Opinion
Civ. No. 03-6198 (RHK/AJB)
January 15, 2004
Christopher R. Morris, Laura J. McKnight, and David A. Turner, Bassford Remele, P.A., Minneapolis, Minnesota, for Plaintiff
Gregg M. Corwin and Amanda R. Cefalu, Gregg M. Corwin Associates Law Office, P.C., St. Louis Park, Minnesota, for Defendant
MEMORANDUM OPINION AND ORDER
Introduction
Metro Networks Communications, Limited Partnership ("Metro") provides traffic reports to radio stations in exchange for advertising time, and then sells that advertising time to sponsors. John Zavodnick sold advertising for Metro. Prior to starting his job at Metro, Zavodnick signed a noncompete covenant and a confidentiality covenant. In October 2003, Zavodnick left Metro for Clear Channel Communications, Inc. ("Clear Channel"). Clear Channel, which owns numerous radio stations, was a customer for Metro's traffic reports. Recently, however, Clear Channel decided to provide its own traffic reports to its radio stations and sell the advertising time for those reports to sponsors. Because Zavodnick was hired to sell Clear Channel's advertising time to sponsors, Metro sought enforcement of his noncompete and confidentiality covenants. On December 12, 2003, this Court granted Metro's motion for a preliminary injunction. Before the Court are Zavodnick's motions to stay the injunction and to increase the bond from $25,000 to $60,000. Oral argument was heard on these motions on January 14, 2004. For the reasons set forth below, the Court will deny both motions.
Background
Factually, little has changed since the December 12, 2003 Order. Therefore, much of the background information is taken from that Order.
I. The Parties
Metro is a Delaware limited partnership with its principal place of business in Texas. It was previously called Metro Traffic Control, Inc. Metro provides traffic reports to radio stations in exchange for advertising time. Metro then sells that advertising time to sponsors and broadcasts the sponsors' advertisements with the traffic reports. One of Metro's largest customers for their traffic reports was Clear Channel, which owns several radio stations in the Minneapolis-St. Paul, Minnesota, metropolitan area.
Zavodnick, a Minnesota resident and citizen, was Metro's Director of Marketing from March 1995 until October 2003. In that position, he was responsible for selling Metro's advertising time and was paid a commission for the advertising contracts he brought in. Zavodnick solicited and sold advertising in the Minneapolis-St. Paul market and was Metro's top seller in its Minneapolis office. Approximately 20% of his business came from the Minneapolis-St. Paul market.
In October 2003, Zavodnick left Metro to become Clear Channel's Regional Sales Manager. Clear Channel cancelled its traffic report contract with Metro effective January 1, 2004 and no longer uses outside businesses for its radio stations' traffic reports. Instead, Clear Channel will provide its own traffic reports and obtain advertising for its radio stations. At Clear Channel, Zavodnick will sell advertising for its traffic reports in the Minneapolis-St. Paul metropolitan area.
II. The Metro-Zavodnick Agreement
In its business, Metro possesses confidential information, including its sponsor lists, identities of current and prospective clients, sales techniques, training manuals, sales case studies, sales forms, market rates, and profit margins. Metro considers this information to be confidential, proprietary, and protectable trade secrets and has taken steps to protect this information, including requiring its employees to execute noncompete and confidentiality covenants.
Prior to his employment at Metro, Zavodnick signed a document entitled "Terms and Conditions of Employment" ("the Agreement"), which contained a noncompete covenant and a covenant to protect trade secrets and confidential information. His noncompete covenant provides that he will not engage in five enumerated "Restricted Activities" in the Minneapolis-St. Paul metropolitan area for one year after he leaves Metro. These Restricted Activities include managing and operating traffic report gathering and broadcast services, soliciting sponsors and affiliates, and broadcasting traffic reports. (Ditmer Aff. Ex. A (Agreement § 5.3).) His covenant to protect trade secrets and confidential information provides that for two years after leaving Metro he will not disclose or use any of Metro's trade secrets or confidential information, including information concerning Metro's operations or its agreements with sponsors or affiliates. (Id.(Agreement § VI).) In exchange for his covenants, Metro agreed to disclose confidential and proprietary information to him. (Id. (Agreement § 5.2).)
