Marco, Inc. v. Advanced Systems, Inc. et al
Filing
68
ORDER granting 61 Amended Motion for Preliminary Injunction. Signed by Chief Judge Karen E. Schreier on 7/13/2011. (KC)
UNITED STATES DISTRICT COURT
DISTRICT OF SOUTH DAKOTA
SOUTHERN DIVISION
MARCO, INC., a Minnesota
Corporation,
Plaintiff,
vs.
ADVANCED SYSTEMS, INC., an
Iowa Corporation;
CHRISTINE M. BERGESON;
WAYNE C. EWING;
JIM E. LIEBSCH;
MICHAEL R. LINTON;
LORIN PITTS; and
KENT REILLY,
Defendants.
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CIV. 11-4072-KES
ORDER GRANTING PLAINTIFF’S
AMENDED MOTION FOR A
PRELIMINARY INJUNCTION
Plaintiff, Marco, Inc., entered a bidding competition with defendant
Advanced Systems, Inc. (ASI) to purchase Best Business Products, Inc., a Sioux
Falls-based company. Marco won the bidding competition and purchased all of
Best’s assets, excluding some antiques. After ASI lost the bidding competition, it
entered the Sioux Falls market and Marco filed a 15-count complaint against
ASI and defendants Christine M. Bergeson, Wayne C. Ewing, Jim E. Liebsch,
Michael R. Linton, Lorin Pitts, and Kent Reilly, all of whom are former Best
employees. Marco sought a temporary restraining order and preliminary
injunction. The court denied the temporary restraining order and set the
preliminary injunction hearing for June 21, 2011. Docket 50. The day before the
hearing, Marco filed an amended motion for a preliminary injunction and
limited its requested relief to an order prohibiting ASI from using, possessing, or
disclosing any of Marco/Best’s confidential and proprietary information and
contacting, soliciting, inducing, or attempting to induce any Best customer to
terminate its relationship with Best. Docket 61.1 ASI resists the amended
preliminary injunction motion. The motion is granted.
BACKGROUND
The pertinent facts to this order are as follows:
Betty Best owned and operated Best, an office equipment sales and
service company, which has six offices in South Dakota. ASI is engaged in a
similar business and maintains its principal place of business in Waterloo,
Iowa. Marco is also engaged in a similar business and maintains its principal
place of business in St. Cloud, Minnesota.
After Betty passed away, ownership of Best passed to her estate. Her
estate’s trustee, Jim Schoettler with Wells Fargo in Minneapolis, took control of
Best. Schoettler created a new board of directors with Schoettler as Best’s
president. Schoettler also created an executive team that included Ewing and
Reilly to manage Best’s day-to-day operations. Schoettler eventually decided
1
At the hearing, Marco orally moved for a preliminary injunction against
Reilly, Best’s former general manager, to prohibit him from violating his
employment agreement containing restrictive covenants. Not only did Marco fail
to provide Reilly with notice that it intended to move for a preliminary
injunction against him, but Marco also failed to offer any evidence that Reilly
has violated his employment agreement. The court denied Marco’s oral motion
for a preliminary injunction against Reilly at the hearing.
2
that Best should be sold and 100 percent of Best, excluding some antiques,
would be for sale. Schoettler used a bidding system to solicit bids from potential
buyers.
There were three serious bidders for Best, including Marco and ASI. On
September 17, 2010, ASI and Best entered into a “Confidential Disclosure
Agreement” (September NDA). Schoettler signed as Best’s president and James
Newcomb, ASI’s President and CEO, signed for ASI. ASI later requested that
Best and ASI enter into another “Non-Disclosure and Confidentiality
Agreement,” which ASI drafted. Newcomb and Schoettler signed the second
agreement on December 7, 2010 (December NDA).
Betty Erhardt, ASI’s Chief Financial Officer, engaged in due diligence for
ASI during the bidding process. After reviewing Best’s initial disclosures,
Erhardt determined that she needed more information to complete due
diligence. ASI requested additional information from Best, specifically customer
information contained in Best’s “E-Automate” program, a software program
used by companies to manage their inventory, finances, service histories, and
customer service records. ASI received a CD containing a complete, unredacted
copy of Best’s entire customer database and other confidential and proprietary
information. ASI concedes that the CD contains confidential and proprietary
information.
Erhardt testified that ASI returned the CD after Marco announced that it
was the winning bidder for Best. Mitch Johnson at Best signed a certified mail
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return receipt for the CD on April 28, 2011. At the hearing, however, Tim
Griggs, ASI’s Chief Operating Officer, admitted that he made a copy of the CD
and retained possession of the CD in a sealed envelope, which he locked in an
office drawer. Griggs was still in possession of the CD when he testified at the
hearing.
Newcomb testified that if ASI did not win the bidding competition, ASI’s
Board of Directors had decided to independently enter the South Dakota
market. ASI made active plans to enter the market. Newcomb also testified that
hiring Best employees was part of ASI’s plan to establish a South Dakota
branch.
