MPI, a Texas company, went to Kentucky and allegedly attempted to hire two Luvata employees, Foster and Meredith. Foster joined MPI soon thereafter. Over the course of the next few months while Meredith remained a Luvata employee, he and Foster allegedly spoke by phone repeatedly. In addition, prior to leaving Luvata for MPI, Meredith allegedly copied his employer’s computer files that described a trade secret manufacturing process, identified its customers, and contained its financial information. Once Meredith became an MPI employee, it allegedly replicated Luvata’s confidential manufacturing process and began competing with Luvata which then sued MPI, Foster and Meredith in a Kentucky federal court.

MPI’s motion to dismiss for lack of personal jurisdiction, on the ground that the Kentucky long-arm statute does not permit the exercise over MPI and a related defendant company, was granted. The ex-employees’ Rule 12(b)(6) motion to dismiss the misappropriation claim against them was denied. Luvata Electrofin, Inc. v. Metal Processing Int’l, L.P., Case No. 11-CV-00398 (W.D. Ky., Sept. 10, 2012).

Luvata is in the business of electrocoating (“e-coating”) coils used in the heat transfer industry. Luvata maintained that its e-coating process is unique, is a trade secret, and cannot be reverse engineered. Foster was allegedly the company’s production supervisor, and Meredith was “intimately involved in running the” e-coating process. All Luvata employees signed non-disclosure agreements (but there was no non-compete provision).

At an e-coating conference held in Kentucky, MPI endeavored to hire both Foster and Meredith. After both initially declined, Foster left Luvata and went to work for MPI. Over the course of the next few months, he allegedly spoke to Meredith by phone more than 30 times, and at least twice Meredith reviewed Foster’s computer files at Luvata which contained trade secrets. In addition, Meredith allegedly copied onto his own CD and thumb drives files from his and Foster’s computers. On his last day at Luvata before joining MPI, Meredith allegedly used a program that “cleaned ‘unnecessary files’” from his and Foster’s computers. Foster allegedly told Luvata’s general manager that MPI was building an e-coating line, based on information Foster learned at Luvata, and that MPI soon would be competing with Luvata. MPI allegedly proceeded to reproduce Luvata’s secret e-coating process and began soliciting Luvata’s customers, and Luvata sued.

MPI’s motion to dismiss Luvata’s complaint for lack of personal jurisdiction was granted because, according to the court, MPI did not engage in acts in Kentucky that bore a “reasonable and direct nexus” to Luvata’s allegations of misappropriation of trade secrets. The court conceded the possibility “that something fishy was occurring” between MPI and Meredith but added that was only conjecture since Meredith may have been acting unilaterally to increase his value to his new employer. However, the court found sufficient to state a cause of action Luvata’s claim that Foster and Meredith violated their non-disclosure agreement with Luvata by disclosing its trade secrets to MPI. Luvata’s breach of fiduciary duty claim against its two ex-employees was dismissed as preempted by the Kentucky Uniform Trade Secrets Act.

Under the circumstances of this case, and particularly in light of the court’s decision denying the ex-employees’ Rule 12(b)(6) motion, the order dismissing Luvata’s lawsuit against MPI could be described as harsh, especially without giving Luvata an opportunity to take discovery. The suggestion that Meredith might have been acting on his own seems far-fetched but possible. Moreover, it is surprising that Luvata’s allegations held to be conjectural in connection with granting MPI’s motion to dismiss were found “to plausibly give rise to an entitlement to relief” as against the individuals. Of course, Luvata might have had an airtight action against them if they had signed non-competition agreements. Please see our recent post regarding a  Kentucky appellate case containing an overview regarding enforcing non-competes in Kentucky.