RAVEN INDUSTRIES, INC. v. Lee

#25393-a-DG

2010 SD 49

IN THE SUPREME COURT
OF THE
STATE OF SOUTH DAKOTA

* * * *

RAVEN INDUSTRIES, INC., Plaintiff and Appellee,

v.

CLARK LEE and INTEGRA
PLASTICS, INC., Defendants and Appellants.

* * * *

APPEAL FROM THE CIRCUIT COURT
OF THE SECOND JUDICIAL CIRCUIT
MINNEHAHA COUNTY, SOUTH DAKOTA

* * * *

HONORABLE KATHLEEN K. CALDWELL
Judge

* * * *

THOMAS J. WELK
JASON R. SUTTON of
Boyce, Greenfield, Pashby & Welk, LLP
Sioux Falls, South Dakota Attorneys for plaintiff
and appellee.

LEE A. MAGNUSON
AMY L. ARNDT
DANA VAN BEEK PALMER of
Lynn, Jackson, Shultz & Lebrun, PC
Sioux Falls, South Dakota Attorneys for defendants
and appellants.

* * * *
CONSIDERED ON BRIEFS
ON MAY 24, 2010

OPINION FILED 06/16/10
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GILBERTSON, Chief Justice

[¶1.] Raven Industries (Raven) sued Integra Plastics, Inc. (Integra), a

business competitor, and Clark Lee (Lee), a former employee of Raven, by complaint

for injunctive relief, tortious interference with contract, and unfair competition.

Raven alleged that Lee unfairly competed with Raven by using alleged secret,

confidential, or proprietary information that he was contractually obligated not to

disclose. Raven’s complaint sought only injunctive relief. A bench trial was held

and the circuit court entered findings of fact, conclusions of law, and a permanent

injunction in Raven’s favor. Integra and Lee appeal.

FACTS

[¶2.] Raven is a string-reinforced plastic film manufacturer in Sioux Falls,

South Dakota. Integra is a manufacturing company in Madison, South Dakota.

Lee was an engineer at Raven from 1991 until February 2006 when he was fired.

In 1991, Lee signed an “Agreement for Execution by Employees of Raven Industries,

Inc. Relating to Inventions, Secret Processes, Trademarks, Trade Names, Character

Names and Other Similar Matters” (Proprietary Rights Agreement). 1 After being

1. The Proprietary Rights Agreement Lee signed stated:

Employee shall not directly or indirectly disclose or use at any time,
either during or subsequent to the said employment, any secret or
confidential information, knowledge, or data of Employer (whether or
not obtained, acquired or developed by Employee) unless he shall first
secure the written consent of Employer. Upon termination of his
employment Employee shall turn over to Employer all notes,
memoranda, notebooks, drawings or other documents made, compiled
by or delivered to him concerning any product, apparatus or process
manufactured, used or developed or investigated by Employer during
the period of his employment; it being agreed that the same and all
(continued . . .)
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fired, Lee signed a “Severance Package/Agreement” (Severance Agreement). The

Proprietary Rights Agreement and Severance Agreement will now collectively be

referred to as the “non-disclosure agreements.” In the Severance Agreement, Lee

agreed not to “[u]se or disclose to any third party any confidential or proprietary

Company information or any confidential or proprietary knowledge about the

Company obtained by [Lee] during the course of [Lee’s] employment, including

without limitation the terms and conditions of this Agreement.” Lee commenced

employment with Integra in February 2006 after he was fired by Raven.

[¶3.] At Raven, Lee was on the engineering team that originally built

Raven’s string-reinforced plastic line (Line) in 1993. 2 Lee was initially responsible

for operating the Line and modifying it to improve product quality. Raven

experienced many problems with the Line after production began. Lee, as the lead

engineer, worked to develop solutions to these problems. As a result, Lee was

intimately familiar with the assembly and operation of Raven’s Line. In sum, it

took over thirteen years to perfect Raven’s Line.

[¶4.] At Integra, Lee was the director of business development and worked

to develop a manufacturing line to produce string-reinforced plastic film almost

________________________
(. . . continued)
information contained therein are at all times the property of the
Employer.

2. The Line is comprised of several integrated pieces of equipment that perform
a process that produces string-reinforced plastic film. Specific details about
the Line and the product it produces are not relevant to this appeal.
Therefore, the specific details will not be disclosed or discussed because of the
sensitive nature of this information.

