Another recent case out of Minnesota raises a number of interesting non-compete and trade secret issues. The case involves a familiar chain of events:
Harley Automotive Group, Inc. sells wholesale automotive parts and supplies to car dealerships. The company is based in Minnesota but also has a facility in Fort Myers, Florida. Harley sells its products via telemarketing. Basically, Harley buys lists of potential customers from lead brokers who sell industry-specific leads. Harley then cold-calls from these lists. Harley keeps all of this information in its customer database, along with names of individual contacts at each dealership, when available.
Three Harley sales representatives: Nicholas Anderson, Erik Mortimer and Craig Passeretti. Anderson began working for Harley in 1995. Passeretti worked for Harley on and off beginning in 1998. And Mortimer began working for Harley in 2006. All three were with the company for several years. All three signed employment agreements that contained a non-compete agreement: not sell within a 300 mile radius of either the Minnesota or Florida outfit for a period of 12 months AND agree to return all corporate records and materials upon termination.
In December 2009, while still employed by Harley, Anderson and Passeretti start a company called Big Rig Supply, which does wholesale telemarketing to heavy truck dealerships. Anderson and Passeretti don’t steal leads from Harley. In fact, Harley is not actively involved in the heavy truck market. So, Anderson and Passeretti develop their own customer lists by running internet searches, using the Yellow Pages and – believe it or not – using reference materials available at a local public library. After just two months running Big Rig Supply as a side business, while still employed by Harley, the two decide to make an even bigger move: they’re going to quit their jobs at Harley and run their own competing venture on a full time basis.
In February 2010, Anderson and Passeretti resign from Harley, shut down Big Rig Supply, and launch a new company called AP Supply. AP Supply does the exact same thing as Harley: sells wholesale auto parts and supplies to car dealerships via telemarketing. Originally, AP Supply sets up shop in Jamestown, North Dakota, more than 300 miles away from Harley’s headquarters in Oakdale, MN. Ostensibly, Anderson and Passeretti were trying to make some showing of good faith vis-à-vis their non-compete agreements, which prevented them from operating a competing venture within a 300-mile radius of Harley’s operations in Minnesota. That said, AP Supply aggressively targeted many of the same customers as Harley.
In February 2011, sick and tired of commuting to Jamestown, ND, Anderson and Passeretti move their operations to Wisconsin, just across the border from Harley’s corporate headquarters in Minnesota. Fast forward another year to February 2012. AP has been incredibly successful. During its first two years in business, AP does several million dollars in sales. Former Harley customers account for nearly $5 million in AP’s revenue during that time.
Then, Jim Harley, the owner of Harley Automotive Group, gets a call from a friend, Jeremy Lindman, who is also in the business. Lindman tells Jim that his company just hired a guy away from AP Supply. And when that guy showed up for work, he brought an AP Supply customer list with him. Suspecting that AP Supply had stolen its customer list, Jim Harley says let me see that list! Lindman sends over a picture of the actual customer list and Jim Harley says he recognizes the customer list as his. And that is the last straw. Harley sues AP Supply and its principals for every claim imaginable: 1) Violation of the Computer Fraud and Abuse Act (“CFAA”), 18 U.S.C. § 1030(a)(2)(C); (2) Violation of the CFAA, 18 U.S.C. § 1030(a)(4); (3) Misappropriation of Trade Secrets under the Minnesota Uniform Trade Secrets Act (“MUTSA”), Minn.Stat. § 325C.01, et seq.; (4) Violation of the Minnesota Deceptive Trade Practices Act (“MDTPA”), Minn.Stat. § 325D. 44; (5) Tortious Interference with Prospective Economic Advantage; (6) Civil Conspiracy; (7) Unjust Enrichment; (8) Breach of Contract—Section 7 of the Employment Agreements; (9) Breach of Contract—Section 8 of the Employment Agreements; (10) Breach of Contract—Section 9 of the Employment Agreements; (11) Breach of the Duty of Loyalty. (Compl.¶¶ 36–115.) Defendants move for summary judgment on all claims.
In the end, the Court granted summary judgment for the defendants on all claims except for a breach of the duty of loyalty claim and a breach of contract claim based on failure to return corporate property. Let’s take a look at some of the highlights:
In litigating trade secret claims, many of us, myself included, have contemplated adding claims under the Computer Fraud & Abuse Act. Particularly in instances where the case would otherwise wind up in state court, it’s tempting to consider tacking on a CFAA claim to get into federal court. Apparently, that’s exactly what happened here. There is no diversity. The only way this case got into federal court was CFAA.
In my experience, if you’re a plaintiff and you have legitimate claims in a complex business dispute, then you want the case in federal court. Frankly, if you’re right on the law in any complex litigation, whether plaintiff or defendant, you probably want the case in federal court. If you’re a plaintiff and you have claims that aren’t quite as strong, maybe you have some flash but not much substance, then you want to take your chances in state court. In this particular case, the plaintiff wanted the case in federal court. That’s why the tacked on the CFAA claim.
In granting summary judgment on the CFAA claim, the court held that the plaintiff had failed to establish “loss” as defined in the CFAA. This is an important point for clients and practitioners alike: The term “loss” under the CFAA is extremely limited. In short, “loss” means loss of the data, costs associated with assessing damages to computer systems and repairing those damages, and losses attributable to service interruption. We’re talking about actual damage to computer systems. Basically, that’s it. This does not extend to damages flowing from a defendant’s misappropriation of the data and use of that data in operating a competing venture. As such, the court granted summary judgment for the defendants on the CFAA claim.
