Opinion
Case No. C-1-02-577
August 30, 2002
Mark Edward Elsener, Jerome Joseph Metz, Jr., Porter, Wright, Morris Arthur — 1, Cincinnati, OH 45202, Christopher J. Barber, Kenneth L. Schmetterer, Piper Rudnick — 1, Chicago, IL 60601, Attorneys for Plaintiff.
Mark Alan VanderLaan, Timothy S. Mangan, Amanda L. Prebble, George Harold Vincent Dinsmore Shohl — 1, Cincinnati, OH 45202, Timothy Allen Smith, Cincinnati, OH 45202, Attorneys for Defendants.
ORDER
This matter came before the Court on August 22, 2002 for a hearing on Plaintiff Deutsche Investment Management Americas, Inc.'s ("Deutsche") motion for a preliminary injunction (Doc. No. 2). On August 6, 2002, Deutsche filed suit against Defendants Riverpoint Capital Management, Inc., Valerie Newell, and Leon Loewenstine alleging, inter alia, that Defendants misappropriated Deutsche's client lists and other confidential materials in violation of Ohio's Uniform Trade Secrets Act, Ohio Rev. Code § 1333.61, et seq. Deutsche's motion for a preliminary injunction seeks an order compelling Defendants to return immediately its confidential materials and prohibiting Defendants from copying such materials. Deutsche also seeks an injunction prohibiting Defendants from using Deutsche's confidential information to solicit its clients, an injunction prohibiting Defendants from further soliciting its clients, and an injunction prohibiting Defendants from soliciting Deutsche's employees for employment relationships. Upon consideration of the pleadings and the evidence presented at the hearing, the Court finds that Deutsche's motion for a preliminary injunction is GRANTED IN PART AND DENIED IN PART.
In the interests of expediency, the Court briefly sets forth what appear to be the uncontroverted background facts to this dispute. Defendants Valerie Newell and Leon Loewenstine were investment portfolio managers for Deutsche's Cincinnati office. Deutsche does business in Cincinnati as Scudder Private Investment Counsel. For ease of reference, the Court will refer to Deutsche's Cincinnati operations as "Scudder." Newell and Loewenstine directed the investments for high net worth individuals and large institutional accounts and trusts. Every year, Newell and Loewenstine were required to sign a Code of Ethics. Initially, Newell and Loewenstine acknowledged their compliance with the Code of Ethics by signing and returning a physical piece of paper. Later, as Scudder moved into the electronic age, Newell and Loewenstine acknowledged their compliance with the Code of Ethics by returning an e-mail form.
For purposes of this case, two sections of the Code of Ethics are pertinent. Section 5A of the Code of Ethics deals with proprietary information and prohibits employees from copying or using confidential information, either during or after their employment, except as required in the conduct of Scudder's business. Section 5B of the Code of Ethics is a non-competition clause and prohibits employees from soliciting Scudder's employees and clients during the term of their employment and for a period of twelve months thereafter. Section 5B was apparently first added to the Code of Ethics in 1999.
When the 2002 version of the Code of Ethics was issued, neither Newell nor Loewenstine wanted to be subject to the provisions of the non-competition clause. By this time, employees were acknowledging their agreement to abide by the Code of Ethics by returning e-mail receipts. Newell found out through a portfolio manager in New York City, Paul Benzinger, that Deutsche was allowing portfolio managers to opt out of the non-competition clause by submitting a second e-mail stating that the signor agreed to comply with the Code of Ethics except for Section 5B. Newell confirmed that this procedure was appropriate through a series of voice mails with Gloria Nelund, Scudder's Director of Sales Marketing. Newell passed this information onto Loewenstine and they both submitted e-mails to Linda Wondrack, Scudder's compliance officer, stating that they declined to be bound by the non-competition clause.
Nelund's duties also included oversight of portfolio managers.
In the winter of 2001, Newell, Loewenstine, Ron Bates and Dean Moulas held preliminary discussions with O'Sullivan, Simms Hogan ("OSH"), another Cincinnati-based investment management firm, about joining forces to establish a new firm. Later, Bates and Moulas dropped out of the picture and Newell and Loewenstine decided to partner with OSH. The new firm created was called Riverpoint Capital Management, Inc. ("Riverpoint"). On July 25, 2002, Newell and Loewenstine left Scudder's Cincinnati office about noon and went immediately to Riverpoint's office where they began soliciting, with apparent success, their former clients to move their business from Scudder to Riverpoint.
Bates and Moulas were also portfolio managers with Scudder and the other principal officers of the Cincinnati office.
