Case Analysis: Longe Industries v. Archco, JNRP

The Legal Environment of Business

Case Analysis #2

Longe Industries v. Archco, JNRP

Background

Longe Industries has been in the business of manufacturing trailing axles for dump trucks. They had pioneered their way into the ‘trailing axles for dump truck’ segment of the market by developing and marketing a series of models that had evolved in design features.

Archco manufactures dump beds for dump trucks. Archco entered into a dealership agreement with Longe Industries on April 6, 1992. They also signed a non-compete agreement that included a non-disclosure of information provision.

JRNP assists other companies in designing and patenting products. JRNP was contracted by Archco to design a trailing axle known as ‘Tough Haul I’. Although this model was never produced, the ‘Tough Haul II’, which was a twin arm trailing axle, very similar to the one developed by Longe, was manufactured and sold in the market.

On October 18, 1998, Longe Industries notified Archco that it was in violation of the non-competition agreement and requested an accounting of all non-Longe trailing axles sold by Archo. Later, on January 4, 1999, Longe Industries filed suit against Archo. JRNP was later added as a defendant. The big issues at hand are misappropriation of trade secrets, fraud, agency relationship/breach of contract, tortious interference and violation of patent law. The analysis will focus on identifying the relevance of these issues, identifying the stances that the plaintiff and defendants will take on these issues and finally providing a managerial perspective on the situation.

Longe Industries’ point of view

Longe Industries, the plaintiff, could contend that the defendants had violated multiple rules by designing, manufacturing and selling the Tough Haul II. Longe Industries should attempt to seek the appropriate damages and also ask that Archco and JRNP be restricted from manufacturing and selling any product type(s) in which Longe Industries engages. They should also seek a similar injunction on selling products against Silent Drive, who was an agent of the plaintiffs’.

The claims that Longe Industries could make are as follows:

Misappropriation of trade secrets: Longe Industries can claim that the necessary elements, in the tort of misappropriation of trade secrets, were present in this case. The necessary elements are:

A trade secret exists.
The trade secret was acquired through a confidential relationship or improper means.
The trade secret was disclosed or used without the consent of its owner.

In T-N-T Motorsports, Inc. v. Hennessey Motorsports, Inc., the court of appeals of Texas defined a trade secret as “any formula, pattern, device, or compilation of information that is used in one’s business, and which gives one an opportunity to obtain an advantage over competitors who do not know or use it.” The key factors in determining whether information is a trade secret are the investment of time and/or money in developing the information and the principal’s efforts to keep the information secret. Longe had been working on the trailing arm design and manufacturing since the mid-1980’s. Between 1986 and 1989, Bobby Longe engaged in research relating to the dump truck industry and trailing axles. Over time, Longe continued to improve the designs and added features that made the products better, including the 7000 series that focused on stabilizing the dump truck. These efforts on Longe’s part can be construed as investment of time and money in developing the 7000 series. Longe Industries had also stamped their manual privileged and confidential in order to protect the information.

Both Archco and JRNP could be considered liable for misappropriation. Archco was liable because they used the trailing arm designs without the consent of Longe Industries. Longe could claim that JRNP was liable because they were aware of the fact that the designs of the trailing arms were being disclosed without the consent of the owner. The tort of misappropriation mentions that a new employer or principal is liable 1) if he knows that the information was wrongfully obtained or wrongfully disclosed or 2) he knows that the information was a trade secret and it was disclosed by mistake. Given their background in designing and patenting products, it is reasonable to believe that JRNP had knowledge that the type of information that they were dealing with was confidential.

