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Cornerstone Systems, Inc. v. Knichel Logistics

August 24, 2006

CORNERSTONE SYSTEMS, INC., A TENNESSEE CORPORATION, PLAINTIFF,
v.
KNICHEL LOGISTICS, L.P., A PENNSYLVANIA LIMITED PARTNERSHIP; KNICHEL MANAGEMENT CORPORATION, A PENNSYLVANIA CORPORATION; WILLIAM R. KNICHEL, AN INDIVIDUAL; ISRAEL BARKLEY, AN INDIVIDUAL; KANDACE BARKLEY, AN ELECTRONIC FILING INDIVIDUAL; JUSTIN BARKLEY, AN INDIVIDUAL; TANYA EKAMA, AN INDIVIDUAL; JESSICA GRANT, AN INDIVIDUAL; RACHEL GRANT, AN INDIVIDUAL; KRISTY KNICHEL, AN INDIVIDUAL; WILLIAM KNICHEL, JR., AN INDIVIDUAL; SCOTT KNECHTEL, AN INDIVIDUAL; CHAD MEYERS, AN INDIVIDUAL; AND JENNIFER SAPIENZA, AN INDIVIDUAL, DEFENDANTS,
v.
CORNERSTONE SYSTEMS, INC.; RICK RODELL; TIM CLAY; AND PAT NIEMAN, COUNTERCLAIM DEFENDANTS.



The opinion of the court was delivered by: David Stewart Cercone, United States District Judge

MEMORANDUM OPINION

I. INTRODUCTION.

Plaintiff, Cornerstone Systems, Inc. ("Cornerstone"), filed a complaint in replevin on Friday, April 25, 2003, seeking to recover possession of certain property comprised of "sensitive, proprietary and confidential information in the possession of the defendants," and simultaneously filed a Motion for a Temporary Restraining Order pursuant to FED. R. CIV. P. 65(b).*fn1 After a hearing, the Court found that Cornerstone failed to meet its burden and the Motion for a Temporary Restraining Order was denied.

Cornerstone then filed an amended complaint against Defendants, Knichel Logistics, L.P., Knichel Management Corporation, William Knichel and several employees of Knichel Logistics*fn2 ("Knichel Defendants" of "Knichel"), alleging: (1) misappropriation of trade secrets at Counts I and II; (2) false designation of origin/false description in violation of 15 U.S.C. § 1125(a) at Counts III and IV; (3) breach of duty of loyalty at Counts V and VI; (4) tortious interference with contractual and/or business relationships at Count VII; and (5) replevin at Count VIII. The Knichel Defendants answered and filed a counterclaim alleging: (a) unfair competition at Count I; (b) tortious interference at Count II; and (c) breach of contract/restitution at Count III. An amended counterclaim was later filed by the Knichel Defendants adding claims of defamation at Count IV and business disparagement at Count V. The parties have filed motions for summary judgment and the matters are now before the Court.

II. STATEMENT OF THE CASE

Plaintiff, Cornerstone Systems, Inc. ("Cornerstone"), is a Tennessee corporation that operates as a non-asset-based transportation company with regional offices throughout the United States. (Amended Complaint ¶¶ 1 and 22). Certain companies, like Cornerstone, are known in the United States transportation industry as intermodal marketing companies ("IMCs") and brokers ("Brokers")(collectively referred to as "IMC/Brokers")*fn3 and serve their customers by making the logistical arrangements for the transportation of large shipments of freight from one location to another throughout the United States. (Amended Complaint ¶ 23; Knichel's Concise Statement of Material Facts ("CSMF") ¶ 11). To facilitate this service, an IMC/Broker typically negotiates and enters into contracts with freight carriers such as railroad and trucking companies ("Carriers") to transport freight for the benefit of the customers and/or the accounts of the IMC/Broker. (Knichel's CSMF ¶ 12).

