Opinion
No. 2017-CV-00246
12-06-2017
New England Employee Benefits Company, Inc. v. Steven LeSage and CGI Business Solutions, Inc.
ORDER
This action involves a noncompetition agreement executed by Steven LeSage ("LeSage") while he was employed as a sales representative at New England Employee Benefits Company, Inc. ("NEEBCo"). In May 2017, LeSage was terminated from his employment at NEEBCo, and went to work for a competitor, CGI Business Solutions, Inc. ("CGI"). He convinced twenty-three of NEEBCo's accounts to switch to CGI. Six of those accounts have since returned to NEEBCo. NEEBCo brought suit, alleging LeSage violated his noncompetition agreement because, while still employed by NEEBCo, he actively solicited clients, and persuaded them to join CGI. After commencement of this suit, the parties filed a Stipulated Preliminary Injunction, prohibiting LeSage from further soliciting NEEBCo's clients during pendency of this matter.
On September 27, 2017, NEEBCo filed a Motion to Modify the Preliminary Injunction, requesting additional relief. NEEBCo now seeks a mandatory injunction requiring LeSage to tell the accounts he took with him from NEEBCo to CGI that "NEEBCo has no plans to sell in the near future and no arrangement is, or was, in place to do so with any buyer." For the reasons stated in this Order, the Motion to Modify the Preliminary Injunction is DENIED.
I
Many of the facts are not in dispute; however, other facts are so sharply disputed, that the Court conducted a three-hour evidentiary hearing. The facts recited in this Order are either not in significant dispute, or are drawn from the evidentiary hearing. The findings contained in this Order are preliminary in nature, and do not constitute factual findings that are binding upon the parties.
NEEBCo is a full-service employee benefits program broker established in 1988. It offers benefits brokerage services to businesses and individuals throughout the State of New Hampshire and the New England region, and uses salespeople to carry out its business. LeSage was one of NEEBCo's four salespeople until May 2017, when NEEBCo fired him after discovering he planned to leave, and was diverting NEEBCo customers to his new employer, CGI.
Part of LeSage's job as a sales representative was to generate business for NEEBCo. NEEBCo obtains the majority of its new business through referrals from current customers and through its reputation established from conducting business for almost thirty years. Brett Houston ("Houston"), co-owner of NEEBCo, testified that NEEBCo attracts new business primarily by building on the relationships of its existing client base. However, testimony during the hearing established that NEEBCo sales representatives are not only expected to obtain new business, but that their compensation depends in part upon the generation of new business. Because most of NEEBCo's sales come from its relationships with existing clientele, NEEBCO spends very little on traditional advertising — a fraction of a percent of its overall expenses — and primarily advertises through joint event sponsorships with current clients.
As brokers, NEEBCo and its competitors do not compete on price; the prices from one insurance carrier to another are generally the same. Rather, benefits brokerage companies differentiate themselves from the competition by providing additional services to their clients, many of which are complementary. Therefore, personal relationships are critical to the business. LeSage had seventy-one clients while employed by NEEBCo, which produced about nine or ten percent of its total revenue. In total, NEEBCO has about 1600 clients. Although NEEBCo does business in other states, and is licensed in twenty-seven of the fifty states, most of its clients are domiciled in New Hampshire.
In April 2017, LeSage was unhappy with changes in his employment, which he believed would result in reduced compensation. He decided to leave NEEBCo to work for CGI, a competing insurance broker. While still employed by NEEBCo, he surreptitiously persuaded twenty-three accounts to switch to CGI. NEEBCo immediately terminated him after discovering this conduct. LeSage signed a noncompetition agreement in 2008, at the time he became a sales representative, but testified that he did not remember signing it at the time he decided to leave NEEBCo. LeSage told a number of the clients he managed that he had a discussion with one of NEEBCo's owners, and was told that NEEBCo would be sold to a large agency in the near future. This information was intended to, and did, induce customers to switch to CGI so that LeSage could continue to service their accounts.
LeSage asserts this information was given to him by one of the owners of NEEBCo, Mark LeCompte ("LeCompte"), at a lunch meeting in Concord, New Hampshire during April 2017. There is significant dispute about what occurred during the lunch. LeSage testified that LeCompte told him the business was "most likely going to be sold in the next three to five years." LeCompte admitted that he and LeSage had lunch, but denied making this statement. He testified that this is not the sort of information he would share with an employee. He admitted that during the lunch LeSage asked him whether he would be interested in selling his book of business, and he responded "no," and thought that the question was odd.
NEEBCo points out that there is an obvious difference between a company being sold "in the near future" and in "three to five years," but this distinction is not relevant to the Court's decision.
