Nike, Inc. v. McCarthy

Citation379 F.3d 576
Decision Date09 August 2004
Docket NumberNo. 03-35818.,03-35818.
PartiesNIKE, INC., Plaintiff-Appellee, v. Eugene McCARTHY, Defendant-Appellant.
CourtUnited States Courts of Appeals. United States Court of Appeals (9th Circuit)

Steven L. Manchel, Manchel & Brennan, P.C., Newton, MA, and Christopher T. Carson, Kilmer, Voorhees & Laurick, P.C., Portland, OR, for the defendant-appellant.

Scott G. Seidman, Tonkon Torp LLP, Portland, OR, for the plaintiff-appellee.

Appeal from the United States District Court for the District of Oregon; Malcolm F. Marsh, District Judge, Presiding. D.C. No. CV-03-01128-MFM.

Before: HUG, McKEOWN and FISHER, Circuit Judges.

FISHER, Circuit Judge:

In this case we must determine the validity of a noncompete agreement under Oregon law. Eugene McCarthy left his position as director of sales for Nike's Brand Jordan division in June 2003 to become vice president of U.S. footwear sales and merchandising at Reebok, one of Nike's competitors. Nike sought a preliminary injunction to prevent McCarthy from working for Reebok for a year, invoking a noncompete agreement McCarthy had signed in 1997 when Nike had promoted him to his earlier position as a regional footwear sales manager. Under Oregon law, which governs here, a noncompete agreement generally is void and unenforceable unless agreed to "upon" either the employee's initial employment or — relevant here — the "[s]ubsequent bona fide advancement of the employee with the employer." Or.Rev.Stat. § 653.295(1)(b) (2004). McCarthy's promotion to regional footwear sales manager was undisputedly an "advancement"; the critical issues are when the advancement occurred and whether Nike obtained McCarthy's agreement not to compete "upon" that advancement. Construing the Oregon statute and reviewing the circumstances surrounding McCarthy's promotion and the execution of the noncompete agreement, we hold that the agreement meets the statutory requirements to be enforceable. We also hold that Nike has a legitimate interest in enforcing the agreement, because there is a substantial risk that McCarthy — in shaping Reebok's product allocation, sales and pricing strategies — could enable Reebok to divert a significant amount of Nike's footwear sales given the highly confidential information McCarthy acquired at Nike. Thus, we affirm the district court's preliminary injunction enforcing the agreement.

I. FACTUAL AND PROCEDURAL BACKGROUND

McCarthy began working for Nike in 1993 and became a key account manager in 1995.1 During the spring of 1997, Nike undertook a major, national reorganization. Out of this came McCarthy's promotion to eastern regional footwear sales manager — and the present dispute as to when that promotion actually occurred. On February 28, John Petersen, McCarthy's supervisor, called McCarthy and asked, "How would you like to be the regional footwear sales manager for the eastern region?" McCarthy answered, "Absolutely, yes." Petersen mentioned there would be an increase in pay but did not say what the salary would be.2

In the following weeks, McCarthy continued to perform some of his old duties while assuming some of the duties of his new position, including leading meetings and preparing a report. In order to perform these duties, McCarthy obtained confidential information he had not seen before that described the top-selling styles in the eastern region. During the week of March 10, Petersen announced to a group of employees that McCarthy was the new regional footwear sales manager. During the remainder of March, McCarthy took several business trips, which were expensed to the cost center for the regional footwear sales manager position.3

On March 27, McCarthy received a letter from Petersen confirming the offer for the regional footwear sales manager position ("Offer Letter"). The letter indicated that the "start date" for the new position was April 1, 1997. According to several Nike executives, it is not unusual for an employee to begin to perform the duties of a new position prior to the start date, in order to ensure a smooth transition once he or she "officially" starts in the new position. The Offer Letter also specified that McCarthy's salary would be $110,000, which became effective April 1. Before that date, McCarthy's salary was charged to the cost center for the key account manager position.

In addition, the Offer Letter required McCarthy to sign an attached covenant not to compete and nondisclosure agreement as a condition of acceptance of the offer. The covenant not to compete contained the "Competition Restriction" clause at issue here, stating in relevant part:

During EMPLOYEE'S employment by NIKE ... and for one (1) year thereafter, (the "Restriction Period"), EMPLOYEE will not directly or indirectly ... be employed by, consult for, or be connected in any manner with, any business engaged anywhere in the world in the athletic footwear, athletic apparel or sports equipment and accessories business, or any other business which directly competes with NIKE or any of its subsidiaries or affiliated corporations.

