William J. Martinez, United States District Judge.
Plaintiffs DigitalGlobe, Inc. ("DigitalGlobe") and DigitalGlobe Intelligence Solutions, Inc. ("DGIS") (together, "Plaintiffs") sue a former employee, Defendant Louis Paladino ("Paladino"), for breach of contractual covenants of noncompetition, nonsolicitation of Plaintiffs' employees, and nondisclosure of Plaintiffs' trade secrets. Currently before the court is Plaintiffs' Renewed Motion for Preliminary Injunction. (ECF No. 25.) The Court has received and reviewed Paladino's response (ECF No. 26) and Plaintiffs' reply (ECF No. 29). The Court held an evidentiary hearing ("Preliminary Injunction Hearing") on August 30, 2017. (ECF No. 39.) The Court then called for simultaneous further briefing on certain lingering questions. (ECF No. 41.) The Court has received and reviewed the parties' supplemental briefs. (ECF Nos. 45, 46.) Having considered the record as a whole as it currently stands, the Court denies Plaintiffs' motion for a preliminary injunction for the reasons explained below.
The preliminary injunction record supports the following findings of fact.
Plaintiffs are in the business of satellite mapping and a host of related services. DGIS in particular focuses heavily on providing services to the Department of Defense. DGIS's main business emphasis is geospatial predictive analysis, which involves gathering various data sets (mostly, satellite imagery and photos in social media posts) to more-or-less surveil the world, "extract[ing] information of military interest, to inform predictions of where and when events will occur." (ECF No. 46 at 3.)
Paladino began working in this field in 2006, when he joined a company that later merged with another company named GeoEye Analytics, Inc. ("GeoEye Inc."). In 2013, GeoEye Inc. went through a complicated series of transactions and emerged as a subsidiary of Plaintiff DigitalGlobe named GeoEye Analytics, LLC ("GeoEye LLC"). GeoEye LLC eventually changed its name to DigitalGlobe Intelligence Solutions — Plaintiff DGIS in this lawsuit. Despite the acquisitions, name changes, and so forth, Paladino's employers have always been based in Washington, D.C., or its suburbs, and that is where Paladino has lived and worked. The current parent entity, DigitalGlobe, is headquartered in Westminster, Colorado.
In 2009 (before GeoEye Inc. became a DigitalGlobe subsidiary), Paladino began leading a GeoEye Inc. team of 4-5 employees on a classified geospatial predictive analysis project for the Defense Intelligence Agency ("DIA") that went by the designation "DRI-7." Paladino's title at the time was "Senior Manager — Geospatial."
A number of subcontractor employees from other companies also worked on DRI-7, including competitor firms named MDA, BigBear, and STR. All three of these firms will play a role in the events that led to Paladino's falling-out with DGIS, described below. But, at the time Paladino began work on DRI-7 in 2009, DGIS had yet to come into existence.
In December 2010, GeoEye Inc. required Paladino to sign an Employee Non-Disclosure Agreement ("GeoEye NDA"). (Plaintiff's Preliminary Injunction Hearing Exhibit ("PX") 3.)
DRI-7 and Paladino's role in it continued after GeoEye Inc.'s 2013 acquisition and eventual name change to DGIS. Also in 2013, GeoEye LLC (soon to be DGIS) required Paladino to assent to the "Employee Invention, Confidential Information, Noncompetition and Non-Solicitation Agreement" ("2013 Agreement"). (PX 1.)
Sometime between 2014 and 2016 (the evidence points in various directions), DGIS promoted Paladino to "Director of Geospatial," making him the "site lead [for DGIS] at DIA" (Preliminary Injunction Hearing Transcript ("Tr.") at 239) and responsible for about thirty DGIS employees. In this position, there was only one layer of management between him and DGIS's CEO.
In 2015, DGIS filed a patent application for certain technology that arose from the DRI-7 work. This upset Terry Busch, the DIA employee in charge of DRI-7. Busch believed that the technology in question had been developed with government dollars and therefore should not be proprietary to DGIS.
Apparently in 2016, DigitalGlobe required Paladino to sign an Employee Stock Option Plan ("Stock Option Plan"). (PX
(id. § 24(b)).
Also in 2016, DIA awarded DGIS a "sole-source" (i.e., no-bid) contract to continue developing a geospatial predictive analysis tool known as "Signature Analyst." This contract could last up to five years. Year one was guaranteed and years two through five are known as "option years." Whether to exercise those options is within DIA's discretion. Paladino was in charge of DGIS's performance under this contract.
