CPI Card Group--Colorado, Inc. v. Lehouck

Filing 31

Judge Nathaniel M. Gorton: ENDORSED ORDER entered. MEMORANDUM AND ORDER: "For the reasons stated in the Memorandum, the Court concludes that the plaintiff has demonstrated that 1) it is likely to succeed on the merits of its claim, 2) it will s uffer irreparable harm in the absence of injunctive relief, 3) the balance of hardships is in its favor and 4) there is a fit (or lack of friction) between the injunction and the public interest. See Nieves-Marquez v. Puerto Rico, 353 F.3d 108, 120 (1st Cir. 2003). Accordingly, plaintiff's motion for a preliminary injunction (Docket No. 3 ) is ALLOWED. So ordered."(Moore, Kellyann)

United States District Court
District of Massachusetts
)
CPI CARD GROUP - COLORADO, INC., )
)
Plaintiff,
)
)
v.
)
)
MICHELLE LEHOUCK,
)
)
Defendant.
)
)

Civil Action No.
14-13435-NMG

MEMORANDUM & ORDER
GORTON, J.
This case arises out of an alleged a breach of an
employment confidentiality agreement.

Plaintiff CPI Card Group

- Colorado, Inc. (“CPI”) is a plastic payment card (e.g. credit
card) production company that also provides related services to
its customers.

Defendant Michelle Lehouck (“Lehouck”) is a

former Senior Manager at CPI who was employed at the company
from November, 2007 until May, 2014.
Pending before the Court is the plaintiff’s motion for a
preliminary injunction to preclude Lehouck from continuing to
use CPI’s confidential and proprietary business information in
violation of her Confidentiality Agreement (“Agreement”) with
CPI.

For the reasons that follow, plaintiff’s motion will be

granted, though the requested scope of the preliminary
injunction has been modified.
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III. Background
Plaintiff CPI is a global leader in the plastic payment
card (e.g. credit card) production industry.

Among other

things, it manufactures EMV-enabled payment cards, which are
cards with embedded computer chips that provide a higher level
of security than magnetic-stripe payment cards and are
customizable to specific client needs.1

The major credit card

brands have announced that they will shift liability for
counterfeit fraud onto credit card issuers and merchants who do
not adopt EMV-enabled systems starting on October 1, 2015.

The

EMV-enabled card migration has thus been a lucrative business
opportunity for CPI.

CPI has been required by its current and

prospective customers to execute non-disclosure agreements with
respect to migration proposals and other work performed for
them.
From July, 2013 until her resignation from the company,
Lehouck worked as a Senior Manager for EMV Technologies in CPI’s
Global Strategic Marketing Team.

Throughout her employment at

CPI, Lehouck provided expert support to the EMV sales teams and
was the primary customer contact.

She had access to

confidential information related to customers’ EMV migration
plans, including 1) the identities and contact information of

1

EMV is an acronym resulting from the original developers
Europay, MasterCard and Visa.
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key decision-makers, 2) business, marketing and information
technology plans and 3) project and proposal specifications.

At

CPI, she also had access to the company’s 1) marketing and
pricing of products and services, 2) business plans, 3)
customers and prospective customers, 4) proposals to customers
and prospective customers and 5) the terms of agreements with
customers.
Following her resignation from CPI, Lehouck became the U.S.
EMV Product Director for Bell Identification B.V. (“Bell ID”).
Bell ID is a software company providing mobile payment
solutions.

It supports many financial institutions with respect

to their migration from magnetic strips to EMV chip technology.
Lehouck’s primary role at Bell ID is to develop business for the
company’s EMV data preparation/lifecycle management software.
A.

Lehouck’s Confidentiality Agreement with CPI

At the outset of her employment at CPI, Lehouck signed the
Agreement at issue in this case.

Section 1, titled

“Confidentiality - Trade Secrets,” provided that she shall not
at any time disclose or use CPI’s confidential information and
trade secrets, including the identities and contact information
of CPI’s customers and potential customers, confidential
information on CPI’s products and services and confidential CPI
marketing and pricing information.

