COA upholds millions in damages for centrifuge company against ex-employees

The Indiana Court of Appeals has affirmed an award of millions to a centrifuge company after two of its former employees took thousands of protected files in the creation of their own startup competitor company.

Before leaving their employment at Separators, Inc. in Indianapolis, Robert Carmichael served as a parts manager and Olice Monday as his assistant. The company provided its customers with centrifuge services, equipment and parts, and Carmichael’s job was to interface with Separators’ customers on a regular basis.

When Carmichael and Monday officially left Separators, they had already created a new company to directly compete with Separators, called Centrifuge Supplies, Inc. Both men took with them from Separators hundreds of downloaded product manuals from a protected technical library at the company without permission, as well as thousands of data files relating to Separators’ business, including the manuals, sales documents, service parts lists, and customer quotes.

The files were downloaded onto two separate USB devices and onto their CSI computers. CSI was immediately profitable as a startup company, generating total profits of $3.25 million in just a few years.

In September 2015, Separators filed a verified complaint for injunctive relief and damages, alleging that the men had copied and taken files containing proprietary and trade secret information. Separators also sought a temporary restraining order on CSI’s unfairly competitive business activities and orders directing the preservation of evidence within the men’s possession or control and for expedited discovery.

Despite a temporary restraining order issued enjoining them from using trade secrets and an order directing them to preserve the stored data in their possession, Carmichael and Monday collectively deleted thousands of items related to Separators from their computers and flash drives. They later continued to delete more items even after the trial court entered a stipulated preliminary injunction order enjoining them from doing so.

In November 2016, the Johnson Superior Court found both men in contempt. As a sanction for the discovery violations, the court entered default judgment for Separators on its claims of misappropriation of trade secrets, breach of fiduciary duty/duty of loyalty, computer trespass, theft, conversion, and civil conspiracy. It also awarded Separators attorney fees and costs and ordered that the men would be subject to third-party oversight of their electronic data use for two years.

Additionally, the trial court denied Carmichael’s motion for summary judgment in an order addressing the merits of his arguments and awarded $3 million in exemplary damages to Separators and $8,680,447 in compensatory damages after finding that less than 3% of CSI’s business had come from customers who had not previously been customers of Separator. Including attorney fees and expenses, the total awarded to Separators is about $13 million.

The court later denied Carmichael and CSI’s motion to correct error/motion to reconsider.

By affirming the trial court in a 44-page decision, a panel of the Indiana Court of Appeals concluded that the trial court’s findings and conclusions supporting the entry of a default judgment against Carmichael as a sanction were not clearly erroneous.

First, the appellate court found that Carmichael’s intracorporate conspiracy argument was waived because it was not raised until after they had filed their motion to correct error. It likewise rejected his argument that the evidence did not support the trial court’s determination that he and Monday conspired to violate the discovery orders because there was no evidence of an agreement between them to do so.

“Here, the evidence supported the trial court’s determination that Carmichael and Monday conspired to violate the trial court’s discovery orders in order to frustrate Separators’ ability to successfully prosecute its Complaint,” Judge Patricia Riley wrote for the appellate court.

Next, the appellate court found that Carmichael’s summary judgment arguments were not properly before it.

“We find nothing in (Trial Rule) 37 or indeed in any other Indiana Trial Rule which would permit a defendant to challenge a discovery violation sanction through a motion alleging a procedural defense to the underlying claims of the complaint. Thus, it is of no moment that Separators still had three active claims, which it subsequently dismissed, and the trial court had not yet entered final judgment when Carmichael filed his summary judgment motion,” it wrote.

Lastly, the appellate court found that the awards of exemplary and compensatory damages in favor of Separators were supported by the evidence and were not clearly erroneous.

It therefore affirmed in Robert Carmichael v. Separators, Inc., 19A-PL-1821.