System Development Services, Inc. v. Haarmann

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State: Illinois

Court: 5th District Appellate

Docket No: 5-07-0648 Rel

Case Date: 04/13/2009

Preview:N O T IC E Decision filed 04/13/09. The text of this dec ision m ay b e changed or corrected prior to the P e t i ti o n for filing of a or the

NO. 5-07-0648 IN THE APPELLATE COURT OF ILLINOIS

Re hea ring

FIFTH DISTRICT _________________________________________________________________________ SYSTEM DEVELOPMENT SERVICES, INC., Plaintiff-Appellee, v. TIMOTHY F. HAARMANN, JASON B. REPKING, RICK HOENE, and TERRY OLDHAM, Individually and d/b/a TECHNICAL PARTNERS, ) ) ) ) ) ) ) Appeal from the Circuit Court of Effingham County. No. 04-CH-30

disposition of the same.

) ) ) ) Honorable ) John P. Coady, Defendants-Appellants. ) Judge, presiding. ________________________________________________________________________ JUSTICE STEWART delivered the opinion of the court: The defendants appeal from the judgment of the circuit court of Effingham County, Illinois, that granted the plaintiff an injunction and awarded the plaintiff damages pursuant to the Illinois Trade Secrets Act (Trade Secrets Act) (765 ILCS 1065/1 et seq. (West 2006)). We reverse. The plaintiff, System Development Services, Inc. (SDS), is an Illinois corporation in the business of furnishing computer network services to businesses in and around Effingham County, Illinois. The defendants, Timothy F. Haarmann, Jason B. Repking, Rick Hoene, and Terry Oldham, are computer technicians that were formerly employed with SDS. Haarmann left employment at SDS in January of 2004, and Repking, Hoene, and Oldham left SDS on April 9, 2004. The defendants then began doing business under the name Technical Partners, and they began competing with SDS in providing the businesses in Effingham County with computer network services. 1

On May 21, 2004, SDS filed a multicount complaint seeking injunctive relief and damages against the defendants, alleging that the defendants violated the Trade Secrets Act by misappropriating, disclosing, using, and acquiring its customer list, manuals, marketing plans, profitability analysis, pricing plans and determinations, and knowledge of SDS's customers' computer systems and system requirements. The plaintiff filed a motion for an emergency restraining order, seeking to prohibit the defendants from having any contact with SDS's customers for a period of two years. On June 22, 2004, the circuit court denied the motion for an emergency temporary restraining order. On November 9, 2004, the plaintiff filed an amended complaint. Counts I through IV of the amended complaint alleged that the defendants violated the Trade Secrets Act, and counts V through VII alleged that the defendants violated fiduciary duties they owed to SDS. On May 8, 2006, through May 11, 2006, the circuit court conducted a bench trial on SDS's amended complaint, and on February 23, 2007, the circuit court entered a memorandum of decision. The court found that SDS's customer list and information about its customers' computer systems and networks were protectable trade secrets under the Trade Secrets Act. The court found that the defendants "utilized SDS's customer mailing list and that it was improperly obtained" and that the defendants "not only utilized their general skills and knowledge of the industry in their new business, they also utilized technical and confidential information that was particularized to each individual customer of SDS that included the intricacies of each customer's network." The court held that SDS was "entitled to compensation for harm caused by defendants' improper conduct and a cessation of the conduct continuing." The court found, however, that the defendants did not "misappropriate SDS'[s] job budgets, estimates[,] and pricing strategies, SDS's weaknesses ***, nor [sic] SDS's internal marketing information." The court granted an injunction prohibiting the defendants "from marketing to and 2

