Indiana Court of Appeals Rules on Irreparable Harm, Laches, Extension Clauses, and More in Recent Restrictive Covenant Case

by Ogletree, Deakins, Nash, Smoak & Stewart, P.C.
Contact

The Indiana Court of Appeals recently issued a restrictive covenant ruling addressing several significant issues. On November 30, 2016, in Hannum Wagle & Cline Engineering, Inc. v. American Consulting, Inc., the Indiana Court of Appeals elaborated on a number of important issues in restrictive covenant cases:

Irreparable Harm

Business development activities that divert the pipeline of opportunities for a company can constitute irreparable harm regardless of lost business. 

Reasonable Restrictions

Business development activities, such as fishing trips and golf outings with former clients, violated a defendant’s noncompetition provision.

Laches

A better practice is to object to known violations of restrictive covenants, but investigating internally and consulting counsel before filing suit 10 months later does not constitute laches—especially when there is no identified prejudice to the defendants.

Non-Solicitation

A party’s claim that it has finished recruiting employees from a prior employer is not a basis to avoid a preliminary injunction based on a non-solicitation contract.

Enforceability of Extension Clauses

Courts should not enforce extension clauses for the period of the violation at the preliminary injunction stage, instead saving that for a final determination on the merits.

Factual Background

American Consulting, Inc., d/b/a American Structurepoint, Inc. (ASI) sued several former employees along with their new employer, Hannum Wagle & Cline Engineering, Inc., d/b/a HWC Engineering, Inc. (HWC), a competitor in the construction industry, for breach of noncompetition and non-solicitation agreements.

ASI moved for a preliminary injunction four months later. Marion Superior Court Judge Heather A. Welch held a three-day evidentiary hearing and then issued findings of fact and conclusions of law. ASI obtained the preliminary injunction against HWC and three former employees: Marlin A. Knowles, Jr., Jonathan A. Day, and David Lancet. Knowles, who had held a senior position at and an ownership interest in ASI, persuaded the trial court several months later to dissolve the injunction against him on the grounds that the two-year period was expiring.

The Courts’ Decisions

The Indiana Court of Appeals considered the injunctions against the three employees on noncompetition and non-solicitation grounds and the dissolution of the injunction against Knowles. The court of appeals affirmed the trial court in all respects. 

Irreparable Harm: Business development activities that divert the pipeline of opportunities for a company can constitute irreparable harm regardless of lost business.

The trial court believed the testimony of ASI’s president that Knowles’s business development activities with ASI clients were diverting ASI’s pipeline of business opportunities. The harm from Knowles’s activity was “necessarily intangible” but damaging nonetheless. And the fact that the damage could not be quantified is an argument in favor of equitable relief. The court of appeals affirmed the finding that Knowles was damaging ASI’s goodwill and was “a present and imminent threat” to its business.

Reasonable Restrictions: Business development activities, such as fishing trips and golf outings with former clients, violated a defendant’s noncompetition provision.

The trial court ruled that it was reasonable to limit both business development and formal business activity under Knowles’s noncompetition agreement. The trial court again agreed with an ASI executive about the need to build relationships, trust, and goodwill with clients in order to obtain future business. The trial court also noted that Knowles had built these relationships while with ASI, which had paid for his business development activities. 

The appellate court found that the restriction on formal work activities was reasonable because Knowles could engage in internal operations and work with HWC clients as long as he had not worked with them while at ASI. 

Laches: A better practice is to object to known violations of restrictive covenants, but investigating internally and consulting counsel before filing suit 10 months later does not constitute laches—especially when there is no identified prejudice to the defendants.

The trial court ruled that a 10-month delay in filing suit was reasonable and did not constitute laches under the circumstances even though ASI knew that Knowles was working for a competitor and had social contact with ASI clients. 

The Indiana Court of Appeals said “the better practice may have been” for ASI to object to the known activities of its former employees, but its delay for internal investigation and consulting counsel was not unreasonable. The court of appeals also found no prejudice from the delay.

Non-Solicitation: A party’s claim that it has finished recruiting employees from a prior employer is not a basis to avoid a preliminary injunction based on a non-solicitation contract.

The defendants argued they were done recruiting from ASI, so there was no need for an injunction based on the non-solicitation agreement. The trial court expressly found that two defendant witnesses lied or were deceptive, so it could not trust that HWC was finished soliciting ASI employees. The court of appeals found that the trial court was within its discretion to enjoin solicitation based on further recruitment or even the threat of it.

Enforceability of Extension Clauses: Courts should not enforce extension clauses for the period of the violation at the preliminary injunction stage, instead saving that for a final determination on the merits.

Knowles asked the trial court to dissolve the injunction against him because the two-year period in which he was restricted from competing with his former employer was expiring. ASI argued that the injunction should be extended for the same period of time for which Knowles violated the noncompete, starting on the date of its violation and lasting until the injunction was entered, as was provided for in the agreement’s extension clause. 

The trial court followed a 2013 Court of Appeals case, which held that a preliminary injunction was not an appropriate vehicle to extend a noncompetition ban. Since the point of a preliminary injunction is to preserve the status quo, any extension of the noncompetition provision should wait until a final determination on the merits, the Kuntz court held. 

The court of appeals rejected ASI’s attempts to distinguish its contract. Instead, the court found that Kuntz controls and does not allow for enforcement of an extension clause at the preliminary injunction stage. 

Conclusion

Indiana employers may want to reevaluate their noncompetition and non-solicitation agreements in light of this ruling to ensure they protect such legitimate interests as goodwill and relationships based on business development activities. Employers should also be aware that preliminary injunctive relief is harder to obtain the longer a company waits to take action after learning of a breach of a restrictive covenant.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Ogletree, Deakins, Nash, Smoak & Stewart, P.C. | Attorney Advertising

Written by:

Ogletree, Deakins, Nash, Smoak & Stewart, P.C.
Contact
more
less

Ogletree, Deakins, Nash, Smoak & Stewart, P.C. on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.