Wednesday, September 16, 2015

11th Circuit Holds Florida Statute Disallowing Consideration of Hardship in Considering Enforceability of Noncompete Agreement Conflcts with Rule 65

Daniel MacLachlan was serving as the CFO of Trans Union Risk and Alternative Data Solutions, Inc. (TRADS).  MacLachlan signed a 1-year "Noncompetition and Nonsolicitation Agreement" with TRADS during his employment with TRADS, which, if he was terminated from TRADS, prohibited MacLachlan from "directly or indirectly":

(a) engag[ing] in a business...that is the same as or is similar to any Business conducted by [TRADS] during [MacLachlan's] employment ...[or];

(b) enter(ing) into any employment or business relationship with any person or entity that engages in a Business that is the same as or similar to any Business conducted by [TRADS] during [MacLachlan's] employment by [TRADS], including, without limitation,...Interactive Data LLC....

MacLachlan, several months after signing this noncompete agreement, resigned from TRADS and signed an employment agreement to become the CFO of TBO, a company that acquired Interactive.  MacLachlan did not inform TRADS of his new relationship with TBO.  

TRADS believed MacLachlan had gone to work for a competitor in violation of the noncompete agreement he signed with them and initiated an action to enforce that agreement and moved for a preliminary injunction.   MacLachlan contested the preliminary injunction arguing, inter alia, that TRADS had not demonstrated a substantial likelihood of success on the merits; that TRADS failed to establish irreparable harm; that the harm of the preliminary injunction to MacLachlan would outweigh any damage to TRADS; and that sections 542.335(1)(g)1, (j) of the Florida statutes did not govern the case.  After an evidentiary hearing on TRADS' motion, the district court granted the preliminary injunction, prohibiting MacLachlan for one year or until the final resolution of the cause, whichever is sooner, from "[c]ontinuing employment or association with [Interactive] or any affiliate or investor thereof" and from "[e]ngaging in a business or activity that is the same as or similar to any business conducted by TRADS."

Did the District Court Properly Grant TRADS' Preliminary Injunction?

In case anyone was wondering what this contract dispute was doing in federal court, it was a diversity action, with state substantive law and federal procedural law applied.  Thus, federal procedure was applied to determine whether the preliminary injunction was properly issued.  Therefore, under Rule 65, a moving party (TRADS) must establish four (4) elements to obtain a preliminary injunction:

"(1) it has a substantial likelihood of success on the merits;  (2) irreparable injury will be suffered unless the injunction issues; (3) the threatened injury to the movant outweighs whatever damage the proposed injunction may cause the opposing party; and (4) if issued, the injunction would not be adverse to the public interest."  

The 11th Circuit noted that preliminary injunctions are "extraordinary" and "drastic" remedies that should not be issued unless the moving party clearly establishes each of the four (4) prerequisites.  

In 1996, Florida adopted Fla. Stat. section 542.335, which contains the substantive law to which courts look in "analyzing, evaluating and enforcing restrictive covenants contained in employment contracts."  The statute prescribes the elements necessary to state a prima facie claim to enforce a restrictive covenant and issues instructions to the courts when ruling on such claims.  Section 542.335(1)(g)1 governs the enforceability of a restrictive covenant and mandates:

(g) In determining the enforceability of a restrictive covenant, a court:  

1.  Shall not consider any individualized economic or other hardship that might be caused to the person against whom enforcement is sought.

Fla . Stat. sec. 542.335(1)(g)1.  Once a restrictive covenant is deemed enforceable, the statute prescribes certain rules for enforcement:

(j) A court shall enforce a restrictive covenant by any appropriate and effective remedy, including, but not limited to, temporary and permanent injunctions.  The violation of an enforceable restrictive covenant creates a presumption of irreparable injury to the person seeking enforcement of a restrictive covenant.

Fla. Stat. sec. 542.335(1)(j).

The 11th Circuit noted that Rule 65 is applied to the exclusion of any contrary state procedure.  See Ferrrero v. Associated Materials, Inc., 923 F.2d 1441, 1448 (11th Cir. 1991).  MacLachlan argued that Rule 65 should have been applied to the exclusion of Fla. Stat. sections 542.335(1)(g)1 and (j) while TRADS argued that the district court appropriately applied those subsections in determining whether Rule 65 had been satisfied.  

Under the Erie doctrine, the Court noted, "[t]he first step of the analysis is to determine whether [Rule 65 and section 542.335(1)(j) are in] conflict .... If no conflict exists, then the analysis need proceed no further, for the court can apply state and federal law harmoniously to the issue at hand."  The 11th Circuit ultimately concluded that, because Rule 65 and section 542.335(1)(j) apply harmoniously to TRADS' motion for preliminary injunction, the district court did not err in their application.

Florida's Excluded Use of Potential Hardship in Preliminary Injunction Analysis

MacLachlan also appealed the district court's application of section 542.335(1)(g)1 to the preliminary injunction analysis, which precluded any consideration of the potential hardship to MacLachlan when the court balanced the harms under Rule 65.
Section 542.335(1)(g) governs the enforceability of restrictive covenants, not the enforcement of an already enforceable restrictive covenant.  After all, the statute begins:  "In determining the enforceability of a restrictive covenant, a court ...."  It then goes on to list four (4) considerations that a court "shall" or "shall not" contemplate when determining whether a restrictive covenant is enforceable.  One of these considerations a court "shall not" consider is "any individualized economic or other hardship that might be caused to the person against whom enforcement is sought."  section 542.335(1)(g)1.

The 11th Circuit held that, "[h]ere, the district court erred when it applied section 542.335(1)(g) in determining whether a preliminary injunction was an appropriate and effective remedy for the enforceable restrictive covenant.  "Having erroneously applied section 542.335(1)(g), the district court failed to consider any harm that MacLachlan would suffer if the injunction issued.  Therefore, we must vacate the district court's order granting the injunction and remand this matter for the district court to balance the harms in accordance with Rule 65.

The case is Transunion Risk and Alternative Data Solutions, Inc., vs. Daniel MacLachlan, No. 15-10985.

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