Systems Spray-Cooled, Inc. v. FCH Tech, LLC et al

Filing 66

MEMORANDUM OPINION. Signed by Honorable Susan O. Hickey on May 16, 2017. (cnn)

IN THE UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF ARKANSAS
EL DORADO DIVISION
SYSTEMS SPRAY-COOLED, INC.
v.

PLAINTIFF
Case No. 1:16-cv-1085

FCH TECH, LLC; WILLIAM HENRY; and
J. MICHAEL CAMPBELL

DEFENDANTS

MEMORANDUM OPINION
Before the Court is an Amended Motion for Preliminary Injunction filed by Plaintiff
Systems Spray-Cooled, Inc. (“Systems”). ECF No. 61. Defendants FCH Tech, LLC, William
Henry and J. Michael Campbell (collectively referred to as “Defendants”) have filed a response
in opposition to the motion. ECF No. 27. On December 12, 2016, the parties appeared before the
Court for a hearing on the motion. After the hearing, Plaintiff submitted a post-hearing brief in
support of its Motion for Preliminary Injunction. ECF No. 44. Defendants also submitted a posthearing brief in opposition to the motion. ECF No. 42. The Court finds this matter ripe for its
consideration.
I. BACKGROUND
This case involves the alleged misappropriation of trade secrets and confidential
information from Systems.

Systems is a Tennessee corporation with principal offices in

Nashville, Tennessee and El Dorado, Arkansas. In 1999, Systems purchased the Systems SprayCooled technology and business from UCAR Carbon Company, Inc. Systems Spray-Cooled
technology is a low pressure spray-cooling system designed to cool furnaces and other
equipment with extreme heat loads in the steel industry. Systems’ Spray-Cooled technology is

unique in the steel industry, as most within the industry use traditional high pressure cooling
systems.
Defendants Henry and Campbell are former long-term employees of Systems. Campbell
was employed by Systems or one of its subsidiaries from September 1992 until February 2013.
Campbell held numerous positions within Systems during his tenure. Campbell was hired as an
engineer and eventually rose to Executive Vice President of Systems in July 2012. Henry
worked as a draftsman and designer for Systems from January 2007 to September 2013. During
their employment with Systems, both Campbell and Henry signed employment agreements
which contained confidentiality and non-compete provisions. Campbell was terminated from his
position with Systems for reasons unrelated to the instant motion, while Henry resigned from his
position voluntarily.
In October 2015, Henry and Campbell formed FCH Tech, LLC, a Tennessee company
which provides custom designed steel plate fabrications and machine parts. Henry and Campbell
acknowledge that FCH Tech was formed, in part, with the intent to directly compete with
Systems. Prior to the formation of FCH Tech, Systems was the only provider of low pressure,
spray cooling equipment in the steel industry.
On September 20, 2016, Systems filed suit against Defendants. The Complaint alleges
that Henry and Campbell executed employment agreements while employed with Systems that
included non-compete and confidentiality provisions prohibiting the taking, disclosure, or use of
Systems’ trade secrets and confidential information. Although Systems concedes that Henry and
Campbell are no longer bound by the non-compete provisions of the employment agreements,
Systems alleges that Henry and Campbell are both subject to the confidentiality provisions until
October 2018 and February 2018, respectively.

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Systems’ Complaint alleges that Henry and Campbell breached the terms of their
confidentiality provisions by taking and possessing Systems’ trade secrets and confidential
information in violation of the Defense of Trade Secrets Act, 18 U.S.C. § 1832, et seq., the
Arkansas Trade Secrets Act, Ark. Code Ann. §§ 4-75-601, et seq., and the Computer Fraud and
Abuse Act, 18 U.S.C. § 1030, et seq. In addition, Systems asserts claims against Defendants for
breach of employment agreement, tortious interference with business expectancy, breach of
fiduciary duty, and unjust enrichment.
On November 11, 2016, Systems filed a Motion for Preliminary Injunction. ECF No. 12.
On March 30, 2017, Systems filed an Amended Motion for Preliminary Injunction. ECF No. 61.
In the amended motion, Systems seeks to enjoin Defendants, as well as anyone acting in concert
with Defendants, from further misappropriation, disclosure and use of Systems’ trade secrets and
confidential information until a final determination on the merits of the pending litigation has
been made.

In addition, Systems seeks to enjoin Defendants from directly or indirectly

designing or supplying low pressure spray-cooling equipment for the steel industry for a three
year period.
II. LEGAL STANDARD
“The primary function of a preliminary injunction is to preserve the status quo until, upon
final hearing, a court may grant full, effective relief.” Ferry-Morse Seed Co. v. Food Corn, Inc.,
729 F.2d 589, 593 (8th Cir. 1984). “A preliminary injunction is an extraordinary remedy and the
burden of establishing the propriety of an injunction is on the movant.” Roudachevski v. All–Am.
Care Centers, Inc., 648 F.3d 701, 705 (8th Cir.2011). It is well-settled that applications for
preliminary injunctions within the Eighth Circuit require the Court to consider the following four
factors: (1) the movant’s likelihood of success on the merits; (2) the threat of irreparable harm to

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the movant; (3) the balance between the harm suffered by the movant and the harm that other
interested parties will incur if an injunction is granted; and (4) whether the issuance of an
injunction is in the public interest. Dataphase Sys., Inc. v. C.L. Sys., Inc., 640 F.2d 109, 113 (8th
Cir. 1981). The Court will separately address each of these factors.
III. DISCUSSION
A. Substantial Likelihood of Success
a. Arkansas Trade Secrets Act
i. Whether the Information in Question Qualifies as Trade Secrets
The first Dataphase factor the Court must consider is whether Systems is likely to
succeed on the merits. In order to evaluate Systems’ likelihood of success on the merits, the
Court must first determine whether the information in question constitutes a “trade secret” under
Arkansas law. Under the Arkansas Trade Secrets Act, a trade secret is defined as information,
including a formula, pattern, compilation, program, device, method, technique, or process, that
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. Ark. Code Ann. § 4-75-601(4)(A). The Act also requires that
the information at issue be the subject of reasonable efforts to maintain its secrecy. Ark. Code
Ann. § 4-75-601(4)(B).
In addition to the definitions contained within the Arkansas Trade Secrets Act, the
Arkansas Supreme Court has established six factors to determine whether information is a trade
secret.

