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Leibowitz v. Aternity

July 14, 2010

MARK LEIBOWITZ, PLAINTIFF,
v.
ATERNITY, INC., AND TREVOR MATZ, DEFENDANTS.



The opinion of the court was delivered by: Arthur D. Spatt United States District Judge

MEMORANDUM OF DECISION AND ORDER

SPATT, District Judge.

This is a case of an important sales employee, in a startup rising software company, under strict legal obligations with regard to trade secrets and confidential information, being terminated and immediately begins working for his prior employer's principal competitor.

Before the Court is a motion by the defendant and counterclaim plaintiff Aternity, Inc. ("Aternity") for a preliminary injunction to enjoin its former Regional Sales Manager, the plaintiff and counterclaim defendant Mark Leibowitz from: (1) "working for Aternity's principal competitor KNOA Software, Inc. ("KNOA") for a period of one year, namely May 14, 2010 through May 14, 2011"; (2) soliciting any business from any existing or prospective customer of Aternity that is competitive with any service or product offered or under development by Aternity for that one year period; (3) using or disclosing any Confidential Information as defined in paragraph 3 of the Agreement; (4) using or disclosing Aternity Trade Secrets; and (5) disparaging Aternity and its officers, directors, shareholders and employees.

The Court held a hearing on this application for a preliminary injunction on June 22, 2010, June 28, 2010 and June 30, 2010. Upon a review of the hearing and the law, for the reasons set forth below, the Court grants the defendant's motion for a preliminary injunction to the extent and in the terms as stated in this opinion.

I. THE HEARING

Initially, an explanation of the business of Aternity is in order and is a necessary foundation for the Court's finding. In the Aternity memorandum of law in support of its motion for a preliminary injunction, there is an explanation of the business of Aternity, which, the Court finds, is supported by the testimony at the hearing.

Aternity is an Information Technology ("IT") company that develops IT management solutions. Aternity's software products enable the IT department in large companies to automatically monitor the computers of its employees in order to detect and correct potential problems before they occur. These software products prevent computer crashes and disruptions that can cost the company many millions of dollars. Aternity's products are designed to transform every desktop computer into a self-monitoring platform. These software products are designed to substantially reduce business disruptions and to increase user productivity. Aternity markets its software to Global 1000 and Fortune 500 companies by its sales and marketing staff and large network of contacts. As to compensation, the Court is further advised that typical sales contracts with these large corporate customers range from $250,000 to more than $1 million.

A. Aternity's Case in Support of the Motion for a Preliminary Injunction

Donna Parent is the Vice President of Marketing for Aternity. Aternity is a relatively new software company in the field described above. Her job is to develop a marketing campaign for the company. Parent had worked for four other companies prior to her employment at Aternity. Her specialty was working with new software companies. Aternity customized the software for each account. Aternity monitors their customer's computer system to identify problems. The Aternity fee is from $250,000 to more than one million dollars. Aternity furnished customized service for each customer, taking six to nine months to design a product for the customer's computer system.

Parent described the somewhat complicated process of working with a prospective customer. During this time, the Aternity personnel work closely with the customer in an ongoing collaborative process. These campaigns cost Aternity substantial funds; more than $400,000 plus $10,000 to $15,000 per event. She described their work as a "unique marketing campaign." Apparently, customers for this type of highly specialized and very expensive procedures are rare. Parent described qualified prospects as "needles in a hay stack." At some point in the process, the customer enters into a non-disclosure agreement with Aternity.

Parent testified as to the trade secrets involved in the Aternity processes. She described their work as "extremely confidential." Among the trade secrets she described were (1) their price lists and calculations leading to the prices, which if known would give a competitor an upper hand; (2) e-mails referring to Aternity weaknesses, which, in the hands of their chief competitor KNOA, would give it a great advantage in making a particular sale; (3) the "MIND SHARE," which is related to Aternity's business needs; (4) the "Sales Force Lead Generation Report," which is a specific report that points out the "needles in the haystack," or potential customers -- great leads for a competitor, which lists are very confidential, cannot be purchased or acquired by competitors and would take "years" for a competitor such as KNOA to create; and (5) the "Strategic Marketing Messaging Document," which is the Aternity playbook for sales and marketing, a confidential document with sales techniques and information regarding potential customers. Parent further explained that with the expensive process Aternity deals with, pricing often becomes the ultimate factor in a sale. In addition, Parent testified that there are many other Aternity trade secrets in this highly specialized software redemption business.

