LABORATORY CORPORATION OF AMERICA HOLDINGS v. KEARNS
Filing
29
MEMORANDUM OPINION AND ORDER: Plaintiff LabCorp's motion for a preliminary injunction (Docs. 3, 17) GRANTED in part and DENIED in part, and Defendant Kearns be PRELIMINARILY ENJOINED as set out. This Preliminary Injunction shall only become effective when Plaintiff LabCorp gives security to the Clerk of Court in the amount of $775.000. Signed by JUDGE THOMAS D. SCHROEDER on 1/30/2015. (Powell, Gloria)
IN THE UNITED STATES DISTRICT COURT
FOR THE MIDDLE DISTRICT OF NORTH CAROLINA
LABORATORY CORPORATION OF
AMERICA HOLDINGS,
)
)
)
)
)
)
)
)
)
)
Plaintiff,
v.
WILLIAM G. KEARNS,
Defendant.
1:14cv1029
MEMORANDUM OPINION
AND ORDER OF PRELIMINARY INJUNCTION
THOMAS D. SCHROEDER, District Judge.
Before
Corporation
the
court
(“LabCorp”)
is
the
to
motion
of
Plaintiff
preliminarily
enjoin
Laboratory
its
former
employee, Defendant William G. Kearns, Ph.D., from competing with
it in alleged violation of his contract of employment.
17.)
(Docs. 3,
The parties have submitted an evidentiary record, and the
court held a hearing on the motion on January 12, 2015.
For the
reasons set forth herein, LabCorp’s motion will be granted in part
and denied in part.
I.
BACKGROUND
A.
Factual Background
Pursuant to Rule 65(d)(1)(A) of the Federal Rules of Civil
Procedure, the court finds the following facts for purposes of the
present motion.
Kearns
is
an
associate
professor
in
the
Department
of
Obstetrics and Gynecology at the Johns Hopkins School of Medicine
in Baltimore, Maryland.
he
and
other
Preimplantation
Center”).
(Doc. 22-1 (Kearns Decl.) ¶ 1.)
partners
formed
the
LLC
(“Shady
Genetics,
(Id. ¶ 5.)
Shady
Grove
Grove
In 2002,
Center
Center”
or
for
“the
Kearns owned approximately seven percent of
the business and served as the Center’s director.
(Id.)
Around a year after forming the company, Kearns met Richard
Leach, Ph.D.
(Id. ¶ 6.)
The two began collaborating on a method
to increase the likelihood of successful pregnancies for women
undergoing in vitro fertilization.
(Id. ¶¶ 7–11.)
By 2006, the
two men believed they had developed a patentable process for
achieving this goal, so they set out that process in a provisional
patent
application
filed
with
the
United
States
and
(Id. ¶ 11.)
Trademark Office on or about September 26, 2006.
Patent
The
process aimed to improve preimplantation genetic diagnosis (“PGD”)
by a method of testing the cells of newly formed embryos for
genetic abnormalities.
(Id. ¶¶ 12–14.)
To this day, Kearns still
uses this process, generally referred to as “microarray” testing,
though
he
sometimes
uses
another
equally
effective
generally known as “next generation sequencing.”
method
(Id. ¶¶ 15–16.)
In 2007, LabCorp approached the Shady Grove Center about
acquiring the company.
(Id. ¶ 18.)
LabCorp provides a suite of
reproductive services, including PGD testing.
Decl.) ¶¶ 3–6.)
(Doc. 5 (Schmalz
Like the Shady Grove Center, LabCorp provides PGD
2
services
to
fertility
clinics.
(Id.
¶¶
5–6.)
LabCorp
was
interested in acquiring the Shady Grove Center, in part, to acquire
its goodwill and customer relationships.
(Id. ¶ 12.)
In negotiations to purchase the Center, LabCorp indicated
that it would only be interested in the acquisition if Kearns
stayed on as director.
(Kearns Decl. ¶ 19.)
LabCorp sought to
have
employment
with
Kearns
covenants.
sign
(Id.)
an
contract
restrictive
Initially, Kearns refused because the covenants
would have prohibited him from continuing to pursue his patent.
(Id.)
Ultimately, the parties negotiated around this obstacle.
Consequently, in July 2007, LabCorp entered into an agreement (the
“Purchase Agreement”) to buy substantially all of the assets of
the Shady Grove Center. 1
(Id. ¶ 22; Schmalz Decl. ¶ 11; Doc. 22-
1 Ex. 1B.)
Also in July 2007, and effective as of the Purchase Agreement,
Labcorp and Kearns executed an Employment Agreement (“Employment
Agreement”), which retained Kearns as Director, Pre-Implantation
Genetics Services of LabCorp at an annual salary of $150,000.00.
(Doc. 5-1 ¶ 1.)
Relevant here, the Employment Agreement contained
the following covenants:
9.
Restrictive Covenants.
(a) . . . during the term of this Contract and for a period
of one (1) year following the termination or expiration
1
LabCorp paid $3.2 million for the Center, of which Kearns had a 7%
interest. (Schmalz Decl. ¶ 11.)
3
of this Contract, Employee will not, without the prior
written consent of the Corporation:
(i)
directly or indirectly through a subordinate,
co-worker, peer, or any other person or entity
contact, solicit or communicate with a
customer or potential customer of Corporation
or its subsidiary or affiliated companies
with whom Employee has had contact while
employed at Corporation or its subsidiary and
affiliated companies for the purpose of (x)
offering, selling, licensing or providing the
same
or
substantially
similar
assays,
commercial medical testing or anatomical
pathology services offered and/or provided to
such customer or potential customer by the
Corporation or its subsidiary and affiliated
companies or (y) influencing said customer’s
or potential customer’s decision on whether
to purchase or use such assays, commercial
medical testing or anatomical pathology
services offered by the Corporation or its
subsidiary and affiliated companies . . . .
*
*
*
(iii) directly or indirectly own, invest in,
consult for, be employed by or otherwise
engaged by any person, trade or business
either (x) involved in the research and
development,
licensing,
production,
distribution, or sale of preimplantation
genetic diagnosis and testing that directly
competes with the Corporation or any of its
subsidiary and affiliated companies in the
same geographic markets serviced by them or
(y) supplies, services, advises or consults
with a person, trade or business involved in
the research and development, licensing,
production,
distribution,
or
sale
of
preimplantation
genetic
diagnosis
and
testing that directly competes with the
Corporation or any of its subsidiary or
affiliated companies in the same geographic
markets serviced by them, except that nothing
in this Contract shall prohibit Employee from
holding not more than three [sic] (3%) of the
4
outstanding shares of a publicly traded
company whether or not engaged in business
activities that compete with the business
activities of the Corporation and its
subsidiary and affiliated companies.
(Doc. 5-1 ¶¶ 9(a)(i), (iii).)
The
Employment
Agreement
further
provided
that
these
restrictions “shall not apply to Employee’s actions, efforts or
business
pursuits
with
respect
to
the
Patent
referenced
in
Paragraph 8(b).” (Id. ¶ 9(b).) 2 Paragraph 8(b), in turn, described
the patent as
the provisional patent application for “Method for In
Vitro Fertilization (IVF) and Genetic Testing of Human
Embryos for Chromosome Abnormalities, Single Gene
Mutations, Segregating genetic Disorders in Families,
and Mitochondrial Mutations” filed Septembar [sic] 22,
2006; applicants: William G. Kearns & Richard A Leach;
Serial No. to be assigned (“Patent”).”
