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Primesource Building Products, Inc. v. Huttig Building Products, Inc.

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

December 9, 2017

SCOTT FELTEN, et al., Defendants.


          Young B. Kim, United States Magistrate Judge

         Before the court are PrimeSource Building Products, Inc.’s (“PrimeSource”) motions for preliminary injunction in these two related cases against Huttig Building Products, Inc. (“Huttig”) and several of PrimeSource’s former employees who currently work for Huttig. PrimeSource seeks what it refers to as a “production injunction,” which would shut down the operation of an entire Huttig division, known as the Huttig-Grip Division, pending a final trial on the merits. Alternatively, it seeks to enjoin Huttig from selling building products to certain customers and to prevent certain Huttig employees from working for either Huttig or the Huttig-Grip Division. The parties have consented to this court’s jurisdiction for the limited purpose of resolving the preliminary injunction motions. For the following reasons, PrimeSource’s motion for a preliminary injunction in case No. 16 CV 11390 is denied, (R. 23), and its motion for a preliminary injunction in case No. 16 CV 11468, (R. 26), is granted in part and denied in part:

         Procedural History

         PrimeSource initiated these related actions within four days of each other in December 2016. On December 15, 2016, PrimeSource sued Huttig along with four former PrimeSource CEOs who currently work in the Huttig-Grip Division: Kenneth Fishbein, Mona Zinman, David Fishbein, and Robert Furio (collectively, “the CEO Defendants”). PrimeSource alleges that the CEO Defendants violated the federal Defend Trade Secrets Act (“DTSA”), 18 U.S.C. §§ 1836-39, and several covenants in their employment agreements with PrimeSource when they went to work for Huttig. (Case No. 16 CV 11390, R. 1, Compl. ¶¶ 68-119.) A month later PrimeSource amended its complaint to include a claim under the Illinois Trade Secrets Act, 765 ILCS 1065/1, et seq. (Case No. 16 CV 11390, R. 18, Am. Compl. ¶¶ 66-67.) On December 19, 2016, PrimeSource sued Huttig along with former PrimeSource employees Scott Felten, Garrett Kessler, Daniel Kottmeyer, Allan Sagunsky, and Jordan Whitehead (collectively, “the Felten Defendants”), alleging that they violated the DTSA, the ITSA, and several restrictive covenants from their employment agreements with PrimeSource when they took jobs working with the CEO Defendants in the Huttig-Grip Division. (Case No. 16 CV 11468, R. 1, Compl. ¶¶ 78-116.) In both cases PrimeSource also alleges that Huttig tortiously interfered with its employment contracts with the individual defendants. (Case No. 16 CV 11390, R. 18, Am. Compl. ¶¶ 100-04; Case No. 16 CV 11468, R. 18, Am. Compl. ¶¶ 123-129.)

         On January 19, 2017, PrimeSource filed the current motion for preliminary injunction in its case against Huttig and the CEO Defendants. (Case No. 16 CV 11390, R. 23.) That same day, PrimeSource moved for a temporary restraining order (and after an evidentiary hearing, a preliminary injunction) against Huttig and the Felten Defendants. (Case No. 16 CV 11468, R. 26.) Following a hearing and briefing, on March 3, 2017, the court granted the TRO motion in part, temporarily restraining the Felten Defendants and Huttig from using PrimeSource materials in their possession, from soliciting certain customers, and from selling certain products or services. (Case No. 16 CV 11468, R. 41, TRO at 1.) The court twice amended the TRO in the six weeks that followed, (Case No. 16 CV 11468, R. 52, Am. TRO at 1; R. 78 at 1), with the third and current iteration specifying that:

a. Defendants Scott Felten, Garrett Kessler, Daniel Kottmeyer, and Allan Sagunsky are prohibited from soliciting any PrimeSource customers, either directly or indirectly, to whom they, individually as PrimeSource employees, sold products or services to during the past two calendar years, where those products or services are (i) competitive with PrimeSource’s fasteners or are (ii) fasteners of a similar type, kind, or nature to those supplied or distributed by PrimeSource during their employment with PrimeSource.

