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RKI, INC. v. GRIMES

December 21, 2001

RKI, INC., D/B/A ROLL-KRAFT, PLAINTIFF,
V.
STEVEN GRIMES AND CHICAGO ROLL CO., INC., DEFENDANTS.



The opinion of the court was delivered by: Morton Denlow, United States Magistrate Judge.

    MEMORANDUM OPINION AND ORDER

This is a case about how an employee who signed a non-disclosure and non-compete agreement chose to join a competitor. This is a textbook case of how not to do it.

The Court conducted a bench trial on December 17, 18 and 19 and heard closing arguments on December 20, 2001, in connection with the complaint brought by Plaintiff, RKI, Inc., d/b/a Roll-Kraft ("Roll-Kraft") that Defendant Steven Grimes ("Grimes") misappropriated Roll-Kraft's confidential data and software and breached his covenant not to disclose and not to compete when he was subsequently employed by Defendant Chicago Roll Corporation ("Chicago Roll"). The Court has carefully considered the testimony of the witnesses who appeared at trial, the witnesses who appeared through depositions, the exhibits introduced into evidence, the written submissions of the parties and the fine arguments of counsel.

The following constitute the Court's findings of fact and conclusions of law pursuant to Rule 52(a) of the Federal Rules of Civil Procedure. To the extent certain findings may be deemed conclusions of law, they shall also be considered conclusions. Similarly, to the extent matters contained in the conclusions of law may be deemed findings of fact, they shall also be considered findings.

I. FINDINGS OF FACT

A. NATURE OF ACTION

1. Roll-Kraft claims that Defendants are engaged in unfair competition. Roll-Kraft alleges that Grimes misappropriated Roll-Kraft's confidential data and used and disclosed the confidential data to benefit his new employer Chicago Roll. Roll-Kraft also alleges that Grimes breached the nondisclosure and non-solicitation covenants in his Employment Agreement and that Chicago Roll knew of Grimes' Employment Agreement when it hired him and interfered with that contract. Roll-Kraft asserts five causes of action: (1) violation of the Illinois Trade Secrets Act, 765 ILCS 1065/1 et seq.; (2) conversion; (3) breach of the duty of loyalty owed by an employee; (4) breach of the nondisclosure and non-solicitation covenants; and (5) tortious interference with contract. Count 1 seeks relief against Grimes and Chicago Roll; Counts 2, 3 and 4 seek relief against Grimes; and Count 5 is directed against Chicago Roll.

B. THE PARTIES

2. Roll-Kraft is an Ohio corporation with its principal place of business in Mentor, Ohio. Roll-Kraft was founded in 1963. Roll-Kraft is engaged in the business of producing and selling tube and pipe mill rolls and roll formed tooling. In addition, Roll-Kraft assists tube and pipe and roll formed companies to increase machine life, reduce costly repairs, reduce setup time and improve overall efficiency through upgrading mills with unique retrofitting and quick change equipment. (PX 35). Charles C. Gehrisch, Jr. ("Gehrisch") is the President and principal shareholder of Roll-Kraft. Martin Byrne ("Byrne") is the Vice President of Sales of Roll-Kraft. Joseph Frandanisa ("Frandanisa") is the Director of Sales of Roll-Kraft. Gehrisch, Byrne and Frandanisa testified in person at the trial. Their testimony was credible. Michael Andre ("Andre") and Mark Principe ("Principe") are in the Information Services Department at Roll-Kraft. Andre and Principe testified by means of deposition at the trial. Jerry Saperstein ("Saperstein") is a computer forensics specialist who was retained by Roll-Kraft as an expert witness in this case to inspect the computers of Grimes and Chicago Roll. Saperstein testified in person at the trial. Saperstein was a careful, precise, credible and knowledgeable expert witness. George A. Tracy, Jr. ("Tracy") was a salesman employed by Chicago Roll from February 2000 through early December 2001 when he was discharged by Chicago Roll; prior to that, he was employed as a salesman by Roll-Kraft. Tracy testified by means of deposition.

