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Cortz, Inc. v. Doheny Enterprises, Inc.

United States District Court, N.D. Illinois, Eastern Division

July 11, 2017

CORTZ, INC., d/b/a In the Swim, Plaintiff,
v.
DOHENY ENTERPRISES, INC., and TIM MURPHY, Defendants.

          MEMORANDUM OPINION AND ORDER

          AMY J. ST. EVE United States District Court Judge.

         On May 5, 2017, Plaintiff Cortz, Inc., d/b/a In the Swim (“Cortz”) filed a six-count First Amended Complaint for Injunctive and Other Relief against its former employee Tim Murphy (“Murphy”) and Doheny Enterprises, Inc. (“Doheny Enterprises”) alleging violations of the Defend Trade Secrets Act of 2016 (“DTSA”), 18 U.S.C. § 1831, et seq. (Count I), and the Illinois Trade Secrets Act (“ITSA”), 765 ILCS 1065/1, et seq. (Count II), three breach of contract claims (Counts III-V), and a tortious interference with contract claim (Count VI). See 28 U.S.C. §§ 1331, 1367(a).

         Before the Court is Cortz's renewed motion for a preliminary injunction brought pursuant to Federal Rule of Civil Procedure 65(a) in which Cortz focuses on its trade secret claims and two breach of contract claims alleged in the First Amended Complaint. The Court held a preliminary injunction hearing on June 28 and 29, 2017, at which time the following witnesses testified: (1) David Newman, Cortz's Executive Vice President of Finance; (2) Michael “Mick” Doheny, Vice President of Doheny Enterprises; (3) Timothy Murphy, Cortz's former Director of Purchasing; and (4) Rick Parise, a Category Director at Leslie's Pool Supplies. The parties produced the following witness testimony through deposition designations: (1) John Doheny, President of Doheny Enterprises; (2) Brink Spruill, Vice President of Sales and Marketing at Kelley Technical Coatings (“Kelley”); and (3) Martin (“Marty”) Mullarkey, President of Mullarkey Associates and a sales representative/agent for Kelley.

         In assessing the parties' preliminary injunction arguments, the Court considered the totality of the evidence presented at the evidentiary hearing, including the deposition designations, and carefully examined the credibility of the witnesses. When assessing witness credibility, the Court considered each witness' demeanor and facial expressions; intelligence; ability and opportunity to see, hear, or know the matters about which the witness testified; memory; potential for bias; and, significantly, the believability of the witness' testimony in light of the other evidence presented. See Anderson v. City of Bessemer, N.C., 470 U.S. 564, 575 (1985); Furry v. United States, 712 F.3d 988, 993 (7th Cir. 2013). Further, the Court thoroughly analyzed the controlling legal authority.

         With these standards in mind, Cortz has not met its burden of establishing the likelihood of success on the merits as to its breach of contract claim against Doheny Enterprises in relation to the November 30, 2015 Confidentiality Agreement, its DTSA and ITSA claims, and its breach of an employment contract claim against Murphy. Therefore, the Court, in its discretion, denies Cortz's motion for a preliminary injunction. See Winter v. Nat. Res. Def. Council, Inc., 555 U.S. 7, 24 (2008) (“A preliminary injunction is an extraordinary remedy never awarded as of right.”); Turnell v. CentiMark Corp., 796 F.3d 656, 661 (7th Cir. 2015) (“A preliminary injunction is an extraordinary equitable remedy that is available only when the movant shows clear need.”). Further, the Court, in its discretion, grants Defendants' in limine motion limiting Rick Parise's testimony as inadmissible hearsay, as discussed in detail below. See Fed.R.Evid. 801(c).

         BACKGROUND[1]

         I. Introduction

         Cortz has been in business for over thirty years and provides swimming pool and spa-related products to residential and commercial customers across the United States. (6/28/17, Newman Prelim. Inj. Hr'g.)[2] Specifically, Cortz offers an assortment of merchandise, such as spa and pool chemicals, equipment, supplies, and parts, from different manufacturers and has its own branded products. (Id.) In addition, Cortz sells its products through a variety of different marketplaces and websites, such as Amazon and eBay. (Id.) Doheny Enterprises, which has been in business for fifty years, directly competes with Cortz and offers pool and spa chemicals, equipment, and accessories to customers across the United States. (6/28 M. Doheny Prelim. Inj. Hr'g.) Like Cortz, Doheny Enterprises sells its products through online marketplaces like Amazon and eBay, as well as through its own proprietary website and at its retail stores. (Id.)