Contracts between Carriers and IMC/Brokers typically quote or reference a series of standard rates the Carrier charges for shipment. (Amended Complaint ¶ 25; Knichel's CSMF ¶¶ 13 & 14). Once a Carrier and IMC/Broker enter into a General Contract, the parties often negotiate special commodity rates ("Special Price Quotes or SPQ's") to apply between the parties with respect to certain shipments. (Amended Complaint ¶ 26; Knichel's CSMF ¶ 15). The SPQ's fall below the standard rates quoted or referenced in the contract, and can be negotiated only if the IMC/Broker and the Carrier have entered into a general contract. Id. The SPQ's are supposed to be kept confidential between the Carrier and the IMC/Broker in order to protect any competitive advantage the IMC/Broker enjoys under a particular SPQ. (Cornerstone's Response to Concise Statement of Material Facts ("RCSMF") ¶ 15). It also protects a Carrier from being approached by another IMC/Broker and demanding from the Carrier an equivalent SPQ. Id. A customer/shipper may transfer an SPQ from one IMC/Broker to another by using what is referred to as a "replacement letter." (Knichel's CSMF ¶ 17). In addition, if a customer/shipper wants to add another IMC/Broker to an SPQ, the customer/shipper may do so by using what is referred to as a "me too letter." Id.

In July of 1997, William Knichel ("Knichel") became an employee of Cornerstone, representing Cornerstone in Western Pennsylvania. (Amended Complaint ¶ 38 & Ex. A). On or about April 26, 2000, Knichel became an independent agent of Cornerstone responsible for the routing of freight, selection of carriers, negotiation of rates, rail billings, invoicing, collections and customer service on behalf of Cornerstone. (Knichel's CSMF ¶¶ 32 & 33). During the term of his association with Cornerstone, Knichel traded under the name "Cornerstone Systems - Pittsburgh (or PGH)." (Knichel's CSMF ¶ 40). Though the agency letter agreements did not prohibit Knichel from billing shipments through an ICM/Broker other than Cornerstone, there is no evidence that Knichel was anything but an exclusive agent of Cornerstone during their relationship.

By letter dated March 28, 2003, Knichel notified Cornerstone that he was terminating his relationship with Cornerstone effective April 27, 2003. (Knichel's CSMF ¶ 49; Amended Complaint Ex. C). Following the submission of his termination letter, Knichel continued to book transportation business through Cornerstone and to perform the duties and obligations set forth in his agency agreements with Cornerstone up through and including the last business day of the relationship. (Knichel's CSMF ¶ 51).

On April 11, 2003, more than two (2) weeks prior to the effective date of his resignation as independent agent for Cornerstone, Knichel sent letters to several customers announcing that the "entire Cornerstone Systems Pittsburgh office [had] resigned from Cornerstone Systems effective April 27, 2003." (Amended Complaint Ex. E). The letter was on "Cornerstone Systems - PGH" letterhead and stated that Knichell Logistics had "secured our own rail contracts, insurance coverage, and over the road brokerage authority." Id. Further, Knichel included a solicitation of the customers' business for Knichel Logistics by enclosing a replacement letter that would ". . . replace Cornerstone Systems with Knichel Logistics for any special quotes . . . and prevent Cornerstone Systems from participating in any future business under [the] quotes." Id.

On April 21, 2003, during the period of his agency agreement with Cornerstone, Knichel sent a letter to several draymen on Knichel Logistics letterhead indicating that the "Pittsburgh office of Cornerstone Systems would no longer be representing Cornerstone Systems as of the close of business on Friday, April 25, 2003." (Amended Complaint Ex. F).

Cornerstone then instituted this action.

