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protecting confidential information, trade secrets and proprietary information
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Civil No. 04-4921 (DWF/JSM).
December 10, 2004
Stuart T. Williams, Esq., David B. Olsen, Esq., and Jane E. Rydholm, Esq., Henson Efron, Minneapolis, MN, counsel for Plaintiff.
Roy A. Ginsburg, Esq., and Todd W. Schnell, Esq., Dorsey Whitney LLP, Minneapolis, MN, appeared at the request of Defendants, but were not yet retained by the Defendants as of the hearing date.
MEMORANDUM OPINION AND ORDER AND PROTECTIVE ORDER
Introduction
The above-entitled matter was brought before the undersigned United States District Judge on December 8, 2004, pursuant to Plaintiff Hypro, LLC's ("Hypro") Motion for Temporary Restraining Order, Motion for a Protective Order, and Motion to Preserve and Protect Evidence. Specifically, Hypro requests that this Court enter a Temporary Restraining Order ("TRO") to enjoin Defendants Fire Lion Global, LLC ("Fire Lion"), CAPS Fire, Inc. ("CAPS"), Thomas W. Reser, and Warren E. Hill (collectively "Defendants"): (1) from disclosing, keeping, or making copies of any of Hypro's confidential information; (2) from carrying on any business that competes with Hypro's business; (3) from consulting, advising, or assisting any business entity that is currently or will become in the future a competitor of Hypro; and (4) from engaging in any practice that attempts to evade the provisions of any TRO entered by this Court.
Hypro's counsel has submitted affidavits showing that Hill was served on December 4, 2004, and Reser, Fire Lion, and CAPS were served on December 6, 2004. However, Defendants had not retained local counsel at the time of the hearing. Nonetheless, Todd W. Schnell, Esq., and Roy A. Ginsburg, Esq., from Dorsey Whitney, LLP, appeared at the hearing and represented to the Court that they had been contacted by Defendants' counsel in Oregon about taking on the case. For the reasons set forth below, the Court grants Hypro's Motion for Temporary Restraining Order, Motion for a Protective Order, and Motion to Preserve and Protect Evidence.
Background
Edwards Manufacturing, Inc. ("Edwards") was an Oregon corporation with its principal place of business in Milwaukie, Oregon. Edwards was engaged in the design, manufacture, sale and distribution of pumps, pumping systems, and related fire protection equipment. Pursuant to a stock purchase agreement dated January 6, 2000 ("the Purchase Agreement"), Edwards' shareholders sold all of their Edwards stock to Hypro. Reser owned 45 percent of Edwards' stock at the time of the sale. The Purchase Agreement contained a five-year non-compete provision and a confidentiality provision.
Reser continued to work for Edwards after the Hypro purchase pursuant to an employment agreement ("the Employment Agreement") dated January 10, 2000. The Employment Agreement provided that Reser agreed not to use or disclose Edwards' confidential information and that Reser agreed that he owed a fiduciary duty of loyalty to Edwards. The Employment Agreement also contained an invention assignment provision providing that any invention developed by Reser up to two years after the expiration of the Employment Agreement would be assigned to Edwards.
In December 2000, Edwards merged with Hypro and became Edwards Manufacturing ("EMI"), a division of Hypro. After the merger, Reser worked for Hypro as EMI's Director of Sales and Marketing. Reser's duties included developing and implementing sales and marketing programs worldwide. Reser held this position through December 2003.
In January 2004, Reser became Regional Sales Manager for EMI. Reser's territory included Australia, New Zealand, India, Indonesia, Southeast Asia, the Philippines, Korea, Japan, China, Hong Kong, and Taiwan. On Hypro's behalf and at its expense, Reser traveled to Asia and other locations to promote Hypro's products and to meet with Hypro's existing and prospective customers and joint venture partners.
In 2002, Reser recruited Hill to work with him at EMI. On June 11, 2002, Hill entered into an agreement ("the Hill Agreement") with EMI to serve as its International Sales Representative. The Hill Agreement provided that Hill could not work for any other company as a salaried employee and could not sell or represent product lines that compete with those of Hypro with the exception of Cutler Hammer fire pump controllers.
Pursuant to the Hill Agreement, Hill was responsible for the sale of EMI's foam pump and mist systems and Underwriters Laboratories/Factual Mutual listed engines for the international market outside of the United States. While serving as Hypro's International Sales Representative, Hill traveled to Asia and elsewhere to develop and maintain relations with Hypro's existing and prospective customers and joint venture partners.