(Id. ¶ 8(b).)
Beginning around July 2007, Kearns ran LabCorp’s PGD testing
lab, doing the same work he had previously performed for the Shady
Grove Center, including the process for PGD testing described in
his provisional patent application.
(Kearns Decl. ¶ 26.)
His
responsibilities and duties also included sales and marketing of
PGD services, as well as research and development of new genetic
tests for LabCorp.
(Schmalz Decl. ¶ 24.)
2
Such duties involved
The Purchase Agreement contained a similar carve-out from its
restrictive covenants. (See Doc. 22-1 Ex. 1B ¶ 1.2; Doc. 22-1 Ex. 1C
¶ 2.)
LabCorp has only sued, however, to enforce the restrictive
covenants in Kearns’ Employment Agreement.
5
Kearns’ meeting with various PGD customers for LabCorp.
Dep. at 109, Doc. 22-2. 3)
(Kearns
Kearns also attended LabCorp meetings
concerning formulation and implementation of sales strategies,
including pricing strategies and analysis of competitive threats.
(Id. ¶ 26; Kearns Dep. at 91–93, Doc. 20-1.)
In this regard, he
was involved in setting the pricing of PGD services for LabCorp.
(Kearns Dep. at 114–17, Doc. 22-2.)
Kearns’ LabCorp team provided
services to between thirty and forty fertility clinics.
(Schmalz
Decl. ¶ 25; Kearns Dep. at 91–93, Doc. 20-1.)
There are many competitors in the PGD testing industry, and
LabCorp relies on the relationships it develops with customers to
maintain and expand its clientele of fertility clinics.
Dep. at 93, Doc. 20-1; Schmalz Decl. ¶ 7.)
(Kearns
Similarly, LabCorp’s
sales strategies and plans are confidential information shared
only with employees who require the information to perform their
jobs.
(Schmalz Decl. ¶ 8.)
Kearns knew this information and
developed relationships with LabCorp’s customers.
(Id. ¶¶ 54–56.)
On September 24, 2007, Kearns and Leach filed a permanent
application for a patent based on their PGD microarray testing
process.
(Kearns Decl. ¶ 27.)
For the next several years, during
his tenure at LabCorp, Kearns worked with Leach in an attempt to
3
The parties have separately submitted various portions of Kearns’
deposition transcript. The court will reference the docket number to
show the proper source.
6
secure a patent based on this permanent application.
(Id. ¶ 28.)
In 2012, however, the two decided to abandon pursuit of the patent,
determining that the expense was too great to bear.
(Id. ¶ 29.)
In July 2012, the United States Patent and Trademark Office issued
a Notice of Final Rejection of the patent application (Doc. 1-3),
and in March 2013 deemed it abandoned.
(Doc. 1-4.)
In January 2014, Kearns was invited to breakfast by two of
his supervisors, Michael Davis and Peter Paperhausen.
Decl. ¶¶ 30–31.)
(Kearns
They told him that LabCorp had decided to close
the PGD lab in May 2014 and to contract with a lab in New Jersey
for all PGD services.
(Id. ¶¶ 31, 33.)
The contract lab would be
performing the actual PGD testing, but Kearns would be the primary
contact for LabCorp’s customers and patients and overseer for the
interpretation and reporting of the contract lab’s test results.
(Schmalz Decl. ¶ 28.)
home.
As a result, Kearns would be working from
(Kearns Decl. ¶ 33.)
and considered resigning.
Kearns was very upset by the decision
(Id. ¶¶ 31–32.)
His new supervisor,
Jeffrey Schmalz, asked Kearns to stay with LabCorp to manage the
transition.
(Id. ¶ 32.)
Kearns felt obliged to the fertilization
clinics and their patients to ensure a successful transition.
(Id.)
LabCorp’s decision left Kearns without a lab to continue his
research
and
to
train
his
medical
school
students.
(Id.)
Therefore, in April 2014, he formed a limited liability company
7
called AdvaGenix and a laboratory of the same name, which would
provide a place to continue his research and teaching.
(Id.)
AdvaGenix is wholly owned by William Kearns and Laura Kearns as
joint tenants with right of survivorship.
(Doc. 5-2 at 14.)
AdvaGenix’s operating agreement states that its business purposes
include
“(i)
provid[ing]
genetic
services
for
in
vitro
fertilization clinics and to do all things related thereto; [and]
(ii) provid[ing] genetic services for any fetus or individual
requiring genetic testing.”
(Id. at 1–2.)
Kearns told Schmalz that he was forming the lab.
Decl. ¶ 33.)
(Kearns
He did not tell Schmalz that the lab would serve a
commercial purpose, however.
(Kearns Dep. at 195, Doc. 22-2.)
At
this point, Kearns was not using the lab to undertake commercial
PGD testing of any kind, whether for LabCorp’s clients or anyone
else, nor was he soliciting LabCorp’s clients for work.
Decl. ¶ 34.)
(Kearns
Kearns believed, however, that under the patent
carve-out to his restrictive covenants, he could have immediately
begun competing against LabCorp.
(Id.)
In May 2014, LabCorp asked Kearns to amend his Employment
Agreement.
(Kearns. Decl. ¶ 35.)
On May 12, 2014, he and LabCorp
executed an amendment which, among other things, changed his title
to
“Technical
Director
and
Business
Development
for
Pre-
Implantation Genetics” and increased his salary $190,000.00, with
bonus opportunities; however, the amendment did not change the
8
restrictive covenants. 4
(Id. ¶¶ 36–37; Doc. 5-1.)
Kearns began managing the transition to the contract lab for
LabCorp, calling and visiting clinics to convince them that they
would receive the same quality of service from the contract lab.
(Kearns Decl. ¶ 35.)
wrinkles.
However, the transition was not without
In June 2014, the contract lab refused to test certain
PGD samples submitted on the grounds that the saline solution in
the LabCorp-provided kits made it difficult to run the necessary
tests.
(Id. ¶ 39.)
attention.
(Id.)
the problem.
Kearns brought the problem to Schmalz’s
Schmalz asked Kearns what should be done to fix
(Id. ¶ 40.)
Kearns told Schmalz that he could run
the PGD testing in his own lab, the one he had told Schmalz about
previously.
(Id.)
Schmalz directed Kearns to run the test in his
own lab, for this case and the twelve problematic cases like it.
(Id.; Kearns Dep. at 197, Doc. 22-2.)
charge LabCorp for the work.
Kearns did so but did not
(Kearns Dep. at 201, Doc. 22-2.)
During this exchange, Kearns did not explicitly tell Schmalz
that his lab was capable of commercially running PGD testing. But,
to be legally permitted to sign these clinical case reports,
Kearns’ lab had to be certified and licensed for diagnostic work,
which meant that the lab was not purely for research.
Decl. ¶ 40; Kearns Dep. at 197–98, Doc. 22-2.)
4
(Kearns
Therefore, Schmalz
The amended Employment Agreement will nevertheless be referred to as
the Employment Agreement.
9
knew that Kearns’ new lab was capable of providing commercial PGD
services.
