Summary
In Tatarian, API Industries, a manufacturer of a variety of plastic bags and trash liners, sold the bags through independent representatives, distributors, and wholesalers.
Summary of this case from In re Target Industries, Inc.Opinion
No. 01-cv-5372(WGB)
May 13, 2002
William C. Rindone, Jr., Esq., LIEBOWITZ, LIEBOWITZ STERN, Englewood, New Jersey, Attorney for Plaintiffs.
Robert L. Jones, Jr., Esq., EPSTEIN BECKER GREEN, P.C., Newark, New Jersey, Attorney for Defendants.
O P I N I O N
Plaintiff/Counterclaim-Defendant Jack Tatarian ("Tatarian" or "Respondent") and his wife, Plaintiff Anita Tatarian, commenced this action in the Superior Court of New Jersey, Bergen County, against Defendants/Counterclaimants API Industries, Inc., (d/b/a Aluf Plastics and hereinafter "API") and Reuven Y. Rosenberg (collectively "Claimants" or "API"), alleging that API discriminated against and ultimately terminated Tatarian on the basis of his religion and his age. Because Tatarian's state court complaint contained a federal cause of action for violation of 42 U.S.C.A. §§ 1981(a) and 2000(e), API properly removed the action to this Court on November 16, 2001.
On January 29, 2002, by application for an Order to Show Cause, Claimants sought leave of the Court to amend their Answer to include verified counterclaims against Tatarian. The factual basis for the counterclaims is API's allegation that after Tatarian was terminated, Tatarian accepted a position with a direct competitor, and used API's confidential client information to lure away API's clients for his new employer. API's counterclaims are common law claims for misappropriation of trade secrets, unfair competition, tortious interference with economic opportunity and contractual relationships, breach of duty of loyalty, conversion, inevitable disclosure, and trade libel.
The Court has subject matter jurisdiction over Plaintiff's federal claims pursuant to 28 U.S.C. § 1331, and supplemental jurisdiction over Plaintiff's state law claims pursuant to 28 U.S.C. § 1367. The Court has supplemental subject matter jurisdiction over Defendants' counterclaims pursuant to 28 U.S.C. § 1367. Venue is proper in this District. 28 U.S.C. § 1391 (b).
On February 7th, 2002, In response to Claimants' application, the Court entered an Order to Show Cause why a preliminary injunction should not issue against Tatarian, to restrain him from soliciting API's clients away for his new employer. The Order to Show Cause provided both sides with limited expedited discovery, allowed for evidentiary submissions, and directed that an evidentiary hearing would be conducted, if necessary. Following discovery, the application for a preliminary injunction was submitted to the Court for determination on the basis of factual affidavits and related materials.
Although given the opportunity to do so, the parties declined to call any live witnesses, and instead elected to rest solely on their paper submissions.
The Court heard oral argument on Claimants' application on May 13, 2002. Having reviewed the relevant submissions, the Court now makes the following findings of fact and conclusions of law pursuant to Rule 52 of the Federal Rules of Civil Procedure. For the following reasons, the Court will deny Counterclaimants' motion for a preliminary injunction.
To the extent that any of the findings of fact might constitute conclusions of law, they are adopted as such. Conversely, to the extent that any conclusions of law constitute findings of fact, they are adopted as such.
I. Findings of Fact
Claimant API is a New Jersey Corporation doing business in New York. Claimant Reuven Rosenberg is the principal of API, and its chief executive officer. Respondent Jack Tatarian is a New Jersey resident. Tatarian was hired by API on March 30, 1992 to be API's "National Sales Manager."
API is a manufacturer of plastic bags, primarily trash liners. API manufacturers a variety of trash liners for its clients (both stock and custom items), and provides a complete line of plastic bag products to its customer base. API sells the bags it manufactures through independent representatives, distributors, and wholesalers' networks. According to API, its independent manufacturer representatives, distributors, and wholesalers are protected through various exclusive selling arrangements to protect their customer base. API had entered into these alliances to produce customized products and personalized service for its clients.
As part of its effort to service fully the industry on which it has focused, API, as mentioned above, has developed a number of unique and proprietary plastic bag and trashliner products (hereinafter the "API products") for various uses such as trash liners, food bags, etc. Also in order to fully service its clients, API developed, trained and supported an independent sales organization adept with and knowledgeable as to the API products and the API clients that used them.
As the National Sales Manager, Tatarian was responsible for all of API's independent sales representatives, personally maintained four to five API customer accounts, and understood himself to be developing customer relationships for API's benefit. Even though Tatarian's job title was "National Sales Manager," within a year of his arrival he was told that he was not permitted to service any of the company's clients in the New York tri-state area. According to Tatarian, who is not Jewish, these lucrative clients (which represented the bulk of the company's business) were reserved for other Jewish employees of API.
