CDI Energy Services v. West River Pumps ( 2009 )

United States Court of Appeals
FOR THE EIGHTH CIRCUIT
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No. 08-1031
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CDI Energy Services, Inc., *
*
Plaintiff - Appellant, *
* Appeal from the United States
v. * District Court for the District
* of North Dakota.
West River Pumps, Inc.; *
John Martinson; Dale Roller; *
Kent Heinle, *
*
Defendants - Appellees. *
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Submitted: November 13, 2008
Filed: May 29, 2009
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Before MELLOY, BOWMAN, and SMITH, Circuit Judges.
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MELLOY, Circuit Judge.
CDI Energy Services, Inc. (“CDI”), sells and services equipment for use in the
oilfield industry. CDI maintained a field office in Dickinson, North Dakota, with
three employees, John Martinson, Dale Roller, and Kent Heinle. CDI alleges that
these men started a competing company, West River Pumps, Inc. (“West River”), stole
proprietary information, and solicited business from CDI’s clients while still
employed by CDI. Upon discovering its employees’ actions, CDI filed the present
diversity action asserting, among other claims, state-law claims of breach of loyalty,
trade-secret misappropriation, and business interference. CDI obtained an initial, ex
parte temporary restraining order and moved for preliminary injunctive relief. After
the parties briefed the matter and submitted affidavits, the district court1 denied the
motion for a preliminary injunction and dissolved the temporary restraining order.
CDI appeals, and we affirm.
I. Background
In February 2000, CDI entered the market for selling and servicing oilfield
equipment in Dickinson, North Dakota, by hiring Martinson and Roller to open a CDI
field office. At that time, Martinson and Roller were experienced in the industry, had
client contacts in the area, and were working for one of CDI’s competitors. While the
men still were working for their previous employer, CDI encouraged them to solicit
business from the competitor’s clients and bring those clients with them to CDI.
Roller and Martinson did so. One of the clients Roller brought with him to CDI
subsequently accounted for approximately half of CDI’s business.
At CDI, Martinson served as the district manager in North Dakota, and Roller
served as the sales and service representative. Martinson hired defendant Kent Heinle
in 2007 to work for CDI as a service technician.
In 2007, while employed by CDI, the three men formed West River and
contacted CDI’s clients. They informed CDI’s clients of their plan to commence
operations as a separate business and asked those clients to do business with West
River. They also secured permission from several clients to move the clients’
equipment from CDI’s shop to West River’s new location. On October 16, 2007, the
three men resigned from CDI.
1
The Honorable Daniel L. Hovland, Chief Judge, United States District Court
for the District of North Dakota.
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Martinson, Roller and Heinle were CDI’s only employees in the area, and when
they left CDI, CDI no longer had a presence in the local market. CDI’s nearest field
office was over 140 miles away in eastern Montana.
CDI argues that it made substantial investments to train Martinson, Roller, and
Heinle, develop business in the Dickinson area, and develop trade-secret information.
CDI argues that these investments and efforts support its breach of loyalty and trade-
secret claims because the investments demonstrate the value that the defendants took
from CDI. For example, CDI asserts that it provided extensive training to the men
regarding marketing strategies and several aspects of CDI’s business operations. The
defendants argue that CDI provided no education or formal training but that CDI hired
them specifically because they already had experience in the industry and, in fact, had
customers they could bring to CDI.
CDI argues that it took efforts reasonable under the circumstances to protect
certain information as trade secrets. CDI identifies customer lists, customer contact
information, business strategies, customer repair and purchase histories, and CDI
pricing information as trade secrets. CDI argues that it had policies in place informing
employees that information was confidential and that employees were to maintain the
information as confidential. The defendants assert that CDI’s Dickinson office was
open, the purportedly trade-secret materials were unguarded and unmarked, and CDI
made no substantial efforts to ensure that the materials were kept confidential.
The defendants admit that Martinson, Roller, and Heinle took limited records
with them when they left CDI. They provided the district court with a description of
all the documents that they took, however, and claim that they returned those
documents to CDI. They assert none of the materials are trade secrets.