Later, in the summer of 2014, several clinics complained to
Kearns about LabCorp’s contract lab, finding it incapable of
undertaking or unwilling to undertake certain cases. (Kearns Decl.
¶¶ 41–42.)
Some of LabCorp’s clients abandoned LabCorp and asked
Kearns to perform the tests in his AdvaGenix lab.
(Id. ¶ 42.)5
Although Kearns may have made some effort to persuade the clinics
to send their cases to LabCorp, he ultimately performed many of
these cases for about ten different clinics throughout the summer
and fall of 2014, for a total of about 100 cases by October 28.
(Id. ¶ 42; Doc. 20-2 at 79–104.) 6
In October 2014, one of LabCorp’s customers told a LabCorp
employee that Kearns had visited the customer on his own behalf,
not LabCorp’s, and had informed the customer that Kearns was
forming his own lab for PGD testing and would soon be resigning
from LabCorp.
(Schmalz Decl. ¶ 29; Kearns Dep. at 146–48, Doc.
20-1.) 7 LabCorp commenced an investigation and learned that Kearns
had developed a new business entity called AdvaGenix.
(Schmalz
5
It is unclear how the clients were aware that Kearns was operating
his AdvaGenix lab.
6
Currently, LabCorp represents that it has addressed the problems that
arose during the transition to the contract lab.
(Doc. 25 (Supp.
Rotthoff Decl.) ¶¶ 3–9.)
7
It is unclear how LabCorp learned this information, or who it was at
LabCorp that learned it.
10
Decl. ¶¶ 31–33.)
Schmalz invited Kearns to a meeting on October 28, 2014, that
Schmalz said would concern budgeting and planning.
¶ 45; Schmalz Decl. ¶ 34.)
In fact, the meeting was arranged to
discuss Kearns’ formation of AdvaGenix.
Schmalz Decl. ¶ 35.)
(Kearns Decl.
(Kearns Decl. ¶ 45;
At the meeting, Schmalz accused Kearns of
hiding his company from LabCorp.
(Kearns Decl. ¶ 45.)
Kearns
told Schmalz that he already told him about the lab twice before.
(Id.)
Schmalz
told
Kearns
that
the
prohibited Kearns from running this lab.
restrictive
covenants
(Id. ¶ 47.)
Kearns
claimed that he was permitted to do so under the Employment
Agreement’s
patent
carve-out.
(Id.)
Kearns
was
placed
on
administrative leave and was required to turn over his LabCorp
cell phone and laptop.
(Id.; Schmalz Decl. ¶ 39.)
Shortly
thereafter, on November 17, 2014, LabCorp fired him for cause.
(Kearns Decl. ¶ 49; Schmalz Decl. ¶ 43.)
On the day of his termination, Kearns sent an email to various
recipients describing services that his AdvaGenix lab would be
offering — services which LabCorp also offers.
(Schmalz Decl.
¶¶ 44–45.) After Kearns was terminated, one of LabCorp’s customers
sent LabCorp an email explaining that it had “elected to continue
[its] care with Dr. Kearns at his new practice.”
(Id. ¶ 52; Doc.
5-6.)
By the time of his October 28 meeting, Kearns had performed
11
PGD testing on around 100 cases for customers who had been clients
of LabCorp but had left LabCorp during the transition because the
contract lab allegedly could not or would not run some of their
cases.
(Kearns Dep. at 138, 179, Doc. 20-1; see Doc. 20-2 at 79–
104.)
For the period from July 5, 2014, to December 20, 2014,
Kearns ran PGD testing on 180 cases.
B.
(See Doc. 20-2 at 79–104.)
Procedural History
On December 9, 2014, LabCorp filed the present action against
Kearns,
claiming
breach
of
the
restrictive
covenants
in
his
Employment Agreement and breach of his fiduciary duties to LabCorp.
(Doc. 1)
LabCorp moved for a temporary restraining order and
expedited discovery against Kearns.
(Doc. 2.)
Kearns appeared,
through counsel, and on December 17, 2014, consented to the entry
of
an
order
for
expedited
discovery
and
to
be
temporarily
restrained from soliciting LabCorp customers or competing until
January 12, 2015, at which time the court would hold a hearing on
whether a preliminary injunction should be entered.
(Doc. 17.)
Kearns has since filed an answer, denying LabCorp’s claims,
and asserted counterclaims for LabCorp’s breach of the Employment
Agreement and violation of the North Carolina Wage and Hour Act.,
N.C. Gen. Stat. § 95.25.1, et seq.
(Doc. 23.)
LabCorp’s motion for preliminary injunction is fully briefed
and supported by affidavits and excerpts from Kearns’ deposition.
Following the court’s January 12, 2015 hearing, the motion is ready
12
for decision.
II.
ANALYSIS
A.
Standard of Review
When a party moves for preliminary injunctive relief, the
burden of showing that such “extraordinary” relief should issue
rests with the movant.
Winter v. Natural Res. Def. Council, Inc.,
555 U.S. 7, 20, 24 (2008).
four pre-requisites:
Movants must make a “clear showing” of
“(1) they are likely to succeed on the
merits, (2) they are likely to suffer irreparable harm, (3) the
balance of hardships tips in their favor, and (4) the injunction
is in the public interest.”
Pashby v. Delia, 709 F.3d 307, 320
(4th Cir. 2013) (citing Winters, 555 U.S. at 20).
The court must
“separately consider each Winter factor” to determine whether each
has been “satisfied as articulated.”
Id. at 320–21.
A party’s
failure on any element precludes injunctive relief from issuing.
See Cantley v. W. Va. Reg’l Jail & Corr. Facility Auth., 771 F.3d
201, 207 (4th Cir. 2014).
B.
Likelihood of Success on the Merits
LabCorp must show that it will likely succeed on its claim
for breach of the restrictive covenants.
This requirement “is far
stricter” than just requiring LabCorp to “demonstrate only a grave
or serious question for litigation.”
Real Truth About Obama, Inc.
v. FEC, 575 F.3d 342, 347 (4th Cir. 2009), cert. granted & judgment
vacated on other grounds, 559 U.S. 1089 (2010), and adhered to in
13
part, Real Truth About Obama, Inc. v. FEC, 607 F.3d 355 (4th Cir.
2010).
But LabCorp need not show a “certainty” of success.
Pashby, 709 F.3d at 321 (citing 11A Charles Alan Wright et al.,
Federal Practice and Procedure § 2948.3 (2d ed. 1995)).
In its complaint, LabCorp alleges that Kearns has breached
two restrictive covenants in his Employment Agreement: a nonsolicitation covenant and a non-competition covenant.
¶ 56.)
(Compl.
Kearns argues that neither is enforceable and that, even
if it is, he is not in breach due to the so-called “patent carveout” exclusion.
Because this carve-out, if valid, would shield
him from the restrictive covenants altogether, the court turns to
it first.
1.
Applicability of the Patent Carve-Out
During the acquisition of the Shady Grove Center, LabCorp and
Kearns negotiated a carve-out to the restrictive covenants in
Kearns’
Employment
Agreement.
The
arrangement
had
several
aspects.
First, while the parties agreed generally that LabCorp would
have a right to Kearns’ inventions arising out of his company work
(Doc. 5-1 ¶ 8(a)), Kearns’ pending provisional patent application
was exempted (id. ¶ 8(b)).
