Witmer v. Arkansas Dailies, Inc. , 202 Ark. 470 ( 1941 )

The majority opinion has substantially and correctly stated the facts, but, in my opinion has clearly misapplied the law to the facts, which are without substantial dispute. Appellee, Arkansas Dailies, Inc., is a small corporation with a capital stock of $10,000, all of which has been expended in developing and building a purely service organization, with the exception of a small amount invested in office equipment. Its assets are intangibles, consisting of contracts with daily newspapers in Arkansas and in neighboring states to supply them with foreign advertising which it solicited and secured from manufacturers and others throughout the country by agents in different cities. For ten years prior to October 9, 1939, appellant had been its general manager, secretary and a director, beginning his employment in 1929. From the beginning he was placed in full charge of the offices and management of the business upon a salary and commission. It was his business and his alone, as well as his duty, to solicit and procure contracts with publishers in Arkansas and in other states, to keep in close touch with them for his company and to render to it full time, faithful and loyal service. This he apparently did for many years and the business grew from one with 8 or 9 clients to one with 54 clients, and all of them knew the Arkansas Dailies only through him, and, to them, he was in fact the Arkansas Dailies. In other words, he was the company. He was paid a good salary, did a good job and had the entire trust and confidence, not only of the company, but of its clients, who were, in effect, his clients. But, some 5 or 6 years before he severed his connection with appellee, he determined to go into business for himself in competition with appellee. One of his witnesses, Donald Murray, testified on cross-examination as follows: "Witmer first talked to me about going into business in competition to the Arkansas Dailies about six years ago. He said he would like to buy Arkansas Dailies. He talked to me about it confidentially. . . . Witmer and I were close friends." So, it appears that, for several years before his resignation as general manager, he had carefully planned his action to get control of appellee. At the meeting in Hot Springs on October 8, 1939, appellant told Palmer and Hussman that they would not be able to agree on plans for future operation, that he had a demand to make. If they would give him 50 per cent. of the stock free of charge, he would remain with the company; otherwise he would quit, form a company of his own, and, within one year, would take away all the clients of the company except those owned by Palmer. Palmer testified: "Witmer said if you will give me a half interest in the business, I will stay with the company. If you don't I will go out and take away all these papers Arkansas Dailies represents except those you own, and within a year you will have to merge with me on that basis." Hussman testified to the same effect, and appellant does not deny this testimony.

The law is not in dispute, generally speaking, only its application. The general rule is thus stated in 64 A.L.R. 784: "Generally it is held that directors or officers of a corporation are not by reason of the fiduciary relationship they bear toward the corporation and the stockholders thereof precluded from entering into and engaging in a business enterprise independent from, though similar to, that conducted by the corporation itself, provided that in doing so they act in good faith and do not interfere with the business engaged in by the corporation." 19 C.J.S., title "Corporations," p. 160, states that such a person, a director or officer, "may not wrongfully use the corporation's resources therein, nor may he enter into an opposition business of such a nature as to cripple or injure the corporation." And 13 Am.Jur., p. 953, 999, states they may do so, "Provided in doing so they act in good faith and do not interfere with the business enjoyed by the corporation."

So, the general rule is well settled and the difficulty arises in applying the rule to the facts in hand. The author of the majority opinion also wrote the opinion in Dudney v. Wilson, 180 Ark. 416, 21 S.W.2d 615. In the case at bar it is stated that no fiduciary relation existed between appellant and appellee corporation, but in that case, Trice v. Comstock, 121 F. 620, 61 L.R.A. 615, was cited and quoted from as follows: "Every agency creates a fiduciary relation, and every agent, however limited his authority, is disabled from using any information or advantage which he acquires through his agency, either to acquire property or to do any other act which defeats or hinders the efforts of his principal to accomplish the purpose for which the agency was established." That was good law in Dudney v. Wilson, supra. I think it is still the law and the majority opinion has departed from it. If "every agency creates a fiduciary relation," can any one doubt that appellant was an agent or vice principal of appellee corporation and was, therefore, a fiduciary as to it? And if "every agent, however limited his authority, (appellant's authority was unlimited) is disabled . . . to do any other act which defeats or hinders the effect of his principal to accomplish the purpose for which the agency was established, " why is it that the majority now say appellant may terminate his agency, go out and destroy the business of appellee, which it has paid him to build up over a period of ten years? See, also, Lybarger v. Lieblong, 186 Ark. 913,56 S.W.2d 760; Harris v. Gilmore, 197 Ark. 641,124 S.W.2d 810.

