LAURIE SMITH CAMP, Chief Judge.
This matter is before the Court on the Plaintiffs' Application for Temporary Restraining
Thrivent filed its Complaint (Filing No. 1) and Application for Temporary Restraining Order and Preliminary Injunction on October 25, 2012. Thrivent asserts two causes of action against Hutchinson: (1) breach of contract, and (2) violation of Nebraska's Trade Secrets Act. Thrivent alleges that Hutchinson wrongfully solicited Thrivent's clients and misappropriated confidential information. Thrivent seeks to enjoin Hutchinson from (1) using or disclosing its confidential information; (2) for a one-year period, soliciting Thrivent clients with whom Hutchinson had direct contact and for whom he had access to Thrivent's Confidential Business information during the two years before August 30, 2012; and (3) otherwise violating his contractual agreements with, and statutory duties owed to, Thrivent.
Thrivent notes that one of two contracts it entered into with Hutchinson contains a mandatory arbitration provision (Filing No. 1-2) and, therefore, it commenced an arbitration claim with the Financial Industry Regulatory Authority ("FINRA") concurrently with this action. The parties acknowledge that, from a substantive perspective, FINRA will hear the issues currently before the Court; and, if a temporary restraining order ("TRO") is granted, FINRA will expedite its hearing.
Plaintiffs Thrivent Financial for Lutherans ("Thrivent Financial") and Thrivent Investment Management, Inc. ("Thrivent Investment") (collectively, "Thrivent") offer financial protection planning products and services to customers through Financial Associates. Defendant Michael C. Hutchinson is a Nebraska resident, and a registered representative and securities broker registered with FINRA.
From 2006 until August 28, 2012, Hutchinson was a Financial Associate affiliated with Thrivent on an independent contractor basis. In order to become affiliated with Thrivent, Hutchinson was required to sign two contracts: (1) the Financial Associate Agreement ("FAA") entered into with Thrivent Financial (Filing No. 1-1), and (2) a Registered Representative Agreement ("RRA") entered into with Thrivent Investment (Filing No. 1-2). Those two contracts each have a provision titled "CONFIDENTIAL INFORMATION," and a provision titled "PRESERVATION OF BUSINESS." (See Filing No. 1-1 at CM/ECF p. 5; Filing No. 1-2, at CM/ECF p. 5.)
The provision titled "CONFIDENTIAL INFORMATION" states:
(See id. ¶ IV. B.)
Hutchinson contends that he "had access" to many of Thrivent's clients with whom he never had personal contact. Thrivent points to Thrivent's privacy policy and security-of-customer-information policy, that indicates it uses "physical, technical and administrative safeguards... to protect" its confidential information, and that its confidential information is maintained on a "need to know basis." (Filing No. 21-3 at CM/ECF p. 2.) Under those policies, someone "need[s] to know" confidential information if the information is "necessary to perform the duties of [his or her] job." (Id. at 5.) The person in control of the confidential information is "responsible for ascertaining the `need to know' before sharing it with another ..." (Id.) Therefore, Thrivent contends that it had policies in place to ensure that Hutchinson, and others, did not have access to Thrivent's Confidential Business Information with respect to a Thrivent client unless they did business with that client.
On or about August 28, 2012, Thrivent received a letter from Hutchinson indicating he was terminating his affiliation with Thrivent and accepting a position with another company, which turned out to be New York Life, one of Thrivent's competitors. Although Hutchinson changed his affiliations, he used the same office and telephone number as he did when he was affiliated with Thrivent. Thrivent alleges it subsequently discovered Hutchinson had sent a letter to at least one of his Thrivent clients the day prior to announcing his resignation. (See Filing No. 1-6.) That letter states:
(Id.) Thrivent contends this letter is evidence that Hutchinson solicited Thrivent clients to move with him to New York Life. Hutchinson alleges he was merely attempting to inform his clients that he was changing his affiliation to New York Life.
The FAC is a service center for Thrivent customers who do not have a specific Financial Associate assigned to their files. Thrivent notes that the FAC is used for low-asset clients who do not need the individual attention of a specific Financial Associate. When a Financial Associate terminates his or her relationship with Thrivent, Thrivent's ordinary practice is to reassign his or her clients to others within the office, not to the FAC. Thrivent alleges that Hutchinson transferred many of his clients, even those with sufficient assets to require the individual attention of a Financial Associate, to the FAC because it made it harder for Thrivent to detect his solicitation activities; and the transferred clients would not form a one-on-one relationship with a new Thrivent Financial Associate. Thrivent contends, therefore, that Hutchinson would not have direct competition with another Financial Associate when he tried to take those clients with him to New York Life.
