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In re Document Technologies Litigation

United States District Court, S.D. New York

July 5, 2017



          JED S. RAKOFF, U.S.D.J.

         The painstaking process of gathering and reviewing documents in connection with litigation discovery used to be a task relegated to (and dreaded by) young associates and paralegals at our nation's law firms. With the advent of electronic discovery, however, firms have shifted this task to third-party providers, who in turn have developed clever strategies for cultivating customers, which they guard jealously. Business apparently is booming - and so too are providers' efforts to protect what they believe is their proprietary information regarding customer contracts, strategies, and the like.

         Before the Court is the motion by Plaintiffs Document Technologies, Inc. ("Document Technologies"), Epiq Systems, Inc. ("Epiq Systems"), and Epiq eDiscovery Solutions, Inc. ("Epiq Solutions") (collectively, "DTI") for a preliminary injunction against their former employees, Steve West, John Parker, Seth Kreger, and Mark Hosford (collectively, the "Individual Defendants") and a competitor of DTI, defendant LDiscovery, LLC ("LDiscovery"). In brief, plaintiffs allege that the Individual Defendants conspired with LDiscovery to misappropriate their trade secrets and solicit their customers in violation of the Individual Defendants' employment agreements and state and federal law. The Court held a three-day evidentiary hearing on whether plaintiffs' were entitled to injunctive relief and, on the basis of the Court's assessment of the evidence presented at that hearing (including its assessment of the witnesses' demeanor and credibility), denied plaintiffs' motion by bottom-line Order dated June 16, 2017. This Opinion explains the reasons for that ruling.

         The pertinent facts, as found by the Court for purposes of this motion, are as follows:

         Plaintiff DTI employs nearly 7, 000 employees and is a global provider of electronic discovery ("e-discovery") services for law firms and corporate legal departments. See transcript of evidentiary hearing ("Tr.") 497:3-17. DTI's formation is a relatively recent development, however, and is the result of an acquisition by Document Technologies of Epiq Systems and its wholly-owned subsidiary Epiq Solutions (collectively, "Epiq") in September 2016. Id. at 496:4-19.

         The Individual Defendants were high level sales personnel at Epiq at the time of the acquisition and were responsible for bringing in new clients and maintaining existing client relationships. Id. at 4 97:18-4 99:10. As a condition of their employment, the Individual Defendants signed agreements with Epiq (the "Epiq Employment Agreements") containing numerous restrictive covenants, including a one-year non-competition agreement, a one-year prohibition on soliciting the company's clients, a one-year prohibition on soliciting the company's employees, a broad nondisclosure provision, and a covenant to return the company's confidential information upon termination of employment. See PX 018; PX 037; PX 063; PX 064. The agreements further set forth that "all disputes relating to all aspects of the employer/employee relationship" shall be settled by arbitration, but establish a limited exception for the signatories "to obtain an injunction from a court of competent jurisdiction restraining [a] breach or threatened breach ... of any [covenant] of this agreement." Id. Although these covenants remained in place following DTI's acguisition, the Individual Defendants have at all times been at-will employees. LcL; Tr. 153:2-154:4.

         The Individual Defendants were dissatisfied with their employment even prior to DTI's acquisition. In their view, Epiq had made several operational and managerial errors that had cost these salesman both clients and personal revenue, in particular by underinvesting in document review centers in Washington, D.C. and Canada. Tr. 14 6:12-149:13. The Individual Defendants accordingly began looking for new employment in 2014, and jointly attended a meeting with one potential employer, Consilio, early that same year. Id. at 146:9-149:23, 151:1-155:2 5, 195:9-18, 196:18-197:22, 260:2-262:14, 262:18-264:3, 2 65:11-266:8, 290:17-293:1.

         The Individual Defendants' concerns grew upon learning of DTI's proposed acquisition. They viewed DTI as a "low cost" provider that would harm their reputation and their relationship with their clients, and accordingly stepped up their efforts in mid-2015 to find new employment. Id. at 151:1-155:25. Then, in January 2016, defendant Kreger received a communication from a recruiter about an employment opportunity at defendant LDiscovery. Id. at 112:15-117:7. Defendant Kreger communicated this opportunity to the rest of the Individual Defendants and, in May 2016, the Individual Defendants met with representatives from LDiscovery in Washington, D.C. to discuss a potential transition. Id. In preparation for the meeting, the Individual Defendants informed LDiscovery of the amount of sales revenue they generated for Epiq from 2011 to 2016, id. at 393:20-394:4; PX 003, and notified LDiscovery at the meeting that they would require document review centers in Canada and Washington, D.C. if they were to join the company. Id. at 114:23-117:19. The Individual Defendants afterwards retained counsel to represent them in further negotiations, and thereby communicated extensively with LDiscovery about the terms of their potential transition during the remainder of the year. Id. at 200:23-202:17.

