Tortious interference with business relationship

Federal District Court Opinions

GENERAL POWER PRODUCTS, LLC v. MTD PRODUCTS, INC., (S.D.Ohio 12-13-2006) General Power Products, LLC, Plaintiff, v. MTD Products, Inc., et al., Defendants. Case No. 1:06-cv-00143. United States District Court, S.D. Ohio, Western Division. December 13, 2006

OPINION AND ORDER

MICHAEL WATSON, District Judge

Plaintiff asserts state law claims of tortious
interference with business relationship and contract,
misappropriation of trade secrets, unfair competition,
unjust enrichment, and fraud. Plaintiff seeks damages and
injunctive relief. The Court has federal subject matter
jurisdiction under the Convention on Recognition of Foreign
Arbitral Awards, 9 U.S.C, § 201 et seq. This matter
is before the Court on plaintiff’s motion for a preliminary
injunction (Doc. 35). For the reasons that follow, the
Court denies plaintiff’s preliminary injunction motion.

I. Facts

This action arises from the efforts of plaintiff General
Power Products, LLC (“GPP”) to secure the exclusive right
to distribute small engines made by defendant Page 2
Chongqing Zongshen General Power Machine Co., Ltd.
(“Zongshen”), and defendant MTD Product Inc.’s (“MTD”)
alleged interference with those efforts.

GPP is an Ohio limited liability company engaged in
engineering, designing, manufacturing, and distributing
engines and utility equipment to the outdoor power
equipment industry. Defendant MTD is a Delaware corporation
in the business of designing and manufacturing lawnmowers
and outdoor garden equipment. It supplies its products to
retailers such as Wal-Mart, Lowes and Home Depot. Defendant
Zongshen is a Chinese company that manufactures a wide
variety of equipment, including outdoor power equipment.

In early 2003, MTD considered Zongshen as a potential
supplier of engines. Sample engines failed to meet U.S.
standards, however, and MTD determined it would not buy
engines directly from Zongshen.

In 2003 and through early 2004, GPP made several
improvements to Zongshen engines. On March 12, 2004, GPP
and Zongshen entered a memorandum of cooperation (“MOC”).
The MOC stated, “GPP expects to cooperate with [Zongshen]
to develop the global market of industrial engines and
application products.” The MOC also provided, “GPP will be
the exclusive marketer in North America and Europe markets
for GPP Products to the Original Equipment Manufacturers
(`OEMs’) and retail customers listed in Annex 3 (the
`Customers’); while [Zongshen] has no rights to sell GPP
Products either directly or indirectly or through the third
party to those Customers.” The MOC defined “GPP products as
“the products and associated parts [for] which GPP has
carried out all of the following tasks based on [Zongshen]
Products: improving design, lowering the cost for same
functionality, customer styling, application Page 3
implementation (the `Improvements’) and acquisition of all
necessary governmental certificates (the `Certificates’)
within this Memorandum.” Under the MOC, GPP and Zongshen
agreed that the intellectual property resulting from the
Improvements would be owned jointly by Zongshen and GPP.

The MOC further provided, “[t]he memorandum will be
effective only after all Annexes are mutually agreed and
signed by both parties.” It is undisputed that neither GPP
nor Zongshen ever approved or signed Annex 6 to the MOC.

On March 25, 2004, representatives from GPP and MTD met
and discussed MTD buying Zongshen engines from GPP. At the
meeting, GPP informed MTD about GPP’s exclusive distributor
status. MTD asked GPP to design a specific and specialized
Zongshen engine for MTD’s outdoor power products. GPP then
undertook improving the Zongshen engine to meet U.S.
standards and MTD’s requirements throughout the spring,
summer and fall of 2004. GPP’s improvements included:
implementing a dam fix to remedy an oil burning problem to
meet EPA compliance; remedying the quality of rubber hoses
on the Zongshen engine; designing a new carburetor screw to
meet U.S. and California emissions standards; and improving
Zongshen’s manufacturing techniques to remedy a stop brake
system in order to meet U.S. standards. GPP avers that it
took reasonable steps to maintain the secrecy of its
improvements by maintaining security at its facility and
requiring clients, customers and employees to sign
confidentiality agreements.

On October 15, 2004, Chairman Zuo of Zongshen sent a letter
to GPP’s President, Dan Lehr, inviting him to China to
discuss seven concerns as detailed in the letter. On
October 26, 2004, Zongshen, through its counsel, sent GPP a
letter Page 4 terminating their business relationship. The
letter stated that the MOC was not effective because the
parties never signed or agreed to the Annexes, and that GPP
had in any event breached the MOC. On January 27, 2005, MTD
sent a letter to Lehr expressing MTD’s understanding that
there was no relationship between MTD and Zongshen that
would preclude Zongshen from dealing directly with MTD, and
that MTD would therefore work directly with Zongshen to
develop and obtain engines for MTD’s products.

