Opinion
No. C01-2050
September 11, 2002
Mark L. Zaiger, Shuttleworth Ingersoll, Cedar Rapids, IA; James R. Neumeister, Mark S. Floyd, Thompson Hine, LLP, Cleveland, OH; Attorneys for Plaintiff.
David H. Correll, Patrick Galles, Correll, Sheerer, Benson, Engels, Galles Demro, PLC, Cedar Falls, IA;
Bruce L. Braley, James H. Cook Dutton Braun Staack Hellman, Iversen, Waterloo, IA; John Michael Carr, Carr Carr, Manchester, IA; for Defendants.
REPORT AND RECOMMENDATION
This matter comes before the court pursuant to the plaintiff's motion for a preliminary injunction (docket number 24), the plaintiff's supplemental motion for preliminary injunction (docket number 53) and plaintiff's clarification of relief requested (docket number 72). The motions were referred to the undersigned United States Magistrate Judge for the issuance of a report and recommendation (docket number 57). An evidentiary hearing was held on April 4, 2002. The plaintiff is seeking an injunction to prevent the defendants from continuing to use the information allegedly taken by the defendants when they left, from interfering with their business opportunities, and to enforce prior court orders. It is recommended that the motions be denied.
The plaintiff is the nation's leading seller of school supplies and equipment. The defendants are former employees who left in early May of 2001 to start Midwest Direct Equipment Supply, Inc. The plaintiff brought suit on August 8, 2001 asserting six theories of recovery: misappropriation of trade secrets, breach of an employee's fiduciary duty of loyalty, breach of non-compete agreement, tortious interference with contract, tortious interference with existing and prospective business relations, and conspiracy. The plaintiff filed motions for preliminary injunctions claiming that the defendants:
1. usurped the plaintiff's sales,
2. interfered with the plaintiff's pending sales,
3. interfered with the plaintiff's post-sale activities,
4. interfered with the plaintiff's relationships with its suppliers,
5. interfered with and violated the plaintiff's non-compete agreements, and
6. failed to comply with Court Orders to turn over business records.
The defendants deny that they did anything improper when they left the plaintiff's employment. The Court makes the following findings of fact and conclusions of law.
FINDINGS OF FACT
The defendants, Michael Weiss, Jerry Zikuda, Clif Mauer, Michael Schmitt, and Kevin Kinley left plaintiff School Specialty's employment in early May 2001 to start their own company. The defendants formed Midwest Direct Equipment Supply, Inc. in May of 2001. Midwest Direct is now a competitor of School Specialty. Midwest Direct is a small company employing 16 people. School Specialty is an established company employing approximately two thousand four hundred people nationwide. It claims to have 50% of the market share in Iowa for products that it sells.
Clif Mauer was dismissed from this lawsuit on December 10, 2001 and was rehired by School Specialty.
Defendant Michael Weiss began as a sales associate for the plaintiff in Minnesota. He worked for the company from the early 1970s until May 2001. He worked as a sales representative in northeast Iowa since the late 1970s. He was one of the highest producers of revenue and gross margin working for School Specialty. He resigned in the first week of May 2001 and went with the newly-formed Midwest Direct.
Defendant J.D. Zikuda worked for School Specialty since the mid-1970s. He worked in Iowa's southwest sales territory. He also was an effective salesperson and a consistently high producer of revenue and gross margin. He also resigned in the first week of May 2001 to work for Midwest Direct.
Clif Mauer was hired as a sales associate by the plaintiff and was assigned to work in the state of South Dakota. Immediately prior to his departure in May 2001, his sales territory was north central Iowa. He also was an effective salesperson with high market penetration, high revenue, and high gross margin.
Defendant Michael Schmitt was another long-term employee of School Specialty whose sales territory included southern Illinois. He was a sales leader or sales manager for the state of Illinois. Illinois produced the highest revenue for School Specialty of all 50 states. He resigned in the first week of May to join Midwest Direct.
Kevin Kinky was a more recent employee of School Specialty who worked in a sales support position as an estimator. Following that, he was a salesperson for School Specialty in southern Illinois. He left School Specialty in the second week of May.
In the school supply business, January through May is a very important time of the year. School districts in the state consider purchases of supplies and equipment during this time of the year, commonly called the requisition period. The orders are made by May and are shipped during the summer. Eighty percent of plaintiff's sales are made between January and May of each year. The supplies and equipment can then be received before the beginning of the school year.
