Carriage Hill Health Care v. Hayden CV-96-101-SD 04/30/97 P UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW HAMPSHIRE
Carriage Hill Health Care, Inc.
v. Civil No. 96-101-SD
Christopher Hayden; Benco Dental Supply Co.
O R D E R
This diversity action for breach of contract, interference
with contractual relations, and misappropriation of trade secrets
arose from the alleged wrongful appropriation and use of customer
information by Christopher Hayden from his former employer.
Carriage Hill Health Care, Inc. Before the court is a motion for
summary judgment filed by defendants Hayden and Benco Dental
Supply Company, to which plaintiff objects. Also before the
court is defendants' reply memorandum and plaintiff's objection
thereto.
Background
Plaintiff Carriage Hill is a dental supply company in the
New Hampshire and Maine seacoast areas. Carriage Hill is a small, fairly new company with only a few employees, including
its president, Lorin Gill. In 1992 defendant Hayden began
working for Carriage Hill as a salesman, but signed no employment
contract or nondisclosure agreements.
Early in 1996 Hayden became dissatisfied with his
compensation package from Carriage Hill and began seeking
employment opportunities elsewhere. Hayden contacted Stephen
Hoyt, the regional sales director for Benco, a large, established
dental supplies distributor. Benco is a direct competitor of
Carriage Hill in the Maine and New Hampshire dental supplies
markets. After interviewing with Hoyt, Hayden was offered and
accepted a sales position with Benco.
On February 9, 1996, Hayden submitted a written resignation
letter to Gill, at which time he offered to stay on for two
weeks, provided Gill could meet Benco's compensation package.
Gill declined to do so, and the two agreed that Hayden would come
in the following Monday to finalize business matters. The two
parted on seemingly good terms, with Gill wishing Hayden "good
luck."
Thereafter, the relationship soured. There are allegations,
although contested, that Hayden used his key to gain entry to
Carriage Hill's office over the weekend and remove certain
customer files. On that Saturday, Hayden used Carriage Hill's
2 customer list to send an announcement that he was going to be
working with Benco. Hayden failed to report for work at Carriage
Hill on that Monday, as agreed. When Hayden called Gill to
indicate he would not be coming to the office. Gill instructed
him to return the allegedly stolen customer lists, informing him
that if he used those "trade secrets" to take unfair advantage,
he would be sued. Rather than return said items to Carriage
Hill, Hayden gave them to his attorney.
The missing customer information is the basis for this
dispute. Carriage Hill claims that Hayden is using this
information on Benco's behalf to undercut Carriage Hill's prices
and unfairly take business away from it. In its complaint.
Carriage Hill alleges (1) that Hayden's conduct in terminating
his relationship with Carriage Hill constitutes breach of the
covenant of good faith and fair dealing implied in all contracts;
(2) that Hayden is tortiously interfering with contractual
relations with its customers; and (3) that Hayden tortiously
misappropriated information protectable as a trade secret.
Discussion
1. Summary Judgment Standard
Summary judgment is appropriate when there is no genuine
issue of material fact and the moving party is entitled to a
3 judgment as a matter of law. Rule 56(c), Fed. R. Civ. P.; Lehman
v. Prudential Ins. Co. of Am., 74 F.3d 323, 327 (1st Cir. 1996) .
Since the purpose of summary judgment is issue finding, not issue
determination, the court's function at this stage "'is not [] to
weigh the evidence and determine the truth of the matter but to
determine whether there is a genuine issue for trial.'" Stone &
Michaud Ins., Inc. v. Bank Five for Savings, 785 F. Supp. 1065,
1068 (D.N.H. 1992) (guoting Anderson v. Liberty Lobby, Inc., 477
U.S. 242, 249 (1986) ) .
When the non-moving party bears the burden of persuasion at
trial, to avoid summary judgment he must make a "showing
sufficient to establish the existence of [the] element[s]
essential to [his] case." Celotex Corp. v. Catrett,, 477 U.S.
