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INFLIGHT NEWSPAPERS, INC. v. MAGAZINES IN-FLIGHT

December 17, 1997

INFLIGHT NEWSPAPERS, INC., and INFLIGHT ADVERTISING, INC., Plaintiffs, against MAGAZINES IN-FLIGHT, LLC, MAGAZINES IN-FLIGHT, INC., MARC PASSARELLI, STEPHEN SERGI, JAMES NEWTON, JODY DYKSTRA, ELISE ANTONELLI, SCOTT T. GUIDO, EDGAR ESCOBAR, ELVIS BRAN and JAN KULIWOSKI, Defendants.


The opinion of the court was delivered by: SEYBERT

 MEMORANDUM AND ORDER

 SEYBERT, District Judge:

 Pending before the Court are the objections submitted by all parties in the instant action to the Report and Recommendation of United States Magistrate Judge Michael L. Orenstein dated November 10, 1997 (hereinafter "R&R").

 BACKGROUND

 On October 15, 1997, plaintiffs Inflight Newspapers, Inc. and Inflight Advertising, Inc. (collectively "Inflight") petitioned this Court for a temporary restraining order alleging violations of (1) the Sherman Act, 15 U.S.C. § 2; (2) the Clayton Act, 15 U.S.C. §§ 15, 26; (3) the Lanham Act, § 15 U.S.C. § 1501 et seq.; and (4) supplemental New York State law claims. The suit arises from the establishment by the individual defendants, former officers and employees of Inflight, of two new corporations, Magazines In-Flight, LLC, and Magazines In-Flight, Inc. (collectively "MIF"). Specifically, defendant MIF is alleged to have infringed upon Inflight's name and logo, and the individual defendants have purportedly violated non-competition and non-disclosure covenants through the use of trade secrets and other proprietary information of Inflight, and in so doing, have been unjustly enriched. Furthermore, the individual defendants, as former officers and employees of Inflight, are alleged to have breached their fiduciary duties of care, loyalty, and good faith, and to have diverted a corporate opportunity and to have tortiously interfered with Inflight's customer contracts. The Court denied the temporary restraining order application and referred the matter to Magistrate Judge Orenstein to conduct a hearing and to issue a Report and Recommendation on the plaintiffs' motion for a preliminary injunction. An exhaustive three week hearing was held and the testimony of 24 witnesses and the introduction of 108 exhibits were received into evidence. The facts underlying this action were adduced after a hearing before the Magistrate and are set forth fully in Magistrate Orenstein's report, read into the record on November 10, 1997, which thoroughly outlined the claims raised and the supporting evidence introduced.

 Magistrate Orenstein recommended enjoining and restraining the named defendants "and their agents, employees, attorneys or successors or anyone in active concert or participation with them who shall receive actual notice . . . from: (a) carrying on or engaging in any business which obtains magazines and newspapers, which binds such magazines into covers and distributes such magazines and newspapers to airlines and others, and (b) using any of plaintiffs' trade secrets, proprietary information or other confidential data . . . and (c) using a logo in the shape of a globe or sphere with an airplane circling or crossing such globe or sphere, and (d) stating in any publication in any manner so as to imply that defendants or defendant business entities are the successors to or affiliated with Inflight Newspaper, Inc. or Inflight Advertising Inc." R&R 1, 2. *fn1"

 Upon plaintiffs' application, and pending resolution of the objections to Magistrate Orenstein's Report and Recommendation, the Court has preliminarily adopted the Report and Recommendation. Now, upon reviewing de novo the Magistrate's findings and recommendations to which objection is made, as required pursuant to 28 U.S.C. § 636(b)(1)(C) and Federal Rule of Civil Procedure 72(b), the Court adopts the Report and Recommendation in its entirety.