Prior to his employment at API, although Tatarian had extensive experience as an industrial plastics sales manager, Tatarian had no sales experience in the plastic trashliner trade, no knowledge of API's customer base, and no customer contacts to bring to API. In fact, prior to his employment at API, Tatarian had, in his own words, "absolutely zero information" about API's customer base. (Tatarian Deposition Transcript ("T.") 44:7-9.)
It is undisputed that as part of his job at API, Tatarian developed client specific information and client prospect specific information, in order to service the needs of API's clients. This information included names of clients, points of contact at the clients, and actual or potential bag requirements for the clients he serviced. Tatarian was also given contact information for any of API's existing clients that were assigned to him. There is no evidence, however, that API maintained a master client contact list, or provided Tatarian with such a list if it existed.
Tatarian was not provided access to API's price structures, or to the methods used by API to calculate the price quotes it would give customers. Instead, Tatarian was required to submit each potential order to management, who would provide him with a price quote to give the customer. By virtue of passing these quotes along, Tatarian would presumably have had knowledge about prices actually charged by API to the clients he serviced.
There is evidence that on a monthly basis, API provided Tatarian with printouts of the company's raw sales information. (T. 58:12-59:8.) From this information Tatarian or his secretary would prepare monthly sales reports, with information on customer sales, for Rosenberg's review. Tatarian did not distribute these reports to API's independent sales force, but did provide each sales representative with the preceding month's sales information for the accounts that they individually managed. (T. 59:25-60:11.) On his own initiative, Tatarian was also able to obtain daily reports from the shipping manager about what client orders had been filed the day before. (T. 61:23-62:13.)
The Court finds credible API's contentions that it closely guarded its sales and pricing information. The Court also finds credible Tatarian's contentions that most of this information was even kept from API's own employees, including Tatarian. Although API claims it also maintained production histories for its clients and contract expiration information, there is no evidence in the record that Tatarian had access to any such formal lists or reports for any of API's closely guarded information. Instead, it appears that Tatarian's knowledge of sales history, client size, and present or future client needs would necessarily have resulted from his actually servicing API's client base during his eight years with the company.
Although API emphasized to its employees the need for confidentiality to be maintained as to sales and pricing information, and although Tatarian admits that such confidentiality is "common sense," (T.38:19-39:22), API did not have Tatarian sign a confidentiality agreement, or even, for that matter, a written employment contract. API did provide its employees with an Employee Handbook, which read in relevant part:
Our customers and suppliers entrust API with important confidential information relating to their businesses. Your employment with API assumes an obligation to maintain confidentiality, even after you leave our employ. Any violation of confidentiality seriously injures API's reputation and effectiveness. Please do not discuss API business with anyone who does not work for us, and never discuss business transactions with anyone who does not have a direct association with the transaction. Refer any such inquiries to your manager or to the President. No one is permitted to remove or make copies of any API records, reports or documents without prior management approval. Unauthorized disclosure of confidential information will result in discipline up to an including dismissal.
(Verified Counterclaim, ¶ 39; emphasis added.) Further, each API employee given the Handbook was allegedly also given a separate sheet stating and affirming API's expectation that its policies and procedures be followed and stating that each employee should be:
aware that during the course of [his/her] employment confidential information will be made available to [him/her], i.e., product designs, marketing strategies, customer lists, pricing policies and other related information and that each employee should understand that this information is critical to the success of API and must not be given out or used outside of API's premises or with non-API employees. In the event of termination of employment, whether voluntary or involuntary, the employee hereby agree[s] not to utilize this information with any other individual or company in any way, and to immediately upon request return any such written information to API.
(Verified Counterclaim, ¶ 41; emphasis added.)
While Tatarian acknowledges having been provided with a copy of API's Employee Handbook, he claims to have never discussed the handbook with his superiors, or to even have read it. Claimants have not submitted any acknowledgment forms signed by Tatarian or provided other testimony to indicate that Tatarian was either actually aware of the Employee Handbook' contents or that he agreed to abide by its terms; therefore the confidentiality provisions contained in the Handbook will be afforded little weight by the Court.
The Court notes that even if Tatarian had read the confidentiality provisions, they would be of limited applicability to Tatarian's conduct. First, while noting that an employee should protect "important confidential information relating to [API's clients'] businesses," and directing that an employee should "never discuss business transactions with anyone who does not have a direct association with the transaction," there is no indication that former employees are not permitted to continue to discuss past transactions with those who had been directly associated with them (i.e., API's customers).
Second, while employees were on notice that both before and after termination they should not disseminate "written information," including "customer lists," the provision contains no express language that the mere identity of API's customers, in written form or otherwise, was to be considered confidential. Similarly, there is no evidence in the record that Tatarian disseminated any "written information," or disseminated mentally retained information that would qualify as "product designs, marketing strategies, customer lists, pricing policies," or other related information.