from providing any computer or network[-]related type services to all actual and potential customers in SDS'[s] customer database on and prior to April 9, 2004, for a period of three (3) years commencing immediately upon [the] entry of this Judgment." In addition, the court granted an injunction prohibiting the defendants from disclosing any of SDS's trade secrets. The court awarded SDS a judgment in the amount of $481,892 plus court costs, attorney fees and expenses in the total amount of $260,695.99, and exemplary damages in the amount of $20,000. The judgment for the plaintiff was entered on October 29, 2007, and the defendants filed a timely notice of appeal. The evidence presented at the bench trial established that SDS began operating in 1983, when its founder, Steven G. Schallert, began helping another company "write some software application." SDS started providing custom applications and software for other customers as well. Initially, Schallert was SDS's only employee, and he ran the business as a sole proprietorship out of his home in Effingham, Illinois. At the same time, he also worked full-time as the director of information systems at a hospital in Mattoon, Illinois. In 1995 or 1996, Schallert incorporated SDS and started working full-time for the corporation. He operated SDS as a "full-time consulting service." He continued to work out of his living room, hired an additional employee, and targeted local businesses in Effingham, for its products and services. At some point, Schallert moved SDS's operations to an apartment building he owned. In the fall of 1997, SDS hired Haarmann as a computer programmer. In negotiating Haarmann's employment, Schallert sent Haarmann an offer of employment dated September 28, 1997. The offer of employment contained a paragraph addressing the issue of confidentiality, which stated: "The nature of the type of work done for many of our customers requires a high level of confidentiality. It is understood failure to maintain strict confidentiality of System Development Services work[-]related information for both 3

customers and company are [sic] grounds for severe disciplinary action, including possible termination." In 1998, SDS moved from Schallert's apartment building to the Lincoln Land Building in Effingham. The building was a "professional office environment" with locked doors and a security alarm. Schallert explained that all of SDS's client information was stored on its computer "server equipment" that was protected by a network "firewall." The firewall prevented public access to SDS's computer network through the Internet. Each computer in SDS's network and SDS's e-mail server were protected with passwords. Schallert testified that they also used paper shredders to shred confidential documents prior to placing them into the trash. In 2001, SDS's business started moving away from custom software applications and started focusing on computer networking services for its business customers. SDS added administrative staff, more programmers, and "networking services people." Schallert explained that the networking services related more to the hardware and equipment of the customers, rather than the programming. He testified that in order to provide network services, a computer technician had to become "intimately knowledgeable of customers' networks, computer systems, and applications." When a customer called SDS for its services, it would send one of its technicians to the customer's location to learn about the customer's computer network needs. Schallert testified SDS purchased an "ACT software" for marketing purposes and for maintaining a database of addresses and contact information for customers and potential customers. The ACT software was password-protected. SDS's network included an automated program that copied the customer information in the ACT database into SDS's e-mail database so that the information in each database was the same. The e-mail database was also password-protected, but all of SDS's employees had access to it. The customer list 4

included current customers, past customers, potential customers, vendors, and various people in the computer business. This ACT database and the identical e-mail database constituted the "client list" that SDS asserted was entitled to protection under the Trade Secrets Act. Schallert testified that in 2002, SDS began "growing fairly rapidly." On July 5, 2002, SDS entered into an agreement for the purchase of the computer division of one of its competitors, RTA Systems. The agreement provided that SDS would purchase all of RTA Systems' "customers, assets, inventory[,] and intellectual property related to the computer division." The agreement provided that, in exchange, Doug Collins would receive a 35% ownership in SDS, and RTA Systems agreed to not "operate, directly or indirectly, a similar computer services company within 30 miles of Effingham, Illinois[,] for 2 years." Schallert and Collins valued the transaction at $1 million, but no cash was transferred in the transaction. The purchase of RTA Systems' computer division was funded entirely with the SDS stock transferred to Collins. Schallert and Collins determined that the value of RTA Systems' assets and inventory was $200,000 and that the value of the intellectual property was $800,000. Collins testified that they arrived at $800,000 for the intellectual property by averaging the last two years of sales by RTA Systems' computer division. The agreement stated, "There is zero value associated with customer good will." After the purchase, SDS integrated RTA Systems' customer list into SDS's customer list in SDS's ACT database and e-mail database. None of RTA Systems' customers were contractually obligated to continue to do business with SDS after the transaction. According to Collins, RTA Systems had approximately 200 clients located in Effingham County in its database when SDS purchased the computer division, but only 50 or 55 of the clients were active at the time of the purchase. Hoene and Repking were computer technicians who worked for RTA Systems at the time of the SDS purchase, and they joined SDS after the purchase. As a condition of 5

