STATE OF MINNESOTA
IN COURT OF APPEALS
World Data Products, Inc.,
David W. Larson, et al.,
Filed November 10, 1999
Hennepin County District Court
File No. 99605
William H. Henney, 5101 Thimsen Avenue, Suite 200, Minnetonka, MN 55345 (for respondent)
D. Clay Taylor, D. Clay Taylor, P.A., 1221 Nicollet Mall, Suite 205, Minneapolis, MN 55403 (for appellants)
Considered and decided by Toussaint, Chief Judge, Lansing, Judge, and Willis, Judge.
Appellant David W. Larson argues the district court abused its discretion by granting a temporary injunction restraining him from having any contact with customers of his former employer, respondent World Data Products. We affirm.
In March 1993, WDP hired David Larson, then a recent college graduate, as a sales representative. Before beginning his employment, Larson signed a noncompete agreement that prohibited him, for a period of one year after termination of his employment for any reason, from being employed by, or owning an interest in, any business wholly or partially owned by a former WDP employee.
In September 1993, Larson left WDP for other employment. Larson was convinced to return to WDP after an absence of less than a week, and he received an increase in compensation upon his return. WDP failed to remove Larson from its automated payroll system, so he was inadvertently paid for the few days he did not work for WDP. Over the ensuing months, Larson became responsible for 25% of WDP's sales, and he earned more than $636,000 in 1998. In early December 1998, Ashton learned that Larson intended to leave WDP, and he terminated Larson's employment on December 9, 1998.
During his employment at WDP, Larson had access to confidential information that had been purchased or developed by WDP, including lead sheets and notebooks containing customer lists, names and telephone numbers of contacts, purchasing information, and sales agreements. WDP protected the confidentiality of this material with noncompete agreements and nondisclosure provisions contained in the company's employee handbook. In early 1997, Larson signed a form acknowledging receipt of a copy of the handbook. After his termination, WDP did not recover Larson's notebook, which contained WDP client information.
The day following his termination, Larson and his wife incorporated Vibrant Technologies, Inc. (VT), to sell computer equipment, and Larson began to contact some of WDP's customers.
On January 13, 1999, WDP commenced this action against Larson and VT, asserting claims of misappropriation of property, conversion, unfair competition, deceptive trade practices, unjust enrichment, breach of fiduciary duty, breach of a duty of loyalty, and breach of contract.
On WDP's motion, the district court granted a temporary injunction prohibiting Larson and VT from contacting WDP's customers except for the limited purpose of completing pending transactions, the net proceeds from which were to be paid to the court. Larson and VT appeal.
1. Nature of the Relationship
When WDP hired Larson, he was a recent college graduate with no background in computers. WDP provided Larson with extensive training and experience in the computer business. The record shows that Larson signed a noncompete agreement when he was first employed by WDP and that he had access to WDP's confidential information, particularly customer lists and sales records, during his employment. Nothing in the nature of the relationship of the parties makes issuance of the temporary injunction an abuse of the district court's discretion.
2. Balance of Harm
WDP must demonstrate irreparable harm to obtain an injunction, while Larson need only show substantial harm to bar it. Pacific Equip., 519 N.W.2d at 915. The failure to demonstrate irreparable harm by the party seeking a preliminary injunction is, by itself, a sufficient ground to deny the injunction. Morse v. City of Waterville, 458 N.W.2d 728, 729 (Minn. App. 1990), review denied (Minn. Sept. 28, 1990).
The district court concluded that WDP showed that, without an injunction, it could lose sales, ongoing business relationships with customers, and reasonably expected profits from its investment of time and commitment of resources in customer development and that the losses could be in the millions of dollars and would be difficult to identify and trace after the fact.
The court also found that issuance of the injunction would not preclude Larson from earning a living.
Based on the record before us, we conclude that the district court did not abuse its discretion in finding that a balancing of harms favored the issuance of the injunction.
3. Likelihood of Success on the Merits
The district court concluded that WDP may prevail on some, if not all, of its claims, including misappropriation of property characterized as trade secrets, conversion, unfair competition, deceptive trade practices, unjust enrichment, breach of fiduciary duty, breach of duty of loyalty, and breach of contract. But the district court analyzed only the issues of breach of Larson's covenant not to compete and misappropriation of trade secrets.
a. Covenant Not To Compete
Larson argues that the district court erred in finding that WDP was likely to prevail on its claim that he had violated a valid covenant not to compete because the covenant expired in September 1994, one year after the date he first terminated his employment with WDP.
Covenants not to compete limit an individual's right to work and to earn a livelihood and therefore are "looked upon with disfavor, cautiously considered, and carefully scrutinized." Dynamic Air, Inc. v. Bloch, 502 N.W.2d 796, 799 (Minn. App. 1993) (quoting Bennett v. Storz Broad. Co., 270 Minn. 525, 533, 134 N.W.2d 892, 898 (1965)). "Such covenants are upheld nonetheless if the restriction is necessary for the protection of the business or the good will of the employer." Id. (citing Bennett, 270 Minn. at 533, 134 N.W.2d at 899).