III. Metro's Lawsuit and the Preliminary Injunction
After Zavodnick left for Clear Channel, Metro initiated this lawsuit to enforce the noncompete and confidentiality covenants. On December 12, 2003, the Court granted Metro's motion for a preliminary injunction. The Court applied Minnesota law after finding that Zavodnick waived the Agreement's Texas law provision (see Ditmer Aff. Ex. A (Agreement § 10.5) and determined that Metro had met its burden for a preliminary injunction under Dataphase Sys., Inc. v. CL Sys., Inc., 640 F.2d 109, 114 (8th Cir. 1981). Consequently, the Court ordered Zavodnick to refrain from (1) managing or operating traffic report gathering and broadcasting services, (2) soliciting Metro's sponsors and dealing with accounts with respect thereto, (3) broadcasting traffic reports, and (4) using or disclosing Metro's confidential information, including information concerning Metro's operations or associations with its sponsors or affiliates. These prohibitions are in effect in the Minneapolis-St. Paul metropolitan area for a period of one year after he left Metro.
IV. Zavodnick's Employment at Clear Channel
When hired by Clear Channel, Zavodnick was to receive a base salary of $100,000 plus a 3% commission on an expected $2 million in advertising billings. Since the issuance of the preliminary injunction, however, his job has been reorganized and he will not receive the 3% commission. His annual salary remains at $100,000.
Standard of Review
Rule 62(c) provides that
[w]hen an appeal is taken from an interlocutory or final judgment granting, dissolving, or denying an injunction, the court in its discretion may suspend, modify, restore, or grant an injunction during the pendency of the appeal upon such terms as to bond or otherwise as it considers proper for the security of the rights of the adverse party.
Fed.R.Civ.P. 62(c). "The party seeking a stay pending appeal must show (1) that it is likely to succeed on the merits; (2) that it will suffer irreparable injury unless the stay is granted; (3) that no substantial harm will come to other interested parties; and (4) that the stay will do no harm to the public interest." James River Flood Control Ass'n v. Watt. 680 F.2d 543, 544 (8th Cir. 1982) (citation omitted); see Arkansas Peace Ctr. v. Arkansas Dept. of Pollution Control. 992 F.2d 145, 147 (8th Cir. 1993). Thus, the factors considered in evaluating Zavodnick's motion are virtually identical to those considered in assessing the initial motion for a preliminary injunction. United Healthcare Ins. Co. v. AdvancePCS, Civ. No. 01-2320 (RHK/JMM), 2002 WL 519720, at *1 (D. Minn. Mar. 22, 2002).
Analysis
Zavodnick has moved to stay the preliminary injunction. Therefore, it is his burden to show all the elements required to stay the injunction. He has not met his burden.
I. Likelihood of Success
In the context of a stay motion, "the likelihood of success on the merits factor focuses `not necessarily on whether the applicant has shown a likelihood that its appeal will be successful, although this is relevant, but whether the order involves the determination of substantial and novel legal questions." United Healthcare. 2002 WL 519720, at *2 (citing Ben Oehrleins Sons Daughter. Inc. v. Hennepin County. 927 F. Supp. 348, 350 (D. Minn. 1996)). In the December 12, 2003 Order, this Court applied Minnesota law after finding that Zavodnick had waived the Agreement's Texas law provision and determined that Metro was likely to succeed in showing that Zavodnick breached his noncompete and confidentiality covenants. The Court also found that had Texas law been applied, the result would be the same. On this motion, Zavodnick again argues that Texas law applies and that the noncompete covenant is unenforceable. Neither the waiver issue nor the application of Texas law, however, involves "substantial and novel legal questions."