III. LEGAL STANDARD FOR SUMMARY JUDGMENT

Pursuant to FED. R. CIV. P 56(c), summary judgment shall be granted when there are no genuine issues of material fact in dispute and the movant is entitled to judgment as a matter of law. To support denial of summary judgment, an issue of fact in dispute must be both genuine and material, i.e., one upon which a reasonable fact finder could base a verdict for the non-moving party and one which is essential to establishing the claim. Anderson v. Liberty Lobby, 477 U.S. 242, 248 (1986). When considering a motion for summary judgment, the court is not permitted to weigh the evidence or to make credibility determinations, but is limited to deciding whether there are any disputed issues and, if there are, whether they are both genuine and material. Id. The court's consideration of the facts must be in the light most favorable to the party opposing summary judgment and all reasonable inferences from the facts must be drawn in favor of that party as well. Whiteland Woods, L.P. v. Township of West Whiteland, 193 F.3d 177, 180 (3d Cir. 1999), Tigg Corp. v. Dow Corning Corp., 822 F.2d 358, 361 (3d Cir. 1987).

When the moving party has carried its burden under Rule 56(c), its opponent must do more than simply show that there is some metaphysical doubt as to the material facts. See Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986). In the language of the Rule, the nonmoving party must come forward with "specific facts showing that there is a genuine issue for trial." FED. R. CIV. P 56(e). Further, the nonmoving party cannot rely on unsupported assertions, conclusory allegations, or mere suspicions in attempting to survive a summary judgment motion. Williams v. Borough of W. Chester, 891 F.2d 458, 460 (3d Cir.1989) (citing Celotex Corp. v. Catrett, 477 U.S. 317, 325 (1986)). The non-moving party must respond "by pointing to sufficient cognizable evidence to create material issues of fact concerning every element as to which the non-moving party will bear the burden of proof at trial." Simpson v. Kay Jewelers, Div. Of Sterling, Inc., 142 F. 3d 639, 643 n. 3 (3d Cir. 1998), quoting Fuentes v. Perskie, 32 F.3d 759, 762 n.1 (3d Cir. 1994).

In the trademark context, if the record contains no evidence of actual confusion between the parties' marks, the Court can conclude that "no likelihood of confusion exists as a matter of law." See generally V Secret Catalogue, Inc. v. Moseley, 2000 U.S. Dist. LEXIS 5215 (W. D. Ky. 2000).

IV. DISCUSSION

A. The Knichel Defendants' Motion for Summary Judgment

Cornerstone's Claim for Misappropriation of Trade Secrets Cornerstone contends that the Knichel Defendants are liable for misappropriation of trade secrets for their alleged post-termination retention and use of the SPQs negotiated with the carriers that shipped through Cornerstone. In a Memorandum Order dated April 29, 2003, this Court found that Cornerstone had failed to meet its burden that such information constituted trade secrets under Pennsylvania law. After reviewing this record on summary judgment, the Court finds no basis in fact or law deviate from its earlier ruling.

Trade secret misappropriation cases are governed by state tort law. Midland-Ross Corp. v. Sunbeam Equip. Corp., 316 F. Supp. 171, 177 (W.D. Pa.1970), aff'd per curiam, 435 F.2d 159 (3d Cir. 1970). Pennsylvania courts have adopted the definition of trade secret found in a comment to the Restatement of Torts. See Smith v. BIC Corp., 869 F.2d 194, 199 (3d Cir. 1989); see also RESTATEMENT OF TORTS § 757 cmt. b (1939). This comment provides:

A trade secret may consist of any formula, pattern, device or compilation of information which is used in one's business, and which gives him an opportunity to obtain an advantage over competitors who do not know or use it. It may be a formula for a chemical compound, a process of manufacturing, treating or preserving materials, a pattern for a machine or other device, or a list of customers. [A trade secret] . . . differs from other secret information in a business . . . in that it is not simply information as to single or ephemeral events in the conduct of a business, as, for example, the amount or other terms of a secret bid for a contract or the salary of certain employees, or the security investments made or contemplated, or the date fixed for the announcement of a new policy or for bringing out a new model or the like. A trade secret is a process or device for continuous use in the operation of the business.