         On January 4, 2017, the Individual Defendants signed employment agreements with LDiscovery whereby they agreed to resign from DTI by no later than January 31, 2017. See, e.g., PX 006; PX 042. The agreements set forth that the Individual Defendants will then take a "Sabbatical Year, " during which LDiscovery will "not request and the [Individual Defendants] will not provide, any work, information, or services purported to be restricted by the Epiq [Employment Agreements]." Id. Following the Sabbatical Year, the Individual Defendants will begin employment at LDiscovery in or around January 2018. Id. In return, LDiscovery agreed to pay each Individual Defendant signing bonuses between $1, 200, 000 and $1, 400, 000 (to be paid in quarterly installments during the Sabbatical Year) and base salaries between $781, 096 and $911, 278 (to be paid upon the start of their employment). Id. LDiscovery further agreed to indemnify the Individual Defendants for attorneys' fees and damages "relating directly to [their] contemplated transition and eventual transition from Epiq to employment with [LDiscovery], " except where a court has determined that the "[e]mployee engaged in the disputed conduct that forms the basis of that claim."[1] Id. The agreement lastly provides that the Individual Defendants may resign from LDiscovery for cause if it does not establish a document review operation in Canada and Washington, D.C. by April 4, 2019. Id.

         On January 5, 2017, the Individual Defendants sent identical letters to DTI (drafted by counsel) resigning from the company, but offering to stay on for two weeks in order to assist with the transition. Tr. 12 6:13-127:19; PX 181. The Individual Defendants did not inform DTI that they had signed employment agreements with LDiscovery, and DTI did not accept their offer to assist in the transition. The next day, on January 6, 2017, a DTI representative contacted the Individual Defendants and requested that they return any property containing DTI's confidential information, pursuant to their Epiq Employment Agreements.[2] See DTX 200-201.

         The Individual Defendants partially complied. Although the Individual Defendants returned their laptops and mobile devices, [3]defendant West failed to return a thumb drive provided to him by Epiq in August 2016 containing a backup of his company laptop. Tr. at 52:19-53:12. Defendant Hosford similarly failed to return a thumb drive inserted into his company computer approximately six weeks before his resignation. Id. at 457:2-11; PX 249-003 at ¶ 7.

         Several weeks later, around January 31, 2017, defendant Kreger contacted a DTI employee for a list of invoices paid by his clients in December 2016. See PX 240, 241; Tr. 397:23-399:19, 437:19-440:2. This was common practice among DTI's sales personnel because the company often made mistakes in calculating commissions checks, and DTI regularly sent invoice lists to its employees so that they could check the accuracy of their commissions payments. Tr. 438:9-439:7. Rather than send Kreger only his own invoices, however, the DTI employee forwarded a list of all of the company's invoices for the entire month. See PX 240. Kreger then forwarded the invoice list to the other Individual Defendants several hours later, purportedly so that they could verify their commissions payments as well. Tr. 397:23-399:19, 4 37:19-440:2.

         Three days later, on February 2, 2017, defendant West circulated an email to the other Individual Defendants titled "Four Horseman 2018 Game Plan." PX 088. According to the correspondence, the Individual Defendants planned to meet in April 2017 to discuss their sales strategy at LDiscovery. In order to prepare for the meeting, defendant West circulated a spreadsheet so that each Individual Defendant could input the names of his clients at Epiq, the client contact information, and the revenue those clients generated for 2016. Id.; Tr. at 380:24-384:16.

         The Individual Defendants never met, however, and the spreadsheet was never completed. This was because in March 2017, DTI sent a cease-and-desist letter to the Individual Defendants demanding, among other things, that they cease all communications with DTI employees and customers "in any manner competitive with DTI" and immediately return all materials relating to the company. See PTX 159. After discussing the matter, the Individual Defendants decided to postpone the meeting indefinitely. Tr. 251:6-24. One month later, in April 2017, DTI filed three lawsuits in federal court: the instant action in the Southern District of New York against defendants West, Kreger, and Parker (the "SDNY Action"), an action in the Northern District of Illinois against defendant Hosford (the "Illinois Action"), and an action in the Eastern District of Virginia against LDiscovery (the "Virginia Action"). See SDNY Compl. ¶¶ 84, 91, 132; Illinois Action Compl. ¶¶ 61, 78, 114; Virginia Action Compl., 17-cv-3733, No. 1, ¶¶ 46, 95, 98, 187.

