Juergensen Defense Corp. et al v. Carleton Technologies, Inc.

Filing 35

ORDER granting a hearing on plaintiff's motion for injunctive relief as to plaintiff's requests to enjoin the defendant from using, disclosing or possessing plaintiff's proprietary information, but denying the motion for injunctive relief in all other respects. Signed by Hon. Richard J. Arcara on 7/20/2009. (JMB) Modified on 7/21/2009 (JMB).

UNITED STATES DISTRICT COURT W ESTERN DISTRICT OF NEW YORK

JUERGENSEN DEFENSE CORP. and JUERGENSEN MARINE INC., Plaintiffs, D E C IS IO N AND ORDER 0 8 -C V - 9 5 9 A

v.

CARLETON TECHNOLOGIES, INC., Defendant.

IN T R O D U C T IO N O n December 30, 2008, plaintiffs commenced this action alleging breach of a n implied-in-fact contract, breach of a Non-Disclosure Agreement ("NDA") e n te r e d in 2007, unjust enrichment, quantum meruit, promissory estoppel, breach o f contract through a failure to remit payment of invoices, common-law d e fa m a tio n , false advertising and trade disparagement, and misappropriation of tra d e secrets. Along with the complaint, plaintiffs filed a motion for a preliminary in ju n c tio n seeking the following forms of injunctive relief (Docket No. 5 at 30­31): (1 ) D e fe n d a n t [shall] be enjoined from substituting Plaintiffs' digital e le c tro n ic rebreather controllers with the digital electronic rebreather c o n tro lle rs of third-parties or Defendant's own controllers in c o n n e c tio n with contracts for the upgrade, maintenance, or delivery o f rebreathers to the U.S. Navy;

(2 )

D e fe n d a n t [shall] be enjoined from using, disclosing, or revealing any c o n fid e n tia l and proprietary information belonging to Plaintiffs, in c lu d in g , but not limited to, Plaintiffs' trade secrets in its schematics u s e d to create digital electronic rebreather controllers;

(3 )

D e fe n d a n t [shall] be enjoined from making false and/or misleading s ta te m e n ts concerning Plaintiffs' digital electronic rebreather c o n tro lle rs , or the design, manufacture, or quality thereof;

(4 )

T h a t Defendant be required to undertake corrective measures for the fa ls e statements and misrepresentations made by Defendant c o n c e rn in g Plaintiffs and their digital electronic controller products, in c lu d in g but not limited to corrective advertising, and take any a c tio n s necessary to remedy and prevent any erroneous impression b y the trade or public concerning the nature, characteristics or q u a litie s of Plaintiffs' products arising from Defendant's statements, in c lu d in g but not limited to issuance of written correspondence re tra c tin g Defendant's false statements and misrepresentations m a d e to the U.S. Navy;

(5 )

D e fe n d a n t [shall] return to Plaintiffs any information or materials (s u c h as schematics) belonging to Plaintiffs which are in Defendant's p o s s e s s io n or under Defendant's control, in any format whatsoever (p a p e r, electronic, or otherwise) and to provide certification that 2

D e fe n d a n t has retained no other materials or copies of materials in its possession or under its control; (6 ) D e fe n d a n t [shall] immediately preserve any information relating to th e claims at issue in this litigation; (7) A n expedited discovery timeline [shall] be set so that this matter may q u ic k ly proceed to resolution;1 and (8 ) A hearing be set for the Court's consideration on entering a p re lim in a ry injunction.2 T h e purpose of this Decision and Order is to determine whether a hearing w ill be necessary for each of the above requests for relief in plaintiffs' motion.

B AC K G R O U N D T h is case concerns a piece of diving equipment called an Underwater B re a th in g Apparatus ("UBA"), also known as a "rebreather." A rebreather is a b a c k p a c k -lik e device that delivers oxygen during underwater diving. Like a SelfC o n taine d Underwater Breathing Apparatus ("SCUBA"), rebreathers allow divers to remain underwater for extended periods of time. Rebreathers are more e ffic ie n t than SCUBA gear, however, because they feature a closed air circuit that

Because expedited discovery already has occurred in this case, this re q u e s t is denied as moot.
2

