Appendix I University Computing Co. v.Lykes-Youngstown Corp., 504 F.2d 518 (5th Cir. 1974)

• Pages: 257-295

APPENDIX I

504 F.2d 518 (1974)

UNIVERSITY COMPU TING COMPANY,

Plaintiff-Appellee-Cross-Appellant,

v.

LYK ES-YOU NGST OWN C ORP ORAT ION,

Lykes-Youngstown Computer Services Corp., and

Oliver F. Shinn, Defendants-Appellants-Cross-Appellees.

No. 73-2688.

United States Court of Appeals, Fifth Circuit.

Novembe r 15, 1974.

Rehearing and Rehearing Denied December 17, 1974.

Charles F. Clark, Ted R. Manry, III, Tampa, Fla., R. Byron Attridge,

Atlanta, Ga., for defendants-appellants-cross-appellees.

Hugh M. Dorsey, Jr., W. Lyman Dillon, Atlanta, Ga., for

plaintiff-appellee-cross-appellant.

Before BROWN, Chief Judge, TUTTLE, Circuit Judge, and YOUNG,

District Judge.

Rehearing and Rehearing En Banc Denied December 17, 1974.

TUTTLE, Circuit Judge:

I. FACTS

This case involves three separate claims for damages arising out of

a complicated series of transactions between four corporations and

a number of their executive officers. The trial lasted three weeks

and the record is correspondingly lengthy and complex. We begin

by briefly summarizing the critical facts.

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Guide to Protecting and Litigating Trade Secrets

258

A. Joint Venture Agreement Between UCC and LYC.

University Computing Company (UCC), a Texas corporation, and

Lykes-Youngstown Corp. (LYC), a Delaware corporation, entered

into a written agreement on July 1, 1969 to create jointly a new

corporation, to be called Lykes-University Computing Company

(Lykes/UCC), which was to offer computer [527] services [1] in the

southeastern United States. This enterprise was a new venture for

LYC, which is a large diversified holding company active in insur-

ance, shipping and other manufacturing enterprises. UCC was

active in other parts of the country, particularly in the southwest,

offering essentially the same services as Lykes/UCC was to offer.

The joint venture was designed to open new markets for the sale

of UCC’s computer systems. [2]

As part of their agreement and pursuant to it, UCC f unded

early operations of the new corporation, including payrolls, equip-

ment purchases and other expenses. These expenditures totalled

$66,647.45. [3] Several UCC employees were hired by the new cor-

poration, including defendant Oliver Shinn who became President

of Lykes/UCC. [4] The joint venture agreement provided UCC was

to sell computer “hardware” (i. e., computer equipment) and “soft-

ware” to the new corporation. UCC was further to receive 10% of

the gross disbursements of the new corporation for the first year

for “management services.” LYC agreed to have its various con-

trolled subsidiaries (with the exception of Youngstown Sheet and

Tube Co.) purchase computer services from the new corporation.

The agreement did not set forth in any greater detail the manner in

which the corporation was to be managed, or by whom.

The new corporation, Lykes/UCC, was chartered in Delaware,

and its articles of incorporation provided for a Board of Directors

to be composed of four individuals, who then had the option of

electing a fifth. This was pursuant to the terms of the joint venture

agreement which provided that UCC and LYC would each select

two members of the Board of Directors of Lykes/UCC.

By October, 1969, before either party had contributed capital

and before stock had been issued, the two original members of

the joint venture came to disagree over the day-to-day manage-

ment of Lykes/UCC. The original intent of the parties is now in

dispute, with UCC pointing to the fee for “management services”

and other terms of the contract as evidence that it was intended to

make operational management decisions, while LYC points to the

terms of [528] the contract, provisions of the Delaware Corporation

University Computing Co. v. Lykes-Youngstown Corp.

259

Act and other extrinsic evidence to support its claim that the new

corporation was to be wholly independent.

The parties aired their disagreements at a meeting held on

September 30, 1969. The outcome of this meeting is now also in

dispute. LYC claims UCC agreed to make a final decision, prior

to October 7, about remaining in the joint venture and that in a

telephone conversation on October 6 both sides agreed to termi-

nate the joint venture. UCC claims the matter was left open at the

meeting and thereafter, and that while both sides understood UCC

would likely wish to withdraw, the terms of that withdrawal and

the amount of compensation for initial expenditures and loss of

prospective profits were left unsettled.

On October 7, 1969, a fourth corporation, Lykes-Youngstown

Computer Services Corp. (LYCSC) was formed as a wholly owned

subsidiary of LYC. Oliver Shinn became President of this corpora-

tion; all property formerly owned by Lykes/UCC was taken over

by LYCSC, and the new subsidiary of LYC proceeded to enter into

the business planned for Lykes/UCC. UCC had no part in the

decision to create this fourth corporation, and UCC now claims it

wasn’t aware of the existence of LYCSC until a story on it appeared

in the Wall Street Journal on October 14, 1969. It is undisputed that

UCC did not authorize the creation of the new corporation, nor did

UCC authorize the seizure of all Lykes/UCC’s property.

While a draft of a rescission and termination agreement was

prepared by UCC following the October 6 telephone conversation,

and a copy was sent to LYC for its consideration, it is undisputed

that the terms of UCC’s withdrawal were unsettled and the parties

remai ned in sub stantial disagre ement over the a mount of compe n-

sation UCC was to receive. The draft agreement was not signed.

During the period between July 1 and September 30, while the

disagreement over the management of Lykes/UCC was devel-

oping, Oliver Shinn met twice with executive officers of LYC.

UCC claims to have been unaware that these meetings were tak-

ing place. In any event, it is undisputed that UCC certainly was

unaware of the matters discussed at these meetings. Among these

topics discussed were the desirability of Lykes/UCC being inde-

pendent of UCC and LYC, the burden of paying the 10% manage-

ment fee owed UCC u nder the joint ventu re agreement, and the fact

that Shinn was confident the UCC name was unlikely to further

sales efforts in the southeast where UCC was virtually unknown.

Although one of the meetings Shinn had with LYC executives took