As we’ve observed over the years, when addressing trade secrets claims based on customer lists, courts have landed all over the place. These cases involve difficult questions such as when an employee develops relationships on behalf of Company A but then leaves for Company B, who “owns” those relationships?
A recent federal district court decision from the District of Hawaii, WHIC LLC dba Aloha Toxicology v. Nextgen Labs, Inc., offers an example of how the severity of the alleged misconduct may enable the employer to prevail, even if it can make only a marginal showing on the existence of a trade secret. On September 17, 2018, the court granted the plaintiff drug testing company’s request for a preliminary injunction, requiring, among other things, its competitor to stop servicing certain former clients of the plaintiff.
WHIC LLC, dba Aloha Toxicology, is a Hawaii business that provides drug testing services. Aloha collects and tests urine samples provided by clients, many of whom are substance abuse treatment centers. Defendants Heidi Maki and Stephanie Simbulan are former Aloha employees who left Aloha to work for competing companies, Ohana Genetics, Inc. and NextGen Laboratories, Inc. (related companies which we will refer to, as the court did, as Ohana/NextGen).
While at Aloha, Maki identified potential clients by using internet searches and the State of Hawaii’s list of substance abuse treatment centers. She then reached out to these leads and developed relationships with them over time, for example, by making in-person visits, setting up educational opportunities, and explaining how the testing process worked. Maki also obtained information from clients about the types of testing they wanted, including the particular substances for which they would like to test.
In early 2018, Ohana/NextGen began recruiting Maki to work for them. At that time, Ohana/NextGen was expanding its drug testing services into the Hawaiian market. Although she joined Ohana/NextGen in March 2018, Maki continued to draw her salary from Aloha until late June 2018. Maki never informed Aloha about this dual employment. According to Simbulan’s testimony, Maki began recruiting her to work for Ohana/NextGen in April 2018. Like Maki, Simbulan was dual-employed by the two competitors for a short period but did not inform Aloha of this fact.
On July 5, 2018, Aloha sued Ohana/NextGen, Maki, and Simbulan, asserting various claims, including that they had stolen trade secrets pertaining to client needs and preferences, using this information to divert clients from Aloha to Ohana/NextGen.
Evidence indicated that, during a regulatory investigation of Aloha, Maki and Simbulan were instructed by Aloha to cease testing and send samples to Aloha’s partner lab, Cordant, until the investigation was finished. Maki admitted in her testimony that (while dual-employed) instead of sending the samples to Cordant, she directed Aloha’s laboratory staff to send the samples to Ohana/NextGen instead.
Maki testified that, in June 2018, she contacted or attempted to contact all of Aloha’s clients to tell them that she was moving to Ohana/NextGen and wanted them to come with her. Maki also admitted to falsely telling Aloha clients that Aloha was being bought by another company and changing its name to Ohana/NextGen.
As the court acknowledged, this case presented a “close call” in terms of whether the information at issue constituted a trade secret. It recognized that there was no evidence that Maki or Simbulan took any confidential information from Aloha other than the information about clients and sample collectors, and that there was “no evidence that Defendants misappropriated Plaintiff’s confidential scientific testing methods.” And even though there was “no evidence that Maki or Simbulan took any files or written compilations of data,” the court found it sufficient for purposes of establishing a trade secret that Maki “possessed such confidential information, which was developed over years with the company.”
Notwithstanding this borderline showing on the existence of a trade secret, the court concluded that the remaining injunctive relief factors were “easily satisfied” and that Aloha was likely to suffer irreparable harm in the absence of preliminary relief. In granting an injunction, the court focused on the apparent harm to Aloha (loss of six accounts), the defendants’ allegedly deceitful conduct in lying to Aloha clients to divert business to Ohana/NextGen, and its conclusion “that Maki and Simbulan were not, on the whole, credible witnesses.”
As this case illustrates, when it comes to trade secrets allegations based on customer lists or information, every case turns on its unique facts. Companies interested in defining their trade secrets and developing strategies for protection should reach out to counsel for help navigating this process.