United States District Court, E.D. Texas, Sherman Division
MEMORANDUM OPINION AND ORDER
L. MAZZANT UNITED STATES DISTRICT JUDGE.
before the Court is Plaintiffs' Application for
Preliminary Injunction (Dkt. #10). After considering the
relevant pleadings, exhibits, and argument at the preliminary
injunction hearing, the Court finds Plaintiffs' motion
should be granted in part.
Derden (“Derden”) has been in the vendor
compliance and tenant screening industry for sixteen years.
In 1999, Derden created his own company, Resident Data.
Derden sold Resident Data to Choice Point and became Vice
President of the department at Choice Point. In 2005, Derden
created Compliance Depot. Derden created Compliance Depot by
using rules and code he found on the internet, six months of
labor, and a $250, 000 investment. By 2011, Compliance Depot
had annual revenues of $6 million.
2011, RealPage Vendor Compliance LLC, a wholly owned
subsidiary of RealPage, Inc. (collectively
“RealPage”) purchased Compliance Depot for nearly
$24 million. As part of the Compliance Depot purchase, Derden
and RealPage entered into three agreements: (1) the Asset
Purchase Agreement (“APA”); (2) the Significant
Owners' Agreement (“SOA”); and (3) the
Employment Agreement. Each agreement contained
non-competition, non-solicitation, and confidentiality
Bean (“Bean”) was one of Derden's long-time
friends and colleagues. In early 2012, Bean left RealPage.
Around May 2012, Bean decided to create a software consulting
firm, IDC Software. In April 2012, Bean emailed another
former RealPage employee, David Boyle (“Boyle”) a
“wish list” of equipment to support IDC
Software's projects. Also in April 2012, Bean worked with
a third former RealPage employee James Beavers
(“Beavers”) to obtain a quote for Dell computers,
using Compliance Depot's account number. Derden provided
the funding for IDC Software to purchase this equipment and
software. On May 17, 2012, Bean received an employer
identification number from the IRS. At this time, IDC
Software had two projects, but focused primarily-if not
exclusively-on getting “[Derden's] core software
business developed.” On May 19, 2012, Bean emailed
Richard Wolff (“Wolff”) and copied Boyle.
Bean's email to Wolff contained several
“.sql” files and instructed Wolff to
“change table and column names and layouts so we
aren't just copying what we did the first time.”
Derden agreed to pay Wolff $115, 000 for this task. Over the
next year, Derden was the sole source of funds for operating
expenses, ultimately investing $160, 000 in IDC Software.
December 2012, Derden created Enterprise Risk Control, LLC
(“Enterprise”). In July 2013, Derden purchased
IDC Software's vendor compliance code and hired Bean as
an employee of Enterprise. At that time, Bean uploaded his
code onto Enterprise's servers. Bean continued to develop
Enterprise's code until April 2017. Enterprise began
marketing its product to potential customers in February
2014, and to its first multi-family customer in August 2015.
February 2014, RealPage caught wind of Enterprise's new
application and potential misappropriation of trade secrets.
RealPage sent Defendants a cease and desist letter demanding
assurances that Defendants were not soliciting RealPage
clients and were not using RealPage secrets. Defendants
responded with assurances that they did mistakenly approach a
RealPage client, but immediately backed off when they learned
of the mistake. Defendants also assured RealPage that they
did not have any trade secret information.
April 2016, RealPage received more information that
Defendants might be using trade secrets when a disgruntled
ex-Enterprise employee, Cheryl Freudiger
(“Freudiger”) approached RealPage claiming that
Enterprise gave her various trade secret materials. However,
Freudiger did not produce corroborating evidence to RealPage
until August 5, 2016. In early September, RealPage also
received an email from one of its clients, explaining how
Enterprise approached with a new vendor compliance
September 23, 2016, RealPage filed suit against Derden and
Enterprise asserting claims for misappropriation of trade
secrets, breach of contract, and breach of fiduciary duty
(Dkt. #1). On December 2, 2016, RealPage served Enterprise
and Derden with its first set of requests for production. In
its requests for production, RealPage requested, among other
things, all of Enterprise's source code. Defendants
produced all source code after early July 2013, but denied
having access to any source code from before July 2013.