Arkansas courts consider the following factors to determine whether information

qualifies as a trade secret: (1) the extent to which the information is known outside the business;
(2) the extent to which the information is known by employees and others involved in the

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business; (3) the extent of measures taken by the plaintiff to guard the secrecy of the information;
(4) the value of the information to the plaintiff and its competitors; (5) the amount of effort or
money expended by the plaintiff in developing the information; and (6) the ease or difficulty
with which the information could properly be acquired by others. Saforo & Assocs., Inc. v.
Porocel Corp., 991 S.W.2d 117, 120 (Ark. 1999). The Arkansas Supreme Court has made clear
that, despite being one of many factors to consider, a company’s effort to maintain the secrecy of
information is a prominent one. ConAgra, Inc. v. Tyson Foods, Inc., 30 S.W.3d 725, 730 (Ark.
2000).
Systems contends that Defendants misappropriated information regarding its SprayCooled technology that qualify as technical trade secrets, including design drawings. Systems
further maintains that Defendants misappropriated its financial and business trade secrets,
including pricing estimate information, customer lists, revenue forecasts and financial
statements. The Court will consider in turn whether each of the aforementioned categories of
information qualifies as a trade secret.
1. Design Drawings
First, Systems contends that its design drawings qualify as trade secrets. During the
preliminary injunction hearing, the Court heard testimony from Dick Arthur, an expert on low
pressure, spray-cooling equipment. Arthur testified about the techniques and features Systems
has developed as a result of its experience designing and supplying low pressure, spray-cooling
equipment for the steel industry. Arthur testified that such features include proprietary water
distribution patterns for Systems’ spray-cooled roofs. Systems asserts that the design drawings
at issue embody the water distribution patterns and other features Systems has developed and,
therefore, qualify as trade secrets. Arthur further testified that he reviewed the publicly available

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exhibits provided by Defendants, including patents, and provided his opinion that none of the
exhibits contained Systems’ trade secrets. Arthur also testified that none of Defendants’ exhibits
contained specific information that can be derived from Systems’ design drawings.
In addition, Systems argues that it has taken reasonable measures to safeguard its design
drawings. Systems offered testimony and evidence establishing that each of the design drawings
contains a legend indicating that the drawing is confidential and exclusively owned by Systems.
Systems also offered evidence to demonstrate that it executes confidentiality agreements with
vendors, fabricators and licensees to limit the use and disclosure of the design drawings. The
Court also heard testimony from Chuck Hays, CEO of the Systems Group, concerning
confidentiality provisions contained within employment agreements that each Systems employee
is required to sign.

Hays specifically testified that the confidentiality provisions require

employees to obtain written consent prior to disclosing any confidential information. According
to Hays, the confidentiality provisions explicitly define confidential information to include
Systems’ design drawings. Systems introduced evidence to establish that Defendants Henry and
Campbell both signed employment agreements that included the confidentiality provisions. It is
also undisputed that Systems has expended a substantial amount of time and resources
developing the technology embodied within the design drawings.
In response, Defendants argue that Systems’ design drawings do not qualify as trade
secrets. Defendants maintain that the information needed to design competing low pressure
spray-cooling systems is readily ascertainable. Defendants specifically assert that Systems’
expired patents and other publicly available information, such as technical materials written by
Systems employees, contain sufficient information to allow Defendants to design and
manufacture a competing system using the technology. In support of this contention, Defendants

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have submitted exhibits containing Systems’ patents and other publicly available information
that, according to Defendants, can be used to design spray-cooling systems.

In addition,

Defendant Campbell testified that Systems’ spray-cooling technology is readily ascertainable and
can be reverse engineered by reading Systems’ patents, as well as by visually inspecting and
measuring equipment owned by Systems’ prior customers.
As previously stated, in order for information to qualify as a trade secret, it cannot be
readily ascertainable to others that might be interested in learning the information. Ark. Code
Ann. § 4-75-601(4)(A). Arkansas trade secret law does not protect information that is readily
ascertainable through legitimate means such as reverse engineering or simple observation. See
Coenco, Inc. v. Coenco Sales, Inc., 940 F.2d 1176, 1179 (8th Cir. 1991). Reverse engineering is
described as the “process of starting with a known product and working backward to find the
method by which it was developed.” Gibraltar Lubricating Servs. v. Pinnacle Res. Inc., 486
S.W.3d 224, 226 (Ark. Ct. App. 2016). The expense and amount of effort it takes to reverse
engineer a product are factors to consider when determining whether or not information is
readily ascertainable. Id. at 227.
Defendants have not presented convincing evidence that Systems’ design drawings do
not qualify as trade secrets. With regard to Systems’ design drawings, Defendant Campbell
offered contradictory testimony about whether specific information contained within Systems’
design drawings is publicly available through patents and technical materials.

However,

Arkansas courts have recognized that “[e]ven where information about a product or its
ingredients is publicly available, such as through a patent, it may be the combination of
characteristics and components that offers a competitive advantage.” Gibraltar, 486 S.W.3d at
228.

Here, Arthur testified that the patents offered by Defendants only provide general

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information and did not contain the specific information necessary to build a spray-cooling
system that can be determined from Systems’ design drawings.
In addition, although Defendants argue that a person of ordinary skill in the art of
engineering would be able to reverse engineer much of Systems’ alleged trade secrets in theory,
Defendants have not submitted any testimony or evidence to demonstrate how much time,
money or effort it would take to actually duplicate Systems’ low pressure, spray-cooling
technology. Without such evidence, the Court cannot determine whether Systems’ spray-cooling
technology is indeed readily ascertainable at this stage of the litigation.
The Court concludes that Systems has sufficiently shown that it has taken reasonable
efforts to protect the secrecy of its design drawings. In light of the six Safaro factors that the
Court must consider in determining whether information is entitled to trade secret protection, the
Court concludes that, on balance, Systems has offered sufficient evidence to prove that its design
drawings qualify as trade secrets under Arkansas law at this stage of the litigation.
2. Pricing Information
Systems next argues that its pricing information qualifies as a trade secret. Systems
specifically argues that an internal estimate sheet qualifies as a trade secret.

