Opinion
Civil No. 05-228 (PAM/RLE).
February 16, 2005
MEMORANDUM AND ORDER
This matter is before the Court on Plaintiff's Motion for a Temporary Restraining Order or Preliminary Injunction. All parties were present at the hearing and therefore the Court will consider the Motion as one for a preliminary injunction pursuant to Federal Rule of Civil Procedure 65. For the reasons that follow, the Court grants the Motion.
BACKGROUND
Plaintiff HR Block Tax Services, Inc. ("HR Block") provides tax preparation services through approximately 10,000 retail offices. Half of those offices are operated by franchisees. Defendant Jean Peshel operated an HR Block franchisee in Ely, Minnesota from 1995 to January 12, 2005. Although no longer affiliated with HR Block, Peshel still maintains her business and has two employees: Shirley Hubbard and Kitty Childs, both of whom also prepare tax returns.
A. The Franchise Agreement
When Peshel was granted the franchise rights in the Ely area, she signed a Satellite Franchise Agreement. The initial term of the Agreement was five years, until December 31, 2000. At the conclusion of the initial term, Peshel elected to renew the Agreement for an additional five year term. Thus, her Agreement was to run until December 31, 2005.
The Agreement provides that Missouri law applies. It restricts Peshel's ability to compete with HR Block after ending her franchise arrangement, including her ability to solicit HR Block's clients for whom she prepared a tax return. In particular, Section 12 of the Agreement, entitled "Limitations on Competition and Disclosure," provides:
Franchisee covenants that: . . . for a period of one year after the termination of this Agreement . . . [she] will not directly or indirectly . . . solicit by mail, phone or in person, or divert from Block or Block franchisees, any person for whom Franchisee prepared a tax return or performed Related Services or Additional Services at any time during the term of this Agreement for the purpose of rendering services in connection with the preparation of tax returns or performance of Related Services or Additional Services.
(Hoeft Aff. Ex. A at § 12(a)(ii).(Section 12 also prohibits Peshel from competing with HR Block by preparing tax returns within forty-five miles of Ely for one year after the termination of her Agreement. (Id. at § 12(a)(i).)
The Court notes that HR Block is not seeking a temporary restraining order relating to this provision.
In addition, Section 12 provides that Peshel would protect HR Block's confidential information:
Franchisee further covenants that Franchisee will never (i) divulge to or use for the benefit of any person, association or corporation outside of the HR Block organization, any information or knowledge concerning customers, the methods, promotion, advertising or any other systems or methods of operation of Block's business.
(Id. at § 12(b).)
Finally, the Agreement requires Peshel to obtain similar non-solicitation, non-compete, and non-disclosure provisions from her employees. (Hoeft Aff. ¶ 6.)
B. Termination of Franchise Agreement
Under the Agreement, Peshel could terminate her relationship with HR Block at the end of the renewal term by giving 120 days written notice. Thus, the earliest Peshel could have terminated the Agreement is August 31, 2005.
Peshel became dissatisfied with the demands that HR Block was placing on its franchisees, including upgrading computer equipment and office space. Consequently, she notified HR Block that she wanted to terminate the franchise relationship on August 26, 2004. In response, HR Block District Manager Gary Hoeft met with Pashel on January 12, 2005. They agreed that Peshel could terminate her Agreement early without any penalty (despite the prohibition against doing so in her Agreement) in exchange for her promise to abide by the non-solicitation, non-compete, and non-disclosure provisions. (See Hoeft Aff. at Ex. D ("Franchisee shall continue to be bound by all of the post-termination provisions of the Franchisee Agreement including Section 12").) Peshel also agreed to surrender all copies of customer files and other HR Block property. (Id.)
C. Violation of Non-Solicitation Obligations
On January 13, 2005 — one day after she promised HR Block that she would abide by the non-solicitation provision — Peshel sent a letter to an unknown number of her former HR Block clients soliciting their business for the upcoming tax season. The letter, which also contained a Tax Preparation Checklist, was signed by Peshel and her two employees and stated:
We would like to thank you for your business and loyalty last year. It was a busy year for us, and we really appreciate your business.