(Case No. 16 CV 11468, R. 78, Am. TRO at 1.) The current TRO further clarifies that:

b. Defendant Huttig is not prohibited from soliciting customers to whom Defendants Felten Kessler, Kottmeyer, or Sagunsky, individually as PrimeSource employees, sold products or services to during the past two calendar years, provided that Defendants Felten, Kessler, Kottmeyer, and/or Sagunsky have no role, either directly or indirectly, in such solicitations by Huttig. Huttig shall not solicit such customers using information provided to Huttig by Defendants Felten, Kessler, Kottmeyer, or Sagunsky.

(Id. at 1-2.)

         In early April 2017 both cases were referred to this court for discovery supervision. (Case No. 16 CV 11390, R. 51; Case No. 16 CV 11468, R. 63.) The following month the referrals were expanded to include the motions to dismiss then pending in both cases and the motion for preliminary injunction pending in the case against the CEO Defendants. (No. 16 CV 11390, R. 55; Case No. 16 CV 11468, R. 85.) This court issued an order scheduling the evidentiary hearing for the preliminary injunction motions to begin on August 10, 2017. (Case No. 16 CV 11390, R. 62; Case No. 16 CV 11468, R. 93.)

         On July 6, 2017, this court issued memorandum reports and recommendations with respect to the two motions to dismiss. In the case against Huttig and the CEO Defendants, the defendants sought to dismiss only the DTSA and the ITSA claims, arguing that PrimeSource failed to identify the relevant trade secrets with sufficient specificity. This court recommended that this argument be rejected, noting that even general allegations regarding the identity of trade secrets are sufficient to pass muster at the Rule 12(b)(6) stage. (Case No. 16 CV 11390, R. 72, Mem. Rep. & Rec. at 9.) In the case against Huttig and the Felten Defendants, the defendants sought to dismiss all seven then-pending counts. This court recommended granting the motion only with respect to the then-pending conversion claim, and denying the motion with respect to the remaining claims. (Case No. 16 CV 11468, R. 105, Mem. Rep. & Rec. at 27.) In addressing the breach of contract claims, this court recommended a finding that Texas law applies to those claims under the terms of the Felten Defendants’ respective employment agreements, (id. at 11), but recommended that the question of the enforceability of the agreements’ covenants be resolved at a post-evidentiary stage in the litigation, (id. at 12).

         Shortly after this court issued its reports and recommendations, PrimeSource amended its complaints in both cases, adding a defendant in the case against the Felten Defendants and dropping the conversion claim.[1] (Case No. 16 CV 11390, R. 75, 2d Am. Compl.; Case No. 16 CV 11468, R. 108, 2d Am. Compl. ¶¶ 75-89, 128-39.) On July 24, 2017, the parties consented to this court’s jurisdiction to resolve the preliminary injunction motions. (Case No. 16 CV 11390, R. 95; Case No. 16 CV 11468, R. 130.) On August 3, 2017, this court’s reports and recommendations with respect to the motions to dismiss were adopted. (Case No. 16 CV 11390, R. 107; Case No. 16 CV 11468, R. 141.)

         Beginning on August 10, 2017, this court held a seven-day joint evidentiary hearing with respect to the preliminary injunction motions pending in both cases. Over the course of the hearing, the parties presented multiple witnesses and hundreds of exhibits. Following the hearing, the parties submitted proposed findings of fact and conclusions of law. Although these cases have never been formally consolidated, the parties agreed to a single evidentiary hearing addressing both motions and filed in both cases identical, global post-hearing briefs covering both motions. Accordingly, and in the interest of efficiency, this court addresses both motions in this single opinion. Based on the testimony and evidence presented at the hearing, the following represents this court’s findings of fact and conclusions of law:

         Findings of Fact

         A. PrimeSource, Huttig, and the Building Products Industry

         PrimeSource is a building products company that derives a significant amount of revenue from the sale of fasteners. (Tr. 53, 56.) Fasteners are nails and screws that are used to join building products together in construction projects. (Tr. 54.) PrimeSource sells many of its products, including fasteners, under the brand name “Grip-Rite,” which is a premium brand that PrimeSource has spent many years developing. (Tr. 412-14.) PrimeSource does not make any products itself, but rather functions as a distributor of building products and an intermediary between suppliers and customers. PrimeSource works with over 17,000 customers and 600 suppliers. (Tr. 473-74.)