McCarthy signed the agreement that day. It is this noncompete agreement that Nike now seeks to enforce.

Two years later, McCarthy was again promoted, this time to the position of director of sales for the Brand Jordan division, the position he held until he resigned from Nike in June 2003. He was not asked to sign a new noncompete agreement. During the spring of 2003, McCarthy accepted a position with Reebok as vice president of U.S. footwear sales and merchandising and tendered his resignation in June. McCarthy began working at Reebok on July 22, 2003.

On August 18, 2003, Nike filed suit in Oregon circuit court, claiming breach of contract and seeking a declaratory judgment that McCarthy's employment with Reebok violated the covenant not to compete. McCarthy removed the case to the United States District Court for the District of Oregon, which had jurisdiction pursuant to 28 U.S.C. § 1332. Nike then moved for a temporary restraining order, which the district court granted on August 26. After conducting an evidentiary hearing, the court granted Nike's motion for a preliminary injunction on September 24. Specifically, the court enjoined McCarthy from "engaging in any athletic footwear business, athletic apparel business, or any other business which directly competes with Nike or any of its subsidiaries or affiliated corporations," including Reebok, through August 25, 2004. Nike, Inc. v. McCarthy, 285 F.Supp.2d 1242, 1248 (D.Or.2003). McCarthy appeals the grant of the preliminary injunction.

II. STANDARD OF REVIEW

We review the district court's decision to grant a preliminary injunction for an abuse of discretion. See Walczak v. EPL Prolong, Inc., 198 F.3d 725, 730 (9th Cir.1999). A district court abuses its discretion if it bases its decision on either an erroneous legal standard or clearly erroneous factual findings. Id. The district court's decision is based on an erroneous legal standard if it (1) did not apply the correct preliminary injunction standard or (2) misapprehended the law with respect to the underlying issues in the litigation. Id.

III. PRELIMINARY INJUNCTION

To obtain a preliminary injunction, Nike must show either (1) "a likelihood of success on the merits and the possibility of irreparable injury" or (2) "the existence of serious questions going to the merits and the balance of hardships tipping in [Nike's] favor." Gilder v. PGA Tour, Inc., 936 F.2d 417, 422 (9th Cir.1991). "These two alternatives represent extremes of a single continuum, rather than two separate tests. Thus, the greater the relative hardship to [Nike], the less probability of success must be shown." Walczak, 198 F.3d at 731 (internal citation and quotation marks omitted). We conclude that Nike has demonstrated a likelihood of success on the merits and the possibility of irreparable injury from McCarthy's employment with Reebok.

IV. VALIDITY OF THE NONCOMPETE AGREEMENT
A. Oregon Revised Statute § 653.295(1)

We first address the merits of Nike's claims. McCarthy contends that the covenant not to compete is void under Oregon Revised Statute § 653.295(1), which provides:

A noncompetition agreement entered into between an employer and employee is void and shall not be enforced by any court in this state unless the agreement is entered into upon the:

(a) Initial employment of the employee with the employer; or

(b) Subsequent bona fide advancement of the employee with the employer.

Or.Rev.Stat. § 653.295(1) (2004). As applied to McCarthy's situation, the statute requires that (1) there was a "bona fide advancement" of McCarthy and (2) that the noncompete agreement was "entered into upon" that bona fide advancement. Id. Although the parties agree that McCarthy's promotion to regional footwear sales manager involved an advancement within Nike, they disagree as to when the advancement occurred. McCarthy contends Nike did not obtain his consent to the noncompete agreement "upon" his advancement but well after it had already been implemented, and thus the agreement came too late to be enforceable under the statute. Understanding what the statute contemplates by way of a bona fide advancement will help shed some light on how to determine when an employee's advancement has occurred so as to justify an employer securing a noncompete agreement.

1. Meaning of bona fide advancement

The district court construed "bona fide advancement" as follows:

[A]n enhancement in job duties and responsibilities, a change in job title and a change in pay or benefits must converge to constitute the triggering date for a "subsequent bona fide advancement" within the meaning of ORS 653.295. An increase in pay standing alone will not suffice; a change in job responsibilities standing alone will not suffice; and a change in job title, standing alone, will not suffice — all of these elements must come together to constitute a bona fide...

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