Arkansas Business Litigation Lawyer & Attorney : Allen Law Firm : Serving Little Rock, Fort Smith, North Little Rock

The Arkansas Court of Appeals affirmed a preliminary injunction in Freeman v. Brown Hiller, Inc., No. 07-717 (4/2/08).

 

Freeman was an insurance agent for BHC. She signed a limited noncompete agreement that prohibited her from soliciting BHC customers for a period of 2 years after her employment ended. The contract also had a provision prohibiting disclosure of trade secrets. The agreement did not contain a geographic limitation. Freeman resigned and immediately went to work for a competitor. Before resigning she accessed, copied and deleted 300 of BHC's computer files.

 

The trial court granted the preliminary injunction for breach of the noncompete agreement but not for trade secret misappropriation. On appeal, Freeman argued the agreement was really an unenforceable covenant not to compete masquerading as a nondisclosure agreement. The court of appeals rejected this argument and affirmed the preliminary injunction.

 

Although Freeman copied an deleted 300 computer files, BHC did not bring a claim for Computer Trespass or Computer Fraud, which is the focus of this recent Arkansas Lawyer article-- Beyond Trade Secrets: Protecting Business Information in Arkansas.

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The district court of South Dakota denied a preliminary injunction in Universal Underwriters Ins. Co. v. Schmidt, 2008 WL 631197 (D.S.D. 3/6/08).

 

Schmidt was an employee of Universal selling property, casualty and life insurance products to automobile dealers. He signed a noncompete agreement that prohibited him from selling these products for 2 years after his employment. During his employment with Universal, Schmidt began selling finance products to automobile dealers. He quit his job with Universal and opened his own business selling these other finance products.

 

The court construed the noncompete agreement narrowly, finding that Schmidt's actions were not prohibited by the contract. The court indicated Universal might incur some harm because of Schmidt's business but concluded any such harm would not be irreparable. After 3 months of discovery and briefing, the court denied the preliminary injunction.

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The Eighth Circuit affirmed summary judgment, to both parties, in a unique case involving a noncompete agreement. See Guardian Fiberglass, Inc. v. Whit Davis Lumber Co., __F.3d__ (12/12/07). This is a long post because this brief opinion brings out some interesting points regarding noncompete agreements.  

The Parties and the Contract

Guardian Fiberglass holds a dominant market position in the insulation products market. Whit Davis Lumber is a lumber company in central Arkansas that sold insulation but never provided installation services to its customers. Guardian ran a program to assist companies like Whit Davis in providing installation services. The parties entered into a contract where Guardian shared information with Whit Davis, including a notebook containing extensive information about providing insulation services. Whit Davis agreed to purchase insulation exclusively from Guardian.

Additionally, the contract had a noncompete clause. If Whit Davis terminated the contract, it would not provide installation services for 2 years after termination. If Guardian terminated the contract, the noncompete provision would not apply. Note that the noncompete agreement only applied to installation services; it did not affect Whit Davis's other business operations.

The parties performed under the contract from 1998 - 2004, and Whit Davis purchased $2.2 million of insulation products from Guardian during this period. Then Whit Davis started purchasing insulation from other suppliers in breach of the contract. Guardian then terminated the contract and brought suit for breach of contract and breach of the noncompete agreement.

The District Court Opinion

The district court granted summary judgment to Whit Davis on the noncompete claim, holding that Guardian did not have a protectable interest to enforce the noncompete agreement. (Note: Michigan law applied, but its law of noncompete agreements is essentially the same as Arkansas) The district court also granted partial summary judgment to Guardian on the breach of contract claim.

The Eighth Circuit Decision

The Eighth Circuit affirmed. First, the court held the noncompete does nothing to protect Guardian's goodwill because Whit Davis never used the Guardian name to promote its installation services. Second, the information Guardian provided was not a trade secret. The court described the information as ordinary knowledge.

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The Arkansas Court of Appeals dismissed the appeal for failure to timely file the record in Murphy v. Michelle Smith Designs, No. 07-251 (12/5/07).

 

Murphy sold the assets of his embroidery business to Smith. He agreed to work for her as a manager and signed a noncompete agreement that he would not compete against her for 2 years after his employment ended. However, he opened a competing business immediately after his employment ended.

 

Smith obtained a preliminary injunction to prohibit Murphy from operating a competing business. After the trial was delayed, the trial court refused to dissolve the preliminary injunction on January 23, 2007. Murphy appealed that order and filed the record with the clerk on March 9, 2007. When a party appeals a refusal to modify a preliminary injunction in Arkansas, the record must be filed with the clerk within 30 days of the entry of the order. See Ark. R. App. P.--Civ. 5(a). In this case, Murphy had to file the record by February 22, 2007. The court dismissed the appeal for lack of jurisdiction.