In assessing the propriety of preliminary injunctive relief, the district court
applied the factors from Dataphase Systems, Inc. v. C.L. Systems, Inc., 640 F.2d 109,
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114 (8th Cir. 1981) (en banc). The court found CDI had not made a showing
sufficient to demonstrate that any of the materials the defendants took constituted
trade secrets under North Dakota law. Accordingly, the court found CDI had not
established a likelihood of success on the merits of the trade-secret claim. Regarding
the men’s solicitation of CDI’s customers while still employed by CDI, the court
found CDI was likely to succeed on the merits of a statutory claim for breach of
loyalty.2 See N.D. Cent. Code. § 34-02-14. Proceeding with the Dataphase analysis,
the court examined the threat of irreparable harm and the balance of the harms of
granting or not granting injunctive relief. Finally, the court examined the public’s
interest and held that injunctive relief was not warranted.
II. Discussion
“A district court has broad discretion when ruling on preliminary injunction
requests, and we will reverse only for clearly erroneous factual determinations, an
error of law, or an abuse of discretion.” Coca-Cola Co. v. Purdy, 382 F.3d 774, 782
(8th Cir. 2004). In Dataphase, we held that the relevant factors to consider when
assessing the propriety of preliminary injunctive relief include: (1) the likelihood of
success on the merits; (2) the presence or risk of irreparable harm; (3) the balancing
of the harms of granting or denying an injunction; and (4) the public’s interest.
Dataphase, 640 F.2d at 114. “The party seeking injunctive relief bears the burden of
proving these factors.” Lankford v. Sherman, 451 F.3d 496, 503 (8th Cir. 2006). We
review the district court’s application of these factors in turn.
a. Likelihood of Success on the Merits
We find no error in the district court’s conclusion that CDI failed to meet its
burden to prove that the defendants had taken trade-secret information or that CDI
2
The court did not expressly address the likelihood of success on the merits as
to several other business-tort claims, and we interpret the district court’s treatment of
those claims as similar to the breach-of-loyalty claim.
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itself had taken reasonable steps to protect any purported trade secrets. The
information at issue was of the type that may, in some industries, be treated as trade-
secret information (customer names, contact information, pricing information, etc.).
CDI, however, failed to show that any of the information in this case actually was a
trade secret, i.e., information that has economic value by virtue of having been kept
secret and that cannot be “ascertain[ed] by proper means.” See N.D. Cent. Code § 47-
25.1-01(4) (“‘Trade secret’ means information . . . that: a. 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; and b. Is the subject of efforts that are reasonable
under the circumstances to maintain its secrecy.”).
It appears undisputed that the potential customers for CDI and West River in
the area surrounding Dickinson are a small collection of easily identifiable, locally
operating oilfield companies. Information about these companies would be easily
obtainable, if not already known, by relevant actors in the local oilfield service and
equipment industry. Also, the record shows little effort by CDI to conceal data as
trade secrets, and the defendants’ affidavits contest CDI’s assertions regarding those
efforts. Because we review the district court’s assessment of the factual record only
for clear error, Coca-Cola, 382 F.3d at 782, we find no basis to disturb the district
court’s conclusion regarding the trade-secret claim.
With no likelihood of success on the merits, there is little justification for
granting a preliminary injunction regarding the trade-secret claim. See Oglala Sioux
Tribe v. C & W Enters., Inc., 542 F.3d 224, 233 (8th Cir. 2008) (ceasing a Dataphase
analysis after finding no likelihood of success on the merits). Regardless, because the
district court determined CDI was likely to succeed on the merits of its other claims,
we address the remaining factors below.
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Regarding a likelihood of success on the statutory breach-of-loyalty claim under
North Dakota Century Code § 34-02-14, the defendants do not seriously contest the
district court’s finding that CDI is likely to prevail. North Dakota law is clear in
setting forth a duty of loyalty that precludes employees from soliciting their
employer’s customers while still working for the employer. Id. CDI argues that this
finding alone mandates a grant of equitable relief in the form of a preliminary
injunction. In so arguing, CDI misconstrues Eighth Circuit law. While the absence
of a likelihood of success on the merits strongly suggests that preliminary injunctive
relief should be denied, a finding of a likelihood of success on the merits only justifies
preliminary relief if there is a risk of irreparable harm and the balance of the factors
support an injunction. See, e.g., Gelco Corp. v. Coniston Partners, 811 F.2d 414, 420
(8th Cir. 1987) (“The failure to show irreparable harm is, by itself, a sufficient ground
upon which to deny a preliminary injunction, for the basis of injunctive relief in the
federal courts has always been irreparable harm and inadequacy of legal remedies.”)