Hutchinson claims that beginning in or around January 2012, Thrivent directed him to reduce the number of clients he serviced to about 125 clients for the stated purpose of assisting with the implementation of a new revenue model for all Thrivent representatives.
Thrivent also alleges that, after terminating his affiliation with Thrivent, Hutchinson failed immediately to return all of Thrivent's property despite certifying that he had returned all of Thrivent's property. (Filing No. 1-4.) Thrivent acknowledges that Hutchinson returned certain files to Thrivent on October 23, 2012, and October 31, 2012, but states that it cannot be certain Hutchinson has returned all Thrivent's property because when he has returned some of Thrivent's property he has falsely represented that he returned all that he had in his possession.
Hutchinson alleged that upon his disassociation with Thrivent, he returned all Thrivent's property except for certain
Courts in the Eighth Circuit apply the factors set forth in Dataphase Sys., Inc. v. CL Sys., Inc., 640 F.2d 109, 114 (8th Cir. 1981) (en banc), when determining whether to issue a TRO. See S.B. McLaughlin & Co., Ltd. v. Tudor Oaks Condo. Project, 877 F.2d 707, 708 (8th Cir.1989) (approving the use of Dataphase factors for analyzing a TRO motion). Those factors are: "(1) the threat of irreparable harm to the movant; (2) the state of balance between this harm and the injury that granting the injunction will inflict on other parties litigant; (3) the probability that movant will succeed on the merits; and (4) the public interest." Dataphase, 640 F.2d at 114. "No single factor is determinative." WWP, Inc. v. Wounded Warriors, Inc., 566 F.Supp.2d 970, 974 (D.Neb.2008). The movant bears the burden of establishing the propriety of the TRO. See Roudachevski v. All-Am. Care Ctrs., Inc., 648 F.3d 701, 705 (8th Cir.2011).
To succeed on its breach of contract claim, Thrivent must prove "(1) the existence of a contract; (2) breach of the contract; and (3) damages which flow from the breach." Remedial Const. Services, Inc. v. Gen. Concrete, Inc., No. 8:02CV8, 2002 WL 31011069, at *1 (D.Neb. Sept. 6, 2002) (citing United States v. Basin Elec. Pwr. Coop., 248 F.3d 781, 810 (8th Cir. 2001)); see also Henriksen v. Gleason, 263 Neb. 840, 643 N.W.2d 652, 658 (2002) (citing Phipps v. Skyview Farms, 259 Neb. 492, 610 N.W.2d 723 (2000)) ("In order to recover in an action for breach of contract, the plaintiff must plead and prove the existence of a promise, its breach, damage, and compliance with any conditions precedent that activate the defendant's duty.").
The parties' dispute focuses on the enforceability of the contracts' non-solicitation provisions. Thrivent argues that the non-solicitation provisions are valid because their coverage is limited to a specific category of clients, it will not deprive the public of financial services, and it is necessary to protect Thrivent's legitimate business interest in its Confidential Business Information. Hutchinson contends the non-solicitation provisions are void because they restrict him from working for or soliciting a Thrivent client even if he did not actually do business with or have personal contact with the client. He also asserts the contracts are injurious to the public because they reduce marketplace competition, which is generally favored for customers and protected under the law. Finally Hutchinson argues that the contracts are unduly harsh and oppressive because Thrivent drafted the contracts and he could not be a Thrivent representative without signing them as drafted.
"Regardless of the context, a partial restraint of trade such as a covenant not to compete must meet three general requirements to be valid." H & R Block
Thrivent argues that the non-solicitation provisions are not injurious to the public because the provisions will not cause the public to be deprived of financial services. That is to say, only a specific category of Thrivent clients are affected by the non-solicitation provisions. Hutchinson contends that the non-solicitation provisions are injurious to the public because they impose a limit on marketplace competition, and marketplace competition is favored for customers.
The record does not demonstrate that enforcement of the non-solicitation provisions will be detrimental to the public. First, nothing indicates Thrivent clients covered by the non-solicitation provisions do not have access to many other financial service firms to obtain financial services.
The parties do not dispute that an employer's interest in its goodwill is a legitimate business interest.
A covenant not to compete in the employment context is "no greater than reasonably necessary" to protect an employer's legitimate business interest "`only if it restricts the former employee from working for or soliciting the former employer's clients or accounts with whom the former employee actually did business and ha[d] personal contact.'" H & R Block, 693 N.W.2d at 554 (quoting Polly, 407 N.W.2d at 756).