 Objections were separately submitted by the plaintiffs, defendant Stephen Sergi, and all other defendants (the "MIF defendants"). At the outset, the Court admonishes the MIF defendants for what is, essentially, a 50 page brief in opposition to the Magistrate's Report and Recommendation. My individual rules clearly state that memoranda of law are limited to 20 double-spaced pages and that memoranda that exceed the page limitations will not be considered by the Court. Nevertheless, the MIF defendants submitted a 21 page brief, outlining their objections and providing legal analysis to support their arguments, as well as a 31 page "Memorandum of Law" that merely expands further the same grounds delineated in the defendants' 21 page objection brief and attempts to add new arguments not mentioned in the MIF defendants' objections brief. Accordingly, the Court will disregard the MIF defendants' "Memorandum of Law" and will address only arguments raised in the objection brief. This approach is fair to both the plaintiffs and defendant Sergi who were able to comply with my rules and page limitations.

 DISCUSSION

 I. THE STANDARD FOR THE ISSUANCE OF A PRELIMINARY INJUNCTION

 In order to obtain a preliminary injunction, the movant must establish that (a) it will suffer irreparable harm in the absence of an injunction and (b) either (i) a likelihood of success on the merits or (ii) sufficiently serious questions going to the merits to make them a fair ground for litigation and a balance of the hardships tipping decidedly in favor of the moving party. Tom Doherty Assocs., Inc. v. Saban Entertainment, Inc., 60 F.3d 27, 33 (2d Cir. 1995).

 A. Irreparable Harm

 Because a preliminary injunction is a drastic measure, Borey v. National Union Fire Ins. Co., 934 F.2d 30, 33 (2d Cir. 1991), "the showing of irreparable harm is the 'single most important prerequisite for the issuance of a preliminary injunction.'" Frank Brunckhorst Co. v. G. Heileman Brewing Co., Inc., 875 F. Supp. 966, 974 (E.D.N.Y. 1994) (citing Bell & Howard v. Masel Supply Co., 719 F.2d 42, 45 (2d Cir. 1983)); see also Reuters Ltd. v. United Press Int'l, Inc., 903 F.2d 904, 907 (2d Cir. 1990)).

 1. The Defense of Laches

 Preliminary injunctions normally are granted "under the theory that there is an urgent need for speedy action to preserve a party's rights." Museum Boutique Intercontinental, Ltd. v. Picasso, 880 F. Supp. 153, 164 (S.D.N.Y. 1995). In the context of granting a preliminary injunction, therefore, the district court should generally consider delay in assessing irreparable harm. Tom Doherty, 60 F.3d at 39 (citation omitted); Citibank, N.A., v. Citytrust, 756 F.2d 273 (2d Cir. 1985). Magistrate Orenstein concluded that there was no laches on plaintiffs' part because, despite a three month delay in seeking injunctive relief, the plaintiffs conducted an investigation in order to collect sufficient information to satisfy the demonstration of irreparable harm. Tr. 1, 14-18, 2352.

 The MIF defendants seem to argue that because the Court denied the plaintiffs a TRO on finding there was no immediate threat of irreparable harm, that somehow plaintiffs are now precluded from establishing irreparable harm to secure a preliminary injunction. Defendant Sergi argues that the plaintiffs should have promptly moved for injunctive relief as soon as Mrs. Lehner became aware of MIF's existence in August 1997. Because the plaintiffs chose to wait until they lost the contract from American Airlines, the defendants argue that they assumed the risk of defendants' continued operations and should be estopped from obtaining equitable relief when they are guilty of gross laches.