317, 322-23 (1986). It is not sufficient to "'rest upon mere
allegation[s] or denials of his pleading.'" LeBlanc v. Great Am.
Ins. C o ., 6 F.3d 836, 841 (1st Cir. 1993) (guoting Anderson,
supra, 477 U.S. at 256), cert, denied, ___ U.S. ___ , 114 S. C t .
1398 (1994). Rather, to establish a trial-worthy issue, there
must be enough competent evidence "to enable a finding favorable
to the non-moving party." Id. at 842 (citations omitted).
In determining whether summary judgment is appropriate, the
court construes the evidence and draws all justifiable inferences
in the non-moving party's favor. Anderson, supra, 477 U.S. at
4 255. Nevertheless, "[e]ven in cases where elusive concepts such
as motive or intent are at issue, summary judgment may be
appropriate if the non-moving party rests merely upon conclusory
allegations, improbable inferences, and unsupported speculation."
Medina-Munoz v. R.J. Reynolds Tobacco Co., 896 F.2d 5, 8 (1st
Cir. 1990) (citations omitted).
2. Obligation of Good Faith and Fair Dealings
Defendants seek summary judgment on Carriage Hill's common
law claim for breach of the implied covenant of good faith and
fair dealing. Carriage Hill argues that Hayden had an obligation
as a contract employee to deal fairly and in good faith with his
employer. Carriage Hill, in matters related to the contract.
Hayden allegedly breached this obligation when he made use of
Carriage Hill's customer information on behalf of Carriage Hill's
competitor, Benco.
"The implied covenant of good faith and fair dealing is an
example of a common law application of public policy to contract
law." Harper v. Healthsource of New Hampshire, Inc., 140 N.H.
770, ___, 674 A.2d 962, 965 (1996). To achieve the goals of
public policy, "[t]he obligation of good faith performance
[excludes] behavior inconsistent with common standards of
decency, fairness, and reasonableness, and with the parties'
5 agreed-upon common purposes and justified expectations."
Centronics Corp. v. Genicom Corp., 132 N.H. 133, 140, 562 A.2d
187, 191 (1989). However, the legally enforceable covenant
itself is not as broad as these initial formulations would
suggest. Not all unethical conduct is unlawful, as legally
enforceable obligations remain a narrower subset of the broader
concept of ethical obligations. The implied covenant of good
faith and fair dealing does not prohibit all unethical conduct.
Justice Souter, writing for the New Hampshire Supreme Court,
defined the scope of the covenant as follows:
[U]nder an agreement that appears by word or silence to invest one party with a degree of discretion in performance sufficient to deprive another party of a substantial proportion of the agreement's value, the parties' intent to be bound by an enforceable contract raises an implied obligation of good faith to observe reasonable limits in exercising that discretion, consistent with the parties' purpose or purposes in contracting.
Id. at 143, 562 A.2d at 193.
The implied covenant of good faith and fair dealing is not a
catch-all cause of action aimed at eradicating all taint of the
unethical from contract dealings. Rather, the covenant arises in
response to "the particular problem raised by a promise subject
to such a degree of discretion that its practical benefit could
seemingly be withheld." Id.at 144, 562 A.2d at 193. For
example, in Griswold v. Heat Corp., 108 N.H. 119, 229 A.2d 183
6 (1967), the court held that a contract to pay $200 a month for
"such services as [the plaintiff], in his sole discretion, may
render", i d . at 124, 229 A.2d at 187, required the plaintiff to
provide a level of services consistent with good faith. Under
the explicit terms of the contract, the plaintiff retained broad
discretion and, in exercise of that discretion, could have
rendered no services at all, in which case the defendant would
have been denied any benefit under the contract. In the absence
of any contract language indicating how plaintiff's discretion
was to be exercised, the court filled the gap with the covenant
of good faith which constrained plaintiff's discretion to
reasonableness.1
The facts of this case distinguish it from those in which
the covenant of good faith has been held appropriate. Here, the
contractual discretion that Hayden allegedly abused could not
have been exercised in such a manner that Carriage Hill would be
denied an essential benefit of the bargain struck in the
employment contract with Hayden. Carriage Hill essentially
1The Centronics court mentions two other categories of situations to which the doctrine of the implied covenant of good faith and fair dealing is applicable--situations involving standards of conduct relating to contract formation and those involving the limitations of an employer's ability to terminate an employee. See Centronics id. at 139, 562 A.2d at 191. The court does not address the doctrine in these contexts because they are not relevant to the instant action.