In addition to clients moving from Scudder to Riverpoint, three employees of Scudder's Cincinnati office, Becky Finn, Joseph Schneider, and Victor Lassandro, were hired by Riverpoint. Finn was Newell's administrative assistant and Schneider was Newell's portfolio manager assistant. Lassandro was Loewenstine's portfolio manager assistant. Newell and Loewenstine deny soliciting these employees to leave Scudder, although Newell did admit showing Finn a blind advertisement for an administrative assistant position that Riverpoint had placed in theCincinnati Enquirer. Newell said she did so only because Finn had stated to her that she was planning on leaving Scudder anyway. Lassandro denied that he was solicited by Newell or Loewenstine to join Riverpoint. Lassandro testified that he discovered Riverpoint's ad in the Cincinnati Enquirer on his own, that he did not discuss it with anyone else at Scudder, and that he responded to it because he perceived it to be a career enhancing opportunity. Schneider's deposition indicates that he learned of the ad from Becky Finn and responded to it because Finn told him he might be interested in the position.
In general, both Newell and Loewenstine deny that they took any of Scudder's proprietary information with them when they left. Newell did admit to taking her Rolodex with her but she characterized the information it contained as personal, relating to her friends only. Examination of many of the cards, however, reveals that the Rolodex does contain Scudder proprietary information, such as account numbers and account names. Loewenstine admitted taking information relating to tax returns he prepared for certain clients as a sideline to his portfolio management responsibilities. Loewenstine testified that Scudder had stopped providing tax return services several years previously and that he continued providing the service on his own, with Scudder's full knowledge and permission, for some of his clients as a courtesy. Loewenstine also testified that he and Lassandro both brought with them to Riverpoint a spreadsheet which contained custodial account numbers for Loewenstine's accounts but that he destroyed the sheet upon learning that it could be construed as confidential information. Loewenstine denied using the spreadsheet to solicit Scudder's clients.
Ron Bates testified that no records were missing from Scudder's permanent files but that Newell had in her office a binder containing client information which turned up missing after her departure. Loewenstine's administrative assistant, Deborah Donley, testified that he kept several binders containing confidential client information in his office which turned up missing after Loewenstine left. Both Newell and Loewenstine denied that such binders even existed. Another administrative assistant, Karen Vannasdall, testified that she saw Schneider print asset listings of all of Newell's accounts just prior to the defection. Newell testified that Schneider provided the listings to her as part of a semi-annual unrealized gains and losses review and that the asset lists were destroyed after the review was completed.
In determining whether to issue a preliminary injunction, the trial court must consider and weigh the follow factors: 1) the plaintiff's likelihood of success on the merits; 2) whether plaintiff will be irreparably harmed in the absence of injunction; 3) the harm to others if an injunction is granted; and 4) the public's interest in granting an injunction. McPherson v. Michigan High Sch. Athletic Ass'n, Inc., 119 F.3d 453, 459 (6th Cir. 1997). These factors are not prerequisites to issuing an injunction but factors to be balanced. See Unsecured Creditors' Comm. of DeLorean Motor Co. v. DeLorean, 755 F.2d 1223, 1229 (6th Cir. 1985). The Court should not issue a preliminary injunction where there is no likelihood of success on the merits. Michigan State AFL-CIO v. Miller, 103 F.3d 1240, 1249 (6th Cir. 1997). Moreover, in order to obtain a preliminary injunction under Ohio's Uniform Trade Secrets Act, the plaintiff must establish his or her entitlement to injunctive relief by clear and convincing evidence. See Proctor Gamble Co. v. Stoneham, 747 N.E.2d 268, 269 (Ohio Ct.App. 2000).
The Court's subject matter jurisdiction is based on diversity of citizenship pursuant to 28 U.S.C. § 1332 in that the Plaintiff and the Defendants are citizens of different states and the amount in controversy is in excess of $75,000. Under Erie, in a diversity case, the plaintiff's burden of proof is a substantive issue controlled by state law. See Dick v. New York Life Ins. Co., 359 U.S. 437, 446 (1959); Conway v. Chemical Leaman Tank Lines, Inc., 540 F.2d 837, 839 (5th Cir. 1976).
With these factors in mind, the Court turns to the merits of Plaintiff's motion for a preliminary injunction.
A. Likelihood of Success on the Merits
The Court's analysis under this heading breaks down into two separate issues — whether Plaintiff has established a likelihood that Newell and Loewenstine breached the non-competition clause of the Code of Ethics and whether Plaintiff has established a likelihood that Defendants misappropriated and then used Plaintiff's trade secrets. The Court finds that Plaintiff probably cannot establish a breach of the non-competition agreement and that Plaintiff's likelihood of success on the misappropriation claim is neutral at best.
