Enforceability and entitlement to injunction are separate inquiries

July 15, 2013 / By Robert Wood

                 While an employer may draft an enforceable non-compete covenant, it does not automatically follow that courts will enforce it with injunctive relief.  Such was the case in Welsco, Inc. v. Brace, 2012 WL 4087224 (E.D. Ark. 2012).  There, although the employment agreement was considered reasonable in both scope and duration, the court held that there was an adequate money damages remedy that precluded enjoining the defendant from competing with his former employer.  Welsco, Inc., 2012 WL 4087224, at *28.

                In Welsco, Mike Brace (“Brace”) was employed from March 15, 2005 to April 30, 2012 as the manager of a Welsco, Inc. (“Welsco”) store in Tulsa, Oklahoma. As a manager with the welding and industrial gas supply business, Brace gained access to extensive confidential information that included lists of clients, their needs, finances, product specifications, and cost information. Additionally, Brace developed extensive relationships with Tulsa area clients, including the highly lucrative and profitable contacts he maintained with the Local 798 pipefitters and welders union (“union”). In fact, the union increasingly represented a large part of the revenue that Brace brought to Welsco during his tenure with the company. By Welsco’s estimate, Brace’s monthly sales through the union was approximately $60,000 per month. After Brace’s resignation from Welsco, however, the company’s sales with the union dwindled to around $400 per month.  Further, Brace allegedly offered to hire two Welsco employees to work with him at his new employer, Gas & Supply, although they ultimately chose not to make the move.

                When Brace accepted his position with Welsco, he traveled numerous times to Arkansas to both interview and receive training in the welding and industrial gas business. After being hired on with Welsco, Brace also received, via mail, a non-compete agreement. Although there were conflicting claims between the parties as to whether this agreement was brought up during his interview process, the court ultimately held that Brace’s claim that he was unaware of the agreement before signing it was not credible. Nevertheless, Brace signed the agreement, without any negotiation or questioning.

                The agreement itself sought to prohibit Brace from “solicit[ing] or procur[ing] any of Welsco’s customers whom or which he had dealt with on behalf of Wesco in an effort to obtain or retain their business other than on behalf of Welsco for a period of one year following the end of his employment with Welsco.” Id. at *21-22. Moreover, the non-compete agreement was restricted solely to the counties that Brace did business for Welsco in his last six months of employment. Id. at *23. Finally, the duration of the agreement was only for one year following the end of his employment with the company. Id. at *22.

                After determining that choice of law required the court to apply Arkansas substantive law, the court held that the agreement was valid and enforceable under Arkansas law. Id. at *21. First, the agreement restricted Brace to a geographic area that was smaller than the Welsco’s trade area. Under Arkansas law, if the geographic restriction is broader than the trade area of the former employer, it is invalid as unreasonable. The court also determined, citing several Arkansas decisions, that the one year duration for the agreement was reasonable. Finally, the court found that Welsco had a legitimate interest to protect, namely the loss of customers and personal relationships with them, with Brace’s non-compete agreement. Ultimately, looking to all the facts and interests, the court held that the agreement sought to prevent more than just ordinary competition on Brace’s part. Id. at *25.

                The court, however, determined that a preliminary injunction was not warranted in this case. In order to impose a preliminary injunction that would prohibit Brace from engaging conduct that agreement prohibited, Welsco would have to show that there was a threat of irreparable harm, the harm was greater to Welsco than the harm it would cause Brace, that enforcing the agreement did not harm the public interest, and that Welsco had a likelihood of succeeding on the merits. First, the court determined that the recitation in the agreement that Welsco was automatically entitled to injunctive relieve had no effect on the court’s decision-making. Instead, the court determined that, as a matter of jurisdiction, it could only provide injunctive relief if money damages were inadequate. And, in fact, the court determined that money damages were adequate to provide relief to Welsco. The court was unpersuaded by testimony by Welsco executives that it was impossible to calculate. Because Welsco was able to determine that it suffered around $60,000 in sales losses when Brace departed, and the non-compete agreement was limited to one year, damages would ultimately be ascertainable and injunctive relief would be inappropriate.

                Comment:

                Just because a noncompete agreement is vaild does not mean that an injunction will automatically be entered.  Under Texas law, a court makes independent assessments of enforceability and entitlement to injunctive relief.

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About the Author

Robert Wood has been a Texas trial lawyer since 1993. During that time, he has represented small, mid-sized, and Fortune 100 companies in business and employment litigation matters all over Texas and the United States. He has also advised and represented hundreds of individuals in employment litigation matters. Read more about Robert Wood