Don't start a competing business using your boss's equipment

Nedschroef Detroit Corp. v. Bemas Enterprises LLC, 2015 WL 2453511, No. 14–10095 (E.D. Mich. May 22, 2015)

 

Defendants Rigole and LePage were Nedschroef employees in Detroit who formed a competing company, Bemas, while still working for Nedschroef. Nedschroef makes industrial machines that produce metal fasteners, such as nuts, bolts, and screws, and the Detroit operation provided service and replacement parts for US customers.  Rigole was the highest ranking Nedschroef employee in North America, while LePage was a project and service engineer.  Both possessed significant authority and access to proprietary information.

 

In late 2010/early 2011, the Nedschroef Detroit employees were told that the Detroit operation would be closed unless business improved, and employees received a pay cut.  Rigole and LePage, using the names of their significant others, formed Bemas a few months later.  While the individual defendants were still employed by Nedschroef, Bemas sold replacement parts for Nedschroef machines and serviced Nedschroef machines.  Nedschroef presented evidence that they copied proprietary drawings of replacement parts (rather than reverse engineering from the parts), though defendants denied this, and also denied obtaining a customer list from Nedschroef’s private server, claiming instead that Rigole learned their names from his years working at Nedschroef.  They said that, when people contacted them in their capacity as Nedschroef employees and said that Nedschroef’s price was too high or delivery time too long, they’d tell customers about Bemas and provide a quote.  Though they maintained that they had little control over Nedschroef pricing, which was set at the corporate level in Belgium, they had access to Nedschroef’s price list. Amost all of Bemas’ customers were first customers of Nedschroef, and almost all of the goods and services offered by Bemas were offered by Nedschroef.

 

Nedschroef further alleged that defendants used Nedschroef’s employees, equipment, warehouse and other resources to run Bemas and compete against Nedschroef. For the first two and a half years of Bemas’ existence, Rigole and LePage conducted the company’s business while employed by Nedschroef and using their Nedschroef-owned computers. Suppliers shipped parts to Bemas at Nedschroef’s warehouse, where Bemas would use Nedschroef’s forklift to unload the goods and then ship them to Bemas’ customers. Nedschroef alleged that this caused consumer confusion, such as an email in which Rigole discussed an order with a supplier and said “please do not send emails concerning Bemas to my Nedschroef email address,” getting the response “[the order] is a Nedschroef order, is it not? Greg quoted this to Nedschroef and I assumed this is who we sold it too [sic], so [the order] is for Bemas?” Another person sent a “Nedschroef Order” to Bemas, and other suppliers appeared confused.

 

The court easily found misappropriation of corporate opportunities and breach of fiduciary duty and the duty of loyalty, as well as misappropriation of trade secrets (even if defendants’ version of events was true, they got proprietary drawings from Nedschroef customers who received them from Rigole and LePage; the defendants knew that the drawings shouldn’t have been given to customers except in “exceptional circumstances” after consultation with Belgium).  The evidence also established conversion of the drawings and other property used to compete directly against Nedschroef.  Nedschroef also won on unjust enrichment and civil conspiracy.

 

Interestingly, the court found no false designation of origin/false advertising under the Lanham Act because defendants didn’t use any “false designation of origin, false or misleading description of fact, or false or misleading representation of fact.” Any confusion was due to the individual defendants’ dual roles as representatives of Nedschroef and Bemas.  The Michigan Consumer Protection Act claims failed because it requires a consumer transaction, and these were business transactions.

 

However, the district court found common-law unfair competition because of the likelihood of confusion. The parties sold the exact same goods/services and the same marketing channels (that is, Rigole and LePage), and defendants’ conduct caused actual confusion among suppliers, which allowed an inference of likely confusion among buyers.  (Hmm, price and sophistication would seem to cut against that for the consumers, but ok.)

 

Finally, the court found tortious interference with prospective economic advantage despite defendants’ arguments that Bemas only provided parts for and/or serviced Nedschroef machines if customers previously requested a quote for the same part or service from Nedschroef and rejected the quote. But before Rigole and LePage formed Bemas, there was only one source in North America for the majority of the parts needed for Nedschroef machines: Nedschroef. Without an alternative, the customer would have had to purchase the parts from Nedschroef Detroit at the price quoted or go without the part. “Presumably the latter option was not a realistic one where the customer relies on the parts to operate their Nedschroef machine.”

The defendants were permanently enjoined from further unfair competition to sell Nedschroef  parts or services because their conduct, the court found, “caused a loss of goodwill and competitive market position … which courts have recognized cannot be fully compensable by monetary damages.” Nedschroef doesn’t have a huge market share, so an injunction precluding defendants from providing replacement parts for Nedschroef machines left substantial legitimate business for them to seek.

 

Nedschroef also was entitled to the return of compensation paid to the individual defendants, to Bemas’ profits from their breach of fiduciary duties, and treble damages plus costs and attorney’s fees from the conversion. [How are the damages from the conversion, as opposed to the other conduct, going to be measured?]