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Trading Secrets A Law Blog on Trade Secrets, Non-Competes, and Computer Fraud

Fireworks Fly, California District Court Enjoins Former Pyrotechnics Company Employee From Soliciting Former Employer’s Customers

Posted in Restrictive Covenants, Trade Secrets

On March 21, 2012, in the case of Pyro Spectaculars, Inc. et al. v. Souza, Case No. 12-CV-00299-GGH, Magistrate Judge Gregory G. Hollows of the USDC for the Eastern District of California (Sacramento Division), issued an order preliminarily enjoining a former Account Executive for a pyrotechnics company from soliciting the customers of his former employer.  There are several notable aspects of this decision:

1.  Employee Mobility vs. Protection of Trade Secrets: In analyzing the “public interest” considerations involved in potentially issuing a preliminary injunction, the court weighed the competing public interests related to California’s strong public policies favoring on the one hand employee mobility, and on the other hand, protection of trade secrets. The court decided to issue a time-limited injunction intended to prevent misuse of Plaintiff’s trade secrets while allowing lawful competition. In so doing, the court made some statements useful to California employers:

  • Given that Defendant was subject to a non-solicitation agreement, the court took care to not run afoul of Business and Professions Code section 16600, which presumes that contracts restraining one’s right to engage in a lawful business, trade or profession are void. Specifically, the court granted a “narrow, time-limited non-solicitation restriction…to prevent defendant’s misuse of [Plaintiff’s] trade secret information in competing with [Plaintiff].” The court found the non-solicitation restriction particularly justified given Defendant’s alleged surreptitious downloading of Plaintiff’s information, use of wiping software to cover his tracks, and failure to account for several thumb drives notwithstanding the court’s order that he do so.
  • As to the likelihood of irreparable harm element required for injunction, the court observed that “damage to a business’s goodwill is often very difficult to calculate”. This is a useful finding for rebutting arguments that damages are sufficient to address a plaintiff’s alleged harm and thus injunctive relief should be denied. This may be particularly so where customer list trade secrets are at issue because the goodwill of customer relationships is often closely related to, if not bound up with, the at issue trade secrets.

2.  The Viability of “Customer Lists” as Trade Secrets: Defendant argued that Plaintiff’s customer lists did not constitute trade secret information. The court found that, although several information components that comprised Plaintiff’s trade secrets were publicly available, the software used by Plaintiff provided a “virtual encyclopedia” of specific Plaintiff customer, operator, and vendor information allowing a competitor to solicit Plaintiff’s clients “more selectively and more effectively without having to expend the effort to compile the data”. See Morlife, Inc. v. Perry, 56 Cal. App. 4th 1514, 1522 (1997). Appealing to common sense, the court also noted, if Plaintiff’s customer list was so readily available, “why was it necessary for defendant to surreptitiously download, retain, and funnel…[Plaintiff’s] information to his new employer in the first place.”

3.  Trade Secrets Retained in One’s Memory May Serve as a Basis to Enjoin Solicitation of a Company’s Competitors: Defendant’s other questionable conduct caused the court to be “skeptical” that an injunction requiring defendant to merely return Plaintiff’s information “will be sufficient to protect against misuse of [Plaintiff’s] trade secrets.” Importantly, the court further found that:

This skepticism is reinforced by the fact that defendant’s probable misappropriation thus far has “so tainted defendant’s base of knowledge that it would be very difficult, at least over the next several months, for defendant to separate his general pyrotechnics information and skills from [Plaintiff’s] legitimate trade secrets when competing with [Plaintiff].”

While California court’s do not recognize the so-called “inevitable disclosure” doctrine, the Pyro Spectaculars court’s injunction and above reasoning is not an articulation of that doctrine. The inevitable disclosure doctrine as applied in its purest form may be used in the absence of any wrongdoing by defendant to enjoin defendant from assuming employment with a competitor because allowing defendant to do so would cause defendant to “inevitably disclose” his former employer’s trade secrets due to the similarity of the duties defendant will have in his new job relative to the duties of his prior job. See Pepsico v. Redmond, 54 F. 3d 1262 (7th Cir. 1995).

In contrast, here the court found that, based on evidence of record, Defendant’s conduct was so unreliable and that his probable misappropriation had “so tainted his base of knowledge” that defendant would not be able to segregate his general knowledge and skills from Plaintiff’s legitimate trade secrets when competing with Plaintiff.

Although such reasoning and related injunction appear powerful indeed, the court tempered this aspect of its reasoning by imposing the qualification in the injunction that Defendant was enjoined only from initiating contact with Plaintiff’s current customers. If Defendant’s alleged bad acts have “so tainted defendant’s base of knowledge that it would be very difficult…for defendant to separate his general pyrotechnics information and skills from [Plaintiff’s] legitimate trade secrets”, query whether the initiating contact limitation is sufficient to fully protect Plaintiff’s trade secrets?

Perhaps anticipating this, the court noted that Plaintiff could use ongoing discovery to monitor compliance wit the preliminary injunction and seek damages if evidence showed any use by defendant and/or his new employer of Plaintiff’s trade secrets.

The court’s decision provides some comfort to California employers that there are at least some rules, even in California, to protect employers from former employees who steal company data and embark on campaigns to flip valuable customer relationships.