North Atlantic Instruments v. Haber

• Decision Date: 01 August 1998
• Docket Number: Docket No. 98-9423
• Citation: 188 F.3d 38
• Parties: (2nd Cir. 1999) NORTH ATLANTIC INSTRUMENTS, INC., Plaintiff-Counter-Defendant-Appellee, v. FRED HABER and APEX SIGNAL CORP., Defendants-Counter-Claimants-Appellants
• Court: U.S. Court of Appeals — Second Circuit

Page 38

188 F.3d 38 (2nd Cir. 1999)

NORTH ATLANTIC INSTRUMENTS, INC., Plaintiff-Counter-Defendant-Appellee, v. FRED HABER and APEX SIGNAL CORP., Defendants-Counter-Claimants-Appellants.

Docket No. 98-9423

August Term, 1998

UNITED STATES COURT OF APPEALS

SECOND CIRCUIT

Argued: May 26, 1999

Decided: Aug. 9, 1999

Appeal from an order of the United States District Court for the Eastern District of New York (Arthur D. Spatt, Judge) adopting a Magistrate Judge's Report and Recommendation (Michael L. Orenstein, Magistrate Judge) to preliminarily enjoin defendants-appellants from, inter alia, using a list of client contacts alleged to be misappropriated from plaintiff-appellee. We hold that the District Court did not clearly err in determining that the list of client contacts at issue was a protectable trade secret and that the defendants-appellants were bound not to use that trade secret. Accordingly, the District Court did not exceed its allowable discretion in granting the preliminary injunction.

Affirmed.

[Copyrighted Material Omitted] THOMAS L. COSTA, Law Offices of Thomas L. Costa, LLP, Melville, NY (Robert L. Folks, Steven M. Lester, and Bryan C. Van Cott, of counsel), for Defendants-Counter-Claimants-Appellants.

ERICA B. GARAY, Rivkin, Radler & Kremer, Uniondale, NY (Evan H. Krinick and Michael P. Versichelli, of counsel), for Plaintiff-Counter-Defendant-Appellee.

Before: VAN GRAAFEILAND, CALABRESI, and STRAUB, Circuit Judges.

Judge Van Graafeiland dissents in a separate opinion.

STRAUB, Circuit Judge:

The defendants-appellants, Fred Haber and Apex Signal Corp., appeal from an order of the United States District Court for the Eastern District of New York (Arthur D. Spatt, Judge) preliminarily enjoining them from, inter alia, soliciting particular client contacts contained in a list allegedly misappropriated from the plaintiff-appellee, North Atlantic Instruments, Inc. In support of its decision, the District Court relied in large part on findings of fact and conclusions of law presented in a Report and Recommendation by the Magistrate Judge (Michael L. Orenstein, Magistrate Judge), who had held an extensive, eight-day evidentiary hearing. Based on the Report and Recommendation and its own review of the record, the District Court concluded, inter alia, that the list of client contacts prepared and used by Haber while Haber was an employee of North Atlantic constituted a protectable trade secret and that the defendants were bound not to use the information contained in the list. In light of those findings and the Magistrate Judge's determination that any misappropriation of North Atlantic's trade secrets would cause the company irreparable damage, the District Court entered a preliminary injunction against the defendants.

This appeal requires us to decide whether the District Court permissibly restricted the defendants from soliciting North Atlantic's customers through the individual client contacts that Haber had developed while at North Atlantic and its predecessor. Because we conclude that the District Court did not exceed its allowable discretion in doing so, we affirm.

BACKGROUND

On August 31, 1994, North Atlantic entered into an Asset Purchase Agreement with Transmagnetics, Inc. ("TMI"). North Atlantic designs and manufactures specialized, technical, industrial electronics equipment utilized in the development and testing of systems used on ships, tanks, and commercial and military aircraft. In 1994, TMI was engaged in a related business targeted towards a particular niche market: It designed, manufactured, and sold customized electronic devices to a limited number of engineers, also in the aerospace and high tech industries. At the time North Atlantic acquired TMI, Haber was a one-third owner of TMI, its president, and the head of sales-a position which allowed him to develop extensive client contacts.

