22nd Century Technologies Inc v. iLabs Inc ( 2023 )

NOT PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
________________
No. 22-1830
________________
22ND CENTURY TECHNOLOGIES, INC.
v.
ILABS, INC.,
Appellant
_____________
On Appeal from the United States District Court
for the District of New Jersey
(D.C. Civil No. 3-22-cv-00717)
District Judge: Honorable Zahid N. Quraishi
________________
Submitted Pursuant to Third Circuit L.A.R. 34.1(a)
on February 6, 2023
Before: CHAGARES, Chief Judge, SCIRICA, and RENDELL, Circuit Judges.
(Filed: May 12, 2023)
________________
OPINION*
________________
*
This disposition is not an opinion of the full Court and pursuant to I.O.P. 5.7 does not
constitute binding precedent.
SCIRICA, Circuit Judge
Government contractor 22nd Century Technologies obtained a preliminary
injunction barring iLabs, its subcontractor, from working on certain U.S. Department of
Agriculture projects for a year. iLabs contends granting the injunction was an abuse of the
District Court’s discretion because its contract agreement with 22nd Century Technologies
is unenforceable and because 22nd Century Technologies cannot show irreparable harm.
We find no abuse of discretion. The parties’ contract is likely enforceable and 22nd Century
Technologies has demonstrated continuing harm: the potential loss of future projects and
frustrated relationships with both its government client and other government contractors.
We will affirm.
I.
The parties are government contractors actively soliciting work from the Farm Loan
Program Group of the U.S. Department of Agriculture. As we write for the parties, we will
not discuss the intricacies of the Farm Loan Program Group’s contractor solicitation
practices or the projects on which the parties worked.
22nd Century Technologies (“22nd Century”) engaged iLabs as a subcontractor after
the Farm Loan Program Group awarded 22nd Century a contract for a series of IT
modernization projects in 2015. The parties executed an agreement (“the Agreement”) that
included confidentiality, non-solicitation,1 and exclusivity provisions. iLabs continued
1
The Agreement defines “solicitation” as follows:
[iLabs] agrees not to solicit, directly or indirectly, [22nd Century] clients for
business, during the term of this agreement and for a minimum of one (1) Years
after the termination of this agreement. In addition, [iLabs] also agrees not to solicit
2
working for 22nd Century under the Agreement after the series of projects concluded
because AttainX, 22nd Century’s business partner, was awarded a contract for related
projects. 22nd Century worked as AttainX’s subcontractor, and iLabs worked as 22nd
Century’s subcontractor. While work on these projects was underway, AttainX
unsuccessfully bid on a contract vehicle2 for additional related projects. The Farm Loan
Program Group awarded that contract vehicle to Creative Systems and Consulting
(“CSC”), a competitor.
In 2021, CSC approached AttainX about the possibility of teaming up to prepare
bids for projects under the vehicle. CSC then approached iLabs with an offer to team up,
which iLabs accepted. iLabs, without 22nd Century’s knowledge, then helped CSC prepare
a successful bid. iLabs’ work for CSC on the bid included “read[ing] material scripted by
directly or indirectly any business from companies (which includes the
subcontracting company, with whom [22nd Century] has contracted, who directly
placed the consultant at the client site as well as the direct client site companies as
well as affiliates, subsidiaries, divisions, parent companies and [22nd Century’s] or
subcontractors of these companies) which [22nd Century] has presented [iLabs]
candidates during the term of this agreement and for a minimum of one (1) year
after the termination of this agreement, irrespective of whether or not they are placed
with said client. . . . The term client refers to the end client to whom [iLabs]
personnel are going to provide services under this agreement . . . .
JA65 ¶ 5.
2
A contract vehicle is a contract or group of contracts that a government agency uses to
pre-select vendors before soliciting bids for a particular product or service. A contractor
holding a contract vehicle is eligible to submit bids but is not guaranteed to be awarded a
contract. See U.S. GENERAL SERVICES ADMINISTRATION, Ways You Can Sell to
Government, https://www.gsa.gov/sell-to-government/step-1-learn-about-government-
contracting/ways-you-can-sell-to-government#Contractvehicles (last updated Apr. 14,
2023).
3
CSC to the potential government customer.” Appellant Br. 7. iLabs also recruited a 22nd
Century employee during the same time period.
After the Agreement terminated in late January 2022, 22nd Century sued iLabs for
breach of contract, alleging that iLabs violated the Agreement’s confidentiality, non-
solicitation, and exclusivity provisions. After an evidentiary hearing, the District Court
issued an injunction on the basis of the non-solicitation provision alone.3 The court found
that 22nd Century demonstrated irreparable harm in the form of lost client relations because
iLabs’ conduct would likely continue to harm its relationships with the Farm Loan Program
Group and other contractors. The court enjoined iLabs from working with CSC on projects
under CSC’s contract vehicle and from soliciting any other work from the Farm Loan
Program Group for a year, as measured from the termination of the parties’ Agreement.
