United States: Despite Evidence That Ex-Employee Violated Customer Non-Solicitation Covenant, Injunction Denied Because No "Irreparable" Harm

Last Updated: May 13 2016
Article by Paul E. Freehling

Touzot was an employee of ROM, a seller of products used in making balsa wood model planes and boats.  His employment agreement included a post-termination customer non-solicitation covenant.  After he left ROM, he became a competitor.  The company sued him and his Ecuadorian supplier of balsa wood, which previously had been ROM's supplier, alleging that they were colluding to steal ROM's customers.  Although ROM was found to have satisfied most of the other requirements for injunctive relief, the court held that a monetary award would provide adequate compensation for any damages. Touzot v. ROM Dev. Corp., Civ. Ac. No. 15-6289 (D.N.J., Apr. 26, 2016) (Linares, J.) (not for publication).

Status of the case.  Touzot initiated litigation in a New Jersey state court against ROM.  The company is based in Rhode Island.  ROM removed the case to federal court and moved to dismiss for lack of personal jurisdiction.  While the motion was pending, ROM filed its own lawsuit in Rhode Island federal court, charging breach of contract, misappropriation of trade secrets, tortious interference, etc.  ROM sought and obtained from the judge in Rhode Island a temporary restraining order, but it was stayed pending a determination of which court should adjudicate the dispute.

After ROM's motion to dismiss the New Jersey case was denied, the Rhode Island suit was transferred to New Jersey for consolidation with the case there.  A few days ago, Judge Linares issued his opinion denying ROM's application for a preliminary injunction and granting the motion filed by Touzot and his balsa wood supplier to dissolve the TRO.

Background.  By 2011, ROM had sustained a sharp decline in the volume of its quite profitable sales of balsa wood products, partly because of a shortage of balsa wood.  Hoping to improve its sales, ROM hired Touzot who introduced the company to a supplier in Ecuador which had abundant quantities of balsa wood and became ROM's principal source.  Touzot was ROM's contact person with the supplier as well as ROM's sales representative for its model wood customers (according to ROM, the customers, unlike the supplier, previously were unknown to Touzot).

Once ROM had an adequate supply of balsa wood, its model products sales took off.  Nevertheless, after four years the company fired Touzot who then formed his own company to sell balsa wood model products.  ROM's supplier announced dramatically increased prices for sales of balsa wood to ROM, which would have eliminated its profits for wood model products.  However, the supplier sold balsa wood to Touzot at the old, lower prices.  Other suppliers of balsa wood did not raise their prices but, as before, they did not have the capacity to satisfy ROM's needs.  Consequently, the company could not compete effectively with Touzot, and many of its former customers became his customers.

The restrictive covenants.  Touzot's employment agreement with ROM contained multiple restrictive provisions (non-compete, non-solicitation, trade secret confidentiality, etc.).  The only covenant ROM sought to enforce with an injunction was Touzot's promise that for two years after termination he would not solicit anyone in "the Americas" who was a ROM customer during his employment for orders with respect to products similar to those sold by ROM.

Injunction standards.  In his opinion, Judge Linares stated that, whether New Jersey or Rhode Island law applied, ROM was required to show that (1) it was likely to succeed on the merits, (2) the balance of equities favored ROM, (3) an injunction was in the public interest, and (4) ROM would suffer irreparable harm if the injunction were not issued.  He wrote that ROM was likely to be able to prove that Touzot solicited its customers, and that he sold products substantially similar to those it sold.  The time and geographical restrictions were found to be reasonable.  Touzot was said to have admitted that he could obtain employment without violating the non-solicit restriction and simply chose not to do so.  However, regarding the fourth prong, the judge ruled that if ROM could prove lost sales as a result of Touzot's covenant violations, a monetary award would provide adequate relief.

Takeaways.  The same evidence admitted at an injunction hearing frequently is offered at a subsequent trial on the merits, and the ruling on a motion for entry of a preliminary injunction often is a good predictor of the likely judgment at trial.  For these reasons, many cases settle after an injunction hearing and ruling.  Of course, Judge Linares stressed that his decision applied solely to the motion for preliminary injunctive relief and was not dispositive with respect to the merits of (a) the parties' differing interpretations as to the meaning of the non-solicitation covenant, much less (b) ROM'S allegation that Touzot breached it.

The court did not really address the public interest prong of the injunction standards.  Yet, if Touzot is enjoined from selling to model wood customers for two years, they might be unable to locate an alternative source for the product during that period.  On the other hand, there is a public interest in holding contracting parties, especially relatively sophisticated parties, to the contractual commitments they make.

In his opinion, Judge Linares pointed out that monetary relief is rarely adequate for breach of a confidentiality covenant which puts another's trade secrets into the public domain.  On the other hand, many courts recently have denied motions for injunctions with respect to violations of various covenants, holding that compensatory damages can be an adequate remedy when the injury consists of provable lost sales and profits.

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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