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The Eastern District of Missouri transferred a case involving trade secret misappropriation and breach of a Missouri noncompete agreement in Buckeye Int'l, Inc. v. Unisource Worldwide, Inc., 2007 WL 4178615 (E.D. Mo. 11/19/07).

 

The dispute centered around Craig Sasso. Sasso was a salesman and then manager for Buckeye International's facility in Georgia. He signed a noncompete agreement that was limited to his sales area. Unisource Worldwide hired Sasso, and he began selling products in Georgia. Buckeye filed this suit in Missouri. Unisource filed suit in Georgia and moved to transfer the Missouri case to Georgia.

 

The court transferred the case to Georgia because the witnesses and documents regarding this dispute are located in Georgia. Additionally, the dispute at issue is Sasso's contact of customers in Georgia. Although these are not the typical red flags stated by the Eighth Circuit, the court felt these were compelling circumstances to supersede the first-filed rule.

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The Eastern District of Missouri denied a motion for temporary restraining order based on a noncompete agreement in Tank Tech, Inc. v. Neal, 2007 WL 2137817 (E.D. Mo. 7/23/07).

 

Tank Tech repairs storage tanks used in the petroleum industry. Neal was a foreman that signed a noncompete agreement. Shortly before joining a competitor, Neal emailed company information to his personal email account. Tank Tech filed this suit for breach of the noncompete agreement.

 

The court denied the TRO because Tank Tech failed to establish the elements of trade secrets under Missouri law. Even if Tank Tech had overcome this hurdle, the noncompete agreement is subject to a reasonableness challenge: the agreement applies for 5 years and covers the entire continental United States.   

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The District Court of Minnesota granted in part and denied in part a preliminary injunction in Novus Franchising, Inc. v. Oksendahl , 2007 WL 2084143 (D. Minn. 7/17/07).

 

Novus specializes in auto glass repair and has over 250 franchisees, including Oksendahl. The franchise contract prohibits franchisees from competing with Novus for 2 years after the expiration of the contract. It also prohibits use of Novus trademarks after expiration. When Oksendahl's franchise expired, he continued to operate a competing business.

 

The court granted a partial injunction against Oksendahl prohibiting him from using Novus trademarks. However, the court determined that Novus failed to show irreparable harm on the noncompete claim. Oksendahl can operate the competing business while the case proceeds.

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The District Court of Minnesota granted a partial preliminary injunction in H.B. Fuller Co. v. Mooney, 2007 WL 1827240 (D. Minn. 6/22/07).

 

H.B. Fuller is an adhesive manufacturer that operates in 34 countries. Mooney, a strategic manager, signed a noncompete agreement. However, he took a job at Coim USA, one of H.B Fuller's competitors. Mooney took with him customer files and copied thousands of computer files. Fuller filed suit for breach of the noncompete agreement and trade secret misappropriation.

 

The court partially granted the preliminary injunction. Mooney is enjoined from disclosing information about Fuller's customers or strategies, but he is permitted to continue his employment at Coim USA. Moreover, the court based the injunction on the noncompete agreement claim; the court found that H.B. Fuller failed to show a likelihood of success on the trade secret claim. The preliminary injunction only has an initial term of 3 months and still commanded a $40,000 bond.

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The Eastern District of Arkansas denied motions for sanctions and attorney fees in Mail Boxes Etc., Inc. v. PBC Services, Inc., 2007 WL 841664 (E.D. Ark. 3/15/07).

 

On February 7, 2006, Mail Boxes brought suit against the defendants for trademark infringement and breach of a noncompete agreement. The court granted a temporary restraining order, and the defendants had to cease business operations. The court also ordered the trial to be consolidated with the preliminary injunction proceedings to begin March 20, 2006.

 

The defendants were parties in a California lawsuit (Morgate) against Mail Boxes that had been ongoing for several years and involved hundreds of parties. The court agreed to let the defendants assert their Morgate claims as counterclaims in the Arkansas trademark case. Mail Boxes chose not to try Morgate in Arkansas, and it voluntarily dismissed the Arkansas claims.

 

The defendants promptly moved to execute on the bond. They also moved for attorney fees of just under $300,000 (for a case that lasted 38 days) and moved for sanctions pursuant to 28 U.S.C. § 1927. After a lengthy recitation of the dispute, the court allowed the defendants to execute $19,990.51 against the bond, but denied the motions for attorney fees and sanctions.

