Primesource Building Products, Inc. v. Felten et al
Filing
205
MEMORANDUM Opinion and Order Signed by the Honorable Young B. Kim on 12/9/2017. (ma,)
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
PRIMESOURCE BUILDING
PRODUCTS, INC.,
)
) No. 16 CV 11390
)
Plaintiff,
)
)
v.
) Magistrate Judge Young B. Kim
)
HUTTIG BUILDING PRODUCTS,
)
INC., et al.,
)
)
Defendants.
)
______________________________________________________________________________
PRIMESOURCE BUILDING
)
PRODUCTS, INC.,
) No. 16 CV 11468
)
)
Plaintiff,
)
) Magistrate Judge Young B. Kim
v.
)
)
SCOTT FELTEN, et al.,
) December 9, 2017
Defendants.
)
MEMORANDUM OPINION and ORDER
Before the court are PrimeSource Building Products, Inc.’s (“PrimeSource”)
motions for preliminary injunction in these two related cases against Huttig
Building Products, Inc. (“Huttig”) and several of PrimeSource’s former employees
who currently work for Huttig.
PrimeSource seeks what it refers to as a
“production injunction,” which would shut down the operation of an entire Huttig
division, known as the Huttig-Grip Division, pending a final trial on the merits.
Alternatively, it seeks to enjoin Huttig from selling building products to certain
customers and to prevent certain Huttig employees from working for either Huttig
or the Huttig-Grip Division. The parties have consented to this court’s jurisdiction
for the limited purpose of resolving the preliminary injunction motions. For the
following reasons, PrimeSource’s motion for a preliminary injunction in case
No. 16 CV 11390 is denied, (R. 23), and its motion for a preliminary injunction in
case No. 16 CV 11468, (R. 26), is granted in part and denied in part:
Procedural History
PrimeSource initiated these related actions within four days of each other in
December 2016. On December 15, 2016, PrimeSource sued Huttig along with four
former PrimeSource CEOs who currently work in the Huttig-Grip Division:
Kenneth Fishbein, Mona Zinman, David Fishbein, and Robert Furio (collectively,
“the CEO Defendants”). PrimeSource alleges that the CEO Defendants violated the
federal Defend Trade Secrets Act (“DTSA”), 18 U.S.C. §§ 1836-39, and several
covenants in their employment agreements with PrimeSource when they went to
work for Huttig. (Case No. 16 CV 11390, R. 1, Compl. ¶¶ 68-119.) A month later
PrimeSource amended its complaint to include a claim under the Illinois Trade
Secrets Act, 765 ILCS 1065/1, et seq. (Case No. 16 CV 11390, R. 18, Am. Compl.
¶¶ 66-67.)
On December 19, 2016, PrimeSource sued Huttig along with former
PrimeSource employees Scott Felten, Garrett Kessler, Daniel Kottmeyer, Allan
Sagunsky, and Jordan Whitehead (collectively, “the Felten Defendants”), alleging
that they violated the DTSA, the ITSA, and several restrictive covenants from their
employment agreements with PrimeSource when they took jobs working with the
CEO Defendants in the Huttig-Grip Division. (Case No. 16 CV 11468, R. 1, Compl.
2
¶¶ 78-116.) In both cases PrimeSource also alleges that Huttig tortiously interfered
with its employment contracts with the individual defendants. (Case No. 16 CV
11390, R. 18, Am. Compl. ¶¶ 100-04; Case No. 16 CV 11468, R. 18, Am. Compl. ¶¶
123-129.)
On January 19, 2017, PrimeSource filed the current motion for preliminary
injunction in its case against Huttig and the CEO Defendants. (Case No. 16 CV
11390, R. 23.) That same day, PrimeSource moved for a temporary restraining
order (and after an evidentiary hearing, a preliminary injunction) against Huttig
and the Felten Defendants. (Case No. 16 CV 11468, R. 26.) Following a hearing
and briefing, on March 3, 2017, the court granted the TRO motion in part,
temporarily restraining the Felten Defendants and Huttig from using PrimeSource
materials in their possession, from soliciting certain customers, and from selling
certain products or services. (Case No. 16 CV 11468, R. 41, TRO at 1.) The court
twice amended the TRO in the six weeks that followed, (Case No. 16 CV 11468,
R. 52, Am. TRO at 1; R. 78 at 1), with the third and current iteration specifying
that:
a.
Defendants Scott Felten, Garrett Kessler, Daniel Kottmeyer,
and Allan Sagunsky are prohibited from soliciting any PrimeSource
customers, either directly or indirectly, to whom they, individually as
PrimeSource employees, sold products or services to during the past
two calendar years, where those products or services are (i) competitive
with PrimeSource’s fasteners or are (ii) fasteners of a similar type,
kind, or nature to those supplied or distributed by PrimeSource during
their employment with PrimeSource.
(Case No. 16 CV 11468, R. 78, Am. TRO at 1.) The current TRO further clarifies
that:
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b.
Defendant Huttig is not prohibited from soliciting customers to
whom Defendants Felten Kessler, Kottmeyer, or Sagunsky,
individually as PrimeSource employees, sold products or services to
during the past two calendar years, provided that Defendants Felten,
Kessler, Kottmeyer, and/or Sagunsky have no role, either directly or
indirectly, in such solicitations by Huttig. Huttig shall not solicit such
customers using information provided to Huttig by Defendants Felten,
Kessler, Kottmeyer, or Sagunsky.
(Id. at 1-2.)
In early April 2017 both cases were referred to this court for discovery
supervision. (Case No. 16 CV 11390, R. 51; Case No. 16 CV 11468, R. 63.) The
following month the referrals were expanded to include the motions to dismiss then
pending in both cases and the motion for preliminary injunction pending in the case
against the CEO Defendants. (No. 16 CV 11390, R. 55; Case No. 16 CV 11468,
R. 85.)
This court issued an order scheduling the evidentiary hearing for the
preliminary injunction motions to begin on August 10, 2017.
(Case No. 16 CV
11390, R. 62; Case No. 16 CV 11468, R. 93.)
On
July
6,
2017,
this
court
issued
memorandum
reports
and
recommendations with respect to the two motions to dismiss. In the case against
Huttig and the CEO Defendants, the defendants sought to dismiss only the DTSA
and the ITSA claims, arguing that PrimeSource failed to identify the relevant trade
secrets with sufficient specificity. This court recommended that this argument be
rejected, noting that even general allegations regarding the identity of trade secrets
are sufficient to pass muster at the Rule 12(b)(6) stage. (Case No. 16 CV 11390,
R. 72, Mem. Rep. & Rec. at 9.)
In the case against Huttig and the Felten
Defendants, the defendants sought to dismiss all seven then-pending counts. This
4
court recommended granting the motion only with respect to the then-pending
conversion claim, and denying the motion with respect to the remaining claims.
(Case No. 16 CV 11468, R. 105, Mem. Rep. & Rec. at 27.) In addressing the breach
of contract claims, this court recommended a finding that Texas law applies to those
claims under the terms of the Felten Defendants’ respective employment
agreements, (id. at 11), but recommended that the question of the enforceability of
the agreements’ covenants be resolved at a post-evidentiary stage in the litigation,
(id. at 12).
Shortly after this court issued its reports and recommendations, PrimeSource
amended its complaints in both cases, adding a defendant in the case against the
Felten Defendants and dropping the conversion claim. 1 (Case No. 16 CV 11390,
R. 75, 2d Am. Compl.; Case No. 16 CV 11468, R. 108, 2d Am. Compl. ¶¶ 75-89, 12839.) On July 24, 2017, the parties consented to this court’s jurisdiction to resolve
the preliminary injunction motions. (Case No. 16 CV 11390, R. 95; Case No. 16 CV
11468, R. 130.) On August 3, 2017, this court’s reports and recommendations with
respect to the motions to dismiss were adopted. (Case No. 16 CV 11390, R. 107;
Case No. 16 CV 11468, R. 141.)
Beginning on August 10, 2017, this court held a seven-day joint evidentiary
hearing with respect to the preliminary injunction motions pending in both cases.
Over the course of the hearing, the parties presented multiple witnesses and
The court limits its analysis to the parties and claims addressed in the pending
preliminary injunction motions, which predate the amended complaints. Any other
analysis would fall outside the scope of the parties’ limited consents.
1
5
hundreds of exhibits.
Following the hearing, the parties submitted proposed
findings of fact and conclusions of law.
Although these cases have never been
formally consolidated, the parties agreed to a single evidentiary hearing addressing
both motions and filed in both cases identical, global post-hearing briefs covering
both motions. Accordingly, and in the interest of efficiency, this court addresses
both motions in this single opinion. Based on the testimony and evidence presented
at the hearing, the following represents this court’s findings of fact and conclusions
of law:
Findings of Fact
A.
PrimeSource, Huttig, and the Building Products Industry
PrimeSource is a building products company that derives a significant
amount of revenue from the sale of fasteners. (Tr. 53, 56.) Fasteners are nails and
screws that are used to join building products together in construction projects.
(Tr. 54.) PrimeSource sells many of its products, including fasteners, under the
brand name “Grip-Rite,” which is a premium brand that PrimeSource has spent
many years developing. (Tr. 412-14.) PrimeSource does not make any products
itself, but rather functions as a distributor of building products and an intermediary
between suppliers and customers. PrimeSource works with over 17,000 customers
and 600 suppliers. (Tr. 473-74.)
Huttig is a publicly traded company that has been in the building products
distribution business since 1885. (Tr. 314, 384.) Its core products include prefabricated doors, windows, and millwork. (Tr. 71, 1458.) Like PrimeSource, Huttig
6
is a building products distributor, meaning it buys and resells products used in the
building industry rather than manufacturing products itself. (Tr. 71-72, 384-85.)
Huttig has approximately 1,500 full-time employees and has historically worked
with over 10,000 customers, including customers who also work with PrimeSource.
(Tr. 246, 326, 385.) Before launching its Huttig-Grip Division in November 2016,
Huttig distributed fasteners primarily in the Pacific Northwest region, but did not
have a sales force specifically designated to fastener sales. (See Tr. 1458-59, 1475.)
As building products distributors, both Huttig and PrimeSource order and
purchase fasteners and other products from suppliers (also known in the industry
as “vendors” or “mills”), which are typically located overseas. Both companies then
resell the products to customers, which are generally lumber yards or retailers like
hardware stores. (See Tr. 58, 384.) Fasteners are pure commodity items, meaning
they are produced according to standard, government-regulated specifications. (See
Tr. 1326.)
Accordingly, fastener suppliers will produce identical fasteners for
competing building products distributors, including PrimeSource, Huttig, and many
others. (Id.)
Both Huttig and PrimeSource employ standard one-step and two-step
distribution models that are widely used by distributors in the building products
industry. (See Tr. 68, 385-87, 420.) The one-step distribution model is known as
“direct sales,” and involves the distributor acting as a product broker arranging for
shipment directly from the supplier to the customer. (Tr. 385-87.) Under the twostep model, the distributor buys products from the supplier, physically receives and
7
warehouses the goods, and then resells the products through the warehouse on an
order-by-order basis. (See Tr. 386.) The warehouses used in the two-step model are
also known as “distribution centers.” Huttig currently has 27 distribution centers
located throughout the United States, (id.), and PrimeSource has 34, (Tr. 64).
The building products industry is a concentrated one, and it is not unusual
for professionals to work for a prior employer’s competitor during the course of a
career. (See, e.g., Tr. 150, 153, 162.) For example, PrimeSource’s current CEO,
George Judd, previously worked as the COO and then the CEO of BlueLinx, a
company that competes directly with PrimeSource’s fastener-distribution business.
(Tr. 51-52.) Judd has hired employees straight from PrimeSource competitors to
work at PrimeSource, and he would hire someone from Huttig “if they were the
right candidate.” (Tr. 159.)
B.
The CEO Defendants and PrimeSource’s 2015 Ownership Change
For a period leading up to the end of 2014, Kenneth Fishbein and Mona
Zinman served as co-CEOs of PrimeSource. (Tr. 486, 1146-47, 1156-57.) Both are
veteran building products professionals, with Zinman getting started in the
industry when she was only 15 years old. (Tr. 1144-45, 1156.) In her role as coCEO of PrimeSource, Zinman focused on import purchasing and logistics, which
involved establishing and maintaining relationships with vendors and negotiating
contract terms with those vendors. (Tr. 1146-60.) Zinman and Kenneth Fishbein
retired as CEOs of PrimeSource on December 31, 2014, but stayed on in consulting
roles for PrimeSource from January through May 2015. (Tr. 342, 1111, 1156-57.)
8
Zinman and Kenneth Fishbein both signed employment agreements while at
PrimeSource that incorporated several restrictive covenants, including restrictions
on post-employment solicitation, competition, and disclosure of confidential
information.
The non-solicitation and non-competition provisions of those
agreements expired on November 8, 2016. (JX 2 3; JX 4; JX 6; JX 7; Case No. 16 CV
11390, R. 148-1.)
The provisions prohibiting the disclosure of PrimeSource’s
confidential information do not have an expiration date. (JX 3 ¶ 4.1.4; JX 6 ¶ 4.1.4.)
Those provisions provide that Zinman and Kenneth Fishbein shall not, during or
after their employment with PrimeSource, use or disclose to any third party
confidential information, defined as:
[I]nformation disclosed to or known by Executive as a consequence of
or through [his or her] employment by PS concerning PS’s or PS’s
client’s business, operations, trade secrets, plans, products, processes,
practices, or services including, without limitation, information
relating to research, development, inventions, suppliers, customers,
purchasing, accounting, finance, price lists, and marketing.
(JX 3 ¶ 4.1; JX 6 ¶ 4.1.)
Upon Kenneth Fishbein’s and Zinman’s retirements, David Fishbein (who is
Kenneth’s son) and Robert Furio took over as co-CEOs of PrimeSource on January
1, 2015. (Tr. 698; JX 9; JX 11.) During David Fishbein’s and Furio’s tenure as coCEOs, PrimeSource’s owner at the time, Itochu International, Inc., was marketing
PrimeSource for sale to private investment companies. (Tr. 1004; JX 2.) Furio and
David Fishbein worked with PrimeSource’s banker to produce various marketing
As used in this opinion, “JX” refers to the parties’ joint exhibits, “PX” refers to
PrimeSource’s exhibits, and “DX” refers to the defendants’ exhibits.
2
9
and promotional materials to present to potential investors. (PX 10.) On the advice
of its banker, PrimeSource included in one of those presentations a reference to its
supplier base as its “secret sauce.” (Tr. 1016, 1390.)
On May 8, 2015, a private equity firm Platinum Equity purchased
PrimeSource. (Case No. 16 CV 11390, R. 18, Am. Compl. ¶ 38.) Platinum Equity
changed some elements of PrimeSource’s operations significantly and the company
began a series of workforce reductions. (Tr. 449-50, 1405-06.) On August 15, 2015,
Platinum Equity fired Furio and David Fishbein. (Tr. 1050-51.) Neither David
Fishbein nor Furio took any documents with them when they left PrimeSource, on
the same day they were fired. (Tr. 1107-08, 1413-14.)