Defendants based their position on Bean's declaration
because he was the primary developer of code before July
2013. Bean swore under oath that when he left RealPage, he
“did not take any of RealPage's confidential
information” (Dkt. #21, Exhibit 3 at ¶ 4). On
February 17, 2017, RealPage filed a motion to compel
production of documents (Dkt. #40) followed two weeks later
by a motion to compel computer images (Dkt. #49).
argued that there was an unexplained gap in the development
of Enterprise's code. RealPage based this argument on
several comments, visible in post-July 2013 code, that were
made as early as July 2012. However, despite being able to
see these comments, the code was not accessible. In response
to RealPage's motions to compel, Defendants relied again
on Bean's sworn testimony that he did not take any
confidential information with him and did not use any of
RealPage's confidential information during his employment
with Enterprise (Dkt. #44, Exhibit 2 at ¶¶ 6, 9,
11). Further, Bean swore that “[a]fter I transferred
the earlier IDC code onto [Enterprise's] TFS server, I
removed the previous work from the IDC computer I had been
using because it was no longer ‘my' code or
‘IDC's' code - it was [Enterprise's]
code” (Dkt. #44, Exhibit 2 at ¶ 8). Finally, Bean
swore that he looked for remnants of Enterprise's source
code from the IDC Software computer that he used before July
2013, but did not locate any (Dkt. #44, Exhibit 2 at ¶
at a stalemate, the Court held that it could not order
Defendants to compel what they did not have. However, finding
that RealPage was entitled to verify Bean's allegations
regarding the code's destruction, the Court ordered
Defendants to produce mirror images of computers and storage
devices used by Tom Bean in July 2013 (Dkt. #62 at p. 5). The
Court limited the examination to determine if the source code
was recoverable. If the code was not recoverable, the Court
permitted the neutral forensic examiner to determine the
details of any deletions so that RealPage could adequately
cross-examine at trial.
forensic examination conducted on April 6, 2017, showed that
Bean did not delete the IDC Software code in July 2013 as he
previously swore to. Instead, Bean destroyed thousands of
files in September 2016, after RealPage filed this suit. The
forensic examination also showed nearly 1, 000 files deleted
on April 3, 2017, after the Court ordered a forensic
examination. In all, nearly 100, 000 files were deleted from
Enterprise's code since RealPage filed suit. Although the
forensic exam shows which files were deleted, it cannot show
any information about what the deleted code contained.
the forensic examination, Defendants withdrew Bean's two
declarations, which claimed that he did not take any RealPage
information and that the Enterprise code was created without
leveraging anything from RealPage. Bean has now admitted that
he took a thumb drive with “everything” from
RealPage and took the thumb drive home in April 2012.
addition to Derden, Enterprise had six former RealPage
employees: Bean, Beavers, Boyle, Linda Jones
(“Jones”), Shawn Davis (“Davis”), and
Michele Head (“Head”). Shortly after the forensic
examination revealed Bean's misrepresentations to the
Court, Enterprise terminated his employment. Enterprise spent
approximately 9, 500 development hours and $3.3 million
creating its current product. Today, Enterprise provides
vendor risk-management and credentialing services to school
districts, restaurant chains, construction companies,
homeowners' association management companies, commercial
real estate, and multi-family properties.
September 23, 2016, Plaintiffs filed suit against Derden and
Enterprise asserting claims for misappropriation of trade
secrets, breach of contract, and breach of fiduciary duty
(Dkt. #1). On October 4, 2016, Plaintiffs filed their
Application for Preliminary Injunction (Dkt. #10). On
November 7, 2016, Defendants filed their response (Dkt. #21).
On June 23, 2017, Plaintiffs filed a supplemental brief and
exhibits (Dkts. #78-82). On July 3, 2017, Defendants filed
their supplemental brief and exhibits (Dkts. #86-88). On July
12, 2017, Plaintiffs filed a supplemental reply (Dkt. #90).
