UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF NEW YORK
June 11, 1998
CARPETMASTER OF LATHAM, LTD., Plaintiff, against DUPONT FLOORING SYSTEMS, INC. and RONALD CASSIN, individually and in his capacity as Vice-President of Dupont Flooring Systems, Inc., Defendants.
The opinion of the court was delivered by: MCAVOY
MEMORANDUM-DECISION and ORDER
Presently before the Court are objections submitted by plaintiff CarpetMaster of Latham, Ltd. ("CarpetMaster") to the Report-Recommendation of United States Magistrate Judge Gary L. Sharpe, which recommends that defendant Dupont Flooring Systems' ("Dupont") motion to dissolve a state court temporary restraining order be granted and that Plaintiff's motion for a preliminary injunction be denied.
The facts of this case are fully stated in Judge Sharpe's February 10, 1998 Report-Recommendation and April 23, 1998 Order and Report-Recommendation which are attached hereto as appendices. Familiarity with these facts is assumed.
In summary, CarpetMaster and Dupont are competitors in the sale and installation of carpeting in the Albany area. In October 1996, defendant Ronald Cassin approached CarpetMaster's President, Robert Taylor, concerning the purchase of CarpetMaster's commercial carpeting division. On October 23, 1996, CarpetMaster and MSA Industries, a carpeting company purchased by Dupont, executed an agreement ("Confidentiality Agreement") that required the parties to exchange confidential and proprietary information to be used exclusively for acquisition evaluations. The acquisition negotiations ultimately broke down.
On November 14, 1997, CarpetMaster filed suit in New York State Supreme Court alleging breach of contract, misappropriation of trade secrets, tortious interference with business relations, and fraud, all arising from the failed negotiations for its purchase by Dupont. In essence, CarpetMaster alleges that Dupont violated the Confidentiality Agreement by disclosing proprietary information to Cassin and that Cassin used that information to steal CarpetMaster's subcontractors, employees, and customers.
In the state court proceeding CarpetMaster obtained a Temporary Restraining Order ("TRO") preventing Dupont from engaging in certain business practices. Dupont removed the action to this Court and moved to dissolve the TRO. Pursuant to 28 U.S.C. section 636(b) and Local Rule 72.3(c) the Court referred the instant dispute to the Honorable Gary L. Sharpe, United States Magistrate Judge, for a report and recommendation.
Judge Sharpe conducted a hearing and afforded both parties the opportunity to present witness, which they declined, instead relying on affidavits and oral argument. Judge Sharpe issued a Report-Recommendation on February 10, 1998, finding: "[CarpetMaster] failed to sustain its burden of persuading this court that it will suffer non-compensatory, irreparable harm, including loss of goodwill. So too, CarpetMaster has failed to demonstrate either a likelihood of success on the merits or serious questions going to the merits." February 10, 1998 Report-Recommendation (hereinafter "First R & R") at 3.
CarpetMaster filed timely objections as well as additional evidence that convinced this Court to refer the matter to Judge Sharpe for reconsideration of his February 10, 1998 Report-Recommendation. On March 13 and 16, 1998, Judge Sharpe conducted an evidentiary hearing, taking testimony from three witness. On April 23, 1998, Judge Sharpe issued a second report-recommendation, stating "the court fails to find anything new in CarpetMaster's evidence and again recommends that the TRO be dissolved and a preliminary injunction denied." April 23, 1998 Order and Report-Recommendation (hereinafter "Second R & R") at 12. CarpetMaster again filed timely objections.
A. Standard of Review
Under Federal Rule of Civil Procedure 72(b) and 28 U.S.C. section 636(b)(1)(A), a district court evaluating a magistrate judge's recommendation is permitted to adopt those portions of the recommendation to which no "specific, written objection" is made, as long as those sections are not clearly erroneous. See, e.g., Thomas v. Arn, 474 U.S. 140, 106 S. Ct. 466, 471-72, 88 L. Ed. 2d 435 (1985); Greene v. WCI Holdings Corp., 956 F. Supp. 509, 513 (S.D.N.Y. 1997), aff'd, 136 F.3d 313 (2d Cir. 1998). Where a party makes a "specific written objection," the district court is required to make a de novo determination regarding those parts of the report to which objection is made. See, e.g., United States v. Raddatz, 447 U.S. 667, 100 S. Ct. 2406, 2412-13, 65 L. Ed. 2d 424 (1980); Ehinger v. Miller, 942 F. Supp. 925, 927 (S.D.N.Y. 1996).