At DIA's urging, part of what DGIS explored in the first year of this contract was "I & W," short for "indicators and warnings." I & W is a particular approach to geospatial predictive analysis. The parties have not explained how I & W differs from other approaches, because those details are classified. In any event, Paladino's team at DGIS diligently developed I & W.
There is some dispute — not relevant to the present proceedings — whether I & W was properly within the scope of DGIS's sole-source contract. Regardless, all parties agree that DIA frequently uses existing "contract vehicles" to explore potentially out-of-scope ideas, with an eye toward proving their feasibility and then establishing a new "contract vehicle" specifically focused on a proven-feasible idea. Whether or not I & W was out of the scope of DGIS's sole-source contract, the parties expected that DIA would eventually place I & W work under its own contract.
In January 2017, DIA exercised the first option year under DGIS's contract, but chose to fund only about $5.6 million of the $9.6 million available for that year. In February 2017, news leaked that MDA was planning to acquire DigitalGlobe. This further upset the DIA's Busch, due to an incident a few years previous in which a contract dispute allegedly prompted MDA to cut off a data stream that was highly important to an in-progress, boots-on-the-ground military operation. DIA had since excluded MDA from DRI-7.
The MDA merger announcement caused concern for many DGIS employees, who feared that DIA would terminate DGIS's participation in DRI-7. Paladino was all the more worried given his knowledge of Busch's lingering resentment over DGIS's patent application. Paladino's specific worries deepened in March 2017 when DGIS's patent application was granted, and then, later in the month, DGIS began touting another allegedly proprietary technology as if it had been developed in-house, although Busch believed that it too had been developed with government dollars.
Around this time, Paladino began to consider leaving DGIS. At first he explored starting his own company. He specifically discussed this idea with Frank Porcelli, CEO of BigBear, who had co-founded BigBear and therefore had advice to offer on that process. He also organized meetings with certain DGIS employees to discuss forming a new business. Nonetheless, Paladino continued his attempts to solidify DGIS as DIA's first choice for I & W work.
In May 2017, a DIA employee named Joe Hartenstine began assuming Busch's role as DIA supervisor of DRI-7. Paladino learned that Hartenstine planned to shift the I & W exploratory work to a different "contract vehicle," namely, a sole-source
(Tr. at 263.) Paladino gave notice to his DGIS superiors on June 1, 2017, and his last day at DGIS was June 16, 2017. In between those dates, he applied for a posted position at BigBear. The record does not reveal precisely when BigBear extended an offer or when Paladino accepted it, but he started with BigBear in "late June" of 2017. (Tr. at 193.)
On June 29, 2017, Hartenstine (or someone of similar authority at DIA) directed DGIS to stop work on I & W, because that work was going to BigBear. Paladino thus continues to work for BigBear on the I & W development he had been doing for DGIS. Five other DGIS employees have since joined Paladino at BigBear to work on I & W. Three of those employees were persons whom he had met with a few months earlier to explore the idea of starting a new company.
Plaintiffs filed this lawsuit on July 5, 2017. (ECF No. 1.) Paladino learned of the lawsuit around that same time and reacted by sending an emotional group text message to a number of his colleagues back at DGIS:
(PX 15.)
Plaintiffs ask that Paladino be enjoined from
(ECF No. 46 at 11-12.)
A preliminary injunction is an extraordinary remedy; accordingly, the right to relief must be clear and unequivocal. See, e.g., Flood v. ClearOne Commc'ns, Inc., 618 F.3d 1110, 1117 (10th Cir. 2010). A movant must show: (1) a likelihood of success on the merits, (2) a threat of irreparable harm, which (3) outweighs any
Until recently, the Tenth Circuit endorsed an alternate standard that relaxed the likelihood of success requirement when the other three factors tipped strongly in the movant's favor. See, e.g., Oklahoma ex rel. Okla. Tax Comm'n v. Int'l Registration Plan, Inc., 455 F.3d 1107, 1113 (10th Cir. 2006). The Tenth Circuit abrogated this standard last year, announcing that "any modified test which relaxes one of the prongs for preliminary relief and thus deviates from the standard test is impermissible." Diné Citizens Against Ruining Our Environment v. Jewell, 839 F.3d 1276, 1282 (10th Cir. 2016).
"The Federal Rules of Evidence do not apply to preliminary injunction hearings." Heideman v. S. Salt Lake City, 348 F.3d 1182, 1188 (10th Cir. 2003). The fact that evidence might be excludable goes to the weight of that evidence, not necessarily its admissibility. See, e.g., Pharmanex, Inc. v. HPF, 221 F.3d 1352 (table), 2000 WL 703164, at *3 (10th Cir. 2000).
