Court Opinion

ID: 2704591
Source: CourtListenerOpinion
Date Created: 2014-08-04 20:28:08.922894+00
Date Added: 2024-06-11T12:57:30.719071
License: Public Domain

[Cite as Litigation Mgt., Inc. v. Bourgeois, 2011-Ohio-2794.]

               Court of Appeals of Ohio
                                 EIGHTH APPELLATE DISTRICT
                                    COUNTY OF CUYAHOGA

                                JOURNAL ENTRY AND OPINION
                                         No. 95730

                        LITIGATION MANAGEMENT, INC.

                                                                PLAINTIFF-APPELLANT

                                                      vs.

                               JEAN BOURGEOIS, ET AL.

                                                                DEFENDANTS-APPELLEES

                                     JUDGMENT:
                               REVERSED AND REMANDED

                                        Civil Appeal from the
                               Cuyahoga County Court of Common Pleas
                                        Case No. CV-655349
      BEFORE: Stewart, J., Kilbane, A.J., and Boyle, J.

      RELEASED AND JOURNALIZED: June 9, 2011

ATTORNEYS FOR APPELLANT

James B. Niehaus
Thomas J. Piatak
Adam J. Russ
Frantz Ward LLP
127 Public Square
2500 Key Center
Cleveland, OH 44114

Michelle Pierce Stronczer
Pierce Stronczer Law, LLC
6900 S. Edgerton Road, Suite 108
Cleveland, OH 44141-3193

ATTORNEYS FOR APPELLEES

Michele Morris
430 White Pond Drive, Suite 500
Akron, OH 44320

Thomas F. Haskins, Jr.
430 White Pond Drive, Suite 200
Akron, OH 44320

William S. Pidcock
Robertson & Pidcock, LLC
236 Third Street, SW
Canton, OH 44702

MELODY J. STEWART, J.:
       {¶ 1} Plaintiff-appellant, Litigation Management, Inc. (“LMI”), prevailed at trial on

its claim for damages caused by defendants-appellees, Jean Bourgeois, Excelas, LLC, and a

number of Excelas employees, all of whom were former LMI employees who breached the

terms of nondisclosure and trade secrets agreements they made with LMI prior to founding

Excelas, a direct competitor to LMI.      In addition to damages, LMI sought a permanent

injunction to enforce prospectively the terms of the noncompetition and trade secrets

agreements.   The court denied the injunction, finding that LMI failed to establish that it had

suffered “irreparable” damages in light of the damage award.        LMI argues that the court

abused its discretion by finding that an injunction for prospective relief was barred when

damages for the breach had been awarded.

                                               I

       {¶ 2} The underlying facts are largely immaterial to the issues raised in this appeal, so

we state them in summary form.      LMI is a company providing litigation support specializing

in analyzing medical records.    It employs a staff of employees called “medical analysts” who

review medical records.   The lead defendant, Bourgeois, was LMI’s chief operating officer.

Bourgeois and the other defendants were all subject to noncompetition, nonsolicitation, and

confidentiality agreements.     Bourgeois was terminated in May 2003.      In December 2004,

she founded Excelas as a direct competitor to LMI and, in the words of the court, set up
business “almost literally across the street.”      She recruited the remaining defendants from

LMI, all of whom were medical analysts, to work for Excelas and perform the same function.

       {¶ 3} LMI brought claims against the individual defendants for breach of the

noncompetition, nonsolicitation, and confidentiality agreements; a claim against Excelas for

intentional interference with contractual relations; and a request for a permanent injunction

under the Uniform Trade Secrets Act, R.C. 1333.61, et seq.

       {¶ 4} In a ruling issued at the close of evidence in the trial, the court upheld the

validity of the noncompetition agreements.           It did find, however, that the geographic

restrictions contained in the noncompetition clauses were too onerous to be enforced because

they encompassed any place in the country that LMI did work.        It reformed those restrictions

to limit noncompetition to the “Greater Cleveland Metropolitan Area.”       It then submitted the

amended noncompetition agreements and the trade secrets violations to the jury.      In a general

verdict, the jury found against each individual defendant and the corporation, awarding

damages of $4,000 per individual defendant and $45,000 against Excelas.       The parties did not

request interrogatories to test the jury verdict.

