Opinion
No. C0-02-783.
Filed August 27, 2002
Appeal from the District Court, Hennepin County, File No. CT-02-1347.
Joseph W. Hammell, Todd W. Schnell, Michael P. Jurgens, (for respondent)
Scott S. Payzant, David Jordan-Huffman, (for appellant)
Considered and decided by Randall, Presiding Judge, Harten, Judge, and Shumaker, Judge.
This opinion will be unpublished and may not be cited except as provided by Minn. Stat. § 480A.08, subd. 3 (2000).
UNPUBLISHED OPINION
After respondent employer fired appellant, he started a comparable business of his own. Respondent brought an action to enjoin appellant, contending that he violated a noncompetition agreement. The district court granted a temporary injunction. Appellant contends that the district court abused its discretion because respondent did not show irreparable harm or a likelihood of success on the merits. Appellant also argues that the district court abused its discretion in issuing an order that was more restrictive than the noncompetition agreement. Because we find no abuse of discretion, we affirm.
FACTS
Respondent TestQuest is a corporation headquartered in Chanhassen, Minnesota, which designs and produces automated product-testing systems for modern technological applications. Respondent does business throughout the United States and the world.
On 15 March 1999, respondent offered appellant the position of vice president of sales. The initial letter offer stated, "[t]he Employment Agreement references a separate non-disclosure and non-compete agreement." The parties negotiated the agreement through a series of faxes. On 25 March appellant began working for respondent. On 29 March, appellant signed a finalized employment agreement and a noncompetition agreement.
In signing the noncompetition agreement, appellant agreed not to use or disclose any of the company's confidential information. Confidential information was defined to include information relating to respondent's current products and products under development, respondent's methods and practices, information about respondent's business plans, and proprietary information submitted by respondent's customers.
Appellant also agreed that
while I am employed by the Company I will not, without the Company's express written consent, engage in any consulting, employment or business within the United States that is competitive with the Company.
* * *
* * * After termination of employment[, i]f I have had significant contact with customers of the Company while employed by the Company, or if I have been materially involved in the design, development or implementation of the Company's present or planned major products or services, then I agree that the [above] provision * * * shall be expanded to prohibit my competing with the Company within the United States both while I am employed by the Company and for twelve (12) months following the termination of my employment.
As vice president of sales, appellant was responsible for overseeing sales of respondent's products throughout the United States. The parties dispute whether appellant had access to confidential information. Martin Hahn, respondent's CEO, testified that appellant knew all of respondent's business and marketing strategies, was responsible for collecting technological information from clients (shaping product development), and was informed regarding product pricing and product plans. Prabha Gopinath, respondent's chief technology officer, testified that appellant participated in product development meetings and strategy meetings. Gopinath also testified that appellant had input on "technical specifications" because he would relay to respondent what type of products clients needed. Nevertheless, appellant argues that he did not have access to respondent's "core technology" or "source code" and was not involved in product development.
In June 2000, respondent gave appellant notice of employment termination without cause. In lieu of termination, appellant sought and obtained a new position, area vice president, which gave appellant responsibility for sales in certain geographical areas and certain markets. Appellant signed a new employment agreement, which explicitly ratified the noncompetition agreement.
On 3 October 2001, respondent terminated appellant without cause. Several weeks later, appellant attended a conference where Spirent, a company that manufactures handheld phones, gave a presentation. After the presentation, appellant spoke with Spirent about improving its technology.
Appellant thereafter created Wireless Automated Verifications Systems (WAVS), a new company that would produce an automated testing system compatible with Spirent technology. WAVS did not then have a commercially available product, but announced plans to release a product in the near future. Appellant actively marketed WAVS products to other companies, including Sprint and Nokia, two clients of respondent. Appellant attempted to recruit some of respondent's employees, including Francois Charette, to join WAVS. Charette, who did not leave respondent, testified that appellant advised him to move to Canada to circumvent respondent's noncompetition agreement.
On 9 January 2002, respondent learned that appellant had become president and CEO of WAVS. Respondent initiated legal action seeking a temporary injunction to curtail appellant's alleged violation of the noncompetition agreement. Appellant removed the case to federal court under federal diversity jurisdiction, claiming that he was a California resident. The federal court remanded the case to state court after finding that appellant was a Minnesota resident. Appellant also filed suit in California to determine whether the noncompetition agreement was enforceable. On 9 May 2002, a Hennepin County district court granted respondent a temporary injunction. Appellant now challenges that injunction.
At oral argument, the parties stated that this suit had been dismissed by the California courts.
ANALYSIS 1. District Court Injunction
A party seeking an injunction must demonstrate that there is no adequate legal remedy and that the injunction is necessary to prevent irreparable harm. Cherne Indus., Inc. v. Grounds Assocs., Inc., 278 N.W.2d 81, 92 (Minn. 1979). A district court's decision to issue an injunction will not be overturned absent a clear abuse of discretion. Carl Bolander Sons Co. v. City of Minneapolis, 502 N.W.2d 203, 209 (Minn. 1993). This court views the facts in the light most favorable to the prevailing party. Queen City Const., Inc. v. City of Rochester, 604 N.W.2d 368, 372 (Minn.App. 1999), review denied (Minn. 14 Mar. 2000).
