Hall v. Edgewood Partners Insurance Center, Inc. , 878 F.3d 524 ( 2017 )

RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit I.O.P. 32.1(b)
File Name: 17a0286p.06
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
BRIAN K. HALL; MICHAEL G. THOMPSON, ┐
Plaintiffs-Appellants, │
│
> No. 17-3744
v. │
│
│
EDGEWOOD PARTNERS INSURANCE CENTER, INC., │
Defendant-Appellee. │
┘
Appeal from the United States District Court for the Northern District of Ohio at Toledo.
No. 3:17-cv-00821—Jeffrey James Helmick, District Judge.
Argued: December 6, 2017
Decided and Filed: December 19, 2017
Before: SILER, KETHLEDGE, and THAPAR, Circuit Judges.
_________________
COUNSEL
ARGUED: Gregory H. Wagoner, SHUMAKER, LOOP & KENDRICK, LLP, Toledo, Ohio,
for Appellants. Steven D. Pearson, COZEN O’CONNOR, Chicago, Illinois, for Appellee. ON
BRIEF: Gregory H. Wagoner, Katherine S. Decker, SHUMAKER, LOOP & KENDRICK,
LLP, Toledo, Ohio, for Appellants. Steven D. Pearson, COZEN O’CONNOR, Chicago, Illinois,
for Appellee.
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OPINION
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THAPAR, Circuit Judge. Brian Hall and Michael Thompson formed a business division
that sold its clients and their goodwill to another company. The buyer kept them on as
employees. And in return, Hall and Thompson agreed not to solicit their old clients if they were
terminated. But Hall and Thompson broke their promise. When they asked the district court to
No. 17-3744 Hall, et al. v. Edgewood Partners Ins. Ctr. Page 2
let them out of the deal, the district court refused, entering a preliminary injunction prohibiting
them from soliciting old clients. They now appeal that injunction.
I.
The equipment rental insurance industry is built on clients and their goodwill. Clients are
assets, and “assets in the insurance world are everything.” R. 57, Pg. ID 1669. Hall and
Thompson have built a significant client base in their careers as brokers of equipment rental
insurance. Early in their careers, they brought some of their clients to a specialty division they
formed at Hylant Group. The division was successful—so much so that another company, USI
Insurance Services, sought to acquire its assets.
USI agreed to pay a substantial sum for the division’s assets and to keep Hall and
Thompson on as employees to continue building their book of business. In return, Hall and
Thompson gave up any ownership interest in their old clients. They also promised that if they
were terminated, they would refrain from soliciting their old clients for two years from the date
on which they were no longer employed. And they agreed that USI could assign their
employment contracts to a subsequent purchaser.
Things went south when a subsequent purchaser—Edgewood Partners Insurance
Center—came into the fold. Edgewood bought out USI’s entire equipment rental insurance
business, including Hall and Thompson’s old clients. But Hall and Thompson could not work
out an arrangement to stay on with Edgewood. So USI terminated them. Upon their
termination, Hall and Thompson began reaching out to their old clients. They also turned to the
courts, seeking a declaratory judgment permitting them to do so. In response, Edgewood sought
a preliminary injunction barring Hall and Thompson from breaching their non-solicitation
agreements. The district court issued the injunction. Hall and Thompson appeal that ruling.
II.
A preliminary injunction is an extraordinary remedy reserved only for cases where it is
necessary to preserve the status quo until trial. See Winter v. Nat. Res. Def. Council, Inc.,
555 U.S. 7, 22 (2008); Univ. of Tex. v. Camenisch, 451 U.S. 390, 395 (1981). In determining
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whether to issue a preliminary injunction, a district court weighs four factors: “(1) whether the
movant has a strong likelihood of success on the merits; (2) whether the movant would suffer
irreparable injury absent the injunction; (3) whether the injunction would cause substantial harm
to others; and (4) whether the public interest would be served by the issuance of an injunction.”
