Opinion
A3-00-159.
January 9, 2001.
MEMORANDUM AND ORDER
I. Introduction
Before the Court is plaintiff's motion for a preliminary injunction (doc. # 4). Defendant resists the motion (doc. # 13). The matter came on for hearing at 9:30 a.m. on Thursday, January 4 in Fargo, North Dakota. Based on the written submissions and oral arguments of the parties, and for the reasons set forth below, plaintiff's motion is DENIED.
II. Background
Plaintiff Drayton Enterprises is a North Dakota company based in Fargo, N.D. It is engaged primarily in the business of manufacturing and distributing food and bakery products. Among these are "pre-proofed" frozen dough products, including breads and pizza crusts, which go directly from freezer to oven without thawing. It is undisputed plaintiff invested much time and money developing the technology for these products, although there is a dispute over how many companies possess similar technology.
Defendant Value-Added Products (VAP) is an Oklahoma cooperative based in Alva, OK. It too distributes bakery goods, especially frozen dough products. Like Drayton, it sells "pre-proofed" products, the technology for which it claims it purchased from a German company named Fritsch, GmbH.
The parties also have an employee in common: Myron Dunker, who worked for plaintiff and now works for defendant. Dunker served as Drayton's vice president of operations from August 1996 until August 1997 and was involved with Drayton's exploration of the pre-proofed process. Before leaving, he signed an "Employment Resignation Agreement and Release of All Claims." This document held Dunker subject to the confidentiality provisions in the employment contract he signed in 1996. Those provisions set forth that Dunker recognized Drayton possessed confidential information, recognized the importance of maintaining secrecy, and bound him not to "divulge, furnish or make accessible to anyone or use in any way" such information.
Two years after he left Drayton, Dunker became VAP's chief executive officer. In that capacity, he has assisted VAP develop pre-proof technology, though the parties disagree over what this means. Defendant insists this meant merely shipping samples of wheat to Fritsch, who did the rest. Plaintiff counters that his involvement was more substantial and involved misuse of trade secrets. It is this that led plaintiff to seek an injunction.
III. Analysis
The four-part standard for preliminary injunctions in the Eighth Circuit is drawn from the Dataphase case:
"[W]hether a preliminary injunction should issue involves consideration of (1) the threat of irreparable harm to the movant;
(2) the state of 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 Systems, Inc. v. C.L. Systems, Inc., 640 F.2d 109, 114 (8th Cir. 1981). No single factor is determinative; rather, "the question is whether the balance of equities so favors the movant that justice requires the court to intervene to preserve the status quo until the merits are determined." Id. at 113. However, plaintiff bears the burden on each factor. See Lexis-Nexis v. Beer, 41 F. Supp.2d 950, 957 (D. Minn 1999) (citing Gelco Corp. v. Coniston Partners, 811 F.2d 414, 418 (8th Cir. 1987)). As set forth below, the Court concludes that, on balance, plaintiff has not met its burden under Dataphase.
1. Likelihood of success on the merits
The Court will consider this factor first, as it requires the most detailed analysis of the facts and law. On the merits, this is a trade secrets case, and the Uniform Trade Secrets Act indicates such cases are appropriate for injunctive relief. See, e.g., Minn. Stat. § 325C.02 (1995). Before an injunction could issue, of course, plaintiff must establish a basis for its position in applicable law. See Uncle B's Bakery, Inc. v. O'Rourke, 920 F. Supp. 1405, 1424 (N.D.Iowa 1996).
The original contract provides that Minnesota law controlled, but the resignation agreement invoked North Dakota law. Luckily, the Court need not resolve this potential conflict, as the parties do not dispute that the relevant law is virtually the same in both states, as it is based on a uniform act.
Under Minnesota law, which both parties cite, proving a trade secret requires consideration of three elements: "(1) the information must not be generally known or readily ascertainable; (2) the information must derive independent economic value from secrecy; and (3) the party asserting misappropriation must have made reasonable efforts to maintain the secrecy of the item." Lexis-Nexis, 41 F. Supp.2d at 958. The Court has little doubt that the second and third are met: A process for making "pre-proofed" pizza crusts and bread, if secret, would surely have economic value, and Drayton sought to maintain secrecy through the use of confidentiality agreements and other methods. The first element, however, is less clear.