7 complains that Hayden wrongfully misappropriated information
about its customers. Granted, Hayden's discretion in dealing
with the customer information was not limited by contract, and
arguably was overbroad, because the contract did not explicitly
deny Hayden the discretion to use the customer information on
behalf of Carriage Hill's competitors. However, even if Hayden
pushed this discretion to its outer limits. Carriage Hill would
still have received the essential and primary benefit of its
bargain with Hayden in the employment contract. Carriage Hill
bargained for Hayden's services, which it had received for a
number of years and which was, according to Gill, of satisfactory
guality. Gill Testimony, Transcript (Tr.) of May 14, 1996,
Hearing before Magistrate Judge at 29. Since the discretion
attached to a nonessential aspect of the contract (how customer
information would be handled), as opposed to an essential aspect
of the contract (i.e., whether or not to render services at all),
an abuse of this discretion could not deprive Carriage Hill of an
essential benefit of its bargain with Hayden. The implied
covenant of good faith and fair dealing only operates to limit
overbroad discretion that could, if abused, deprive one party of
an essential benefit of their bargain, and is thus inappropriate
on these facts. Carriage Hill will not be permitted to invoke the covenant simply because it has been harmed by unethical
conduct in the course of contractual dealings with Hayden.
3. Interference with Contractual Relations
Hayden and Benco next seek summary judgment on plaintiff's
common law claim for tortious interference with contractual
relations. As grounds, defendants argue that there were no
contractual ties between plaintiff Carriage Hill and the customer
dentists, and, as a matter of law, an action for tortious
interference with contractual relations will not lie absent a
showing of a formal contract sealing the relation. However,
defendants have misstated the law because the absence of a formal
contract is not fatal to an action brought under this tort. As
noted in W. Pa g e K e e t o n , et a l ., P r o s s e r a n d K e e t o n on the L a w of T or ts
(5th ed. 1984), "it may be tortious to interfere with the
plaintiff's prospects of economic gain even where those prospects
have not been reduced to a contract right." Id. at 97 8; see also
Demetracopoulos v. Wilson, 138 N.H. 371, 373, 640 A.2d 279, 281
(1994) .
However, economic prospects, such as the ones at issue here,
that are not formalized by contract are not protected as
vigorously as contract relations. As noted by Prosser and K ee t o n ,
"It has always been agreed that a defendant might intentionally interfere with the plaintiff's interests without liability if
there were good grounds for the interferences." Id. at 983.
Intentional interference with economic relations is not
actionable if the defendant acts with a proper purpose. In a
system committed to the free market, the range of permissible
reasons to interfere with economic relations must be broader when
those relations are merely prospective, expectant, and not sealed
by contract. Prosser & K ee t o n , supra, at 981 ("Existence of a
contract, as distinct from a mere prospect of business, may
therefore narrow the range of interference that may be considered
proper by a defendant in pursuit of his own ends.") . Otherwise,
excessively stringent protection of prospective relations
threatens to facilitate pockets of monopoly in which one market
participant is granted a property right against the world in the
prospect of dealing with limited groups of consumers.