A court considers five factors when determining whether to issue a temporary injunction: (1) the relationship between the parties before the dispute; (2) the relative harms to the parties if the injunction is or is not granted; (3) the likelihood that one party will prevail on the merits; (4) the public interest involved; and (5) the administrative burden in enforcing the injunction. Medtronic, Inc. v. Advanced Bionics Corp., 630 N.W.2d 438, 451 (Minn.App. 2001); see also Dahlberg Bros., Inc. v. Ford Motor Co., 272 Minn. 264, 274-75, 137 N.W.2d 314, 321-22 (1965). Appellant challenges the district court's findings regarding the balance of harms and the likelihood of success.
a. Balance of Harms
The district court found that WAVS would offer a product "directly competitive with [respondent]'s product" and consequently, respondent would suffer irreparable harm.
Irreparable injury can be inferred from the breach of a restrictive covenant if the former employee came into contact with the employer's customers in a way which obtains a personal hold on the goodwill of the business.
Webb Publ'g Co. v. Fosshage, 426 N.W.2d 445, 448 (Minn.App. 1988). Appellant argues that his establishment of WAVS has not affected respondent's goodwill with any clients because WAVS has not released a product and has not done business with any of respondent's clients.
But WAVS will soon release an automated testing system for handheld wireless devices. Martin Hahn testified that respondent has a fixed number of clients and that success in the industry depends on being able to develop cutting edge technology testing systems. Once a client company decides to accept a testing product, it does not usually switch; this concept is referred to as "first mover advantage." WAVS seeks this advantage as indicated by its business strategy:
WAVS has the first mover advantage in the wireless test automation market because there are no other products currently on the market [and] WAVS will prevent competition by establishing the first relationships with marketing partners, resellers, and other wireless technology providers.
Given the fixed number of potential clients, respondent could suffer irreparable harm by losing "first mover advantage" if WAVS releases its product before respondent can do so. See Medtronic, 630 N.W.2d at 453. (irreparable harm inferred if company may loose the goodwill of a limited customer base). Moreover, WAVS has marketed appellant's product to several companies, including two of respondent's customers. As respondent's former vice president of sales, appellant had previous knowledge of these companies' needs and could use this knowledge to obtain their accounts, causing respondent to suffer irreparable harm. See id. (irreparable harm inferred when employee developed relationships with his ex-employer's clients and could use those relationships when working for a new company).
Appellant will experience less severe harm. The noncompetition agreement is limited to one year and appellant may operate in places outside the United States and enter market areas that do not compete with respondent. See Webb Publ'g Co., 426 N.W.2d at 449 (balance of harms favors employer when former employee can obtain other clients). Accordingly, we conclude that the district court did not abuse its discretion in finding that the balance of harms favors respondent.
b. Likelihood of Success on the Merits
Appellant argues that the district court erred in finding that respondent would prevail on the merits because the noncompetition agreement is invalid for lack of consideration and, even if found valid, he did not breach it. We disagree.
(1) Validity of Noncompetition Agreement
Minnesota courts do not favor noncompetition agreements because they are a restraint of trade. National Recruiters, Inc. v. Cashman, 323 N.W.2d 736, 740 (Minn. 1982). Noncompetition agreements that are not ancillary to an employment contract must be supported by independent consideration. Sanborn Mfg. Co. v. Currie, 500 N.W.2d 161, 164 (Minn.App. 1993).
Continuation of employment can be sufficient consideration if the agreement is bargained for and provides the employee with real advantages.
Midwest Sports Marketing, Inc. v. Hillerich Bradsby of Canada, 552 N.W.2d 254, 265 (Minn.App. 1996) (quotation and citation omitted), review denied (Minn. 20 Sept. 1996). The district court found that while employed by respondent, appellant gained knowledge of product development and technology and had access to trade secrets and confidential information about respondent's clients.
Appellant claims that he did not have access to confidential information because he worked in sales. But respondent's employees testified that appellant participated in product development meetings, influenced product development, and had access to respondent's marketing strategy and confidential client information. Appellant also claims that any knowledge he gained while employed by respondent is insufficient consideration because others who did not sign a noncompetition agreement had access to the same information. Hahn testified that the employees who had not signed a noncompetition agreement have been with the company since its inception when it did not require them. Hahn also testified that respondent is negotiating with these employees to sign noncompetition agreements and has assurances that they will keep all information confidential.