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identical to Raven’s. Although Integra considered building a production line for this

product before Lee was hired, it did not. Once Integra employed Lee, Lee contacted

an equipment manufacturer that built a component of Raven’s Line to have the

same modified component made for Integra. The modifications Lee requested were

unique to Raven’s Line and were not used by any other manufacturer in the

industry. Within one month of receiving the necessary equipment, Integra was able

to produce a product that was commercially comparable to Raven’s.

[¶5.] Raven filed suit against Integra and Lee for injunctive relief, tortious

interference with contract, and unfair competition. Raven alleged that Integra and

Lee unfairly competed against Raven by using secret, confidential, or proprietary

information – that Lee was contractually obligated not to disclose – to produce a

product for Integra commercially comparable to Raven’s. Raven’s complaint sought

only injunctive relief. A nine-day bench trial was held, and the circuit court found

for Raven on all three claims. The circuit court subsequently entered findings of

fact, conclusions of law, and a permanent injunction prohibiting Integra from

operating its line for two years.

[¶6.] Integra and Lee appeal, raising the following issues: 3

3. Raven argues “an issue exists about whether th[is] Court has jurisdiction to
hear the appeal because [Integra] fail[ed] to appeal [a] modified permanent
injunction” that was entered after the circuit court entered the original
permanent injunction enjoining Integra’s operation of its line. Raven asserts
that even if this Court reverses the original permanent injunction, the
modified permanent injunction will remain as a final judgment. On this
basis, Raven contends that this appeal is moot. However, after a thorough
review of the record, Raven, Integra, and Lee were aware that the appeal
from the original permanent injunction included the related modified
permanent injunction. See SEC v. Van Waeyenberghe, 990 F2d 845, 847 n3
(continued . . .)
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1. Whether the circuit court erred in concluding that the Uniform
Trade Secrets Act did not preempt Raven’s tort claims.

2. Whether the circuit court erred in concluding that Raven and
Lee’s non-disclosure agreements were enforceable.

3. Whether the circuit court erred in concluding that Integra
engaged in unfair competition.

4. Whether the circuit court erred in granting the permanent
injunction.

ANALYSIS AND DECISION

[¶7.] 1. Whether the circuit court erred in concluding that the
Uniform Trade Secrets Act did not preempt Raven’s tort
claims. 4

________________________
(. . . continued)
(5thCir 1993) (citations omitted) (holding that court had jurisdiction even
though SEC filed notice of appeal from a modified order, but not the original
order, because “notices of appeal are liberally construed where ‘the intent to
appeal an unmentioned or mislabeled ruling is apparent and there is no
prejudice to the adverse party’” and where “claims or issues are inextricably
entwined”); Walker v. Los Angeles County Metro. Transp. Auth., 104 P3d
844, 847 (Cal 2005) (quoting Vibert v. Berger, 410 P2d 390, 392 (Cal 1966)
(citing Cal. Rules of Court, Rule 1)) (recognizing and applying maxim that
“notice of appeal must be liberally construed in favor of its sufficiency”).
Raven had sufficient notice of the issues appealed and was able to submit a
brief in response. Therefore, Raven’s contention that this Court lacks
jurisdiction is rejected.

4. Raven argues Integra and Lee failed to preserve this issue for appeal because
they did not raise it to the circuit court after their motion for summary
judgment was denied. Raven suggests that “[b]y failing to raise preemption
after the summary judgment hearing, [Integra and Lee] did not provide the
[c]ircuit [c]ourt the opportunity to correct any mistake made in denying
summary judgment[.]” No prior South Dakota case has addressed this issue
directly. Turning to other jurisdictions, it appears that after a circuit court
denies a motion for summary judgment, there is no need to raise the same
issue at trial to preserve it for appeal. See Kahn v. CVS Pharmacy, Inc., 846
NE2d 904, 907-08 (OhioCtApp 2006) (“Once the court had ruled on the
motion for summary judgment, [the plaintiff] was under no obligation to
again raise the issue with the trial court in order to preserve it for appeal.”);
Carrico v. Kondos, 111 SW3d 582, 585 (TexCtApp 2003) (citing Cincinnati
(continued . . .)
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[¶8.] Integra and Lee initially argued that the circuit court erred in

concluding that the Uniform Trade Secrets Act (UTSA) did not preempt Raven’s

claims for injunctive relief,5 tortious interference with contract, and unfair

competition. Integra and Lee concede in their reply brief, however, that a breach of

contract claim would not be preempted by the UTSA. See SDCL 37-29-7(b)(1)

(specifically excluding from the UTSA “contractual remedies, whether or not based

upon misappropriation of a trade secret”). Integra and Lee instead maintain that

the non-disclosure agreements (or contracts) entered into by Lee were

unenforceable. Integra and Lee therefore argue that the allegedly invalid and

unenforceable non-disclosure agreements could neither support a contract claim nor

provide a contractual basis to support the tortious interference with contract claim.