1

T h is request will be considered in the context of plaintiffs' other requests. 3

re c yc le s exhaled air. Exhaled air still contains a significant amount of oxygen. In S C U B A gear, that oxygen is lost when divers exhale the air into the surrounding w a te r. In a rebreather, exhaled air passes through a closed-circuit system that re m o ve s carbon dioxide, restores consumed oxygen, and presents the air to the d ive r again for inhalation. A device called a controller helps divers regulate the le ve ls of oxygen and carbon dioxide in the air circulating through the rebreather. D e fe n d a n t is a manufacturer of rebreathers. Since approximately the 1 9 8 0 s , defendant has made and maintained rebreathers for the Navy under c o n tra c ts awarded to it. For years, defendant's rebreathers featured mechanical c o n tro lle rs . In approximately 2002, the Navy issued revised specifications for re b re a th e rs that required digital electronic controllers. Around 2003, defendant a n d plaintiffs began working together to develop digital electronic controllers that w o u ld work with defendant's rebreathers and meet Navy specifications. Plaintiffs a re corporations that specialize in the development of rebreather technology, in c lu d in g digital electronic controllers. T h e working relationship that plaintiffs and defendant developed over the n e xt five years entailed a number of different activities. Defendant, the only party in this case who had a formal contractual relationship with the Navy, would advise p la in tiffs regularly about specifications that the Navy set for its rebreathers. Plaintiffs maintain that they developed at least 12 different versions of digital e le c tro n ic controllers as the Navy modified these specifications. Plaintiffs 4

d e ve lo p e d new hardware and software in response to the Navy's specifications. Plaintiffs spent many hours in product design, development, and testing. Plaintiffs had many meetings during the course of the working relationship with d e fe n d a n t's employees and potential customers, including representatives from th e Navy and NATO. Plaintiffs also underwent audits from defendant and the N a vy of the equipment that it was developing with defendant. In 2004 and 2007, th e parties signed NDAs regarding technology that plaintiffs were developing for d e fe n d a n t. The 2004 NDA contained the following merger clause: T h is Agreement constitutes the entire understanding between the P a r tie s and supersedes all previous understandings, agreements, c o m m u n ic a tio n s , and representations, whether written or oral, c o n c e rn in g the treatment of proprietary information. (D o c k e t No. 1-2 at 5.) T h e 2007 NDA contained a nearly identical merger clause: T h is Agreement constitutes the entire understanding between the p a rtie s and supersedes all other agreements express or implied b e tw e e n the parties regarding disclosure of the Confidential In fo r m a tio n . (Id . at 11.) T h e s e merger clauses concerned only the disclosure of proprietary in fo rm a tio n . The parties never reduced any other aspect of their working re la tio n s h ip to writing. In 2007, the relationship between the parties began to deteriorate. That ye a r, defendant received two additional Navy contracts for rebreathers fitted with d ig ita l electronic controllers. The parties began to work together toward fulfilling 5

th e s e new contracts. Sometime that same year, plaintiffs began to invoice d e fe n d a n t $9,129.05 per controller, a higher amount that reflected additional c o s ts for research and new materials. Plaintiffs maintain that defendant's view of th e ir controllers changed after the new contracts and the new invoicing. According to plaintiffs, defendant started raising concerns about the quality of p la in tiffs ' controllers despite prior approval and endorsement. Defendant c o n te n d s that any prior approval concerned preliminary review of plaintiffs' c o n tro lle r s and did not reflect pre-production testing. By approximately August 2 0 0 8 , defendant deemed plaintiffs' controllers unfit for military applications. The re la tio n s h ip between the parties ceased around that time. Plaintiffs claim that th e y became aware in November 2008 that defendant had made allegedly d e fa m a to ry statements to the Navy about the quality of their controllers. Plaintiffs n o w express concern that the timetable for delivery of rebreathers under d e fe n d a n t's newest Navy contracts implies an intent to disclose plaintiffs' p ro p rie ta ry technology for digital electronic controllers. That is, defendant a lle g e d ly does not have time to deliver rebreathers with digital electronic c o n tro lle rs unless it takes the technology that plaintiffs developed over five years a n d either uses it internally or discloses it to another company. P la in tiffs commenced this action on December 30, 2008, asserting claims fo r breach of an implied-in-fact contract, breach of the 2007 NDA, unjust e n ric h m e n t, quantum meruit, promissory estoppel, breach of contract through a 6

fa ilu re to remit payment of invoices, common-law defamation, false advertising a n d trade disparagement, and misappropriation of trade secrets. That same day, p la in tiffs filed a preliminary injunction motion seeking the forms of relief quoted a b o ve in the Introduction. On April 2, 2009, the parties agreed to a schedule of limited discovery in c o n n e c tio n with the pending motion. The parties also agreed to submit s u p p le m e n ta l briefing to address this Court's authority to grant some or all of the re lie f requested. The Court held oral argument on the supplemental briefing on J u n e 24, 2009.

