FOURTH OF JULY EDITION: Family Fireworks: Plot to Steal Client Lists Goes up in Smoke

fireworks220For many, Fourth of July festivities wouldn’t be complete without a baseball game, a family barbecue, and of course, fireworks.  But for one family-operated fireworks company in California, its members had an unhappy reunion in court when a great-grandson’s decision to leave the family business exploded into a dazzling dispute over trade secrets.

According to court papers, Manuel de Sousa and his family immigrated to the San Francisco Bay Area from Portugal in the early 1900s and set up a fireworks business for local Portuguese community celebrations.  Manuel eventually passed the family business to his son Alfred, who then passed it on to his grandson Bob.

Today, Pyro Spectaculars, Inc. (“PSI”) is one of the most successful pyrotechnics companies in the United States, producing fireworks shows for events such as Macy’s Fourth of July Fireworks, the Olympic Games, and the World Series.  Still a closely-held, family owned and operated company, PSI put together customer lists over several decades that included not only client names, but client preferences and feedback, budgeting and cost information, and production details about past shows.

In 1995, PSI hired Manuel’s great-grandson Steven to join the family business as a sales account executive.  Steven worked for the company for more than 16 years and had access to all of PSI’s most sensitive customer information.  But in January 2012, Steven left the family business with a bang and joined a competitor.  When PSI’s office manager wished him good luck and told him to keep in touch, he apparently said, “you may not want to after I take business away from Pyro.”  Steven’s wife also apparently made some fiery comments, telling a PSI employee that she hated her husband’s family and would “take as many shows as we can.”

Steven fired off letters soliciting PSI’s customers as soon as he joined his new employer, making 20 proposals within two weeks of leaving.  Before he left, he apparently transferred the customer lists and dozens of other PSI files to a portable hard drive and USB drives, and then used “Disk Redactor” wiping software to cover up his activity.

shutterstock_119265862After losing a number of customers to Steven, PSI launched a lawsuit and the courtroom fireworks started immediately, with PSI seeking a preliminary injunction to enjoin Steven from soliciting PSI’s clients.  At the hearing, Steven’s counsel essentially admitted misappropriation, conceding that the only dispute was whether the information qualified as a trade secret.  He argued that PSI’s customer identities are widely known throughout the industry and easily ascertainable from public records such as permit applications and city council meeting minutes that could be found on the Internet.

The court rejected Steven’s arguments and held that the information did qualify as a trade secret.  Although the customers’ names may be public, the court said, the true value of PSI’s database was in its “comprehensive, if not encyclopedic, compilation of customer, operator and vendor information.”  The court also found that even though PSI’s security measures weren’t perfect, it made reasonable efforts to protect the secrecy of the information through confidentiality agreements, password requirements, and limited access to secure servers.

Unlike other jurisdictions, California courts considering injunctive relief must balance the state’s strong policy in favor of employee mobility with the concern for protecting trade secrets.  While recognizing these competing interests, the court concluded that “a narrow, time-limited non-solicitation restriction” was necessary to prevent Steven from misusing PSI’s trade secrets.  The court barred him for six months from initiating contact with any customers with whom he had contact while he worked for PSI, but carved out a limited exception: If a PSI customer initiated contact with Steven, he’d be permitted to conduct business with the potential client.

While the case eventually settled, it highlights that even California courts will enforce non-solicitation obligations when an ex-employee goes after his old employer’s clients using stolen trade secrets.  As the nation gathers to watch fireworks shows across the country, employers should also remember to watch something else — departing employees who may try to abscond with the company’s trade secrets as their grand finale.

The case is Pyro Spectaculars North, Inc. v. Souza, 861 F. Supp. 2d 1079 (E.D. Cal. 2012).  Read the court’s preliminary injunction order here.