The court ordered 22nd Century to post $750,000 as security. iLabs timely appealed.
II.4
Injunctive relief is an “extraordinary remedy.” Novartis Consumer Health, Inc. v.
Johnson & Johnson-Merck Consumer Pharms. Co., 290 F.3d 578, 586 (3d Cir. 2002)
3
We focus on the non-solicitation provision as the District Court found that 22nd Century
did not make a sufficient showing that iLabs breached the agreement’s confidentiality and
exclusivity provisions.
4
The District Court had jurisdiction under 28 U.S.C. § 1332. We have jurisdiction under
28 U.S.C. § 1292(a)(1). We review the grant of a preliminary injunction for abuse of
discretion. Amalgamated Transit Union Local 85 v. Port Auth. of Allegheny Cty., 39 F.4th
95, 102 (3d Cir. 2022). In practice, this is a “‘tripartite standard of review’: findings of fact
are reviewed for clear error, legal conclusions are reviewed de novo, and the decision to
grant or deny an injunction is reviewed for abuse of discretion.” Del. Strong Families v.
Att’y Gen. of Del., 793 F.3d 304, 308 (3d Cir. 2015) (quoting K.A. ex rel. Ayers v. Pocono
Mountain Sch. Dist., 710 F.3d 99, 105 (3rd Cir. 2013)).
4
(citation omitted). We have repeatedly held that a district court must weigh four factors
when considering a request for a preliminary injunction: “(1) whether the movant has a
reasonable probability of success on the merits; (2) whether irreparable harm would result
if the relief sought is not granted; (3) whether the relief would result in greater harm to the
non-moving party[;] and (4) whether the relief is in the public interest.” Amalgamated
Transit Union Local 85 v. Port Auth. of Allegheny Cty., 39 F.4th 95, 102–03 (3rd Cir. 2022)
(quoting Swartzwelder v. McNeilly, 297 F.3d 228, 234 (3d Cir. 2002)). The first two factors
are the “most critical.” Reilly v. City of Harrisburg, 858 F.3d 173, 179 (3d Cir. 2017)
(citation omitted). Only after the moving party makes a threshold showing that these two
factors are met will the district court determine “in its sound discretion if all four factors,
taken together, balance in favor of granting the requested preliminary relief.” Greater
Phila. Chamber of Commerce v. City of Phila., 949 F.3d 116, 133 (3d Cir. 2020) (citation
omitted); see also ADP, LLC v. Rafferty, 923 F.3d 113, 120 (3d Cir. 2019).
A.
We consider each of the factors in turn. First, a plaintiff must show “a reasonable
chance, or probability, of winning.” In re Revel AC, Inc., 802 F.3d 558, 568 (3d Cir. 2015)
(citation omitted). A reasonable chance is “not necessarily more likely than not.” Reilly,
858 F.3d at 179; see also id. at 179 n.3. But plaintiffs must still demonstrate that they would
be able to prove each element of their claims. See Punnett v. Carter, 621 F.2d 578, 588 (3d
Cir. 1980) (observing that moving parties need not place their right to receive a preliminary
injunction beyond all doubt but still must carry their burden of establishing a prima facie
case).
5
A breach of contract claim requires the plaintiff to prove the existence of “a valid
contract, defective performance by the defendant, and resulting damages.” Globe Motor
Co. v. Igdalev, 139 A.3d 57, 64 (N.J. 2016) (quoting Coyle v. Englander’s, 488 A.2d 1083,
1088 (N.J. Super. Ct. App. Div. 1985)). We agree with the District Court that iLabs likely
breached the non-solicitation provision of its agreement with 22nd Century. The provision
bars iLabs from directly or indirectly soliciting (1) 22nd Century’s clients and (2) companies
that 22nd Century sent iLabs employees to as consultants, regardless of whether the
employees ever performed work for those companies, for “a minimum” of one year after
the end of the Agreement. JA65.
There is sufficient evidence in the record to support a finding that iLabs directly
solicited the Farm Loan Program Group, 22nd Century’s end client, as well as AttainX, 22nd
Century’s business partner and prime contractor.5 The relationship between 22nd Century
and iLabs ended on Friday, January 28, 2022. iLabs entered into a teaming agreement with
CSC in August 2021 and began helping CSC prepare its bid on January 31, 2022—the
Monday after its relationship with 22nd Century ended. iLabs also hired a former 22nd
Century employee on January 31, 2022. iLabs expressed an intent to continue working with
CSC on bids for Farm Loan Program Group projects. iLabs did not inform 22nd Century of
5
Prime contractors are general contractors—they contract directly with the government
and manage subcontractors, who do not contract directly with the government. Some
government contracts require prime contractors to subcontract to small businesses. U.S.