During the

preliminary injunction hearing, Systems introduced testimony from Hays, CEO of the Systems
Group, regarding the internal estimate worksheet. Hays testified that the estimate worksheet is
essentially a spreadsheet and that the information contained within the worksheet demonstrates
how Systems calculates its prices for every project. Hays testified that the worksheet includes
historical data, such as the cost of labor to do a particular engineering project. Hays further
testified that Systems’ estimate worksheets are internal documents and not available to the
public. Systems asserts that the pirating of this information would be detrimental because

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competitors would be able to easily undercut Systems’ pricing. Hays further testified that
employment agreements signed by Systems’ employees, including Defendants Campbell and
Henry, during the course of their employment designate “pricing information,” such as the
internal estimate worksheet, as “confidential information.”
Defendants argue that the internal estimate worksheet is not entitled to trade secret
protection. Defendants refute Systems’ assertion that they currently possess Systems’ internal
estimate worksheets. Furthermore, Defendants contend that any information contained within
the estimate worksheet is now outdated and, therefore, not entitled to trade secret protection. At
the preliminary injunction hearing, Defendant Campbell testified that the pricing information that
he had access to while employed at Systems is now stale. In addition, Campbell testified that
Systems’ estimate worksheet would be of little utility because Defendants use a different pricing
structure than Systems.
At the preliminary injunction hearing, Systems provided testimony to refute Defendants’
contention that the information contained within the internal estimate worksheet is stale. Hays
testified that the estimate worksheet at issue was recently used to place a bid on a project to
replace a furnace roof at one of Nucor’s facilities. Hays stated that Defendants also placed a bid
on the Nucor project. Hays further testified that, at the time of the hearing, the quote was still
outstanding for the project.
Arkansas courts have previously held that a company’s pricing information may be
worthy of trade secret protection under the proper circumstances. Bradshaw v. Alpha Packaging,
Inc., 379 S.W.3d 536, 539 (Ark. App. 2010). Although Arkansas courts are silent on the issue,
the Eighth Circuit has considered similar trade secret laws from other states and held that a trade
secret may lose its protected status upon a showing that the information has become stale or

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outdated. Synergetics, Inc. v. Hurst, 477 F.3d 949, 958 (8th Cir. 2007) (applying Missouri trade
secrets law). “Determination of when trade secret information becomes stale cannot be made by
reference to a bright line rule and necessarily requires fact specific consideration.” Id. (internal
citation omitted).
In Hurst, the Eighth Circuit rejected the defendant’s conclusory argument that the
plaintiff’s trade secrets grew stale and unworthy of protection. Id. at 957. The Eighth Circuit
agreed with the district court’s finding that the defendant’s argument lacked merit because the
defendants failed to offer any evidence in support of their position or provide “any facts and
circumstances to suggest that the information [was] stale.” Id. at 958.
Similar to the defendants in Hurst, Defendants have failed to offer any convincing facts
to suggest that the information contained within Systems’ estimate worksheet is stale. Systems
presented evidence which established that the internal estimate worksheet includes numerous
formulas used to calculate the pricing for a particular project. Although Defendants maintain
that information such as raw materials, labor and shipping change over time, it appears that this
information may be easily adjusted within Systems’ worksheet. Moreover, it is unclear if the
formulas within the worksheet used to calculate pricing are stale. As a result, the Court is
unconvinced that the information contained within the internal estimate worksheet is stale.
Moreover, the Court finds that Defendants’ argument that they would not benefit from
Systems’ pricing information to be inapposite. Regardless of whether Defendants utilize a
different pricing scheme than Systems, knowing how Systems estimates its costs for particular
projects provides a competitive advantage to its competitors. Accordingly, the Court finds that
Systems has sufficiently shown that its internal estimate worksheet is entitled to trade secret
protection at this stage.

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3. Customer Lists
Systems further contends that its customer lists qualify as trade secrets.

Systems

maintains that its customer lists compile large quantities of information, including the names and
contact information of its customers. Systems also notes that the employment agreements signed
by Systems’ employees, including Defendants Campbell and Henry, during the course of their
employment designate customer lists as “confidential information.”
Defendants contend that Systems’ customer lists do not qualify as a trade secret.
Defendants specifically argue that Systems’ customer lists are readily ascertainable and are not
kept as confidential because Systems has published the names and contact information of its
customers on prior versions of its website.

Defendants further maintain that Systems has

provided its customer lists to trade publications, such as the Association for Iron & Steel
Technology, as well as trade directories.
The Arkansas Supreme Court has held that customer lists obtained through the use of
business efforts and the expenditure of time and money are afforded trade secret protection so
long as the lists are not readily ascertainable and are kept confidential. Allen v. Johar, 823
S.W.2d 824, 826-27 (Ark. 1992) (holding that a customer list and files which included detailed
information about customers such as “personality traits, hobbies and likes, credit history, buying
habits and pricing agreements” and were kept confidential qualified as trade secrets). In the
present case, the Court finds that Systems has not proven that its customer lists rise to the level
of trade secrets at this stage of the litigation. Specifically, Systems has failed to show that its
customer lists differ from the information that can be readily obtained from the internet.
Defendants presented testimony and evidence indicating that many of Systems’ customer names,
contact information and the type of service provided can be found on the internet from older

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versions of Systems’ website and within trade publications. Although Systems is correct in
noting that customer lists may qualify as trade secrets and that its employment agreements
designate such lists as confidential, the Court concludes that Systems has failed to show that the
information contained within its customer lists is not readily ascertainable or actually kept
confidential at this stage.
4. Revenue Forecasts and Financial Statements
Lastly, Systems argues that its revenue forecasts and financial statements qualify as trade
secrets. Systems specifically contends that its annually prepared revenue forecasts and financial
statements qualify as trade secrets because the reports show the overall financial structure of its
business. Systems has also submitted evidence at the preliminary injunction hearing indicating
that the reports are considered confidential information per Systems’ standard employment
agreement.
Defendants argue that this information is updated annually and that any information
Defendants had access to is now outdated and no longer worthy of trade secret protection.
Defendant Campbell also testified that he was responsible for creating the annual revenue
forecasts while employed with Systems and that the report was never stamped or labeled as
confidential. Campbell’s testimony also revealed that the annual reports were saved on Systems’
network in a manner where all employees could retrieve them. With regard to the financial
statements, Campbell testified that he did not recall seeing a confidentiality stamp on the
documents.
After reviewing the record and the exhibits introduced at the preliminary injunction
hearing, the Court finds that Systems has failed to provide sufficient evidence regarding its
efforts to maintain the secrecy of its revenue forecasts and financial statements. It also appears