With regard to the non-competition clause, the evidence at the hearing established that Newell and Loewenstine acknowledged that they would agree to adhere to the Code of Ethics on a yearly basis. Since 1999, the Code of Ethics included the non-competition clause at issue. In the year 2002, however, Newell and Loewenstine, with Scudder's full knowledge and agreement, exempted themselves from the provisions of the non-competition clause. The only Ohio case law on the subject that this Court has unearthed indicates that a non-competition clause will not be enforced against an employee where the employer has indicated that it will not be enforced and the employee reasonably relies on that representation.Chrysalis Health Care, Inc. v. Brooks, 640 N.E.2d 915, 921 (Oh. Mun. Ct. 1994). New York law, which may apply to the Code of Ethics, is not as clear, but in the Court's opinion tends to indicate that the parties entered into a valid waiver of the non-competition clause or simply that the parties manifested no intention of agreeing to a non-competition clause beginning in 2002. See, e.g., Gimper, Inc. v. Giacchetta, 633 N.Y.S.2d 614, 616 (N.Y.App.Div. 1995) (parties to employment agreement validly waived non-competition clause by addendum).
The 2002 version of the Code of Ethics indicates that its provisions are to be governed by New York law where applicable. See Plaintiff Ex. 1, at SC000083.
At the hearing, Deutsche argued that even if the Court finds that Newell and Loewenstine validly opted out of the non-competition agreement in 2002, they are still subject to the provisions of the non-competition clauses contained in the agreements they signed in previous years. Although this argument has initial appeal, it does not hold up against the case law or reason. The general rule under both Ohio law and New York law is that where so intended by the parties a subsequent agreement covering the same subject matter supersedes an earlier agreement. See Izold v. Gumina, No. 4062, 1986 WL 12544, at *2 (Ohio Ct.App. Nov. 5, 1986); Northville Ind. Corp. v. Fort Neck Oil Term. Corp., 474 N.Y.S.2d 122, 125 (N.Y.App.Div. 1984). In this case, the parties entered into Code of Ethic agreements on a yearly basis. The evidence presented to the Court indicates that the parties intended that each year's Code of Ethics would supersede the previous year's Code of Ethics. If one acknowledgment of the non-competition clause was meant to be good for the duration of the employee's employment with Scudder, as Deutsche suggests was the case, then the Court can see no reason for requiring employees to re-affirm their compliance with the clause on an annual basis, which was the practice.
Furthermore, it seems equally clear to the Court that Newell and Loewenstine wished to completely exempt themselves from any restrictions on competing with Scudder in the event of their termination and that this was understood by Scudder. It is, therefore, anomalous to believe that Newell and Loewenstine would have sought and agreed to an exemption from the non-competition clause which in effect would have been no exemption at all. Moreover, the evidence established that Newell and Loewenstine signed previous versions of the Code of Ethics which did not contain the non-competition clause. Applying Deutsche's argument that each Code of Ethics agreement that Newell and Loewenstine signed stands alone and is enforceable by itself produces the paradox that they are both subject and not subject to the clause at the same time. In fact, however, since there are earlier versions of the Code in existence, the only way in which Newell and Loewenstine could arguably be subject to a non-competition clause at all is if the parties intended that the new agreement supersede the old agreement. Indeed, this is only way to rationally interpret the series of agreements. Therefore, the Court finds that Newell and Loewenstine validly exempted themselves from the non-competition clause in 2002.
During closing arguments, counsel for Plaintiff argued that the Court could enjoin Defendants from competing against it even if the non-competition clause was not enforceable if the Court found that Defendants did misappropriate Plaintiff's confidential information. The Court disagrees. If Defendants did misappropriate Plaintiff's trade secrets, the Court certainly could prohibit Defendants from using those secrets to compete against Plaintiff. However, in the absence of a valid non-competition clause, the Court cannot prohibit Defendants from competing with Plaintiff, which includes solicitation of Plaintiff's clients, as long as Defendants do not employ Plaintiff's trade secrets in doing so. Curry v. Marquart, 11 N.E.2d 868, 869 (Ohio 1937).
Accordingly, the Court finds that Plaintiff is unlikely to succeed on the merits of its claim regarding the alleged breach of the non-competition clause.
With respect to the claim that Defendants misappropriated Scudder's trade secrets, the Court finds that, except for the issue of Valerie Newell's Rolodex, the evidence is in equipoise, which means that Plaintiff failed to carry its burden on this issue. Essentially one party claims that certain binders containing confidential information once existed and are now missing while the other parties claim that the binders never existed at all, or at least not in the recent past. The conflict in testimony sets up a classic credibility issue to be resolved by the ultimate trier of fact. However, the fact that a trier of fact could choose to believe or disbelieve a witness's testimony per force means that Plaintiff's likelihood of success on the claim of misappropriation of the binders is at best 50 percent.
On the other hand, the Court finds that Plaintiff did establish by clear and convincing evidence that Valerie Newell's Rolodex contained confidential information. Although Newell characterized the Rolodex as personal because most of her clients are also her friends, the Rolodex clearly contains information proprietary to Scudder, such as account names and numbers. The clients' capacities as both client and friend are inextricably intertwined, and thus, in this case involving proprietary information, business must prevail over friendship. Therefore, Defendants will be compelled to return Newell's Rolodex to Scudder.