 The Court finds that the record reelects sufficient evidence to rebut a finding of laches that would bar a finding of irreparable harm. As Magistrate Orenstein correctly found, beginning on July 16, 1997, the plaintiffs, through counsel, sent the key defendants a letter with regard to their activities. Defs. Ex. W. Defendants Sergi, Newton and Passarelli then responded through their own attorney on July 22, 1997, which expressed a willingness to cooperate with Inflight. Pls. Ex. 32. It was not until August 1997 that plaintiffs actually became aware of the possible threat posed by MIF. Then, as the Magistrate found, it was not until September 30, 1997 that plaintiffs realized the extent of the threat when it lost its leading client, American Airlines. It was at that time that the possible threat of MIF manifest itself as the actual threat. Within two weeks, plaintiffs moved for their temporary restraining order and the instant motion for a preliminary injunction. To the extent the defendants may have suffered any prejudice during this time, the Magistrate also found, and the defendants do not now dispute, that their investment initiated as early as July 16, 1997, well before it was reasonable for the plaintiffs to seek this type of drastic relief. Accordingly, the Court finds that the Magistrate's ruling as to laches was well reasoned and supported in the record and thus any delay is not a bar to granting this injunction. See also Playboy Enters. v. Chuckleberry Publ'g, Inc., 486 F. Supp. 414, 434-35 (S.D.N.Y. 1980) ("parties should not be encouraged to sue before a practical need to do so has been clearly demonstrated").

 2. Inadequate Remedy at Law

 In addition to a showing that the plaintiffs did not unduly delay resorting to injunctive relief, also essential to a showing of irreparable harm is the unavailability or at least inadequacy of a money damages award. See, e.g., Weinberger v. Romero-Barcelo, 456 U.S. 305, 312, 102 S. Ct. 1798, 1803, 72 L. Ed. 2d 91 (1982) (stating "the basis for injunctive relief in the federal courts has always been irreparable injury and the inadequacy of legal remedies").

 The MIF defendants contend that the plaintiffs have not met this requirement because they have failed to submit any evidence that they will go bankrupt if the injunction is not granted and that any business lost to MIF can be assessed at the time of trial by looking at MIF's accounts receivable. Notwithstanding any threat of bankruptcy, however, the law is clear in the Second Circuit that irreparable harm is presumed where a trade secret has been misappropriated. As the Second Circuit declared, "[a] trade secret once lost is, of course, lost forever" and, as a result, such a loss "cannot be measured in money damages." FMC Corp. v. Taiwan Tainan Giant Indus. Co., Ltd., 730 F.2d 61, 63 (2d Cir. 1984) (holding loss of a trade secret is not measurable in money damages); see also Computer Assocs. Int'l, Inc. v. Bryan, 784 F. Supp. 982, 986 (E.D.N.Y. 1992) (granting a preliminary injunction because loss of trade secrets is not measurable in terms of money damages and is thus considered irreparable harm). As such, the plaintiffs need not establish that they will go bankrupt as the defendants suggest. Rather, they must demonstrate, as they have, that trade secrets have been misappropriated.

 3. Threatened Disclosure v. Actual Disclosure

 The defendants raise one final objection with respect to irreparable harm that bears discussion. Defendant Sergi argues that irreparable harm cannot lie where there has been no proof of actual disclosure of the trade secrets or information. Sergi relies on International Paper Co. v. Suwyn, 966 F. Supp. 246, 258 (S.D.N.Y. 1997), which held that in comparatively low-technology industries, irreparable harm does not exist absent actual disclosure.

 In Suwyn, however, the court found that there was no risk of disclosure because there was no evidence that the defendant would disclose confidential information in his new position, or that the information would allow the competitor to improve its business with little or no effort, or that the former employees were endeavoring to create an identical product. See 966 F. Supp. at 258-59. In this case, on the other hand, the record indicates that defendants Passarelli and Sergi had intimate knowledge of the process of binding the magazines and of the needs and preferences of Inflight's customers, Tr. 281, 411, 427, 428, 453, and that Passarelli felt he could use that information freely. Tr. 466, 467. Passarelli made representations in MIF's proposals that the company was tapping our unique knowledge of both the publishing industry as well as the Inflight entertainment arenas, Tr. 466, 467, and that the new production facility capitalizes on 25 years experience of manufacturing and shipping in-flight amenity products. Tr. 480. Suwyn is inapposite because in this instance, MIF provides an identical product to its customers as previously provided by Inflight. In sum, MIF represented to the airlines that their past expertise would be used in formulating competitive bids and providing an identical product.

