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A Pennsylvania federal judge has cleared the way for a high-tech company to sue a rival for defamation for allegedly telling one of their mutual potential customers that the first company was “going out of business.” In his 14-page opinion in Pennfield Precision Inc. v. EF Precision Inc., U.S. Magistrate Judge Charles B. Smith rejected the argument that the statement was merely opinion, or at worst “hyperbole,” and therefore was incapable of having defamatory meaning. “It is more than fair to assume that being told a corporation is going out of business would have the effect of deterring one from accepting that corporation’s bid,” Smith wrote. The fact that Pennfield is currently in a Chapter 11 bankruptcy reorganization “makes its position even more precarious,” Smith said, “possibly requiring greater confidence from the industry.” And the bankruptcy proceedings — despite being a reorganization and not a liquidation — would also make it more reasonable for customers to believe such a false statement, Smith found. “Where seeds of doubt are already sown, little cultivation is needed to achieve complete lack of confidence,” he wrote. Smith also refused to dismiss Pennfield’s claim that EF Precision has misappropriated its trade secrets by hiring away dozens of its employees who allegedly took confidential information — including customer lists, technical capabilities and pricing data — and have been using it to help EF underbid Pennfield. QUESTION OF DETERRENCE Pennfield and EF are both in the business of high technology manufacturing and engineering services. In the industry, business is generated when a contractor requests bids for specific manufacturing projects. Over the past seven years, Pennfield claims it has lost dozens of employees to EF, including several of its “key employees.” In December 1999, Pennfield filed for relief and reorganization under Chapter 11. Several months later, the suit says, an EF employee told a mutual customer that Pennfield was “going out of business.” Pennfield responded by filing suit alleging defamation; misappropriation of trade secrets; and unjust enrichment. Plaintiff’s attorney Alan L. Frank of Philadelphia’s Frank & Rosen argues that the false statement about Pennfield’s going out business was made “with the intention of discouraging customers from utilizing [Pennfield's] services.” EF’s lawyers, John K. Fiorillo of Unruh, Turner, Burke & Frees in West Chester, Pa., and Michael J. Cordone of Stevens & Lee in Philadelphia, moved to dismiss the defamation claim, arguing that the mere allegation of the statement fails to establish a prima facie case. The comment wasn’t even defamatory in character, they said, and Pennfield can’t show any “resultant special harm.” Judge Smith disagreed, finding that under Pennsylvania law, the plaintiff in a defamation case “must show that the statement in question deters other persons from associating or dealing with plaintiff in professional or business relationships.” Whether a statement is capable of defamatory meaning is for the court to decide, Smith said. “In assessing the deterrent effect of the alleged statement, the court should consider what impression it is calculated to leave on the reasonable-minded persons to whom it is made, or those among which it is likely to circulate,” Smith wrote. Pennfield’s claim is valid, Smith found, because “the livelihood of a high technology manufacturing and engineering services corporation, such as plaintiff, depends upon successful bids with contractors, ranging in value from several hundred to several hundred thousand dollars.” Since bids are often accepted based upon reputation and the presumption that the corporation chosen for the job will be able to follow through with the project, Smith found that “customer confidence is critical for success.” As a result, he said, the news that Pennfield was going out of business would have deterred companies from accepting its bids. Smith rejected EF’s argument that the comment was a legally protected “opinion” because no one would reasonably rely on it as fact since EF “is not a party whom one would reasonably believe to hold specialized knowledge of undisclosed facts concerning whether [Pennfield] was going to stay in business.” Instead, Smith said, Pennfield is “entitled to a presumption that [the customer] could reasonably believe [EF], as a professional in the same business as plaintiff and with various other connections, had specialized knowledge concerning [Pennfield's] Chapter 11 efforts which substantiated its comment, either as an opinion or statement of fact.” Smith said he also agreed with Pennfield’s argument that the comment “does not express an opinion on plaintiff’s qualifications or expertise, but rather may very well be construed as a deliberate statement of fact to a potential customer with the intention of deterring the customer from doing business with plaintiff.” Likewise, Smith rejected EF’s argument that Pennfield’s defamation claim was flawed since it never alleged any “resultant harm” that flowed from the statement. “Having alleged harm to its business reputation, plaintiff is now entitled to prove the truth of that statement,” Smith wrote. TRADE SECRETS Turning to the trade secrets claim, Smith rejected EF’s argument that it should be dismissed because it fails to set forth the existence of a legally recognizable trade secret and that Pennfield insufficiently pleaded the element of resultant detriment. The Pennsylvania courts, Smith said, have held that a trade secret can be “any formula, pattern, devise or compilation of information which is used in one’s business, and which gives him an opportunity to obtain an advantage over competitors who do not know or use it.” EF argued that the claim merely involves former Pennfield employees, now working for EF, who are legally using the experience and skill they acquired at Pennfield. But Smith said EF’s “characterization” of the claim was “somewhat restrictive.” The complaint, he said, says that Pennfield’s bids are “premised upon highly confidential and proprietary information concerning not only Pennfield’s technical engineering choices and capacities, but of course, the cost of each project to Pennfield,” and that the bids are sealed and unavailable to competitors. According to Pennfield, he said, information regarding its technical capacities and pricing data are trade secrets “communicated to Pennfield employees only to the extent required” for their jobs and in strict confidence. Smith found that pricing data and technical capabilities “may constitute a ‘formula’ or ‘compilation of information’ to which competitors are not privy. Thus, the type of novel information described above satisfies, for pleading purposes, the requirements of a legally recognizable trade secret.” Pennfield also properly alleged detriment, Smith said, by claiming that particular bids were lost due to the defendant’s unlawful use of plaintiff’s confidential information. “Certainly, if plaintiff can prove that unique and confidential pricing data and knowledge of technical capacities and capabilities were communicated to current employees of defendant in confidence and used in breach of that confidence to unlawfully underbid plaintiff, plaintiff is entitled to relief for misappropriation of trade secrets,” Smith wrote. But in the end of the opinion, Smith stressed that his rulings pertained only to a motion to dismiss and therefore reflected only on the validity of the plaintiff’s theory. “This opinion by no means reflects plaintiff’s likelihood of success in this suit. During the course of discovery and trial, plaintiff will be required to more fully demonstrate the unique and secret nature of such information and how it is used to gain advantage over competitors,” Smith wrote. “Plaintiff has a heavy burden of proof … and is advised that this court is able and willing to judge summarily if discovery fails to substantiate these claims.”

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