Zagg v. Harmer , 345 P.3d 1273 ( 2015 )

2015 UT App 52_________________________________________________________
THE UTAH COURT OF APPEALS
ZAGG, INC.,
Petitioner and Appellant,
v.
LORENCE A. HARMER; HARMER HOLDINGS, LLC; AND
TELEPORTALL, LLC,
Respondents and Appellees.
Opinion
No. 20130586-CA
Filed February 26, 2015
Third District Court, Salt Lake Department
The Honorable Ryan M. Harris
No. 110917687
David L. Arrington, Peter H. Donaldson,
and David W. Tufts, Attorneys for Appellant
Marcus R. Mumford and Joshua S. Ostler,
Attorneys for Appellees
JUDGE MICHELE M. CHRISTIANSEN authored this Opinion, in
which JUDGES JAMES Z. DAVIS and STEPHEN L. ROTH concurred.
CHRISTIANSEN, Judge:
¶1 Zagg, Inc. appeals from the district court’s interlocutory
order denying its request for an injunction to prevent Lorence A.
Harmer from selling shares of Zagg stock under the terms of a
settlement agreement between the parties. We reverse that order
and remand the matter to the district court for further proceedings.
Zagg, Inc. v. Harmer
BACKGROUND
¶2 Harmer is a former director of Zagg. Upon resigning from
the board of directors, he and Zagg entered into a settlement
agreement to resolve a dispute between them.1 Under the terms of
this agreement, Harmer agreed to execute a promissory note in
favor of Zagg. The agreement also provided that Harmer could not
sell approximately 80,000 of his shares of Zagg stock (the
Encumbered Shares) until two months after the promissory note
was paid in full.
¶3 Harmer made no payments on the note and instead filed suit
seeking, among other things, a declaratory judgment that Zagg had
breached the settlement agreement and that Harmer was excused
from performing under the agreement. During the course of the
litigation, Harmer sought to sell the Encumbered Shares, and Zagg
moved the district court for a temporary injunction to prevent
Harmer from doing so pending the resolution of the parties’ claims.
The district court denied Zagg’s request for an injunction,
concluding that “the threatened harm to [Zagg] is quantifiable in
money damages and is therefore not irreparable.” Zagg petitioned
for permission to appeal from the district court’s interlocutory
order, and this court granted the petition.
ISSUE AND STANDARD OF REVIEW
¶4 The sole issue on appeal is whether the district court abused
its discretion in denying Zagg’s request for a preliminary
injunction. We will not disturb a district court’s denial of a
preliminary injunction “‘unless the court abused its discretion or
rendered a decision clearly against the weight of the evidence.’”
Miller v. Martineau & Co., 1999 UT App 216, ¶ 26, 983 P.2d 1107(quoting Aquagen Int’l, Inc. v. Calrae Trust, 972 P.2d 411, 412 (Utah
1998)).
1. Harmer signed the settlement agreement and promissory note on
behalf of himself; Harmer Holdings, LLC; and Teleportall, LLC.
20130586-CA 2 2015 UT App 52Zagg, Inc. v. Harmer
ANALYSIS
¶5 Generally, a district court may issue a preliminary injunction
only if the applicant establishes four elements: (1) “[t]he applicant
will suffer irreparable harm unless the order or injunction issues”;
(2) “[t]he threatened injury to the applicant outweighs whatever
damage the proposed order or injunction may cause to the party
restrained or enjoined”; (3) “[t]he order or injunction, if issued,
would not be adverse to the public interest”; and (4) “[t]here is a
substantial likelihood that the applicant will prevail on the merits
of the underlying claim, or the case presents serious issues on the
merits which should be the subject of further litigation.” Utah R.
Civ. P. 65A(e). The principal question here is whether the district
court erred in denying Zagg’s request for an injunction on the basis
that Zagg failed to show irreparable harm.2
¶6 Zagg argues that the district court erred in concluding that
Zagg would not be irreparably harmed by the sale of the
Encumbered Shares, because the contractual prohibition on the sale
of the shares constitutes “important bargained-for leverage that
cannot be valued by any precise standard or adequately
compensated by money damages.” Generally, irreparable harm is
“that which cannot be adequately compensated in damages or for
which damages cannot be compensable in money”—in other
words, harm from which the injured party cannot be made whole
by monetary compensation. See Hunsaker v. Kersh, 1999 UT 106, ¶ 9,
991 P.2d 67 (emphasis omitted) (citation and internal quotation
marks omitted). Thus, an injunction may be appropriate to prevent
harms that “occasion damages that are estimated only by
conjecture, and not by any accurate standard.” Id. (citation and
internal quotation marks omitted).
2. The district court expressly determined that Zagg had presented
“serious issues on the merits which should be the subject of further
litigation.” See Utah R. Civ. P. 65A(e)(4). However, because it
concluded that Zagg had failed to demonstrate irreparable harm,
the court did not address the other two elements of Zagg’s request
for a preliminary injunction.