Second, in delineating Kearns’ duties,
the parties agreed that Kearns may “engage in actions, efforts or
business pursuits with respect to” the patent, so long as such
actions
did
not
“interfere”
with
14
his
general
duties
and
responsibilities to the company.
(Id. ¶ 1(b).)
Finally, in what
the parties term the “carve-out” for the current motion, they
agreed explicitly that the restrictive covenants “shall not apply
to [Kearns’] actions, efforts or business pursuits with respect
to” the provisional patent application.
(Id. ¶ 9(b).)
LabCorp argues that the patent carve-out has no application
here because Kearns abandoned pursuit of the patent.
16.)
(Doc. 19 at
Kearns argues for a broader interpretation of the clause.
Specifically, he argues that what has been carved out is his use
of the PGD testing process described in the patent application
itself, regardless of whether he actually received a patent for
his invention.
(Doc. 22 at 7.)
Kearns’ construction is unpersuasive.
The patent carve-out
excludes Kearns’ “actions, efforts [and] business pursuits with
respect to the patent”; indeed, as LabCorp conceded at the hearing,
had the patent been acquired, the carve-out would have exempted
licensing the technology, even to LabCorp.
But no patent was
acquired, and Kearns concedes that he has not pursued it during
the times relevant to the motion.
Under the plain terms of the
carve-out, therefore, Kearns’ conduct in conducting PGD testing
services
does
not
qualify.
Moreover,
Kearns’
interpretation
conflicts with his essential duties under the Employment Agreement
and cannot reflect what the parties reasonably intended when they
executed it.
As director of preimplantation genetic services,
15
Kearns was responsible for “operating, managing, and overseeing
laboratory services for [PGD] testing”; “marketing and developing
business opportunities for such services”; and “researching and
developing assays for [PGD] testing.”
(Doc. 5-1 ¶ 1(a).)
If the
process Kearns was already using and developing when he joined
LabCorp was itself exempt from the restrictive covenants, as Kearns
contends,
then
LabCorp
would
have
employed,
in
a
management
position no less, a person already free to compete against it.
Kearns’ interpretation would essentially render the restrictive
covenants meaningless ab initio. 8
interpretation
of
the
This court should not adopt an
Employment
eliminates material provisions.
Agreement
that
effectively
See Marcoin, Inc. v. McDaniel,
320 S.E.2d 892, 897 (N.C. Ct. App. 1984) (rejecting proposed
construction that would “render meaningless” a material provision
of a contract absent reason why such a “strained construction [was]
more reflective of the parties’ intent than a more reasonable
construction guided by traditional principles”).
Kearns’ primary argument — that the provision carves out the
process described in the patent — finds no support in the language
of the Employment Agreement.
The carve-out exempted Kearns’
8
Kearns freely admits that his interpretation would have this effect.
In his declaration, he admits, “Although, under my patent carve-out, I
could immediately have devoted my AdvaGenix lab to competing against
LabCorp in undertaking PGD, it frankly did not occur to me to do so, as
I would simply have been competing with myself (doing precisely the same
work wearing two different hats).” (Kearns Decl. ¶ 34.)
16
actions “with respect to the Patent referenced in Paragraph 8(b).”
(Doc. 5-1 ¶ 9(b).)
In paragraph 8(b), the term “Patent” is defined
not as Kearns’ process for PGD testing, nor as a process that he
hoped to develop in the future.
defined
in
more
concrete
Rather, the term “Patent” was
terms
as
application” for Kearns’ PGD process.
“the
provisional
patent
The parties were free to
define “Patent” in reference to the process itself.
That they did
not do so is evidence that they did not intend to do so. 9
Kearns
developed
a
competing
business
while
working
at
LabCorp, servicing only his former LabCorp customers, and he
continued operating the business once he departed. Because Kearns’
only argument against breach relies on the patent carve-out, the
court finds that LabCorp has made a clear showing of breach.
The
court
are
turns
now
to
whether
the
restrictive
covenants
enforceable.
2.
Enforceability of Paragraph 9(a)(i)
Kearns argues that both covenants, paragraphs 9(a)(i) and
9(a)(iii), are unreasonably broad and unenforceable.
Both parties refer to the covenant of paragraph 9(a)(i) as a
non-solicitation agreement.
As noted, the paragraph provides
that, during the term of the Employment Agreement and for one year
9
Although Kearns has not argued that the carve-out should be construed
against LabCorp, it would be inappropriate to do so in this case. The
provision is not ambiguous and, even if it were, Kearns conceded at the
hearing and in his declaration that he specifically negotiated the
clause. (See Kearns Decl. ¶¶ 18–22.)
17
after its termination or expiration, Kearns would not, without
LabCorp’s prior written consent,
directly or indirectly through a subordinate, co-worker,
peer, or any other person or entity contact, solicit or
communicate with a customer or potential customer of
Corporation or its subsidiary or affiliated companies
with whom Employee has had contact while employed at
Corporation or its subsidiary and affiliated companies
for the purpose of (x) offering, selling, licensing or
providing the same or substantially similar assays,
commercial medical testing or anatomical pathology
services offered and/or provided to such customer or
potential customer by the Corporation or its subsidiary
and affiliated companies or (y) influencing said
customer’s or potential customer’s decision on whether
to purchase or use such assays, commercial medical
testing or anatomical pathology services offered by the
Corporation or its subsidiary and affiliated companies
. . . .
(Doc. 5-1 ¶ 9(a)(i).)
The covenant prohibits Kearns from contacting, soliciting, or
communicating with LabCorp’s customers and potential customers
with whom he had contact while working for the company.
parties
agree
that
the
covenant
not
only
prohibits
The
active
solicitation, but also prohibits Kearns from passively accepting
work from his prior contacts made at LabCorp.
Doc. 24 at 6–7.)
(Doc. 22 at 18–19;
They argue that this issue has not been addressed
by any North Carolina court, and both rely on law from other
jurisdictions.
Contrary to the suggestion of the parties, the enforceability
of this provision can be determined by North Carolina law.
Carolina
courts
evaluate
non-competes
18
and
North
non-solicitation
agreements through the same lens.
See, e.g., United Labs., Inc.
v. Kuykendall, 370 S.E.2d 375, 379–80 (N.C. 1988) (explaining the
law for restrictive covenants, including both non-competes and
non-solicitation agreements).
So, although the parties label this
provision as a non-solicitation covenant, where the provision
purports to bar passive acceptance of work from a previous client,
it constitutes a customer-contact non-compete because it has the
same effect of barring the former employee from competing for his
former clients.
North
Carolina
courts
have
long
stated
that
restrictive
covenants between an employer and an employee are not viewed
favorably.
See Kadis v. Britt, 29 S.E.2d 543, 546 (N.C. 1944);
VisionAIR, Inc. v. James, 606 S.E.2d 359, 362 (N.C. Ct. App. 2004).
Because they restrain the ability of employees to secure gainful
employment and of employers to find qualified workers, restrictive
covenants “must be no wider in scope than is necessary to protect
the business of the employer.”
VisionAIR, 606 S.E.2d at 362
(quoting Manpower of Guilford County, Inc. v. Hedgecock, 257 S.E.2d
109, 114 (N.C. Ct. App. 1979)). When a non-compete is unreasonably
broad, courts are “severely” limited in their ability to bluepencil offensive provisions.
