Opinion
Civ. No. 04-2773 (JNE/JGL).
June 18, 2004
Perry M. Wilson, III, Esq., and Angela M. Hall, Esq., Dorsey Whitney, LLP, appeared for Plaintiffs Hypred S.A. and A L Laboratories, Inc.
John Baker, Esq. and Lawrence M. Shapiro, Esq., Greene Espel, P.L.L.P., appeared for Defendant Guy P. Pochard.
ORDER
Hypred S.A. and A L Laboratories, Inc. (collectively, Plaintiffs) brought this action against Guy P. Pochard after he began working for one of Plaintiffs' competitors. The matter is before the Court on Plaintiffs' motion for a preliminary injunction. For the reasons set forth below, the Court grants the motion in part and denies the motion in part.
I. BACKGROUND
A L Laboratories, Inc. (A L) is a Minnesota corporation. It sells chemicals to dairy farmers for cleaning milking equipment and for udder hygiene. In 1992, Pochard purchased A L and developed business relationships through which to sell A L chemicals. During that time, A L also manufactured products for Bou-Matic, LLC (Bou-Matic), which in turn sold those products to independent equipment dealers under Bou-Matic's private label. Bou-Matic is an international supplier of dairy equipment, dairy sanitation, and udder hygiene and health products.
For convenience, the Court will refer to Bou-Matic and Bou-Matic's predecessor companies collectively as Bou-Matic.
In 2000, Pochard sold A L to Hypred. S.A. (Hypred). Hypred is a French company that is also in the business of selling chemicals to dairy farmers for cleaning milking equipment and for udder hygiene. As part of the purchase, Pochard and Hypred executed a Stock Purchase Agreement (Agreement) and an Employment Agreement. Under the Agreement, Pochard conveyed 80% of his A L stock to Hypred in January 2000 and the remaining 20% of his stock to Hypred in January 2003. In return, Pochard received $7.32 million, and he was employed as president of A L. The Agreement contained a noncompete provision.
In January 2003, A L terminated Pochard's employment and, pursuant to the Employment Agreement, paid him $200,000. On April 5, 2004, Bou-Matic offered Pochard, and he accepted, a job as Vice President of Business Development for the European and AustrialAsia markets. On April 30, 2004, Bou-Matic sent a letter to its North American dealers which, in part, announced that Pochard had began working for Bou-Matic in the European and AustrialAsia markets. After learning of Pochard's new employment, on May 25, 2004 Plaintiffs brought this action. The next day, they moved for a temporary restraining order, which the Court granted ex parte on June 1, 2004. The Court extended the June 1 Order until the issuance of this Order.
II. DISCUSSION
Plaintiffs seek an injunction against Pochard prohibiting him from breaching the noncompete portion of the Agreement and misappropriating Plaintiffs' trade secrets. Injunctive relief may be granted only if the moving party can demonstrate: (1) a likelihood of success on the merits; (2) the movant will suffer irreparable harm absent the restraining order; (3); the balance of harms favors the movant; and (4) the public interest favors the movant. Dataphase Sys., Inc. v. CL Sys., Inc., 640 F.2d 109, 113 (8th Cir. 1981). Injunctive relief is an extraordinary remedy, see Calvin Klein Cosmetics Corp. v. Lenox Labs., Inc., 815 F.2d 500, 503 (8th Cir. 1987), and the party requesting the injunctive relief bears the "complete burden" of proving all the factors listed above. Gelco Corp. v. Coniston Partners, 811 F.2d 414, 418 (8th Cir. 1987). While no one factor is determinative, likelihood of success on the merits is generally the touchstone inquiry. Dataphase, 640 F.2d at 113; see also S M Contractors, Inc. v. Foley Co., 959 F.2d 97, 98 (8th Cir. 1981).
