At a time when an ex-employee’s newly created company was subject to an injunction prohibiting misappropriation of his former employer’s supposed trade secret, the new company allegedly used that confidential information on a few occasions in the course of providing services.  The former employer sued.  Although the trial court found no violation of the injunction, that ruling was reversed on appeal, and the new company was ordered to pay $1.9 million to the former employer.  Analog Technologies Corp. v. Knutson, Case No. A14-1721 (Minn. App., July 13, 2015) (not for publication).

Summary of the case.  Shortly after leaving the employ of Analog, an electrical engineering company, Knutson formed Dimation, a competitor company.  Dimation allegedly used a trade secret process belonging to Analog for installing and repairing printed circuit boards.  Analog sued for misappropriation and initially was awarded $1.9 million.  The court also enjoined Dimation from using that process for three years.  After filing for bankruptcy, Dimation executed a confession of judgment.  The confession document contained an Early Payment Option (EPO).  Pursuant to the EPO, the judgment would be satisfied if $600,000 was remitted by a specified date, but the EPO would expire if (a) there was a default in payment, or (b) the injunction was violated.  Dimation paid as promised, but Analog rejected the final payment.  It sued Dimation, claiming the EPO was void because the injunction had been violated.  The trial court found no violation.  A few days ago, the Minnesota Court of Appeals reversed and awarded Analog the full $1.9 million judgment less the $600,000 already paid.   

The parties’ litigation. 

Analog I.  Analog’s first trade secret misappropriation lawsuit resulted in a 2009 judgment against Dimation for $1.6 million and attorneys’ fees.  In addition, that company was enjoined from further misappropriation for three years.  It filed for bankruptcy and then executed the confession described above.  Dimation also challenged the injunction in the Minnesota appellate court.  In 2011, that court substantially affirmed but remanded with instructions to clarify the injunction order.

Analog II.  On remand, the parties agreed to certain modifications of the injunction, but Dimation proposed still more.  In 2013, the trial court entered a new injunction in the form requested by Analog.  Dimation appealed on the grounds that Analog had no protectable trade secret and that the trial court had not complied in full with the appellate court’s remand instructions.  Late in the year, the 2013 trial court order was affirmed.

Analog III.  While Analog II was pending, Analog asked the lower court to find Dimation in contempt for violating the earlier injunction.  Dimation responded by requesting entry of an order to the effect that the EPO terms had been satisfied.  During an evidentiary hearing, Knutson testified that from April 2011 to February 2012, Dimation had made “at the most” 10 infringing sales amounting to $8,000.  The court held that Dimation did not violate the injunction and should not be held in contempt.  Analog appealed.  The Court of Appeals affirmed in part and reversed in part.

The ruling in Analog III

  1. Misappropriation. The lower court was reversed.  Dimation stressed that the lower court had found as a fact that Analog had failed to prove infringement of its supposed trade secret.  The appellate tribunal held that the finding clearly was erroneous.  Earlier decisions upheld the validity of Analog’s trade secret.  Knutson’s own testimony established a violation of the 2009 injunction order, an order which Analog I did not vacate or reverse.  Further, Dimation breached its contractual obligation (set forth in the confession of judgment) not to violate the injunction.
  2. Contempt. The lower court was affirmed.  Analog claimed that the lower court erred by refusing to find Dimation in contempt of the 2009 order.  The appellate court found no abuse of discretion.  It said that Dimation had been found to be in civil (not criminal) contempt, and that the purpose of civil contempt is remedial, not punitive.  Since the court’s decision in Analog III reinstated the original $1.9 million judgment, “finding Dimation in contempt would serve no further remedial purpose.”

Takeaways.  Dimation was held to have made the $8,000 in allegedly infringing sales during a period when it was prohibited by court order from making any.  By also contracting not to make those sales, Dimation gave Analog a second string to its bow: breach of contract.  Dimation seemingly speculated that (a) if it was sued for violating the injunction or breaching the contract, it could prove that Analog had no protectable trade secret, and (b) if that gambit failed, the miniscule amount of sales it had made would suffice to persuade a court not to find a violation that might result in a nearly $2 million judgment against Dimation.

The principal takeaway from the recent Minnesota Court of Appeals decision is that Dimation engaged in risky conduct.  Judges rarely are sympathetic towards parties that violate court orders while simultaneously appealing the issue of whether the order is valid.  Moreover, many court cases hold that violation of an injunction while it is in effect is inappropriate even if the injunction later is found to be unenforceable.