A. Waiver
The Court previously found that Zavodnick waived the Agreement's Texas law provision. "A waiver is a voluntary and intentional relinquishment or abandonment of a known right." Montgomery Ward Co., Inc. v. County of Hennepin. 450 N.W.2d 299, 304 (Minn. 1990) (citation omitted). When the facts are not in dispute, the question of waiver "may be decided as a matter of law." Id.
The Court again finds that Zavodnick voluntarily and intentionally waived the Texas law provision. The following events demonstrate his waiver. First, at the November 21, 2003 hearing the Court cited the Texas law provision and expressed its concern over which state's law applied to this case. The Court noted that the law on noncompete covenants can vary from state to state and requested further briefing on the issue. Second, despite the Court's request for further briefing, Zavodnick's November 26, 2003 memorandum did not address the Texas law provision and cited no Texas law in opposition to the preliminary injunction motion. Third, at the December 5, 2003 hearing, the Court announced its stated assumption that Minnesota law, not Texas, law applied. Zavodnick raised no objection. Then, several days later, Zavodnick's counsel submitted a letter arguing that Texas law applied. The Court rejected his argument, finding that he had waived the Texas law provision. The Court stands by this decision.
Zavodnick's counsel responds with two counterarguments, neither of which is persuasive. First, he states that he did not investigate Texas law on noncompete covenants because he relied on Metro's representation that there were no differences between it and Minnesota law. Although Zavodnick's counsel was brought into this case the week before Thanksgiving, there was certainly sufficient time between the November 21st conference with counsel (where the issue of Texas law was clearly identified) and the December 5th hearing on the preliminary injunction to research the issue. It was not until four days after oral argument that the Court was informed of Zavodnick's position that Texas law should be applied.
Metro's representation was not as emphatic as Zavodnick's counsel would have the Court believe. (PL's Mem. in Supp. at 8 n. 2. ("Because the breach-of-contract and other common-law claims asserted by Metro Networks do not appear to be affected by any difference in the laws of Texas and Minnesota, this Memorandum cites primarily to decisions of the Eighth Circuit, this Court, and the Minnesota Supreme Court.") (emphasis added).)
Second, he states that although Metro's counsel was questioned during the December 5, 2003 hearing about which state's law applied, he was not similarly questioned. This implies that he did not object to the Court's stated assumption that Minnesota law applied because he was not asked about it. The Court does not accept that he would sit back quietly and allow Minnesota law to be applied-unless he agreed with the Court's statement and intended to waive the Texas law provision. Accordingly, given this voluntary and intentional conduct, the Court finds that Zavodnick waived the Texas law provision.
Zavodnick also contends that, under Minnesota law, assignment of his noncompete covenant from Metro Traffic to Metro Networks required his consent. The Court has previously rejected this argument, and Zavodnick's recent citation to Inter-Tel Inc. v. CA Communications. Inc., Civ. No. 02-1864 (PAM/RLE) (D. Minn. Dec. 26, 2003) does not alter this Court's conclusion. That case involved the sale of part of one business to another, whereas the present case involves a corporate name change. (See Hillman Aff. ¶ 2.) (Zavodnick has not placed anything before the Court rebutting Metro's affidavit that the change from Metro Traffic to Metro Networks was in name only.) As such, this Court concludes, as it did before, that Zavodnick's consent was not required.See Guidant Sales Corp. v. George, Civ. No. 01-1638 (MJD/JGL), 2001 WL 1491317, at *6 (D. Minn. Nov. 19, 2001);BFI-Portable Servs., Inc. v. Kemple, No. C5-89-1172, 1989 WL 138978, at *2 (Minn.Ct.App. Nov. 21, 1989) (unpublished).
B. Texas Law
Even if Texas law were applied, the noncompete covenant would be enforceable. In Texas, the enforceability of noncompete covenants is governed by statute. It provides: § 15.50. Criteria for Enforceability of Covenants Not to Compete
[A] covenant not to compete is enforceable if it is ancillary to or part of an otherwise enforceable agreement at the time the agreement is made to the extent that it contains limitations as to time, geographical area, and scope of activity to be restrained that are reasonable and do not impose a greater restraint than is necessary to protect the goodwill or other business interest of the promisee.
