Technology Partners, Inc. v. Hart , 298 F. App'x 238 ( 2008 )

UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 08-1651
TECHNOLOGY PARTNERS, INCORPORATED,
Plaintiff – Appellant,
v.
BRIAN HART,
Defendant – Appellee.
Appeal from the United States District Court for the Western
District of North Carolina, at Charlotte. Graham C. Mullen,
Senior District Judge. (3:08-cv-00208-GCM)
Argued: September 23, 2008 Decided: November 4, 2008
Before TRAXLER, KING, and DUNCAN, Circuit Judges.
Affirmed by unpublished opinion. Judge Duncan wrote the
opinion, in which Judge Traxler and Judge King joined.
ARGUED: Pamela Suzanne Duffy, WISHART, NORRIS, HENNINGER &
PITTMAN, P.A., Burlington, North Carolina, for Appellant.
Virginia Whitner Hoptman, WOMBLE, CARLYLE, SANDRIDGE & RICE,
Tysons Corner, Virginia, for Appellee. ON BRIEF: Molly A.
Orndorff, WISHART, NORRIS, HENNINGER & PITTMAN, P.A.,
Burlington, North Carolina, for Appellant. Kurt E. Lindquist II,
WOMBLE, CARLYLE, SANDRIDGE & RICE, Charlotte, North Carolina,
for Appellee.
Unpublished opinions are not binding precedent in this circuit.
DUNCAN, Circuit Judge:
Technology Partners, Inc. appeals from the district court’s
refusal to issue a preliminary injunction to prevent its former
employee, Brian Hart, from working for its competitor, AMICAS.
TPI claims that such employment would breach Hart’s covenants
not to compete and result in a misappropriation of its trade
secrets. Finding no abuse of discretion in the district court’s
denial of the motion for a preliminary injunction, we affirm.
I.
Technology Partners, Inc. (“TPI”) is a software development
company that develops building and financial management software
for healthcare providers generally and radiology in particular.
TPI’s flagship product is called IMAGINEradiology (the
“Software”).
In 2003, Hart was hired out of college by TPI as an hourly-
wage programmer. Hart worked his way up through the ranks at
TPI and its subsidiaries. In January 2008, Hart accepted a
position at TPI as Vice President of Product Management. At
that time, he signed a new employment agreement (“2008
Agreement”), which included covenants not to compete in
paragraphs 8 and 13. For a one-year period following
termination, these covenants precluded Hart from accepting
employment at a “Conflicting Organization” or “any firm or
2
corporation engaged in a venture or business substantially
similar to” that of TPI. J.A. 39-41. The covenants also
included a geographical restriction preventing Hart from
accepting employment with a competitor in geographical areas in
which TPI had done business or was doing business as of the date
of Hart’s termination.
Hart’s job responsibilities at TPI gave him complete
administrative level access to all computer systems, server
records and databases. He was directly and intimately involved
in the development of TPI’s new products. He had thorough
knowledge of TPI’s technology, as well as access to TPI’s client
list and confidential financial and business information.
In late 2006 and early 2007, AMICAS, a provider of
radiology software, entered into negotiations to purchase TPI.
During the due diligence phase of AMICAS’ investigation of TPI,
AMICAS became familiar with the financial, business, and
operational underpinnings of TPI, including its books and
records, customers and business goals. Although TPI and AMICAS
did not come to terms regarding the acquisition of TPI itself,
TPI did agree to sell AMICAS rights, title and interest
(including all inventions, intellectual property and trademarks)
in the Software for $2.3 million. Through an Asset Purchase
Agreement (“APA”) AMICAS became co-owner of the Software with
TPI. The APA provided that TPI was to furnish training and
3
education services for the Software, customer installation
instruction and “current information and documentation about bug
issues, product roadmap and existing development plans.” J.A.
131, 267; Appellee Br. at 6.
From April through September 2007, Hart was assigned by TPI
to oversee the installation of the Software at AMICAS, as well
as to conduct concurrent training in the use of the Software.
In February or March 2008, Hart was contacted by a recruiter and
subsequently entered into employment discussions with AMICAS.