The Court considers the identities of API's clients in-and-of-themselves to be distinct from a formal customer list prepared by API. While a formal customer list is readily transportable and could be misappropriated, knowledge that a particular company or companies purchased their bags from API could be obtained by contacting the companies directly. There is no evidence Tatarian mentally catalogued contact information for API's entire customer base; instead the evidence demonstrates that he retained information only about those customers with whom he had worked directly, by virtue of having worked with them.
Even absent a confidentiality agreement, the Court does find that all of the knowledge or information Tatarian gained about the plastic bag industry generally and about API's clients in particular was gained by him during his period of employment at API, largely with the financial support and encouragement of API. Tatarian must also have known that API sought to generally guard its customer information.
Before he was terminated, among the clients and potential clients of API with whom Respondent Tatarian worked were: a) Dodge Packaging; b) Clearfield Wholesale; c) Brookmeade Hardware; d) K.M. Sanford, Co.; e) A-Z Janitorial Supply; f) L.A. Packaging; g) Chad Supply; h) T.J. Russell Co.; and i) Key Distributor. Some of these clients Tatarian had developed. Others, like Chad Supply, were existing clients of API that Tatarian was asked to manage. All of the preceding companies were clients that Tatarian actually interacted with while employed by API.
On February 28, 2001, API terminated Tatarian. The stated reason for his termination was "unsatisfactory performance." Plaintiff was given no advanced notice that his employment with API was to be terminated. Defendant Rosenberg informed Tatarian of his termination, and immediately escorted him to his work area, so that he could gather his personal effects. Tatarian was then escorted from Claimants' building. Absent any evidence to the contrary, the Court finds that Tatarian took with him no business documents or records of any type; the only information related to API's business that he retained after his termination was what he stored in his memory.
The Court's findings as to the circumstances surrounding Tatarian's termination are made for purposes of this Opinion only. The Court recognizes that they are the subject of Plaintiff's case in chief, and that discovery as to Plaintiff's claims surrounding his termination has yet to be completed.
Based on a statement made at Tatarian's deposition, API claims that he made a specific effort to mentally catalogue API's confidential information, implying that he sought to store the information for future use against API. (T. 117:1-5.) The Court disagrees. The only evidence is that Tatarian developed a large mental base of stored knowledge about API's business and customers, in order to be a more effective employee. For that reason, this case is distinct from those where an employee goes out of his or her way to memorize a customer list prior to departing the organization.
Either contemporaneous with Tatarian's termination or shortly thereafter, API suggested that the parties engage in mediation with Jonas Miller, API's recommended mediator. The purpose of the mediation, which commenced in early March, 2001, seems to have been to provide Tatarian with a severance package payable over several years in exchange for Tatarian's entering into a non-competition agreement. The mediation spanned several months, ending sometime in July, 2001. According to Tatarian, during the mediation period he did not seek new employment. It is uncontested that during this period he neither solicited nor made sales to API's clients on behalf of any new employer. Tatarian further claims that he refrained from seeking new employment in the good-faith belief that Claimants were sincere in their desire to negotiate a severance package.
Based on Tatarian's sworn statements and correspondence generated by the mediator, it appears to the Court that the mediation was plagued by Claimants repeatedly making offers of settlement, and then withdrawing them at the last minute. (See May 3, 2002 Tatarian Cert. Ex. H.) Although the Court is not prepared to make a finding at this time that Claimants were negotiating in bad faith, there is evidence to support Tatarian's allegation that Claimants only negotiated with Tatarian to string him along, so that he would not begin working for a competitor.
Based on the foregoing, the Court rejects API's suggestion that it believed Tatarian to be leaving the trashliner business, and that it was taken unawares when he joined forces with a competitor; the June 18, 2001 Mediation Letter sent by Jonas Miller to the parties expressly recommended the parties accept a non-competition agreement whereby Tatarian could not solicit API's business for one year, but could in the following year replace up to $4,250,000 in API products with (presumably) the products of a competitor.
Ultimately, the mediation failed. Claimants did not provide Tatarian with a compensation package, and Tatarian did not provide API with a non-competition agreement. Roughly contemporaneous with the breakdown in mediation, Tatarian accepted an offer of employment from Spectrowax, a Brighton, Massachusetts company which is a distributor of plastic bags and other products. Tatarian is now the Sales Manager of National Accounts at Spectrowax, a position he assumed on August 1, 2002. Unlike API, Spectrowax does not manufacture plastic bags. Instead, it works with a number of manufacturers to provide its clients with both stock and custom made plastic bags and trashliners.
After Tatarian's termination, a number of API's customers and distributors, with whom he had worked closely, contacted him to inquire about his departure from API. (T. 77:14-78:25; 81:2-13; 88:13-91:8.) Tatarian informed them he had been terminated, and that he had yet to find new employment. It is uncontested that he did not attempt to solicit business from any of these individuals until after mediation had failed, and after he had accepted employment from Spectrowax. Once Tatarian joined Spectrowax, starting in September, 2001 he contacted a number of API's clients, to inform them of his new business circumstances, and to solicit their business for Spectrowax.