In late 2001, Hypro began to explore a business opportunity to develop a pumping system using 3M's Novec 1230 fire protection fluid. On January 4, 2002, two of Hypro's engineers visited 3M's Mendota Heights, Minnesota, facility to discuss a pump delivery system for Novec. The Hypro engineers reported that there was a large potential for this application, that knowledge of the project should remain confidential, and that Reser would work with 3M on the project.
On May 24, 2002, Reser met with 3M engineers to discuss the Novec project. Reser reported to Hypro that "an opportunity exists to pump Novec" and that if Hypro "can pump it, there will be a market for it." (Affidavit of Richard Hinkes ("Hinkes Aff."), ¶ 3, Ex. A at 6.) In a later memorandum, Reser reported to Hypro that 3M estimated the world-wide market to be $200-225 million per year. 3M believed it could capture 50% of the market by 2005 using Novec. The development of a pumping system began in 2002 and remained a strategic development project for Hypro. Reser was the main person handling the Novec project for Hypro from 2002-2004.
On September 6, 2002, Reser seemingly changed his position on the viability of the Novec project stating that "[i]n my view we should not spend any time or money on pursuing . . . Novec." (Hinkes Aff., ¶ 4, Ex. B. at 2.) On October 29, 2002, Reser wrote a letter to 3M returning original documents to 3M that it had provided to EMI for the Novec project. Reser's letter states that Edwards has elected not to pursue testing of Novec 1230. Reser's letter further states that 3M should reissue the confidential documents to CAPS.
Although Reser had presented Hypro's management with discouraging comments regarding the Novec project, Hypro contends that it believed Reser was continuing to work with 3M to develop a pumping system for Hypro using Novec.
Hypro alleges that Reser shared his knowledge regarding Hypro's Novec project with David Smith. In January 2003, Reser and Smith began to work on a plan to develop, manufacture, and market a pumping system for Novec using the name CAPS. In May 2003, Reser made a presentation on behalf of CAPS at a trade show in Dallas, Texas. Reser attended the event at the expense of Hypro. After the trade show, Reser sent out letters to prospective customers stating that CAPS was willing to develop a Novec 1230 pumping system to the customers' specifications.
In July 2003, Reser proposed to 3M an exclusive licensing agreement for Novec between 3M and CAPS. Later in 2003, Reser met with 3M personnel in Minnesota to propose a marketing support agreement between 3M and CAPS. Reser and Smith incorporated CAPS in February 2004. In May 2004, Reser again made a presentation and solicited business on behalf of CAPS while attending a trade show at the expense of Hypro. Hypro alleges that Reser or CAPS purportedly have a patent application pending regarding a pumping system used for Novec that Hypro believes is based on Hypro's confidential and proprietary information.
Hypro also alleges that in 2004, if not earlier, Reser and Hill conspired to misappropriate Hypro's joint venture business plans for themselves to compete with Hypro using the name Fire Lion. Reser and Hill allegedly have done business with Hypro customers under the Fire Lion name since at least March 2004.
Reser and Hill incorporated Fire Lion in May 2004 to develop, manufacture, market and distribute pumps, pump systems, components, and related products, to export fire protection goods and services from the United States, and to establish a foam pump manufacturing company in China via a joint venture. According to Hypro, these activities would compete directly with its business.
In March 2004, Fire Lion allegedly began selling fire protection equipment to Hypro customers, including CMA, which was a distributor of EMI products in Asia. Later, Reser and Hill allegedly met with Chemguard, a Hypro customer, and Williams Fire Hazard Controls ("Williams Fire"), a Hypro competitor, to promote Fire Lion. Reser and Hill allegedly told Chemguard and Williams Fire representatives to keep their discussions confidential. In a letter dated April 12, 2004, Reser also provided Williams Fire with information regarding EMI's methodology for obtaining certification for its products from Factory Mutual.
Throughout 2004, Reser allegedly met with a number of companies to discuss joint ventures between these companies and Fire Lion. Hypro alleges that the strategic business alliances Reser proposed to these companies were based on proposals that had been prepared by Hypro. Hypro further alleges that Reser also issued quotes to companies for Fire Lion products.
Hypro received information that Reser was handing out his business card as a Fire Lion director while he was attending a trade show in Beijing, China, on behalf of Hypro. Reser was confronted by Hypro management about the incident at a meeting on November 4, 2004. At the meeting, Hypro management required Reser to turn over his company laptop computer. Later that day, Reser allegedly retrieved his computer from Janice Wiser, a Hypro employee, under false pretenses.
