TMFS Holdings, LLC et al v. Capace et al

Filing 13

MEMORANDUM AND ORDER granting 6 Motion for TRO. See Order for details. Signed by District Judge Julie A. Robinson on 2/7/2017. (ydm)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF KANSAS
TMFS HOLDINGS, LLC, FINANCIAL
ENGINES ADVISORS, LLC, AND
FINANCIAL ENGINES, INC.,
Plaintiffs,

Case No. 17-2063-JAR-GLR

v.
SCOTT M. CAPACE AND JOSEPH G.
ZINSEL,
Defendants.

MEMORANDUM AND ORDER
Plaintiffs TMFS Holdings, LLC, Financial Engines Advisors, LLC, and Financial
Engines, Inc. filed this action in Johnson County, Kansas District Court on January 31, 2017,
alleging breach of contract and misappropriation of trade secrets under Kansas law by two
former employees that resigned on January 25, 2017, Defendants Scott Capace and Joseph
Zinsel. Plaintiffs filed a motion for temporary restraining order along with the Petition, and that
motion was set for hearing in state court on February 2, 2017. But on February 2, Defendants
removed the case on the basis of diversity jurisdiction.1 This matter is before the Court on
Plaintiffs’ Motion for Temporary Restraining Order (Doc. 6), which was refiled after removal.
The motion is fully briefed and the Court heard argument on February 6, 2016. The Court has
considered the parties’ submissions and their oral argument and is prepared to rule. For the

1

The parties advise the Court that a parallel case was filed by Defendants in Louisiana state court and
removed to the United States District Court for the Eastern District of Louisiana. Defendants moved for a temporary
restraining order in that action, which was denied on February 3, 2017. That court directed the parties to brief the
issue of whether it should stay proceedings in deference to this matter. The briefs are due today. Capace v. TMFS
Holdings, No. 17-919, Doc. 6 (E.D. La. Feb. 3, 2017).

reasons explained more fully below, the Court grants Plaintiffs’ motion for a temporary
restraining order.
I.

Background
The following facts are alleged in the Petition and attachments thereto, or are contained

in Capace’s declaration, attached to Defendants’ response. Plaintiff Financial Engines, Inc.
operates a nationwide system of investment advisers, including a business formerly known as
The Mutual Fund Store. The Mutual Fund Store was founded in 1996 in the Kansas City area,
and eventually became part of TMFS Holdings, LLC, which Financial Engines acquired in
February 2016. Plaintiffs refer to themselves, as well as “their direct and indirect subsidiaries,
including Plaintiff FE Advisers” as “TMFS.” Defendants are former employees of Plaintiffs,
who started their employment with TMFS in November 2011 and January 2012, respectively.2
At the time of their resignations, Defendants held the title Senior Vice-President, Financial
Planning. Defendants each entered into the same standard language employment agreement sent
to them by TMFS. Capace’s agreement is undated; Zinsel’s agreement is dated January 11,
2012. By the end of 2016, Capace was managing approximately $87 million and Zinsel was
managing approximately $50 million in Assets Under Management for TMFS. They collectively
generated over $1 million in revenue for TMFS over the last two years of their employment.
Defendants resigned on January 25, 2017, and started a new investment-advisory firm
called Open Source Investments, LLC (“Open Source”). Plaintiffs allege that Defendants took
customer lists and solicited at least two of TMFS’s former clients in violation of restrictive
covenants included in their identical employment agreements. Section 2 of the agreement

2

Capace previously owned Mutual Fund Store franchises in Louisiana before he became a TMFS employee
in November 2011.