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Section 3 of the Agreement, titled “Unfair Competition,”
provided that for a period of one year following the termination
of employment, Lehouck will not directly or indirectly divert,
attempt to divert, solicit, or attempt to solicit any of CPI’s
customers, “including but not limited to those [with] whom [s]he
became acquainted while engaged as an Employee....”

In the

event of a breach, the Agreement provides for injunctive relief
in addition to any other remedy.
B.

Alleged breach of Agreement

CPI alleges that Lehouck violated the Agreement after she
began working for Bell ID.

Plaintiff contends that Lehouck used

confidential CPI information, including customer contact
information, to divert corporate opportunities from CPI and to
sell Bell ID’s EMV-related products and services to CPI’s
customers and prospective customers.

Specifically, CPI alleges

that Lehouck 1) reached out to a CPI employee to obtain contact
information for one of its customers, 2) contacted three of
CPI’s customers and drew on her knowledge of CPI’s confidential
information in an attempt to sell Bell ID’s products to them and
3) continuously solicited one of CPI’s prospective customers and
used her knowledge of CPI’s confidential information to sell
Bell ID’s products, which directly caused CPI to lose that
potential business.

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When CPI’s outside counsel sent Lehouck a cease-and-desist
letter asking her to confirm her intention to abide by the
confidentiality and non-solicitation provisions of the
Agreement, Bell ID’s outside counsel responded by stating that
the Agreement was void and unenforceable under Colorado law.
Furthermore, counsel asserted that the contact information of
the three CPI customers was not protected by trade secret
because the identity of each had been publicly disclosed.
C.

Choice of law

Both parties agree that the Agreement should be interpreted
under Colorado law, in accordance with the choice of law
provision in the Agreement.

There are no public policy reasons

counseling against the application of Colorado law to the
Agreement.
D.

Procedural History

Plaintiff CPI filed the instant lawsuit on August 22, 2014.
It moved for a preliminary injunction on the same day.

The

Court heard argument on the plaintiff’s motion on September 11,
2014.

After hearing argument by each party, the Court indicated

that it was inclined to enter a preliminary injunction to
prevent defendant from disclosing CPI’s trades secrets and
confidential information.

It urged the parties to agree upon a

limited injunction and to submit a joint proposed order by
September 19, 2014.

The parties have been unable to do so.
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IV.

Plaintiff’s Motion for a Preliminary Injunction
A.

Legal Standard

In order to obtain a preliminary injunction, the moving
party must establish
(1) a substantial likelihood of success on the merits,
(2) a significant risk of irreparable harm if the
injunction is withheld, (3) a favorable balance of
hardships and (4) a fit (or lack of friction) between
the injunction and the public interest.
Nieves-Marquez v. Puerto Rico, 353 F.3d 108, 120 (1st Cir. 2003)
(citation omitted).

Out of these factors, the likelihood of

success on the merits “normally weighs heaviest on the
decisional scales.” Coquico, Inc. v. Rodriguez-Miranda, 562 F.3d
62, 66 (1st Cir. 2009).
The Court may accept as true “well-pleaded allegations [in
the complaint] and uncontroverted affidavits.” Rohm & Haas Elec.
Materials, LLC v. Elec. Circuits, 759 F. Supp. 2d 110, 114, n.2
(D. Mass. 2010) (quoting Elrod v. Burns, 427 U.S. 347, 350, n.1
(1976).

The Court may also rely on otherwise inadmissible

evidence, including hearsay, in deciding a motion for
preliminary injunction. See Asseo v. Pan American Grain Co.,
Inc., 805 F.2d 23, 26 (1st Cir. 1986).
B.

Application
1.

