Litigation Mgt., Inc. v. Bourgeois

[Cite as Litigation Mgt., Inc. v. Bourgeois, 2011-Ohio-2794.]
Court of Appeals of Ohio
EIGHTH APPELLATE DISTRICT
COUNTY OF CUYAHOGA
JOURNAL ENTRY AND OPINION
No. 95730
LITIGATION MANAGEMENT, INC.
PLAINTIFF-APPELLANT
vs.
JEAN BOURGEOIS, ET AL.
DEFENDANTS-APPELLEES
JUDGMENT:
REVERSED AND REMANDED
Civil Appeal from the
Cuyahoga County Court of Common Pleas
Case No. CV-655349
BEFORE: Stewart, J., Kilbane, A.J., and Boyle, J.
RELEASED AND JOURNALIZED: June 9, 2011
ATTORNEYS FOR APPELLANT
James B. Niehaus
Thomas J. Piatak
Adam J. Russ
Frantz Ward LLP
127 Public Square
2500 Key Center
Cleveland, OH 44114
Michelle Pierce Stronczer
Pierce Stronczer Law, LLC
6900 S. Edgerton Road, Suite 108
Cleveland, OH 44141-3193
ATTORNEYS FOR APPELLEES
Michele Morris
430 White Pond Drive, Suite 500
Akron, OH 44320
Thomas F. Haskins, Jr.
430 White Pond Drive, Suite 200
Akron, OH 44320
William S. Pidcock
Robertson & Pidcock, LLC
236 Third Street, SW
Canton, OH 44702
MELODY J. STEWART, J.:
{¶ 1} Plaintiff-appellant, Litigation Management, Inc. (“LMI”), prevailed at trial on
its claim for damages caused by defendants-appellees, Jean Bourgeois, Excelas, LLC, and a
number of Excelas employees, all of whom were former LMI employees who breached the
terms of nondisclosure and trade secrets agreements they made with LMI prior to founding
Excelas, a direct competitor to LMI. In addition to damages, LMI sought a permanent
injunction to enforce prospectively the terms of the noncompetition and trade secrets
agreements. The court denied the injunction, finding that LMI failed to establish that it had
suffered “irreparable” damages in light of the damage award. LMI argues that the court
abused its discretion by finding that an injunction for prospective relief was barred when
damages for the breach had been awarded.
I
{¶ 2} The underlying facts are largely immaterial to the issues raised in this appeal, so
we state them in summary form. LMI is a company providing litigation support specializing
in analyzing medical records. It employs a staff of employees called “medical analysts” who
review medical records. The lead defendant, Bourgeois, was LMI’s chief operating officer.
Bourgeois and the other defendants were all subject to noncompetition, nonsolicitation, and
confidentiality agreements. Bourgeois was terminated in May 2003. In December 2004,
she founded Excelas as a direct competitor to LMI and, in the words of the court, set up
business “almost literally across the street.” She recruited the remaining defendants from
LMI, all of whom were medical analysts, to work for Excelas and perform the same function.
{¶ 3} LMI brought claims against the individual defendants for breach of the
noncompetition, nonsolicitation, and confidentiality agreements; a claim against Excelas for
intentional interference with contractual relations; and a request for a permanent injunction
under the Uniform Trade Secrets Act, R.C. 1333.61, et seq.
{¶ 4} In a ruling issued at the close of evidence in the trial, the court upheld the
validity of the noncompetition agreements. It did find, however, that the geographic
restrictions contained in the noncompetition clauses were too onerous to be enforced because
they encompassed any place in the country that LMI did work. It reformed those restrictions
to limit noncompetition to the “Greater Cleveland Metropolitan Area.” It then submitted the
amended noncompetition agreements and the trade secrets violations to the jury. In a general
verdict, the jury found against each individual defendant and the corporation, awarding
damages of $4,000 per individual defendant and $45,000 against Excelas. The parties did not
request interrogatories to test the jury verdict.
