Opinion
No. 5:15-CV-115-BR
06-29-2015
Chryso, Inc., Plaintiff, v. Innovative Concrete Solutions of the Carolinas, LLC, Carolinas Concrete Solutions, Inc., Daniel Matthews, & Brian Matthews, Defendants.
Order
Plaintiff Chryso, Inc. requests permission to proceed with discovery prior to the parties conducting their Rule 26(f) conference in order to prepare for a hearing on its Motion for a Preliminary Injunction. A party seeking to conduct discovery at this early stage of a proceeding must establish that it is reasonable to do so considering the totality of the circumstances. After considering the arguments of the parties, the court has determined that Chryso is entitled to conduct a limited amount of discovery in advance of the Rule 26(f) conference due, primarily, to the potential for the loss or destruction of electronically stored information. However, Chryso's proposed discovery is overbroad considering the issues that will be in play in the preliminary injunction hearing (if such a hearing takes place). Therefore, as explained in more detail below, the court will require the Defendants to respond to some of the written discovery proposed by Chryso within 21 days from the date of this order.
Procedural Background
Chryso brought this lawsuit against Defendants Innovative Concrete Solutions of the Carolinas, LLC ("ICSC"), Carolinas Concrete Solutions, Inc. ("CCS"), Daniel Matthews ("Danny"), and Brian Matthews seeking injunctive relief and monetary damages as a result of Defendants' alleged misappropriation of Chryso's confidential information and trade secrets. A few days after filing its Complaint, Chryso filed a motion seeking a preliminary injunction which would: (1) prohibit the Defendants from making use of Chryso's confidential information and trade secrets; (2) require Defendants to return various documents, information, and equipment to Chryso; and (3) prohibit Danny Matthews from soliciting many, if not all, of Chryso's customers in the Southeastern United States. Chryso also filed a motion seeking permission to conduct discovery prior to the parties' Rule 26(f) conference in order to obtain documents and information in support of its Motion for a Preliminary Injunction. The Defendants opposed the Motion for Expedited Discovery.
The court held a hearing on Chryso's Motion for Expedited Discovery on May 28, 2015. At the hearing, Chryso indicated that it had recently served a revised set of proposed discovery on the Defendants. After reviewing the revised discovery, the Defendants continued to maintain their objection to any expedited discovery.
Factual Overview
In 2008, Chryso, a company involved in the manufacture and sale of specialty chemicals (known generally as admixtures) to companies in the construction industry, hired Danny Matthews as its Sales and Operations Manager for the Southeast. Shortly after he was hired, Danny brought his son, Brian, on board as an independent contractor. Both Danny and Brian were responsible for servicing Chryso's customers throughout the region.
Although both Danny and Brian Matthews worked for Chryso, they had distinctly different relationships with the company. Danny worked directly for the company and was given access to a vast array of confidential information and trade secrets regarding the manner in which Chryso conducted its business. In order to obtain this access, Danny was required to sign an employment contract that contained non-disclosure, non-solicitation, and non-compete provisions. Brian, on the other hand, was employed by CCS and was only supposed to have access to a limited amount of Chryso's information. There is no indication that Brian ever signed an employment agreement with Chryso that included restrictive covenants.
In early 2015, Danny and Brian Matthews both ended their employment relationship with Chryso because Brian decided to start his own admixture business, ICSC. Although he professed that he would not be involved with Brian's company, Danny felt it was inappropriate to continue to work for Chryso and, in effect, be in business against his son.
After tendering his resignation, Danny refused to return his Chryso-issued laptop to the company for approximately two weeks due to a dispute over whether he was entitled to certain payroll and expense reimbursements. Chryso contends that during this time Danny copied its confidential information and trade secrets to several external drives. The company maintains that Danny then deleted files and ran various programs to attempt to conceal that he had purloined Chryso's documents and information. Danny does not dispute that he removed files from the computer, but he contends that he only removed personal files and that the deletion or modification of any files was only an attempt to ensure that his personal information was removed from the computer.