Id. See also Emtec, Inc. v. Condor Tech. Solutions, Inc., 1998 U.S. Dist. LEXIS 18846 *17-18 (E. D. Pa. 1998). In addition, the Third Circuit cited several factors which should be considered in concluding whether certain information is a trade secret:

(1) the extent to which the information is known outside of the owner's business; (2) the extent to which it is known by employees and others involved in the owner's business; (3) the extent of measures taken by the owner to guard the secrecy of the information; (4) the value of the information to the owner and to his competitors; (5) the amount of effort or money expended by the owner in developing the information; and (6) the ease or difficulty with which the information could be properly acquired or duplicated by others.

SI Handling Sys., Inc. v. Heisley, 753 F.2d 1244, 1256 (3d Cir. 1985) (citing RESTATEMENT OF TORTS § 757 cmt. b (1939)).

Further, a trade secret can be a plan or process, tool or mechanism, compound or element which is known only to its owner and those employees to whom it is necessary to inform of it. See Van Prods. Co. v. General Welding & Fabricating Co., 419 Pa. 248, 213 A.2d 769, 775 (1965). "Novelty is only required of a trade secret to the extent necessary to show that the alleged secret is not a matter of public knowledge." Id. Consequently, information that is in the public domain cannot be protected as trade secrets. See id.

Protection has been extended to certain business and marketing information. See, e.g., S.I. Handling, 753 F.2d at 1260 (extending trade secret protection to cost and pricing information); Union Carbide Corp. v. UGI Corp., 731 F.2d 1186, 1191 (5th Cir. 1984) (extending trade secret protection to marketing information and strategies); Alexander & Alexander, Inc. v. Drayton, 378 F. Supp. 824, 833 (E.D. Pa.) (extending trade secret protection to the terms of specific customer accounts), aff'd, 505 F.2d 729 (3d Cir. 1974); Air Prods. & Chems., Inc. v. Johnson, 296 Pa. Super. 405, 442 A.2d 1114, 1121 (1982) (extending trade secret protection to business plans and financial projections).

Customer lists and confidential business information cannot be trade secrets if they are easily or readily obtained, without great difficulty, through some independent source other than the trade secret holder. General Business Services, Inc. v. Rouse, 495 F. Supp. 526, 530 (E.D. Pa. 1980) (citing Van Products Co. v. General Welding & Fabricating Co., 419 Pa. 248, 213 A.2d 769, 777 (1965) and Denawetz v. Milch, 407 Pa. 115, 178 A.2d 701, 704-705 (1962)); see SI Handling v. Heisley, 753 F.2d 1244, 1258-59 (3d Cir. 1985). Accordingly, courts have denied protection to customer lists which are easily generated from trade journals, ordinary telephone listings, or an employee's general knowledge of who, in an established industry, is a potential customer for a given product. S.I. Handling, 753 F.2d at 1258; Van Products Co. v. General Welding and Fabrication Company, 419 Pa. 248, 263, 213 A.2d 769, 777 (1965); Spring Steels, Inc. v. Molloy, 400 Pa. 354, 358, 162 A.2d 370 (1960). The burden is on the plaintiff to show that the names of customers constituted a trade secret. Spring Steels, Inc. v. Molloy, 400 Pa. 354, 162 A. 2d 370 (1960). Burroughs Corp. v. Cimakasky, 346 F. Supp. 1398, 1400 (E. D. Pa. 1972).

Moreover, the gravaman of liability for disclosure of a trade secret is whether the secret was communicated to the employee while he was employed in a position of trust and confidence. Clearly, if the information was originally in the employee's possession then it could not have been communicated to him by the employer so as to make it inequitable or unjust for the employee to disclose it to others. See Fidelity Fund, Inc. v. Di Santo, 347 Pa. Super. 112, 122, 500 A.2d 431, 437 (1985).

