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Volume XIII, Number 39

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One Bad Apple Won’t Spoil the Rest of the Bunch’s Ability to Fairly Compete in Matthews International Corp. v. Lombardi

The tension between encouraging free and fair competition and protecting competitive advantages derived from hard work and ingenuity is at the very heart of trade secrets law. Among other things, this tension manifests itself in the gray areas endemic to any legal analysis of what information may constitute a “trade secret.” In comparison, assessing the behavior of those accused of misappropriating trade secrets can sometimes be a much more straightforward exercise. And it seems that the more egregious (and less “gray”) the behavior, the more likely a court is to exercise its limited discretion to restrain competition at the preliminary relief stage to prevent disclosure and use of misappropriated trade secrets. The 3rd Circuit’s recent decision in Matthews International Corp. v. Lombardi(October 12, 2022) is a timely example of this principle.

In Matthews, the plaintiff, a manufacturer, designer, installer, and servicer of cremation equipment, asserted “claims of trade secret misappropriation [under both federal and state law] and breach of contract against several of its former employees and two of the entities where they are now employed.” The parties agreed (and the District Court entered a corresponding order) that the defendants would (a) return all of the plaintiff’s information, (b) remove the information from their systems, and, (c) refrain from servicing customers who had the plaintiff’s cremation equipment. But the plaintiff sought a broader restriction on the defendants’ competitive activities—a complete ban on all defendants’ provision of services to any of plaintiff’s customers (i.e., not just those customers who had equipment manufactured by the plaintiff).

As to all but one of the individual defendants, the District Court concluded that no further injunctive relief was appropriate for varying reasons—“because there’s no enforceable restrictive covenant, there’s no evidence of such a breach, the restrictive period has ended, or there’s no irreparable harm.” The District Court further noted that “because Defendants are returning, and not using, Matthew’s information, any potentially unfair harm to Matthews is greatly diminished.”

But the District Court did order fairly sweeping relief against one particularly nefarious defendant, one of plaintiff’s former sales representatives. Despite agreeing to the plaintiff’s confidentiality, non-solicitation, and non-competition requirements as part of his employment, the sales representative “took with him thousands of [the plaintiff’s] documents, including confidential and client information… [,] uploaded these documents to [his new employer’s] servers and used some of them in his role at [the new employer].” Accordingly, the sales representative’s situation was deemed “entirely different from the other former Matthews employees” and the District Court broadly enjoined him from soliciting plaintiff’s customers and competing against plaintiff for a two-year period.

Quoting its decision in Mallet & Co. v. Lacayo, 16 F.4th 364 (3d Cir. 2021), the 3rd Circuit cautioned that “[i]njunction orders should not restrain competitors from engaging in lawful business activities” and that “[i]t would take a truly extraordinary showing . . . to justify an order ejecting a competitor from the marketplace altogether.” Seemingly unimpressed by the plaintiff’s evidentiary showing as to the former employees other than the nefarious sales representative, the 3rd Circuit held “it was not error for the District Court to conclude that the scope of the conduct already enjoined in the Revised Order protects [plaintiff’s] trade secrets and prevents any irreparable harm.”

The result in Matthews is a good reminder of the courts’ tendency towards restraint in imposing anti-competitive injunctive relief, particularly at the preliminary relief stage. Even an egregiously “bad apple” won’t necessarily spoil the rest of the bunch’s ability to fairly compete.

Copyright © 2023, Sheppard Mullin Richter & Hampton LLP.National Law Review, Volume XII, Number 300
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About this Author

Isaiah Z. Weedn, Business, Trial Practice Attorney, Sheppard Mullin, Law firm
Associate

Isaiah Weedn is an associate in the Business Trial Practice Group and is based in the firm's Orange County Office.

Mr. Weedn has experience in a broad spectrum of business litigation in federal and state courts. His clients include commercial real estate investment firms, commodity traders, manufacturers, builders, and financial institutions. He has helped his clients resolve disputes with their joint venture partners, investors, competitors, vendors, and customers in matters involving breach of contract, unfair competition, fraud, violation of...

714-424-2828
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