In late January 2006, GPP learned that MTD was selling a
high volume of lawnmowers with Zongshen engines at Wal-Mart
stores in the United States. In early February 2006, GPP
bought an MTD lawnmower at a Cincinnati, Ohio Wal-Mart. GPP
inspected the lawnmower, and contends that it contains GPP
improvements and trade secrets. On February 8, 2006, GPP
learned that MTD had entered a long-term exclusive
distribution agreement with Zongshen and that as a result
MTD had world-wide exclusive rights to sell Zongshen
engines.

Plaintiff originally filed this action in the Clermont
County, Ohio Court of Common Pleas. Zongshen removed the
action to this Court with MTD’s consent on March 15, 2006
on the basis of federal subject matter jurisdiction under
the Convention on Recognition of Foreign Arbitral Awards, 9
U.S.C, § 205. GPP filed a second amended motion for
preliminary injunction on February 21, 2006 (Doc. 3) and
again on March 28, 2006 (Doc. 35). MTD filed its response
on March 28, 2006. GPP thereafter filed various amended and
supplemental reply briefs, the last of which was filed on
October 6, 2006. Following limited discovery, the Court
conducted a hearing on GPP’s preliminary injunction motions
on June 23, 2006. Page 5

II. Standard of Review

The Court considers four factors in determining whether to
issue a TRO or preliminary injunction:

1) whether the movant has a strong likelihood of success
on the merits;

(2) whether the movant would suffer irreparable injury
without the injunction; (3) whether issuance of the
injunction would cause substantial harm to others; and (4)
whether the public interest would be served by issuance of
the injunction.

Chabad of S. Ohio & Congregation Lubavitch v. City of
Cincinnati, 363 F.3d 427, 432 (6th Cir. 2004). The factors
are not prerequisites; rather, they must be balanced.
Capobianco, D.C. v. Summers, 377 F.3d 559, 561 (6th Cir.
2004).

III. Discussion

A. Likelihood of success on the merits

GPP seeks a preliminary injunction based upon two claims:
(1) tortious interference with contract; and (2)
misappropriation of trade secrets.

1. Tortious interference

GPP argues that MTD tortiously interfered with GPP’s
exclusive distributor agreement with Zongshen. Under Ohio
law, to establish a claim of tortious interference with
contract, the plaintiff must demonstrate: (1) the existence
of a contract; (2) the alleged wrongdoer’s knowledge of the
contract; (3) the alleged wrongdoer’s intentional
procurement of the contract’s breach; (4) lack of
justification; and (5) resulting damages. Power Marketing
Direct Co. v. Ball, No. 05-4149, 2006 WL 3390373, at * 2
(6th Cir. Nov. 22, 2006) (citing Fred Siegel Co. v. Arter &
Hadden, 85 Ohio St.3d 171, 176 (1999)); see also Kenty v.
Transamerica Premium Ins. Co., 72 Ohio St.3d 415 (1995)
(syllabus § 2). Page 6

MTD argues GPP cannot establish the existence of a
contract between GPP and Zongshen. GPP does not cogently
respond to this argument. The MOC provided, “[t]he
memorandum will be effective only after all Annexes are
mutually agreed and signed by both parties.” It is
undisputed that neither GPP nor Zongshen ever approved or
signed Annex 6 to the MOC. The Court finds that the failure
of GPP and Zongshen to agree to and sign Annex 6 to the MOC
casts significant doubt on whether an enforceable contract
existed between GPP and Zongshen.

In addition, Zongshen represented to MTD that the MOC did
not prevent Zongshen from selling engines to MTD. Also,
Zongshen told MTD it had terminated its business
relationship with GPP. As reluctant as the Court is to
accept the representations of Zongshen as truthful, GPP has
failed to establish the certainty of an ongoing contractual
relationship between Zongshen and GPP. Given these facts,
uncertainty exists as to whether GPP has made a strong
showing that MTD knowingly and intentionally procured a
breach of the MOC.

For the above reasons, the Court cannot say that GPP has
demonstrated a strong likelihood of success on the merits of
its tortious interference claim. This weighs against the
issuance of a preliminary injunction.

2. Misappropriation of trade secrets

GPP next argues MTD misappropriated GPP’s trade secrets
embodied in the improvements GPP made to Zongshen’s engines.
The Ohio Revised Code defines “trade secret” as follows:

“Trade secret” means information, including the whole or
any portion or phrase of any scientific or technical
information, design, process, procedure, formula, pattern,
compilation, program, device, method, Page 7 technique,
or improvement, or any business information or plans,
financial information, or listing of names, addresses, or
telephone numbers, that satisfies both of the following:

(1) It derives independent economic value, actual or
potential, from not being known to, and not being readily
ascertainable by proper means by, other persons who can
obtain economic value from its disclosure or use.

(2) It is the subject of efforts that are reasonable
under the circumstances to maintain secrecy.

Ohio Rev. Code § 1366.61(D).

MTD argues GPPs improvements are generally known or are
readily ascertainable by proper means. For example, the use
of break-off head carburetor screws has been generally
known since as early as 1996. Likewise, the use of braided
rubber fuel hose is the industry standard in the United
States. The use of fixed lengths of fuel hose to avoid
kinks is also generally known and in any event readily
ascertainable by proper means.