SMALL BUSINESS ADMINISTRATION, Prime and Subcontracting,
https://www.sba.gov/federal-contracting/contracting-guide/prime-subcontracting#:~:
text=Prime%20contractors%20work%20directly%20with,for%20Award%20Managemen
t%20(SAM) (last visited May 3, 2023).
6
its relationship with CSC because it had signed a non-disclosure agreement. In addition, an
iLabs employee solicited AttainX, 22nd Century’s business partner, via texts and phone
calls in January 2022. Based on this evidence, 22nd Century could demonstrate that iLabs
breached the non-solicitation provision.
iLabs argues that 22nd Century has no chance of prevailing on the merits because
the non-solicitation provision is unenforceable. Under New Jersey law, which governs the
parties’ contract, restrictive covenants such as the non-solicitation provision are
enforceable to the extent necessary to “protect [the employer’s] legitimate interests”
without causing “undue hardship on the defendant” or “impair[ing] the public interest.”
Solari Indus., Inc. v. Malady, 264 A.2d 53, 61 (N.J. 1970); Whitmyer Bros., Inc. v. Doyle,
274 A.2d 577, 581 (N.J. 1971). A restrictive covenant is unreasonable if it hinders
competition more than it protects legitimate business interests. Ingersoll-Rand Co. v.
Ciavatta, 542 A.2d 879, 895 (N.J. 1988).
Protecting customer relationships is a legitimate business interest. Ingersoll-Rand
Co., 542 A.2d at 888 (“Solari and Whitmyer both recognize as legitimate the employer’s
interest in protecting trade secrets, confidential information, and customer relations.”).
Protecting customer relationships includes preventing disintermediation—i.e., customers
cutting out a middleman or subcontractor. See HR Staffing Consultants LLC v. Butts, 627
F. App’x 168, 172 n.4 (3d Cir. 2015) (explaining how preventing disintermediation is a
form of protecting customer relations and citing Ingersoll-Rand). Government contractors
must make a more detailed showing of a need for protection than is generally required
because of the transparent character of the government contracting industry. The entire
7
industry is “fully aware when public work is available” and government agencies generally
choose contractors based on “price rather than personal consideration.” Whitmyer Bros.,
274 A.2d at 583.
iLabs understands Whitmyer Bros. to hold that government contractors, because of
the transparent nature of their industry, cannot claim protecting customer relationships as
a legitimate business interest unless they also identify a threat to their trade secrets or
confidential information. This bright line rule is not explicitly stated in the opinion. The
New Jersey Supreme Court mentions only that Whitmyer Bros. “may have legitimate
interests in protecting its customer relationships” before describing the transparent nature
of the government contracting industry and concluding that the defendant employee was
unlikely to “be in any position to harm the plaintiff’s relationships with the governmental
entities or with prime contractors doing work for them.” Id. at 583–84. We cannot find,
and iLabs does not offer, any cases interpreting Whitmyer Bros. as putting forth a bright-
line rule.
New Jersey courts have embraced a flexible and case-specific approach to restrictive
covenants. Where possible, a court will tailor an overbroad covenant rather than
invalidating it. ADP, 923 F.3d at 122; see also id. at 120 (describing New Jersey courts
applying the Solari/Whitmyer test as “eschewing a dichotomous choice between
enforcement and invalidation”). There is nothing in the record before us to suggest that a
8
court would decline to tailor the non-solicitation provision and instead declare it
unenforceable.6
iLabs’ own description of its efforts to help CSC prepare a bid suggests government
contractors “expend great energy and money in soliciting clients and developing projects
for their benefit.” A.T. Hudson & Co. v. Donovan, 524 A.2d 412, 416 (N.J. Super. App.
Div. 1987). Because the industry is transparent and government agencies usually make
decisions based on price alone, Whitmyer Bros., 274 A.2d at 583, contractors cannot hope
to develop long-term exclusive relationships with their government customers. They may
rely on reputation or goodwill to maintain such relationships with other contractors, but
these relationships, too, may ebb and flow in response to government customer needs.