On several occasions, Tatarian was successful in convincing former API clients to begin doing business with Spectrowax. Dodge Packaging, a large API client, ceased using API after being solicited by Tatarian to use Spectrowax instead of API for their plastic bag and trashliner needs. (T. 94:9 to 95:18; 114:25 to 116:2.) Dodge Packaging subsequently returned to API only when API reduced its prices to offer a price lower than Spectrowax's. (T. 95:22-24.) Clearfield Wholesale and K.M. Sanford Co. had also ceased using API and had used Spectrowax for their plastic bag and trashliner needs. (T. 72:3 to 73:6.) Clearfield and K.M. Sanford only returned to API after API undercut Spectrowax's prices. (T. 107:6-17.) Once at Spectrowax, Tatarian similarly contacted Thompson Manufacturing, T.J. Russell Co., Key Distribution, Mark Lawry and A.Z. Janitorial, all API customers with whom Tatarian had previously interacted while employed by API. (T. 99:7 to 100:19; 101:11 to 103:11; 103:18 to 104:10; 105:5-15.)
Tatarian also dealt with Chad Supply, a Florida company which had been an API house account initially handled by Gabriel Kahana and subsequently turned over to Tatarian during his employment with API. (See Certification of Reuven Y. Rosenberg ("Rosenberg Cert.") ¶ 3.) Tatarian made contact with Chad Supply when he was contacted by the independent sales representative API had been using, Michael Eichorn Associates. (April 15, 2002 Tatarian Cert. ¶¶ 6-7.) Tatarian initially told Chad Supply that it should not leave API while it remained under contract with API, as the available alternatives were not desirable. (Apirl 15 Tatarian Cert. ¶ 9.) At the expiration of Chad Supply's contract with API, Spectrowax began servicing Chad's trashliner needs and using Michael Eichorn as its representative. (Id.)
Although API has not informed the Court as to the scope of its lost business as a result of the preceding companies' patronizing Spectrowax instead of API, Defendant Rosenberg has stated that during 2000 and 2001 API did over one-half million dollars in business with Chad Supply. (Rosenberg Cert. at ¶ 5.) In addition to customers entirely lost, as previously mentioned API's business has been impacted by the price concessions it has made to bring lost customers back to API. (T. 95:22-24; 107:1-17.)
The Court finds credible Tatarian's claim that, at Spectrowax, his practice has been to ask API's former clients what the current scope of their dealing with API is (i.e., what/how much they order, how much they pay). Upon being provided with the information, Tatarian has either formulated a bid price or recommended that the customer remain with API, if he could not beat API's price. Aside from knowing which companies purchased plastic bags from API and knowing the identity of individuals with purchasing authority at those companies, the Court accepts that any information about API's current prices that plays a role in Tatarian's solicitations for Spectrowax is necessarily known to API's customers themselves. It is escapes the Court how Tatarian could now achieve some competitive advantage by knowing what API's prices had been six months to a year in the past.
The Court find credible Tatarian's statement at his deposition that given the frequent price fluctuations in the trash liner market, any price information he might have recalled from his days at API would now be stale, and not indicative of API's current prices. (T. 107:6-11.)
Beyond any sales information he might remember from the period of his employment and API's customer contact information, there is no evidence that Tatarian had either in his memory or in his physical possession any trade secret or confidential information regarding API's manufacturing processes, marketing plans, or business strategies. There is no evidence Tatarian made plans to solicit away API's customers while he was still employed by API. API's unsupported allegations aside, there is also no evidence that Tatarian disparaged API's products or business in luring away its customers after he was terminated.
The evidence is quite to the contrary. Claimants have not rebutted Tatarian's statement that, when a distributor complained to him about API after his termination, Tatarian suggested that the distributor remain with API because of their quality products. (T. 77:25-76:10.) Tatarian also made favorable comments about Claimants to other competitors of API, (T. 120:20-25), and recommended that Chad Supply remain a customer of API's until the expiration of its existing contract.
Given all of the preceding facts, the question before the Court is a relatively narrow one: under New Jersey law, may an involuntarily terminated former employee, in the absence of an express non-competition or confidentiality agreement, solicit his former employer's customers, using allegedly proprietary knowledge of customer information acquired solely during his earlier employment?
Although Plaintiff's wrongful termination action is grounded in the Court's federal question jurisdiction, the parties agree that New Jersey law applies to Defendants' counterclaims. A "[t]rade secret claim in federal court is governed not by federal common law but by state law, regardless of whether jurisdiction is based upon diversity of citizenship or on pendency to [federal] claim." Rohm Hass, Co. v. Adco Chemical Co., 689 F.2d 424, 428 (3d Cir. 1982).