Plaintiffs sue Paladino for breach of contractual covenants of noncompetition, nonsolicitation of Plaintiffs' employees, and nondisclosure of Plaintiffs' trade secrets. Plaintiffs also sue for breach of the duty of loyalty, but that claim is not at issue in these preliminary injunction proceedings.
Before the Court can evaluate Plaintiffs' likelihood of success on any of their contract theories, the Court must first determine which contract applies. As noted above, Paladino has signed three similar agreements: the GeoEye NDA, the 2013 Agreement, and the Stock Option Plan.
The 2013 Agreement specifically states that it supersedes any prior agreement between the employee and what was then GeoEye LLC (which later changed its name to DGIS). (PX 1 § 9(b).) Thus, there appears to be no circumstance under which the GeoEye NDA is still enforceable.
As for the Stock Option Plan, its covenants of noncompetition, nonsolicitation, and nondisclosure are stated as conditions for obtaining and keeping stock option awards, and violation of any of them allows DigitalGlobe to rescind and/or recapture those awards. (PX 2 § 24(a).) It is not clear that these provisions are enforceable apart from that purpose. (Cf. Tr. at 18 (Plaintiffs' counsel's acknowledgment that "the relief on the stock option agreement is that DigitalGlobe gets back the stock if he breaches").) The Court therefore finds
This leaves only the 2013 Agreement, and that is the focus of the Court's analysis below.
The 2013 Agreement's noncompete covenant states:
(PX 1 § 6.)
In Colorado, "[a]ny covenant not to compete which restricts the right of any person to receive compensation for performance of skilled or unskilled labor for any employer shall be void," subject to enumerated exceptions. Colo. Rev. Stat. § 8-2-113(2). "[T]he employer has the burden to establish that the covenant not to compete falls within one of those narrow exceptions." Phoenix Capital, Inc. v. Dowell, 176 P.3d 835, 840 (Colo. App. 2007).
Plaintiffs assert two exceptions: "[a]ny contract for the protection of trade secrets," Colo. Rev. Stat. § 8-2-113(2)(b); and "[e]xecutive and management personnel and officers and employees who constitute professional staff to executive and management personnel," id. § 8-2-113(2)(d). The Court will analyze each exception in turn.
The 2013 Agreement requires the signatory to "acknowledge that the [non-compete] restrictions ... are reasonable and that the covenants are necessary to protect the Company's interest in Business Confidential Information, which would be inevitably disclosed if were to compete, directly or indirectly, with the Company in its direct product lines." (PX 1 § 7.) Again, "Business Confidential Information" means
Paladino responds by invoking the statutory definition of "trade secret" under the Colorado Uniform Trade Secrets Act ("CUTSA"), Colo. Rev. Stat. §§ 7-74-101 to -110. That definition is as follows:
Colo. Rev. Stat. § 7-74-102(4). Having set forth this definition, Paladino argues that "Plaintiffs have failed to identify (1) any specific trade secrets, (2) what measures Plaintiffs took to keep the alleged trade secrets confidential, (3) why the information has competitive value, and (4) how Paladino is allegedly misappropriating the information in his job at BigBear." (ECF No. 26 at 20.)
Plaintiffs counter that Paladino is confusing the elements of a trade secret misappropriation claim (the focus of CUTSA) with the question of whether a noncompete covenant is valid because it is intended to protect trade secrets. (ECF No. 29 at 8.) The Court agrees. The plain language of the Colorado noncompete statute says that a "covenant not to compete ... shall be void, but this [provision] shall not apply to * * * [a]ny contract for the protection of trade secrets." Colo. Rev. Stat. § 8-2-113(2)(b). Thus, the focus is not on whether any particular trade secret is at risk of disclosure, but whether the noncompete covenant is a "contract for the protection of trade secrets." The 2013 Agreement fits that description, and therefore falls within the statutory exception.
The second exception Plaintiffs invoke is for "[e]xecutive and management personnel and officers and employees who constitute professional staff to executive and management personnel." Colo. Rev. Stat. § 8-2-113(2)(d). Surprisingly, the Colorado Court of Appeals interprets this exception to apply only when an individual holds the relevant position at the time he or she signed the noncompete agreement. Phoenix Capital, 176 P.3d at 840-41. How the court reached this interpretation does little to mitigate the surprise.