{¶ 5} Following the verdict, LMI asked the court to enter a permanent injunction
against eight of the individual defendants and enforce the terms of the noncompetition,
nonsolicitation, and confidentiality agreements. The court issued “half-sheet” judgment
entries that summarily denied a permanent injunction for the nonsolicitation and
confidentiality agreements. The court addressed the noncompetition agreements in a written
opinion. It noted that LMI sought a permanent injunction to prevent the defendants from
working for Excelas for an amount of time equal to the time during which they worked in
violation of their non-compete agreements. LMI also asked that Bourgeois be prevented
from soliciting clients for a period of 12 days — the amount of time in which she violated her
nonsolicitation agreement.
{¶ 6} The court refused to enter a permanent injunction on the noncompetition claim
because LMI did not show that it suffered an irreparable injury. It noted that each defendant
had been ordered to pay damages as a result of the breach of their agreements, thus being
made whole: “In short, not only is an adequate remedy at law available, it has been given.
The wrong of competing unfairly has been righted by the jury’s award: LMI as received fair
and reasonable redress.”
{¶ 7} On appeal, LMI appears to limit its arguments to the individual defendants,
arguing that the court abused its discretion by refusing to enter a permanent injunction on the
trade secrets (confidentiality) and noncompetition agreements. Although LMI mentions the
nonsolicitation agreements, it does not separately argue its entitlement to a permanent
injunction under that claim, so we need not address it.
II. Trade Secrets
{¶ 8} The court did not issue a written opinion on LMI’s request for a permanent
injunction barring the defendants from using LMI’s trade secrets. Nevertheless, we think it
plain that the reasoning the court applied in rejecting a permanent injunction on the
noncompetition claims heavily informed and perhaps outright controlled its decision to deny
injunctive relief on the trade secrets claim. Indeed, there are such significant points of
overlap in the trade secrets and noncompetition arguments that we believe it fair to apply the
court’s reasoning in its written opinion to the trade secrets claim.
A
{¶ 9} An injunction is an extraordinary remedy in equity, and being a creature of
equity, it may not be demanded as a matter of right. Perkins v. Village of Quaker City
(1956), 165 Ohio St. 120, 133 N.E.2d 595, syllabus. However, the Uniform Trade Secrets
Act specifically provides for injunctive relief in trade secrets cases: “Actual or threatened
misappropriation may be enjoined.” R.C. 1333.62(A).
{¶ 10} When an injunction is authorized by a statute, “[t]he party seeking a permanent
injunction must demonstrate by clear and convincing evidence that they [sic] are entitled to
relief under applicable statutory law, that an injunction is necessary to prevent irreparable
harm, and that no adequate remedy at law exists.” Acacia on the Green Condominium
Assoc., Inc. v. Gottlieb, 8th Dist. No. 92145, 2009-Ohio-4878, ¶18, citing Proctor & Gamble
Co. v. Stoneham (2000), 140 Ohio App.3d 260, 268, 747 N.E.2d 268.
{¶ 11} Injunctive remedies are an important component of the trade secrets law,
because they “serve the important purposes of encouraging innovation and helping to preserve
standards of commercial morality.” Rowe, Introducing a Takedown for Trade Secrets on the
Internet (2007), 2007 Wis.L.Rev. 1041, 1074, citing DVD Copy Control Assn., Inc. v. Bunner
(2003), 31 Cal.4th 864, 880, 75 P.3d 1. Intellectual property can be expensive to develop,
yet it is difficult to keep a trade secret inviolate and exclusive. The legal protection of a trade
secret assures those who develop intellectual property that the cost of developing the property
will not be in vain. Kewanee Oil Co. v. Bicron Corp. (1974), 416 U.S. 470, 480-481, 94
S.Ct. 1879, 40 L.Ed.2d 315.