20130586-CA 3 2015 UT App 52Zagg, Inc. v. Harmer
¶7 Zagg characterizes the prohibition on the sale of the
Encumbered Shares as “valuable, bargained-for contractual
leverage incentivizing Harmer to . . . pay the Note” and argues that
if Harmer is allowed to sell the shares, Zagg will be permanently
deprived of its ability to assert this leverage against Harmer.
However, in denying the injunction, the district court stated, “I just
don’t think we’re in a situation where we’re talking really about
anything other than money at the end of the day.” The court
explained its view that the prohibition on the sale of the
Encumbered Shares was not an “intangible right” but rather
implicated only Zagg’s “ability to get paid at the end of the day.”
The court therefore concluded that Zagg’s loss of its ability to
enforce the prohibition did not constitute irreparable harm.
¶8 We determine that the district court’s narrow focus on
whether Zagg would ultimately be able to collect on the note
overlooked the value to Zagg of this bargained-for leverage in its
ongoing dispute with Harmer. Injunctive relief is fundamentally
preventive in nature, and an injunction serves to “preserve the
status quo pending the outcome of the case.” Hunsaker, 1999 UT
106, ¶ 8 (citation and internal quotation marks omitted). While
there is no Utah authority squarely on point with this issue, courts
in other jurisdictions have recognized that injunctive relief is
appropriate to preserve the relative leverage and negotiating
positions of the parties in an ongoing dispute. See, e.g., Brady v.
National Football League, 640 F.3d 785, 792–93 (8th Cir. 2011) (per
curiam); Trilogy Portfolio Co. v. Brookfield Real Estate Fin. Partners,
LLC, No. CIV.A. 7161-VCP, 2012 WL 120201, at *7 (Del. Ch. Jan. 13,
2012). And a contractual covenant that allows one party to restrict
the other’s ability to liquidate assets or access money creates
leverage and “provides a ‘material commercial advantage’ to the
party that can invoke it.” See NAMA Holdings, LLC v. Related World
Mkt. Ctr., LLC, 922 A.2d 417, 438 (Del. Ch. 2007) (quoting Boesky v.
CX Partners, LP, CIV. A. Nos. 9739, 9744, 9748, 1988 WL 42250, at
*14–15 (Del. Ch. Apr. 28, 1988)).
¶9 In Brady v. National Football League, the Eighth Circuit Court
of Appeals considered whether the National Football League
20130586-CA 4 2015 UT App 52Zagg, Inc. v. Harmer
would be irreparably harmed if an injunction prohibiting its
exercise of a player “lockout” was not stayed pending appeal.3 640
F.3d 785, 793 (8th Cir. 2011) (per curiam). During the lockout, the
players could not play or practice with their teams or receive any
compensation from their teams. Id. at 788. The district court
enjoined the NFL from enforcing the lockout, and the NFL
requested a stay of that injunction pending appeal of the district
court’s decision. Id. at 787. The NFL contended that its inability to
utilize a lockout to prevent the players from continuing to play and
be paid would deprive it of leverage in its dispute with the players
and compromise its negotiating position. Id. at 793. The circuit
court agreed, concluding that the NFL had shown “some degree of
irreparable harm” from the loss of its advantaged negotiating
position, and granted the stay. Id. at 793–94.
¶10 Like the NFL’s ability to block the players from playing with
and being paid by their teams during an ongoing labor dispute,
Zagg has bargained for the ability to block Harmer from selling the
Encumbered Shares while the promissory note is in default, placing
Zagg in an advantaged negotiating position in resolving the
current dispute. Harmer argues that this case is distinguishable
from Brady and similar cases upon which Zagg relies, asserting that
Zagg “will not lose any ‘leverage’ because there are no ongoing
negotiations—there is only a contract dispute where [Harmer has]
asserted claims, and [Zagg] has asserted counterclaims.” Harmer
argues, essentially, that Zagg has no leverage to lose because “the
parties’ negotiations concluded with the signing of the Settlement
Agreement.” However, as Harmer recognizes, this litigation itself
is an ongoing dispute between the parties and is thus a potential
ground for further negotiation and settlement. The leverage Zagg
obtained in the original settlement agreement remains valuable and
3. The grounds to obtain a stay pending appeal under rule 8(a) of
the Federal Rules of Appellate Procedure are substantively similar
to those enumerated for issuance of a preliminary injunction under
rule 65A of the Utah Rules of Civil Procedure. See Utah R. Civ. P.
65A(e); Brady v. National Football League, 640 F.3d 785, 789 (8th Cir.
2011) (per curiam).
20130586-CA 5 2015 UT App 52Zagg, Inc. v. Harmer
“provides a material commercial advantage” to Zagg. See NAMA
Holdings, 922 A.2d at 438 (citation and internal quotation marks
omitted).