II. Conclusions of Law
A. The Preliminary Injunction Standard
Preliminary injunctive relief is an extraordinary and drastic remedy that should not be granted unless the party seeking the injunction can, upon a clear showing, demonstrate: (1) that there is a likelihood of eventual success on the merits; (2) that there is a probability of irreparable injury if relief is not granted; (3) that the non-moving party will not suffer irreparable harm if the preliminary injunction is issued; and (4) that preliminary injunctive relief is in the public interest. Times Mirror Magazines, Inc. v. Las Vegas Sports News, L.L.C., 212 F.3d 157, 160 (3d Cir. 2000), cert. den., 531 U.S. 1071 (2001).
B. Likelihood of Success on the Merits
Although Claimants have brought a wide array of common law counterclaims, at least a pair of API's claims are easily disposed of when determining whether a preliminary injunction is warranted. First, an injunction should not issue on Claimants' Trade Libel claim (Count VIII), because Claimants have failed to demonstrate that they are likely to succeed on the merits of the claim at trial. The Court reaches this conclusion because there is no evidence in the record of Tatarian's having made any false or disparaging remarks to anyone about API.
Even if there were evidence of such statements, it is not clear to the Court that such statements made in the business context would merit injunctive relief. See Subcarrier v. Day, 299 N.J. Super. 634, 645-46 (App.Div. 1997).
Similarly, an injunction should not issue on Claimants' Inevitable Disclosure claim (Count VII), essentially because the proverbial horse has already left the barn. API has effectively conceded in its pleadings that all of the information it seeks to protect via its Inevitable Disclosure claim has already been disclosed to Spectrowax. Therefore, the Court finds that API's Inevitable Disclosure claim has been wholly subsumed by Claimants' other common law claims.
Those claims, for Misappropriation of Trade Secrets/ Confidential Information (Count I), Unfair Competition (Count II), Tortious Interference (Counts III IV), Breach of Duty of Loyalty (Count V), and Conversion (Count VI), all require the Court to address a common question, namely whether Tatarian impermissibly purloined legally protected information when he joined Spectrowax while retaining API's customer information in his head.
Counts III and IV of Defendants' Counterclaim are captioned "Tortious Interference with Present and Prospective Economic Opportunity," and "Interference with Existing Contractual Relations," respectively. The Court will consider them together.
The New Jersey Supreme Court recently addressed the general protectability of client information in Lamorte Burns Co., Inc. v. Walters, 167 N.J. 285 (2001). The Court initially found that in New Jersey, service businesses' customer lists have in some instances been afforded protection as trade secrets. 167 N.J. at 299. The Court's conclusion was tempered by the finding that in all instances where protection has been afforded, "a substantial measure of secrecy must exist in order for information to be treated as a trade secret." Id.
Even without the "substantial measure of secrecy" required to render the information a trade secret, customer information may still be protected in some circumstances. According to the Court, "[t]he key to determining the misuse of information is the relationship of the parties at the time of disclosure and the intended use of the information."Lamorte, 167 N.J. at 299.
In Lamorte, the Court found that defendants had misappropriated confidential information, because the "specific information provided to [them] by their employer, in the course of employment, and for the sole purpose of servicing plaintiff's customers, is legally protectable as confidential and proprietary information." 167 N.J. at 301. The "confidential and proprietary information" in question was "surreptitiously gathered by defendants from plaintiff," was "not generally available to the public," would not have been known to defendants but for their employment, and consisted of "specific information concerning the clients' [pending insurance] claims, such as the name of the injured party and the date of injury." Id. Additionally, "defendants admitted that [the] information gave them an advantage in soliciting plaintiff's clients once they resigned." Id.
Lamorte does not end the Court's inquiry, however, because the court stated specifically that "the information went beyond the mere names of plaintiff's clients." 167 N.J. at 301. The record was also "clear that defendants . . . knew that Lamorte had an interest in protecting" the information taken. Id.
Whether injunctive relief should issue is less certain when the information does not go "beyond the mere names of plaintiff's clients." Other New Jersey Court have addressed whether an injunction should issue when an employee leaves his former employer with a list of the former employer's customers, and uses it to solicit them away. In National Tile Board Corp. v. Panelboard Manufacturing Co., 27 N.J. Super. 348, 352 (Ch.Div. 1953), a defendant left his employer for a competitor and removed a list of customers that he had compiled during the course of his employment. He then used this list to solicit away customers from his former employer for the benefit of the new employer.
Even with the foregoing facts, the National Tile Board court found for the defendants. The court noted that none of the defendants:
was a party to a contract, express or implied, which prohibited him from selling to customers of his late employer. And the general rule is that such solicitation of business is not objectionable. The plaintiff is a manufacturer dealing with jobbers and retailers. The knowledge of the names of its customers is not a trade secret.27 N.J.Super. at 352-53 (footnote added). The court further expounded on New Jersey's general policy of allowing employees to compete against their former employers:
Although the issue was not raised by the parties, the Court is cognizant of a line of New Jersey cases that have found implied employment contracts to exist where an Employee Handbook has been issued. See, e.g., Witkowski v. Thomas J. Lipton, Inc., 136 N.J. 385 (1994). In all of the cases known to the Court, however, the terms of Employee Handbook have only been enforced against 1) the employer that issued them or 2) employees who executed signed acknowledgments indicating that their employment was to be governed by the terms of the Manual. The Court is not aware of any decision where an implied contract has been formed solely by virtue of an employer unilaterally issuing an Employee Handbook, without any indication that an employee has agreed to be bound by it.