Hart gave written notice of resignation to TPI on March 19,
2008, stating that his last day at TPI would be April 4, 2008.
Because of some last-minute employment negotiations with TPI
(concerning whether TPI would match or surpass AMICAS’ offer),
Hart actually resigned from TPI on April 8, 2008.
Approximately three weeks later, on April 28, 2008, TPI
filed a motion for a preliminary injunction to prevent Hart from
working for AMICAS. TPI claimed that Hart’s employment with
AMICAS would both breach his covenants not to compete and result
in a misappropriation of its trade secrets. On May 6, 2008,
Hart removed the case to federal court on the basis of diversity
because Hart is a citizen and resident of South Carolina while
TPI is a corporation organized in, and principally operating in,
North Carolina. On May 21, 2008, the district court denied
TPI’s motion for a preliminary injunction. TPI timely appealed.
4
II.
This court reviews the grant or denial of a preliminary
injunction for abuse of discretion, “recognizing that
preliminary injunctions are extraordinary remedies . . . to be
granted only sparingly and in limited circumstances.” Micro
Strategy, Inc. v. Motorola, Inc., 245 F.3d 335, 339 (4th Cir.
2001) (citations omitted). A court abuses its discretion if its
conclusion is guided by erroneous legal principles or rests upon
clearly erroneous factual findings. Westberry v. Gislaved Gummi
A.B., 178 F.3d 257, 261 (4th Cir. 1999). Under the abuse of
discretion standard, this court may not substitute its judgment
for that of the district court, “rather, we must determine
whether the court’s exercise of discretion, considering the law
and the facts, was arbitrary or capricious.” United States v.
Mason, 52 F.3d 1286, 1289 (4th Cir. 1995).
The grant or denial of a preliminary injunction is governed
by the so-called Blackwelder analysis, which has three steps.
Blackwelder Furniture Co. of Statesville, Inc. v. Seilig Mfg.
Co., Inc., 550 F.2d 189 (4th Cir. 1977). First, the court must
“balance the ‘likelihood’ of irreparable harm to the plaintiff
[if the injunction is denied] against the ‘likelihood’ of harm
to the defendant [if the injunction is granted].” Id. at 195.
Second, the court must determine whether the plaintiff is likely
to succeed on the merits. Id. at 196. However, if the balance
5
in the first step is struck in favor of the plaintiff and there
are grave or serious questions presented, the plaintiff need not
also show likely success on the merits. Id. The importance of
showing likelihood of success increases as the probability of
irreparable harm diminishes. Id. at 195. The third step of the
analysis is the court’s determination of where the “public
interest” lies with regard to the grant or denial of the
preliminary injunction. Id. at 196-97. Blackwelder also
teaches that the steps of the analysis are intertwined and each
can affect the other. Id. at 196.
A. Covenants not to compete
In its determination of whether to grant a preliminary
injunction on the basis of TPI’s claim of breach of the
covenants not to compete, the district court began its analysis
with the first Blackwelder step, balancing the potential harm to
TPI against the potential harm to Hart. After considering live
argument by the parties, the APA, and the submitted affidavits, 1
1
These affidavits included an affidavit by Charles Kauffman,
which detailed the specific technology that pre-dated or post-
dated the March 2007 APA. J.A. 351-56. TPI, in live argument
before the district court, proffered Kauffman as a witness on
this issue. The district court declined to hear Kauffman’s
testimony, apparently relying instead on his affidavit. TPI
asserts this was an error. See, e.g., Reply Br. at 5-7. TPI,
subsequent to the live argument, submitted a second affidavit by
Kaufman on this issue. J.A. 364-67. Because the record shows
(Continued)
6
the court found that the harm to TPI if the injunction was
denied (thereby allowing Hart work for AMICAS) was mitigated
because “there’s a significant possibility that Technology
Partners was required by the terms of [the APA] to transfer
substantial chunks of what they now claim are trade secrets over
to somebody that paid them . . . Certainly enough of the stuff
that they were required to transfer and the training they were
required to do would clearly have suggested a lot of the issues
that they now say are trade secrets.” J.A. 199. In other
words, according to the district court, TPI’s earlier decision
to sell the source code to the Software to AMICAS, and to
continue to service the Software, significantly undermined its
current claim that the denial of a preliminary injunction would
irreparably harm TPI. As to Hart, the district court found that
the harm to him if the injunction was granted was readily
ascertainable, consisting of loss of his increased compensation
at AMICAS 2 and the covenants’ requirement to stay outside the
market for a “fairly extended period of time.” J.A. 199. The
that the district court had a reasonable basis for declining to
hear Kaufman’s live testimony (i.e., Kaufman’s affidavit on the
issue was already in the court’s possession), the court did not
abuse its discretion in this regard.