Accordingly, a government contractor may not be able to claim an interest in protecting
customer relationships on the ground it successfully bid on an agency project or
successfully teamed with another contractor in the past. But the lack of long-term
relationships in the industry means that shorter-term relationships—those associated with
ongoing or upcoming bids, projects, or teaming opportunities—are important to the
6
The parties’ agreement includes the following severability provision:
If any term or provision of this Agreement shall be found by a Court of competent
jurisdiction to be illegal or otherwise unenforceable, the same shall that invalidate
the whole of this Agreement but such term or provision shall be deemed modified
to the extent necessary in the court’s opinion to render such term or provision
enforceable and the rights and obligations of the parties shall be construed and
enforced accordingly, preserving to the fullest permissible extent the intent and
agreements of the parties herein set forth.
JA66 ¶10.
9
viability of a government contractor’s business and are “worthy of protection.” A.T.
Hudson & Co., 524 A.2d at 416.
The record here is illustrative. 22nd Century first engaged iLabs as a subcontractor
on a project for which it was the prime contractor. iLabs then continued to work with 22nd
Century on separate, but related, bids and projects for which AttainX was the prime
contractor. iLabs now declares an intention to continue working with CSC on additional
bids and projects. These continued collaborations on work for a single end client strongly
suggest that the maintenance of customer relationships is valued in the government
contracting industry, even if those relationships are shorter-term than in other industries. If
they were not so valued, CSC would have had little incentive to request that iLabs sign a
non-disclosure agreement.
Accordingly, a court considering the parties’ non-solicitation provision is unlikely
to find it unenforceable. Instead, a court would likely tailor it, as the District Court tailored
the preliminary injunction, to cover only 22nd Century’s customers with whom iLabs was
in contact. See ADP, LLC, 923 F.3d at 122 (“[I]f a restrictive covenant seeks to protect
client relationships, [New Jersey] courts have narrowed the covenant to clients with which
the employee interfaced.”). iLabs had direct contact with the Farm Loan Program Group
while working for both 22nd Century and CSC. For 22nd Century, iLabs “maintain[ed] the
currently operating USDA systems.” Appellant Br. 5. For CSC, iLabs “provid[ed] a high
level overview of the company” and had an employee “read material scripted by CSC” to
the Farm Loan Program Group during the bidding process. Id. at 7.
10
A court would likely find that the tailored non-solicitation provision is enforceable
because iLabs’ conduct put it in a “position to harm” 22nd Century’s relationships with the
Farm Loan Program Group and other government contractors. See Whitmyer Bros., 274
A.2d at 583. The government contracting industry may be transparent, but iLabs’ conduct
was not. iLabs, while still under contract with 22nd Century, teamed up with 22nd Century’s
competitor (and possible collaborator) without 22nd Century’s knowledge to solicit 22nd
Century’s current client. As the District Court pointed out, “iLabs eliminated one layer of
subcontract by dealing directly with [CSC].” JA18; see Butts, 627 F. App’x at 172
(identifying disintermediation as a form of interference with customer relations). Even if
22nd Century would not have chosen to team up with CSC, iLabs’ intent to continue
working with CSC at minimum prevents 22nd Century from enjoying the “open and even
playing field” iLabs suggests is characteristic of the government contracting industry.
Reply Br. 14. 22nd Century will likely be able to show harm in the form of lost teaming,
bidding, and project opportunities flowing from iLabs’ conduct.
As the party moving for a preliminary injunction, 22nd Century does not have to
show a certainty of success on the merits—just a reasonable chance. 22nd Century has made
that showing.
B.
In addition to showing a reasonable chance of success on the merits, a plaintiff
seeking a preliminary injunction must demonstrate that it will suffer irreparable harm in
the absence of the injunction. Irreparable harm is “not merely serious or substantial”—it is
an injury that monetary compensation cannot cure. Siemens U.S. Holdings Inc. v.
11
Geisenberger, 17 F.4th 393, 407–08 (3d. Cir. 2021) (citation omitted); see also Campbell
Soup Co. v. ConAgra, Inc., 977 F.2d 86, 91 (3d Cir. 1992) (“[T]he plaintiff must
demonstrate potential harm which cannot be redressed by a legal or an equitable remedy
following a trial.”) (citation omitted). The harm must be “immediate” or a “presently
existing actual threat.” Cont’l Grp., Inc. v. Amoco Chems. Corp., 614 F.2d 351, 359 (3d
Cir. 1980) (cleaned up). This Court has long recognized that a preliminary injunction is
appropriate when a plaintiff’s injury is compensable by monetary damages but the amount
of those damages is difficult to prove with reasonable certainty. See Apollo Techs. Corp. v.