         The Court held an initial pretrial conference in the SDNY Action on April 12, 2017, during which counsel for all the defendants agreed to a common discovery plan applicable to all the actions. Two days later, on April 14, 2017, the Individual Defendants in the SDNY Action moved to transfer the case to the Eastern District of Virginia, and on April 25, 2017, the Court issued an Opinion and Order denying the motion. On May 1 and May 10, 2017, the courts presiding over the Virginia and Illinois Actions issued orders transferring their cases to this District, and the Court consolidated the actions by Order dated May 19, 2017. As noted, the Court subsequently held a three-day evidentiary hearing on DTI's motion for a preliminary injunction from May 30 to June 1, 2017, after which counsel submitted written opening and rebuttal summations.[4]

         A preliminary injunction is an "extraordinary and drastic remedy, one that should not be granted unless the movant, by a clear showing, carries the burden of persuasion." JBR, Inc. v. Keurig Green Mountain, Inc., 618 F.App'x 31, 33 (2d Cir. 2015) (quoting Sussman. v. Crawford, 488 F.3d 136, 139 (2d Cir. 2007))(emphasis in original). With exceptions not here relevant, the moving party must show four elements: "(1) likelihood of success on the merits; (2) likelihood that the moving party will suffer irreparable harm if a preliminary injunction is not granted; (3) that the balance of hardships tips in the moving party's favor; and (4) that the public interest is not disserved by relief." Id. (quoting Salinger v. Colting, 607 F.3d 68, 79-80 (2d Cir.2010)).

         The Court begins with DTI's claims for injunctive relief against LDiscovery and, in particular, the claim that LDiscovery tortiously interfered with DTI's relationships with existing and prospective customers. Under New York law, tortious interference with existing customer relations consists of five elements: "(1) the existence of a valid contract between plaintiff and a third party; (2) defendant's knowledge of the contract; (3) defendant's intentional inducement of the thirdparty's breach of contract without justification; (4) actual breach of the contract; and (5) damages to plaintiff." American Bldg. Maintenance Co. of New York v. Acme Property Servs., Inc., 515 F.Supp.2d 298, 308 (N.D.N.Y. 2007). Likewise, tortious interference with prospective customer relations requires that the plaintiff show: "(1) [that] it had a business relationship with a third party; (2) the defendant knew of that relationship and intentionally interfered with it; (3) the defendant acted solely out of malice, or used dishonest, unfair, or improper means; and (4) the defendant's interference caused injury to the relationship." Id. at 316.

         DTI contends here that LDiscovery intentionally induced the Individual Defendants to breach the restrictive covenants in their employment agreements by indemnifying them against claims that would foreseeably be brought by DTI and by agreeing to pay them a collective $5.1 million during their Sabbatical Year. The Court, however, is unpersuaded that LDiscovery has done anything improper by entering into these agreements with the Individual Defendants, let alone that the Individual Defendants have breached the applicable terms of their agreements with DTI.

         As previously noted, the Individual Defendants forfeit their right to indemnification should a court find that they have "engaged in the disputed conduct that forms the basis of [DTI's] claim, " e.g., PX 006; PX 042, so the Individual Defendants' agreements with LDiscovery can hardly be read as an inducement to commit such breaches. Moreover, it makes perfect sense for LDiscovery to compensate the Individual Defendants during the Sabbatical Period for their year of lost income as a way of inducing them to join the company. Tr. 395:8-19. Indeed, LDiscovery set forth a rational business case for these payments during the evidentiary hearing, see Tr. 356:3-12, and there is thus no basis for the Court to infer that the signing bonuses are in return for any alleged wrongdoing. The Court accordingly finds that DTI has failed to show a likelihood of success on the merits for its claims for tortious interference against LDiscovery.

         DTI similarly fails to show a likelihood of success on the merits for its misappropriation claims. The requirements for showing a misappropriation of a trade secret are similar under state and federal law. Under New York law, a party must demonstrate: (1) that it possessed a trade secret, and (2) that the defendants used that trade secret in breach of an agreement, confidential relationship or duty, or as a result of discovery by improper means. N. Atl. Instruments, Inc. v. Haber, 188 F.3d 38, 43-44 (2d Cir. 1999). Likewise, under the federal Defend Trade Secrets Act ("DTSA"), a party must show "an unconsented disclosure or use of a trade secret by one who (i) used improper means to acquire the secret, or, (ii) at the time of disclosure, knew or had reason to know that the trade secret was acquired through improper means, under circumstances giving rise to a duty to maintain the secrecy of the trade secret, or derived from or through a person who owed such a duty." Syntel Sterling Best Shores Mauritius Ltd. v. Trizetto Grp., Inc., No. 15CV211LGSRLE, 2016 WL 5338550, at *6 (S.D.N.Y. Sept. 23, 2016) (quoting 18 U.S.C. § 1839(3) (A)-(B)). Although there is no one-size-fits all definition to a trade secret, New York courts generally consider the following factors to determine its contours:

(1) the extent to which the information is known outside of the business; (2) the extent to which it is known by employees and others involved in the business; (3) the extent of measures taken by the business to guard the secrecy of the information; (4) the value of the information to the business and its competitors; (5) the amount of effort or money expended by the business in developing the information; (6) ...

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