TROs, Preliminary Injunctions, and Covenants Not to Compete

1
TROs, Preliminary Injunctions, and Covenants Not
to Compete
N.C. Association of Superior Court Judges Summer
Conference 2005
2
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
3

• 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
• applicants atty certifies efforts made to
  give notice and why notice shouldnt 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
Main
4
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- Applicants ability
to pay damages
PI Standards
Main
5

• 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
Main
6
Security for Preliminary Injuntion

• Consider same factors as at TRO stage
• Duration of injunction
• Likelihood of harm
• Severity of harm
• Applicants 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 eee could make
  during injunction) and new employers 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
Main
7
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
• in writing
• made part of employment k
• based on valuable consideration
• reasonable in time and territory
• 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
Main
8
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
Main
9
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
• area or scope of restriction
• area assigned to employee
• area in which employee actually worked
• area in which employer operated
• nature of business involved
• nature of employees duty and his knowledge of
  business operation.

Time/Territory examples
Main
10
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
Main
11
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
Main
12
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
Main
13
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
Main
14
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
Main
15
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
Main
16
Trade secrets
Trade secret Business 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
Main
17
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
Main
18
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
Main
19
Trade secrets
Examples Customer database stored on employees
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
Main
20
Trade secrets

• Customer lists
• extent to which identity of customers
  generally known or available from public
  sources
• exclusivity of relationship between employer
  and customers
• employees other contact with customers
  (outside of work for employer)
• employees 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
Main
21
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
defendants claim barred by laches. -
Plaintiff obtains dismissal on jurisdictional
grounds e.g., improper service of process -
Defendant voluntarily dismisses case at
trial
Main