Centrosphere Indus. Corp., 805 F. Supp. 1157, 1210 (D.N.J. 1992) (collecting Third
Circuit opinions). “Grounds for irreparable injury include loss of control of reputation, loss
of trade, and loss of goodwill.” Pappan Enters., Inc. v. Hardee’s Food Sys., Inc., 143 F.3d
800, 805 (3d Cir. 1998).
As noted above, 22nd Century has made a sufficient showing of harm flowing from
iLabs’ breach of the non-solicitation provision of their Agreement. It stood to lose teaming,
bidding, and project opportunities when iLabs accepted CSC’s offer, and it will continue
to do so as long as iLabs continues to work with CSC. 22nd Century’s losses are not
speculative, as both 22nd Century and iLabs intend to bid on upcoming Farm Loan Program
Group projects.
The existence of actual harm is not hard to discern here—iLabs admits 22nd Century
could be entitled to damages should the court find iLabs in breach. But calculation of some
of 22nd Century’s damages will be difficult. At stake here is not only work from the Farm
Loan Program Group, the value of which is easily expressed in monetary terms, but also
12
22nd Century’s reputation and goodwill, which are not. Because other contractors are also
competing for work, it will be challenging for 22nd Century to show what projects it may
have been awarded, or what it would have bid, in the absence of iLabs’ collaboration with
CSC. See Laidlaw, Inc. v. Student Transp. Am., 20 F. Supp. 2d 727, 767 (D.N.J. 1998)
(finding, in a case involving contractors submitting bids to a New Jersey agency,
irreparable harm because it was “impossible to calculate” the impact of defendant’s
interference on plaintiff’s contract awards and bidding practices).
As a result, 22nd Century can demonstrate irreparable harm.7
C.
The final two factors—whether the relief would result in greater harm to the non-
moving party and whether the relief is in the public interest—also weigh in favor of a
preliminary injunction here. iLabs does not seriously contest either factor individually, so
we take it that iLabs believes the District Court did not abuse its discretion in considering
either one.
7
iLabs contends any harm 22nd Century has suffered is not irreparable because 22nd
Century did not file this case for six months and has no reasonable explanation for the
delay. The record shows that the parties attempted to resolve this matter out of court after
22nd Century sent iLabs a demand letter in November 2021. There is no requirement that a
plaintiff forego extrajudicial attempts to resolve a dispute in order to move for a
preliminary injunction. We do not, however, credit 22nd Century’s statement that it timed
its filings deliberately to protect the interests of its government client. 22nd Century and
AttainX filed suit against CSC and iLabs in the District of Maryland on January 4, 2022.
22nd Century and iLabs’ business relationship was not terminated until late January. The
Maryland case was voluntarily dismissed on February 1—a day before 22nd Century filed
this case in New Jersey state court. Regardless of 22nd Century’s reasons for its filing
decisions, there is nothing in the record to suggest that 22nd Century was dilatory in
pursuing relief.
13
First, a preliminary injunction would not result in greater harm to iLabs than the
harm it would prevent for 22nd Century. As the District Court found, iLabs’ harm is self-
inflicted. Instead of waiting a year or notifying 22nd Century of its intention to seek other
work, iLabs secretly teamed up with 22nd Century’s competitor. Harm resulting from the
willful breach of a valid restrictive covenant is not the sort of harm the law seeks to protect
against. Laidlaw, 20 F. Supp. 2d at 768; see also Pappan Enters., 143 F.3d at 806 (finding
the “self-inflicted nature of any harm suffered . . . weighs in favor of granting preliminary
injunctive relief”). And the harm iLabs would suffer if enjoined is minimal. It will still be
able to work with other contractors on bids and projects for other U.S. Department of
Agriculture groups—iLabs will only be unable to solicit the Farm Loan Program Group
and work with CSC, and it will only be enjoined from those endeavors for a year. Second,
again as the District Court found, enforcing restrictive covenants that balance the interests
of the parties involved is in the public interest.
III.
The District Court’s consideration of these factors and ultimate conclusion did not
“rest[] on an incorrect legal standard, a clearly erroneous factual finding, or a
misapplication of the law to the facts.” TD Bank NA v. Hill, 928 F.3d 259, 270 (3d Cir.
2019). 22nd Century has demonstrated a strong probability of success on the merits and that
it stands to suffer irreparable harm to its client relationships if iLabs is not enjoined. As
iLabs only stands to suffer self-inflicted harm, any injury an injunction would cause is
outweighed by the benefit to 22nd Century. In addition, it is in the public’s interest to
incentivize compliance with narrowly tailored restrictive covenants protecting legitimate
14
business interests, such as the non-solicitation provision at issue here. Accordingly, the
District Court’s grant of 22nd Century’s preliminary injunction was not an abuse of
discretion, and we will AFFIRM the District Court.
15