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that neither of these documents was introduced into evidence for the Court’s inspection. As a
result, the Court concludes that it lacks sufficient evidence to determine whether Systems’
revenue forecasts and financial statements qualify as trade secrets at this stage.
ii. Whether Systems’ Trade Secrets were Misappropriated
Having found that Systems has sufficiently demonstrated that its design drawings and
internal estimate worksheet qualify as trade secrets, the Court must next consider whether
Defendants misappropriated them. The Arkansas Trade Secrets Act authorizes courts to issue an
injunction against actual or threatened misappropriation of trade secrets. Ark. Code Ann. § 4-75604(a). The act defines “misappropriation” as acquisition of another’s trade secret by a person
who “knows or has reason to know that the trade secret was acquired by improper means.” Ark.
Code Ann. § 4-75-601(2)(A). The act defines “improper means” as “theft, bribery,
misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, or espionage
through electronic or other means.” Ark. Code Ann. § 4-75-601(1). Misappropriation also
occurs when a person acquires another’s trade secrets through improper means and, without
consent, discloses or uses the trade secret.

Ark. Code Ann. § 4-75-601(2)(B)(i).

Lastly,

misappropriation occurs when a person discloses or uses another’s trade secret and knew or had
reason to know that his knowledge of the trade secret was (1) derived from a person who
acquired the trade secret through improper means; (2) acquired under circumstances giving rise
to a duty to maintain its secrecy or limit its use; or (3) derived from a person who owed a duty to
the trade secret owner to maintain its secrecy or limit its use. Ark. Code Ann. § 4-75601(2)(B)(ii).

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1. Whether Defendants Misappropriated Systems’ Trade Secrets
via Electronic Storage Devices
Systems maintains that its trade secrets were misappropriated by Defendants in multiple
ways. 1 Systems first argues that Defendants acquired its trade secrets by improper means.
Systems specifically argues that Defendants Campbell and Henry connected external storage
devices to their Systems-issued laptops and downloaded numerous files containing trade secrets,
such as design drawings and internal estimate worksheets. According to Systems, neither
Campbell nor Henry returned any of the external storage devices to Systems after leaving the
company.
Systems offered testimony from Yaniv Schiff, a computer forensics expert who
performed an analysis of Defendants’ Systems-issued computers. Schiff stated that Defendant
Campbell connected an external storage device to his laptop two days after his employment was
terminated. Schiff also testified that Defendant Henry connected external storage devices to his
laptop after submitting his notice of resignation but before his last day of employment.
According to Schiff, several folders on the external storage devices matched the names of folders
listed on Systems’ servers. Systems argues that these findings demonstrate that Defendants’
external storage devices contained a substantial amount of Systems’ confidential information and
trade secrets.
On November 11, 2016, Systems filed the original Motion for Preliminary Injunction, as
well as a Motion for Expedited Discovery. The Motion for Expedited Discovery included a
request for Defendants to produce for inspection any hard drives and external storage devices
used by Defendants. Defendants subsequently produced for inspection file listings and other
1

In its post-hearing brief, Systems argues that Defendants misappropriated its design drawings by disclosing the
drawings to a third party. On March 2, 2017, the Court entered an order striking the evidence Systems offered in
support of this assertion. See ECF No. 50. Accordingly, the Court will not consider the merits of this claim.

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data contained on two computers used by Defendants Henry and Campbell. An analysis of this
information by Schiff revealed that the operating systems on the computers were installed on
November 14, 2016. The analysis further revealed that CCleaner, a program used to delete
unwanted files from hard drives, was run on Campbell’s computer on November 17, 2016 and on
Henry’s computer on November 19, 2016. Defendants later revealed that the computer hard
drives had been replaced and destroyed “in the ordinary course of business” as a result of
technical issues.
On February 22, 2017, the Court issued an order granting Systems’ Motion for Default
Judgment or, Alternatively, an Adverse Inference. See ECF No. 46. In the order, the Court
found that Defendants intentionally destroyed their hard drives in order to prevent Systems from
inspecting them in this litigation. As a result, the Court awarded Systems an adverse inference
instruction, as well as attorneys’ fees and costs in connection with the filing of its motion for
sanctions.
Systems now argues that Defendants’ spoliation of the computer information is evidence
that Defendants misappropriated Systems’ trade secrets. Defendants maintain Systems has failed
to prove that its trade secrets were misappropriated as there is no direct evidence in the record
that they currently possess or have access to any of Systems’ pricing information and design
drawings.
“Direct evidence of theft of trade secret is rarely available and not required in order to
maintain the action.” Sw. Energy Co. v. Eickenhorst, 955 F. Supp. 1078, 1085 (W.D. Ark.
1997), aff’d, 175 F.3d 1025 (8th Cir. 1999). “Instead, a plaintiff may maintain an action for theft
of trade secrets based entirely on circumstantial evidence.” Id. Although there is no direct
evidence that Defendants misappropriated Systems’ trade secrets, the destruction of the hard

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drives supports the conclusion that Defendants likely destroyed evidence of misappropriation.
See e.g., RKI, Inc. v. Grimes, 177 F. Supp. 2d 859, 877 (N.D. Ill. 2001) (finding that spoliation of
computer data “support[ed] a negative inference that defendants destroyed evidence of
misappropriation.”). Accordingly, the Court finds that Systems has demonstrated a substantial
likelihood of success on the merits in proving that its trade secrets were misappropriated by
Defendants through the use of the aforementioned electronic storage devices.
2. Whether Defendants Misappropriated Systems’ Trade Secrets
by Knowingly Inducing Nucor to Breach its Duty to Maintain
Secrecy
Systems next argues that Defendants misappropriated its trade secrets by knowingly
inducing Nucor to disclose Systems’ design drawings. Nucor is Systems’ largest customer, and
the design drawings at issue are of the low pressure, spray-cooling equipment located at Nucor’s
Yamato facility. Nucor is given design drawings for the equipment it purchases from Systems.
Defendants began to perform consulting work for the Nucor Yamato facility in 2015.
Defendants received the design drawings from Nucor and subsequently used the drawings to
prepare a report for Nucor regarding modifications to part of a furnace roof located at the
Yamato facility.
Systems maintains that Nucor was under a duty to maintain the secrecy of the design
drawings. In support of this contention, Systems points to a confidentiality provision contained
on each of its design drawings. The confidentiality provision states as follows:
The materials and information, including the principles of design represented by
this print, is the exclusive property of Systems Spray-Cooled Equipment, and it is
confidential information. Accordingly, this information is submitted to you with
the agreement that it is not to be produced, copied, or loaned in part or in whole.
Nor is the information to be relayed to any other individual or company. All
materials contained herein originating with Systems Sprayed-Cooled Equipment
shall remain the property of Systems Spray-Cooled Equipment.