Tex. Bus. Com. Code Ann. § 15.50. Thus, "[s]ection 15.50 requires . . . two initial inquiries as to formation of the covenant not to compete: (1) is there an otherwise enforceable agreement, to which (2) the covenant not to compete is ancillary to or a part of at the time the agreement is made." Light v. Centel Cellular Co. of Texas. 883 S.W.2d 642, 644 (Tex. 1994). The Court must then examine whether the limitations on competition imposed by the noncompete covenant are reasonable and no more restrictive than necessary. Am. Express Fin. Advisors. Inc. v. Scott. 955 F. Supp. 688, 691 (N.D. Tex. 1996). The enforceability of the covenant not to compete is a question of law.Light. 883 S.W.2d at 644.
1. Otherwise Enforceable Agreement
The first inquiry under Light is whether there was an otherwise enforceable agreement. "This `otherwise enforceable agreement' cannot be an at-will employment contract, because at-will employment contracts are illusory." Ireland v. Franklin. 950 S.W.2d 155, 158 (Tex.Ct.App. 1997) (citing Travel Masters. Inc. v. Star Tours. Inc., 827 S.W.2d 830, 832-33 (Tex. 1991)). "An at-will employment contract is illusory because neither party is bound to the promise of continued employment." Id.(citing Light. 883 S.W.2d at 645). "The covenant may be enforceable, though, if the contract contains another promise that is not dependent upon the illusory promise of continued employment." Id.(citing Light. 883 S.W.2d at 644-45). The Court need only find one non-illusory promise to establish consideration for the agreement. Curtis v. Ziff Energy Group. Ltd., 12 S.W.3d 114, 118 (Tex.Ct.App. 1999): see Light. 883 S.W.2d at 645.
In his at-will employment agreement (see Ditmer Aff. Ex. A (Agreement § 10.7)), Zavodnick promised that he would not engage in five enumerated Restricted Activities in the Minneapolis-St. Paul metropolitan area for one year after leaving Metro (id. (Agreement §§ 5.1-5.4)) and promised that he would not use or disclose any of Metro's confidential information or trade secrets for two years (id. (Agreement § VI)). To form an otherwise enforceable agreement, however, Metro must have given some corresponding non-illusory promise to Zavodnick. Metro made such a promise when it agreed to disclose confidential and proprietary information to him. The Agreement states:
In consideration of draw and commission, the training and knowledge that Employee has received and/or will receive from the Company, the employment of Employee as provided in this agreement, and the disclosure by the Company to Employee the knowledge and information described above, Employee covenants and agrees that he/she shall not engage in or make any preparations to engage in any Restricted Activity (as defined in Section 5.3). . . .
(Id. (Agreement § 5.2) (emphasis added).) The disclosure of "knowledge and information described above" clearly references Metro's confidential and proprietary information. Therefore, there was an "otherwise enforceable agreement": Zavodnick's promises not to engage in Restricted Activities and not to disclose confidential information was given in exchange for Metro's non-illusory promise to disclose confidential and proprietary information.See Curtis, 12 S.W.3d at 118; Ireland. 950 S.W.2d at 158; Scott. 955 F. Supp. at 692.
Zavodnick argues that Metro's promise to disclose confidential information was illusory; that is, Metro was not obligated to disclose the information because it could have terminated the at-will employment relationship at any time. He cites Tom James of Dallas. Inc. v. Cobb, 109 S.W.3d 877, 887 (Tex.Ct.App. 2003) and Anderson Chemical Co., Inc. v. Green. 66 S.W.3d 434, 438 (Tex.Ct.App. 2001) in support. In Tom James. the employee entered into a confidentiality agreement in exchange for confidential information that he "ha[d] received" or "will become familiar with and acquire knowledge of confidential information." 109 S.W.2d at 887 (internal quotations omitted). The court found that the confidentiality agreement was based on past consideration ("ha[d] received") and the employer was not obligated to disclose confidential information ("will become familiar with and acquire knowledge of confidential information"). Id. In Anderson Chemical, the employment contract also contained no promise by the employer to furnish the employee with confidential information. 66 S.W.3d at 438. Consequently, even if the employer later disclosed confidential information, the court found no otherwise enforceable agreement existed because at the time the agreement was made the employer was not obligated to disclose any confidential information. Id.
