Archives for July 2014

Greeting Card Giant Wins $30M-Plus Jury Verdict in Trade Secrets Case (8th Cir.)

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In Hallmark Cards, Inc. v. Monitor Clipper Partners, LLC, 2014 WL 3408853 (8th Cir. 2014), the Eighth Circuit affirmed a $31.3M dollar jury verdict in favor of the greeting card giant against a private equity firm that used Hallmark’s confidential market research.

Hallmark hired a consultant to research consumer behavior as it relates to greeting cards.  Hallmark had the consultant sign non-disclosure agreements that strictly prohibited it from sharing the research findings.  The contracts also contained broad consequential damages disclaimers.

Hallmark sued under trade secrets law when it learned the consultant surreptitiously disclosed Hallmark’s data to the defendant who used the data to try to buy a Hallmark competitor.

 The jury awarded Hallmark a more than $30M judgment against the defendant equity firm including $10M in punitive damages.

Held: Verdict affirmed.

Reasons:

Missouri’s trade secrets statute (Mo.Rev.Stat. s. 417.450, 454) broadly defines a trade secret as (1) information, including (2) non-technical data, that’s (3) sufficiently secret to derive monetary value from not being known to competitors and (4) that’s subject to efforts to maintain the information’s secrecy. 

Misappropriation covers both acquisition of and subsequent use of a trade secret and occurs where a defendant (1) acquires a trade secret that defendant knows or has reason to know was obtained by improper means or (2) discloses or uses the trade secret without the secret’s owner’s express or implied consent. (*5).  

The court held that the PowerPoint slides qualified as trade secrets under the statute in view of the lack of market research available in the greeting cards market.  The scarcity of data on the subject led the appeals court to affirm the jury’s finding that the research data compiled for Hallmark met the elements of a protectable trade secret under Missouri law. 

The court also found there was evidence of the defendant’s misappropriation of the trade secrets. (**3-5). 

Upholding the damage award, the court rejected defendant’s argument that Hallmark obtained improper double recovery.  In Missouri, a party can’t recover twice for the same injury.  

Here, the Court found there were two separate injuries: (1) the consultant’s transmission of the secret data to the defendant; and (2) defendant’s (own) use of the market data. (*4).  Since the injuries were separate, Hallmark could recover separate damage amounts for each injury.

Finally, the Court affirmed the $10M punitive damage award.  Punitive damages under Missouri law are allowed where conduct is outrageous, reprehensible and shows an evil motive or reckless indifference to others’ rights. 

Defendant exhibited reckless indifference by its stealthy campaign of document destruction to cover its tracks once Hallmark learned of the defendant’s plan to buy Hallmark’s rival. 

The court found the defendant’s conduct reckless and sufficiently reprehensible to support the punitive damage award.  The Court also noted that the punitive damage award was “only” one-half of the compensatory award and that this damage ratio met due process standards. (*8).

Afterwords:

Even something as nebulous and innocuous as consumer buying trends research in the greeting card market can qualify for trade secret protection (at least in Missouri). 

Hallmark Cards also shows that a trade secrets plaintiff can recover separately for both (1) disclosure of a trade secret and (2) subsequent use by a third party without violating contract law double-recovery restrictions. 

 

Non-Compete Signed 16 Years After Employment Start Date Is Too Late (To Be Enforced) – Says KY High Court

In prior articles, I’ve discussed how restrictive covenants (i.e., non-disclosure, non-solicitation and non-competition provisions) are staples of modern-day employment contracts and business sale agreements.  In Creech, Inc. v. Brown (http://law.justia.com/cases/kentucky/supreme-court/2014/2012-sc-000651-dg.html) the Supreme Court of Kentucky struck down a non-competition provision in a hay supplier’s written contract the supplier made a long-time employee sign several years after he started working there.

The defendant worked for the plaintiff in various capacities through the years.  Sixteen years into his tenure, plaintiff’s new management asked the defendant to sign a Conflict of Interest Agreement (the “Agreement”) that contained broad non-disclosure provisions and a non-competition clause.  The non-compete spanned three years and had no geographic boundaries.  Fearing job loss, defendant signed the Agreement.  The defendant continued to work for the plaintiff for a couple more years when he took a job with a rival supplier.  Plaintiff then sued to enforce the Agreement’s non-competition provision.  The trial court sided with the defendant and the appeals court reversed.  On remand, the trial court entered summary judgment for the plaintiff employer and found that the defendant violated the Agreement.  This time, the appeals court upheld the non-competition clause.  Both parties appealed to Kentucky’s Supreme Court.

Held: Reversed.  The non-competition provision is unenforceable because it lacks consideration.

Reasons:

The defendant worked for nearly two decades for the plaintiff hay supplier and wasn’t asked to sign a non-compete until more than sixteen years after his start date.  The plaintiff gave defendant nothing in exchange for defendant signing the Agreement.  It didn’t give the defendant a raise, didn’t change the defendant’s job duties and offered no training or other benefits.  There was no consideration flowing to the defendant to bind him to the non-competition provision’s three-year term.

Consideration means a benefit to the party making a promise and a loss to the party to whom the promise is made.  Each side gives and gets something.  Benefit means the promisor has gained something to which he is not otherwise entitled.  Detriment or loss means that the promisee has given up something in exchange for the promise.  (p. 12).