A. Breach of Noncompete Agreement
1. Likelihood of success on the merits
The Agreement contains a noncompete provision, which is governed by Minnesota law. Noncompete agreements, though disfavored by Minnesota courts, are enforceable if they serve a legitimate interest and are no broader than necessary to protect this interest. See Kallok v. Medtronic, Inc., 573 N.W.2d 356, 361 (Minn. 1998). In determining whether a noncompete provision is reasonable, courts look to see if the provision is territorially and temporally reasonable. See Bennett v. Storz Broad., 134 N.W.2d 892, 899 (Minn. 1965). Minnesota courts measure reasonableness differently, depending on whether the noncompete provision relates to the sale of a business or to an employment contract. Id. Because the Agreement was entered into in connection with the sale of A L, the Court will apply the standard of reasonableness described in Bess v. Bothman, 257 N.W.2d 791, 795 (Minn. 1977). In that case, the Minnesota Supreme Court explained:
Three elements of reasonableness gauge the validity of territorial and temporal restrictions in this situation: First, whether the restriction exceeds the protection necessary to secure the goodwill purchased; second, whether the restriction places an undue hardship on the covenantor; and third, whether the restriction has a deleterious effect on the interests of the general public.Bess, 257 N.W.2d at 795.
The Agreement restricts Pochard from the closing date until January 1, 2007 from engaging in "Restricted Activities" in "Restricted Areas" and from "directly or indirectly" performing any service for any business that engages in "Restricted Activities" in "Restricted Areas." Restricted Activities are defined as:
Engaging in the research, development, manufacture, marketing, promotion, distribution, or sale of any product, formulation, process or service which competes with any product, formulation, process or service offered by [A L], [Hypred], or any of [Hypred's] direct or indirect subsidiaries. A product, formulation, process or service "competes" with a product, formulation, or service of [A L], [Hypred] or any of its affiliation if it can be substituted for any product, formulation, process or service of [A L], [Hypred] or any of [Hypred's] direct or indirect subsidiaries.
Restricted Area is defined as "anywhere on the continents of North or South America."
The Agreement's noncompete provision restricts Pochard for seven years. Plaintiffs contend that this provision is reasonable because part of Hypred's purchase of A L was Pochard's goodwill, which he built during his eight years with A L. Given these circumstances, the Court agrees with Plaintiffs and concludes that they are likely to succeed in showing that the seven-year temporal restriction is reasonable. Cf. Kunin v. Kunin, 1999 WL 486814 at * 3 (Minn Ct. App. July 13, 1999) (upholding district court's decision that an 11-year, nationwide noncompete was reasonable); Elect. Distribs., Inc. v. SFR, Inc., 166 F.3d 1074, 1085 (10th Cir. 1999) (concluding that seven-year provision was reasonable); Bicycle Transit Auth., Inc. v. Bell, 333 S.E.2d 299, 304 (N.C. 1985) (same).
The Agreement prohibits Pochard from engaging in Restricted Activities anywhere on the continents of North or South America. Plaintiffs contend that this territorial restriction is reasonable because at the time Hypred purchased A L, A L had customers in the United States, Canada, and Mexico. Based on his arguments made in his opposition memorandum and during the motion hearing, it appears that Pochard agrees that the territorial scope of the noncompete provision is reasonable as it relates to him performing Restricted Activities in Restricted Areas. The record reveals that the majority of A L's business at the time of Hypred's purchase was in North and South America. For instance, Bou-Matic's president states that the majority of A L's business during Pochard's tenure was concentrated in the upper Midwest and that Bou-Matic accounted for 85% of A L's business in North America. Further, Mr. Petagna, A L's Chairman of the Board and Hypred's Director, explains in his declaration that Hypred purchased A L to establish a presence in the United States. Based on these facts, the Court concludes that Plaintiffs are likely to succeed on the merits of showing that the territorial restriction as it relates to Pochard is reasonable.
The Agreement also prohibits Pochard from working for any business that performs Restricted Activities in Restricted Areas. The parties disagree about whether this provision is enforceable. In other words, the parties disagree about whether this provision reasonably protects Hypred's investment in A L's goodwill that Hypred purchased from Pochard. See Bess, 257 N.W.2d at 795. As stated above, when the Agreement was signed, A L was Bou-Matic's supplier for dairy sanitation and udder hygiene products. Some of these products were sold to Bou-Matic in Europe. After Hypred purchased A L, it began providing Bou-Matic its products in Europe. In 2002, Bou-Matic filed for bankruptcy, and subsequently, Hypred was unable to reach any deal with Bou-Matic to continue to supply products to Bou-Matic for Bou-Matic to sell to its dealers. Consequently, any of A L's goodwill with Bou-Matic that Hypred purchased is no longer in existence. Instead, Hypred now sells products directly to Bou-Matic dealers in direct competition with Bou-Matic's privately labeled products.