Parent also described Aternity's efforts to protect the confidentiality of its trade secrets. This is a major objective in the company's business. In this regard, each employee must sign a confidentiality agreement. Also, among other protections, there is a password protected data base called The Globe, that only Aternity employees can access.

The plaintiff Mark Leibowitz signed a non-disclosure agreement, which is in evidence as the defendants' Exhibit A. This agreement is detailed and extensive. It includes many paragraphs relating to Aternity trade secrets and confidential information and the obligation of the employee not to reveal this confidential information. There is no doubt that the plaintiff had full access to the confidential information and trade secrets of Aternity.

Parent testified that KNOA was the primary competitor in the End User Experience ("EUE"). Aternity had already gone head to head with KNOA in the Black & Decker customer rivalry. At quarterly sales meetings, Aternity personnel discussed their primary competitor, and what must be done to outsell KNOA. In the Aternity 2009 review (Defendant's Ex. D), a major tool in the Aternity business life, the second page in this Aternity road map is devoted to Product Competition by KNOA. The page reads as follows:

Product

Competition

' KNOA ' They are watching us closely and emulating our messages and product features ' We need to continue to widen the gap so they can NOT catch up ' We need to continue to OUT SELL them at EVERY opportunity ' We can NOT let them get a foothold into ANY of our verticals ' Our Core Focus Areas are our Differentiators!! ' Be Vigilant, Be Paranoid, Be the Best!

At the 2009 Product Review session, the plaintiff was present when Parent and CEO Trevor Matz presented a personal slide review including a discussion of their major competition, KNOA. In addition, the plaintiff acknowledged that he was able to access The Globe, which contained Aternity confidential information.

Parent learned in mid-April 2010, that the plaintiff was terminated from employment with Aternity. Significantly, in a review of his e-mail files, she learned that the plaintiff, by e-mails, did send himself a number of confidential documents not available in the public domain. Apparently, he sent these confidential documents to himself in his personal e-mail account after he learned that he was no longer to be employed by Aternity. Included in these confidential documents were trade secrets including a number of pricing records sent to companies that Aternity was endeavoring to sell and a 2010 pricing calculator containing confidential trade secret information. Parent testified that this material was never shared with anyone outside the company and was stored in the company's protected data. The record includes repeated e-mails from Leibowitz to himself in which he receives a number of confidential Aternity records including trade secrets. These include the Aternity Pricing Calculator; the Proof of Concept, which provide software data to clients and is shared only with prospects; an Aternity signed Contract Form; an Aternity License Agreement; an Aternity Revenue Plan Discussion; and a list of potential major customers, with dates of appearances. In addition, Leibowitz e-mailed to himself in late February 2010, the lists of qualified prospects of Aternity, including the "needles in a haystack" prospective customers (Defendant's Ex. G).

Q: Did Aternity consider Exhibit G to be proprietary and confidential information?

A: Yes.

Q: Why is that?

A: Because these are the results of the time, effort and money from doing a number of outreach marketing programs to get to a subset of prospects, qualified prospects, who are interested in receiving a demonstration of Aternity, and they also include the people who actually received that demonstration.

Q: Was this information shared outside of Aternity?

A: No.

Q: Were measures kept to keep it confidential?

A: Yes.

Q: Is this something that Mr. Leibowitz could have accessed on the Globe?

A: No, these lists are not available on the Globe. What he could have accessed was his web-based e-mail account to see this e-mail.

Q: When Mr. Leibowitz left the company, did he, to your knowledge, return this information?

A: Not to my knowledge.

Q: Would this information be useful to an employee who left the company and had it in his or her possession?

MR. PERLBERG: Objection.

THE COURT: Overruled.