D IS C U S S I O N S ta n d a r d for Preliminary Injunction "In order to obtain a preliminary injunction, a party must demonstrate: 1 ) that it is subject to irreparable harm; and 2) either a) that it will likely succeed o n the merits or b) that there are sufficiently serious questions going to the merits o f the case to make them a fair ground for litigation, and that a balancing of the h a rd s h ip s tips `decidedly' in favor of the moving party." Genesee Brewing Co., In c . v. Stroh Brewing Co., 124 F.3d 137, 142 (2d Cir. 1997) (citations omitted). Additionally, "if a preliminary injunction will make it difficult or impossible to render a meaningful remedy to a defendant who prevails on the merits at trial, then the p la in tiff should have to meet the higher standard of substantial, or clear showing 7

o f, likelihood of success to obtain preliminary relief." Tom Doherty Assocs., Inc. v . Saban Entm't, Inc., 60 F.3d 27, 35 (2d Cir. 1995).

Possession, Use, or Disclosure of Proprietary Information (Request Nos. 2 and 5) T h e second and fifth requests for relief in plaintiffs' motion relate to alleged p r o p r ie ta r y information in defendant's possession. Through those requests, p la in tiffs seek to enjoin defendant from any use or disclosure of proprietary in fo rm a tio n , and to require defendant to return materials containing that in fo rm a tio n . Plaintiffs argue that they spent five years developing at least 12 d iffe re n t versions of digital electronic controllers for defendant's rebreathers. These development efforts, according to plaintiffs, led to new and original te c h n o lo g y that is proprietary. Plaintiffs' fear of use or disclosure of the supposed p ro p rie ta ry information stems from an inference that they make about the tim e ta b le of delivery under defendant's two newest Navy contracts. Plaintiffs c la im that anyone developing digital electronic controllers from scratch would n e e d at least as long as they did to complete a product that met Navy s p e c ific a tio n s . Defendant would miss deadlines for delivery of rebreathers to the N a vy if it waited five years. Defendant, however, appears intent on delivering re b re a th e rs this year as scheduled under the contracts. Plaintiffs infer that d e live ry in so short a time would be possible if and only if defendant takes

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p la in tiffs ' proprietary information and either uses it internally for its own controller d e ve lo p m e n t, or shares with other contractors to accelerate their development of re p la c e m e n t controllers. In opposition to this part of the pending motion, defendant contends that p la in tiffs ' inference about likely use or disclosure has no factual basis. According to defendant, digital electronic controllers are not a concept unique to plaintiffs. In fact, defendant asserts that it has developed its own digital electronic controller te c h n o lo g y without any reference to any proprietary information from plaintiffs. Defendant maintains that it developed its own controllers simply by reviewing the N a vy 's specifications and building from scratch. The factual disputes that surround the issue of proprietary information re q u ire a hearing for resolution. "On a motion for preliminary injunction, where e s s e n tia l facts are in dispute, there must be a hearing . . . and appropriate fin d in g s of fact must be made." Fengler v. Numismatic Americana, Inc., 832 F.2d 7 4 5 , 747 (2d Cir. 1987) (internal quotation marks and citations omitted). The p a rtie s have not specified what proprietary information might be in question. They disagree over plaintiffs' inference about the timetable for delivery of re b re a th e rs to the Navy. They disagree further about defendant's--or any c o m p a n y's -- c a p a c ity to make digital electronic controllers from scratch. Resolving these questions will be critical to determining whether plaintiffs face irre p a ra b le harm and what the scope of any injunction might be. The Court thus 9

o rd e rs a hearing regarding the second and fifth requests in plaintiffs' motion. The C o u rt reserves decision on these requests pending the conclusion of the hearing. D e fa m a tio n (Request Nos. 3 and 4) T h e third and fourth requests in plaintiffs' motion relate to alleged d e fa m a tio n . Plaintiffs allege that after their relationship with defendant d e terio ra te d , defendant made certain false and defamatory statements to third p a rtie s , including the Navy, about plaintiffs' products. "Specifically, among other th in g s , Plaintiffs were informed that the U.S. Navy had decertified Plaintiffs' digital e le c tro n ic rebreather controllers due to Defendant's false assertions [about q u a lity and/or manufacture]; that Defendant was attempting to fulfill the U.S. Navy c o n tra c ts with alternate digital electronic rebreather controllers; and that they w e re attempting to design and manufacture such digital electronic rebreather c o n tro lle rs without subcontractor assistance, the first of which would be delivered b y April 2009." (Docket No. 5 at 13.) Plaintiffs seek to enjoin defendant from m a k in g any future false or defamatory statements and to require defendant to c o rre c t past statements. In opposition to this part of plaintiffs' motion, defendant denies that any s ta te m e n ts that it made to the Navy were defamatory. Defendant claims that any s ta te m e n ts that it made to the Navy regarding the quality of plaintiffs' products w e re accurate and truthful. These statements allegedly stemmed from prep ro d u c tio n testing of plaintiffs' controllers that revealed hardware and software 10

