Financial Equip. Co. Inc v. Silva, Case No. 10-C-794
| Decision Date | 17 November 2010 |
| Docket Number | Case No. 10-C-794 |
| Parties | FINANCIAL EQUIPMENT COMPANY, INC., Plaintiff, v. MICHAEL SILVA, Defendant. |
| Court | U.S. District Court — Eastern District of Wisconsin |
This action was commenced on August 12, 2010, when Financial Equipment Company, Inc. ("FECO") filed an complaint against Michael Silva ("Silva") in state court, alleging breach of a noncompete agreement, misappropriation of trade secrets, misappropriation of confidential information, and unfair competition. In state court FECO also sought injunctive relief against Silva. On September 14, 2010, Silva removed the action to federal court. Presently before this court is FECO's motion for a preliminary injunction. As with its motion for injunctive relief in state court, FECO asserts in this court that it is entitled to a preliminary injunction against Silva predicated on claims for breach of a non-compete agreement, misappropriation of trade secrets and confidential information, and unfair competition. The briefing on FECO's motion is now complete. Furthermore, on October 29, 2010, the parties presented oral argument on the plaintiff's motion. Thus, FECO's motion for preliminary injunction is now ready for resolution. Despite a most valiant effort on the part of FECO's counsel to persuade the court otherwise, for the reasons set forth below, the court will deny FECO's motion for a preliminary injunction.
The following constitutes some of the essential factual background giving rise to this lawsuit.
Silva began working for Financial Service & Pneumatics Inc. ("Financial Service") as a service technician in February 2004. (Pl.'s Br. 3.) He signed an employment agreement with Financial Service on February 16, 2004, which described his position and imposed certain post-employment restrictions. (Callahan Aff., Ex. 1.) Specifically, the agreement provided: Section 7. Covenant Not to Compete
7.1 Covenant. For a period of two years after the Employee's employment with the Corporation has been terminated by either party, the Employee will not directly or indirectly:
7.1.1 enter into or attempt to enter into the "Restricted Business" (as defined below) within a 120 mile radius of the Corporation's business office;
...
7.1.3 use contracts, proprietary information, trade secrets, confidential information, customer lists, mailing lists, goodwill, or other intangible property used or usefull (sic) in connection with the Corporation's business.
...
7.3 Restricted Business. The term "Restricted Business" means the business engaged in by the Corporation while the Employee is an employee of the Corporation. Nevertheless, the Employee may own not more than five percent of the outstanding equity securities of a corporation that is engaged in the Restricted Business.
Sometime in 2006, Silva joined FECO as a sales representative. (Pl.'s Br. 3.) Silva primarily worked with customers in northern Illinois and did not service accounts located in Wisconsin. (Def.'s Br. 3.) FECO is in the business of selling, installing, and servicing security equipment used by banks and credit unions. (Pl.'s Br. 2.) FECO utilizes sales representatives to meet the day-to-day needs of individual customers or accounts and to develop new accounts. (Pl.'s Br. 2-3.) The sales representative interacts with the customers on a regular basis and is the person the customer would contact for service work or new security equipment. (Pl.'s Br. 2-3.)
Silva worked closely with many of FECO's customers, including MB Financial Bank, NA ("MB Bank"), which is a bank based in Chicago, Illinois. (Pl.'s Br. 7-8.) MB Bank has over $10 billion in assets and more than ninety physical branch locations in northern Illinois and Indiana. (Pl.'s Br. 7.) MB Bank has been FECO's customer for over seventeen years and comprises more than fifty percent of FECO's total sales. (Pl.'s Br. 7.)
On July 20, 2010, Silva resigned from his employment with FECO and began working for Dakota Security Systems, Inc. ("Dakota"), a company that specializes in security systems for a variety of industries. (Pl.'s Br. 4; www.dakotasecurity.com.)