On April 15, 2011, Marco issued a press release announcing that it was
acquiring Best’s assets and planned to begin operations as of April 29, 2011.
On Monday, April 18, 2011, Ewing, a member of Best’s executive team,
generated two large reports, an equipment report and a contract profitability
report, and backed up certain files from the “C” drive of his computer onto flash
drives. The flash drives were not protected by a password.2
Ewing did not prepare the two reports in the ordinary course of his job
duties at Best. Instead, Ewing testified that he produced the reports to prepare
for a prospective job interview with Marco. But Marco never informed Ewing
2
Marco provided a copy of these two reports to the court under seal. After
reviewing the reports, the court agrees with Marco that the two reports contain
highly confidential and proprietary information, including lists of all equipment
that Best owns or has sold and contract profitability information for all of Best’s
customers.
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that it would be interviewing him and Jennifer Mrozek, Marco’s Chief Financial
Officer, testified that Marco had no intention of hiring Ewing.
Ewing stated that he did not take the flash drives off of Best’s property.
But the very next morning, on April 19, 2011, Ewing and two other key Best
employees met with ASI executives at a secret meeting in Albert Lea, Minnesota.
When Ewing met with ASI on April 19, he was unaware that Marco was not
going to hire him.
The April 19 Albert Lea meeting involved Reilly (Best’s General Manager),
Ewing, Doug Patrick (Best’s Sales Manager), Newcomb, Don Hinckle (ASI’s
Service Manager), and Dave Quint (ASI’s Vice President and General Sales
Manager). The meeting took place in the restaurant section of an Albert Lea HyVee grocery store.
Patrick testified that he heard about the April 19 meeting from Reilly and
that the meeting was a secret. Ewing also testified that Reilly told him that the
April 19 meeting was a secret.
The April 19 meeting lasted between forty-five minutes and one hour.
During the meeting, ASI informed the three Best employees that ASI intended to
enter the Sioux Falls market. According to Patrick, ASI stated that it wanted to
hire good service technicians and sales representatives and expressed a special
interest in hiring key Best personnel. ASI’s executives also stated that ASI
desired to roll Best’s customer contracts over to ASI, and employees, such as
Patrick, would receive a financial incentive for each contract that they converted
from Best to ASI. The ASI executives also explained that ASI planned to open
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offices in Sioux Falls, Aberdeen, and Watertown, which were all locations where
Best had offices.
On April 20, Quint called Patrick and again told Patrick that he would
receive a monetary incentive for every customer maintenance contract that
Patrick could roll from Best to ASI. Quint also asked Patrick to identify and
provide contact information of key Best employees. Patrick provided the names
of Loren Pitts, Dan Haslehorst, Sean Falken, and John Rickarns [phonetic] to
Quint.
On Thursday, April 21, ASI posted two employment openings on
careerbuilder.com, one for sales representatives and one for service technicians.
Dockets 44-1, 44-2. The ads were blind, meaning that ASI did not identify itself
as the employer. ASI received 14 responses for sales representative and 61
responses for service technicians. Five people were hired, all former Best
employees: Ewing, Bergeson, Liebsch, Linton, and Pitts.
Ewing applied through careerbuilder.com on April 22. Ewing learned from
Hinkle on April 24 that he would be hired by ASI, but Ewing did not formally
interview with ASI until April 28. Ewing resigned from Best on April 28.
While Ewing still officially worked for Best and knew that he would be
hired by ASI, he attempted to recruit Craig Davis, a Best service technician with
25 years of experience to work for ASI. Davis testified that he was nervous
about Marco taking control of Best and wanted to explore his options. On
Tuesday, April 26, Ewing told Davis that he could go online and apply for a new
job. Davis said he did not want to apply; he just wanted information about
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salary and health insurance. On Wednesday, April 27, Davis met with Ewing at
Ewing’s home over breakfast to discuss working for ASI. Ewing told Davis that
even though Davis was a service technician, he would be working in sales until
ASI had an established sales base. Ewing also told Davis that he would receive a
financial “spiff” for every contract that he successfully rolled over from Best to
ASI.
Ewing pressured Davis to make a decision quickly. Ewing said he had to
have Davis’s response before Friday, April 29. Because Marco required its
employees to sign non-compete agreements, Ewing needed Davis’s answer
before April 29, when he would become a Marco employee.
When Davis questioned Ewing about whether he would be in legal trouble
for working for ASI, Ewing told Davis not to worry about it because legal counsel
would be made available to assist with any issues. Davis did not accept a
position with ASI. Davis testified that a number of years ago, a young technician
left Best, took confidential information with him, and lured some of Best’s
customers away from Best. Davis did not want to engage in similar behavior and
stated that he would feel “dirty” about soliciting Best’s customers.
