AMENDED MEMORANDUM OPINION AND ORDER
HARMON, District Judge.
The Court's order entered on March 12, 1999 (Instrument #32), is hereby
This case involves the scope of a covenant not to compete agreement, confidentiality agreement, and non-solicitation agreement entered into by Maxim and its prior employee, Michelson. It also involves whether Michelson is liable for conversion, breach of fiduciary duty, and misappropriation of trade secrets. Maxim is a Texas corporation with, until 1997, its corporate headquarters located in Sugarland, Texas.
During his employment at Maxim, Michelson signed at least two stock option agreements. In consideration for receiving stock options, Michelson agreed not to compete with Maxim for a one year period and to keep Maxim's confidential information secret.
In January 1999, Michelson began to negotiate employment with another company, PHS. The day before Michelson resigned from Maxim, he exercised some of his stock options. He also requested a large batch of client information printed. The individual who received this request forwarded it to another office employee.
The next day, the list was gone. After informing Michelson of such, Michelson told her that he had taken it. He also lied to her and told her that the client information she had printed was useless because the printing was off line. That same day, Michelson resigned from Maxim and started employment at PHS. After Maxim employees checked Michelson's laptop, they discovered that he had deleted a great deal of confidential company information from his hard drive.
A preliminary injunction is an extraordinary and drastic remedy, one that should not be granted unless the movant, by a clear showing, carries the burden of persuasion. Mazurek v. Armstrong, 520 U.S. 968, 117 S.Ct. 1865, 1867, 138 L.Ed.2d 162 (1997) (citing 11A CHARLES A. WRIGHT, ARTHUR R. MILLER, & MARY KAY KANE, FEDERAL PRACTICE AND PROCEDURE § 2948, pp. 129-130 (2d ed.1995)); Hoover v. Morales, 164 F.3d 221, 224 (5th Cir.1998). In meeting this burden, the plaintiff must demonstrate: (1) a substantial likelihood of success on the merits; (2) a substantial threat that the movant will suffer irreparable injury if the injunction is denied; (3) that the threatened injury outweighs any damage that the injunction might cause the defendant; and (4) that the injunction will not disserve the public interest. Morales, 164 F.3d at 224. "The decision to grant or deny a preliminary injunction lies within the discretion of the district court and will be reversed on appeal only upon a showing of abuse of discretion." House the Homeless, Inc. v. Widnall, 94 F.3d 176, 180 (5th Cir.1996), cert. denied, 520 U.S. 1169, 117 S.Ct. 1434, 137 L.Ed.2d 541 (1997).
A. Success on the merits
1. Maxim's contract claims
To determine the likelihood of success on the merits, this Court must look to the standards provided by the substantive law. Valley v. Rapides Parish Sch. Bd., 118 F.3d 1047, 1051 (5th Cir.1997). The first issue this Court must address is which state's substantive law should be applied. Maxim contends that Texas law should apply because the parties agreed to such via a choice of law provision in the stock option agreement. Michelson contends that California law should apply because the choice of law provision is unenforceable and California has the "most significant relationship" to this dispute.
A federal court customarily applies the choice of law rules of the forum in which it is located. Klaxon v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496, 61 S.Ct. 1020, 1021, 85 L.Ed. 1477 (1941); King v. Douglass, 973 F.Supp. 707, 723 (S.D.Tex. 1996) (citing Klaxon). With regard to breach of contract actions, Texas follows the RESTATEMENT (SECOND) OF CONFLICT OF LAWS § 187 (1971). DeSantis v. Wackenhut Corp., 793 S.W.2d 670, 677 (Tex.1990). Section 187 states:
Law of the State Chosen by the Parties
RESTATEMENT (SECOND) OF CONFLICT OF LAWS § 187. This issue of whether a covenant not to compete agreement is enforceable is not "one which the parties could have resolved by an explicit provision in their agreement". DeSantis, 793 S.W.2d at 678 (citing RESTATEMENT (SECOND) OF CONFLICT OF LAWS § 187 cmt. d (1971)). Thus, section 187(1) is inapplicable, and the Court must look to section 187(2). Id. Generally, the Court should apply the law chosen by the parties under section 187(2), unless section 187(2)(b) applies,
Id. Thus, the Court must determine whether: (1) California law would apply under section 188's significant relationship test;
In this case, the place of contracting occurred in both California and Texas; but, Michelson executed the noncompetition agreement in California. The negotiation of the contract occurred in both California and Texas. The place of performance of the contract was in California, Nevada, Arizona, and Texas. The location of the subject matter of the contract was in California. The domicile, residence, nationality, place of incorporation and place of business are also split between California and Texas. The factor that tips the balance to California is that the gist of the agreement was the performance of personal services, for the most part, in California. See id. This factor alone is generally conclusive in determining what state's law will apply.
