MERRIMACK, SS SUPERIOR COURT Grafton Data Systems, Inc. v. Craig Moore, et al. No. 217-2016-CV-353 ORDER The Plaintiff, Grafton Data Systems, Inc. ( Grafton ), moves for a preliminary injunction against the Defendants, Craig Moore ( Moore ) and Barlo Signs International, Inc. ( Barlo ), seeking to enjoin Moore and Barlo from pursuing Grafton s client base in violation of a non-competition agreement and from using Grafton s trade secrets for their benefit. The Defendants object. The Court held a hearing September 7, 2016. For the following reasons, the Motion for Preliminary Injunction is DENIED. I The following facts are based upon the parties offers of proof, and therefore are not conclusive, and do not constitute the law of the case. However, it appears to be undisputed that Moore was employed by Grafton for a period of approximately fifteen years. Moore left Grafton on March 31, 2016 and began work at Barlo at some point soon after that date. Barlo is a competitor of Grafton; both companies sell interior and/or exterior signage for commercial businesses in the New England area. There is some dispute between Moore and Grafton as to what non-compete agreements Moore signed and when they were signed. Grafton says that Moore signed a non-compete agreement in 2007. Moore has stated that he does not recall signing a non-
compete in 2007, but does remember signing one in 2015. (Moore Mem. in Supp. Of Obj. to Pl. Mot. for Prel. Inj., 5.) Grafton has produced a copy of a 2007 non-compete that appears to have Craig Moore s signature and a date of 3/7/2007. (Compl., Attach. A.) Grafton has also produced a copy of the 2015 non-compete. (Compl., Attach. B.) The 2015 non-compete, which Moore agrees he signed, prohibits him from competing in the same capacity for a period of two (2) years after employment termination by solicitation of the client base of Graft Data Systems, Inc. (Id.) It further states that employees who improperly use or disclose trade secrets or confidential business information will be subject to disciplinary action, including termination of employment and legal action, even if they do not actually benefit from the disclosed information. (Id.) Before leaving Grafton, Moore was involved in the preliminary stages of a project with Holyoke Medical Center ( H ), 1 a hospital located in Massachusetts. Moore had corresponded with representatives of H on several occasions between December 30, 2015 and the end of his employment with Grafton on March 31, 2016, and performed some preliminary design work for H. The preliminary design work for new hospital signage had gone as far as sending early designs of the signs to the hospital and seeking feedback. After Moore left Grafton, Moore sent an email to some recent clients at Grafton, notifying the recipients that he would no longer be employed at Grafton and providing his personal email address in case any recipient wanted to reach him after his Grafton email address was no longer valid. After Moore began employment at Barlo, Barlo pursued the project from H. Grafton alleges that Moore took the designs created by a Grafton 1 The parties, at various times, have referred to this client as H and the Court adopts that nomenclature here. - 2 -
employee 2 and attempted to gain H s business for Barlo using the same designs. Moore and Barlo argue that they received the design from the hospital and that it is common practice in their industry for one firm to draw up initial plans for signs for a client as a sales proposal and for that client to then solicit other bids from other companies to fine-tune, construct, and install the signs. After a bidding process, neither Grafton nor Barlo won the project from H. Grafton moves for a preliminary injunction preventing Moore from using Grafton s trade secrets related to the H project designs and Grafton s general pricing structure and information. Grafton also seeks to prevent Moore from soliciting business from Grafton s client base, arguing that such contact is violative of Moore s non-compete agreement with Grafton. Moore and Barlo argue that a sign company like Grafton does not have an established and well-defined client base because sign purchases are often one-time transactions and repeat customers make up a very small portion of a sign company s business. They also argue that even if Grafton did have a client base, H was not part of that group. II The issuance of injunctions, either temporary or permanent, has long been considered an extraordinary remedy. Murphy v. McQuade Realty, 122 N.H. 314, 316 (1982) (citing Timberlane Reg l Sch. Dist. v. Timberlane Reg l Educ. Ass n, 114 N.H. 245, 250 (1974)). A preliminary injunction is a provisional remedy that preserves the status quo pending a final determination of the case on the merits. N.H. Dep t of Envt l. Servs. v. Mottolo, 155 N.H. 57, 63 (2007) (citing Kukene v. Genualdo, 145 N.H.1, 4 (2000)). An 2 This employee, Lauren Pasquarella (Lauren Graziano at the time of her employment), is no longer employed by Grafton. - 3 -
injunction should not issue unless there is an immediate danger of irreparable harm to the party seeking injunctive relief... there is no adequate remedy at law... [and the] party seeking an injunction [is] likely [to] succeed on the merits. ATV Watch v. N.H. Dep t of Res. & Econ. Dev., 155 N.H. 434, 437 (2007) (brackets in original) (quoting N.H. Dep t of Envtl. Servs, 155 N.H. at 63). The plaintiff bears the burden of establishing the above factors in order to obtain an injunction. Mottolo, 155 N.H. at 63. Grafton effectively makes two claims against Moore and Barlo. First, it claims that Moore and/or Barlo stole trade secrets from Grafton when he or it allegedly used the design plans for H s project for Barlo s bid for the H project, and when Moore allegedly stole Grafton s pricing information. Second, it claims that Moore violated one or more non-compete agreement(s) from 2007 and/or 2015 by soliciting business from H. A To succeed in a trade secret case, a plaintiff must establish (i) it is the owner of the information that (ii) has been received by another party in a protected relationship and (iii) the other party has used or is about to use the information to the plaintiff s detriment. See R. Milgrim, Trade Secrets, 15.01(1) (2014). Under New Hampshire law, a trade secret is information, including a formula, pattern, compilation, program, device, method, technique, or process, that: (a) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use; and (b) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy. RSA 350-B:1, IV. In general, injunctive relief is available when a trade secret is stolen because once a trade secret is lost, it cannot be recovered and monetary damages are insufficient. Ivy Mar Co. v. C.R. Seasons, 907 F. Supp. 547, 567 (E.D. N.Y. 1995). Grafton argues that both the design plans for H and Grafton s general pricing - 4 -