2

prevents Defendants from using or disclosing TMFS’s confidential information, and requires
them to promptly return confidential and proprietary information at the end of their employment.
Section 3 of the agreement prohibits Defendants from soliciting, diverting, or taking away
TMFS’s customers for one year after their date of resignation. It also prevents them from
causing or attempting to cause TMFS customers to terminate or reduce their relationship with
TMFS, and from soliciting TMFS employees to work for a competitor. The agreement provides
for injunctive relief in the event of breach or threatened breaches of sections 2 or 3.
Defendants’ resignation letters, attached to the Petition, state: “In accordance with Broker
Recruiting Protocol, I am taking a paper copy of my clients’ names, addresses, phone numbers,
and email addresses. Also in accordance with the Protocol I am leaving an exact copy of this
information with the office.”3 The Petition alleges that Capace told TMFS that he scrubbed his
TMFS computer prior to leaving. Defendants started working for Open Source one week before
they resigned. Open Source will provide independent wealth management services, the same
types of services offered by TMFS. Defendants contacted their former clients by email, advising
them that they left TMFS, that the clients are still enrolled with TMFS, and that they have
formed a new company, which “can offer a better array of services and products best suited for
our clients’ investments needs through our own investment advisory firm.” They provided their
new contact information at Open Source to these customers. At least two of TMFS’s clients are
in the process of switching their accounts to Open Source.
Capace’s declaration states he and Zinsel took hard copy lists of their own clients, as
described in their resignation letters. Capace’s declaration also states that, “on January 28, 2017,
Joseph Zinsel and I returned all paper copies of the client list to Financial Engines/TMFS by

3

Doc. 1-1 at 42–43.

3

Federal Express and destroyed the electronic copies of the list including any documents using
information from the list.”4
Defendants’ employment agreement contains a forum selection clause in section 9,
specifying that Kansas law will apply to disputes relating to the contract. The contracts were
performed in whole or in part in Kansas. TMFS provided Defendants with administrative,
regulatory, and customer-related support and information (including confidential, competitivelyvaluable information) from Kansas; Capace repeatedly traveled to Kansas in connection with his
employment; TMFS provided Zinsel with training in Kansas; and Defendants allegedly took
customer lists held in servers located in Kansas. Defendants live and work in Louisiana. They
were recruited by TMFS in Louisiana and most of their clients are located in that state.
II.

Standard
A TRO preserves the status quo and prevents immediate and irreparable harm until the

court has an opportunity to pass upon the merits of a demand for preliminary injunction.5 Where
the parties have notice of and an opportunity to respond to a motion for TRO, courts generally
apply the standards governing issuance of preliminary injunctions.6 “A plaintiff seeking a
preliminary injunction must establish that he is likely to succeed on the merits, that he is likely to
suffer irreparable harm in the absence of preliminary relief, that the balance of equities tips in his
favor, and that an injunction is in the public interest.”7 This standard “requires plaintiffs seeking
preliminary relief to demonstrate that irreparable injury is likely in the absence of an

4

Doc. 8-1 ¶ 20.

5

Flying Cross Check, LLC v. Central Hockey League, Inc., 153 F. Supp. 2d 1253, 1258 (D. Kan. 2001).

6

See Kan. Hosp. Ass’n v. Whiteman, 835 F. Supp. 1548, 1551 (D. Kan. 1993).

7

Winter v. Nat. Res. Def. Council, Inc., 555 U.S. 7, 20 (2008).

4

injunction.”8 A relaxed standard applies if the movant can show that the harm and public interest
factors “tip strongly in its favor.”9 If the movant can make this showing, it can meet the
likelihood of success on the merits prong “by showing that questions going to the merits are so
serious, substantial, difficult, and doubtful as to make the issue ripe for litigation and deserving
of more deliberate investigation.”10
III.

Discussion
A.

Irreparable Harm

To constitute irreparable harm, the injury “must be both certain and great.”11 It “is often
suffered when ‘the injury can[not] be adequately atoned for in money,’ or when ‘the district
court cannot remedy [the injury] following a final determination on the merits.’”12 “Loss of
customers, loss of goodwill, and threats to a business’ viability have been found to constitute
irreparable harm.”13 On the other hand, wholly conclusory statements alone will not constitute
irreparable harm.14
Defendants argue that there is no indication of irreparable harm to Plaintiffs if this Court
does not issue a temporary restraining order, and that Plaintiffs’ claims are based on wholly
conclusory statements. The Court disagrees. Plaintiffs allege that Defendants were managing
tens of millions of dollars’ worth of Assets Under Management for TMFS at the time of their
8

Id. at 21. The injunction sought in this case seeks to preserve the status quo, so the heightened standard
employed for disfavored injunctions does not apply. See O Centro Espirita Beneficiente Uniao Do Vegetal v.
Ashcroft, 389 F.3d 973, 975 (10th Cir. 2004) (per curiam), aff’d, 546 U.S. 418 (2006).
9

Oklahoma ex rel. Okla. Tax Comm’n v. Int’l Registration Plan, Inc., 455 F.3d 1107, 1113 (10th Cir. 2006)
(quoting Davis v. Mineta, 302 F.3d 1104, 1111 (10th Cir. 2002)).
10

Id. (footnote omitted).