The next question is whether California has a materially greater interest than Texas in deciding whether the covenant not to compete between Maxim and Michelson should be enforced. Like the Texas Supreme Court in DeSantis,
The final question to be addressed is whether California's public policy would be contravened if this Court were to apply Texas law. California has promulgated Section 16600 of the California Business & Professions Code which states, "Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void." One of the few exceptions to Section 16600 is where the covenant is necessary to protect trade secrets of the employer. See Muggill v. Reuben H. Donnelley Corp., 62 Cal.2d 239, 242, 398 P.2d 147, 149, 42 Cal.Rptr. 107, 109 (Cal.1965); Metro Traffic Control, Inc. v. Shadow Traffic Network, 22 Cal.App.4th 853, 860-61, 27 Cal.Rptr.2d 573, 577-78 (2d Dist.1994); John F. Matull & Assocs., Inc. v. Cloutier, 194 Cal.App.3d 1049, 1054, 240 Cal.Rptr. 211, 214 (2d Dist.1987); Loral Corp. v. Moyes, 174 Cal.App.3d 268, 276, 219 Cal.Rptr. 836, 841 (6th Dist.1985).
Texas law permits noncompetition covenants to the extent that they are reasonable and ancillary to an otherwise enforceable agreement. See DeSantis, 793 S.W.2d at 681-82. Thus, to the extent that it is reasonable, the agreement in this case would be completely enforceable in Texas. As mentioned supra, however, it would only be enforceable in California to the extent necessary to protect Maxim's trade secrets. Thus, if this Court were to apply Texas law, California's public policy in preventing broad noncompetition covenants would be contravened. Cf. Team Envtl. Servs., Inc. v. Addison, 2 F.3d 124, 126 n. 1 (5th Cir.1993) (notwithstanding Texas choice of law provision, Louisiana had greater interest because of strong public policy against covenants not to compete)
Because California law would apply under section 188's significant relationship test, California has a materially greater interest than Texas, and California's public policy would be contravened by applying Texas law, this Court will apply California law to determine the enforceability of the covenant not to compete between Michelson and Maxim.
Because the broad noncompetition agreement would be unenforceable in California absent reformation, the Court must determine whether reformation is appropriate. The noncompetition agreement in this case contains the following passage:
Plaintiff's Ex. 1, p. 3 (emphasis added).
A recent California decision is dispositive of the reformation issue. In Kolani v. Gluska, 64 Cal.App.4th 402, 407-08, 75 Cal.Rptr.2d 257, 259-60 (2d Dist.1998), the court struck down a similarly broad noncompetition agreement because it could not be reformed. First, the court noted that agreements are only generally reformed if the parties made a mistake. Id., 64 Cal.App.4th at 408, 75 Cal.Rptr.2d at 260. The parties in Kolani, however, merely entered into an illegal contract; there was no allegation or evidence of mistake. Id. Second, the court noted that the parties only agreed that the noncompetition agreement could be reformed if it were found "unfair" or "commercially unreasonable," not if it were merely illegal. Id. Third, the court held that any reformation would undermine the important public policy that is protected by section 16600:
Id. The Kolani court pointed out that no California case had permitted the reformation of an illegal noncompetition agreement. Id.