3. Defendant Grimes is a citizen of St. Charles, Illinois. From March 1999 until his October 18, 2001 resignation, Grimes was employed as a salesman by Roll-Kraft. On October 18, 2001, he began work as a salesman for Chicago Roll, a direct competitor of Roll-Kraft. Although Grimes sat through the entire trial, he did not testify. Grimes was listed as a "will call" witness by Defendants in the final pretrial order. The Court draws an adverse inference by reason of Grimes' decision not to testify to rebut statements attributed to him and to fail to explain key events in this case for which he had personal knowledge such as why he accessed Roll-Kraft's computers on the evening of October 16, 2001, why 60 megabytes of data were deleted from his home computer after this litigation was instituted and why his home computer was defragmented on four occasions in November, 2001.

4. Defendant Chicago Roll is an Illinois corporation with its principal place of business in Lombard, Illinois. Chicago Roll is engaged in producing and selling tube and pipe mill rolls. Chicago Roll is a direct competitor of Roll-Kraft in the highly competitive tube, pipe and roll formed tooling industry. Harold Focht ("Focht") is the President and sole shareholder of Chicago Roll. Wendy Fuscone ("Fuscone") is the Comptroller of Chicago Roll and runs its computers. Robert Manos ("Manos") is the Vice President of Sales of Chicago Roll. Joseph Olson ("Olson") was the President and fifty percent shareholder of Chicago Roll until 1999 when he sold his interest to Focht; he is presently a competitor of Roll-Kraft and Chicago Roll. Jeff George ("George") and Wally Mullin ("Mullin") are salesmen for Chicago Roll. Although Focht sat through the trial, he did not testify. Focht, Manos, George and Mullin were listed as "will call" witnesses by Defendants in the final pretrial order. Defendants called no witnesses in their defense, and the Court draws an adverse inference by reason of Chicago Roll's decision not to call a witness to explain why information was deleted from its computers after this litigation commenced.

C. ROLL-KRAFT-GRIMES EMPLOYMENT AGREEMENT AND TRAINING

5. In 1996, Roll-Kraft opened a facility in Frankfort, Illinois to better service its accounts in Illinois, Indiana, Iowa, Missouri and Wisconsin.

7. On May 12, 1999, Grimes and Roll-Kraft entered into a two-year Employment Agreement with a one year automatic extension unless terminated. (PX 1). That Agreement includes nondisclosure and non-solicitation provisions. Specifically, the Agreement provides:

6. NON-DISCLOSURE/NON-COMPETITION.

Employee agrees as follows:

(a) That during the term of this Agreement and at any time after Employee leaves the Company, Employee shall not, without prior written consent of the Company in each instance obtained, directly or indirectly, communicate, disclose, transmit, disseminate or otherwise publish or reveal in any form whatsoever to third parties, the Proprietary Information (as hereinafter defined) imparted to Employee by the Company (except as required in the discharge of Employee's duties to the Company). "Proprietary Information" shall mean any and all information, including, but not limited to, information concerning the design and development of tooling used in the Company's business, not generally known or recognized as standard practices, and information which is disclosed to, developed by, or known by Employee concerning any and all of the technology, research, test procedures and results, inventions, concepts, documentation, and computer programming, formulae, manufacturing processes and products, produced or developed by the Company, its successors or assigns.
(c) That during the term of this Agreement and for a period of three (3) years after the termination of this Agreement for any reason, Employee shall not within Lake, Ashtabula, Geauga and Cuyahoga Counties or within a radius of fifty (50) miles from Chicago, Illinois, and Birmingham, Alabama solicit or induce or attempt to solicit or induce, employees or sales representatives of the Company to terminate their employment by or representation of the Company; or solicit customers of the Company or solicit or accept business, patronage or orders directly or indirectly from existing or potential customers of the Company, whether on his own account, or as a partner, joint venturer, employee, agent, representative, consultant, or as a shareholder of any corporation. This covenant is of the essence of this Agreement and shall be construed as independent of any other provision of this Agreement; and the existence of any claim or cause of action of Employee against the Company, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement of this covenant by the Company.
(e) That in the event of a breach or threatened breach by Employee of the provisions of Subparagraphs a, c and d hereof, the Company and its successors, assigns and affiliates (as third party beneficiaries) shall be entitled to an injunction restraining such violation, it being understood that the Company and its successors, assigns and affiliates may also pursue other available remedies for such breach or threatened breach, including the recovery of damages.