{¶ 12} Although it is said that injunctions will not be granted unless there is a showing
of both irreparable harm and an inadequate remedy at law, in the context of permanent
injunctions, those two requirements are essentially one and the same. “An irreparable injury
is one for the redress of which, after its occurrence, there could be no plain, adequate and
complete remedy at law, and for which restitution in specie (money) would be impossible,
difficult or incomplete.” Cleveland v. Cleveland Elec. Illum. Co. (1996), 115 Ohio App.3d
1, 14, 684 N.E.2d 343, quoting Ohio Turnpike Comm. v. Texaco (1973), 35 Ohio Misc. 99,
105, 64 O.O.2d 383, 297 N.E.2d 557. The federal courts take a similar view. See, e.g.,
Abbott Laboratories v. Mead Johnson & Co. (C.A.7, 1992), 971 F.2d 6, 11; Lewis v. S.S.
Baune (C.A.5, 1976), 534 F.2d 1115, 1124.
{¶ 13} The court’s opinion did not distinguish between the threat of irreparable harm to
LMI and whether it had an adequate remedy at law, so we likewise do not differentiate them
as separate elements that must be shown as a requirement for obtaining a permanent
injunction.
B
{¶ 14} When a trade secret is misappropriated, a threat of actual harm is presumed.
Proctor & Gamble, 140 Ohio App.3d at 274. This is because the point of a “secret” is that
no one else knows about it. Unlike a published patent, a trade secret derives its value only to
the extent that it remains secret. Thus, “the ‘proprietary aspect’ of a trade secret flows, not
from the knowledge itself, but from its secrecy.” DTM Research, L.L.C. v. AT & T Corp.
(C.A.4, 2001), 245 F.3d 327, 332. The courts therefore find that “[t]he existence of an actual
threat of irreparable injury may be established by showing that the employee possessed
knowledge of the employer’s trade secrets.” Levine v. Beckman (1988), 48 Ohio App.3d 24,
27, 548 N.E.2d 267, citing Arthur Murray Dance Studios v. Witter (C.P.1952), 62 Ohio Law
Abs. 17, 53-56, 105 N.E.2d 685.
{¶ 15} The evidence at trial showed that LMI suffered irreparable harm from the
misappropriation of its trade secrets. LMI expended money and effort into developing
proprietary information that it wished to remain confidential and it took steps to protect this
information by requiring its employees to sign nondisclosure and confidentiality agreements.
Despite being under agreement not to disclose LMI trade secrets, Bourgeois and the other
individual defendants took LMI’s proprietary information like pricing strategies and used them
so that Excelas could solicit and underbid LMI clients. The evidence showed that Bourgeois
used information compiled by LMI on existing customer preferences to win jobs for Excelas
that, as an upstart, it might not have qualified enough to acquire. Excelas told a potential
(and then LMI) client that Excelas could readily perform a documents review to the client’s
existing standards because Excelas employees who formerly worked for LMI knew how the
client wanted its work product presented. Excelas was particularly brash in the manner in
which it misappropriated LMI’s customer preferences — its employees essentially copied
those preferences to the point that a newly-hired former LMI employee was told that the
“guidelines” Excelas used (its terminology for “preferences”), would be familiar to her: “You
will crack up that some of our ‘terminology’ was changed so it did not look like it was copied
from ‘the-company-that-must-not-be-named (LMI).’”
{¶ 16} The court found that LMI had an adequate remedy at law because the damages
award ordered by the jury was intended to compensate LMI for its economic injury caused by
the defendants’ unfair competition: “In short, not only is an adequate remedy at law available,
it has been given.”
{¶ 17} The purpose of contract damages is to compensate the nonbreaching party for
the loss suffered as a result of the breach. Lake Ridge Academy v. Carney (1993), 66 Ohio
St.3d 376, 381, 613 N.E.2d 183. The purpose of an injunction is to prevent future harm.
Lemley v. Stevenson (1995), 104 Ohio App.3d 126, 136, 661 N.E.2d 237. The act explicitly
codifies this distinction, providing for injunctive relief in addition to the monetary damages.