On July 13, 2017, the parties submitted joint deposition
submissions in lieu of several witnesses' live testimony
(Dkt. #92). On July 16, 2017, Defendants filed a supplemental
surreply (Dkt. #93). On July 17, 2017, the Court held an
evidentiary hearing. After the hearing, the parties submitted
an admitted exhibit list (Dkt. #95).
seeking a preliminary injunction must establish the following
elements: (1) a substantial likelihood of success on the
merits; (2) a substantial threat that plaintiffs will suffer
irreparable harm if the injunction is not granted; (3) that
the threatened injury outweighs any damage that the
injunction might cause the defendant; and (4) that the
injunction will not disserve the public interest. Nichols
v. Alcatel USA, Inc., 532 F.3d 364, 372 (5th Cir. 2008).
“A preliminary injunction is an extraordinary remedy
and should only be granted if the plaintiffs have clearly
carried the burden of persuasion on all four
requirements.” Id. Nevertheless, a movant
“is not required to prove its case in full at a
preliminary injunction hearing.” Fed. Sav. &
Loan Ins. Corp. v. Dixon, 835 F.2d 554, 558 (5th Cir.
1985) (quoting Univ. of Tex. v. Comenisch, 451 U.S.
390, 395 (1981)). The decision whether to grant a preliminary
injunction lies within the sound discretion of the district
court. Weinberger v. Romero-Barcelo, 456 U.S. 305,
addressing the merits of RealPage's application for
preliminary injunction, the Court will address
Defendants' assertion of the equitable defense of laches.
To establish laches, Defendants must prove that RealPage (1)
delayed in asserting the rights at issue; (2) the delay is
inexcusable; and (3) Defendants have suffered undue prejudice
because of the delay. Uptown Grill, L.L.C. v.
Shwartz, 817 F.3d 251, 256 (5th Cir. 2016). In the
context of laches, prejudice means “defendant has done
something it otherwise would not have done absent the
plaintiff's conduct.” Conan Props., Inc. v.
Conans Pizza, Inc., 752 F.2d 145, 153 (5th Cir. 1985).
period for laches begins when the plaintiff knew or should
have known of the infringement.” Elvis Presley
Enters. v. Capece, 141 F.3d 188, 205 (5th Cir. 1998).
The Fifth Circuit has devised a formula of
“‘LACHES = DELAY x PREJUDICE, ' a factual
calculation of the trial court.” Gruma Corp. v.
Mexican Rests., Inc., No. 4:09-cv-488-MHS-ALM, 2013 WL
12134147, at *8 (E.D. Tex. Sept. 27, 2013) (citing Armco,
Inc. v. Armco Burglar Alarm Co., 693 F.2d 1155, 1162
(5th Cir. 1982)). “There is no bright-line rule on how
long of a delay is sufficient to establish the defense of
argue that RealPage's claims are barred by laches because
RealPage did not seek legal action for over two years after
receiving Defendants' response to the cease and desist
letter. Defendants argue that based upon RealPage's lack
of action after its cease and desist letter, Defendants
invested significant time and resources, totaling $3.3
million, in developing their application. RealPage argues
that Defendants' unclean hands prevents them from
asserting the laches defense. RealPage also argues that it was
justified in its delay until 2016 because Defendants
represented in 2014 that they were not using trade secrets.
Court finds that Defendants have failed to show a prima facie
case of either unreasonable delay or undue
did not unreasonably delay in asserting its rights. The clock
for laches can be stopped by a plaintiff's act showing
intent to enforce its rights, such as by sending a cease and
desist letter. Gruma, 2013 WL 12134147, at *8
(citing Elvis Presley Enters., 141 F.3d at 206).
RealPage sent Defendants a cease and desist letter on March
25, 2014, in which it raised concerns about Defendants
soliciting RealPage clients and providing a multi-family real
estate management service (Exhibit 4). RealPage demanded a
comprehensive written response “(i) detailing the
specific nature of Enterprise's services . . ., and (ii)
confirming that none of Enterprise's services is
competitive to RealPage” (Exhibit 4 at p. 2).
Defendants responded on April 1, 2014, unequivocally denying
the allegations in the cease and desist letter and describing
the accidental contact with one of RealPage's (although
not Compliance Depot's) clients (Exhibit 5).