11

Prairie Band of Potawatomi Indians v. Pierce, 253 F.3d 1234, 1250 (10th Cir. 2001) (quoting Wis. Gas
Co. v. Fed. Energy Regulatory Comm’n, 758 F.2d 669, 674 (D.C. Cir. 1985)).
12

Id. (quoting Am. Hosp. Ass’n v. Harris, 625 F.2d 1328, 1331 (1980)).

13

Hill’s Pet Nutrition, Inc. v. Nutro Prods., Inc., 258 F. Supp. 2d, 1197, 1205 (D. Kan. 2003).

14

Dominion Video Satellite, Inc. v. Echostar Satellite Corp., 356 F.3d 1256, 1261 (10th Cir. 2004).

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resignations, and collectively generated over $1 million in revenue for TMFS. And case law
from the Tenth Circuit explicitly acknowledges that loss of customers and goodwill may
constitute irreparable harm. This is precisely the type of harm claimed by Plaintiffs, and for
which the restrictive covenants in Defendants’ employment agreements seek to protect. The
Court easily finds that this is the type of damage that cannot be remedied after a final
determination on the merits, or with damages. Indeed, the Tenth Circuit has recognized that
“[o]ne such situation in which damages may not fully compensate a plaintiff is when the
business at issue ‘is based on personal contacts and a knowledge of the special needs and
requirements of customers, a fact which complicates any damage estimate.’”15 The Court further
finds that Plaintiffs’ claims of harm are not merely conclusory—they submitted emails showing
Defendants communicated with their former clients, and Defendants have admitted multiple
times that they took with them their clients’ names and contact information when they resigned.
In fact, Defendants maintain that they were entitled to this information under industry standards.
Plaintiffs have met their burden of demonstrating irreparable harm.
B.

Balance of Harms and Public Interest

The Court must weigh the irreparable harm to Plaintiffs without the injunction against the
harm to Defendants if the injunction issues. Defendants characterize their harm as “hardship that
Defendants and their families would suffer if they are denied the protections afforded to
Louisiana employees, and enjoined from working as financial advisors in the state and area
where they have lived and worked their entire lives.”16 But this mischaracterizes section 3 of the
employment agreement. The restrictive covenant is a nonsolicitation clause; it does not prohibit

15

Southwest Stainless, LP v. Sappington, 582 F.3d 1176, 1191–92 (10th Cir. 2009) (quoting Equifax Servs.,
Inc. v. Hitz, 905 F.2d 1355, 1361 (10th Cir. 1990)).
16

Doc. 8 at 15.

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Defendants from working as financial advisors in Louisiana. Sections 2 and 3 restrict the
information Defendants could take with them when their employment ends, and prevents them
from soliciting TMFS customers, or causing them to leave TMFS. Defendants are permitted to
work as financial advisors so long as they develop new client relationships. Such hardship does
not outweigh the irreparable harm to Plaintiffs without a TRO—a loss of goodwill that could not
be compensated through monetary damages. The TRO freezes the status quo until the Court can
determine whether Defendants’ choice of law argument, and thus their entitlement to “the
protections afforded to Louisiana employees,” is dispositive without risking further loss of
customers and goodwill to Plaintiffs.
The Court also finds that the TRO is in the public interest. Generally, there is a public
interest in upholding enforceable contracts.17 Here, the Court determines that a TRO is an
appropriate remedy to freeze the status quo by enforcing the parties’ contracts based on the
forum selection clause in those contracts. Indeed, the parties’ contracts provide for injunctive
relief in the event of a breach or a threatened breach. The Court finds that both the balance of
harms and the public interest factors tip strongly in Plaintiffs’ favor.
C.

