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NATIONAL CHEMSEARCH CORP. OF NEW YORK v. BOGATIN

August 21, 1964

NATIONAL CHEMSEARCH CORPORATION OF NEW YORK, Inc.
v.
Alfred L. BOGATIN and Madison Chemical Corporation



The opinion of the court was delivered by: HIGGINBOTHAM

Plaintiff, National Chemsearch Corporation of New York, Inc., (Chemsearch), is a Texas Corporation with its principal place of business in Dallas, Texas. Defendant, Alfred L. Bogatin (Bogatin), is a citizen of Pennsylvania and defendant, Madison Chemical Corporation (Madison), is an Illinois corporation with its principal place of business in Maywood, Illinois. Jurisdiction is founded upon diversity of citizenship in the requisite jurisdictional amount. *fn1"

This is a business piracy case in which plaintiff seeks a preliminary injunction *fn2" to restrain its former salesman, Bogatin, from violating certain provisions of his written employment contract with it which provided, inter alia, that Bogatin would not solicit or divert Chemsearch's customers in the territory which he previously covered for Chemsearch. Plaintiff also seeks injunctive relief against Madison, Bogatin's present employer, for conspiring with and inducing Bogatin to breach the foregoing contract.

 In addition to the contract and conspiracy claims, plaintiff also seeks relief against both defendants on the theory of unfair competition for unlawful divulgence and receipt of trade secrets. However, since I find that the defendants are liable on the first two grounds, it is not necessary to reach the question of unfair competition.

 For the purposes of the preliminary injunction, I make the following findings of fact:

 Both Chemsearch and Madison are engaged in what is known as the 'chemical specialties business.' *fn3" The products which they merchandise generally perform similar functions and are competitive. The chemical specialty business itself is highly competitive and operates, for the most part, by direct selling; the success or failure of an individual company in the field depends to a great degree upon the training, technique, and abilities of its individual salesmen and, also, upon the extent to which they are able to establish a continuing relationship with customers in the areas they serve. To build a competent sales force, Chemsearch has a well developed selection process for salesmen, as well as a detailed training program, including training aids, product guides, training in the field, and periodic sales analysis and training meetings. These items and techniques as well as the customer lists of Chemsearch are considered by it to be confidential. The customer lists in the form of black route books contain lists of customers, times called, sales made, likes, dislikes and interests of the customers, and products bought in the past. Because of the investment in each salesman's training, and the direct nature of his contacts, Chemsearch required each of its salesmen to sign a written employment agreement containing a restrictive covenant. Chemsearch has established a valuable and extensive trade in its products and a valuable good will among its customers.

 In January of 1962, Bogatin made application to Chemsearch for employment as a salesman and, after being interviewed and taking the aptitude tests mentioned above, was told that Chemsearch was interested in employing him. Prior to coming with Chemsearch, Bogatin had no experience selling chemical specialties and no experience selling in the territory which would subsequently be assigned to him. In discussing the terms of employment with Bogatin, it was agreed that he would undergo a week of training, after which he would become an employee of Chemsearch upon the execution of a written agreement of employment and would receive customer lists and other sales aids. After five days of training in which he received no commissions or customer lists, Bogatin signed the agreement on February 9, 1962. The terms were explained to him and Bogatin was fully aware that all Chemsearch salesmen were required to sign such contract, and that he would not become a Chemsearch salesman until he signed it.

 The agreement was under seal and stated $ 1.00 consideration as well as any 'other good and valuable consideration * * * paid by Company to Representative.' It was agreed therein that the employment relation could be terminated at any time by either party without notice. Bogatin also agreed that the following restrictive covenants were reasonable and necessary to the protection of Chemsearch's business and that the contract 'shall be construed under and governed by the laws of the STATE OF TEXAS.' The agreement stipulated that the following eight counties in Pennsylvania were assigned to Bogatin: Miflin, Juniata, Perry, Cumberland, Franklin, Adams, Huntingdon and Fulton. In return for employment, training, customer lists, and selling aids, Bogatin covenanted that for a period of one year after the termination of his employment with Chemsearch:

 In addition, Bogatin agreed not to divulge or use for his own benefit any confidential information obtained during the course of his employment and expressly recognized in the contract that such confidential information should include sales volume and strategy, number and location of sales representatives, and names and lists of Chemsearch's customers. See Appendix for complete agreement.

 Such restrictive covenants for salesmen are customary in the chemical specialty business, and defendant-Madison utilizes an even broader covenant in connection with its salesmen.