Haslehorst, a service technician in Best’s Aberdeen, South Dakota, office,
testified that Hinckle called him while he was working at Best, a few days after
the April 21 job posting on careerbuilder.com. Hinckle received Haslehorst’s
contact information from Patrick. Hinckle informally offered Haslehorst a job.
Haslehorst then filled out an application on careerbuilder.com on April 26.
Hinckle formally offered Haslehorst the job on April 27. Hinckle, Haslehorst,
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and Shawn Falken, another Best employee who received a job offer from ASI
after Patrick provided Quint with Falken’s contact information, met on April 28
to discuss working for ASI.
During the April 28 meeting, Haslehorst expressed his concerns about
taking a job with ASI because ASI was not in the Aberdeen market. Hinckle told
Haslehorst that he would cold call businesses and tell his former customers
that if they rolled their services agreements from Best to ASI, Haslehorst could
continue working as their service technician. Hinckle promised Haslehorst a
financial incentive for every contract that he successfully rolled over from Best
to ASI.
Hinckle told Haslehorst that he needed to make a decision quickly
because as of Friday, April 29, Haslehorst would be a Marco employee and his
non-compete agreement would be effective. During this process, Hinckle told
Haslehorst not to tell anyone about the job offer.
Bergeson, a Best service technician of Canon copiers with 14 years of
experience, learned about ASI through Ewing. She applied for a job through the
blind careerbuilder.com ad on April 25. Hinkle called Bergeson that evening and
the two discussed Bergeson working for ASI. Bergeson had a second interview
with ASI on April 28 and was offered a job, which she accepted.
Liebsch was uncomfortable with Marco acquiring Best. He testified that
after Betty passed away, he began looking for jobs. But the only time he applied
for a job was through the careerbuilder.com ad in April of 2011. Quint called
Liebsch, interviewed him, and offered him a job. Liebsch accepted ASI’s job
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offer. Because ASI is not doing business in Yankton, where Liebsch worked with
Best, he is cold calling businesses in Sioux Falls with Bergeson.
Linton, a Best employee with 6 years of experience, was told on April 29
that he would not be hired by Marco. After Linton left Best on April 29, Liebsch
called and told Linton to call Quint if he needed a job. Linton met with Quint
around 3:30 or 4 p.m. on April 29. After a two-hour discussion, Quint hired
Linton. Linton admitted that he saw Best’s customer list before he left Best.
Pitts was a service technician at Best with 37 years of experience. Pitts
was getting anxious about Marco taking over Best and told Davis about his
concerns. On Thursday, April 28, Davis told Pitts about careerbuilder.com and
that there was going to be a meeting that night. Pitts applied, was offered a job,
and accepted employment with ASI on Thursday, April 28. As an ASI employee,
Pitts cold called business with Quint and Linton.
Newcomb and Tammy Bedard, ASI’s marketing director, described ASI’s
go-to-market plan, also called the door-to-door campaign, in the greater Sioux
Falls area. ASI’s go-to-market plan is to cold call or prospect3 all businesses
3
Newcomb testified that ASI is “prospecting” to all businesses in Sioux
Falls and Brookings. During the prospecting process, the ASI employee
introduces himself or herself to the business, asks which company currently
services the business, and collects business cards. When asked whether
prospecting is cold calling, Newcomb maintained that prospecting is different
from cold calling. It appears that prospecting and cold calling involve the same
process of soliciting a customer to sell him or her goods or services. See THE
NEW SHORTER OXFORD 437 (Lesley Brown, ed., 5th ed. 1993) (defining cold call as
to “make an unsolicited call to or on (a person) to sell them goods or services”).
For simplicity, the court will refer to the process used by ASI to solicit new
customers as cold calling.
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located in the greater Sioux Falls area. The plan consisted of two phases.
During the first phase, ASI employees who worked in Sioux Falls cold called all
businesses in the Sioux Falls and Brookings areas. The second phase was a
blitz where ASI employees from other states converged in Sioux Falls and
Brookings and made cold calls to all businesses. Through this process,
Newcomb learned that Best had about 14 percent of the market in Sioux Falls.
With the exception of Liebsch, whose sales territory as a salesman with
Best was in Yankton, all of ASI’s employees who were Best employees have
solicited Best customers during the cold-calling process in the same sales or
service territories where they worked while employed by Best.
Pitts, a service technician, was paired with Quint and Linton for the doorto-door campaign. Pitts testified that he knew his customers well and that they
were loyal to him. Pitts visited Best’s largest customer in Brookings, along with
four other Best customers in Brookings. Pitts testified that sales were not his
“thing” and that he mainly rode along on sales calls. Pitts was assigned to the
Brookings area when he worked for Best.
While Bergeson repeatedly testified that she was a service technician and
that she enjoyed working on Canon copiers, she went on sales calls as an ASI
employee. During these cold calls, Bergeson told customers that if they switched
contracts from Best to ASI that she could continue servicing their Canon
copiers. Bergeson knew that she would receive a financial incentive for every
contract she successfully rolled from Best to ASI.