North Atlantic's chief executive testified that the specialized and customized nature of TMI's business made the identity of the relatively small numbers of engineers who required its products especially crucial to its business success. That is, there may be only two engineers-within a company comprised of 20,000 engineers and 100,000 employees-who might need the technology produced by TMI. As a result, he concluded, knowing the identity and needs of these engineers was an extremely valuable aspect of TMI's business and one that would have been very difficult for any company to derive on its own. In part because of this, North Atlantic evidently conditioned its purchase of TMI on Haber's continuing to work for North Atlantic in a similar role to that which he had occupied at TMI.

The Asset Purchase Agreement provided that TMI would sell and transfer to North Atlantic "all of the properties and assets of every kind, nature and description, real, personal or mixed, tangible or intangible." Specifically itemized within these assets were "[a]ll...customer and vendor data bases" and "[a]ll goodwill and other intangible assets, owned, used or held for use by [TMI]" in its business. Consistent with this language, North Atlantic's owner testified that the list of client contacts presumably included within these intangible assets was "a very important aspect of the purchase." North Atlantic paid $99,667 for TMI's fixed assets, a portion of which included goodwill, and $851,134 for TMI's inventory. In addition, North Atlantic clearly valued the information that Haber brought to bear, as demonstrated by its paying him salary and bonuses of approximately $300,000 in his first year with North Atlantic.

Shortly after the acquisition, on November 7, 1994, North Atlantic entered into an employment agreement (the "Employment Agreement") with Haber. Its original term was twenty-one months, and the parties later extended it to continue to July 31, 1997. The Employment Agreement acknowledged that North Atlantic "is engaged in specialized businesses...and the information, research and marketing data developed by [North Atlantic] or any affiliate are confidential." In it, Haber expressly agreed:

to keep secret and retain in the strictest confidence all confidential matters which relate to [North Atlantic], including, without limitation, customer lists, trade secrets, pricing policies and other confidential business affairs of [North Atlantic]...and any affiliate...and not to disclose any such confidential matter to anyone outside [North Atlantic] or any affiliate . . . .¹

The terms of this provision apply both "during and after his period of service with [North Atlantic]," and the agreement required that Haber turn over, upon his termination, all documents and property of North Atlantic that contained any confidential information.² Haber acknowledged in the Employment Agreement that an injunction would be a permissible remedy for a material breach of the confidentiality provision because such a breach would cause "irreparable injury to [North Atlantic] and...money damages [would] not provide an adequate remedy to [North Atlantic]." Finally, the Employment Agreement contained a merger clause, which stated that the contract represented the "full and complete agreement of the parties relating to the employment of [Haber]."

After the acquisition, TMI became a division of North Atlantic with Haber as its president and, for the first six months, as its engineering manager. While he occupied these positions, Haber had access to information about North Atlantic's technology and customer base, including lists of customers and contacts with their individual product needs. Specifically, information on each client of North Atlantic's TMI division was centralized in a customer database program, accessible to Haber and a handful of other North Atlantic employees from both desktop and laptop computers. The client information contained in the database included company names, contact names, phone and fax numbers, and more particularized information relating to the specific clients' needs and purchases.

In July 1997, Haber left North Atlantic to join Apex Signal Corp., a company that manufactures products targeting the same niche market as North Atlantic's TMI division. North Atlantic argues that after Haber joined Apex, Apex changed its focus from more general purpose products to the customized products produced by TMI and later by North Atlantic's TMI division. In doing so, North Atlantic asserts, Apex began to target North Atlantic's customer base. Apex contends that it had developed the technology earlier and hired Haber only when it had reached the stage when it could begin marketing the product. In either case, as soon as Haber left North Atlantic and began work for Apex, he began calling the client contacts he had used and developed while at North Atlantic and TMI, and asking that they leave North Atlantic to do business with Apex. In so doing, he offered them replacement products for products he had sold them while at North Atlantic or TMI. Indeed, Apex hired Haber specifically because his years in the business and the contacts that he had developed over those years would assist Apex in marketing its product.

In addition, at the hearing before the Magistrate Judge, North Atlantic produced a printout of confidential client information from North Atlantic's customer database, printed by Haber on September 5, 1997-over one month after he had left North Atlantic-and found in Apex's files.³ Haber had no explanation for how or why he would have had access to or would have been able to print that information at that time, because he had purported to delete or return to North Atlantic all of his confidential client information upon changing jobs.⁴ Testimony at the hearing suggested that it would have been impossible for Haber to have generated this information unless he had taken files with him when he left North Atlantic. Finally, evidence at the hearing indicated that Haber had in other instances used his contacts and...