employment, SDS required Hoene and Repking to sign an employee-confidentiality agreement, which stated as follows: "The employee acknowledges that his/her employment affords access to both company[-] and customer-related information that is proprietary, confidential, and not generally known by the public, current or prospective customers, vendors, subcontractors[,] or competitors. The employee agrees not to divulge any of this information to the general public, current or prospective customers, vendors, subcontractors[,] or competitors for any reason. Specific examples of confidential information would include[] but is not limited to: system manuals, employee manuals, price lists, pricing strategies, contracts, accounting/financial information (such as profit and loss statements, bank statements, balance sheets, job budgets, job estimates, job cost reports, etc.), management forms, customer lists[,] and internal marketing information. Violations of this confidentiality agreement can result in disciplinary action and/or dismissal." Haarmann also signed the same employee-confidentiality agreement in July of 2002. SDS's employee handbook also contained a paragraph on confidentiality, which read as follows: "It is very important for all employees to maintain the confidentiality of our customer information as well as the confidentiality of company[-]related information. Information we have access to at our customer locations may seem non[]confidential but could be of great importance to them. We must maintain very high levels of confidentiality so our customers will know we can be trusted with their information. Company[-]related information is also very sensitive and should never be divulged or discussed with persons outside the company. Failure to maintain confidentiality is grounds for disciplinary action and possibly termination." 6

On December 11, 2002, SDS hired Oldham as a network analyst. On that date, he signed an offer of employment that included the following provision on confidentiality: "The nature of the type of work done for many of our customers requires a high level of confidentiality. It is understood failure to maintain strict confidentiality of SDS

work[-]related information for both customers and company are [sic] grounds for severe disciplinary action, including possible termination." The record does not contain a separate employee-confidentiality agreement signed by Oldham like the agreements signed by Haarmann, Hoene, and Repking. Schallert testified that the company's practice was to have all the employees sign an employee-confidentiality agreement, and he had no reason to believe that Oldham had not signed one, but he was unable to find one signed by Oldham in SDS's records. Oldham did not remember signing such an agreement. Despite SDS's growth in 2002, SDS had a bad year financially in 2003. The company did not make a profit, and it did not give its employees any year-end bonuses. The morale of certain employees at SDS, including the defendants, began to decline. These employees would talk about their unhappiness at SDS from time to time when they gathered for lunch or after work. They complained about an increase in the company's overhead and an increase in their work hours. In January of 2004, Haarmann resigned from SDS and formed his own business called Computer Guys. Haarmann's new business focused on "home-based" work rather than the "business-based" work that was SDS's focus. Haarmann saw Hoene, Repking, and Oldham on a few occasions after he left SDS, and he invited them to join his new business. They started considering the idea of leaving SDS and forming their own company. On Friday, April 9, 2004, Hoene, Repking, and Oldham resigned from SDS in order to join Haarmann in a new business called Technical Partners and to compete in the business of providing computer networking services to the businesses of Effingham County. None of 7

the defendants had signed an agreement not to compete that would have prohibited them from competing against SDS upon the termination of their employment with SDS. Schallert and Collins were concerned about the defendants forming a competing business because the defendants had a "great deal of knowledge about [SDS's] customers, their networks, their systems, their passwords." SDS sent letters out to all of its customers and active clients to notify them of the defendants' sudden departure and the unknown nature of their plans and requesting the customers to continue using SDS's services. According to Schallert and Collins, they also discovered that some work orders and e-mails had been deleted from SDS's computer system before Hoene, Repking, and Oldham left the company. The next day, Saturday, April 10, 2004, Schallert found a Technical Partners flyer inside one of SDS's service vans that had been used by Hoene. The flyer referred to Technical Partners as doing business in Effingham by providing technical computer networking services. The flyer announced that Hoene, Repking, and Oldham were new partners and were new computer technicians of Technical Partners. The brochure stated that Technical Partners could provide "better service rates along with the high quality service that you have come to expect." The defendants testified that Hoene, Repking, and Oldham helped Haarmann create the brochure three or four days before they resigned from SDS. Hoene and Repking testified that after they resigned from SDS, they began preparing a mailing list of potential customers for their new business. They testified that they spent five or six hours preparing a handwritten mailing list by going through telephone books and using the Internet. The defendants denied using SDS's customer list to prepare their brochure mailing. The defendants mailed their brochure on Monday, April 12, 2004, and Hoene testified that he threw away the handwritten mailing list after the brochures were mailed. Oldham testified that on April 12, 2004, their strategy was to get their name out to potential customers in whatever way they could, including cold calls, the brochure mailing, 8