The other common law theory that can be asserted to redress the alleged theft of Longe’s trade secrets is the violation of the common law duty of violation. This has been addressed in the violation

Fraud: Longe Industries can claim that the defendants, specifically Archco, had defrauded them by not living up to the assurances they made while signing the non-competition agreement. The necessary elements for fraud are:

The defendant must misrepresent a material fact: In order to establish that Archco had misrepresented a material fact, Longe should bring to light the intent of Archco. Generally, a promise made to do something in the future and the promise is not fulfilled is not grounds for misrepresentation. However, such a promise can be considered fraudulent if the promisor had no intent to perform when the promise was made. Archco clearly went through the formalities of signing the agreements without any intent to abide by them. This is evident from the fact that Archco contracted JRNP, to develop a trailing axle, within three months of signing the non-compete agreement with Longe.
The defendant must have the intent to deceive the plaintiff: Using the same argument that was used to establish misrepresentation, Longe could claim that Archco intended to deceive Longe from the get go. If Archco was already working on a similar design for a trailing arm before the agreements were signed, Archco should have disclosed this fact to Longe. Even if Longe fell short of proving this, Archco could still be liable for negligent misrepresentation. This applies when a defendant does not exercise reasonable care and competence in communicating the information. Although the damages available would be different in case of fraud vs negligent misrepresentation, Archco could still be charged with one of the two.
The plaintiff must justifiably rely on defendant’s misrepresentation: As stated in the case, Longe Industries shared confidential and proprietary information with Archco over the course of their relationship. Longe Industries taught Archco how to build a “super dump”. Bobby Longe has also testified that he would not have provided this information and education to anyone without knowing that the information was protected. The actions taken by Bobby Longe and Longe Industries were sufficient to prove their reliance on Archco’s promises. Given that the appropriate agreements were signed, it was indeed reasonable for Longe Industries to rely upon Archco.
The plaintiff’s reliance must result in detriment to the plaintiff: Longe Industries’ reliance on Archco, led to the design and development of the Tough Haul II, which was in direct competition with the 7000 series. Between 1997 and 1999, 45 Tough Haul IIs were sold. As the 7000 series and Tough Haul II were the only trailing arms that attached to the truck bed rather than the frame, it meant that Tough Haul IIs were directly eating into 7000 series’ market share. It is credible that this led to a direct effect on number of units sold by Longe and in turn proved a detriment to Longe Industries.

A challenge that Longe could face is their ability to provide evidence distinguishing a breach of contract from fraud. The subsequent actions taken by the defendants, i.e. pursuing the development, manufacturing and selling of the trailing axles, can be used as evidence to prove their intent (or lack thereof).

Breach of contract: An important consideration from Longe Industries’ point of view would be whether both fraud and breach of contract could apply in the same situation. A clear distinction between the two can be made as follows:

A material misrepresentation (or intent to deceive) that is relied ...

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Breach of contract: An important consideration from Longe Industries’ point of view would be whether both fraud and breach of contract could apply in the same situation. A clear distinction between the two can be made as follows:

A material misrepresentation (or intent to deceive) that is relied upon and results in harm can be considered fraud.
A failure to meet the terms of a contract or agreement can be considered breach of contract.

In this case, Longe could claim both fraud (as explained above) and breach of contract.

The necessary elements of a contract are:

Offer,
Acceptance,
Consideration,
Capacity, and
Legality

Archco made the offer and its acceptance by Longe resulted in the dealership agreement and a non-competition agreement that included a non-disclosure of information provision. Consideration represents the element of bargaining to indicate that each party agrees to surrender something in return for what it is to receive. Although not specifically provided, it can be assumed that there were monetary terms and dealership commissions in the agreements. The elements of capacity and legality were not violated in this case. Based on this, a valid contract existed between Longe and Archco and made it an enforceable agreement.

The non-competition agreement was intended to prevent Archco from manufacturing, selling or distributing any device of the type(s) in which Longe Industries engages, within the territorial jurisdiction of the United States. Longe could provide substantive evidence that Archco violated the non-competition agreement as well as the non-disclosure covenant. In order to establish the enforceability of the covenant not to compete, the covenant must be:

Ancillary to an otherwise enforceable agreement and
Reasonable in its time, geographic and activity constraints.