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Plaintiff’s Ex. No. 20.
Systems asserts that the above confidentiality provision prohibited Nucor from disclosing
Systems’ design drawings to another company or individual, including Defendants. At the
preliminary injunction hearing, Systems introduced two emails sent from Defendant Henry to an
employee at Nucor’s Yamato facility. In the emails, Defendant Henry asks the Nucor employee
to request a set of roof design drawings from Systems. The emails further reveal that Defendants
obtained at least some of the requested design drawings. Systems asserts that Defendants
Campbell and Henry prepared and approved some of the design drawings at issue and, as former
employees, knew that each drawing contained a confidentiality provision. As a result, Systems
maintains that Defendants misappropriated its trade secrets by knowingly inducing Nucor to
breach its duty to maintain the secrecy of the design drawings.
Defendants maintain they did not misappropriate the Yamato facility design drawings. In
essence, Defendants argue that Nucor did not owe Systems a duty to maintain the secrecy or
limit the use of the design drawings and, therefore, Nucor was within its contractual rights to
provide them with Systems’ design drawings. Defendants first cite Chuck Hays’ testimony
which reveals that Systems sells its equipment to customers instead of entering into a licensing
agreement. Defendants also highlight the testimony of Dick Arthur, which provided that other
companies perform maintenance on equipment sold by Systems at its respective customers’
facilities.
In addition, Defendant Campbell testified that Nucor represented that the design drawings
were owned by Nucor. Defendant Campbell also testified that during his tenure with Systems, it
was customary for Systems’ customers to provide Systems’ design drawings to third party

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contractors for the purpose of performing maintenance. Defendant Campbell further testified
that Systems was aware of this practice during his tenure with the company.
Defendants also point to the contracts entered into evidence as proof that Nucor was
within its contractual rights to share the design drawings.

Defendants highlight several

contractual provisions within the various Nucor contracts in support of their contention.
Defendants note that one of the contracts in evidence included the “design” of the equipment in
the price paid to Systems. Defendants argue that this is evidence that Nucor paid for the design
drawings, as well as the equipment. Moreover, Defendants assert that all of the contracts in
evidence indicate that Nucor is responsible for repairing or replacing equipment parts that are
used in normal operation, damaged or outside of warranty. Defendants further assert that all of
the contracts obligate Systems to protect Nucor’s confidential information and do not mention
Systems’ confidential information.

Defendants also note that none of the Nucor contracts

explicitly prohibit Nucor from inspecting, disassembling or reverse engineering any of the
equipment Nucor purchases from Systems. Lastly, Defendants highlight that all of the Nucor
agreements have “merger” clauses which state that the terms of the agreements “are exclusive
and in lieu of any other commercial terms and conditions of sale.”
A review of the Nucor contracts reveals that the terms of each contract are different.
Although Defendants are right in their assertion that the contract for Nucor’s Alabama facility
contains language in the Price and Sale provision indicating that the total price of the sale of
equipment includes “design,” the contract between Systems and Nucor’s Yamato facility does
not contain similar language. In addition, all of the confidentiality provisions contained within
the contracts appear to be silent with regard to the confidentiality of Systems’ design drawings.

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“[O]ne must have notice of both the fact that the information claimed to be a trade secret
is in fact secret and the fact that disclosure by the third person is a breach of duty before one is
subject to liability for the use or disclosure of the trade secret.” Curtiss-Wright Corp. v. EdelBrown Tool & Die Co., 407 N.E.2d 319, 323 (Mass. 1980) (citing Restatement of Torts §
757(c)). “Thus, if the actor knows (or should know) that the information proffered to him by one
person is the trade secret of another he is put on inquiry as to the former’s authority to disclose
the information.” Id. “Knowledge or the likelihood that a defendant knew of the wrongful
character of the disclosure can and often must be proved by the weight of credible circumstantial
evidence.” Id. (internal citation omitted).
Upon consideration, the Court concludes that, at this stage in the litigation, there is
insufficient evidence in the record to determine whether Defendants knowingly induced Nucor to
breach its duty to maintain secrecy. First, there is insufficient evidence with regard to whether
Nucor had a duty to maintain the secrecy of the design drawings. Systems maintains that
Nucor’s duty to maintain the secrecy of the design drawings arises from the confidentiality
provisions located on each of its drawings. However, there is also uncontroverted evidence in
the record which establishes that it was Systems’ practice to provide its customers with design
drawings with the knowledge that its customers will share the information with third party
contractors.
In addition, there is insufficient evidence in the record to determine whether Defendants
knew that obtaining the drawings would be a breach of Nucor’s duty to maintain its secrecy. As
stated above, the contracts in evidence are silent regarding the confidentiality of Systems’ design
drawings. Moreover, while each of the design drawings contains a confidentiality provision,
Defendants maintain that Nucor informed them that the drawings were, in fact, owned by Nucor.