Hypro alleges that Reser took the computer to his home and installed a wiping software program called "Incinerate." Hypro alleges that Reser used the program to delete approximately 94 megabytes of information from the computer. Reser returned the computer to Hypro the following day without mentioning the deleted files to anyone. However, Hypro had made a copy of the documents on the computer used by Reser earlier on November 4. A later review of these documents showed that the files deleted by Reser included letters, memoranda, business plans, and other files related to his involvement with CAPS and Fire Lion.
Hypro also alleges that Reser and Hill attempted to conceal their actions by altering Fire Lion's website after Reser resigned from Hypro on November 8, 2004. Specifically, Hypro alleges that the products listing was removed from the site and replaced with a general description of the products sold by Fire Lion.
Based on the actions of Reser, Hill, CAPS, and Fire Lion, Hypro filed these motions alleging: (1) Reser, Hill, CAPS, and Fire Lion violated the Purchase Agreement and the Employment Agreement; (2) Reser, Hill, CAPS, and Fire Lion violated the Uniform Trade Secrets Act; (3) Reser, Hill, and Fire Lion violated the Hill Agreement; (4) Reser and Hill breached their respective employment agreements; (5) Reser and Hill have breached their common law duties of loyalty and good faith; (6) Reser, Hill, CAPS, and Fire Lion misappropriated Hypro's business opportunities; (7) Hill tortiously interfered with the Purchase Agreement and the Employment Agreement; (8) Reser tortiously interfered with the Hill Agreement; (9) Reser and CAPS tortiously interfered with Hypro's business expectancy regarding Novec; (10) Reser, Hill, and Fire Lion tortiously interfered with Hypro's business expectancy regarding joint ventures and other business arrangements; and (11) Reser and CAPS conspired to misappropriate Hypro's trade secrets.
Discussion
I. Motion for Temporary Restraining Order
Under Eighth Circuit precedent, a temporary restraining order may be granted only if the moving party can demonstrate: (1) a likelihood of success on the merits; (2) that the movant will suffer irreparable harm absent the restraining order; (3) that the balance of harms favors the movant; and (4) that the public interest favors the movant. See Dataphase Sys., Inc. v. C L Sys., Inc., 640 F.2d 109, 113 (8th Cir. 1981). None of the factors by itself is determinative; rather, in each case the factors must be balanced to determine whether they tilt toward or away from granting injunctive relief. See West Publ'g Co. v. Mead Data Cent., Inc., 799 F.2d 1219, 1222 (8th Cir. 1986), cert. denied, 479 U.S. 1070 (1987). The party requesting the injunctive relief bears the "complete burden" of proving all the factors listed above. Gelco Corp. v. Coniston Partners, 811 F.2d 414, 418 (8th Cir. 1987).
A. Likelihood of Success on the Merits
The first Dataphase factor requires that the movant establish a substantial probability of success on the merits of its claim. See Dataphase, 640 F.2d at 114. Hypro has asserted several causes of action in its Complaint. Specifically, Hypro alleges that Defendants' actions breached duties owed to Hypro, including contractual non-compete provisions, contractual confidentiality provisions, and common law fiduciary duties. Hypro also alleges that Defendants violated certain statutory duties owed to it. Defendants failed to file papers in response to these allegations or obtain counsel to do so prior to the initial hearing on this matter.
The Court finds that Hypro has established a likelihood of success with regard to a number of its claims. Hypro has presented compelling evidence that Defendants have violated the Purchase Agreement, the Employment Agreement, and the Hill Agreement by misappropriating Hypro's business opportunities and developing those opportunities in such a way as to compete with Hypro's existing and future business activities. Accordingly, the Court finds that Hypro has demonstrated a likelihood of success.
B. Irreparable Harm
The second factor that the movant must establish is that irreparable harm will result if injunctive relief is not granted and that such harm will not be compensable by money damages. See Packard Elevator v. I.C.C., 782 F.2d 112, 115 (8th Cir. 1986). A showing of speculative harm is insufficient to meet this burden. See id. Failure to show irreparable harm alone is a sufficient basis for a court to deny injunctive relief. See Gelco, 811 F.2d at 420.
Hypro asserts that it will suffer irreparable harm absent the grant of a temporary restraining order because Defendants have violated the terms of the Purchase Agreement, Employment Agreement, and Hill Agreement and Defendants are using Hypro's confidential and proprietary information in the marketplace to gain an unfair advantage.