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Bergeson testified that she contacted about ten of Best’s customers and
one customer moved its contract to ASI. Liebsch estimated that ASI contacted at
least 100 Best customers. Linton estimated that he has solicited at least 25
Best customers.
Newcomb testified that he has no intention of refraining from soliciting
Best’s customers or altering employees’ territories to avoid Best customers.
Mrozek testified that the employees leaving Best for ASI have hurt Best’s
goodwill. Patrick similarly testified that the five employees who left Best for ASI
have negatively impacted Best’s goodwill.
DISCUSSION
When ruling on a preliminary injunction motion, the court considers four
factors: (1) the likelihood of success on the merits; (2) the threat of irreparable
harm to the moving party; (3) balancing this harm with an injury that a
preliminary injunction would inflict on the other party; and (4) the public
interest. Dataphase Sys., Inc. v. C L Sys., Inc., 640 F.2d 109, 113 (8th Cir. 1981)
(en banc). While no single factor is dispositive, Calvin Klein Cosmetics Corp. v.
Lenox Laboratories, Inc., 815 F.2d 500, 503 (8th Cir. 1987), the two most critical
factors are the probability that the movant will succeed on the merits and
whether the movant will suffer irreparable harm if the preliminary injunction is
not granted. Chicago Stadium Corp. v. Scallen, 530 F.2d 204, 206 (8th Cir.
1976); see also Sampson v. Murray, 415 U.S. 61, 88 (1974) (reasoning that the
Supreme “Court has stated that ‘[t]he basis of injunctive relief in the federal
courts has always been irreparable harm and inadequacy of legal remedies.’ ”
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(alteration in original) (quoting Beacon Theatres, Inc. v. Westover, 359 U.S. 500,
506-07 (1959))).
I.
Likelihood of Success on the Merits
On the likelihood of success on the merits factor, the court determines
whether Marco has a “fair chance of prevailing” on the merits. Heartland Acad.
Cmty. Church v. Waddle, 335 F.3d 684, 690 (8th Cir. 2003). “[A]t this stage of
the litigation, [plaintiff] is not required to prove a mathematical (greater than
fifty percent) probability of success on the merits.” Id. (citing Dataphase, 640
F.2d at 113). “ ‘[A] preliminary injunction is customarily granted on the basis of
procedures that are less formal and evidence that is less complete than in a trial
on the merits. A party thus is not required to prove his case in full at a
preliminary-injunction hearing.’ ” Id. (quoting Univ. of Tex. v. Camenisch, 451
U.S. 390, 395 (1981)).
Relevant to this order are counts three and four of Marco’s complaint,
which allege breach of contract claims against ASI for an alleged violation of the
September and December NDAs. While the September and December NDAs are
similar, it appears that the December NDA, which ASI drafted, provides broader
protections against the disclosure of confidential information and solicitation of
Best customers. The December NDA is the last contract entered into between
Best and ASI. Thus, the court will limit the remaining discussion to the
December NDA.
The December NDA has a choice of law provision: “This Agreement shall
be governed by and construed in accordance with the laws of the state of Iowa.”
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December NDA ¶ 8, Docket 56-4 at 7. Because the parties have not alleged that
a conflict exists between South Dakota and Iowa law on the restrictive
covenants in the December NDA, the court will apply Iowa law in interpreting
the December NDA.
A.
Assignability
ASI disputes whether Marco can enforce the December NDA because the
agreement was between Best and ASI and Marco was not a signatory to the
December NDA. Marco responds that it succeeded to all of Best’s contractual
rights in its assets purchase agreement because it bought all “claims, causes of
action, rights of recovery, refunds, rebates[,] deposits and rights of set off of any
kind.” Docket 56 at 16.
Schoettler testified that he was selling 100 percent of Best, excluding
some antiques. Mrozek similarly testified that Marco was buying 100 percent of
Best’s assets, including Best’s contractual rights. Thus, it appears that Marco
intended to and believed it did purchase Best’s contractual rights, including
Best’s rights contained in the December NDA. The issue remains, however,
whether the December NDA can be assigned from Best to Marco.
Under Iowa law, a formal assignment of contractual rights is not
necessary for an assignment to be valid. See Cass Atl. Dev. Corp. v. Pellett,
No. 05-1569, 2006 WL 3313791, at *5, 725 N.W.2d 658 (Iowa Ct. App. Nov. 16,
2006) (table decision) (enforcing a contractual right to exercise an option of an
acquired business even though the contract lacked an assignment clause (citing
Corp. Express Office Prods., Inc. v. Phillips, 847 So. 2d 406, 414 (Fla. 2003)
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(holding that the surviving corporation after a merger is assumed to have the
right to enforce non-compete agreements exercised by the merged entity and
“no assignment is necessary.”))).
Other jurisdictions have similarly held that non-compete agreements are
assignable. See, e.g., Public Op. Pub. Co. v. Ransom, 148 N.W. 838, 839 (S.D.
