H.Q. Milton, Inc. v. Webster, et al

Filing 21

ORDER by Judge Phyllis J. Hamilton GRANTING 9 Administrative Motion to File Under Seal; GRANTING 10 Application for Temporary Restraining Order; GRANTING 11 Expedited Discovery; GRANTING IN PART and DENYING IN PART 15 Administrative Motion to File Under Seal; GRANTING IN PART and DENYING IN PART 20 Motion for Joinder to Administrative Motion to File Under Seal. (pjhlc2, COURT STAFF) (Filed on 11/22/2017)

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1 2 3 4 UNITED STATES DISTRICT COURT 5 NORTHERN DISTRICT OF CALIFORNIA 6 7 H.Q. MILTON, INC., v. 9 10 ORDER GRANTING APPLICATION FOR TEMPORARY RESTRAINING ORDER JESSY WEBSTER, et al., 11 United States District Court Northern District of California Case No. 17-cv-06598-PJH Plaintiff, 8 Defendants. Re: Dkt. No. 10 12 13 Plaintiff’s application for a temporary restraining order (“TRO”) and an order to 14 15 show cause re preliminary injunction came on for hearing before this court on November 16 22, 2017. Plaintiff appeared by its counsel Nancy E. Harris, and defendants Jessy 17 Webster and Hidekazu Matsuba appeared by their counsel Russell Goodrow and Burke 18 Hansen, respectively. Having read the parties’ papers and carefully considered their 19 arguments and the relevant legal authority, and good cause appearing, for the reasons 20 stated at the hearing and summarized below, the court hereby GRANTS plaintiff’s 21 application for a temporary restraining order. BACKGROUND1 22 23 24 25 26 27 28 1 Plaintiff’s motions to seal are GRANTED in part and DENIED in part, as follows. Plaintiff’s motion to seal portions of Jacek Kozubek’s declaration and Exhibit A attached to that declaration is GRANTED. Plaintiff’s motion to seal portions of Matsuba’s declaration and Exhibits A and B to that declaration is also GRANTED. The portions of these documents that the court now seals are some of the same trade secret information, including customer names or pricing information, that is the subject of the temporary restraining order. Plaintiff’s motion to seal the entirety of the termination agreement between Webster and H.Q. Milton is DENIED. However, as stated at the hearing, the court will seal the “separation payment” amount shown in that document. Plaintiff H.Q. Milton seeks an immediate temporary restraining order to prevent 1 2 defendants Jessy Webster and Kazu Matsuba from using allegedly misappropriated trade 3 secrets. Amongst other claims, the complaint asserts that defendants violated the 4 Defend Trade Secrets Act, 18 U.S.C. 1836 et seq. (the “DTSA”), intentionally interfered 5 with H.Q. Milton’s prospective economic advantage, and converted H.Q. Milton property.2 6 Complaint ¶¶ 32-66. The present TRO application is based only on the DTSA cause of 7 action. In support of its TRO application, plaintiff submitted declarations from Scott 8 Kaplan, H.Q. Milton’s founder, Jacek Kozubek, a long-time employee and partner at H.Q. 9 Milton, and excerpts of over 1200 pages of text messages between defendants Matsuba 10 and Webster. Scott Kaplan founded H.Q. Milton, which is one of the world’s leading purveyors of United States District Court Northern District of California 11 12 high-value, collectible vintage and modern timepieces, with a particular focus on Rolex 13 sports model watches. Dkt. 10-2, Kaplan Decl. ¶ 1, 4; Compl. ¶ 2. H.Q. Milton’s 14 business relies upon its well-earned reputation for honesty, reliability, impeccable 15 merchandise and its vast knowledge of vintage and antique timepieces. Compl. ¶ 2. 