So, on the one hand, it has been said that "in a civilized
community which recognizes the right of private property among
its institutions, the notion is intolerable that a man should be
protected by the law in the enjoyment of property once it is
acguired, but left unprotected by the law in his efforts to
acguire it." Brennan v. United Hatters of North America, 73
N.J.L. 729, 65 A. 165 (1906), reprinted in Prosser and Keeton,
supra at 1006. On the other hand, it is egually true that the
10 state should not deviate from its position of neutrality by
granting one marketplace competitor excessively broad proprietary
rights over limited and scarce resources, such as customers,
thereby frustrating another competitor's efforts to acguire
property.
Here, the number of potential New Hampshire customers of
dental supplies is limited. It would unduly curtail Hayden's
economic pursuits to deprive him of the right to solicit business
from that limited pool of dentists simply because Carriage Hill
was first in time to actively pursue economic relations with
these customers. It is clear from the evidence that Hayden did
not maliciously desire the interference with Carriage Hill's
efforts. Rather, such interference was brought about only as the
necessary conseguence of Hayden's solicitation of customers for
the purpose of advancing his own economic interests. It would
disserve eguality in market opportunities to saddle Hayden with
disadvantage by creating proprietary rights in dental supply
customers on behalf of Carriage Hill.
3. Claim Brought under the Uniform Trade Secrets Act (UTSA), New
Hampshire Revised Statutes Annotated (RSA) 350-B
In its amended complaint. Carriage Hill seeks relief against
Hayden and Benco under the UTSA, which prohibits misappropriation
11 of trade secrets. Hayden and Benco allegedly misappropriated
Carriage Hill's compilation of trade secret information
pertaining to its customers of dental supplies. Hayden allegedly
went through Carriage Hill's customer files after his resignation
to obtain information including, among other things, the
customers' names, addresses, telephone numbers, contact persons,
histories, ratings, and potential for future purchases.
According to Carriage Hill, Hayden exploited this information to
his advantage in soliciting business for Benco.
"Trade secret" is defined as information that "is not
readily ascertainable" from other sources, RSA 350-B:1, IV(a);
otherwise, the information cannot be claimed a "secret."
Compiled customer information such as that for which Carriage
Hill seeks protection is protectable as a trade secret if it is
not "readily ascertainable." However, trade secret protection
extends only to that information not readily ascertainable, but
no further. A vast amalgamation of information is not
protectable as a trade secret simply because some of its elements
are not readily ascertainable. Fleming Sales Co. v. Bailey, 611
F. Supp. 507, 513 (N.D. 111. 1985) ("[I]t is simply unreasonable
to construe the Act's 'readily ascertainable' standard as
reguiring exact duplication of the information on the customer
list."). Conversely, trade secret protection cannot be denied to
12 all elements of compiled information simply because some of them
are publicly ascertainable. The compiled information for which
Carriage Hill seeks protection will be parsed to determine what,
if any, of the information about its customers is not readily
ascertainable and properly characterized as a trade secret.
Before embarking on this task, it is important to keep in mind
the competing policies of trade secret law as they pertain to
customer information.
On the one hand, trade secret protection for customer
information creates incentives rewarding industry and production.
Compiling customer information enhances business efficiency. For
instance, customer lists isolate the specialized market of
customers who may be interested in a particular service or given
product. Such benefits are not without significant costs both in
creating a market for the goods and services and in maintaining
records of the market's targeted customers. Some customer lists
are comprised of customers "'whose trade and patronage have been
secured by years of business effort and advertising, and the
expenditure of time and money, constituting a part of the good
will of a business which enterprise and foresight have built up'
. . . ." Callahan v. R.I. Oil Co., 103 R.I. 656, 660, 240 A.2d
411, 413 (R.I. 1968) (guoting Town & Country House & Home Servs.,
Inc. v. Newberry, 147 N.E.2d 724, 726 (N.Y. 1958)). Protecting
13 compiled customer information as secret encourages the
expenditure of time, money, and energy necessary to initiate
creative and individualized plans of marketing fostering
constructive competitive results. Employers would be reluctant
to invest the necessary resources if former employees were
entitled to reap the fruits on behalf of the employer's
competitors.
