University Computing Company v. Lykes-Youngstown Corporation

• Author: Joanna H. Kim-Brunetti - Jeffrey K. Riffer - Gregory S. Bombard - Emily J. Friedman
• Pages: 281-317

281

APPENDIX J

504 F.2d 518 (1974)

UNIVERSITY COMPUTING COMPANY,

Plaintiff-Appellee-Cross-Appellant,

v.

LYKES-YOUNGSTOWN CORPORATION,

Lykes-Youngstown Computer Services Corp., and

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

No. 73-2688.

United States Court of Appeals, Fifth Circuit.

November 15, 1974.

Rehearing and Reheari ng Denied December 17, 1974.

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

Atlanta, Ga ., for defendants-app ellants- cross-appellees.

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

plaintiff- appellee- cross-appel lant.

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

trict Judge.

Rehearing and Reheari ng En Banc Denied December 17, 1974.

TUTTLE , Circuit Judge:

I. FACT S.

This case involves three separate claims for dama ges arising out of

a complicated series of transactions between four corporations and

a number of their executive officers. The trial lasted three week s and

the record is correspondingly lengthy and complex. We begin by

briefly summarizing the cr itical facts.

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Guide to Protecting and Litigating Trade Secrets

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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 corpora-

tion, 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 insurance, shipping and

other manufacturing enterprises. UCC was active in other pa rts of the

country, particularly in the southwest, offering essentia lly 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 ag reement and pursuant to it, UCC funded early

operations of the new corporation, including payrolls, equipment pur-

chases and other expen ses. These expenditures totalled $66,6 47.45.

[3] Several UCC employees were hired by the new corporation, includ-

ing defendant Oliver Shinn who became President of Lykes/UCC. [4]

The joint venture agreement provided UCC was to sell computer “hard-

ware” (i. e., computer equipment) and “software” to the new corpora-

tion. 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 controlled 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 mana ged, 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 ag reement

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 management of Lykes/

UCC. The original intent of the parties i s 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 man-

agement decisions, while LYC points to the terms of [528] the con-

tract, provisions of the Delaware Corporation Act and other extr insic

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University Computing Co. v. Lykes Youngstown Corp.

evidence to support its claim that the new corporation was to be

wholly independent.

The parties aired t heir disagreements at a meeting held on Sep -

tember 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 conversa-

tion on October 6 both sides agreed to terminate the joint venture.

UCC claims the matter was left open at the meeting a nd thereafter, and

that while both sides understood UCC would likely wish to withdraw,

the terms of that withdrawal and the amount of compensation for ini-

tial expenditures and loss of prospect ive profits were left unsettled.

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

puter Services Corp. (LYCSC) was formed as a wholly owned subsid-

iary of LYC. Oliver Shinn became President of this corporation; 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 exis-

tence of LYCSC until a story on it appeared in the Wall Street Journa l

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 ag reement was pre-

pared 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 rema ined in

substantial disagreement over the amount of compensation UCC was

to receive. The draft agreement was not signed.

During the period between July 1 a nd September 30, while the

disagreement over the management of Lykes/UCC was developing,

Oliver Shinn met twice with executive officers of LYC. UCC claims

to have been unaware that these meetings were taking place. In any

event, it is undisputed that UCC certainly was unaware of the mat-

ters discussed at these meet ings. Among these topics d iscussed

were the desirability of Lykes/UCC being independent of UCC and

LYC, the burden of paying the 10% management fee owed UCC under

the joint venture agreement, and the fact that Shinn was confident

the UCC name was unlikely to further sale s efforts in the southeast

where UCC was virtually unk nown. Although one of the meetings

Shinn had with LYC executives took place when he was still a Vice

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