         II. Prospective Purchase of Cortz

         In November 2015, John Doheny, Doheny Enterprises' President, discovered that Cortz might be for sale. (R. 84, J. Doheny Dep., at 40-41.) More specifically, John Doheny learned that Lincoln International, LLC (“Lincoln”) was acting as a broker for the sale of Cortz, after which he contacted a representative at Lincoln to express an interest in purchasing Cortz. (Id. at 40-41.) In connection with this inquiry, John Doheny signed a Confidentiality Agreement on behalf of Doheny Enterprises. (Id. at 42.) In particular, Doheny Enterprises' counsel forwarded the Confidentiality Agreement to John Doheny, who signed it on November 30, 2015. (Id. at 42-43; Prelim. Inj. Hr'g Ex. 35, Confidentiality Agmt.)

         Following the execution of the Confidentiality Agreement, in December 2015, an associate at Lincoln sent Cortz marketing materials to John Doheny and Doheny Enterprises' counsel. (J. Doheny Dep., at 52-53; Prelim. Inj. Hr'g Ex. 39.) In January 2016, John Doheny attended a meeting with Cortz's management team. (J. Doheny Dep., at 53.) The Cortz employees attending the January 2016 meeting were Steve Druckman (CEO), Eric Rohrdanz (COO), David Newman (CFO), and Christine Mattson (CMO). (6/28 Newman Prelim. Inj. Hr'g; 6/29 M. Doheny Prelim Inj. Hr'g.) Defendant Tim Murphy, Cortz's former Director of Purchasing, did not attend the January 2016 meeting and did not participate in any discussions with Doheny Enterprises regarding the potential sale of Cortz. (6/29 M. Doheny Prelim Inj. Hr'g.) At that time, however, John Doheny knew who Murphy was and that he worked for Cortz. (J. Doheny Dep., at 51.) Meanwhile, at the January 2016 meeting, Cortz distributed an information packet marked confidential to the following Doheny Enterprises' personnel attending the meeting - John Doheny (President), Mick Doheny (Vice President), and Brian Hendrickson (Vice President of Marketing). (Id. at 30-31, 52-53.)

         At some point after the January 2016 meeting, John Doheny expressed an interest in purchasing Cortz. (J. Doheny Dep., at 55-56.) Nonetheless, in February 2016, Cortz's counsel sent a letter to John Doheny - but not to Doheny Enterprises' counsel - explaining that because Doheny's participation in the sale had ended, John Doheny should destroy the confidential information provided by Cortz pursuant to paragraph 6 of the Confidentiality Agreement. (Id. at 71-72.) According to John Doheny, upon receiving this letter, he destroyed the confidential information and contacted Mick Doheny and Brian Henderson directing them to do the same. (Id.) John Doheny specifically testified that because Doheny Enterprises' counsel had not attended the January 2016 meeting and had not received the packet of confidential information, he did not think to contact counsel and ask him to destroy any confidential documents that counsel might have. (Id. at 72-74.)

         Leslie's Pool Supplies (“Leslie's”) was the successful purchaser of Cortz, and around the end of June 2016, Leslie's closed on its acquisition of Cortz. (6/28 Newman Prelim. Inj. Hr'g.) Cortz is now a wholly-owned subsidiary of Leslie's. (Id.) At the preliminary injunction hearing, Newman testified that Leslie's paid approximately $7 million for Cortz, along with paying approximately $30 million in Cortz's debt. (Id.) Newman further explained that prior to Leslie's 2016 acquisition, more specifically from 2012 to 2016, Cortz's sales were steady, but its earnings were going down. (Id.) Newman also clarified that Leslie's yearly sales figures are about five times larger than Cortz's yearly sales. (Id.) Similarly, Mick Doheny testified at the preliminary injunction hearing that Leslie's is ten times larger than Doheny Enterprises. (6/29 M. Doheny Prelim. Inj. Hr'g.)

