Whyte v. Schlage Lock Co.

• Decision Date: 12 September 2002
• Docket Number: No. G028382.,G028382.
• Citation: 101 Cal.App.4th 1443,125 Cal.Rptr.2d 277
• Court: California Court of Appeals Court of Appeals
• Parties: J. Douglas WHYTE et al., Plaintiffs, Cross-defendants and Respondents, v. SCHLAGE LOCK COMPANY, Defendant, Cross-complainant and Appellant; Ingersoll-Rand Company, Defendant and Appellant.

125 Cal.Rptr.2d 277

101 Cal.App.4th 1443

J. Douglas WHYTE et al., Plaintiffs, Cross-defendants and Respondents, v. SCHLAGE LOCK COMPANY, Defendant, Cross-complainant and Appellant Ingersoll-Rand Company, Defendant and Appellant.

No. G028382.

Court of Appeal, Fourth District. Division 3.

September 12, 2002.

Fisher & Phillips, John M. Poison, Robert Yonowitz and John E. Lattin IV, Irvine, for Defendant, Cross-complainant

and Appellant and Defendant and Appellant.

Sonnenschein Nath & Rosenthal, Martin J. Foley, Michael E. Pappas and Azniv Ksachikyan, Los Angeles, for Plaintiffs, Cross-defendants and Respondents.

OPINION

FYBEL, J.

The doctrine of inevitable disclosure permits a trade secret owner to prevent a former employee from working for a competitor despite the owner's failure to prove the employee has taken or threatens to use trade secrets. Under that doctrine, the employee may be enjoined by demonstrating the employee's new job duties will inevitably cause the employee to rely upon knowledge of the former employer's trade secrets. No published California decision has accepted or rejected the inevitable disclosure doctrine.

In this opinion, we reject the inevitable disclosure doctrine. We hold this doctrine is contrary to California law and policy because it creates an after-the-fact covenant not to compete restricting employee mobility.

This holding leads us to affirm the trial court's order denying the application of Schlage Lock Company (Schlage) for a preliminary injunction and granting the motion of J. Douglas Whyte (Whyte) and Kwikset Corporation (Kwikset) to dissolve a temporary restraining order. We reach the issue of inevitable disclosure because we conclude certain information Schlage seeks to protect does constitute trade secret, but the evidence presented below, viewed (as it must be) through the lens of the applicable standard of review, fails to establish actual or threatened misappropriation.

FACTS

Schlage is a subsidiary of defendant Ingersoll Rand Company (Ingersoll Rand). Kwikset and Schlage manufacture and sell locks and related products. They are fierce competitors and vie intensely for shelf space at The Home Depot, which is the major seller of locks and alone accounts for 38 percent of Schlage's sales.

Whyte worked as Schlage's vice-president of sales and was responsible for sales to The Home Depot and other "big box" retailers such as HomeBase, Lowe's, Menard's, and Sears. Whyte signed a confidentiality agreement to protect Schlage's proprietary information and agreed to abide by Schlage's code of ethics, which forbids disclosure of confidential information for personal or noncompany uses. Whyte did not sign a covenant not to compete.

The Home Depot periodically conducts a review of its suppliers' product lines, prices, pricing and marketing concessions, and ability to deliver product. The Home Depot uses this "line review" to determine which products it will sell and which products to remove from its shelves. As part of the line review, The Home Depot usually asks vendors, such as Kwikset and Schlage, to submit proposals for pricing and marketing concessions and for the amount of promotional discounts and advertising funds, and to present information about product changes and new products.

The Home Depot conducted a line review with Schlage in February 2000. The Home Depot followed Schlage's recommendation to remove Kwikset's Titan brand of locks and to expand Schlage's presence on its shelves. Whyte participated in the line review and in drafting the line review agreement confirming the business relationship between Schlage and The Home Depot.

Whyte's sales abilities impressed Kwikset's president, Christopher Metz. Metz realized Whyte "was killing my team," and asked him "what it would take to get him to leave Ingersoll Rand...." Whyte apparently got what it took, for he accepted a position with Kwikset on June 3, 2000. He did not resign from Schlage, however, until June 14—after participating on behalf of Schlage in confidential meetings with The Home Depot on June 5.

Whyte departed Schlage on June 16, 2000. Schlage was not pleased with Whyte, and the parting was not amicable. Schlage contends Whyte left to revenge belittling comments made by Schlage's president, Robert Steinman, and contends Whyte disavowed a confidentiality agreement, stole trade secret information (including a copy on computer disk of the line review agreement with The Home Depot), and lied about returning company information. Whyte denies taking any trade secrets, claims he reaffirmed the confidentiality agreement, and contends that in the exit interview on June 16 Steinman vowed to destroy his career.