1914) (reasoning that a contract in restraint of trade can be valid if it is
“connected with and an incident of the sale of the good will of the business to
which it relates.”); Guidant Sales Corp. v. George, No. 01-1638, 2001 WL
1491317, at *6 (D. Minn. Nov. 19, 2001) (reasoning that a “non-compete
agreement may be assigned ‘ancillary to the sale of a business to protect the
goodwill of that business.’ ” (quoting Saliterman v. Finney, 361 N.W.2d 175, 179
(Minn. Ct. App. 1985))). Because Marco’s asset purchase agreement stated that
Best was purchasing all of Best’s contractual rights and an express assignability
clause is not necessary, Marco has shown that a fair probability exists that the
December NDA was assignable.
B. Enforceability of the December NDA
Sections 2(e) and 2(f) of the December NDA are at issue here:
2. Neither party will, directly or indirectly, in any many [sic]
whatsoever
...
(e)
Induce or attempt to induce any vendor, customer,
employee, sub-representative, or independent contractor or
other party to terminate such relationship; or
(f)
Use any Proprietary or Confidential Information to solicit
any customer of the other party for the purpose of selling
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or offering to sell such customers products or goods the
same as or similar to the goods or products sold or offered
for sale by the other party.
...
The foregoing restrictions (a) through (f) shall not apply with
respect to any portion of the Proprietary Information which, as of
this date, is in the public domain or which is disclosed to the public
by a third party, which or who is not under a legal or contractual
restriction with respect to such disclosure.
9. The restrictions contained in the Agreement shall survive for a
period of two (2) years from the date hereof.
Docket 56-4 at 5.
In its amended motion for a preliminary injunction, Marco seeks to
prohibit ASI from using, possessing, or disclosing any of Marco/Best’s
confidential and proprietary information and contacting, soliciting, inducing, or
attempting to induce any Best customer to do business with ASI or cease doing
business with Best/Marco. Docket 61. Marco’s requests conform to the
language contained in sections 2(e) and 2(f).
“When interpreting a written contract, the court determines the intent of
the parties from the plain language of the instrument itself.” Pillsbury Co. v.
Wells Dairy, Inc., 752 N.W.2d 430, 439 (Iowa 2008) (citing Metro. Sports Facilities
Comm’n v. Gen. Mills, Inc., 470 N.W.2d 118, 123 (Minn. 1991)). “When a
contractual provision is clear and unambiguous, courts should not rewrite,
modify, or limit its effect by a strained construction.” Id. (citations omitted).
In section 2(e), ASI and Best agreed that neither company would induce
or attempt to induce the other company’s customers to terminate their
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relationships. ASI alleges no ambiguity and the court finds no ambiguity in this
prohibition. In section 2(f), ASI and Best agreed that neither company would use
any proprietary or confidential information to solicit the other company’s
customers to sell the same or similar goods or products offered for sale by the
other company. ASI alleges no ambiguity and the court finds no ambiguity in
this prohibition.
While the plain language of sections 2(e) and 2(f) of the December NDA is
clear, because the sections contain restrictive covenants, the court must
determine if the sections meet Iowa’s law on the enforceability of restrictive
covenants. In analyzing the enforceability of an employee-employer restrictive
covenant, the Iowa Supreme Court adopted the Restatement (Second) of
Contracts § 188 on restrictive covenants. Iowa Glass Depot, Inc. v. Jindrich, 338
N.W.2d 376, 381 (Iowa 1983) (reasoning that “[o]ur rule is analogous to the
Restatement rule” (citing Restatement (Second) of Contracts § 188(1))); see also
Moore Bus. Forms, Inc. v. Wilson, 953 F. Supp. 1056, 1062 (N.D. Iowa 1996)
(articulating the same test). Because the Iowa Supreme Court has looked to the
Restatement (Second) of Contracts regarding the enforceability of restrictive
covenants in the employee-employer relationship, the court assumes the Iowa
Supreme Court would also look to the Restatement (Second) of Contracts with
regard to the enforceability of other restraints on trade.
Section 188(1) of the Restatement (Second) of Contracts provides in
pertinent part:
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(1) A promise to refrain from competition that imposes a restraint
that is ancillary to an otherwise valid transaction or
relationship is unreasonably a restraint of trade if
(a)
the restraint is greater than is needed to protect the
promisee’s legitimate interest, or
(b)
the promisee’s need is outweighed by the hardship to the
promisor and the likely injury to the public.
Restatement (Second) of Contracts §§ 188(1)(a) and (b). Ancillary promises are
promises that impose restraints that are ancillary to a valid transaction or
relationship. Id. at § 188(2). While subsection (2) lists three examples of
ancillary promises, according to the comments to the Restatement, that list is
not exhaustive and other courts have enforced restraints as ancillary to
additional types of transactions or relationships, including an agreement by a
potential purchaser of a business not to use confidential information to compete
with the current owner. Id. at cmt. c, referring to Island Air, Inc. v. LaBar, 566
P.2d 972 (Wash. Ct. App. 1977).