A: Absolutely.

Again, these lists contain those qualified prospects or those needles in the haystack that we've taken a lot of time to nurture and to get them to a point to be interested in an end-user experience and to receive a demonstration of Aternity.

A list like this in our competitor's hands gives them the benefit of not having to do all the work that has done into creating the campaigns and finding these prospects. They would get a jump start on being able to build campaigns that would go after these prospects with their own software. (Tr. at 69-71).*fn1

Parent described the contents of another e-mail Leibowitz sent to himself, two days before his official termination: From: Mark Leibowitz [Mark.Leibowitz@aternity.com]

Sent: Friday, April 09, 2010 8:51 AM To: 'markl2@optonline.net'

Subject: FQ: Q2 Revenue Plan Discussion Attachments: Bank of America Schedule A6 for Merrill Lynch (March 15 2010).docx; Proposal for Cigna - USD (March 19 2010).pdf; 2010 Aternity Pricing Calculator - Cigna (March 19 2010).xls; Proposal for Paychex - USD (Feb 23 2010).pdf; Aternity Pricing Calculator for Paychex (Feb 23 2010).xls; 2010 Aternity Pricing Calculator - Sidley Austin LLP-1600 (Jan 26 2010).xls; 2010 Aternity Pricing Calculator - Sidley Austin LLP-3200 (Jan 26 2010).xls; Proposal For Sidley Austin LLP (Jan 26 2010).pdf

Significantly, Leibowitz did not return any of these highly confidential documents to Aternity, after his termination. Parent described the potential danger to Aternity if the plaintiff was permitted to work at KNOA, as "devastating" and could crush the company.

Q: Ms. Parent, just to wind down, would you describe for the Court, in your view, the harm that Aternity would suffer if Mr. Leibowitz is permitted to work at Knoa?

MR. PERLBERG: Objection.

THE COURT: Overruled.

A: The harm would be devastating to the company.

I've been in marketing for a good number of years now. I spent a lot of time at start-up enterprise software companies, and at every company I've been at, including Aternity, it's very difficult to not have information spread throughout the organization because we are so small. And being a small company means that we all understand that you need to sign NDAs in order to protect the leakage of that organization outside of the company.

We're at a critical time for the company, and having our proprietary and confidential information shared, especially to a competitor like Knoa, could absolutely crush the company.

Everything that I've talked about, from the pricing list to the strategic messaging document to the sales list that show those needles in the haystack, those people I've personally taken hours and weeks and even years to find, to give to our sales organization, is just simply not fair for someone to be able to give this information to a competitor and give them such a competitive edge.

Because right now, where the end-user experience industry is at, any competitive edge is so huge - - and like I said, it would absolutely devastate a company of our size where, every day, all of our employees are working and struggling very hard to not only maintain our competitive edge but to also protect our confidential information and to make sure we're doing all we can to continue to be an industry leader. (Tr. at 71, 72).

On cross-examination, Parent conceded that there was no Aternity rule that employees can't e-mail documents from the Globe to their personal computers. She said that although there was no specific rule, it was understood. Also, she stated that Leibowitz had some prior relationships with financial companies and brought "some of his business into the company." (Tr. at 95). However, Parent testified that Leibowitz brought in no revenue producing customers. In fact there was no customer or relationship from Leibowitz that purchased the EUE Aternity software. Also, the plaintiff worked at home for the company and was furnished with a small computer for that purpose.

Parent was questioned about the key term EUE, meaning End-User Experience.

According to Parent, this term "is a subcategory of application performance management." Parent further explained the term:

THE COURT: Now, you used some initials: EUE.

THE WITNESS: That's the acronym.

THE COURT: What does that stand for?

THE WITNESS: End-user experience.

THE COURT: End-user experience.

What does that mean?

THE WITNESS: So that goes back to the overarching industry is application performance management. End-user experience, for instance - - maybe if I provide an example, that might be more relevant.

You are using your computer, and an application starts to go down. It starts to crash on you. Aternity, or end-user experience, provides the ability for the IT organization to proactively identify application issues before they impact the end-user.

