Progressive Techs., Inc. v. Chaffin Holdings, Inc.

• Decision Date: 02 May 2022
• Docket Number: 20-1474
• Citation: 33 F.4th 481
• Parties: PROGRESSIVE TECHNOLOGIES, INC., Plaintiff - Appellee v. CHAFFIN HOLDINGS, INC.; David Chaffin, Defendants - Appellants
• Court: U.S. Court of Appeals — Eighth Circuit

33 F.4th 481

PROGRESSIVE TECHNOLOGIES, INC., Plaintiff - Appellee

v.CHAFFIN HOLDINGS, INC.; David Chaffin, Defendants - Appellants

No. 20-1474

United States Court of Appeals, Eighth Circuit.

Submitted: January 14, 2021

Filed: May 2, 2022

Meredith A. Powell, John E. Tull, III, Quattlebaum & Grooms, Little Rock, AR, Abigail Abide Stephens, Shea Sisk Wellford, Martin & Tate, Memphis, TN, for Plaintiff - Appellee.

Joshua C. Ashley, Elizabeth R. Murray, Friday & Eldredge, Little Rock, AR, for Defendants - Appellants.

Before LOKEN, GRASZ, and KOBES, Circuit Judges.

GRASZ, Circuit Judge.

Progressive Technologies, Inc. sued David Chaffin and Chaffin Holdings, Inc. for breaching a noncompete agreement, tortious interference with business expectancy, and civil conspiracy. Chaffin and Chaffin Holdings appeal the district court's preliminary injunction entered against them. We reverse.

I. Background

Chaffin owned Arkansas State Security, Inc., which sold and maintained video security equipment for school districts. Progressive is a low-voltage cabling and systems contractor. In 2013, Progressive bought Arkansas State Security¹ from Chaffin. Three relevant contracts governed this transaction.

The first was the asset purchase agreement in which Progressive agreed to pay $1.9 million over three years to purchase Arkansas State Security's assets, including its customer lists and goodwill. The second was an employment agreement in which Progressive agreed to employ Chaffin for a one-year term, followed by indefinite at-will employment. The employment agreement stated Chaffin was to assist with new sales and transition customer and vendor relationships for Progressive.

The third contract was the noncompete agreement, which included four restrictive covenants. The first covenant (the competition restriction) barred Chaffin from being involved in the "Video Security Business" throughout the state of Arkansas for five years. The second covenant (the customer-solicitation restriction) barred Chaffin from soliciting any of Progressive's current or prospective customers for video security sales or for the purpose of terminating their business with Progressive for five years. The third covenant (the employee-solicitation restriction) barred Chaffin from soliciting any Progressive employees for two years. Each of the time limitations in the first three covenants was designated to begin on the latter of the noncompete agreement's signing date or the termination of Chaffin's employment. The fourth covenant (the nondisclosure clause) barred Chaffin indefinitely from disclosing any proprietary information.

After the initial one-year transition term, Chaffin continued working for Progressive for an additional five and a half years until Progressive terminated him. After his termination, Chaffin allegedly met with four Progressive school district customers to obtain their business to benefit himself, Chaffin Holdings, and another company, AJL Technology, Inc., which is a competitor of Progressive. Each of the four school districts withdrew their business from Progressive, and one began contracting with AJL. Chaffin also allegedly had others steal documents from Progressive and allegedly solicited many Progressive employees to come work for AJL.

Progressive sued Chaffin, Chaffin Holdings, and others (not relevant here) in federal court. Progressive claimed Chaffin breached the restrictive covenants in the noncompete agreement and misappropriated trade secrets in violation of the Arkansas Trade Secrets Act. See Ark. Code Ann. § 4-75-601. Progressive also claimed both Chaffin and Chaffin Holdings tortiously interfered with Progressive's business expectancy and committed civil conspiracy. Each of these claims arose under Arkansas law.

Progressive moved for a preliminary injunction against Chaffin and Chaffin Holdings based on all its claims except the tortious interference claim. The district court granted Progressive's motion, concluding Progressive was likely to succeed on its claims for breach of contract, civil conspiracy, and—though not raised in Progressive's motion—tortious interference. The district court also concluded each of the other preliminary injunction factors weighed in Progressive's favor. The district court preliminarily enjoined Chaffin and Chaffin Holdings from, among other things, violating the noncompete agreement.

Chaffin and Chaffin Holdings appeal. Progressive no longer seeks injunctive relief for its misappropriation claim but asserts the district court properly granted the preliminary injunction on the other claims.

II. Analysis

Our review of the grant "of a preliminary injunction is layered: fact findings are reviewed for clear error, legal conclusions are reviewed de novo, and the ultimate decision to grant the injunction is reviewed for abuse of discretion." Kodiak Oil & Gas (USA) Inc. v. Burr , 932 F.3d 1125, 1133 (8th Cir. 2019) (cleaned up) (quoting Comprehensive Health of Planned Parenthood Great Plains v. Hawley , 903 F.3d 750, 754 (8th Cir. 2018) ). Because we are sitting in diversity, we apply state substantive law and federal procedural law. Miller v. Honkamp Krueger Fin. Servs., Inc. , 9 F.4th 1011, 1016 (8th Cir. 2021).