The parties also strongly disagree about the propriety of Brian's new business venture and Danny's level of involvement. Chryso contends that Danny and Brian spent several months working with one of Chryso's competitors to arrange their departure from the company and the misappropriation of its confidential information and trade secrets. Chryso's theory posits that as a result of their advanced planning and access to Chryso's confidential information and trade secrets, the Defendants have been able to decimate Chryso's business in the Southeast by converting almost 85% of Chryso's customers to their own.
The Defendants reject this assertion and contend that they have acted properly at all times. Brian, CCS, and ICSC argue that they are free to compete in the marketplace against Chryso because they were not subject to non-disclosure, non-competition, or non-solicitation agreements. Brian also claims that Chryso's argument that he is misappropriating its confidential information or trade secrets is belied by the fact that he was given free access to this information despite the lack of any restrictions on his ability to use or disseminate the information. For his part, Danny contends that he is complying with the terms of his employment agreement and that Chryso is attempting to stretch the agreement's scope well beyond what a considered reading of its terms will bear.
Discussion
Courts will allow litigants to conduct discovery in advance of a hearing on a motion for a preliminary injunction if the moving party can show good cause to do so. Here, Chryso has proposed serving voluminous discovery on a broad array of topics, despite the fact that a preliminary injunction hearing has not been scheduled and there is no demonstrable irreparable harm that will result from waiting until the Rule 26(f) conference has occurred to conduct discovery. However, due to the evidence that certain electronically stored information pertinent to this case may have been modified or destroyed, it is appropriate for Chryso to conduct limited discovery to ensure that this information is properly preserved.
I. Standard for Expedited Discovery
Generally, the Federal Rules of Civil Procedure only allow parties to engage in discovery after they have "conferred as required by Rule 26(f)." Fed. R. Civ. P. 26(d). However, there are several exceptions to this general rule, including an exception for discovery authorized by a court order. Id. at 26(d)(1).
Although courts are undoubtedly authorized to allow discovery prior to a Rule 26(f) conference, the Rules are silent on the standard a court should utilize in evaluating such a request and courts have been unable to settle upon a uniform standard. See Dimension Data North America, Inc. v. NetStar-1, Inc., 226 F.R.D. 528, 531 (2005). Some courts apply a standard which incorporates certain aspects of a preliminary injunction test, Notaro v. Koch, 95 F.R.D. 403, 405 (S.D.N.Y. 1982), while others apply a standard that is based upon the reasonableness of the request for expedited discovery in light of the totality of the circumstances, Merrill Lynch, Pierce, Fenner & Smith v. O'Connor, 194 F.R.D. 618 (N.D. Ill. 2000).
After reviewing the relevant case law, the court determines that it is more appropriate to apply the reasonableness-based test when a party seeks to conduct discovery prior to the Rule 26(f) conference in order to prepare for a preliminary injunction hearing. See Dimension Data, 226 F.R.D. at 531; but see ForceX, Inc. v. Technology Fusion, LLC, No. 4:11-cv-88, 2011 WL 2560110 (E.D. Va. June 27, 2011) (declining to adopt the reasonableness test because the Fourth Circuit adopted the preliminary injunction test prior to Winter v. National Resources Defense Counsel, 555 U.S. 7 (2008)). Therefore, in evaluating Chryso's request for expedited discovery the court will consider the following factors: (1) the procedural posture of the case; (2) whether the discovery at issue is narrowly tailored to obtain information that is probative to the preliminary injunction analysis; (3) whether the requesting party would be irreparably harmed by waiting until after the parties conduct their Rule 26(f) conference; and (4) whether the documents or information sought through discovery will be unavailable in the future or are subject to destruction. Dimension Data, 226 F.R.D. at 532.