Viewing the facts in the light most favorable to the prevailing party, we find that appellant received access to respondent's confidential information as a result of signing the initial noncompetition agreement. Industry and product training and design and marketing knowledge are consideration for a noncompetition agreement. See, e.g., Satellite Industries, Inc. v. Keeling, 396 N.W.2d 635, 639 (Minn.App. 1986), review denied (Minn. 21 Jan. 1987). Accordingly, the noncompetition agreement was valid.
The district court also found that the 2000 employment agreement provided consideration for the noncompetition agreement. We agree. Appellant argues that it was not sufficient consideration because he was demoted and received less benefits under the new agreement. But as appellant concedes, without the new agreement he would not have continued to work for respondent. Moreover, by continuing his employment, appellant vested in additional shares of the company's stock. And in his new position appellant monitored and became familiar with respondent's product development and marketing plans in the handheld and wireless market. These benefits constitute consideration for the noncompetition agreement. See id; see also Univ. Hosp. Serv. Inc. v. Hennessy, ___ F. Supp.2d ___, ___, 2002 WL 192564, at *3 (D.Minn. 23 Jan. 2002) (stock options that appellant would not have received without signing an agreement were consideration); Satellite Industries, Inc., 396 N.W.2d at 639 (industry training and product knowledge are considerations). We conclude that the noncompetition agreement was supported by sufficient consideration.
(2) Breach of Noncompetition Agreement
The district court found that appellant had breached the noncompetition agreement by establishing and operating WAVS and using respondent's confidential information to develop WAVS's products. Appellant argues that he did not breach the noncompetition agreement because respondent and WAVS's testing systems use different modules to connect to the product being testing.
WAVS and respondent would compete in the same market and offer the same services to a limited number of potential customers. One of respondent's senior sales engineers, who observed a demonstration of WAVS's product at a tradeshow, testified that it had the same features and functions as respondent's products. Respondent's chief technology officer, Gopinath, testified that WAVS's and respondent's products are "functionally equivalent in the capabilities they deliver." And although respondent does not have a product with similar connecting capabilities available now, it is developing one. Appellant's attempted recruitment of several of respondent's employees also indicates that the two companies are competitive. Finally, appellant concedes that he intends to market his product to Sprint and Nokia, two of respondent's clients.
Respondent also offered evidence that appellant used confidential information acquired when employed by respondent to develop WAVS's product, in violation of his noncompetition agreement. Appellant testified that he expected to develop a working product in six months. Hahn and Gopinath testified that such a timeline was not feasible without a significant prior knowledge of designs and prototypes and that appellant gained such knowledge from respondent.
Based on these facts, we conclude that the district court did not abuse its discretion in finding that respondent has a likelihood of success on the merits.
2. Terms of the Injunction
Appellant argues that the district court abused its discretion in granting an injunction that was more restrictive than the noncompetition agreement. He first claims that the injunction goes beyond the scope of the agreement because it does not geographically limit the prohibition on competition to the United States. Appellant points to the following language:
[Appellant] is restrained from any activity involved * * * in the development [or] manufacture * * * of any product or service relating to automated testing of any electronic devices * * *.
Appellant's argument misreads the district court's order because the language that precedes the above quotation limits the restraint to the United States.
Appellant also argues that the district court should not have listed the respondent's clients with which he is to have no contact. Respondent provided this list to the district court and appellant presented no evidence that these companies were not respondent's current or prospective clients. By including this list, the district court further clarified its injunction.
Appellant next claims the district court erred in prohibiting any communication with these companies, rather than just prohibit him from marketing testing systems to them. Appellant tried to circumvent the noncompetition agreement by claiming that he had moved to California and by advising an employee of respondent to move to Canada in order to circumvent the noncompetition agreement. These acts gave the district court a legitimate concern that appellant might undermine the noncompetition agreement if he were allowed any communication with respondent's clients.
The district court also extended its order to "all employees, consultants, and agents of WAVS." Appellant contends that this overreaches the court's jurisdiction because these people are not parties to the lawsuit. But the district court's injunctive powers are binding upon the parties to the action, their officers, agents, servants, employees, and attorneys, and upon those persons in active concert or participation with them * * *.
Finally, appellant argues the district court ordered respondent to post an insufficient cost bond; the district court set the amount at $50,000. Minn.R.Civ.P. 65.03(a) requires the party seeking an injunction to post security "in such sum as the court deems proper." The district court may waive the bond if appropriate. Ecolab, Inc. v. Gartland, 537 N.W.2d 291, 297 (Minn.App. 1995). Appellant gives no guidelines on which this court could set a new bond, recommending only "a bond in the multiple millions of dollars." Appellant's request is vague and unsupported.
We conclude that the district court did not abuse its discretion by the terms of the temporary injunction.
When determining whether the district court has abused its discretion, we review only the facts before the district court. See Fara v. Great Northern Ry. Co., 269 Minn. 573, 573, 130 N.W.2d 142, 143 (1964). Accordingly we grant appellant's motion to strike from the record matters from respondent's appendix that were not before the district court.