[while] employees of one having a trade secret `who are under an express contract, or a contract implied from their confidential relation to their employer, not to disclose that secret, will be enjoined from divulging the same to the injury of their employer' . . . an employee is not compelled to shut his eyes to what goes on in his place of employment nor is he required to wipe his memory clear of those matters which he learns during the course of that employment. So long as no contract express or implied prohibits him from divulging the information learned during his employment, the employee may use that information for his own benefit.
Sound public policy encourages employees to seek better jobs from other employers or to go into business for themselves . . . in the absence of agreement . . there must be a very strong case before the court will restrain the former employee from competing with his former employer.National Tile Board, 27 N.J. Super. at 355-56 (internal citations omitted; emphasis added); See also, Abalene Exterminating Co. Of N.J. v. Elges, et al., 137 N.J. Eq. 1, 2 (Chan. 1945) (well settled in New Jersey that "`in the absence of a restrictive covenant, and when no fraud is practiced, a former employee will not be enjoined from soliciting the customers of his former employer.'`The law distinguishes between an employee pirating his employer's trade by fraudulent means, and honestly competing with him for it.'")
Although the National Tile Board decision is almost 40 years old, it was recently embraced by the Appellate Division in Subcarrier Communications, Inc. v. Day, 299 N.J. Super. 634, 641 (App.Div. 1997). In Subcarrier, the Appellate Division vacated an injunction entered by the trial court, in part because a question of fact existed as to whether a customer list taken by the defendant contained protectable confidential information.
The Subcarrier decision was guided in part by the New Jersey Supreme Court's test, articulated in Sun Dial Corp. v. Rideout, 16 N.J. 252, 257 (1954), of when a customer list constitutes a trade secret:
a trade secret may consist of a . . . compilation which one uses in his business and which gives him an opportunity to obtain an advantage over competitors who do not know or use it. Its subject matter must not be a matter of public knowledge or of general knowledge within the industry. Although a substantial measure of secrecy must exist the secrecy need not be absolute and disclosure to employees involved in its use will not ordinarily result in loss of the employer's protection . . . Novelty and invention are not essential.
Mindful of the Sun Dial test, it appears to the Court that the distinction drawn in Subcarrier and other cases between protectable and non-protectable customer lists is a fact specific one.
Confidential customer lists in service businesses, drawn from the general population, and not easily discernable by competitors, have been considered valuable protectable assets, even in the absence of a non-competition agreement. See AYR Composition, Inc. v. Rosenberg, 261 N.J. Super. 495, 504 (App.Div. 1993). Such lists are protected because of the substantial time and expense involved in soliciting and obtaining customers out of the general population. See Abalene Extermination Co., Inc. v. Oser, 125 N.J. Eq. 331 [ 125 N.J. Eq. 329,] (Chan. 1939).
On the other hand, customer lists that are not entitled to injunctive protection are those where, for example, the company is a "manufacturer or wholesaler dealing with jobbers or retail merchants." Haut v. Rossbach, 128 N.J. Eq. 77, 78 (Ch. 1940), aff'd. 128 N.J. Eq. 478 (1941). "Where customers are known in an industry or are easily discernable and personal contacts are taken from job to job," "a former employee cannot be enjoined from using his or her experience in the industry as a basis for earning a living," even where a restrictive covenants exist. Subcarrier, 299 N.J. Super. at 643.
In this case, API's customers seem to the Court to be a finite group of wholesalers and janitorial supply companies. The Court appreciates that API engaged in substantial effort to develop these clients and generally refrained from distributing their identities to outsiders. That having been said, the Court does not have evidence before it to help it decide whether the identities of these companies are known to other manufacturers and distributors in the industry. Without that evidence, the Court can not determine whether API's customer lists are made up of readily available information (and are presumptively unprotectable), or whether they are more akin to random companies culled from the general population (and therefore protectable).
The Court notes that because this matter is before it on an application for a preliminary injunction, it is the movant's burden to show that they will ultimately prevail on the merits. Because Claimants have failed to adequately show that the information known to Tatarian is not common knowledge in the industry (i.e., that API's customers are in the market for trash liners), it would be difficult for the Court to find in Claimant's favor.
Another factor that cuts against finding API's customer information to be protectable is the fact that in the course of business, API relies almost exclusively on independent outside agents and brokers to place it in contact with its customers. While the Sun Dial Court held that "disclosure to employees involved in [confidential information's] use will not ordinarily result in loss of the employer's protection," disclosures to independent agents strike the Court as being an entirely different matter.