So before your e-mail starts to crash and you can't get into the system, Aternity gives them that information so as not to disrupt the business user.

(Tr. at 107, 108).

Parent testified that Aternity went head to head with KNOA to do work for the following companies: EMC, Black & Decker, AT&T, and Starwood. (Tr. at 108). Some of the Aternity documents actually are stamped or marked "Notice of Confidentiality". For example, the Aternity price lists are so marked. In addition, the Playbook, pages 13 through 21, entitled "Industry Specific Key Messages," outlines the messages that Aternity is preparing to build marketing campaigns for specific industries -- used "to craft our marketing campaign to gain mind share." (Tr. at 126).

Parent concluded her testimony by attempting to explain the danger to Aternity if Leibowitz revealed the confidential information and trade secrets currently in his possession.

Q: What is messaging, please?

A: Messaging in a young start-up company is the way we speak to particular stakeholders in a way that will get them to understand the business value that we can provide to their organization. So it is the road map. It's the game plan that this document presents in sum that would really give our competitor precise information on how to go after those industries as well. What we're saying to these industries, what our campaigns could look like.

That, in combination with the price list, they could undermine our pricing. That, in combination with having access to our lead generation report that we spoke about earlier, they can pinpoint and target those people we spent weeks and months and even years cultivating to find those needles in a haystack, to find those end users' experience.

It would be devastating to have a document with this level of detail, the messaging detail around marketing, messaging detail around sales and messaging detail around the product, that could absolutely devastate the company.

BY MR. PARIS:

Q: And how would a competitor use this messaging information in a detrimental way? In other words, if you had the messaging information of Knoa, how could you use that in a way that would cause harm, serious harm, to Knoa?

A: I could go out and I could construct campaigns, marketing campaigns, that counter their messages. I could go after areas where I believe could be weak and be able to show how we are stronger than they are.

So I develop campaigns that would target specific industries that would be able to entice my share away from Aternity. (Tr. at 131, 132).

Trevor Matz has been the President and CEO of Aternity since the end of May 2007. Previously, he held many management positions with high technology companies. Matz signed a Non-Disclosure Agreement when he became the CEO. A young company, Aternity sold five customers by the end of 2007. The plaintiff reported directly to him. He testified that there was no reason for Leibowitz to be e-mailing the Chase Licensing Agreement in March 2010 when Chase became a customer in 2008. Matz prepared the Aternity 2009 Review which was a Power-Point presentation to share with their employees as to who were the company's primary competitors. This information was presented at a meeting at which the plaintiff was present. At this meeting, Matz told the company "that we have one primary competitor and that competitor is KNOA." (Tr. at 137). He further stated that KNOA was "the only company that represents a huge competitor threat to Aternity's success and survival." (Tr. at 137). Matz also testified that "there are really only two remaining end-user experience companies in the market today and that is KNOA and Aternity, and we fight head to head all the time. . . This is a two horse race between Aternity and KNOA." (Tr. at 137-138). Matz further described their apprehensions about KNOA:

A: We would speak about them in our quarterly meetings. We would speak about them when they were in competitive situations that arose. We would speak about them in the analyst community.

We are and am constantly monitoring Knoa's evolution in the markets, their success, their press releases, what they are saying. We were constantly being aware of what they were doing. (Tr. at 138, 139).

Leibowitz well understood this intense competition between Aternity and KNOA. On April 11, 2008, Leibowitz sent Matz an e-mail. The subject was "KNOA Update", as follows: From: Mark Leibowitz Sent: Friday, April 11, 2008 12:15 PM To: Trevor Matz Subject: KNOA Update Hello, Trevor, I got some very good G2 on KNOA this morning from a friend of mine who worked with me at GT Software who joined KNOA last week. They are in the process of hiring 6 direct salesman, 4 for direct sales and 2 for Channels. They just hired a former colleague of mine Marvel Gentle Davis who is based in Ohio. The internal talk is that they know we have a good product but they believe they are slightly ahead of us with their technology and want to do everything possible to keep that lead.