       {¶ 5} Following the verdict, LMI asked the court to enter a permanent injunction

against eight of the individual defendants and enforce the terms of the noncompetition,

nonsolicitation, and confidentiality agreements.       The court issued “half-sheet” judgment

entries that summarily denied a permanent injunction for the nonsolicitation and
confidentiality agreements.   The court addressed the noncompetition agreements in a written

opinion.   It noted that LMI sought a permanent injunction to prevent the defendants from

working for Excelas for an amount of time equal to the time during which they worked in

violation of their non-compete agreements.       LMI also asked that Bourgeois be prevented

from soliciting clients for a period of 12 days — the amount of time in which she violated her

nonsolicitation agreement.

       {¶ 6} The court refused to enter a permanent injunction on the noncompetition claim

because LMI did not show that it suffered an irreparable injury.   It noted that each defendant

had been ordered to pay damages as a result of the breach of their agreements, thus being

made whole: “In short, not only is an adequate remedy at law available, it has been given.

The wrong of competing unfairly has been righted by the jury’s award:     LMI as received fair

and reasonable redress.”

       {¶ 7} On appeal, LMI appears to limit its arguments to the individual defendants,

arguing that the court abused its discretion by refusing to enter a permanent injunction on the

trade secrets (confidentiality) and noncompetition agreements.     Although LMI mentions the

nonsolicitation agreements, it does not separately argue its entitlement to a permanent

injunction under that claim, so we need not address it.

                                       II.   Trade Secrets
       {¶ 8} The court did not issue a written opinion on LMI’s request for a permanent

injunction barring the defendants from using LMI’s trade secrets.      Nevertheless, we think it

plain that the reasoning the court applied in rejecting a permanent injunction on the

noncompetition claims heavily informed and perhaps outright controlled its decision to deny

injunctive relief on the trade secrets claim.       Indeed, there are such significant points of

overlap in the trade secrets and noncompetition arguments that we believe it fair to apply the

court’s reasoning in its written opinion to the trade secrets claim.

                                                A

       {¶ 9} An injunction is an extraordinary remedy in equity, and being a creature of

equity, it may not be demanded as a matter of right. Perkins v. Village of Quaker City

(1956), 165 Ohio St. 120, 133 N.E.2d 595, syllabus.        However, the Uniform Trade Secrets

Act specifically provides for injunctive relief in trade secrets cases: “Actual or threatened

misappropriation may be enjoined.”      R.C. 1333.62(A).

       {¶ 10} When an injunction is authorized by a statute, “[t]he party seeking a permanent

injunction must demonstrate by clear and convincing evidence that they [sic] are entitled to

relief under applicable statutory law, that an injunction is necessary to prevent irreparable

harm, and that no adequate remedy at law exists.”           Acacia on the Green Condominium

Assoc., Inc. v. Gottlieb, 8th Dist. No. 92145, 2009-Ohio-4878, ¶18, citing Proctor & Gamble

Co. v. Stoneham (2000), 140 Ohio App.3d 260, 268, 747 N.E.2d 268.
       {¶ 11} Injunctive remedies are an important component of the trade secrets law,

because they “serve the important purposes of encouraging innovation and helping to preserve

standards of commercial morality.”       Rowe, Introducing a Takedown for Trade Secrets on the

Internet (2007), 2007 Wis.L.Rev. 1041, 1074, citing DVD Copy Control Assn., Inc. v. Bunner

(2003), 31 Cal.4th 864, 880, 75 P.3d 1.        Intellectual property can be expensive to develop,

yet it is difficult to keep a trade secret inviolate and exclusive.   The legal protection of a trade

secret assures those who develop intellectual property that the cost of developing the property

will not be in vain. Kewanee Oil Co. v. Bicron Corp. (1974), 416 U.S. 470, 480-481, 94

S.Ct. 1879, 40 L.Ed.2d 315.