         Huttig is a publicly traded company that has been in the building products distribution business since 1885. (Tr. 314, 384.) Its core products include prefabricated doors, windows, and millwork. (Tr. 71, 1458.) Like PrimeSource, Huttig is a building products distributor, meaning it buys and resells products used in the building industry rather than manufacturing products itself. (Tr. 71-72, 384-85.) Huttig has approximately 1,500 full-time employees and has historically worked with over 10,000 customers, including customers who also work with PrimeSource. (Tr. 246, 326, 385.) Before launching its Huttig-Grip Division in November 2016, Huttig distributed fasteners primarily in the Pacific Northwest region, but did not have a sales force specifically designated to fastener sales. (See Tr. 1458-59, 1475.)

         As building products distributors, both Huttig and PrimeSource order and purchase fasteners and other products from suppliers (also known in the industry as “vendors” or “mills”), which are typically located overseas. Both companies then resell the products to customers, which are generally lumber yards or retailers like hardware stores. (See Tr. 58, 384.) Fasteners are pure commodity items, meaning they are produced according to standard, government-regulated specifications. (See Tr. 1326.) Accordingly, fastener suppliers will produce identical fasteners for competing building products distributors, including PrimeSource, Huttig, and many others. (Id.)

         Both Huttig and PrimeSource employ standard one-step and two-step distribution models that are widely used by distributors in the building products industry. (See Tr. 68, 385-87, 420.) The one-step distribution model is known as “direct sales,” and involves the distributor acting as a product broker arranging for shipment directly from the supplier to the customer. (Tr. 385-87.) Under the two-step model, the distributor buys products from the supplier, physically receives and warehouses the goods, and then resells the products through the warehouse on an order-by-order basis. (See Tr. 386.) The warehouses used in the two-step model are also known as “distribution centers.” Huttig currently has 27 distribution centers located throughout the United States, (id.), and PrimeSource has 34, (Tr. 64).

         The building products industry is a concentrated one, and it is not unusual for professionals to work for a prior employer’s competitor during the course of a career. (See, e.g., Tr. 150, 153, 162.) For example, PrimeSource’s current CEO, George Judd, previously worked as the COO and then the CEO of BlueLinx, a company that competes directly with PrimeSource’s fastener-distribution business. (Tr. 51-52.) Judd has hired employees straight from PrimeSource competitors to work at PrimeSource, and he would hire someone from Huttig “if they were the right candidate.” (Tr. 159.)

         B. The CEO Defendants and PrimeSource’s 2015 Ownership Change

         For a period leading up to the end of 2014, Kenneth Fishbein and Mona Zinman served as co-CEOs of PrimeSource. (Tr. 486, 1146-47, 1156-57.) Both are veteran building products professionals, with Zinman getting started in the industry when she was only 15 years old. (Tr. 1144-45, 1156.) In her role as co-CEO of PrimeSource, Zinman focused on import purchasing and logistics, which involved establishing and maintaining relationships with vendors and negotiating contract terms with those vendors. (Tr. 1146-60.) Zinman and Kenneth Fishbein retired as CEOs of PrimeSource on December 31, 2014, but stayed on in consulting roles for PrimeSource from January through May 2015. (Tr. 342, 1111, 1156-57.) Zinman and Kenneth Fishbein both signed employment agreements while at PrimeSource that incorporated several restrictive covenants, including restrictions on post-employment solicitation, competition, and disclosure of confidential information. The non-solicitation and non-competition provisions of those agreements expired on November 8, 2016. (JX[2] 3; JX 4; JX 6; JX 7; Case No. 16 CV 11390, R. 148-1.) The provisions prohibiting the disclosure of PrimeSource’s confidential information do not have an expiration date. (JX 3 ¶ 4.1.4; JX 6 ¶ 4.1.4.) Those provisions provide that Zinman and Kenneth Fishbein shall not, during or after their employment with PrimeSource, use or disclose to any third party confidential information, defined as:

[I]nformation disclosed to or known by Executive as a consequence of or through [his or her] employment by PS concerning PS’s or PS’s client’s business, operations, trade secrets, plans, products, processes, practices, or services including, without limitation, information relating to research, development, inventions, suppliers, customers, purchasing, accounting, finance, price lists, and marketing.