16 H.Q. Milton has invested time, energy and resources to build its own proprietary and 17 invaluable set of customer and vendor contacts. Kaplan Decl. ¶¶ 6-7; Compl. ¶ 4. H.Q. Milton protects its client source and lead information and does not share it 18 19 with anyone outside its small company that employed four people in 2017 and currently 20 employs two people. Kaplan Decl. ¶¶ 7, 10, 11; Compl. ¶¶ 2, 19. Because the market 21 for vintage timepieces is volatile, H.Q. Milton protects the information it has acquired 22 about customer interests, pricing, and profit margin. Kaplan Decl. ¶¶ 4-5, 7-8, 9, 11; 23 Compl. ¶¶ 19-20. Access to that pricing and profit margin information is invaluable in a 24 fast-moving market where pricing decisions ultimately determine profitability. Kaplan 25 Decl. ¶ 4, 5, 7-8, 11; Compl. ¶¶ 19-20. Up until November 7, 2017, defendant Matsuba was employed by H.Q. Milton as a 26 27 28 2 This court has jurisdiction over this action pursuant to the DTSA and 28 U.S.C. § 1331. 2 1 sales person. Compl. ¶ 23. In that role, Matsuba was given access to H.Q. Milton’s 2 customer information, a “customer wish list,” and final pricing and margin information, so 3 that he could adequately perform his job duties. Compl. ¶ 23; Kaplan Decl. ¶ 17-21. 4 Defendant Webster worked for H.Q. Milton as a professional photographer for 5 approximately 3.5 years. Compl. ¶ 24; Kaplan Decl. ¶¶ 13-16. H.Q. Milton fired Webster 6 in December 2016. Kaplan Decl. ¶¶ 13-16; Compl. ¶ 24. At that time, H.Q. Milton was 7 aware that Webster intended to pursue vintage watch dealing on his own. Kaplan Decl. 8 ¶¶ 15-16; Compl. ¶ 24. A couple of months after leaving, Webster launched his own 9 vintage watch dealing website called oysterpalace.com. Compl. ¶ 25. 10 Between February and November 2017, Matsuba, still working at H.Q. Milton, United States District Court Northern District of California 11 provided Webster with key client information, including names and contact information. 12 Dkt. 10-3, Kozubek Decl. ¶¶ 12-31; Compl. ¶¶ 26-29. Matsuba also provided Webster 13 with H.Q. Milton’s proprietary pricing information. Compl. ¶¶ 3, 5, 23-29; Kozubek Decl. 14 ¶¶ 26-31. The text messages show that Matsuba affirmatively steered H.Q. Milton 15 customers to Webster and Oyster Palace. Kozubek Decl. ¶¶ 23-25; Compl. ¶¶ 26-29. 16 Some of these customers purchased vintage timepieces from Webster and Matsuba, 17 rather than H.Q. Milton. Kozubek Decl. ¶ 22; Compl. ¶ 27. 18 The text messages also show that both defendants were aware that their conduct 19 should be kept hidden from H.Q. Milton. For example, Matsuba, then still working at 20 H.Q. Milton, rebuffed Webster’s request that he leave H.Q. Milton, stating “we may be 21 more successful this way, me staying here, and you doing ur thing . . . I’m a splinter cell 22 for [Oyster Palace] . . . and we actually have access to more, I have information at [my] 23 fingertips, and access to all of my clients, with the credibly [sic] of HQ” Milton. Compl. ¶ 24 5. Webster responded “Yessir I’m in! Obviously hahahaha.” Kozubek Decl. ¶ 14. But 25 Webster then immediately warned Matsuba to “[j]ust be careful with leaving your 26 messages on your comp :-/.” Id. In another instance, after Matsuba confirmed which 27 watch parts Webster wanted from H.Q. Milton, Webster stated “Yes please ;) and delete 28 this convo from your comp ;).” Id. at ¶ 23. 3 DISCUSSION 1 2 3 A. Legal Standard Federal Rule of Civil Procedure 65 provides federal courts with the authority to 4 issue temporary restraining orders and preliminary injunctions. Fed. R. Civ. P. 65(a), (b). 5 Generally, the purpose of a preliminary injunction is to preserve the status quo and the 6 rights of the parties until a final judgment on the merits can be rendered, see U.S. Philips 7 Corp. v. KBC Bank N.V., 590 F.3d 1091, 1094 (9th Cir. 2010), while the purpose of a 8 temporary restraining order is to preserve the status quo before a preliminary injunction 9 hearing may be held. See Granny Goose Foods, Inc. v. Bhd. of Teamsters and Auto 10 United States District Court Northern District of California 11 Truck Drivers, 415 U.S. 423, 439 (1974). Requests for temporary restraining orders are governed by the same general legal 12 general standards that govern the issuance of a preliminary injunction. See New Motor 13 Vehicle Bd. v. Orrin W. Fox Co., 434 U.S. 1345, 1347 n.2 (1977); Stuhlbarg Int'l Sales 14 Co., Inc. v. John D. Brush & Co., Inc., 240 F.3d 832, 839 n.7 (9th Cir. 2001). 