DS Parent, Inc. v. Teich

• Decision Date: 10 February 2014
• Docket Number: 5:13-CV-1489 (LEK/DEP)
• Parties: DS PARENT, INC.; and DAVIS-STANDARD, LLC Plaintiffs, v. DONALD TEICH; and SAM NORTH AMERICA, LLC, Defendants.
• Court: U.S. District Court — Northern District of New York

DS PARENT, INC.; and DAVIS-STANDARD, LLC Plaintiffs, v. DONALD TEICH; and SAM NORTH AMERICA, LLC, Defendants.

5:13-CV-1489 (LEK/DEP)

UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF NEW YORK

DATED: February 10, 2014

MEMORANDUM-DECISION and ORDER

I. INTRODUCTION

Plaintiffs DS Parent, Inc. ("DS") and Davis-Standard, LLC ("Davis") (collectively, "Plaintiffs" or "Davis") have moved for a preliminary injunction enjoining Defendant Donald Teich ("Teich"), a former Davis employee, from, inter alia, working for his current employer, Defendant SAM North America, LLC ("SAM"). Dkt. No. 12 ("Motion"); see also Dkt. No. 14 ("Memorandum"). Because Plaintiffs have failed to demonstrate that noncompete agreements bound Teich or that Plaintiffs have protectable interests, the Motion is denied and the January 13, 2014 Temporary Restraining Order is, to the extent it remains in effect, dissolved. See Dkt. No. 18 ("TRO").

II. BACKGROUND

Davis builds and sells converting and extrusion machines, including "liquid coating" equipment,¹ based on its customers' specifications. Dkt. No. 7 ("Amended Complaint") ¶¶ 17-18.Teich began working for a Davis predecessor in 1987 and served as a salesman and an executive. Id. ¶¶ 19-20. From 2002 until 2013, Teich worked in Davis's (and it predecessor's) liquid coating division, first as a district sales manager and subsequently as Vice President for Liquid Coating, although he returned to a sales position at his request in April 2013. Id. ¶¶ 22-23, 44.

In January 2012, incident to DS's acquisition of Davis, Teich entered into an employment agreement containing: (1) a noncompete provision prohibiting Teich, were he to resign from Davis or be terminated with cause, from working for a domestic competitor for two years; (2) a nonsolicitation provision prohibiting Teich from soliciting Davis's customers for the same two-year period; and (3) a nondisclosure provision indefinitely prohibiting Teich from disclosing Davis's trade secrets or confidential information. Id. ¶¶ 24-26; Dkt. No. 7-1 ("Employment Agreement") ¶¶ 5, 7.²

Teich was also given the option to purchase DS stock pursuant to a securities purchase plan ("Plan"). Am. Compl. ¶ 51. He did so by signing a joinder agreement and participation election form pursuant to which he became a party to, and bound by, a Stockholder Agreement. Am. Compl. ¶¶ 51, 54-55; Dkt. Nos. 7-5 ("Participation Form"); 7-2 at 2-90³ ("Stock Agreement"); id. at 90-92 ("Joinder Agreement"). The Stock Agreement contained restrictive covenants prohibiting Teich, upon termination of employment, from working for any competitor or soliciting Davis'scustomers or employees for a one-year period.⁴ Stock Agreement at 27-29; Am. Compl. ¶¶ 3, 52.⁵

Teich resigned from Davis on November 14, 2013. Am. Compl. ¶ 62. A week later, he informed Plaintiffs that he had accepted an offer of employment with SAM. Id. ¶ 63. SAM and its affiliate also produce machines, including liquid coating machines, pursuant to customer specifications. Dkt. No. 26-1 ("Christie Declaration") ¶¶ 9-10. Teich was hired as a Vice President of Sales responsible for SAM's North American liquid coating business and its South and North American gravure printing business. Dkt. No. 21 ("Teich Declaration") ¶ 81; Dkt. No. 26-1 at 51.⁶

On November 22, 2013, Teich filed a complaint in New York Supreme Court seeking a declaration that the restrictive covenants in the Employment and Stock Agreements were unenforceable. Am. Compl. ¶ 64; Teich Decl. ¶ 81; Dkt. No. 13-1. Davis then removed that action. See Dkt. No. 13 ¶ 11; Teich v. Davis-Standard, LLC, No. 13-CV-1533, Dkt. No. 1 (N.D.N.Y. Dec. 12, 2013).⁷ Davis also filed this action seeking to enforce the Stock Agreement and a separate action in the District of Connecticut seeking to enforce the Employment Agreement. See Dkt. Nos. 1 ("Complaint"); 13-2. The parties entered into a stipulation dismissing the Connecticut action and agreeing to adjudicate the Employment Agreement in this action. Dkt. No. 13 ¶ 13; 13-6 ("Stipulation"). Plaintiffs then filed the Amended Complaint, which seeks to enforce bothAgreements. See generally Am. Compl. Plaintiffs subsequently filed the Motion, which sought both a temporary restraining order and a preliminary injunction. Mot. The Court issued the TRO, which enjoined Teich, pending "further notice of th[e] Court," from working for SAM or another Davis competitor, soliciting Davis customers or clients, or using any trade secrets or confidential information. See Dkt. No. 18 ("TRO").⁸ Plaintiffs were subsequently ordered to post bond and did so. Dkt. Nos. 28-29. Defendants responded to the Motion and Plaintiffs replied. See Dkt. Nos. 21-1 ("Teich Response"); 26 ("SAM Response"); 30 ("Reply"). Oral argument was held on January 22, 2014. Dkt. Nos. 36; 43 ("Transcript").

