has violated the secrecy [of a trade secret] or who has provoked or stimulated that violation."). Dutch society's protection of trade secrets also is reflected in article 273 of The Netherlands Penal Code, which provides criminal penalties for employees who breach the confidentiality of their employers' trade secrets. Netherlands Penal Code, art. 273, reprinted in addendum to br. of BSI B.V. without compensating Remington U.S., the trustees breached their "duty of good care to be observed in social intercourse."

After hearing extensive testimony by Dutch law experts, the bankruptcy court held that, as an industrialized society, The Netherlands would afford protection to Remington U.S.'s trade secrets in the hands of the trustees. It furthermore held that, by transferring the Den Bosch plant to BSI B.V. without compensating Remington U.S. for its trade secrets, the trustees committed an inappropriate act. The district court adopted these conclusions and we agree. Accordingly, we hold that the district court did not err in holding that the first element of the liability standard was met.


To determine whether BSI committed an inappropriate act sufficient to meet the second element of the liability standard, the bankruptcy court evaluated BSI's conduct according to New Jersey law, and, alternatively, according to Dutch law. Under either choice of law, the bankruptcy court held, it was required that BSI knew or should have known of the know-how licensing agreement between Remington U.S. and Remington B.V. when BSI purchased the Den Bosch plant from Remington B.V.'s trustees. In its final opinion on liability, the bankruptcy court found that BSI had the requisite knowledge of the licensing agreement. This issue of knowledge therefore is dispositive. BSI contends that the bankruptcy court's finding of knowledge, adopted by the district court, was clearly erroneous. Because the question whether BSI knew or should have known of the licensing agreement is a question of fact, it is reviewed under the clearly erroneous standard. Universal Minerals v. C. A. Hughes & Co., 669 F.2d 98, 101-103 (3d Cir. 1981); F. R. Bankr. P. 8013.

In making its finding, the bankruptcy court relied in part on references in two audit reports prepared on behalf of BSI, while BSI was contemplating purchasing Remington B.V. One audit report stated, "In the budget for the months April and May 1981, and the budget for 1981/1982 . . . possible royalties or license fees due for the SR-101 . . . have [not] been taken into account." App. at 1814. Another audit report stated, "With regard to problems like the industrial ownership, so that development, production and selling could be continued undisturbed, the draft of a provisional contract, and possible litigations, we may refer to the activities of your other advisors." Id. at 1800.

The bankruptcy court did not use these audit reports as the sole basis for its finding. It determined that the reports contradicted earlier testimony by BSI's officers. The court recognized that I.A.M. Khatib (the BSI principal primarily involved in purchasing Remington B.V.) was a sophisticated businessman and had testified that, had he known of royalties being paid by Remington B.V., he would have inquired into their basis before purchasing the company. Moreover, the bankruptcy court acknowledged that BSI probably was made aware of the licensing agreement by Remington B.V.'s trustees, with whom BSI conducted negotiations regarding the sale of the Den Bosch plant. The trustees knew of the licensing agreement through their access to monthly reports of royalties paid by Remington B.V. to Remington U.S., as well as through negotiations they had with Roger Wollert, Remington U.S.'s president.

Because the finding that BSI knew or should have known of the licensing agreement is not devoid of credible evidentiary support and is rationally related to the evidentiary data, it is not clearly erroneous. See Krasnov v. Dinan, 465 F.2d 1298, 1302 (3d Cir. 1972). When combined with our conclusion that the trustees committed an inappropriate act by selling Remington U.S.'s trade secrets to BSI, this finding fulfills the standard by which BSI's liability is to be measured. Accordingly, we hold that the ...

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