(JX 3 ¶ 4.1; JX 6 ¶ 4.1.)

         Upon Kenneth Fishbein’s and Zinman’s retirements, David Fishbein (who is Kenneth’s son) and Robert Furio took over as co-CEOs of PrimeSource on January 1, 2015. (Tr. 698; JX 9; JX 11.) During David Fishbein’s and Furio’s tenure as co-CEOs, PrimeSource’s owner at the time, Itochu International, Inc., was marketing PrimeSource for sale to private investment companies. (Tr. 1004; JX 2.) Furio and David Fishbein worked with PrimeSource’s banker to produce various marketing and promotional materials to present to potential investors. (PX 10.) On the advice of its banker, PrimeSource included in one of those presentations a reference to its supplier base as its “secret sauce.” (Tr. 1016, 1390.)

         On May 8, 2015, a private equity firm Platinum Equity purchased PrimeSource. (Case No. 16 CV 11390, R. 18, Am. Compl. ¶ 38.) Platinum Equity changed some elements of PrimeSource’s operations significantly and the company began a series of workforce reductions. (Tr. 449-50, 1405-06.) On August 15, 2015, Platinum Equity fired Furio and David Fishbein. (Tr. 1050-51.) Neither David Fishbein nor Furio took any documents with them when they left PrimeSource, on the same day they were fired. (Tr. 1107-08, 1413-14.)

         On the day that Platinum Equity bought PrimeSource, David Fishbein and Furio signed Amended and Restated Employment Agreements, (JX 9; JX 11), and on September 24, 2015, just over a month after they were fired and stopped working at PrimeSource, they both signed separate Severance and Release of Claims Agreements, (JX 10; JX 12). Those agreements included post-employment covenants not to compete and non-solicitation covenants. The covenants restricted David Fishbein and Furio from entering the employment of, or rendering any services to, a material competitor of PrimeSource. (JX 9 ¶ 4; JX 10 ¶13; JX 11 ¶ 4; JX 12 ¶ 13.) The covenants also precluded the two from soliciting for employment or hiring any of PrimeSource’s employees. (Id.) The non-competition and solicitation covenants lasted for 12 months and expired on September 16, 2016. (Id.)

         The agreements also included covenants relating to the disclosure of confidential information. (Id. ¶ 4.1) Through those covenants David Fishbein and Furio agreed not to use, disseminate or disclose PrimeSource’s confidential information, defined identically to the definition of confidential information set out in Zinman’s and Kenneth Fishbein’s non-disclosure covenants. (Id.) The nondisclosure covenants do not have an expiration date, and extend beyond the expiration of the CEO Defendants’ employment at PrimeSource. (Id. ¶ 4.1.4.)

         C. The Felten Defendants

         The Felten Defendants all worked in sales, sales support, or purchasing roles at PrimeSource during David Fishbein’s and Furio’s tenure as co-CEOs. Four of the five Felten Defendants (Sagunsky being the exception) met David and Kenneth Fishbein while working as golf caddies at a local country club. Specifically, Felten, Kessler, Kottmeyer, and Whitehead all worked as golf caddies at a country club where the Fishbeins played golf, and got to know the Fishbeins while working in those jobs. (Tr. 484, 692-93, 791-92, 885.)

