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In a January 21, 2011 opinion and order, a federal district court in Alabama denied a request for a preliminary injunction from clothing manufacturers Fruit of the Loom, Inc. and Russell Brands, LLC, seeking to prohibit a former employee from continuing to work for a competitor. (Fruit of the Loom, Inc. and Russell Brands, LLC v. Lonnie C. Bishop, Middle District of Alabama 2:2010cv01058). Plaintiffs requested the injunction pending their lawsuit to enforce a Kentucky non-compete agreement against the former employee. Although Kentucky courts generally enforce non-compete agreements where the restraint is no greater than reasonably necessary, this case demonstrates the practical difficulties of enforcement. Even in cases where an employer is successful in an action to enforce a non-compete agreement, the benefit of the agreement can be substantially eroded where a former employee is not immediately prohibited from working for the employer’s competitor.

The court in the Fruit of the Loom, Inc. case found that Plaintiffs failed to show a “substantial likelihood of success on the merits” of their claim that the non-compete agreement was enforceable, or that Plaintiffs would suffer “irreparable injury” if the injunction were not granted. Defendant began working for Russell Brands LLC (owned by Fruit of the Loom, Inc.) in July 1993, and voluntarily resigned to take a job with their competitor, Gildan Activewear Charleston, Inc. Defendant held similar positions with Russell Brands and Gildan Activewear as a distribution center manager. Approximately four months before his resignation, Defendant signed a non-compete agreement with Russell Brands. (Under Kentucky law, non-compete agreements signed by current employees are enforceable even absent additional consideration). The agreement stated that for a period of 12 months following the termination of his employment, Defendant would not “work or provide services for a Competitor…in an area, position or capacity in which you gained particular knowledge or experience during your employ with [Russell Brands], involving the sale, design, or manufacture of Competitive Products…”.

The Parties agreed that Defendant was employed “in an area, position or capacity” with his new employer “in which [he] gained particular knowledge or experience” from his former employer. The court doubted, however, that a reasonable fact-finder would view Defendant’s work in the distribution centers as involving the “sale” of products. Based on this interpretation, the court concluded that Plaintiffs did not show a “substantial likelihood of success on the merits” of their case to enforce the non-compete agreement.

The court also held that Plaintiffs did not meet their burden of showing that they would suffer “irreparable injury” if the injunction was not granted. The court noted that Plaintiffs had presented no evidence that their business interests had been harmed during Defendant’s two month tenure with the competing company. Plaintiffs also failed to identify any specific information that Defendant may not have already shared with the competing company, and that would be protected by the injunction. The court also noted that there was no evidence of loss of customers or goodwill as a result of Defendant’s employment with Plaintiffs’ competitor. Finally, the court found that there was no reason why monetary damages would not sufficiently compensate Plaintiffs should they be successful in the litigation to enforce the non-compete agreement.

In addition to the above reasons for denying the injunction, the court found that forcing Defendant to quit his job while the lawsuit was pending would place a significant hardship on him and his family, “especially considering how long civil lawsuits generally take to resolve in the federal court system.” By comparison, the court felt that denying the injunction would not impose a similar hardship on Plaintiffs, or otherwise be adverse to the public interest.
 

Co-authored by Christie O. Tate.

As we reported in this blog on March 1, 2010, last year the proposed “Illinois Covenants Not To Compete Act” was introduced in the Illinois House of Representatives. If passed, it would have substantially altered the law regarding non-competition agreements in Illinois. We have been monitoring the progress of the bill, which was re-introduced on January 12, 2011 as House Bill 0016 in exactly the same form as last year. As before, the bill has not attracted significant public attention or commentary, but we will continue to monitor it. For a detailed analysis of the proposed law, please see our original post on March 1, 2010.

A December 30, 2010 decision of New York’s Appellate Division, Fourth Department, in James V. Aquavella, M.D., P.C. v. Viola, should be noted by legal practitioners dealing with issues of enforceability of non-competition agreements.

The plaintiffs -- an ophthalmologist named James V. Aquavella, M.D. and his professional corporation -- sued Ralph S. Viola, M.D., an employee who in 2002 resigned and opened a competing practice within 300 yards of the plaintiffs’ practice. Plaintiffs claimed breach of a non-compete provision that, they argued, barred Viola from competing with plaintiffs for two years.

In 1996, Viola began working for Urban Oncology Service, P.C. (which eventually sold assets of the ophthalmology practice to plaintiffs) pursuant to a written contract that included a provision prohibiting Viola from competing with that entity’s business for two years after termination of Viola’s employment. In 1998, Viola entered into an oral employment agreement with plaintiffs. According to plaintiffs, this oral agreement incorporated all of the terms and conditions of the 1996 written agreement, including the non-compete clause.

In 2002, Viola resigned and began competing against plaintiffs by opening his own practice just 300 yards away. Plaintiffs sued, and secured a jury verdict determining that Viola had violated the non-compete clause, and that Viola was liable to plaintiffs for damages of nearly $250,000. Viola moved for judgment notwithstanding the verdict, and the trial court (Supreme Court, Monroe County) granted his motion. The Appellate Division, Fourth Department has now affirmed.

The Appellate Division reasoned that the non-compete clause that plaintiffs sought to enforce sets forth a two-year time period, and thus is subject to New York’s statute of frauds. Further, the Court rejected the argument that the 1996 written agreement satisfied the statute of frauds, because there was no writing evidencing the incorporation of the 1996 written agreement into the 1998 oral employment agreement. This lack of writing led the Court to find that plaintiffs’ version of the 1998 oral agreement is unenforceable and void under the statute of frauds.

The lesson for practitioners here is that a non-compete provision extending for one year or more may not be orally extended in a subsequent agreement. Best practice dictates that non-compete clauses of such duration always be evidenced by a writing signed by the employee.