IP Law Daily Preliminary injunction denied against former employee who secretly recorded firm’s meetings
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Thursday, February 21, 2019

Preliminary injunction denied against former employee who secretly recorded firm’s meetings

By Linda Panszczyk, J.D.

Despite the former employee’s secret recordings of a capital management firm’s meetings and his discrimination lawsuit against the firm, the firm’s mistrust of him was not evidence of irreparable harm sufficient to warrant a preliminary injunction against him.

A capital management firm has been denied a preliminary injunction barring a former employee from using information obtained when he secretly recorded company research department meetings to assist him with his age discrimination lawsuit against the firm. The federal district court in Bridgeport, Connecticut, determined that, although portions of the information in his recordings met the definition of confidential information as described in both his employment agreement and by the state’s trade secrets law, the firm did not establish an imminent and inevitable risk of disclosure warranting preliminary relief. There was no evidence that the former employee would use or disclose the firm’s confidential information or trade secrets in connection with some hypothetical future employment or otherwise (Graham Capital Management, L.P. v. Bongiovanni, February 14, 2019, Eginton, W.).

Graham Capital Management (GCM) moved for a preliminary injunction against the former employee, whose job responsibilities included developing quantitative methods and computer software programs. GCM sought a preliminary injunction to enjoin the former employee from using GCM confidential information or trade secrets in any manner or for any purpose and from disclosing any GCM confidential information or trade secrets to any person or entity outside of GCM Since initially filing for the preliminary injunction, GCM had withdrawn its request for a return order.

During a deposition by GCM counsel in the former employee’s age discrimination lawsuit against GCM, the employee testified that he secretly recorded meetings at GCM, including research department meetings, and still possessed five such recordings. When he made these secret recordings, he was actively seeking employment with other investment advisory firms.

GCM argued that the recordings of GCM research department meetings had the potential to cause irreparable harm to the firm, which cannot be adequately compensated by monetary damages. Information in the secret recordings could enable a third party to replicate or one or more of GCM’s proprietary trading strategies. It could, it said, suffer irreparable hard in the absence of a preliminary injunction because the former employee secretly recorded confidential and trade secret information regarding GCM’s trading systems and models, which was crucial to its business.

The former employee contended that GCM was merely trying to prevent him from successfully litigating his discrimination claims and that this action is retaliation for those claims and that his main objective in making these recordings was ensuring the accuracy of his age-based discrimination claims. Further, he claimed that the recordings were kept only because they were accidentally and unintentionally copied from the recording device to his automated backup on his laptop computer.

Breach of restrictive covenant. Initially, GCM argued that the former employee breached his employment agreement, and this should create a presumption of irreparable harm. However, the court pointed out, even when all parties agree that a restrictive covenant has been breached, courts consider all factors that determine the issue of irreparable harm and decide whether the covenant is enforceable. Although the breach of a restrictive covenant is one factor in this analysis, it is not determinative.

While the former employee admitted that he inadvertently copied audio recordings of team meetings onto his personal computers, he claimed that he took reasonable precautions to ensure that the recordings did not leave GCM offices, and, though he failed to assure that the information on the recordings did not leave GCM’s premises, he claimed that the removal was an honest mistake.

The court noted that the content of the audio files was sketchy and limited in scope when compared to the content of confidential information accumulated in the former employee’s head over the years of his employment with the firm. As a result, the court said, his possession of those recordings did not significantly affect his ability to misappropriate GCM’s proprietary information.

The former employee testified, in a believable and convincing manner, that his purpose in making the recordings was to support his discrimination claims against the firm. In fact, when GCM challenged his right to unemployment benefits, the state Employment Security Appeals Division referee found that he did not knowingly violate the employer’s policy. Beyond that, he claims that he had no intention of using the recordings to compete against GCM nor to disclose the recordings to any person or entity outside of GCM. The former employee offered to stipulate with GCM to a protective order that would effect the exact confidentiality that GCM sought here via injunctive relief. Thus, he contended, GCM failed to demonstrate any threat of disclosure by him to a third party.

Proprietary or confidential information. The court, however, disagreed with the former employee’s claim that the recordings did not contain the actual values, formulas, and parameters needed to replicate a GCM trading system because "perfect replication is not the test." The recordings need not contain the entire "recipe" of the firm’s trading model to be protected, and these recordings did contain discussions of formulas and also GCM’s ideas, methods, processes, and techniques to improve its trading strategies.

In light of the definition of confidential information and trade secrets in the former employee’s employment agreement, portions of the information in his recordings meet the definition of confidential information as described in both his employment agreement and the Connecticut Uniform Trade Secret Act, the court said. Based on the transcripts of his recordings and the testimony of GCM’s representatives, the court found that information contained on the recordings has the potential to derive independent economic value from not being generally known. Especially in the research and development context, what seem to be rough ideas can prove to be important, said the court. The court also found that GCM has demonstrated reasonable efforts to maintain the information’s secrecy and thus, the court found that the material on the recordings has value to GCM deserving of protection.

Evidence of irreparable harm. After noting that there is no automatic presumption of irreparable harm, even where a defendant has competed directly with the plaintiff and has misappropriated the plaintiff’s trade secrets for years, the court pointed out, that, in contrast, the former employee in this instance is not competing with GCM. In fact, he is not employed by anyone, much less a competitor.

During the hearing, GCM supervisory employees’ testimony focused on the primary threat of harm caused by the former employee’s removal of recordings from the premises, namely, insecurity. The problem for GCM, said the court, is that the remedies GCM seeks, namely that the former employee be enjoined from (1) using GCM’s confidential information or trade secrets in any manner or for any purpose and (2) disclosing GCM’s confidential information or trade secrets to any person or entity outside of GCM, would not prevent the harm of insecurity as illustrated in GCM’s testimony.

Further, GCM had not established an imminent and inevitable risk of disclosure warranting preliminary relief, said the court, as there was no evidence that the former employee "will use or disclose GCM’s confidential information or trade secrets in connection with some hypothetical future employment or otherwise." No evidence demonstrated that the former employee was actively misappropriating from GCM, the court stressed.

After acknowledging that the court understood the firm’s wariness with the former employee, considering his secret recordings and discrimination lawsuit against the company, the court pointed out that a preliminary injunction was an extraordinary and drastic remedy. GCM’s mistrust of the former employee was not evidence of irreparable harm sufficient to warrant the injunctive relief GCM sought. As a result, the court denied GCM’s motion for a preliminary injunction.

This case is No. 3:18-cv-01665-WWE.

Attorneys: Daniel Schwartz (Day Pitney LLP) for Graham Capital Management, L.P. Elizabeth W. Swedock (Mark P. Carey P.C.) for Steven Bongiovanni.

Companies: Graham Capital Management, L.P.

MainStory: TopStory TradeSecrets ConnecticutNews

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