S. Glazer’s Distribs. of Ohio, LLC v. Great Lakes Brewing Co., 860 F.3d 844, 849 (6th Cir.
2017) (quoting Bays v. City of Fairborn, 668 F.3d 814, 818–19 (6th Cir. 2012)). As long as
there is some likelihood of success on the merits, these factors are to be balanced, rather than
tallied. Id.
This court reviews the decision to enter a preliminary injunction with some deference.
Id. Specifically, we review the district court’s decision to grant an injunction for abuse of
discretion. Id. But we review legal conclusions made in the process de novo and findings of fact
for clear error. Id.
III.
Asset Purchase Agreement. Hall and Thompson devote most of their appeal to arguing
that Edgewood is unlikely to succeed on the merits. They first contend that their employment
contracts were not properly assigned to Edgewood. Why? Because the Asset Purchase
Agreement—the principal document by which USI acquired Hall and Thompson’s clients—is
assignable only with Hall’s written consent. Hall did not consent in writing to USI’s sale to
Edgewood. And so Hall and Thompson maintain that Hall’s lack of consent invalidates USI’s
assignment of their employment contracts, which were exhibits to the Asset Purchase
Agreement.
Stepping back for a moment, an initial problem with Hall and Thompson’s argument sits
in plain view: Edgewood was not a party to the Asset Purchase Agreement. USI was. So if USI
breached the Asset Purchase Agreement by executing the sale to Edgewood and assigning Hall
and Thompson’s employment contracts without Hall’s consent, Hall’s beef is with USI.
But Hall and Thompson’s argument also suffers from a more basic flaw: Their
employment contracts both had their own assignment provisions, separate from the one in the
Asset Purchase Agreement. So even if Hall and Thompson were right that USI breached the
No. 17-3744 Hall, et al. v. Edgewood Partners Ins. Ctr. Page 4
Asset Purchase Agreement through the sale to Edgewood, they still need to show that the
assignment provision in the Asset Purchase Agreement somehow supersedes the assignment
provision in their employment contracts. Ohio law guides this inquiry. Lulaj v. Wackenhut
Corp., 512 F.3d 760, 764 (6th Cir. 2008) (applying law of forum state in diversity action where
there was no dispute as to choice of law); see also R. 20, Pg. ID 409 (specifying that the Asset
Purchase Agreement “shall be governed by, and construed under, the laws of the State of Ohio”).
Ohio law instructs that contracts be interpreted to give effect to the parties’ intent.
Eastham v. Chesapeake Appalachia, L.L.C., 754 F.3d 356, 361 (6th Cir. 2014) (quoting Sunoco,
Inc. (R&M) v. Toledo Edison Co., 953 N.E.2d 285, 292 (Ohio 2011)). To discern the parties’
intent, courts look to the plain and ordinary meaning of the language used in their agreement. Id.
And—as is key here—courts “give reasonable effect to every provision in the agreement.”
Savedoff v. Access Grp., Inc., 524 F.3d 754, 763 (6th Cir. 2008) (quoting Stone v. Nat’l City
Bank, 665 N.E.2d 746, 752 (Ohio Ct. App. 1995)).
Here, the only way to give reasonable effect to every provision of the parties’ agreement
is to apply the Asset Purchase Agreement’s assignment language to the Asset Purchase
Agreement and the employment contracts’ assignment language to the employment contracts.
Hall and Thompson fail to rebut the presumption that this plain-meaning interpretation is what
they intended. After all, the Asset Purchase Agreement required that Hall and Thompson agree
to their employment contracts as a condition of closing the sale. And the employment contracts
repeatedly refer back to the Asset Purchase Agreement. So when Hall and Thompson negotiated
their employment contracts with USI, they would have known the assignment language in the
contracts differed from that in the Asset Purchase Agreement. We therefore must give effect to
that differing language. Savedoff, 524 F.3d at 763. To do otherwise would render it a nullity.
