United States: California Federal District Court Grants TRO And Preliminary Injunction To Protect Trade Secret Customer Lists

A California federal district court recently granted a TRO and preliminary injunction against a general manager who allegedly misappropriated customer information from his previous employer in violation of the California Uniform Trade Secrets Act (CUTSA), Defend Trade Secrets Act (DTSA), and his employment agreement. Sun Distributing Company v. Corbett, No. 18-cv-2231, 2018 WL 4951966 (S.D. Cal. Oct. 12, 2018).

Background

Sun Distributing is a distribution company that works with major national logistics companies to provide last-mile distribution to residences and businesses in California. Paul Corbett worked as a general manager at Sun Distributing. While employed, Corbett signed an employment agreement in which he agreed to a confidentiality provision stating that he would not use Sun Distributing's trade secrets, including customer lists, needs, and pricing structures, in order to compete with Sun Distributing after he left the company. Corbett later resigned from Sun Distributing to work for Pacblue, a company that distributes free newspapers and other print media for publishers in California.

After Corbett's resignation, Sun Distributing had all emails sent to Corbett forwarded to Sun Distributing's CEO. In September 2018, Sun Distributing's CEO received an inadvertent email from one of its customers addressed to Corbett. In the email, the customer mentioned that he and Corbett discussed transferring the customer's business, using Sun Distributing's maps and circulation data, to Corbett. The customer specifically mentioned a rate, stating that he would not pay more than what he paid Sun Distributing.

Sun Distributing subsequently filed a complaint for misappropriation of trade secrets under the DTSA and CUTSA, as well as for breach of contract. After weighing the factors, the federal court granted Sun Distributing's motion for a TRO and Preliminary Injunction.

Temporary Restraining Order

As a preliminary matter, the court found it had subject matter jurisdiction over the case. The issue was whether federal question jurisdiction existed under the DTSA, which provides that an owner may bring a trade secret misappropriation action if "the trade secret is related to a product or service used in, or intended for use in, interstate or foreign commerce." The court stated that Sun Distributing sufficiently pled the jurisdictional element of the DTSA. The court explained that Sun Distributing's complaint pled that it distributes publications for newspapers and magazine publishers across Southern California and Mexico. The complaint further pled that Sun Distributing's trade secrets are related to these publications. The court noted that Sun Distributing was only required to plead that its trade secrets are used or intended for use outside California, and it was irrelevant that Corbett's current employer PacBlue does not distribute products outside of California.

The court then turned to whether the requirements of a TRO had been met for the claims of trade secret misappropriation and breach of contract.

Trade Secret Misappropriation

The court found that Sun Distributing had sufficiently alleged a likelihood of success on the merits for its trade secret misappropriation claim. At issue was whether plaintiff alleged the existence of a trade secret and misappropriation of the trade secret. First, the court found that Sun Distributing had established protectable trade secrets in its customer lists and customer preferences. The court rejected Corbett's argument that some of the trade secret information belonged to the customer, stating that "the value to the customer list is in the completeness and details of the list; the fact that each individual customer has access to its own information does not make Plaintiff's list of customers worthless." The court also rejected Corbett's argument that the publisher information was publically available and therefore not protectable, and reasoned that although publication names and contact information might be public knowledge, it was clear that Sun Distributing had put in time and effort to develop other specific information, including its customer lists, preferences, pricing structures, and "do not deliver" lists.

Second, the court found Sun Distributing adequately alleged misappropriation of its trade secret information. The court explained that, regardless of who first contacted who, Corbett and the customer discussed transferring the customer's business, including specific rates and distribution plans. Accordingly, because Corbett only knew Sun Distributing's rates and distribution plans due to his position as general manager, he therefore "used" the customer and pricing information. Moreover, as Corbett was Sun Distributing's general manager, he had a duty maintain the secrecy of the information even after he left the company. Finally, the court noted that while there was little direct evidence of misappropriation (specifically, one email), when coupled with the circumstantial evidence, Sun Distributing had met its burden of establishing that Corbett acquired trade secret information through improper means.

The court weighed the remaining factors and found Sun Distributing had established it would lose customers and goodwill through Corbett's actions, which suggested in turn that there was a likelihood of irreparable harm if no injunction was granted. Additionally, the balance of equities tipped in Sun Distributing's favor. Finally, the public interest was served in ordering Corbett to abide by trade secret laws and protect trade secrets.

In conclusion, the court held that Sun Distributing met its burden and was entitled to a TRO with respect to its misappropriation claim.

Breach of Contract

As for the breach of contract claim, the court found that the claim was preempted by Sun Distributing's CUTSA claim. Sun Distributing argued that Corbett breached the confidentiality provision of the employment agreement by using trade secrets, including customer lists, needs, and pricing structures, to compete with Sun Distributing. The court reasoned that Sun Distributing's breach of contract claim had no basis other than its misappropriation claim, and therefore it was preempted.

Accordingly, the court denied Sun Distributing's request for a TRO with respect to its breach of contract claim.

Preliminary Injunction

The court subsequently heard oral argument as to Sun Distributing's motion for preliminary injunction. The court reincorporated by reference its findings from its order granting the TRO and, thereafter, granted the preliminary injunction. In a footnote, the court stated that upon further reflection, Sun Distributing's breach of contract claim was not preempted by the CUTSA; however, an injunction prohibiting misappropriation was adequate to protect Sun Distributing's interests, rendering an injunction based on breach of contract duplicative.

Takeaways

This case represents a small victory for employers seeking TROs and preliminary injunctions based on misappropriated customer lists. Interestingly, the court granted the TRO and preliminary injunction based, in large part, on a single email evidencing wrongdoing that was inadvertently sent after the employee's resignation. This case serves as a reminder for employers to ensure they have in place effective termination protocols.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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