In order to obtain injunctive relief, a plaintiff bears the burden of establishing: (1) a reasonable likelihood of success on the merits; (2) irreparable harm will ensue absent an injunction; and (3) no adequate remedy at law exists. Promatek Indus., Ltd. v. Equitrac Corp., 300 F.3d 808, 811 (7th Cir. 2002); Kiel v. City of Kenosha, 236 F.3d 814, 815 (7th Cir. 2000). If this threshold showing is made, the court considers two additional factors. First the court must balance the harm to the plaintiff if the preliminary injunction is not issued, against the harm to the defendant if the injunction is wrongfully granted. Storck USA, L.P. v. Farley Candy Co., 14 F.3d 311, 314 (7th Cir. 1994). This balancing involves a sliding scale analysis: if the plaintiff's chances of success on the merits are great, then the plaintiff may make a lesser showing that the balance of harm is in the plaintiff's favor (and vice versa). Id.; Roth v. Lutheran Gen. Hosp., 57 F.3d 1446, 1453 (7th Cir. 1995). Finally, the court should consider the public interest served by granting or denying the motion. Promatek Indus., Ltd, 300 F.3d at 811. The parties implicitly agree that Wisconsin law applies to FECO's claims.
Restrictive covenants "are prima facie suspect as restraints on trade that are disfavored at law, and must withstand close scrutiny as to their reasonableness." Star Direct, Inc. v. Dal Pra, 767 N.W.2d 898, 905 (Wis. 2009). Wisconsin courts therefore require that a restrictive covenant be construed in favor of the employee. Id. The applicable law on restrictive covenants in employment contracts is Wis. Stat. § 103.465. The statute provides that a covenant not to compete "is lawful and enforceable only if the restrictions imposed are reasonably necessary for the protection of the employer or principal." Wis. Stat. § 103.465.
In order for a court to find a restrictive covenant enforceable under the statute, the covenant must: (1) be necessary for the protection of the employer, that is, the employer must have a protectable interest justifying the restriction imposed on the activity of the employee; (2) provide a reasonable time limit; (3) provide a reasonable territorial limit; (4) not be harsh or oppressive as to the employee; and (5) not be contrary to public policy. Lakeside Oil Co. v. Slutsky, 98 N.W.2d 415, 419-21 (Wis. 1959). If the restrictive covenant fails to meet any one of the criteria listed above, the covenant is unenforceable. The burden of proving the reasonableness of an employment contract's non-compete covenant is on the employer. Star Direct, 767 N.W.2d at 905.
Additionally, the statute provides that "[a]ny covenant... imposing an unreasonable restraint is illegal, void and unenforceable even as to any part of the covenant or performance that would be a reasonable restraint." Wis. Stat. § 103.465. Therefore, a court must determine not only the reasonableness of the clause, but whether an unreasonable clause is divisible from the remaining clauses in the covenant. Generally, if a court finds a restraint unreasonable, the rest of the covenant is also unenforceable. Star Direct, 767 N.W.2d. However, if a court strikes an unreasonable provision, the covenant may still be enforceable if the remaining provisions can be understood and independently enforced. Id. In other words, "[r]estrictive covenants are divisible when the contract contains different covenants supporting different interests that can be independently read and enforced." Id.
In addressing the reasonableness of each covenant not to compete, the court will also examine whether Silva was subject to an employment agreement at all. Recall that the only employment agreement that was signed by Silva was with Financial Service, not with FECO. Nevertheless, FECO argues that Silva is subject to the employment agreement that he signed with Financial Service in 2004 and that FECO may enforce this agreement because Financial Service and FECO merged in 2009. Alternatively, FECO claims that Silva is subject to FECO's employment agreement, which Silva did not sign, because Silva submitted a counterclaim for unpaid commissions on his sales while working for FECO. FECO claims that this counterclaim specifically references the commission schedule set forth in its employment agreement, and, therefore, Silva has admitted to being subject to the agreement. The court will discuss each covenant below.
Silva signed an employment agreement with Financial Service in 2004, when he began working for that company as a service technician. In 2006, Silva left Financial Service and joined FECO as a sales representative. (Def.'s Br. 3.) When Silva left Financial Service, the covenant not to compete with Financial Service was enforceable for two years, causing the covenant to expire in 2008. FECO claims that it merged with Financial Service in 2009, approximately one year after the restrictive covenant expired. (Pl.'s Br. 2.)
Even if FECO had produced documents evidencing a merger, which it has not, the restrictive covenant would still be unenforceable by FECO because the covenant would be equally unenforceable by Financial Service three years after Silva terminated his employment with Financial Service. The court therefore finds that it is not reasonably likely that FECO will prevail on this issue.
However, for sake of completeness, the court will evaluate the reasonableness of the covenant, assuming that it were enforceable by FECO. In doing so, the court will examine the likelihood that the covenant would be found reasonable under the five steps listed above. To adequately evaluate the reasonableness of the...
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