In order to establish that the covenant is ancillary, Longe would need to show that consideration was given in the otherwise enforceable agreement i.e. the dealership agreement that needed Longe to restrain Archco from competing. The consideration in this case was the education and manuals provided by Longe to Archco. The constraints placed on Archco were intended to enforce Archco’s return promise that they would not engage in manufacturing, selling or distributing any device of the type(s) in which Longe engages. From Longe’s standpoint, the jurisdiction of U.S. was reasonable because there was nobody else the developed the type of products that Longe manufactured and sold.

The covenant could also become unenforceable if it is not reasonable in its restraint of trade. Given the fact that the 7000 series was a one of a kind, that considerable time and effort had been expended on it and that nobody else had a similar design for the trailing arm, it was reasonable for Longe to restrain Archco as stated in their agreements. So, in addition to claiming fraud charges, Longe could also claim breach of contract against Archco. To strengthen their case, Longe could also argue that the inevitable disclosure doctrine applied when Smith started working for Archco after completing his work on the 7000 series. The nature of work that Smith performed at Archco was very similar to that performed at Longe.

Violation of agency relationship laws: An agency is a relationship “in which one person, the agent, acts on behalf of another with the authority of the latter, the principal.” An agent is “one who, by mutual consent, acts for the benefit of another; one authorized by a party to act on that party’s behalf.” By virtue of signing a dealership contract and the non-competition agreement, Archco became an agent of Longe Industries. Absent an agreement to the contrary, an agent owes the following duties to his principal:

Performance
Notification
Obedience
Accounting
Loyalty

Longe can claim that the duties of notification and loyalty were violated by Archco. An agency is required to notify the principal of all information that is relevant to the agency. Archco should have disclosed their relationship and history of working with JRNP to Longe. Prior to signing the agreements, Archco should also have notified Longe about their plans of developing a trailing axle. The fact that Longe was requesting an accounting of all “non-Longe trailing axles” sold by Archco meant that they were not apprised of this very relevant matter and the numbers related to selling a competing product. Archco seems to be in violation of the duty of notification.

The duty of loyalty, which is at the heart of any agency relationship, also was violated by Archco. In an agency relationship, an agent may not:

Accept outside, secret benefits
Represent more than one principal without the consent of the principals.

JRNP had a conflicting interest in the design and development of trailing axles, which were very similar to the 7000 series. By signing a contract with JRNP, Archco violated the single principal requirement.

This relationship also requires that the agent not disclose or use for his own benefit any confidential information learned during the agency relationship. Archco used the information they had gathered from Longe to work with JRNP in coming up with the Tough Haul II. This information included the training they had received and the manuals that contained technical drawings of the Longe Arm. By sharing this information with JRNP and by saying that they had conceived the idea, Archco seems to be in clear violation of the common law restriction related to the agent’s duties.

Tortious interference with contract: Longe Industries could make this claim against JRNP. A tortious or wrongful interference is said to occur when the following elements exist:

A valid, enforceable contract or agreement exists between the plaintiff and a third party: This could be easily proved by the presence of the dealership agreements.
The defendant must know that the contract exists: Based on the fact that Archco and JRNP had been doing business for a number of years, it is conceivable that JRNP was aware of the contracts that were signed between Archco and Longe.
The defendant must intentionally cause the breach of contract (or interference of agreement) for the purpose of advancing his own economic interest: JRNP, along with Archco, was entitled to receive royalties on the sales of Tough Haul II by Silent Drive and thus had an economic interest in the deal.

As stated in Juliette Fowler Homes v. Welch Associates, in Texas the elements of a cause of action for tortuous interference with contractual relations are:

There was a contract subject to interference,
The act of interference was willful and intentional,
Such intentional act was a proximate cause of plaintiffs damage, and
Actual damage or loss occurred.

These elements are very similar to those explained above. The last two elements where the intentional act is tied to the plaintiff’s damages can be proved by the fact that the 7000 series and Tough Haul II were the only products of that type in the market. A sale of any Tough Haul II unit would have a negative effect on the sale of 7000 series units. The fact that 45 Tough Haul IIs were sold between 1997 and 1999 meant that Longe could have, potentially, sold 45 more units. Longe Industries could claim an actual loss of those opportunity costs.