The first issue is the scope of what plaintiff seeks to protect. The Court agrees the specific formula or recipe for the products Drayton makes, as well as specific steps needed to create it, could be considered a trade secret. At the hearing, however, plaintiff sought to tie these together with Dunker's general experience with Drayton. In short, Drayton wishes the Court to determine that the formula, process for making it, equipment needed to do so, and experience to make it work combine into one large secret. While it is possible to establish a system as a trade secret in some cases, the Court declines to do so. See, e.g., PepsiCo v. Redmond, 54 F.3d 1262 (7th Cir. 1995) (discussing a pricing and marketing system as a trade secret).
For example, Drayton points out VAP uses a wider "laminating" system than it does, a system that Drayton learned, after purchasing its current system and while Dunker was still working for it, was preferable. Pl.'s Reply Br. at 6.
The Court is aware that the line between trade secret knowledge of Drayton's system and general skills and knowledge, which are not protected, is hard to draw. PepsiCo, 54 F.3d at 1269. The Court is convinced, however, that plaintiff draws the line too broadly. At least on the basis of the evidence in the record, the Court cannot draw a clear line between general bakery knowledge, which Dunker obtained in his career in the bakery business, and specific knowledge unique to Drayton's pre-proof process. Further, plaintiff concedes that, as defendant has urged and substantiated with exhibits, a certain amount of knowledge about pre-proof baking is commonly available in the industry. How to draw the line between common knowledge and knowledge unique to Drayton is beyond the Court's ability at this stage of the proceedings. Therefore, the Court will analyze these issues with a more constricted view of what is to be considered a trade secret. The Drayton recipe is clearly within the Court's view; information beyond that is less so.
A second problem is that Drayton seeks to prove its case through circumstantial evidence and by proving that plaintiff's employment will lead inevitably to misappropriation. There is no direct evidence that VAP is using Drayton's formula. Circumstantial evidence is an acceptable method of proving a trade secrets case, but it is more complicated for plaintiff and undercuts the likelihood that an injunction can issue. See Monovis, Inc. v. Aquino, 905 F. Supp. 1205, 1231 (W.D.N.Y. 1994) (discussing circumstantial proof of trade secret violation); see also PepsiCo, 54 F.3d at 1269 (discussing inevitable disclosure).
Essentially, plaintiff points out that VAP has entered the same market as Drayton with similar products, that VAP advertised its hiring of Dunker as important because he's "been there and done that," and that Dunker's affidavit reveals VAP has purchased and is using a set of equipment similar to plaintiff's equipment. It further emphasizes that Dunker could not possibly compartmentalize this information, so his work with VAP's pre-proof line will inevitably lead to disclosure of trade secrets. While recognizing the force of these arguments, the Court believes they do not justify a preliminary injunction.
First, the Court notes that this case is complicated by the presence of Fritsch GmbH, a German company who has worked with both Drayton and VAP in recent years. It is not clear what its precise involvement is, but there is no question it has been involved with both parties as they developed their pre-proof technologies. The Court does not know what contractual duties Fritsch owes either party, and Fritsch is not a party to this suit, so the Court does not decide the case on this basis. Nevertheless, it is clear that defendant's explanation of how it obtained pre-proof technology — it purchased it, including formula and equipment, from Fritsch — is plausible. (Kelly Aff. ¶¶ 3-7.) This at least undercuts the notion that trade secrets of Drayton's necessarily moved through Dunker to VAP.
Further, the Court finds the circumstantial evidence Drayton cites does not justify an injunction. That VAP is entering the market is merely proof there is a market for pre-proof products, not that VAP has done anything untoward. The Court is somewhat troubled by the lists of equipment, but this could be explained by Fritsch's presence, discussed above. Finally, the Court is also troubled by VAP's statement that Dunker "has been there and done that," seeming to suggest that his prior knowledge of the pre-proof business, presumably gained with Drayton, was at VAP's disposal. However, the Court also notes Dunker has many years experience in the bakery business, and the reference, in that context, is arguably more benign. In short, the evidence Drayton cites does not justify the extraordinary remedy of an injunction.
