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decided: July 6, 1976.



David Freeman, Philadelphia, for appellants in Nos. 281 and 546 and appellees in No. 296.

John F. A. Earley, Jr., Edward Fackenthal, Norristown, for appellant in No. 296 and appellee in Nos. 281 and 546.

Jones, C. J., and O'Brien, Roberts, Pomeroy, Nix and Manderino, JJ. Eagen, J., did not participate in the consideration or decision of this case. Jones, C. J., concurs in the result.

Author: Manderino

[ 468 Pa. Page 107]


There are three appeals before us which arose out of an equity action brought against William H. Newbauer, Incorporated (Newbauer, Inc.) and its president and sole shareholder, William H. Newbauer (Newbauer) by College Watercolor Group, Inc. (Watercolor, Inc). In one of the appeals, No. 281 January Term, 1974, Newbauer, Inc., and Newbauer appeal from the order of the trial court which (1) enjoined Newbauer, Inc., and Newbauer from utilizing appellee's trade secrets involving water color reproductions, (2) awarded damages to Watercolor, Inc., because its trademark had been improperly used, (3) ordered Newbauer, Inc., and Newbauer to pay to Watercolor, Inc., monies due as the result of the sale of watercolor products, and (4) rescinded a contract for the sale by Watercolor, Inc., of original watercolors to Newbauer. In the second appeal at No. 546 January Term, 1974, Newbauer, Inc., and Newbauer appeal from an order dissolving a preliminary injunction bond filed by Watercolor, Inc., when the trial court issued a preliminary injunction which was later modified. In the third appeal, No. 296 January Term, 1974, Watercolor, Inc., appeals from the trial court's order modifying its earlier order holding Newbauer, Inc., and Newbauer in contempt for violating a preliminary injunction.

[ 468 Pa. Page 108]


After concluding that appellants had discovered the appellee's trade secrets through the use of misrepresentations and had used them in breach of confidence, the trial court issued a permanent injunction restraining appellants from:

"selling, displaying or giving away for promotional purposes, any watercolors, watercolor originals, copies, prints or other reproductions in any form belonging to or provided by plaintiff, or copies from or otherwise taken from any materials owned or supplied to defendants by plaintiff, or any such materials manufactured or processed by said defendants, or either of them directly or indirectly, by methods heretofore devised by said defendants, said methods having utilized trade secrets improperly obtained from the plaintiff, and said defendants are hereby permanently enjoined from infringing upon plaintiff's registered trademark 'Gray's'."

The trial court further held that appellants had improperly used the appellee's trademark and held appellants jointly and severally liable for $4,950 in compensatory damages and $5,000 in punitive damages. It also held appellants jointly and severally liable to the appellee for the sum of $36,040 owed to appellee as a result of sales of appellee's product through appellant Newbauer, Inc. Finally, the court rescinded a contract between appellant Newbauer and the appellee for the purchase of certain watercolor originals, provided the appellee returned the purchase price.

The appellee, Watercolor, Inc., is in the business of preparing and reproducing original watercolor paintings. It markets these reproductions, primarily to banks and other financial institutions for use in promotional campaigns

[ 468 Pa. Page 109]

    designed to encourage deposits. Since 1968, the appellee has been marketing these reproductions under the properly registered trademark "Gray's" Watercolors.

In October, 1971, appellant Newbauer, met the appellee's president, Paul D. McConaughy, at a banking convention. This meeting led to an arrangement whereby appellant, Newbauer, Inc., was to sell the appellee's reproductions in a five-state area. The agreement called for Newbauer, Inc., to receive a commission for each reproduction and frame sold through its efforts. The billing of financial institutions was to be done by Newbauer, Inc., and the proceeds were to be turned over to the appellee.

Throughout the life of the agreement, appellant, Newbauer, acting for his corporation, Newbauer, Inc., conducted a vigorous campaign on behalf of appellee's product. During the latter part of 1971 and the first quarter of 1972, he succeeded in generating a large volume of sales of promotional campaigns to financial institutions. At certain times, the appellee was unable to produce enough reproductions to meet the demand generated by the sales campaign. In late February, 1972, Newbauer brought his financial advisor, Thomas Kelly, to appellee's plant in order to evaluate the efficiency of the production methods and to suggest improvements. At this time certain of the confidential techniques utilized by the appellee were disclosed to both Newbauer and Kelly. Kelly later made a second visit to appellee's plant in the company of Frederick Dello, an artist.

Shortly thereafter, Newbauer asked Dello to devise a method for reproducing watercolor paintings and in March, 1972, Dello became an employee of Newbauer, Inc. At approximately the same time Kelly was commissioned by Newbauer to develop a process for the mass production of watercolors. In mid April, 1972, Newbauer and Dello visited the home and studio of Ernest Walden, appellee's artist. At that time they both saw

[ 468 Pa. Page 110]

    the appellee's process in the studio. A few days later, Newbauer asked Walden to leave appellee's employ and come to work for him, but Walden refused. Newbauer also asked one of his own employees to spy on the appellee, but the spying was never carried out.

Newbauer also entered into a personal contract to purchase sixty-three (63) original watercolor paintings from the appellee. At the time this contract was made, Newbauer told appellee's president, Paul D. McConaughy, that he wanted the paintings for his own private satisfaction and for tax purposes. The parties agreed that delivery would not be made until the "programs" for which the paintings were done had been completed. Prior to the completion of the "programs" Newbauer appeared at the appellee's studio, knowing McConaughy would be away visiting the Bank of Delaware because of certain complaints from that customer. Newbauer told the chief supervisor that he needed the original paintings in order to compare them to the copies because of complaints from the Bank of Delaware. He took fifty-four (54) originals which he then used to reproduce copies. These copies were passed off as the appellee's product, including the use of the trademark "Gray's."

During the life of the agreement appellant Newbauer became a minor shareholder in the appellee corporation. Subsequently, he expressed an interest in increasing his holding and insisted that appellee's president sell him a controlling interest in the corporation. Unless McConaughy assented, Newbauer threatened to have Newbauer, Inc., refuse to pay appellee $36,000 that was owing to it from sales of promotional campaigns. The ...

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