The Court finds that Hypro has demonstrated it will suffer irreparable harm absent the grant of injunctive relief. Hypro alleges that Defendants have breached their contractual duties and are actively competing with Hypro in the marketplace using Hypro's confidential and proprietary information. Accordingly, the Court finds that Hypro has demonstrated it will suffer irreparable harm unless the Court grants its motion for a temporary restraining order.
C. Balance of Harms
The third Dataphase factor to be considered is whether the harm to the movant in the absence of injunctive relief outweighs the potential harm that granting injunctive relief may cause to the non-movant. See Dataphase, 640 F.2d at 114. Hypro asserts that no amount of money can adequately compensate it for the harm that will be caused by allowing Defendants to use and market technology based on Hypro's trade secrets. Moreover, Hypro asserts that any business lost by CAPS or Fire Lion as a result of the injunction only existed because of Defendants' misappropriation of Hypro's business opportunities. In light of Hypo's allegations regarding Defendants' actions, the Court finds that Hypro has demonstrated the balance of harms weighs in favor of granting injunctive relief.
D. Public Interest
The final Dataphase factor to be considered by a court is whether injunctive relief is in the public's interest. See Dataphase, 640 F.2d at 114. Hypro asserts that the public interest is best served when parties can enter into agreements and come before the courts to enforce those agreements. The Court agrees and finds that Hypro has demonstrated that the public's best interest is served by a grant of injunctive relief.
II. Motion for a Protective Order
Liberal discovery "is provided for the sole purpose of assisting in the preparation and trial, or the settlement, of litigated disputes." Seattle Times Co. v. Rhinehart, 467 U.S. 20, 34 (1984). Because of the potential abuse of the discovery rules, courts have broad discretion to decide when a protective order is necessary. See id. at 36. The Federal Rules of Civil Procedure provide for the protection of a "trade secret or other confidential research, development, or commercial information." Fed.R.Civ.P. 26(c)(7).
Hypro has requested a protective order for all materials and information designated as confidential and produced by the parties during the course of discovery. Hypro moves for the protective order because it believes it will be necessary to introduce and use trade secrets and other confidential information as evidence in this case.
Based on Hypro's pleadings, supporting memoranda, and the arguments of counsel, the Court finds that both parties will likely be required to produce confidential and proprietary information during the discovery process. Thus, the Court grants Hypro's Motion for a Protective Order.
III. Motion to Preserve and Protect Evidence
Hypro has also requested that the Court enter an order requiring Defendants to preserve and protect evidence. Hypro makes this request based on its belief that Reser previously attempted to destroy computer files regarding his involvement with the other Defendants. In light of Hypro's allegations, the Court grants Hypro's request for an order requiring all parties to preserve and protect evidence.
Conclusion
As the Court stated during the hearing on these motions, the parties to this matter will be given calendar priority. In addition, Magistrate Judge Janie S. Mayeron is available to assist in the negotiation of a settlement should the parties find such services to be helpful. If the Court may be of assistance in this matter, the parties should contact Lowell Lindquist, Calendar Clerk for Judge Donovan W. Frank, at 651-848-1296, or Katie Haagenson, Calendar Clerk for Magistrate Judge Mayeron, at 651-848-1190.
For the reasons stated, LET IT BE ORDERED THAT:
1. Plaintiff Hypro's Motion for Temporary Restraining Order (Doc. No. 2) is GRANTED, as follows:
a. Defendants Reser, Hill, CAPS, and Fire Lion, and each of them and all those acting in concert with them, are enjoined from:
1. using for any purpose, disclosing to any person or keeping or making copies of documents, tapes, discs or programs containing any confidential information concerning Hypro, including but not limited to, Hypro's trade secrets, product specifications, methods, equipment, technology, patents, know-how, inventions, improvements, designs, business plans, marketing plans, cost and pricing information, internal memoranda, development programs, sale methods, customer lists, customer usages and requirements, computer programs and other confidential technical or business information and data that is not in the public domain through lawful means; and
2. engaging in, continuing or carrying on any business which competes with Hypro's business or is substantially similar thereto, including owning or controlling any financial interest in any corporation, partnership, firm or other form of business organization which is so engaged, or competing with Hypro in the design, manufacture, marketing and sale of pumps, pumps components, assemblies and systems, and related products for the high hazard fire suppression market; and
3. consulting with, advising, or assisting in any way, whether or not for consideration, any corporation, partnership, firm or other business organization which is now or becomes a competitor of Hypro or in any aspect with respect to the business of Hypro, including, but not limited to, advertising or otherwise endorsing the products of any such competitor; soliciting customers or otherwise serving as an intermediary for any such competitor; loaning money or rendering any other form of financial assistance to or engaging in any form of business transaction on other than an arm's length basis with any such competitor; and
4. engaging in any practice the purpose of which is to evade the provisions of this injunction to compete with or to commit any act which adversely affects Hypro's business.