2
Hart’s job with AMICAS represented a 67% pay raise
($150,000 versus $90,000) with added incentive bonuses of
$90,000. It was unlikely to be matched by any alternative
offer. J.A. 183; J.A. 199.
7
district court ultimately concluded that the balance of harms
did not decidedly tip in favor of either of the parties.
TPI maintains that the district court erred in not finding
that the harm to TPI outweighed the harm to Hart. TPI asserts
that the harm it would suffer flowed from the fact of Hart’s
significant exposure to both its clients and its confidential
development activities. TPI describes the loss to Hart as a
fairly minimal restriction of his employment opportunities.
Both characterizations miss the mark. The district court
appropriately recognized and weighed both competing harms. As
to the harm to TPI, the record reflected a strong possibility
that AMICAS had already learned much of the information at issue
independently of Hart, either through its due diligence during
earlier negotiations with TPI or through the APA. Although TPI
contended at oral argument that the district court’s recognition
that not all valuable information had been passed to AMICAS
compelled a decision in its favor, this misstates the function
of the Blackwelder analysis. The fact that the district court
conceded that there may be some harm to TPI does not undermine
its conclusion regarding the balance of harms. Similarly, with
respect to the harm to Hart, the district court appropriately
evaluated both the geographical and temporal breadth of the
covenants in concluding that the balance of harms tipped neither
way.
8
Having found the balancing test inconclusive, the district
court proceeded to the second step of Blackwelder, analyzing
whether TPI was likely to succeed on the merits. This step
entails an analysis of whether the covenants not to compete were
likely to be enforceable. If the covenants were enforceable,
TPI would be likely to succeed on the merits of its breach of
covenants claim. The district court, however, found that there
were serious doubts about the enforceability of the covenants
not to compete, both because it was unclear whether new
consideration was given to support them and because of the
covenants’ breadth.
Conflicting claims were presented as to consideration. On
the one hand, Hart contended that the change of positions
accompanying the 2008 Agreement was a mere formality that
followed on the dissolution and merger into TPI of a former
subsidiary for which Hart had been working. Hart argued that no
change in pay or substantive responsibilities occurred. On the
other hand, TPI maintained that its subsidiary was never merged
into TPI and that Hart was given new responsibilities, although
it acknowledged that his compensation was not increased. Given
the reasonable ground for doubt, we cannot conclude that the
district court’s finding was clearly erroneous.
As to the breadth of the covenants, TPI argues the district
court erred in failing to exercise North Carolina’s “blue
9
pencil” rule to strike the offending portions and then enforce
the remainder. North Carolina’s “blue pencil” rule, however, is
narrow and its employment by the courts is discretionary. 3 When
the language of a non-compete agreement is overly broad, “North
Carolina’s ‘blue pencil’ rule severely limits what the court may
do to alter the covenant. A court at most may choose not to
enforce a distinctly separable part of a covenant in order to
render the provision reasonable.” Hartman, 450 S.E.2d at 920;
see also Whittaker Gen. Medical Corp. v. Daniel, 379 S.E.2d 824,
828 (N.C. 2001). The court may not otherwise revise or rewrite
the covenant.
One need only attempt to apply the blue pencil rule to the
covenants at issue to demonstrate how unworkable such an option
would have been. For example, had the district court been
willing to strike the time limitations, the action would have
voided the covenants because there would have been no time
constraints and the court would not have been free to substitute
a period it found acceptable. Similarly, no amount of blue
penciling could have addressed the breadth or ambiguity of the
terms “conflicting organizations” or “business substantially
3
The language in Hartman v. Odell, 450 S.E.2d 912 (N.C. Ct.