LeCompte and his co-owner Houston testified that NEEBCo is not for sale and was not for sale at any time while LeSage was employed by NEEBCo. He admitted that in November and December 2016, they were approached by a potential buyer and — although they were not interested in selling — entered into discussions with the potential buyer in order to get a sense of what a third party believed the business was worth.
Of the twenty-three accounts that followed LeSage to CGI, six companies returned after NEEBCo employees contacted the accounts and explained that NEEBCo was not being sold. Nonetheless, seventeen companies are no longer NEEBCo accounts, even though NEEBCo has contacted them. Some have refused to speak with NEEBCo, although it sent an email to the customers who had not returned, explaining that NEEBCo is not likely to be sold in the near future. Houston testified that he believes LeSage's accounts left NEEBCo because they believed the accounts were going to be sold. This belief is based on information given to him by the clients who agreed to return to NEEBCo.
The Defendants have stipulated to a preliminary injunction, which provides that LeSage and CGI will not solicit the business of any client NEEBCo had under contract during Lesage's employment, and with whom LeSage had direct contact, or for whom he had primary responsibility. (Stipulated Preliminary Injunction, ¶ A.)
II
NEEBCo now seeks a mandatory injunction under the Lanham Act, 15 U.S.C. § 1125 et seq. The Act provides, in relevant part that any person who uses in commerce a "false or misleading description of fact" that is "likely to cause confusion or to cause mistake" in "commercial advertising or promotion" shall be liable in a civil action by a person who believes he or she is likely to be damaged. 15 U.S.C. § 1125 (a)(1)(A)(B). The purpose of the Act is to "protect persons engaged in commerce against false advertising and unfair competition." American Italian Pasta Co. v. New World Pasta Co., 371 F.3d 387, 390 (8th Cir. 2004). The Lanham Act is intended to protect sellers from having their customers lured away from them by deceptive ads, or labels, or other promotional materials. Schering-Plough Healthcare Products, Inc. v. Schwarz Pharma, Inc., 586 F.3d 500, 512 (7th Cir. 2009). A private cause of action under the Act allows those parties with the greatest interest in enforcement (i.e. competitors) to enforce the statute rigorously. See, e.g. Coca-Cola Co. v. Procter & Gamble Co., 822 F.2d 28, 31 (1987).
In order for a statement to be actionable under the Lanham Act, it must be false. Relying on PhotoMedex v. Irwin, 601 F.3d 919, 931 (9th Cir. 2010), Defendants argue LeSage's statement, that NEEBCo was "going to be sold in the near future," was not false because he could not know whether or not NEEBCo would be sold, and thus it was a "forward-looking statement of opinion and not actionable." (Def.'s Post Hearing Mem., Arg. II.) Defendants also claim that LeSage's statement that NEEBCo was going to be sold soon was a truthful statement of fact because he was given this information by LeCompte.
These arguments are inconsistent. The Court finds that, for purposes of this Order, LeSage's statement was a statement of fact, and that NEEBCo has satisfied its burden of establishing that LeSage's statement that NEEBCo would be sold soon was literally false. This preliminary finding is based on LeCompte's testimony, that he would never have provided such confidential information to an employee. Additionally, no proof of intent or willfulness is required to establish a violation of the Lanham Act. SharkNinja Operating, LLC. v. Dyson, Inc., 200 F. Supp. 3d 281, 286-87 (D. Mass. 2016). Moreover, good faith is not a defense to a false advertising claim under the Act. Id. at 287 (citing Lyons P'ship, L.P. v. D & L Amusement & Entm't, Inc., 702 F.Supp.2d 104, 113 (E.D.N.Y.2010). Therefore, even if LeSage innocently misunderstood LeCompte, his statements about NEEBCo's impending sale would still be actionable.
The Court must then consider whether or not LeSage's statement constituted "commercial advertising or promotion" within the meaning of the Act. The courts have developed a four-part test to ascertain what representations fall into the category of "commercial advertising or promotion" for purposes of the Act. See generally Podiatrists Ass'n, Inc. v La Cruz Azul De Puerto Rico, Inc., 332 F.3d, 19 (1st Cir. 2003); see also Procter & Gamble, Co. v. Haugen, 222 F.3d 1262, 1273-74 (10th Cir. 2000). The test requires that a representation:
(a) constitute commercial speech (b) made with the intent of influencing potential customers to purchase the speaker's goods or services (c) by a speaker who is a competitor of the plaintiff in some line of trade or commerce and (d) disseminated to the consuming public in such a way as to constitute advertising or promotion.Podiatrists Ass'n, Inc., 332 F.3d at 19.