On the day that Platinum Equity bought PrimeSource, David Fishbein and
Furio signed Amended and Restated Employment Agreements, (JX 9; JX 11), and
on September 24, 2015, just over a month after they were fired and stopped working
at PrimeSource, they both signed separate Severance and Release of Claims
Agreements, (JX 10; JX 12).
Those agreements included post-employment
covenants not to compete and non-solicitation covenants. The covenants restricted
David Fishbein and Furio from entering the employment of, or rendering any
services to, a material competitor of PrimeSource. (JX 9 ¶ 4; JX 10 ¶13; JX 11 ¶ 4;
JX 12 ¶ 13.) The covenants also precluded the two from soliciting for employment
or hiring any of PrimeSource’s employees.
(Id.)
The non-competition and
solicitation covenants lasted for 12 months and expired on September 16, 2016.
(Id.)
10
The agreements also included covenants relating to the disclosure of
confidential information. (Id. ¶ 4.1) Through those covenants David Fishbein and
Furio agreed not to use, disseminate or disclose PrimeSource’s confidential
information, defined identically to the definition of confidential information set out
in Zinman’s and Kenneth Fishbein’s non-disclosure covenants.
(Id.)
The non-
disclosure covenants do not have an expiration date, and extend beyond the
expiration of the CEO Defendants’ employment at PrimeSource. (Id. ¶ 4.1.4.)
C.
The Felten Defendants
The Felten Defendants all worked in sales, sales support, or purchasing roles
at PrimeSource during David Fishbein’s and Furio’s tenure as co-CEOs. Four of the
five Felten Defendants (Sagunsky being the exception) met David and Kenneth
Fishbein while working as golf caddies at a local country club. Specifically, Felten,
Kessler, Kottmeyer, and Whitehead all worked as golf caddies at a country club
where the Fishbeins played golf, and got to know the Fishbeins while working in
those jobs. (Tr. 484, 692-93, 791-92, 885.)
The Fishbeins helped Felten, Kessler, Kottmeyer, and Whitehead secure jobs
at PrimeSource. Kenneth Fishbein helped Felten get a job at PrimeSource as an
inside sales person.
(JX 16; Tr. 694.)
Felten later transitioned to a role as a
territory manager covering Chicago’s northwest suburbs, and in 2015 he moved into
his last role at PrimeSource, which was in domestic purchasing. (Tr. 694, 759-60.)
Kessler first met the Fishbeins when he was a 13-year-old caddy, and his first fulltime job was in the major accounts department at PrimeSource. (Tr. 484-85.) After
11
serving in that role for a couple of years, Kessler moved to the direct sales
department in early 2014, where he worked out of the Buffalo Grove office but
serviced customers outside the area, primarily through phone and online contacts.
(Tr. 485; 593-94.)
Similarly, David Fishbein helped Kottmeyer get a job at
PrimeSource as an inside sales representative, eventually moving to an outside
sales representative job serving a small territory in Chicago’s northern suburbs.
(Tr. 791-94.) Whitehead met the Fishbeins as a 17-year-old caddy, and went to
work at PrimeSource in a support capacity for inside salespeople. (Tr. 885, 914-15.)
The fifth Felten defendant, Allan Sagunsky, never caddied for the Fishbeins but
now considers David Fishbein to be a friend. (Tr. 685.) He worked in direct sales at
PrimeSource until November 2016. (Tr. 430-31, 646.)
During their tenure at PrimeSource four of the five Felten Defendants—
Felten, Kessler, Kottmeyer, and Sagunsky—signed employment agreements which
included non-solicitation and non-competition covenants.
Those covenants
precluded the Felten Defendants from soliciting PrimeSource customers or working
for PrimeSource competitors for 18 months after their PrimeSource employment
ended. Specifically, the covenants provided that the employees would not:
[W]ithin a three-hundred (300) mile radius of any (a) distribution
center of PrimeSource to which Employee has reported at any time
during his or her employment with PrimeSource or (b) sales territory
which has been serviced by Employee at any time during his or her
employment with PrimeSource:
•
Sell or offer for sale any products or services of the type sold or
offered by PrimeSource to any customer to whom PrimeSource sold
products or provided services or any prospect PrimeSource solicited for
business during the two most recently complete calendar years;
12
•
Enter the employ of, or render any services to, any person, firm
or business that is engaged in any business competitive with that of
PrimeSource, including but not limited to the business of wholesale
distributing or selling packaged or bulk nails or screws, collated tools
or fasteners, roofing, gypsum, insulation, adhesives, wire products or
any other building, building materials or related products and who has
sold or offered for sale such products or services during the two most
recently completed calendar years[.]
(JX 13 ¶ IV; JX 14 ¶ IV; JX 16 ¶ IV; JX 17 ¶ IV.)
All five of the Felten Defendants signed agreements including a covenant
restricting disclosure of confidential information. Whitehead signed an agreement
that explicitly states it “survive[s] any termination of this Agreement or of
Employee’s employment” and that defines confidential information as follows:
[A]ll non-public information regarding the (A) businesses, operations,
finances and administration of the Company; (B) the systems, knowhow and records, products, services, costs, inventions, computer
software programs, marketing and sales techniques or programs,
methods, methodologies, manuals, lists and other trade secrets
heretofore or hereafter acquired, sold, developed, maintained or used
by the Company, (C) the nature and terms of the Company’s
relationships with its customers, suppliers, lenders, underwriters,
vendors, consultants, independent contractors, attorneys, accountants
and employees; and (D) annual and monthly budgets, sales margins,
compensation statements and all company reports including, but not
limited to, the Sales Performance Detail Report, Reports of DC Sales
by Salesman and Customer, Sale Type and Product Reports.
(JX 15 ¶¶ 1, 5.) The remaining Felten Defendants signed nondisclosure agreements
that do not have an explicit termination date, and that define confidential
information as:
[A]ll information not otherwise generally known to the public relating
to each of (A) the financial condition, businesses and interests of
PrimeSource, (B) the systems, know-how and records, products,
services, costs, inventions, computer software programs, marketing
13
and sales techniques and programs, methods, methodologies, manuals,
customer, price, and other lists, business plans and other trade secrets
acquired or maintained by PrimeSource, and (C) the nature and terms
of PrimeSource’s relationships with its customers, suppliers, lenders,
vendors, consultants and employees[.]
(JX 13 ¶ II; JX 14 ¶ II; JX 16 ¶ II; JX 17 ¶ II.)
D.
David Fishbein’s and Furio’s Post-PrimeSource Activities
In August 2015, after PrimeSource fired David Fishbein and Furio but before
they signed severance agreements, the two had a conversation with Huttig CEO Jon
Vrabely about the possibility of entering an arrangement whereby they would
become employed by Huttig after their non-compete covenants expired. (Tr. 113637, 1426, 1536.) On December 9, 2015, both Fishbeins, Furio, and Huttig entered
into what the parties refer to as the “Letter Agreement.”
(JX 18.) The Letter
Agreement provided that upon the termination of their respective non-compete
periods, David Fishbein and Furio would become employed by Huttig, and Kenneth
Fishbein would work as a consultant to Huttig, to help the company expand its
Huttig-Grip brand to a national scale. (Id.; Tr. 383.) Although during his hearing
testimony David Fishbein characterized the agreement as just requiring him to
“show up and go through this process of getting to know” Huttig upon the expiration
of his non-compete, (Tr. 1429), attached as exhibits to the signed Letter Agreement
were proposed employment and consulting agreements, including salary terms.
(JX 18, Exs. A and B.) The Letter Agreement also included a one-million dollar
break-up fee, meaning that if Furio, the Fishbeins, or Huttig failed to execute the
14
employment or consulting agreements, the non-signing party would pay one million
dollars to the other. (Tr. 1438.)
After David Fishbein signed the Letter Agreement and before his
PrimeSource non-solicitation agreement expired, he kept in touch to some extent
with the Felten Defendants and the other CEO Defendants.
David Fishbein
exchanged a string of text messages with Kessler, some of which were explicitly
work related. For example, in December 2015 he asked Kessler to provide him
information about Kessler’s non-compete agreement and Kessler complied, and in
January 2016 he asked Kessler about his compensation at PrimeSource. (Tr. 49697, 499-501.) Other contacts with Kessler and other Felten Defendants were in no
way explicitly work-related, involving, for example, birthday greetings or
invitations to golf. (Tr. 649, 1448-49.) In August 2016 the CEO Defendants had
dinner together, and the Fishbeins and Furio told Zinman that they were “thinking
about something.” (Tr. 1460.) They asked Zinman generally if she was thinking
about going back into the building products industry.
(Tr. 1165.)
At the time
Zinman did not know that the Fishbeins and Furio had entered into a Letter
Agreement with Huttig. (Tr. 1168-69.)
On September 16, 2016, the non-solicitation and non-compete covenants that
David Fishbein and Furio had signed with PrimeSource expired. (JX 9 ¶ 4.2; JX 10
¶ 13; JX 11 ¶ 4.2; JX 12 ¶ 13.) Three days later they entered into consulting
agreements with Huttig that were to last through November 18, 2016, allowing
them to work on developing the Huttig-Grip division as independent contractors.
15
(JX 19; JX 20.) Shortly thereafter David Fishbein contacted Kessler to ask about
his non-compete agreement, (Tr. 514-15), and in October 2016, he contacted
Whitehead letting him know that a new job opportunity might soon exist, and
asking him to spread the word to some of the other Felten Defendants, (Tr. 896-97).
During the period of their consulting arrangement with Huttig, David
Fishbein and Furio met with Vrabely and Huttig’s CFO to develop a tactical plan
for the launch of the Huttig-Grip Division. (Tr. 1047-48.) The three of them worked
with between 30 and 50 people, mostly existing Huttig employees, to develop a plan
as to whether it was viable to expand the Huttig fastener business through the
Huttig-Grip Division. (Tr. 280-81, 383, 1128-29.) By October 2016 they had created
a tactical plan complete with tasks and task assignments. (Tr. 295; JX 45.) One of
the tasks listed there described cross-referencing Huttig customers with prior
customers and vendors from memory. (JX 45 at 2.) Furio was assigned a task
related to distribution center layouts and integrating new products into the
distribution centers.
(Id.)
That task included developing layout for warehouse
racking. (Id.) The tactical plan included a reference to Zinman, even though at the
time she was still bound by her non-compete agreement. (JX 45 at 5.) The tactical
plan also included a reference to “The Huttig Club,” which was a customer
recognition event similar to one of PrimeSource’s signature events, called “Premier
Club.” (Id. at 4; Tr. 1090.) David Fishbein and Furio were also involved in budget
development and determining the financial impact of the Huttig-Grip Division,
including developing job positions and salaries. (PX 300 at 2, 40, 49.)
16
The tactical plan was presented to the Huttig Board of Directors and
approved on October 25, 2016. Leading up to that presentation, the team assigned
to developing the tactical plan expended at least 1,000 working hours in
determining whether the Huttig-Grip product line expansion was feasible. (Tr. 39697, 1128.)
On November 8, 2016, Kenneth Fishbein’s and Zinman’s non-compete
agreements with PrimeSource expired. (JX 3 ¶ 4.2; JX 4 ¶ 4.1; JX 6 ¶ 4.2; JX 7,
¶ 4.1.)
On November 14, 2016, David Fishbein and Furio signed employment
agreements with Huttig and Kenneth Fishbein and Zinman signed consulting
agreements with Huttig. (JX 21; JX 22; JX 23; JX 24.) The following day, Huttig
issued a press release announcing the launch of its new Huttig-Grip Division, which
it described as “a new division to expand its private label construction fastener and
specialty building products line.” (JX 1.)
E.
The Launch of the Huttig-Grip Division
Huttig’s stated goal in launching the Huttig-Grip Division was to grow its
revenues in the sale of fasteners within two to three years.
(Tr. 335-39.)
It
intended to achieve that goal in part by procuring direct shipment sales, which are
a good revenue generator because they do not require stocked inventory. (Tr. 68-69,
325-27, 1478.) Before launching Huttig-Grip, Huttig had sold fasteners through
direct sales to a few customers, but among David Fishbein’s duties in his new role
at Huttig was to develop a sales plan to grow direct-shipment sales of fasteners.
(Tr. 326, 362-63, 400-01.)
Huttig also intends to increase its fastener sales by
17
selling products through its warehouses, and has added a large number of fastener
stock keeping units (“SKUs”) to its inventory following the Huttig-Grip launch.
(Tr. 301, 303-04, 1097-98, 1488-89.) Huttig is expanding its warehouses to increase
its capacity to house the additional fasteners.
(Tr. 304-08.)
The Huttig-Grip
Division is housed within a new office Huttig opened in Lincolnshire, Illinois, just a
five-minute drive from PrimeSource’s Buffalo Grove office. (Tr. 297-98, 529.)
Huttig’s November 15, 2016 press release included an announcement that the
new division was hiring for positions nationwide, and included a link to an online
job application. (JX 1.) The Felten Defendants all submitted applications through
the online link. (Tr. 364, 527, 653-54, 718, 904.) Several of the Felten Defendants
testified that they were dissatisfied with their jobs at PrimeSource after Platinum
Equity’s May 2015 acquisition, because that shift led to an underlying threat of
layoffs and they were asked to do more work for the same compensation.
(See
Tr. 794-96.) After receiving the Felten Defendants’ applications, Huttig asked, as
part of its established hiring protocol, if they were subject to any employment
restrictions stemming from their employment with PrimeSource.
(Tr. 1552-53.)
Only Sagunsky and Kessler realized that they had signed non-competes, and they
provided copies of the agreements to David Fishbein, who forwarded the
agreements to Huttig for legal review. (Tr. 1552.) Felten and Kottmeyer did not
remember that they were subject to non-compete agreements with PrimeSource.
(Tr. 1553-54.)
18
On November 17, 2016, two days after the Huttig-Grip press release, Felten,
Kessler, and Sagunsky resigned from PrimeSource, (Tr. 486-87, 646, 757), and the
next day, Kottmeyer and Whitehead resigned, (Tr. 859, 916). None of the Felten
Defendants took any PrimeSource materials or documents with them when they left
PrimeSource on the days of their resignations, or at any other time. (Tr. 618-19,
673, 764-65, 845, 917-18.) In fact, David Fishbein instructed the Felten Defendants
not to take anything with them when they left PrimeSource. (See, e.g., Tr. 619, 765,
845.)
Almost immediately upon their resignations from PrimeSource, the Felten
Defendants went to work for the newly launched Huttig-Grip Division. Kottmeyer
already had an offer letter from Huttig when he resigned from PrimeSource, and he
started work with the Huttig-Grip Division on November 21, 2016.