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Systems’ argument that Defendants are former Systems employees and, thus, were aware of
Nucor’s duty to maintain the secrecy of the drawings is also unavailing in light of the evidence
presented indicating that Systems has previously provided its design drawings to its customers
with knowledge that those customers would provide the drawings to subcontractors to make
repairs to equipment as is the case in the present action. Accordingly, the Court finds that, at this
stage of the litigation, Systems has failed to demonstrate that Defendants misappropriated its
trade secrets by knowingly inducing Nucor to disclose Systems’ design drawings.
Systems further argues that Defendants misappropriated its trade secrets by using its
design drawings for the aforementioned study regarding modifications to part of a furnace roof
located at the Yamato facility. Because the Court finds that Systems has failed to demonstrate
that Defendants misappropriated the design drawings by receiving them from Nucor, the Court
finds that this argument also fails.
3. Inevitable Disclosure Doctrine
Systems next argues that the inevitable disclosure doctrine applies in this case. Arkansas
has adopted the inevitable disclosure doctrine, which allows a plaintiff to “prove a claim of trade
secrets misappropriation by demonstrating that a defendant’s new employment will inevitably
lead him to rely on the plaintiff’s trade secrets.” Bendinger v. Marshalltown Trowell Co., 994
S.W.2d 468, 474 (Ark. 1999) (citing PepsiCo, Inc. v. Redmond, 54 F.3d 1262, 1269 (7th Cir.
1995)). Systems maintains that Defendants, as former employees, had full knowledge of its
trade secrets and have formed a business that is in direct competition with Systems in the low
pressure, spray-cooling equipment market. As a result, Systems contends that it is inevitable that
Defendants will disclose and rely upon its low pressure, spray-cooling trade secrets through their
work.

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Defendants contend that the employment agreements signed by Defendants Campbell and
Henry preclude Systems’ reliance upon the inevitable disclosure doctrine.

Defendants

specifically argue that the restrictive covenants at issue expired after a two year period. The
provision at issue, which is identical in both Defendants’ employment agreements, states as
follows:
“Upon termination of employment, Employee agrees for a period of twenty-four
months thereafter not to develop, manufacture or attempt to sell, directly or
indirectly, goods that compete with Systems Spray Cooled, Inc.’s engineering,
designs or products.”
Plaintiff’s Exs. 5 and 6. It is undisputed that the non-compete provisions within Defendants’
employment agreements have expired.

Defendants assert that Systems’ reliance on the

inevitable disclosure doctrine is an attempt to extend the two-year non-compete period.
At least one court faced with similar facts has rejected the application of the inevitable
disclosure doctrine. In Multiform Desiccants v. Sullivan, the parties executed an employment
agreement which contained a one-year covenant not to compete following the defendant’s
termination. No. 95-CV-0283E(F), 1996 WL 107102, at *1 (W.D.N.Y. Mar. 8, 1996). The
plaintiff was a manufacturer of desiccant products, and the defendant was a former upper-level
manager who was terminated from his position. Id. The defendant later began working for a
corporation that directly competed with the plaintiff. Id. The plaintiffs filed suit against the
defendant alleging that he breached his covenant not to compete, as well as misappropriated and
divulged the plaintiff’s trade secrets. Id. at *2. Citing Seventh Circuit precedent, the plaintiffs
sought to enjoin the defendant, arguing that disclosure of its trade secrets would be inevitable
because of the nature of the defendant’s previous employment, as well as his “lack of candor”
regarding his failure to return some of the plaintiff’s confidential information. Id.

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The Sullivan court noted that the parties expressly agreed to a one-year period of noncompetition which had already expired. Id. The court further noted that restrictive covenants
were viewed unfavorably in New York. Id. As a result, the court found that the one-year period
of non-competition governed and could not be extended by the inevitable disclosure doctrine. Id.
Arkansas courts have expressed a similar disfavor for restrictive covenants. See
Federated Mut. Ins. Co. v. Bennett, 818 S.W.2d 596, 597 (Ark. App. 1991) (“Covenants not to
compete are not looked upon with favor by the law.”). Moreover, the non-compete provisions
executed between the parties have already expired.

Accordingly, the Court finds that

Defendants’ non-compete provisions govern and should not be extended.
In sum, the Court finds that Systems has shown a substantial likelihood of success on the
merits of their trade secret claim with regard to the design drawings and internal estimate
worksheets. The Court further finds that Systems has not shown a substantial likelihood of
success on the merits of their trade secret claim with regard to its customer lists or other financial
documents.
b. Breach of Employment Agreement
Systems also argues that it has shown a substantial likelihood of success on the merits
regarding its claim that Defendants breached their employment agreements. Systems argues that
Defendants Campbell and Henry signed identical employment agreements with Systems on
August 5, 2012. Systems contends that the employment agreements contain post-employment
confidentiality provisions which require Defendants to maintain the secrecy of Systems’
“confidential information.” The confidentiality provisions state, in part, as follows:
No copies of Confidential Information shall be kept by Employee or removed
from [Systems’] custody by photostatic, computers, electronically or otherwise.
Furthermore, each party will use all reasonable efforts to prevent the disclosure of

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any Confidential Information to employees or agents who do not require access to
such information to properly perform their duties.
Plaintiff’s Ex. No. 5 and 6. Confidential information is defined in the agreement as including
designs, drawings, plans, specifications, customer lists, and pricing information related to SprayCooled equipment. According to Systems, Defendants breached their employment agreements
by taking Systems’ design drawings. In addition, Systems asserts that Defendants breached the
agreements by requesting and obtaining Systems’ drawings from Nucor.
Defendants counter that the evidence in the record does not support a finding that
Campbell or Henry have breached or are likely to breach the confidentiality provisions.
Defendants primarily argue Systems has failed to demonstrate that Campbell or Henry possess
any of Systems’ confidential information disclosed to them during their employment.