In this instance, Cornerstone failed in its burden to show: (1) that the information constitutes a trade secret; (2) that it was of value to the employer and important in the conduct of his business; (3) that by reason of discovery or ownership the employer has the right to the use and enjoyment of the secret; and (4) that the secret was communicated to the Knichel Defendants while employed in a positions of trust and confidence under such circumstances as to make it inequitable and/or unjust for Deendants to disclose it to others, or to make use of it in their own right, to the prejudice of Cornerstone. S. I. Handling Systems, Inc. v. Heisley, 753 F.2d 1244, 1255 (3d Cir. 1985). Therefore, summary judgment on Cornerstone's claim of misappropriation of trade secrets shall be granted.

Cornerstone's Claim for False Designation Under the Lanham Act At Counts III and IV of its amended complaint, Cornerstone alleges false designation of origin and false description in violation of Section 43(a) of the Lanham Act, 15 U.S.C. § 1125(a), with respect to the letters dated April 11, 2003, and April 23, 2003, and sent by Bill Knichel to certain customers. Section 43(a) provides:

(a)(1) Any person who, on or in connection with any goods or services . . . uses in commerce any word, term, name, symbol, or device, or any combination thereof, or any false designation of origin, false or misleading description of fact, or false or misleading representation of fact, which--(A) is likely to cause confusion, or to cause mistake, or to deceive as to the affiliation, connection, or association of such person with another person, or as to the origin, sponsorship, or approval of his or her goods, services, or commercial activities by another person . . . * * * shall be liable in a civil action by any person who believes that he or she is likely to be damaged by such act.

15 U.S.C. § 1125(a).

To prevail on a claim for false designation of origin under the Lanham Act, Cornerstone must demonstrate that (1) it owns the mark in question; (2) the mark is valid and legally protectable; and (3) Knichels's use of the mark to identify goods or services is likely to create confusion concerning their origin. See Checkpoint Sys., Inc. v. Check Point Software Techs., Inc., 269 F.3d 270, 279 (3d Cir. 2001), A & H Sportswear v. Victoria's Secret Stores, 237 F.3d 198, 210 (3d Cir. 2000), Commerce Nat'l Ins. Servs., Inc. v. Commerce Ins. Agency, Inc., 214 F.3d 432, 437 (3d Cir. 2000). To prove likelihood of confusion, Cornerstone must show that "consumers viewing the mark would probably assume the product or service it represents is associated with the source of a different product or service identified by a similar mark." Scott Paper Co. v. Scott's Liquid Gold, Inc., 589 F.2d 1225, 1229 (3d Cir. 1978).

The Lanham Act states that the registration of an incontestable mark is conclusive evidence of "the validity of the registered mark and of the registration of the mark, of the registrant's ownership of the mark, and of the registrants exclusive right to use the registered mark in commerce." 15 U.S.C. § 1115(b). See also Park N' Fly, Inc. v. Dollar Park and Fly, Inc., 469 U.S. 189, 196 (1985)("With respect to incontestable marks . . ., § 33(b) provides that registration is conclusive evidence of the registrant's exclusive right to use the mark. . . ."). Under the Lanham Act, a registered mark becomes "incontestable" upon the filing of an affidavit of use between the fifth and sixth years of that mark's registration. 15 U. S. C. §§ 1058, 1065; Opticians Ass'n of America v. Independent Opticians of America, 920 F.2d 187, 190 (3d Cir. 1990).

Cornerstone has not federally registered the name "Cornerstone Sytems," and makes no argument that it is incontestable under 15 U. S. C. §§ 1058 and 1065. Therefore, in order to prevail, Cornerstone must prove the strength of its mark or show "secondary meaning" of the mark. See Checkpoint Sys., Inc. v. Check Point Software Techs., Inc., 269 F.3d at 282-283.