(JX 25.)
Kottmeyer was hired as a building materials specialist in direct sales, but his
position excludes the sale of fasteners.
(Tr. 847, 849.)
Felten, Kessler, and
Sagunsky received their offer letters on November 21, 2016, and started the same
day.
(JX 26; JX 27; JX 28.)
Felten was hired as an account executive selling
fasteners on a direct basis and was ultimately assigned a territory including
Florida, Mississippi, Alabama, Montana, North Dakota, and South Dakota.
(Tr. 772-73.) Kessler was hired as a fastener specialist focused on direct sales of
fasteners, and he was assigned to a territory designed not to overlap with the
territories he had previously serviced at PrimeSource. (Tr. 622-24.) Sagunsky was
hired in the Huttig Xpress Group, where his focus was to be on direct sales of
19
products. (Tr. 646.) He was assigned a territory that did not overlap with the
territory he serviced at PrimeSource. (Tr. 1552-53.) Huttig gave Whitehead an
offer letter on November 28, 2016, and he started work that same day. (JX 29.)
Whitehead’s role at Huttig is as an account executive selling building materials on a
direct basis. (Id.; Tr. 914-15.)
F.
The Felten Defendants’ Huttig-Grip Activities
After moving to Huttig both Kottmeyer and Felten contacted customers they
had serviced at PrimeSource. Kottmeyer reached out to about five to ten of the
customers he had serviced at PrimeSource, and Felten reached out to about three.
(Tr. 739-40, 742-44, 813-14.)
When the Felten Defendants began working in the Huttig-Grip Division, they
were given a three- to four-inch thick spreadsheet listing Huttig’s then-existing
customers and they began calling on those customers. (Tr. 625-29.) Because the
list was so extensive, it became clear that they needed a better way to identify
customers who would be interested in direct sales orders. (Tr. 629.) In an attempt
to pinpoint customers that might be more open to direct sales of fasteners, David
Fishbein instructed the Felten Defendants to use internet resources regarding
roofing and drywall wholesalers to try to mine data that would be more valuable in
targeting customers for direct sales. (Tr. 1463-69.) Another former PrimeSource
executive working at Huttig, Sam Sprague, instructed Whitehead to include in his
list customers he remembered servicing at PrimeSource. (Tr. 911-12.)
20
In response to these requests, Kessler created a list which included 220 of his
former PrimeSource customers. (PX 141; Tr. 538-41.) Kessler testified that he
made the list from memory, using online resources to fill in information he could not
remember. (Tr. 538-39.) Kessler’s list included a reference to the PrimeSource
branch that serviced each customer, along with customer contact information and
some information about the products the customers purchased. (PX 141; Tr. 54346.)
One entry included a reference to a specific PrimeSource SKU number
associated with the referenced product. (PX 141; Tr. 546-47.) In a column labeled
“call notes,” Kessler also included information about the customers’ buying habits
that he remembered from servicing the customers while at PrimeSource. (PX 141;
Tr. 546.)
The customer lists created by the remaining Felten Defendants were
somewhat less detailed. Sagunsky’s list included 50-60 of his former PrimeSource
customers, along with customer contact information that he either recalled or that
he found on the internet. (Tr. 656.) The list also included some information he
recalled about the customers’ buying habits. (PX 160; Tr. 656.) Sagunsky testified
that when he left PrimeSource he was given permission to transfer contacts from
his PrimeSource cell phone to his personal phone, and those contacts included a
handful of customer contacts. (Tr. 657-58.) He said that it is possible that one
contact on the customer list he created while at Huttig came from the transferred
contacts information. (Tr. 658.) Kottmeyer created a list that included about 40 of
his former PrimeSource contacts, along with contact and product-purchasing
21
information. (PX 138; Tr. 807-11.) Felten created a list of about 25 PrimeSource
customers, and Whitehead created a similar list. (Tr. 739, 907-08.)
After the Felten Defendants created their lists, Felten took the new lists and
added them to Huttig’s database of pre-existing customers.
(Tr. 820-21.)
The
Felten Defendants also exchanged the lists to divide up the contacts to ensure that
none of them was directly contacting customers they had serviced while at
PrimeSource. (Tr. 689-90.) They began calling on those customers, and Kessler
made the Huttig-Grip Division’s first sale to one of Sagunsky’s former PrimeSource
customers, who appeared on Sagunsky’s customer lists.
(Tr. 563-68.) In reaching
out to each other’s PrimeSource customers in December 2016 and March 2017,
Kessler and Sagunsky referenced those customers’ prior relationships with Kessler
or Sagunsky in making their sales pitches. (PX 170; PX 223; PX 223; Tr. 567, 66970.)
G.
Zinman’s Huttig-Grip Activities
Zinman joined Huttig after a two-year retirement. (Tr. 1162-63.) On her
first day on the job at Huttig, Zinman began contacting mills with which she
remembered working during her years in the industry. (Tr. 1235-37, 1239, 126364.) She did not have a list of contact information, so she used internet resources,
including an industry database called Panjiva, to find publicly available contact
information for the mills she remembered. (Tr. 1236-37, 1263-64.) In her first few
days at Huttig Zinman sent somewhere around 50 emails to various mills with a
similar generic message introducing or re-introducing herself and referencing her
22
former position as CEO of PrimeSource.
(Tr. 1267, 1270-71.)
Those emails
constituted a basic starting point from which Huttig would conduct due diligence to
vet suppliers. (Tr. 1271, 1322-23; see also, e.g., PX 70.)
It is not typical for mills in the building products industry to have exclusive
contracts with any one distributor. (Tr. 1314-16, 1335-36.) That is because mills
generally do not undertake a commitment to sell to only one importer distributor
and instead book orders on a month-to-month or as-needed basis.
(Tr. 1336.)
Zinman testified that it is common for mills to tell distributors which other
distributors they work with as a selling point, and that at a given time the same
mill may be running production lines for the exact same product being made for
multiple distributors. (Tr. 1315.) Many of the suppliers Zinman contacted while at
Huttig also supply to PrimeSource and other competing distributors. (Tr. 1314-16.)
Moreover, whether a given mill can be considered a “good quality” mill is something
that can change over time, depending on whether the mill develops claim issues,
goes through management changes, or experiences other quality-changing factors.
(Tr. 1270-71.)
Analysis and Conclusions of Law
PrimeSource asks this court to enter a production injunction in both of these
related cases shutting down all operations in the Huttig-Grip Division during the
pendency of this lawsuit. “A preliminary injunction is an extraordinary remedy and
is never awarded as of right.” D.U. v. Rhoades, 825 F.3d 331, 335 (7th Cir. 2016).
Instead, it is up to the moving party to show that the preliminary injunction is
23
necessary to preserve the parties’ respective positions until the case can be resolved
on the merits. Univ. of Tex. v. Camenisch, 451 U.S. 390, 395 (1981); Harlan v.
Scholz, 866 F.3d 754, 758 (7th Cir. 2017). Preliminary injunctive relief should be
narrowly tailored to address the identified harm, and “[s]weeping relief is
inappropriate if more focused restrictions will serve.”
Lakeview Tech., Inc. v.
Robinson, 446 F.3d 655, 658 (7th Cir. 2006).
The court engages in a two-step analysis to determine whether preliminary
injunctive relief is appropriate. Whitaker v. Kenosha Unified Sch. Dist. No. 1 Bd. of
Educ., 858 F.3d 1034, 1044 (7th Cir. 2017). First, it asks whether the moving party
has demonstrated the following: (1) that it will suffer irreparable harm before the
case can be resolved absent the requested relief; (2) that any remedies at law are
inadequate to compensate it for that harm; and (3) that it has a reasonable
likelihood of success on the merits of its claims. Id.; see also Harlan, 866 F.3d at
758.
The moving party must demonstrate only that its likelihood of success is
“better than negligible” to meet this threshold aspect of the test. Rhoades, 825 F.3d
at 338. With respect to irreparable harm, however, the moving party must show
that such harm is “likely,” not just “possible.” Winter v. Nat. Res. Defense Council,
Inc., 555 U.S. 7, 22 (2008). Although to meet its burden here the moving party is
not required to provide concrete proof of particular injuries, see Hess Newmark
Owens Wolf, Inc. v. Owens, 415 F.3d 630, 632 (7th Cir. 2005), it must do more than
speculate “about hypothetical future injuries,” see East St. Louis Laborers’ Local 100
v. Bellon Wrecking & Salvage Co., 414 F.3d 700, 705-06 (7th Cir. 2005).
24
If the moving party meets these thresholds, in the second phase the court
engages in a balancing test, weighing the harm in the absence of a preliminary
injunction to the moving party against the harm of the requested injunction to the
non-moving party, and asking whether the public interest outweighs the movant’s.
Whitaker, 858 F.3d at 1044. That balancing test incorporates a “subjective and
intuitive” sliding scale approach, see Ty, Inc. v. Jones Grp., Inc., 237 F.3d 891, 89596 (7th Cir. 2001) (citation omitted), under which “the degree of likelihood of
prevailing on the merits that the plaintiff must demonstrate decreases the more
heavily the balance of harms weighs in its favor,” and vice versa, see Brunswick
Corp. v. Jones, 784 F.2d 271, 275 (7th Cir. 1986).
A.
Irreparable Harm and Inadequate Remedy at Law
Taking the threshold elements in order, see Harlan, 866 F.3d at 758, the
court looks first to PrimeSource’s showing of irreparable harm. PrimeSource has
shown a possibility of harm stemming from its trade secrets and breach of
nondisclosure agreement claims. “Where trade secrets and goodwill are involved,
the threat is significant that the harm experienced by the misappropriation or
misuse of trade secrets will be irreparable.” IDS Fin. Servs., Inc. v. Smithson, 843
F. Supp. 415, 418 (N.D. Ill. 1994). And because it is difficult to quantify precise
losses associated with a former employee’s decision to funnel trade secrets to its
competitor, the harm associated with that kind of unfair competition is presumed to
be irreparable. See Intertek USA Inc. v. AmSpec, LLC, No. 14 CV 6160, 2014 WL
4477933, at *6 (N.D. Ill. Sept. 11, 2014).
25
Here, PrimeSource argues that the
defendants have used its confidential information and trade secrets to gain an
unfair advantage in launching their division focused on the direct sales of fasteners
and that they continue to use that information to compete unfairly in the direct
sales market. Should PrimeSource prevail on those claims, the harm stemming
from the misuse of its confidential and trade secrets information would be difficult
to either pin down or quantify. See Hess Newmark, 415 F.3d at 632. Accordingly,
PrimeSource meets the threshold irreparable harm showing with respect to its
ITSA, DTSA, and breach of non-disclosure agreement claims.
PrimeSource’s showing of irreparable harm with respect to its remaining
breach of contract and tortious interference claims is more tenuous. When asked to
describe PrimeSource’s irreparable harm at the hearing, PrimeSource’s CEO,
George Judd, testified only that the former employees’ transition to Huttig has led
PrimeSource to have “numerous meetings, conversations” with suppliers who have
“uncertainty and uncomfortableness,” that it has caused “constant management”
with current employees, and that he has to engage in “vast discussion” with
customers about how this might change customer relationships going forward.
(Tr. 94.)
Judd said that his “fear” is that Huttig “will continue to take more
business from PrimeSource; they’ll continue to expand their relationships with our
vendor partners; and they’ll continue to shrink PrimeSource’s revenues and gross
margins.” (Id.)
Although Judd’s testimony about his “fear” of irreparable harm could be read
to reflect the kind of speculation that falls below the threshold requirement, see
26
East St. Louis, 414 F.3d at 705-06, the fact that he testified that he fears a
continuation of problems that he already is managing suggests that at some level
there is a current and on-going harm from lost business. And given the evidence
that customers rarely contract exclusively with one distributor in the building
products industry, that lost business is likely to be harder to quantify than it would
be in a case where the plaintiff could point to one or two specific customers whose
business was diverted. In other words, the fluidity of the customer contracts and
the competitive nature of those sales in the building products industry would make
it difficult to identify which contracts or customers PrimeSource lost to Huttig as a
result of the claimed misconduct. See Hess Newmark, 415 F.3d at 632 (noting that
movant not required to specifically identify lost business to justify injunctive relief).
Moreover, the Seventh Circuit has described the injuries flowing from a
violation of a non-compete agreement as “a canonical form of irreparable harm,”
because those injuries “are difficult to prove and quantify.” Turnell v. CentiMark
Corp., 796 F.3d 656, 666-67 (7th Cir. 2015). And although neither party points to
this provision in their proposed findings, all of the relevant contracts include
language stating that a breach of their respective covenants constitutes irreparable
harm.
That is a factor weighing in favor of an irreparable harm finding.
See
Mickey’s Linen v. Fischer, No. 17 CV 2154, 2017 WL 3970593, at *19 (N.D. Ill. Sept.
8, 2017); nClosures, Inc. v. Block & Co., Inc., No. 12 CV 9358, 2012 WL 1589654, at
*2 (N.D. Ill. Jan. 15, 2013). Moreover, injunctive relief is “the best, and probably
the only, adequate remedy” where the magnitude or existence of the injury
27
stemming from a violation of a restrictive covenant is difficult to discern. Turnell,
796 F.3d at 667. For all of these reasons, the court concludes that PrimeSource has
passed the threshold for a showing of irreparable harm with respect to its breach of
non-solicitation and non-competition covenants and its tortious interference claims,
and that remedies at law are inadequate to address that harm. See id.
B.
Likelihood of Success
During the hearing in this case and through the post-hearing briefs it has
become clear that PrimeSource’s pursuit of a preliminary injunction is not premised
in any way on its claims against Kenneth Fishbein or on its claims that the CEO
Defendants violated their non-compete covenants.
Instead, PrimeSource has
tailored its request for injunctive relief to the following claims: (1) that David
Fishbein and Furio violated their non-solicitation covenants; (2) that David
Fishbein, Furio, and Zinman violated their non-disclosure covenants; (3) that the
Felten Defendants violated their non-disclosure agreements and that Felten,
Kessler, Kottmeyer, and Sagunsky violated their non-compete and non-solicitation
agreements; 3 (4) that Huttig tortiously interfered with the Felten Defendants’
PrimeSource agreements; and (5) that the Felten Defendants and David Fishbein,
Furio, and Zinman have misappropriated and/or will inevitably continue to
PrimeSource also asserts that it is entitled to relief based on what it argues was
Samuel Sprague’s violation of his employment agreements and Huttig’s tortious
interference with those agreements, but as explained in footnote 1, the court limits
its analysis to the parties and claims addressed in the preliminary injunction
motions pending before this court based on the parties’ consent, which predate the
amended complaints. Any other analysis would fall outside the scope of the parties’
limited consents.
3
28
misappropriate PrimeSource’s trade secrets. 4 Accordingly, the court will focus on
whether PrimeSource has made the requisite showing of a likelihood of success with
respect to these categories of claims.