¶11 We are also persuaded by the reasoning expressed in Boesky
v. CX Partners, LP, CIV. A. Nos. 9739, 9744, 9748, 1988 WL 42250(Del. Ch. Apr. 28, 1988). There, the Delaware Court of Chancery
considered whether a partner and creditor of a partnership would
be irreparably harmed if the partnership breached a covenant in
the partnership agreement prohibiting the payment of distributions
while the notes held by the creditor-partner were in default. Id. at
*14. The partnership argued that because the planned distribution
left adequate assets in the partnership to satisfy the notes, the
creditor-partner could bring a breach-of-contract claim to recover
the amount due under the notes, and therefore had an adequate
remedy at law. Id.
¶12 The Boesky court rejected the partnership’s argument,
explaining that the partnership failed to “appreciate the distinctive
nature of [the] covenant restricting distributions . . . when an
obligation to pay money is in default.” Id. The court observed that
such a covenant has at least two purposes: “First, it retains assets
within the debtor in order to make ultimate recovery by the party
protected by the covenant more likely.” Id. The court recognized
that where a creditor can be assured that funds adequate to
discharge the debt will remain available, injunctive relief is not
necessary on that basis. See id. However, the court determined that
“[t]he negotiation of such a covenant inevitably involves a second
bargained-for benefit”:
That is leverage. Obviously, the holder of a defaulted
note is in a stronger position vis-a-vis the maker of
the note if, by reason of the default, he is empowered
to prevent distributions of earnings to the owners of
the firm, whether they are stockholders or partners.
Such a power can be of material commercial
advantage. When it is bargained for, as it was in
20130586-CA 6 2015 UT App 52Zagg, Inc. v. Harmer
connection with the issuance and placement of the
[subject notes], it cannot fairly be ignored by a court.
Id. The court explained that to deny injunctive relief because the
creditor may ultimately recover the value of the debt at some
future time “would essentially involve the judicial nullification of
the leverage-conferring aspects of such a provision.” Id. The court
further determined that “no money damage award could reliably
be calculated to compensate [the creditor-partner] for the loss of
bargained-for leverage that it would suffer” and that injunctive
relief was therefore appropriate to prohibit the distribution. Id. at
15.
¶13 We conclude that the contractual provision at issue here
confers on Zagg essentially the same type of leverage as was at
issue in Boesky. By virtue of Harmer’s default on the promissory
note, Zagg is empowered to prevent Harmer from selling the
Encumbered Shares and receiving their cash value. And while
Zagg may ultimately be able to obtain a judgment against Harmer
for the value of the note, to deny injunctive relief on that basis
would be to ignore the leverage conferred by this provision of the
settlement agreement. We also conclude that no award of money
damages could be reliably calculated to compensate Zagg for the
loss of this leverage if Harmer were allowed to sell the Encumbered
Shares.4 Accordingly, we conclude that the district court erred in
determining that Zagg would not be irreparably harmed if the
4. Harmer also contends that an appropriate measure of damages
can be calculated because Zagg “can bring suit for breach of
contract and recover the readily-ascertained monetary value of the
stock shares” if Harmer is eventually found in breach of the
agreement. However, even if we assume that Zagg would be
entitled to the value of the Encumbered Shares as a remedy for
breach of the no-sale provision, this approach would fail to
compensate Zagg for the loss of the leverage-conferring aspect of
the provision. See Boesky v. CX Partners, LP, CIV. A. Nos. 9739, 9744,
9748, 1988 WL 42250, at *14 (Del. Ch. Apr. 28, 1988).
20130586-CA 7 2015 UT App 52Zagg, Inc. v. Harmer
court did not enjoin Harmer from selling the Encumbered Shares
and that the district court exceeded its discretion in denying the
injunction on this basis. Water & Energy Sys. Tech., Inc. v. Keil, 1999
UT 16, ¶ 6, 974 P.2d 821. We therefore reverse the district court’s
order denying Zagg’s request for an injunction.5
CONCLUSION
¶14 The district court erred in concluding that Zagg would not
be irreparably harmed if Harmer were allowed to sell the
Encumbered Shares. We therefore conclude that the district court
abused its discretion in denying Zagg’s request for a preliminary
injunction on this basis, and we reverse the district court’s order.
We remand the matter to the district court to consider the
remaining factors enumerated in rule 65A and determine if an
injunction should issue.
5. Harmer urges this court to affirm on the alternative ground that
the parties modified the terms of the settlement agreement by their
subsequent acts and that Zagg therefore no longer has an
enforceable right to prevent the sale of the Encumbered Shares. “In
the limited circumstance that an appellate court chooses to affirm
on an alternate ground, it may do so only where the alternate
ground is apparent on the record.” Bailey v. Bayles, 2002 UT 58,
¶ 20, 52 P.3d 1158. The factual and legal basis of this argument
properly remains the subject of litigation below. We therefore
decline to affirm on this alternative ground.
20130586-CA 8 2015 UT App 52