All of the hires are new. They have not been actively selling last year but the big push with them will start coming now. I did not give any information that could be used against us. They are going to start going after the financial vertical as of next month. Marvel does not know much as she just joined but I wanted to give you an update on KNOA. They have been heavily focused on SAP but going forward that strategy will be changing. They want to be application agnostic.

I hope this helps.

Regards, Mark Leibowitz Sales Manager, Financial Services Aternity Inc. (Dfts' Ex. J). (emphasis supplied).

At 12:57 PM that same day, April 11, 2008, Matz responded to the plaintiff, as follows: From: Trevor Matz Sent: Friday, April 11, 2008 12:54 PM To: Mark Leibowitz Cc: Raviv Chalamish; Donna Parent; Eden Shochat; Orit Kislev; Marcus Brown Subject: Re: KNOA Update Great intel. Thanks Mark.

1. KNOA is definitely the competition to watch.

2. We monitor every press release they issue, all press coverage they get as well their website (product related material) on a monthly basis (written reports).

3. They were placed highest in the Forester Wave in Sept/Oct last year.

4. They, together with Primatech and Serden, were our competition for the Gartner Cool Vendor report. We won!

5. They are about a year ahead of us in terms of sales activities, but do not have too much to show for their efforts yet. Their big wins included a major sale to BT around Siebel last year which resulted in their Forester positioning.

6. We have marketed directly to almost every company (20-40 per company), including BT, that they have on their website.

7. They have been successful around Siebel and have currently signed a reseller agreement with SAP. In this area they are WAY ahead of us.

8. They are definitely not ahead of us from a technology perspective:

a. They do not have an analytic engine, at least at the moment.

b. They are not application agnostic, at least at the moment.

c. They do not support Citrix like we do, at least at the moment.

d. They do not support desktop monitoring, at least at the moment.

e. Wanting be application agnostic and being application agnostic is VERY different.

f. Carefully review the Comp Analysis I last sent you around KNOA for Hartford (similar to what I sent for TROWE).

9. I am SURE that they are monitoring us closely and will be/are working on filling the gaps aggressively.

10. We need to watch them closely and keep pushing ahead AGGRESSIVELY on all fronts.

11. They are definitely our #1 competitor in terms of addressing the same market space we address.

12. We need to make sure that do NOT forge the strategic relationships with the Partners we want to forge partnerships with, before we do.

13. We are doubling our sales force from Monday with Marcus ;)!

14. Competition is good, as long as we win! Thanks. (Dfts' Ex. J). (emphasis supplied).

The purpose of these e-mails is clear. It was to warn Leibowitz and other sales persons that "KNOA is definitely the competitor to watch" and "they are definitely our #1 competitor in terms of addressing the same market space we address."

Matz testified that Leibowitz had major performance and/or behavioral problems many times during his employment. He stated that these problems started in 2007, and continued through 2008. Leibowitz had major behavioral issues in early 2009, which resulted in the company putting him on probation. Leibowitz continued to have behavioral issues throughout 2009 which resulted in the company putting him back on probation. For example, in an e-mail, dated July 29, 2009, from Jeanne O'Byrne, the Aternity Vice President of Operations, the plaintiff was chastized for inappropriate conduct during a "war story meeting" including an assertion that he made himself look like a "jerk". (Pltf's Ex. 26). He also had behavioral issues in the first quarter of 2010. In sum, on this subject, Matz testified that Leibowitz had behavioral and performance issues throughout his tenure. In early 2010, Matz had conversations with Leibowitz in which he advised him if he didn't change he would be terminated. Leibowitz was warned about this problem at every quarterly review. These warnings took place prior to the dates the plaintiff decided to e-mail confidential information and trade secrets to his home.

Matz was asked to describe the consequences if Leibowitz was permitted to work for KNOA.

Q: Lastly, Mr. Matz, if Mr. Leibowitz is permitted to work for Knoa, could you describe the harm that Aternity would suffer as a consequence?

A: Sure. In early stage start-up companies like Aternity, we fight every day for survival and our market leadership. Both our survival and our market leadership depend on the competitive ...


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