Zimmer, Duncan & Cole

Old Rules Apply to Space-Age Companies, Too

A decade-long court battle about a space-age roof paint is the subject of this week's case, Spiska Engineering, Inc., v. SPM Thermo-Shield, Inc. (2011 S.D. 23). A link to the full opinion is available at LessLegalesePlease.com.
Joseph Raver is the CEO and only shareholder of a South Dakota company called SPM Thermo-Shield. His company is headquartered in Custer, and it makes a variety of products used as coatings for roofs and walls.
The technology used in Thermo-Shield coatings is literally "space age". In the 1970's, several private companies helped NASA solve the problem of how to keep a reusable space craft from burning up during reentry.
They developed a ceramic coating for the shuttle's heat tiles that could withstand temperatures up to 2400 degrees Fahrenheit. The secret ingredient: microscopic ceramic bubbles.
Because these bubbles are also impervious to water and resist corrosion, Thermo-Shield adapted this technology into superior roof and wall coatings.
The company expanded into Europe, via a distribution agreement with Spiska Engineering. After a few years, this relationship soured, and Thermo-Shield terminated its agreement.
Spiska Engineering stood to lose millions of dollars, and it sued Thermo-Shield for breach of contract. Although it took six years and three trips to our Supreme Court, Spiska finally prevailed in 2007. However, the question then became how Spiska was going to collect on its $5 million judgment.
Spiska asked the court to appoint a "receiver" for Thermo-Shield. A receiver is a neutral party who steps in to run a distressed company.
The purpose of a receivership is to figure out the best way to pay a company's debts, whether by finding a buyer for the whole company or by selling the physical assets, piece by piece. Meanwhile, the receiver steps into the shoes of the owner and makes all of the business decisions, under court supervision, and usually without the input of the owner.
It took three years, but the receiver finally found a buyer for Mr. Raver's business. The receiver then requested the court's approval of the sale and mailed a notice of the proposed sale to Mr. Raver (and other interested parties).
This is where the case took an unusual turn. The trial court's order should have said, simply, that the court approved of the sale.
However, at the urging of the receiver, the trial court went several steps further. It issued an order that prohibited Mr. Raver from ever owning or working with "any company that manufactures ceramic coatings or paint products."
Mr. Raver's future employment hadn't been brought up at any time during the previous decade of litigation. And more importantly, Mr. Raver had never been a party to any of these lawsuits. Instead, this had always been a dispute between two companies.
Mr. Raver appealed this decision, which he described as "a covenant not-to-compete that spans the entire world". He argued that the trial court didn't have "personal jurisdiction" over him.
The word "jurisdiction" sounds very important and almost a little intimidating. This is perhaps for good reason, because it describes a court's power. It comes from two Latin words that roughly mean "to speak the law" (juris is "law", and dictio is "saying").
In addition to "saying" what the law is, a court also has the power to enforce its rulings. But this power is very specific, and it only extends to the people that have been properly notified about the lawsuit.
There are very old rules which dictate how a lawsuit begins, and they focus entirely on giving the defendant notice of the claim.
In old England, the sheriff would actually arrest you and bring you to court so that there was no mistake about whether you had been sued.
Today, we still use the sheriff (or a process server), but instead of arresting you, he hands you a summons. This document warns you about the lawsuit, tells you where the legal papers will be filed, and gives you a deadline to respond.
Except in rare cases, if you aren't "served" with a summons, the court has no jurisdiction over you.
Here, Mr. Raver argued that the trial court didn't have jurisdiction to forbid him from owning or working for another ceramics company.
The Supreme Court agreed. Mr. Raver had never been a party to this ten-year lawsuit, and nobody had ever suggested that he should be. Most importantly, he had never been served with a summons of any kind. Without personal jurisdiction over Mr. Raver, the trial court had no authority to tell him anything.
Daniel K. Brendtro is a trial attorney from Sioux Falls. He is a partner in the law firm Zimmer, Duncan & Cole, and he edits the blog LessLegalesePlease.com