       {¶ 12} Although it is said that injunctions will not be granted unless there is a showing

of both irreparable harm and an inadequate remedy at law, in the context of permanent

injunctions, those two requirements are essentially one and the same. “An irreparable injury

is one for the redress of which, after its occurrence, there could be no plain, adequate and

complete remedy at law, and for which restitution in specie (money) would be impossible,

difficult or incomplete.”    Cleveland v. Cleveland Elec. Illum. Co. (1996), 115 Ohio App.3d

1, 14, 684 N.E.2d 343, quoting Ohio Turnpike Comm. v. Texaco (1973), 35 Ohio Misc. 99,

105, 64 O.O.2d 383, 297 N.E.2d 557.          The federal courts take a similar view.       See, e.g.,

Abbott Laboratories v. Mead Johnson & Co. (C.A.7, 1992), 971 F.2d 6, 11; Lewis v. S.S.

Baune (C.A.5, 1976), 534 F.2d 1115, 1124.
       {¶ 13} The court’s opinion did not distinguish between the threat of irreparable harm to

LMI and whether it had an adequate remedy at law, so we likewise do not differentiate them

as separate elements that must be shown as a requirement for obtaining a permanent

injunction.

                                                B

       {¶ 14} When a trade secret is misappropriated, a threat of actual harm is presumed.

Proctor & Gamble, 140 Ohio App.3d at 274.           This is because the point of a “secret” is that

no one else knows about it.    Unlike a published patent, a trade secret derives its value only to

the extent that it remains secret.   Thus, “the ‘proprietary aspect’ of a trade secret flows, not

from the knowledge itself, but from its secrecy.”       DTM Research, L.L.C. v. AT & T Corp.

(C.A.4, 2001), 245 F.3d 327, 332.     The courts therefore find that “[t]he existence of an actual

threat of irreparable injury may be established by showing that the employee possessed

knowledge of the employer’s trade secrets.”     Levine v. Beckman (1988), 48 Ohio App.3d 24,

27, 548 N.E.2d 267, citing Arthur Murray Dance Studios v. Witter (C.P.1952), 62 Ohio Law

Abs. 17, 53-56, 105 N.E.2d 685.

       {¶ 15} The evidence at trial showed that LMI suffered irreparable harm from the

misappropriation of its trade secrets.     LMI expended money and effort into developing

proprietary information that it wished to remain confidential and it took steps to protect this

information by requiring its employees to sign nondisclosure and confidentiality agreements.
Despite being under agreement not to disclose LMI trade secrets, Bourgeois and the other

individual defendants took LMI’s proprietary information like pricing strategies and used them

so that Excelas could solicit and underbid LMI clients.   The evidence showed that Bourgeois

used information compiled by LMI on existing customer preferences to win jobs for Excelas

that, as an upstart, it might not have qualified enough to acquire.   Excelas told a potential

(and then LMI) client that Excelas could readily perform a documents review to the client’s

existing standards because Excelas employees who formerly worked for LMI knew how the

client wanted its work product presented.      Excelas was particularly brash in the manner in

which it misappropriated LMI’s customer preferences — its employees essentially copied

those preferences to the point that a newly-hired former LMI employee was told that the

“guidelines” Excelas used (its terminology for “preferences”), would be familiar to her: “You

will crack up that some of our ‘terminology’ was changed so it did not look like it was copied

from ‘the-company-that-must-not-be-named (LMI).’”

       {¶ 16} The court found that LMI had an adequate remedy at law because the damages

award ordered by the jury was intended to compensate LMI for its economic injury caused by

the defendants’ unfair competition: “In short, not only is an adequate remedy at law available,

it has been given.”

       {¶ 17} The purpose of contract damages is to compensate the nonbreaching party for

the loss suffered as a result of the breach.   Lake Ridge Academy v. Carney (1993), 66 Ohio
St.3d 376, 381, 613 N.E.2d 183.     The purpose of an injunction is to prevent future harm.

Lemley v. Stevenson (1995), 104 Ohio App.3d 126, 136, 661 N.E.2d 237.        The act explicitly

codifies this distinction, providing for injunctive relief in addition to the monetary damages.

