TROs, Preliminary Injunctions, and Covenants Not to Compete

N.C. Association of Superior Court Judges

Summer Conference 2005

Employer seeks TRO w/out notice

Generic TRO requirements (notice)

Security – setting amount

Preliminary injunction hearing

Generic requirements (amount of notice?)

Setting/Adjusting security

Enforceability of covenants

Choice of law issues

Trade secrets

Recovering on bond

Trial on merits

Before issuing a TRO without notice:

•Must clearly appear, from specific facts•In affidavit or verified complaint, that:

- applicant will suffer immediate & irreparable injury before adverse party can be heard, and- applicant’s atty certifies efforts made to give notice and why notice shouldn’t be required

What is immediate/irreparable harm in this context?

• Employee left 1 month ago to work for competitor• Employee about to begin work for competitor, has taken confidential info. re: product under development• Employee has recently left and started new company. Employer hears from customer contacted by employee

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TRO Bond

Bond: “No restraining order or preliminary injunction shall issue except upon the giving of security by the applicant, in such sum as the judge deems proper, for the payment of such costs and damages as may be incurred or suffered by any party who is found to have been wrongfully enjoined or restrained.” Rule 65(c)

Discretion not to require bond

- No material damages/likelihood of harm- Applicant has considerable assets (?)

Factors to consider (non-exhaustive)

- Duration of injunction- Likelihood of harm to restrained party- Severity of harm to restrained party- Applicant’s ability to pay damages

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Security for TRO

PI Standards

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Preliminary injunction standards:

• Notice: -“No preliminary injunction may issue w/out notice to the adverse party.” Rule 65(a)-“Notice” undefined. Rule 6(d)?

• Applicant must show:- Likelihood of success on merits- Irreparable harm w/out injunction, or- Issuance necessary for protection of rights during litigation- Need to show irreparable harm in covenant not to compete cases?

• Discretion as to what type of evidence to allow at hearing (affidavits, live testimony, etc)

Setting Bond

• Barr-Mullin, Inc. v. Browning, 108 N.C. App. 590, 424 S.E.2d 226 (1993): Should consider all factors. $10,000 inadequate for injunction barring employee & new company from marketing software in which they had made substantial investment and where they would lose substantial sales during injunction. • Curtis 1000, Inc. v. Youngblade, 878 F. Supp. 1224 (D. Iowa 1995): $200,000 bond (approx. 1 yr. salary) even though employer was likely to succeed where trial was expected to be 1 yr. •Uncle B's Bakery, Inc. v. O'Rourke, 920 F. Supp. 1405 (D. Iowa 1996): $100,000 bond for lost salary and benefits (less what e’ee could make during injunction) and new employer’s costs to find replacement. • Standard Register Co. v. Cleaver, 30 F.Supp.2d 1084 (D. Ind. 1998): Requiring 1 year salary as bond where trial expected to take 1 yr.

Consider same factors as at TRO stage:- Duration of injunction- Likelihood of harm- Severity of harm- Applicant’s ability to pay damages

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Security for Preliminary Injuntion

Noncompete Stds

Noncompetes – substantive standards

• G.S. § 1-75.4: No contract limiting right to do business in N.C. enforceable unless in writing signed by restrained party.

• Requirements for enforceability:1. in writing2. made part of employment k3. based on valuable consideration4. reasonable in time and territory5. not against public policy

• Time and territory restrictions considered together, and covenant must be “no wider in scope than is necessary to protect the business of the employer.”

• Burden of proof on party seeking injunction

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Noncompete examples

Requirements: Writing & Consideration

Requirement:

• writing (signed by restrained party) - made part of employment k - based on valuable consideration

• Employer and employee discuss potential terms of employment: salary, benefits, employer mentions that covenant restricting right to compete will be required. Employee begins work – is presented with and signs covenant one week later.

• Covenant not discussed before employee starts work. Presented to at-will employee 1 month after starting.

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Time/Territory

Rqmts: Reasonable in time/territory

• Requirement: Restriction must be reasonable as to time and territory. Consider both together. Actual scope of covenant is key.

• Employer must prove the geographic and numerical scope of its customer base, and that covenant is no broader than necessary to protect legitimate business interests

• Factors in determining reasonableness of geographic restriction:(1) area or scope of restriction(2) area assigned to employee(3) area in which employee actually

worked(4) area in which employer operated(5) nature of business involved(6) nature of employee’s duty and his

knowledge of business operation.

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Time/Territory examples

Rqmts: Reasonable in time

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Territory

Outer boundary of 5 years?

Assume clause prohibits employee from working, for 3 years, for any customer of employer at time of termination, or anyone who was customer within preceding 2 years. What is “term” of covenant?

Examples:

Kennedy v. Kennedy, 160 N.C. App. 1, 584 S.E.2d 328 (N.C. App. 2003): Enforces 3 year/15 mile restriction on dentist.

Precision Walls, Inc. v. Servie, 152 N.C. App. 630, 568 S.E.2d 267 (N.C. App. 2002): Enforces 1 year restriction on work with any competitor of employer.

Whittaker Gen. Med. Corp. v. Daniel, 324 N.C. 523, 379 S.E.2d 824 (1989): Enforces 2 year restriction on contacting/soliciting customers in area assigned to employee salesperson at time of termination.

Context matters: rapidly changing technologies

Rqmts: Reasonable in territory

Employer must prove geographic and numerical scope of its customer base.

Assessing world-wide or “customer-based” restrictions.

• Not invalid simply b/c no geographic scope specified• Significant factor (where loss of clients is key concern): number of clients covered by covenant vs. number of clients employee actually served

• “A client-based limitation cannot extend beyond contacts made during the period of . . . Employment.”

