Southwest Dealer Services, Inc. v. Little
Filing
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ORDER denying 2 motion for TRO. Signed on 7/29/11 by District Judge Ortrie D. Smith. (Wolfe, Steve)
IN THE UNITED STATES DISTRICT COURT FOR THE
WESTERN DISTRICT OF MISSOURI
WESTERN DIVISION
SOUTHWEST DEALER SERVICES, INC.,
Plaintiff,
vs.
JESSE LITTLE,
Defendant.
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Case No. 11-0711-CV-W-ODS
ORDER AND OPINION DENYING PLAINTIFF’S MOTION
FOR TEMPORARY RESTRAINING ORDER
Pending is Plaintiff’s Motion for Temporary Restraining Order. A hearing was
held on July 28, 2011. Both sides also presented written arguments in support of their
respective positions. After considering these matters, the Court hereby denies the
motion (Doc. # 2).
I. BACKGROUND
Plaintiff is a Kansas Corporation with its principal place of business in Kansas.
Plaintiff is in the business of selling after-market products (such as vehicle service
contracts, paint protection, and security devices) to car dealerships in Nebraska, Iowa,
Kansas, Missouri, and Northeast Oklahoma. Defendant is a Missouri citizen who
worked for Plaintiff as a sales representative until he was terminated on June 29 or 30,
2011.
A. The Recordings
Plaintiff conducted monthly meetings attended by its sales representatives
(including Defendant), the Office Manager (Cathy Peirceall), and the President (Bill
Wilson). Topics discussed during these meetings included (but were not necessarily
limited to) matters related to the cost and pricing of products sold by Plaintiff, sales
representative commissions, and other matters related to customers. Defendant
recorded sixty to eighty hours of these meetings; he testified he did this because he felt
a need to have some sort of record because he previously had disputes with Wilson
about the instructions and directives issued during these meetings.
After being terminated, Defendant e-mailed Steve Alderson, Plaintiff’s majority
owner,1 advising him that he had made these recordings. The e-mail included an
excerpt from one the recordings that lasted approximately thirty-five seconds. The
recording is extremely difficult to understand, but according to Wilson it is his voice that
can most plainly be heard, and he is making a statement to the effect that Alderson
does not know certain unidentified numbers and that he makes them up.
Plaintiff also sent an excerpt from the recordings to the Finance Manager (J.S.)
at Lee’s Summit Mitsubishi. The excerpt sent to J.S. was approximately one minute
and twenty-two seconds, and is even more unintelligible than the excerpt sent to
Alderson. Wilson testified that the most intelligible voice is his, and he admitted it
contains unflattering comments he made about J.S., some of which were based on
information provided by Lee’s Summit Mitsubishi’s owner, Corey Matt. Plaintiff testified
he sent the audio excerpt because he had been friends with J.S. for a long time. The
Court is not convinced Plaintiff’s motivations were so altruistic: he did not divulge
Wilson’s statement to his friend at the time they were made, but within two weeks of
being fired he suddenly found it necessary to advise his friend of Wilson’s comments.
However, the Court also does not believe Defendant was motivated by animus toward
Plaintiff; at worst, the Court believes Defendant was motivated by animosity toward
Wilson, whom Defendant clearly did not like and did not get along with. Wilson is not a
party to this suit.
Stubbs played the excerpt for Matt, who was upset not only by the comments but
by the fact that Wilson divulged information Matt provided about J.S. in confidence.
Wilson’s statements have caused Matt to “reconsider” his dealership’s relationship with
1
Alderson owns 55% of Plaintiff’s stock; Wilson owns the other 45%.
2
Plaintiff; they are still doing business, but he is entertaining offers from Plaintiff’s
competitors. When asked whether a decision to change to another vendor would be
based on anything other than financial considerations, Matt’s answer was not entirely
clear.2 Other than what has been said about Lee’s Summit Mitsubishi, there is presently
no reason to believe Defendant has played a part in any other customer’s decision to
sever its relationship with Plaintiff.
After being terminated, Defendant formed a company called Premier Dealer
Services. He then contacted at least one of the vendors that supplied the aftermarket
parts/services sold by Plaintiff (IAS) in an attempt to become a dealer of its
products/services. Plaintiff confirmed that he is trying to work in this industry.
There is no evidence that Defendant has played any portions of the recordings
for anyone else, and Defendant denies doing so. This means that approximately two
minutes of the sixty to eighty hours have been divulged. Plaintiff does not know what is
on the rest of the tapes; for that matter, neither does the Court. Defendant also testified
that he has no plans to play any other portions for anyone else, and agreed that he no
longer needs them to protect himself. While he has not offered to transfer them to
Plaintiff, he has no objection to doing so.