III. Analysis
A. Procedural Posture
Chryso seeks to conduct discovery prior to a hearing on its motion for a preliminary injunction in order to develop additional evidentiary support for its motion and to allow the court to "determine the proper scope of the requested preliminary injunction." (D.E. 21 at 3-4.) The Comments to the Rules of Civil Procedure recognize that it may be appropriate to allow expedited discovery when a party seeks preliminary injunctive relief. Fed. R. Civ. P. 26(d) Advisory Committee Comment (1993 Amendment). The Fourth Circuit and at least one court in this district have reached a similar conclusion. See e.g., KBG Holding Corp. v. Union Bank, 56 F. App'x 111, 114 (4th Cir. 2003) ("The parties engaged in expedited discovery in preparation for the ... hearings on the competing motions for preliminary injunction."); CIENA Corp. v. Jarrard, 203 F.3d 312, 315 (4th Cir. 2000) (remanding to give the defendant an opportunity to conduct expedited discovery in advance of district court's reconsideration of preliminary injunction motion); Dan River, Inc. v. Unitex Ltd., 624 F.2d 1216, 1220 (4th Cir. 1980) (noting that the district court "set a hearing on the motion for a preliminary injunction and directed the parties to engage in discovery on an expedited basis prior to that hearing"); Dimension Data, 226 F.R.D. at 532 ("[I]f the need for a hearing [on a motion for injunctive relief] arises, expedited discovery, or other form of bifurcated or limited discovery may be appropriate.").
In this case, while Chryso has moved for a preliminary injunction, the court has not indicated if it will hold a hearing on the motion. The lack of a pending motion hearing distinguishes this case from many other cases regarding expedited discovery. Thus, if the court were to allow Chryso's expedited discovery, there is the potential that the parties might engage in discovery in preparation for a preliminary injunction hearing that never occurs. Therefore, while the procedural posture of this case generally weighs in favor of granting Chryso's Motion, it does so only slightly because of the uncertainty surrounding a potential preliminary injunction hearing.
B. Narrowly Tailored Discovery
When a party is seeking expedited discovery in connection with a request for a preliminary injunction, the discovery requests should be "narrowly tailored to focus on information believed to be probative to the preliminary injunction analysis." Dimension Data, 226 F.R.D. at 532. Here, Chryso's Motion for a Preliminary Injunction is based upon allegations that Danny Matthews misappropriated Chryso's trade secrets and violated the terms of his employment agreement by disclosing its confidential information, competing against Chryso in the marketplace, and soliciting Chryso's customers. D.E. 17. There is no allegation in the Complaint or in the Motion for a Preliminary Injunction that any of the defendants other than Danny Matthews are subject to the terms of an employment agreement with Chryso. Instead, the request for injunctive relief against the other defendants is based upon their alleged violation of the North Carolina Trade Secrets Protection Act, N.C. Gen. Stat. §§ 66-152-157.
Chryso has proposed serving the defendants with a total of 60 interrogatories and 61 requests for production of documents. Additionally, Chryso seeks to depose Danny Matthews and Brian Matthews, but does not provide any limits on the topics it will cover in the deposition. While a number of the discovery requests seek information related to the grounds for Chryso's Motion for a Preliminary Injunction, on the whole they seek documents and information well beyond that which is relevant to the court's resolution of the preliminary injunction question.
Chryso originally proposed serving the defendants with 60 interrogatories, well over 200 requests for production of documents, taking the depositions of all four defendants plus one third party, and serving subpoenas on two third parties.
Chryso's discovery requests addressing the use, possession, and dissemination of its trade secrets and confidential documents are, generally, narrowly tailored to the issues confronting the court. However, as discussed during the May 28, 2015 motion hearing, the scope of the term "Chryso Information," which defines the scope of the interrogatory, is problematic. Chryso defines this term to mean:
[A]ny document, information or physical thing: that belongs to Chryso; that ever belonged to Chryso; that was provided or issued to you by Chryso; to which you were provided access by Chryso; that you created, that were provided to you by any Person, or that you used for any purpose, related in any way to your employment with Chryso; that you downloaded from any Chryso server or electronic device; and/or that relates in any way to or is derived from information related in any way to Chryso and/or any of Chryso's current, former or prospective customers, contractors, distributors, vendors, business relationships, sales or business strategies or programs, business practices, products, pricing, training, Trade Secrets and/or Confidential Information.Pl.'s First Interrogs. to Def. Daniel Matthews, Definition 18. As noted at the hearing, given the nature of the industry the parties are engaged in, the final clause of the definition, particularly the portion dealing with Chryso's prospective business dealings, could encompass almost every document related to the defendants' businesses, regardless of whether those documents are related to the Preliminary Injunction Motion. Thus, this definition is not narrowly tailored to the issues to be addressed in connection with Chryso's Motion for a Preliminary Injunction. See United Health Care Servs., Inc. v. Richards, No. 3:09-CV-215, 2009 WL 482584, *1 (W.D.N.C. Dec. 2, 2009) (finding that discovery was not narrowly tailored when it sought "'a map and blueprint of [defendant's] business activities at [plaintiff's] competitor'").