The plaintiff sends sales catalogs to school districts by January in order for schools to have ample time to fill out their order forms. The sales representatives deliver the catalogs and requisition forms to the schools and pick up the forms toward the end of April or the beginning of May. While the catalogs and requisition forms are in the schools, the salespersons respond to any questions the schools have and bid on items as requested by the schools.
In order to ease the bidding process for its sales force, the plaintiff gives its salespersons a computer program called EZ quote. The EZ quote software was designed to allow plaintiff's sales force to enter the plaintiff's catalog product codes into the program to retrieve the description, wholesale cost, and retail price of each of the plaintiff's products. Each salesperson is responsible for the maintenance of his or her own customer files and the EZ quote software.
The plaintiff alleges that the defendants left its employ with customer files which included historical ordering patterns for customers as well as all of the information pertaining to the sales and attempted sales in their district. They also had sales leads, requests for pricing on specific furniture and equipment items, and knowledge of projects that they were working on that had not been completed. In addition, they would have had sales literature, catalogs, price lists, software, requisition forms, and sales binders. Finally, they had samples of various products. All of this information is what one would expect a salesperson would have and know. As with most other kinds of sales, sales of school-related equipment and supplies is driven by quality, price, service, and the relationship between the salesperson and the customer. These salespeople know the buying habits of their customers as well as their preference for quality or price. The defendants' extensive history in this business and knowledge of the number one competitor obviously assists them in their competing business. However, beyond their general knowledge of the industry and of the plaintiff, the individual defendants lost access to changing price information as well as access to key vendors who had exclusive relationships with the plaintiff.
Many of the company's important competitive documents, such as pricing information, were marked "confidential" and were not widely distributed even within the company. However, although individuals within the plaintiff were familiar with covenants not to compete, School Specialty did not have current enforceable covenants with any of the defendants. Such covenants were signed back in the 1970s but the plaintiff went through a series of corporate identity changes and plaintiff is no longer able to prove that these covenants still bind any of the defendants. This is particularly important in this case as it is clear that valid covenants not to compete would easily have prevented the situation plaintiff now complains about.
After tendering their respective resignations and starting their own company, the defendants went back to the schools they had called on in their capacities as salesmen for the plaintiff. The defendants told the schools that they were now with a new company and asked for an opportunity to requote some of the orders they were pursuing for plaintiff, using Midwest Direct's pricing. The defendants were unable to offer all of the products offered by the plaintiff because the defendants did not reestablish the same vendor agreements they had when they were with the plaintiff. The defendants were able, in many instances, to offer similar product lines.
After the defendants left, the plaintiff requested the return of all customer lists, bid lists, pricing information, customer files, furniture samples, equipment samples, and computer software. On July 2, 2001, three of the defendants returned a number of customer files, furniture samples, and other information regarding previous sales. Another defendant was unable to make the July 2 meeting but later returned materials to the plaintiff. Three of the defendants retained some very limited customer information until a dispute regarding their commissions was resolved.
The plaintiff was not satisfied with the quantity or quality of the information returned by the defendants and sought a court order requiring the return of all proprietary information, including customer files, pricing information, and the EZ quote computer software. Three orders were entered that required the defendants to return all proprietary information in their possession that was obtained in the course of their employment with the plaintiff. The plaintiff contends that those orders have not been complied with. The defendants say they have returned all the information required to be returned under the court orders. This court concludes that only a few pieces of paper necessary to resolve commission disputes were retained. These very limited documents gave the defendants absolutely no competitive advantage.
At the hearing, considerable attention was devoted to a handful of incidents in which the defendants filled school district orders with their new company after beginning their efforts to sell those products while they were still employed by the plaintiff. There was a suggestion that the plaintiff believed that a defendant deliberately made an erroneous encoding of a sales order for furniture that arrived in the wrong finish to sabotage the plaintiff before the defendant left its employ. However, this was complete speculation. There was also hearsay evidence about a customer who believed that it was either unethical or unprofessional for one of the defendants to place an order with Midwest Direct that had been started with School Specialty.
The emphasis of the plaintiff in moving for the preliminary injunction is its allegation concerning the negative impact that the defendants' departure was having on its good will, its reputation, and the relationships that the plaintiff had with longstanding customers. The plaintiff believes that the mere fact that these long term employees now work for another company implies that School Specialty was somehow a less desirable company. The alleged damage to plaintiff's good will, its reputation, and its relationship with its customers was simply not proved. Further, it is difficult for the court to accept the plaintiff's premise that the mere fact of the defendants' departure casts some bad light on the plaintiff's integrity. It appears to the court that these defendants thought that they could make more money and would be happier working for themselves. The decision to leave a longstanding employer and start a competing business does not, by itself, carry such negative inferences about the former employer.