The reason that the scope of a non-solicitation provision must be limited to clients with whom the former employee actually did business and had personal contact is that courts try to protect an employer "against competition by improper and unfair methods," but will not protect an employer "from ordinary competition." Boisen, 383 N.W.2d at 33 (internal quotation marks omitted). The focus is "on an employee's opportunity to appropriate the employer's goodwill by initiating personal contacts with the employer's customers" when a court tries "[t]o distinguish between `ordinary competition' and `unfair competition.'" Id. This is because personal contact with an employer's customers allows the employee to "develop[] goodwill with [those] customers, and siphon[ ] away the goodwill under circumstances where the goodwill properly belongs to the employer." Id.
Although the language of the non-solicitation provisions indicates Hutchinson is prohibited from soliciting a client if he "had access" to Thrivent's Confidential Business Information relating to that client even if he did not do any business with the client, Thrivent had in place policies that made it so that Hutchinson would not "ha[ve] access" to Thrivent's Confidential Business Information unless needed to do his job. Therefore, there is no reason to believe that Hutchinson "had access" to confidential information relating to Thrivent clients with whom he did not actually do business because that information would not have been needed by him to do his job.
The Nebraska Supreme Court uses a balancing test to determine if a covenant not to compete is "unduly harsh and oppressive." Am. Sec. Servs., Inc. v. Vodra, 222 Neb. 480, 385 N.W.2d 73, 80 (1986). Under that test, "a court must balance harshness and oppressiveness on the covenantor employee against protection of the covenantee employer's valid business interest." Chambers-Dobson, 472 N.W.2d at 400. The factors a court may consider include:
Vodra, 385 N.W.2d at 80 (quoting Philip G. Johnson & Co. v. Salmen, 211 Neb. 123, 317 N.W.2d 900, 904 (1982)). There is, however, "no arithmetical computation or formula required in a court's consideration of the factors involved or to be considered." Chambers-Dobson, 472 N.W.2d at 400. They "are not weighted; that is, there is no prescribed method by which more or less weight is assigned to each factor to be considered in the balancing test ..." Id.
The Court finds that the non-solicitation provisions are not "unduly harsh and oppressive." Even if Hutchinson may not have been able to negotiate the terms of the FAA and RRA if he wanted to be affiliated with Thrivent, the non-solicitation provisions help protect Thrivent's legitimate interest in its goodwill and they do not require Hutchinson to change his calling or residence. Keeping in mind Thrivent's privacy and security-of-customer-information policies, the non-solicitation provisions are narrowly tailored to cover only those clients for whom Hutchinson had access to Thrivent's Confidential Business Information and with whom Hutchinson actually did business. There is no reason to believe the number of other potential clients outside the scope of the non-solicitation provisions with whom Hutchinson could pursue business opportunities is significantly limited. Further, the non-solicitation provisions do not prohibit Hutchinson from doing business with clients within the scope of the non-solicitation
Thrivent has presented evidence demonstrating that Hutchinson likely breached the non-solicitation provisions, and Hutchinson does not dispute that Thrivent would suffer damages resulting from a breach of those non-solicitation provisions. Therefore, Thrivent has satisfied its burden of showing a likelihood of success on the merits with respect to its breach of contract claim.
To succeed on his misappropriation of trade secrets claim, Thrivent must prove:
Softchoice Corp. v. MacKenzie, 636 F.Supp.2d 927, 936-37 (D.Neb.2009) (citing Richdale Dev. Co. v. McNeil Co., 244 Neb. 694, 508 N.W.2d 853 (1993)).
The Nebraska Trade Secrets Act defines a "trade secret" as:
Neb.Rev.Stat. § 87-502(4). Generally, "[c]ourts are reluctant to protect customer lists to the extent that they embody information that is readily ascertainable through public sources." Home Pride Foods, Inc. v. Johnson, 262 Neb. 701, 634 N.W.2d 774, 782 (2001). However, "where time and effort have been expended to identify particular customers with particular needs or characteristics, courts will prohibit others from using this information to capture a share of the market" because "[s]uch lists are distinguishable from mere identities and locations of customers that anyone could easily identify as possible customers." Id.
Thrivent has satisfied its burden of showing the existence of a trade secret. Hutchinson does not dispute that Thrivent's Confidential Business Information consists of information such as client lists, information disclosed by clients to Thrivent, customer files, and information regarding client assets and investments. Thrivent also has pointed to evidence indicating that it puts forth reasonable efforts to maintain the secrecy of that information. (See Filing No. 21-3.)
Further, there is reason to believe that Thrivent's Confidential Business Information is valuable and important to Thrivent's business. Thrivent has in place policies designed to ensure the secrecy of its Confidential Business Information, and it requires those who want to become affiliated with Thrivent to sign contracts in which they agree to maintain the secrecy of that information and return it to Thrivent in the event that they terminate their affiliation with Thrivent. Here specifically, the parties agreed in writing that Hutchinson would not disclose Thrivent's Confidential Business Information, regardless of whether Hutchinson discovered or developed the information composing Thrivent's Confidential Business Information, in order to
With respect to the third element of Hutchinson's misappropriation of trade secrets claim, Hutchinson does not dispute that he agreed in writing that Thrivent owned its Confidential Business Information. (See Filing No. 1-1, at CM/ECF p. 4 ¶ D.)
