Saturday, January 17, 2009

Illinois District Court Issues Partial TRO In Employee Competition Dispute (Hal Wagner Studios v. Elliott)

A federal district case out of Southern Illinois illustrates the difficulty employers face in attempting to enforce restrictive covenants - even those reasonably drafted.

The case of Hal Wagner Studios v. Elliott arises out of the school photography business. HWS provides yearbook and portrait services to schools in the Southern Illinois area. At the end of 2008, several of its key employees defected to a competitor, Herff Jones, and immediately began soliciting key HWS accounts. HWS also produced substantial evidence that certain of the employees misappropriated a substantial number of corporate documents. To its credit, HWS listed the specific documents missing, produced logs indicating suspicious copying and printing activity, and outlined for the court how it would be harmed by the defendant's use of those documents.

HWS also produced a non-compete agreement with the lead defendant, Kris Elliott. The non-compete was well-drafted and reasonably tailored; it only barred Elliott from soliciting school photography accounts which were in his defined territory or which he produced for HWS. (A separate aspect of the non-compete further barred Elliott from engaging in other competition with respect to those accounts, but the reasonableness of this clause was not discussed.)

HWS immediately filed suit and moved for a TRO on both the non-solicitation covenant and on several common-law claims seeking return of the information taken by the defendant group around the time of their mass exodus. The court denied HWS' effort to prevent Elliott from soliciting clients, but granted an affirmative injunction mandating return of documents.

In denying relief on Elliott's non-solicitation covenant, the court found that it was of questionable applicability under Missouri law because HWS had failed to pay Elliott commissions for a period of time. Though HWS claimed it adjusted Elliott's salary instead, the court found that a provision of the contract requiring modifications or amendments to be in writing doomed HWS' explanation. As such, and even though the court warned Elliott about the risks of further solicitation, the court could not issue a TRO in light of the likelihood HWS would not prevail on the merits.

The issue regarding return of documents proved easier for the court. Under a fiduciary duty theory, the court exercised its power of equity to demand immediate return and an accounting of documents HWS identified as missing. Key to this finding was the balance of harms analysis. Not only was HWS likely to prevail on the merits, but HWS was in a far worse position from not retrieving its documents than the defendants were from having unlawful continued access to them.

To its credit, the court issued a very specific TRO outlining by document name what should be returned and how the documents needed to be accounted for. Frequently, courts issue overbroad TROs without any degree of required specificity.


Court: United States District Court for the Southern District of Illinois
Opinion Date: 1/15/09
Cite: Hal Wagner Studios v. Elliott, 2009 U.S. Dist. LEXIS 2778 (S.D. Ill. Jan. 15, 2009)
Favors: Employee
Law: Missouri, Illinois

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