However, business efficiency is only one of the many other
interests served by this area of the law. Fleming Sales, supra,
611 F. Supp. at 513 ("[A] court called on to define boundaries in
this area must take care to strike a balance between (1) the
underlying purposes of trade secret law (to maintain standards of
commercial ethics and to encourage research and innovation) and
(2) the egually strong policy against inhibiting competition in
the marketplace."). Employee mobility must be preserved by
permitting employees to retain the knowledge, skill, and
experience acguired during the course of employment. This
acguired experience is part of the package received by the
employee as consideration for his services and may constitute one
of his most valuable assets in the job market. Depriving the
employee of the use of acguired knowledge threatens to enslave
the employee to his current employer by rendering his services
less valuable to other prospective employers. Part of the
14 knowledge gained by employment in an industry is acguired by
learning who are the customers in that given industry. Employees
should be permitted to exploit this resource in order to obtain
the full value of their services. "Business experience and know
how as reflected in the information which [an employee] acguired
during the course of his [or her] employment is . . . 'not
something that the law protects from the rigors of the
marketplace.'" AMP, Inc. v. Fleischhacker, 823 F.2d 1199, 1207-08
(7th Cir. 1987) (citing Fleming Sales, supra, 611 F. Supp. at
516) .
First, this court will consider whether Carriage Hill's
customer lists (including information such as names, addresses,
and telephone numbers of its dentist customers) is not "readily
ascertainable." This customer list does not represent a market
that has been cultivated through expenditure of time, effort, and
money. Most of the customers on the list consisted of dentists
practicing in the state of Maine, whose potential availability as
consumers of dental supplies, in addition to their name, address,
and telephone number, were readily ascertainable to anyone in the
dental supply business with a Maine telephone directory. The
names of Maine dentists and their potential willingness to
purchase dental supplies was public, and therefore constituted
15 general knowledge which Hayden was entitled to carry with him to
the labor market.
Carriage Hill argues that, even though the name of each
individual dentist customer was discoverable from the telephone
directory, the customer list represented a unigue compilation and
subset of Maine dentists not readily ascertainable from other
sources. As support for its contention that the list is
protectable on this ground. Carriage Hill cites the following
passage: "[A] trade secret plaintiff need not prove that every
element of an information compilation is unavailable elsewhere.
Such a burden would be insurmountable since trade secrets
freguently contain elements that by themselves may be in the
public domain but together gualify as a trade secret." Boeing
Co. v. Sierracin Corp., 738 P.2d 665, 675 (Wash. 1987). However,
Carriage Hill has failed to further the argument with evidence
that the compilation process was creative or otherwise involved
in expenditure of resources. The compilation simply listed
Carriage Hill's active customers. The customer list was not, for
example, a compilation of the highest volume purchasers of dental
supplies in Maine, which would have constituted the type of
creative compilation process that trade secret law seeks to
reward.
16 Carriage Hill also asserts that some of the customers on the
list were not dentists and made no public displays of willingness
to purchase dental supplies. Their potential availability as
customers of dental supplies was not, according to Carriage Hill,
readily ascertainable from telephone directories. This court
would be inclined to accept this argument had Carriage Hill
submitted any evidence of which customers were not listed as
dentists in telephone directories. However, as Carriage Hill
carries the burden of proof on this point, it cannot rest on
unsupported and conclusory assertions.
While the list of customers' names, addresses, and telephone
numbers does not gualify as a trade secret, some of the other
information about Carriage Hill's customers is not readily
ascertainable from other sources, and is thus protectable as a
trade secret. The list rating Carriage Hill's customers and
their potential for future purchases reflects levels of creative
compilation and is not ascertainable from other sources.
Likewise, information about the prices charged each customer is
not readily ascertainable, and becomes an advantageous and
valuable tool in the hands of a competitor. Thus, the customer
ratings and the purchase histories are protectable trade secrets.