Finally, under the circumstances presented here, it would be inequitable for Hutchinson to disclose or communicate Thrivent's Confidential Business Information to others or to use it solely for his own benefit. Hutchinson agreed in writing that, even if he discovered or developed the information, Thrivent owned the Confidential Business Information and that, upon the termination of his affiliation with Thrivent, he would return that information to Thrivent and would not use it or disclose it to others for a one-year period.
Thrivent contends that there is a threat of irreparable harm because Hutchinson is threatening its goodwill and reputation by continuing to breach his contractual obligations and continuing to misappropriate its Confidential Business Information. Hutchinson argues that Thrivent has not met its burden of proving irreparable harm because it alleges only the possibility of economic harm, and "[t]he possibility that adequate compensatory or other corrective relief will be available at a later date, in the ordinary course of litigation, weighs heavily against a claim of irreparable harm." Sampson v. Murray, 415 U.S. 61, 90, 94 S.Ct. 937, 39 L.Ed.2d 166 (1974).
Although Thrivent may seek economic damages, under the present circumstances, the amount of damages resulting from the solicitation of Thrivent's clients and use of its Confidential Business information would be difficult, if not impossible, to ascertain with any degree of certainty. Therefore, the Court finds that Thrivent has satisfied its burden of showing a threat of irreparable harm. See Med. Shoppe Int'l, Inc. v. S.B.S. Pill Dr., Inc., 336 F.3d 801, 805 (8th Cir.2003) (internal quotation marks omitted) ("Loss of intangible assets such as reputation and goodwill can constitute irreparable injury.... Harm to reputation and goodwill is difficult, if not impossible, to quantify in terms of dollars."); see also Am. Express Fin. Advisors, Inc. v. Yantis, 358 F.Supp.2d 818, 835 (N.D.Iowa 2005) (internal quotation marks omitted) ("The courts of a number of states have held that the mere violation of a valid covenant not to compete supports an inference of the existence of the threat of irreparable harm.... The Eighth Circuit Court of Appeals has employed this approach without concern of any particular state's laws.").
Thrivent contends that the equities weigh in favor of an injunction because Hutchinson's activities threaten irreparable harm to Thrivent, whereas, an injunction would not impose an undue burden on Hutchinson because he could continue to
The Court finds that, on balance, the equities weigh in favor of an injunction. As previously stated, whereas the non-solicitation provisions do not prohibit Hutchinson from seeking client relationships from people with whom he did not do business, there is a threat of irreparable harm to Thrivent if an injunction is not granted. Further, the nonsolicitation provisions do not prohibit Hutchinson from servicing his former Thrivent clients as a New York Life representative as long as he is not the one who initiates the contact with the client.
Hutchinson argues that granting an injunction would not serve the public interest because it might prohibit him from providing needed services to the many people who have entrusted their money and retirement funds with him. Hutchinson argues that he would not be able to provide objective advice to those customers with whom he has built significant, trusting relationships, because he could not advise those people to obtain a new product over a Thrivent product even if the new product would provide a higher return than the Thrivent product for fear that it might result in a violation of the injunction. As explained previously, that is not the case. As long as he does not initiate contact with his former Thrivent clients and otherwise complies with the terms of the non-solicitation provisions, he may provide anyone his objective advice. Therefore, the Court finds enforcing the non-solicitation provisions in this case would serve the public interest.
Based on an analysis of the Dataphase factors, the Court finds that a TRO is necessary to preserve the status quo, at least pending the resolution of the expedited arbitration hearing to be held before FINRA. Accordingly,
IT IS ORDERED that the Plaintiffs' Application for Temporary Restraining Order and Preliminary Injunction (Filing No. 2) is granted in part, as follows:
1. Defendant Michael C. Hutchinson, his agents, employees, and all those acting in concert with him, are restrained and enjoined from:
2. This action is stayed pending an expedited arbitration hearing to be held before the Financial Industry Regulatory Authority regarding Plaintiff Thrivent Investment Management Inc.'s request for permanent injunctive relief; and
3. The parties shall notify the Court of the results of the expedited arbitration hearing to be held before the Financial Industry Regulatory regarding Plaintiff Thrivent Investment Management Inc.'s request for permanent injunctive relief.
See also Filing No. 20-3.
H & R Block, 693 N.W.2d at 554 (alteration in original) (internal quotation marks omitted) (quoting Presto-X-Company, 568 N.W.2d at 239).
