Curtis 1000, Inc. v. Youngblade, No. C 94-4117.

• Court: United States District Courts. 4th Circuit. Northern District of West Virginia
• Citation: 878 F. Supp. 1224
• Decision Date: 27 January 1995
• Docket Number: No. C 94-4117.
• Parties: CURTIS 1000, INC., Plaintiff, v. Daniel YOUNGBLADE, Defendant.

878 F. Supp. 1224

CURTIS 1000, INC., Plaintiff,
v.
Daniel YOUNGBLADE, Defendant.

No. C 94-4117.

United States District Court, N.D. Iowa, Western Division.

January 27, 1995.

878 F. Supp. 1225

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878 F. Supp. 1226

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878 F. Supp. 1227

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878 F. Supp. 1228

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878 F. Supp. 1229

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878 F. Supp. 1230

Roger T. Stetson, Belin, Harris, Lamson, McCormick, Des Moines, IA, for plaintiff Curtis 1000

James C. Hanks and Douglas L. Phillips, Klass, Hanks, Stoos, Stoik, Mugan & Villone, Sioux City, IA, for defendant Youngblade.

ORDER REGARDING PLAINTIFF'S MOTION FOR PRELIMINARY INJUNCTION PURSUANT TO FED.R.CIV.P. 65(a)

BENNETT, District Judge.

 I. INTRODUCTION AND PROCEDURAL HISTORY ..................................... 1231
                 II. FINDINGS OF FACT ........................................................ 1232
                 A. Curtis 1000's Training Of Its Sales Staff ............................ 1233
                 1. Level I Contacts .................................................. 1233
                 2. Level II Contacts ................................................. 1234
                 3. Level III Contacts ................................................ 1234
                 4. Level IV Contacts And Other Training .............................. 1235
                 B. Restrictive Covenants ................................................ 1236
                 C. Youngblade's Employment History With Curtis 1000 ..................... 1238
                 1. The Development Of Problems Between Youngblade And Curtis 1000 .... 1239
                 a. Compensation ................................................... 1239
                 b. Short Counting ................................................. 1239
                 2. Youngblade's Termination .......................................... 1240
                 D. Events After Youngblade's Termination ................................ 1241
                III. CONCLUSIONS OF LAW ...................................................... 1243
                 A. Standards For Granting A Preliminary Injunction ...................... 1243
                 1. State Or Federal Standards? ....................................... 1243
                 2. Dataphase And Its Progeny ......................................... 1244
                 a. Purpose And Standards For Preliminary Injunctions .............. 1244
                 b. The Individual Factors And Their Relationship .................. 1245
                 i. Likelihood Of Success On The Merits ........................ 1246
                 ii. Threat Of Irreparable Harm ................................. 1247
                 iii. Balance Of Harm ............................................ 1248
                 iv. The Public Interest ........................................ 1249
                 3. Stipulated Grounds For Injunction ................................. 1249
                 B. Conflict of Laws ..................................................... 1251
                 1. The Iowa Conflict Of Laws Rules For Contract Cases ................ 1251
                 2. Application Of The Choice Of Law Rules ............................ 1253
                 a. The Chosen State Has No Substantial Relationship ............... 1254
                 b. The Chosen State's Law Is Contrary To Iowa's Policy ............ 1255
                 C. The Covenant Not To Compete .......................................... 1256
                 1. Covenants Not To Compete Under Iowa Law ........................... 1257
                 a. An Overview .................................................... 1257
                 b. The Consideration Requirement .................................. 1259
                 c. The Enforceability Analysis .................................... 1260
                 d. Summary Of Iowa Law ............................................ 1263
                 2. Covenants Not To Compete Under Delaware Law ....................... 1264
                 3. Comparison Of Iowa And Delaware Law ............................... 1267
                 D. The Grant Or Denial Of A Preliminary Injunction:
                 Application Of The Dataphase Factors ............................... 1268
                 1. Likelihood Of Success On The Merits:
                 The Validity And Enforceability Of This Covenant ............... 1268
                 a. Validity And Enforceability Under Iowa Law .................... 1269
                 b. Under Delaware Law ............................................ 1272
                

878 F. Supp. 1231
                III. CONCLUSIONS OF LAW â Continued
                 D. The Grant Or Denial Of A Preliminary Injunction: â Continued
                 2. Threat of Irreparable Harm ................................. 1272
                 3. Balance Of Harms ........................................... 1274
                 4. Public Interest ............................................ 1274
                 E. The Requirements Of Fed.R.Civ.P. 65(c) & (d) .................. 1275
                 1. The Scope Of A Preliminary Injunction ...................... 1275
                 2. Fed.R.Civ.P. 65(c)'s Security Requirement .................. 1275
                IV. CONCLUSION ....................................................... 1280
                

