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Partylite Gifts, Inc. v. Swiss Colony Occasions

August 15, 2006

PARTYLITE GIFTS, INC., PLAINTIFF,
v.
SWISS COLONY OCCASIONS, A/K/A ACCESS VENTURES, INC., SWISS COLONY, INC., AND KATHY WATKINS, DEFENDANTS.



The opinion of the court was delivered by: Thomas A. Varlan United States District Judge

VARLAN/SHIRLEY

MEMORANDUM OPINION

Kathy Watkins was formerly employed by PartyLite Gifts, Inc., as a Director of Sales Development, before she joined Swiss Colony Occasions ("SCO") as the Senior Vice President of Sales. After joining SCO, Ms. Watkins began recruiting salespeople from PartyLite Gifts. Plaintiff PartyLite contends that defendant Watkins and her employer, defendant SCO, are "raiding" plaintiff's salesforce by making use of trade secrets defendant Watkins misappropriated from plaintiff. Plaintiff alleges that defendants' recruitment based upon the misappropriated trade secrets constitutes tortious interference and inducement to breach of contract, breach of contract and fiduciary duty, and unfair competition.

This civil action is now before the Court for consideration of plaintiff's motion for preliminary injunction [Doc. 8]. Plaintiff seeks a preliminary injunction pursuant to Fed. R. Civ. P. 65 to prohibit defendants "and anyone working with or for them from recruiting, attempting to recruit or assisting in the recruiting [sic] of PartyLite salespeople, or entering into any further agreements with PartyLite salespeople[,] including Bridge Agreements, or interfering with PartyLite's valuable relationships." Doc. 9 at 8. Defendants respond in opposition to the motion, arguing that plaintiff has not demonstrated a likelihood of success on the merits as to its trade secrets claim, and plaintiff's other claims are all derivative of that claim. Id. at 8-9, 17.

On July 10, 2006, the Court heard oral argument on the motion. See Doc. 38. The Court has also reviewed the various briefs, affidavits, and declarations. See Docs. 8, 9, 24, 25, 26, 27, 29, 33, 34, 35, 36, 37-2. For the reasons discussed herein, the Court will deny plaintiff's motion for preliminary injunction.

I. Relevant Facts

PartyLite is a direct sales firm that sells candles and other similar items. SCO is a direct sales firm that sells food and other similar items. Both firms utilize the home party plan sales method whereby individuals sell products to their family, friends, and acquaintances during in-home events or other small gatherings. An important feature of direct sales firms utilizing the home party plan sales method is the development of a sophisticated salesforce organizational structure. PartyLite has structured its salesforce into a multi-level organization composed of salespeople who are independent contractors. Based on the accomplishment of certain sales and recruiting goals, an individual salesperson may rise through the ranks. As a salesperson rises through the organization, they begin to earn commissions not only from their own sales but also from the sales of those they have recruited into the firm. Over time, as this process continues, a salesperson can reach the level of a Senior Regional Vice President, with salespeople beneath them in the organization.

Higher-level PartyLite salespeople enter into a contract with PartyLite whereby they agree to provide support to their "downline" salespeople and abide by the code of conduct. Among the provisions of the code of conduct is a requirement that a salesperson not disclose "confidential information," including the names and contact information of downline salespeople and customers, sales and ordering information, and any other information that would be helpful to others competing with PartyLite. PartyLite also attempts to protect its confidential information through the use of "CONFIDENTIAL" stamps and firewalls. On the other hand, PartyLite also distributes literature containing the names and locations of its salespeople, including "Reflections" magazine and its public website. Furthermore, PartyLite also permits its salespeople to use PartyLite literature and business cards, further publicizing themselves in an attempt to solicit new customers.

Defendant Watkins was employed by PartyLite to develop its extensive salesforce. As an employee, defendant Watkins was required to abide by the code of conduct, including the confidentiality provisions, but she did not enter into non-solicitation or non-competition agreements in the event of her discharge or resignation. On March 6, 2006, defendant Watkins resigned from PartyLite and joined SCO as the Senior Vice President of Sales.

PartyLite alleges that defendant Watkins and SCO undertook a strategy to raid PartyLite's salesforce using trade secrets defendant Watkins misappropriated from PartyLite during her fifteen years of employment. PartyLite recounts how SCO began offering various gift baskets to certain PartyLite salespeople, depending on their sales ranking, and offers the declaration of Llounda Putz, who believed the gifts were a ruse to establish a means to begin recruiting the recipient. PartyLite also recounts how defendant Watkins, while still employed with PartyLite, began giving PartyLite salespeople her new email address and, when asked, would discuss SCO. Finally, PartyLite points to a special agreement, known as a "Bridge Agreement," that SCO utilizes to attract experienced salespeople.

