Peo Experts Ca, Inc. v. Engstrom

PEO EXPERTS CA, INC., dba BIXBY ZANE INSURANCE SERVICES,a California corporation, Plaintiff, v. MICHAEL CRAIG ENGSTROM, an individual;CHRISTOPHER IGNAZIO LONGO, an individual;RYAN WAKEFIELD, an individual; JENNIFER ENGSTROM, an individual;MICHAEL ENGSTROM, INC., a California corporation;B&C LOC, INC., a California corporation;PEO ADVISORS OF CA, INC., a California corporation; andFREEDOM RISK INSURANCE SERVICES,a business entity form unknown, Defendants.

No. 2:17-cv-00318-KJM-CKD

UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF CALIFORNIA

September 21, 2017

ORDER

Plaintiff PEO Experts CA, Inc., doing business as Bixby Zane Insurance Services ("Bixby"), sues a former sales manager and two sales agents, as well as their respective businesses and family, for allegedly misappropriating Bixby's trade secrets. Bixby moved for a preliminary injunction barring defendants' continued misappropriation of those secrets, which defendants opposed. After holding a hearing on the motion, and for the reasons discussed below,

///// the court GRANTED a limited injunction against the sales manager and his company only, for reasons explained in full below.

I. PROCEDURAL BACKGROUND

Bixby filed this case on February 14, 2017, asserting the following claims against all defendants: (1) Misappropriation of Trade Secrets in Violation of the Defend Trade Secrets Act ("DTSA" or "the Federal Act"), 18 U.S.C. § 1836; (2) Misappropriation of Trade Secrets in Violation of the California Uniform Trade Secrets Act ("CUTSA" or "the Uniform Act"), Cal. Civ. Code §§ 3426-3426.11; (3) Breach of Confidence; (4) Breach of Fiduciary Duty and Duty of Loyalty; (5) Tortious Interference with Economic Relations; (6) Conversion; (7) Civil Conspiracy; and (8) Unfair Competition in Violation of Cal. Bus. & Prof. Code §§ 17200-17209. Compl. ¶¶ 39-102, ECF No. 1.

On February 24, 2017, the court denied Bixby's ex parte application for a temporary restraining order. Mot. TRO, ECF No. 4; Feb. 24, 2017 Hr'g Mins., ECF No. 18. The court ordered the parties to meet and confer regarding expedited discovery and set a preliminary injunction hearing. See ECF Nos. 18, 21, 23.

On March 30, 2017, Bixby filed its motion for a preliminary injunction. Motion Mem. P. & A. ("Mot."), ECF No. 32-1. Defendants opposed. Wakefield Opp'n, ECF No. 34; Engstrom and Longo Opp'n, ECF No. 35. Bixby filed a reply. Reply, ECF No. 37. The court held a hearing on the motion on April 27, 2017, at which Alden Parker appeared for Bixby; Jason Smith¹ and Matt Breining appeared for defendants Ryan Wakefield and his company; and Eric

/////

/////Graves and Jeff Stone appeared for defendants Michael Engstrom, Jennifer² Engstrom, Chris Longo, and their respective companies. April 27, 2017 Hr'g Mins., ECF No. 41.

At hearing, the court indicated it would grant the preliminary injunction in part, id., and the parties filed supplemental briefs addressing whether a bond should be required, ECF Nos. 42-43. On May 19, 2017, the court issued a short order granting the preliminary injunction in part as to Wakefield and Freedom Risk Insurance Services only and requiring Bixby to post a bond in the amount of $5,000. ECF No. 50. The court explained it would fully explain the reasons for its decision in a subsequent order, and it does so here.

II. FACTUAL BACKGROUND

"A plaintiff seeking a preliminary injunction must establish that he is likely to succeed on the merits, that he is likely to suffer irreparable harm in the absence of preliminary relief, that the balance of equities tips in his favor, and that an injunction is in the public interest." Winter v. Natural Res. Def. Council, Inc., 555 U.S. 7, 20 (2008). Bixby relies exclusively on defendants' alleged misappropriation of its trade secrets to support its motion, see Mot. at 17-25, and the court focuses on the likelihood of success of Bixby's trade secrets claims. With these considerations in mind, the court provides the facts most relevant to Bixby's motion below.

A. Bixby Zane Insurance Services

Founded in 2003, Bixby helps small-to-medium-sized businesses address the administrative burdens and costs of workers' compensation, payroll and taxes, employee benefits and management, and regulatory compliance. Crawford Decl. ¶ 2, ECF No. 32-2. Bixby helps its clients find these services from Professional Employer Organizations ("PEOs"). Id. ¶ 3; Crawford Dep. at 15:24-16:7³ (describing Bixby as a "wholesaler" for services to PEOs). Bixby's clients purchase services generally through renewable one-year contracts. Engstrom Decl. ¶ 2, ECF No. 35-3.