Hartman v. W.H. Odell & Associates,
Inc., 450 S.E.2d 912, 920 (N.C. Ct. App. 1994).
A court “at most
may choose not to enforce a distinctly separable part of a covenant
in order to render the provision reasonable.
19
It may not otherwise
revise or rewrite the covenant.”
Id.
The burden of showing enforceability rests with LabCorp, as
the party seeking to restrain trade.
Hartman, 450 S.E.2d at 916.
To be enforceable under North Carolina law, a restrictive covenant
must
be
(1)
in
writing;
(2)
made
as
part
of
an
employment
agreement; (3) based on valuable consideration; (4) reasonable as
to
both
time
and
territory;
and
(5)
designed
legitimate business interest of the employer.
to
protect
a
Young v. Mastrom,
Inc., 392 S.E.2d 446, 448 (N.C. Ct. App. 1990) (citing A.E.P.
Industries v. McClure, 302 S.E.2d 754, 760–61 (N.C. 1983)).
covenants’
restrictions
cannot
be
“wider
in
scope
than
The
is
necessary” to protect an employer’s legitimate business interests.
Asheboro Paper & Packaging, Inc. v. Dickinson, 599 F. Supp. 2d
664, 671 (M.D.N.C. 2009) (quoting VisionAIR, 606 S.E.2d at 362).
a.
Legitimate Business Interests
To determine the reasonableness of the restrictions, the
court must first identify what business interests LabCorp can
legitimately protect. LabCorp has identified two types of business
interests that both restrictive covenants are designed to protect:
(1)
customer
relationships
pricing information.
and
(2)
confidential,
proprietary
(Doc. 19 at 15.)
The North Carolina Supreme Court has outlined the contours of
an employer’s legitimate interests in its goodwill and customer
relationships:
20
[P]rotection of customer relationships and good will
against misappropriation by departing employees is well
recognized as a legitimate protectable interest of the
employer.
The greater the employee’s opportunity to
engage in personal contact with the employer’s customer,
the greater the need for the employer to protect these
customer relationships.
This theory, which is often
referred to as the “customer contact” theory, is most
applicable where the employee is the sole or primary
contact between the customer and the employer.
Kuykendall, 370 S.E.2d at 381 (citations omitted).
Employers can
also have legitimate business interests in other confidential or
proprietary information that their employees learn and use during
their time of employment.
See A.E.P. Indus., Inc. v. McClure, 302
S.E.2d 754, 763 (N.C. 1983).
At this stage, the court finds that LabCorp has demonstrated
legitimate business interests in protecting both its customer
goodwill,
confidential
pricing
information,
and
confidential
pricing strategy.
b.
Overbreadth of Paragraph 9(a)(i)
Kearns argues that paragraph 9(a)(i) is wider than necessary
to
protect
LabCorp’s
customer
relationships
for
two
reasons.
First, he argues that the phrase “customer or potential customer”
is too vague to be enforceable.
the
North
Carolina
Court
Kearns cites to three cases from
of
Appeals
for
support:
MJM
Investigations, Inc. v. Sjostedt, No. COA09-596, 2010 WL 2814531
(N.C. Ct. App. July 20, 2010), Hejl v. Hood, Hargett & Assocs.,
Inc., 674 S.E.2d 425 (N.C. Ct. App. 2009), and Farr Assocs., Inc.
21
v. Baskin, 530 S.E.2d 878 (N.C. Ct. App. 2000).
The theme common to all three cases, however, is absent here.
Each case found the covenant unreasonably broad because it was not
limited to customer contacts made by the employee himself during
his period of employment.
See MJM Investigations, 2010 WL 2814531
at *4 (“The language of the agreement clearly extends the nonsolicitation
‘prospect
clause
clients’
to
with
cover
‘clients’
which
and,
Defendants
in
had
particular,
never
made
contact.”); Hejl, 674 S.E.2d at 307 (“But in the case before us,
where
the
Agreement
reaches
not
only
clients,
but
potential
clients, and extends to areas where Plaintiff had no connections
or
personal
knowledge
of
customers,
the
Agreement
is
unreasonable.”); Farr Assocs., 530 S.E.2d at 882 (“The covenant in
question prevents Mr. Baskin from working for all of Farr’s current
or recent clients, regardless of where the client is located,
whether he had any contact with them, or whether he even knew about
them.”).
In North Carolina, covenants prohibiting competition for a
former
employer’s
customers
are
only
enforceable
when
they
prohibit the employee from contacting customers with whom the
employee actually had contact during his former employment.
Farr
Assocs., 530 S.E.2d at 883 (“[A] client-based limitation cannot
extend beyond contacts made during the period of the employee’s
employment.”).
Paragraph 9(a)(i) explicitly limits the covenant
22
to customers “with whom [Kearns] has had contact while employed
at” LabCorp. Therefore, the court finds that the covenant properly
limits its use of the term “customer.”
Second,
Kearns
asserts
that
this
covenant
is
overbroad
because it prohibits him from providing competing services to the
subsidiaries and affiliates of the customers with whom he had
actual contact during his employment.
cites
no
authority
for
Carolina or elsewhere.
this
(Doc. 22 at 18–19.)
proposition,
whether
from
Kearns
North
Nor does he make any meaningful attempt to
show how this issue should render the covenant unenforceable.
“It
is not the role or the responsibility of the Court to undertake
the
legal
argument.”
research
needed
to
support
or
rebut
a
perfunctory
Hayes v. Self-Help Credit Union, No. 1:13-CV-880, 2014
WL 4198412, at *2 (M.D.N.C. Aug. 22, 2014).
Kearns’ conclusory
argument, without more, cannot overcome LabCorp’s otherwise clear
showing on this issue.
For these reasons, the court finds that LabCorp has made a
clear
showing,
at
this
time,
that
paragraph
9(a)(i)
is
enforceable. 10
3.
Enforceability of Paragraph 9(a)(iii)
Kearns also argues that paragraph 9(a)(iii), a more typical
10
Kearns has not questioned the time restriction of this covenant, so
the court does not address it here. Cf. Farr Assocs., 530 S.E.2d at 881
(addressing application of a so-called “look-back period”).
23
non-compete provision, is unreasonably broad and unenforceable.
As noted, it provides that during the Employment Agreement and for
one year after its termination or expiration, Kearns would not,
without LabCorp’s prior written consent,
directly or indirectly own, invest in, consult for, be
employed by or otherwise engaged by any person, trade or
business either (x) involved in the research and
development, licensing, production, distribution, or
sale of preimplantation genetic diagnosis and testing
that directly competes with the Corporation or any of
its subsidiary and affiliated companies in the same
geographic markets serviced by them or (y) supplies,
services, advises or consults with a person, trade or
business involved in the research and development,
licensing,
production,
distribution,
or
sale
of
preimplantation genetic diagnosis and testing that
directly competes with the Corporation or any of its
subsidiary
or
affiliated
companies
in
the
same
geographic markets serviced by them, except that nothing
in this Contract shall prohibit Employee from holding
not more than three [sic] (3%) of the outstanding shares
of a publicly traded company whether or not engaged in
business activities that compete with the business
activities of the Corporation and its subsidiary and
affiliated companies.
(Doc.
5-1
¶
9(iii).)