Likelihood of Success on the Merits

Because the Court finds that the balance of harms and public interest factors tip strongly
in their favor, a relaxed standard applies to the likelihood of success on the merits prong of the
TRO analysis. Plaintiffs base their request for injunctive relief on their breach of contract claim
under Kansas law. Defendants only challenge to whether Plaintiffs are likely to succeed on the
merits of this claim is that the choice of law provision in section 9 of the agreement is
unenforceable. “[A] federal court sitting in diversity must apply the substantive law of the state
17

Fireworks Spectacular, Inc. v. Premier Pyrotechnics, Inc., 86 F. Supp. 2d 1102, 1109 (D. Kan. 2000);
Hearton, Inc. v. Shackelford, 898 F. Supp. 1491, 1502 (D. Kan. 1995).

7

in which it sits, including the forum state’s choice-of-law rules.”18 Both parties invite the Court
to consider the Kansas Supreme Court’s decision in Brenner v. Oppenheimer & Co.19 In that
case, the court was called upon to consider whether a choice of law provision specifying that
New York law would govern standard form client agreements for certain brokerage accounts is
enforceable given Kansas’s strong public policy favoring securities regulation.20 As a threshold
matter, the court discussed the constitutional limitations on choice of law questions, recognizing
that choice of law must not be “arbitrary nor fundamentally unfair,” and thus, Kansas must have
“significant contact or significant aggregation of contacts.”21 The court found sufficient
minimum contacts with the State of Kansas to satisfy that constitutional inquiry.22
Next, the court determined that there was an actual conflict between New York and
Kansas securities law requiring it to determine which law should govern the dispute.23 The court
recited the general rule under Kansas law that a contractual choice of law provision controls.24 A
narrow exception applies to this general rule where enforcing a contractual choice of law
provision “engenders a result contrary to public policy.”25 The brokerage firm urged the court to
apply the test used in Altrutech, Inc. v. Hooper Holmes, Inc., that “the enforceability of a
contractual choice-of-law provision turns on whether the forum selected bears a reasonable
relation to the contract at issue,” which is found in the Restatement (Second) of Conflict of

18

Boyd Rosen & Assocs., Inc. v. Kan. Mun. Gas Agency, 123 F.3d 1351, 1352–53 (10th Cir. 1997).

19

44 P.3d 364 (Kan. 2002).

20

Id. at 371.

21

Id. at 372 (quoting Sys. Design v. Kan. City P.O. Emps. Cred. Union, 788 P.2d 878, 881 (1990)).

22

Id.

23

Id. at 373.

24

Id. at 375.

25

Id.

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Laws.26 But the Kansas Supreme Court declined, stating that Altrutech did not consider whether
the public policy exception to Kansas choice of law rules applies. Brenner neither endorsed nor
applied that test. Ultimately, the court determined that Kansas public policy strongly favors the
regulation of securities transactions, and thus application of New York law, which does not allow
redress for the sale of unregistered securities, would violate Kansas public policy.27 The court
found the forum selection clause invalid under the public policy exception.28
Defendants in this case mistakenly focus on language in Brenner discussing the Altrutech
reasonable relation standard and argue that this test determines whether a choice of law provision
should be enforced under Kansas law. The Court acknowledges that the reasonable relation test
has been recited and applied in several past opinions in this district.29 But none of the cited cases
invalidated a forum selection clause on these grounds, nor provide any analysis of a reasonable
relation test under the Restatement (Second) Conflict of Laws.30 The Court has reviewed the
cases cited by the parties and agrees with Plaintiffs that this language appears to derive from a
prior Kansas case construing the UCC.31

26

Id. (discussing Altrutech, Inc. v. Hooper Holmes, Inc., 6 F. Supp. 2d 1269, 1273 (D. Kan. 1998)).

27

Id. at 377–81.

28

Id. at 380.