 The Court adheres to the rule, therefore, that while the applicant for injunctive relief must establish more than a mere "possibility" of irreparable harm, it need only show that irreparable harm is "likely" to occur. See JSG Trading Corp. v. Tray-Wrap, Inc., 917 F.2d 75, 79 (2d Cir. 1990); Frank Brunckhorst Co., 875 F. Supp. at 974-75 (citing Tucker Anthony Realty Corp. v. Schlesinger, 888 F.2d 969, 975 (2d Cir. 1989). Consequently, the plaintiffs need not establish that the information was actually used, but need only show that the use and disclosure of an employer's protected confidential information is likely to occur. See Lumex, Inc. v. Highsmith, 919 F. Supp. 624 (E.D.N.Y. 1996); Ecolab, Inc. v. K.P. Laundry Machinery, Inc., 656 F. Supp. 894, 899 (S.D.N.Y. 1987); Churchill Communications Corp. v. Demyanovich, 668 F. Supp. 207 (S.D.N.Y. 1987). In this case, the use and disclosure of confidential information, as described infra, is likely because there is no dispute that the defendants had access to confidential information concerning, for example, Inflight's binding system, and such information could not have been obtained other than through their employment at Inflight. In addition, MIF provides identical services to its clientele and directly competes with Inflight and the likelihood of use and disclosure is especially strong where the defendants held high positions at both the plaintiffs' and the newly formed defendant companies. See Giffords Oil Co., Inc. v. Wild, 106 A.D.2d 610, 611, 483 N.Y.S.2d 104, 105 (2d Dep't 1984). Accordingly, the Court rejects defendant Sergi's argument that actual disclosure is a prerequisite to finding irreparable harm in this case.

 II. DETERMINATION OF TRADE SECRETS

 Having established the threat of irreparable harm if trade secrets are divulged, the Court must now consider Magistrate Orenstein's trade secret determinations. To establish misappropriation of a trade secret, plaintiff must prove that: "(1) it possessed a trade secret, and (2) [defendants are] using that trade secret in breach of an agreement, confidence, or duty, or as a result of discovery by improper means." Integrated Cash Mgmt. Servs. Inc., v. Digital Transactions, Inc., 920 F.2d 171, 173 (2d Cir. 1990). In making this determination, the Court is mindful that "[a] trade secret may consist of any formula, pattern, device or compilation of information which is used in one's business, and which gives him an opportunity to obtain an advantage over competitors who do not know or use it." Id. Magistrate Orenstein's utilization of the six factor test of the Restatement of Torts § 757 was proper, see id., and the analysis was sound.

 A. The Terms of the Proposals and Contracts

 In his Report and Recommendation, Magistrate Orenstein found that the information contained in Inflight's proposals to the airlines, clients and publishers is entitled to trade secret protection based on the six factors provided in the Restatement of Torts. First, the Magistrate concluded that this information is not known outside of Inflight's business because the proposals contained confidentiality provisions. As a result of working almost fifteen years at Inflight, defendant Passarelli gained insight into the arrangements Inflight had with the airlines, the pricing, the magazine preferences, when and where the magazines were shipped and the terms of the cargo fee arrangements, and which magazine subscription rates were special. The Magistrate also noted that Mr. Passarelli contacted the airlines in a manner which conveyed the impression that he was still associated with Inflight and was providing the same services as he previously did. Second, Mr. Passarelli was the only employee at Inflight who negotiated terms of arrangements with the airlines. Third, Inflight took sufficient measures to protect the secrecy of this information. Fourth, this information was extremely valuable to Inflight and its only competitor, MIF. In this regard, the Magistrate relied on Support Systems Associates, Inc. v. Tavolacci, 135 A.D.2d 704, 522 N.Y.S.2d 604 (2d Dep't 1987), in which the court held that pricing and cost information contained in confidential bid proposals was entitled to trade secret protection because if it were known to competitors, they could underbid the plaintiff. Fifth, Inflight must have expended considerable time and effort preparing its bid proposals given that it did not receive the American Airlines request for proposal until September 8, 1997 and was able to provide it to the airline by September 12, 1997. Sixth, and finally, the information in the proposals could not be easily acquired or duplicated by others.