The plaintiff contends that the defendants' actions have negatively impacted the plaintiff in two ways. First, the plaintiff's Iowa sales were reduced by two million dollars ($2,000,000). Second, the plaintiff's sales manager for the state of Iowa said, "more importantly than the reduction in sales has been the impact its had on our reputation, on the goodwill, the relationships that we've had with customers. School supply business is a relationship business. Our reputation, our goodwill, our relationships, are the more important assets that our company has. It's vital to us." There was simply no proof of actual damages to plaintiff's reputation, good will, or its relationships generally.
In the first year following the defendants' departure, they projected $12 million in sales. They did not reach $3 million in sales. No school district in Iowa has stopped doing business with the plaintiff and of the plaintiff's 2,000 vendors, they had lost only one to the defendants. Dennis Bigelow, plaintiff's sales manager for the state of Iowa, had no direct evidence as of the date of the preliminary injunction hearing to show that any of the defendants had used any confidential information to compete against the plaintiff. The plaintiff had only one hearsay allegation of a wrongfully diverted order from School Specialty to Midwest Direct. Prior to May 9, 2001, the defendants had not distributed their catalogs, requisition forms, or other sales materials. Following plaintiff's request for the return of plaintiff's documents, the defendants retained only a handful of documents that they believed were necessary to assure the payment of a few remaining commissions. In addition, there were some school measurements that were retained in order to document the defendants' actions in the event that a dispute later arose concerning requisitioned items.
The competition between the plaintiff and the defendants has caused prices to drop precipitously. The parties are pricing products very close to cost when they are competing against each other.
CONCLUSION OF LAW
Whether a preliminary injunction should issue involves consideration of: (1) the threat of irreparable harm to the movant; (2) the state of balance between this harm and the injury that granting the injunction will inflict on other parties litigant; (3) the probability that movant will succeed on the merits; and (4) the public interest. Dataphase Systems, Inc. v. C.L. Systems, Inc., 640 F.2d 109, 114 (8th Cir. 1981);Dakota Industries, Inc. v. Ever Best LTD., 944 F.2d 438, 440 (8th Cir. 1991). No single factor in itself is dispositive; rather each factor must be considered to determine whether the balance of equities weighs toward granting the injunction. United Industries Corporation v. Clorox Company, 140 F.3d 1175, 1179 (8th Cir. 1998). With regard to a preliminary injunction, however, the burden on the movant is heavy, in particular where granting the preliminary injunction will give substantially the same relief it would obtain after a trial on the merits. See id.; Dakota Industries, 944 F.2d at 440.
In a document entitled Clarification of Relief Requested filed after the hearings the plaintiff requested the following relief: barring the defendants from retaining, possessing, misappropriating, or otherwise using any and all of plaintiff's confidential, proprietary, and trade secret information; compelling the defendants to return all copies and versions of plaintiff's confidential, proprietary, and trade secret information that was in the defendants' possession at the time of resignation; barring the defendants from intervening, interfering, or otherwise involving themselves in any sales projects that have been consummated, entered into, or begun between plaintiff and any of its clients or customers; and ordering the defendants to identify and disclose to plaintiff all sales opportunities, business leads, and other potential business ventures or projects learned in the course of employment at School Specialty, and to account for any and all monies received and profits defendants earned through their knowledge of that information.
The facts of this case do not so favor the plaintiff as to require the court to intervene to preserve the status quo. The plaintiff contends that because of the defendants' actions they lost two million dollars in sales and its goodwill, reputation, and its relationship with customers suffered. The plaintiff did not prove that the defendants caused the loss of sales. The plaintiff admitted that many factors could have contributed to a decline in sales. Budget shortages and purchase freezes in the schools contributed to the overall decline in sales statewide. Increased competition may have had an impact on the plaintiff's relationship with its customers but that is not a reason to issue an injunction. If any particular sales in May of 2001 were inappropriately made by the defendants, this can be compensated by an award of money damages.