Kearns
argues
that
LabCorp
has
not
demonstrated a legitimate interest in prohibiting his ownership of
or investment in a direct competitor or supplier of a direct
competitor.
The
(Doc. 22 at 14–15.)
general
rule
on
The court agrees.
indirect
ownership
is
set
out
in
VisionAIR, Inc. v. James, 606 S.E.2d 359 (N.C. Ct. App. 2004).
In
that case, the non-compete provided that, after termination, the
former employee could not “own, manage, be employed by or otherwise
participate in, directly or indirectly, any business similar to
24
Employer’s . . . within the Southeast” for two years.
Id. at 362.
The court held that prohibiting indirect ownership of a similar
firm would also prevent the former employee from “even . . .
holding interest in a mutual fund invested in part in a firm
engaged in business similar to [the former employer’s].
Such vast
restrictions on [the former employee] cannot be enforced.”
Id. at
362–63. The rule from VisionAIR has been applied by numerous other
courts, both state and federal.
See, e.g., Horner Int’l Co. v.
McKoy, 754 S.E.2d 852, 857 (N.C. Ct. App. 2014) (“Finally, the
[non-compete agreement] purports to bar Defendant from having even
an indirect financial interest in such a business, a condition
specifically rejected by the Court in VisionAIR . . . .”); Superior
Performers, Inc. v. Meaike, No. 1:13CV1149, 2014 WL 1412434, at
*10 (M.D.N.C. Apr. 11, 2014); CNC/Access, Inc. v. Scruggs, 2006
NCBC 20 ¶ 51 (N.C. Super. Ct. Nov. 15, 2006) (“By prohibiting
Scruggs from even indirect ownership of a competing company, the
covenant goes farther than is necessary to prevent Scruggs from
competing for the customers of CNC/Access.
seen
as
protecting
a
legitimate
It therefore cannot be
business
interest
of
the
ownership
and
employer.”).
Paragraph
9(a)(iii)
extends
to
indirect
investment in both (1) businesses involved in PGD testing that
directly compete with LabCorp, and (2) companies that supply,
service, advise, or consult with businesses involved with PGD
25
testing that directly compete with LabCorp.
LabCorp has not
justified such broad restrictions here.
The first provision would prohibit Kearns from investing in
a startup trying to develop new PGD technology for commercial
exploitation.
Likewise, under the second provision, Kearns could
not even invest in a paper company that supplies paper to a PGD
testing laboratory.
This covenant sweeps too broadly and, at this
stage, LabCorp has not clearly justified this apparent overreach.
This covenant does contain an exception to the restraint on
investment:
“[N]othing in this Contract shall prohibit [Kearns]
from holding not more than three [sic] (3%) of the outstanding
shares of a publicly traded company whether or not engaged in
business activities that compete with the business activities of
the Corporation and its subsidiary and affiliated companies.”
(Doc. 5-1 ¶ 9(a)(iii).)
LabCorp argued at the hearing that this
exception was meant to address the concern raised in VisionAIR.
But this exception is not wide enough.
LabCorp has offered no
legitimate
protected
business
that
can
only
be
by
limiting
investment to publicly traded companies or to only three percent
of such companies.
This restriction could also bar ownership
through a mutual fund or various other mechanisms of passive
investment.
In light of these deficiencies, the court need not examine
the provision further and holds that LabCorp has not made a clear
26
showing at this point that paragraph 9(a)(iii) is enforceable. 11
4.
LabCorp
Reformation
argues
that,
should
the
court
find
any
of
the
restrictive covenants unreasonably broad and unenforceable, it
should reform them to meet the parameters of the law.
Under North Carolina law, courts are narrowly limited in their
power to reform overbroad restrictive covenants in employment
agreements:
“If
a
contract
by
an
employee
in
restraint
of
competition is too broad to be a reasonable protection to the
employer’s business it will not be enforced.
The courts will not
rewrite a contract if it is too broad but will simply not enforce
it.”
Whittaker Gen. Med. Corp. v. Daniel, 379 S.E.2d 824, 828
(N.C. 1989); see also Noe v. McDevitt, 45 S.E.2d 121, 123 (N.C.
1947) (“The Court cannot by splitting up the territory make a new
contract for the parties — it must stand or fall integrally.”).
The courts are authorized, “at most,” only “to enforce a distinctly
separable part of a covenant in order to render the provision
11
Kearns also argues that this covenant is unenforceable for two other
reasons. First, he contends that, because paragraph 9(a)(iii) prohibits
him from working for a direct competitor in a capacity unrelated to his
capacity at LabCorp, it is overbroad. The only exception, he argues,
is found in Precision Walls, Inc. v. Servie, 568 S.E.2d 267, 273 (N.C.
Ct. App. 2002) (“Thus, plaintiff’s legitimate business interest allows
the covenant not to compete to prohibit employment of any kind by
defendant with a direct competitor.”), which he contends has been limited
to its facts by other decisions.
Second, Kearns argues that the
geographic scope of paragraph 9(a)(iii) is unreasonably broad. Because
the court has found that LabCorp has failed to demonstrate the validity
of the covenant on another ground, the court need not reach these
alternative arguments.
27
reasonable.
It may not otherwise revise or rewrite the covenant.”
Hartman, 450 S.E.2d at 920.
LabCorp argues that this court has special authority to bluepencil paragraph 9(a)(iii) because the parties agreed in the
Employment
Agreement
that
a
reviewing
court
unreasonable covenant to make it reasonable.
could
reform
an
(Doc. 24 at 9–10.)
LabCorp is correct that the parties did so agree:
[I]f any provision contained in this Contract shall be
adjudicated to be invalid or unenforceable because such
provision is held to be excessively broad as to duration,
geographic scope, activity or subject, such provision
shall be deemed amended by limiting and reducing it so
as to be valid and enforceable to the maximum extent
compatible
with
the
applicable
laws
of
such
jurisdiction, such amendment only to apply with respect
to the operation of such provision in the applicable
jurisdiction in which the adjudication is made.
(Doc. 5-1 ¶ 14(d).)
No
North
Carolina
court
has
directly
addressed
whether
parties to an employment agreement can empower a court to modify
a restrictive covenant that it could not modify absent such a
provision.
For support, LabCorp cites a recent North Carolina
Court of Appeals case, Beverage Systems of the Carolinas, LLC v.
Associated Beverage Repair, LLC, 762 S.E.2d 316 (N.C. Ct. App.
2014), notice of appeal filed, No. 316A14 (N.C. Sept. 5, 2014).
In that case, the plaintiff sold his business to the defendants.
Id. at 318–19.
As part of the asset purchase agreement, the
plaintiff-seller agreed to a restrictive covenant.
28
Id. at 319.
The parties agreed that, should a court find the restrictive
covenants unreasonably broad and unenforceable, the court would be
allowed to reform the covenants “to cover the maximum period, scope
and area permitted by law.”
Id.
The trial court found the covenants unenforceable and refused
to modify them.
restrictive
Id.
covenants
unreasonably broad.
The Court of Appeals agreed that the
in
the
asset
Id. at 321.
purchase
agreement
were
However, the court held that the
trial court erred by refusing to reform them to the maximum,
reasonable extent permitted under law.
Id. at 321–22.