The strength of a mark is determined by (1) the distinctiveness or conceptual strength of the mark and (2) its commercial strength or marketplace recognition. Fisons Horticulture, Inc. v. Vigoro Indus., Inc., 30 F.3d 466, 478-479 (3d Cir. 1994). Under distinctiveness, a court looks at the inherent features of the mark. Trademarks protected under the Lanham Act are divided into four categories: [1] arbitrary or fanciful marks [that] use terms that neither describe nor suggest anything about the product; they "bear no logical or suggestive relation to the actual characteristics of the goods." [2] Suggestive marks [that] require consumer "imagination, thought or perception" to determine what the product is. [3] Descriptive terms [that] "forthwith convey[] an immediate idea of the ingredients, qualities or characteristics of the goods" [and] [4] generic marks . . . that "function as the common descriptive name of a product class."

A&H Sportswear, 237 F.3d at 221-22 (quoting A.J. Canfield Co. v. Honickman, 808 F.2d 291, 296-97 (3d Cir. 1986)). While generic marks do not receive trademark protection, arbitrary, suggestive and descriptive marks with a demonstrated secondary meaning are entitled to trademark protection. Checkpoint Sys., Inc. v. Check Point Software Techs., Inc., 269 F.3d at 282-283. The Court is mindful that the distinctions between the categories are less than clearly defined and may be difficult to distinguish. As previously stated by courts in other circuits, "[t]hese categories, like the tones in a spectrum, tend to blur at the edges and merge together. The labels are more advisory than definitional, more like guidelines than pigeon holes. Not surprisingly, they are somewhat difficult to articulate and apply." Blinded Veterans Ass'n v. Blinded Am. Veterans Found., 872 F.2d 1035, 1039 (D.C. Cir. 1989) (quoting Zatarains, Inc. v. Oak Grove Smokehouse, Inc., 698 F.2d 786, 790 (5th Cir. 1983)) Whether Cornerstone's mark is classified as arbitrary, suggestive or descriptive, however, is irrelevant as this Court finds no evidence of secondary meaning in the record.

Proof of secondary meaning entails vigorous evidentiary requirements, and the burden of proof rests upon the party asserting rights in the purported mark. Ideal World Marketing, Inc. v. Duracell, Inc., 15 F. Supp. 2d 239, 245 (E.D. N.Y. 1998). Cornerstone must establish secondary meaning at the time and place that the Knichel Defendants began use of the mark. Scott Paper Co. v. Scott's Liquid Gold, Inc., 589 F.2d at 1231. In order for secondary meaning to exist, "it is not necessary for the public to be aware of the name of the [source]. . . . It is sufficient if the public is aware that the product [or service] comes from a single, though anonymous, source." Union Carbide Corp. v. Ever-Ready Inc., 531 F.2d 366, 380 (7th Cir. 1976). The factors relevant to determining whether a mark has acquired secondary meaning include: the extent of sales and advertising leading to buyer association; length of use; exclusivity of use; the fact of copying; customer surveys; customer testimony; the use of the mark in trade journals; and actual confusion. Ford Motor Co. v. Summit Motor Prods., Inc., 930 F.2d 277, 292 (3d Cir.), cert. denied sub nom. Altran Corp. v. Ford Motor Co., 116 L.Ed. 2d 324, 112 S.Ct. 373 (1991) (citations omitted).

Cornerstone began using the name "Cornerstone Systems, Inc." in 1997. Cornerstone's Responsive Statement of Facts ¶¶ 19 and 40. In July of 1997, William Knichel ("Knichel") became an employee of Cornerstone, representing Cornerstone in Western Pennsylvania. (Amended Complaint ¶ 38 & Ex. A). On or about April 26, 2000, Knichel became an independent agent of Cornerstone. (Knichel's CSMF ¶¶ 32 & 33). During the term of his association with Cornerstone, Knichel traded under the name "Cornerstone Systems -Pittsburgh (or PGH)." (Knichel's CSMF ¶ 40). This was done with Cornerstone's knowledge and permission. Without a modicum of evidentiary support in the record, Cornerstone contends that use of the name by Knichel "led many to believe that Cornerstone Systems-PGH was an office of Cornerstone," therefore, ...


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