1.
The DTSA and ITSA Claims
At the heart of this litigation lies PrimeSource’s concern that the defendants
are disclosing or will inevitably disclose its trade secrets or confidential information
to Huttig. Accordingly, the court will begin by addressing its likelihood of success
on its trade secrets claims. PrimeSource argues that the CEO Defendants have
misappropriated or will inevitably misappropriate trade secrets including supplier,
marketing, budgeting, and inventory management information.
PrimeSource
argues that the Felten Defendants misappropriated its trade secrets by recording
and sharing information about its customers, including contact information and
buying preferences. Huttig argues that PrimeSource will be unable to show that
any of this information rises to the level of a trade secret.
“To prevail on a claim for misappropriation of a trade secret under the
[ITSA], the plaintiff must demonstrate that the information at issue was a trade
secret, that it was misappropriated and that it was used in the defendant’s
business.” Learning Curve Toys, Inc. v. PlayWood Toys, Inc., 342 F.3d 714, 721 (7th
Cir. 2003). Similarly, the DTSA allows the owner of a misappropriated trade secret
to seek relief where “the trade secret is related to a product or service used in, or
intended for use in, interstate or foreign commerce.”
18 U.S.C. § 1836(b)(1);
For the remainder of this opinion, in the interest of efficiency, the court will refer
to David Fishbein as “Fishbein.”
4
29
Mickey’s Linen, 2017 WL 3970593, at *8. Both statutes allow for injunctive relief to
prevent “threatened misappropriation” as well as actual misappropriation.
18
U.S.C. § 1836(b)(3); 765 ILCS 1065/3(a).
The DTSA defines trade secrets to include: “all forms and types of financial,
business, scientific, technical, economic, or engineering information, including
patterns, plans, compilations, program devices, formulas, designs, prototypes,
methods, techniques, processes, procedures, programs, or codes,” where the trade
secrets owner “has taken reasonable measures to keep such information secret” and
where the information derives economic value from its secrecy. 18 U.S.C. § 1839(3).
The ITSA also focuses “fundamentally on the secrecy of the information sought to be
protected,” see Learning Curve Toys, 342 F.3d at 721, and defines a trade secret as
“information, including but not limited to, technical or non-technical data, a
formula, pattern, compilation, program, device, method, technique, drawing,
process, financial data, or list of actual or potential customers or suppliers,” 765
ILCS 1065/2(d). To establish a protectable trade secret under either statute, the
party seeking protection must show that the information: “(1) is sufficiently secret
to derive economic value, actual or potential, from not being generally known to
other persons who can obtain economic value from its disclosure or use; and (2) is
the subject of efforts that are reasonable under the circumstances to maintain its
secrecy or confidentiality.” 765 ILCS 1065/2(d); see also 18 U.S.C. § 1839(3). In
analyzing whether a purported trade secret meets these requirements, Illinois
courts look to the following six factors: “(1) the extent to which the information is
30
known outside of the plaintiff’s business; (2) the extent to which the information is
known by employees and others involved in the plaintiff’s 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’s business and to its competitors; (5) the
amount of time, effort and money expended by the plaintiff in developing the
information; and (6) the ease or difficulty with which the information could be
properly acquired or duplicated by others.” Learning Curve Toys, 342 F.3d at 722.
a.
Trade Secrets Claims Against Zinman
In its opening post-hearing brief, PrimeSource argues that its “supplier lists”
constitute trade secrets and that Zinman misappropriated those trade secrets when,
on the first day of her employment at Huttig and thereafter, she “reached out to the
supplier contacts she had established at PrimeSource in an attempt to utilize those
contacts to supply product to Huttig.” (R. 152, Pl.’s Mem. at 68. 5) In its reply brief,
PrimeSource expands considerably on those assertions, clarifying that it is not
simply the identity of its suppliers that are subject to trade secret protection, but
also information regarding “the quality, reliability, product specifications, contract
terms and costs related to those suppliers.” (R. 155, Pl.’s Reply at 28.)
After carefully considering the evidence presented at the hearing, the court
concludes that PrimeSource is unlikely to establish that the supplier information it
cites is entitled to trade-secret protection, and accordingly, its likelihood of
prevailing on its trade secrets claims against Zinman is low. In asserting that the
In the interest of efficiency, all references to the record from this point forward
are to the records in Case No. 16 CV 11390 unless noted otherwise.
5
31
identity of its suppliers amounts to a trade secret, PrimeSource notes that the ITSA
includes supplier lists in its definition of trade secrets and that several courts have
found supplier information to be protectable as trade secrets. (R. 152, Pl.’s Mem. at
68.) But just because supplier lists are included in the ITSA definition of the kinds
of information that can constitute trade secrets does not mean that every supplier
list is protectable as a trade secret. Whether information is a trade secret hinges on
its secrecy, Learning Curve Toys, 342 F.3d at 721, and obviously unless the owner
takes steps to establish and maintain its secrecy, a supplier’s identity does not
amount to a trade secret.
Here, the hearing evidence shows that the identity of PrimeSource’s suppliers
is publicly available through customs reports and industry resources known as
Panjiva and Import Genius. (Tr. 1115-17, 1236.) Those resources allow subscribers
to identify not just the identity of PrimeSource’s suppliers, but shipping details and
generic descriptions of the products sourced from the vendor. There was testimony
establishing that customers regularly identify suppliers to middleman distributors,
(Tr. 1250), and that the suppliers themselves freely share information about who
they are supplying as a way to market themselves, (Tr. 1315). Even PrimeSource’s
CEO admitted that the identity of PrimeSource’s suppliers is not even confidential,
let alone a trade secret. (Tr. 119.) And as for specific supplier contact information,
Zinman credibly testified that with the exception of one email address she
remembered, she used Panjiva and other public resources to track down contact
32
information for each supplier she contacted after her employment at Huttig began.
(Tr. 1239.)
Engaging with the relevant trade secret factors, it is clear that neither the
identity of the suppliers nor the contact information Zinman used in reaching out to
those suppliers amounts to a PrimeSource trade secret. For example, given the
testimony that supplier identities and supplier contacts are publicly available
through internet resources, it is clear that information is known outside of
PrimeSource’s business.
Zinman testified that competing distributors can visit
product mills and see the products they are making for various distributors all at
the same time. (Tr. 1315.) PrimeSource points to no evidence that this information
was not shared among its own employees, and although it is clear that PrimeSource
would prefer that its vendor information not “be out on the street,” other companies
are free to ask questions and obtain information about where PrimeSource sources
its products. (Tr. 463.) All of that evidence reflects the relative ease with which
players in the industry are able to obtain information about supplier identities and
contacts.
So even though it is clear that supplier information is valuable to
PrimeSource, the bulk of the relevant trade secrets factors weigh against a finding
that its suppliers’ identities or contact information constitute trade secrets. 6
At the hearing and in its reply brief, PrimeSource points to the fact that during
his time as PrimeSource co-CEO Fishbein approved a marketing document that
referred to PrimeSource’s supplier information as its “secret sauce.” (R. 155, Pl.’s
Reply at 27.) But Fishbein testified that the “secret sauce” phrase was suggested by
the bank helping PrimeSource promote itself for sale, and that the term was a form
of puffery to make PrimeSource more interesting to prospective buyers. (Tr. 139091.) While Fishbein’s willingness to implement a suggestion that was not accurate
6
33
PrimeSource also argues that Zinman’s email correspondence with vendors
shows that she misappropriated trade secret information consisting of the quality
and reliability of various mills, contract terms used with the mills, and supplier cost
information. (R. 155, Pl.’s Reply at 28.) In its post-hearing briefs, PrimeSource
makes no attempt to demonstrate how the relevant trade secret factors apply to
these specific sub-categories of information, but the evidence suggests that several
of the factors would weigh more heavily in favor of PrimeSource with respect to the
quality and reliability of mills and specific contract terms.
Judd testified that
PrimeSource invested significant time and resources into evaluating the quality and
reliability of various mills and this information was highly valuable because mill
mistakes could be extraordinarily expensive. (Tr. 56-57, 77-78.) And there is no
information that its precise contract terms with vendors or related costs are publicly
known or easily duplicated.
Although PrimeSource may have shown some likelihood of success on its
claim that information about its contract terms with suppliers and their quality and
reliability were generally treated as trade secrets, the hearing evidence does not
support a conclusion that Zinman misappropriated that information for several
reasons. First, Zinman repeatedly and credibly testified that she took nothing with
her when she left PrimeSource. There is no evidence whatsoever that Zinman took
any documents with her when she left PrimeSource or that any information Zinman
diminishes Fishbein’s credibility, this court accepts the puffery explanation given
that the supplier information is indeed not secret. The presence of that phrase in
marketing materials does little to establish that categorically, all PrimeSource
supplier information is sufficiently secret to warrant trade secret protection.
34
used in contacting potential vendors for Huttig exists anywhere other than in her
memory.
More importantly, the hearing evidence points to a conclusion that by the
time Zinman began working for Huttig, any trade secret information regarding
vendor prices, quality, or reliability that Zinman had been privy to at PrimeSource
was stale. Information that is too old to hold any value loses any protection it
would otherwise be entitled to as a trade secret. See UTStarcom, Inc. v. Starent
Networks, Corp., 675 F. Supp. 2d 854, 871-72 (N.D. Ill. 2009). Especially where, as
here, there is no evidence that the defendant took any documents or relied on
anything other than her memory, information such as vendor pricing that is stale
does not plausibly support a trade secrets claim. See Cortz, Inc. v. Doheny Enters.,
Inc., No. 17 CV 2187, 2017 WL 2958071, at *12 (N.D. Ill. July 11, 2017). It is
undisputed that Zinman sat out her non-compete agreement before beginning to
work for Huttig, and her employment there began almost two years after she
retired as PrimeSource’s CEO. (Tr. 1111, 1156-57.) PrimeSource has pointed to no
evidence to rebut Zinman’s credible testimony that supplier contract terms, costs,
and quality information all come with a short shelf life.
Specifically, Zinman
testified that whether a given mill can be considered a “good quality” mill is
something that can change over time, depending on whether the mill develops claim
issues, goes through management changes, or experiences other quality-changing
factors. (Tr. 1270-71.)
She also testified that because fasteners are a very basic
commodity their prices are tied to the cost of wire rod, the raw material from which
35
they are made. (Tr. 1320.) The price of fastener production fluctuates with the
commodity price of wire rod, and accordingly can be extremely unstable even within
a period of a few weeks or days. (Tr. 1320-21.) Zinman testified that given those
price fluctuations, as a rule price quotes from vendors are only good for 30 days, and
sometimes only 72 hours.
(Tr. 1321.)
Given this undisputed testimony,
PrimeSource is unlikely to be able to show that Zinman’s knowledge of PrimeSource
trade secret information related to vendor quality, reliability, or prices was not stale
by the time Zinman joined Huttig.
As for PrimeSource’s contract terms with suppliers, PrimeSource has not
pointed to evidence that Zinman actually used those terms in corresponding with
vendors on behalf of Huttig. None of the exhibits PrimeSource submitted shows
that Zinman explicitly or implicitly referenced specific PrimeSource contract terms.
Instead, Zinman simply referenced her former position at PrimeSource as context in
re-introducing herself to prospective suppliers. (R. 155, Pl.’s Reply at 28-29 and
PXs cited therein.)
Obviously the fact of Zinman’s prior role as CEO at
PrimeSource is a matter of public knowledge, not a trade secret. In its reply brief,
PrimeSource points in support of its misappropriation claim to an email in which
Zinman wrote to another Huttig employee that a customer was “getting the same
exact quality they have been getting from PS-same mill-same quality. They know
the [customer] specs.” (R. 155, Pl.’s Reply at 29; PX 230.) But nothing in the text of
that email reveals any specific PrimeSource contract terms that Zinman could have
misappropriated. And as set forth above, the identity of the mills PrimeSource
36
worked with does not amount to a trade secret and any information about
production quality that Zinman obtained at PrimeSource was stale by the time she
joined Huttig. Without more, the emails PrimeSource has pointed to are unlikely to
successfully support its claim that Zinman actually misappropriated any trade
secrets.
b.
Trade Secrets Claims Against Fishbein & Furio
PrimeSource argues that Fishbein and Furio misappropriated trade secrets
in
the
form
of
marketing
and
budgeting
information,
and
that
Furio
misappropriated trade secrets about inventory management. (R. 152, Pl.’s Mem. at
69-71.)
PrimeSource cites these as categories of trade secrets, rather than
presenting the court with any specific documents or data that amount to trade
secrets. As was the case with Zinman, PrimeSource has not presented any evidence
that Fishbein or Furio took any documents or other materials with them when they
left PrimeSource. And PrimeSource’s own CEO testified that these categories of
information are so voluminous that he would be unable to commit them to memory.
(Tr. 104-05.)
Because PrimeSource has pointed only to general categories of marketing and
budgeting information it asserts amount to trade secrets, the lack of specificity
greatly
reduces
its
chances
of
demonstrating
that
Fishbein
or
Furio
misappropriated its trade secrets. See Composite Marine Propellers, Inc. v. Van Der
Woude, 962 F.2d 1263, 1266 (7th Cir. 1992) (noting that the plaintiff must point to
concrete secrets, not broad areas of technology, to prevail on trade secrets claim);
37
Service Ctrs. of Chi., Inc. v. Minogue, 535 N.E.2d 1132, 1135 (Ill. App. Ct. 1989)
(reversing grant of preliminary injunction where plaintiff “consistently failed to
identify with any degree of particularity the alleged trade secrets or confidential
information in need of protection”). To prevail on a trade secret claim the plaintiff
must do more than produce lists of general information and assert that it contains
trade secrets. See GlobalTap LLC v. Elkay Mfg. Co., No. 13 CV 632, 2015 WL
94235, at *5 (N.D. Ill. Jan. 5, 2015).
Accordingly, where a plaintiff only cites
general categories of information, but “never singles out any particular trade secret,
explaining how it created and safeguarded that particular bit of information,” the
lack of particularity renders it unlikely to succeed on its trade secrets
misappropriation claim. Traffic Tech, Inc. v. Kreiter, No. 14 CV 7528, 2015 WL
9259544, at *20 (N.D. Ill. Dec. 18, 2015).
With respect to marketing information, PrimeSource cites nothing more
specific than a PrimeSource initiative to grow direct sales, general marketing
strategies, and the “structure, funding and opportunities offered by PrimeSource’s
Premier Club.” (R. 155, Pl.’s Reply at 29.) But Judd testified that much of that
information is not even confidential, let alone a trade secret.