Under Minnesota law, noncompete provisions in connection with the sale of a business can be enforced only to the extent necessary to protect the "goodwill purchased." Bess, 257 N.W.2d at 795. Hypred purchased A L "to establish a presence in the United States market for the sale of chemicals to dairy farmers for cleaning milking equipment and for udder hygiene." (Petagna Decl. ¶ 4. (emphasis added).) At the time of the purchase, it appears that A L's goodwill outside of Restricted Areas with companies that engage in Restricted Activities in Restricted Areas was minor in comparison to A L's goodwill in Restricted Areas. For this reason, the Court concludes that Plaintiffs are not likely to succeed in showing that this portion of the noncompete provision is enforceable as written. Specifically, it appears to exceed the protection necessary to protect Hypred's investment in A L's goodwill outside of the Restricted Areas.
2. The Remaining Dataphase Factors
Having concluded that Plaintiffs have met, in part, their burden of establishing a likelihood of success on the merits of their breach of noncompete claim, the remaining factors may be dealt with briefly. "The basis of injunctive relief in the federal courts has always been irreparable harm and inadequacy of legal remedies. Thus, to warrant . . . [injunctive relief], the moving party must demonstrate a sufficient threat of irreparable harm." Bandag, Inc. v. Jack's Tire Oil, Inc., 190 F.3d 924, 926 (8th Cir. 1999). "Minnesota courts recognize that the breach of a valid non-competition agreement affirmatively raises an inference of irreparable harm." Ikon Office Solutions, Inc. v. Dale, 170 F. Supp.2d 892, 898 (D. Minn. 2001). Accordingly, the Court concludes that Plaintiffs have shown they will suffer irreparable harm if Pochard is not enjoined from breaching the noncompete portion of the Agreement insofar as it relates to him engaging in Restricted Activities in Restricted Areas.
With respect to the balance of harms, the Court recognizes that Pochard received a substantial sum of money from Hypred and as a result, he is unlike a typical employee faced with a breach-of-noncompete suit. This distinction, however, does not warrant the conclusion that Pochard would not be harmed if he were enjoined. Rather, if enjoined pursuant to the complete terms of the noncompete provision, Pochard would lose the right to work in any market. As discussed at the motion hearing and confirmed in the Declaration of Robert A. Kmoch, Pochard was hired to work with existing Bou-Matic equipment dealers in various countries of Europe and AustrialAsia to sell them Bou-Matic dairy hygiene and udder sanitation products. He was not hired to work directly or indirectly, in any capacity, in the Restricted Area. If Pochard's work is limited to activities described to the Court, the balance of harms favors Pochard because it allows him to work while also protecting Hypred's investment in A L's goodwill.
Finally, the Court concludes that it is in the public interest to award Plaintiffs a limited preliminary injunction. Minnesota law strongly disfavors restraints on trade. National Recruiters, Inc. v. Cashman, 323 N.W.2d 736, 740 (Minn. 1982). It would be contrary to Minnesota public policy to impose Plaintiffs' entire requested relief at this time in light of the Court's conclusion that a portion of the noncompete provision will likely be found to be territorially unreasonable. Accordingly, the Court grants in part and denies in part this portion of their motion for a preliminary injunction as it relates to Plaintiffs' breach on noncompete claim. 2. Trade Secret Misappropriation
The Court's conclusion is not intended to provide any opinion as to the ultimate merits of Plaintiffs' claims. The Court reaches this conclusion based upon the limited record available from both sides at this early stage of the action.
The Minnesota Uniform Trade Secret Act (MUTSA) protects certain information by providing for an action for trade secret misappropriation. Electro-Craft Corp. v. Controlled Motion, Inc., 332 N.W.2d 890, 897 (Minn. 1983). Under the MUTSA, a plaintiff must establish the existence of a trade secret and actual or threatened misappropriation of that trade secret. Minn. Stat. § 325C.01 (2002). A trade secret is information that "derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use," and "is the subject of efforts that are reasonable under the circumstances to maintain its secrecy." Minn. Stat. § 325C.01, subd. 5. In other words, for information to qualify as a trade secret: (1) the information must be neither generally known nor readily ascertainable; (2) the information must derive independent economic value from secrecy; and (3) the plaintiff must make reasonable efforts to maintain secrecy. Electro-Craft, 332 N.W.2d at 899.