29

See, e.g., Altrutech, 6 F. Supp. 2d at 1273; Higby Crane Serv., LLC v. Nat’l Helium, LLC, No. 10-1334JAR, 2012 WL 5987473, at *3 (D. Kan. Nov. 29, 2012), rev’d on other grounds, 751 F.3d 1157 (10th Cir. 2014);
BHC Dev., L.C. v. Bally Gaming, Inc., 985 F. Supp. 2d 1276, 1285 (D. Kan. 2013) (citing Nat’l Equip. Rental, Ltd.
v. Taylor, 587 P.2d 870, 872 (Kan. 1978) (applying the U.C.C.)).
30

Defendants also mistakenly suggest that the Due Process standard for determining whether minimum
contacts exist for the choice of law provision to pass constitutional muster, is “consistent with” the Restatement
(Second) of Conflict of Laws, which provides a test for determining the validity of a choice of law provision.
Brenner does not discuss these tests in tandem; they are separate inquiries. Compare Brenner, 44 P.3d at 372
(discussing the constitutional inquiry before considering whether an actual conflict exists), with 44 P.3d at 374–75
(reciting the reasonable relation test as it has been applied in two federal court cases to determine choice of law
validity).
31

See, e.g., Nat’l Equip. Rental, Ltd. v. Taylor, 587 P.2d at 872.

9

The Court is satisfied at this juncture that Kansas has significant contacts with this
dispute to satisfy due process. There is no question that The Mutual Fund Store was based in
Kansas at the time Defendants entered into their employment agreements. Plaintiffs also allege
that at least for a period, Defendants traveled to Kansas, received documents in Kansas, and
reported to managers in Kansas. The computer servers that house Plaintiffs’ customer data are
located in Kansas. This is not a situation, as suggested by Defendants, where an employer
specified the law of an entirely unconnected forum that favors restrictive covenants. And
Defendants do not offer the Court authority to support their argument that the parties’ past ties
with Kansas have no bearing on constitutional significant contacts analysis; that if a party’s
contacts with a state dissipate over time, it can render a forum selection clause unenforceable.
The Court is satisfied that Plaintiffs are substantially likely to succeed on the merits of their
claim that enforcing the choice of law provision in the employment agreement does not offend
the Constitution.
Next, assuming there is a conflict between Kansas and Louisiana law, Kansas applies the
Restatement (First) of Conflict of Laws in addressing choice of law issues.32 As the Brenner
court explained, the First Restatement is silent as to contractual choice of law provisions, but
“Kansas case law and the Uniform Commercial Code . . . recognize the principle of freedom to
contract and, under most circumstances, permit parties to choose the law applicable to their
agreement.”33 The general rule applies here because Defendants have not demonstrated that
enforcing the choice of law provision would offend Kansas public policy. Moreover, as already
discussed, Defendants have neither demonstrated that this Court is bound by the reasonable

32

See In re K.M.H., 169 P.3d 1025, 1031–32 (Kan. 2007).

33

Brenner, 44 P.3d at 374.

10

relation test set forth in the Second Restatement, nor that Kansas is not reasonably related to the
dispute.
Although Defendants stated at the hearing that Plaintiffs are not likely to succeed on the
merits under Kansas law, they do not explain this argument, nor does their brief address any
specific infirmity under Kansas law. The Court finds that Plaintiffs have met their burden of
demonstrating serious questions on the merits of their breach of contract claim making it ripe for
adjudication. Kansas courts look to the following factors to determine whether a restrictive
covenant is reasonable, and therefore enforceable, under the particular facts of each case: “(1)
Does the covenant protect a legitimate business interest of the employer? (2) Does the covenant
create an undue burden on the employee? (3) Is the covenant injurious to the public welfare? (4)
Are the time and territorial limitations contained in the covenant reasonable?”34
The covenants in sections 2 and 3 of Defendants’ employment agreement protect
legitimate business interest of Plaintiffs. Defendants were allowed to develop goodwill and
business relationships in their capacity as TMFS agents; TMFS has a legitimate interest in
disallowing them from obtaining an unfair advantage by taking those clients and confidential
information about those clients when they leave. The Court also finds that the agreement does
not place an undue burden on Defendants. The covenants do not prohibit them from working as
financial advisers; they must only refrain from soliciting clients and employees for one year after
resigning. There is no evidence to suggest that enforcing the employment agreements would be
injurious to public welfare. And finally, the Court finds that the one-year period that applies to
these restrictive covenants is reasonable. This time period is shorter than those commonly

34

Idbeis v. Wichita Surgical Specialists, P.A., 112 P.3d 81, 86–87 (Kan. 2005) (quoting Weber v. Tillman,
913 P.2d 84, 90 (Kan. 1996)).