As PartyLite explains it, under the provisions of the Bridge Agreement, an experienced salesperson joins SCO with a bridge title equivalent to a salesperson's ranking with PartyLite and receives special payments for a certain transition period. Along with these benefits, however, the new SCO salesperson has a certain period of time to recruit other salespeople to join SCO and fill in the lower levels of the organization. If successful, the salesperson keeps the bridge title; but if unsuccessful, the salesperson is demoted to a lower level within SCO. Based on these incentives, PartyLite argues that the Bridge Agreement is designed to encourage the recruitment of entire groups or clusters of PartyLite's salesforce structure.

PartyLite contends that defendant Watkins's misappropriation of trade secrets and SCO's use of the Bridge Agreement has resulted in the recruitment of 15, but as many as 100, PartyLite salespeople. PartyLite speculates that if the downline organizations of those 15 salespeople are lost, the damage to PartyLite could be $15 million per year, but it argues it is difficult to calculate the loss. Furthermore, because of the commission structure, the loss of some salespeople also affects the incomes of other salespeople. In light of it's alleged irreparable harm, PartyLite has filed the instant motion seeking a preliminary injunction.

II. Discussion

The Court must weigh four factors in determining whether to issue a preliminary injunction: "(1) the likelihood of the plaintiff's success on the merits; (2) whether the injunction will save the plaintiff from irreparable injury; (3) whether the injunction would harm others; and (4) whether the public interest would be served." Performance Unlimited, Inc. v. Questar Publishers, Inc., 52 F.3d 1373, 1381 (6th Cir. 1995) (citations omitted). These factors must be balanced against one another and should not be considered prerequisites. Performance Unlimited, 52 F.3d at 1381 (citing In re DeLorean, 755 F.2d 1223, 1229 (6th Cir. 1989)). On the other hand, a preliminary injunction is an extraordinary remedy that should only be granted when the movant carries its burden of persuasion. Leary v. Daeschner, 228 F.3d 729, 739 (6th Cir. 2000). See also Mazurek v. Armstrong, 520 U.S. 968, 972 (1997) (preliminary injunction is "an extraordinary and drastic remedy"). With those principles in mind, the Court now turns to a balancing of the four factors.

A. Likelihood of Success on the Merits

The showing necessary to establish a likelihood of success on the merits varies inversely with the other three factors. See DeLorean, 755 F.2d at 1229. Accordingly, where the other three factors strongly favor issuance of an injunction, the movant may make a lesser showing of a likelihood of success on the merits. See Performance Unlimited, 52 F.3d at 1386. But where the movant makes a stronger showing of a likelihood of success on the merits, a lesser showing of the other three factors is necessary. See Total Car Franchising Corp. v. L & S Paint Works, Inc., 981 F. Supp. 1079, 1081 (M.D. Tenn. 1997) (stating that showing of "substantial likelihood" is sufficient to show "the three other factors will favor the party as well"). At a minimum, however, to establish the likelihood of success on the merits, "it is ordinarily sufficient if the plaintiff has raised questions going to the merits [which are] so serious, substantial, difficult, and doubtful as to make them a fair ground for litigation and thus for more deliberate investigation." University of Texas v. Camenisch, 451 U.S. 390, 395 (1981), quoted in Corporate Express Office Prod., Inc. v. Warren, No. 01-2521 DBRE, 2002 WL 1901902 at *7 (W.D. Tenn. 2002).

i. Misappropriation of Trade Secrets

Under the Tennessee Uniform Trade Secrets Act ("TUTSA"), the elements for a misappropriation of trade secrets claim are: (1) the existence of a trade secret; (2) misappropriation of the trade secret by the defendant; and (3) resulting detriment to the plaintiff. See Tenn. Code Ann. §§ 47-25-1701 to 1709 (2005); Stratienko v. Cordis Corp., 429 F.3d 592, 600 (6th Cir. 2005) (citing Hickory Specialties, Inc. v. B & L Lab., Inc., 592 S.W.2d 583, 586 (Tenn. Ct. App. 1979)); Hauck Mfg. Co. v. Astec Indus., Inc., 376 F. Supp. 2d 808, 816-17 (E.D. Tenn. 2005).*fn1

Under TUTSA, "trade secret" means: information, without regard to form, including, but not limited to, technical, non-technical or financial data, a formula, pattern, compilation, program, device, method, technique, process, or plan that:

(A) Derives independent economic value, actual or potential, from not being generally known to, and not being readily accessible by proper means by other persons who can obtain ...


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