Likelihood of Success

CPI maintains that it is likely to succeed on the merits of
its claims because 1) the non-solicitation and confidentiality
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provisions in the Agreement are enforceable under Colorado law,
2) CPI’s confidential information constitutes trade secrets
under Colorado law and 3) Lehouck has breached her Agreement
with CPI.

All three arguments are contested by Lehouck.
a.

Direct competitors

As a preliminary matter, Lehouck argues that CPI cannot
show a likelihood of success on the merits because CPI and Bell
ID are not competitors.

Instead, defendant claims that card

manufacturers like CPI are Bell ID’s potential customers.

While

CPI is a payment card manufacturer, Bell ID is exclusively a
software developer for devices that interface with EMV-enabled
payment cards, among other applications.

Lehouck asserts that

there is no meaningful competition even though CPI and Bell ID
serve the same kinds of customers.
CPI has explained, both at oral argument and in an
affidavit, that the companies are direct competitors in many
areas within the EMV migration marketplace.

CPI and Bell ID are

direct competitors with respect to 1) EMV-enabled credit and
debit card mobile payment solutions, 2) data preparation
services, 3) personalization services, 4) key management
solutions, which is the process of creating and maintaining keys
for encrypted transport and storage of data, 5) secure trusted
service manager services, which enables secure transmission of

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data and 6) EMV consulting services to customers throughout the
EMV migration process.
The Court concludes that CPI has demonstrated that the
businesses do overlap significantly and that CPI and Bell ID are
direct competitors in many respects.
b.

Enforceability of the Agreement

Under Colorado law,
[a]ny covenant not to compete which restricts the
right of any person to receive compensation for
performance of skilled or unskilled labor for any
employer shall be void, but this subsection [] shall
not apply to...(b) Any contract for the protection of
trade secrets....
Colo. Rev. Stat. § 8-2-113(2).

An agreement not to solicit

customers is considered a form of covenant not to compete.
Saturn Sys., Inc. v. Militare, 252 P.3d 516, 526 (Colo. App.
2011) (citation omitted).

Such a provision is enforceable so

long as 1) its purpose is to protect the employer’s trade
secrets and 2) is reasonably limited in time and geographic
scope. Id.
Colorado courts have looked to the preamble and the
substantive provisions of the contract to determine whether a
restriction was drafted with the purpose of protecting trade
secrets. See Haggard v. Spine, 2009 WL 1655030, at *5 (D. Colo.
June 12, 2009).

In the “RECITALS” section of the Agreement, the

defendant acknowledged that CPI

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uses information and data which it has developed or
acquired at great expense and effort....It is important to
[CPI] that such information and data be solely for the
benefit of [CPI]...and shall remain confidential at all
times during and after the term of Employee’s employment...
Section 1 of the Agreement, titled “Confidentiality - Trade
Secrets,” is dedicated to describing the proprietary information
that the document seeks to protect.

Moreover, there are no

other provisions in the Agreement regarding unrelated subjects,
such as job responsibilities or salary.

The language in the

Agreement signed by Lehouck indicates that the purpose of the
contract was to protect trade secrets.
The Court concludes that the Agreement also meets the
second prong of the trade secret statutory exception because it
is reasonably limited in scope.

Section 3, titled “Unfair

Competition,” precludes Lehouck from soliciting CPI’s customers
for just one year, which is “well within the realm of
enforceable agreements.” Haggard, 2009 WL 1655030, at *10; see
also Taff v. Brayman, 518 P.2d 298 (Colo. App. 1974)(upholding a
two-year noncompetition restriction).
Furthermore, the terms of the Agreement do not limit
defendant from working for any other company, so long as she
does not engage in activity that would call on her “to use any
of [CPI’s] Confidential Information or trade secrets.”

Although

the Agreement lacks a geographic limitation, CPI contends that
the language is justified due to the global nature of companies
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involved in the EMV migration business and the defendant’s
contact with customers that have a global reach.

