A trial court declined to enter a preliminary injunction in a non-compete covenant case despite a provision in the covenant giving the employer the “right to seek injunctive relief in addition to any other remedy available to it.” The decision was affirmed on appeal.
Summary of the case. A 20% owner of a pest control service company (referred to by the appellate court as “Yuma Pest”), his wife and his sister all were employees of the company. In late 2010 or early 2011, in settlement of a dispute the three of them had with Yuma Pest, the 20% ownership interest was relinquished, all three signed non-compete and non-solicitation covenants, they resigned, and they and Yuma Pest executed mutual releases. A few months later, they and several other former employees allegedly began to compete with the company. In June 2012, Yuma Pest sued and moved for issuance of a preliminary injunction. Twenty months later, following an evidentiary hearing, the motion was denied. The Arizona Court of Appeals affirmed. Security Pest & Termite Systems v. Reyelts, No. 1 CA-CV 14-0237 (May 14, 2015) (not for publication).
The covenant. In addition to the injunction clause, Yuma Pest’s covenant provided that employees would not work in the pest control business within a 50-mile radius of the company’s Yuma, Arizona headquarters for two years after termination.
The defendants. Prior to the settlement, Matthew Reyelts was the general manager and a one-fifth owner of Yuma Pest. His wife and his sister were the company’s office manager and financial manager, respectively. A new company, RAM Pest Management, opened for business in Yuma five months after the settlement. Two months later, Matthew’s wife and sister went to work for RAM. Subsequently, two other Yuma Pest employees, one of whom was Matthew’s father, resigned and joined RAM. Matthew, who did not become employed by RAM, formed a company in Yuma known as “Bug Warrior” to provide education and training services related to pest control. Yuma Pest sued all of the above, alleging contract and tort claims.
The injunction hearing. The hearing commenced more than a year after the complaint was filed. By that time, several years had elapsed since the settlement. One of the witnesses at the hearing, Yuma Pest’s general manager, testified that although customer cancellations had increased after the settlement, Yuma Pest’s revenue did not decline. He added that he could calculate with reasonable certainty the damages the company sustained due to the defendants’ competition. Seven months after the hearing began, the court ruled that an injunction was not warranted. It reasoned that (a) Yuma Pest had an adequate remedy at law, and (b) in light of the passage of several years between the alleged violation and the ruling on the motion, the company failed to show the likelihood of irreparable damage.
The decision on appeal. The primary basis for the trial court’s judgment that Yuma Pest had an adequate remedy at law was, of course, the general manager’s testimony. Further, according to the appellate tribunal, any inappropriate solicitation of Yuma Pest’s customers has “already occurred.” So, the lower court was held to have concluded correctly that the company failed to show that denial of an injunction would result in irreparable harm.
Takeaways. Yuma Pest’s request for a preliminary injunction was problematic:
- The covenant’s mention of a “right to seek an injunction.” The lower court reasoned, and the Court of Appeals agreed, that the non-compete did not require entry of injunctive relief. Rather, it merely allowed such relief if — in the court’s discretion — an injunction was deemed to be appropriate. Consider stating in a non-compete simply that the company has “the right to injunctive relief” in the instance of a covenant violation rather than that the company could “seek” injunctive relief.
- Adequacy of a legal remedy. A preliminary injunction often is entered against the violator of a non-compete. The reasoning is, in part, that a monetary award equal to losses already incurred will not suffice to make the injured party whole (for example, absent an injunction future losses also may be caused by the violation). Here, however, the injunction motion was denied partly because (a) the general manager testified that he would be able to compute Yuma Pest’s damages with reasonable certainty, and (b) the complaint apparently failed to allege that the company sustained additional harm.
- Delay. The appeals court’s opinion does not state who was responsible for the lengthy delay between the date Yuma Pest learned of the alleged violations and the date of the ruling on Yuma Pest’s injunction motion. The jurists may have concluded that Yuma Pest was not diligent in its pursuit of injunctive relief.