In an 89-page post-trial decision in Great American Opportunities, Inc. v. Cherrydale Fundraising, LLC, C.A. No. 3718-VCP (Del. Ch. Jan. 29, 2010), read opinion here, Vice Chancellor Parsons found that the defendant tortiously interfered with the plaintiff’s contractual relationships as to three former employees of an acquired company by enticing or encouraging them to breach several provisions in their employment contracts and that the defendant willfully and maliciously misappropriated certain of the acquired company’s trade secrets.
Kevin Brady, a highly regarded Delaware litigator, provided this synopsis.
Great American Opportunities, Inc. (“Great American”), Cherrydale Fundraising LLC (“Cherrydale”) and Kathryn Beich, Inc. (“KB”) were competitors in the product and service-based fundraising industry. Great American wanted to increase its sales force through the addition of KB’s sales force, so Great American entered into an Asset Purchase Agreement with KB on April 24, 2008 and paid $9.3 million in exchange for, among other things, all of KB’s information on past, present, and potential customers, including contact information, fundraising needs, cost and margins on products sold, account disputes and resolution, and the likelihood of customers conducting similar fundraisers in the future.
Great American’s claims arise from recruiting efforts by Cherrydale and its representatives prior to and subsequent to the acquisition of KB. The trade secret information from KB at issue included, among other things: (i) KB’s Consultant Schedule, which was a list of KB’s sales reps personal information (home address, telephone numbers, etc.); (ii) KB’s Ranking Report, which contained sales volume figures of KB employees; (iii) customer contact lists.
Tortious Interference Claim
Under Delaware law, proof of tortious interference with contractual relations requires a showing of: (i) a valid contract about which the defendant has knowledge; (ii) an intentional act by defendant that is a significant factor in causing the breach of the contract without justification; and (iii) which causes injury.
Delaware courts also recognize a cause of action for tortious interference with prospective contractual relations which requires a showing of: (a) a reasonable probability of a business opportunity or prospective contractual relationship; (b) intentional interference by a defendant with that opportunity; (c) proximate cause; and (d) damages.
Great American argued that Cherrydale tortiously interfered with KB’s employment contracts by inducing certain individuals to breach noncompete and nonsolicitation clauses as well as other contractual provisions. Great American also argued that Cherrydale interfered with its prospective contractual relations with former KB customers by allowing and encouraging certain employees to retain KB customer information and use it to foster Cherrydale’s sales efforts. Cherrydale responded by arguing that Great American did not establish tortious interference with any contract because it did not show that the relevant employment contracts were assignable, that Cherrydale wrongfully interfered with any employment or customer contracts, or that any of those contracts were breached. The Court agreed with Great American finding that Cherrydale did tortiously interfere with KB’s employment contracts causing injury to Great American.
Misappropriation of Trade Secrets
Under the Delaware Uniform Trade Secrets Act (“DUTSA”), Great American had to prove: (i) that it possessed information sufficiently secret and valuable to give it a competitive advantage; (2) that it took reasonable efforts to maintain the secrecy of that information; and (3) that Cherrydale knowingly acquired such information by “improper means.”
With respect to its claims for misappropriation of trade secrets, Great American argued that Cherrydale misappropriated Great American’s Consultant Schedule, the Ranking Report, the Order Status Report, and other confidential and proprietary reports as well as KB customer contact and purchasing information. Cherrydale countered by arguing that Great American did not establish that the information at issue constituted trade secrets or was misappropriated by Cherrydale because such information was used solely by independent contractors whose acts cannot be attributed to Cherrydale.
For the Consultant Schedule to qualify as a protectable trade secret, Great American had to show that it “[derived] independent economic value by virtue of its not being generally known or readily ascertainable by proper means.” The Court found that Great American failed to show that the Consultant Schedule – and the hire dates it contained – had independent economic value by virtue of its secrecy and thus the Consultant Schedule was not a trade secret.
The Ranking Report contained a frequently updated list of KB’s sales reps ranked by volume of sales paid. The Court found that the Ranking Report was not generally accessible outside of KB and reasonable efforts were made to maintain its secrecy. As a result, the Court found that the Ranking Report constituted a trade secret that was misappropriated by Cherrydale.
With respect to the customer lists, the Court determined that they did contain important, nonpublic information, such as the names, addresses, and phone numbers of contacts at each organization as well as the types and volume of product purchased by each customer and thus they constituted “trade secrets that were misappropriated by Cherrydale, whose top management both knew of and encouraged the retention and use of such information.”
While the Court found that Great American proved tortious interference and misappropriation of trade secrets, it also found that Great American failed to prove actual damages. However, DUTSA allows recovery for the unjust enrichment caused by misappropriation, so the Court awarded Great American compensatory damages in the amount of $61,538.
In addition, the Court found that “Cherrydale acted maliciously with intent to harm KB and, indirectly, Great American through its questionable and illegal recruiting efforts, including Cherrydale’s misappropriation of trade secrets.” For a finding of willfulness, under 6 Del. C. § 2003(b), the Court could award exemplary damages in the amount of two times the compensatory damage award. As a result, the Court awarded Great American an additional $61,538 plus one half of its reasonable attorneys’ fees incurred in connection with this litigation. The Court also sanctioned Cherrydale for contempt regarding the Preliminary Injunction and awarded Great American its attorneys’ fees and expenses incurred in connection with its motion for contempt.