Colorado

courts, while weary of restrictive covenants without geographic
limitations, have not found it to be dispositive and have been
able to interpret those provisions more narrowly without deeming
them invalid under the statute. See, e.g., Haggard, 2009 WL
1655030, at *10 (“The fact that the restrictive covenants meet
the statutory exception does not end the analysis....As such,
the worldwide restriction on solicitation is unreasonably
broad.”)

Following the example set in Haggard, this Court will

also interpret the non-solicitation provision more narrowly, to
preclude Lehouck from contacting only those customers with whom
she had actual contact during her employment at CPI, rather than
preventing her from soliciting all CPI customers and potential
customers. See id. at *11.
Having determined that the Agreement is enforceable under
Colorado law, the Court will now proceed to consider whether
Lehouck utilized information that constitutes trade secrets, in
violation of her Agreement.
c.

Trade secrets

The Colorado Uniform Trade Secrets Act defines a trade
secret as:
the whole or any portion or phase of any scientific or
technical information, design, process, procedure,
formula,
improvement,
confidential
business
or
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financial information, listing of names, addresses, or
telephone numbers or other information relating to any
business or profession which is secret and of value.
To be a “trade secret” the owner thereof must have
taken measures to prevent the secret from becoming
available to persons other than those selected by the
owner to have access thereto for limited purposes.
Colo. Rev. Stat. § 7-74-102(4).

Colorado courts consider a

number of factors in determining whether information warrants
trade secret protection.

These factors include:

1) the extent to which the information is known
outside the business, 2) the extent to which it is
known to those inside the business, i.e., by the
employees, 3) the precautions taken by the holder of
the trade secret to guard the secrecy of the
information, 4) the savings effected and the value to
the holder in having the information as against
competitors, 5) the amount of effort or money expended
in obtaining and developing the information, and 6)
the amount of time and expense it would take for
others to acquire and duplicate the information.
Porter Indus., Inc. v. Higgins, 680 P.2d 1339, 1341 (Colo. App.
1984).
CPI asserts that its confidential information, including 1)
the identities and contact information of key decision-makers,
2) business, marketing and information technology plans and 3)
project and proposal specifications, constitutes trade secrets.
CPI notes that it has invested significant resources in
developing and marketing its EMV-related technology.

As a

result of its efforts, it has aggregated significant amounts of
information on its customers’ EMV-migration plans.

CPI has

taken measures to protect such information, including requiring
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employees to sign Confidentiality Agreements, requiring
employees to relinquish all CPI property upon the termination of
their employment and maintaining extensive external and internal
security systems.
Lehouck disputes that the terms describing CPI’s trade
secrets and confidential information in the Agreement meet the
requisite level of particularity necessary for trade secret
protection.

She asserts that the descriptions in the Agreement,

with the possible exception of identities of customers and their
key decision-makers, are overly vague and therefore the nonsolicitation provision of the Agreement is unenforceable under
Colorado law.
Lehouck’s assessment is unpersuasive.

The Agreement lists

specific areas of information that constitute CPI’s trade
secrets, including
the names, addresses, telephone numbers of customers,
their buying habits, terms of sale extended to
customers, including credit terms, if any, or other
practices
of
any
of
Company’s
customers
[and]
Company’s marketing methods, related information and
the costs thereof.
A company’s confidential information consisting of “client
lists, customer contracts, pricing information, detailed debtor
information, client information and customer log-in codes” has
been found to qualify as trade secrets. Saturn Sys., 252 P.3d at

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527.

CPI describes its trade secrets in a similar manner and

thus they do not appear to be overly vague.
The defendant also contends that the names of a number of
CPI customers, including the ones she contacted, are not trade
secrets because they were publicly disclosed as customers or
otherwise publically known to be potential EMV migration
customers.

For example, CPI referred to Interactive

Communications International (“InComm”) as one of its
“partners.”

The same relationship was disclosed on the

Paybefore.com website on January 20, 2014 in which CPI was
referred to as a “partner” of InComm.

