IP Law Daily Former employees preliminarily enjoined from using trade secrets to sell spray-cooling equipment
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Thursday, May 18, 2017

Former employees preliminarily enjoined from using trade secrets to sell spray-cooling equipment

By Mark Engstrom, J.D.

A provider of low-pressure spray-cooling equipment for furnaces in the steel industry was entitled to a preliminary injunction that prohibited two former employees and their new company from using the plaintiff’s trade secrets to design and supply low-pressure spray-cooling equipment for the steel industry, the federal district court in El Dorado, Arkansas, has ruled. Until a trial could be held on the merits, or the court could decide otherwise, the defendants were enjoined from misappropriating, disclosing, or using the plaintiff’s design drawings and internal estimate worksheets (Systems Spray-Cooled, Inc. v. FCH Tech, LLC, May 16, 2017, Hickey, S.).

Lawsuit. Prior to the formation of defendant FCH Tech, plaintiff Systems Spray-Cooled Inc. was the only provider of low-pressure spray-cooling equipment in the steel industry. Former Spray-Cooled employees William Henry and J. Michael Campbell formed FCH to directly compete with Systems. Systems sued Henry, Campbell, and FCH for violations of the Arkansas Trade Secrets Act, federal Defend Trade Secrets Act, federal Computer Fraud and Abuse Act, and various common law causes of action. Systems also sought a preliminary injunction, which required the court to consider: (1) the likelihood of Systems’ success on the merits; (2) the threat of irreparable harm to Systems; (3) the balance of harms suffered by Systems and other interested parties; and (4) whether an injunction was in the public interest.

Success on the merits. After determining that Systems had adequately established that its design drawings and internal pricing estimate worksheet were trade secrets under Arkansas law (but failed to show that its customer lists, revenue forecasts, and various financial documents qualified as trade secrets), the court had to decide whether the defendants had misappropriated the drawings and worksheet.

On February 22, 2017, the court issued an order that found that the defendants had intentionally destroyed their hard drives to prevent Systems from inspecting them. Systems successfully argued that this spoliation of information showed that the defendants had misappropriated its trade secrets.

The court acknowledged that the record contained no direct evidence of misappropriation, but nevertheless found that the destruction of the hard drives supported the conclusion that the defendants had likely destroyed evidence of misappropriation. The court thus found that Systems had demonstrated a substantial likelihood of success on the merits in proving that its trade secrets had been misappropriated by the defendants through their use of the plaintiff’s storage devices.

Systems failed, however, to show that the defendants had misappropriated its trade secrets by inducing its largest customer, Nucor, to disclose design drawings of low-pressure spray-cooling equipment located that was used at Nucor’s Yamato facility.

In addition, Systems failed to show that the defendants would "inevitably" disclose and rely on its low-pressure, spray-cooling trade secrets because the individual defendants had: (1) full knowledge of its trade secrets and (2) formed a business in direct competition with Systems in the market for low-pressure spray-cooling equipment.

The court noted that covenants not to compete were disfavored by Arkansas courts, and further noted that the non-compete provisions in the restrictive covenants of Systems’ employment agreements had already expired. For those reasons, the court found that the inevitable disclosure doctrine could not be used to extend the provisions of the non-compete clause in the employment agreements.

Ultimately, however, the court found that the defendants had intentionally destroyed evidence that supported an inference of their misappropriation of some of the plaintiff’s trade secrets and confidential information. For that reason, the court found that Systems had shown a substantial likelihood of success on its claim that the defendants had breached the confidentiality provisions in their employment agreements.

Irreparable harm. The court decided that a presumption of irreparable harm was not warranted, as Systems had urged. According to Systems, the alleged misappropriation created a presumption of irreparable harm because the resulting damages could not be measured by money. Significantly, however, Systems failed to show that there was any danger that the defendants would disseminate its trade secrets to others, or that the defendants had disclosed its trade secrets to third parties.

Further, the record was "sparse" with respect to "irreparable impairment" of the value of the trade secrets at issue. Without evidence that the defendants had disseminated, disclosed, or otherwise irreparably diminished the trade secrets of Systems, the court could not "presume" irreparable harm.

Nevertheless, the court concluded that Systems had shown that it was threatened with irreparable harm based on a letter a letter that one of the defendants (Henry) had sent to a technical manager of Nucor. Henry wrote that if Systems were successful in its lawsuit, it would "be able to extend [its] monopoly and high pricing on spray cooling furnace equipment for the next decade." The letter also stated that Nucor had "suffered under [Systems’] monopoly for almost 20 years." Further, Systems offered testimony to show that Nucor was its largest, most important customer, and provided testimony from a CEO who stated that, if Nucor chose to believe the information contained in the letter, Systems could go out of business.

The court acknowledged that the technical manager might not have received the letter, but the fact that the disparaging letter was received by an employee of Nucor could cause "irreparable harm to Systems’ reputation and goodwill by damaging a longstanding business relationship with Nucor and affecting future dealings between the companies." For those reasons, the court found that Systems had sufficiently established a threat of irreparable harm, which favored of an injunction.

Public interest. The court concluded that the public interest in preserving fair competition and in protecting trade secrets favored injunctive relief. The defendants argued that an injunction would not serve the public interest because it would limit the defendants’ ability to use publicly available patents to develop a competing product. The court disagreed because Systems had established a substantial likelihood of success on the merits regarding the defendants’ misappropriation of design drawings and internal estimate worksheets. In addition, the defendants failed to show that the information needed to design a competing low-pressure spray-cooling system was readily ascertainable from publicly available patents.

Because three of the four injunction factors favored preliminary relief (the fourth factor, balancing of the equities, was neutral), the court found that Systems was entitled to temporary injunctive relief. The court thus enjoined the defendants from further misappropriation, disclosure, or use of the trade secrets of Systems (i.e., its design drawings and internal estimate worksheets) until a trial on the merits could be held or the court could decide otherwise.

The case is No. 1:16-cv-1085.

Attorneys: Jayme Partridge (Patterson Sheridan LLP) and John Thomas Shepherd (Shepherd & Shepherd, P.A.) for Systems Spray-Cooled, Inc. Cynthia Moulton (Moulton, Wilson & Arney, LLP) and Richard T. Donovan (Rose Law Firm) for FCH Tech, LLC.

Companies: Systems Spray-Cooled, Inc.; FCH Tech, LLC

MainStory: TopStory TradeSecrets ArkansasNews

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