Memorandum

To: Larry LAgence

From: Austin Sellers, Brian Holmen, Ryuichi Shinzato, Stormi Harmon
Date: April 15, 2015
Subject: ACME Toys, Inc. v. Smith
________________________________________________
Dear Larry LAgence,
INTRODUCTION
The purpose of this document is to discuss the case of our clients ACME Toys Inc. and
Sandra Smitten to determine whether their actions would constitute wrongful termination or
sexual harassment in a court of law.
ISSUES AND SHORT ANSWERS
I.

Did ACME wrongfully terminate Mr. Smith in retaliation for reporting sexual

harassment?
No, ACME did not wrongfully terminate Smith. Smith was not being sexually
harassed and because he was an at-will employee ACME could terminate his employment
for any reason or no reason.

II.

Did Smith breach his employment agreement by competing with ACME?

Yes, Smith did breach is employment agreement by competing with ACME.

Since the non-compete commenced as of his termination and for a period of two years
thereafter. Smith established a competing business which was a breach of the non-

compete contained in his employment agreement, therefore, he is guilty of breach of

contract.

III.

Did Smith breach his duty of loyalty by hiring Peanuts, Inc.?

Yes, Smith did breach his duty of loyalty by hiring Peanuts, Inc. Smiths

knowledge of Peanuts skills and abilities was ACMEs confidential information that
Smith would not have known but for his position at ACME. It is likely a court will find
that Smith breached his fiduciary duties owed to ACME.

IV.

Did Smith violate the Utah Unfair Competition Statute when he established a

competing toy business?

Yes, Smith did violate the Utah Unfair Competition Statute. Smith started his
business with specific ideas and designs for the educational toys which would directly
compete with ACME.
FACTS
In 2002, ACME Toys hired Joel Smith as a senior toy engineer. When
Smith began working for ACME, he signed an employment agreement that would expire
after two years.
In 2004 when the employment agreement expired ACME created a new
employment agreement to sign in exchange for a week of paid vacation. After careful
consideration Smith decided not to sign the new employment contract and continued
working at will for ACME for the next ten years.
In January 2014, ACME Toys hired Sandra Smitten as a production
specialist in order to improve the fact that ACMEs toy division revenues has been

declining for the previous 4 years. Most of the senior toy engineers had no problems with
Ms. Smitten, but Joel Smith caused multiple problems.
On June 20, 2014, he mocked Ms. Smittens idea to market educational
toys, and as a result on June 21, Ms. Smitten contacted senior management about the
issues Smith was causing. In response, senior management suggested terminating his
employment unless she had another idea for a better outcome.
Early on June 23, Ms. Smitten responded to senior management that she
wanted to take Smith to lunch and establish trust with him. She was instructed to
terminate his employment if he remained uncooperative.
Smith refused her lunch suggestion and later that day was fired for
insubordination.
Shortly after his employment ended, on December 15th, 2014, Mr. Smith
filed articles of incorporation for an educational toy company with Mr. John Van De
Camp.
The next day Mr. Smith hired Peanuts Inc. to assist with marketing of the
companies first toy. Mr. Smith knew of Peanuts because Peanuts worked for ACME. Mr.
Smith signed an agreement with Peanuts Inc. as the corporations president.
Our clients, ACME Toys Inc., and Sandra Smitten, are suing Joel Smith for breach of
employment contract and unfair competition. Joel Smith is counter-suing, alleging that sexual
harassment and wrongful termination have occurred.

RULES
I.

Wrongful Termination

At-will rule plus violation of statute exception:

First, where an employee is fired in a manner or for a reason that contravenes a

recognized and established public policy, the at-will rule will not serve to insulate the employer
from liability. Second, courts have clarified the requirements for finding an express or implied
contract term for employment for a certain period or a covenant for dismissal only with cause.
Finally, many courts have relied upon the implied covenant of good faith and fair dealing and
have granted the discharged employee a cause of action to sue when the employer's conduct
breaches that implied covenant. (Berude v. Fashion Centre, Ltd. 771 P. 2d 1003 - Utah: Supreme
Court)
Sexual harassment is defined as:
Any sexually harassing conduct in the workplace, whether physical or verbal,
committed by any employee is also prohibited. This includes: repeated offensive sexual
flirtations, advances, propositions; continued or repeated verbal abuse of a sexual nature; graphic
verbal commentaries about an individuals body; sexually degrading words used to describe an
individual; and the display in the workplace of sexually suggestive objects, pictures or posters.
(Retherford v. AT&T Communications, Utah Supreme Court, 1992)
Sexual harassment and retaliation:
Prosser and Keeton properly call sexual harassment on the job "undoubtedly an
intentional infliction of emotional distress." W. Page Keeton et al., Prosser & Keeton on the Law
of Torts 12, at 18 (Supp. 1988). By this, we take them to mean that the conduct generally
labeled sexual harassment is outrageous and intolerable and, when performed with the requisite
intent, satisfies the elements of the tort of intentional infliction of emotional distress. If the
conduct that constitutes sexual harassment is per se outrageous and intolerable, it stands to

reason that retaliation for complaining of sexual harassment must also be considered outrageous
and intolerable. (Retherford v. AT&T Communications, Utah Supreme Court, 1992)