According to § 188(1), Marco must show, by a fair probability, that it will
succeed on the merits in establishing that (1) the restrictions in the December
NDA are reasonably necessary for the protection of Marco’s business; (2) the
covenants are not unreasonably restrictive of ASI’s rights; and (3) the covenants
are not prejudicial to the public interest. See, e.g., Jindrich, 338 N.W.2d at 381
(relying on § 188 to formulate a similar three-part test for employee-employer
restrictive covenants); Revere Transducers, Inc. v. Deere & Co., 595 N.W.2d 751,
760-61 (Iowa 1999) (same).
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Under the first factor, a portion of Marco’s business is sales, and, as a
dealership, Marco relies heavily on Best’s customer lists and customer goodwill
to be a profitable business. The restrictions in sections 2(e) and 2(f) appear to be
reasonably necessary for Marco’s business.
Under the second factor, the covenants contained in sections 2(e) and 2(f)
are not unreasonably restrictive of ASI’s rights. The covenants expire on
December 7, 2012, according to paragraph 9 of the December NDA. Newcomb
testified that Best only has a 14 percent market share of the businesses in
Sioux Falls, so the covenants appear to not unreasonably restrict ASI’s right to
fairly compete with Marco. Furthermore, ASI drafted the December NDA and
had every right to modify the language as it believed was necessary to allow it to
compete in the marketplace if ASI was not selected as the winning bidder.
The third factor, the public interest, is also met. “In the case of a sale of a
business . . . the likely injury to the public may be too great if it has the effect of
removing a former competitor from competition.” Restatement (Second) of
Contracts § 188 cmt. c. Not only was ASI not a competitor in the South Dakota
market before Marco acquired Best, but ASI will not be completely removed
from competition if the court enforces the December NDA. ASI will be free to
solicit the remaining 86 percent of businesses in the greater Sioux Falls area
and other South Dakota businesses that are not Best customers.
ASI, citing Joynt v. Wilson Trailer Co., No. 99-0478, 2000 WL 766126
(Iowa App. Ct. June 14, 2000), argues that Iowa applies a fairness standard for
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restrictive covenants when the covenant is between two corporate entities. In
Joynt, the Iowa Court of Appeals reasoned that “[i]n the sale-related covenants
not to compete cases we do not apply a ‘strict construction,’ but do hold the
contract, being in restraint of trade and personal liberty, should not be
construed beyond its fair import.” Id. at *2 (citing Thomas v. Thomas Truck &
Caster Co., 228 N.W.2d 52, 55 (Iowa 1975)).
Even if a fairness standard is created, the restrictive covenants meet that
standard. The plain language of sections 2(e) and 2(f) is clear and fair. Because
ASI received highly confidential and proprietary information about Best during
the bidding process, it is fair that ASI not be allowed to solicit Best’s customers
or use Best’s confidential information to gain a competitive edge.
Marco has shown by a fair probability that sections 2(e) and 2(f) in the
December NDA meet Iowa’s enforceability rules for a restrictive covenant. Marco
must next demonstrate that it has a fair chance of succeeding on its breach of
contract claims involving sections 2(e) and 2(f).
C. Breach of Sections 2(e) and 2(f)
While recruiting former Best employees to work for ASI, ASI promised the
employees that if they were able to successfully roll contracts from Best to ASI,
the employee would receive a financial incentive in addition to his or her normal
compensation. ASI even had service technicians such as Bergeson and Linton
solicit Best customers and tell Best customers that if they terminated their
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service contracts with Best and became ASI customers, then Bergeson and
Linton could continue to work as their service technicians.
ASI has solicited Best’s customers. Former Best employees offered varying
numbers of how many Best customers have been contacted ranging from 25 to
100. But all five of Best’s former employees who now work for ASI testified that
they have cold called Best customers. Newcomb admitted that part of ASI’s plan
to enter the Sioux Falls market is to solicit all businesses in the greater Sioux
Falls area, including Best customers. Newcomb also stated that he has no
intention of limiting ASI’s go-to-market plan to soliciting only non-Best
customers. Marco has shown by a fair probability that it will succeed on the
merits that ASI breached section 2(e) of the December NDA by soliciting Best’s
customers.
Regarding Best’s confidential and proprietary information, Marco
presented evidence that ASI has Best’s confidential information and may be
using that information to solicit Best’s customers. During the bidding process,
Erhardt requested additional information from Best. Erhardt received a CD
containing unredacted information about Best’s customers and contract
profitability. Griggs made a copy of the CD and retained it, even after Erhardt
returned her copy and after Marco closed on its acquisition of Best. This
information has been available to ASI to use to solicit Best’s customers.