"A preliminary injunction is an extraordinary remedy never awarded as of right." Winter v. Nat. Res. Def. Council, Inc. , 555 U.S. 7, 24, 129 S.Ct. 365, 172 L.Ed.2d 249 (2008). The movant must show the preliminary injunction is warranted. Turtle Island Foods, SPC v. Thompson , 992 F.3d 694, 699 (8th Cir. 2021). The district court must consider: "(1) the threat of irreparable harm to the movant; (2) the state of balance between this harm and the injury that granting the injunction will inflict on other parties litigant; (3) the probability that movant will succeed on the merits; and (4) the public interest." Miller , 9 F.4th at 1014 (quoting Dataphase Sys., Inc. v. C.L. Sys., Inc. , 640 F.2d 109, 114 (8th Cir. 1981) (en banc)). Generally, no single factor is dispositive. D.M. ex rel. Bao Xiong v. Minn. State High Sch. League , 917 F.3d 994, 999 (8th Cir. 2019). The movant's failure to show irreparable harm, however, is a sufficient ground to deny a preliminary injunction. Sessler v. City of Davenport , 990 F.3d 1150, 1156 (8th Cir. 2021).

Two more principles guide our analysis. First, to satisfy the likelihood of success factor, the movant need not "prove a greater than fifty [percent] likelihood that [it] will prevail on the merits." Jet Midwest Int'l Co., Ltd. v. Jet Midwest Grp., LLC , 953 F.3d 1041, 1044 (8th Cir. 2020) (second alteration in original) (quoting Dataphase , 640 F.2d at 113 ). Instead, the "movant must show that it has at least a ‘fair chance of prevailing.’ " Miller , 9 F.4th at 1014 (quoting Kroupa v. Nielsen , 731 F.3d 813, 818 (8th Cir. 2013) ). If a movant does not satisfy the likelihood of success prong, it "strongly suggests that preliminary injunctive relief should be denied." D.M. , 917 F.3d at 999 (quoting Barrett v. Claycomb , 705 F.3d 315, 320 (8th Cir. 2013) ). Second, a movant suffers irreparable harm when it "has no adequate remedy at law, typically because its injuries cannot be fully compensated through an award of damages." Phyllis Schlafly Revocable Tr. v. Cori , 924 F.3d 1004, 1009 (8th Cir. 2019) (quoting Gen. Motors Corp. v. Harry Brown's, LLC , 563 F.3d 312, 319 (8th Cir. 2009) ).

Here, Progressive fails to show it is entitled to this preliminary injunction. We address each relevant claim in turn.

A. Breach of the Noncompete Agreement

Progressive does not establish a fair chance of prevailing on its breach of the noncompete agreement claim. Arkansas is generally skeptical of noncompete agreements and considers them on a case-specific basis. Stuart C. Irby Co. v. Tipton , 796 F.3d 918, 924–25 (8th Cir. 2015). To be enforceable, noncompete agreements generally "must meet three requirements: [1] there must be a valid interest to protect; [2] the time limit contained in the agreement must be reasonable; and [3] the scope of the agreement must not be overly broad." Optical Partners, Inc. v. Dang , 381 S.W.3d 46, 53 (Ark. 2011). The noncompete agreement must be "no greater than what is reasonably necessary to secure the interest of the party protected by the contract and [ ] not so broad as to be injurious to the public interest." Id. Arkansas applies "stricter scrutiny" to noncompete agreements "in employment contracts ... than those connected with a sale of a business ." Dawson v. Temps Plus, Inc. , 337 Ark. 247, 987 S.W.2d 722, 726 (1999).

Although it is a close call, we conclude Chaffin's noncompete agreement is properly characterized and analyzed as one in an employment contract. This is because under the terms of the agreement it was Progressive's termination of Chaffin's employment —six and a half years after the business sale and more than three years after Progressive's payment plan for the business ended—that triggered the noncompete agreement's obligations. By Progressive's own admissions, Chaffin's noncompete agreement consisted of "post-employment" and "post-termination" restrictions. Given the distant temporal proximity between the business sale and Chaffin's noncompete obligations, we apply the "stricter scrutiny" associated with noncompete agreements in employment contracts. See Dawson , 987 S.W.2d at 726.²

The noncompete agreement's competition and customer-solicitation restrictions both likely fail this stricter scrutiny. The competition restriction's five-year length is likely too long, and the restriction unreasonably defines the protected business activity as any business Progressive "conducted during any period " between the noncompete agreement's signing date and Chaffin's termination—which could ban Chaffin from engaging in business activities Progressive abandoned years before his termination. Noncompete Agreement , Appellant's Addendum at 12 ¶ 3(A) (emphasis added); see Bailey v. King , 240 Ark. 245, 398 S.W.2d 906, 908 (1966) ("It seems...