United States: Trend In The Courts: It's Getting Harder To Obtain Preliminary Injunctions In Restrictive Covenant Cases

Last Updated: November 25 2015
Article by Paul E. Freehling

In recent weeks, courts almost routinely have been denying preliminary injunctive relief in cases alleging violation of non-compete and similar employment agreements. Three examples: Burleigh v. Center Point Contractors, 2015 Ark. App. 615 (Oct. 28, 2015); Evans v. Generic Solution Engineering, LLC, Case No. 5D15-578 (Fla. App., Oct. 30, 2015); and Great Lakes Home Health Services Inc. v. Crissman, No. 15-cv-11053 (E.D. Mich., Nov. 2, 2015).

Status of those cases. In each of those cases, injunctions were denied or, if granted by a lower court, the order was reversed.

Burleigh. When he was employed in 2012 by Center Point, a general commercial construction company, Burleigh had more than 10 years of experience in construction in northwest Arkansas. His title was operations manager and estimator. He signed non-compete (two years, within a radius of 50 miles from Bentonville, Arkansas), non-solicitation, and confidentiality covenants. In 2014, he resigned and formed, with a friend, a competitor of Center Point.

Center Point sued Burleigh. His motion to dismiss the complaint was denied, and Center Point sought a preliminary injunction. The trial court granted the injunction including two additions to the non-compete agreement: (a) the court required Burleigh to give Center Point notice of and details concerning any prospective business activity that would compete with activities in which he was engaged on or before the date he resigned, and (b) Center Point was ordered to post a $50,000 bond. He appealed.

The Arkansas Appellate Court reversed and remanded. It held that Center Point failed to demonstrate a likelihood of success on the merits. According to the court, there was no evidence that Center Point provided Burleigh with any "special training," "proprietary formulas," "trade secrets," "confidential business information," or "a secret customer list." Further, Center Point did not show that he learned anything at Center Point that would give him an unfair advantage in the bidding process. Therefore, "Center Point did not have a legitimate interest to be protected by agreement, and the non-compete agreement only shielded Center Point from ordinary competition."

Evans v. Generic. In order for a former employer to prevail in a suit under Florida law based on a non-competition covenant, enforcement of the covenant must be shown to be necessary in order to protect the former employer's "legitimate business interests." Reaching a decision similar to that in Center Point, the Florida Appellate Court held that the former employer failed to make the requisite showing.

The former employer, Tech Guys, builds online sales and marketing systems. It does not have employees, preferring instead to retain independent contractors. One of them was Chinn who had signed a restrictive covenant prohibiting, for two years after termination of his relationship with Tech Guys, work for current or former Tech Guys clients. While working for Tech Guys, Chinn assisted one of its significant clients, RRI, which had a three-year non-exclusive contract for services.

When Chinn left Tech Guys, he and another ex-Tech Guys independent contractor — but one who had not signed restrictive agreements — formed a competitor. After RRI's contract with Tech Guys expired, RRI offered to continue to use Tech Guys (although not exclusively). The offer was declined. When RRI became a client of Chinn's new company, Tech Guys sued Chinn and his company and obtained a preliminary injunction.

The defendants appealed, and the appellate court reversed. According to the appellate tribunal, the "facts are insufficient to support the trial court's finding of a substantial business relationship in need of protection."

Great Lakes Home. Great Lakes is a home-health and hospice provider. Crissman was vice-president for operations and planning in Michigan. At the time of her employment, she signed non-competition, non-solicitation, and confidentiality covenants. Pursuant to the agreements, she promised that for two years after termination, she would not divert or attempt to divert from Great Lakes business opportunities in any county where Great Lakes was Medicare-certified on the date she was employed by Great Lakes.

Eighteen months after leaving Great Lakes, Crissman accepted a position with a competitor. Her responsibilities included work in various states but not in any county where Great Lakes does business. Great Lakes sued her and sought a preliminary injunction. Judge Rosen authored a detailed must-read opinion, clearly laying out Michigan law on the subject and explaining in detail why injunctive relief was denied.

Confidentiality. Great Lakes contended the court could presume that Crissman disclosed Great Lakes' confidential information. Crissman rebutted the presumption by submitting a signed and sworn denial that she had made any improper disclosures and describing in detail the firewall established with her new employer that precluded any disclosures.

Non-compete. Great Lakes argued that Crissman was liable for non-compete covenant violations because of her employment by a competitor that was servicing areas where Great Lakes operated. There was no allegation that Crissman, personally, violated the covenant. The parties agreed that her new employer did provide services competitive to those offered by Great Lakes even though there was no evidence that she participated. The court concluded that Great Lakes' interpretation of the covenant would preclude her "from working in any capacity, in any location, with a competitor as defined in the Agreement" (emphasis in the original). That interpretation was held to violate Michigan law which provides that "'non-competition agreements must be tailored so that the scope of the agreement is no greater than is reasonably necessary to protect the employer's legitimate business interests'" (quoting from an earlier Michigan district court case but adding the emphasis).

Extension of the non-compete agreement. Judge Rosen observed that enforcement of the non-compete agreement would require extending its duration since, by its terms, it expired in August 2015. Although conceding that Great Lakes had been diligent in seeking injunctive relief, he pointed to Michigan law restricting extension of such covenants to "the most extreme circumstances." Here, he held, there was "no clear 'flouting' of the Agreement or bad faith." Accordingly, Great Lakes had failed to demonstrate a likelihood of success on the merits.

Takeaways. These cases, and other similar recent decisions, indicate that courts are reluctant to enter preliminary injunctions for alleged violations of employment agreements. Even if the non-compete time period and geographic area are reasonable, a mere showing that the ex-employee went to work for a competitor during that period and within that area may no longer be sufficient. Rather, the moving party seemingly will have to demonstrate clearly that the ex-employee him- or herself caused damages by poaching significant customers, hiring away invaluable workers, or disclosing highly confidential information.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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