To succeed on a trade secret misappropriation claim, a plaintiff must first define its alleged trade secrets with sufficient specificity. Electro-Craft, 332 N.W.2d at 898 (explaining that plaintiff's lack of specificity was fatal to its trade secret claim); NewLeaf Designs, LLC v. BestBins Corp., 168 F. Supp.2d 1039, 1046 (D. Minn. 2001) (noting that plaintiff had failed to show likelihood of success on the merits "primarily because it had not been able to articulate with specificity" the allegedly misappropriated trade secrets). Plaintiffs assert that they will succeed on their MUTSA claim because Pochard possesses "confidential and trade secret information such as A L's dealer information and A L's product formulation and manufacturing secrets." (Plfs.' Mem. at 8; see also Plfs.' Reply Mem. at 17.) At the motion hearing, Plaintiffs were unable to provide additional specificity regarding the trade secrets Pochard allegedly possesses or if such information, such as dealer information, indeed qualifies as a trade secret. Without more, Plaintiffs have failed to sufficiently identify their alleged trade secrets. The identification of a trade secret requires more than categorizing information as a "formula" or "secret." As a result, the Court cannot ascertain whether the alleged trade secrets are neither generally known nor readily ascertainable, whether Plaintiffs are likely to succeed in showing that the alleged trade secrets derive independent economic value from their secrecy, and whether Plaintiffs took reasonable steps to maintain the secrecy of their trade secrets. The Court therefore concludes that Plaintiffs have failed to meet their burden with respect to showing likelihood of success on the merits on their trade secret claim. See Electro-Craft, 332 N.W.2d at 897 (explaining that "[w]ithout a proven trade secret there can be no action for misappropriation, even if [a defendant's] actions were wrongful").
2. The Remaining Dataphase Factors
Because Plaintiffs have not met their burden with respect to success on the merits of its misappropriation of trade secrets claim, the Court cannot infer that they will experience irreparable harm in the absence of injunctive relief. See Lexis-Nexis v. Beer, 41 F. Supp.2d 950, 959 (D. Minn. 1999). In light of that conclusion, the balance of harms favors Pochard, who would experience the immediate loss of his right to work. To support their claim, Plaintiffs rely solely on evidence concerning hearsay statements made by a dealer in Wisconsin. In the absence of greater proof, the Court does not that Plaintiffs will suffer greater harm than Pochard. Finally, it is not in the public interest to award Plaintiffs a temporary restraining order in the absence of greater proof. Therefore, the Court denies Plaintiffs' motion for a preliminary injunction insofar as it relates to their trade secrets claim.
III. CONCLUSION
Based on the files, records, and proceedings herein, and for the reasons stated above, IT IS ORDERED THAT:
1. The Court's June 1 Temporary Restraining Order [Docket No. 9], as amended [Docket Nos. 21 and 34], is DISSOLVED.
2. Hypred S.A. and A L Laboratories, Inc.'s Motion for a Preliminary Injunction [Docket No. 15] is GRANTED IN PART AND DENIED IN PART.
3. Guy Pochard is hereby enjoined and restrained from engaging in "Restricted Activities" in "Restricted Areas," as defined in the Stock Purchase Agreement.
4. Guy Pochard is permitted to continue his employment with Bou-Matic, LLC for the purposes stated on the record at the June 17, 2004 motion hearing and as detailed in the Declaration of Robert A. Kmoch.
5. This Order is conditioned upon Plaintiffs posting, or continuing to maintain, a bond in the amount of $5,000.
Plaintiffs urge the Court to waive the bond requirement because under the Agreement Pochard waived his right to a bond. The Court is unaware of any authority that allows parties to contractually waive their rights to the Rules of Civil Procedure. The Court can issue no preliminary injunction order without a bond. See Fed. Rule Civ. P. 65(c).