There is no serious dispute that LeSage's statement - that NEEBCo was going to be sold to a larger agency in the near future - was commercial speech, made with the intent to influence the customer's decisions to leave NEEBCo and to bring their business to his new employer, CGI. NEEBCo argues that because the insurance brokerage business is dependent on personal service and not on price, individual relationships matter greatly, and a statement that a company would be sold to a larger company would negatively impact a customer's view of it. NEEBCo argues that sale to a larger company is an obvious reason that a client would choose to leave because, "loss of local control suggests a potential loss of personal service, if not of LeSage himself should he fail to be retained by the new company." (Pl's Mem. at 4; Pl's Ex. C, Aff. of Christopher, Gilbert.)
Nevertheless, LeSage argues more persuasively that the statements he made to the twenty- three accounts he was handling did not constitute "commercial advertising" within the meaning of the Act. To constitute "commercial advertising" communication must, at the bare minimum, "target a class or category of purchasers or potential purchasers, not merely particular individuals." Podiatrists Ass'n, Inc., 332 F.3d at 19-20. The statement must be "disseminated sufficiently to the relevant purchasing public . . . within the industry." Pourous Media Corp. v. Pall Corp., 173 F.3d 1109, 1121 (8th Cir. 1999). In the ordinary course, commercial advertising addresses "promotional material disseminated to anonymous recipients." First Health Group Corp. v. BCE Emergis Corp., 269 F.3d 800, 804 (7th Cir. 2001). For example, in Sanderson v. Culligan Intern. Co., the court held that three false statements made during person-to-person communication at trade shows did not constitute commercial advertising within the meaning of the Act. 415 F.3d 620, 624 (7th Cir. 2005). In Seven-Up Co. v. Coca-Cola Co., the court found that a presentation called "The Future is Sprite," given to eleven of the seventy-four "cross-franchise bottlers" who were the only relevant potential "consumers" or "purchasing public" for this product, and within the industry, would constitute commercial advertising within the meaning of the Act. 86 F.3d 1379, 1386 (5th Cir. 1996).
What constitutes advertising is, as the Court noted in its Order of September 28, 2017, industry-specific. NEEBCo cites Coastal Abstracts Service, Inc. v. First American Title Ins. Co., 173 F.3d 725, 735 (9th Cir. 1998) for the proposition that a single communication can constitute commercial advertising within the meaning of the Act. However, in that case, the representation was made to five customers who constituted one-third of the relevant purchasing public. Id. Other courts have similarly found that communications constituted commercial advertising when representations were made to a small number of individuals or entities that comprised a large segment of the market. For example, in Mobius Mgmt. Sys., Inc. v. Fourth Dimension Software, Inc., the court found liability under the Act where two software suppliers for IBM mainframe computers were competing for a sale with one customer. 880 F. Supp. 1005, 1020-21 (S.D.N.Y. 1994). The court noted that the overall software market for IBM mainframe computers was very small and there was evidence that tainting the goodwill of the plaintiff with one purchaser could easily affect other purchasers' views, and therefore the "true relevant purchasing public" consisted solely of the recipient of the communication. Similarly, in Pourous Media Corp., the court upheld a jury finding that a letter sent to only five recipients violated the Act, because the letter deceived or had a tendency to mislead a "substantial segment" of the market for the relevant product. 173 F.3d at 1121. Thus, "the touchstone of whether a defendant's actions may be considered 'commercial advertising or promotion' under the Lanham Act is that the contested representations are part of an organized campaign to penetrate the relevant market." Fashion Boutique of Short Hills, Inc. v. Fendi USA, Inc., 314 F.3d 48, 57 (2nd Cir. 2002).
NEEBCo relies heavily upon National Artists Management Co. Inc. v. Weaving, in which the court held that the defendant engaged in "commercial advertising" when she called a number of colleagues and communicated her reasons for terminating her relationship with a theatrical booking company. 769 F. Supp. 1224, 1235-36 (S.D.N.Y. 1991). The court found that the communication was advertising in the context of the Act because, in the theater industry, services are provided by "word of mouth" and information is spread through a network of telephone contact with producers, promoters, and presenters. Id. There is a facial similarity between National Artists and the instant case because NEEBCo's witnesses testified that it obtains most of its new clients through "word-of-mouth." However, closer examination establishes that there are significant differences between the two cases.
