IP Law Daily Fastener distributor gets preliminary injunction against former employees in trade secrets dispute
Tuesday, December 12, 2017

Fastener distributor gets preliminary injunction against former employees in trade secrets dispute

By Joseph Arshawsky, J.D.

PrimeSource Building Products, Inc.’s ("PrimeSource") motion for a production injunction or for injunctive relief preventing certain former CEOs from working for Huttig Building Products, Inc., ("Huttig") or preventing Huttig from working with suppliers contacted by a former PrimeSource CEO was denied by the federal district court in Chicago. The motion was further denied as against former employee Jordan Whitehead. However, the motion for preliminary injunction was granted to the extent that Huttig was enjoined from selling products to any customers on the lists developed by three other former PrimeSource employees during their first weeks of employment at Huttig, and four former PrimeSource employees were precluded from working with the competing Huttig-Grip Division (PrimeSource Building Products, Inc. v. Huttig Building Products, Inc., December 9, 2017, Kim, Y.).

On December 15, 2016, PrimeSource sued Huttig, along with four former PrimeSource CEOs who currently work in the Huttig-Grip Division: Kenneth Fishbein, Mona Zinman, David Fishbein, and Robert Furio ("the CEOs"), under the federal Defend Trade Secrets Act ("DTSA") and the Illinois Trade Secrets Act ("ITSA"). Four days later, PrimeSource sued Huttig, along with former PrimeSource sales employees, Scott Felten, Garrent Kessler, Daniel Kottmeyer, Allan Sagunsky and Whitehead (the "Employees") who took jobs working with the CEOs at the Huttig-Grip Division. PrimeSource is a building products company that derives significant revenues from the sale of fasteners, which are nails and screws used to join building products together in construction projects. The CEOs and Employees each signed various agreements while employed at PrimeSource, including post-employment covenants not to compete and non-solicitation. PrimeSource filed for a preliminary injunction against the production of fasteners and against the former CEOs and Employees working for Huttig in the Huttig-Grip Division, which the court granted in part and denied in part.

Irreparable harm. PrimeSource argued that the CEOs and Employees used its confidential information and trade secrets to gain an unfair advantage in launching their division focused on the direct sales of fasteners, and that they continued to compete unfairly. The harm "would be difficult to either pin down or quantify." Accordingly, PrimeSource met the threshold irreparable harm showing with respect to its ITSA, DTSA, and breach of non-disclosure agreement claims. Moreover, the fluidity of the customer contracts and the competitive nature of sales made it difficult to identify which contracts or customers PrimeSource lost to Huttig as a result of the claimed misconduct. Each of the employment agreements also included language that a breach of covenants constitutes irreparable harm, which favored a finding of irreparable harm. PrimeSource also passed the threshold for a showing of irreparable harm with respect to its breach of non-solicitation and non-competition covenants and its tortious interference claims, and that the remedies at law were inadequate to address that harm.

Likelihood of success. PrimeSource argued that its "supplier lists" constituted trade secrets that former CEO Zinman misappropriated by reaching out to supplier contacts on her first day at Huttig. The court held that PrimeSource was unlikely to establish that the supplier information was entitled to trade-secret protection, making a likelihood of success against Zinman low. Hearing evidence showed that the identity of PrimeSource’s suppliers was publicly available through customs reports and industry resources known as Panjiva and Import Genius. Those resources allow subscribers to identify not just PrimeSource’s suppliers, but shipping details and a generic description of the products sourced from the vendor. Moreover, "Zinman repeatedly and credibly testified that she took nothing with her when she left PrimeSource." Here, there was no evidence that Zinman took any documents or relied on anything other than her memory for information such as vendor pricing that was stale did not plausibly support a federal or state trade secrets claim.

Former CEOs Fishbein & Furio. PrimeSource argued that Fishbein and Furio misappropriated trade secrets in the form of marketing and budgeting information, and that Furio misappropriated trade secrets about inventory management. Fishman and Furio did not take any documents or other materials with them when they left PrimeSource. PrimeSource’s lack of specificity hurt the trade secrets claim, rendering it unlikely to succeed on the merits with regard to these two defendants.