The district court found that on March 9, 1993, Larson entered into a noncompete agreement that was one of the terms and conditions of his original employment with WDP, and that, therefore, the covenant was valid as ancillary to the original employment and continued in effect throughout the entire time he was employed by WDP. By its terms, the agreement restricted Larson for a period of one year following the termination of his employment with WDP for any reason.
Larson resigned from WDP on Tuesday, September 7, 1993, worked for another firm for three days, then returned to work for WDP the following Monday. Larson contends that he was not asked to sign a new noncompete agreement, nor was he told that the March 9, 1993, noncompete agreement would continue to be effective.
WDP's assertion that Larson "really never left" is not supported by the record. Because Larson resigned from WDP on September 7, 1993, the covenant not to compete appears to have expired by its own terms in early September 1994. We conclude from the record before us that the district court abused its discretion in finding that WDP is likely to succeed on the merits of its claim that Larson breached his noncompete agreement.
b. Misappropriation of Trade Secrets
The Uniform Trade Secrets Act, Minn. Stat. §§ 325C.01-.08 (1998), articulates and clarifies much of the common law concerning trade secrets and confidential information, allowing the protection of certain types of information through an action for misappropriation. Electro-Craft Corp. v. Controlled Motion, Inc., 332 N.W.2d 890, 897-98 (Minn. 1983). The act has been interpreted to require the party seeking protection to show both the existence of and the misappropriation of the trade secret. Id. at 897. To qualify as a trade secret under the act, information (1) must not be generally known nor readily ascertainable; (2) must derive independent economic value from secrecy; and (3) must be the subject of reasonable efforts to maintain its secrecy. Minn. Stat. § 325C.01, subd. 5; Electro-Craft, 332 N.W.2d at 899-900.
Ashton testified that WDP's "proprietary" material included "lead sheets," which are lists of potential customers that WDP purchased for $20,000-30,000, as well as notebooks containing lists of customers, contact names and phone numbers, and sales information. Although Larson is correct in noting that these are readily ascertainable to anyone who has the money to purchase them, this information is not generally known and has a monetary value, as indicated by its cost to WDP. "The presence of an alternate means of obtaining the names * * * without more, is not sufficient to establish that the information is generally ascertainable." Cherne Indus., Inc. v. Grounds & Assocs., Inc., 278 N.W.2d 81, 90 (Minn. 1979). Additionally,
[i]f an outsider would obtain a valuable share of the market by gaining certain information, then that information may be a trade secret if it is not known or readily ascertainable.
Electro-Craft, 332 N.W.2d at 900.
The record shows that, in addition to requiring noncompete agreements that addressed in detail the information that is to remain confidential, WDP required every employee to sign a form acknowledging receipt of its employee handbook, which contains WDP's policy prohibiting the use or disclosure of confidential and proprietary information. The record also shows that this information was physically protected from outsiders; employees were required to use electronic key cards for entry to WDP's premises and were instructed not to leave confidential information in view on their desks when visitors were present. Cf. Electro-Craft, 332 N.W.2d at 901-03 (holding that requiring only some employees to sign confidentiality agreements, having many unlocked entrances, and failure to issue policy statement delineating material to be kept confidential was insufficient to qualify as reasonable efforts to maintain security).
The district court concluded that the information at issue is within the definition of trade secrets, relying on the supreme court holding in Electro-Craft, 332 N.W.2d at 899, and stating that the requirement was satisfied "if the information was not quickly available and if the total combination of the information * * * alleged to be secret * * * was sufficiently unique, even if it lacked the novelty required for patenting."
The district court then determined that WDP had made the requisite showing of misappropriation by Larson. Misappropriation involves the use or acquisition by improper means of another's trade secret, without that person's express or implied consent, by an individual who knew or had reason to know that the information was "acquired under circumstances giving rise to a duty to maintain its secrecy or limit its use." Minn. Stat. § 325C.01, subd. 3; Electro-Craft, 332 N.W.2d at 903. "Improper means" are defined to include theft, as well as the "breach of a duty to maintain secrecy." Minn. Stat. § 325C.01, subd. 2. The record contains testimony that WDP's electronic "card-swipe" security system showed that on the night after his termination and the resulting deactivation of his key card, Larson attempted unsuccessfully to enter the building four times between midnight and 12:30 a.m., but he was at his desk at 7:00 the next morning. The record shows that WDP did not find Larson's notebook containing client information and that Larson contacted WDP's customers after his termination by WDP.
The evidence in the record demonstrates the likelihood of success on the merits of WDP's claim of misappropriation of trade secrets and supports the district court's issuance of the temporary injunction.
4. Public Policy
The district court found that the public interest is not served if a former employee is allowed to derive benefit from violating his employer's confidence and confidentiality after enjoying a relationship that provided him considerable education, training, and income over a period of years. We conclude that the district court did not abuse its discretion in finding that public policy favors the issuance of the injunction.
5. Administrative Burden
The district court specifically stated that it planned to take a diligent and active role in enforcing the injunction and did not feel overly burdened by taking on that responsibility. We find nothing to suggest this was an abuse of the district court's discretion.
We conclude that the record does not support the district court's determination that WDP is likely to succeed on the merits of its claim that Larson breached his noncompete agreement. But we also conclude from the record as a whole and review of the district court's Dahlberg analysis that issuance of the temporary injunction was not a clear abuse of the district court's discretion.