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The Eighth Circuit affirmed a $2 million dollar judgment based on trade secret misappropriation and breach of confidentiality agreements in Synergetics, Inc. v. Hurst, 2007 WL 313585 (8th Cir. 2/5/07).

 

Synergetics sells laser equipment for eye surgery procedures. Messrs. Hurst and McGowan held high-level sales positions with Synergetics. Both Hurst and McGowan signed confidentiality agreements that prohibited them from using Synergetics' confidential information during or after their employment. 

 

Hurst and McGowan formed a competing company during their employment. They constructed equipment using Synergetics' confidential designs and contacted Synergetics' customers about the new company, which they opened 2 weeks after terminating their employment. The court was not hard pressed to affirm the judgment of $1,759,165 actual damages and $293,194.16 punitive damages per defendant.

 

Hurst and McGowan presented a novel argument regarding confidentiality agreements. They argued these agreements cannot be enforceable unless they have time and geographic limitations like noncompete agreements. The court rejected this argument because these limitations have never been required in confidentiality agreements. This case reflects the growing trend of limited noncompete agreements to protect confidential information and avoid the pitfalls of noncompete agreements.

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The Eastern District of Missouri granted a temporary restraining order based on a noncompete agreement in U.S. Bank Nat'l Ass'n v. Meyer, 2007 WL 188406 (E.D. Mo. 1/23/07).

 

Meyer was a former Senior Portfolio Manager with U.S. Bank. He signed a noncompete agreement that prohibited him from soliciting U.S. Bank customers and from accepting business from these customers. In an extremely brief opinion, the court granted the TRO, and the case quickly settled.

 

This case is important because it presents a limited noncompete agreement. This limited agreement only prohibited Meyer from doing business with existing U.S. Bank customers; it did not prohibit his employment at a competing bank. These limited noncompete agreements are a growing trend to avoid courts' general dislike for noncompete agreements that prohibit employment.

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The Western District of Arkansas denied a preliminary injunction for breach of a noncompete agreement and trade secret misappropriation in Rare Valley Resources, Inc. v. Kinetic Technologies, LLC, 2006 WL 3096682 (W.D. Ark. 10/31/06).

 

Rare Valley and Kinetic both sell veterinary products. They entered into an agreement where Kinetic distributed Rare Valley's products, which included a noncompete agreement for 2 years after the venture terminated. However, the noncompete agreement was limited to the Aloe products, not veterinary products in general.

 

Rare Valley waited almost 6 months after filing the complaint to move for a preliminary injunction, which the court found as strong evidence against irreparable harm. The court also found no likelihood of success for either the noncompete claim or the trade secret misappropriation claim.

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The District Court of Minnesota denied a preliminary injunction against a former employee in Unisource Worldwide, Inc. v. Schroeder, 2006 WL 3030887 (D. Minn. 10/23/06).

 

Unisource claimed breach of a noncompete agreement and trade secret misappropriation by Schroeder after he joined a competing firm. The parties' employment arrangement was altered by several letter agreements, but they never reduced the arrangement into one cohesive contract.

 

The court found no likelihood of success because Unisource could not establish that the noncompete agreement was still in effect, and Unisource could not provide evidence of trade secret misappropriation. The court also found that any harm could be remedied with monetary damages.

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The Eastern District of Missouri denied a preliminary injunction in American Equity Mortgage, Inc. v. First Option Mortgage LLC, 2006 WL 3032417 (E.D. Mo. 10/23/06).

 

First Option opened a branch in Indianapolis by hiring away 7 of American Equity's employees, even though all these employees had signed noncompete agreements. American filed suit against First Option claiming tortious interference with these contracts.

 

The court found no likelihood of success because the employees themselves contacted First Option to seek new employment. The court also found lack of irreparable harm in that Americna Equity has a long history of not enforcing its noncompete agreements.

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Noncompete agreements are typically referred to as covenants not to compete. These agreements come in two forms: (1) prohibit an employee from competing with the former employer for an amount of time after the employment is terminated; or (2) prohibit the seller of a business from competing with the buyer for an amount of time after the sale. Arkansas law is more favorable to the second form than the first. See Hyde v. CM Vending Co., Inc., 288 Ark. 218 (1986).

 

Arkansas law has three requirements for noncompete agreements to be enforceable: (1) there must be a valid interest to protect; (2) the geographical restriction must not be overly broad; and (3) a reasonable time limit must be imposed. See Statco Wireless, LLC v. Southwestern Bell Wireless, LLC, 80 Ark.App. 284 (2003).  

 

Arkansas is not a blue pencil state--if one provision of the noncompete agreement fails, then the entire agreement fails. See Rector-Philips-Morse, Inc. v. Vroman, 253 Ark. 750 (1973).

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