Like Kolani, there is no allegation of mistake in the drafting of the noncompetition agreement. Furthermore, the reformation provision at issue would only permit this Court to reform the broad agreement where Maxim's goodwill or other business interest did not require it to be as lengthy, as geographically expansive, or as restrictive in its terms. Although the agreement is too restrictive, it is not necessarily more restrictive "than is necessary to protect Maxim's goodwill or other business interest." Maxim may well need this expansive agreement to protect its goodwill and business interests. The problem is, as discussed supra, the California legislature has determined that such an agreement is void. Finally, as in Kolani, this noncompetition agreement is very broad. Any reformation of the illegal noncompetition agreement would undermine the public policy of section 16600. Maxim would have no disincentive to use this broad, illegal clause in the future if this Court permitted it to retreat to a narrow, lawful construction in this litigation. Id. Thus, the noncompetition agreement cannot be reformed into a narrower agreement strictly limited to trade secrets.
California's section 16600, however, does not apply to the confidentiality and nonsolicitation agreements. Cloutier, 194 Cal.App.3d at 1054, 240 Cal.Rptr. at 214; Moyes, 174 Cal.App.3d at 276, 219 Cal.Rptr. at 841; In re Ingle Co., Inc., 116 F.3d 1485, 1997 WL 8495, at *3-5 (9th Cir.1997). Thus, unlike the noncompetition agreement, there is no public policy that would be contravened by the application of Texas law as the parties contractually agreed.
With regard to the nonsolicitation agreement,
Maxim alleges that Michelson breached the confidentiality agreement
2. Maxim's tort claims
Maxim also alleges several tort claims. As in the breach of contract claims, this Court must determine which state's substantive law should apply. Texas has adopted the "most significant relationship" test, as enunciated in Sections 6
Since the "locus of the conduct" is in California, the Court believes that California has a "greater interest in seeing that its standard of care is applied" because of the affect it will have on the way parties tailor their conduct within the state. De Aguilar, 47 F.3d at 1414. "[S]ubject only to rare exceptions, the local law of the state where the conduct and injury occurred will be applied to determine whether the actor satisfied minimum standards of acceptable conduct and whether the interest affected by the actor's conduct was entitled to legal protection." Id. at 1414 n. 11. Thus, this Court will apply California law to Maxim's tort claims.
Misappropriation of trade secrets
California has adopted the Uniform Trade Secret Act ("UTSA"). Under the UTSA, a court may enjoin actual or
Defendant William Redmond was a ten-year veteran sales employee of Pepsi. Id. at 1264. By 1994, he had become General Manager of Pepsi's California Business Unit, having revenues of more than $500 million and representing 20% of Pepsi's North American profits. Id. Because Redmond's position was relatively high up in Pepsi's hierarchy, Redmond had access to significant inside information and Pepsi trade secrets, including sales and marketing plans and "pricing architecture." Id.
In the spring of 1994, a former Pepsi executive who had become the head of Quaker's Gatorade division began to solicit Redmond. Id. Quaker eventually offered Redmond the position of "Vice President — On Premises Sales." Id. For some time, Redmond negotiated with Quaker over the salary of the position. Id. Eventually, Quaker offered Redmond the position of "Vice President — Field Operations." Throughout this time, Redmond kept his Quaker negotiations secret from Pepsi. Id.
On November 10, 1994, Redmond finally announced to his superiors that he was leaving Pepsi to go to its fierce competitor,
On November 16, 1994, Pepsi sought an injunction preventing Redmond from working for Quaker. The district court issued an injunction barring Redmond from assuming his new job through May of 1995 and permanently barred his use of Pepsi trade secrets. Redmond appealed the injunction, and the Seventh Circuit affirmed the district court.
In its decision, the court held that a plaintiff may prove a claim of trade secret misappropriation by demonstrating that defendant's new employment will inevitably lead him to rely on the plaintiff's trade secrets. Id. at 1269. A number of factors in that case convinced the court that Redmond would inevitably rely on Pepsi's trade secrets. First, Pepsi had established beyond question that Redmond possessed extensive Pepsi trade secrets. Redmond had more than just general skills and knowledge. Instead, he had "particularized plans or processes developed by [Pepsi] and disclosed to him while the employer-employee relationship existed, which are unknown to others in the industry and which give the employer an advantage over his competitors" Id. These included Pepsi's annual Strategic Plan containing its competitive plans, financial goals, and three-year manufacturing, production, marketing, packaging and distribution strategies; its Annual Operating Plan, including its so-called "pricing architecture" for the coming year; its "attack plans" for specific markets; and its innovations in selling and delivery systems. Id. at 1265. Moreover, Redmond had signed a confidentiality agreement with Pepsi agreeing not to disclose confidential information relating to Pepsi's business not generally known or available to the public or recognized as standard practice. Id. at 1266.
