Opinion
No. CV-07-5002153
June 21, 2007
MEMORANDUM OF DECISION ON APPLICATION FOR TEMPORARY INJUNCTION AND ORDER FOR TEMPORARY INJUNCTION
The plaintiff, CUNA Mutual Life Insurance Company ("CUNA Mutual") has applied for a temporary injunction against Matthew P. Butler based on a covenant in an employment agreement between CUNA Mutual and Mr. Butler. After hearing the court finds the facts as follows.
Matthew Butler was hired by CUNA Mutual in August 2002, as the company's Executive Benefits Specialist for a territory consisting of Maine, Vermont, Connecticut, Rhode Island, New Hampshire, Massachusetts and certain New York accounts. CUNA Mutual sells a variety of insurance-related products to credit unions and their employees nationwide. Credit unions account for approximately 98 percent of CUNA Mutual's business. One of the product lines sold by CUNA Mutual to credit unions was an Executive Benefits program, which included a variety of products such as life insurance, annuities and mutual funds used to defer executive compensation to provide for retirement benefits. The actual purchasers of Executive Benefits products such as those marketed by Mr. Butler were the credit unions, and not the individual officers of the credit unions.
When he was hired by CUNA Mutual, Matthew Butler executed an Executive Benefits Specialists Full-Time Contract ("EBS Contract"). Paragraph Q of that Contract provided:
for a period of two years following the termination of this Contract . . ., Specialist shall not for any reason, directly of indirectly, by any means or device whatsoever, for himself/herself or on behalf of or in conjunction with any person, partnership, corporation or association, market to, sell to, or solicit for the purpose of selling to or marketing to any Executive Benefit Program client which Specialist called upon or served while under this Contract, any insurance product, annuity, mutual funds, employee benefit plan, deferred compensation arrangement, securities brokerage product or service or any other financial product or service that is similar to any product or service marketed through the Executive benefit Program.
The EBS Contract defined "Executive Benefit Program client" to include:
(i) those persons and organizations who have . . . purchased a product or service from, or established a securities brokerage account with, Company or CUNA Mutual, which is the same or similar to any product, service or account marketed or made available through the Company or the Executive Benefits Program (whether sold or established by Specialist or by another specialist or representative); and
(ii) those persons and organizations who, within the 90-day period immediately preceding the termination for this Contract had contact with Specialist having as its purpose (or one of its purposes) the discussion of products and/or services (including but not limited to securities brokerage services) offered through the Executive Benefits Program.
The original EBS Contract contained a 180-day "look back" period, but that was subsequently reduced to 90 days.
The EBS Contract further provided:
Specialist acknowledges and agrees that any violation by Specialist of any provision of this Paragraph Q will cause irreparable ham to Company, that the payment of money alone would not be an adequate remedy for the harm done, and that the harm resulting from a violation is not readily measured in monetary terms. Accordingly, in addition to all of Company's other rights and remedies, Company shall be entitled to injunctive relief to stop any such violation or threatened violation by Specialist.
Specialist has carefully considered the nature and extent of the restrictions placed upon Specialist and the rights and remedies the Company has under this Contract, and acknowledges and agrees that they are reasonable as to time, territory, and activity; are designed to eliminate unfair competition to Company; do not stifle Specialist's Inherent skill and experience or prohibit Specialist from being gainfully employed in Specialist's chosen profession; are fully required to protect the legitimate interests of Company; and do not confer a benefit upon Company disproportionate to the restrictions imposed upon Specialist.
In addition to the covenant not to compete, Mr. Butler agreed in Paragraph F(8) of the EBS Contract that he would return "all Company books, rate books, records, applications, materials, conditional receipts, customer or client lists, including, but not limited to, credit union and credit union sponsoring organizations' names, employee and mailing list . . . in whatever form (e.g. computer-ready discs, tapes, photocopies, printed, microfilm, handwritten, etc as well as "executive benefit, compensation, insurance, retirement, financial and estate plans, sales tools, guides, manuals, marketing pieces, designs, descriptions, presentation materials . . . and other data or materials used, generated or developed by Specialist under this Contract . . ." Mr. Butler further agreed pursuant to paragraph F(8) of the EBS Contract that he would not "copy, reproduce, summarize, abstract or reformat in any way, any such materials, after termination of his contract."