In

addition, Defendants argue there is no evidence that they have disclosed any confidential
information to third parties.
The Court disagrees. As previously noted, the Court found that Defendants intentionally
destroyed evidence which supports an inference that they misappropriated some of Systems’
trade secrets and confidential information. Accordingly, the Court finds that Systems has
demonstrated a substantial likelihood of success on its claim that Defendants breached
confidentiality provisions contained within the employment agreements.
B. Threat of Irreparable Harm
The second Dataphase factor the Court must consider is the threat of irreparable harm
that Systems will suffer if the Court does not grant an injunction. “In order to demonstrate
irreparable harm, a party must show that the harm is certain and great and of such imminence
that there is a clear and present need for equitable relief.” Iowa Utilities Bd. v. F.C.C., 109 F.3d
418, 425 (8th Cir. 1996). “Irreparable harm occurs when a party has no adequate remedy at law,
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typically because its injuries cannot be fully compensated through an award of damages.” Gen.
Motors Corp. v. Harry Brown's, LLC, 563 F.3d 312, 319 (8th Cir. 2009). A movant’s “failure to
demonstrate irreparable harm is a sufficient ground to deny a preliminary injunction.” Id. at 320.
Systems offers two primary arguments to demonstrate that it has been irreparably harmed
by Defendants. First, Systems argues that Defendants’ misappropriation of its trade secrets
cannot be measured in money damages and, thus, creates a presumption of irreparable harm.
Systems cites Second Circuit case law in support of this proposition. FMC Corp. v. Taiwan, 730
F.2d 61, 63 (2d. Cir. 1984) (holding that “the loss of trade secrets cannot be measured in money
damages” because “[a] trade secret once lost is . . . lost forever.”).
The Court must first note that prior decisions from this district have held that all four
Dataphase factors “must be weighed before deciding whether to issue a preliminary injunction,
regardless of the subject matter of the underlying lawsuit.” Spears, 929 F. Supp. 2d at 871
(making no presumptions of irreparable harm as to Arkansas Trade Secrets Act claims). In
addition, the Second Circuit has held that such a presumption of irreparable harm is not
automatic and may be unwarranted “[w]here a misappropriator seeks only to use those secrets—
without further dissemination or irreparable impairment of value—in pursuit of profit. Faiveley
Transp. Malmo AB v. Wabtec Corp., 559 F.3d 110, 118 (2d Cir. 2009). The Faiveley court
reasoned that a presumption is not warranted in such cases “because an award of damages will
often provide a complete remedy for such an injury.” Id. 118-19.
In the present case, the Court finds that a presumption of irreparable harm is unwarranted.
Even considering Second Circuit precedent, Systems has failed to show that there is any danger
that Defendants will disseminate its trade secrets to others or that Defendants have disclosed
Systems’ trade secrets to third parties. The record is also sparse with regard to whether

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Defendants’ misappropriation has caused or threatened to cause any irreparable impairment to
the value of Systems’ trade secrets. The current record reflects that Defendants have only
solicited Nucor for its business, and Nucor was already in possession of at least some of
Systems’ trade secrets, such as design drawings.

Without evidence that Defendants

disseminated, disclosed or otherwise irreparably diminished Systems’ trade secrets, the Court
cannot presume that Systems has been irreparably harmed. As the Faiveley court noted, the only
injury a plaintiff may suffer in such situations “is loss of sales to a competing product . . .
[which] should be fully compensable by money damages.” Id. at 119 (quoting Geritrex Corp. v.
Dermarite Indus., LLC, 910 F.Supp. 955, 966 (S.D.N.Y.1996)).
Next, Systems argues that it has suffered irreparable harm as a result of a letter Defendant
Henry addressed to Gary McQuillis, a technical manager of Nucor, concerning this action. In the
letter, which is dated September 25, 2016, Henry wrote that if Systems is successful in the
instant lawsuit, it will “be able to extend [its] monopoly and high pricing on spray cooling
furnace equipment for the next decade.” Plaintiff’s Ex. No. 17. The letter also states that
“Nucor has suffered under [Systems’] monopoly for almost 20 years.” Id. Systems offered
testimony to establish that Nucor is its largest, most important customer. Systems also provided
testimony from Chuck Hays, CEO of the Systems Group, who stated that if Nucor chose to
believe the information contained within the letter, Systems could go out of business.
Although the letter is addressed to McQuillis, there is conflicting evidence in the record
regarding whether McQuillis actually received it. Dick Arthur, Systems’ expert on low pressure
spray cooling equipment, testified that it appeared the letter had been sent to McQuillis. Arthur
later testified on cross-examination that he had no actual knowledge of whether the letter was
sent. Defendants counter that there is no evidence in the record to establish that the letter was

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sent to or seen by McQuillis. As a result, Defendants argue that Systems cannot prove a threat of
irreparable harm. However, it is undisputed that the letter was sent to the personal email address
of another Nucor manager, Charles Clark.
“Harm to reputation and goodwill is difficult, if not impossible, to quantify in terms of
dollars.” Med. Shoppe Int'l, Inc. v. S.B.S. Pill Dr., Inc., 336 F.3d 801, 805 (8th Cir. 2003). As a
result, the Eighth Circuit has established that “[l]oss of intangible assets such as reputation and
goodwill can constitute irreparable injury.” Id. (citing United Healthcare Ins. Co. v.
AdvancePCS, 316 F.3d 737, 741 (8th Cir. 2002)); see also Wave Form Sys., Inc. v. AMS Sales
Corp., 73 F. Supp. 3d 1052, 1058 (D. Minn. 2014) (“Harm to reputation and goodwill . . . can
form sufficient irreparable harm to grant a preliminary injunction.”).
The Court finds that Systems has demonstrated that it is threatened with irreparable harm
because of the letter. Despite the conflicting evidence presented by the parties regarding whether
the letter was actually sent to McQuillis as intended, it is undisputed that the letter was emailed
to one of McQuillis’ colleagues at Nucor. Although McQuillis may not have received the letter,
the fact that Defendants’ disparaging letter was received by an employee of Nucor could cause
irreparable harm to Systems’ reputation and goodwill by damaging a longstanding business
relationship with Nucor and affecting future dealings between the companies. In light of the
foregoing, the Court finds that Systems has sufficiently established a threat of irreparable harm.
Therefore, this factor weighs in favor of an injunction.
C. Balance of Equities
The Court must next balance the potential for harm to the moving party against any
potential harm to the nonmoving party in the event an injunction issues. Dataphase, 640 F.2d at
114. Systems claims that if the Court does not issue an injunction, it stands to lose customers

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and customer goodwill that it spent years cultivating. On the other hand, Defendants take the
position that if Systems’ request for an injunction is granted, they will be put out of business.
The Court agrees that, absent an injunction, Systems could potentially lose customers if
Defendants are able to develop a competing low pressure, spray-cooling system using Systems’
trade secrets. Conversely, the Court agrees that granting an injunction will have an impact on
Defendants’ business if it is enjoined from developing and supplying competing products to the
steel industry. However, the record demonstrates that Defendants are engaged in business other
than developing and supplying low pressure, spray-cooling equipment.