This definition is included in each set of interrogatories Chryso proposes to serve on the Defendants. Although the definition of Chryso Information is not included in Chryso's requests for production to each defendant, the first request for production effectively requests that the defendants produce all Chryso Information as that term is defined in the interrogatories.
The discovery requests also seek substantial information regarding the planning and operations of the Defendants' post-Chryso business enterprise. For example, Chryso seeks all documents and information related to the planning of the enterprise, all communications among the defendants and third-parties regarding the planning of the enterprise, all communications among the defendants and among third parties related to the operations of the enterprise, the defendants' compensation in connection with the enterprise, and even all expense reimbursement requests submitted in connection with the enterprise. While some of these topics may be relevant to the overall case, they are not narrowly tailored to the issues relevant to the preliminary injunction. See Dimension Data, 226 F.R.D. 528 at 532 (finding proposed expedited discovery to be overbroad when it sought "[a]ll Documents relating to or containing any information about any communications [defendants] had with any North Carolina individual [or] entities regarding the provisions of services by [defendants]...."); United Healthcare, 2009 WL 4825184, *2 (finding that requests for "phone records related to all telephones [defendant] has used for business purposes ..., all emails concerning any [of plaintiff's] customers, all records of [defendant's] travel, including expense reports, and 'documents that reveal [defendant's] level of compensation'" were not narrowly tailored to a request for a preliminary injunction); Quest Communications International., Inc. v. World Quest Networks, Inc., 213 F.R.D. 418, 420 (D. Colo. 2003) (rejecting attempts to obtain expedited discovery about all of a company's products and related services); Palermo v. Underground Solutions, Inc., No. 12-cv-1223, 2012 WL 2106228 (S.D. Cal. June 11, 2012) (rejecting as overbroad a party's request for "all documents and all electronically stored information of any type whatsoever" related to employees or contractors who had any dealings with a company's website).
The court also finds that Chryso failed to establish that its proposed depositions of Danny and Brian Matthews will be narrowly tailored because it did not propose any limits on the topics it may inquire about at the deposition. See Better Packages, Inc. v. Zheng, No. Civ.A. 05-4477, 2006 WL 1373055, *4 (D.N.J. May 17, 2006) (rejecting request to take depositions prior to a Rule 26(f) conference when the "[p]laintiff has not limited the scope of the questioning ... to those matters specifically related to the determination of the preliminary injunction."). Although Chryso assures the court that "[t]he scope of the depositions will be narrowly tailored to obtain information relevant to the preliminary injunction hearing[,]" Pl.'s Mem. in Supp. at 7, the overbroad nature of its discovery requests undermines the court's confidence in Chryso's ability to deliver on this promise.
Because Chryso's proposed discovery is, on the whole, overbroad, this factor does not counsel in favor of granting Chryso's motion. Any discovery allowed prior to the Rule 26(f) conference will need to be limited to address matters pertinent to the preliminary injunction hearing.
C. Irreparable Harm Due to Delay in Discovery
Among the factors relevant to the court's determination of whether a party is entitled to conduct expedited discovery is whether the party will suffer irreparable harm by being required to wait until after the Rule 26(f) conference to conduct discovery. Dimension Data, 226 F.R.D. at 532. Here, Chryso asserts that it will suffer irreparable harm because the defendants have access to and are implementing its business plan. As the damages Chyrso may suffer during this time period are quantifiable and can be remedied through a damages award or eventual injunctive relief, they have not shown irreparable harm of such an extent to require expedited discovery. See id.