A de novo determination entails an independent review of all objections and responses to the magistrate's findings and recommendations. See, e.g., United States v. Tortora, 30 F.3d 334, 337 (2d Cir. 1994); Bristol-Myers Squibb Co. v. McNeil-P.P.C., 973 F.2d 1033, 1045 (2d Cir. 1992). When objections are filed a district court is not, however, required to ignore the magistrate judge's recommendations. As Judge Spatt has noted, "by using the phrase de novo determination . . . rather than de novo hearing, Congress intended 'to permit whatever reliance a district judge, in the exercise of sound judicial discretion, chose to place on a magistrate's proposed findings and recommendations.'" U.S. v. Ten Cartons, Ener-B Nasal Gel, 888 F. Supp. 381, 390 (E.D.N.Y.), aff'd, 72 F.3d 285 (2d Cir. 1995) (quoting Grassia v. Scully, 892 F.2d 16, 19 (2d Cir. 1989) (quoting Raddatz, 100 S. Ct. at 2412)). Thus, the statute does not require a district court rehear the contested testimony in order to make its determination. Id. ; Grassia, 892 F.2d at 19.
Here, Plaintiff has filed objections. Consequently, the Court reviews de novo those portions of Judge Sharpe's Report-Recommendation to which Plaintiff has objected. See 28 U.S.C. § 636(b)(1).
B. Plaintiff's Objections
In both his First and Second R & R, Judge Sharpe recommended that the TRO be dissolved and that Plaintiff's request for a preliminary injunction be denied. Plaintiff's objections essentially focus on two aspects central to Judge Sharpe's findings. First, Plaintiff argues that in hiring two of CarpetMaster's key employees, Dupont acquired protected trade secrets. Second, Plaintiff argues that because trade secrets are involved, irreparable harm is presumed.
In this circuit the standard for obtaining a preliminary injunction is well established. In order to obtain a preliminary injunction the movant must make an affirmative showing of: (1) irreparable harm; and either (2) likelihood of success on the merits; or (3) sufficiently serious questions going to the merits to make them a fair ground for litigation and a balance of hardships tipping decidedly in favor of the movant. See, e.g., Covino v. Patrissi, 967 F.2d 73, 77 (2d Cir. 1992); Resolution Trust Corp. v. Elman, 949 F.2d 624, 626 (2d Cir. 1991); Jackson Dairy, Inc. v. H.P. Hood & Sons, Inc., 596 F.2d 70, 72 (2d Cir. 1979).
i. Trade Secret Protection
Plaintiff argues that in hiring two of CarpetMaster's key employees, Wes Moller and Gus Franze, Dupont acquired access to trade secrets involving (1) costs, products, and prices included in customer budgeting and proposal processes in which Moller and Franze were involved, and (2) the identity, source, and price of certain "CarpetOne" trademarked floorcovering products sold by CarpetMaster. Judge Sharpe rejected both of Plaintiff's trade secret allegations.
To recover for the misappropriation of a trade secret Plaintiff must demonstrate (i) that it possessed a trade secret and (ii) that Defendant used that trade secret in breach of an agreement, a confidential relationship 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); Speedry Chem. Prods., Inc. v. Carter's Ink Co., 306 F.2d 328, 331 (2d Cir. 1962). Under New York law, "a trade secret 'may consist of any formula, pattern, device or compilation of information [that] is used in one's business, and [that] gives [the owner] an opportunity to obtain an advantage over competitors who do not know or use it.'" Hudson Hotels Corp. v. Choice Hotels Int'l, 995 F.2d 1173, 1176 (2d Cir. 1993) (quoting Restatement of Torts § 757 cmt. b (1939)); see also Delta Filter Corp. v. Morin, 108 A.D.2d 991, 485 N.Y.S.2d 143, 144 (A.D. 3d Dep't 1985); Lehman v. Dow Jones & Co., 783 F.2d 285, 297 (2d Cir. 1986); Support Sys, Assocs. v. Tavolacci, 135 A.D.2d 704, 522 N.Y.S.2d 604, 606 (App. Div. 2d Dep't 1987). In determining whether a trade secret exists, courts have considered the following factors:
(1) the extent to which the information is known outside of his business; (2) the extent to which it is known by employees and others involved in his business; (3) the extent of measures taken by him to guard the secrecy of the information; (4) the value of the information to him and to his competitors; (5) the amount of effort or money expended by him in developing the information; (6) the ease or difficulty with which the information could be properly acquired or duplicated by others.
Integrated Cash Mgmt. Servs., 920 F.2d at 173 (citing Eagle Comtronics, Inc. v. Pico, Inc., 89 A.D.2d 803, 453 N.Y.S.2d 470, 472 (A.D. 4th Dep't 1982)).
(1) Costs, Products, Prices, and General Business Information
Plaintiff argues that by hiring Moller and Franze, Dupont obtained trade secret information about proposals CarpetMaster prepared for customers during Moller and Franze's employment.