p ro b le m s . The problems allegedly would have put defendant's rebreathers out of c o m p lia n c e with Navy specifications. According to defendant, it relayed this in form a tio n to the Navy in straightforward fashion without adding any defamatory c o n te n t. Nevertheless, defendant has offered "to enter into a stipulated order p r o v id in g that, during the pendency of these proceedings, its employees, officers, a n d agents will make no statements, whether written or oral, to any third-parties re g a rd in g plaintiffs, their products, their processes, and/or their technology." (Docket No. 32 at 12.) Defendant has made this offer in a good-faith effort to re d u c e the number of issues in contention in this case. In light of defendant's offer of stipulation, the Court finds that plaintiffs' third a n d fourth requests should be denied. Moreover, even absent that stipulation, in ju n c tiv e relief would be inappropriate for these requests. Plaintiffs essentially a re asking for a restraint on defendant's speech. "It is elementary, of course, that in a case of this kind the courts do not concern themselves with the truth or va lid ity of the publication . . . . No prior decisions support the claim that the in te r e s t of an individual in being free from public criticism of his business p ra c tic e s . . . warrants use of the injunctive power of a court." Org. for a Better A u s tin v. Keefe, 402 U.S. 415, 418­20 (1971); see also Am. Malting Co. v. Keitel, 2 0 9 F. 351, 354 (2d Cir. 1913) ("Equity will not restrain by injunction the th re a te n e d publication of a libel, as such, however great the injury to property m a y be. This is the universal rule in the United States . . . . If the publications . . . 11

a re false and injurious, [plaintiffs] can prosecute the publishers for libel.") (internal q u o ta tio n marks and citations omitted). Plaintiffs' remedy here is legal and not e q u it a b le . S p e c ific Performance (Request No. 1) T h e first request in plaintiffs' motion relates to the daily working relationship th a t they had with defendant from 2003 to 2008. Plaintiffs seek to enjoin d e fe n d a n t from breaching what they describe as an implied-in-fact contract e s ta b lis h in g "that Plaintiffs would be the sole supplier of the digital electronic c o n tro lle r technology to be used in any upgraded rebreathers provided under any s u c h military contracts." (Docket No. 6 ¶ 14.) Plaintiffs contend that their working re la tio n s h ip rested on promises of mutual non-competition through many stages o f product design and development. Plaintiffs contend further that their p a rtn e rs h ip with defendant helped defendant acquire its latest two contracts from th e Navy. Under these circumstances, plaintiffs argue, defendants should not re a p the benefits of plaintiffs' many hours of work creating a unique product that s e rve d only one market. In opposition to this part of the motion, defendant asserts that plaintiffs w e re suppliers only, not partners, and that no organized working relationship e xis te d . Additionally, defendant contends that plaintiffs are free to sell their c o n tro lle rs to other purchasers and are not cut off from access to any market by d e fen d a n t 's termination. Finally, defendant contends that plaintiffs are 12

e xa g g e ra tin g the importance of defendant's most recent Navy contracts. According to defendant, plaintiffs have admitted to selling roughly 2,000 civilian c o n tro lle rs over the last three years, a sales figure approximately 400% higher tha n the number that they would have sold under defendant's most recent Navy c o n tra c ts . "The showing of irreparable harm is perhaps the single most important p re re q u isite for the issuance of a preliminary injunction, and the moving party m u s t show that injury is likely before the other requirements for an injunction will b e considered. To establish irreparable harm, a party seeking preliminary in ju n c tive relief must show that there is a continuing harm which cannot be a d e q u a te ly redressed by final relief on the merits and for which money damages c a n n o t provide adequate compensation. And, irreparable harm must be shown to b e actual and imminent, not remote or speculative." Kamerling v. Massanari, 295 F .3d 206, 214 (2d Cir. 2002) (internal quotation marks and citations omitted). H e re , plaintiffs have alleged wrongful termination of their working re la tio n s h ip with defendant. The termination occurred last year, and was a single e ve n t that is not ongoing in nature. Although plaintiff claims that the wrongful term in a tio n has resulted in missed opportunities for them to sell their controllers to the Navy, monetary damages are the appropriate remedy, not equitable relief. Plaintiffs stated that, as of November 2007, they were invoicing defendant $ 9 ,1 2 9 .0 5 for each controller. The invoice amount establishes that quantifying 13