b. The foregoing injunction shall remain in full force and effect until dissolved by further Order of this Court. This Order is conditioned upon Hypro's filing of a bond in the amount of $25,000.
2. Plaintiff Hypro's Motion for a Protective Order (Doc. No. 6) is GRANTED, as follows:
a. This Protective Order shall apply to all materials and information designated as Confidential as provided in this Protective Order, and produced by the parties during the course of discovery. The following definitions shall apply in the construction and application of this Protective Order:
1. "Source of Confidential Information" means the party producing Confidential Information.
2. "Confidential Information" means documents and things, and the information contained therein, which is identified as Confidential Information in accordance with paragraph 3 below.
3. "Under Seal" means to be placed in an envelope or suitable container which bears a legend in substantially the following form:
CONFIDENTIAL-SEALED PURSUANT TO COURT ORDER IN CIVIL CASE NO. 04-4921 (DWF/JSM).
b. The Source of Confidential Information shall identify Confidential Information by placing the label "CONFIDENTIAL" on documents or things, or by an appropriate indication on the record during testimony.
c. Confidential Information disclosed in accordance with this Protective Order shall be used solely in connection with this action and not for any other purpose, unless otherwise agreed to in writing by all the parties to the Protective Order.
d. Any person to whom Confidential Information is disclosed in accordance with this Protective Order must, prior to and as a precondition of such disclosure, agree to be bound by the terms of this Protective Order by signing the Acknowledgment provided hereunder.
e. Nothing contained in the Protective Order nor any actions taken in accordance with this Protective Order shall be construed as an admission that the information disclosed in accordance with this Protective Order constitutes confidential information, trade secrets, proprietary information, or the like.
f. The disclosure of Confidential Information in accordance with this Protective Order shall not constitute a waiver, release or abandonment of any right, title or interest of a Source of Confidential Information, which right, title, or interest is fully reserved by such Source of Confidential Information.
g. If there is an objection to the designation of information or materials as Confidential, the party which objects shall notify the Source of Confidential Information, and the parties shall in good faith attempt to resolve the dispute regarding the designation. If the parties are unsuccessful, the objecting party shall promptly move the Court for a ruling on whether the designated but disputed Confidential Information is entitled to protection.
h. Within sixty (60) days of the conclusion of this action and exhaustion of appeal remedies, if any, all documents and things containing Confidential Information shall be returned to the Source of Confidential Information, and any copies, duplicates, extracts, summaries, models or other documents or things prepared by a recipient of Confidential Information and containing Confidential Information shall be destroyed.
i. If any party produces, and inadvertently fails to designate as "Confidential" any document appropriate for such designation, the parties agree to treat such documents in accord with the provisions of this Order to the fullest extent possible from the time notice is given to the opposing party of the inadvertent disclosure.
j. This Order shall not prevent a party from applying to the Court for relief therefrom, or from applying to the Court for further or additional protective orders, or from agreeing to modification of this Order, subject to the approval of the Court.
k. Nothing in this Order shall apply to or restrict the use of Confidential Information designated by a Source of Confidential Information if the Confidential Information is or becomes publicly known or available or is or becomes known to the non-designating party or its agents or employees by other lawful means.
l. This Order shall remain in force and effect until modified, superseded, or terminated by order of the Court. The provisions of this Order shall continue to be binding upon conclusion of this action. This Court shall retain jurisdiction over the parties for enforcement of the provisions of this Order following conclusion of this action.
3. Plaintiff Hypro's Motion to Preserve and Protect Evidence (Doc. No. 4) is GRANTED, as follows:
a. The parties, including their officers, employees and agents, and anyone acting in concert with them, shall preserve during the pendency of this litigation all evidence, including electronic documents and electronic mail on their business or personal computers, containing any reference to the Plaintiff or Defendants' activities regarding matters identified or referred to in the Complaint, and shall not erase, alter, modify, or destroy such evidence.