Hall and Thompson attempt to sidestep this common-sense conclusion by pointing to an
integration clause in the Asset Purchase Agreement that states that the employment contracts are
part of the parties’ agreement. But this is just an integration clause; it does not supersede the
employment contracts’ assignment language. Coal Res., Inc. v. Gulf & W. Indus., Inc., 756 F.2d
443, 447 (6th Cir. 1985) (“The purpose of an integration clause . . . [is] to prevent either party
from relying upon statements or representations made during negotiations that were not included
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in the final agreement.”). Indeed, the Asset Purchase Agreement’s assignment restrictions apply
only to the “Agreement” itself. R. 20, Pg. ID 410. And the Asset Purchase Agreement defines
“Agreement” as the Asset Purchase Agreement. Id. at Pg. ID 386.
Moreover, it would make very little sense for USI to allow Hall to veto its ability to
transfer Hall and Thompson’s employment contracts to a subsequent buyer. In USI’s view, its
power to stop Hall and Thompson from stealing back clients was as valuable as the clients
themselves. USI would no doubt want the option to transfer this power on resale. And if Hall
were to withhold his consent to USI transferring that power, it would deprive USI of the benefit
of its bargain. Surely that is not what the parties intended.
In a footnote in their opening brief, Hall and Thompson further argue that the assignment
to Edgewood was invalid because their employment negotiations with Edgewood had already
failed at the time of assignment. But whatever the merits of this argument, Hall and Thompson
forfeited it by failing to raise it before the district court. Scottsdale Ins. Co. v. Flowers, 513 F.3d
546, 552 (6th Cir. 2008). We therefore decline to address it.
Termination Without Cause. Hall and Thompson next claim that even if USI properly
assigned the employment contracts to Edgewood, those contracts’ non-solicitation provisions are
unenforceable. They say that, under the law governing their contracts (New York law), an
employer cannot enforce a restrictive covenant against an employee terminated without cause.
They cite Post v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 397 N.E.2d 358 (N.Y. 1979), for
this proposition. But Post did not establish that restrictive covenants are only enforceable
against employees terminated for cause. Rather, Post addressed the “narrow issue” of whether
an employer can “forfeit pension benefits earned by an employee who competes with the
employer after being involuntarily discharged.” Id. at 359. Post, therefore, is about a specific
type of restrictive covenant: one penalizing the violator of a non-compete provision by stripping
him of a post-employment benefit. Neither USI nor Edgewood forced Hall or Thompson to
forfeit post-employment benefits here.
Granted, some courts have read Post to establish a per se rule that restrictive covenants
are unenforceable against employees terminated without cause. But as New York’s highest court
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has explained, Post establishes no such rule. Morris v. Schroder Capital Mgmt. Int’l, 859 N.E.2d
503, 506 (N.Y. 2006) (describing Post as applying to “cases where an employer conditions
receipt of postemployment benefits upon compliance with a restrictive covenant”). Similarly,
the Second Circuit has stated that Post does not hold that restrictive covenants are per se
unenforceable against an employee terminated without cause. Hyde v. KLS Prof’l Advisors Grp.,
LLC, 500 F. App’x 24, 26 (2d Cir. 2012) (per curiam); see also Morris v. Schroder Capital
Mgmt. Int’l, 481 F.3d 86, 88 (2d Cir. 2007) (per curiam) (explaining Post’s limited relevance).
In short, Post does not bar Edgewood from enforcing the non-solicitation provisions.
Thompson’s Old Clients. Thompson alone argues that Edgewood is unlikely to succeed
on the merits against him because he is free to solicit his old clients under BDO Seidman v.
Hirshberg, 712 N.E.2d 1220 (N.Y. 1999). There, an accountant joined BDO when his firm and
BDO merged. Id. at 1221. Like Thompson, the accountant agreed that if he was terminated, he
would not solicit BDO’s clients for a period of time. Id. But when BDO sought to enforce the
agreement, the court concluded that the agreement was overbroad. Specifically, the court held
that BDO could not bar the accountant from servicing clients who came to the firm “only as a
result of [the accountant’s] own independent recruitment efforts, which BDO neither subsidized
nor otherwise financially supported as part of a program of client development.” Id. at 1225.