17 The next element of a claim under the UTSA is proof that the
trade secret was "misappropriated." The statute provides the
following definition:
II. "Misappropriation" means: (a) Acquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means; or (b) Disclosure or use of a trade secret of another without express or implied consent by a person who: (1) Used improper means to acquire knowledge of the trade secret; or (2) At the time of disclosure or use, knew or had reason to know that his knowledge of the trade secret was derived from or through a person who had utilized improper means to acquire it; or acquired under circumstances giving rise to a duty to maintain its secrecy or limit its use; or derived from or though a person who owed a duty to the person seeking relief to maintain its secrecy or limit its use; or (3) Before a material change of his position, knew or had reason to know that it was a trade secret and that knowledge of it had been acquired by accident or mistake.
RSA 350-B:1, II.
One court has said the following about the UTSA definition
of "misappropriation":
[T]he right to announce a new affiliation, even to trade secret clients of a former employer, is basic to an individual's right to engage in fair competition, and . . . the common law right to compete fairly and the right to announce a new business affiliation have survived the enactment of the UTSA. However, misappropriation occurs if information from a customer database is used to solicit customers.
18 MAI Systems Corp. v. Peak Computer, Inc., 991 F.2d 511, 521 (9th
Cir. 1993). It is undisputed that Hayden used customer
information to announce his new affiliation with Benco, as he was
entitled to do. In addition, it is undisputed that Hayden
solicited dentists on behalf of Benco who previously did business
with Carriage Hill. This, too, Hayden was entitled to do. The
dental supply business in Maine is highly competitive, and many
of the dentists purchase supplies from and do business with more
than one supplier at a time. Affidavit of Dr. F.C. Lamothe at 14
(defendants' appendix in support of motion for summary judgment).
Under these circumstances, Hayden was certain to solicit business
from certain dentists who happen to have been previous customers
of Carriage Hill. Unless Hayden exploited Carriage Hill's
customer information to his advantage in soliciting business on
behalf of Benco, the UTSA imposes no barriers to free competition
between Hayden and his former employer. Carriage Hill.
There is enough evidence in the record that Hayden exploited
Carriage Hill's proprietary information in soliciting business
for Benco. Circumstantial evidence points to the fact that
Hayden used Carriage Hill's customer ratings because the
telephone records show that the lion's share of his calls were
made to dentists who were rated highly on Carriage Hill's list.
Also, there is evidence that Hayden used information concerning
19 Carriage Hill's customers' pricing histories. By affidavit,
Debbie Thomas, a purchaser for one of Carriage Hill's customers,
swears that Hayden solicited her business, claiming that Benco
could "give [her] a better price than Carriage Hill." Affidavit
of Debbie Thomas (attached as Exhibit 5 to plaintiff's memorandum
in opposition to motion for summary judgment). While this is not
particularly strong evidence that Hayden was using Carriage
Hill's pricing information, it is enough to survive a motion for
summary judgment.
Typically, plaintiff would be reguired to prove the damages
suffered from Hayden's misappropriation of the customer rating
and pricing information. Ferrero v. Coutts, 134 N.H. 292, 295,
591 A.2d 1320, 1322 (1991). However, Carriage Hill claims that
it cannot present evidence of damages at this stage of discovery
because the documentation necessary to do so is uniguely in
defendants' possession. Under Rule 56(f), an application for
summary judgment can be refused on grounds of the
impracticability of production on an element of plaintiff's case.
Rule 56(f), Fed. R. Civ. P.
Conclusion
For the foregoing reasons, defendants' motion for summary
judgment (document 41) is granted as to Counts I, II, and III,
20 but is denied as to Count IV. Their motion for leave to file
reply memorandum is denied as moot (document 45).
SO ORDERED.
Shane Devine, Senior Judge United States District Court
April 30, 1997
cc: Donald E. Mitchell, Esq. Francis X. Quinn, Jr., Esq.