Phoenex Capital, Inc. v. Dowell, 05CA2712.

• Citation: 176 P.3d 835
• Decision Date: 26 July 2007
• Docket Number: No. 05CA2712.,05CA2712.
• Parties: PHOENIX CAPITAL, INC. and Phoenix Analytic Services, Inc., Plaintiffs-Appellants and Cross-Appellees, v. Robert M. DOWELL, Defendant-Appellee and Cross-Appellant.
• Court: Court of Appeals of Colorado

176 P.3d 835

PHOENIX CAPITAL, INC. and Phoenix Analytic Services, Inc., Plaintiffs-Appellants and Cross-Appellees, v. Robert M. DOWELL, Defendant-Appellee and Cross-Appellant.

No. 05CA2712.

Colorado Court of Appeals, Div. V.

July 26, 2007.

Certiorari Denied February 19, 2008.

Horowitz Forbes, LLP, Peter C. Forbes, Denver, Colorado; Dean Neuwirth, P.C., Dean Neuwirth, Denver, Colorado, for Plaintiffs-Appellants and Cross-Appellees.

Kamlet Shepherd & Reichert, LLP, Barry A. Schwartz, Denver, Colorado, for Defendant-Appellee and Cross-Appellant.

Opinion by Judge DAILEY.

Plaintiffs, Phoenix Capital, Inc. (PCI) and Phoenix Analytic Services, Inc. (PAS), appeal the trial court's order (1) denying their motion to preliminarily enjoin defendant, Robert M. Dowell, from violating a noncompetition agreement and (2) denying injunctive relief against Dowell beyond a one-year time limit specified in a nonsolicitation agreement. Dowell cross-appeals the trial court's order preliminarily enjoining him from "violating the nonsolicitation agreement for the remainder of the specified period. We affirm in part, vacate in part, and remand with directions.

I. Background

PCI is an investment bank that provides analytic and brokerage assistance to financial institutions and investors who buy, sell, and manage certain servicing rights associated with large pools of mortgages. Those servicing rights—to collect mortgage payments, taxes, and interest on residential mortgages and then to remit these proceeds to the mortgage holder—exist independently of the underlying mortgage obligations themselves.

PCI initially employed Dowell as a senior portfolio analyst. In 2000, Dowell signed an agreement with PCI, under which he was prohibited, in the event he left PCI's employ, from competing with PCI or soliciting its customers or employees for one year. The agreement provided that it was binding and would "inure to the benefit of the parties, and [PCI's] successors and assigns."

By 2002, Dowell was the head of PCI's analytics division. Subsequently, PCI formed PAS as an independent company to undertake its analytical functions and transferred Dowell to manage the analytics division at PAS.

In forming PAS, PCI executed, a transfer agreement which provided, in pertinent part, that, at closing, PCI would "sell, transfer, assign, and deliver to PAS, all the properties, assets, goodwill, and business of every kind and description, both real and personal, tangible and intangible, of the analytic services division, as set forth on Schedule 1 (the Assets')." (Emphasis in original.) PCI's employment agreements were not listed on Schedule 1; nor, for that matter, was anything else.

In March 2005, Dowell resigned from PAS to join one of PCI's competitors in forming a new company. According to PCI and PAS (collectively, Phoenix), he began to actively solicit PCI's clientele, assist his new company in competing with PCI for brokerage work, and try to convince two of PAS's key employees to join his new company.

Phoenix instituted the present action, seeking injunctive relief to enforce, and damages for past violations of, the noncompetition and nonsolicitation provisions in Dowell's employment agreement.

After a hearing, the trial court determined that Phoenix was entitled to preliminary injunctive relief only with respect to the nonsolicitation provisions in the employment agreement.

The trial court determined that Phoenix had not established a reasonable probability of success on the merits and thus was not entitled to relief with respect to the noncompetition provision because (1) Dowell, at the time he signed the agreement, was not "professional staff to executive [or] management personnel" within the meaning of 8-2-113(2)(d), C.R.S.2006, and thus, the noncompetition provision was void ab initio; and (2) the void ab initio provision could not be given effect when, subsequently, Dowell attained a prominent managerial position with PCI and PAS.

The trial court ruled that Phoenix was, however, entitled to enforce the provisions addressing nonsolicitation of customers and employees because, consistent with Atmel Corp. v. Vitesse Semiconductor Corp., 30 P.3d 789, 796 (Colo.App.2001), abrogated in part on other grounds by Ingold v. AIM-CO/Bluffs, L.L.C. Apartments, 159 P.3d 116, 124 (Colo.2007), Phoenix had voluntarily agreed to limit the scope of those provisions to only "active" efforts to solicit clients or employees.

Pursuant to C.A.R. 1(a)(3), Phoenix and Dowell each appeal those aspects of the trial court's preliminary injunction ruling that were adverse to their respective interests.