• BUT where employer has other interests (confidentiality, investment in training, etc) broader covenant might be enforced

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Territory

Rqmts: Reasonable in territory

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Territory

ABC Consulting firm with world-wide client base hires EE as consultant.

- Consultants work closely with clients

- ABC has offices in 40 states and 5 countries

- ABC trains consultants in system developed by ABC

- ABC does not train EE b/c already had experience

- Noncompete: 3 years after termination, EE will not perform similar services for any current or former ABC client, or who was client w/in preceding 2 years

- EE works for 2 years, 8 clients before resigning and starting competing firm.

Rqmts: Reasonable in territory

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Public Policy

ABC Consulting firm with world-wide client base hires EE as consultant.

- Consultants work closely with clients

- ABC has offices in 40 states and 5 countries

- ABC trains consultants in system developed by ABC

- ABC does not train EE b/c already had experience

- Noncompete: 3 years after termination, EE will not perform similar services for any current or former ABC client, or who was client w/in preceding 2 years

- EE works for 2 years, 8 clients before resigning and starting competing firm.

- What if EE also has access to customer lists, key customer contacts, information about specific consulting needs of customers?

Rqmts: Public policy

Covenant must not violate public policy.

Distinction is between whether covenant results in inconvenience to public or whether there will be a substantial question of potential harm.

• Number of other providers serving community

• Undesirable and critical delays in patient treatment

• Nature of patients and ability to travel

• Likeliest case for invalidating on public policy grounds: defendant is sole provider or one of limited number of specialists

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Choice of Law

Choice of law

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Trade secrets

Generally: Contract interpretation governed by law of place where contract is made.

- Contract made where last act necessary to make it binding occurred.

But, parties may choose to apply other law, unless:

- Chosen state has no substantial relationship to parties or transaction and no other reasonable basis for choice; or

- Application of chosen law (1) contrary to fundamental policy of state (2) with materially greater interest, whose (3) law would apply but for choice of law clause.

Example: Original employment k has no covenant. Later, at-will employee forced to sign or be fired. Chosen law recognizes continued employment as “new consideration” (unlike N.C.)

Trade secrets

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Trade Secrets

Trade secret: “[B]usiness or technical information, including but not limited to a formula, pattern, program, device, compilation of information, method, technique, or process that:

(a) derives independent actual or potential commercial value from not being generally known or readily ascertainable through independent development or reverse engineering by persons who can obtain economic value from its disclosure or use; and

(b) is the subject of efforts, reasonable under the circumstances, to maintain secrecy.

Misappropriation: Acquisition, disclosure, or use of a trade secret without express or implied authority or consent, unless such trade secret was arrived at by independent development, reverse engineering, or was obtained from another person with a right to disclose the trade secret.

Trade secrets

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Trade Secrets

Pleading requirements: Plaintiff must identify trade secret with sufficient particularity to enable defendant to determine what he is accused of misappropriating and a court to determine whether misappropriation has occurred or threatens to occur.

• Not sufficient to allege misappropriation of broad product and technology categories. Visionair, Inc. v. James, 606 S.E.2d 359 (N.C. App. 2004)• Plaintiff identified trade secret with sufficient particularity when it provided copy of customer list allegedly misappropriated and identified employees who could explain in detail which technical information defendant allegedly misappropriated. Static Control Components, Inc. v. Darkprint Imaging, Inc., 200 F.Supp.2d 541 (M.D.N.C. 2002)

Trade secrets

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Trade Secrets

What is a trade secret:

1. extent to which information is known outside the business;

2. extent to which it is known to employees and others involved in the business;

3. extent of measures taken to guard secrecy of information;

4. value of information to business and its competitors;

5. effort or money expended in developing information; and

6. ease or difficulty with which information could properly be acquired or duplicated by others

Trade secrets

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Trade Secrets

Examples:

Customer database stored on employee’s computer and provided to competitor not trade secret; competitor could have compiled a similar list from public records like trade show and seminar lists. Combs & Assocs v. Kennedy, 147 N.C. App. 362 (2001)

Customer lists and data not trade secret where no evidence employer kept secret, employee could have obtained contact information from phone book, and employee serviced those customers while employed. Novacare Orthotics and Prosthetics v. Speelman, 137 N.C. App. 471 (2000).

Owner of business demonstrated trade secret where it kept cost information for each of its service contracts secret, kept info. a long time, and used info. to prepare bids. Even though similar information could have been compiled by competitor, information had value to plaintiff and competitors and could be used to underbid plaintiff. Byrd's Lawn & Landscaping, Inc. v. Smith, 142 N.C.App. 371, 542 S.E.2d 689 (2001).

Trade secrets

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Recovering on bond

Customer lists:• extent to which identity of customers generally known or available from public sources• exclusivity of relationship between employer and customers• employee’s other contact with customers (outside of work for employer)• employee’s access to additional customer information: special needs, key customer contacts, pricing information, etc.• steps taken to guard confidentiality• effort/expense to develop and value to business/competitors

Recovering on Bond

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Security for preliminary injunction or TRO given “for the payment of such costs and damages as may be incurred or suffered by any party who is found to have been wrongfully enjoined or restrained.” Rule 65(c).

What does it mean to have been “wrongfully enjoined or restrained?”

- Plaintiff obtains ruling at trial that covenant was overbroad & unenforceable.

- Plaintiff wins at trial on grounds that defendant’s claim barred by laches.

- Plaintiff obtains dismissal on jurisdictional grounds – e.g., improper service of process

- Defendant voluntarily dismisses case at trial