structure are trade secrets. The Court finds that Grafton has not established a likelihood of success on either claim. First, the design plans were submitted to H, an outside customer, without an expectation of confidentiality or secrecy for those plans. No nondisclosure agreement ( NDA ) was required of H, nor was one executed. Based on offers of proof given at the hearing on this motion, the Court understands that many sign companies may submit designs to a given customer as sales proposals to induce the customer to engage with a given company to create the signs that have been preliminarily designed. It is common practice in the sign business for a customer to take a sales proposal s preliminary design from one company and put it out to other companies for competitive bids. The industry practice it is reflected by the facts of this case. The plans Grafton sent to H are marked unauthorized duplication is subject to a design fee of $1500, suggesting that Grafton knew that the preliminary design would not be kept confidential and established a measure of monetary compensation for dissemination. Complaint, 18.Under these facts, the plans submitted as preliminary proposals to H could not be considered trade secrets, as Grafton did not expect non-confidentiality, evidenced by its duplication fee. Moreover, although not essential to the Court s decision, Grafton has not established a likelihood that Moore gave the designs to Barlo. Grafton submitted preliminary designs to H, and Barlo and Moore both argue that, while Moore was involved in Grafton s submission of those preliminary designs to H, Barlo actually received those designs from H. Grafton has not established that Barlo received the designs from Moore instead of from H as Barlo claims. Further, given the representations about industry practice and putting proposals out to bid, it is hard to see why Moore would need to steal the plans from Grafton in order to bid on the H project. - 5 -
Second, Grafton alleges that Moore used or is about to use trade secret information related to Grafton s pricing structure and business model. It alleges in its memorandum that H has selected Barlo as its signage designer and fabricator of the product and obtained the contract from H by using Grafton s competitive pricing information. Pltf.'s Mem. in Support of Prelim. Inj., p.6. However, at oral argument on the Motion both parties agreed that Grafton and Barlo both submitted bids for the H project, but neither company was awarded the project. If Moore has stolen trade secret information about Grafton s pricing structure that would have been useful to Barlo, he either did not share it with Barlo or Barlo either did not use it to Grafton s detriment or perhaps did not benefit from using the allegedly confidential information. But most importantly, even if the pricing structure is a trade secrets, Grafton has not established that it will suffer immediate irreparable harm if injunctive relief is not granted. If Grafton can prove that Defendants tortiously interfered with its proposal to H, it can recover money damages for lost profits. It therefore has a remedy at law. Grafton has not shown that the Defendants can and are about to harm Grafton with whatever knowledge about Grafton s pricing that Moore may have. Grafton has not alleged that there are other, immediate, specific projects that Barlo and Grafton are competing to get. Nor has it explained what pricing information Moore has which is confidential and which will harm it if disclosed. Although the Court makes no finding, Barlo claims its business model is much different from Grafton s because, unlike Grafton, it has fabrication capabilities. In sum, Grafton has not shown that immediate irreparable will result if a preliminary injunction is not granted prohibiting Moore from using Grafton s confidential trade secrets. - 6 -
B Grafton also alleges that Moore has violated at least one and possibly two noncompetes; one executed in 2007 and one executed in 2015. Moore argues that he only signed the October 2015 non-compete, and both the 2015 non-compete and the 2007 noncompete are overbroad. Although Moore claims he did not sign the 2007 non-compete, the copy of the document produced at the hearing appears to bear his signature. The 2007 non-compete purported to prohibit an employee of Grafton from working for any business, without geographical limitation, which competes with it. It provided, in relevant part, that for a period of 18 months an employee will not: engage in, continue in or carry on any business which competes with the business conducted by the Company, including owning or controlling any financial interest in any corporation, partnership, firm or other form of business organization which is so engaged The 2015 agreement is much narrower. It has a term of 2 years, instead of 18 months. The 2015 agreement provided in relevant part that: The employee also agrees not to compete in the same capacity for a period of two (2) years after employment termination by solicitation of the client base of Grafton Data Systems, Inc. Grafton s memorandum primarily discusses the terms of the 2015 noncompetition agreement. The Court believes that the 2015 agreement is in fact a substitute for the 2007 agreement. Indeed, the 2007 agreement, which purported to prohibit Moore from engaging in any business which competed with the business conducted by the Company, without any geographic limitation, would probably fall afoul of the New Hampshire Supreme Court s prohibition of non-competition agreements which prohibit solicitation of - 7 -