During his nearly five years of employment with CUNA Mutual Mr. Butler had the exclusive right to sell Executive Benefit Program products in his territory. CUNA Mutual introduced Mr. Butler to various credit union personnel. CUNA Mutual specialized in providing financial services to credit unions and enjoyed significant good will with those credit unions which assisted Mr. Butler in his marketing efforts. Mr. Butler admitted that at least fifty percent of his business was generated from leads and referrals from other CUNA Mutual representatives.
Mr. Butler participated in various CUNA Mutual sponsored training programs throughout his years with CUNA Mutual. Those programs covered topics which ranged from CUNA Mutual products to insurance and financial planning and effective presentations. He took part in management meetings and was made privy to marketing and development plans of CUNA Mutual and was given access to confidential customer information, including historical customer sales. Such information could be used to give someone a competitive advantage.
CUNA Mutual's investment in developing good will and positive customer relationships for Mr. Butler also included the introduction of Mr. Butler to credit union personnel by a CUNA Mutual relationship manager, direct marketing to credit unions, sponsorship of seminars for credit union human resources personnel, boards of directors and CEOs, participation in various credit union societies, support of state credit union leagues and participation in the Credit Union National Association.
During the three-year period of 2004, 2005 and 2006 Mr. Butler earned $1.3 million while he was employed by CUNA Mutual.
Mr. Butler presented evidence concerning alleged unethical conduct by Chris Abely, his manager at CUNA Mutual. Mr. Bulter claimed that Mr. Abely held back a premium check from a client so that he or Mr. Butler could attempt to induce the client to purchase a CUNA Mutual product rather than a product of a competitor. The court finds that there was no credible evidence that such an event occurred. At most, Mr. Abely on two occasions suggested a change in a product being offered to a customer to favor a CUNA Mutual product over that of a competitor.
The alleged "unethical" conduct of Mr. Abely paled in comparison to that of Mr. Butler. Prior to his resignation, Mr. Butler created Elite Capital Management Group and on March 22, 2007 created a website: elitecapgroup.com. In mid-March 2007, Mr. Butler submitted a formal business proposal and application to Cambridge Research Investment, an independent broker-dealer, to obtain a brokerage license through that firm for Mr. Butler doing business as Elite Capital Management.
On the morning of March 28, 2007 Cambridge approved Mr. Butler's application. The last step in Mr. Butler's establishment of his new business completed, he then faxed his resignation to CUNA Mutual. Although he knew he would be resigning, Mr. Butler did not advise anyone in advance of his intended departure. Instead, he attended a confidential strategy session for the Executive Benefits program from March 20 through March 22, 2007 in which the entire Executive Benefit Group strategy was discussed.
Notwithstanding the prohibition against solicitation in the FBS Contract, on March 28, 2007 Mr. Butler sent a following letter via e-mail to 75 of his CUNA Mutual clients which contained the following language:
Dear Client:
We worked extremely hard to establish/maintain the current Executive Benefit program at your credit union. Great care and effort went into the design, approval, and service of the plan and I'm proud of what we've accomplished . . . My business is based on core values that guide every decision I make. These core values are:
. . .
Integrity
Intellectual honesty
It is within this spirit of values and convictions that I have decided to voluntarily resign from CUNA Mutual effective March 28, 2007. Keep in mind, I have not resigned from the Executive Benefits business — a business I have operated within since 1990.
The letter goes on state, "Please see the following document (scroll below), which identifies what lies ahead." The document referred to was a notice which contained Mr. Butler's name, the name and address and phone number of Elite Capital Management Group, LLC and the following language:
Elite Capital Management Group, LLC is an Investment Advisory Firm specializing in Employer Funded Benefit Strategies. We are 100% Independent and 100% Owned by Management.
