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Rycoline Products, Inc. v. C&W Unlimited

96-2567 (U.S. Dist. Ct. D. N.J. 1998) (Unpublished)

SUCCESSOR COMPANIES; CONFIDENTIALITY—A company that purchases the assets of its predecessor cannot maintain an action for breach of confidentiality against its seller’s former employees because New Jersey law doesn’t allow assignment of such claims prior to final judgment.

In early 1980, two employees of a chemical manufacturing company (Old Rycoline) left to start a competing company (C&W). Later that year, Old Rycoline threatened to take legal action against C&W if it did not cease manufacturing and marketing a chemical solution alleged to be derived from a secret formula of Old Rycoline’s. In 1981, Old Rycoline was liquidated and its assets purchased by a company which then changed its name to Rycoline. In May, 1995, Rycoline sued C&W and four individuals who had left Rycoline in 1994 to work for C&W. Rycoline sought summary judgment on all its claims, which included misappropriation of trade secrets, breach of contract, tortious interference with property, conversion, and fraud.

Rycoline sought summary judgment that C&W used a formula obtained from Old Rycoline to manufacture its product. The United States District Court denied summary judgment because Rycoline was not really seeking a judgment of law, but just a determination of facts, leading the Court to question how, “as a matter of logic, facts could ever be established as a matter of law.” Rycoline also sought summary judgment that one of C&W’s products was created using information misappropriated from Rycoline. The Court denied this claim on substantive grounds, finding that Rycoline failed to establish any of the elements of misappropriation. A claim for misappropriation must demonstrate: (1) the existence of a trade secret, (2) communicated in confidence to an employee who (3) disclosed the secret, in breach of the confidence, (4) to a competitor that had knowledge of the breach and (5) who used the secret to the detriment of the plaintiff. Most importantly, Rycoline failed to show that it even had a trade secret or that its formulas were not being used by others in the industry. The lack of any confidentiality agreements also led the Court to conclude that the formula may not have been communicated in confidence. The Court stated that even though a jury might conclude there was misappropriation that was not the only conclusion that a jury might have reached and therefore the claim did not merit summary judgment.

Rycoline sought a tolling of the 6 year statute of limitations for its contract and tortious injury to property claims. The “discovery rule” delays accrual of a cause of action as long as a party is reasonably unaware it has been injured or that the injury is due to the fault of an identifiable person or entity. The party seeking to invoke this rule bears the burden of establishing its applicability. The District Court found that Rycoline knew of its injuries prior to 1994 or 1995. Rycoline knew the employees left in 1980 to form a competing company, and because of Rycoline’s suspicions that formulas were stolen, Rycoline was at least on inquiry notice regarding the misconduct of the former employees. The 1980 letter from Old Rycoline to C&W threatening legal action was even more convincing evidence that Rycoline knew of potential misconduct earlier than it claimed. Rycoline also asserted that C&W’s misappropriation was a continuing wrong which tolled the statute of limitations and created a new, actionable tort upon each successive use of the trade secret. The District Court agreed, and applied the discovery rule to misappropriation claims that arose after May, 1989.

Finally, the defendants sought to dismiss all claims on the theory that Rycoline was simply an assignee of Old Rycoline, and therefore, could not assert any tort claims arising before 1981 because those claims belonged solely to Old Rycoline, who was not a party to the action. Pursuant to New Jersey law, tort, fraud, and conversion claims are not assignable prior to final judgment. Accordingly, these claims were dismissed. However, the Court did not dismiss the misappropriation claim because it encompassed continuing behavior actionable by Rycoline in its own right.


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