II. Breach of Contract

An anticipatory breach occurs when a party to an executory contract manifests a
positive and unequivocal intent not to render performance when the time fixed for performance
was due... The other party can immediately treat the anticipatory repudiation as a breach, or it
can continue to treat the contract as operable and urge performance without waiving any right to
sue for that repudiation. (Kasco Services Corporation v. Benson, 831 P.2d 86 (1992))
Breach of non-compete:
A party that has received a definite repudiation from the breaching party to the
contract should not be penalized for its efforts to encourage the breaching party to perform its
end of the bargain. (United California Bank v. Prudential Insurance company of America. etc,
681 P.2d 390, Court of Appeals of Arizona, 1938)
III. Breach of Fiduciary Duty
Fiduciary duty rule:
"An agent or employee of another is prohibited from acting in any manner inconsistent
with his agency or trust and is at all times bound to exercise the utmost good faith and loyalty in
the performance of his duties." (internal quotations omitted)); (Bessman v. Bessman, 520 P. 2d
1210 - Kan: Supreme Court 1974)
8.04, Comment c: Corporate executives and other employees in positions of trust or
confidence may not usurp business opportunities for their individual gain. Restatement of the
Law Third: Employment Law, the American Law Institute.

IV. Unfair Competition

13-24-1: Uniform Trade Secrets Act
13-24-2: Definition (4)

"Trade secret" means information, including a formula, pattern,

compilation, program, device, method, technique, or process, that:

(a) derives independent economic value, actual or potential, from not being generally
known to, and not being readily ascertainable by proper means by, other persons who
can obtain economic value from its disclosure or use; and
(b) is the subject of efforts that are reasonable under the circumstances to maintain its
secrecy.
ANALYSIS
I. ACME is not liable for wrongful termination because an employer may terminate an employee
who is employed for an indefinite period for any reason or no reason. Sexual harassment did not
occur.
The Utah Supreme Court supports the idea that once an employment contract is expired,
the situation turns to at-will employment (Steelworkers v. Enterprise Wheel & Car Corp., 363
US 593 [1960]). Smith continued to work with ACME for years after his contract expired, which
means that his employment should be considered at will, and therefore wrongful termination
could not have occurred unless one of the usual exceptions applies.
Because the state of Utah recognizes all three exceptions to the at-will employment
doctrine, Smith will most likely attempt to argue that he should fall under one or more of these
exceptions. He was given a reason for his termination, rather than suddenly let go without
explanation, so it is less likely that he could claim either the public-policy exception or the

covenant of good faith exception. The implied-contract exception may apply; however we have
not at this time heard of any separate assurances regarding job security made to Smith.
Smith claims that he was sexually harassed by Ms. Smitten, however the court should
note that Smith is the only one claiming that such incidents occurred. The facts are very similar
to the case Stokes v. Board of Review, 832 P.2d 56 (1992) the employee claiming sexual
harassment was the only employee who had noted anything wrong was happening, and no one
else at the company could support these claims. Smith has claimed that Ms. Smitten was
harassing him, but he is unable to prove that anything of a sexual nature occurred.
Retherford v. AT&T Communications, 844 P.2d 949 (1992), noted that sexual harassment
includes repeated offensive sexual flirtations, advances, propositions; continued or repeated
verbal abuse of a sexual nature; graphic verbal commentaries about an individuals body;
sexually degrading words used to describe an individual; and the display in the workplace of
sexually suggestive objects, pictures or posters. Smith has reported Ms. Smitten for sexual
harassment without proving that any of the following occurred. Her comments about the quality
of his work are not considered sexual advances, and therefore ACME would have no reason to
fire him as retaliation for reporting sexual harassment.

II. Smith is in violation of his original non-compete agreement because he failed to re-negotiate
new terms of employment when his contract expired.
The terms of Smiths original employment agreement remain valid despite the fact that he
did not sign to renew it after his second year for employment. If he desired at that point to
change the terms of his employment, his only two options at that time were to end his
employment or to negotiate a new contract, as upheld in Kasco Services Corporation v. Benson,
831 P.2d 86 (1992). Because he chose to simply ignore the situation and continue working at

ACME, Smith accepted the terms of the original employment contract to continue working for
ACME at the will of himself and ACME. In the original employment agreement it, contained a
covenant by Mr. Smith that he would not compete with ACME for two years from
separation/termination from ACME. When he started his own toy company less than a year
after his employment was terminated this was clearly a violation of the non-compete clause in
his employment agreement.
While Smith will no doubt argue that the terms of his contract were unreasonable, the
term was for only two years, and Smiths job required enough special training to make toys that
the company should be allowed to protect its investment in his training, which distinguishes this
case from the circumstances found in Robbins v. Finlay, 645 P.2d 623 (1982).

