Within days of each other, your clothing company―Free Country Ltd.―loses two employees who decamp to a rival to set up a competing apparel line. You discover that just before leaving, they transferred some 50,000 documents to a personal account—customer orders, your master contact list, and product design information. Incensed, you file a trade secrets lawsuit and seek an injunction prohibiting the thieves from soliciting your customers. Their defense amounts to, “so what if we took the documents―it’s a free country!” Easy win, right? Wrong. These are the facts of a recent trade secrets lawsuit in the Southern District of New York, in which the court denied the plaintiff’s request that its former employee defendants be prohibited from soliciting plaintiff’s customers.
Plaintiff Free Country Ltd. moved for a preliminary injunction and temporary restraining order against defendants Brian Drennen, Matthew Vander Wyden, Rousso Apparel Group, Inc., and Santa Fe Apparel, LLC. Free Country alleged that its former employees Drennen and Vander Wyden misappropriated Free Country’s trade secrets in order to establish a competing apparel line for defendants Rousso and Santa Fe. Free Country asserted claims under New York law and the Defend Trade Secrets Act, alleging that Vander Wyden misappropriated its (i) client list and (ii) pricing information. Before resigning from Free Country, defendant Vander Wyden had emailed to his personal address Free Country’s master contact list as well as four product designs dating from the mid-1990s.
In explaining its decision not to restrain defendants from using this information to solicit plaintiff’s customers, the court’s order provides some clues as to what companies can do to avoid this fate. The key takeaway for employers is this: Do not assume that your customer lists, pricing information, product designs, and other “secret sauce” ingredients necessarily will be protected as trade secrets.
Despite “misgivings” about Vander Wyden’s credibility following testimony at an evidentiary hearing, the court concluded that Vander Wyden had not misappropriated trade secrets. Free Country’s customer list contained well-known apparel retailers whose identities were not protected and whose contact information was readily ascertainable. As for Free Country’s pricing information, the court accepted defendants’ testimony that it was based on basic sourcing information commonly utilized in the industry absent any contrary evidence from Free Country. Although pricing data can constitute a trade secret if it relies on a proprietary formula that gives the company a unique advantage, such as a complex pricing or trading algorithm, bare testimony from a Free Country executive that this information was “secret sauce” did not cut it. Free Country also failed to show that Vander Wyden had stolen proprietary information related to pricing, or that, even assuming a protected trade secret existed, Vander Wyden would inevitably disclose or use the information.
The court agreed with Free Country that the large amount of Free Country information that Drennen copied immediately prior to his resignation taken as a whole constituted trade secret information critical to Free Country’s business, and that his innocent excuse for his actions was “preposterous.” However, the court found that Free Country failed to show that Drennen misused the proprietary information for an improper purpose or was likely to do so in the near future given evidence that he deleted the files soon afterwards.
What could Free Country have done differently here? To start, it should not have named many of its customers on its “secret” contact list in its complaint, a point noted by the Court. It also should have presented detailed evidence (if it existed) establishing that its pricing formula gave it unique advantage. And it should have secured a non-competition agreement with its employees if it wanted to protect pricing information. The pricing information was in Vander Wyden’s head, not any document. As the Court noted, New York state law provides for non-competition provisions to address just this type of situation. But in the absence of such a provision, courts in the Second Circuit will restrict an individual’s employment only where the individual has stolen its former employer’s trade secrets and where there is a high probability that the individual will disclose that information to its new employer. With no non-competition provision to enforce, the court found that a restraining order prohibiting Drennen and Vander Wyden from selling to Free Country’s customers would effectively restrain defendants’ employment.
Despite a rough start to the New Year, all is not lost for Free Country. The court’s order did prohibit defendants from using or disseminating Free Country’s confidential information. The court also ordered expedited discovery and scheduled a preliminary injunction hearing to conclude by no later than January 31, 2017, if Free Country were to discover any material information. The court further noted that it has a “variety of means” to avoid any irreparable harm that Free Country might establish.