Labor Logic

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John D. Finerty, Jr.

Eric Robinson probably felt pretty good after he beat back a motion for a preliminary injunction brought in a lawsuit filed by his former employer, Lakeview Technology, Inc. Lakeview alleged that Robinson breached a provision in his employment contract in which he promised not to solicit any of Lakeview’s customers.

Robinson’s victory was short lived; on appeal, the U.S. Court of Appeals for the Seventh Circuit ordered that the district court issue the appropriate equitable relief. Lakeview Technology, Inc. v. Robinson, Case No. 05-4433 (7th Cir. May 1, 2006).

Background

Lakeview Technology sells software that enables its customers to access their computer data during system outages. Eric Robinson worked for Lakeview until May 2005, at which time he quit to work for a competitor, Vision Solutions, Inc. Robinson took with him Lakeview’s sales plan for the 2005-06 sales year. Lakeview filed a diversity suit in federal court against Robinson.

Robinson had an employment contract that precluded him from soliciting Lakeview’s customers for 24 months after employment. Lakeview moved for an injunction.

Robinson, however, promised the district judge that he would limit his solicitations to areas in which Lakeview had not been promoting its software and would not solicit his old customers.

The district court, thus, denied Lakeview’s motion for a preliminary injunction. The district court gave three reasons for denying relief: the absence of proof that Robinson had solicited Lakeview’s customers or disclosed its secrets; Robinson’s promise not to do so in the future; and, the prospect of “hefty damages” if he breached his promise. Lakeview filed an appeal under 28 U.S.C. 1292(a)(1), that allows interlocutory appeals of district court decisions to grant or deny an injunction.

Analysis

There were two primary reasons why the court of appeals reversed the district court and ordered equitable relief. First, the district court failed to hold an evidentiary hearing to determine whether or not Robinson was lying when he said he had not solicited Lakeview’s customers and would not do so in the future. Second, the possibility of “hefty damages” demonstrated the likelihood that significant harm could befall Lakeview, but it was unclear whether Robinson could ever satisfy such a judgment.

1. Evidentiary Hearing Requirements.

The district court should have held an evidentiary hearing to explore whether Robinson was telling the truth that he had not solicited Lakeview’s customers or disclosed its trade secrets and would not do so in the future.

Important to this point was that Robinson lied to Lakeview before leaving the company. In 2004, Robinson entered negotiations with Vision Solutions to change employment; when Lakeview heard rumors that he was going to Vision, it asked him point blank, but Robinson denied the rumors. When he subsequently quit, he told Lakeview he was pursuing real estate interests. According to the court, “By deceiving his employer, Robinson not only extended the duration of his salary but also obtained commercially valuable information that he could take with him.”

Robinson’s prior dishonesty should have called into question his pledge to the district court that he would not solicit Lakeview’ customers or disclose its secrets. At a minimum, as the court of appeals noted, it should have triggered an evidentiary hearing. After all, Robinson broke the promises in his employment agreement and did nothing more than re-make those same promises to the district court.

2. “Hefty Damages” As A Deterrent.

The district court viewed the possibility of a large damages award as a sufficient deterrent against Robinson soliciting Lakeview’s customers or disclosing its trade secrets. The court of appeals took issue with that conclusion because, if the damage award was high enough, Robinson would never be able to pay it.

According to the court, “A judgment proof defendant is not deterred by the threat of monetary damages …” If Robinson wants to avoid an injunction, he should have to put up some type of security to protect Lakeview if he, again, breaches his promises.

The court also wrote that Vision Solutions could play a role. That is, “If Vision is confident that it has in place controls to prevent Robinson from violating his promises to Lakeview, then Vision should be willing to pledge its credit to induce a commercial surety to stand behind Robinson’s obligation.” To date, neither Robinson nor Vision had offered to provide the sureties that would make damages an adequate remedy if Robinson breached his promise or violated an injunctive order.

A Rare Reversal

The court of appeals held that, “The balance of equities is so lopsided that Lakeview is entitled to injunctive relief …” Important to this analysis was that, if Robinson plans to abide by his commitments, then an injunction costs him nothing. On the other hand, the risks to Lakeview, should Robinson breach his promise or violate the injunction, are substantial. The balance of harms, thus, weighed heavily in Lakeview’s favor.

The only question left in the case, for the district court to answer, is the type of bond or amount of other surety that would be sufficient to withhold injunctive relief. That is, a defendant like Robinson may be able to put up sufficient security so that an award of monetary damages would be sufficient to remedy a breach. In such case, deterrence would be effective and an injunction potentially unnecessary. The case was, therefore, remanded with instructions.

John D. Finerty, Jr. is a partner in the litigation practice group at Michael Best & Friedrich LLP and can be reached at (414) 225-8269 or on the Internet at [email protected].