         III. Murphy's Employment

         Defendant Murphy began his employment with Cortz in April 1997 starting as a Store Assistant Manager. (6/29 Murphy Prelim. Inj. Hr'g.) At that time, Murphy entered into an employment agreement with Cortz. (Id.) During his employment at Cortz, Murphy worked his way up to the position of Cortz's Director of Purchasing. (Id.) When Murphy was the Director of Purchasing, his responsibilities included purchasing products from vendors and negotiating vendor agreements. (Id.) At the preliminary injunction hearing, Newman testified that as Cortz's employee, Murphy had access to the costs of goods from its suppliers, the suppliers' rebate structures, and the suppliers' early-buy discount terms, as well as certain marketing strategies like bundling products for a discounted price. (6/28 Newman Prelim. Inj. Hr'g.) In particular, Newman testified that Murphy attended daily management meetings, at which time various Cortz officers and managers met with Cortz's CEO and reviewed what Newman characterizes as a “great sum of data.” (Id.; Prelim. Inj. Hr'g Ex. 43.) Newman further elucidated that Murphy was privy to the daily flash report sent to approximately twenty-five to thirty other Cortz employees. (6/28 Newman Prelim. Inj. Hr'g.) Also, Newman stated that after Cortz fired Murphy, Murphy did not physically take any documents containing Cortz's trade secrets with him. (Id.)

         Cortz terminated Murphy's employment on July 14, 2016. (Id.; 6/29 Murphy Prelim. Inj. Hr'g.) At the preliminary injunction hearing, Murphy explained that Cortz terminated his employment due in part to his refusal to sign a retention bonus agreement that Leslie's offered because it contained a two-year non-compete clause prohibiting him for working in the swimming pool supply industry if he left Leslie's employment or if Leslie's terminated his employment. (6/29 Murphy Prelim. Inj. Hr'g.) Murphy also testified that prior to rejecting the retention bonus, he had numerous conversations with Cortz and Leslie's, at which time he expressed his concerns about the two year non-compete clause. (Id.) Similarly, Newman testified that Cortz terminated Murphy's employment because Murphy would not sign the two year non-compete agreement. (6/28 Newman Prelim. Inj. Hr'g.)

         After his termination, Murphy began looking for work and called Mick Doheny in July 2016. (Id.; 6/28 M. Doheny Prelim. Inj. Hr'g.) That phone call resulted in several meetings between Murphy and Mick Doheny. (6/28 M. Doheny Prelim. Inj. Hr'g.) Doheny offered to hire Murphy as a re-buyer working with 14 vendors. (6/29 Murphy Prelim. Inj. Hr'g; 6/29 M. Doheny Prelim. Inj. Hr'g.) At the preliminary injunction hearing, Mick Doheny clarified that a re-buyer is tasked with looking at sales trends to build and then place orders for products with certain vendors. (6/28 M. Doheny Prelim. Inj. Hr'g.) Doheny Enterprises and Murphy agreed that Murphy would initially work as a consultant with the understanding that it was for a one-year trial period. (J. Doheny Dep., at 57-58; 6/28 M. Doheny Prelim. Inj. Hr'g.) Doheny Enterprises and Murphy signed a consulting agreement dated August 29, 2016 (“Consulting Agreement”) and Murphy started working for Doheny Enterprises on September 6, 2016. (6/28 M. Doheny Prelim. Inj. Hr'g; Prelim. Inj. Hr'g Ex. 7 Consulting Agmt.) The Consulting Agreement affirmatively prohibited Murphy from using third-party confidential information in connection with his employment with Doheny. (Consulting Agmt. ¶ 10.)

         IV. Vendor Pricing

         At the preliminary injunction hearing, Rick Parise, a Leslie's employee who works with vendors, testified that he had a telephone conversation with Brink Spruill, an employee of pool supply vendor Kelley, sometime in February 2017. (6/29/17 Parise Prelim. Inj. Hr'g.) Parise testified that during this telephone conversation, Spruill brought to his attention that Murphy - who now works for Doheny Enterprises - had pressured Spruill about costs and vendor pricing. (Id.) Further, Parise testified that he talked to Spruill another time after the first conversation, although he did not recall the exact date. (Id.) During this second conversation, Parise told Spruill that Leslie's legal counsel had contacted him about the February 2017 telephone conversation. (Id.)

