Federal Court Issues Temporary Restraining Order Preventing Former Employees From Using Confidential Information and Contacting Customers
December 10, 2020
By: Stephen B. Stern
In Marina Dist. Dev. Co. v. Walk, Case No. 2:20-cv-01592-GMN-BNW, 2020 U.S. Dist. LEXIS 166241 (D. Nev. Sept. 10, 2020), the United States District Court for the District of Nevada issued a temporary restraining order (“TRO”) preventing former employees of a hotel and casino from using confidential information obtained during their prior employment and from contacting customers they worked with while employed by their former employer.
In Walk, William Callahan was the Vice President of Relationship Marketing for Marina District Development Company, LLC d/b/a Borgata Hotel Casino & Spa (“Borgata”), where he was responsible for developing and maintaining business relationships with individuals who gambled over $1 million during visits to Borgata. Callahan developed close personal relationships with many of Borgata’s important customers, learning their preferences with respect to credit, large loss discounts, gaming rule changes, and hospitality, among other things, which gave Borgata a competitive advantage over other hotels and casinos to establish customer loyalty. Callahan frequently communicated with these customers on his company-issued cell phone, which he did not return when his employment ended. According to Borgata, the cell phone contained “highly sensitive information in the gaming industry and is the exact type of information that could be used by [Borgata’s] competitors to sway high level players and corporate clientele to patronize their hotels and casinos.”
Callahan had signed an employment agreement that specifically identified information he acquired through relationships he made with customers as “Confidential Information” that he was prohibited from disclosing to individuals outside of Borgata. The employment agreement also prohibited Callahan from providing services to a competitor that were similar to the ones he provided to Borgata for a period of 12 months after his employment with Borgata ended. The employment agreement further prohibited the solicitation of employees of Borgata to work for another company. Kelly Ashman Burke had signed a similar employment agreement while employed by Borgata, where she was employed as the Executive Director of Marketing. Her duties included devising and executing marketing strategies that included advertising, brand development, direct mail, promotional offers, special events, and gift giveaways. These responsibilities, according to Borgata, required Burke to have extensive knowledge of Borgata’s customer database, which is very valuable to Borgata’s competitors.
AC Ocean Walk, LLC d/b/a Ocean Casino Resort (“Ocean”), a competitor of Borgata, hired Callahan to be the Senior Vice President of Hotel Operations, which Borgata alleged was a sham title to hide Callahan’s responsibilities of serving high value clientele, like he did while employed by Borgata. Similarly, according to Borgata, Ocean hired Burke to serve in a senior marketing capacity that was similar to the role she served while employed by Borgata.
Borgata sued Callahan, Burke, and Ocean for misappropriation of trade secrets in violation of federal and state law (all defendants), breach of employment agreements (Callahan and Burke), and tortious interference (Ocean). In response to Borgata’s motion for a TRO, the court started analyzing Borgata’s likelihood of success on the merits, focusing primarily on the trade secret misappropriation claim. Borgata asserted that customer identities and their gambling and hospitality preferences were trade secrets, and that information was not only within Callahan’s general knowledge from working with these customers, but it also was on his company-issued cell phone, which contained customer contact information as well as text message conversations describing their preferences. According to Borgata, it took reasonable steps to protect this information, such as having Callahan execute the employment agreement that included nondisclosure and noncompete provisions. Although Callahan contended that he was not working in a competitive capacity for Ocean, Borgata presented substantial evidence that he was, including a sworn declaration from an employee who said that several top customers informed him that Callahan was soliciting them to gamble at Ocean, as well as cell phone bills that showed Callahan was contacting several of Borgata’s top customers. Based on this evidence, the court found that Borgata was likely to succeed on the merits of its breach of contract claim against Callahan with respect to the nondisclosure and noncompete provisions of his employment agreement and it was likely to succeed on its claim for misappropriation of trade secrets under the Defense of Trade Secrets Act (“DTSA”) (the court determined that Borgata’s claim under the New Jersey Trade Secrets Act likely will fail because Borgata did not address an element under the New Jersey statute – that the defendant used the trade secret to the plaintiff’s detriment).
The court then turned to the likelihood of success on the trade secret misappropriation claim against Burke and Ocean together because Borgata alleged that Burke breached the noncompete and nondisclosure provisions of her employment agreement by accepting a similar marketing position with Ocean and, to perform her duties for Ocean, she would inevitably disclose trade secrets she learned from her employment with Borgata. In response, Burke argued that she satisfied the requirements of the agreement when she terminated her employment for “good cause.” The court found that she did not satisfy the “good cause” requirements, however. In fact, the court found that she did not even attempt to invoke the “good cause” termination provision, but, instead, sought to renegotiate the noncompete provision based on her anticipated new job duties for Ocean. The court, nevertheless, determined that Borgata did not provide any evidence to show that Burke had actually or will inevitably disclose trade secrets in connection with her employment for Ocean. The fact that she was performing similar job duties for Ocean was not enough to establish a threatened misappropriation or the inevitable disclosure of confidential business information. Thus, the court concluded that Borgata was not likely to succeed on the merits of its misappropriation claim against Burke, but it was likely to succeed on the merits of its breach of contract claim against Burke with respect to the noncompete provision.
The court then concluded that Borgata presented sufficient evidence to show it would suffer irreparable harm if Callahan and Ocean continued to use Borgata’s trade secrets and confidential business information. Specifically, the court found that Borgata would suffer irreparable harm in the form of lost income, loss of goodwill, damage to reputation, and damage to business relationships.
When balancing the equities, the court noted that the DTSA specifically precludes enjoining employment even when competitive employment may result in the disclosure of trade secrets. Additionally, the court noted that, even when an injunction is sought to enforce a noncompete agreement under New Jersey law, “the agreement may only be enforced if there is a proprietary interest of the employer at stake worthy of judicial protection.” The court did not find that standard was met and concluded that Callahan and Burke may remain in their jobs with Ocean, and it would impose another remedy to protect against the misappropriation of trade secrets.
Lastly, the court found that the public interest in this case favored granting a TRO because “there is a strong public interest in protecting trade secrets, as evidenced by the existence of the DTSA and [similar state laws].”
Based on the foregoing, the court granted Borgata’s motion for TRO with respect to Callahan and Burke, but not Ocean. The TRO precluded Callahan and Burke from contacting, soliciting, diverting, or otherwise interfering with any past, prospective, or current patrons or clients of Borgata, and it prevented them from retaining, using, or disclosing to Ocean or any other competitor of Borgata, any confidential, non-public information or trade secrets belonging to Borgata. In addition, Callahan and Burke were required to return immediately all Borgata property or copies of such property that contained trade secrets, including Callahan’s company-issued cell phone.
The court’s decision in Walk is significant because it illustrates the value of trade secrets involving customer relationships, including customer preferences, and the need for companies to be diligent about protecting such information both during and after the employment relationship. It also shows the value of information stored on cell phones and the need to implement an effective program to recoup company-issued cell phones at the conclusion of the employment relationship. Even if they are not company-issued cell phones, it is important to recoup the information that is stored on personal devices so that former employees do not continue to have access to trade secrets and other confidential business information after the employment relationship ends.