III. Smith breached his fiduciary duties by abusing ACMEs confidential information in hiring
Peanuts Inc.
Peanuts Inc. was being hired by ACME as their marketing specialist while Smith
remained in the employ of ACME. Although His initial knowledge of Peanuts Inc. was obtained
during his time at ACME, He misused ACMEs confidential information of Peanuts after
receiving his termination from ACME in order to utilize for his own toy company. It is supported
from the case of Herbert Morris Ltd v. Saxelby (1916) He is also entitled not to have his old
customers by solicitation or such other means enticed away from him.
Regardless of the fact that the state of Utah had rejected the articles of incorporation he
had filed, it is likely that the court will find that Smith breached his fiduciary duties as supported
by 8.04, Comment c: Corporate executives and other employees in positions of trust or

confidence may not usurp business opportunities for their individual gain. Restatement of the
Law Third: Employment Law, the American Law Institute.

IV. Smith breached his duty of loyalty to ACME by directly competing with them and using
insider knowledge to do so.
After we establish that the employment agreement continued to be applicable after
Smiths non-renewal, the next issue is whether Mr. Smiths actions actually created competition
for ACME. While ACME does not manufacture educational toys, there are three counts in which
Mr. Smiths actions may still qualify as competition:
Though the goods produced are not exact replicas, Smith may still utilize
techniques in toy-making which he learned during his training and employment at ACME
Smith may have gotten the idea to move into the educational toy sector from
ACME on June 20, 2012 when Ms. Smitten brought it up in a meeting. Smith had insider
knowledge that ACME considered expanding in the educational toy sector and chose to
enter into direct competition with them
It can be said that a consumer would buy educational toys instead of regular toys,
and therefore that educational toys qualify as a substitute good for the toys that ACME
produces and could reduce their market share in the toy sector

On the first count, in Microbiological Research Corp v. Muna, 625 P.d 690 (1981)
concluded that A trade secret, whether it be a secret formula, process, pattern, device,
compilation of information or otherwise, is under the majority view held to be property
During his time with ACME toys, Smith had access to devices, information, and other trade
secrets. It is interesting that after leaving ACME he immediately went to start a competing

company that manufactured educational toys. Many toys, educational or not, may use the same
kinds of patterns, processes, and devices, all of which were found to be trade secrets in the Muna
case. By using his experience at ACME, Smith may have made use of all of the above, thus
forming a clear case for competition.
As to Smiths insider knowledge of ACMEs new business idea, in Herbert Morris Ltd v.
Saxelby, (1916), the court ruled that protection may be secured by restraining the employee
from divulging [trade] secrets or putting them to his own use. Ms. Smittens idea to push ACME
toward educational toys was property of the company, and Smith put that idea to his own use
when he started his own educational toy company.
Smith may try to claim that his actions would create no more competition for ACME, but
the last point should disprove that. Educational toys are a subcategory and a substitute for regular
toys, and therefore would create direct competition with ACME.
Smith also contracted with the marketing firm Peanuts, Inc., which was used by ACME
during the term of his employment. This is another indication that Smith intended to directly
compete with ACME by running a similar marketing campaign for a similar line of toys. This is
a clear violation of his fiduciary duties to the company he recently left.

CONCLUSION
ACME Toys and Sandra Smitten should not be found liable for wrongful termination and
sexual harassment because wrongful termination would only exist within an at will work
environment if sexual harassment was present. Sexual harassment is not present as compliments
or advances about work is not considered a sexual advance.
Even though Smith did not sign a new employment contract with ACME Toys the
contract that he had signed still applies at the will of ACME. Thus the non-compete contract still

applies. Since Smith started a competing business within 2 years of his termination of ACME, he
was in breach of the non-compete. Along with the breaching the non-compete, Smith breached
his fiduciary duty by using trade secrets for Mr. Smiths personal gain.
Mr. Smiths knowledge of Peanuts skills and abilities was ACMEs confidential
information that Smith would not have known but for his position at ACME. A company has
right to protect their patterns, process, information, and other ideas linked to their business.
Peanuts Inc. and the market ideas they gave to ACME were not common knowledge and by
using that information to compete with ACME, Mr. Smith was breaching his fiduciary duty to
ACME.
When Mr. Smith started his own toy company he violated the Utah Unfair Competition
Statute. Near the end of Mr. Smiths career at ACME, he was involved in a new product idea of
educational toys. After his termination, Mr. Smith started his own toy company that focuses on
educational toys. This is a direct violation of the Utah Unfair Competition Statute and Uniform
Trade Secrets Act.