III. LEGAL STANDARD

A preliminary injunction is an "extraordinary remedy that should not be granted as a routine matter." Patton v. Dole, 806 F.2d 24, 28 (2d Cir. 1986). "The purpose of issuing a preliminary injunction is to 'preserve the status quo and prevent irreparable harm until the court has an opportunity to rule on the . . . merits.'" Candelaria v. Baker, No. 00-CV-0912, 2006 WL 618576, at *3 (W.D.N.Y. Mar. 10, 2006) (quoting Devose v. Herrington, 42 F.3d 470, 471 (8th Cir. 1994)). To prevail on a motion for preliminary injunctive relief, a movant must show: (1) irreparable harm; and (2) either (a) a likelihood of success on the merits of the claim, or (b) sufficiently serious questions going to the merits of the case to make it a fair ground for litigation, and a balance of hardships tipping decidedly in favor of the moving party. D.D. ex rel. V.D. v. N.Y.C. Bd. of Educ., 465 F.3d 503, 510 (2d Cir. 2006). A preliminary injunction "should not be granted unless themovant, by a clear showing, carries the burden of persuasion." Moore v. Consol. Edison Co., 409 F.3d 506, 510 (2d Cir. 2005).

IV. DISCUSSION

A. Likelihood of Success on the Merits.

Plaintiffs bring a number of claims: (1) breach of contract against Teich for breach of the Employment and Stock Agreements; (2) misappropriation of trade secrets against Teich; (3) tortious interference with the Employment and Stock Agreements against SAM; (4) unfair competition against SAM and Teich; and (5) breach of the implied covenant of good faith and fair dealing against Teich. Am. Compl. at 23-29. Because a determination of the likelihood of success of the breach of contract claims largely determines the likelihood of success on Plaintiffs' other claims, the Court turns to those claims first. As discussed below, Plaintiffs have failed to make the requisite showing because it is likely that: (1) Teich was released from the Employment Agreement's noncompete and became subject to the Stock Agreement's noncompete by a unilateral mistake caused by Plaintiffs' misrepresentations; and (2) the Agreements' restrictive covenants, even if they otherwise applied, are unenforceable in light of Plaintiffs' failure to identify any protectable interests.

1. Breach of Contract

a. Contractual Effectiveness of the Restrictive Covenants

i. Employment Agreement

The Employment Agreement releases Teich from its noncompete⁹ provision if Davis"reduce[d] its efforts in the liquid coating markets" by, inter alia, "1) Ending or severely reducing its participation in trade shows, conferences, trade print advertising, website, etc.; or 2) Permanently allocating existing liquid coating resources to other product areas." Employment Agreement ¶ 5.¹⁰

Teich has asserted that Davis reduced its liquid-coating efforts by "severely reduc[ing] its participation on trade print advertising for liquid coating." Dkt. No. 13-5, Ex. 8 ("Resignation Letter"); see also Dkt. No. 26-1 at 38-39 (noting that, as of June 2013, there had been a decrease in advertising). Davis responded to Teich's claims by asserting that Davis "does very little print advertising." Dkt. No. 26-1, Ex. 9. But the inclusion of the print-advertising release indicates that Davis engaged in print advertising substantial enough to allow for the possibility of a "severe reduction"—otherwise, the release provision would be a nullity. Plaintiffs have not provided evidence or argued that they did not severely reduce their trade advertising. Thus, the record indicates that print advertising was severely reduced. Moreover, while Davis also asserted that it did support "several major trade show events" during 2013, it does not indicate that this support represented an increase over prior years and therefore that the advertising reduction had been offset. Dkt. No. 26-1, Ex. 9. Thus, Davis has not demonstrated a likelihood that it did not reduce its liquidcoating market participation by severely reducing advertising, and therefore has not demonstrated a likelihood that Teich was not released from the Employment Agreement's noncompete.

Teich also alleges that he was released from the noncompete because Davis permanently allocated liquid coating resources to other product areas. See Resignation Letter. He provides unrebutted evidence that Davis terminated a liquid coating product manager (one of three members of the liquid coating group) and a salesperson who sold liquid coating along with Davis's other products (one of five who did so). Id.; Teich Decl. ¶¶ 33, 41; Dkt. No. 26-1 at 39. Teich has not presented any specific evidence that these positions or their salaries were permanently allocated to other product areas. However, he does note that a Davis executive stated around the time of these layoffs that the liquid coating division had "the lowest ability to win and the lowest market attractiveness" of all of Davis's product lines, Teich Decl. ¶ 49, thereby implying that available resources would be allocated to other product lines. Moreover, Davis has not presented any evidence that it has replaced either of these terminated employees. See generally Mem.; Reply. Although it does allege that it made some efforts at...