On June 25, 2000, Whyte became Kwikset's vice-president of sales for national accounts. His job duties at Kwikset are substantially similar to those at Schlage: handling the lock products account for The Home Depot and other "big box retailers."

PROCEEDINGS BELOW

Whyte's defection to Kwikset ignited a firestorm of litigation. Ingersoll Rand sued Whyte in Colorado state court, seeking an injunction against him. Ingersoll Rand urged the Colorado state court to issue an injunction based upon the doctrine of inevitable disclosure. The Colorado court denied the request for an injunction on June 27, 2000.

Whyte then filed this suit against Ingersoll Rand and Schlage on June 30, 2000. Whyte sought, among other things, damages for interference with contract and a declaration of his freedom to work for Kwikset.

On July 11, 2000, Schlage filed a cross-complaint for unfair competition, misappropriation of trade secrets, breach of contract, breach of fiduciary duty, intentional and negligent interference with economic relations, and conversion. The next day, Schlage brought an ex parte application to restrain Whyte temporarily from using or disclosing trade secrets, pending a hearing on an application for a preliminary injunction. The court granted the ex parte application on July 25 and issued a temporary restraining order enjoining Whyte from using or disclosing 20 categories of trade secret information and ordering Whyte to return any such information in his possession. In response, Whyte turned over a kitchen-sized garbage bag of shredded documents and a Ziploc bag containing seven destroyed "floppy" disks and nine destroyed "zip" disks.

The court permitted expedited discovery, and rapid-fire discovery ensued. The results of this discovery, as well as declarations, exhibits, and briefs were submitted in support of and in opposition to the application for preliminary injunction. At the first hearing on the application, the court rejected the inevitable disclosure doctrine, but took the matter under submission to consider issuing an injunction based upon actual or threatened misappropriation.

The parties submitted additional declarations, exhibits, requests for judicial notice, and briefs before the next hearing. Whyte filed a motion to dissolve the temporary restraining order, which Schlage opposed.

At a second hearing on October 24, 2000, the court stated it would deny the application for an injunction. In announcing the ruling, the court stated the information Schlage sought to protect was not trade secret: "I don't think these things rise I don't think these are trade secrets." The court reflected, "I think Mr. Whyte should be able to go about his business," but added, "[c]ertainly if it is proven somehow that he used specific information, well, there is money damages."

Later on October 24 the court entered a minute order denying the preliminary injunction and granting Whyte's motion to dissolve the temporary restraining order without stating its reasons. Schlage then filed (and withdrew) a lengthy motion for reconsideration.

Schlage and Ingersoll Rand appealed from the October 24 order. Although-Ingersoll Rand did not cross-complain for injunctive relief and did not bring or join in the application for a preliminary injunction, it is a party to the complaint and is sufficiently aggrieved by the order to have standing to appeal. (Code Civ. Proc., § 902; County of Alameda v. Carleson (1971) 5 Cal.3d 730, 736, 97 Cal.Rptr. 385, 488 P.2d 953.) The trial court denied Schlage's application for a stay pending appeal, and we denied Schlage's petition for writ of supersedeas.

STANDARD OF REVIEW

Injunctions in the area of trade secrets are governed by the principles applicable to injunctions in general. (Hilb, Rogal & Hamilton Ins. Services v. Robb (1995) 33 Cal.App.4th 1812, 1820, fn. 4, 39 Cal.Rptr.2d 887.) "In deciding whether to issue a preliminary injunction, a trial court weighs two interrelated factors: the likelihood the moving party ultimately will prevail on the merits, and the relative interim harm to the parties from the issuance or nonissuance of the injunction." (Hunt v. Superior Court (1999) 21 Cal.4th 984, 999, 90 Cal.Rptr.2d 236, 987 P.2d 705.) "`Generally, the ruling on an application for preliminary injunction rests in the sound discretion of the trial court. The exercise of that discretion will not be disturbed on appeal absent a showing that it has been abused. [Citations.]'" (Ibid.) Denial of a preliminary injunction will be upheld on appeal if the trial court did not abuse its discretion with respect to either the question of success on the merits or the question of irreparable harm. (Cohen v. Board of Supervisors (1985) 40 Cal.3d 277, 286-287, 219 Cal.Rptr. 467, 707 P.2d 840; Hart v. Cult Awareness Network (1993) 13 Cal.App.4th 777, 785, 16 Cal. Rptr.2d 705.)

Whether the trial court granted or denied a preliminary injunction, the appellate court does not resolve conflicts in the evidence, reweigh the evidence, or assess the credibility of witnesses. (Hilb, Rogal & Hamilton Ins. Services v. Robb, supra, 33 Cal.App.4th at p. 1820, 39 Cal. Rptr.2d 887.) "`[T]he trial court is the judge of the credibility of the affidavits filed in support of the application for preliminary...