th e value of the controllers is possible. At trial, plaintiffs could submit evidence e s tim a tin g the number of controllers that they might have sold under the two c o n tra c ts that defendant won from the Navy in 2007. Because monetary d a m a g e s provide plaintiffs with an adequate remedy at law to redress this harm, th e first request in their motion must be denied. The first request in plaintiffs' motion is problematic for another reason. Plaintiffs essentially are asking this Court to require defendant to resume its dayto -d a y relationship with plaintiffs. Such relief is excessively vague and s p e c u la tive . "The embodiment of an intricate relationship between plaintiff and d e fe n d a n t . . . militates against specific performance. Where a contract governs s u c h an ongoing relationship, a grant of specific performance could require the c o u r ts to supervise the . . . relationship over the length of plaintiffs' lifetime, a task for which courts are poorly suited." Litho Prestige v. News Am. Pub., Inc., 652 F. S u p p . 804, 809­10 (S.D.N.Y. 1986) (internal quotation marks and citations o m itte d ) . This working relationship entailed meetings, audits, design activities, a n d testing over the course of five years. These activities, in turn, almost c e r ta in ly entailed countless conferences, memoranda, email messages, te le p h o n e calls, document exchanges, and other types of daily communications. In the absence of any written agreement whose concise, particular terms could b e enforced, the entirety of the parties' daily activities would fall under the scope o f any injunction that the Court issued. It would be impossible for any order of 14

th is Court to articulate with any specificity what is meant by an injunction requiring th e parties to re-establish their working relationship. Further, any injunction that va g u e ly enjoined defendants from "breaching its contractual obligations" would fa il to put defendant on notice as to the specific conduct required or prohibited a n d would run afoul of the requirement that "[e]very order granting an injunction a n d every restraining order must: (A) state the reasons why it issued; (B) state its te rm s specifically; and (C) describe in reasonable detail--and not by referring to th e complaint or other document---the act or acts restrained or required." Fed. R . Civ. P. 65(d)(1); see also Diapulse Corp. of Am. v. Carba, Ltd., 626 F.2d 1108, 1 1 1 1 (2d Cir. 1980) ("A court is required to frame its orders so that those who m u s t obey them will know what the court intends to forbid. Basic fairness re q u ire s that those enjoined receive explicit notice of precisely what conduct is o u tla w e d . . . . An order which does not satisfy the requirement of specificity and d e fin ite n e s s will not withstand appellate scrutiny.") (internal quotation marks and c ita tio n s omitted). This is especially true where, as here, plaintiffs seek to e n fo rc e the terms of an unwritten contract. The first request in plaintiffs' motion m u s t be denied for this reason as well.

P r e s e rv a tio n of Relevant Information (Request No. 6) T h e sixth request in plaintiffs' motion relates to spoliation. Plaintiffs seek a n injunction requiring that defendant "immediately preserve any information 15

re la tin g to the claims at issue in this litigation." This request needlessly would re p e a t the general obligation that both sides in this case already have to preserve e v id e n c e . "The obligation to preserve evidence arises when the party has notice th a t the evidence is relevant to litigation or when a party should have known that the evidence may be relevant to future litigation." Fujitsu Ltd. v. Fed. Exp. Corp., 2 4 7 F.3d 423, 436 (2d Cir. 2001) (citation omitted). Here, both sides have s u b m itte d pleadings and motion papers that relate to plaintiffs' claims. Both sides h a ve conducted limited discovery to explore the basis for plaintiffs' claims. By n o w , each side should be fully aware of how the other views this case and what in fo rm a tio n might be relevant to those views. Both sides, therefore, are required a lre a d y to preserve any information that might be relevant to the claims and d e fe n s e s in this case. Under these circumstances, the Court will not take a d d itio n a l action against only one side without evidence that spoliation actually h a s occurred. The sixth request in plaintiffs' motion thus is denied.

CONCLUSION F o r all of the foregoing reasons, the first, third, fourth, and sixth requests fo r injunctive relief in plaintiffs' motion are denied. With regard to the second and fifth requests, an evidentiary hearing is necessary to address whether defendant is in possession of any of plaintiffs' proprietary information and, if so, whether in ju n c tive relief is necessary to prevent the use or disclosure of that information. 16

T h e parties are directed to appear before the Court on Thursday, August 1 3 , 2009 at 9:00 a.m. for a status conference to set a hearing date.

SO ORDERED.

s/ Richard J. Arcara
HONORABLE RICHARD J. ARCARA CHIEF JUDGE UNITED STATES DISTRICT COURT DATED: July 20, 2009

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