 After Bogatin signed the agreement on February 9, 1962, he was given customer lists and sales aids, and he proceeded to sell in the eight-county area *fn4" in central Pennsylvania until January 20, 1964, when he left Chemsearch to go with Madison. Bogatin's gross commissions were $ 11,500 in 1962 and $ 16,500 in 1963. During the period of his employment, Bogatin was the principal contact of Chemsearch with its customers in the eight county territory and became familiar with their specific problems and was able to form a close relationship with such customers.

 On January 20, 1964, Bogatin terminated his employment with Chemsearch and entered the employ of Madison as a 'field training representative,' a position which he continues to hold at the present time. Bogatin described this position as working with salesmen, going over their territory with them and assisting them in sales and problems. As early as January 23, 1964, Bogatin began to solicit and contact customers in the eight county territory. During the period from February 1964, until at least June 12, 1964 -- this suit was instituted on May 18, 1964 -- Bogatin made a series of sales of Madison products to various accounts he had formerly sold as customers of Chemsearch in the eight county area. In each instance, Bogatin attempted to conceal the fact that he had made such sale by putting the name of another employee of Madison on the order.

 In addition to these sales, Bogatin made many other calls on former Chemsearch customers in the eight county area, solicited sales, advised the customers of his association with Madison, and charged the expenses to Madison as a business expense. Bogatin took officers of Madison with him to many of these customers and they were introduced as employees of Madison who might be contacting them for sales in the future. Bogatin also advised Madison of the names of the customers he formerly served for Chemsearch and personally sent Madison catalogs to many former and potential customers of Chemsearch in the eight-county area. These acts of Bogatin were done with the knowledge of Madison, and were participated in by Madison will full knowledge of the restrictive covenants between Chemsearch and Bogatin. In evaluating conflicts of testimony and inferences to be drawn therefrom, the singular lack of candor on the part of Bogatin has led me to discredit much of his direct testimony.

 I

 DOING BUSINESS IN PENNSYLVANIA

 At the outset, defendants contend that plaintiff is 'doing business' in Pennsylvania without having registered with the Department of State and hence may not institute a suit in contract in this Court *fn5" under the provisions of Article X of the Business Corporation Act.

 Under § 1014 of Article X of the Business Corporation Act. *fn6" captioned 'Penalty for doing business without certificate of authority,' it is provided that 'any foreign business corporation which is required by the provisions of this act to procure a certificate of authority, but has not done so * * *' shall not institute an action on any contract in the Courts of Pennsylvania until the corporation obtains a certificate of authority. *fn7" This Section refers to § 1001 of the same Article which sets forth the circumstances in which a certificate of authority is required to be obtained:

 'A foreign business corporation, before doing any business in this Commonwealth, shall procure a certificate of authority to do so from the Department of State, * * * unless the entire business operations of the corporation within this Commonwealth are within the protection of the Commerce Clause of the Federal Constitution * * *.'8(Emphasis added.)

 The question, therefore, is whether plaintiff is doing business within the meaning of § 1001.

 Plaintiff's activities in Pennsylvania consist of solicitation by salesmen for orders for chemical specialty products manufactured in Dallas, Texas. The orders are subject to approval or rejection in Dallas and the salesmen have no authority to bind Chemsearch to any contract in Pennsylvania. If approved, the merchandise is shipped direct from Dallas to the customer and the customer is billed from and pays directly to Dallas, Texas.

 Chemsearch has held at least one sales meeting in Pennsylvania and at times the salesmen endeavor to collect delinquent accounts. Chemsearch has no office in Pennsylvania and no property other than samples and training and promotional material in the hands of individual salesmen. Chemsearch has 20 salesmen in Pennsylvania who solicited $ 846,146.78 in business for the period April 30, 1962 to April 30, 1963, and $ 1,087,601.95 for the period April 30, 1963 to April 30, 1964. It has no certificate of authority to do business in Pennsylvania.

 Although there are no Pennsylvania cases in point construing the meaning of 'doing business' under the Registration Section § (1001), analogous cases show that a greater nexus must exist than is present in the instant case.

 The standards set forth in Lutz and Law, supra, both service of process cases, were reiterated in Motch v. Merryweather Machinery Co. v. Pittsburgh School District, 381 Pa. 619, 116 A.2d 733 (1955), where the Court held that the rent of an office and office equipment, the extensive solicitation of orders, and the follow-up of orders and customer complaints in Pennsylvania did not constitute doing business in this State for the purpose of taxation.

 Since the salesmen in the instant case did not have authority to bind plaintiff to sales contracts in Pennsylvania, and the degree of contact herein is less than in the above-cited cases, the plaintiff is not doing business within the meaning of § 1001.

 However, defendants cite a different line of cases, *fn10" all construing the 1959 amendment to the Service of Process Section of Article X which established the so-called 'pecuniary benefit' test of doing ...


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