"Elite" has built strategic business alliances with some of the leading financial firms of our time: Schwab Institutional, Litman Gregory, Standard Poor's, Dorsey Wright, Cambridge Investment Research, Pershing, Russell, and more. Insurance affiliations include top rated companies such as MassMutual, Nationwide, and others.
Mr. Butler admitted that he sent those documents to the clients because he wanted them to respond to the e-mail and to understand how good a company Elite Capital Management was and he "wanted them to feel comfortable contacting" him to do business with him. Mr. Butler has further admitted that any credit union personnel who contacted him after March 28, 2007 did so in response to the e-mail.
The aforementioned e-mail was sent only to CUNA Mutual clients and was clearly intended as a solicitation. After March 28, 2007 Mr. Butler continued to actively solicit CUNA Mutual customers until the date of the temporary injunction hearing.
Discussion of the Law and Ruling
A party is entitled to a temporary injunction if the party establishes that: (i) there is a probability of success on the merits and there is no other adequate remedy at law, and (ii) substantial and irreparable injury is imminent. Connecticut Association of Clinical Laboratories v. Connecticut Blue Cross, 31 Conn.Sup. 110, 119 (1973). Irreparable injury and lack of an adequate remedy at law is considered to be automatically established where a party seeks to enforce a covenant not to compete. Lampson Lumber Co. v. Caporale, 140 Conn. 679, 685, 102 A.2d 875 (1954); Welles v. O'Connell, 23 Conn.Sup. 335, 337 (1962).
In Welles v. O'Connell, 23 Conn.Sup. 335, 337 (1962) the court stated that where a party has engaged in "a breach of a restrictive covenant there can be no question that the plaintiff is entitled to an injunction restraining the breach, irrespective of whether the damage he will suffer is great or small." (quoting Lampson Lumber Co. v. Caporale, 140 Conn. 679, 685, 102 A.2d 875 (1954).
In Gartner Group, Inc. v. Mewes, 7 C.S.C.R. 275 (Jan. 3, 1992, Mottolese, J.) [ 5 Conn.L. Rptr. 411] this court considered the requirement of proving irreparable harm in an action to enjoin the breach of a covenant not to compete in an employment contract:
While ordinarily proof of imminent harm is essential, in this type of case there is no such requirement. It has long been recognized in this state that a restrictive covenant is a valuable business asset which is entitled to protection. Torrington Creamery, Inc. v. Davenport, [ 126 Conn. 516], [ 126 Conn. 515], at 521. Irreparable harm would invariably result from a violation of the defendant's promises. Mattis v. Lally, 138 Conn. 51, 56; Welles v. O'Connell, 23 Conn.Sup. 335, 337. The reason for this is that such a plaintiff's actual injury is not susceptible of determination to its entire extent but is estimable largely by conjecture and prediction. Case v. Zeiff, 10 Conn.Sup. 530, 532.
* * * *
[W]hile the plaintiff could maintain a claim for damages as to each violation that causes injury the difficulty of proof and the inefficiency of repetitive suits render inadequate the use of successive remedies at law, and injunctive relief is therefore warranted to protect the plaintiff from harm which the restrictive covenant was intended to prevent.
A party challenging the enforceability of a restrictive covenant has the burden of proving that the covenant is not enforceable. Mattis v. Lally, 138 Conn. 51, 55, 82 A.2d 155 (1951); Scott v. General Iron Welding Co., 171 Conn. 132, 137, 368 A.2d 111 (1976).
The Connecticut Supreme Court enumerated five criteria by which to determine the reasonableness of a restrictive covenant in an employment contract: (1) the length of time the restriction is to be in effect; (2) the geographic area covered by the restriction; (3) the degree of protection afforded to the party in whose favor the covenant is made; (4) the restrictions on the employee's ability to pursue his occupation; and (5) the extent of interference with the public's interests. Robert S. Weiss Assoc., Inc. v. Wiederlight, 208 Conn. 525, 529, n. 2, 546 A.2d 216 (1988); Scott v. General Iron Welding Co., supra.
