As directed by the court of appeals, a district court judge reconsidered his denial of a non-compete covenant case injunction but reached the same result on reconsideration. He also stated why he would not have extended the covenant’s expiration date even if he had been inclined to enter the injunction. Ocean Beauty Seafoods LLC v. Pacific Seafood Group Acquisition Co., No. C14-1072 (W.D.Wash., Oct. 30, 2014) (Ricardo S. Martinez, J.), remanded, No. 14-35950 (9th Cir., May 8, 2015), on remand, (W.D. Wash., June 25, 2015).
Status of the case. Last October, a federal district court judge in Seattle denied a motion for preliminary injunction in a lawsuit alleging violation of a non-competition covenant. The unsuccessful movant appealed to the Ninth Circuit Court of Appeals. Concluding that the lower court had made a number of factual, legal and procedural errors, the appellate court remanded for the district court’s reconsideration. Last month, the Seattle judge again declined to issue an injunction order. He also explained why, if he had issued the order, he would not have equitably tolled expiration of the one-year covenant.
Background. When Michael Coulston first became a Pacific Seafood employee in January 2011, he signed a covenant barring him, for 12 months after termination, from engaging in business with a competitor of the company in any “geographic area” in which it does business. The covenant was governed by Oregon law. In July 2014, he left Pacific and went to work for Ocean Beauty. Both companies are seafood processors and distributors on the West Coast. Pacific sued Ocean Beauty and Coulston.
Judge Martinez’s initial denial of a preliminary injunction. In his 2014 decision, Judge Martinez determined that Pacific Seafood (a) had failed to demonstrate a likelihood of success on the merits of its claim against Ocean Beauty and Coulston, and (b) had failed to show that it would sustain irreparable harm absent injunctive relief. There was no definition of “geographic area” in the covenant. The judge said it appeared to encompass the entire west coast of the U.S. which he found to be unreasonable since Coulston had a more limited territory. Moreover, Judge Martinez held that Coulston was not shown to have diverted, or was likely to divert, any business to Ocean Beauty based on his knowledge of Pacific’s business practices.
The Ninth Circuit’s decision. Marked as a “Memorandum” and “Not for Publication,” the appellate court’s ruling took issue with Judge Martinez’s findings, conclusions and denial of Pacific Seafood’s motion to supplement the record. According to the appeals court, Coulston’s territory while he worked for Pacific was more extensive than the district court indicated and, moreover, Oregon law does not render a covenant automatically unenforceable even if it covers an overly broad territory. Further, Pacific was held to have a protectable interest in information Coulston possessed regarding Pacific’s “marketing plans and product allocation.” The Ninth Circuit also noted that the trial court seemingly did not appreciate the difference between evidence of actual harm and a showing of a likelihood of harm. The trial court’s denial of Pacific’s motion to supplement the record was said to be an abuse of discretion as well. The case was remanded to Judge Martinez for reconsideration. Finally, in a footnote, the appellate court directed the district court, if it grants a preliminary injunction, to consider equitably extending the non-compete’s one-year term.
Judge Martinez’s second denial of an injunction. On remand, the judge said he “remains unconvinced” that “the geographic scope of the non-compete agreement is reasonable.” Further, he stated that the record before him did not persuade him that “there is a substantial risk Ocean Beauty would be able to divert a significant part of Pacific Seafood’s business given Mr. Coulston’s knowledge” or that he was “likely to divert business to Ocean Beauty based on any such knowledge.” So, Judge Martinez again found a failure by Pacific to show that it would suffer irreparable harm in the absence of an injunction.
In light of the Ninth Circuit’s footnote, and recognizing that the appellate court might disagree with his second denial of an injunction, Judge Martinez discussed equitable tolling. The issue potentially was relevant because of the imminent expiration of Coulston’s one-year non-compete. The judge noted that the Oregon Supreme Court, the Ninth Circuit and many other courts of appeal have declined to extend a covenant that has expired or is about to expire, and he said that the record before him warranted a similar ruling in this case.
Takeaways. Counsel drafting, seeking to enforce, or defending against an effort to enforce, a non-compete should consider the following:
Equitable tolling. A non-competition agreement often expresses the parties’ intent that the employer shall be entitled to an extension of the injunction period equal to the length of time during which the ex-employee engaged in illicit competition. The non-compete in the Ocean Beauty litigation did not include such a provision. Arguably, Pacific Seafood’s request for tolling asked the court to amend the covenant by adding a term to which Coulston had not consented. But a contrary contention could be made: assuming the covenant was enforceable, failure equitably to toll would deprive Pacific of the benefit of its bargain which was for 12 months’ freedom from Coulston’s competition. A party seeking equitable tolling should present persuasive, admissible evidence justifying an extension of the non-compete period.
Geographic scope and time limit of the non-compete. Larger and longer are not necessarily preferable when it comes to the area and temporal provisions set forth in a restrictive covenant. If excessive, they may cause unenforceability. Geographic scope and time limit terms may approach, but they should never exceed, the maximums that are reasonable under the circumstances.
Be gracious to a judge whose prior opinion has been remanded for reconsideration. Judge Martinez emphasized that he disagreed with the appellate court’s order, and he did not take kindly to what he viewed as Pacific Seafood rubbing his face in the remand order. His second opinion expressed annoyance — to say the least — at what he called Pacific’s “rejoic[ing] in reiterating the numerous ‘errors’ found by the Ninth Circuit.” He also took “exception to the tone” of Pacific’s briefs and Pacific’s “apparent lack of respect for this Court and its prior findings.” If Pacific wanted to generate sympathy for its legal position, understatement might have been more effective. However, he might have reached the same result in any event.