Second, Redmond's responsibilities in his new position with Quaker were parallel to his old job so that he would have to refer to and use Pepsi's secrets. "[U]nless Redmond possessed an uncanny ability to compartmentalize information, he would necessarily be making decisions about Gatorade and Snapple by relying on his knowledge of [Pepsi's] trade secrets."
Third, Redmond's deceit played a part in the court's decision that he would inevitably disclose Pepsi's trade secrets. In this regard, the court relied on the district court's findings:
Id. In other words, having shown himself to be untrustworthy in one context, the court doubted he would honor the nondisclosure obligation were he allowed to assume his new position. For these reasons, the district court's limited injunction, preventing Redmond from assuming his new position for six months, i.e., until the Pepsi trade secrets he possessed were stale, was affirmed.
Redmond has been widely followed.
One commentator has delineated the factors that courts have relied upon in determining whether disclosure is inevitable. D. Peter Harvey, "Inevitable" Trade Secret Misappropriation after PepsiCo, Inc. v. Redmond, 537 PLI/PAT 199, 226 (1998). These factors include: (1) Is the new employer a competitor? (2) What is the scope of the defendant's new job? (3) Has the employee been less than candid about his new position? (4) Has plaintiff clearly identified the trade secrets which are at risk? (5) Has actual trade secret misappropriation already occurred? (6) Did the employee sign a non-disclosure and/or non-competition agreement? (7) Does the new employer have a policy against use of others' trade secrets? (8) Is it possible to "sanitize" the employee's new position? Id. at 226-27.
In the case sub judice, all of the factors espoused in Redmond and above weigh heavily in favor of a finding of inevitable disclosure. It is undisputed that Michelson was in possession of a great deal of Maxim's proprietary information and trade secrets. As in Redmond, Michelson
Michelson's position at PHS is also sufficiently parallel to the position he held at Maxim. Although the vice-president of PHS tried to distinguish Michelson's position at PHS, there is no dispute that Michelson will inevitably be in direct competition with Maxim armed with Maxim's trade secrets. "[U]nless [Michelson] possessed an uncanny ability to compartmentalize information, he would necessarily be making decisions about [PHS] by relying on his knowledge of [Maxim's] trade secrets." Redmond, 54 F.3d at 1270. It is difficult not to conclude that PHS, entering the sterile tray assembly business, hired Michelson at a substantial raise in salary in order to utilize Maxim's trade secrets.
The Court also notes that PHS does not even have an agreement with PHS that would require him to refrain from using Maxim's trade secrets. Furthermore, Michelson's and PHS's vice-president's contentions that Maxim's secrets would be completely useless to Michelson as he executed his responsibilities were directly rejected by the Redmond court. Id. In this fiercely competitive field, the point is that Maxim "finds itself in the position of a coach, one of whose players has left, playbook in hand, to join the opposing team before the big game." Id.
Michelson was also not candid regarding his new position, like Redmond, he negotiated for some time with PHS without telling Maxim. During these negotiations, Michelson divulged Maxim's confidential stock option agreement to PHS. Michelson also destroyed confidential information on his laptop hard drive and ordered a large batch of confidential client information printed the day before his departure. Michelson then lied to the staff member who printed the information by stating that the print out was off-line, thereby rendering it useless. Michelson, in an attempt to explain his suspicious actions, testified that these actions were a huge mistake and that he "will regret them for the rest of his life." The explanation was less than credible. Furthermore, his open hostility to Maxim and dissatisfaction with the company was palpable. There was also some evidence that Michelson might have backed up the deleted confidential information from his laptop hard drive. Michelson asserts that he did not do so, and that he threw away the printouts of the client information. In any event, his "lack of forthrightness on some occasions, and out and out lies on others, in the period between the time he accepted the position with [PHS] and when he informed plaintiff that he had accepted that position leads the court to conclude that defendant [Michelson] could not be trusted to act with the necessary sensitivity and good faith under the circumstances in which the only practical verification that he was not using plaintiff's secrets would be defendant [Michelson's] word to that effect." Id.