(internal quotation and alteration omitted). Accordingly, it is necessary to balance the
likelihood of success on the non-trade-secret claims against the remaining factors.
b. Irreparable Harm
The district court determined that any harm in the present case can be addressed
through an award of damages because the harm to CDI, to a large extent, has already
occurred. The non-trade-secret claims rest on the possibly wrongful appropriation of
CDI’s clients, an act the defendants have already carried out. As such, it is not
entirely clear how injunctive relief would actually assist CDI in any manner. This
clearly was the district court’s view of the case, and the court noted further that it did
not want to order (and lacked the authority to order) the customers to cease doing
business with defendants and return to CDI.
Also, the record strongly suggests that, without the individual defendants as
employees, CDI had no local personnel in place to service the customers. CDI
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repeatedly stressed in its brief to our court that Martinson, Roller, and Heinle were
CDI’s only employees in North Dakota. CDI stated, “West River has taken virtually
all of CDI sales and service business in Dickinson and the surrounding North Dakota
area.” The defendants assert that CDI is simply forwarding its calls to a service office
in Sidney, Montana, 150 miles away, and CDI does not contest this assertion.
Given this state of affairs, it was appropriate for the district court to view the
irreparable-harm factor as weighing against the issuance of a preliminary injunction.
The harm that had already occurred could be remedied through damages. Adam-
Mellang v. Apartment Search, Inc., 96 F.3d 297, 300 (8th Cir. 1996) (finding
preliminary injunctive relief unavailable where a plaintiff had “an adequate remedy
at law, namely, the damages and other relief to which she will be entitled if she
prevails”). Also, CDI failed to show that an injunction would actually serve to lessen
any possible ongoing damages by causing customers to return to CDI.
c. Balance of Harms
The district court viewed any potential harm to the defendants in granting
preliminary relief as substantial and any additional harm to CDI in denying the order
as minor. The defendants are a small local business and its three owners. The record
shows the individual defendants are substantially invested in West River. The
customers that West River took from CDI comprise the majority of the defendants’
business, and it appears undisputed that an injunction would put the defendants out
of business. Because CDI asserts that it has already lost almost its entire business in
North Dakota, it is difficult to appreciate what additional harm to CDI an injunction
might prevent. Moreover, because former CDI customers might turn to a third party
for service, the issuance of an injunction, if anything, would seem likely to harm both
parties. As the district court stated, “It would be detrimental to the customers/clients,
and not particularly helpful to CDI, if the Court were to enjoin West River . . . from
servicing those customers without forcing them to return to CDI.”
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d. Public Interest
Finally, public interest does not factor strongly into the final balance in this case
because North Dakota has enacted legislation that favors both parties. The need to
preserve the public’s access to services, however, pushes this factor slightly in favor
of denying a preliminary injunction. This was the view of the district court, and we
agree.
North Dakota generally prohibits contractual restrictions on an employee’s
ability to practice his “profession, trade, or business.” N.D. Cent. Code § 9-08-06; see
also Warner and Co. v. Solberg, 634 N.W.2d 65, 70 (N.D. 2001). Describing this
prohibition, the North Dakota Supreme Court has stated, “It is the right of the public’s
access to the services offered by the employee that is more significant than the
employee’s interests.” Warner, 634 N.W.2d at 70. As relevant to this Dataphase
factor, then, North Dakota deems the public’s access to services to be a more pressing
policy concern than the details of the relationship between a particular employee and
employer.
North Dakota also considers employee loyalty to be in the public interest and
prohibits employees from soliciting their employers’ customers while still working
for the employer. See N.D. Cent. Code § 34-02-14. This second public policy,
however, is rather limited in that North Dakota cabins the restriction on solicitation
to the duration of the employment relationship. Warner, 634 N.W.2d at 73 (“Our
decisions . . . prohibit restraints on solicitation after the employment ceases.”). Given
the limited nature of the restriction on solicitation, the policy precluding contractual
restrictions on practicing a trade, and the clear public interest in preserving access to
services, the district court acted well within its discretion when it held the public
policy factor was a “close call” that weighed “more against the issuance of a
preliminary injunction.”
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Finding no error in the district court’s assessment of the record or abuse of its
considerable discretion in the application of the Dataphase factors, we affirm the
judgment of the district court.
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