B. Financial Information
Evidence was also presented regarding Defendant’s access to confidential
financial information. The dealerships that comprise Plaintiff’s customers may have
provided Plaintiff with documents revealing their costs (and other financial information),
but the dealerships are not parties to this case. Moreover, it is not clear how secret the
information is: dealerships seem willing to provide this information to vendors (and
potential vendors, like Plaintiff) in order to negotiate acceptable terms for after-market
products.
2
The Court does not insinuate that Matt was evasive. The Court’s impression is
that Matt had not considered the issue before being asked, and did not really know what
he would do.
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This leads to Plaintiff’s allegation that Defendant has access to Plaintiff’s cost
information, which constitutes trade secrets that Defendant cannot use. The Court is
not persuaded that he has any such information. The Court also believes the
information is too voluminous for Defendant to have memorized.
Plaintiff also contended Defendant could calculate Plaintiff’s costs based on his
pay stubs because the commission is based on percentages of Plaintiff’s profit.
However, the profit is widely varied because different prices were charged to different
dealers for different products, and those prices also varied for each car model sold by
each dealer. For Plaintiff’s contention to be correct, its employees’ pay stubs had to
record the commission (1) for each product sold (2) for each model of car (3) on a
dealer-by-dealer basis. The Court finds it hard to believe this much detail was provided
on the pay stubs. The Court also notes Plaintiff – whose claim depends on this fact –
did not present the Court with a sample pay stub to demonstrate the calculation could
be performed.
II. DISCUSSION
The Complaint asserts two causes of action: Count I asserts a claim for tortious
interference with Plaintiff’s contracts or business expectancies, and Count II asserts a
claim for misappropriation of trade secrets. Count III does not assert a cause of action
but only seeks injunctive relief; specifically, it seeks an injunction (1) prohibiting from
disclosing or otherwise using Plaintiff’s trade secrets, (2) limiting the extent to which
Defendant can work in the industry, and (3) requiring Defendant to return the audio
recordings to Plaintiff. In determining whether a plaintiff should be granted a temporary
restraining order, this Court must weigh “(1) the threat of irreparable harm to the
movant; (2) the state of the balance between this harm and the injury that granting the
injunction will inflict on other parties litigant; (3) the probability that movant will succeed
on the merits; and (4) the public interest.” Dataphase Sys., Inc. v. C.L. Sys., Inc., 640
F.2d 109, 113 (8th Cir. 1981) (en banc).
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A.
Before addressing Plaintiff’s claims, it is necessary to address an argument
raised by Defendant; specifically, that Plaintiff’s claims are covered by an agreement to
arbitrate. On May 7, 2007, Defendant (but, apparently, not Plaintiff) signed an
Arbitration Acknowledgment, pursuant to which Plaintiff
agrees that any dispute, claim or controversy concerning his employment
or the termination of his employment or any dispute, claim or controversy
arising out or relating to any interpretation, construction, performance or
breach of this Agreement, shall be settled by binding arbitration.
Assuming this agreement is binding on the parties, the Court holds it is not applicable to
the present case. The claims in this case do not concern terms, conditions, or other
matters related to his employment or termination; they concern matters that occurred
after his termination and that are disconnected from his employment. The only real
connection between this case and Defendant’s employment is the fact that Defendant
was once Plaintiff’s employee – which is not enough to bring the suit within the
arbitration agreement’s scope. The situation might be different if Plaintiff claimed
Defendant stole information while he was employed (because then it would be a claim
concerning his employment), but this claim is not made. While the recordings were not
authorized, there is not even a claim that the act of recording sales meetings (or
recording Wilson specifically) was independently wrongful.
B.
For ease of analysis, the Court will analyze a “phantom claim” first. Plaintiff’s
request for equitable relief includes a request to limit Defendant’s efforts to compete
with Plaintiff. Evidence was presented, and the argument was made, that Defendant
should be prevented from competing with Plaintiff. However, neither Count I nor Count
II would justify such relief. Moreover, there is no evidence Defendant signed a noncompete agreement, much less what the terms of that agreement might have been.
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Given that covenants not to compete are to be strictly construed against the employer,
e.g., Eastern Distributing Co. v. Flynn, 567 P.2d 1371, 1376 (Kan. 1977),3 these
evidentiary and procedural failings are fatal to Plaintiff’s request for an order limiting
Defendant’s ability to work in the industry. The Court cannot conclude Plaintiff is likely
to succeed on the merits of such a claim, and the public interest is not served by
enforcing a nonexistent agreement.
C.