         On the other hand, Brink Spruill testified at his deposition that he did not recall this conversation with Parise and that he has not talked to or e-mailed Murphy after Leslie's acquired Cortz in June 2016. (R. 83, Spruill Dep., at 29-32, 39.) Not only did Spruill testify that he did not remember any such conversation, but he specifically denied that he told Parise that Murphy put pressure on him regarding vendor pricing or that he discussed Murphy putting pressure on him with any other vendors. (Id. at 32-33.) Spruill also testified that no one at Doheny Enterprises, including Murphy, has told him that they know the prices Cortz pays Kelley. (Id. at 60-61.)

         Next, Cortz points to the ongoing three-year negotiation between Doheny Enterprises and Kelley regarding the per gallon price of a product called “Zeron, ” which is an epoxy pool coating. (R. 86, Mullarkey Dep., at 74; 6/28 M. Doheny Prelim. Inj. Hr'g.) In particular, in November 2016, Kelley's agent, Marty Mullarkey, along with Mick Doheny and Brink Spruill, exchanged a series of e-mails concerning Mick Doheny's request for lower Zeron prices from Kelley. (Mullarkey Dep., at 76-81; 6/28 M. Doheny Prelim. Inj. Hr'g.) Shortly thereafter, in a letter to Mick Doheny, Spruill mentioned Cortz (by its abbreviation ITS) and offered Doheny a reduced price on the Zeron. (6/28 M. Doheny Prelim. Inj. Hr'g; Ex. 33, 11/17/16 Spruill Letter.) Spruill specifically referenced Cortz as follows:

Please consider that Kelley Technical Coatings has done some good things in support of the Doheny efforts to reach deep into the marketplace. For instance, we direct hundreds of callers to you when inquiring about purchasing Olympic, a very trusted brand. I believe our website to be superb and we will be ramping up our social media presence for the upcoming year, along with our ongoing marketing investments. I also think it important to mention we sent out at no charge over $43, 000 in free goods plus freight last year to Doheny customers (we code them) for whatever complaint they were being unreasonable about, just to maintain a smooth relationship and faith in the line. Remember, Doheny grew 12% over the last 4 years where ITS [Cortz] flat lined.

(11/17/16 Spruill Letter.) Mick Doheny replied to Spruill's letter requesting an additional $4.00 per gallon price reduction on Zeron. (6/28 M. Doheny Prelim. Inj. Hr'g; Prelim. Inj. Hr'g Ex. 34, 11/22/16 e-mail.) Kelley eventually offered to reduce the price by an additional $2.00 a gallon, which Mick Doheny accepted. (6/28 M. Doheny Prelim. Inj. Hr'g.) In explaining why he asked for a lower per gallon price for Zeron, Mick Doheny testified that he requested a lower price because he discovered through Cortz's advertising that Cortz was selling its self-branded version of Zeron for a retail price of $69.99 a gallon, which was essentially Doheny Enterprises' wholesale per gallon cost of the product. (Id.) Mick Doheny explained that “I just wanted a better price on it because I couldn't sell it for what they were selling it for and not lose money.” (Id.) Furthermore, Mick Doheny testified that Murphy was not involved in the Zeron price negotiations and that Murphy never told him the vendor price that Cortz paid. (Id.)

         LEGAL STANDARD

         “A preliminary injunction is an extraordinary equitable remedy that is available only when the movant shows clear need.” Turnell v. CentiMark Corp., 796 F.3d 656, 661 (7th Cir. 2015); see also Whitaker By Whitaker v. Kenosha Unified Sch. Dist. No. 1 Bd. of Educ., 858 F.3d 1034, 1044 (7th Cir. 2017) (“A preliminary injunction is an extraordinary remedy.”). Moreover, a preliminary injunction is “a way to maintain the status quo until merits issues can be resolved at trial.” Michigan v. U.S. Army Corp of Eng'rs, 667 F.3d 765, 783 (7th Cir. 2011). To obtain a preliminary injunction, the moving party must show that (1) its claims have some likelihood of success on the merits; (2) it will suffer irreparable harm prior to ...


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