         The Fishbeins helped Felten, Kessler, Kottmeyer, and Whitehead secure jobs at PrimeSource. Kenneth Fishbein helped Felten get a job at PrimeSource as an inside sales person. (JX 16; Tr. 694.) Felten later transitioned to a role as a territory manager covering Chicago’s northwest suburbs, and in 2015 he moved into his last role at PrimeSource, which was in domestic purchasing. (Tr. 694, 759-60.) Kessler first met the Fishbeins when he was a 13-year-old caddy, and his first fulltime job was in the major accounts department at PrimeSource. (Tr. 484-85.) After serving in that role for a couple of years, Kessler moved to the direct sales department in early 2014, where he worked out of the Buffalo Grove office but serviced customers outside the area, primarily through phone and online contacts. (Tr. 485; 593-94.) Similarly, David Fishbein helped Kottmeyer get a job at PrimeSource as an inside sales representative, eventually moving to an outside sales representative job serving a small territory in Chicago’s northern suburbs. (Tr. 791-94.) Whitehead met the Fishbeins as a 17-year-old caddy, and went to work at PrimeSource in a support capacity for inside salespeople. (Tr. 885, 914-15.) The fifth Felten defendant, Allan Sagunsky, never caddied for the Fishbeins but now considers David Fishbein to be a friend. (Tr. 685.) He worked in direct sales at PrimeSource until November 2016. (Tr. 430-31, 646.)

         During their tenure at PrimeSource four of the five Felten Defendants- Felten, Kessler, Kottmeyer, and Sagunsky-signed employment agreements which included non-solicitation and non-competition covenants. Those covenants precluded the Felten Defendants from soliciting PrimeSource customers or working for PrimeSource competitors for 18 months after their PrimeSource employment ended. Specifically, the covenants provided that the employees would not:

[W]ithin a three-hundred (300) mile radius of any (a) distribution center of PrimeSource to which Employee has reported at any time during his or her employment with PrimeSource or (b) sales territory which has been serviced by Employee at any time during his or her employment with PrimeSource:
• Sell or offer for sale any products or services of the type sold or offered by PrimeSource to any customer to whom PrimeSource sold products or provided services or any prospect PrimeSource solicited for business during the two most recently complete calendar years;
• Enter the employ of, or render any services to, any person, firm or business that is engaged in any business competitive with that of PrimeSource, including but not limited to the business of wholesale distributing or selling packaged or bulk nails or screws, collated tools or fasteners, roofing, gypsum, insulation, adhesives, wire products or any other building, building materials or related products and who has sold or offered for sale such products or services during the two most recently completed calendar years[.]

(JX 13 ¶ IV; JX 14 ¶ IV; JX 16 ¶ IV; JX 17 ¶ IV.)

         All five of the Felten Defendants signed agreements including a covenant restricting disclosure of confidential information. Whitehead signed an agreement that explicitly states it “survive[s] any termination of this Agreement or of Employee’s employment” and that defines confidential information as follows:

[A]ll non-public information regarding the (A) businesses, operations, finances and administration of the Company; (B) the systems, know-how and records, products, services, costs, inventions, computer software programs, marketing and sales techniques or programs, methods, methodologies, manuals, lists and other trade secrets heretofore or hereafter acquired, sold, developed, maintained or used by the Company, (C) the nature and terms of the Company’s relationships with its customers, suppliers, lenders, underwriters, vendors, consultants, independent contractors, attorneys, accountants and employees; and (D) annual and monthly budgets, sales margins, compensation statements and all company reports including, but not limited to, the Sales Performance Detail Report, Reports of DC Sales by Salesman and Customer, Sale Type and Product Reports.

(JX 15 ¶¶ 1, 5.) The remaining Felten Defendants signed nondisclosure agreements that do not have an explicit termination date, and that define confidential information as:

[A]ll information not otherwise generally known to the public relating to each of (A) the financial condition, businesses and interests of PrimeSource, (B) the systems, know-how and records, products, services, costs, inventions, computer software programs, marketing and sales techniques and programs, methods, methodologies, manuals, customer, price, and other lists, business plans and other trade secrets acquired or maintained by PrimeSource, and (C) the nature and terms of PrimeSource’s relationships with its customers, suppliers, lenders, vendors, consultants and employees[.]

(JX 13 ¶ II; JX 14 ¶ II; JX 16 ¶ II; JX 17 ¶ II.)