8. Grimes had no prior experience or customers in the industry when he was hired by Roll-Kraft. Roll-Kraft devoted extensive efforts to training Grimes about its industry and products. Roll-Kraft introduced him to its customers and gave him lists of existing customers and qualified prospects. But for his employment at Roll-Kraft, Grimes would not have knowledge of Roll-Kraft's customers and proprietary customer information. Roll-Kraft spent a great deal of time and money on Grimes' travel and entertainment, sending other sales employees, engineers and service employees on customer calls with Grimes and supporting his sales efforts.

9. Roll-Kraft is a job shop. It designs its own products and manufactures them in its own shop. Roll-Kraft commands a premium price for its products because of their quality and service. It has been doing business with its customers for many years and holds a large market share at its major customers and in the submarket for premium products and services. Roll-Kraft is the largest company in its industry.

10. The non-disclosure and non-competition provisions of the Employment Agreement were reasonable because Roll-Kraft had developed substantial proprietary information regarding its customers and prospects which a) were not known outside Roll-Kraft's business; b) Roll-Kraft took reasonable measures to safeguard; c) was developed at substantial expense to Roll-Kraft; d) would have great value if disclosed to competitors; and e) would be extremely difficult to duplicate without the expenditure of years of time and millions of dollars of resources.

D. ROLL-KRAFT'S CONFIDENTIAL INFORMATION AND GRIMES' ACCESS TO IT

11. By reason of Grimes' position as a salesperson for Roll-Kraft, Grimes had access to and used Roll-Kraft's customer contact management system (the "ACT" system) which contained confidential, sensitive, proprietary information including but not limited to the following for each customer and potential customer of Roll-Kraft:

a. Name, address and telephone number;

b. Details of any pending quotations;

c. Details of visits or other contacts with the customer, including the subject of the contact;

d. Year-to-date sales and prior year sales; and

e. Information about persons with influence over purchasing decisions.

12. In 2001, Roll-Kraft spent approximately six months developing its own proprietary basic account contact management software (the "BAM" system) at substantial expense in order to give Roll-Kraft a further competitive advantage. In July 2001 Roll-Kraft implemented its new BAM software. BAM represents an improvement over the previous ACT system. (PX 16a — 16j). Under the BAM system, information regarding a customer is available by: 1) salesperson; 2) product use; 3) result of last contact; 4) last contact information; 5) contact type; 6) competition; 7) territory; and 8) country. (PX 16a). Roll-Kraft collects and retains detailed information on every customer and prospect which identifies the customer's decision maker, the products used, the results of each visit made to the customer, open quotes for orders, pricing information and other customer specific information. This system was devised in order to give Roll-Kraft a competitive advantage in servicing its existing customers, in developing new business and enabling a new salesperson to step in without missing a beat. This information was accumulated over many years and at a cost of millions of dollars.

13. In addition to ACT and BAM, Grimes also had access to certain reports on another computer system at Roll-Kraft known as NPI. The NPI system contains confidential and sensitive information including but not limited to:

a. Proposals (quotations);

b. Orders;

c. Prices;

d. Cost information;

e. Profit margins;

f. Shipping dates;

g. Inquiry dates;

h. Prices and other terms of arrangements with vendors of goods and services;

i. Financial statements; and

j. Strategic plans.

Grimes had access to all of these reports, except financial statements and strategic plans.