He testified that
market direction is not confidential, (Tr. 203, 210), and it is hard to see the idea
that PrimeSource wanted to grow direct sales as anything more than a general
market direction. He testified that the existence of PrimeSource’s Premier Club
and who attends is all public information, and that PrimeSource’s customers are
free to share any information they have about that program. (Tr. 115-16.) It may
38
well be that there is information connected to PrimeSource’s growth initiative and
Premier Club structure that could meet the trade secrets standards, but
PrimeSource has not pointed to that information with any level of specificity that
would allow the court to properly analyze its trade secret assertion. See GlobalTap
LLC, 2015 WL 94235, at *5.
With respect to the category of inventory management, PrimeSource has not
provided much evidence in support of its assertion that PrimeSource treats its SKU
numbers or product numbers or the layout or inventory stocking methods at its
distribution centers as trade secrets.
At the hearing Judd admitted that
PrimeSource allows its customers to tour its distribution centers and on at least one
occasion invited the press to take pictures inside a warehouse.
(Tr. 101-02.)
PrimeSource does not require vendors, customers, or prospective customers who it
invites to warehouse open houses to sign non-disclosure agreements. (Tr. 1117-18.)
That evidence suggests that PrimeSource did not treat information such as the
general layout or the types of racking systems it used inside its distribution centers
as trade secrets.
Again, there may be specific information related to inventory
management that PrimeSource maintains with a level of secrecy that would make it
protectable as a trade secret, but it has not identified that information with
sufficient specificity to allow the court to analyze its assertion.
Because
PrimeSource has not identified any concrete trade secrets that Fishbein or Furio
misappropriated, the court concludes that it is unlikely to succeed on its trade
secrets claims as related to these two defendants.
39
c.
Trade Secrets Claims Against the Felten Defendants
With respect to the Felten Defendants, PrimeSource’s ITSA and DTSA claims
turn on its assertion that they misappropriated trade secrets in the form of
PrimeSource’s customer lists. Although PrimeSource concedes that the identity of
some of its customers is available publicly, it argues that information about its
customers’ buying habits, whether the customer made direct ship orders, and the
customer’s contact person are PrimeSource trade secrets. (R. 152, Pl.’s Mem. at 67.)
Customer lists are included in the ITSA as an example of the kind of
information that can warrant trade secret protection.
See 765 ILCS 1065/2(d).
“Although the DTSA does not expressly include customer lists within its definition
of a trade secret, its definition includes any valuable business information for which
reasonable measures are taken to maintain secrecy, and is therefore applicable to
customer lists.” Mickey’s Linen. 2017 WL 2970593, at *20 n.2. But customer lists
do not automatically acquire trade secret status simply because they fall within the
statutory definitions. Liebert Corp. v. Mazur, 827 N.E.2d 909, 922 (Ill. App. Ct.
2005) (“Whether customer lists are trade secrets depends on the facts of each
case.”). Rather, factors such as whether the customer information “was developed
slowly and through hard work, stored in a secure location, and shared with
employees on a need-to-know basis and only after they signed confidentiality
agreements,” help determine whether the information qualifies as a trade secret.
UTStarmcom, 675 F. Supp. 2d at 866-67.
The fact that an employee signs an
agreement restricting his use of confidential information standing alone is
40
insufficient to establish that the information is entitled to trade-secret protection.
Fire ‘Em Up, Inc. v. Technocarb Equip. (2004) Ltd., 799 F. Supp. 2d 846, 851 (N.D.
Ill. 2011).
Although PrimeSource has submitted sufficient evidence to show that its
customers’ buying preferences and direct ship status may be confidential, it has
done little to show that this specific information was treated with sufficient secrecy
to warrant trade-secret protection.
First, at the hearing Judd testified that
customer buying preferences including the frequency of purchases and seasonal
demands are confidential, but not trade secrets.
(Tr. 120-21.)
He testified “I
believe there’s some information with the other [Felten] group that was trade
secrets.” (Tr. 121.) But Judd did not explain what that information is. Second,
other than the fact that the Felten Defendants all were required to sign
nondisclosure
agreements
characterizing
this
information
as
confidential,
PrimeSource has not identified additional steps it took to protect this information.
Although Judd and Eric Royse (PrimeSource’s Senior Vice President, (Tr. 105))
testified generally that employees completed training regarding the correct
handling of confidential information, and that it limits electronic “network access
based on [the] type of role and information needed for the role,” (R. 152, Pl.’s Mem.
at 18), that evidence does not explicitly address these general categories of
information, let alone any specific customer buying or direct-ship preferences.
Third, Royse testified that he does not consider his competitor’s market pricing and
quoting process to customers to even be confidential, (Tr. 460), and some of the
41
Felten Defendants testified that it was common for sales people to ask customers
about the prices and order information they got from other competitors in the
marketplace, (Tr. 597-98, 679-80). In other words, customers freely shared with
distributors information about what they paid to competing distributors for certain
amounts of specific products. Where customers are at liberty to disclose pricing
structures and those structures are not unique, without evidence that those details
were closely guarded by the plaintiff the customer information does not amount to a
trade secret.
See Carbonic Fire Extinguishers, 190 Ill. App. 3d at 952-53;
UTStarcom, Inc., 675 F. Supp. 2d at 866 (“Absent a showing to the contrary, Illinois
courts tend to treat price lists as non-trade secrets, as customers often share that
information with one another.); but see Mickey’s Linen, 2017 WL 3970593, at *10
(stating that customer pricing information can be trade secret even if customers at
liberty to divulge in context where employer closely guarded information).
Specifically included in those price quotes are the types of product ordered, so it is
unclear that PrimeSource is even asserting that the type of product a customer
purchases is the trade secret information. See Delta Med. Sys. v. Mid-Am. Med.
Sys., Inc., 772 N.E.2d 768, 781 (Ill. App. Ct. 2002) (noting that customer data
“including pricing, service history, key decision-makers, and customer contract
terms” are protected as trade secrets only where plaintiff shows information derived
value from secrecy).
Once the court excludes from the category of “customer
preferences” information about pricing of certain quantities of products, what
information is left is ambiguous. Trade secret status under the ITSA and DTSA
42
hinges on the steps taken to maintain secrecy and the value that secrecy provides to
the trade secret owner.
See Cortz, Inc., 2017 WL 2958071, at *8-*9.
Because
PrimeSource has done little to establish that its customers’ buying habits or
preferences were secret, and has not pinpointed for the court the customer
information it contends is a trade secret, the court must conclude that it has little
chance of succeeding on its claim of trade secret misappropriation against the
Felten Defendants.
d.
Inevitable Disclosure Theory
Although this court has concluded that PrimeSource has shown little chance
of succeeding on the merits of its claims that the categories of information it has
identified qualify as trade secrets, in the interest of completeness it will address its
inevitable disclosure theory of misappropriation. The inevitable disclosure doctrine
allows a plaintiff to “prove a claim of trade secret misappropriation by
demonstrating that defendant’s new employment will inevitably lead him to rely on
the plaintiff’s trade secrets.” PepsiCo, Inc. v. Redmond, 54 F.3d 1262, 1269 (7th Cir.
1995). “Courts do not often apply the inevitable disclosure doctrine, recognizing
that a broad application would be an effective bar against employees taking similar
positions with competitive entities.”
Triumph Packaging Grp. v. Ward, 834
F. Supp. 2d 796, 809 (N.D. Ill. 2011). To protect against that broad application, the
plaintiff must do more than show that a former employee went to a direct
competitor to do the same job and demonstrate more than a fear that the former
employee will disclose trade secrets. See PepsiCo, 54 F.3d at 1269-70.
43
PrimeSource argues that it has established more than a fear that the
defendants will misuse its trade secrets because all of the defendants are working in
similar roles to their former PrimeSource positions in a new division of Huttig
designed to compete with PrimeSource’s fastener business.
Recognizing that to
prevail on an inevitable disclosure theory it is insufficient to show that a skilled
employee took his skills to a direct competitor, PepsiCo, 54 F.3d at 1269; Cortz, 2017
WL 2958071, at *12, PrimeSource also argues that Huttig cannot be trusted to
prevent the former PrimeSource employees from disclosing its trade secrets.
(R. 152, Pl.’s Mem. at 75.) Although it acknowledges that Huttig required all of the
defendants to sign agreements that they would not use PrimeSource’s trade secret
information, it asserts that this fact “should be given little deference,” because
according to it, Fishbein instructed the Felten Defendants to recreate customer lists
from their memory and testified “that he believed he was free to use at Huttig
anything he had learned while at PrimeSource.” (Id.) As for the customer lists, the
testimony PrimeSource cites just reflects Furio’s “expectation” that Fishbein would
have directed the Felten Defendants to write down the identity of customers they
remember serving at PrimeSource. (Tr. 1072.) But PrimeSource concedes that its
customers’ identities are not trade secrets and there is no evidence that Fishbein
asked the Felten Defendants to include trade secret information along with the
customer identities. Fishbein’s testimony that he does not believe that his memory
of anything he learned as CEO of PrimeSource is confidential is more troubling.
(Tr. 1413.)
That testimony suggests that to the extent Fishbein remembers
44
information that qualifies as a PrimeSource trade secret, PrimeSource has shown
some likelihood of succeeding on its claim that he will inevitably disclose that
information. But again, as set forth above, PrimeSource has not identified with any
particularity what trade secret information it thinks Fishbein will inevitably
disclose. Moreover, Fishbein’s testimony does not extend to any of the other
defendants, and PrimeSource has not explained why the inevitable disclosure
doctrine should apply to them, beyond pointing to their similar positions at Huttig.
That is insufficient to demonstrate inevitable disclosure. See PepsiCo, 54 F.3d at
1269. For all of these reasons, the court concludes that PrimeSource’s likelihood of
prevailing on its claims under the ITSA or the DTSA at the merits phase of this
litigation is low.
2.
The CEO Defendants’ Non-Disclosure Agreements
Even though the court has concluded that PrimeSource is unlikely to show
that the defendants misappropriated trade secrets, whether they breached the nondisclosure provisions of their employment agreements by sharing confidential
information requires a distinct analysis.
The CEO Defendants all signed
employment agreements while at PrimeSource that include non-disclosure
provisions precluding them from disclosing to any third-party not connected to or
employed by PrimeSource any confidential information relating to PrimeSource’s
“research, development, inventions, suppliers, customers, purchasing, accounting,
finance, price lists, and marketing.” (JX 3 ¶ 4.1; JX 9 ¶ 4.1; JX 11 ¶ 4.1.) The
parties agree that these provisions are “evergreen,” meaning they have no
45
expiration date, and that pursuant to the agreements’ choice of law provisions, they
are governed by New York law. 7 PrimeSource points to the same categories of
information cited in support of its trade secrets claims to argue that the CEO
Defendants all have breached the non-disclosure covenants in the course of their
work for Huttig.
New York courts recognize an employer’s legitimate interest in preventing
the disclosure of the employer’s confidential information. Reed, Roberts Assoc. v.
Strauman, 40 N.Y.2d 303, 308 (N.Y. App. 1976). “Although covenants that tend to
prevent employees from pursuing similar employment upon termination or
retirement are disfavored by the law, reasonable restrictions related to the
disclosure of trade secrets or confidential customer information will be enforced.”
Perfect Fit Glove Co. v. Post, 635 N.Y.S. 2d 917, 918 (N.Y. App. Div. 1995) (internal
citations omitted). To prevail on its claim that the CEO Defendants breached their
non-disclosure agreements, PrimeSource must show: (1) the existence of a contract;
(2) the plaintiff’s adequate performance; (3) breach of the contract by the
defendants; and (4) damages stemming from the breach. See Northern Shipping
Funds I, LLC v. Icon Capital Corp., No. 12 Civ. 3584 (JCF), 2013 WL 1500333, at *8
(S.D.N.Y. Apr. 12, 2013) (applying standard breach of contract principles to breach
In their post-hearing briefs, both parties assert that New York law applies to the
CEO Defendants’ employment agreements based on those agreements’ choice of law
provisions. Although this court applies federal law with respect to the governing
preliminary injunction standards, given the parties’ agreement with respect to the
law governing these restrictive covenants, this court will apply New York law in
considering PrimeSource’s likelihood of success with respect to its claims stemming
from the CEO Defendants’ agreements. See Turnell, 796 F.3d at 661.
7
46
of confidentiality provision). Here, the parties’ dispute hinges on the second prong─
whether PrimeSource is likely to succeed in showing that the CEO Defendants
breached their non-disclosure covenants.
PrimeSource argues that it is likely to succeed in demonstrating that Zinman
breached the non-disclosure provision by using PrimeSource’s confidential supplier
information in communicating with potential vendors on behalf of Huttig.
Specifically, it asserts that she breached the contract by recreating “from memory a
list of the mills she recalled working with at PrimeSource and then, within 24
hours, reached out to those supplier contacts, referenced her previous employment
at PrimeSource, and referenced confidential arrangements and agreements between
PrimeSource and certain of the suppliers all in an attempt to obtain quick access to
product for the Huttig-Grip Division.” (R. 152, Pl.’s Mem. at 55.) PrimeSource does
not identify any specific communications or confidential information in making that
assertion.
As explained above, the identities of the vendors PrimeSource used is not
confidential, and there is no evidence to counter Zinman’s testimony that except for
one contact that she happened to remember, she used publicly available resources
to find the contact information she used to email vendors on behalf of Huttig. It is
also undisputed that Zinman did not take any documents with her when she left
PrimeSource almost two years before starting at Huttig.
To the extent that
PrimeSource is arguing that she breached her non-disclosure agreement by using or
disclosing her knowledge of how vendors supplied customers, in New York “[a]n
47
employee’s recollection of information pertaining to specific needs and business
habits of particular customers is not confidential.”
Natural Organics, Inc. v.
Kirkendall, 52 A.D. 3d 488, 489 (N.Y. App. Div. 2008) (quotation omitted). Where
there is no evidence that the former employee stole information or engaged in
wrongful tactics, “[t]he mere recollection of such information as a result of casual
memory is not actionable.” Zurich Depository Corp. v. Gilenson, 121 A.D.2d 443,
445 (N.Y. App. Div. 1986).
That is particularly true where the identities of
distributors who purchased products are generally known in the industry and
where data like customer preferences and pricing information are freely
communicated between distributors and manufacturers.
See Scott Paper Co. v.
Finnegan, 101 A.D.2d 787, 789 (N.Y. App. Div. 1984). There was abundant hearing
evidence that manufacturers who service building products distributors including
PrimeSource and Huttig freely share information about which distributors they are
servicing, what products they are producing for those distributors, and pricing.
Accordingly, and because PrimeSource has not highlighted with any particularity
which communication disclosed what confidential information, the court concludes
that it is unlikely to succeed in showing that Zinman has breached her nondisclosure obligations during her tenure at Huttig.
Turning to PrimeSource’s breach of contract claims against Fishbein and
Furio, again it has not pointed to any specific actions or communications to show
that the contracts were breached.
