In cases involving non-competition agreements, the battle is almost always fought, and won or lost, at the preliminary injunction stage. Once the court rules on whether the former employer (or other party which has obtained a non-compete agreement) is, or is not, entitled to a preliminary injunction, in my experience, a trial rarely occurs. Thus, the importance of prevailing, or not, at the preliminary injunction stage cannot be overstated.
Broadly speaking, one of the main types of relief typically sought in a motion for a preliminary injunction arising out of an employment agreement is that the court enter an order prohibiting the former employee from competing with his or her former employer. The exact terms of an order obtained at the preliminary injunction stage will vary according to the terms of the non-compete agreement at issue and the court’s modification of those terms, if it modifies them (which it is empowered to do).
In deciding whether to grant a motion for a preliminary injunction, a court will consider the following factors: (1) Whether the former employer is likely to prevail on the merits at trial; (2) whether, without an injunction, the former employer will suffer irreparable harm; (3) whether the preliminary injunction will cause substantial harm to the former employee or others; and (4) the public interest. In my experience, the most important factor is (1), followed by (3).
Our firm has handled many of these cases over the years and factors (2) and (4) have mostly been inconsequential. With respect to factor (2), irreparable harm means harm which has occurred, but for which a court cannot calculate damages, and thus, for which it cannot award damages. There is a large body of case law that supports the conclusion that a former employer will suffer irreparable harm from unfair competition by a former employee. This is so because it is almost always impossible for a former employer to prove, with any degree of specificity, the damages it will incur from lost business and lost opportunities resulting from the former employee, even when they will most assuredly occur without an injunction. Thus, in our experience, once a court determines that the former employer is likely to prevail on the merits, it is infrequent that a preliminary injunction is not granted on the basis that the former employer did not prove irreparable harm.
The two non-competition agreement cases below are worth juxtaposing to educate oneself on how a court will go about considering a motion for a preliminary injunction and the chances that it might grant one. In one case, the court denied a motion for a preliminary injunction. In the other, the court granted it.
Here are the key facts in the case of Southwestern Consulting, Inc. v. Vaden, 2018 WL 6580131 (M.D. Tenn. Oct. 10, 2018):
- The defendants (“Employees”) were former employees of the Plaintiff (“Employer”)
- Employees were husband and wife
- The husband Employee had begun working for Employer in 2001 when he participated in a door-to-door summer sales program
- Wife had started working for Employer in 2007
- Employer fired wife Employee in May of 2018
- Very shortly after wife was fired, the husband Employee resigned from employment with Employer
- The court noted that the case was not one in which two former employees appeared to have had a premeditated plan to cease employment, much less to cease employment and begin competing with Employer
- After their employment with Employer was terminated, the Employees started a personal branding business
- Employer described its business as “sales and leadership coaching and training, corporate sales, and digital marketing consulting, and key note speaking services worldwide”
- Employer’s representatives testified in depositions that its core business was sales coaching and consulting
- While at Employer, the husband Employee had produced a video and blogs about the importance of personal branding
- Employees’ position was that personal branding services, while the same might touch on teaching sales skills to individuals, were distinct services which were never offered by Employer
- Employer’s position was that personal branding services were an integral part of the Employees’ job duties as evidenced by the fact that they touted their past experience with personal brand building while employed by Employer when they started their new company
- Based on the terms of the Employees’ non-compete agreements, the Employer sought a preliminary injunction prohibiting the Employees from “providing brand coaching and brand strategy services” wherever Employer did business, which was the entire United States and European Union
The court in the Vaden case held that a preliminary injunction should not be granted. It found that the non-compete contracts at issue were so “extraordinarily broad” that they were close to being unenforceable at all. In that respect, the court pointed out that the Supreme Court of Tennessee had held that, if a non-compete contract was “deliberately unreasonable and oppressive,” a court could strike it down rather than modifying it. Ultimately, the court denied the requested injunction on other grounds, but the over breadth of the non-compete agreements at issue could not have helped the Employer’s chances.
The Vaden court denied the requested preliminary injunction on the grounds that the Employer had not shown a likelihood of success on the merits (factor 2). The court found that the Employees were not the “face” of Employer and that Employer had not presented evidence that it had made the kind of corporate investments in the Employees’ reputations that justified enforcement of the non-compete agreements. The court found that the non-compete agreements, when construed strictly, only prohibited the Employees from selling the same kinds of services sold by Employer and that Employer did not provide, as a discreet service, personal brand building.
Here are the key facts in the other case, American Home Shield Corporation v. Specter, 2019 WL 4935459 (W.D. Tenn. Apr. 4, 2019):
- The former Employer (“Employer”) sold home warranty contracts
- Employer hired the defendant former employee (“Employee”) as an account executive in 2013
- Employee was one of three account executives who worked the St. Louis territory
- Employee resigned in January of 2019
- A key component of Employee’s work was to foster and to maintain relationships with real estate agents and brokers as they were a source of substantial referrals and business
- Most of Employee’s compensation was tied to his sales of home warranties
- Employer had provided a personal web page for Employee
- Employer had sent emails with Employee’s picture and contact information to over 100,000 recipients
- Employer had paid for advertisements for Employee
- Employer had paid Employee’s dues for real estate associations
- Employer had reimbursed Employee for marketing expenses for such things as meals, and sports events
- Right after resigning and beginning employment with a competitor, Employee posted on Facebook that he hoped that all the real estate agents who had been working with him would continue to do so
- The non-compete agreement which bound Employee was narrowly tailored and prohibited him, for one year, from rendering any services for a competitor within any county in which he had performed duties for Employer during the last twelve months of his employment
In the Specter case, the court found that the Employer was likely to succeed on the merits and granted the preliminary injunction. Significantly, the court found that Employee’s work was “relationship-centric.” The court’s decision was based on that fact, the efforts undertaken by Employer to promote Employee’s personal relationships, and the narrowness of the non-compete provision at issue.
For Tennessee lawyers who handle non-compete cases, and employers, employees, businesses, and independent contractors who are parties to non-competition agreements, here are some lessons I submit can be derived from the above two cases:
- Pigs get fat and hogs get slaughtered. The non-compete in Vaden was grossly overly broad and that fact had to color the court’s thinking or the court would not have spent so much ink on it.
- A court will likely consider whether the preliminary injunction is sought by an employer which has terminated the employee, or against an employee who has voluntarily resigned
- Courts seem always to be sympathetic to a situation where the employer has spent money and resources for an employee to build personal relationships where the employee is then able to use those very relationships to compete with his or her former employer. (Conversely, in many cases, it is important to prove that the employee already had relationships which he or she brought to the table when he or she started employment).
- Whether the former employee is truly in the competitive space of his or her former employer is critical. This factor was one of the, if not the, determinative factor in the above two cases.