The trial court whose judgment was under review in Phoenix Capital had apparently relied on three Court of Appeals decisions interpreting "void" in § 8-2-113(2) to mean "void ab initio." See id. (citing In re Marriage of Fischer, 834 P.2d 270, 272 (Colo. App.1992); Mgmt. Recruiters of Boulder, Inc. v. Miller, 762 P.2d 763, 765 (Colo. App. 1988) ("Miller"); and Colo. Accounting Machs., Inc. v. Mergenthaler, 44 Colo.App. 155, 609 P.2d 1125, 1127 (1980) ("Mergenthaler")). If "void" means "void ab initio," then logically a noncompete covenant is as if it never came into existence if no exception applies at the time of contracting. Id. at 840.
Interestingly, however, none of the three cases relied upon by the trial court self-consciously held that "void" means "void ab initio"; they instead summarized § 8-2-113(2) and (in case of Fischer and Miller) used the phrase "void ab initio" instead of the lone statutory word "void"; or (in the case of Mergenthaler) stated
Nonetheless, the Court of Appeals in Phoenix Capital reasoned that "the trial court was obliged to follow [these] decisions" and therefore "perceive[d] no abuse of the trial court's discretion in concluding, consistent with those decisions, that the validity of a noncompetition provision is determined as of the time the agreement is entered into, and not as of any time thereafter." 176 P.3d at 840. Thus, if the employee signs such an agreement "while not qualifying as personnel as described in § 8-2-113(2)(d)" but is "later promoted to [a] key position[] in the company," it is the employer's obligation to enter into a new noncompete agreement with that employee. Id. at 841.
As this summary makes clear, Phoenix Capital did not actually hold that the trial court's interpretation was the correct interpretation as a matter of law, but rather that the trial court committed no abuse of discretion in interpreting prior Court of Appeals cases as it did. Phoenix Capital further stated that it "perceive[d] no persuasive reason to abandon or decline to follow that line of authority," referring to the three cases on which the trial court had relied, id. — as if they had already considered and resolved the question at issue.
Federal courts sitting in diversity are not bound by the decisions of state intermediate appellate courts. See Clark v. State Farm Mut. Auto. Ins. Co., 319 F.3d 1234, 1240-41 (10th Cir. 2003). Out of comity and practical expediency, such decisions are normally followed without comment, as if binding, but they may be ignored when the federal court concludes that the intermediate appellate court decided the question contrary to the likely holding of the state's highest court.
The Court is confident that the Phoenix Capital interpretation of the executive/management exception — which, again, is stated in terms of an affirmance under the circumstances, and not a holding — is contrary to the Colorado Supreme Court's likely future construction of that phrase. This is so for two reasons.
First, the Court agrees with the Court of Appeals that "[t]he determination of whether an employee is executive or management personnel, or professional staff, is a question of fact for the trial court." Miller, 762 P.2d at 765. But, particularly with respect to alleged managers, this factual question is often settled under a multifactorial analysis that examines
See Doubleclick Inc. v. Paikin, 402 F.Supp.2d 1251, 1259 (D. Colo. 2005); DISH Network Corp. v. Altomari, 224 P.3d 362, 368 (Colo. App. 2009); Atmel Corp. v. Vitesse Semiconductor Corp., 30 P.3d 789,
In this light, any employer attempting to comply with the burden announced by Phoenix Capital — to "enter into new employment agreements as its employees take on additional responsibilities," 176 P.3d at 841 — has essentially no guidance on whether those new employment agreements will be effective, or will instead be further exercises in futility. The only safe course for an employer in these circumstances would be to require everyone in the company to repeatedly sign noncompete covenants at regular, frequent intervals, irrespective of promotions, raises, changes in team size, changes in supervisory reporting responsibilities, etc.
Second, and closely related to the foregoing, is the problem raised by the likelihood that the outcome under the various factors discussed above will fluctuate over the course of an employee's tenure, so an employee who might be a manager at the time of hiring might not meet that standard later. For example, some cases have found that supervising fifty employees, combined with other factors, confirms that an employee is a "manager" for purposes of § 8-2-113(2)(d). Doubleclick, 402 F.Supp.2d at 1259; Altomari, 224 P.3d at 368. If an alleged manager supervises fifty employees and then her team is broken into two teams of twenty-five and she remains the supervisor of only one of those teams, is she still a manager for purposes of the statute? If those two teams are later reconstituted as one and she is appointed the supervisor, is she a manager again? What if she remains a supervisor over fifty employees but an acquisition causes the company to restructure and she now has more layers of management over her than before? What if the manager supervises what began as a particularly significant part of the company's business, but over time it becomes less significant?