Moreover, Ewing generated two large reports containing highly
confidential information on the afternoon of April 18. Ewing was not asked to
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prepare these reports by Best or Marco and did not prepare these reports
during his normal course of duties. Ewing testified that he reviewed the
information contained in these reports. The very next morning, Ewing met with
ASI executives during a secret meeting in Albert Lea and discussed working for
ASI. Marco may be able to show that Ewing used this information to either
secure a job with ASI or to more effectively target Best customers or both.
Thus, Marco has shown that a fair probability exists that ASI breached sections
2(e) and 2(f) of the December NDA. The probability of success on the merits
factor weighs heavily in favor of granting the preliminary injunction.
II.
Irreparable Harm
There is a threat of irreparable harm to Marco if ASI is allowed to
continue its activities. Marco heavily relies on Best’s customer lists and
customer goodwill to be a profitable business. In the sales business, a customer
list is a valuable asset and provides a business advantage over competitors. See,
e.g., Walling Chem. Co. v. Bigner, 349 N.W.2d 647, 650 (S.D. 1984) (reasoning
that a customer list “provides a business advantage over competitors who lack
the information . . . .”).
“Loss of intangible assets such as reputation and goodwill can constitute
irreparable injury,” because those items are not readily compensable by
monetary damages. United Healthcare Ins. Co. v. AdvancePCS, 316 F.3d 737,
741 (8th Cir. 2002) (citing Gen. Mills, Inc. v. Kellogg Co., 824 F.2d 622, 625 (8th
Cir. 1987)). Because the loss of customer goodwill is difficult to compensate,
21
courts find that the irreparable injury prong of the preliminary injunction test is
met if a valid restrictive covenant is breached. N.I.S. Corp. v. Swindle, 724 F.2d
707, 710 (8th Cir. 1984) (“If the noncompete agreements are valid, then we
think an irreparable injury has been shown.”).
Marco purchased Best’s goodwill. Marco presented evidence that Best’s
goodwill is currently being threatened and will continue to be threatened by ASI
through ASI’s solicitation of Best customers. It will be difficult, if not impossible,
for the court to adequately compensate Marco with monetary damages if it
suffers a loss of goodwill through ASI’s actions.
ASI also possesses confidential information in the form of customer lists
and product placement lists. ASI could further harm Marco by using this
information to solicit Best’s customers.
Newcomb testified that he has not done anything to prohibit ASI’s
employees from contacting Best’s customers or using the customer information
that they possess in soliciting Best’s customers. ASI has no intention of
voluntarily ceasing its actions. Thus, Marco has shown a threat of irreparable
harm and this factor weighs in favor of granting the preliminary injunction.
III.
Balance of the Harms
The balance of the harms factor requires the court to determine and then
balance the harms that would result in the following scenarios: (1) if the court
improperly denied the preliminary injunction because Marco prevailed on the
merits; and (2) if the court improperly granted the preliminary injunction
22
because ASI prevailed on the merits. See Scotts Co. v. United Indus. Corp., 315
F.3d 264, 284 (4th Cir. 2002) (“[W]hile cases frequently speak in the short-hand
of considering the harm to the plaintiff if the injunction is denied and the harm
to the defendant if the injunction is granted, the real issue in this regard is the
degree of harm that will be suffered by the plaintiff or the defendant if the
injunction is improperly granted or denied.”); Am. Hosp. Supply Corp. v. Hosp.
Prods., Ltd., 780 F.2d 589, 594 (7th Cir. 1986) (announcing a similar test); see
also Hillerich & Bradsby Co. v. Christian Bros., Inc., 943 F. Supp. 1136, 1142 (D.
Minn. 1996) (balancing the harms by looking at what the harm to the defendant
would be if the injunction were “improperly granted”).
If the court improperly denied the preliminary injunction motion, Marco’s
competitive place in the copier sales and service industry would be diminished,
and its confidential information could be used to undercut Marco’s competitive
nature. Marco would then be denied adequate legal and equitable remedies
because of the difficulty in accurately calculating damages resulting from the
loss of customer goodwill. If the court improperly granted the preliminary
injunction, ASI will have been wrongly prevented from competing against Marco
and partaking in a valid business venture to the extent such activity is allowed
by the December NDA.
On the one hand, any potential harm to ASI is less than the potential
harm to Marco. If ASI improperly uses or discloses Marco’s confidential
information or otherwise decreases Marco’s customer base by competing with
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Marco in violation of the December NDA, it will difficult, if not practically
impossible, for the court to return the improperly disclosed or utilized
information to being confidential and secure.
On the other hand, the potential harm to ASI is greater than the harm to
Marco because the Sioux Falls branch of ASI is a new office. “Interfering with a
new business is more likely to cause irreparable harm than interfering with an
established business like [Marco] . . . because an established business is more
likely to withstand a financial setback.” Howard Venture LLC v. Lively, No. 104072-KES, 2010 WL 2595276, at *2 (D.S.D. June 23, 2010). ASI’s South Dakota
office, however, is not a completely new, independent business, but rather a
branch office of a larger company that has offices in Waterloo, Cedar Rapids,
Fort Dodge, Dubuque, Mason City, Davenport, and Spencer, Iowa. Furthermore,
ASI will only be prevented from competing with 14 percent of the businesses in
the Sioux Falls market and other South Dakota businesses that are currently
Best customers. A loss to ASI’s Sioux Falls office will likely neither bankrupt ASI
nor cause irreparable harm to ASI.