Although compilations of business information such as customer and supplier lists, pricing, and cost information may be protected, see Hudson Hotels Corp., 995 F.2d at 1176, "an employee is entitled to learn the ordinary operation of a business in the course of his employment, and will not be enjoined from putting such knowledge to subsequent use where there is nothing secret, confidential, or unusual about it." 104 N.Y.Jur.2d Trade Regulation § 250 (1992). Solicitation of an employer's customers by a former employee is not actionable unless the information used is "considered a trade secret or there was wrongful conduct by the employee such as physically taking or copying the employer's files or using confidential information." Amana Exp. Int'l. Inc. v. Pier-Air Intern., Ltd., 211 A.D.2d 606, 621 N.Y.S.2d 108, 109 (A.D. 2d Dep't 1995).
Here, CarpetMaster alleges that Moller and Franze were intimately involved with the budgeting process in connection with generating bid proposals for CarpetMaster. Thus, through an exchange of information with a potential customer they would identity and recommend specific products, obtain costs from the manufacturer, and decide a price for the customer. According to CarpetMaster, this information is entitled to trade secret protection.
While the Court agrees with Plaintiff that this information has competitive value, it does not necessarily follow that this information is entitled to trade secret protection. In fact, the facts militate against such a finding. First, CarpetMaster appears to have taken no measures to guard the secrecy of this information. See, e.g., Delta Filter Corp. v. Morin, 108 A.D.2d 991, 485 N.Y.S.2d 143, 144 (A.D. 3d Dep't 1985) ("An essential requisite to legal protection against misappropriation of such a formula, process, device or compilation of information is the element of secrecy.").
Second, there is no evidence that Franze or Moller ever copied, intentionally memorized, or stole this information. See, e.g., Levine v. Bochner, 132 A.D.2d 532, 517 N.Y.S.2d 270, 271 (A.D. 2d Dep't 1987) ("The use of information about an employer's customers which is based on casual memory is not actionable."). An employee's recollection of information pertaining to specific needs and business habits of particular customers is not confidential. Walter Karl, Inc. v. Wood, 137 A.D.2d 22, 528 N.Y.S.2d 94, 98 (A.D. 2d Dep't 1988).
Finally, this is the type of information that can easily be acquired or duplicated by others. See Great Lakes Carbon Corp. v. Koch Indus., Inc., 497 F. Supp. 462, 470 (S.D.N.Y. 1980) ("price and cost estimates . . . are not 'trade secrets' or protected confidences"). As New York courts have noted:
[Pricing and estimating] is a matter of experience, knowledge of the business, and judgment. The factors to be considered in making estimates are fundamental--inside costs, outside costs, overhead, and profit. The amount of money making up each factor necessarily fluctuates with the market. There is nothing secret in the decision of how much of a mark-up percentage is necessary for a good profit.
Richard M. Krause, Inc. v. Gardner, 99 N.Y.S.2d 592, 595 (N.Y.Sup.Ct. 1950). Similarly, as to customer lists, trade secret protection "will not attach to customer lists where such customers are readily ascertainable from sources outside the former employee's business unless the employee had stolen or memorized the customer lists." WMW Machinery Co., Inc. v. Koerber AG, 240 A.D.2d 400, 658 N.Y.S.2d 385, 387 (A.D. 2d Dep't 1997); see also Amana, 621 N.Y.S.2d at 109.
For the foregoing reasons, the Court concludes that Plaintiff has not met its burden of demonstrating that its costs, prices, budgeting, and general business information are entitled to trade secret protection.
(2) CarpetOne Information
CarpetMaster also alleges that Moller and Franze brought to Dupont detailed knowledge of CarpetMaster's CarpetOne labeled products. In essence, the CarpetOne program packages a number of popular carpet styles in such a way that it is difficult for competitors to ascertain the precise color and type identification or who manufactured the carpet. Robert Taylor, CarpetMaster's President, states the value of this "inside information" as follows:
The carpet merchant who can pull an exact match out of tens of thousands of floor covering products available on the market today has a tremendous edge over his competitor. . . . For precisely these reasons, CarpetMaster and other members of the Carpet Co-Op of America Association expended considerable money and resources selecting and advertising carpet products to be sold exclusively through Co-Op members. . . . The Co-Op made efforts to protect the identities of the sources (and pricing structures) of those products by labeling them with the exclusive CarpetOne names, trademark and related marks.
(Taylor Aff., PP 8-10).
As the Court previously stated, there are a number of factors courts use in determining whether a trade secret exists. See Integrated Cash Mgmt. Servs., 920 F.2d at 173. After careful review of the record, the Court finds these factors weigh in favor of Plaintiff.