In that case of Trice v. Comstock, Trice and another were real estate brokers and they employed Comstock and Reitmeyer as their agents. They had listed for sale a large tract of land. By reason of his agency or employment, Comstock acquired information of this land, the owner, the price and terms of sale. He quit the service of Trice and his partner and entered into business himself. Later he made a sale of this large tract of land and suit was brought by his former employers to have a trust declared upon the fruits of the transaction. Judge SANBORN, speaking for the court of appeals, 8th circuit, 121 F. 622, 61 L.R.A. 176, reversed the decree of the district court and ordered a decree for appellants. After stating that "the law peremptorily forbids every one who in a fiduciary relation, has acquired information concerning or interest in the business or property of his correlate from using that knowledge or interest to prevent the latter from accomplishing the purpose of the relation," continues by defining what is meant by a fiduciary relation as follows: "And, within the prohibition of this rule of law, every relation in which the duty of fidelity to each other is imposed upon the parties by the established rules of law is a relation of trust and confidence. The relation of trustee and cestui que trust, principal and agent, client and attorney, employer and an employee, who through the employment gains either an interest in or a knowledge of the property or business of his master, are striking and familiar illustrations of the relation. From the agreement which underlies and conditions these fiduciary relations, the law both implies a contract and imposes a duty that the servant shall be faithful to his master, the attorney to his client, the agent to his principal, the trustee to his cestui que trust, that each shall work and act with an eye single to the interest of his correlate, and that no one of them shall use the interest or knowledge which he acquires through the relation so as to defeat or hinder the other party to it in accomplishing any of the purposes for which it was created." Later in the opinion, the learned jurist says: "Nor is it any defense to the suit to enforce this trust that the agency had terminated before the confidence was violated. The duty of an attorney to be true to his client, or of an agent to he faithful to his principal, does not cease when the employment ends, and it cannot be renounced at Will by the termination of the relation. It is as sacred and inviolable after as before the expiration of its terms."

See, also, Southwest Pump Machinery Co. v. Forslund,226 Mo. App. 262, 29 S.W.2d 165. There the court stated the facts as follows: "Southwest Pump Machinery Company was first a partnership composed of defendant Forslund and two associates. Later it was organized into a corporation, of which Forslund was an officer and general manager. During a long period of time and by the expenditure of much money a favorable business and reputation were built by advertising, personal solicitation and otherwise, and many customers established. Valuable contracts with various concerns for the sale and disposition of their products were acquired. Defendant decided he wanted the business and first made some move to buy it. Suddenly he quit his position as manager and entered business for himself under a scheme to deprive the corporation of its contracts with its various patrons and to convert such a business to his own use, inducing the corporation's patrons to cancel their contracts with the corporation and establish business relations with him. He remained an officer of the corporation for some months after establishment of his own independent business." The trial court enjoined the defendant from pursuing such a course of conduct for three years, and the Kansas City court of appeals affirmed the decree. I can see no valid distinction in fact or law to be made between that case and this. It was there said: "As a director and as president of the corporation he occupied a fiduciary relation to the company and to its stockholders. His position was one of trust. He was bound to act with fidelity and to subordinate his personal interest to the interest of the company should there be a conflict. He was required at all times to exercise the utmost good faith toward the corporation. His position is treated in the same way as that of a trustee or guardian, and he is not permitted to assume a position inconsistent with this relation. The evidence in this case abundantly demonstrates that defendant failed to act in good faith and unselfishly, but was animated by motives of self-interest if not by revenge against his benefactors. He sought individual profit at the expense of his principal, grossly violated a trust relationship, and committed a flagrant breach of duty. The law will not tolerate and emphatically condemns such conduct. . . . In this case it is not wholly a question as to whether defendant had a right to engage in a competing business after he had severed all relation with the company, but is primarily a question of his duty and obligation to refrain from injuring a company of which he was president and a director. An injury of any character would be prohibited in the absence of other adequate remedy such as the facts in this case show."

We are unable to understand how the majority can say appellant did not occupy a fiduciary relation to appellee, in view of the foregoing quoted authorities, and, as we understand the opinion, it is based on the assumption that such relation did not exist. Perhaps because the relation terminated when he resigned his position, but the authorities hold that the fact that a termination of the relation was had before the confidence and trust were violated is no defense to the suit. Judge SANBORN said so in Trice v. Comstock, supra. It was not so much a question of whether "he had a right to engage in a competing business after he had severed all relation with the company, but is primarily. a question of his duty and obligation to refrain from injuring a company" of which he had been secretary, general manager and director. The quoted language is from the Forslund case, supra. It must be admitted that, so long as his connection with appellee existed, there was a fiduciary relation, and the authorities cited show that it is no defense for him to resign such relation and then undertake to destroy his former benefactor.

Cases cited and relied on in the majority opinion, such as El Dorado Laundry Co. v. Ford, 174 Ark. 104, 294 S.W. 393, and Fulton Grand Laundry Co. v. Johnson,140 Md. 359, 117 A. 753, 23 A.L.R. 420, are not in point. They hold that the names of the patrons of a laundry on a particular route are not trade secrets which will be protected by injunction to prevent a driver employed on such route from utilizing it and soliciting the patronage of such persons when he leaves the service of his employer and enters business for himself. Appellant's connection with appellee is not comparable to that of a laundry driver or a truck driver on an ice delivery route. He was not selling a commodity, but a service to a limited number of clients — only 54 in 10 year's work. Nor was his connection comparable to that of an officer or employee in a department store whose business is the sale of goods, wares and merchandise to thousands of customers.

It is, therefore, my view that the decree of the trial court should be affirmed on direct appeal, but the injunction granted should be extended to three years on the cross-appeal. I am authorized to say that Mr. Justice HOLT agrees with this dissent.