In all of these hypotheticals, there is a strong argument that an employee may begin as a manager for purposes of the statute, but then regress to some non-managerial role. Thus, the noncompete covenant could not be deemed void ab initio, but it might later be deemed void in some more-generic sense. Cf. Black's Law Dictionary, s.v. "void (adj.)" (10th ed. 2014) (definition 2: "Although [`of no effect whatsoever'] is the strict meaning of void, the word is often used and construed as bearing the more liberal meaning of `voidable.'"). And indeed, two Colorado Court of Appeals decisions evaluate an employee's responsibilities at the time of separation precisely because of this scenario — regression from a supervisory to a non-supervisory role during the course of employment. See Reed Mill & Lumber Co. v. Jensen, 165 P.3d 733, 738-39 (Colo. App. 2006); Atmel, 30 P.3d at 795.
Paladino claims this shows an "elegant harmony [of] Colorado law on this issue." (ECF No. 45 at 10.) "Reading all of these cases together," he says,
(Id. at 11 (emphasis in original).) Far from displaying an "elegant harmony," this explanation reveals the various problems created by the Colorado Court of Appeals's various applications of the executive/management exception.
The first problem is that Reed Mill and Atmel — the two cases from which Paladino derives the possibility that noncompete covenants can become voidable, if they were not void ab initio — never use the word "voidable."
The second problem is that Paladino's proposed synthesis can really be reduced to the following: when the Colorado Legislature used the undefined word "void" in § 8-2-113(2), it actually meant something like "`void ab initio' if the employee began as a non-manager but later became a manager, but `voidable' if the employee began as a manager and later became a non-manager." The Court will not impute to the Legislature such a complicated and non-obvious meaning, particularly when the word "void" comes in the general statement of the rule and not in the sub-part announcing the executive/management exception — thus weakening any inference that the Legislature was consciously considering how "void" might be interpreted in the specific context of that exception.
The third problem is that the supposed "Colorado public policy of putting the burden on employers to secure enforceable covenants in the first place, if possible, [and] to secure updated or new ones upon a bona fide promotion" (ECF No. 45 at 11) cannot fairly be considered Colorado public policy. It is, rather, Phoenix Capital's statement of an employer's burden in light of Phoenix Capital's choice to affirm the trial court. It is not at all a fair reading of what the Colorado Legislature actually intended on this issue.
The fourth problem has already been highlighted by the hypotheticals posed above. If Paladino's interpretation is correct, then some noncompete covenants are void ab initio, but others float in and out of enforceability depending on numerous factors. At any given moment, an employer has no way of knowing whether an employee in an arguable management position will actually be restrained from competing if that employee separates from the company.
Finally, Phoenix Capital and Paladino overlook the clearly obvious, namely, that a post-separation noncompete covenant is meant to apply when the employee separates. Thus, the Court can see no reason why the Colorado Legislature would not want a noncompete covenant's validity judged at the time of separation. Given this, it makes no sense to say that an employee who "started in the mailroom" and then rose to a senior position may nonetheless join a competing firm because the employer miscalculated precisely when the employee was required to sign a noncompete agreement.
Considering the foregoing, the Court predicts that if the question were squarely presented to the Colorado Supreme Court, it would hold that the Colorado Legislature never intended "void" in § 8-2-113(2) to have a strict technical meaning (either "void ab initio" or "voidable"), but rather as an emphatic synonym for "unenforceable"; and that a noncompete covenant's enforceability must be judged under the circumstances present at the employee's separation, regardless of whether the noncompete covenant would have been enforceable at some earlier time.
The Court has held that Plaintiffs are likely to succeed in proving that both the trade secrets exception and executive/management exception apply to the noncompete covenant in the 2013 Agreement. In briefing and at the Preliminary Injunction Hearing, Plaintiffs have argued as if that is all they need to prove — if an exception applies, the noncompete covenant is automatically enforceable through injunctive relief. Given the statutory scheme applicable here, this is manifestly incorrect. Proving that an exception applies only saves a noncompete covenant from unenforceability. Now that the Court has concluded that the covenant is enforceable, the Court must determine whether Plaintiffs are likely to succeed in proving a breach of the covenant.
The basic breach-of-contract elements in Colorado are: "(1) the existence of a contract; (2) performance by the plaintiff or some justification for nonperformance; (3) failure to perform the contract by the defendant; and (4) resulting damages to the plaintiff." W. Distrib. Co. v. Diodosio, 841 P.2d 1053, 1058 (Colo. 1992) (internal quotation marks and citations omitted). The Court has no doubt that Plaintiffs will prove the existence of a contract and their own performance. The Court also finds that Plaintiffs are likely to prove that Paladino failed to perform. Paladino led the "I & W team" (for lack of a better term) at DGIS, and then Paladino went to BigBear, a competitor, and continued working on I & W (and indeed, leading mostly the same team, once other DGIS employees joined him). Consequently, on the record as it now stands, there is no question that Paladino has "join[ed] ... an[] entity ... that engages in or is seeking to engage in the current or planned business activities of [DGIS]," in violation of the 2013 Agreement. (PX 1 § 6.) The Court finds, however, that Plaintiffs have not carried their burden to show a likelihood of proving damages resulting from Paladino's breach.