15 An injunction is a matter of equitable discretion and is “an extraordinary remedy 16 that may only be awarded upon a clear showing that the plaintiff is entitled to such relief.” 17 Winter v. Natural Res. Def. Council, Inc., 555 U.S. 7, 22 (2008); see also Munaf v. Geren, 18 553 U.S. 674, 689-90 (2008). A preliminary injunction “should not be granted unless the 19 movant, by a clear showing, carries the burden of persuasion.” Mazurek v. Armstrong, 20 520 U.S. 968, 972 (1997) (per curiam) (citation omitted). 21 A plaintiff seeking a preliminary injunction must establish that (i) he is likely to 22 succeed on the merits, (ii) that he is likely to suffer irreparable harm in the absence of 23 preliminary relief, (iii) that the balance of equities tips in his favor, and (iv) that an 24 injunction is in the public interest. Winter, 555 U.S. at 20. Alternatively, the plaintiff may 25 demonstrate that the likelihood of success is such that “serious questions going to the 26 merits were raised and that the balance of hardships tips sharply in the plaintiff's favor,” 27 so long as the other two elements of the Winter test are met. Alliance for Wild Rockies v. 28 Cottrell, 632 F.3d 1127, 1131-32 (9th Cir. 2011). 4 1 2 B. H.Q. Milton’s Application for a TRO H.Q. Milton seeks a TRO enjoining defendants Webster and Matsuba, their 3 agents, and any others acting in concert with defendants, from any further use or 4 disclosure of H.Q. Milton’s confidential information or trade secrets, including but not 5 limited to H.Q. Milton’s client or lead information and H.Q. Milton’s vintage watch pricing 6 information or any other information taken by Webster and Matsuba. 7 H.Q. Milton argues that it is entitled to injunctive relief because it can demonstrate 8 a likelihood of success on the merits, a likelihood of irreparable harm in the absence of 9 preliminary relief, that the balance of equities tip in its favor, and that an injunction is in 10 the public interest. United States District Court Northern District of California 11 1. Likelihood of Success On The Merits 12 H.Q. Milton first contends that it has a strong likelihood of success on the merits 13 because defendants have used “improper means” to obtain H.Q. Milton’s protected 14 customer and price-related information as defined by the DTSA. See 18 U.S.C. 15 § 1839(6) (defining “improper means” as “theft, bribery, misrepresentation, breach or 16 inducement of a duty to maintain secrecy . . .”). Specifically, plaintiff alleges that through 17 the scheme described above, defendants misappropriated H.Q. Milton’s trade secrets, 18 including H.Q. Milton’s customer list and contact information, sales leads, customer 19 interests, and H.Q. Milton’s proprietary pricing (e.g., final sales price and profit margins). 20 Not only did defendants use this information to price their own products but defendants 21 also affirmatively steered H.Q. Milton customers to defendants’ own competing business, 22 Oyster Palace. Compl. ¶ 26. 23 The above type of information constitutes protectable trade secrets. MAI Systems 24 Corp. v. Peak Comput., Inc., 991 F.2d 511, 521 (9th Cir. 1993) (holding that under the 25 Uniform Trade Secrets Act the soliciting of customers of former firm constituted trade 26 secret misappropriation); Brocade Commc’n Sys. Inc. v. A10 Networks, Inc., 873 F. 27 Supp. 2d 1192, 1214 (N.D. Cal. 2012) (“[C]ustomer-related information including . . . 28 pricing guidelines . . . and customers’ business needs/preferences . . . is routinely given 5 1 trade secret protection.”); Henry Schein, Inc. v. Cook, No. 16-03166C, 2016 WL 2 3418537, at *4 (N.D. Cal. June 22, 2016) (holding customer information, margins, and 3 profit percentages used to gain an advantage over competitors were protectable as trade 4 secrets). 