Presumably, any of the independent intermediaries API used could have elected to terminate their business with API, and instead directed the companies known to them to a new supplier with better prices than API's. If those individuals could conduct themselves in that manner based on information derived from their daily business with API, it would not be appropriate to restrain Tatarian from engaging in the same conduct.
For the preceding reasons, Claimants have failed to present sufficient evidence that the names and contact information of API customers as known to Tatarian should be affored protection as either trade secrets or confidential information. Accordingly, the Court declines to find that information (as memorized by Tatarian) worthy of protection. The Court finds insightful the words of the Chancery Court in Abalene Exterminating v. Elges, that:
to catalogue the employee's own knowledge of his employer's customers in a simple artless business as a `trade secret' or `confidential information' and thus perpetually enjoin the employee from thereafter honestly soliciting business from such customers in a competitive enterprise seems . . . to be an unreasonable restraint of trade unsupported by any dominant social or economic justification.137 N.J. Eq. at 3. Although the language in Elges refers to the business of killing cockroaches, the Court believes it to be equally applicable to the business of peddling plastic bags. Absent evidence that Tatarian used some of API's other confidential business information to solicit clients, and absent evidence that Tatarian even possessed other API confidential information that he could have used to solicit clients, the mere fact that he mentally catalogued API's client contact information is not sufficient to sustain issuance of preliminary restraints. With that conclusion in mind, the Court finds that each of Claimants' common law claims are not likely to succeed on the merits, for the following reasons.
First, Claimants' cause of action for Misappropriation of Trade Secrets/Confidential Information (Count I) necessarily requires a finding that some trade secret or confidential information was misappropriated. Having concluded that there is not sufficient evidence to find API's customer contact information protectable, and having found that Tatarian had no other trade secret or confidential information in his possession, Claimants are not likely to succeed on the merits of this cause of action.
Claimants' second cause of action is for Unfair Competition (Count II). Given the findings of fact made by the Court, this cause of action also fails. In the Court's estimation, absent fraud or other illicit conduct, there is nothing unfair about a former employee soliciting his former employer's clients away after his employment ends. As the Appellate Division noted in Subcarrier, although "later competition with a current employer may eventually prove harmful to the former employer . . . [t]hat sort of harm is not actionable; it is called free enterprise." 299 N.J. Super. at 645 (internal quotation omitted).
Similarly, Claimants are not likely succeed on the merits of their claims for Tortious Interference (Counts III IV). As Claimants rightly note, New Jersey law does protect both existing contracts and prospective business relationships from tortious interference. Van Natta Mechanical Corp. v. Distaulo, 277 N.J. Super. 175, 182 (App.Div. 1994). A prima facie case of tortious interference requires that a plaintiff show 1) that it pursued a "reasonable expectation of economic advantage," 2) that defendant intentionally and maliciously interfered with its business relationships, and 3) that it suffered a loss as a result. Id. There is no question Claimants have satisfied the first and third elements for a tortious interference claim; even so, they are not likely to succeed on their claims because they have failed to demonstrate that Tatarian "intentionally and maliciously interfered" with API's business relationships.
The long standing rule in New Jersey is that:
while a trader may lawfully engage in the sharpest competition with those in like business by holding out extraordinary inducements, by representing his own wares to be better and cheaper than those of others, yet when he oversteps that line and commits an act with the malicious intent of inflicting injury upon his rival's business, his conduct is illegal, and, if damage results from it, the injured party is entitled to redress.Lamorte, 167 N.J. at 306, quoting Van Horn v. Van Horm, 56 N.J.L. 318, 323 (1893) (emphasis added). "Malice is not used here in its literal sense to mean `ill will;' rather, it means that harm was inflicted intentionally and without justification or excuse." Lamorte, 167 N.J. at 306.
It is not sufficient that a defendant seek to take business away from a plaintiff; instead "the conduct must be most injurious and transgressive of generally accepted standards or common law morality or of the law. The line clearly is drawn at conduct that is fraudulent, dishonest, or illegal and thereby interferes with a competitor's economic advantage."Lamorte, 167 N.J. at 306-07 (internal citations and quotations omitted).
Tatarian's conduct has not been shown to cross the aforementioned line. While he contacted API's customers and convinced a number of them to leave API for Spectrowax, he did so many months after his departure from API and only after giving API more than ample time to secure from him a non-competition agreement. There is no evidence he engaged in any fraudulent or dishonest activity, or used information about the inner workings of API's business against it.
Instead, the only evidence in the record is that Tatarian contacted businesses he knew to be in the market for Spectrowax's products. Necessarily, all of the businesses were known to him from his days at API, and were present or former API customers. Using the contact information (much of which he had developed himself), he contacted those businesses, inquired about their present contracts with API, and attempted to outbid API on behalf of Spectrowax. While such conduct undoubtedly led to a loss of business for API, that in-and-of-itself does not make it tortious, malicious, or actionable. Accordingly, Claimants are not likely to succeed on the merits of their Tortious Interference claims.