 The MIF defendants object to this conclusion on several grounds. First, because Inflight is a monopoly, its trade secrets should not be protected. National Risk Mgmt., Inc. v. Bramwell, 819 F. Supp. 417 (E.D. Pa. 1993). The defendants' antitrust argument is discussed infra, Section V.

 Second, this conclusion is inconsistent with the Magistrate's other finding that Inflight's computer system and the information therein are not trade secrets. In this regard, the MIF defendants point out that the information on Inflight's computer system is the same information they used to prepare their proposals for the airlines. This argument is addressed infra, Section II.C.

 Third, the MIF defendants argue that the requests for proposals asked for detailed information and specifications and Mr. Passarelli was able to comply because of his own memory and the business intricacies of Inflight. Under Reed, Roberts Assocs., Inc. v. Strauman, 40 N.Y.2d 303, 386 N.Y.S.2d 677, 353 N.E.2d 590 (1976), therefore, Passarelli should be allowed to use the skills and knowledge he acquired in his overall experience at Inflight. See also Abraham Zion Corp. v. Libo, 593 F. Supp. 551 (S.D.N.Y. 1984)(mere recollection of customer information is not actionable); Ivy Mar Co., Inc. v. C.R. Seasons Ltd., 907 F. Supp. 547 (E.D.N.Y. 1995)(no trade secret protection for customer lists that are recalled or can be obtained by contacting the customer directly). Because Passarelli has not "intentionally memorized customer information" the MIF defendants argue that he is entitled to use the knowledge and talents he acquired at Inflight. Defendant Sergi adds that pricing decisions are made based on current competitive information and thus the proposals are not entitled to trade secret protection, nor is business information that is merely recalled by the former employee. Ivy Mar, 907 F. Supp. at 556; Datatype Int'l, Inc. v. Puzia, 797 F. Supp. 274, 283 (S.D.N.Y. 1992); Walter Karl, Inc. v. Wood, 137 A.D.2d 22, 28, 528 N.Y.S.2d 94 (2d Dep't 1988); Catalogue Serv. Of Westchester, Inc. v. Henry, 107 A.D.2d 783, 784, 484 N.Y.S.2d 615, 616 (2d Dep't 1985).

 The defendants place great emphasis on Mr. Passarelli's personal involvement in every phase of the negotiations while at Inflight. Ultimately, this learned knowledge was instrumental in MIF's preparation of competitive proposals. Defendants unwisely equate this information to customer lists while relying upon Reed, Roberts for support. Reed, Roberts is inapposite because it involved the use of general customer lists by a former employee in contravention of an anti-competition covenant, where trade secrets were not involved nor at issue on appeal. Defendant Sergi and the MIF defendants thus construe these cases to preclude a finding that Inflight's customer lists are protected. Apparently, they did not fully comprehend Magistrate Orenstein's Report and Recommendation, wherein he specifically found that the names of the clients were not entitled to trade secret protection. Rather, what is protectible, as this Court agrees, is the information contained in the proposals to the airlines, clients and publishers.

 The Court agrees with the Magistrate that while Inflight's customers may be readily ascertainable from public sources, its proposal information is not. See, e.g., Giffords Oil, 106 A.D.2d at 611, 483 N.Y.S.2d at 106 ("Information, such as fuel oil capacity of customers' tanks, and the amount certain customers are willing to pay, which aid plaintiffs in establishing prices and which could only be achieved through personal solicitation" is confidential). The only way the defendants could gain access to the information necessary to submit competitive proposals was through their employment at Inflight.