Plaintiffs believe that DIA would not have sent DGIS's I & W work to BigBear but for Paladino's choice to join BigBear, and all parties admit that Paladino's I & W work at BigBear is the same I & W work he had been doing at DGIS. This would appear to be a clear case of detrimental competition but for one unique wrinkle. DIA controlled the I & W work, and — according to Paladino — DIA had decided to move that work away from DGIS regardless of his own personal decision to leave. Indeed, Paladino's testimony is that he decided to leave DGIS because of DIA's intent to transfer I & W work from DGIS to STR (as prime contractor) and BigBear (as subcontractor), which intent he claims he learned about in late May 2017.
Plaintiffs point out, of course, that DIA did not revoke the I & W work until June 29, 2017, around the time Paladino joined BigBear. Thus, there is a fair inference that Paladino's move to BigBear influenced DIA's decision whether to act on the intent Paladino had supposedly learned about in late May. But, on the evidence
Plaintiffs also believe that DGIS's competitive position will be harmed in the future as new opportunities to serve the Defense Department arise. Presumably this harm would come because BigBear would have access, through Paladino, to DGIS's alleged trade secrets, thus depriving DGIS of its ability to promote its unique capabilities when competing for Defense Department contracts. To the extent this is Plaintiffs' theory, the Court once again finds that Plaintiffs have not demonstrated a likelihood of proving it, or more specifically, a likelihood of proving that Paladino possesses any trade secrets that he will use to BigBear's advantage. Cf. Miller, 762 P.2d at 766 (in the context of a noncompete covenant designed to protect trade secrets, stating that "[t]he trial court must first examine the factual situation to determine whether a restrictive covenant is justified at all").
Plaintiffs argue that Paladino possesses two categories of trade secrets:
technical secrets and "competitive assets." (ECF No. 46 at 2.) Concerning technical secrets, Plaintiffs describe them in briefing as follows:
(ECF No. 46 at 2.) The Court does not doubt that "algorithms and methods for applying machine learning to large volumes of geospatial data" could qualify as trade secrets. However, Plaintiffs do not assert (and certainly have not proven) that Paladino retained these algorithms and methods in his possession, or even in his head. Rather, Plaintiffs say that Paladino "retains all the key aspects of DGIS's technical information." This is far too generic for the Court to conclude that Paladino possesses some item of competitively advantageous knowledge. Indeed, this problem is emphasized by the testimony of Tony Frazier, DGIS's CEO, who was asked at the Preliminary Injunction Hearing about the technical trade secrets allegedly in Paladino's possession:
(Tr. at 36-38.) Frazier here describes technical capabilities that certainly look like they could be trade secrets. But as to the most important question for present purposes — what trade secrets does Paladino still possess? — Frazier's answer is that Paladino had "access" to something "resulting" from his team's efforts.
In the Court's experience, a plaintiff who believes its trade secrets are at risk can point to specific information or data sources that the defendant "carried out the door" (sometimes literally), or that the defendant may be able to recreate from memory. See, e.g., Engility Corp. v. Daniels, 2016 WL 7034976, at *3 (D. Colo. Dec. 2, 2016) (defendant impermissibly copied numerous sensitive computer files); First W. Capital Mgmt. Co. v. Malamed, 2016 WL 8358549, at *3-4 (D. Colo. Sept. 30, 2016) (defendant obtained a printout of the company's book of current clients and prospects, as well as account statements from current clients) ("Malamed"); id. at *7 ("[the defendant] likely remembers at least some of the management fee percentages charged to various clients, or categories of clients"). Here, Plaintiffs offer no such specificity, instead falling back on vague terms such as "key aspects" and "access to" unspecified "result[s]." Thus, the current record does not contain enough to establish a likelihood of success on the theory that Paladino possesses technical trade secrets and therefore must be enjoined from working for BigBear.