and talking to people. He testified that they referred to the Internet, telephone directories, and a chamber of commerce directory. Each partner contributed names of businesses and people to contact in the Effingham area. Several of SDS's customers gave Schallert copies of the brochures and envelopes Technical Partners had mailed to them. Schallert compared the addresses on the envelopes with the addresses contained in SDS's customer database. At the trial Schallert identified four envelopes that he believed contained distinguishing similarities with SDS's customer list. The similarities included the use of the four-digit zip code extension on one envelope, the use of post office box numbers on three of the envelopes, and particular address abbreviations used on all four envelopes. Schallert maintained that these distinguishing characteristics were not in the telephone book and indicated that the defendants had misappropriated SDS's client list. Schallert also presented evidence that from April 19, 2004 through May 18, 2004, Technical Partners' first 30 days of business, most of Technical Partners' income came from customers that had recently been SDS's customers. Schallert admitted that he did not have personal knowledge that the defendants actually printed or copied SDS's database, and the defendants denied taking any information from SDS's ACT database or e-mail database or otherwise utilizing SDS's customer list after they had resigned from SDS. Schallert testified that he did not obtain any potential customers by simply looking in the telephone book. He obtained the names of potential customers by attending business networking events, such as local Rotary Club and chamber of commerce events. He testified that SDS's customer list represented 20 years of effort and work. However, one of SDS's former office and sales managers testified that he identified potential customers for SDS by utilizing the telephone book and the chamber of commerce list of area businesses, by making cold calls, and by driving around Effingham. The sales manager testified that if there was 9

an operating business in the area with more than five employees, it was a worthwhile target. The bigger the business, the more likely it would utilize computers and a computer network. Collins testified that knowing that a particular business has a computer network and knowing a contact person's name makes it easier to get "your foot in the door." Knowing the customer's network is a further advantage. Collins also acknowledged, however, that identifying potential customers was somewhat based on common sense. Businesses with more than one employee were potential customers of computer networking services. Haarmann testified that when he left SDS in January of 2004, he told Schallert that all the businesses in the area were "fair game" since "probably 99 percent of the businesses in Effingham County have a computer now." According to Oldham, every business in the telephone book was a potential client, and all the computer businesses in Effingham were "going after the same piece of pie." Oldham testified that Hoene's family members had many businesses in Effingham County and were well known within the Effingham community. Oldham testified that Repking also had a large family that worked in many businesses in the community. Hoene and Repking testified that they had lived in Effingham County their entire lives and that they had developed significant contacts throughout the business community through family, friendships, classmates, and personal contacts. They testified that their initial strategy after resigning from SDS was to contact businesses in Effingham County that they had a previous relationship with through family, friends, former classmates, or someone they knew in the business community. Hoene testified that he "went around driving hitting all the businesses that [he] knew in town, talking to family and friends and just letting them know, and getting the word out." Repking, Hoene, and Oldham identified personal relationships with several individuals who were working for businesses that discontinued using SDS and became 10

Technical Partners' customers. One of the companies, Effingham Asphalt, was owned by Hoene's immediate family. Six former customers of SDS testified at the trial that they chose to use Technical Partners to service their computer networks because they were personally familiar with the defendants and wanted to continue to use their services. The defendants denied soliciting any of SDS's clients before they resigned. At the trial, Schallert acknowledged that there was nothing to prohibit the defendants from leaving SDS and going to work for a competitor of SDS or opening their own business to compete with SDS. Schallert also testified that SDS's customers had the right to choose who serviced their computer networks and that SDS did not have any exclusivity contracts with any of its customers. He agreed that SDS employees could resign, go out on their own, and begin servicing SDS's customers. Schallert and Collins both testified that the customers, not SDS, owned the computers, servers, networks, passwords, and related network information located at the customers' respective business locations. Schallert testified that if an SDS customer switched to a new computer service company, SDS would furnish the customer's computer and network information to the customer's new technician if the customer asked SDS to do so. However, SDS would not explain the intricacies of the customer's computer network to the new service provider. Repking testified that there was nothing unique or special about the networks they had serviced for SDS's customers. He explained: "A network is one, two servers in most instances, and PC's. There's usually a router for the [I]nternet and a switch to connect all the PC's to the servers." He testified, "Anybody can take care of them as long as they have some knowledge of a service and network and routers." At the conclusion of the evidence, the circuit court found that the defendants violated the Trade Secrets Act by misappropriating SDS's customer list and confidential information concerning SDS's customers' networks, and the defendants timely appeal the circuit court's 11