Instead, PrimeSource attempts to establish
breach simply by pointing to the similarities between their roles at PrimeSource
48
and at Huttig. For example, it argues that “it is more likely than not that Furio put
to use PrimeSource’s inventory management information,” because he made
distribution stocking decisions at PrimeSource and at Huttig. (R. 152, Pl.’s Mem. at
46.)
Similarly, it asserts that “it is more likely than not” that they both used
“information they learned at PrimeSource” to create a Huttig-Grip budget, because
Huttig did not have a developed direct shipment business before they arrived, and
PrimeSource did. (Id. at 47.) But Judd testified that PrimeSource was not claiming
that Fishbein or Furio memorized its budget information, (Tr. 107-08), and
PrimeSource has not identified with any particularity what confidential information
they disclosed.
For example, they have not pointed to any evidence comparing
specific data in PrimeSource budgets that Fishbein and Furio helped develop to
specific data in the Huttig-Grip Division’s budget to support their assertion that it
is likely they used PrimeSource’s budget information. With respect to marketing
information, the only specific evidence PrimeSource points to regarding Fishbein’s
disclosure of confidential information (it identifies none related to Furio) is that he
sent an email characterizing a particular marketing plan as being important.
(R. 152, Pl.’s Mem. at 45, 69-70.) But there is no evidence that Fishbein learned of
that marketing plan in the course of his employment at PrimeSource. Moreover, it
is insufficient under New York law to point to broad “strategic plans” to
demonstrate that confidential information was misappropriated without explaining
what that specific information was or why it was confidential. See Marsh USA Inc.
v. Karasaki, No. 08 Civ. 4195(JGK), 2008 WL 4778239, at *21 (S.D.N.Y. Oct. 31,
49
2008). Given the lack of evidence demonstrating that Fishbein or Furio actually
breached the non-disclosure agreements, this court concludes that PrimeSource is
unlikely to succeed on the merits of these claims. 8
3.
The Felten Defendants’ Non-Disclosure Agreements
PrimeSource also argues that the Felten Defendants violated their nondisclosure agreements by using confidential customer information to develop call
lists that they used or traded with other salespeople at Huttig. (R. 152, Pl.’s Mem.
at 62.)
All five Felten Defendants signed non-disclosure agreements while at
PrimeSource precluding them from disclosing any non-public information to third
parties even after the end of their employment, including any information about the
nature and terms of PrimeSource’s relationships with its customers. (JX 13 ¶ II; JX
14 ¶ II; JX 15 ¶¶1, 5; JX 16 ¶ II; JX 17 ¶ II.) Although at the motion to dismiss
stage the Felten Defendants argued that Illinois law should govern the
enforceability of their employment agreements with PrimeSource, they did not file
objections to this court’s report and recommendation ruling that Texas law should
apply, and this recommendation was adopted in full. (No. 16 CV 11468, R. 141.) In
their current brief, the Felten Defendants recognize the rulings with respect to the
application of Texas law to their respective PrimeSource agreements and present
their arguments under Texas law. (R. 154, Defs.’ Mem. at 90-98.) For all of these
PrimeSource does not appear to be putting forward an inevitable disclosure
theory as it relates to the breach of the nondisclosure claim, and it has not cited any
cases showing that such a theory is viable under New York law with respect to a
breach of contract claim, as opposed to the trade secret context.
8
50
reasons, the court will evaluate PrimeSource’s likelihood of success with respect to
its breach of covenant claims against the Felten Defendants under Texas law.
Although Texas has a statute governing the enforceability of covenants not to
compete, see Tex. Bus. & Com. Code Ann. § 15.50(a) (West 2011), non-disclosure
agreements are not expressly governed by that statute, Marsh USA Inc. v. Cook,
354 S.W.3d 764, 768 (Tex. 2011). And because non-disclosure agreements are not
considered to be against public policy in Texas, there is no requirement with respect
to limitations on the duration or geography covered. See Zep Mfg. Co. v. Harthcock
& Panther Indus., Inc., 824 S.W.2d 654, 663 (Tex. App. 1992). Therefore to prevail
on a claim that the Felten Defendants breached their confidentiality agreements,
PrimeSource must show that the contract is valid, PrimeSource performed, the
Felten Defendants breached the contract, and PrimeSource suffered damages as a
result. See Fomento de Construcciones y Contratas, S.A. v. VeroLube, Inc., No. 4:14CV-2199, 2015 WL 1235738, at *1 (S.D. Tex. Mar. 13, 2015). In evaluating a claim
that a non-disclosure covenant has been breached, the court must bear in mind that
such provisions do not “prohibit the former employee from using, in competition
with the former employer, the general knowledge, skill, and experience acquired in
former employer.” Shoreline Gas, Inc. v. McGaughey, No. 13-07-364-CV, 2008 WL
1747624, at *10 (Tex. App. 2008). Moreover, because Texas courts do not appear to
apply categorically the inevitable disclosure doctrine to non-disclosure agreements,
see Cardoni v. Prosperity Bank, 805 F.3d 573, 589-90 (5th Cir. 2015), to prevail
51
PrimeSource needs to show that the Felten Defendants actually breached or are
breaching their non-disclosure agreements.
In the proposed conclusions of law sections of PrimeSource’s post-hearing
briefs, it argues that the Felten Defendants breached their non-disclosure
agreements by incorporating confidential customer information into call lists, but
does not provide more specifics about what actions each individual defendant took
that amount to a breach. PrimeSource has made clear that it “is not maintaining
that the ‘mere identity’ of customers is confidential.
What is confidential is
information about what the customers purchase, when the customers purchase it,
[and] contacts at those customers.” (R. 155, Pl.’s Reply at 9.) But as to Felten and
Whitehead, PrimeSource has not presented evidence that they included anything
other than the names of customers, the city and state where the customer is located,
and the name of a contact person on the list they developed for Huttig. (R. 152, Pl.’s
Mem. at 39; Tr. 739-40, 907-09.) 9 Without more, it is unclear what confidential
information PrimeSource thinks Felten or Whitehead disclosed. To prevail on its
breach of the confidentiality agreement claims, PrimeSource must do more than
make a “speculative showing” that Felten and Whitehead disclosed confidential
information. See Cardoni, 805 F.3d at 589. Because PrimeSource has not identified
the confidential information they shared with any particularity, the court concludes
Whitehead’s customer list includes columns describing the products the customer
purchases, but the call note column suggests that Whitehead added that
information after making calls to the customers while at Huttig. (PX 229.)
Whitehead did not sign a non-solicitation agreement while at PrimeSource, and
PrimeSource has not shown that these columns represent information Whitehead
learned while at PrimeSource.
9
52
that it has shown a low likelihood of succeeding on its claims for breach of nondisclosure agreements with respect to these two defendants.
With respect to Kessler, Kottmeyer, and Sagunsky, PrimeSource has shown
that they included in their customer lists information beyond their customers’
identities. Kottmeyer included in his list the names of the contacts he had worked
with, along with references to what products that customer purchased from
PrimeSource. (PX 138, Tr. 805.) Sagunsky’s list of over 50 customers he serviced at
PrimeSource included similar information, along with in some instances notes
about his relationships with specific customer contacts, the time of year they
purchased products, and the amount of products they had purchased. (PX 160,
Tr. 656-68.) Kessler’s list of 220 customers he serviced at PrimeSource has the most
additional information, including information about the products the customer
purchased from PrimeSource and the branch number for the PrimeSource branch
that serviced the customer. (PX 141; Tr. 543, 545.) In one entry Kessler included
the PrimeSource SKU number that corresponded to the product the customer
purchased.
(PX 141; Tr. 546-47.)
The Felten Defendants’ non-disclosure
agreements specify that they may not disclose non-public information about the
nature or terms of PrimeSource’s relationship with its customers. Arguably, the
additional product information Kessler, Kottmeyer, and Sagunsky included on the
lists that they provided to Huttig include that information, and go beyond the
“general knowledge, skill, and experience” they acquired at PrimeSource.
Shoreline Gas, 2008 WL 1747624, at *10.
53
See
Accordingly, PrimeSource has
demonstrated at least some likelihood of success on the merits of its claims that
Kessler, Kottmeyer, and Sagunsky breached their nondisclosure agreements.
4.
Fishbein’s and Furio’s Non-Solicitation Agreement
PrimeSource argues that it is likely to succeed on its claims that Fishbein
and Furio violated their non-solicitation covenants by contacting the Felten
Defendants between December 2015 and September 2016 and by meeting with
Zinman during that period. (R. 152, Pl.’s Mem. at 53.) In response, Huttig points
out that those non-solicitation covenants expired on September 16, 2016, months
before these lawsuits were filed, and argue that accordingly, injunctive relief is
inappropriate with respect to those claims.
(R. 154, Defs.’ Mem. at 62-64.)
Although the defendants raised this argument both during the preliminary
injunction hearing and in their post-hearing brief, PrimeSource has not addressed
this argument in its post-hearing opening or reply briefs. (R. 155, Pl.’s Reply at 1618.)
Preliminary injunctions represent a form of prospective relief designed to
prevent a harmful event, but “[o]nce the event in question occurs, any possible use
for a preliminary injunction is expired.” A.B. by Kehoe v. Housing Auth. of South
Bend, 683 F.3d 844, 845 (7th Cir. 2012); see also Aladdin Cap. Holdings, LLC v.
Donoyan, 438 Fed. Appx. 14, 16 (2d Cir. 2011) (dismissing appeal as moot where “it
is no longer possible to grant preliminary relief enjoining the violation of these
covenants, which have, by their own terms, expired” (emphasis in original)). Under
New York law, which the parties agree applies to the CEO Defendants’ employment
54
agreements with PrimeSource, courts generally will not grant injunctive relief to
enforce a restrictive covenant beyond its term.
See OTG Mgmt., LLC v.
Konstantinidis, 967 N.Y.S.2d 823, 826 (N.Y. Sup. Ct. 2013) (stating that
preliminary injunction automatically expires on the day non-solicitation clause
expires); Mitel Telecomms. Sys., Inc. v. Napolitano, 640 N.Y.S.2d 113 (N.Y. App.
Div. 1996) (“Plaintiff is also not entitled to a preliminary injunction enjoining
defendants from soliciting their former customers, since the parties contracted to
limit the non-solicitation of customers to three years following the sale of the
business, which period also has already elapsed.”). Even where preliminary
injunctive relief is appropriate during the term of a non-solicitation covenant, the
injunction must be tailored to expire along with the covenant. See Ingenuit, Ltd. v.
Harriff, 822 N.Y.S.2d 301, 303 (N.Y. App. Div. 2006). New York courts will not
consider even partial enforcement of a restrictive covenant through an injunction
where the covenant has expired. See Zinter Handling, Inc. v. Britton, 46 A.D.3d
998, 1001-02 (N.Y. App. Div. 2007) (“Since the covenant not to compete has now
expired as to both defendants, we perceive no legitimate basis upon which to
consider partial enforcement.”).
Given the case law suggesting that New York courts will not enforce a nonsolicitation clause beyond its term, and especially in light of PrimeSource’s silence
on the issue, this court concludes that PrimeSource is not entitled to preliminary
injunctive relief with respect to its claims that Fishbein and Furio violated the nonsolicitation provisions of their respective employment agreements. Based on the
55
limited consent in this case, there is no need for the court to comment further on
PrimeSource’s likelihood of succeeding on the merits of these claims.
5.
Felten’s, Kessler’s, Kottmeyer’s, and Sagunsky’s Non-Compete
Covenants
PrimeSource argues that it has shown the requisite likelihood of success on
the merits of its claim that by working for Huttig, Felten, Kessler, Kottmeyer, and
Sagunsky breached and are continuing to breach their covenants not to compete. 10
Felten, Kessler, Kottmeyer, and Sagunsky all signed agreements including a
covenant not to compete stating that for a period of 18 months following the end of
their employment at PrimeSource they will not “[e]nter the employ of, or render any
services to, any person, firm or business that is engaged in any business competitive
with that of PrimeSource” within a 300 mile radius of any PrimeSource distribution
center where the defendant reported or any sales territory the defendant serviced.
(JX 13 ¶ IV; JX 14 ¶ IV; JX 16 ¶ IV; JX 17 ¶ IV.) Despite having entered those
agreements, Felten, Kessler, Kottmeyer, and Sagunsky all went to work for the
Huttig-Grip Division within a few miles of their PrimeSource offices just days after
resigning from PrimeSource.
The defendants do not deny these facts, but instead argue that PrimeSource
has no reasonable likelihood of success on its breach of contract claims because,
according to them, the non-compete covenants are unenforceable under Texas law.
(R. 154, Defs.’ Mem. at 91.)
Specifically, they argue that the non-compete
Defendant Whitehead did not sign either a non-solicitation or a non-competition
agreement during his tenure at PrimeSource.
10
56
covenants’ time and geographic restraints on their ability to work for a competitor
are so broad that PrimeSource has no chance of showing either that they are
reasonable, or that they can be reformed or “blue-penciled” by the court in a way to
render them enforceable.
Under Texas law, “[c]ovenants that place limits on former employees’
professional mobility” are “restraints on trade and are governed by the [Covenant
Not to Compete] Act.” Marsh USA, 354 S.W.3d at 768. Under Texas’s Covenants
Not to Compete Act (“the Act”), “[a] covenant not to compete is enforceable if it is
ancillary to or part of an otherwise enforceable agreement at the time the
agreement is made to the extent that it contains limitations as to time, geographical
area, and scope of activity to be restrained that are reasonable and do not impose a
greater restraint than is necessary to protect the goodwill or other business interest
of the promisee.” Tex. Bus. & Com. Code Ann. § 15.50(a) (West 2011). “Whether a
covenant imposes a reasonable restraint on trade is a question of law for the court.”
Cobb v. Caye Publ’g Grp., Inc. 322 S.W.3d 780, 783 (Tex. App. 2010). Where a
restrictive covenant is unreasonably restrictive under the circumstances, rather
than invalidating the covenant, the court will “attempt to reform the unenforceable
provisions to make them reasonable as to time, geographical area, or scope of
activity to be restrained.” Rimkus Consulting Grp., Inc. v. Cammarata, 255 F.R.D.
417, 436 (S.D. Tex. 2008). The Act makes clear that “the court shall reform the
covenant to the extent necessary to cause the limitations contained in the covenant
as to time, geographical area, and scope of activity to be restrained to be reasonable
57
and to impose a restraint that is not greater than necessary to protect the goodwill
or other business interest of the promisee and enforce the covenant as reformed.”
Tex. Bus. & Com. Code Ann. § 15.51(c) (emphasis added). However, Texas law calls
for the reformation of a restrictive covenant’s temporal limitations only where its
restriction is unreasonably long. See Tex. Bus. & Com. Code Ann. § 15.51(c). And
Texas courts have repeatedly upheld as reasonable restrictions on competition
lasting from two to five years. Gallagher Healthcare Ins. Servs. v. Vogelsang, 312
S.W.3d 640, 655 (Tex. App. 2010) (citing cases).