Defendants' response was satisfactory. Therefore, the
clock for laches did not begin.
the clock did not start in April 2016 when Freudiger tipped
off RealPage to potential trade secret violations. RealPage
was reasonably skeptical of Freudiger's initial tip
because she was a disgruntled ex-Enterprise employee
(See Exhibit 177). Freudiger did not substantiate
her claims with physical evidence until August 5, 2016.
RealPage filed suit on September 23, 2016, one week after
receiving an email from a Compliance Depot client about
Enterprise's sales pitch. The Court finds that this
period does not constitute unreasonable delay to support
have not shown that they suffered undue harm due to the
delay. Defendants assert that they expended additional time
and resources to develop their application based on
RealPage's implied acquiescence. However, Defendants do
not substantiate this assertion. While Defendants claim that
they expended $3.3 million in total to develop their
application, they do not account for how much of that money
was spent during the two years before the cease and desist
letter. Therefore, the $3.3 million is misleading. Without
any reference to what was spent before April 2014, Defendants
have failed to meet their burden to show undue prejudice
after their reliance.
these reasons, Defendants fail to prove their affirmative
defense of laches. The Court will now address the merits of
RealPage's application for injunction.
Likelihood of Success on the Merits
prevail on their motion for preliminary injunction,
Plaintiffs must demonstrate a substantial likelihood of
success on the merits. This requires a movant to present a
prima facie case. Daniels Health Scis., LLC v. Vascular
Health Scis., 710 F.3d 579, 582 (5th Cir. 2013) (citing
Janvey v. Alguire, 647 F.3d 585, 595-96 (5th Cir.
2011)). A prima face case does not mean Plaintiffs must prove
they are entitled to summary judgment. Byrum v.
Landreth, 566 F.3d 442, 446 (5th Cir. 2009).
Breach of Contract
Texas law, “[t]he elements of a breach of contract
claim are: (1) the existence of a valid contract between
plaintiff and defendant; (2) the plaintiff's performance
or tender of performance; (3) the defendant's breach of
the contract; and (4) the plaintiff's damage as a result
of the breach.” In re Staley, 320 S.W.3d 490,
499 (Tex. App.-Dallas 2010, no pet.). RealPage claims that it
can establish each element. Derden argues that the noncompete
is invalid because it is overly broad and that even if the
covenant is valid, he did not breach the terms. The Court
will address each argument in turn.
not to compete are generally disfavored by Texas courts.
Marsh U.S., Inc. v. Cook, 354 S.W.3d 764, 768 (Tex.
2011). However, the Supreme Court of Texas noted that the
Texas Legislature enacted the Covenants Not to Compete Act to
restore the well-established rule in Texas that
non-competition clauses “pertaining to employment were
not normally considered to be contrary to public
policy.” Marsh, 354 S.W.3d at 733 (alteration
omitted). To be enforceable under Texas law, a covenant not
to compete must be: (1) ancillary to or part of an otherwise
enforceable agreement; (2) contain reasonable limitations as
to time, geographical area, and scope of activity to be
restrained; and (3) not impose a greater restraint than is
necessary to protect the goodwill or other business interest
of the promisee. Tex. Bus. & Comm. Code Ann. §
15.50(a). Whether a noncompete is a reasonable restraint of
trade is a question of law for the court. Peat Marwick
Main & Co. v. Haass, 818 S.W.2d 381, 388 (Tex.
1991); Martin v. Credit Protection Ass'n, 793
S.W.2d 667, 668-69 (Tex. 1990). Restraints are unreasonable
if they are broader than necessary to protect the legitimate
interests of the employer. DeSantis v. Wakenhut
Corp., 793 S.W.2d 670, 681-82 (Tex. 1990); Henshaw
v. Kroenecke, 656 S.W.2d 416, 418 (Tex. 1983).
Defendants do not contest the first element. Therefore, the
Court will analyze only the final two elements.
and RealPage entered into three agreements surrounding the
purchase of Compliance Depot and Derden's subsequent
employment with RealPage: The APA, SOA, and Employment
the APA, Derden agreed that for a period of sixty months
after the closing date, they would not “engage in the
Business” (Exhibit 76 at p. 39). “Business”
means “the Compliance Depot business, which provides