 Defendant Sergi also points out that there was no evidence that any of the defendants physically took from Inflight any lists, records or documents relating to proposals, contracts, pricing or costs. The requirement of actual theft, however, arises only when the customer information is not deemed a trade secret, but should be protected because of the departing party's breach of duties to his former employer. Leo Silfen, Inc. v. Cream, 29 N.Y.2d 387, 391, 328 N.Y.S.2d 423, 427, 278 N.E.2d 636 (1972); Panther Systems II, Ltd. v. Panther Computer Systems, Inc., 783 F. Supp. 53, 66 (E.D.N.Y. 1991); Ecolab Inc. v. Paolo, 753 F. Supp. 1100, 1111 (E.D.N.Y. 1991). The Court notes that the record in this area is far from clear. There was evidence suggesting that the videotape of Inflight's operations was removed by Sergi, Tr. 296, and that Newton removed his Rolodex from Inflight's premises. Tr. 2111. Because this decision does not turn on whether there was a physical taking by the defendants of Inflight's property, no such finding need be made.

 Sergi attempts to distinguish Support Systems on the grounds that the defendant in that case was still employed for the plaintiff and assisted in preparing the proposal, and that the proposal was for a highly confidential government bomber contract. Once again, as discussed infra, although it is not determinative of this issue, the Court finds that there is sufficient evidence to at least question, if not conclude, that the individual defendants took steps in the planning and preparation of a competitive business after the death of Danny Lehner while still employed at Inflight.

 The R&R analyzed the data and language of the proposals to determine a purposeful intent on the part of MIF to undercut Inflight's proposal in price and quality of service offered through the use of deceptive statements. It was not the knowledge of the customers' names or their general needs that rose to trade secret status. Rather, MIF was aware of every facet of Inflight's contracts with every customer, information that included pricing, billing, delivery, product selection, etc. This was not publicly accessible information and it represented current Inflight data. Cf. Ivy Mar, 907 F. Supp. at 558 (finding no trade secret where prices were publicly disseminated and were outdated). Having the exact knowledge of current Inflight pricing afforded MIF an opportunity to underbid and secure the airline contracts.

 It is not, as defendants suggest, the pilfering or pirating of Inflight's customer lists that stands as the basis for trade secret protection. Rather, it is the use of all of Inflight's essential and guarded proposal information, garnered by Mr. Passarelli and other defendants during their years at Inflight, to prepare a favorable MIF proposal, that is violative of trade secret protections.

 The testimony of Mr. Passarelli makes this conclusion eminently clear. In discussing MIF's negotiations with potential airline customers, it was revealed that MIF only made proposals to airline customers of Inflight. Tr. 555. The proposal to Delta, for example, gave a short biography of the six former "major executives" at Inflight "who had created, produced and implemented the magazine amenity business on board commercial airlines for 20 years." Tr. 556. The terms of the proposal, submitted in response to a detailed Request For Proposal, exactly matched the service provided by Inflight in all aspects including: (1) charging for newspapers and not magazines, Tr. 561; (2) the drop off location, Tr. 562; (3) the contract cycle, Tr. 571-72; (4) providing magazines in a custom Delta binder printed on 12 point coated two side paper stock with an acetate from cover, and a custom fit size, Tr. 574; (5) the location of advertising subject to Delta's content approval, Tr. 576; (6) the labeling of binders with the name and date of the individual publication, Tr. 578; (7) the collation of the magazines into sets, shrink-wrapped in a box and labeled, Tr. 580; (8) the use of a numbered airway bill for tracking the shipments, Tr. 583; (9) delivering on Tuesdays, Tr. 584; (10) delivery of the magazine sets at the same three locations, Tr. 586; (11) the airline COMAT shipping facility, Tr. 587; (12) an identical distribution system, Tr. 589; (13) an identical magazine content screening procedure, Tr. 590-91; (14) proposal information and format, Tr. 591; (15) the magazine titles that were provided free by the publisher which could be provided free to ...


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