In September 2022, in Dearborn Mid-West Company, LLC v. F M Sylvan, Inc., the United States District Court for the Eastern District of Michigan granted Plaintiff Dearborn Mid-West Company, LLC’s (DMW) request for a preliminary injunction against Defendants Pandolfi, Dorchak, and Eid (Defendants) for alleged misappropriation of DMW’s confidential and trade secret information for the benefit of Defendants’ new employer and DMW’s direct competitor, Defendant F M Sylvan, Inc. (Sylvan).
As explained more below, key to the Court’s decision was strong evidence that: (i) the former employees downloaded company information immediately prior to their resignations; and (ii) then after a lawsuit was threatened, they destroyed the devices on to which the information was downloaded, preventing DMW and the Court from learning what precisely was taken.
DMW and Sylvan both specialize in the production, installation, and maintenance of conveyor systems used by major automakers to assemble vehicles on factory floors. DMW is based on Taylor, Michigan. Sylvan is in multiple states, with its headquarters in Pontiac , Michigan and another office in Dearborn , Michigan.
DMW alleges that following their employment with the company, Defendants Pandolfi, Dorchak, and Eid violated various provisions of their employment contracts and committed trade secrets misappropriations under both federal law and state law. DMW specifically alleged the theft and dissemination of 1) engineering standards for DMW’s material handling systems and products; 2) quality assurance processes and procedures; and 3) financial, pricing, and costing information. The court stated that based on reports of Sylvan employees installing products nearly identical to those of DMW and the forensic audit report submitted by DMW, it is very likely Defendants downloaded, copied, or transferred files pertaining to DMW’s confidential financial information onto their personal removable devices.
Standards and Relevant Law
DMW requested a preliminary injunction against Defendants for violations of the federal Defend Trade Secrets Act (DTSA) and the Michigan Uniform Trade Secrets Act (MUTSA) , among others. Both statutes provide causes of action and remedies for the misappropriation of trade secrets and establish the elements for such a claim as 1) the existence of a trade secret; 2) its acquisition in confidence; and 3) the defendant’s unauthorized use of it.
A preliminary injunction is an order by the court, prohibiting a party from performing a particular act in order to preserve the status quo before final judgment. Here, DMS originally sought an ex parte preliminary injunction, which means an injunction without even providing the defendants notice of the lawsuit. While the Court denied that request, it did subsequently hold an evidentiary hearing on the injunction request.
A preliminary injunction is an extraordinary remedy and can be quite difficult to obtain. A plaintiff seeking a preliminary injunction under Federal Rule of Civil Procedure 65 must establish (1) it has a strong likelihood to succeed on the merits; (2) it is likely to suffer irreparable harm without the injunction; (3) the injunction would not cause substantial harm to others; and (4) an injunction is in the public interest.
Likelihood of Success on the Merits
To establish likely success of a case on the merits, a litigant is not required to prove the case in full but must also show more than a mere possibility of success. Based on evidence from forensic audits of the Defendants’ devices and testimony from various DMW employees, the court stated it was likely the Defendants had committed the alleged violations and that DMW is likely to succeed on the merits.
Likelihood of Suffering Irreparable Harm
The court also stated that denial of a preliminary injunction creates irreparable harm if it is not fully compensable by monetary damages. DMW asserted that because of the Defendants’ violations, the value of DMW’s confidential and trade secret information, goodwill, and reputation was harmed. Based on significant testimony from DMW employees, the court believed there was a strong likelihood that the Defendants used Plaintiff’s confidential trade secret information to create identical products and used them to fulfill client expectations. While a profit margin may be monetarily calculable, the loss of DMW’s competitive advantage due to the likely misappropriation by Sylvan is not. Loss of customer goodwill cannot be repaired monetarily, demonstrating favor to a preliminary injunction.
DMW contended that Defendants will suffer no harm from being restrained from the continued use of confidential and trade secret information and will be able to compete in the industry freely and fairly. The court agreed, stating that “Defendants cannot be truly harmed by being enjoined from using information that they are not legally entitled to possess.”
The court additionally agreed with DMW’s argument that an injunction is in the public interest as the public has an interest in favor of protecting trade secrets, promoting fair competition in the marketplace, and enforcing contractual obligations.
As the Court reiterated, a preliminary injunction – which is an order that requires a party to cease taking a certain action or else be in contempt of court – is a serious and drastic remedy. It appears the primary reason the Court granted a preliminary injunction against the former employees and their new employer was due to the strong evidence that they had, in fact, stolen confidential information from their prior employer and used that same information on behalf of their new employer.
The case is also far from over. Unless the case settles, the plaintiff, DMW, will likely now proceed with the rest of discovery and eventually go to trial for a jury to determine its damages – which in this case could be in the millions.
Perhaps stating the obvious, it is critical that, when hiring new employees, a business first:
- Confirm the candidates did not take any of their prior employer’s confidential information and/or will not use such information.
- Determine whether the candidates have any prior employment related agreements that include restrictive covenants, such as non-competes or non-solicits.
If the candidates have confidential information and/or have restrictive covenants, a business should speak with an attorney about what should be done to minimize legal exposure.