App. 1994) regarding a court’s decision of whether or not to
“blue line” ( “may do,” “may choose”) indicates that an overly
broad covenant is subject to an abuse of discretion standard.
TPI agrees. See Appellant Br. at 20-21.
10
similar.” Any attempt to do so would simply eliminate the
reference to any organization for which Hart could not work. 4
Consequently, TPI has provided no basis for assigning error to
the district court’s decision not to blue pencil the covenants
not to compete, and the court properly exercised its discretion
in this regard. Further, since the court’s doubt about TPI’s
likelihood of success on the merits is amply supported by the
record, there was no error in the court’s finding on this issue.
With respect to the third step of the Blackwelder analysis,
the district court found that the public interest weighed
against granting a preliminary injunction. The court concluded
that in sharply disputed cases like this, the public interest is
best served if the parties are subject to the normal litigation
process. In light of the court’s earlier findings on the
balance of harm and the probability of success on the merits,
this determination of the public interest was not in error.
Just as it is a matter of public interest to enforce valid non-
compete agreements, similarly it is a matter of public interest
to see that non-compete agreements that are likely invalid do
4
TPI’s argument about blue penciling also seems to neglect
the context of the district court’s ruling, i.e., a
determination of TPI’s likelihood of succeeding on the merits.
Since the court was not actually determining the validity of the
covenants on the merits, the employment of blue penciling by the
district court to try to ensure their validity would not have
been appropriate.
11
not receive the extraordinary relief of a preliminary
injunction. Since the district court employed the proper legal
standards and its factual findings were not clearly erroneous,
the district court did not abuse its discretion in denying TPI’s
motion for a preliminary injunction on the basis of the breach
of covenants claim.
B. Trade secrets
In determining whether to grant a preliminary injunction on
the basis of TPI’s trade secrets claim, the first step in the
district court’s Blackwelder analysis encompassed the second. 5
In balancing the harms, the court found, as we have noted, that
much of what TPI was claiming as trade secrets probably already
had been, or was required to be, disclosed to AMICAS under the
APA, and that this voluntary transfer significantly mitigated
any potential harm to TPI. Although TPI argues that there could
be no harm to Hart in not disclosing the trade secrets, this
argument ignores the fact that the injunctive relief TPI seeks
would prevent Hart from working for AMICAS. The district
court’s analysis in this regard was not erroneous.
5
Also, to a considerable extent, the district court’s
Blackwelder analysis of TPI’s trade secrets claim was embedded
within its analysis of TPI’s breach of covenants claim.
12
In balancing the competing harms, the district court was
also considering the likelihood of TPI’s success. By finding
that “there’s a significant possibility that Technology Partners
was required by the terms of [the APA] to transfer substantial
chunks of what they now claim are trade secrets over to somebody
that paid them,” the district court was simultaneously finding
that TPI had not made a showing that it would likely succeed on
its trade secrets claim. At oral argument, TPI maintained that
the district court had impermissibly muddled the steps of the
Blackwelder analysis. However, while Blackwelder held that if
the plaintiff could show irreparable harm then the plaintiff did
not need also show likelihood of success on the merits,
Blackwelder did not hold that the consideration of the two steps
must be strictly segregated. Indeed, Blackwelder recognized
that the steps of the analysis are frequently intertwined. 550
F.2d at 196. Since TPI failed to make the showing of
irreparable harm, the district court here needed to proceed to
the second step but it was under no obligation to rigidly
compartmentalize its analysis of the two. The district court’s
finding that the first two steps of the Blackwelder analysis
weighed against granting TPI injunctive relief on the basis of
its trade secrets claim was not in error.
13
The third step of the district court’s analysis – the
determination of the public interest – is identical for both
TPI’s claims and has been articulated above.
III.
Because the district court did not abuse its discretion in
denying TPI’s motion for a preliminary injunction, the district
court’s order is
AFFIRMED.
14