See R.C. 1333.63(A); State ex rel. Besser v. Ohio State Univ., 87 Ohio St.3d 535, 538-539,
2000-Ohio-475, 721 N.E.2d 1044. In doing so, the act maintains the common-law
understanding that injunctions are preventative in the sense that they are designed to prevent
future harm:
{¶ 18} “It must be remembered that, in discussing ‘irreparable harm,’ the proper focus
is not so much on what kind of damage the misappropriator has already inflicted, but what
damage the misappropriator may inflict in the future. As explained above, injunctions
concern the prevention of future harm, not compensation for, or punishment of, past harm.
The law has other remedies that are designed to compensate and punish; i.e., the ‘inadequate
remedy at law’ requirement cannot be met.” Casagrande, Permanent Injunctions in Trade
Secret Actions: Is a Proper Understanding of the Role of the Inadequate at Law/Irreparable
Harm Requirement the Key to Consistent Decisions? (2000), 28 AIPLA Q.J. 113, 132.
{¶ 19} LMI’s trade secrets were undeniably misappropriated and used by the
defendants to LMI’s disadvantage. Without an injunction, it is plain that those trade secrets
would continue to be used in the future against LMI. “Where the plaintiff seeks injunctive
relief, the value of his claim is generally assessed with reference to the right he seeks to
protect and measured by the extent of the impairment to be prevented by the injunction. In
calculating that impairment, the court may look not only at past losses but also at potential
harm.” A.F.A. Tours, Inc. v. Whitchurch (C.A.2, 1991), 937 F.2d 82, 87. Indeed, the
failure to show pecuniary loss from the missappropriation of a trade secret does not foreclose
the use of an injunction to bar any future use of the trade secret. Schanfield v. Sojitz Corp.
of Am. (S.D.N.Y., 2009), 663 F.Supp.2d 305, 350.
{¶ 20} As the defendants concede in their statement of the issues, the monetary
damages awarded at trial were intended to make LMI whole for the breach of the
confidentiality agreeements “up through the date of trial.” See Appellees’ Brief at 1.
Future violations of the confidentiality agreements were not (and could not be) an element of
what were, in essence, contract damages. R.C. 1333.62(A) allows the court to enjoin
“threatened” violations of the trade secrets act, and LMI made a compelling case that the
defendants would, unless enjoined, continue to use the misappropriated trade secrets. The
court erred as a matter of law by finding that an award of compensatory damages showed that
LMI’s harm was not “irreparable” for purposes of an injunction.
C
{¶ 21} The court also found, under the rubric of an adequate remedy of law, that the
prospective enforcement of the breached agreements:
{¶ 22} “[W]ould not protect the plaintiff’s legitimate business interest by preventing
unfair competition because the unfair competition occurred when Excelas first opened for
business and was able to quickly establish itself as a competitor to the plaintiff by the efforts
of the breaching defendants. Future competition by Excelas will be ordinary and fair and is
not the type of competition a non-compete is designed to stifle.”
{¶ 23} The defendants used LMI’s proprietary information to start Excelas and were
forced to pay compensation for the misappropriation. But it does not follow that the
defendants will discontinue use of that information prospectively. The court conceded that
Excelas was essentially built on LMI’s trade secrets and quickly made itself a direct
competitor to LMI. Any future business it conducts will necessarily be conducted on what
had been misappropriated.
{¶ 24} The defendants argue that the court did not abuse its discretion by refusing to
grant a permanent injunction because LMI did not present any evidence of future damages.
Absent a showing of future harm, they maintain that the court could suppose that the damages
awards sufficiently compensated LMI and was an adequate remedy at law.
{¶ 25} This argument runs counter to the purposes of the trade secrets law, which is to
keep proprietary information secret. Even though the law provides for damages in the event
a secret is misappropriated, an award of damages without an injunction to enjoin the use of the
trade secrets does not make the person holding the trade secrets whole. The court
specifically acknowledged this point:
{¶ 26} “The court recognizes that not enforcing an expired covenant non-competition
agreement where damages have been calcuated and awarded may cause some
employee-plaintiffs to gamble at the expense of employer-defendants. An employee may
decide to breach in the hope that the breach is not discovered for the duration of the
non-compete with the expectation that the worst that can happen thereafter is a lawsuit for
damages that are difficult to calculate and prove. The employer in that circumstance is stuck
with having not only incurred damages but, from its perspective, continuing to incur them
because the employee has never taken the ‘time out’ from competition that the covenant
required. But an employer in that situation may simply elect a remedy: damages or an
injunction.”
