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Systems Spray-Cooled, Inc. v. FCH Tech, LLC

United States District Court, W.D. Arkansas, El Dorado Division

May 16, 2017

SYSTEMS SPRAY-COOLED, INC. PLAINTIFF
v.
FCH TECH, LLC; WILLIAM HENRY; and J. MICHAEL CAMPBELL DEFENDANTS

          MEMORANDUM OPINION

          Susan O. Hickey United States District Judge

         Before the Court is an Amended Motion for Preliminary Injunction filed by Plaintiff Systems Spray-Cooled, Inc. (“Systems”). ECF No. 61. Defendants FCH Tech, LLC, William Henry and J. Michael Campbell (collectively referred to as “Defendants”) have filed a response in opposition to the motion. ECF No. 27. On December 12, 2016, the parties appeared before the Court for a hearing on the motion. After the hearing, Plaintiff submitted a post-hearing brief in support of its Motion for Preliminary Injunction. ECF No. 44. Defendants also submitted a post-hearing brief in opposition to the motion. ECF No. 42. The Court finds this matter ripe for its consideration.

         I. BACKGROUND

         This case involves the alleged misappropriation of trade secrets and confidential information from Systems. Systems is a Tennessee corporation with principal offices in Nashville, Tennessee and El Dorado, Arkansas. In 1999, Systems purchased the Systems Spray-Cooled technology and business from UCAR Carbon Company, Inc. Systems Spray-Cooled technology is a low pressure spray-cooling system designed to cool furnaces and other equipment with extreme heat loads in the steel industry. Systems' Spray-Cooled technology is unique in the steel industry, as most within the industry use traditional high pressure cooling systems.

         Defendants Henry and Campbell are former long-term employees of Systems. Campbell was employed by Systems or one of its subsidiaries from September 1992 until February 2013. Campbell held numerous positions within Systems during his tenure. Campbell was hired as an engineer and eventually rose to Executive Vice President of Systems in July 2012. Henry worked as a draftsman and designer for Systems from January 2007 to September 2013. During their employment with Systems, both Campbell and Henry signed employment agreements which contained confidentiality and non-compete provisions. Campbell was terminated from his position with Systems for reasons unrelated to the instant motion, while Henry resigned from his position voluntarily.

         In October 2015, Henry and Campbell formed FCH Tech, LLC, a Tennessee company which provides custom designed steel plate fabrications and machine parts. Henry and Campbell acknowledge that FCH Tech was formed, in part, with the intent to directly compete with Systems. Prior to the formation of FCH Tech, Systems was the only provider of low pressure, spray cooling equipment in the steel industry.

         On September 20, 2016, Systems filed suit against Defendants. The Complaint alleges that Henry and Campbell executed employment agreements while employed with Systems that included non-compete and confidentiality provisions prohibiting the taking, disclosure, or use of Systems' trade secrets and confidential information. Although Systems concedes that Henry and Campbell are no longer bound by the non-compete provisions of the employment agreements, Systems alleges that Henry and Campbell are both subject to the confidentiality provisions until October 2018 and February 2018, respectively.

         Systems' Complaint alleges that Henry and Campbell breached the terms of their confidentiality provisions by taking and possessing Systems' trade secrets and confidential information in violation of the Defense of Trade Secrets Act, 18 U.S.C. § 1832, et seq., the Arkansas Trade Secrets Act, Ark. Code Ann. §§ 4-75-601, et seq., and the Computer Fraud and Abuse Act, 18 U.S.C. § 1030, et seq. In addition, Systems asserts claims against Defendants for breach of employment agreement, tortious interference with business expectancy, breach of fiduciary duty, and unjust enrichment.

         On November 11, 2016, Systems filed a Motion for Preliminary Injunction. ECF No. 12. On March 30, 2017, Systems filed an Amended Motion for Preliminary Injunction. ECF No. 61. In the amended motion, Systems seeks to enjoin Defendants, as well as anyone acting in concert with Defendants, from further misappropriation, disclosure and use of Systems' trade secrets and confidential information until a final determination on the merits of the pending litigation has been made. In addition, Systems seeks to enjoin Defendants from directly or indirectly designing or supplying low pressure spray-cooling equipment for the steel industry for a three year period.

         II. LEGAL STANDARD

         “The primary function of a preliminary injunction is to preserve the status quo until, upon final hearing, a court may grant full, effective relief.” Ferry-Morse Seed Co. v. Food Corn, Inc., 729 F.2d 589, 593 (8th Cir. 1984). “A preliminary injunction is an extraordinary remedy and the burden of establishing the propriety of an injunction is on the movant.” Roudachevski v. All-Am. Care Centers, Inc., 648 F.3d 701, 705 (8th Cir.2011). It is well-settled that applications for preliminary injunctions within the Eighth Circuit require the Court to consider the following four factors: (1) the movant's likelihood of success on the merits; (2) the threat of irreparable harm to the movant; (3) the balance between the harm suffered by the movant and the harm that other interested parties will incur if an injunction is granted; and (4) whether the issuance of an injunction is in the public interest. Dataphase Sys., Inc. v. C.L. Sys., Inc., 640 F.2d 109, 113 (8th Cir. 1981). The Court will separately address each of these factors.