D. Potential for Loss of Evidence in the Absence of Expedited Discovery
Finally, Chryso alleges that expedited discovery is necessary to preserve evidence because Danny Matthews has engaged in a pattern of destroying or attempting to destroy electronically stored information related to this case. Although the parties disagree over Danny's motivation for doing so and the extent of his conduct, it appears that he did delete or modify certain electronically stored information after receiving a litigation hold letter from Chryso's counsel. Allowing Chryso to engage in discovery at this early stage would ensure that data is preserved so that it can be utilized by the parties throughout the course of this litigation.
The court's statement on this issue should not be interpreted as a finding that Danny Matthews engaged in the spoliation of evidence or that his actions were undertaken for a malicious purpose. At this stage of the proceeding, there is insufficient evidence before the court to make such a finding. --------
E. Reasonableness of Allowing Discovery Prior to the Rule 26(f) Conference
Overall, the court is attempting to determine whether, in light of the totality of the circumstances, it is reasonable to allow Chryso to conduct discovery prior to the parties' Rule 26(f) conference. Although there are factors weighing both for and against Chryso's request for discovery, the court finds that it is reasonable to allow Chryso to conduct limited discovery at this point in the proceeding because of the potential for a preliminary injunction hearing, the presence of some requests that are narrowly tailored to the issues to be decided at such a hearing, and the potential for the loss of electronically stored information. However, the scope of the discovery requests will be limited so that they are more focused on the issues to be addressed at the preliminary injunction hearing and the concerns which led the court to allow discovery to commence prior to the Rule 26(f) conference.
IV. Conclusion
In light of the foregoing, the court grants in part and denies in part Chryso's Motion to Conduct Expedited Discovery. Discovery will proceed as follows:
1. Defendants shall respond to the following discovery requests no later than 21 days after the date of this order.
a. Plaintiff's First Interrogatories to Defendant Danny Matthews: Interrogatories 1, 2, 3, 4, 5, 6, and 11.
b. Plaintiff's First Interrogatories to Defendant Brian Matthews: Interrogatories 1, 2, 3, 4, 5, 6, and 11.
c. Plaintiff's First Interrogatories to Defendant Innovative Concrete Solutions of the Carolinas, LLC: Interrogatories 1, 2, 3, 4, 5, 6, and 11.
d. Plaintiff's First Interrogatories to Defendant Carolinas Concrete Solutions, Inc.: Interrogatories 1, 2, 3, 4, 5, 6, and 11.
e. Plaintiff's First Requests for Production of Documents to Defendant Danny Matthews: Requests 1, 2, 3, 4, 5, and 13.
f. Plaintiff's First Requests for Production of Documents to Defendant Brian Matthews: Requests 1, 2, 3, 4, 5, and 13.
g. Plaintiff's First Requests for Production of Documents to Defendant Innovative Concrete Solutions of the Carolinas, LLC: Requests 1, 2, 3, 4, 5, and 13.
h. Plaintiff's First Requests for Production of Documents to Defendant Carolinas Concrete Solutions, Inc.: Requests 1, 2, 3, 4, 5, and 13.
2. The following language is omitted from the definition of Chryso Information contained in Chryso's Interrogatories: "and/or that relates in any way to or are derived from information related in any way to Chryso and/or any of Chryso's current, former or prospective customers, contractors, distributors, vendors, business relationships, sales or business strategies or programs, business practices, products, pricing, training, Trade Secrets and/or Confidential Information."
3. The following language is omitted from Chryso's first request for production to each defendant: "and/or that relates in any way to or is derived from information related in any way to Chryso and/or any of Chryso's current, former or prospective customers, contractors, distributors, vendors, business relationships, sales or business strategies or programs, business practices, products, pricing, training, Trade Secrets and/or Confidential Information."
4. Chryso's request to depose Danny Matthews and Brian Matthews prior to the Rule 26(f) conference is denied.
5. Review and analysis of any computer hardware shall proceed according to the terms of the Agreed Protocol for Review of Computer Hardware agreed to by the parties.
6. The court will enter a protective order governing discovery in this case concurrently with the entry of this order. Dated: June 29, 2015.
/s/_________
ROBERT T. NUMBERS, II
UNITED STATES MAGISTRATE JUDGE