According to Harley, its customer and supplier lists constituted trade secrets under the Minnesota Uniform Trade Secrets Act. Having read the complaint and much of the briefing from the case, I am fairly shocked by such dramatic overreaching on the part of plaintiff and its counsel. First, the customer lists at issue were compiled, principally, from leads that Harley purchased from lead brokers. Beyond that, the contact information for car dealerships is easily available to the general public. Is it possible that the defendants stole Harley’s customer lists? Sure. Is that wrong? Absolutely. But are the lists a trade secret? No.
Harley’s claim that its supplier lists constituted a trade secret is even more ridiculous. The identity of suppliers within the automotive wholesale industry is obviously well-known to any company in the business. Beyond that, as a matter of law, supplier relationships simply are not equivalent to customer relationships. Supplier relationships are substantively very different. I have written about this issue extensively and litigated it on a few occasions. At least in Florida, both at the state and federal court levels, there is a solid body of very well-reasoned authority holding that supplier relationships cannot be protected.
Again, more overreaching on the part of the plaintiff: Harley claimed that its customer list was more than a list of names: Harley claimed the list contained personal information and other details compiled by Harley over the course of twenty years. As it turns out, this simply was not true. According to the court, the list at issue contained nothing more than the names of car dealerships, addresses, phone numbers and occasionally the name of a contact person. That’s it. There was no information regarding purchasing history, product needs, or other account-specific information (which, in contrast, really could have been a trade secret).
My favorite line from the trade secrets analysis: “Indeed, the record establishes that Harley purchases information on car dealerships from InfoUSA, a publicly available source. In addition, there is evidence that Harley’s employees used the internet to find information on car dealerships.”
Minnesota Deceptive Trade Practices Act
I mention this count only for its sheer absurdity. In its complaint, Harley alleges a massive fraudulent conspiracy to steal its confidential information, its trade secrets and ultimately its customers. Part of this massive, fraudulent scheme was defendants’ use of the same part numbers. Harley identifies each auto part and supply with a unique number. Apparently, as part of their massive scheme, defendants used the same unique part numbers, allegedly in an attempt to confuse and deceive consumers. There’s only one problem with this argument: Both Harley and AP Supply use the manufacturer’s part numbers to identify all of the parts in their respective catalogues. The court found “nothing deceptive about the use of the actual manufacturer’s part number.”
The Non-Compete Agreement
Next, the court dismissed the claim for breach of the non-compete agreement. Remember, both of these companies – Harley and AP Supply – are telemarketing businesses that call on car dealerships throughout the US and Canada. Apparently, as written, the non-compete agreement only prevented the defendants from selling auto parts from a location within a 300-mile radius of Harley’s Minnesota or Florida locations. That’s it. There was no non-solicitation agreement. In practice, that means the defendants could still run the same telemarketing operation and could call on all the same clients— just as long as they did it from a location more than 300 miles away from Harley. The court found that such a restriction was arbitrary, unreasonable and served no legitimate business purpose, thereby rendering the non-compete agreement unenforceable.
The Remaining Claims
Ultimately, after granting summary judgment for the defendants on most of the big ticket items, the court denied summary judgment on just two counts: One was a breach of contract claim predicated on defendants’ alleged failure to return certain corporate records and documents following the end of the employment relationship. The other was a claim for breach of the duty of loyalty based on the defendants running Big Rig Supply for a few months while still employed by Harley. Clearly, the possible damages flowing from these claims – the value of whatever corporate property defendants failed to return and the value of any business Big Rig Supply diverted from Harley during those two months – pales in comparison to the millions of dollars of business Harley lost to AP Supply.
Some Parting Thoughts
(1) The plaintiff used non-compete agreements that were poorly written. Yes, even with better agreements in place, the defendants still might have prevailed. But Harley would have had a much better chance on the non-compete issue if it used well-drafted non-compete agreements and a non-solicitation clause.
(2) Harley used a CFAA claim to get the case into federal court. Given the relatively weak nature of the claims, that was probably a bad idea. Harley would have had a much better chance of this sliding through in state court.
(3) Harley badly overreached in every way possible. It claimed its customer lists were so much more than just lists— that it spent decades building this customer database that was so valuable as to constitute a trade secret. In reality, it was just a list of names and addresses that could be purchased from any commercial lead broker. Likewise, Harley advanced that ludicrous argument about AP Supply using the same part numbers in an effort to confuse consumers. Again, this is absurd— both companies were using the manufacturer’s part numbers. This type of overreaching does not help your cause. Beyond that, this type of overreaching reflects on the plaintiff’s lawyers. If you routinely practice in a certain court and you get a reputation for puffery and overreaching— you lose credibility with the judges. Basically, this is another trade secrets lawsuit that borders on frivolous.
Ultimately, I expect Harley winds up settling and writing a fairly hefty check to the defendants to cover their attorney’s fees. The case is Harley Auto. Grp., Inc. v. AP Supply, Inc., CIV. 12-1110, 2013 WL 6801221 (D. Minn. Dec. 23, 2013).
Jonathan Pollard is a competition lawyer based in Fort Lauderdale. He is licensed in all Florida federal and state courts and routinely represents clients in Fort Lauderdale, Miami, West Palm Beach, Boca Raton, Fort Myers, Tampa, Orlando, Jacksonville, and Sarasota. His office can be reached at 954-332-2380.