an employer s prospective customers. Syncom Industries, Inc. v. Wood, 155 N.H. 73, 80 (2007). The public policy of the State of New Hampshire encourages free trade and discourages covenants not to compete. Concord Orthopaedics Prof l Ass n v. Forbes, 142 N.H. 440, 443 (1997). Such agreements are narrowly construed. Merrimack Valley Wood Prods. v. Near, 152 N.H. 192, 197 (2005). However, restrictive covenants are valid and enforceable if they are supported by consideration and if the restraint is reasonable, given the particular circumstances of the case. Id. ). Moore complains in his papers that the 2015 agreement was presented to him while he was employed at Grafton, in in bad faith, but provided no offer of proof to that effect. However, the New Hampshire Supreme Court has specifically held that continued employment may constitute adequate consideration for a noncompetition agreement. Smith, Batchelder and Rugg v. Foster, 119 N.H. 679, 683 (1979). The Court, therefore, must examine the 2015 agreement. 3. Grafton has the burden of persuading the Court that the restrictive covenant is valid and enforceable. To determine the reasonableness of a covenant not to compete, the New Hampshire Supreme Court has applied a three-pronged test: (1) whether the restriction is greater than necessary to protect the legitimate interests of the employer; (2) whether the restriction imposes an undue hardship upon the employee; and (3) whether the restriction is injurious to the public interest. Syncom Indus., Inc. v. Wood, 155 N.H. 73, 79 (2007). This three-part test originated from the Restatement (Second) of Contracts, 188. Technical Aid Corp. v. Allen, 134 N.H. 1, 8 (1991). 3 By its terms, RSA 275:70 which since October 2015 has required employers to provide copies of noncompetition agreements to potential employees prior to the acceptance of an offer of employment does not apply to existing employees like Moore. - 8 -
The first step in determining the reasonableness of a restrictive covenant is to identify the legitimate interests of the employer, and to determine whether the restraint is narrowly tailored to protect those interests. Merrimack Valley, 152 N.H. at 197. The New Hampshire Supreme Court has stated: Legitimate interests of an employer that may be protected from competition include: the employer's trade secrets that have been communicated to the employee during the course of the employment; confidential information communicated by the employer to the employee, but not involving trade secrets, such as information on a unique business method; an employee s special influence over the employer's customers, obtained during the course of employment; contacts developed during the employment; and the employer's development of goodwill and a positive image. Syncom, 155 N.H. 79, (quoting Nat l Employment Ser.Corp. v. Olsten Staffing Svc., 145 N.H. 158, 160 (2000)). Employers also have a legitimate interest in protecting information about their customers gained by employees during the course of their employment. Technical Aid, 134 N.H. at 9. Unlike the 2007 noncompetition agreement, the 2015 agreement appears designed to protect Grafton s goodwill with its customers. However, given the nature of the industry in which Grafton operates, it is not clear that protectable goodwill exists. The 2015 non-compete at issue here protects Grafton s client base. The term client base is not defined in the 2015 non-compete agreement 4. Moreover, based on the offers of proof at the hearing on this Motion, the Court understands that sign companies do not maintain a particular client base of repeat customers because customers rarely need additional sign work within a relatively short period of time. In the context of this industry, the Court therefore believes that client base can only be read as a list of current 4 It is also not defined in the 2007 non-compete. - 9 -
or immediately past customers, or it would include any and all potential customers and be overbroad. Syncom, 155 N.H. at 80; Concord Orthopedics, 142 N.H. at 443. At the time Moore left Grafton, H was still a prospective customer. It did not become an actual customer, and, even though H had been a customer of Grafton more than fifteen years prior, it had never been a customer during Moore s employment. It did not have any prior interaction with Moore that may have established goodwill that Moore used for Barlo s benefit. In the context of this case, Grafton has not established that H is part of its client base, to the extent such a group exists. More importantly, Grafton has not established that it will suffer harm which cannot be compensated by money damages if the Court does not grant preliminary injunctive relief prohibiting Moore and Barlo from contacting its client base. The H contract has apparently been awarded to a vendor other than Grafton or Barlo. In general, because of the nature of the business Grafton and Barlo are engaged in, the opportunity for the Defendants to use information about past Grafton s clients in bidding processes with future clients is low. If the Defendants tortiously interfered with Grafton s prospective contractual relations with H, money damages can be awarded. Grafton has not established that any harm it may suffer as a result of Moore violating the non-compete agreement would be irreparable with respect to any other prospective client. It follows that on record before the Court, Grafton s Motion for Preliminary Injunction must be DENIED. 10/18/16 s/richard B. McNamara DATE Richard B. McNamara, Presiding Justice - 10 -
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