         D. David Fishbein’s and Furio’s Post-PrimeSource Activities

         In August 2015, after PrimeSource fired David Fishbein and Furio but before they signed severance agreements, the two had a conversation with Huttig CEO Jon Vrabely about the possibility of entering an arrangement whereby they would become employed by Huttig after their non-compete covenants expired. (Tr. 1136-37, 1426, 1536.) On December 9, 2015, both Fishbeins, Furio, and Huttig entered into what the parties refer to as the “Letter Agreement.” (JX 18.) The Letter Agreement provided that upon the termination of their respective non-compete periods, David Fishbein and Furio would become employed by Huttig, and Kenneth Fishbein would work as a consultant to Huttig, to help the company expand its Huttig-Grip brand to a national scale. (Id.; Tr. 383.) Although during his hearing testimony David Fishbein characterized the agreement as just requiring him to “show up and go through this process of getting to know” Huttig upon the expiration of his non-compete, (Tr. 1429), attached as exhibits to the signed Letter Agreement were proposed employment and consulting agreements, including salary terms. (JX 18, Exs. A and B.) The Letter Agreement also included a one-million dollar break-up fee, meaning that if Furio, the Fishbeins, or Huttig failed to execute the employment or consulting agreements, the non-signing party would pay one million dollars to the other. (Tr. 1438.)

         After David Fishbein signed the Letter Agreement and before his PrimeSource non-solicitation agreement expired, he kept in touch to some extent with the Felten Defendants and the other CEO Defendants. David Fishbein exchanged a string of text messages with Kessler, some of which were explicitly work related. For example, in December 2015 he asked Kessler to provide him information about Kessler’s non-compete agreement and Kessler complied, and in January 2016 he asked Kessler about his compensation at PrimeSource. (Tr. 496-97, 499-501.) Other contacts with Kessler and other Felten Defendants were in no way explicitly work-related, involving, for example, birthday greetings or invitations to golf. (Tr. 649, 1448-49.) In August 2016 the CEO Defendants had dinner together, and the Fishbeins and Furio told Zinman that they were “thinking about something.” (Tr. 1460.) They asked Zinman generally if she was thinking about going back into the building products industry. (Tr. 1165.) At the time Zinman did not know that the Fishbeins and Furio had entered into a Letter Agreement with Huttig. (Tr. 1168-69.)

         On September 16, 2016, the non-solicitation and non-compete covenants that David Fishbein and Furio had signed with PrimeSource expired. (JX 9 ¶ 4.2; JX 10 ¶ 13; JX 11 ¶ 4.2; JX 12 ¶ 13.) Three days later they entered into consulting agreements with Huttig that were to last through November 18, 2016, allowing them to work on developing the Huttig-Grip division as independent contractors. (JX 19; JX 20.) Shortly thereafter David Fishbein contacted Kessler to ask about his non-compete agreement, (Tr. 514-15), and in October 2016, he contacted Whitehead letting him know that a new job opportunity might soon exist, and asking him to spread the word to some of the other Felten Defendants, (Tr. 896-97).

         During the period of their consulting arrangement with Huttig, David Fishbein and Furio met with Vrabely and Huttig’s CFO to develop a tactical plan for the launch of the Huttig-Grip Division. (Tr. 1047-48.) The three of them worked with between 30 and 50 people, mostly existing Huttig employees, to develop a plan as to whether it was viable to expand the Huttig fastener business through the Huttig-Grip Division. (Tr. 280-81, 383, 1128-29.) By October 2016 they had created a tactical plan complete with tasks and task assignments. (Tr. 295; JX 45.) One of the tasks listed there described cross-referencing Huttig customers with prior customers and vendors from memory. (JX 45 at 2.) Furio was assigned a task related to distribution center layouts and integrating new products into the distribution centers. (Id.) That task included developing layout for warehouse racking. (Id.) The tactical plan included a reference to Zinman, even though at the time she was still bound by her non-compete agreement. (JX 45 at 5.) The tactical plan also included a reference to “The Huttig Club,” which was a customer recognition event similar to one of PrimeSource’s signature events, called “Premier Club.” (Id. at 4; Tr. 1090.) David Fishbein and Furio were also involved in budget development and determining the financial impact of the Huttig-Grip Division, including developing job positions and salaries. (PX 300 at 2, 40, 49.)

         The tactical plan was presented to the Huttig Board of Directors and approved on October 25, 2016. Leading up to that presentation, the team assigned to developing the tactical plan expended at least 1,000 working hours in determining whether ...

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