See R.C. 1333.63(A); State ex rel. Besser v. Ohio State Univ., 87 Ohio St.3d 535, 538-539,

2000-Ohio-475, 721 N.E.2d 1044.         In doing so, the act maintains the common-law

understanding that injunctions are preventative in the sense that they are designed to prevent

future harm:

       {¶ 18} “It must be remembered that, in discussing ‘irreparable harm,’ the proper focus

is not so much on what kind of damage the misappropriator has already inflicted, but what

damage the misappropriator may inflict in the future.       As explained above, injunctions

concern the prevention of future harm, not compensation for, or punishment of, past harm.

The law has other remedies that are designed to compensate and punish; i.e., the ‘inadequate

remedy at law’ requirement cannot be met.”       Casagrande, Permanent Injunctions in Trade

Secret Actions: Is a Proper Understanding of the Role of the Inadequate at Law/Irreparable

Harm Requirement the Key to Consistent Decisions? (2000), 28 AIPLA Q.J. 113, 132.

       {¶ 19} LMI’s trade secrets were undeniably misappropriated and used by the

defendants to LMI’s disadvantage.    Without an injunction, it is plain that those trade secrets

would continue to be used in the future against LMI. “Where the plaintiff seeks injunctive

relief, the value of his claim is generally assessed with reference to the right he seeks to
protect and measured by the extent of the impairment to be prevented by the injunction. In

calculating that impairment, the court may look not only at past losses but also at potential

harm.”     A.F.A. Tours, Inc. v. Whitchurch (C.A.2, 1991), 937 F.2d 82, 87.       Indeed, the

failure to show pecuniary loss from the missappropriation of a trade secret does not foreclose

the use of an injunction to bar any future use of the trade secret. Schanfield v. Sojitz Corp.

of Am. (S.D.N.Y., 2009), 663 F.Supp.2d 305, 350.

         {¶ 20} As the defendants concede in their statement of the issues, the monetary

damages awarded at trial were intended to make LMI whole for the breach of the

confidentiality agreeements “up through the date of trial.”       See Appellees’ Brief at 1.

Future violations of the confidentiality agreements were not (and could not be) an element of

what were, in essence, contract damages.       R.C. 1333.62(A) allows the court to enjoin

“threatened” violations of the trade secrets act, and LMI made a compelling case that the

defendants would, unless enjoined, continue to use the misappropriated trade secrets.     The

court erred as a matter of law by finding that an award of compensatory damages showed that

LMI’s harm was not “irreparable” for purposes of an injunction.

                                              C

         {¶ 21} The court also found, under the rubric of an adequate remedy of law, that the

prospective enforcement of the breached agreements:
       {¶ 22} “[W]ould not protect the plaintiff’s legitimate business interest by preventing

unfair competition because the unfair competition occurred when Excelas first opened for

business and was able to quickly establish itself as a competitor to the plaintiff by the efforts

of the breaching defendants.   Future competition by Excelas will be ordinary and fair and is

not the type of competition a non-compete is designed to stifle.”

       {¶ 23} The defendants used LMI’s proprietary information to start Excelas and were

forced to pay compensation for the misappropriation.         But it does not follow that the

defendants will discontinue use of that information prospectively.     The court conceded that

Excelas was essentially built on LMI’s trade secrets and quickly made itself a direct

competitor to LMI.    Any future business it conducts will necessarily be conducted on what

had been misappropriated.

       {¶ 24} The defendants argue that the court did not abuse its discretion by refusing to

grant a permanent injunction because LMI did not present any evidence of future damages.

Absent a showing of future harm, they maintain that the court could suppose that the damages

awards sufficiently compensated LMI and was an adequate remedy at law.