Threat of Irreparable Harm
The first factor of the Dataphase test is the threat of irreparable harm to the movant if the injunction is not issued. The plaintiff has not produced evidence to show that it will suffer irreparable harm without injunctive relief. The defendants already left the business and are operating their own competing business. The plaintiff does not ask for, nor would the court grant, an injunction that would prohibit the defendants from working. Plaintiff identified no specific, ongoing practices of the defendants that need to be enjoined. Beyond the allegation that the defendants were trained by the plaintiff, plaintiff had no evidence that defendants continue to use specific confidential information to the plaintiff's detriment. If the mere fact of training employees and giving them access to necessary company information were enough to enjoin them, no employees could ever work for competitors. As a general rule, "an employee cannot be precluded from exercising the skill and general knowledge he has acquired or increased through experience or even instruction while in the employment" of his employer. Iowa Glass Depot, Inc. v. Jindrich, 338 N.W.2d 376, 383 (Iowa 1983). Through testimony of the plaintiff's Iowa sales force leader, the plaintiff admitted that the information allegedly retained by the defendants contained historical price data, bid prices, customer lists, and other company information that is updated periodically so the importance of the information diminishes over time. The defendants were familiar with the customers because of the relationships made over the years as salespersons for the plaintiff. Nothing in the law requires an employee to forget the experience he gained with an employer.
Balance of Harms
Because this court does not believe that the plaintiff is operating under the threat of irreparable harm, the court necessarily believes that the balance of harm favors the defendants. The relief requested as clarified by the plaintiff is still very general and therefore vague. The plaintiff seeks to prohibit the defendants from retaining, possessing, misappropriating, or otherwise using plaintiff's confidential, proprietary, and trade secret information. The evidence does not show that the defendants currently engage in any particular sales practice that threatens the plaintiff. There are no pending sales by the defendants that the plaintiff can prove would result in the misappropriation of any trade secrets. The threat of having the defendants operate under an injunction that simply requires them to follow the law would damage the defendants' reputation by suggesting that the plaintiff had proved that they were currently engaging in some improper sales practice. In the absence of specific proof that the defendants are engaging in improper sales practices, the harm from operating under an injunction outweighs any harm to the plaintiff.
Likelihood of Success on the Merits
Because of the abbreviated nature of an evidentiary hearing on a preliminary injunction motion, it is difficult to determine the likelihood of success on the merits. For the specific instances of sales during May 2001 identified at the hearing, the plaintiff may or may not prevail. However, it is clear to this court that the remedy of money damages for these specific sales will adequately make the plaintiff whole without the need for equitable relief.
Public Interest
The final Dataphase factor is the public interest. The defection of the defendants from the plaintiff's sales force has benefitted the public. School districts now have a choice of more companies from which to buy school supplies, furniture, and equipment at a lower price. Competition in the marketplace results in better quality goods for lower prices. The public interest clearly favors this competition.
Trade Secrets
In Economy Roofing Insulating Co. v. Zumaris, 538 N.W.2d 641 646-47, the Iowa Supreme Court stated:
Under the plain language of [Iowa Code Section 550.2(4)] "trade secret" is defined as "information" and eight examples of this term are provided. Although these examples cover items normally associated with the production of goods, "trade secrets" are not limited to the listed examples. Business information may also fall within the definition of a trade secret, including such matters as maintenance of data on customer lists and needs, source of supplies, confidential costs, price data and figures. One commentator explains:
Trade secrets can range from customer information, to financial information, to information about manufacturing processes to the composition of products. There is virtually no category of information that cannot, as long as the information is protected from disclosure to the public, constitute a trade secret.
We believe that a broad range of business data and facts which, if kept secret, provide the holder with an economic advantage over competitors or others, qualify as trade secrets.
citing US West Communications, Inc. v. Office of Consumer Advocate, 498 N.W.2d 771, 714 (Iowa 1993). The evidence at the preliminary injunction hearing indicated that the defendants returned all the information they had except for a small number of orders that were kept to insure a job was done correctly and to prove a few commissions. These retained documents gave the defendants no competitive advantage at all.
The plaintiff could have protected itself in this case by requiring its salespersons to sign non-compete agreements. This was not done. The plaintiff lost key members of its sales force at an important time of the year, allegedly resulting in a loss of the plaintiff's profits and negative impact on customer relations. However, no evidence has been produced to tip the balancing test stated in the Dataphase case in the plaintiff's favor. The plaintiff failed to satisfy its burden to prove that a preliminary injunction is appropriate.
IT IS RECOMMENDED that, unless any party files objections to the report and recommendation in accordance with 28 U.S.C. § 636(b)(1)(C) and Fed.R.Civ.P. 72(b) within ten (10) days of the service of a copy of this report and recommendation, the plaintiff's motions for preliminary injunction be denied.
Objections must specify the parts of the "report and recommendation to which objections are made. Objections also must specify the parts of the record, including exhibits and transcript lines, which form the basis for such objections. See Fed.R.Civ.P. 72. Failure to file timely objections may result in waiver of the right to appeal questions of fact. See Thomas v. Arn, 474 U.S. 140, 155 (1985); Thompson v. Nix, 897 F.2d 356 (8th Cir. 1990).