Violation of patent law: Longe Industries had filed a patent application for the Longe Arm 7000 series axles. The design of the 7000 series included a twin arm trailing axle that attached to the truck bed, rather than the truck frame. Longe Industries can claim the defendants had copied a patented design. There was no other trailing axle that ever had such a design. Even the expert witness, Tom Grubbs, testifies that the two were “incredibly similar”.

Longe industries’ management should seek an injunction against Archco, JRNP and their agents. Longe Industries should seek, based on the all the claims made above, that Archco, JNRP and all their agents including Silent Drive be prohibited from developing, manufacturing and selling trailing axles.

From a management perspective, Longe Industries could have done a few things that would have helped them deal with the issue sooner rather than later.

First, upon understanding that Archco was planning on developing, manufacturing and selling the Tough Haul series for trailing axles, Bobby Longe should have raised the appropriate level of concern. Bill Hartman had approached Bobby Longe with the drawings and an engineer data book, which included the details of the Tough Haul I. For some reason, Longe seemed to be indifferent to Archco’s plan. A possible reason for this could have been Longe’s overconfidence that nobody else could conceive a design for a better trailing axle.

Second, they should have recognized Fred Smith’s intentions when he refused to sign a non-compete and non-disclosure agreement. Longe Industries should have made a management decision to not work with anybody that did not sign the necessary documents. Furthermore, Smith was hired to work out the technical details of the design and perform finite element analysis on the design. Given that Smith had not signed the agreement; he should never have worked on intimate details such as finite element analysis. Longe could sue Smith for violating the agent’s duty of loyalty, which is at the heart of any agency relationship. In American Express v. Topal, Topal violated his duty not to compete with his principal by soliciting customers for his new venture prior to termination of his agency relationship. In a similar manner, Smith can be perceived to be illegally competing with Longe by preparing to compete upon termination of the employment relationship. The knowledge gained by Smith during the development of the 7000 series and the assistance that he provided in the filing of the patent proved detrimental for Longe. The Longe management team should have attempted to enjoin Smith from using the confidential information gathered during his stint with Longe. They could have done that based on the fact that it was very probable that Smith would have used that information after leaving Longe.

Archco’s point of view:

Archco’s defense would primarily need to focus on directly refuting the claims being made by Longe Industries.

Archco could challenge Longe’s claim related to fraudulent intent and material misrepresentation. There was no factual evidence that indicated Archco’s intent when the dealership agreement was signed. Although the case does not provide actual sales numbers for Longe Industries’ axles sold by Archco, Archco could use their sales numbers to support their claim of genuine intent to sell the Longe axles. Archco could further contend that Longe Industries was aware of the development plans that Archco had. Archco’s president, Bill Hartman, had approached Bobby Longe regarding the production of the Tough Haul I. Hartman had also shared the drawings and the engineer data book with Longe. Based on this meeting and the conversation that Hartman and Longe had, Archco could argue that Longe was fully aware of Archco’s plans of developing the trailing axle. Longe did not question or confront Hartman on their intent to produce axles that would be similar to the ones developed by Longe Industries. Archco could argue that it was reasonable for them to infer that Longe did not have a problem with Archco developing other trailing axle products.
Another defense that Archco could make is related to the covenant not to compete. In order for the covenant to be enforceable, an essential element is that the business information should deserve protection as confidential, proprietary or trade secret information. If Archco could provide evidence that they had been working on the design for trailing axles independent of Longe Industries, Archco may have a valid defense against the breach of contract claim. For a non-compete covenant to be enforceable, it should be reasonable in the constraints that it places. Archco could take a compromising position by conceding that eighteen months was a fair time period for the non-compete but the jurisdiction of the entire country was not. As in Evan’s World Travel v. Paula Adams and Marshall Pro-Travel where the geographic scope of the covenant was restricted only to a specific county, Archco could request that the scope of the restriction be changed from the entire country to a smaller region.
In order to challenge the tort of misappropriation of trade secrets, Archco could draw attention to the fact the Longe Industries did not take efforts to ensure that the information was kept secret. In his meeting with Bill Hartman, soon after the dealership agreements were signed, Bobby Longe did not seem to be concerned about someone else building the Tough Haul I. Bobby Longe should have questioned the similarity of designs and should have reminded Hartman of the confidential nature of the designs. Longe Industries taught Archco how to build a “super dump”. Archco could contend that it was not conventional for a manufacturer to share the details of its manufacturing process with dealers. It is also uncommon for sales manuals to include technical drawings with design details. Archco’s defense on the misappropriation could try to establish that Longe had lost its trade secret protection by not taking the appropriate steps to protect the information.