       {¶ 25} This argument runs counter to the purposes of the trade secrets law, which is to

keep proprietary information secret.   Even though the law provides for damages in the event

a secret is misappropriated, an award of damages without an injunction to enjoin the use of the
trade secrets does not make the person holding the trade secrets whole.               The court

specifically acknowledged this point:

       {¶ 26} “The court recognizes that not enforcing an expired covenant non-competition

agreement where damages have been calcuated and awarded may cause some

employee-plaintiffs to gamble at the expense of employer-defendants.         An employee may

decide to breach in the hope that the breach is not discovered for the duration of the

non-compete with the expectation that the worst that can happen thereafter is a lawsuit for

damages that are difficult to calculate and prove.   The employer in that circumstance is stuck

with having not only incurred damages but, from its perspective, continuing to incur them

because the employee has never taken the ‘time out’ from competition that the covenant

required.   But an employer in that situation may simply elect a remedy: damages or an

injunction.”

       {¶ 27} The court’s statement shows why both damages and injunctive relief are

necessary in some trade secrets cases.        If recovery is limited solely to damages, the

misappropriator can simply buy the stolen secret.      But this remedy deprives the holder of

misappropriated information of its intrinsic value — the secret itself. “A trade secret once

lost is, of course, lost forever.”   See FMC Corp. v. Taiwan Tainan Giant Indus. Co., Ltd.

(C.A.2, 1984), 730 F.2d 61, 63.      If recovery is limited solely to an injunction, on the other

hand, enjoining a misappropriated secret will not compensate the holder of the secret for any
unfair economic advantage the misappropriator derived from taking the secret in the first

place.

         {¶ 28} The court’s view that LMI could choose between damages or an injunction

created only half a remedy and was erroneous as a matter of law.              In addition to the

availability of damages, LMI was entitled to a rebuttable presumption of irreparable harm

from the loss of its proprietary information.      Computer Assocs. Int'l v. Quest Software, Inc.

(N.D.Ill. 2004), 333 F.Supp.2d 688, 700.        The burden of proving that an injunction should

not issue is thus on the party opposing the injunction.

         {¶ 29} The court found that “unfair competition” occurred when “Excelas first opened

for business and was able to quickly establish itself as a competitor to the plaintiff by the

efforts of the breaching defendants.”        It is unclear exactly which secrets were used in the

process, as the parties did not submit interrogatories to the jury.     However, in their briefs,

defendants challenge certain aspects of the evidence, arguing for example that the evidence did

not support a finding that Excelas misappropriated LMI’s pricing or marketing strategies.

They did not, however, appeal from the jury verdict.          When a “general verdict has been

returned untested by special interrogatories, it will be presumed that the jury found in favor of

the successful party on all issues * * *.”     H.E. Culbertson & Co. v. Warden (1931), 123 Ohio

St. 297, 303, 175 N.E. 205.     We must therefore assume that the jury found in favor of LMI

on all of the claims in its complaint and the court should have enforced the terms of the
confidentiality agreements pursuant to R.C. 1333.62(A).        The terms used for the permanent

injunction should be similar to those ordered by the court in its April 2, 2008 temporary

restraining order.

                                      III.   Noncompetition

       {¶ 30} The court also denied LMI’s request for injunctive relief on the nonsolicitation

agreements, finding that enforcement of those agreements “almost four years after the last

breach in the case of some defendants,” would not protect LMI’s business interests because

“the unfair competition occurred when Excelas opened for business and was able to quickly

establish itself as a competitor to the plaintiff by the efforts of the breaching defendants.”

       {¶ 31} As with the trade secrets claims, the court incorrectly found that the availiability

of damages meant that LMI could not be granted a permanent injunction.                In Rogers v.

Runfola & Assoc., Inc. (1991), 57 Ohio St.3d 5, 565 N.E.2d 540, the Ohio Supreme Court

made it clear that a party claiming the breach of a noncompetition agreement could obtain

both damages and injunctive relief.    The supreme court found the noncompetition agreements

at issue in that case were valid, enjoined the employees from further violations of the

agreement, and remanded the case for a determination of damages, if any, caused by the

violation of the noncompetition agreement.      Id. at 9.

       {¶ 32} Noncompetition agreements are, at bottom, a category of intellectual property

regulation because the harm sought to be avoided is that an employee will know so much
about the former employer that it will give a new and directly competing employer an unfair

competitive advantage.    In Berardi’s Fresh Roast, Inc. v. PMD Ents., Inc., 8th Dist. No.

