Monday, January 26, 2009

Minnesota Court Refuses to Enter Headstart Injunction In Absence of Non-Compete Agreement (Cenveo Corp. v. Southern Graphic Systems)

There are generally three ways an employer can prevent an ex-employee's post-termination competitive activity: (1) breach of a valid non-compete agreement; (2) breach of a fiduciary duty of loyalty; and (3) misuse of trade secrets or other confidential information. In the case of the last two theories, the scope of injunctive relief is always the subject of vigorous debate. Specifically, in the case of egregious pre-termination wrongful conduct or extensive trade secret theft, a court may deploy its power of equity to order what in effect is a non-compete remedy.

However, almost always, the employer needs a factually compelling case, and not mere isolated tidbits of circumstantial evidence. To illustrate, a Minnesota court last week denied an employer's motion for preliminary injunction, which sought to prevent several ex-employees from servicing its customers. None apparently had a non-compete agreement. But the dispute arose out of a mass exodus from one direct marketing firm to another, and there appeared to be some pre-termination competitive activity as well as limited disclosure of one business document.

The court, though granting the injunction to protect disclosure of some of the identified information, denied the relief pertaining to client solicitation. In particular, the court noted that ordering the defendants to stay away from certain clients would change the status quo, since the competitive activity took place while they were still employed by Cenveo several months earlier. Courts have gone either way on this issue, with Illinois one of the states a bit more flexible on the status quo issue and more willing to grant a so-called "headstart" injunction. That type of injunction can enable the plaintiff to recapture some of the headstart gained by unfair competitive activity. In this case, the Minnesota court found that a legal remedy of damages would be adequate, and it never addressed the propriety of a headstart injunction.

Additionally, the court noted the potential harm to third-parties - the customers themselves - from being denied the opportunity to work with a vendor of their choosing. This, too, is a fact with undetermined relevance. The cases come out both ways, with some placing more importance on third-party preferences than others.


Court: United States District Court for the District of Minnesota
Opinion Date: 1/22/09
Cite: Cenveo Corp. v. Southern Graphic Systems, Inc., 2009 U.S. Dist. LEXIS 4542 (D. Minn. Jan. 22, 2009)
Favors: Employee
Law: Minnesota

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