The Court rejected the plaintiff’s claim that the defendant’s continued employment was sufficient consideration.  The plaintiff didn’t give the defendant anything in exchange for him signing the Agreement.  The Agreement was silent on defendant’s job duties or rate of pay and as a result couldn’t be considered a “rehiring.”  Nor did the Agreement alter defendant’s employment terms.  He remained an at-will employee at the same pay rate. (p. 14).  The Agreement imposed a three-year restriction on defendant seeking alternative employment without giving him any corresponding benefit.  Since the Agreement didn’t require plaintiff to give up anything in exchange for the defendant signing the Agreement, the non-competition provision lacked consideration and wasn’t enforceable.  (p. 15).

Besides defendant’s job description and pay remaining static, the plaintiff hay supplier also didn’t offer any specialized training to the defendant after he signed the Agreement.  A contract law axiom posits that a promise devoid of a reciprocal flow of benefits and detriments can’t be enforced.  (pp. 15-17).  By not giving up anything in consideration for defendant executing the Agreement, the plaintiff’s offer of continued employment was illusory.

Afterword: I’ve never practiced in Kentucky but the case is relevant to Illinois restrictive covenant law since it’s congruent with Fifield’s (Fifield v. Premier Dealer Services, Inc., http://www.state.il.us/court/Opinions/AppellateCourt/2013/1stDistrict/1120327.pdf) two-year rule. (Two years of continued employment is required for a non-compete to have adequate consideration.)  

The result in Creech seems fair.  An employer shouldn’t be able to unilaterally foist a non-compete on a long-time employee without providing some additional benefit to him.  For employers, the lesson is clear: if you’re going to have an employee sign a restrictive covenant after he’s started working, you should pay the employee a bonus, give him a raise or provide some other tangible benefit so that there is sufficient consideration – loss or detriment –  flowing to the employee so that you can bind him to a non-competition provision.

 

Serving The Corporate Defendant – An IL Case Note

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(Photo credit: www.corbusimages.com)

This case piqued my interest since I recently spent an obscene amount of time trying to serve a defendant in a commercial lease dispute.  It wasn’t until after my process server gave sworn testimony for nearly an hour at an evidentiary hearing that the court finally (and mercifully) put the service issue to bed and allowed us to proceed with prosecuting the case.

A few weeks ago (late June 2014), the First District appeals court examined the importance of proper process service in the context of a petition to vacate a default judgment.  The commercial tenant in Essi v. Fiduccia, 2014 IL App (1st) 120203-U, sued her ex-landlord for wrongful eviction.  After serving the summons and complaint on who she thought was the defendant at his insurance agency office, the plaintiff got a default judgment of nearly $300,000 – a sum comprised of lost profits, lost equipment and punitive damages.  About four months later, the defendant filed a petition to vacate the default judgment.  The trial court granted the petition and plaintiff appealed.

Held: Affirmed.  Trial court properly granted defendant’s petition to vacate the default judgment.

Rules/Reasoning:

The defendant’s petition to vacate the default judgment was properly granted because the defendant was never served.  In Illinois a judgment entered without personal jurisdiction over a party is void and can be attacked at any time and the petitioner doesn’t have to show due diligence or a meritorious defense.  735 ILCS 5/2-1401(f), (¶¶ 28-29).

Code Section 2-203 (735 ILCS 5/2-203) governs service of process on individual and corporate defendants in Illinois.  Permissible service methods are (1) personal service – delivering a copy of process to the defendant personally; or (2) substitute or abode service: leaving a copy of process at defendant’s usual place of abode with someone living there over the age of 13, and informing the person of the contents of the summons.  A corporation can be served by leaving the process with its registered agent or any officer or agent of the corporation found anywhere in the state.  (¶45); 735 ILCS 5/2-203.

A sheriff or process server’s return of service that reflects personal service on a defendant is presumptively valid and can only be overturned by clear and convincing evidence.  Uncorroborated, self-serving testimony of a defendant who claims he wasn’t served is usually insufficient to challenge a sheriff’s or process server’s sworn return.  (¶¶ 29, 36-37).  Conversely, where a defendant does submit a properly supported affidavit contesting service, the plaintiff must have the process server testify at an evidentiary hearing concerning the circumstances surrounding the challenged process service.  (¶ 37).

Here, the sheriff deputy’s return stated that process was served on the defendant at his insurance agency’s office.  But this was only a business address.  The defendant didn’t live there.  Defendant supported his petition to vacate with two affidavits: one from him, the other from his brother who is also defendant’s business partner.  Defendant’s brother testified that he was the only one in the insurance officer at the date and time on the sheriff’s return and accepted the papers because he thought they were insurance documents. Defendant, for his part, testified in his affidavit that he was never served at home and that nobody who lived with him was served.  Plaintiff failed to challenge defendants’ affidavits and didn’t call the sheriff deputy to testify in support of his service return (that showed personal service on the defendant).  The Court held that because plaintiff failed to challenge defendants’ affidavits, defendant met the clear and convincing standard for vacating the default judgment.

Afterwords:

This case illustrates that a default judgment entered without proper service can be attacked at any time.  A sheriff’s return of service is prima facie valid but not inviolable.  If a defendant offers sworn testimony contesting service, the plaintiff should call the sheriff deputy or process server to testify at an evidentiary hearing and elicit testimony on the date, time and circumstances surrounding the service on the defendant.  Then, it’s up to the judge to decide based on whose testimony she finds more believable.