5 In response, neither defendant denies the conduct alleged in the complaint and evidenced by the text messages. Instead, defendants contend that, in contravention of 7 18 U.S.C. § 1839(3)(A), H.Q. Milton did not make reasonable efforts to keep the 8 purported trade secret information confidential. In support, defendants argue that neither 9 defendant ever signed a nondisclosure agreement, or any other agreement regarding the 10 confidentiality of customer lists, pricing, etc. See Kaplan Decl. ¶ 11. Further, defendants 11 United States District Court Northern District of California 6 assert that the customer list and pricing information were not password protected or 12 encrypted and that Webster was able to freely access the information even though he 13 was an independent contractor during his time at H.Q. Milton. Dkt. 13-1, Webster Decl. 14 ¶¶ 4-5, 7-8. In addition, defendants contend that Kozubek’s conduct of freely providing 15 certain information to Webster after he had left the company, see Webster Decl. ¶¶ 6,7, 16 10-14, shows that H.Q. Milton did not attempt to protect the purported trade secrets. 17 Lastly, Matsuba attests that as a sales tactic, Kozubek would show clients “confidential 18 H.Q. Milton information” which showed “past purchases and profit margins.” Dkt. 14-1, 19 Matsuba Decl. ¶ 4. 20 Information only qualifies as a trade secret under § 1839 if “the owner thereof has 21 taken reasonable measures to keep such information secret.” See 18 U.S.C. § 22 1839(3)(A). The statute does not require, and defendants have not cited any authority to 23 support a requirement, that “reasonable measures” necessarily includes encryptions, 24 passwords, or confidentiality agreements. While such measures would be prudent and 25 are indicative of an attempt to protect the information, they are not the exclusive 26 measures a company might take to protect its information. 27 28 The court finds that H.Q. Milton took reasonable measures to keep its trade secret information confidential. H.Q. Milton is a small company that had four or fewer 6 1 employees throughout 2017. Kaplan, H.Q. Milton’s founder, attests that the company 2 protects its customer list because its customers often value their confidentiality. Kaplan 3 Decl. ¶ 7. In July 2017, the company reiterated its policy that any work done in the office 4 or on H.Q. Milton time was company property and employees could not use contacts, 5 photos or anything else owned by the company without H.Q. Milton’s consent. Id. at ¶ 8. 6 Kaplan further attests that all H.Q. Milton employees acknowledged that they understood 7 those rules. Id. Matsuba was an employee when this meeting took place. 8 Further, Kaplan attests that the company takes care not to share cost, final sale or profit margin information outside the company. Kaplan Decl. ¶¶ 9, 11. Contrary to 10 defendants’ assertion, plaintiff keeps this information in an electronic file that is only 11 United States District Court Northern District of California 9 accessible via a password protected account. Kaplan Decl. ¶ 9. The information in that 12 spreadsheet is only shared with H.Q. Milton employees for purposes of conducting H.Q. 13 Milton business with the company’s permission. Kaplan Decl. ¶ 11. It was for that 14 reason, and not so Matsuba could pass information to Webster, that Matsuba was given 15 access to the database. 16 In light of the above, the court concludes that plaintiff is likely to succeed on the 17 merits of its DTSA cause of action. The court also finds that plaintiff has demonstrated 18 that “serious questions going to the merits were raised and that,” as discussed below, 19 “the balance of hardships tips sharply in the plaintiff's favor.” Alliance for Wild Rockies, 20 632 F.3d at 1131-32. 