Lehouck also asserts that

the members of the EMV Migration Forum, a group created by the
Smart Card Alliance in July, 2012 to address issues that require
cooperation and coordination to introduce secure EMV contact and
contactless technology in the United States, are publicly known
and therefore she should not be restrained from contacting the
12 CPI’s customers participating in the Forum.
Lehouck alleges that Colorado has found that the
intermittent provision of customer leads and other shared
customer information is not a trade secret, even if the entirety
of customer information contained in a database might be a trade
secret. Frontrange Solutions USA, Inc. v. Newroad Software,
Inc., 505 F. Supp. 2d 821, 836 (D. Colo. 2007).

In Frontrange,

the company seeking to protect its customer database through
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trade secrecy had prominently advertised “the identities of many
of its customers on its website as a marketing tool,” had
permitted “free sharing of customer information at its user
group meetings and at supplier-sponsored events,” and others
could “obtain this information without restriction at trade
shows.” Id. at 837.
However, CPI is distinguishable because it has not
advertised its customer relationships to the extent publicized
by the plaintiff in Frontrange.

Listing a company as a

“partner” does not necessarily indicate that the company is a
customer of CPI.

CPI has also taken precautionary measures to

protect its confidential information through maintaining
extensive external and internal security systems, requiring
employees to sign Confidentiality Agreements and requiring
employees to relinquish all CPI property upon termination of
their employment.
More importantly, throughout her years of employment at
CPI, Lehouck learned not only the identities and contact
information of CPI’s customers, but also their strategies,
buying preferences, pricing requirements, technical
specifications and long-term plans.

No public listing would

give a salesperson that level of insight. See Haggard, 2009 WL
1655030, at *9 (rejecting the argument that customer contact
information could not be trade secret simply because it was
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obtainable from the internet and finding that relationships with
customers and knowledge of their business preferences and
primary contacts that were developed through the employment were
protected as trade secrets).

Thus, the confidential information

categories enumerated in the Agreement, including customer
information, constitute trade secrets.
d.

Breach of the Agreement

CPI alleges that Lehouck initiated contact with three CPI
customers and that she used her knowledge of CPI’s confidential
information to divert business away from CPI.

Plaintiff

informed the Court at the September, 2014 hearing that in
addition to using her knowledge of the identities of and contact
information for the customers, Lehouck also relied on her
acquired knowledge of the customers’ needs and concerns during
the EMV migration in her attempt to lure them away to Bell ID.
CPI provided examples of two emails written by Lehouck to CPI
customers in which she urged them to conduct “side by side”
comparisons of a CPI product and a Bell ID product.
Lehouck disputes that she used any of CPI’s confidential
information during her contacts with the customers.

She asserts

that none of the emails she sent revealed any trade secrets
belonging to CPI.

The evidence brought forth by the plaintiff,

however, suggests otherwise.

Even if she did not explicitly

reveal confidential information in the emails, Lehouck
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necessarily relied on the knowledge that she developed while
employed at CPI in order to address the customers’ concerns and
attempt to dissuade them from purchasing the CPI product in
favor of the Bell ID product.
The Court concludes that plaintiff is likely to prove that
the defendant improperly used CPI confidential information
following her resignation from CPI.

That is so because Lehouck

is unlikely to be able to separate out her intimate knowledge of
CPI’s confidential information and trade secrets in her attempt
to sell Bell ID’s products to the same customers.
2.

Remaining factors
a.

Irreparable harm

Irreparable injury is “a substantial injury that is not
accurately measureable or adequately compensable by money
damages.” Ross-Simons of Warwick v. Baccarat, Inc., 102 F.3d 12,
19 (1st Cir. 1996).

Plaintiffs alleging irreparable injury must

show more than a “tenuous or overly speculative forecast of
anticipated harm.” Id.

Examples of irreparable injuries include

loss of incalculable revenue and harm to goodwill or reputation.
Id. at 19-20.