As a result, the Court concludes that, if Michelson has not already, he will inevitably disclose Maxim's trade secrets to PHS. Therefore, Maxim has a substantial likelihood of prevailing on the merits of its trade secret misappropriation claim.
b. Breach of fiduciary duty and conversion claims
Agents are considered to be fiduciaries of their principal. See Duffy v. Cavalier, 215 Cal.App.3d 1517, 1534, 264 Cal.Rptr. 740, 751 (1st Dist.1989) ("Any agent is also a fiduciary, whose obligation of diligent and faithful service is the same
c. Conversion claim
The elements of a conversion claim are: (1) the plaintiff's ownership or right to possession of the property; (2) the defendant's conversion by a wrongful act or disposition of property rights; and (3) damages. Moore v. Regents of Univ. of Cal., 51 Cal.3d 120, 144 & n. 38, 271 Cal.Rptr. 146, 793 P.2d 479 (1990); Burlesci v. Petersen, 68 Cal.App.4th 1062, 1065, 80 Cal.Rptr.2d 704, 706 (1st Dist.1998) (citing Moore).
It is undisputed that Maxim owned the material on the hard drive of Michelson's laptop, as well as the computer printouts of the client information Michelson ordered. It is also undisputed that Michelson, at a minimum, destroyed this property. It is also without question, that Maxim has spent monies on recovering the information from the laptop hard drive. Therefore, there is a substantial likelihood that Maxim will prevail on the merits of its conversion claim.
B. The rest of the preliminary injunction prerequisites
This Court has found that Maxim has a substantial likelihood of prevailing on its breach of the confidentiality agreement, misappropriation, breach of fiduciary duty, and conversion claims. Thus, the Court must next determine the remaining three prerequisites to obtaining injunctive relief, i.e., (1) whether there is a substantial threat that the movant will suffer irreparable injury if the injunction is denied; (2) whether the threatened injury outweighs any damage that the injunction might cause the defendant; and (3) whether the injunction will not disserve the public interest. Morales, 164 F.3d at 224.
It is beyond dispute that Maxim will suffer irreparable harm if Michelson is permitted to work for PHS until the information he has becomes stale. As discussed supra, absent injunctive relief, Maxim will find itself in the big game competing against one of its own using its own playbook against it. Although Michelson will be without the PHS job until the information he has is stale, i.e., one year,
RESTATEMENT (SECOND) OF CONFLICT OF LAWS § 196 (emphasis added). The fact that some services were not performed in California is of less import because section 196, by its plain terms, is applicable where a major portion of the services are performed in a given state.
DeSantis, 793 S.W.2d at 677 (emphasis added and citations omitted). The court further elaborated on this concept of limited autonomy in the context of section 187 of the Restatement. As delineated supra, the party must show two things: (1) there is a reasonable relationship between the state of the law to be applied and the contract in question; and (2) the application of this law does not offend the public policy of a state that has a greater interest. In this case, Maxim's attempt to distinguish Desantis solely relates to the first of these two categories, i.e., that Texas has a reasonable relationship here. The problem with Maxim's contention is that it fails to take into account the second category, the public policy aspect of the rule.
Nondisclosure of Company Secrets. The Optionee acknowledges that in the course of his employment or other relationship with the Company, he has had and may continue to have access to certain trade secrets and proprietary information of the Company, know-how, programs, lists of customers, information regarding inventions, ... and other confidential information and knowledge concerning the business of the Company (hereinafter collectively referred to as the "Information") which the Company desires to protect. The Optionee understands that the Information is confidential and has been or will be received or learned by him in confidence, and the Optionee agrees that unless and until such information shall become a matter of public knowledge, he will not reveal any such Information to any third party for any reason or under any circumstances, either during or subsequent to his employment by the Company, other than in the ordinary course of his duties for the benefit of the Company, or as required by applicable law.
Plaintiff's Ex. 2, p. 4.
These contacts are to be evaluated according to their relative importance with respect to the particular issue.