As in this case, in National Artists, the defendant, in anticipation of starting her own business and while still employed by National Artists Management Co. ("National Artists"), contacted National Artists' clients and made false representations regarding her reason for leaving. The defendant told National Artists' clients that she was forced to leave because of improprieties and that these improprieties had been "covered up." The court found that this was an attack on National Artists' integrity, which as the court noted is "the sine qua non for a successful theatrical booking agency." National Artists, 769 F. Supp at 1229. The court noted that the defendant spoke to ten of approximately thirty National Artists clients and ten customers who had contact with National Artists within the past fifteen years, as well as friends, acquaintances, and colleagues about the reasons for terminating her employment. The court emphasized the unique nature of the business in finding that this limited communication constituted "commercial advertising" for purposes of the Act:
It is true that defendants' conduct—speaking by telephone with a number of friends, acquaintances, and colleagues about the reasons for terminating their relationships with [National Artists]—is not "commercial advertising and promotion" in the traditional sense of large-scale, nationwide commercial advertising campaigns. In the context of the theatre-booking industry, however, "services" are "promoted" by word-of-mouth and information is spread through a network of telephone contacts with producers, promoters, and presenters. . . . In an industry that is indisputably small and closely interconnected, Weaving's alleged "advertising campaign," assertedly conducted with her husband's help, appears to have been quite effective.National Artists, 769 F. Supp 1235.
In this case, unlike in National Artists, while NEEBCo offered testimony that most of its new business comes from word-of-mouth advertising, there is no testimony that the industry is "small and closely interconnected." In fact, the testimony introduced at the evidentiary hearing established that there are approximately 9000 companies that are prospective customers in the market. Sales representatives, such as LeSage, were required to produce new business on a regular basis and were compensated for their ability to do so. Here, LeSage's clients only constituted nine to ten percent of the revenue generated from NEEBCo's 1600 clients and, if the market is 9000 companies, less than one percent of the available market. Therefore, as NEEBCo has not shown that LeSage directed his communication at a substantial segment of the purchasing market, it has not established a likelihood of success on the merits of its claim that LeSage's communication constituted commercial advertising for purposes of the Lanham Act.
C
Even if NEEBCo could establish a likelihood of success on the merits, it is not entitled to the mandatory injunction it seeks. "A mandatory injunction is one that goes beyond maintaining the status quo and preventing irreparable harm while a lawsuit remains pending." Handsome Brook Farm, LLC v. Humane Farm Animal Care, Inc., 193 F. Supp. 3d 556, 566 (E.D.Va. 2016) (aff'd 700 Fed.Appx. 251 (2017)). The few cases that have afforded such relief have done so either after a full trial on the merits, Alpo Pet Foods v. Ralston Purina Co., 913 F.2d 958, 961 (D.D.C. 1994), or where there is evidence of broad dissemination of a clearly objectively false statement. See Handsome Brook Farm, LLC, 193 F. Supp. 3d at 571-73.
Two other cases upon which Plaintiff relies are inapposite. Fidelity Fund, Inc. v. DiSanto, et al, 500 A.2d 431 (1985) involved a court's order, after full hearing, that defendants who had misappropriated clients of a broker countermand with any insurer the designation of them as broker of record. In Wojnarowicz v. American Family Ass'n, 745 F.Supp. 130 (S.D.N.Y. 1990) the Plaintiff was entitled to statutory injunctive relief under the New York Artist's Authorship Act. Neither case is relevant here.
NEEBCo argues that, although it could attempt to explain the true facts to customers itself, no one would believe it if it did. (Pl's Mem. at 14.) However, as Defendants point out, there is no logical reason why its clients would believe a statement from LeSage. (Def.'s Post Hearing Mem.) More importantly, unlike cases such as Handsome Brook and Alpo, where the court definitively found that a challenged statement about past events was false, the Court cannot determine here what NEEBCo's owners will do in the near future. See Alpo Pet Foods, 913 F.2d at 962; see also Handsome Brook, 193 F. Supp. 3d at 573. That information can only be known to NEEBCo, and may well depend on future circumstances unknown or unknowable today. Even if LeCompte never told LeSage that the company would be sold in the next three to five years, that does not mean that LeSage could truthfully testify that the company will not be sold in the near future; only NEEBCo's owners know that. Whatever the owners' present intention, the Company may well be sold in the next three to five years; "[t]he best laid schemes of mice and men/ [g]ang aft agley."
Robert Burns, To a Mouse, on Turning Her Up in Her Nest With the Plough, November 1785. --------
It follows that the Motion for a Mandatory Injunction must be DENIED.
SO ORDERED
12/6/17
DATE
Richard B . McNamara
Richard B. McNamara,
Presiding Justice RBM/