II. Preliminary Injunction Standards

"The granting or denial of a preliminary injunction does not amount to an adjudication of the ultimate rights in controversy. In granting a preliminary injunction, the court should not attempt to do what can be done only after a full hearing and final decree." Litinsky v. Querard, 683 P.2d 816, 819 (Colo.App.1984) (citation omitted). Thus, findings made by a trial court after a preliminary injunction hearing are not determinative of the ultimate merits of the case. Carroll v. Stancato, 144 Colo. 18, 354 P.2d 1018 (1960).

Preliminary injunctions protect plaintiffs from sustaining irreparable injury while preserving the trial court's ability to render a meaningful decision following a trial on the merits. A preliminary injunction is not warranted, however, unless the trial court finds that the moving party has demonstrated each of the following six factors: (1) the moving party has a reasonable probability of success on the merits; (2) a danger of real, immediate, and irreparable injury exists that may be prevented by injunctive relief; (3) the moving party has no plain, speedy, and adequate remedy at law; (4) the granting of a preliminary injunction will not disserve the public interest; (5) the balance of equities favors granting the injunction; and (6) the injunction will preserve the status quo pending a trial on the merits. Rathke v. MacFarlane, 648 P.2d 648, 653-54 (Colo. 1982); see Bloom v. Nat'l Collegiate Athletic Assn, 93 P.3d 621, 623 (Colo.App.2004).

In the present case, neither side presents an argument about the last five of the Rathke factors. Instead, both Phoenix's appeal and Dowell's cross-appeal turn on the trial court's assessment of the first factor, that is, whether Phoenix has shown a reasonable probability of success on the merits.

We review a trial court's grant or denial of a preliminary injunction for abuse of discretion. Under that standard, we examine the court's ruling to determine whether it is based on an erroneous application of the law, or is otherwise manifestly arbitrary, unreasonable, or unfair. Bloom v. Nat'l Collegiate Athletic Ass'n, supra, 93 P.3d at 623.

III. The Noncompetition Provision

Phoenix contends that the trial court erred in ruling that it had not established a reasonable probability of success on its request to enforce the noncompetition provision. We disagree.

"Covenants not to compete, with some narrow exceptions, are contrary to the public policy of Colorado and are void." DBA Enters., Inc. v. Findlay, 923 P.2d 298, 302 (Colo.App.1996). In the preliminary injunction context, the employer has the burden to establish that the covenant not to compete falls within one of those narrow exceptions. See Porter Indus., Inc. v. Higgins, 680 P.2d 1339, 1341 (Colo.App.1984).

As pertinent here, § 8-2-113(2)(d) provides that the prohibition on covenants not to compete "shall not apply to ... [e]xecutive and management personnel and officers and employees who constitute professional staff to executive and management personnel."

Here, the trial court denied Phoenix's request for a preliminary injunction because it found that Phoenix had not established a reasonable probability that, at the time Dowell signed the agreement, he fell within "the statutory exception for professional staff."

Phoenix asserts that the trial court erred in two respects. First, it asserts the applicability of the exception contained in § 8-2-113(2)(d), is determined not as of the time Dowell signed the agreement in 2000, but, rather, as of the time he left PAS's employ in 2005, when he was a manager. Second, it asserts that, even if the applicability of the exception is determined as of the time Dowell signed the agreement, he was, even at that time, "professional staff to executive and management personnel." We are unpersuaded.

A. Operative Date of the Covenant

Three divisions of this court have interpreted § 8-2-113, C.R.S.2006, to mean that "a covenant which restricts the right of a person to receive compensation for work performed for any employer is void ab initio," "rather than voidable." Management Recruiters of Boulder, Inc. v. Miller, 762 P.2d 763, 765 (Colo.App.1988); accord In re Marriage of Fischer, 834 P.2d 270, 272 (Colo. App.1992); Colo. Accounting Machs., Inc. v. Mergenthaler, 44 Colo.App. 155, 156-57, 609 P.2d 1125, 1127 (1980).

A covenant or provision that is void ab initio is "[n]ull from the beginning, as from the first moment when a contract is entered into." Black's Law Dictionary 1568 (7th ed.1999) (defining "void ab initio"); see City & County of Denver v. Bd. of County Comm'rs, 661 P.2d 1185, 1187 (Colo.App.1982)(equating void ab initio with void, and stating, "The meaning of the term void is `null, ineffectual, nugatory.' A `void' judgment, for example, is one which `has neither life nor incipience.'" (citation omitted) (quoting Black's Law Dictionary and Davidson Chevrolet, Inc. v. City & County of Denver, 138 Colo. 171, 175, 330 P.2d 1116, 1118 (1958))).

Under C.A.R. 35(f), the trial court was obliged to follow the decisions in Management Recruiters of Boulder, Inc. v. Miller, supra, In re Marriage of Fischer, supra, and Colorado Accounting Machines, Inc. v. Mergenthaler, supra. Consequently, we perceive no abuse of the trial court's discretion in concluding,...