This year we have some changes at Peshel Accounting. We are no longer affiliated with HR Block. We will still gladly do your taxes here at Peshel Accounting and will be happy to answer any questions that you may have.
(Hoeft Aff. Ex. E.)
DISCUSSION
A. Subject Matter Jurisdiction
Peshel maintains that the Court lacks subject matter jurisdiction under 28 U.S.C. § 1332 because the amount in controversy does not exceed $75,000 and because HR Block has numerous offices throughout the State of Minnesota.
Federal district courts have original jurisdiction over all civil actions between citizens of different states in which the amount in controversy exceeds $75,000. 28 U.S.C. § 1332(a). For diversity purposes, a corporation is a citizen of the state in which it is incorporated and in which it maintains its principal place of business.Id. § 1332(c)(1). When determining the amount of controversy, "a complaint that alleges the jurisdictional amount in good faith will suffice to confer jurisdiction, but the complaint will be dismissed if it appears to a legal certainty that the claim is really for less than the jurisdictional amount." Capitol Indem. Corp. v. 1405 Assocs., Inc., 340 F.3d 547, 549 (8th Cir. 2003) (citation omitted).
Complete diversity of citizenship exists between the parties. HR Block is a Missouri corporation with its principal place of business in Kansas City, Missouri. Peshel is a Minnesota resident. As it relates to the amount of controversy, the Complaint alleges that Peshel is soliciting HR Block customers, from which Peshel admits she derives an annual income of over $57,000. (Peshel Aff. ¶ 14.) The Complaint also alleges that Peshel is misappropriating trade secrets. Damages for misappropriation of trade secrets include both the actual loss and unjust enrichment caused by misappropriation. Minn. Stat. § 325C.03. In addition, HR Block seeks exemplary damages, for which the Court may award an amount equal to twice the actual damages. Id. Finally, HR Block is also seeking attorneys' fees, which are included in the calculation of the amount in controversy. Peterson v. BASF Corp., 12 F. Supp. 2d 964, 968 (D. Minn. 1998) (Tunheim, J.). Based on these demands, the Court cannot conclude to a legal certainty that the amount in controversy is less than or equal to $75,000. The Court therefore concludes that subject matter jurisdiction exists for the purpose of this Motion.
B. Preliminary Injunction
An injunction may be granted only if the moving party can demonstrate: (1) a likelihood of success on the merits; (2) that the balance of harms favors the movant; (3) that the public interest favors the movant; and (4) that the movant will suffer irreparable harm absent the injunction.Dataphase Sys., Inc. v. C L Sys., Inc., 640 F.2d 109, 113 (8th Cir. 1981); see also N.I.S. Corp. v. Swindle, 724 F.2d 707, 710-11 (8th Cir. 1984) (upholding a preliminary injunction to enforce a valid non-compete agreement between an employer and employee).
1. Likelihood of Success on the Merits
Under Missouri law, employers have a legitimate interest in protecting themselves against unfair competition by former employees. Sturgis Equip. Co., Inc. v. Falcon Indus. Sales Co., 930 S.W.2d 14, 17 (Mo.Ct.App. 1996). Employers also have a legitimate interest in protecting trade secrets and goodwill that flows from client relationships. Id. "Where an employer has a legitimate proprietary interest in his customers and goodwill, a noncompete agreement will be enforced as to an employee with substantial customer contacts."Refrigeration Indus., Inc. v. Nemmers, 880 S.W.2d 912, 921 (Mo.Ct.App. 1994) (enforcing agreement); see Safety-Kleen Sys., Inc. v. Hennkens, 301 F.3d 931, 936 (8th Cir. 2002) (restrictive covenant enforceable to protect "the influence an employee acquires over his employer's customers through personal contact").