In the preliminary injunction context, the First

Circuit Court of Appeals measures irreparable harm
on a sliding scale, working in conjunction with a
moving party’s likelihood of success on the merits,
such that the strength of the showing necessary on
irreparable harm depends in part on the degree of
likelihood of success shown.
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Braintree Labs, 622 F.3d at 42-43 (internal quotation marks and
citations omitted).
CPI asserts that there is a significant risk of irreparable
harm if the Court does not grant the preliminary injunction due
to the October 1, 2015 deadline imposed by major credit card
payment brands for credit card issuers and merchants to upgrade
their systems to accept EMV-enabled cards.

Once that deadline

has passed, many of the major credit card issuers and merchants
will already have their EMV technologies in place and the
opportunity to compete for these customers will have passed.
The unique time-sensitive nature of the EMV migration makes
potential damages suffered by CPI difficult to calculate.
Lehouck responds that even if the Court finds that the
plaintiff has shown a likelihood of success on the merits, CPI
will not suffer irreparable harm if it does not receive a
preliminary injunction because it can receive an adequate remedy
at law in the form of pecuniary damages for lost profits after
trial.
Defendant’s argument fails to acknowledge that a loss of
confidentiality of trade secrets and loss of competitive
position does not merely decrease a company’s profits.

It

affects the company’s position in the marketplace and its
goodwill with customers which are difficult to quantify

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monetarily.

As such, CPI is likely to be able to demonstrate

that it will suffer irreparable harm if defendant is not
enjoined from violating her Agreement.
b.

Balance of harms

Pursuant to the terms of the Agreement, the restrictions
placed on the defendant end one year after separation.

Any

injunction imposed, therefore, has a finite termination date.
Although defendant would be precluded from soliciting a limited
number of CPI’s customers until that date, there are numerous
other business prospects, many of which are listed as members in
the EMV Migration Forum.
c.

Public interest

The fourth element requires plaintiff to show that entry of
a preliminary injunction would not be adverse to the public
interest.

Although Colorado disfavors noncompetition

agreements, the Colorado legislature has created an exception to
the prohibition when the agreement relates to the protection of
trade secrets. See Colo. Rev. Stat. § 7-74-102(4).

Thus, a

preliminary injunction enforcing the confidentiality and nonsolicitation provisions of the Agreement does not violate the
public interest.
C.

Security under Fed. R. Civ. P. 65(c)

A movant for a preliminary injunction must give “security
in an amount that the court considers proper to pay the costs
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and damages sustained by any party found to have been wrongfully
enjoined or restrained.” Fed. R. Civ. P. 65(c).

At the

September, 2014 hearing, the plaintiff suggested a security in
the amount of $10,000 while the defendant suggested a range of
$50,000 to $100,000.

Those numbers were calculated based on a

representation that defendant earns about $150,000 per year.
Following the hearing, the defendant submitted a supplemental
memorandum in opposition to the plaintiff’s motion for
preliminary injunction in which she requested a security of
$840,000.

She derives that figure based on the assumption that

she would receive a maximum commission on sales to all 23
companies that CPI seeks to enjoin Lehouck from contacting.
Court finds Lehouck’s assumption to be unrealistic and deems
$50,000 to be an appropriate security.

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The

ORDER
For the reasons stated in the Memorandum, the Court
concludes that the plaintiff has demonstrated that 1) it is
likely to succeed on the merits of its claim, 2) it will suffer
irreparable harm in the absence of injunctive relief, 3) the
balance of hardships is in its favor and 4) there is a fit (or
lack of friction) between the injunction and the public
interest. See Nieves-Márquez v. Puerto Rico, 353 F.3d 108, 120
(1st Cir. 2003).

Accordingly, plaintiff’s motion for a

preliminary injunction (Docket No. 3) is ALLOWED.
So ordered.
/s/ Nathaniel M. Gorton
Nathaniel M. Gorton
United States District Judge
Dated October 8, 2014

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