21 2. Likelihood of Irreparable Harm. 22 Next, H.Q. Milton argues that it has established a likelihood of irreparable harm as 23 a result of defendants’ wrongful and potentially ongoing acts. Defendants 24 misappropriated H.Q. Milton’s customer and pricing information, which took years for 25 H.Q. Milton to develop. See, e.g., Kaplan Decl. ¶ 11. Plaintiff argues the 26 misappropriation of this information in and of itself constitutes irreparable harm. Further, 27 defendants’ use of the information undermined H.Q. Milton’s competitive advantage and 28 any further use threatens additional irreparable harm. Plaintiff also contends that 7 1 defendants’ targeted solicitation of H.Q. Milton’s customers is another basis on which the 2 court can find irreparable harm. At the hearing, plaintiff also argued that defendants’ use 3 of the misappropriated trade secrets threatens to cause harm to H.Q. Milton’s reputation 4 and customer goodwill. 5 The court agrees. Each of plaintiff’s identified injuries has been previously held to 6 satisfy the irreparable harm requirement. Stuhlbarg Int'l Sales Co. v. John D. Brush & 7 Co., 240 F.3d 832, 841 (9th Cir.2001) (“[e]vidence of threatened loss of prospective 8 customers or goodwill certainly supports a finding of the possibility of irreparable harm”); 9 MAI Systems, 991 F.2d at 521 (soliciting of customers of former firm constituted trade secret misappropriation); Fid. Brokerage Servs. LLC v. Rocine, No. 17-4993C, 2017 WL 11 United States District Court Northern District of California 10 3917216, at *5 (N.D. Cal. Sept. 7, 2017) (potential reputational harm found irreparable); 12 Richmond Techs., Inc. v. Aumtech Bus. Sols., 11-02460C, 2011 WL 2607158, at *22 13 (N.D. Cal. July 1, 2011) (“[T]o the extent that Defendants are using Plaintiff's trade 14 secrets to compete with Plaintiff and to encourage Plaintiff's customers to switch their 15 accounts . . . the Court agrees that Plaintiff has shown a likelihood of irreparable harm.”); 16 Defendants’ arguments miss the mark. Defendants argue that money damages 17 are adequate to compensate for any lost sales and that a fledgling startup like Oyster 18 Palace would not challenge H.Q. Milton. Both of these arguments ignore the harms that 19 H.Q. Milton actually alleges are irreparable. 20 Matsuba next argues that “customers presumably understand how the free market 21 works.” This argument does not address the actual harm alleged—the misappropriation 22 of pricing and customer information. Additionally, Oyster Palace and H.Q. Milton 23 customers likely do not presume the free market functions through defendants’ 24 misappropriation of a competitor’s trade secrets. 25 Lastly, Webster also argues that there is no possibility of continued harm because 26 the alleged scheme depended on Matsuba’s continued employment at H.Q. Milton and, 27 as of early November, Matsuba no longer works at H.Q. Milton. This argument fails 28 because defendants have not presented persuasive evidence showing they no longer 8 1 possess any misappropriated information. See I-Flow Corp. v. Apex Med. Techs., Inc., 2 No. 7-1200C, 2010 WL 141402, at *1 (S.D. Cal. Jan. 8, 2010) (rejecting defendants’ 3 argument that they have ceased the offending conduct and finding irreparable injury). 4 For the above reasons, the court finds that H.Q. Milton has shown the likelihood of 5 significant irreparable harm if defendants are not enjoined from using H.Q. Milton’s trade 6 secrets, including customer and pricing information. 7 3. 8 Lastly, H.Q. Milton argues that both the balance of equities and the public interest 9 Balance of Hardships and Public Interest. strongly favor granting the requested relief. H.Q. Milton claims that the benefit of injunctive relief far outweighs any detriment to defendants, as an injunction would protect 11 United States District Court Northern District of California 10 H.Q. Milton’s trade secrets. Any injunction would be focused on preventing defendants 12 from using H.Q. Milton’s confidential information, and such an order would not cause 13 significant hardship to defendants because it would only require them to comply with 14 existing law. 15 In response, Matsuba argues that these factors favor defendants because Oyster 16 Palace is a new entrant into a market that is dominated by a few firms, including H.Q. 17 Milton. Relatedly, Matsuba argues that public policy favors more, rather than less, 18 market competition. 