{¶ 27} The court’s statement shows why both damages and injunctive relief are
necessary in some trade secrets cases. If recovery is limited solely to damages, the
misappropriator can simply buy the stolen secret. But this remedy deprives the holder of
misappropriated information of its intrinsic value — the secret itself. “A trade secret once
lost is, of course, lost forever.” See FMC Corp. v. Taiwan Tainan Giant Indus. Co., Ltd.
(C.A.2, 1984), 730 F.2d 61, 63. If recovery is limited solely to an injunction, on the other
hand, enjoining a misappropriated secret will not compensate the holder of the secret for any
unfair economic advantage the misappropriator derived from taking the secret in the first
place.
{¶ 28} The court’s view that LMI could choose between damages or an injunction
created only half a remedy and was erroneous as a matter of law. In addition to the
availability of damages, LMI was entitled to a rebuttable presumption of irreparable harm
from the loss of its proprietary information. Computer Assocs. Int'l v. Quest Software, Inc.
(N.D.Ill. 2004), 333 F.Supp.2d 688, 700. The burden of proving that an injunction should
not issue is thus on the party opposing the injunction.
{¶ 29} The court found that “unfair competition” occurred when “Excelas first opened
for business and was able to quickly establish itself as a competitor to the plaintiff by the
efforts of the breaching defendants.” It is unclear exactly which secrets were used in the
process, as the parties did not submit interrogatories to the jury. However, in their briefs,
defendants challenge certain aspects of the evidence, arguing for example that the evidence did
not support a finding that Excelas misappropriated LMI’s pricing or marketing strategies.
They did not, however, appeal from the jury verdict. When a “general verdict has been
returned untested by special interrogatories, it will be presumed that the jury found in favor of
the successful party on all issues * * *.” H.E. Culbertson & Co. v. Warden (1931), 123 Ohio
St. 297, 303, 175 N.E. 205. We must therefore assume that the jury found in favor of LMI
on all of the claims in its complaint and the court should have enforced the terms of the
confidentiality agreements pursuant to R.C. 1333.62(A). The terms used for the permanent
injunction should be similar to those ordered by the court in its April 2, 2008 temporary
restraining order.
III. Noncompetition
{¶ 30} The court also denied LMI’s request for injunctive relief on the nonsolicitation
agreements, finding that enforcement of those agreements “almost four years after the last
breach in the case of some defendants,” would not protect LMI’s business interests because
“the unfair competition occurred when Excelas opened for business and was able to quickly
establish itself as a competitor to the plaintiff by the efforts of the breaching defendants.”
{¶ 31} As with the trade secrets claims, the court incorrectly found that the availiability
of damages meant that LMI could not be granted a permanent injunction. In Rogers v.
Runfola & Assoc., Inc. (1991), 57 Ohio St.3d 5, 565 N.E.2d 540, the Ohio Supreme Court
made it clear that a party claiming the breach of a noncompetition agreement could obtain
both damages and injunctive relief. The supreme court found the noncompetition agreements
at issue in that case were valid, enjoined the employees from further violations of the
agreement, and remanded the case for a determination of damages, if any, caused by the
violation of the noncompetition agreement. Id. at 9.
{¶ 32} Noncompetition agreements are, at bottom, a category of intellectual property
regulation because the harm sought to be avoided is that an employee will know so much
about the former employer that it will give a new and directly competing employer an unfair
competitive advantage. In Berardi’s Fresh Roast, Inc. v. PMD Ents., Inc., 8th Dist. No.
