Transcript Slide 1

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
Trial on merits
Recovering on bond
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
TRO Bond
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Security for TRO
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
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
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Security for Preliminary Injuntion
Consider same factors as at TRO stage:
- Duration of injunction
- Likelihood of harm
- Severity of harm
- Applicant’s ability to pay damages
• 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.
Noncompete Stds
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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 writing
2. made part of employment k
3. based on valuable consideration
4. reasonable in time and territory
5. 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
Noncompete examples
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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.
Time/Territory
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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.
Time/Territory examples
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Rqmts: Reasonable in time
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
Territory
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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
Territory
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Rqmts: Reasonable in 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.
Territory
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Rqmts: Reasonable in 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.
- What if EE also has access to customer
lists, key customer contacts, information
about specific consulting needs of
customers?
Public Policy
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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
Choice of Law
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Choice of law
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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Trade secrets
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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Recovering on Bond
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
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