judgment. "The standard of review in a bench trial is whether the judgment is against the manifest weight of the evidence." Chicago's Pizza, Inc. v. Chicago's Pizza Franchise Ltd. USA, 384 Ill. App. 3d 849, 859, 893 N.E.2d 981, 991 (2008). "A judgment is against the manifest weight of the evidence only if the opposite conclusion is apparent or when findings appear to be arbitrary, unreasonable, or not based on the evidence." International Capital Corp. v. Moyer, 347 Ill. App. 3d 116, 122, 806 N.E.2d 1166, 1170 (2004). We hold that the circuit court's judgment in the present case is against the manifest weight of the evidence. The evidence does not support the circuit court's finding that SDS was entitled to relief under the Trade Secrets Act. The Trade Secrets Act provides for injunctive relief as well as actual and punitive damages for the misappropriation of trade secrets. 765 ILCS 1065/3, 4 (West 2006). In order to establish a violation of the Trade Secrets Act, a plaintiff is required to establish that information "was (1) a trade secret; (2) misappropriated; and (3) used in the defendant's business." Delta Medical Systems v. Mid-America Medical Systems, Inc., 331 Ill. App. 3d 777, 790, 772 N.E.2d 768, 780 (2002). In the present case, the circuit court held that the defendants misappropriated two categories of information which qualified as SDS's trade secrets: (1) SDS's list of customers and potential customers and (2) the intricacies of SDS's customers' networks. The evidence was insufficient to establish that this information qualified as SDS's trade secrets. The Trade Secrets Act defines a "trade secret" as follows: "(d) 'Trade Secret' means information, including but not limited to[] technical or non[]technical data, a formula, pattern, compilation, program, device, method, technique, drawing, process, financial data, or list of actual or potential customers or suppliers, that: (1) is sufficiently secret to derive economic value, actual or potential, from not 12

being generally known to other persons who can obtain economic value from its disclosure or use; and (2) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy or confidentiality." 765 ILCS 1065/2(d) (West 2006). Accordingly, in order for information to qualify as a trade secret under the Trade Secrets Act, the information must meet two requirements: first, the information must be sufficiently secret to give the plaintiff a competitive advantage, and second, the information must be subjected to affirmative measures to prevent others from acquiring or using it. Stenstrom Petroleum Services Group, Inc. v. Mesch, 375 Ill. App. 3d 1077, 1090, 874 N.E.2d 959, 971 (2007). In addition to the statutory definition, our courts have identified six common law factors that are relevant in evaluating whether information qualifies as a trade secret: (1) the extent to which the information is known outside the employer's business, (2) the extent to which it is known by employees and others involved in the business, (3) the extent of the measures taken by the employer to guard the secrecy of the information, (4) the value of the information to the employer and to his or her competitors, (5) the amount of effort or money expended by the employer in developing the information, and (6) the ease or difficulty with which the information could be properly acquired or duplicated by others. Stenstrom Petroleum Services Group, Inc., 375 Ill. App. 3d at 1090, 874 N.E.2d at 971-72. The Trade Secrets Act balances conflicting interests. Delta Medical Systems, 331 Ill. App. 3d at 791, 772 N.E.2d at 780. A secret advantage created by an employer through the expenditure of significant time, money, and effort should be protected from improper procurement and use. Delta Medical Systems, 331 Ill. App. 3d at 791, 772 N.E.2d at 780. However, in a competitive market, employees must be allowed to use their general knowledge and skills they acquire through experience in pursuing their chosen occupations. 13

Delta Medical Systems, 331 Ill. App. 3d at 791, 772 N.E.2d at 780. "[W]hether the information sought to be protected qualifies as a trade secret focuses fundamentally on the secrecy of such information." Pope v. Alberto-Culver Co., 296 Ill. App. 3d 512, 515, 694 N.E.2d 615, 617 (1998). "[T]he information at issue must be substantially secret to impart economic value to both its owner and its competitors because of its relative secrecy." Pope, 296 Ill. App. 3d at 515, 694 N.E.2d at 617. This requirement precludes " 'protection for information not generally known to the public but clearly understood in a particular industry.' " Service Centers of Chicago, Inc. v. Minogue, 180 Ill. App. 3d 447, 454, 535 N.E.2d 1132, 1136 (1989) (quoting M. Jaeger, Trade Secrets Law

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