The denial of the preliminary injunction will infringe on Marco’s
contractual rights under the December NDA, but granting the injunction will
not unfairly infringe on ASI’s right to compete. The balance of the harms factor
tips in favor of granting the preliminary injunction.
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IV.
Public Interest
The public has an interest in ensuring that contractual agreements are
enforced within the confines of the law because “there is no public policy or rule
of law which condemns or holds in disfavor a fair and reasonable” restrictive
covenant. Dental Prosthetic Servs., Inc. v. Hurst, 463 N.W.2d 36, 38 (Iowa 1990).
If refusing to grant the preliminary injunction would allow the parties to an
agreement “to conduct themselves in a manner directly contrary to the express
terms of the agreement,” then the court will grant the preliminary injunction.
Frank B. Hall & Co. v. Alexander & Alexander, Inc., 974 F.2d 1020, 1026 (8th
Cir. 1992). If “noncompete agreements are valid, the public interest calls for
their enforcement.” Swindle, 724 F.2d at 710; see also Bradley Grain Co. v.
Peterson, 267 N.W.2d 836, 839 (S.D. 1978) (reasoning that the law has a
“traditional interest in protecting the expectations of the parties,” and abhors
“any unjust enrichment.”). Moreover, there is also a public interest in “fair
competition by protecting confidential and secret information . . . .” 1st Am.
Sys., Inc. v. Rezatto, 311 N.W.2d 51, 57 (S.D. 1981) (citation omitted).
But courts must also “consider the broader economic implications” when
determining whether to grant a preliminary injunction. Calvin Klein Cosmetics,
815 F.2d at 505. There is a “strong public interest in lowest possible prices,”
avoiding monopolies, and “in encouraging, not stifling, competition.” Id. (citing
Smith v. Chanel, Inc., 402 F.2d 562, 566 (9th Cir. 1968)). Consumer choice is a
public interest. Gen. Motors Corp. v. Harry Brown’s LLC, 563 F.3d 312, 321 (8th
25
Cir. 2009) (citation omitted). In determining the public’s interest in competition,
the court also considers the direct economic cost to the competitor, such as how
much merchandise is in the pipeline. Dakota Indus., Inc. v. Ever Best Ltd., 944
F.2d 438, 441 (8th Cir. 1991).
Marco seeks to prohibit ASI from using any of Best/Marco’s confidential
information and soliciting any of Best’s customers. Marco has made the
threshold showing for a preliminary injunction that it has a fair probability of
succeeding on its breach of contract claims involving sections 2(e) and 2(f) of the
December NDA. Because the December NDA appears to be enforceable, the
public has an interest in its enforcement. While the public has an interest in
competition and lower consumer prices, ASI does not currently have an
established presence in South Dakota and will not lose merchandise currently
in its pipeline for the South Dakota market. Thus, the public interest factor
weighs slightly in favor of granting the preliminary injunction.
CONCLUSION
Marco seeks a preliminary injunction to prohibit ASI from using,
possessing, or disclosing any of Best/Marco’s confidential or proprietary
information and to prohibit ASI from contacting, soliciting, inducing, or
attempting to induce any customer of Best to do business with ASI. After
considering all four factors, the court finds that Marco has shown it has a fair
chance of succeeding on the breach of contract claim and the preliminary
injunction is granted. Accordingly, it is
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ORDERED that plaintiff’s amended motion for preliminary injunction
(Docket 61) is granted.
IT IS FURTHER ORDERED that defendant Advanced Systems, Inc. and
any of its employees and/or agents are prohibited from using, possessing, or
disclosing any of Marco/Best’s confidential information.
IT IS FURTHER ORDERED that defendant Advanced Systems and any of
its employees and/or agents are prohibited from contacting, soliciting, inducing,
or attempting to induce any customer of Best Business Products (to the extent
that such customer was a customer of Best Business Products as of
December 7, 2010) to do business with Advanced Systems, Inc. or cease doing
business with Marco/Best until a final decision has been issued in this case or
until December 7, 2012, see Docket 56-4 at ¶ 9 (stating that the December 7,
2010, NDA is effective for two years), whichever occurs first. For purposes of
clarification, ASI may continue its cold-call operation, but known Best
customers should not be contacted and when a potential customer discloses
that it has either a product under contract with Best or a service contract with
Best, all contact by ASI with that customer should immediately cease.
Dated July 13, 2011.
BY THE COURT:
/s/ Karen E. Schreier
KAREN E. SCHREIER
CHIEF JUDGE
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