This application for a preliminary injunction requires the court to confront a number of intriguing questions raised by a covenant not to compete in an employment contract. First, the court must decide whether a covenant not to compete in an employment contract should be enforced according the law chosen in the contract between the parties (Delaware), which is the law of a forum with no substantial contacts with the parties or the transaction, or the law of the state in which the contract was substantially performed (Iowa). Second, the court must decide whether the covenant is valid and enforceable under the law of either state, identifying in the process significant differences between those bodies of law concerning covenants not to compete. Third, the court must decide whether issuing a preliminary injunction is appropriate in the circumstances of this case. This third issue requires the court to consider what standards apply to the determination of whether the injunction should issue, state law, federal law, or a clause of the contract between the parties which purportedly establishes a lower threshold for this court's exercise of such equitable powers.

An employer, a nationally-recognized manufacturer of business forms and papers, seeks a preliminary injunction against a former top sales representative enjoining the sales representative from violating a covenant not to compete found in the sales representative's employment contract. The sales representative, who was terminated from his position shortly after filing a declaratory judgment action in Iowa district court seeking to determine his rights under the covenant not to compete, has found employment with another local business, and has allegedly been contacting customers he originally obtained for his former employer. Some of those customers have switched allegiance to the sales representative's new company, allegedly causing or potentially causing his former employer serious economic harm and other injuries. The court notes that from at least late 1993, the employee's repeated indications that he could do better elsewhere and could probably take some of his customers with him when he went "hung like the sword of Damocles over the heads of" the employer. The value of the Damoclean sword is "that it hangs â not that it drops." LaSociete Generale Immobiliere v. Minneapolis Community Development Agency, 44 F.3d 629, 637 (8th Cir.1994) (quoting Marshall, J., dissenting, in Arnett v. Kennedy, 416 U.S. 134, 231, 94 S.Ct. 1633, 1682, 40 L.Ed.2d 15 (1974)). When it did drop in this case, it may have severed more than the employee anticipated.

I. INTRODUCTION AND PROCEDURAL HISTORY

This matter comes before the court pursuant to the motion of plaintiff Curtis 1000, Inc. ("Curtis 1000"), for a preliminary injunction filed December 22, 1994, in an action filed the same day. On January 6, 1995, an amended complaint was filed by Curtis 1000. Curtis 1000's amended complaint seeks, in Count I, an injunction for breach of contract, and, in Count II, an injunction for violation of Iowa's Uniform Trade Secrets Act, Iowa Code § 550.3 (1993). A return of service was executed on defendant Daniel Youngblade on January 11, 1995.

On December 29, 1994, Youngblade also filed a lawsuit, but in the Iowa District Court for Woodbury County, in a case styled Youngblade v. Curtis 1000, Inc., Equity No. 110095C. In his lawsuit, Youngblade seeks a declaratory judgment with respect to the parties' rights pursuant to a covenant not to compete found in an employment contract between the parties. On January 19, 1995, Curtis 1000 removed that action to this court on the ground that diversity of citizenship

878 F. Supp. 1232

exists between the parties, and the court therefore has jurisdiction in that case pursuant to 28 U.S.C. § 1332. On January 19, 1995, Curtis 1000 filed a motion to consolidate this action with the action for declaratory judgment filed by Youngblade.¹ Also, on January 19, 1995, Youngblade filed his answer which raises the following defenses: that despite Youngblade's intention to continue working for Curtis 1000, he was fired; that his termination was contrary to public policy, because it was motivated by his filing of a declaratory judgment action concerning the covenant not to compete in Iowa district court; that Curtis 1000 has no protectible interest in enforcing the covenant; that the covenant is not supported by adequate consideration; that Curtis 1000 has breached the contract; that the equities balance in favor of Youngblade and against enforcement of the covenant; and that the covenant is excessive in its scope and therefore is unenforceable; that Youngblade cannot be restricted under the covenant from pursuing customers outside of the specified geographical area originally identified in the contract of employment; enforcement of the contract is contrary to the public interest; and that the application for preliminary injunction is impermissibly based on allegations of possible future conduct only

A hearing on Curtis 1000's motion for preliminary injunction was held on January 20, 1995. Curtis 1000 appeared through its counsel Roger T. Stetson of Belin, Harris, Lamson, McCormick, Des Moines, Iowa. Defendant Youngblade was represented at the hearing by James C....