The court
held that, because the parties’ asset purchase agreement expressly
authorized reformation, “the trial court’s ability to revise the
non-compete is not subject to the restrictions of the ‘blue pencil
doctrine’ which prohibits a trial court from revising unreasonable
provisions in non-compete agreements.”
Id. at 321.
The court noted that the issue as it saw it — “the right of
a trial court to revise the provisions of a non-compete based on
the express language of the contract for the sale of a business”
— was one of first impression.
Id. at 322 (emphasis added).
court limited its holding to that context:
Given the fact that non-competes drafted based on the
sale of a business are given more leniency than those
drafted pursuant to an employment contract since the
parties are in relatively equal bargaining positions,
the trial court should not have held the entire noncompete unenforceable nor should the trial court’s power
to revise and enforce reasonable provisions of the non29
The
compete
be
limited
under
the
“blue
pencil
doctrine.” . . . In contrast, pursuant to the sale of
a business, these parties, who were at arms-length with
equal bargaining power, agreed to allow the trial court
to revise the non-compete to make it reasonable, and the
trial court should have done so.
Id. at 321–22 (emphasis added).
All the policy justifications
offered for the holding were also limited to the context of the
sale of a business.
Id. at 322–23.
As a federal court sitting in diversity and applying North
Carolina law, this court is obliged to apply the jurisprudence of
North
Carolina’s
Carolina.
highest
court,
the
Supreme
Court
of
North
See Private Mortgage Inv. Servs., Inc. v. Hotel & Club
Assocs., Inc., 296 F.3d 308, 312 (4th Cir. 2002).
When that court
has not spoken directly on an issue, this court must “predict how
that court would rule if presented with the issue.”
Id.
The
decisions of the North Carolina Court of Appeals are the “next
best indicia” of what North Carolina’s law is, though its decisions
“may be disregarded if the federal court is convinced by other
persuasive data that the highest court of the state would decide
otherwise.” Id. (quoting Liberty Mut. Ins. Co. v. Triangle Indus.,
Inc., 957 F.2d 1153, 1156 (4th Cir. 1992)).
At this stage, it is not clear that North Carolina courts
would extend Beverage Systems to the employment context.
court’s holding appears limited to the sale of a business.
The
In
contrast, the North Carolina Supreme Court has long emphasized
30
that “[c]ontracts restraining employment are looked upon with
disfavor.”
Kadis, 29 S.E.2d at 546; accord Farr Assocs., 530
S.E.2d at 881.
Historically, North Carolina’s blue-pencil rule
has been characterized as both “strict” and “severe.”
Beverage
Sys., 762 S.E.2d at 321; Hartman, 450 S.E.2d at 920.
In sum, even assuming that the North Carolina Supreme Court
would accept the rule from Beverage Systems, LabCorp has not made
a clear showing that North Carolina’s appellate courts would extend
the holding to employment agreements.
For this reason, the court
will not attempt to reform paragraph 9(a)(iii), but will simply
not enforce it. 12
C.
Irreparable Harm
Having shown a likelihood of success on the merits concerning
the breach and enforceability of paragraph 9(a)(i), LabCorp must
also clearly show that it will suffer irreparable harm without
preliminary injunctive relief.
Irreparable harm is suffered “when
monetary damages are difficult to ascertain or are inadequate.”
Multi-Channel
TV
Cable
Co.
v.
Charlottesville
Operating Co., 22 F.3d 546, 551–52 (4th Cir. 1994).
Quality
Cable
And when the
failure to grant preliminary relief creates a permanent loss of
customers
likelihood
to
of
a
competitor
such
or
losses),
the
the
12
loss
of
irreparable
goodwill
(or
injury
prong
the
is
Although this case involved the sale of a business, LabCorp has not
sought to enforce the restrictive covenants in the Purchase Agreement.
31
satisfied.
See id. at 552; Signature Flight Support Corp. v.
Landow Aviation Ltd. P’ship, 442 F. App’x 776, 785 (4th Cir.
2011) 13.
In this case, LabCorp has made a clear showing that it
has already lost customers to Kearns’ new AdvaGenix lab, customers
that may never return.
Kearns argues these customers have been lost because of
LabCorp’s transition to using the contract lab and that there is
no irreparable harm where an employer’s “loss of customers and/or
goodwill is just as likely attributable to [the employer’s] own
strategic
business
competitive
decisions
conduct.”
(Doc.
as
22
at
[the
19–20
former
employee’s]
(quoting
Southtech
Orthopedics, Inc. v. Dingus, 428 F. Supp. 2d 410, 418 (E.D.N.C.
2006)).)
This argument is unpersuasive.
At this stage, LabCorp has made a clear showing that, without
preliminary injunctive relief, it will likely continue to lose
customers through Kearns.
The record demonstrates that Kearns has
contributed to LabCorp’s loss of customers by not informing LabCorp
of the alleged customer complaints and providing it an opportunity
to remedy any concerns.
LabCorp has also provided evidence that
it (through its contract lab) has corrected the problems that are
complained of.
(Doc. 25-1 ¶¶ 4-10.)
And although LabCorp no
13
Unpublished opinions of the Fourth Circuit are not precedential but
are cited for the weight they generate by the persuasiveness of their
reasoning. See Collins v. Pond Creek Mining Co., 468 F.3d 213, 219 (4th
Cir. 2006).
32
longer performs the PGD testing in-house, it still has legitimate
interests in its customers serviced by the contract lab because
LabCorp aims to maintain these customer relationships in order to
interpret the lab results for them and to sell these customers
other related services that LabCorp provides in-house.
Therefore, the court finds that LabCorp has made a clear
showing of irreparable harm absent a preliminary injunction.
D.
Balance of Hardships
In this case, the relative balance of hardships between the
parties clearly favors LabCorp.
Kearns is being enjoined from
doing that which he promised not to do.
380.
Kuykendall, 370 S.E.2d at
There has been no showing that he will not be able to seek
gainful
employment
if
Agreement is enforced.
paragraph
9(a)(i)
of
the
Employment
Indeed, he enjoys employment as faculty at
Johns Hopkins School of Medicine, which he can continue.
22-1 ¶ 1.)
(Doc.
With enforcement of only paragraph 9(a)(i), Kearns can
compete as long as his customers are not LabCorp’s clients and
prospects with whom he dealt personally.
Moreover, as counsel for
LabCorp conceded at the hearing, LabCorp does not service customers
in the western half of the United States, leaving many prospective
purchasers unaffected by this preliminary injunction.
Kearns argues that the balance of hardships favors him because
the only clients LabCorp has lost are those for whom its contract
lab would not or could not do the required testing.
33
Enforcing the
covenants, Kearns argues, would not restore any lost client and
may leave fertility patients without the best possible care. (Doc.
22 at 20.)
To the extent he argues causation based on LabCorp’s
inability to perform, he overlooks his failure to have brought the
issue to LabCorp’s attention to permit it to address the situation
— problems LabCorp now says have been fixed.
argues
the
public
interest
is
better
To the extent he
served
with
him
as
a
competitor, Kearns misunderstands this element of the analysis.
The balance of hardships is weighed as between the parties to this
case.
The public interest is a separate analysis.
See infra.
The court finds that LabCorp has made a clear showing that
the balance of hardships tips in its favor.
E.
Public Interest
Finally, LabCorp must show that a preliminary injunction is
in the public interest.