“Because the goodwill of those clients was not acquired through the expenditure of BDO’s
resources,” the court found that BDO had no legitimate interest in barring the accountant from
dealing with them. Id.
Thompson likens himself to the accountant in BDO. But they are not entirely alike.
Thompson developed certain client relationships during his employment with Hylant and USI.
Thus, Hylant and USI may have “subsidized [and] otherwise financially supported” the
recruitment of at least some of Thompson’s clients “through the expenditure of [their]
resources.” Id. at 1225. BDO, therefore, is inapposite as to those clients.
On the other hand, Thompson has identified certain clients with which he formed
relationships without any financial contribution from Hylant or USI. Edgewood has no
legitimate interest in barring Thompson from soliciting clients “who came to [Hylant and USI]
solely to avail themselves of [Thompson’s] services and only as a result of his own independent
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recruitment efforts.” Id. at 1225. As to these clients, therefore, Edgewood cannot enforce
Thompson’s non-solicitation agreement.
The district court failed to distinguish between those clients Thompson recruited with the
benefit of Hylant’s and USI’s resources and those he recruited solely on his own accord.
Edgewood has no likelihood of success on the merits as to the latter camp. We therefore reverse
the district court’s ruling with respect to those clients. See S. Glazer’s Distribs., 860 F.3d at 849
(observing that a preliminary injunction cannot issue without the movant demonstrating some
likelihood of success on the merits). On remand, the district court should make factual findings
as to which of Thompson’s clients he recruited and developed solely on his own accord,
and which clients Hylant and USI expended their own resources in recruiting and developing.
It should modify the preliminary injunction to exclude clients that Thompson recruited and
developed solely on his own.
In all other respects, however, the district court correctly concluded that Edgewood is
likely to succeed on the merits.
IV.
Hall and Thompson also challenge the remainder of the district court’s preliminary-
injunction analysis. First, they claim that the district court erred in concluding that Edgewood
would suffer irreparable harm absent the injunction. But this court has held that loss of customer
goodwill and fair competition resulting from breach of a restrictive covenant constitutes
irreparable harm. Basicomputer Corp. v. Scott, 973 F.2d 507, 512 (6th Cir. 1992); accord
Certified Restoration Dry Cleaning Network, L.L.C. v. Tenke Corp., 511 F.3d 535, 550 (6th Cir.
2007). Although lost profits alone are calculable and compensable through monetary damages,
loss of goodwill is not. Collins Inkjet Corp. v. Eastman Kodak Co., 781 F.3d 264, 279 (6th Cir.
2015) (answering the argument that “lost profits are fairly easily calculated and remedied
through damages” by pointing out that corresponding “harm [to] goodwill and competitive
position . . . would be hard to compensate”). Thus, it may be clear what Edgewood paid for Hall
and Thompson’s clients and what percentage of profits those clients might currently represent.
But it is impossible to know what additional business those clients and their goodwill might
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generate. The district court did not err, therefore, in finding that Edgewood was likely to be
irreparably harmed.
Nor did the district court err in weighing harm to others or in considering what would
serve the public interest. The district court acknowledged that Hall, Thompson, and their clients
might suffer some harm because of the injunction, but concluded that this harm was
insufficiently weighty to preclude entry of the injunction. Given Edgewood’s strong likelihood
of success on the merits and the irreparable harm it is likely to suffer absent the injunction, the
district court did not abuse its discretion. See Brake Parts, Inc. v. Lewis, 443 F. App’x 27, 33
(6th Cir. 2011) (affirming district court’s decision to grant preliminary injunction despite harm to
non-movant where other factors weighed in favor of issuance); see also FirstEnergy Sols. Corp.
v. Flerick, 521 F. App’x 521, 529 (6th Cir. 2013) (discounting harm to businessman who
knowingly agreed to restrictive covenant and observing that enforcing such covenants, where
lawful, is “always” in the public interest (quoting Nat’l Interstate Ins. Co. v. