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applying Illinois law where actual misappropriation of trade secret took place
Summary of this case from Medidata Sol. v. Veeva Sys.Opinion
No. 00 Civ. 5583 (JSM).
April 3, 2002
OPINION AND ORDER
Plaintiff Fedders Corporation brings this action against Defendant Kurt Kaufhold, a former Fedders employee, and Defendant Haier America Trading LLC, a competitor in the air conditioner market, alleging numerous claims stemming from Defendant Kaufhold's alleged misappropriation of sensitive information from Fedders and Defendant Haier America Trading LLC's alleged improper hiring of Kaufhold in order to obtain and use such information. Plaintiff Fedders Corporation now moves for partial summary judgment on the question of liability. Defendants move for summary judgment, seeking dismissal of all of Fedders' claims. Defendants' motion is granted and the complaint is dismissed.
Fedders has also moved to strike portions of the affidavits submitted by Defendants. In large measure these motions are premised on the remarkable proposition that a party may not swear to facts not supported by documentary evidence. In any event, the issue is moot in light of the fact that Defendants' motion for summary judgment is being granted due to a lack of proof of damages.
Background
Plaintiff Fedders Corporation ("Fedders"), a Delaware corporation with its principal place of business in New Jersey, manufactures and distributes room air conditioners across North America. Fedders' room air conditioners are sold at Wal-Mart, a retail giant which has done business with Fedders for a number of years. Prominent in this long-standing business relationship between Fedders and Wal-Mart was Defendant Kurt Kaufhold ("Kaufhold"). Kaufhold, an Illinois resident, began his employment with Fedders in or about May 1990 as Regional Sales Manager. Upon commencing his employment with Fedders, he executed Fedders' confidentiality agreement, which was signed in Illinois. He held various sales positions with Fedders, which involved the development and maintenance of sensitive proprietary information relating to Fedders' relationship with customers, including Wal-Mart. Kaufhold ultimately held the position of Vice President of Sales in charge of the Wal-Mart account.Wal-Mart contracts with distributors such as Fedders through a highly competitive bidding process. Distributors are invited to submit bids. Wal-Mart compares the bids and then individually meets with each bidder in an effort to drive the bids down. Bids for Wal-Mart's 2001 room air conditioner business were to be presented to Wal-Mart in Asia in July 2000. Prior to this process, Wal-Mart challenged Fedders to supply a 5,000 BTU model that Wal-Mart could retail for $99. While the parties fiercely contest the import of Kaufhold's role in the process that followed, it is clear that he did help prepare Fedders' bid and was privy to Fedders' research. Kaufhold had intimate knowledge of bid-related information that he acknowledged could have hurt Fedders if disclosed to competitors.
As Fedders prepared for the Wal-Mart negotiations, Kaufhold was considering employment elsewhere. At a trade show in January 2000, Kaufhold met an employee of Defendant Haier America Trading LLC ("Haier") and expressed an interest in joining Haier. Haier, a limited liability company organized under the laws of New York with its principal place of business in New York City, also manufactures room air conditioners and distributes them in North America. Haier similarly does business with Wal-Mart and was going to participate in the July 2000 bidding process. Kaufhold submitted a resume to Haier's Senior Vice President for Sales on or about February 11, 2000, and in April 2000, this Vice President expressed an interest in hiring Kaufhold. On June 25, 2000, Haier's President interviewed Kaufhold at Newark Airport and told. Kaufhold that if employed, he would be working on Haier's Wal-Mart account. Haier's President then made an oral offer of employment to Kaufhold and sent emails to Kaufhold to confirm this offer.
In addition to his dealings with Haier, Kaufhold also sent a resume to Intermatic, Inc., a lighting company, on June 26, 2000. On June 27, 2000, Kaufhold submitted his resignation to Fedders. Upon being asked where he was headed next, Kaufhold told Fedders' management that he was going to work for Intermatic. At the time, Kaufhold did not have an offer from Intermatic. Not knowing that Kaufhold had interviewed with Haier, Fedders allowed Kaufhold to continue working on the Wal-Mart account in preparation for the Wal-Mart negotiations in Asia. On July 6, 2000, Kaufhold attended a preliminary meeting between Fedders and Wal-Mart in which Fedders discussed its intention of submitting a bid of $117. Prior to going to the Wal-Mart negotiations in Asia, Fedders anticipated that this number would ultimately be negotiated down to $105-$110.
Kaufhold's last day with Fedders was July 7, 2000, and prior to this he did not tell anyone at Fedders that he had an offer from Haber. Kaufhold accepted Haier's offer on the morning of July 7, 2000, but asserts that he did not know whether he was going to work for Haier until after July 5, 2000. Kaufhold claims that before starting with Haier, he destroyed or returned all information that he had relating to Fedders, but Fedders argues That there is no proof of such destruction and that Kaufhold must have provided such information to Haier. Kaufhold's first day with Haier was July 10, 2000. He began as a Vice President of Sales and was involved in selling room air conditioners to Wal-Mart.
In late July 2000, both Fedders and Haier were present for Wal-Mart's bidding process in Asia. Haier sent Kaufhold to attend the meetings, claiming that it wanted Kaufhold to tour Haier's Asia factories and to witness the negotiations because Kaufhold would be servicing the Wal-Mart account. Fedders, on the other hand, asserts that Kaufhold was sent to Asia so that Haier's negotiators could utilize Kaufhold's knowledge of Fedders' bidding strategy.
During the bidding process, Wal-Mart met with each manufacturer in sequence and in private. Accordingly, the manufacturers were not aware of what bids were being submitted by the other manufacturers. Fedders' initial bid for the 5,000 BTU model was $117. After pressure from Wal-Mart, Fedders lowered its bid to $107, and ultimately to $105. Haier's initial bid, which had been formulated prior to Kaufhold's employment, was $93. Haier ultimately lowered its bid to a final figure of $90. LG, a Korean manufacturer and a competitor in the room air conditioner market, also had a final (and initial) bid of $90. At the end of the negotiations, Fedders, LG, and GE (whose bid was $108) each received orders, with Fedders receiving the largest share. Haier, on the other hand, received no orders from Wal-Mart.
On July 27, 2000, Fedders filed a complaint against Haier and Kaufhold (collectively "Defendants"), claiming unfair competition, misappropriation of trade secrets, tortious interference with business relations, breach of fiduciary duty, inducing breach of fiduciary duty, conversion, breach of contract, inducing breach of contract, misrepresentation and conspiracy. These claims were based on, inter alia, Kaufhold's alleged misappropriation and use of confidential information with respect to Wal-Mart, as well as Haier's alleged improper hiring of Kaufhold in order to obtain such information and under-bid Fedders. Fedders seeks actual and compensatory damages in excess of $6,000,000, exemplary and punitive damages in excess of $10,000,000, and attorneys' fees and costs.
Discussion
A party is entitled to summary judgment as a matter of law when the evidence demonstrates that there is no genuine issue as to any material fact. Fed.R.Civ.P. 56(c); Celotex Corp. v. Catrett, 477 U.S. 317, 325 (1986). "Only when no reasonable trier of fact could find in favor of the nonmoving party should summary judgment be granted." White v. ABCO Eng'g Corp., 221 F.3d 293, 300 (2d Cir. 2000) (quoting Taggart v. Time, Inc., 924 F.2d 43. 46 (2d Cir. 1991)); Howley v. Town of Stratford, 217 F.3d 141, 150-51 (2d Cir. 2000) ("[T]he court is required to resolve all ambiguities, and to credit all factual inferences that could rationally be drawn, in favor of the party against whom summary judgment is sought.").
I. Choice of Law
Fedders claims that New York or New Jersey law applies to all of their claims, and Defendants assert that Illinois law applies. In this diversity action, New York choice of law rules govern. Wm. Passalacqua Builders, Inc. v. Resnick Developers S., Inc., 933 F.2d 131, 137 (2d Cir. 1991). This action contains claims in tort and contract. New York courts use an interest analysis approach in tort actions, Babcock v. Jackson, 12 N.Y.2d 473, 481-82 (1963); AroChem Int'l, Inc. v. Buirkle, 968 F.2d 266, 270 (2d Cir. 1992), and a grouping of contacts approach in contract actions. Lazard Freres Co. v. Protective Life Ins. Co., 108 F.3d 1531, 1539 (2d Cir. 1997)
On the tort claims, interest analysis requires that the law of the jurisdiction with the greatest interest in the litigation be applied.Kalb, Voorhis Co. v. American Fin. Corp., 8 F.3d 130, 132 (2d Cir. 1993). "Two separate inquiries are . . . required to determine the greater interest: (1) what are the significant contacts and in which jurisdiction are they located; and (2) whether the purpose of the law is to regulate conduct or allocate loss." Padula v. Lilarn Properties Corp., 84 N.Y.2d 519, 521 (1994).
Here, Illinois has the greatest interest in the litigation. First, the contacts with Illinois are quite significant. Defendant Kaufhold is domiciled in Illinois and one of Fedders' factories is there. This is where Kaufhold signed a confidentiality agreement upon joining Fedders, and Kaufhold worked for Fedders from his home in Illinois. It is here that Kaufhold kept the materials that Fedders claims were not destroyed but misappropriated by Kaufhold. See Softel, Inc. v. Dragon Medical and Scientific Communications, Inc., 118 F.3d 955, 967-68 F.2d Cir. 1997);Boyd v. University of Illinois, 2001 WL 246402 at *5 (S.D.N.Y. Mar 13, 2001). Second, Unfair competition laws regulate conduct. See C.A. Westel De Venezuela v. American Tel. Tel. Co., 1992 WL 209641 at *13 (S.D.N.Y. August, 17 1992). Here, the conduct to be regulated — compliance with confidentiality agreements, the freedom to find new employment and the obligations due to a former employer — took place in Illinois, and Illinois has the greatest interest in regulating conduct within its own state.
Fedders argues that the law of New Jersey should be applied to the tort claims because Fedders' principal place of business is in New Jersey and New Jersey is also the location of Kaufhold's interview with Haier (Newark Airport). Furthermore, Fedders notes that the injury was felt in New Jersey because that is where Fedders suffered economic loss, and claims that the law of the place of injury should control because this is "the last event necessary to make the actor liable." See Schultz v. Boy Scouts of America, Inc., 65 N.Y.2d 189, 195 (1985). However, because the actual misappropriation, if any, took place in Illinois, and both Kaufhold and Fedders have ties to Illinois, the general rule of lex loci delicti may be displaced. See Softel, Inc., 118 F.3d at 968.
As for New York, Defendant Haier is incorporated in New York and has its principal place of business there. The decision to hire Kaufhold was made in New York, and Kaufhold called Wal-Mart from Haier's New York offices. These contacts, though relevant, do not outweigh the Illinois contacts. Furthermore, neither New York nor New Jersey appear to have a paramount interest in regulating the underlying conduct as compared to Illinois.
Illinois law will similarly apply to the contract claims. In applying the grouping of contacts approach, New York courts consider such contacts as place of contracting, negotiation, performance, location of the subject matter, and domicile or place of business of the contracting parties. See Lazard, 108 F.3d at 1539. Here, the confidentiality agreement between Fedders and Kaufhold was signed in Illinois at the start of Kaufhold's employment with Fedders. This contract was presumably negotiated in Illinois as well. Kaufhold worked primarily in an office in his Illinois home, and the confidential information which was allegedly misappropriated was located here.
II. Misappropriation of Trade Secrets, Breach of Contract, and Inducing Breach of Contract
Although the Complaint contains ten causes of action, the thrust of Fedders' case revolves around the alleged misappropriation by Defendants of Fedders' trade secrets. According to Fedders, the misappropriation and use by Defendants of Fedders' margin analysis and bid "terms and conditions" ultimately tainted the bidding process to Fedders' detriment. At the onset, Fedders' claims of unfair competition, interference with business relations, breach of fiduciary duty, conversion, misrepresentation and conspiracy are all preempted by the Illinois Trade Secret Act, 765 Ill. Comp. Stat. 1065/8(a) (2001), because these claims stem directly from the trade secret misappropriation claim.See id. ("Except as [otherwise provided], this Act is intended to displace conflicting tort, restitutionary, unfair competition, and other laws of this State providing civil remedies for misappropriation of a trade secret."); Thomas Betts Corp. v. Panduit Corp., 108 F. Supp.2d 968, 971-76 (N.D. Ill. 2000); see also Composite Marine Propellers v. Van Der Woude, 962 F.2d 1263, 1265 (7th Cir. 1992) (With the passage of the ITSA, "Illinois . . . abolished all common law theories of misuse of [secret] information."). Thus, the remaining claims are for misappropriation of trade secrets, breach of contract, and inducing breach of contract.
A necessary element of each of these claims is damages. While the Illinois Trade Secret Act does not require a showing of damages in order to prove that a misappropriation of trade secrets has taken place, see 765 Ill. Comp. Stat. 1065/2(b) (2001); Composite Marine Propellers, Inc. v. Van Der Woude, 962 F.2d 1263, 1265-66 (7th Cir. 1992) (describing elements of misappropriation as a secret, which is taken, and used), damages caused by the misappropriation must be demonstrated in order for a plaintiff to recover compensatory and exemplary damages. See 765 Ill. Comp. Stat. 1065/4 (2001) Cf. Engineering Resources, Inc. v. CRC Steam, Inc., 94 C 6970, 1997 WL 232778 at *3 (N.D. Ill. May 1 1997) (rejecting an argument that the requisite showing of damages was not made in a trade secret misappropriation action). See also Morrow v. L.A. Goldschmidt Associates, Inc., 492 N.E.2d 181, 186 (Ill. 1986) (recognizing that tort liability will not be imposed where there has been a mere breach of an obligation without any injury or damage); Stromberger v. 3M Co., 990 F.2d 974, 976 (7th Cir. 1993) (reiterating "the general requirement of tort law . . . that the victim prove he was injured."). Similarly, "in order to sustain a cause of action for breach of contract, a plaintiff must establish that there was a wrongful act and that a loss or damages resulted directly from it." Jackson v. Hammer, 653 N.E.2d 809, 813 (Ill.App.Ct. 1995). Here, even if Fedders could produce evidence sufficient to sustain a claim that Defendants misappropriated trade secrets and used such information at the Wal-Mart negotiations or that Kaufhold and Haier breached or induced a breach of the confidentiality agreement, Fedders' claims must be dismissed because Fedders has failed to prove that Defendants' actions actually caused damage to Fedders or unjustly enriched Haier.
action 4 of the Illinois Trade Secrets Act states:
(a) In addition to [injunctive relief], a person is entitled to recover damages for misappropriation. Damages can include both the actual loss caused by misappropriation and the unjust enrichment caused by misappropriation that is not taken into account in computing actual loss. If neither damages nor unjust enrichment caused by the misappropriation are proved by a preponderance of the evidence, the court may award damages caused by misappropriation measured in terms of a reasonable royalty for a misappropriator's unauthorized disclosure or use of a trade secret.
(b) If willful and malicious misappropriation exists, the court may award exemplary damages in an amount not exceeding twice any award made under subsection (a)
765 Ill. Comp. Stat. 1065/4 (2001).
Fedders argues that Kaufhold's mere presence at the Wal-Mart negotiations in Asia tainted the bidding process. According to Fedders, it "had no choice but to lower its pricing to account for the high likelihood of Defendants' misappropriation and use [of Fedders margin analysis and bid `terms and conditions'] either by acts of omission or his mere involvement in the Haier bidding process at the critical moment." (Pl.'s Opp. to Def.'s Mot. for Summ. J. at 17). While Fedders admits that its initial bid of $117 was not tainted, it claims that its later bids of $107 and $105 were tainted because Kaufhold's presence forced Fedders to drop its bid down so low. Fedders points to GE's accepted bid of $108, and suggests that a significant amount of money was lost in having to settle at $105.
Even after making all factual inferences in favor of Fedders, Fedders' speculation is unsupported by the evidence. First, to argue that Fedders was damaged by having to drop from $117 to $105 contradicts the testimony of Steve Oldani, Fedders' then Director of Sales, who said that prior to attending the WalMart negotiations, he anticipated that Fedders would have to drop its bid to $110-$105 to secure an order from Wal-Mart. (Oldani Dep. at 159). Furthermore, Wal-Mart had challenged Fedders' to provide a unit which Wal-Mart could retail at $99. Thus, even though Fedders may have suffered economically by having to rest at such a low bid, Fedders did not suffer an unanticipated damage in having to bid at $105. Alternatively, Fedders could argue that while Fedders itself did not suffer any direct damage, it is entitled to damages in the form Haier's unjust enrichment. 765 Ill. Comp. Stat. 1065/4(b) (2001). However, Haier received no orders from Wal-Mart and thus no benefit from the alleged misappropriation.
Nevertheless, even if there was proof that Fedders was damaged by having to bid at $105, there is no causal connection between this damage and Defendants' conduct. To support a tort claim, Fedders must establish that but for Defendants' conduct, Fedders would not have suffered the harm it complains of. See A.I. Credit Corp. v. Hartford Computer Group, Inc., 847 F. Supp. 588, 600 (N.D.Ill. 1994). Fedders admits that Haier's initial bid of $93 was formulated without Kaufhold's input. Thus, to establish causation Fedders would have to prove that but for Haier's drop to $90 and Haier's use of Fedder's bid "terms and conditions," Fedders would not have been damaged. No reasonable trier of fact could reach such a conclusion. LG, a competitor that was awarded even fewer orders than Fedders, had the same opening bid as Haier's final bid ($90) and there is nothing to suggest that Haier's bid was the sole reason that Wal-Mart pressured Fedders to come down from $117. Furthermore, according to Mike Etters, a senior decision maker on Fedders' team, Kaufhold had no idea of how low Fedders would be willing to bid. Accordingly, Haier's own bid strategy could not have caused Fedders to bid lower because Haier would not have known how low Fedders could bid.
Similarly, the bidding process was secret, so even if Haier did use Fedders' information to formulate its own bid, this could not have "caused" Fedders to lower its bid because Fedders would not be aware of how Haier's bid was proceeding. That Fedders felt the need to lower its bid because it had to "account for the high likelihood of Defendants' misappropriation and use" is insufficient to establish causation.
Finally, even though GE did receive a certain portion of the Wal-Mart business with a bid of $108, there is no evidence from which a jury could determine what percentage of the Wal-Mart business Fedders would have been awarded if it bid $108, or whether it would have received a lesser share of the more profitable high-end air conditioner business.
Conclusion
For the foregoing reasons, Plaintiff Fedders' motion for partial summary judgment is denied and Defendants' motion for summary judgment is granted. The Complaint is dismissed.
SO ORDERED.