First, the extent of measures taken by CarpetMaster and Carpet Co-Op of America Association ("Co-Op") to guard the secrecy of the information favors CarpetMaster. According to Taylor, the Co-Op protects the identity of its sources by relabeling them with exclusive names and related marks. Howard Brodsky, Co-Chairman of Carpet Co-Op, states: "The specifications, source and pricing of Carpet One product are closely-guarded trade secrets . . . . Non-member competitors are not entitled to such information." (Brodsky Aff., P 3). By joining the CarpetOne Co-Op program, CarpetMaster agreed to maintain the confidentiality of the CarpetOne product information. (Brodsky Aff., Ex. B).
Second, the value of the information to CarpetMaster and to its competitors is significant. Although Dupont can undoubtedly compete with CarpetMaster without this information, the ability to easily determine the source of popular carpet styles is clearly of value. In support of this point, CarpetMaster submits the transcript from an "undercover operation" it orchestrated to test if Dupont would attempt to match a particular carpeting offered exclusively by CarpetMaster. As the transcript demonstrates, Moller immediately identified the carpet sample's exact specifications and manufacturer. (Taylor Aff., P 17).
Third, CarpetMaster and the Co-Op expend a substantial amount of money in developing the information. For example, CarpetMaster paid $ 18,000 to the Co-Op for a license to sell CarpetOne products. (Brodsky Aff., Ex. C). The Co-Op "researches the demands for floor covering products among particular groups of retail, commercial, and construction consumers, and shops carpet mills around the world to locate products." (Brodsky Aff., P 2).
Fourth, the ease or difficulty with which the information could be properly acquired or duplicated by others weighs in favor of CarpetMaster. Again the Court notes that although Dupont can compete with CarpetMaster without this "inside" information, it would be time-consuming for Dupont to match CarpetMaster's CarpetOne products without this CarpetOne information. To illustrate, Taylor states that it is difficult to precisely identify CarpetOne products because the particular dyeing processes, gauges, weights, and styles are simply too numerous, and thus the carpet merchant who can pull an exact match out of tens of thousands of floor covering products available on the market has a tremendous edge over his competitor. (Taylor Aff., PP 9, 16).
The remaining factors, the extent to which the information is known outside of CarpetMaster's business and the extent to which it is known by employees and others involved in its business appear to favor neither party. To gain injunctive relief, however, Plaintiff need not establish this issue as a matter of law. The Court instead holds Plaintiff to a slightly lower standard; Plaintiff must demonstrate either a likelihood of success on the merits or sufficiently serious questions going to the merits to make them a fair ground for litigation and a balance of hardships tipping decidedly in its favor. Covino, 967 F.2d at 77.
After reviewing the extensive record here, the Court finds that Plaintiff has demonstrated that it is likely to succeed on its claim that CarpetOne product specifications are entitled to trade secret protection.
ii. Irreparable Harm
As this Court recently noted, "courts in this circuit have repeatedly stated that 'perhaps the single most important prerequisite for the issuance of a preliminary injunction is a demonstration that if it is not granted the applicant is likely to suffer irreparable harm before a decision on the merits can be rendered.'" Nakatomi Investments v. City of Schenectady, 949 F. Supp. 988, 990 (N.D.N.Y. 1997) (quoting Borey v. National Union Fire Ins. Co., 934 F.2d 30, 34 (2d Cir. 1991)). Irreparable injury, moreover, means injury for which a monetary award cannot be adequate compensation. Jackson Dairy, 596 F.2d at 72 (citing Studebaker Corp. v. Gittlin, 360 F.2d 692, 698 (2d Cir. 1966), Foundry Srvs. Inc., v. Beneflux Corp., 206 F.2d 214, 216 (2d Cir. 1953)).
In the present context, however, the law is clear in the Second Circuit that irreparable harm is presumed where a trade secret has been misappropriated. See, e.g., Inflight Newspapers, Inc. v. Magazines In-Flight, LLC, 990 F. Supp. 119, 124 (E.D.N.Y. 1997); Computer Assocs. Int'l, Inc. v. Bryan, 784 F. Supp. 982, 986 (E.D.N.Y. 1992). The reason for this presumption is clear, "[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).
For the foregoing reasons, Defendants' motion to dissolve the TRO is GRANTED. Plaintiff's motion for a preliminary injunction is GRANTED IN PART.
The TRO issued in New York state court is DISSOLVED. Defendants, however, are hereby ENJOINED from using or disclosing CarpetOne product specifications during the pendency of this action. All other aspects of Judge Sharpe's February 10, 1998 Report-Recommendation and April 23, 1998 Order and Report-Recommendation are adopted for the reasons stated therein.
IT IS SO ORDERED.
June 11, 1998
Binghamton, New York
HON. THOMAS J. McAVOY
Chief U.S. District Judge
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