At the hearing, Defendants argued that under Ohio law a Rolodex is not considered a trade secret. The Court disagrees with that assertion. The principal case on point is Fred Siegel Co., L.P.A. v. Arter Hadden, 707 N.E.2d 853 (Ohio 1999), in which a departing lawyer retained Rolodex cards with client names and addresses. The majority opinion seemed not to address the importance of the Rolodex to the defendant in compiling a mailing list with which to solicit the plaintiff's clients. Justice Cook, in dissent, argued that the court of appeals found that it was not improper for the defendant to use the Rolodex to compile a mailing list and, since that part of the decision was not appealed, it became the law of the case. See id. at 183-84 (Cook, J. dissenting). As this Court reads the court of appeals' decision in Arter, the court found that the Rolodex contained only names of clients. See Fred Siegel Co., L.P.A. v. Arter Hadden, No. 71440, 1997 WL 428629, at *4 (Ohio Ct.App. July 31, 1997). The present case is distinguishable, however, because much of Newell's Rolodex goes beyond client names, containing such information as Scudder account names and account numbers.
Defendants also argued that the Rolodex was not a trade secret because Plaintiff failed to take reasonable precautions to protect it. The Uniform Trade Secrets Act, however, only requires the owner to take reasonable precautions to protect the information from persons who are not otherwise authorized to have access to it. See Arter, 707 N.E.2d at 862. The Court fails to see what reasonable measures Plaintiff could have implemented to prevent a principal of the Cincinnati office, who presumably has access to everything, from taking the Rolodex.
Loewenstine admitted that both he and Victor Lassandro took spreadsheets containing Scudder clients' custodial account information but these sheets have now been destroyed. The Court, therefore, cannot order him to return something which does not now exist.
Finally, Loewenstine admitted taking documents related to the tax preparation services he provides for certain clients. Scudder, however, does not provide this service to its clients and the Court finds no evidence that Loewenstine has used this information to otherwise compete against Scudder. Furthermore, Defendants persuasively argue that Loewenstine needs to retain these documents in the event any of his tax clients are subjected to an audit. Accordingly, the Court will not order Loewenstine to return these documents.
In summary, given the polar opposite testimony on the question of whether binders containing confidential information even existed, or remained in existence at the time Newell and Loewenstine left Scudder, the Court can only conclude that Plaintiff's likelihood of success on the bulk of its claims is only 50 percent at best. The Court does find, however, that Valerie Newell's Rolodex contains Scudder's proprietary information and should be returned, although the Court hastens to add that at this juncture we find nothing malicious about Newell's retention of that item.
B. The Existence of Irreparable Harm
The loss of trade secrets is usually considered an irreparable harm which cannot be measured in money damages. See North Atlantic Instruments, Inc. v. Haber, 188 F.3d 38, 49 (2nd Cir. 1999). Therefore, where it is shown that the defendant has misappropriated the plaintiff's trade secrets, a preliminary injunction ordinarily should issue. See Vanguard Transportation Sys., Inc. v. Edwards Transfer Storage Co., 673 N.E.2d 182, 186 (Ohio Ct.App. 1996). Consequently, the loss of the Rolodex would constitute irreparable harm to Plaintiff. As previously indicated, however, the other items Plaintiff alleges are missing Defendants claim were either destroyed, never existed in the first place, or did not exist at the time Newell and Loewenstine departed. Therefore, it is impossible for the Court to gauge any irreparable harm to Plaintiff by the loss of those items.
C. The Harm to Others if an Injunction is Issued
The Court discerns no harm to others if an injunction is issued. We assume that both Plaintiff and Defendants will continue to provide professional investment management services for their clients no matter which side eventually prevails in the struggle over their business.
D. The Public's Interest in an Injunction
The Uniform Trade Secrets Act evinces a public policy in favor of safeguarding confidential and proprietary information. Therefore, the public's interest in granting an injunction would be substantial.
Conclusion
This case presents an unusual situation in that most of the documents the Plaintiff claims are missing the Defendants claim never existed or no longer exist. The Court is loathe to order Defendants, under penalty of contempt for failure to comply, to turn over documents they claim they do not have. In other words, for the most part, it is impossible for the Court to issue an injunction with which Defendants could comply. Moreover, in the absence of a valid non-competition clause, the Court cannot order Defendants to cease soliciting Plaintiff's clients or employees. At this juncture, the Court finds only that Plaintiff has established the loss of the Rolodex and its value as a trade secret by clear and convincing evidence. Consequently, the injunctive relief order by the Court will be limited to return of the Rolodex, and any copies of it which may exist, and an order prohibiting Defendants from any use or derivative use of the Rolodex to compete for Plaintiff's clients.