14. The ACT, BAM and NPI data are proprietary and confidential. Substantial portions of the customer information contained in ACT and BAM is not known to competitors. The proprietary data in ACT, BAM and NPI has been disclosed by Roll-Kraft to its employees only on a "need-to-know" basis and is not generally known or available to the public or competitors. Roll-Kraft maintains the secrecy of such information through such means as limited access and password-protected computer databases. Even within a database, employees have access only to certain reports that are relevant to their jobs and are blocked from access to other reports that they do not have a need-to-know in order to do their jobs. No other employees of Roll-Kraft, except for its Information Services ("IS") Department personnel, can gain access to such ACT, BAM or NPI information. The IS personnel are under strict instructions not to grant access to such information except to the authorized employees with a need-to-know. Roll-Kraft's customer information provides it with a competitive advantage. Roll-Kraft's competitors could derive significant economic value if they obtained access to this information.

15. Grimes' Employment Agreement contains a provision that he shall not disclose Roll-Kraft's proprietary information. (PX 1, ¶ 6(a)). In addition, Roll-Kraft's Employee Handbook contains the following nondisclosure of confidential information provision:

CONFIDENTIAL NATURE OF WORK

All Roll-Kraft records and information relating to Roll-Kraft or its customers are confidential and employees must treat all matters accordingly. No Roll-Kraft or Roll-Kraft-related information, including without limitation, documents, notes, files, records, oral information, computer files or similar materials (except in the ordinary course of performing duties on behalf of Roll-Kraft) may be removed from Roll-Kraft's premises without permission from Roll-Kraft. Additionally, the contents of Roll-Kraft's records or information otherwise obtained in regard to business may not be disclosed to anyone, except where required for a business purpose. Employees must not disclose any confidential information, purposefully or inadvertently (through casual conversation), to any unauthorized person inside or outside the Company. Employees who are unsure about the confidential nature of specific information must ask their supervisor for clarification. Employees will be subject to appropriate disciplinary action, up to and including dismissal, for knowingly or unknowingly revealing information of a confidential nature.

EMPLOYER INFORMATION AND PROPERTY

The protection of Roll-Kraft business information, property and all other Company assets are vital to the interests and success of Roll-Kraft. No Roll-Kraft related information or property, including without limitation, documents, files, records, computer files, equipment, office supplies or similar materials (except in the ordinary course of performing duties on behalf of Roll-Kraft) may, therefore, be removed from the Company's premises. In addition, when an employee leaves Roll-Kraft, the employee must return to the Company all Roll-Kraft related information and property that the employee has in his/her possession, including without limitation, documents, files, records, manuals, information stored on a personal computer or on a computer disc, supplies, and equipment or office supplies. Violation of this policy is a serious offense and will result in appropriate disciplinary action, up to and including discharge. (PX 25).

On January 22, 2001, Grimes signed an Acknowledgment agreeing to abide by the Employee Handbook. (PX 26).

16. Information as to Roll-Kraft's proposals to customers or potential customers, if known to a competitor, would harm Roll-Kraft's ability to win the business. Details of customer contacts and sales figures would provide valuable information to competitors as to sales and marketing opportunities. Information as to Roll-Kraft's prices, costs, profit margins and other financial data would allow a competitor to anticipate Roll-Kraft's future bids. Likewise, information as to the prices and other terms of Roll-Kraft's relationships with vendors of goods and services could allow competitors to pressure the vendors to provide similar terms. A competitor in possession of Roll-Kraft's proprietary and confidential information could unfairly compete with Roll-Kraft through the use of such information.

E. GRIMES' DECISION TO GO TO WORK FOR CHICAGO ROLL

17. Roll-Kraft required that its salesmen add all customer contact information to ACT and BAM promptly and in detail. This task required an average of four to six hours per week for each salesman. Roll-Kraft's President, Gehrisch, carefully monitors the BAM reports as a means of assuring that his sales personnel are performing their work. Beginning in November, 1999, Grimes was told that he was not adequately completing his reports and that his salary would be reduced if his performance did not improve. (PX 3a). Gehrisch determined that Grimes was not performing up to expectations.

18. On October 3, 2000, Gehrisch reduced Grimes' salary by $2,500 because he failed to comply with Roll-Kraft's requirements for adding customer contact ...


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