Before the Court will enforce the Agreement, HR Block must show that the Agreement is reasonably necessary to protect its legitimate interests, and reasonable as to time and geographical scope. Superior Gearbox Co. v. Edwards, 869 S.W.2d 239, 247 (Mo.Ct.App. 1993). To be reasonable, the Agreement must protect the former employer from unfair competition without imposing unreasonable restraint on the employee.Sturgis Equip. Co., Inc., 930 S.W.2d at 17. A client-based non-solicitation provision is reasonable. Silvers, Asher, Sher McLaren, M.D.s Neurology, P.C. v. Batchu, 16 S.W.3d 340, 345 (Mo.Ct.App. 2000) ("An accepted method of limiting a post-employment restraint so as to be reasonable is to draft a covenant restricting the former employee from soliciting the former employer's clients.").
The non-solicitation restriction that HR Block seeks to enforce is reasonable and narrowly tailored. HR Block is not seeking to prevent Peshel from performing any tax services in a particular geographic area. Rather, it simply seeks to prohibit her from soliciting or providing services to particular clients whom she worked with as an HR Block franchisee. The Court therefore finds that HR Block has demonstrated a probability of success on the merits.
Peshel maintains that she was forced to sign the agreement under duress because HR Block made unreasonable demands to upgrade technological equipment and office space. The Court rejects this argument because unreasonable demands do not equate to duress. Clark v. Riverview Fire Prot. Dist., 354 F.3d 752, 755 (8th Cir. 2004) (duress requires a showing that "one party to the transaction was prevented from exercising his free will by the threats or wrongful conduct of the other").
2. Irreparable Harm
Under Missouri law, irreparable injury occurs when an employee uses his experience gained from an employer in violation of a reasonable covenant not to compete. Safety-Kleen Sys., Inc., 301 F.3d at 935 (citation omitted). Accordingly, an employer need not show actual damages in order to obtain an injunction. Rather "the significant circumstance is the potential for damage." Id. at 936 (quotation omitted). Where a sales representative is the principal client contact, these "substantial and individualized customer contacts are a protectable interest warranting injunctive relief enforcing a covenant not to compete." Id. at 936-37.
In this case, HR Block faces irreparable harm if Peshel is allowed to ignore her obligations because she will appropriate goodwill that belongs to HR Block. She and her employees were the only individuals affiliated with HR Block that most clients in the Ely area knew. She developed close relationships with those clients while preparing their tax returns. Because HR Block risks losing those relationships due to Peshel's violation of the Agreement, HR Block has shown irreparable harm.
3. Balance of Harms
In contrast to the irreparable harm HR Block will suffer, the hardship to Peshel from the issuance of a temporary restraining order is minimal. A temporary restraining order prohibiting Peshel from soliciting or providing tax operation services to her former HR Block clients leaves her free to continue to operate her office in Ely, to provide tax preparation services to any individual who was not an HR Block client while she was an HR Block franchisee, and to provide non-tax-related services to anyone, including HR Block clients.
4. Public Interest
There is a clear public interest in ensuring that employees honor their obligations to their employers. Eaton Corp. v. Giere, 971 F.2d 136, 141 (8th Cir. 1992). This is especially true in this case, where Peshel renewed her obligations in exchange for the benefit of being released early from her Franchise Agreement, and where Peshel blatantly ignored those obligations the very next day.
CONCLUSION
The requested preliminary injunction is narrowly tailored and reasonable. Accordingly, it is HEREBY ORDERED that Plaintiff HR Block Tax Services, Inc.'s Motion for Preliminary Injunction (Clerk Doc. No. 2) is GRANTED:
1. Defendant Jean Peshel, as well as her employees and contractors are hereby enjoined from directly or indirectly soliciting by mail, phone, or in person, or diverting from HR Block or its franchisees, for the purposes of rendering tax preparation services, any person whom Peshel and her employees or contractors prepared a tax return since December 31, 1995;
2. Defendant Jean Peshel, as well as her employees and contractors, are hereby enjoined from preparing preparing tax returns for any person for whom they have prepared a tax return since December 31, 1995;
3. Defendant Jean Peshel, as well as her employees and contractors, are hereby enjoined from divulging or using information or knowledge concerning HR Block's customers and the marketing and operation methods of HR Block; and
4. Defendant Jean Peshel, as well as her employees and contractors, are hereby ordered to immediately surrender to HR Block the originals and all copies (whether in electronic or paper form) of all customer files and other HR Block property.