As Integra and Lee have presented this issue, their appeal hinges on whether

________________________
(. . . continued)
Life Ins. Co. v. Cates, 927 SW2d 623, 626 (Tex 1996)) (“To preserve [the
issues for appeal], the party must raise them in the summary judgment
proceeding and present them in an issue or cross-point on appeal.”);
Normandeau v. Hanson Equip., Inc., 215 P3d 152, 159 (Utah 2009)
(“[R]aising a legal issue during a summary judgment motion based on the
undisputed facts properly provides the court with an opportunity to rule on
the issue” and the court “will not require parties to reraise the same issue in
order to preserve it for appeal.”). Cf. SDCL 19-9-3 (“Once the court makes a
definitive ruling on the record admitting or excluding evidence, either at or
before trial, a party need not renew an objection or offer of proof to preserve a
claim of error for appeal.”). Therefore, this issue was preserved for appeal.

5. Raven asserts in its brief that “[a]lthough labeled as ‘injunctive relief,’ the
allegations in Count I sound in breach of contract.”

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Integra and Lee can demonstrate that the circuit court erred in ruling that the non-

disclosure agreements were enforceable. This issue is addressed below. 6

[¶9.] 2. Whether the circuit court erred in concluding that Raven
and Lee’s non-disclosure agreements were enforceable.

[¶10.] Integra and Lee argue the circuit court erred in holding that Raven

and Lee’s non-disclosure agreements were valid and enforceable. As noted above, if

the non-disclosure agreements are unenforceable, Raven’s tortious interference with

contract claim must also fail because that claim was premised on a valid and

enforceable contract.

[¶11.] Non-disclosure agreements are unenforceable if: “(1) a trade secret or

confidential relationship does not exist; (2) the employer discloses the information

to others not in a confidential relationship; or, (3) it is legitimately discovered and

openly used by others.” 1st Am. Sys., Inc. v. Rezatto, 311 NW2d 51, 57 (SD 1981).

Integra and Lee argue the non-disclosure agreements in this case were

6. If the contract claim survives, the tortious interference with contract claim
must also survive. Although a separate cause of action, this tort is a
protection of contractual rights, which this Court has long recognized. See
Hayes v. N. Hills Gen. Hosp., 1999 SD 28, ¶17, 590 NW2d 243, 248 (citing
Commc’n Tech. Sys., Inc. v. Densmore, 1998 SD 87, 583 NW2d 125;
Landstrom v. Shaver, 1997 SD 25, ¶73, 561 NW2d 1, 16; Tibke v. McDougall,
479 NW2d 898 (SD 1992)); Case v. Murdock, 1999 SD 22, ¶11, 589 NW2d
917, 919. Furthermore, in this case, Raven’s tortious interference with
contract claim was not based on the misappropriation of a trade secret, but
rather the breach of the non-disclosure agreements. As a result, Raven’s
tortious interference claim was not preempted by the UTSA. See IDX Sys.
Corp. v. Epic Sys. Corp., 285 F3d 581, 586-87 (7thCir 2002) (“‘The tort of
inducing breach of a non-disclosure contract (the sort of contract
independently protected by [a statute similar to SDCL 37-29-7(b)(1)])’ ‘is not
based upon misappropriation of a trade secret.’ ‘It is based on interference
with the contract.’”).

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unenforceable because “Lee was not informed about what information Raven

considered secret, confidential, or proprietary”; “Raven disclosed the alleged secret,

confidential, [or] proprietary information to others not in a confidential

relationship”; and, the “alleged secret, confidential, [or] proprietary information was

legitimately discovered and openly used by others.”

Confidential Relationship

[¶12.] Integra and Lee contend that while “Raven and Lee may have been in

a confidential relationship as employer and employee, Raven’s claimed secret

process does not constitute a trade secret[.]” The first requirement in assessing

whether a non-disclosure agreement is enforceable is whether a trade secret or

confidential relationship exists. Id. In this case, the circuit court found that Raven

and Lee had a confidential relationship. See Walling Chemical Co. v. Bigner, 349

NW2d 647, 650 (SD 1984) (recognizing that an employer-employee relationship was

a confidential relationship). Integra does not assert that this finding was clearly

erroneous. Instead, Integra and Lee argue that because Lee was never informed

about what information Raven considered secret, confidential, or proprietary, “Lee

could not have known that he was violating the non-disclosure agreements.”