11

upheld by Kansas courts.35 In sum, Plaintiffs have demonstrated a substantial likelihood of
success on their breach of contract claim, based on an employment agreement with enforceable
choice of law and restrictive covenant provisions.
D.

Bond

Fed. R. Civ. P. 65(c) provides that “[t]he Court may issue a preliminary injunction or a
temporary restraining order only if the movant gives security in an amount that the court
considers proper to pay the costs and damages sustained by any party found to have been
wrongfully enjoined or restrained.” The Court may exercise its discretion, and determine a bond
is unnecessary “if there is an absence of proof showing a likelihood of harm.”36 Plaintiffs do not
oppose a bond, and the Court finds that a bond is warranted. However, Defendants provided no
information about the costs and damages that may inure to Defendants if Defendants are wrongly
enjoined for the short period between today and a ruling on a motion for preliminary injunction.
Plaintiffs shall post a bond in the amounts of $10,000 for Capace and $5000 for Zinsel.
IT IS THEREFORE ORDERED BY THE COURT that Plaintiffs’ Motion for
Temporary Restraining Order (Doc. 6) is granted. Defendants Capace and Zinsel, and their
officers, agents, servants, employees, and other persons acting in concert or participation with
them (including Open Source) who receive actual notice of this Order by personal service or
otherwise, are temporarily restrained and prohibited from, directly or indirectly:
a.

violating the terms of the Agreement, including by soliciting, diverting, or taking

away, or attempting to solicit, divert, or take away from TMFS, the business of TMFS’s
Customers for the purpose of selling or providing to or servicing for any such Customer any

35

See, e.g., Wichita Clinic P.A. v. Louis, 185 P.3d 946, 954–55 (Kan. Ct. App. 2008) (acknowledging that
two-year time limits are commonly enforced yet enforcing three-year restrictive covenant).
36

Coquina Oil Corp. v. Transwestern Pipeline Co., 825 F.2d 1461, 1462 (10th Cir. 1987).

12

product or service which was provided by TMFS at any time during the last two years of Capace
and Zinsel’s employment with TMFS (or which product or service is a substitute therefor or
competes therewith);
b.

causing or attempting to cause any of TMFS’s Customers to terminate or reduce

their existing relationships with TMFS;
c.

using, disclosing, copying, communicating, or distributing any of Plaintiffs’ trade

secret information or other Confidential Information;
d.

avoiding or attempting to avoid providing discovery in this litigation by purging,

destroying, altering, modifying or concealing any of TMFS’s trade secret or other Confidential
Information, whether in original, copied, computerized, handwritten or any other form;
e.

processing paperwork or otherwise opening a new account for any TMFS

Customers that Defendants may have already contacted.
Defendants are further ordered to immediately return any and all documents (including
the TMFS customer lists that Defendants allegedly improperly took) containing any trade secret
or other Confidential Information of TMFS or pertaining to TMFS’s business, including, but not
limited to all files, emails, text or instant messages, and other electronically stored documents
and information taken or retained by Defendants, regardless of the form or medium in which
it/they is/are stored or preserved (including, but not limited to, on a computer, thumb drive, flash
drive, DVD or CD, “smart” phone, iPad, etc.), and whether in original, copied, computerized,
handwritten or any other form.
Pursuant to Fed. R. Civ. P. 65(b), this restraining order shall remain in force for no longer
than the Court’s ruling on the propriety of a preliminary injunction, which is set for hearing on
February 15, 2017, at 9:00 a.m. in Kansas City, Kansas, Courtroom 427.

13

Plaintiffs shall post a security bond in the amounts of $10,000 for Capace and $5000 for
Zinsel.
IT IS SO ORDERED.
Dated: February 7, 2017
S/ Julie A. Robinson
JULIE A. ROBINSON
UNITED STATES DISTRICT JUDGE

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