Former Employees. Although PrimeSource submitted sufficient evidence to show that its customers’ buying preferences and direct ship status may be confidential, it did little to show sufficient secrecy to warrant trade-secret protection. Besides having the Employees sign agreements, PrimeSource did not identify additional steps it took to protect customer lists. Customers freely shared with distributors information about what they paid to competing distributors for certain amounts of specific products. Therefore, no trade secret existed. "Because PrimeSource has done little to establish that its customers’ buying habits or preferences were secret, and has not pinpointed for the court the customer information it contends is a trade secret, the court must conclude that it has little chance of succeeding on its claim of trade secret misappropriation against" the Employees.

Inevitable disclosure theory. The inevitable disclosure doctrine allows a plaintiff to "prove a claim of trade secret misappropriation by demonstrating that defendant’s new employment will inevitably lead him to rely on the plaintiff’s trade secrets." Again, PrimeSource had not identified trade secret information with particularity. PrimeSource did not demonstrate inevitable disclosure, and therefore PrimeSource’s likelihood of success under ITSA or the DTSA at the merits phase of this litigation was low.

The CEOs non-disclosure agreements. The parties focused on whether PrimeSource was likely to establish that the CEOs breached their non-disclosure covenants. Because PrimeSource did not highlight with any particularity which communication disclosed what confidential information, the court concluded that it was unlikely that Zinman breached her non-disclosure obligations. As to Fishbein and Furio, again PrimeSource did not point to any specific actions or communications to show that the contracts were breached. For example, PrimeSource did not compare the two companies’ budgets. Given the lack of evidence demonstrating that Fishbein or Furio actually breached the non-disclosure agreement, PrimeSource was unlikely to prevail on the merits.

The Employees non-disclosure agreements. Under Texas law, PrimeSource did not provide specifics about what actions each individual employee took that amounted to a breach. As to Felten and Whitehead, because PrimeSource did not identify any confidential information they shared with any particularity, the court concluded that PrimeSource was unlikely to succeed against them. Arguably, the additional product information from Kessler, Kottmeyer, and Sagunsky included non-public information about PrimeSource’s relations with its customers. PrimeSource therefore demonstrated at least some likelihood of success on the merits regarding these three employees.

Fishbein and Furio’s non-solicitation agreement. Given that New York will not enforce a non-solicitation clause beyond its terms, the court concluded that PrimeSource was not entitled to preliminary injunctive relief with respect to its claims that Fishbein and Furio violated those clauses.

Felten’s, Kessler’s, Kottmeyer’s, and Sagunsky’s non-compete covenants. These four employees all went to work for the Huttig-Grip Division within a few miles of their PrimeSource offices just days after resigning from PrimeSource. Given the willingness of Texas courts to enforce temporal restrictions that are significantly longer than the 18-month restriction at issue here, the court concluded that PrimeSource showed some likelihood of success on the merits of enforcing the restriction. Even though the non-compete covenant’s geographic restrictions were overly broad, the court attempted to enforce them in a manner to make them reasonable.

Felten’s, Kessler’s, Kottmeyer’s, and Sagunsky’s non-solicitation covenants. These four employees signed non-solicitation agreements that expire in May 2018. The court found that PrimeSource had shown some likelihood of success on the merits. The court found that the tortious interference claims were not likely to succeed on the merits.

Balance of the harms. A production injunction was overly broad and would cause great harm. The court concluded that the balance of harms weighed in favor of a limited injunction precluding Huttig from selling products to the customers who appeared on the initial lists created by Kessler, Kottmeyer, and Sagunsky. The court also concluded that Felten, Kessler, Kottmeyer, and Sagunsky should be enjoined from performing work for Huttig that was in any way related to the Huttig-Grip Division or the sale of fasteners or building materials until their non-compete covenants expire, or a resolution of this case, whichever comes first. PrimeSource’s request for an injunction targeting Fishbein, Furio or Zinman was denied.

The case is Nos. 16-CV-11390 and 16-CV-11468.

Attorneys: Richard R. Winter (Holland & Knight LLC) for PrimeSource Building Products, Inc. Patrick Sean Coffey (Husch Blackwell LLP) for Huttig Building Products.

Companies: PrimeSource Building Products, Inc.; Huttig Building Products

MainStory: TopStory TradeSecrets IllinoisNews

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