GPP’s dam plate fix was derived from an existing Honda
engine. Hence, the dam plate fix was readily discoverable
through reverse engineering of another manufacturer’s
engine. The brake lever arm geometry was arrived at by
looking at Honda and Briggs & Stratton engines and making
some straightforward calculations. Plaintiff also failed to
adequately demonstrate that the pull back spring on the MTD
engines actually relies on GPP’s design. Lastly, MTD
demonstrated that all of GPP’s improvements are all readily
ascertainable from GPP’s Zongshen engines, and that costly
reverse engineering would not be required to discover the
improvements. In sum, MTD has submitted substantial
evidence casting doubt on the trade secret status of GPP’s
improvements to Zongshen’s engines. For this reason, the
Court concludes Page 8 that GPP has not demonstrated a
strong likelihood of success on its misappropriation of
trade secret claim. This factor weighs against granting a
preliminary injunction.

B. Irreparable harm

GPP argues that it will suffer two forms of irreparable
harm in the absence of an injunction. First, GPP maintains
that it will be driven out of business if an injunction is
not issued. Second, GPP asserts MTD’s alleged use of GPP’s
trade secrets constitutes irreparable harm.

GPP’s arguments are flawed in several respects. GPP has
not affirmatively demonstrated that it will go out of
business if the Court fails to grant a preliminary
injunction. In this regard, the Court notes that GPP has
remained in business since it filed this action early in
2006, and it has continued to fund extensive litigation.
Moreover, GPP became aware between February 4, 2005 and
March 19, 2005 that MTD had shipped 10,000 Zongshen engines
to Hungary[fn1], yet GPP inexplicably waited until early
2006 to file its lawsuit. Under these circumstances, the
Court finds that GPP has an adequate remedy at law in its
claim for monetary damages.

Furthermore, GPP fails to explain how enjoining MTD will
prevent harm to GPP. The harm to GPP results principally
from its inability to purchase Zongshen engines. The
injunction GPP seeks against MTD would not force Zonshen to
recognize, comply with, or reinstate the MOC or otherwise
require Zongshen to sell its engines to GPP. Accordingly,
merely enjoining MTD would do little to stem the alleged
harm GPP has suffered. Page 9

GPP also maintains it has and will sustain irreparable harm
as a result of MTD’s continued use of GPP’s trade secrets.
For the reasons stated above, the Court has already
concluded that significant doubt exists as to whether GPP’s
improvements constitute trade secrets. In the absence of a
strong showing that GPP’s improvements are trade secrets,
GPP also cannot show that it will suffer irreparable harm.
Additionally, on top of the 10,000 Zongshen engines already
shipped to Hungary, thousands of MTD lawnmowers with
Zongshen engines have been shipped to major retailers, and
presumably sold to consumers, across the United States. As
a result, GPP’s readily ascertainable improvements have
been widely distributed. If GPP has suffered harm, a
substantial portion of that harm cannot be undone.

For the above reasons, the Court finds that GPP has not
demonstrated irreparable harm. GPP’s failure to establish
irreparable harm weighs against the issuance of injunctive
relief.

C. Harm to others

Both parties address this factor as a balancing of
injuries. GPP argues that an injunction would not
significantly harm MTD given the company’s net worth, and
the fact that an injunction would affect only two models of
lawnmowers. MTD contends an injunction would substantially
impair its ability to obtain inexpensive, quality engines
that it helped to develop.

The chief harm to GPP is its inability to obtain Zongshen
engines. As noted above, the requested injunction would not
force Zongshen to do business with GPP. Thus, an injunction
would not return the parties to the positions they were in
before Zongshen terminated its business relationship with
GPP. The Court finds that an Page 10 injunction would
harm MTD without providing significant benefit to GPP.
Therefore, the balance of harm and benefit weighs against
granting injunctive relief.

D. Public interest

GPP asserts that an injunction would serve the public’s
interests in protecting trade secrets and maintaining
commercial ethics. MTD maintains that an injunction would
have a chilling effect on business and would undermine the
ability of parties to designate conditions precedent to
their contracts. Moreover, MTD contends an injunction would
harm public interests by restraining sources of supply and
competition, and could result in the loss of jobs.

Although the public has an interest in protecting trade
secrets, GPP has not made a strong showing that its
improvements to the Zongshen engines constitute trade
secrets under Ohio law. In addition, upon the current
record, the Court finds the public interest would not be
served by the recognition of a contract for which
conditions precedent appear to remain unsatisfied. Lastly,
the Court finds that the public interest may be harmed to
some extent by the interruption of the availability of
inexpensive lawnmower engines. For these reasons, the Court
concludes public interests weigh against the issuance of an
injunction.

All of the relevant factors weigh against granting
preliminary injunctive relief. A preliminary injunction is
therefore not appropriate in this case. Page 11

IV. Disposition

For the above reasons, the Court DENIES GPP’s motion for a
preliminary injunction (Doc. 3 and Doc. 35).

IT IS SO ORDERED.

[fn1] Hungary was part of GPP’s exclusive European territory
under section 1.1.4 of the MOC.