The restriction in CUNA Mutual's EBS Contract is limited to two years. Courts in this state have upheld temporal restrictions of this length, or longer. See, e.g Robert S. Weiss Assoc., Inc. v. Wiederlight, supra (two-year restriction upheld); Scott v. General Iron, supra (five-year restriction upheld); May v. Young, 125 Conn. 1, 2 A.2d 385 (1938) (two-year restriction upheld); New Haven Tobacco Co. v. Perrelli, 18 Conn.App. 531, 559 A.2d 715 (1989) (two-year restriction upheld).
In this case the geographic area is large, but the potential customers within the area are limited to only those credit unions with whom Mr. Butler dealt while at CUNA Mutual. In New Haven Tobacco Co. v. Perrelli, supra, the Appellate Court held that a restriction limited to the plaintiff's customers is nor over broad or unreasonable.
The covenant is not an anticompetitive covenant that restricts an employee from engaging in the same business as the employer in a given geographical area and prohibits the employee from doing business with all consumers of the service located in that area. Instead, the covenant at issue imposes an antisales restriction that prevents the employee from transacting business with only a specific group of consumers, namely, the customers of the former employer. An antisales restriction as opposed to an anticompetitive restriction, is by its nature limited to definite geographic area.
In this case the restriction is limited to "any Executive Benefit Program client which Specialist called upon or served while under this Contract," and further limited to products or services that are "similar to any product or service marketed through the Executive Benefit Program." Mr. Butler testified that his sales to CUNA Mutual clients consisted of 90% variable annuities, 5% life insurance and 5% mutual funds. The restriction does not prevent him from marketing those types of products to anyone except those with whom he dealt while he was at CUNA Mutual. He can sell executive benefit type products to any corporate officers of any type of corporation, partners in partnerships, or even individuals, a very large group of potential customers. He just can't sell to clients with whom he dealt while at CUNA Mutual. The restriction, therefore, is quite reasonable. It protects CUNA Mutual's substantial investment in building goodwill with its clients while permitting Mr. Butler to market to a very large potential group of customers.
The restriction does not unreasonably restrain Mr. Butler's ability to pursue his occupation. Mr. Butler can still market executive benefit products to a multitude of potential customers including state and federal banks, corporations and non-profit organizations and other businesses. His potential market is much larger than the niche credit union market covered by the restrictions. He can also sell to the majority of credit unions within his former territory. There are approximately 750 credit unions in his former territory. The plaintiff concentrated his efforts on only 150 of them.
There was no evidence presented that the defendant cannot earn a livelihood while honoring the restrictive covenant. The number of potential purchasers of variable annuities, Mr. Butler's main product, is vastly larger than the number of CUNA Mutual clients to whom Mr. Butler is prohibited from selling.
Enforcing the restrictive covenant will not adversely affect the public interest. The defendant has relied heavily upon NASD (National Association of Securities Dealers) Rule 2110 which provides that it is "inconsistent with just and equitable principles of trade for a member or a person associated with a member to interfere with a customer's request to transfer his or her account in connection with the change of the customer's registered representative . . . The defendant's argument that the foregoing language renders the restrictive covenant at issue unenforceable has no legal basis. In its NASD Notice to Member 01-36-Request for Comments in connection with Proposed Interpretive Material IM-2110-7, the NASD confirmed the enforceability of non-competition agreements:
In evaluating the proposal, members and other interested persons should bear in mind that the proposed material would not restrict the ability of member firms to use employment agreements to prevent former representatives from soliciting customers. Similarly, the proposal would not prevent a firm from enforcing agreements with former representatives. For example, a member could seek an injunction against a former registered representative and/or his or her new firm to prohibit solicitation of the member's customers if the registered representative had signed a contract agreeing not to solicit those customers. The proposed Interpretive Material is limited to restricting a member from interfering with a customer's right to transfer his or her account once the customer has decided to move the account.
NASD arbitration panels have granted or approved injunctions against the solicitation of customers. See, e.g., Himel and Maxtor Financial v. Crecitex, Inc., Dispute Resolution Case No. 03-02196 (Award March 2003); Wachovia Securities, LLC v. Duff, NASD, Dispute Resolution Case No. 03-04209 (Award February 2005); Pruco Securities and Prudential Insurance Company et al v. Ariette, Dispute Resolution Case No. 05-04990 (Award November 2006).