         III. DISCUSSION

         A. Substantial Likelihood of Success

         a. Arkansas Trade Secrets Act

         i. Whether the Information in Question Qualifies as Trade Secrets

         The first Dataphase factor the Court must consider is whether Systems is likely to succeed on the merits. In order to evaluate Systems' likelihood of success on the merits, the Court must first determine whether the information in question constitutes a “trade secret” under Arkansas law. Under the Arkansas Trade Secrets Act, a trade secret is defined as information, including a formula, pattern, compilation, program, device, method, technique, or process, that 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. Ark. Code Ann. § 4-75-601(4)(A). The Act also requires that the information at issue be the subject of reasonable efforts to maintain its secrecy. Ark. Code Ann. § 4-75-601(4)(B).

         In addition to the definitions contained within the Arkansas Trade Secrets Act, the Arkansas Supreme Court has established six factors to determine whether information is a trade secret. Arkansas courts consider the following factors to determine whether information qualifies as a trade secret: (1) the extent to which the information is known outside the business; (2) the extent to which the information is known by employees and others involved in the business; (3) the extent of measures taken by the plaintiff to guard the secrecy of the information; (4) the value of the information to the plaintiff and its competitors; (5) the amount of effort or money expended by the plaintiff in developing the information; and (6) the ease or difficulty with which the information could properly be acquired by others. Saforo & Assocs., Inc. v. Porocel Corp., 991 S.W.2d 117, 120 (Ark. 1999). The Arkansas Supreme Court has made clear that, despite being one of many factors to consider, a company's effort to maintain the secrecy of information is a prominent one. ConAgra, Inc. v. Tyson Foods, Inc., 30 S.W.3d 725, 730 (Ark. 2000).

         Systems contends that Defendants misappropriated information regarding its Spray-Cooled technology that qualify as technical trade secrets, including design drawings. Systems further maintains that Defendants misappropriated its financial and business trade secrets, including pricing estimate information, customer lists, revenue forecasts and financial statements. The Court will consider in turn whether each of the aforementioned categories of information qualifies as a trade secret.

         1. Design Drawings

         First, Systems contends that its design drawings qualify as trade secrets. During the preliminary injunction hearing, the Court heard testimony from Dick Arthur, an expert on low pressure, spray-cooling equipment. Arthur testified about the techniques and features Systems has developed as a result of its experience designing and supplying low pressure, spray-cooling equipment for the steel industry. Arthur testified that such features include proprietary water distribution patterns for Systems' spray-cooled roofs. Systems asserts that the design drawings at issue embody the water distribution patterns and other features Systems has developed and, therefore, qualify as trade secrets. Arthur further testified that he reviewed the publicly available exhibits provided by Defendants, including patents, and provided his opinion that none of the exhibits contained Systems' trade secrets. Arthur also testified that none of Defendants' exhibits contained specific information that can be derived from Systems' design drawings.

         In addition, Systems argues that it has taken reasonable measures to safeguard its design drawings. Systems offered testimony and evidence establishing that each of the design drawings contains a legend indicating that the drawing is confidential and exclusively owned by Systems. Systems also offered evidence to demonstrate that it executes confidentiality agreements with vendors, fabricators and licensees to limit the use and disclosure of the design drawings. The Court also heard testimony from Chuck Hays, CEO of the Systems Group, concerning confidentiality provisions contained within employment agreements that each Systems employee is required to sign. Hays specifically testified that the confidentiality provisions require employees to obtain written consent prior to disclosing any confidential information. According to Hays, the confidentiality provisions explicitly define confidential information to include Systems' design drawings. Systems introduced evidence to establish that Defendants Henry and Campbell both signed employment agreements that included the confidentiality provisions. It is also undisputed that Systems has expended a substantial amount of time and resources developing the technology embodied within the design drawings.

         In response, Defendants argue that Systems' design drawings do not qualify as trade secrets. Defendants maintain that the information needed to design competing low pressure spray-cooling systems is readily ascertainable. Defendants specifically assert that Systems' expired patents and other publicly available information, such as technical materials written by Systems employees, contain sufficient information to allow Defendants to design and manufacture a competing system using the technology. In support of this contention, Defendants have submitted exhibits containing Systems' patents and other publicly available information that, according to Defendants, can be used to design spray-cooling systems. In addition, Defendant Campbell testified that Systems' spray-cooling technology is readily ascertainable and can be reverse engineered by reading Systems' patents, as well as by visually inspecting and measuring equipment owned by Systems' prior customers.

         As previously stated, in order for information to qualify as a trade secret, it cannot be readily ascertainable to others that might be interested in learning the information. Ark. Code Ann. § 4-75-601(4)(A). Arkansas trade secret law does not protect information that is readily ascertainable through legitimate means such as reverse engineering or simple observation. See Coenco, Inc. v. Coenco Sales, Inc., 940 F.2d 1176, 1179 (8th Cir. 1991). Reverse engineering is described as the “process of starting with a known product and working backward to find the method by which it was developed.” Gibraltar Lubricating Servs. v. Pinnacle Res. Inc., 486 S.W.3d 224, 226 (Ark. Ct. App. 2016). The expense and amount of effort it takes to reverse engineer a product are factors to consider when determining whether or not information is readily ascertainable. Id. at 227.