Plaintiffs' second category of alleged trade secrets is "competitive assets,"
There is, nonetheless, a potentially troubling possibility not directly covered by Paladino's testimony. It is likely that Paladino will eventually participate on BigBear's behalf in business proposals to the Defense Department, and it is possible that some of these proposals will compete directly or indirectly with DGIS proposals. In formulating such proposals, Paladino need not affirmatively divulge anything to his BigBear colleagues about DGIS's pricing and salary structures, for example, but could nonetheless suggest business terms that he knows (in his own mind) would be competitive with DGIS. Cf. Malamed, 2016 WL 8358549, at *7 ("without making any explicit comparison to [his former company], he can offer management fees that are, say, a quarter of a percent lower than what he knows the individual was paying at [the former company], and thereby entice the client — who almost certainly would recognize that he or she was being offered a discount as compared to [the former company]").
However, the Court finds this insufficient to show a likelihood of success for two reasons. First, Frazier and Paladino both testified that "labor rates" have a "shelf life" of only about one year. (Tr. at 95, 232.) Second, the evidence as a whole shows Paladino's intention to respect the trade-secret status of this sort of information. Contra Malamed, 2016 WL 8358549, at *7 ("This evidence is sufficient for preliminary injunction purposes to convince the Court that Malamed does not consider his knowledge of Plaintiffs' client information to be a trade secret, and that he will use it to compete with Plaintiffs if not enjoined.").
In conclusion, the Court finds that Plaintiffs have not met their burden to show a likelihood of success on the damages element of their breach of contract claim. Accordingly, they are not entitled to a preliminary injunction enforcing the noncompete covenant in the 2013 Agreement.
The nonsolicitation covenant at issue here reads as follows:
(PX 1 § 8.) Paladino argues, and Plaintiffs have not disputed, that by its terms this covenant applies only to post-separation activities. (ECF No. 26 at 21.)
The evidence certainly shows that, prior to Paladino's separation from DGIS, he pitched the possibility of other employment opportunities to certain DGIS colleagues. This course of conduct may be relevant to Plaintiffs' claim for breach of the duty of loyalty, which is not at issue in these preliminary injunction proceedings. As to post-separation conduct, the current record contains insufficient evidence to find that Paladino has "directly or indirectly, recruit[ed], solicit[ed], attempt[ed] to persuade, or assist[ed] in the recruitment or solicitation of, any [DGIS] employee."
In particular, the Court finds that Paladino's post-separation text message complaining to his former DGIS colleagues about DGIS's lawsuit (PX 15) does not qualify as direct or indirect recruitment or solicitation, or an attempt to persuade his former colleagues to leave DGIS. The Court instead agrees with the perception of one of the text message's recipients, Andrew Jenkins, whom Paladino had solicited to leave DGIS before his separation, but who chose to remain at DGIS. When Jenkins received this text message, he interpreted it as an attempt to gain sympathy among those still employed at DGIS, who might then influence DGIS's decision-makers to drop the legal action against him: "[H]e was trying to appeal to his friends, a lot of people that he worked with, he had a long history with the company, but you know, that — this is very — this is not right, and what they're doing to me, and stuff like that." (Tr. at 154.)
Consequently, Plaintiffs have not shown a likelihood of success in proving breach of the nonsolicitation covenant. No preliminary injunction is justified on these grounds.
The nondisclosure provision in the 2013 Agreement reads, in relevant part, as follows:
(PX 1 § 2.)
Even if Paladino will not be enjoined from working at BigBear, the Court could still enjoin him from disclosing BigBear's trade secrets. However, for the reasons already explained above (Part IV.A.2.c), Plaintiffs have failed to persuade the Court on the record as it is currently developed that any trade secrets are at risk. Thus, Plaintiffs have not established a likelihood
Nonetheless, to be clear, the Court takes no position on the view expressed at the Preliminary Injunction Hearing by Paladino and Porcelli (BigBear's CEO) that technical capabilities developed with government dollars should not be considered trade secrets. (Tr. at 188, 291.) Paladino has proffered no legal argument to support that position, and the current record suggests that Plaintiffs do possess protectable technical trade secrets, such as the algorithms for analyzing geospatial data — regardless of whether Plaintiffs developed those trade secrets through money earned on a government contract. If discovery reveals that Paladino retains these trade secrets (or any others) and has used them or is likely to use them to further BigBear's business at DGIS's expense, nothing prevents Plaintiffs from filing a renewed preliminary injunction motion specifically to enforce the nondisclosure covenant.
Apart from the foregoing, the Court also finds that Plaintiffs have failed to demonstrate a threat of irreparable harm.