19 The court finds that the balance of hardships and the public interest both favor the 20 issuance of a TRO. Defendants’ arguments in response are essentially that the issuance 21 of a TRO will harm them because it will interfere with their competing timepiece company. 22 However, nothing in the TRO precludes defendants from competing in the high-end 23 timepiece market. Instead, the TRO only prevents defendants from using H.Q. Milton’s 24 confidential information when conducting their business. To the extent Matsuba argues 25 that such an injunction would harm defendants’ fledgling company, that argument 26 implicitly concedes H.Q. Milton’s confidential information was being used and therefore 27 does not weigh in favor of defendants. 28 CONCLUSION 9 In accordance with the foregoing, the court hereby GRANTS H.Q. Milton’s 1 2 application for a TRO and ORDERS as follows: 1. 3 Defendants, and anyone acting in concert with them, are hereby enjoined 4 from any further use or disclosure of H.Q. Milton’s confidential information or trade 5 secrets. This includes any customer or lead information and any H.Q. Milton non-public 6 vintage watch pricing that either defendant knows about because either defendant did 7 business with an H.Q. Milton customer while employed at H.Q. Milton or while in any 8 other business relationship with H.Q. Milton, or became otherwise aware of that 9 information during the defendant’s employment at H.Q. Milton or while in a business 10 relationship with H.Q. Milton; 2. United States District Court Northern District of California 11 Defendants, and anyone acting in concert with them, shall return to H.Q. 12 Milton all records, documents and/or information pertaining to the confidential information 13 described in the preceding paragraph, whether in electronic, handwritten or any other 14 form within five (5) days of entry of this order, including any and all copies. This 15 requirement includes all records or documents, in any form, created by defendants or 16 anyone acting in concert with them, including documents created from memory or based 17 on documents or information that was obtained from or removed from H.Q. Milton; 3. 18 Webster shall file a declaration attesting that he has returned to H.Q. Milton 19 all information subject to this order within seven (7) days from the date of entry of the 20 order; 4. 21 Matsuba shall file a declaration attesting that he has returned to H.Q. Milton 22 all information subject to this order within seven (7) days from the date of entry of the 23 order; 24 5. This order is effective immediately and does not require the posting of an 25 injunction bond. 26 6. A hearing to show cause why a preliminary injunction should not issue in 27 this case is set for hearing on Wednesday, January 31, 2018 at 9:00 a.m., in Courtroom 28 3, at the Courthouse located at 1301 Clay Street, South Tower, Oakland, California. The 10 1 opening motion should be filed no later than December 27, 2017. Any opposition must 2 be filed by January 10, 2018, and any reply must be filed by January 17, 2018. Both 3 parties may conduct discovery in support of their papers until December 22, 2017. 4 5 6 7 IT IS SO ORDERED. Dated: November 22, 2017 __________________________________ PHYLLIS J. HAMILTON United States District Judge 8 9 10 United States District Court Northern District of California 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 11

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