Olin Water Services v. MIDLAND RESEARCH LAB., LR-C-84-845.

• Citation: 596 F. Supp. 412
• Decision Date: 30 October 1984
• Docket Number: No. LR-C-84-845.,LR-C-84-845.
• Parties: OLIN WATER SERVICES; Performance Products & Services Group; and Olin Corporation, a Virginia Corporation, Plaintiff, v. MIDLAND RESEARCH LABORATORIES, INC.; Bruce E. Donigan; and John W. Garmon, Defendants.
• Court: U.S. District Court — Eastern District of Arkansas

596 F. Supp. 412

OLIN WATER SERVICES; Performance Products & Services Group; and Olin Corporation, a Virginia Corporation, Plaintiff, v. MIDLAND RESEARCH LABORATORIES, INC.; Bruce E. Donigan; and John W. Garmon, Defendants.

No. LR-C-84-845.

United States District Court, E.D. Arkansas, W.D.

October 30, 1984.

Frederick K. Starrett, Ralston & Frieden, Topeka, Kan., for plaintiff.

David R. Schlee, Kansas City, Mo., W.H. Dillahunty, Little Rock, Ark., for defendants.

ORDER GRANTING PRELIMINARY INJUNCTION

HENRY WOODS, District Judge.

On October 19, 1984, plaintiff's application for preliminary injunction came on for hearing. Plaintiff Olin Water Services is a Virginia corporation with its principal place of business in the State of Connecticut. Defendant Midland Research Laboratories, Inc. is a Kansas corporation registered to do business in Arkansas. Defendants Donigan and Garmon are residents of Arkansas. An amount greater than Ten Thousand Dollars ($10,000.00) exclusive of interest and costs is in controversy between the parties. The injunction is requested to prohibit defendants Garmon and Donigan from violating the terms of agreements not to compete which they executed while in the employ of Olin. Both parties put on evidence at the hearing, and the case was taken under advisement to give counsel the opportunity to submit briefs. The matter is now ripe for decision.

The application for preliminary injunction requires evaluation of four criteria: 1) the threat of irreparable harm to Olin if the injunction is not granted; 2) the harm that will result to Midland if the injunction is granted; 3) the probability that Olin will succeed on the merits at the trial of the case; and 4) the public interest. Dataphase Systems, Inc. v. C L Systems, 640 F.2d 109 (8th Cir.1981). These four factors will be considered seriatim.

Olin asserts that it will be irreparably harmed if the requested injunction is not granted. The evidence indicated that Garmon and Donigan, who were originally employed as salesmen by Olin, left that employment and went to work in a sales capacity for Midland. Midland sells the same type of water treatment products and services as does Olin. Shortly after becoming employed by Midland, Donigan began to contact Olin customers in Arkansas, and succeeded in getting several such customers to stop doing business with Olin and start doing business with Midland. These customers had previously been serviced by Donigan or Garmon when they were employed by Olin. Donigan also contacted several active prospects who were on a list of prospects being worked by Olin at the time he left Olin. Garmon claimed not to have contacted any Olin customers, but admitted that he has serviced former Olin customers after they have been converted into Midland customers by Donigan. There was evidence that Garmon and Donigan were Midland's only Arkansas employees, and that Midland was not active in Arkansas prior to hiring Garmon and Donigan. There is no evidence that either Garmon or Donigan has established as Midland customers any businesses that were not formerly Olin customers. The activity of Garmon and Donigan has caused not only immediate loss of customers to Olin, but corresponding loss of business goodwill, references to potential customers, and future business. These losses are continuing in nature and are irreparable.

This Court must next consider the harm that will result to the defendants if the injunction is granted. The evidence showed that there are thousands of potential customers for the services of Olin, Midland, and similar companies in Arkansas. The injunction sought by Olin would impose only a slight restraint on Midland activities. It would prevent only two Midland employees from contacting a very limited number of enterprises in this area. They would be prohibited from contacting existing customers of Olin in Arkansas, now 18 in number; from contacting active or established prospects of Olin in Arkansas who were so established at the time Garmon and Donigan left Olin; and from revealing customer information about Olin customers to other water treatment service providers. No other Midland employee is restrained from contacting Olin customers, and Garmon and Donigan are not restrained from contacting any potential customer except for those who were established prospects of Olin at the time they left Olin. The potential harm to the defendants is virtually nonexistent. Therefore, the second prong of Dataphase is satisfied.

The third criterion in Dataphase is frequently the most difficult to apply. Is there a probability that Olin will prevail on the merits of its case? A great deal of evidence was presented at the hearing on this matter, and the Court is satisfied that Olin has a very good chance of prevailing on the merits at trial.

A threshold issue is what law applies to the agreements in question, Arkansas law or Kansas law. A federal court must apply the conflict of laws rules prevailing in the state in which it sits. Klaxon Co. v. Stentor Electric Manufacturing Co., 313 U.S. 487, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941). Arkansas law does not rely on any one factor in determining what law applies to a contract, but looks to several alternatives: the law of the state in which the contract was made, the law of the state in which the contract is performed, the law chosen by the parties, if there is sufficient nexus; or the "significant contacts" or "center of gravity" test. Tiffany Industries v. Commercial Grain Bin Co., 714 F.2d 799 (8th Cir.1983). Under such a flexible test, either Kansas law or Arkansas law might apply. However, it is the finding of this Court that the agreements in question would probably be upheld under either Arkansas or Kansas law.

Under both Arkansas and Kansas law, the test of a covenant not to compete is whether the restraint of competition is reasonable under the facts and circumstances of the particular case. All-State Supply, Inc. v. Fisher, 252 Ark. 962, 483 S.W.2d 210 (1972); Eastern Distributing Co., Inc. v. Flynn, 222 Kan. 666, 567 P.2d 1371 (1977). Reasonableness, in turn, hinges on considerations of time and territory. The restraint must not be for an overly-long period of time, nor may it involve an unnecessarily large territory. Id. In addition, neither Arkansas nor Kansas will enforce a covenant not to compete if its object is to prevent only ordinary competition, but both jurisdictions recognize that "customer contacts" is a legitimate interest to be protected. Borden, Inc. v. Huey, 261 Ark. 313, 547 S.W.2d 760 (1977), Flynn, supra. The theory of customer contacts "gains added weight where the business is one in which the employee is the sole or primary contact with the customers and in which a close personal relationship with them is fostered, enabling the employee to control such business as a personal asset." Flynn, supra, 567 P.2d at 1377. The only real difference in Arkansas and Kansas law on the...