In a previous noncompetition lawsuit involving a statutory claim of trade secret misappropriation (which Plaintiffs have not pleaded in this lawsuit), the Court granted a preliminary injunction, reluctantly following a line of Tenth Circuit precedent establishing that irreparable harm is presumed when a defendant "is or will soon be engaged in acts or practices prohibited by statute, and that statute provides for injunctive relief to prevent such violations." Malamed, 2016 WL 8358549, at *11 (citing Star Fuel Marts, LLC v. Sam's East, Inc., 362 F.3d 639, 651 (10th Cir. 2004); Kikumura v. Hurley, 242 F.3d 950, 963 (10th Cir. 2001); and Atchison, Topeka & Santa Fe Ry. Co. v. Lennen, 640 F.2d 255, 259 (10th Cir. 1981)). The Court nonetheless stated that, "but for Star Fuel and its predecessors, the Court would not have found irreparable harm," and the Court expressed doubt that Star Fuel remained good law after certain Supreme Court decisions suggesting that no element of the preliminary injunction test should ever be presumed. Id. at *12 n.5.
One month after that order, the Tenth Circuit announced in Diné Citizens that "any modified test which relaxes one of the prongs for preliminary relief and thus deviates from the standard test is impermissible." 839 F.3d at 1282. About three months after Diné Citizens, the Tenth Circuit stayed this Court's preliminary injunction pending appeal. (See First W. Capital Mgmt. Inc. et al. v. Malamed, Civil Action No. 16-cv-1961, ECF No. 124 (Jan. 27, 2017).) The Tenth Circuit did not explain its decision beyond announcing that the stay-pending-appeal factors "weigh in favor of granting a stay." (Id. at 2.) Nonetheless, the Court strongly suspects that its reluctant reliance on and criticism of Star Fuel was the decisive consideration for the Tenth Circuit, particularly in light of Diné Citizens.
Whether or not the Court has correctly read the appellate tea leaves, Diné Citizens itself makes clear that the Court may not presume irreparable harm simply because this case involves a noncompete covenant, trade secrets, or the like. Contra, e.g., Miller v. Kendall, 541 P.2d 126, 127 (Colo. App. 1975) ("Where there is a noncompetition agreement, breach is the controlling factor and injunctive relief follows almost as a matter of course. Damage is presumed to be irreparable and the remedy at law is considered inadequate.").
"[A] plaintiff satisfies the irreparable harm requirement by demonstrating a significant risk that he or she will experience harm that cannot be compensated after the fact by monetary damages." RoDa Drilling Co. v. Siegal, 552 F.3d 1203, 1210 (10th Cir. 2009) (internal quotation marks omitted). "Courts finding irreparable harm" in similar types of cases "have identified the following as factors supporting irreparable harm determinations: inability to calculate damages, harm to goodwill, diminishment of competitive positions in [the] marketplace, loss of employees' unique services, the impact of state law, and lost opportunities to distribute unique products." Dominion Video Satellite, Inc. v. Echostar Satellite Corp., 356 F.3d 1256, 1263 (10th Cir. 2004). As explained below, these factors tip in favor of Paladino, not Plaintiffs.
Plaintiffs have not shown an inability to calculate damages. If Plaintiffs can prove that Paladino's breach of any portion of the 2013 Agreement caused DIA to transfer the I & W work from DGIS to BigBear, damages are calculable, namely, whatever amounts DGIS would have received under its current DIA contract for performing the I & W work. If Plaintiffs can prove that Paladino's breach caused DIA not to pick up subsequent option years on DGIS's sole-source contract, Plaintiffs' damages are again calculable, namely, the amounts DGIS would have been paid under those option years.
Plaintiffs have a stronger case as to potential future opportunities to contract with the Defense Department or other entities. Nonetheless, the industry in which DGIS and BigBear compete is not one characterized by a high volume of transactions. Rather, contract awards to any one business are relatively infrequent, and are also highly formal. If some contract eventually goes to BigBear and Plaintiffs can prove at trial that it is more likely than not that the contract would have gone to DGIS but for Paladino's breach of the 2013 Agreement, Plaintiffs will be able to calculate their damages according to the value of the contract awarded to BigBear.
The evidence currently of record suggests that DGIS inflicted harm to its own goodwill, competitive position, and opportunities by its actions with respect to patents, and through the pending acquisition by MDA. Thus, although discovery may reveal otherwise, it appears more likely at this point that the relevant harm had already been suffered when Paladino left DGIS for BigBear.
This factor partially favors DGIS because it has lost Paladino and, allegedly, other employees at Paladino's encouragement. Even so, there is significant factual doubt whether any of these employees would have stayed at DGIS given its waning reputation among relevant DIA decisionmakers.
Having considered the relevant factors, the Court concludes that Plaintiffs have
For the reasons set forth above, Plaintiffs' Renewed Motion for Preliminary Injunction (ECF No. 25) is DENIED.