Integra and Lee argue that the circuit court erred by ignoring this fact in its

findings of fact and conclusions of law. Raven, however, was not required to inform

Lee of this information under Rezatto. 311 NW2d at 57. Furthermore, the circuit

court was free to disregard testimony it found to lack credibility. See Osman v.

Karlen & Assocs., 2008 SD 16, ¶30, 746 NW2d 437, 446. Therefore, the circuit court

did not err in determining that the first Rezatto factor was not satisfied.

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Disclosure of Information

[¶13.] Integra and Lee next argue that the circuit court erred in concluding

that Raven did not disclose secret, confidential, or proprietary information to others

not in a confidential relationship. Integra and Lee cite Rezatto for the proposition

that the test for whether secret, confidential, or proprietary information was

disclosed, which would render the non-disclosure agreements unenforceable,

requires determining if this information was disclosed to others “at all.” See 311

NW2d at 57. Integra and Lee point out that Raven often had people, other than

those in a confidential relationship with Raven, observe the process that Raven

asserts was secret, confidential, or proprietary. These instances, among many

others, included Raven permitting one of its competitors to tour its facilities,

allowing consultants who were not required to sign confidentiality agreements to

observe the Line, and not requiring contractors who assisted in the Line’s

installation to sign confidentiality agreements.

[¶14.] In response, Raven argues Rezatto does not stand for the proposition

that any dissemination of information invalidates a non-disclosure agreement.

Raven asserts that only reasonable efforts to maintain secrecy are required. See

Centrol, Inc. v. Morrow, 489 NW2d 890 (SD 1992). In Morrow, this Court, relying

on Rezatto, concluded that general dissemination would invalidate trade secret

protections, but that dissemination of confidential or proprietary information to

other members of a cooperative would not. See id. Moreover, Morrow stated that

the Rezatto decision was “consistent with the [UTSA].” Id. at 894-95. Under the

UTSA, absolute secrecy, as advanced by Integra and Lee, is not required. The

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UTSA only requires reasonable efforts to keep secret, confidential, or proprietary

information from general dissemination. SDCL 37-29-1(4)(ii).

[¶15.] Here, the circuit court found that Raven “engaged in reasonable efforts

to maintain the secrecy of its process for manufacturing string-reinforced plastic

film” and that “Raven did not disclose its process for manufacturing string-

reinforced plastic to persons outside a confidential relationship.” These findings

were based on extensive testimony given at trial that Raven had policies that

protected its Line from anyone not in a confidential relationship with Raven.

Because the circuit court’s findings were supported by the record, they are not

clearly erroneous. Therefore, the circuit court did not err in determining that the

second Rezatto factor was not satisfied.

Legitimately Discovered and Openly Used

[¶16.] Integra and Lee finally contend that the circuit court erred in

concluding that Raven’s Line was not legitimately discovered and openly used by

others in the industry. The circuit court concluded that “Raven developed a unique

process for manufacturing string-reinforced plastic film that has only been

replicated by Integra with the assistance of Lee.” Integra and Lee take issue with

this conclusion, asserting that “the circuit court ignored [ ] evidence to the

contrary.” However, testimony at trial established that Raven’s Line was so unique

that no other manufacturer, other than Integra with Lee’s assistance, could

replicate it. Lee had even told his manager at Raven that the Line could not be

replicated without his knowledge. Therefore, the record supports the circuit court’s

conclusion that Raven’s Line had not been legitimately discovered and openly used

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by others. Whether the circuit court “ignored” Integra and Lee’s “evidence to the

contrary” is not reversible error, as such determinations are left to the sound

discretion of the circuit court. See Osman, 2008 SD 16, ¶30, 746 NW2d at 446.

[¶17.] Integra and Lee have failed to satisfy any of the Rezatto factors. As a

result, Integra and Lee have failed to demonstrate that the circuit court erred in

ruling that the non-disclosure agreements were enforceable. Thus, Raven’s contract

claim based on these enforceable non-disclosure agreements survives, as well as the

circuit court’s grant of injunctive relief as a remedy.

[¶18.] 3. Whether the circuit court erred in concluding that
Integra engaged in unfair competition.

[¶19.] Integra and Lee argue that the circuit court’s conclusion that Integra

engaged in unfair competition “was unfair” and “erroneous.” The circuit court found

that Raven proved each element for tortious interference with contract. The circuit

court then concluded that Integra’s tortious interference also constituted unfair

competition. This conclusion was premised on Integra receiving a thirteen-year

head start in manufacturing string-reinforced plastic film after it induced Lee to

disclose Raven’s secret, confidential, or proprietary information.

