On January 9, 2009, Plaintiff Hal Wagner Studios ("Wagner"), a company engaged in the business of supplying photography services to local schools for the purpose of composing yearbooks, filed a ten-count complaint against Kris Elliott ("Elliott") and others, including a claim for a preliminary injunction to enforce a non-compete agreement against Elliott. Wagner also filed a motion for a temporary restraining order ("TRO") seeking to prohibit Elliott and others from soliciting Wagner accounts in Elliott’s territory and from competing with Wagner until the hearing on the preliminary injunction.
Elliot served as the General Manager of Wagner’s business in Central and Southern Illinois from an office in Edwardsville, Illinois. Elliott’s territory included seven counties in Illinois, excluding 21 specifically identified schools, and also included 16 specifically identified schools in Missouri. All of the other defendants worked in various capacities under his direction. On December 31, 2008, all of the defendants submitted letters of resignation effective immediately, leaving only two employees in the Edwardsville office. Subsequently, the defendants each took jobs with Wagner’s major competitor, Herff Jones.
As the basis for the relief requested in the TRO, the complaint alleged that on March 1, 1994, Elliott entered into an employment agreement with Wagner that contained a covenant not to compete, which provided that Elliott could not:
directly or indirectly, (for or on behalf of himself or any other person or entity) for a period of 18 months for the date of termination of this Agreement:
A. Solicit or sell school photography accounts which were accounts in the Elliott Territory or were accounts produced by Elliott during the term of this Agreement;
B. Disclose the list of the above-described school photography accounts or any part thereof, to anyone without the prior written consent of Employer;
C. Otherwise engage in competition in any respect, with Employer for any of the above-described school photography accounts.
Elliott argued that the covenant not to compete was no longer enforceable because Wagner breached the employment agreement by refusing to pay certain commissions. Wagner admitted that commissions had not been paid, but claimed this was because it agreed with Elliott to modify the agreement to pay a higher salary in lieu of commissions. Wagner failed to provide any documentation of this modification, and the March 1994 employment contract stated that it could not be amended or modified except by a signed writing.
The standard for granting a TRO and for the issuance of a preliminary injunction are identical: the movant must make an initial showing that (1) its case has a likelihood of success on the merits, (2) no adequate remedy at law exists, and (3) it will suffer irreparable harm if injunctive relief is not granted. If the movant meets the burden on these three requirements, the court then considers two additional criteria: (4) whether the balance of harm to the plaintiff if the TRO is wrongly denied outweighs the harm to thedefendant if the TRO is wrongly granted, and (5) the public interest.
Under Missouri law, which was applicable to Elliott’s employment agreement, the threshold for showing that the movants have a likelihood of success on the merits is low, and plaintiffs "need only demonstrate a better than negligible chance of succeeding." Missouri law does not favor covenants not to compete because they restrain trade. However, courts may uphold such agreements if the party seeking its enforcement establishes "both the necessity to protect the claimant's legitimate interests and that the agreement is reasonable as to time and space." Under Missouri law, a business’s "‘stock of customers’ and the company’s goodwill" are considered to be legitimate interests
In this case, the court declined to issue a TRO prohibiting Elliott from soliciting clients that might be governed by the covenant not to compete because the enforceability of that provision was doubtful; i. e., it was not clear whether this later modification or agreement to increase Elliott’s salary in lieu of commissions was a proper modification, an entirely new agreement, or something else. Due to the lack of clarity surrounding this issue, the court declined to enjoin Elliott from soliciting clients falling within the covenant not to compete; instead, the court set the matter for a preliminary injunction hearing.
Even though the non-compete provision was narrowly drawn and appeared to be enforceable on its face, a TRO was not granted solely because of Wagner’s failure to follow through with Elliott by documenting the change in his compensation structure.
Employers, if you seek the benefit of a non-compete agreement which usually includes the right to obtain a TRO, make certain you have "crossed the t’s and dotted the i’s" in the employment relationship, including documenting the terms of the employment agreement and any modification thereof. Employees, restrictive provisions that might have been enforceable at the time of their inception may no longer be enforceable based upon changed circumstances or a change in the law. Please contact us if you have any questions about the enforceability of non-compete provisions.
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