90822, 2008-Ohio-5470, we considered the “inevitable disclosure” rule of trade secrets and
stated that “[t]he rule against inevitable disclosure holds that a threat of harm warranting
injunctive relief exists when an employee with specialized knowledge commences
employment with a competitor.” Id. at ¶27. We went on to say that the rule “is applied
when a former employer seeks ‘injunctive’ relief when a former employee begins work with a
competitor while the noncompetition clause has not expired.” Id. The rule has been
justified because the courts have recognized that “it is very difficult for the human mind to
compartmentalize and selectively suppress information once learned, no matter how well
intentioned the effort may be to do so.” FTC v. Exxon Corp. (D.C.Cir.1980), 636 F.2d 1336,
1350.
{¶ 33} The evidence produced by LMI at trial convincingly showed that individual
defendants breached the terms of their noncompetition agreements. As with the trade secrets
violations, the court should have presumed that LMI suffered irreparable harm when ruling on
the request for a permanent injunction, particularly since the defendants were likewise found
to be in possession of LMI’s trade secrets.
{¶ 34} The court found that LMI’s injuries were not irreparable because so much time
had elapsed between the “last” breaches of the noncompetition agreements. The court noted,
for example, that one employee’s one-year noncompetition ban would have expired in
February 2006 (she left LMI in February 2005 and started to work for Excelas in April 2005).
The court found that the unfair competition occurred when Excelas first opened for business
and that “[f]uture competition by Excelas will be ordinary and fair and is not the type of
competition a non-compete is designed to stifle.”
{¶ 35} The noncompetition agreements provided that “[t]his Agreement will be
extended for a period of time equal to the period required to secure the enforcement of this
Agreement.” The court impliedly upheld the validity of this provision when it found the
noncompetition agreements enforceable. Despite doing so, it made no mention of this
provision when refusing to enter the permanent injunction on grounds that too much time had
elapsed to justify enforcement of the noncompetition clauses. The delay mentioned by the
court was caused by LMI’s necessity to seek legal redress after the defendants openly
breached their individual agreements. Delay was not a proper cause for refusing to issue the
permanent injunction.
{¶ 36} We also find that the court erred by concluding that any harm caused by the
violation of the noncompetition agreements occurred only when Excelas opened for business
and that future competition by Excelas would be “ordinary and fair.” Each day when the
individual defendants worked in violation of their noncompetition agreements was a day in
which Excelas gained an unfair competitive advantage. These employees were specifically
hired away from LMI because they brought a wealth of knowledge, gained from LMI, that
allowed Excelas to go from being a start-up to a direct competitor in a fraction of the time it
might take without such information. Without the knowledge that the defendants brought to
Excelas, it is highly unlikely that Excelas could have so quickly become a serious competitor
to LMI. The harm to LMI thus continues to this day and LMI is entitled to enforcement of
that to which both sides agreed.
{¶ 37} It follows that the court abused its discretion by refusing to grant a permanent
injunction and enforce the time remaining on each individual defendant’s respective
noncompetition agreement. We are aware that enforcement of the noncompetition
agreements might cause a hardship to the affected employees, but each of the employees
willingly violated the terms of their noncompetition agreements and now must answer at law
for their breach. Despite having been ordered to pay damages for their breach, the future
harm caused by the employee breaches continues to this day. On remand, the court is ordered
to calculate the time remaining on each individual defendant’s noncompetition agreement, less
the amount of time during which the temporary restraining order remained in effect.
{¶ 38} This cause is reversed and remanded for proceedings consistent with this
opinion.
It is ordered that appellant recover of appellees its costs herein taxed.
The court finds there were reasonable grounds for this appeal.
It is ordered that a special mandate be sent to the Cuyahoga County Court of Common
Pleas to carry this judgment into execution.
A certified copy of this entry shall constitute the mandate pursuant to Rule 27 of the
Rules of Appellate Procedure.
___________________________________________
MELODY J. STEWART, JUDGE
MARY EILEEN KILBANE, A.J., and
MARY J. BOYLE, J., CONCUR