For instance,

Defendants have conducted studies and recommended modifications to existing furnace roofs at
Nucor facilities. Accordingly, the Court finds that the balance of equities does not clearly favor
either party.
D. Public Interest
The final Dataphase factor that the Court must consider in its analysis is whether the
issuance of an injunction is in the public interest. Dataphase, 640 F.2d at 114. Defendants
assert that issuance of an injunction would be against the public interest because it would limit
Defendants’ ability to use publicly available patents to develop a competing product. The Court
finds Defendants’ argument unavailing considering that Systems has established a substantial
likelihood of success on the merits with regard to Defendants’ misappropriation of its design
drawings and internal estimate worksheets. In addition, Defendants have failed to demonstrate
that the information needed to design a competing low pressure spray-cooling system is readily
ascertainable from publicly available patents. The Court thus concludes that the public interest
in preserving fair competition and protecting trade secrets weighs in favor of granting injunctive
relief.

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In conclusion, the Court finds that a balance of the factors weighs in favor of granting
Systems’ request for a preliminary injunction. The Court, thus, concludes that Systems should
be granted temporary injunctive relief.
E. Scope of the Injunction
Because the Court has found that the balance of factors weighs in favor of granting an
injunction, the Court must next consider the appropriate scope of the injunction. “The decision
to issue an injunction, and the injunction’s scope, are committed to the Court's discretion.”
Mooney v. Allianz Life Ins. Co. of N. Am., No. CIV. 06-545, 2011 WL 1792966, at *4 (D. Minn.
May 11, 2011) (citing Thompson v. Edward D. Jones & Co., 992 F.2d 187, 189 (8th Cir. 1993)).
However, the Court’s discretion to fashion injunctive relief is not unlimited. Coca-Cola Co. v.
Purdy, 382 F.3d 774, 790 (8th Cir. 2004). The Eighth Circuit has cautioned that district courts
should tailor injunctions to remedy the harm suffered. See E.E.O.C. v. HBE Corp., 135 F.3d
543, 557 (8th Cir. 1998) (“Provisions of an injunction may be set aside if they are broader than
necessary to remedy the underlying wrong.”).
In its Amended Motion for Preliminary Injunction, Systems requests that the Court enjoin
Defendants, as well as anyone acting in concert with Defendants, from further misappropriation,
disclosure, and use of Systems’ trade secrets and confidential information until a trial on the
merits can be held. In addition, Systems requests that the Court enjoin Defendants, as well as
anyone acting in concert with Defendants, from directly or indirectly designing or supplying low
pressure, spray-cooling equipment for the steel industry for a three year period. Systems further
requests that the Court order Defendants to sign affidavits certifying their compliance with the
specific terms of the Court’s order.

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As noted previously, Systems has demonstrated a substantial likelihood of success on the
merits in proving that its design drawings and internal estimate worksheets constitute trade
secrets and that they were misappropriated by Defendants through the use of electronic storage
devices. Accordingly, the Court finds that it is appropriate to enjoin Defendants from further
misappropriating, disclosing or using Systems’ design drawings and internal estimate worksheets
until a trial on the merits can be held or until the Court decides otherwise.
Systems also requests that the Court enjoin Defendants and anyone acting in concert with
them from designing or supplying low pressure, spray-cooling equipment for the steel industry
for three years. The Court finds this request overbroad. The Court first notes that Systems has
failed to sufficiently explain why the duration of the proposed injunction should extend for a
period of three years. In addition, the Court recognizes that Defendants have a right to utilize
their own knowledge and experience of low pressure, spray-cooling equipment and technology
to develop a competing product for the steel industry. This recognition is further strengthened in
light of the employment agreement entered into by Systems and Defendants Henry and Campbell
which included a two year non-compete provision that has since expired. As a result, the Court
finds it appropriate to issue a more limited injunctive remedy by enjoining Defendants from
using those items found to be trade secrets in this Memorandum Opinion to design and supply
low pressure, spray-cooling equipment for the steel industry until a trial can be held on the merits
or until the Court decides otherwise.
Lastly, the Court finds Systems’ request that the Court direct Defendants to sign
affidavits certifying their compliance with the Court’s order to be unwarranted. The Court, thus,
finds that Systems’ request should be denied.

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F. Security Bond
Finally, the Court must consider the amount of security that Systems is required to post
prior to the issuance of the injunction. Federal Rule of Civil Procedure 65(c) provides that “[t]he
Court may issue a preliminary injunction . . . only if the movant gives security in an amount that
the court considers proper to pay the costs and damages sustained by any party found to have
been wrongfully enjoined or restrained.” The purpose of Rule 65(c) is “to enable a restrained or
enjoined party to secure indemnification for any costs, usually not including attorney’s fees, and
any damages that are sustained during the period in which a wrongfully issued equitable order
remains in effect.” 11A Charles Alan Wright, Arthur R. Miller & Edward H. Cooper, Federal
Practice & Procedure: Civil § 2954 (3d ed. 2002). “The amount of the bond . . . is plainly in the
discretion of the district court.” Curtis 1000, Inc. v. Youngblade, 878 F. Supp. 1224, 1279 (N.D.
Iowa 1995) (citing Rathmann Grp. v. Tanenbaum, 889 F.2d 787, 789 (8th Cir. 1989)).
Although Systems has demonstrated a likelihood of success on the merits at this stage of
the litigation, the Court concludes that Defendants will face financial damage if it is later
determined that they were wrongly enjoined as a result of the preliminary injunction.

As a

result, the Court believes that requiring a security bond in some amount is warranted. Taking
into account the express language provided in Rule 65(c), the evidence presented thus far, the
amount of damages sought, and the purpose of the bond requirement, the Court finds that a
security bond in the amount of $5,000,000 is appropriate.
IV. CONCLUSION
In light of the above findings, the Court finds that a preliminary injunction should be
issued. Accordingly, the Court finds that Systems’ Amended Motion for Preliminary Injunction
(ECF No. 61) should be and hereby are GRANTED IN PART and DENIED IN PART. The

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Court further finds that Systems’ Motion for Preliminary Injunction (ECF No. 12) should be and
hereby is DENIED AS MOOT. An order of even date consistent with this Opinion shall issue.
IT IS SO ORDERED, this 16th day of May, 2017.
/s/ Susan O. Hickey
Susan O. Hickey
United States District Judge

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