Ordinarily, as Kearns concedes (Doc. 22
at 21), the enforcement of valid restrictive covenants is in the
public interest.
Kuykendall, 370 S.E.2d at 380.
Kearns argues,
however, that the public interest would be better served in this
case by denying the preliminary injunction because of the public’s
“vital interest in quality and efficient health care.”
(Doc. 21
at 22 (quoting Southtech Orthopedics, Inc. v. Dingus, 428 F. Supp.
2d 410, 421 (E.D.N.C. 2006)).)
While Kearns surely identifies a legitimate interest, he has
made no showing that there is a shortage of providers of this type
34
of genetic testing or that enforcement of the covenants he agreed
to will deny anyone quality and efficient health care.
Kearns
admits
that,
if
he
is
restrained
from
In fact,
providing
PGD
services, numerous other competent laboratories remain in the
marketplace
to
do
so.
(Kearns
Dep.
at
265–66,
Doc.
22-2.)
Therefore, the court finds that the public interest is served by
enforcing paragraph 9(a)(i) of the Employment Agreement.
III. Security
Under Rule 65(c) of the Federal Rules of Civil Procedure, a
court may issue a preliminary injunction “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 parties did not address the issue of an adequate bond in
their briefing, and thus the court raised the issue at the hearing.
Counsel for LabCorp contended that an appropriate bond would be
Kearns’ annual $190,000 salary at LabCorp, pro-rated for the time
remaining on his restrictive covenants, which “expire” on November
17,
2015
—
a
total
of
“around
$150,000.”
This
suggestion
misunderstands Rule 65(c) because it does not represent the injury
Kearns
would
restrained.
incur
were
he
found
to
have
been
wrongfully
A proper bond must take into account the loss Kearns
would suffer from not being able to compete for his former LabCorp
customers.
35
Kearns’ counsel argued that his client charges approximately
$2500 for each PGD procedure and would bring in gross revenue of
about $500,000 to $1,000,000 per year.
He also contends he has
additional, unspecified fixed and variable costs for equipment,
employee salaries, and rent.
Counsel argued that, taking into
account the gross revenue and costs, a bond should be set around
“a
couple
million.”
However,
this
estimate
contemplated
enforcement of both restrictive covenant paragraphs and is not
limited to the alleged loss from enforcement of paragraph 9(a)(i)
only.
The court must determine the “proper” amount of a bond based
on the record evidence.
See Pashby, 709 F.3d at 332; Gateway E.
Ry. Co. v. Terminal R.R. Ass’n of St. Louis, 35 F.3d 1134, 1142
(7th Cir. 1994) (finding that the district court must provide an
explanation for its decision to set the bond at the chosen figure
so the reviewing court can determine whether the bond imposed was
“within
the
reasonable
range
trial
of
judge
options
to
from
select”
which
one
(internal
could
expect
quotation
a
marks
omitted); 11A Charles A. Wright, Federal Practice and Procedure
§ 2954 (3d ed. 2013) (“[T]he district court is required to make
factual findings to support its decision for setting a bond at a
particular amount to allow for appropriate appellate review.”).
The bond is effectively “the moving party’s warranty that the law
will uphold the issuance of the injunction.”
36
Edgar v. MITE Corp.,
457 U.S. 624, 649 (1982) (Stevens, J., concurring).
The burden of
establishing the bond amount rests with the party to be restrained,
who is in the best position to determine the harm it will suffer
from a wrongful restraint.
Philips Electronics N. Am. Corp. v.
Hope, 631 F. Supp. 2d 705, 724 n.14 (M.D.N.C. 2009); Int’l Equity
Investments, Inc. v. Opportunity Equity Partners Ltd., 441 F. Supp.
2d 552, 566 (S.D.N.Y. 2006) (“[T]he burden is on the party seeking
security to establish a rational basis for the amount of the
proposed bond.”), aff’d, 246 F. App’x 73 (2d Cir. 2007).
In this case, the value to be calculated is the loss to Kearns
reasonably attributable to the enforcement of paragraph 9(a)(i)
for
the
approximately
restrictive covenants.
ten-month
period
remaining
on
his
In the five-month period from July 15,
2014, to December 15, 2014, Kearns (through his limited liability
company AdvaGenix) performed PGD testing on 155 cases, an average
of 31 cases per month.
(See Doc. 20-2 at 79–104.)
the
months
approximately
10
remaining
on
Therefore, for
Kearns’
restrictive
covenant, the court projects that Kearns could have analyzed about
310 cases.
At $2500 per PGD case (see Kearns Dep. at 180, Doc.
22-2), the projected lost gross revenue would be about $775,000.
Because this figure represents lost revenue and does not take
into account Kearns’ ability to solicit work from customers with
whom he did not have contact during his LabCorp employment, it may
overstate his loss from a wrongful restraint.
37
Yet, LabCorp has
offered no rational basis for opposing the figure, either in its
briefing or at the hearing on its motion.
Given this apparent
acquiescence, the court deems $775,000 to be a proper bond amount. 14
However, should either party conclude that a different figure would
be proper, it may move for adjustment of the bond amount while the
preliminary injunction is still in effect.
See Rathmann Grp. v.
Tanenbaum, 889 F.2d 787, 790 (8th Cir. 1989); 13 Moore’s Federal
Practice - Civil § 65.50 (“A party may move the court to increase
or decrease the amount of security so long as the restraint or
injunction is in effect.”).
IV.
CONCLUSION
For the reasons stated,
IT IS THEREFORE ORDERED that Plaintiff LabCorp’s motion for
a preliminary injunction (Docs. 3, 17) be GRANTED in part and
DENIED in part, and that Defendant Kearns be PRELIMINARILY ENJOINED
as follows:
Through November 16, 2015, Defendant Kearns, his agents,
servants,
employees,
attorneys,
and
those
persons
in
active
concert or participation with him shall not, without the prior
written consent of LabCorp, directly or indirectly through a
subordinate,
co-worker,
peer,
or
any
other
person
or
entity
14
At least one court has noted that an understated bond could cause
irreparable harm on the ground that “the damages for an erroneous
preliminary injunction cannot exceed the amount of the bond.”
Mead
Johnson & Co. v. Abbott Labs., 201 F.3d 883, 888 (7th Cir. 2000).
38
contact, solicit, or communicate with a customer or potential
customer of LabCorp or its subsidiary or affiliated companies with
whom Kearns had contact while employed at LabCorp or its subsidiary
and affiliated companies for the purpose of either (1) offering,
selling, licensing, or providing the same or substantially similar
assays,
commercial
medical
testing,
or
anatomical
pathology
services offered and/or provided to such customer or potential
customer by LabCorp or its subsidiary and affiliated companies, or
(2) influencing said customer or potential customer’s decision on
whether to purchase or use such assays, commercial medical testing,
or
anatomical
pathology
services
offered
by
LabCorp
or
its
subsidiary and affiliated companies.
IT IS FURTHER ORDERED that, pursuant to Rule 65(c) of the
Federal Rules of Civil Procedure, this Preliminary Injunction
shall only become effective when Plaintiff LabCorp gives security
to the Clerk of Court in the amount of $775,000.
/s/
Thomas D. Schroeder
United States District Judge
January 30, 2015
5:20 p.m.
Winston-Salem, N.C.
39
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