In Subcarrier, a defendant used a plaintiff's lease forms without permission. The Court found it not to be actionable, in part because the forms had first been provided by the plaintiff to its customers, and then given to the defendant by those customers. 299 N.J. Super. at 646. Analogously, it is important to note that in the fall of 2001, API's customers would have been in a much better position to provide Tatarian with API's pricing information than Tatarian would have been to provide those customers with any information he might have recalled from his days at API. Such an exchange of information would not be actionable.
Claimants' fifth cause of action for Breach of Duty of Loyalty (Count V) is also unavailing. "Loyalty from an employee to an employer consists of certain very basic and common sense obligations. An employee must notwhile employed act contrary to the employer's interest. During that period of employment, an employee has a duty not to complete with his or her employer." Lamorte, 167 N.J. at 302 (citations omitted; emphasis added). After termination of employment, however, a former employee may directly compete without violating his duty of loyalty. "Because of the competing interests of allowing an employee some latitude in switching jobs and at the same time preserving some degree of loyalty owed to the employer while on the job, neither the decision to compete nor the consequent entering into competition alone is actionable." Auxton Computer Enterprises, Inc. v. Parker, 174 N.J. Super. 418, 424 (App. Div. 1980).
"An employee who is not bound by a covenant not to compete after the termination of employment, and in the absence of any breach of trust ," may begin to compete with his former employer. Lamorte, 167 N.J. at 303 (emphasis added). This is true in part so long as the former employee does not take "legally protected information from his or her employer, in order to seek a competitive advantage upon resignation." Id. at 304.
Unlike the defendant in Lamorte, Tatarian did not begin an "intentiona[l] . . . process of subverting [his] employer's business while still employed." Claimants' protestations to the contrary, Tatarian did not use confidential information when he contacted those API clients known to him, even if API sought to keep the identity of its customers known from the general public. Instead, Tatarian's conduct was more properly characterized as an instance where:
a former employee, not bound by a restrictive covenant and not guilty of any breach of trust, after the termination of his employment, [permissibly elects] to compete honestly with his former employer, even to the extent of soliciting the customers of his former employer with whom he became acquainted in the course of his employment.United Board Carton Corp. v. Britting, 63 N.J. Super. 517, 523 (Chan. 1959). Mindful that New Jersey courts have "been careful to distinguish between former employees `honestly' competing with the old employer for the latter's customers and the `pirating' of the former employer's business by dishonorable and disloyal means," Id. at 525, on the facts before the Court Tatarian's conduct does not justify issuance of an injunction on breach of Duty of Loyalty grounds.
Claimants' final cause of action is for Conversion (Count VI), of Claimants' trade secrets. Because Claimants have failed to demonstrate that Tatarian misappropriated the information stored in his head, this cause of action also fails.
In addition to finding that Claimants are not likely to succeed on the merits of any their claims, in declining to grant API a preliminary injunction, the Court has also taken into account the fact that the circumstances surrounding Tatarian's termination are very much in question. This is not a case where an employee elected to join a competitor and take clients with him; Tatarian was instead terminated with little or no notice, potentially wrongfully. The public interest and balance of the equities tips against allowing an employer to terminate a senior employee, and then on the basis of that employee's accumulated knowledge alone keep the employee from engaging in his chosen profession.
Additionally, the Court believes it to be important that Claimants had repeated opportunities to obtain a non-competition agreement from Respondent, but elected not to do so. Although non-competition agreements are closely scrutinized in New Jersey, they are routinely included in employment contracts and are routinely enforced. Had Tatarian entered into a non-competition agreement before engaging in his present conduct, Claimants' case would have been considerably strengthened. Mindful that Claimants would have had to compensate Tatarian for entering into a non-competition agreement but made the calculated decision not to do so, Claimants should not now get the benefit of a constructive non-competition agreement on equitable grounds, essentially for free.
It also bears mentioning that had the parties entered into a non-competition agreement, it would have been for a finite term. That is in contrast to the permanent injunction Claimants now seek via litigation. Because New Jersey courts disfavor permanent restraints on trade, even if Claimants had successfully made out a case for issuance of an injunction, that injunction necessarily would have been as narrowly tailored as this Court could have crafted it. See, e.g., Britting, 63 N.J. Super. at 534 (issuing a two year injunction instead of a permanent one, and finding that "the defendants should not be kept out of competition forever, for such a policy would destroy free enterprise and the wholesome benefits which fair and honest competition creates.")
Finally, the Court does not believe the alleged damage to Claimants to be irreparable. API's lost former clients are known to it. The revenue generated by Spectrowax from those clients is discoverable. In the unlikely event that Claimants succeed at trial, those damages can certainly be recouped. Cf. Britting, 63 N.J. at 533 (damage from misappropriated customers and lost future profits presumptively irreparable).
III. CONCLUSION
For all of the foregoing reasons, Claimants' application for a preliminary injunction is denied.
An appropriate Order follows.