The Felten Defendants argue that the 18-month restriction on working for a
PrimeSource competitor represents an unreasonable restraint that is not tied to any
of PrimeSource’s legitimate business interests. They point out that Judd testified
at the hearing that the current PrimeSource employment agreement for people in
roles like those filled by Felten, Kessler, Kottmeyer, and Sagunsky at PrimeSource
(specifically, non-executives) includes only a nine-month restriction on posttermination competition. 11
(Tr. 144-145.)
According to the defendants, Judd’s
testimony amounts to an admission that a nine-month restriction is all that is
needed to protect PrimeSource’s legitimate business interests, and they argue that
accordingly, the court should blue-pencil the temporal restriction from 18 months to
9 months.
Were the court to do so, the non-compete provisions would have
According to PrimeSource, under the new guidelines people serving in the roles
performed by Kessler and Sagunsky are subject to a twelve-month, not a ninemonth, restriction. (R. 155, Pl.’s Reply at 20.)
11
58
effectively expired in August 2017, and according to the defendants, they could no
longer be enforced through an injunction. (R. 154, Defs.’ Mem. at 94.)
Given the willingness of Texas courts to enforce temporal restrictions in noncompete provisions that are significantly longer than the 18-month restriction at
issue here, the court concludes that PrimeSource has shown some likelihood of
success on the merits of its claim that this restriction is enforceable as written. The
fact that PrimeSource currently uses a non-compete covenant with a shorter
duration for its salesforce does not change that conclusion. There may have been
changes at PrimeSource or among its current workforce that motivated
PrimeSource to reduce the duration of its non-compete provisions, but that does not
mean that at the time Felten, Kessler, Kottmeyer, and Sagunsky signed their
agreements there was no basis for the 18-month restriction, or that the connection
between the 18-month limit and PrimeSource’s legitimate interests is no longer
valid. Essentially, Huttig is arguing that anytime a company changes its policy
with respect to the length of its non-compete provisions the court must necessarily
find any greater restrictions in previous contracts unreasonable, but that would
have a negative effect on companies’ willingness to reconsider their restrictive
covenants as their needs change. Moreover, Texas courts readily enforce temporal
limitations much longer than those at issue here without engaging in much handwringing or analysis. See, e.g., McKissock, LLC v. Martin, __ F.Supp.3d __, 2016
WL 8138815, at *11 (W.D. Tex. Sept. 10, 2016) (stating, without analysis, that
“[r]egarding the duration of the Non-Compete Agreement, the Court also finds that
59
a two-year restriction is reasonable”); Brink’s Inc. v. Patrick, No. 3:14-CV-775-B,
2014 WL 2931824, at *5 (N.D. Tex. Jun. 27, 2014) (“[E]ven if the agreement did
effectively impose a four-year restriction, the Court cannot conclude that such a
restriction would be unreasonable under Texas law.”); Drummond Am., LLC v.
Share Corp., 692 F.Supp.2d 650, 655 (S.D. Tex. 2010) (noting that two-year
“restriction appears reasonably necessary to protect [the employer’s] business
interest in maintaining confidential sales information and customer lists” and
stating that “Texas courts have enforced covenants not to compete with similar or
greater restrictions”); Evans Consoles Inc. v. Hoffman Video Sys., Inc., No. 3:01-CV1333-P, 2001 WL 36238982, at *7 (N.D. Tex. Dec. 6, 2001) (summarily stating that
three years is not an unreasonable time limit).
Accordingly, and because the
defendants have not cited any cases where an 18-month restriction was found
unenforceable in a similar context, the court declines the defendants’ invitation to
recast the restrictions as 9-month limitations.
Turning to the geographic limitations, the defendants argue that restricting
competition within a 300-mile radius of their sales territories or the PrimeSource
distribution centers where they reported is unreasonably broad and therefore
unenforceable as written.
There is merit to that argument.
As with time
restraints, geographical limits in non-compete agreements are unreasonable if they
are broader than necessary to protect an employer’s goodwill or other legitimate
business interests. Cobb, 322 S.W.3d at 783. “A reasonable geographic scope is
generally considered to be the territory in which the employee worked for the
60
employer.” GE Betz, Inc. v. Moffitt-Johnson, No. H-13-0459, 2014 WL 12596523, at
*7 (S.D. Tex. Jun. 6, 2014) (quotation and citation omitted); see also Butler v. Arrow
Mirror & Glass, Inc., 51 S.W.3d 787, 793 (Tex. App. 2001). By contrast, industrywide exclusions or covenants that restrict competition in virtually every
metropolitan area in a state may be unreasonably broad.
See Wright v. Sport
Supply Grp., Inc., 137 S.W.3d 289, 298 (Tex. App. 2004); Gomez v. Zamora, 814
S.W.2d 114, 118 (Tex. App. 1991) (concluding that covenant covering almost every
major metropolitan area in Texas was too broad). But even where a non-compete
covenant’s geographic restrictions are overly broad, “Texas courts attempt to reform
the unenforceable provisions to make them reasonable.” Rimkus, 255 F.R.D. at 436.
This court agrees with the defendants that under Texas law the geographic
restrictions here are overly broad as written.
By their terms, the restrictions
preclude the defendants from working for a PrimeSource competitor within 300 mile
radius of any PrimeSource distribution center where the defendant reported or any
sales territory the defendant serviced. In that way, the relevant terms are not
tailored to restrict competition in the territory where the defendants actually
worked, see GE Betz, 2014 WL 12596523, at *7, because the restrictions extend 300
miles beyond those territories. As an example illustrating the breadth of those
restrictions, if one of the defendants serviced PrimeSource clients in an area that
included Naperville, Illinois, he would be precluded under the terms of these
restrictions from working for a competitor in Des Moines, Iowa during the pendency
of the non-compete, even if he had never worked in Iowa while at PrimeSource.
61
Because the restriction extends well outside the territories where the defendants
worked, PrimeSource is unlikely to succeed in showing that the covenants should be
enforced as written. See Rimkus, 255 F.R.D. at 436.
Nevertheless, as PrimeSource correctly argues, even if the court were to
reform the covenant to apply only to the territories in which the defendants actually
worked (as opposed to a radius of 300 miles beyond that territory), PrimeSource is
likely to succeed on its claim that they breached their non-compete covenants,
because all four defendants are currently working in a Huttig-Grip office that is
located less than two miles away from their former PrimeSource offices. (Tr. 529,
719, 864.)
As PrimeSource points out, these facts render the defendants’
unreasonableness argument purely academic, because given the requirement in
Texas that unreasonable restrictions “shall” be reformed, see Tex. Bus. & Com. Code
Ann. § 15.51(c), the non-compete covenant may be enforced in the territory where
the defendants worked for PrimeSource, and they admit that Huttig-Grip is located
practically next door. Accordingly, despite the overly broad geographic restriction
in the defendants’ non-compete covenants, PrimeSource has shown that it is likely
to succeed on its claims that they breached those covenants even if reformed to
conform to the defendants’ previous work territories.
6.
Felten’s, Kessler’s, Kottmeyer’s,
Solicitation Covenants
and
Sagunsky’s
Non-
Next, PrimeSource argues that it has shown a likelihood of success with
respect to its claim that Felten, Kessler, Kottmeyer, and Sagunsky breached their
non-solicitation covenants in their new roles at Huttig.
62
The non-solicitation
provisions of their PrimeSource agreements, which are set to expire in May 2018,
include the same geographic and temporal restrictions as apply to their noncompete covenants, and specify that they will not “[s]ell or offer for sale any
products or services of the type sold or offered by PrimeSource to any customer to
whom PrimeSource sold products or provided services or any prospect PrimeSource
solicited for business during the two most recently complete calendar years.” (JX 13
¶ IV; JX 14 ¶ IV; JX 16 ¶ IV; JX 17 ¶ IV.) PrimeSource argues that the four
relevant defendants violated the non-solicitation clause by making lists of the
customers they serviced at PrimeSource, exchanging those lists, and calling on each
other’s customers. (R. 152, Pl.’s Mem. at 62-63.)
Again the defendants do not dispute that they exchanged customer lists or
contacted each other’s former customers, but instead argue that the non-solicitation
provisions are unenforceable as written. Although the Act does not explicitly apply
to non-solicitation covenants, Texas courts apply the same analysis to nonsolicitation provisions as they do to covenants not to compete. See Shoreline Gas,
2008 WL 1747624, at *9-*10. As with non-competition covenants, restrictions on a
former employee’s “solicitation of the former employers’ customers and employees
are restraints on trade,” and are enforceable only if reasonably constructed to
protect the former employer’s legitimate business interests.
Marsh USA, 354
S.W.3d at 768. “Texas courts have held that nonsolicitation covenants that cover
clients with whom the employee had no contact while working for the employer are
63
overbroad and not reasonably necessary to protect the employer’s legitimate
business interest in maintaining its client base.” Rimkus, 255 F.R.D. at 439.
Here, the defendants challenge the scope of the non-solicitation covenants,
pointing out that the language precluding them from soliciting any of PrimeSource’s
clients or prospective clients is not limited to the work they actually performed
while at PrimeSource. (R. 154, Defs.’ Mem. at 97.) Specifically, they argue that the
scope of the precluded activity is unreasonably broad because the language extends
to any customer that PrimeSource provided products or services to or solicited for
business up to two years before the defendants’ departure, instead of being tailored
to the customers the defendants serviced and solicited. (Id.) Under Texas law, “[i]n
the case of covenants applied to a personal services occupation, such as that of a
salesman, a restraint on client solicitation is overbroad and unreasonable when it
extends to clients with whom the employee had no dealings during his [or her]
employment.” John R. Ray & Sons, Inc. v. Stroman, 923 S.W.2d 80, 85 (Tex. App.
1996).
In response to the defendants’ argument with respect to the scope of activity,
PrimeSource merely asserts that “virtually identical clauses have been upheld” in
Texas. (R. 155, Pl.’s Reply at 22.) But the two opinions it cites in support of that
assertion involve non-solicitation clauses or circumstances that are distinguishable
from the language and circumstances at issue here.
In Orchestratehr, Inc. v.
Trombetta, No. 3:13-CV-2110-KS-BH, 2016 WL 4563348, at *4 (N.D. Tex. Sept. 1,
2016), the defendant challenged an agreement that prevented him from directly or
64
indirectly soliciting his former employer’s current clients. The court held that the
provision preventing him from soliciting any of his former employer’s current clients
was not overbroad because the defendant “introduced no evidence that there is any
client with which he has had no contact.”
Id.
In other words, the provision
preventing contact with any of his former employer’s clients was tailored in that
case to the clients with whom the defendant had engaged.
See id.
The non-
solicitation agreement at issue in Salas v. Chris Christensen Sys. Inc., No. 10-1100107-CV, 2011 WL 4089999, at *18-*19 (Tex. App. Sept. 14, 2011), extended to
entities beyond those with which the former employee worked, but in upholding
that broad prohibition, the court simply said that “[c]ourts have upheld similar
provisions prohibiting a former employee from soliciting the employer’s customers.”
But the three cases it cited to support that conclusion all involved agreements or
injunctions specifically tailored to limiting the former employee’s contact with
customers the employee actually serviced or about whom the employee obtained
confidential information. See id. at *19 (citing Lockhart v. McCurley, No. 10-0900240-CV, 2010 WL 966029, at *2 (Tex. App. Mar. 10, 2010) (upholding injunction
that limited former employee from soliciting specific clients of his former employer
who he had “served,” with whom he had “dealt,” or with whom he had “represented
or conducted” business related to his former employer); Totino v. Alexander & Ass.,
Inc., No. 01-97-01204-CV, 1998 WL 552818, at *4 (Tex. App. Aug. 20, 1998) (not
designated for publication) (“Here . . . the covenants restrict the individual
appellants from soliciting and servicing only those clients with whom they
65
personally worked.”); Rugen v. Interactive Bus. Sys., Inc., 864 S.W.2d 548, 550-51,
553 (Tex. App. 1993) (upholding injunction preventing former employee “from
soliciting or transacting business with IBS’s consultants and customers, whose
identities she was able to obtain through confidential information” and who were
specifically set out in two exhibits, rather than all of the former employer’s clients)).
Standing in contrast to the cases on which PrimeSource relies is the weight of
Texas case law making it clear that a non-solicitation clause without a reasonable
geographic limitation is overly broad if it extends to clients with whom the former
employee never interacted.
See, e.g., Rimkus, 255 F.R.D. at 439; Wright, 137
S.W.3d at 298; John R. Ray & Sons, 923 S.W.2d at 85; Peat Marwick Main & Co. v.
Haass, 818 S.W.2d 381, 387-88 (Tex. 1991). And here, the defendants’ agreements
prevent them from soliciting not just any PrimeSource customer, but any entity
that PrimeSource solicited as a prospective customer in the two years predating
their departure.
That renders the connection between the prohibition and
PrimeSource’s legitimate business interests even more tenuous. See GE Betz, 2014
WL 12596523, at *9 (noting that non-solicitation agreement’s extension to
prospective customers was overbroad). Accordingly, the court agrees that the nonsolicitation covenant is unreasonably broad as written, and should be reformed to
prevent the defendants from soliciting PrimeSource clients with whom they had
contact during their employment with PrimeSource.
Even where the non-solicitation agreement is reformed to target only the
defendants’ former PrimeSource contacts, the court must consider PrimeSource’s
66
argument that the defendants violated the non-solicitation provisions by making
lists of the clients they had serviced while at PrimeSource, exchanging the lists, and
soliciting contacts from their colleagues’ lists. Although this argument hinges
largely on the premise that the defendants divulged confidential information in
creating those lists, a premise addressed in Section B(3) above, they argue that
divulging customer identities violates the non-solicitation covenants even if they
simply provide a list of customers and do not solicit those customers themselves. In
support of that argument, PrimeSource primarily points to York v. Hair Club for
Men, LLC, No. 01-09-00024-CV, 2009 WL 1840813, at *5 (Tex. App. June 25, 2009),
where the court stated that former employees of a hair replacement company
violated their non-solicitation agreements by divulging to their new employer a list
of clients they had serviced at their former employer.
But the non-solicitation
agreement at issue in York is distinguishable from the language at issue here,
because there the “non-solicitation agreement require[s] the employee not to solicit
or aid in soliciting any business” from any of their former employer’s customers. Id.
(emphasis added). So arguably under the agreement at issue in York, the act of
providing their new employer a list of their previous customers aided the new
employer’s solicitation of those customers. Here, the defendants’ non-solicitation
agreements say nothing about aiding in solicitation or otherwise address instances
of indirect solicitation, so the York decision is of limited utility.
Although the court concludes that the non-solicitation agreement may be
enforced as reformed to preclude the solicitation of PrimeSource customers with
67
whom the defendants actually had contact during their tenure at PrimeSource,
PrimeSource has not made a persuasive showing that as a blanket matter the
defendants are violating the reformed agreements by soliciting PrimeSource clients
who they never worked with, but with whom their former PrimeSource colleagues
worked. But there are two lines of evidence from which the court concludes that
PrimeSource has shown some likelihood of success.