In the Pruco award, the NASD arbitration panel granted an injunction that was as comprehensive as the one sought by CUNA Mutual:
Pursuant to Rule 10335, the Prudential Insurance Company of America, Pruco Securities, LLC and prudential Insurance Brokerage, Incorporated are granted injunctive relief until June 27, 2007 enjoining Respondent and all those acting in concert with him from . . .
c. Soliciting any business from, or initiating any contact with, any client whom Respondent served or whose name became known to him during the course of his association with Prudential, or causing, assisting or inducing any client or contract holder of Prudential, PRUPAC-NJ and/or any affiliate of Prudential of PRUPAC-NJ, or any person whose name became know to Respondent during the course of his association with Prudential, to discontinue, terminate or withdraw values from any policy, annuity, contract, service or product of any kind of Prudential, PRUPAC-NJ and/or any affiliate of Prudential or PRUPAC-NJ, or any policy sold by Prudential and/or any affiliate of Prudential of PRUPAC-NJ, or to purchase services or products that compete, directly or indirectly, with those sold or serviced by Prudential and/or any affiliate of Prudential.
The cases cited by the defendant, Morgan Stanley DW, Inc. v. Clayson, 19 Mass. L. Rep. 201 (March 14, 2005), and Morgan Stanley DW, Inc. v. Frisby, 163 F.Sup.2d 1371 (N.D.Ga. 2001), do not support his argument that NASD Rule 2110 invalidates a non-compete agreement. Clayson involved a contempt proceeding in connection with the violation of a previously issued preliminary injunction to enforce a non-compete agreement. The Court in Frisby found that the agreement at issue was unenforceable under Georgia law for various reasons, including a finding that the challenged covenant was overbroad. NASD 2110 was not a factor in the decision.
Under the defendant's interpretation of NASD 2110, a court cannot enforce a restrictive covenant in a contract if doing so would interfere with a customer's ability to deal with the registered representative of his choice. Even if this interpretation was correct, by soliciting CUNA Mutual clients on the very day he left CUNA Mutual, Mr. Butler has made it virtually impossible for any court to determine whether those clients who subsequently purchased from him or his new entity were motivated by their own choice or by Mr. Butler's improper solicitation.
CUNA Mutual has proved that is it is probable that it will succeed on the merits and that the restrictive covenant is reasonable and enforceable. It has proved that irreparable injury and lack of an adequate remedy at law exist as a matter of law by virtue of the restrictive covenant signed by Mr. Butler under Lampson Lumber Co. v. Caporale, 140 Conn. 679, 685, 102 A.2d 875 (1954) and Mattis v. Lally, 138 Conn. 51, 55, 82 A.2d 155 (1951). It has also proved that the defendant has solicited customers of CUNA Mutual in violation of the restrictive covenant. Injunctive relief is warranted to protect CUNA Mutual from the harm which the restrictive covenant was intended to prevent. Based on the foregoing the court ORDERS:
1. The defendant, Matthew P. Butler, is hereby enjoined until further order of this court from directly or indirectly, for himself or on behalf of or in conjunction with any person, partnership, corporation or association, marketing to, selling to, or soliciting for the purpose of selling to or marketing to any Executive Benefit Program client of CUNA Mutual who defendant ever called upon and any person or organization who defendant called upon between December 28, 2006 and March 28, 2007 concerning products or services offered through CUNA Mutual Executive Benefits Program;
2. The defendant, Matthew P. Butler, is further enjoined from using, appropriating, or disclosing at any time or for any purpose any CUNA Mutual trade secrets, confidential, or proprietary information, including any customer lists;
3. If the defendant, Matthew P. Butler, has any CUNA Mutual trade secrets, confidential, or proprietary information, including any customer lists, in his possession, he shall forthwith return such materials, including all copies of such materials in any form, including electronic or computerized form, to CUNA Mutual.