While Defendant may be free to compete with Plaintiff, he may not utilize trade
secrets to do so. Customer lists can constitute trade secrets, e.g., Progressive
Products, Inc. v. Swartz, 205 P.3d 766, 773 (Kan. Ct. App. 2009), but they do not
automatically qualify as trade secrets. To be trade secrets, they (1) must derive
economic value from not being generally known, (2) must be the subject of efforts to
maintain their secrecy, and (3) must not be readily ascertainable. K.S.A. § 60-3320(4).
Wilson testified that the identity of Plaintiff’s customers is readily ascertainable and no
efforts are made to keep them confidential. Therefore, the identity of Plaintiff’s
customers does not appear to be a trade secret. Plaintiff’s cost and pricing information
might qualify as trade secret, but as noted earlier the Court does not believe Defendant
possesses this information.
Wilson explained that he believed the fact that he developed the relationships
with the dealerships, and Defendant merely benefitted from those relationships by virtue
of working for Plaintiff. This may be true; however, those relationships do not qualify as
trade secrets. Those relationships may justify enforcement of a covenant not to
compete – but, as stated in subsection II.B, there is no such covenant. These
observations persuade the Court that Plaintiff is not likely to succeed on the merits of its
trade secret claim.
3
Plaintiff suggests, and the Court agrees (at least preliminarily) that Kansas law
governs this dispute.
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D.
The tort of interference with existing or potential business relationships requires
proof establishing
(1) the existence of a business relationship or expectancy with the
probability of future economic benefit to the plaintiff; (2) knowledge of the
relationship or expectancy by the defendant; (3) that, except for the
conduct of the defendant, plaintiff was reasonably certain to have
continued the relationship or realized the expectancy; (4) intentional
misconduct by defendant; and (5) damages suffered by plaintiff as a direct
or proximate cause of defendant's misconduct.
Burcham v. Unison Bancorp, Inc., 77 P.3d 130, 151 (Kan. 2003). There is no indication
Defendant has, or will, commit this tort. Even if one assumes Defendant’s actions will
someday cause Lee’s Summit Mitsubishi to sever its relationship with Plaintiff, there is
no likelihood of success because, under Kansas law, making truthful statements or
providing truthful information cannot support this tort. Cohen v. Battaglia, 202 P.3d 87,
98-99 (Kan. Ct. App. 2009). Wilson does not deny that the recording of his statements
about J.S. accurately reflects what he said, so the fact that Defendant sent those
statements to J.S. cannot constitute tortious interference with Plaintiff’s business
relationship with Lee’s Summit Mitsubishi.4 Even if truthful information could form the
basis for the tort, Defendant appears to have a legitimate business justification for
interfering with Plaintiff’s business relationships: he wants to compete for Plaintiff’s
business (which is permitted in the absence of a covenant not to compete). Turner v.
Halliburton Co., 722 P.2d 1106, 1117 (Kan. 1986). For these reasons, the Court does
not believe Plaintiff is likely to succeed on the merits of this claim.
E.
4
Obviously, sending the excerpt to Alderson is of no legal effect: Defendant
cannot interfere with the relationship between Plaintiff and Plaintiff’s majority owner.
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The Court recognizes its conclusions are based on an early presentation of the
facts, and its observations do not represent the final word on these matters. However,
the Court must decide whether to grant the TRO based on what the parties have
presented, and the Record so far is not favorable to Plaintiff. In light of the unlikelihood
of Plaintiff’s success on any of its claims, none of its requests for injunctive relief appear
justified. This leads to another conclusion relevant to the Dataphase factors: there also
does not seem to be a threat of harm, much less irreparable harm, from anything
Defendant may do in the future – at least, no harm for which a remedy exists.
The Court acknowledges the possibility that the recordings contain some
confidential information. Even though Defendant contends he will not divulge the
contents of the recordings to anyone else, an order insuring the recordings are not
divulged to third parties is appropriate. Such an order works no hardship on Defendant
in light of his stated intent to not play the tape, his admission that he does not need
them any longer, and his statement that he does not oppose surrendering the tapes.
Such an order is also an appropriate means for insuring any trade secrets that were
recorded are not divulged. Accordingly, on or before the close of business on August 2,
2011, Defendant is instructed to deliver all copies, originals, and transcripts of the
recordings to the Court. In the meantime, Defendant is prohibited from playing the
recordings for anyone and from displaying any transcripts to anyone. In all other
respects, Plaintiff’s request for a TRO is denied.
IT IS SO ORDERED.
/s/ Ortrie D. Smith
ORTRIE D. SMITH, SENIOR JUDGE
UNITED STATES DISTRICT COURT
DATE: July 29, 2011
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