Wednesday, February 11, 2009

On Preliminary Injunction Hearing, Court Enforces Non-Compete Agreement Against Kris Elliott (Hal Wagner Studios v. Elliott)

I wrote several weeks ago about a temporary restraining order partially granted in the case of Hal Wagner Studios v. Elliott, a non-compete dispute out of the Southern District of Illinois. At that time, the court granted the plaintiff only part of what it requested - a TRO requiring the defendants to return certain business documents taken from their former employer prior to their sudden departure at the end of 2008. I also noted that the court declined to enforce the covenant not to compete against the main defendant, Kris Elliott. That said, the court warned Kris Elliott that - in essence - he was proceeding at his own peril.

Less than a month later, Hal Wagner Studios was able to obtain the broad relief it initially requested. As my previous post indicates, the dispute arises out of the photography services business. HWS sells photography and yearbook services to schools in a number of different regions, including Missouri and Southern Illinois. Kris Elliott was in the same business in 1994, at which time HWS purchased the assets of Elliott's business. Apparently, Elliott's non-compete agreement was signed at or around the time he sold his business to HWS.

The non-compete was fairly narrow, particularly for one arising out of the sale of a business. In essence, it barred Elliott from competing with school photography accounts in a defined territory which appears commensurate with the geographic region he serviced before the sale to HWS.

As with many change-in-control situations where the seller party is retained following a sale, the relationship deteriorated. At least from the court's opinion, it appears the source of Elliott's grievance with HWS concerned the amount of money he was being paid and his bonus structure. At the end of 2008, Elliott and his wife, Pam, led a mass exodus out of HWS' Edwardsville, Illinois location. The resignations were abrupt and an array of key business documents and electronic files were missing. Pam Elliott, in an effort to avoid her husband's non-compete restrictions, solicited at least 21 accounts in the former Elliott territory.

The primary issue at the preliminary injunction stage concerned the enforceability of the non-compete agreement in Kris Elliott's contract. The contract was governed by Missouri law. Elliott's main defense concerned his argument that HWS was in breach of its obligation to him by reducing his income and salary. In this respect, Elliott's own words appeared to do him in.

The court cited a number of exhibits where it appeared Elliott agreed to the changes in bonus structure and salary rate, indicating that Elliott confirmed the alterations with Hal Wagner and appeared - at least at the time - satisfied with what he was being paid. Though it appears HWS could have been more diligent in complying with the requirement that any modifications be in writing, the court clearly had little sympathy for Elliott - particularly since he did not voice any objections about the change in pay and actually documented his consent to them.

The case did not discuss whether the non-compete agreement should be adjudicated under the traditional employee standard or the less stringent sale-of-business standard. In Illinois, it seems clear that the non-compete would be viewed under the sale-of-business standard, which in essence presumes that a legitimate business interest exists in favor of the promisee (here, HWS). The non-compete Elliott signed was incidental to the sale of assets to HWS. Whether it was included within the asset purchase agreement, a covenant not to compete, or an employment agreement is irrelevant.

Given the patently reasonable terms of the non-compete (a covenant far less restrictive than those typically seen in a sale of business) as well as the insufficient evidence adduced as to HWS' alleged breach of contract, Elliott appears to have little hope of avoiding a permanent injunction for the balance of his non-compete term.

Finally, the injunction order issued by the court prohibited Pam Elliott, Kris' wife, from soliciting accounts as well - despite the fact she had no governing non-compete agreement. This was an easy call for the court, as Pam's work in recruiting HWS clients at her husband's direction presented a paradigm case of impermissible indirect solicitation.

There are a number of obvious signs when a court will enforce a non-compete agreement, and this dispute presented quite a few of them, including:

(1) a non-compete signed in an arms-length transaction;
(2) the taking or misappropriation of important company documents;
(3) deletion of corporate data;
(4) surprise resignation or an orchestrated mass exodus of employees;
(5) trying to crawl through a non-compete loophole by funneling sales activity to someone not a party to the agreement; and
(6) confused third-party customers.


Court: United States District Court for the Southern District of Illinois
Opinion Date: 2/6/09
Cite: Hal Wagner Studios, Inc. v. Elliott, 2009 U.S. Dist. LEXIS 8892 (S.D. Ill. Feb. 6, 2009)
Favors: Employer
Law: Missouri

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