Bixby asserts its "most valuable relationship" in California is with Workforce Business Services, Inc. ("WBS"), a PEO that bundles services and insurance into packages that target the heavy construction industry. Mot. at 8; see Crawford Decl. ¶ 30; Worley Dep. at 25:22-23; Engstrom Decl. ¶ 2; Wakefield Decl. ¶ 31 (estimating WBS makes up 80% of Bixby's business). The record does not make clear whether Bixby has an exclusive relationship with WBS or, even if it does, whether the agreement is in writing. See Crawford Decl. ¶ 30; Crawford Dep. at 17:22-25; Worley Dep. at 22:10-13, 22:4-6, 22:17-20; Wakefield Dep. at 96:15-16; Engstrom Dep. at 57:9-13; Wakefield Decl. ¶ 28, ECF No. 34-3; Smith Decl. Ex. A, ECF No. 35-1. In any event, construction companies and contractors use Bixby as an intermediary to purchase WBS's bundled services, and WBS pays Bixby a commission for the business it places with WBS. Engstrom Decl. ¶ 2.

Since 2003, Bixby has spent "substantial resources" developing a list of clients, such as construction companies, and partner vendors, such as WBS; Bixby considers the list a trade secret. Compl. ¶ 42; see also Mot. at 8-9. The allegedly secret information includes: clients' identities, contact information, pricing information, prior purchase history, product preferences and habits. Compl. ¶ 42. It also includes commission information, such as the amount WBS pays Bixby for the business it brings. Id.

B. Ryan Wakefield's Employment at Bixby

Defendant Ryan Wakefield began working for Bixby as a commissioned sales person in April 2008 and signed an employment agreement that same month. Wakefield Decl. ¶ 4; id. Ex. A (Employment Agreement), ECF No. 34-3. The employment agreement included several restrictive covenants, including a "Covenant Not to Use or Disclose The Company's Trade Secrets." Employment Agreement at 4 ¶ 5(a). In October 2008, Wakefield left Bixby and formed and operated his own insurance company entitled "Wakefield Insurance Services." Id. ¶¶ 6-7. Wakefield rejoined Bixby in the fall of 2009 as a sales manager with a salary, commission and percentage of profits, and was tasked with managing independent sales agents including defendants Michael Engstrom and Chris Longo. Id. ¶¶ 8, 12. When Wakefield rejoined in 2009,Bixby did not ask him to sign any restrictive covenant such as a confidentiality agreement or nondisclosure agreement. Id. ¶ 9.

On February 6, 2017, Bixby principal Brad Worley told Wakefield that Wakefield would no longer manage Bixby's day-to-day affairs. Id. ¶ 20. Around this time, Wakefield renamed his company Freedom Risk Insurance Insurances ("Freedom Risk"), which is also named as a defendant in this case. Wakefield Dep. at 26:10-22, 63:4-10, 63:15-20. On February 7 or 8, 2017, Wakefield resigned. Wakefield Decl. ¶ 21; Crawford Decl. ¶ 18.

Within weeks after leaving Bixby, Wakefield approached representatives from three PEOs with which Bixby works to discuss doing business with his company. Wakefield Dep. at 63:21-65:22, 71:22-23 (describing communications with Insured Solutions, Decisions HR, and WBS). In particular, Wakefield submitted a proposal to WBS that included commission details based, in part, on his memory of a similar plan he developed for Bixby principal Jason Crawford. Id. at 66:17-21, 67:3-6. Based partially on this conduct, Bixby now asks the court to enjoin Wakefield from using Bixby's trade secrets to solicit business from its clients and partners.

C. Michael Engstrom's and Chris Longo's Employment at Bixby

Defendants Michael Engstrom and Chris Longo began working for Bixby in 2011 and 2010, respectively. See Engstrom Decl. ¶ 2. Although initially hired as Bixby employees, starting in 2013 Engstrom and Longo worked as independent contractors through their own corporations, defendants Michael Engstrom, Inc. ("MEI") and B&C Loc, Inc. ("B&C"). Engstrom Suppl. Decl. ¶ 4, ECF No. 11-2; Longo Suppl. Decl. ¶ 3, ECF No. 11-1.

In late 2016, Engstrom and Longo settled a dispute with Bixby over unpaid commissions. In short, Bixby reduced Engstrom and Longo's 2013 commissions during WBS's "cash crunch," but did not restore the commissions when WBS's rates increased in 2015. Engstrom Decl. ¶ 5; Longo Decl. ¶ 4, ECF No. 35-2. In July 2016, Engstrom and Longo sought reimbursement for approximately $500,000 in commissions they asserted Bixby withheld from them. Id.⁴ As part of their settlement negotiations, Bixby sent each a written IndependentContractor Agreement; Engstrom and Longo each refused to sign due to their "onerous" restrictive covenants. Engstrom Decl. ¶ 6 ("[T]he definition of Bixby's 'confidential information' in the [Agreement] was so broad that it could be interpreted to include my clients and contacts."); id. Ex. A (Independent Contractor Agreement), ECF No. 35-3. Bixby nonetheless settled in December 2016 and paid the withheld commissions. See id. Ex. C (Settlement Agreement), ECF No. 35-3; Longo Decl. Ex. B (same), ECF No. 35-2.

On January 18, 2017, Bixby principal Jason Crawford emailed Engstrom advising him to transition his clients from the Bixby brand to Engstrom's own company, MEI. Wakefield Decl. Ex. B, ECF No. 34-3. Crawford also explained that Wakefield was currently reviewing Engstrom's active agents, and "[a]ny agent that you have written business with over the past two calendar years will be added to a reserved list." Id. (emphasis in...