Preliminary Injunctions in Non-competition Cases

posted by Neil Klingshirn  |  Dec 10, 2009 3:39 PM [EST]  |  applies to Ohio

A preliminary injunction is a court order, issued at the beginning of a case, which preserves the relative position of the parties while the case is pending.  It usually remains in effect until replaced by a final trial order.

Normally, an injunction orders one or more parties not to do something. In the non-competition context, an injunction typically orders a party to obey restrictions from the non-competition agreement, as modified by the court.  A preliminary injunction might prohibit the defendant/employee from working for a competing employer, calling on customers or working within a defined area for a specific period of time. Unless dissolved, the preliminary injunction lasts until the trial, at which point it is replaced by the final trial order.

Standard for Granting a Preliminary Injunction

The test for whether a court will grant an injunction is whether:

1. party has a strong likelihood of success on the merits;
2. party would suffer irreparable injury without the injunction;
3. issuance of the injunction would cause substantial harm to others; and
4. the public interest would be served by the issuance of the injunction.

Courts should balance these factors and not give any single factor overriding weight.

Strong Likelihood of Success on the Merits

The first factor to consider is whether the plaintiff demonstrated a strong likelihood of success on the merits. A strong likelihood of success is less than proving the case in full, but more than a mere possibility of success.  Evidence that the employee has already violated the non-competition by using trade secrets or exploiting the former employer's protectible interest may satisfy the court that the plaintiff/employer has a strong likelihood of success on the merits.

In addition to evidence of actual violations, the court will consider viable contract defenses, such as lack of consideration or capacity.  The court will also consider, in states that require it to do so, the reasonableness of the non-compete covenant. If the court concludes that the restrictions sought by the party seeking the injunction are overly broad, the court will redraw those restrictions. At that point the court will decide whether the defendant/employee violated the restrictions, as modified.

Irreparable Injury to Plaintiff Absent the Injunction

Harm  is irreparable if it is not fully compensable by monetary damages. An injury is not fully compensable by monetary damages if the nature of the loss makes the damages difficult or impossible to calculate. Courts routinely find that the likely interference with customer relationships resulting from the breach of a non-compete agreement is the kind of injury for which monetary damages are difficult to calculate. The amount of lost profits resulting from the loss of customer goodwill, for example, is almost impossible to prove.

Substantial Harm to Others

A preliminary injunction that prohibits a party from engaging in trade will reduce competition and the benefits of competition.  However, if the customers are still able to obtain sufficient services from the party seeking the injunction, the harm to competition will probably not be sufficient to deny the injunction. Where an injunction interferes with the availability or delivery of  services affecting the public's health and safety, however, such as a physician’s scarce medical specialty, the court may find that the harm to others is sufficiently substantial to deny the preliminary injunction.

Public Interest Served by the Injunction

An important interest implicated in non-competition cases is the general public interest in the enforcement of voluntarily  assumed contract obligations. Absent a countervailing interest militating against the injunction, the public interest served by the injunction will point towards issuing it.

Lack of Evidentiary Hearing

Rule of Civil Procedure 65, adopted by the federal courts and most state courts, governs the issuance of preliminary injunctions.  Rule 65 states that a preliminary injunction "shall not be issued without notice to the adverse party.”  Fed. R. Civ. P. 56(a)(1). Although this does not explicitly require the court to conduct an evidentiary hearing before issuing an injunction, courts generally require a hearing if necessary to resolve material, factual disputes.

At the hearing, parties seeking a preliminary judgment need not prove their case in full.  However, they must show that they have a strong likelihood of success on the merits.  Similarly, while the findings of fact and conclusions of law made by a court granting the preliminary injunction do not bind it at the trial on the merits, those findings and conclusions may forecast the eventual outcome of the case.

Reverse Preliminary Injunctions

Employers have long sought injunctions to bar employees from violating valid non-competition agreements.  Recently, courts have begun to issue TROs and preliminary injunctions to bar employers from enforcing or threatening to enforce invalid or overly broad non-competition agreements. Preliminary injunctions prohibiting enforcement of a non-competition agreement, which we refer to as "reverse preliminary injunctions," provide an important tactical tool with which an employee can challenge a an invalid or overly broad agreement.

External Links

Links to external sites with additional information about this topic.

• Federal Rule Civil Procedure 65;
• Winter v. NRDC, Inc., 129 S. Ct. 365 (2008) (U.S. Supreme Court review of a preliminary injunction that prevented the U.S. Navy from using sonar that was harmful to marine mammals).
  

posted by Neil Klingshirn  |  Dec 10, 2009 3:39 PM [EST]  |  applies to Ohio