First, and most straight-
forwardly, Felten and Kottmeyer both admitted that in their early days at Huttig
they contacted some of their former PrimeSource customers to solicit business for
Huttig. (Tr. 739-40, 742-44, 813-14, 816, 837-38.) Second, there is evidence that
after exchanging customer lists, in reaching out to each other’s previous
PrimeSource contacts, some of the
defendants referenced the customer’s
relationship with the defendant who provided the customer information and tried to
leverage that relationship to make a sale.
For example, in soliciting one of
Sagunsky’s PrimeSource contacts, Kessler wrote to a customer specifically
referencing her relationship with Sagunsky and Sagunsky’s intent that her ordering
needs be met. (PX 170.) Similarly, in contacting one of Kessler’s PrimeSource
customers Sagunsky specifically referenced the contact’s relationship with Kessler
at PrimeSource to establish credibility with the customer. (PX 223.) That evidence
suggests that Kessler and Sagunsky leveraged the customer goodwill they knew
their colleague had built with a customer while at PrimeSource to make sales on
behalf of Huttig-Grip. 12
12
That type of customer goodwill represents the kind of
Even Fishbein testified that although he “heard rumblings” that the Felten
68
legitimate business interest that non-solicitation provisions are designed to protect.
Thus the court concludes that PrimeSource has shown at least some likelihood of
success on the merits of its claims that Felten, Kessler, Kottmeyer, and Sagunsky
violated their non-solicitation covenants while working at Huttig-Grip.
7.
Tortious Interference with Contracts
Finally, PrimeSource argues that it is likely to succeed on its claims that
Huttig tortiously interfered with the Felten Defendants’ non-competition, nonsolicitation, and non-disclosure agreements with PrimeSource by employing them
despite their restrictive covenants, instructing them to create lists of customers
they had serviced at PrimeSource, and having them solicit customers their
colleagues serviced while at PrimeSource. 13 “Tortious interference with a contract
occurs when someone intentionally and improperly interferes with the performance
of a contract between another and a third person by inducing or otherwise causing
the third person not to perform the contract.” Minnesota Mining & Mfg. Co. v.
Pribyl, 259 F.3d 587, 601 (7th Cir. 2001). To prevail on its tortious interference
claim PrimeSource must establish: “(1) the existence of a valid and enforceable
contract between the plaintiff and another party; (2) that the defendant was aware
of the contractual relationship; (3) an intentional and unjustified inducement of a
Defendants had communicated with each other about customers within the
switched territories, he “would not permit” that, out of respect for their nonsolicitation agreements. (Tr. 1471.)
PrimeSource also argues that Huttig tortiously interfered with Brad Strosahl’s
and Samuel Sprague’s restrictive covenants, but because those claims fall outside
the scope of the current preliminary injunction motions, the court limits its analysis
to the claims against the Felten Defendants.
13
69
breach of the contract by the defendants; (4) the subsequent breach of the contract
by the other party, caused by the defendant’s inducement; and (5) damages.” See
Williams v. Shell Oil Co., 18 F.3d 396, 402 (7th Cir. 1994).
To establish the
inducement element, PrimeSource must show that Huttig engaged in “some active
persuasion, encouragement, or inciting that goes beyond merely providing
information in a passive way.” In re Estate of Albergo, 656 N.E.2d 97, 103 (Ill. App.
Ct. 1995).
PrimeSource argues that Huttig “provided a forum” for the Felten
Defendants to disclose its confidential information. (R. 155, Reply at 23.) Merely
“providing a forum” for a breach of their non-disclosure agreements is not the kind
of active inducement that tortious interference claims are meant to protect against.
And although the court has concluded that PrimeSource has shown some likelihood
of successfully showing that Kessler, Kottmeyer, and Sagunsky breached their nondisclosure agreements by providing information about customers that goes beyond
their identities, PrimeSource has not pointed to any evidence that their supervisors
at Huttig asked or induced them to provide anything more than customer’s
identities in the lists they assembled.
(Tr. 911-12, 1468-69.)
But again,
“PrimeSource is not maintaining that the ‘mere identity’ of customers is
confidential.” (R. 155, Pl.’s Reply at 9.) Because PrimeSource has not pointed to
evidence that Huttig actively induced Kessler, Kottmeyer, and Sagunsky to include
confidential details in their customer lists, it has not shown it is likely to succeed on
this aspect of its tortious interference claim.
70
Turning to the non-solicitation and non-competition provisions as applied to
Felten, Kessler, Kottmeyer, and Sagunsky, PrimeSource argues that Huttig actively
induced them to breach their non-compete agreements by working for Huttig and
their non-solicitation agreements by asking them to contact customers with whom
they had worked at PrimeSource. But it has pointed to no evidence that anyone at
Huttig persuaded or induced Kottmeyer or Felten to contact their former customers
in their first days at PrimeSource, and to the extent it will be able to show that they
breached the non-solicitation agreements by leveraging each other’s previous
customer relationships in contacting potential customers for Huttig, there is little
evidence that they did so because Huttig asked them to.
By contrast, there is
evidence that Huttig actively induced Felten, Kessler, Kottmeyer, and Sagunsky to
breach their non-compete agreements. Fishbein testified that after joining Huttig
he asked new hires, including the Felten Defendants, if they were subject to noncompete agreements before offering them employment, and admitted that he was
aware of the relevant non-compete provisions. (Tr. 1472-73.) And there is evidence
that after he began his consultancy with Huttig, Fishbein contacted Whitehead in
October 2016 and asked him to let the other Felten Defendants know, without
revealing Huttig’s identity, that he would soon have a job opportunity to offer them.
(PX 261.) Several of the Felten Defendants applied for jobs at Huttig the day the
hiring application went live and were hired by the next day. Given those contacts
after Fishbein was working for Huttig and the almost instantaneous hiring of
several Felten Defendants who Huttig knew were subject to non-compete
71
provisions, PrimeSource has shown at least some likelihood of success on the merits
of this aspect of its tortious interference claim. See Equis Corp. v. Staubauch Co.,
No. 99 CV 7046, 2000 WL 283982, at *1 (N.D. Ill. Mar. 13, 2000) (noting that
allegations that defendant attempted to recruit and recruited company’s brokers
knowing they were subject to non-competition restrictions supported tortious
interference with contracts claim).
C.
Balance of Harms
Turning to the balancing phase of the preliminary injunction analysis, the
court must weigh the balance of harms PrimeSource faces if its requested injunction
is wrongfully denied against the harms the defendants face if it is wrongly granted,
factoring in whether the public interest outweighs PrimeSource’s interests.
See
Whitaker, 858 F.3d at 1044. In conducting this analysis the court uses a sliding
scale approach, meaning the greater the likelihood of success on a given claim the
less the balance of harms must favor the movant. Id. at 1054. “The sliding scale
approach is not mathematical in nature, rather it is more properly characterized as
subjective and intuitive, one which permits district courts to weigh the competing
considerations and mold appropriate relief.” Ty, Inc., 237 F.3d at 896-96 (internal
quotation omitted).
The court must also analyze the scope of the proposed
injunction, bearing in mind that “[s]weeping relief is inappropriate if more focused
restrictions will serve.” Lakeview Tech., 446 F.3d at 658.
In its primary request for injunctive relief, PrimeSource seeks what it calls a
“production injunction,” asking this court to enter an order shutting down the entire
72
Huttig-Grip Division pending a final trial on the merits. That request is wildly out
of line with the evidence of wrongdoing that PrimeSource has presented.
PrimeSource argues that a production injunction is justified because, according to
it, PrimeSource’s trade secrets were so central to the formation of the Huttig-Grip
Division that it cannot continue to operate without using that information. (R. 152,
Pl.’s Mem. at 77.) But the court has concluded that it has very little chance of
succeeding on the merits of its trade secrets claims, given its failure to identify with
particularity any misappropriated trade secrets and the weak evidence of actual or
threatened misappropriation.
The harm to Huttig if a production injunction is
wrongfully entered pending the outcome of this case is substantial, because
hundreds of Huttig employees who have no relation to the claims in this case work
within that division. (PX 158; Tr. 311, 329, 394, 1128.) Nothing about the evidence
relating to trade secrets or misuse of confidential information suggests that the
Huttig-Grip Division is unable to function without exploiting PrimeSource’s secrets,
and risking the livelihood of hundreds of people is a harm that far outweighs any
harm PrimeSource will suffer in the absence of a production injunction.
That
balance is especially clear because, as described below, a much more tailored
injunction can preserve the status quo and protect PrimeSource against any
“palpable risks of future injury.” See Lakeview Tech., 446 F.3d at 657.
PrimeSource’s
alternative
request
seeks
a
more
tailored
injunction
precluding Huttig from: (1) selling products to the customers who appeared on the
Felten Defendants’ customer lists; (2) restraining Felten, Kessler, Kottmeyer, or
73
Sagunsky either from working at Huttig or from working within the Huttig-Grip
Division; (3) enjoining David Fishbein, Furio, and Zinman from working within the
Huttig-Grip Division; and (4) preventing Huttig from using suppliers that Zinman
contacted during her first month at Huttig with whom she had also worked at
PrimeSource. (R. 152, Pl.’s Mem. at 78.) Starting with the request for injunctive
relief against the Felten Defendants, the court concludes that the balance of harms
weighs in favor of a limited injunction precluding Huttig from selling products to
the customers who appeared on the initial lists created by Kessler, Kottmeyer, and
Sagunsky. As described above, PrimeSource has shown some likelihood of success
with respect to its claims that these three defendants breached their non-disclosure
agreements by including confidential information in their customer lists. The harm
to PrimeSource in potentially having its confidential information exploited for
unfair competition outweighs any harm to Huttig in foregoing sales to a relatively
small universe of potential customers pending the outcome of this litigation.
Moreover, the public interest in protecting confidential information flows in
PrimeSource’s favor with respect to this request. See nClosures, Inc., 2013 WL
158954, at *4.
Given that PrimeSource has shown some likelihood of success on its claims
that Felten, Kessler, Kottmeyer, and Sagunsky breached their non-competition and
non-solicitation covenants, the court concludes that the balance of harms weighs in
its favor on these claims as well. But the court must tailor the injunction to address
that harm. In its reply brief, PrimeSource asserts that were the court to enter a
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production injunction it “would have no objection to Huttig employing the
Defendants in roles having nothing to do with the sales or procurement of fasteners
or other building materials.”
(R. 155, Pl.’s Reply at 38.)
In other words,
PrimeSource concedes that the harm it fears does not flow from the Felten
Defendants working at Huttig generally, as long as they are not involved in or able
to influence Huttig’s sales of fasteners or other building materials.
The court
recognizes that that harm of temporary unemployment to these individual
defendants if they were precluded from working at Huttig in any capacity until
their non-compete provisions expire is a real and serious one. Balancing the harms,
the court concludes Felten, Kessler, Kottmeyer, and Sagunsky should be enjoined
from performing work for Huttig that is in any way related to the Huttig-Grip
Division or the sale of fasteners or building materials until their non-compete
covenants expire, or until a resolution of the merits of this case, whichever comes
first. 14 To the extent they remain employed by Huttig in this period, Huttig must
establish a firewall to prevent Felten, Kessler, Kottmeyer, or Sagunsky from doing
any work related to the Huttig-Grip Division, performing any activities related to
the sale of fasteners or other building materials, or having any contact with current
or prospective customers.
Turning to PrimeSource’s requests for relief against the CEO Defendants, the
court finds that the balance of harms weighs against even the more tailored request
The non-compete and non-solicitation provisions applicable to Felten, Kessler,
and Sagunsky will expire on May 17, 2018, and the same provisions applicable to
Kottmeyer will expire on May 18, 2018.
14
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for injunctive relief. With respect to PrimeSource’s request to preclude Huttig from
using any suppliers that Zinman contacted during her first month at Huttig, based
on the evidence presented at the hearing its chances of succeeding on the merits of
its trade secrets or breach of non-disclosure claims related to those suppliers is
quite low.
Given the lack of evidence that Zinman used any confidential
information in identifying or reaching out to suppliers with whom she had past
relationships, there is no demonstrable harm to PrimeSource in allowing Huttig to
continue to work with those suppliers. That is especially true given the abundant
evidence that fastener suppliers often simultaneously service multiple competing
distributors and rarely if ever enter into exclusive contracts with distributors. In
light of that evidence, the harm to Huttig if it is precluded from using certain
suppliers outweighs any harm to PrimeSource. And the public interest here weighs
in favor of promoting on-going free competition in the building products industry.
Nor has PrimeSource shown that an injunction preventing the CEO
Defendants from working within the Huttig-Grip Division pending trial is
warranted. As discussed above, given that Fishbein’s and Furio’s non-solicitation
agreements have expired, injunctive relief tailored to prevent harm from claims
that they breached those agreements is inappropriate. And because the evidence is
so weak with respect to the trade secrets misappropriation and breach of nondisclosure agreements claims against the CEO Defendants, PrimeSource’s burden of
demonstrating harm is higher. See Whitaker, 858 F.3d at 1054. But here, the
evidence suggests that the CEO Defendants can carry on with their duties at Huttig
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without using PrimeSource’s confidential information.
As a point of reference,
PrimeSource’s current CEO arrived at PrimeSource after sitting out a non-compete
agreement he signed with a direct PrimeSource competitor, and despite having
served as the CEO of that competitor, he testified that he is able to fill his role at
PrimeSource without improperly using his former employer’s confidential
information. (Tr. 52, 124, 158-59.) The hearing evidence suggests that the CEO
Defendants can do the same.
And again, the public interest in allowing
professionals to pursue their occupation after sitting out a non-competition
agreement’s term flows in favor of the defendants here. For all of these reasons,
PrimeSource’s request for an injunction targeting Fishbein, Furio, or Zinman is
denied.
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Conclusion
For the foregoing reasons, this court denies the motion for a production
injunction or for injunctive relief preventing David Fishbein, Furio, or Zinman from
working for Huttig or preventing Huttig from working with suppliers Zinman
contacted on its behalf. The motion is further denied to the extent that it seeks any
injunction against Whitehead. The motion is granted to the extent that Huttig is
enjoined from selling products to any of the customers identified on the customer
lists Kessler, Kottmeyer, and Sagunsky created in their first weeks of employment
at Huttig, and Felten, Kessler, Kottmeyer, and Sagunsky are precluded from
working within the Huttig-Grip Division, performing any activities related to the
sale of fasteners or other building materials, or having any contact with current or
prospective customers until their non-competition restrictions expire in May 2018 or
until this case is resolved on the merits, whichever occurs sooner.
ENTER:
____________________________________
Young B. Kim
United States Magistrate Judge
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