         Defendants have not presented convincing evidence that Systems' design drawings do not qualify as trade secrets. With regard to Systems' design drawings, Defendant Campbell offered contradictory testimony about whether specific information contained within Systems' design drawings is publicly available through patents and technical materials. However, Arkansas courts have recognized that “[e]ven where information about a product or its ingredients is publicly available, such as through a patent, it may be the combination of characteristics and components that offers a competitive advantage.” Gibraltar, 486 S.W.3d at 228. Here, Arthur testified that the patents offered by Defendants only provide general information and did not contain the specific information necessary to build a spray-cooling system that can be determined from Systems' design drawings.

         In addition, although Defendants argue that a person of ordinary skill in the art of engineering would be able to reverse engineer much of Systems' alleged trade secrets in theory, Defendants have not submitted any testimony or evidence to demonstrate how much time, money or effort it would take to actually duplicate Systems' low pressure, spray-cooling technology. Without such evidence, the Court cannot determine whether Systems' spray-cooling technology is indeed readily ascertainable at this stage of the litigation.

         The Court concludes that Systems has sufficiently shown that it has taken reasonable efforts to protect the secrecy of its design drawings. In light of the six Safaro factors that the Court must consider in determining whether information is entitled to trade secret protection, the Court concludes that, on balance, Systems has offered sufficient evidence to prove that its design drawings qualify as trade secrets under Arkansas law at this stage of the litigation.

         2. Pricing Information

         Systems next argues that its pricing information qualifies as a trade secret. Systems specifically argues that an internal estimate sheet qualifies as a trade secret. During the preliminary injunction hearing, Systems introduced testimony from Hays, CEO of the Systems Group, regarding the internal estimate worksheet. Hays testified that the estimate worksheet is essentially a spreadsheet and that the information contained within the worksheet demonstrates how Systems calculates its prices for every project. Hays testified that the worksheet includes historical data, such as the cost of labor to do a particular engineering project. Hays further testified that Systems' estimate worksheets are internal documents and not available to the public. Systems asserts that the pirating of this information would be detrimental because competitors would be able to easily undercut Systems' pricing. Hays further testified that employment agreements signed by Systems' employees, including Defendants Campbell and Henry, during the course of their employment designate “pricing information, ” such as the internal estimate worksheet, as “confidential information.”

         Defendants argue that the internal estimate worksheet is not entitled to trade secret protection. Defendants refute Systems' assertion that they currently possess Systems' internal estimate worksheets. Furthermore, Defendants contend that any information contained within the estimate worksheet is now outdated and, therefore, not entitled to trade secret protection. At the preliminary injunction hearing, Defendant Campbell testified that the pricing information that he had access to while employed at Systems is now stale. In addition, Campbell testified that Systems' estimate worksheet would be of little utility because Defendants use a different pricing structure than Systems.

         At the preliminary injunction hearing, Systems provided testimony to refute Defendants' contention that the information contained within the internal estimate worksheet is stale. Hays testified that the estimate worksheet at issue was recently used to place a bid on a project to replace a furnace roof at one of Nucor's facilities. Hays stated that Defendants also placed a bid on the Nucor project. Hays further testified that, at the time of the hearing, the quote was still outstanding for the project.

         Arkansas courts have previously held that a company's pricing information may be worthy of trade secret protection under the proper circumstances. Bradshaw v. Alpha Packaging, Inc., 379 S.W.3d 536, 539 (Ark. App. 2010). Although Arkansas courts are silent on the issue, the Eighth Circuit has considered similar trade secret laws from other states and held that a trade secret may lose its protected status upon a showing that the information has become stale or outdated. Synergetics, Inc. v. Hurst, 477 F.3d 949, 958 (8th Cir. 2007) (applying Missouri trade secrets law). “Determination of when trade secret information becomes stale cannot be made by reference to a bright line rule and necessarily requires fact specific consideration.” Id. (internal citation omitted).

         In Hurst, the Eighth Circuit rejected the defendant's conclusory argument that the plaintiff's trade secrets grew stale and unworthy of protection. Id. at 957. The Eighth Circuit agreed with the district court's finding that the defendant's argument lacked merit because the defendants failed to offer any evidence in support of their position or provide “any facts and circumstances to suggest that the information [was] stale.” Id. at 958.

         Similar to the defendants in Hurst, Defendants have failed to offer any convincing facts to suggest that the information contained within Systems' estimate worksheet is stale. Systems presented evidence which established that the internal estimate worksheet includes numerous formulas used to calculate the pricing for a particular project. Although Defendants maintain that information such as raw materials, labor and shipping change over time, it appears that this information may be easily adjusted within Systems' worksheet. Moreover, it is unclear if the formulas within the ...


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