Much Ado About Muffins

A senior executive with knowledge of the trade secrets behind Thomas' English Muffins unique "nooks and crannies" texture may not work for the company's competitor, Hostess Brands, Inc. This according to the U.S. Court of Appeals for the Third Circuit, which, on July 27, upheld a preliminary injunction issued earlier this year against the former executive.

Bimbo Bakeries USA, Inc. and its affiliates manufacturer and distribute many popular baked goods including Thomas' English Muffins. Chris Botticella, a California citizen and resident, was Bimbo's Vice President of Operations for California from 2001 until early 2010. In that capacity he was one of only seven people who possessed all of the knowledge necessary to independently replicate the muffins.

The secret process for making Thomas' English Muffins consists of three component parts, including (1) the formula, (2) the manufacturing engineering design, and (3) certain process parameters. Information about each component is kept separate from information about the other components. Access to each is restricted and provided to employees only on a "need to know" basis. For additional security, the process parameters in the third category differ between plants so that the parameters used in one plant do not work in another plant.) In his position, Botticella had access to this process and to many other company trade secrets for other products. He also knew other confidential information, such as Bimbo's national strategy for sales initiatives and product launches for major customers, such as Walmart, Costco, BJ's, and Sam's Club.

In 2009, he signed a confidentiality agreement in which he agreed not to compete directly with Bimbo during the term of his employment, nor to use or disclose any of the company's confidential or proprietary information during or after his employment. He also agreed to return every document he received from the company during his employment upon the termination of his employment. The agreement did not, however, restrict where Botticella could work after he left the company.

On September 28, 2009, Hostess, one of Bimbo’s primary competitors in the baking industry, offered Botticella a job in Texas as Vice President of Bakery Operations for its eastern region. Botticella accepted the position and agreed to begin in January 2010.

But Botticella did not disclose his plans to Bimbo for several months and continued to work at the company, and retained full access to its confidential and proprietary information, during this period. He maintained his access to confidential information during this period. For example, he met with Bimbo's president and other corpoate officers and discussed the company’s strategic plan for California. At another point Botticella deleted a number of documents from his company-issued laptop computer, including his resume and a number of documents containing confidential information. He claimed he deleted these documents because he didn’t think they would have any value to anyone. However, he later asked a computer technician to restore them, "just in case."

On January 4, 2010, he informed his supervisor at Bimbo that he planned to leave the company on January 15. He did not disclose that he was headed to Hostess, nor does it appear that Bimbo asked about his future plans. On January 12, Hostess announced the retirement of its former Vice President of Bakery Operations for the eastern region and that Botticella would replace him. Bimbo learned of the announcement and realized it didn't know its muffin man. Botticella was confronted the next day at which point he confirmed his intention to work for Hostess. He was directed to vacate Bimbo's offices that day.

Bimbo hired a computer forensics expert to test Botticella’s company laptop and his use of it during the relevant period. The testing revealed, among other things, that highly sensitive documents were accessed during Botticella's final days with the company. Moreover, a user had logged in as Botticella and accessed multiple confidential documents on January 13, minutes after Botticella was told to leave the company.

The lawsuit was filed in federal district court in Pennsylvania. On February 12, 2010, the district court entered a preliminary injunction, pending full trial on the merits, enjoining Botticella from working for Hostess, and on July 27, following an expedited appeal, the Third Circuit Court of Appeals affirmed. The appellate court found that Bimbo was likely to prevail on the merits of its case under the Pennsylvania Uniform Trade Secrets Act. It found the evidence supported a finding that Bimbo would succeed on the merits in proving at trial that: the relevant information constituted trade secrets; Botticella had access to the trade secrets and he was likely to misappropriate them if he went to work for Hostess; absent the injunction Bimbo would suffer irreparable harm that was greater than any harm Botticella might face; and the public interest favored the issuance of the injunction.

The appellate court's opinion also clarified the applicability of Pennsylvania's inevitable disclosures doctrine and explained that an injunction may issue even if the disclosure of trade secrets is not found to be "inevitable." That is, if a trial court finds that there is a "sufficient likelihood, or substantial threat" that the defendant will make the disclosure, it is proper to issue an injunction. Because the standards were satisfied, the Court of Appeals affirmed the issuance of the injunction and remanded the case for further proceedings.

COMMENT: Botticella is California citizen residing in California, and Hostess had hired him to work in Texas. Bimbo itself is a Delaware corporation. So what procedural and choice of law nooks and crannies led the case to be litigated in Philadelphia by a court applying Pennsylvania law?

First of all, California law generally prohibits covenants not to compete, and California public policy strongly favors employee mobility. California courts have also rejected the inevitable disclosure doctrine and adopted the California's Uniform Trade Secrets Act which makes it more difficult to obtain an injunction. See e.g., California Civil Code § 3426.2(a) (the mere possession of trade secrets by a departing employee is insufficient to obtain an injunction; there must be an “[a]ctual or threatened misappropriation”).

Although the facts of this case might even satisfy California's standards, the fact that the confidentiality agreement did not restrict where Botticella could work after he left the company -- and the fact that Hostess had required Botticella to execute an “Acknowledgment and Representation Form,” confirming that Hostess was not interested in any confidential information, trade secrets, or other proprietary information he may have acquired from Bimbo, and agreeing that he would not disclose such information to Hostess -- might have made it more difficult for Bimbo to prevail in California. So it is no surprise that the company elected to sue in Pennsylvania, where it alleged it maintains its "principal place of business." (The confidentiality agreement Botticella signed contained a choice of law provision that permitted Bimbo to sue there and called for the application of Pennsylvania law.)

At any rate, Botticella did not contest that Pennsylvania law should apply. It also appears he did not contest Bimbo's allegations that Pennsylvania was where the company maintained its "principal place of business." Although the confidentiality agreement might have conceded this point, if prompted, the district court might have been willing to conduct an independent analysis of the issue to determine for itself whether it had jurisdiction to hear the case in the first place. It bears noting that eleven days after the injunction was issued, the U.S. Supreme Court, in The Hertz Corp. v. Friend, 130 S.Ct 1181 (February 23, 2010), issued a new standard for analyzing a company's "principle place of business" in diversity of citizenship cases such as this one. (A company's “principal place of business” is no longer simply an office where the corporation holds its board meetings but now constitutes the company's "nerve center," where its officers direct, control, and coordinate the corporation's activities.)

The preliminary injunction is expected to remain in effect until the case goes to trial.

The Third Circuit's opinion in Bimbo Bakeries USA, Inc. v. Botticella, U.S. Court of Appeals, Third Circuit Case No. 10-1510 (3d Cir., July 27, 2010) is available here.