These cases are factually distinguishable from the present matter. In both, the court found there was no non-illusory promise by the employer to disclose confidential information to the employee at the time the agreement was made. In contrast, the Zavodnick-Metro Agreement obligated Metro to disclose confidential and proprietary information to Zavodnick at the time the Agreement was made. (Ditmer Aff. Ex. A (Agreement § 5.2).) Therefore, Metro's promise was not illusory.
2. Ancillary To or Part of the Otherwise Enforceable Agreement
The second consideration under Light is whether the noncompete covenant was ancillary to or part of the otherwise enforceable agreement. To meet this requirement: "(1) the consideration given by the employer in the otherwise enforceable agreement must give rise to the employer's interest in restraining the employee from competing; and (2) the covenant must be designed to enforce the employee's consideration or return promise in the otherwise enforceable agreement." Light. 883 S.W.2d at 647. The Light court provided an example of what would meet this test: "[I]f an employer gives an employee confidential and proprietary information . . . in exchange for the employee's promise not to disclose them, and the parties enter into a covenant not to compete, the covenant is ancillary to an otherwise enforceable agreement." Id. at 647 n. 14.
The Zavodnick-Metro relationship fits Light's example. Metro promised to disclose confidential and proprietary information to Zavodnick (see Ditmer Aff. Ex. A (Agreement § 5.2)) in exchange for Zavodnick's promise not to disclose this information (id. (Agreement §§ 5.3 VI)), and they entered into a covenant not to compete (id. (Agreement §§ 5.1-5.5)). Therefore, the noncompete covenant is ancillary to an otherwise enforceable agreement.See Curtis. 12 S.W.3d at 118; Ireland. 950 S.W.2d at 158; Scott. 955 F. Supp. at 692.
3. Reasonable Restrictions
Finally, "the Court must examine whether the non-compete covenant contains limitations as to time, geographical area, and scope of activity to be restrained that are reasonable and do not impose a greater restraint than is necessary to protect [Metro's] goodwill and other business interests pursuant to" § 15.50. Am. Express. 955 F. Supp. At 692. The noncompete covenant prohibits Zavodnick from doing several "Restricted Activities" in the Minneapolis-St. Paul metropolitan area for one year. "Generally, a reasonable area for purposes of a covenant not to compete is considered to be the territory in which the employee worked while in the employment of his employer."Curtis. 12 S.W.2d at 119 (citation omitted). Based on Zavodnick's responsibilities at Metro in the Minneapolis-St. Paul metropolitan area, and for the reasons stated in the previous Order, the time, geographical, and scope of activity restrictions were reasonable. See id.
While Zavodnick does not contest the reasonableness of the covenant's temporal and geographical restrictions, he contends that its scope is over-broad. He argues that the noncompete covenant "essentially prohibits [him] from engaging in any employment with any company that provides traffic reports. . . ." (Def.'s Mem. in Supp. of Stay at 12.) The Court rejected this argument in its December 5, 2003 Order and does so again for the reasons expressed previously. In sum, the Court finds that the noncompete covenant is likely enforceable under Texas law. Accordingly, even if Texas law had been applied, Zavodnick would not meet his burden to show a likelihood of success.
In addition, Zavodnick's present employment, with a $100,000 annual salary, belies his assertion that he is prohibited from employment by any company that provides traffic reports.
The December 12, 2003 Order also granted a preliminary injunction enforcing the Agreement's confidentiality covenant. Zavodnick does not challenge the enforceability of this provision.