[¶20.] The crux of Integra and Lee’s argument is that Raven’s unfair

competition claim should have been rejected by the circuit court because Lee did not

have a non-competition agreement with Raven. Thus, Integra and Lee conclude

that not allowing Lee to work for Integra was anti-competitive. However, in

Rezatto, this Court recognized that non-disclosure agreements are not anti-

competitive. 311 NW2d at 57 (citing 2 R. Callmann, The Law of Unfair

Competition, Trademarks and Monopolies, 51.2(c) at 363 (3d ed. 1968) (additional

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citations omitted)) (“[a]n agreement not to disclose information or solicit, unlike a

covenant not to compete, is free from challenge as a general restraint on trade”).

Furthermore, as Raven points out, Lee was not restricted by his non-disclosure

agreements from working at Integra; instead, Lee was only prohibited from using

Raven’s secret, confidential, or proprietary information while working at Integra.

This distinction was properly recognized by the circuit court, was not unfair or

erroneous, and does not require reversal.

[¶21.] 4. Whether the circuit court erred in granting the
permanent injunction.

[¶22.] Integra and Lee contend that the circuit court erred in “granting an

overly broad injunction that was not specifically tailored to redress the harm

alleged.” The circuit court granted Raven an injunction that prohibited Integra and

Lee from “operating Integra’s [line], or any portion thereof, for a period of two years”

and from “working on any project containing [a component of the Line] to

manufacture string-reinforced plastic film for two years.” This Court reviews a

circuit court’s decision to grant a permanent injunction under the abuse of

discretion standard. Halls v. White, 2006 SD 47, ¶4, 715 NW2d 577, 579 (citation

omitted) (stating that such a decision is left to the “sound discretion of the [circuit]

court”).

[¶23.] Permanent injunctions are authorized by SDCL 21-8-14, which

provides:

Except where otherwise provided by this chapter, a permanent
injunction may be granted to prevent the breach of an obligation
existing in favor of the applicant:

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(1) Where pecuniary compensation would not afford
adequate relief;
(2) Where it would be extremely difficult to ascertain
the amount of compensation which would afford
adequate relief;
(3) Where the restraint is necessary to prevent a
multiplicity of judicial proceedings; or
(4) Where the obligation arises from a trust.

Four additional factors are considered in determining whether to award injunctive

relief. These factors include: (1) whether the party to be enjoined caused the harm;

(2) whether irreparable harm would be suffered if the injunction were not granted;

(3) whether the party to be enjoined acted in bad faith or if the injury-causing

behavior was an innocent mistake; and, (4) in balancing the equities, whether the

hardship to be suffered by the enjoined party would be disproportionate to the

benefit to be gained by the injured party. Prairie Hills Water and Dev. Co. v. Gross,

2002 SD 133, ¶¶36-37, 653 NW2d 745, 753-54 (citations omitted).

[¶24.] The circuit court considered these factors and concluded that each had

been met. The circuit court determined that: “Both Lee and Integra have caused

and continue to cause harm to Raven by using Raven’s secret, confidential, or

proprietary information”; Raven has experienced and will continue to experience

irreparable harm as long as Lee and Integra use Raven’s secret, confidential, or

proprietary information; Integra and Lee’s use of Raven’s secret, confidential, or

proprietary information was not an innocent mistake; and, “the harm experienced

by Lee and Integra if the permanent injunction [was] issued [wa]s not

disproportionate to the harm incurred by Raven without the injunction.” Thus, the

circuit court concluded that “it [wa]s appropriate to exercise its discretion and enter

a permanent injunction in favor of Raven.” While Integra and Lee may disagree

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with the circuit court’s findings and conclusions on this issue, on this record, they

cannot demonstrate that the issuance of the injunction was an abuse of discretion.7

[¶25.] The circuit court is affirmed.

[¶26.] KONENKAMP, ZINTER, and SEVERSON, Justices and WILBUR,

Circuit Court Judge, concur.

[¶27.] WILBUR, Circuit Court Judge, sitting for MEIERHENRY, Justice,

disqualified.

7. Integra and Lee’s assertion that the injunction was overly broad rings hollow.
Raven requested an injunction that was indefinite in duration, one which
would last until another competitor discovered the specific process it used in
its Line. The circuit court exercised its discretion, however, and issued an
injunction that was for a period of two years, which was the amount of time
Integra’s president testified would have been required to build its line
without Lee. The circuit court’s decision demonstrates that it tailored the
injunction to the evidence and testimony presented at trial.

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