90822, 2008-Ohio-5470, we considered the “inevitable disclosure” rule of trade secrets and

stated that “[t]he rule against inevitable disclosure holds that a threat of harm warranting

injunctive relief exists when an employee with specialized knowledge commences

employment with a competitor.”      Id. at ¶27.     We went on to say that the rule “is applied

when a former employer seeks ‘injunctive’ relief when a former employee begins work with a

competitor while the noncompetition clause has not expired.”           Id.   The rule has been

justified because the courts have recognized that “it is very difficult for the human mind to

compartmentalize and selectively suppress information once learned, no matter how well

intentioned the effort may be to do so.”      FTC v. Exxon Corp. (D.C.Cir.1980), 636 F.2d 1336,

1350.

        {¶ 33} The evidence produced by LMI at trial convincingly showed that individual

defendants breached the terms of their noncompetition agreements.      As with the trade secrets

violations, the court should have presumed that LMI suffered irreparable harm when ruling on

the request for a permanent injunction, particularly since the defendants were likewise found

to be in possession of LMI’s trade secrets.

        {¶ 34} The court found that LMI’s injuries were not irreparable because so much time

had elapsed between the “last” breaches of the noncompetition agreements.      The court noted,
for example, that one employee’s one-year noncompetition ban would have expired in

February 2006 (she left LMI in February 2005 and started to work for Excelas in April 2005).

 The court found that the unfair competition occurred when Excelas first opened for business

and that “[f]uture competition by Excelas will be ordinary and fair and is not the type of

competition a non-compete is designed to stifle.”

       {¶ 35} The noncompetition agreements provided that “[t]his Agreement will be

extended for a period of time equal to the period required to secure the enforcement of this

Agreement.”    The court impliedly upheld the validity of this provision when it found the

noncompetition agreements enforceable.      Despite doing so, it made no mention of this

provision when refusing to enter the permanent injunction on grounds that too much time had

elapsed to justify enforcement of the noncompetition clauses.    The delay mentioned by the

court was caused by LMI’s necessity to seek legal redress after the defendants openly

breached their individual agreements.   Delay was not a proper cause for refusing to issue the

permanent injunction.

       {¶ 36} We also find that the court erred by concluding that any harm caused by the

violation of the noncompetition agreements occurred only when Excelas opened for business

and that future competition by Excelas would be “ordinary and fair.”      Each day when the

individual defendants worked in violation of their noncompetition agreements was a day in

which Excelas gained an unfair competitive advantage.     These employees were specifically
hired away from LMI because they brought a wealth of knowledge, gained from LMI, that

allowed Excelas to go from being a start-up to a direct competitor in a fraction of the time it

might take without such information.     Without the knowledge that the defendants brought to

Excelas, it is highly unlikely that Excelas could have so quickly become a serious competitor

to LMI.    The harm to LMI thus continues to this day and LMI is entitled to enforcement of

that to which both sides agreed.

       {¶ 37} It follows that the court abused its discretion by refusing to grant a permanent

injunction and enforce the time remaining on each individual defendant’s respective

noncompetition agreement.          We are aware that enforcement of the noncompetition

agreements might cause a hardship to the affected employees, but each of the employees

willingly violated the terms of their noncompetition agreements and now must answer at law

for their breach.   Despite having been ordered to pay damages for their breach, the future

harm caused by the employee breaches continues to this day. On remand, the court is ordered

to calculate the time remaining on each individual defendant’s noncompetition agreement, less

the amount of time during which the temporary restraining order remained in effect.

       {¶ 38} This cause is reversed and remanded for proceedings consistent with this

opinion.

       It is ordered that appellant recover of   appellees its costs herein taxed.

       The court finds there were reasonable grounds for this appeal.
       It is ordered that a special mandate be sent to the Cuyahoga County Court of Common

Pleas to carry this judgment into execution.

       A certified copy of this entry shall constitute the mandate pursuant to Rule 27 of the

Rules of Appellate Procedure.

___________________________________________
MELODY J. STEWART, JUDGE

MARY EILEEN KILBANE, A.J., and
MARY J. BOYLE, J., CONCUR