II. Irreparable Injury
Zavodnick must also show that he will suffer irreparable injury unless the stay is granted. "The basis of injunctive relief in federal courts has always been irreparable harm and the inadequacy of legal remedies."Watkins Inc. v. Lewis. 346 F.3d 841, 844 (8th Cir. 2003) (citation and internal quotations omitted). "Failure to show irreparable harm is an independently sufficient ground upon which to deny a preliminary injunction." Id. (citations omitted). "When there is an adequate remedy at law, a preliminary injunction is not appropriate."Id.(citation omitted).
Zavodnick has not shown irreparable injury. Rather, he has shown only that because of the injunction he has lost the opportunity to earn a 3% commission on advertising billings and, as a consequence, his salary will decrease to $100,000 from an expected total compensation of $160,000 ($60,000 of which would be commissions).
III. No Substantial Harm To Metro
Zavodnick has also failed to show that no substantial harm will come to Metro if the injunction is stayed. In the December 12, 2003 Order, the Court found that Metro had sustained its burden to show irreparable harm. Not only could irreparable harm be inferred from the breach of the noncompete and confidentiality covenants, Metro showed that it would likely lose valuable business relationships in the traffic report advertising market if the injunction was not imposed. Upon the present motion to stay the injunction, Zavodnick has not shown otherwise.
Zavodnick argues that the inference of irreparable harm "may be rebutted by evidence that the employee `has no hold on the good will of the business or its clientele.'" (Def.'s Mem. in Supp. of Stay at 10 (citing Thermorama. Inc. v. Buckwold. 125 N.W.2d 844, 845 (Minn. 1964) and Webb Publ'g Co. v. Foasshage. 426 N.W.2d 445, 448 (Minn.Ct.App. 1988)).) While he correctly summarizes the law, the Court did not rely solely on the inference of irreparable harm and, in any event, he has failed to present competent rebuttal evidence.
IV. Public Interest
Finally, Zavodnick fails to show that staying the injunction will do no harm to the public interest. The public interest is served by upholding valid restrictive covenants. See Millard v. Elec. Cable Specialists. 790 F. Supp. 857, 863 (D. Minn. 1982). Because the noncompete and confidentiality covenants are likely enforceable under either Texas or Minnesota law, staying the injunction will harm the public interest.
V. Bond Amount
Zavodnick has also moved to increase the bond amount. In the previous Order, the Court set Metro's bond, pursuant to Fed.R.Civ.P. 65(c), at $25,000. Because of the injunction, he claims that he has lost the opportunity to earn a 3% commission on advertising billings and, as a consequence, his compensation will be capped at $100,000 rather than the $160,000 he hoped for with commissions of $60,000. He therefore requests a $60,000 bond.
The Court will deny his motion. Rule 65(c) provides:
No restraining order or preliminary injunction shall issue except upon the giving of security by the applicant, in such sum as the court deems proper, for the payment of such costs and damages as may be incurred or suffered by any party who is found to have been wrongfully enjoined or restrained.
Fed.R.Civ.P. 65(c). At the December 5, 2003 oral argument, Metro made no bond proposal. From the plain language of Rule 65(c), however, issuing an injunction without a bond was not possible. In arriving at the $25,000 bond amount, the Court considered that the injunction would last for approximately ten months (mid-December 2003 to October 2004). It also considered that Zavodnick's demonstrated abilities in areas outside the scope of the noncompete and confidentiality covenants would not adversely impair his employment opportunities. Therefore, the Court determined that the $25,000 bond imposed upon Metro fairly protected him should it be found that he was wrongfully enjoined. See Glenwood Bridge. Inc. v. City of Minneapolis. 940 F.2d 367, 373 (8th Cir. 1991). In contrast, the $60,000 figure Zavodnick proposes is inappropriate for at least two reasons. First, this amount is based on a loss of $5,000 in commissions per month for twelve months. But the injunction will only last approximately ten months. Second, there are no assurances that he would have, in fact, earned those commissions. Accordingly, the Court finds the current bond sufficient.