The Archco management team should look back on the sequence of events to analyze their current position. They could have taken steps, in their relationship with Longe Industries, to avoid the barrage of claims against them. In fact, there may have been scenarios where all the parties involved could have come out winners. One such situation could have been if Archco took actions within the limits of the agreements that they had with Longe. Another scenario could have been a different set of agreements between Archco and Longe such as a joint development agreement, partnership Etc. which would give Archco the ability to add value to the Longe products as well as allow them to develop their own products.

Given that there was a high possibility of Longe Industries’ claims being accepted, the Archco management should also think about ways to control the damages that they might have to pay out.

JRNP’s point of view:

JRNP, also a defendant in the case, would like to counter the charges that were brought against them. Their goal in this case should be to provide sufficient evidence to prove that their role in the development and selling of the Tough Haul II was not a violation of law.

JRNP should consider preparing for a defense in the following areas:

Although both, JRNP and Archco, were named as defendants in the case the two were distinct entities and had played different roles with respect to Longe Industries. JRNP could mainly be facing tortious interference charges. The contract between Archco and JRNP stated that Archco had conceived the idea for a trailing axle. JRNP’s role was to develop the idea and to make it marketable. JRNP should claim that the information they had received from Archco provided no indication of Longe’s role in the development of Tough Haul II.
JRNP could contend that they were not aware of the agreements and the associated covenants that were signed between Archco and Longe. The charges of misappropriation require that JRNP was aware that the designs and other related information of the trailing arms were trade secrets. It would be difficult for the plaintiffs to provide evidence showing JRNP’s intent.
Another perspective that JRNP could look at is the damages that Longe would have tried to recover from JRNP. Given that JRNP and Archco jointly owned the Tough Haul II concept, the damages that would incur should be joint as opposed to each party individually paying damages to Longe Industries. This is mainly because the effect of JRNP’s and Archco’s actions on Longe Industries’ finances was combined i.e. lost sales of their trailing axles.

The JRNP management team could definitely have taken certain steps to ensure that they did not become party to the suit filed by Longe Industries’. Just like a new employer should check if the employee has non-compete or non-disclosure agreements with previous employers, JRNP should have checked the agreements that Archco had with Longe Industries and other product vendors. JRNP should have performed due diligence on the information that they were receiving and acting upon.

JRNP’s role in regards to Smith’s work with Longe Industries is unclear. If Smith was an employee i.e. an agent of JRNP, they had the responsibility to ensure that his actions were consistent with JRNP’s. It would have been a mistake on JRNP’s part to intentionally allow Smith to work for Longe in an attempt to gather information related to the 7000 series. JRNP and Archco seemed to have collaborated on Smith’s work with Longe and his subsequent work with Archco on the trailing axle. The case does not provide details on the dynamics of the relationship between these entities and hence assuming that JRNP was a principal of Smith, they should have taken the precautionary measures.

Finally, the JRNP management should focus on their core competencies and continue to work on what they are best at i.e. designing and patenting products. If they are interested in being a part of selling the products that they design, they should ensure that they are not violating any laws in doing so. Negligence or ignorance in such major issues could continue to prove detrimental to JRNP if not addressed immediately.

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