Finally, the Court is not persuaded by Drayton's argument that Dunker will inevitably disclose secrets. This argument, while not without force, is weakened by the involvement of Fritsch and the two-year gap between Dunker's employment with VAP and when he left Drayton. Further, the Court is troubled that there is not a clear record of the distinction between what pre-proof technology is generally available and what is unique to Drayton. This prevents the Court from determining when a duty not to disclose Drayton's formulae turns into a general covenant not to compete in the pre-proof industry. This makes unclear the extent to which disclosure is inevitable. On balance, therefore, the plaintiff could perhaps prevail on the merits, the likelihood that it would do so is not sufficient to support an injunction.
2. Threat of irreparable harm to the movant
Courts in the Eighth Circuit have found loss of a trade secret to be irreparable harm. See, e.g., Overholt Crop Ins. Service Co. v. Travis, 941 F.2d 1361, 1371 (8th Cir. 1991); Medtronic, Inc. v. Gibbons, 684 F.2d 565, 569 (8th Cir 1982). However, allegations of loss in a trade secrets case do not automatically entitle one to a preliminary injunction on the basis of irreparable injury. Rather, the court must consider the issue in the context of the overall Dataphase analysis.
Here, the Court notes Dunker has already been working at VAP and that VAP has apparently already purchased equipment and is operating its facility. (Dunker Aff. ¶¶ 13-14.) This is not a case in which a former employer seeks an injunction to prevent a former employee from beginning work at a competitor, but rather one in which the former employer wants to interrupt an already-begun employment. See, e.g., PepsiCo, 54 F.3d at 1263 (addressing an injunction to prevent an employee from assuming job duties). While not unique among trade secrets cases, this affects the analysis of irreparable harm.
To the extent Dunker may have revealed trade secrets, it is likely he has already done so. In fact, this is exactly what plaintiff claims. While it is possible Dunker has more trade secrets to divulge (assuming he both had and divulged some secrets), the key secret, the recipe and/or process which allows a company to produce pre-proof products, already has been.
Thus, an injunction cannot prevent secrets from being lost in the first place, thus keeping them sacrosanct. Other courts have seen this as undercutting irreparable harm. See generally Campbell Soup Co. v. ConAgra, Inc., 977 F.2d 86, 92 (3d Cir. 1992) ("A threat of disclosure may establish immediate irreparable harm but `further' disclosure of something already revealed cannot"). Thus, while the Court does not doubt that plaintiff is and will continue to suffer damages, assuming a trade secret violation, its claim that this harm can be prevented by an injunction is less forceful. Therefore, this factor does not weigh heavily in it favor.
3. Balance of harms
The harms faced by the plaintiff have been well documented in the preceding analysis, and the Court in no way seeks to minimize them. On the other hand, defendant also faces serious harms. It has represented to the Court, both in a sworn affidavit and at oral argument, that it faces the prospect of losing an operating loan if an injunction issues, which loss would require it to cease operations. (Dunker Aff. ¶ 15.) While this would not prevent an injunction if the other elements were met, it is significant when considering the balance of harms. The Court thus finds the balance of harms does not clearly favor either party.
4. The public interest
A recent case describes the tensions inherent in this issue:
The question of threatened or inevitable misappropriation . . . lies at the heart of a basic tension in trade secret law. Trade secret law serves to protect "standards of commercial morality" and "encourage invention and innovation" while maintaining "the public interest in having free and open competition in the manufacture and sale of unpatented goods." Yet that same law should not prevent workers from pursuing their livelihoods when they leave their current positions. It has been said that federal age discrimination law does not guarantee tenure for older employees. Similarly, trade secret law does not provide a reserve clause for solicitous employers.
PepsiCo, 54 F.3d at 1268 (citations omitted). Thus, trade secrets law stands at the cusp of competing public interests. Perhaps in a case in which it was more clear that trade secrets law was being violated, it would be possible to choose between them. In this case, however, the Court finds no clear reason to do so.
IV. Conclusion
For the reasons set forth above, the Court concludes plaintiff has not met its burden under Dataphase. Therefore, its motion for a preliminary injunction is DENIED.
IT IS SO ORDERED.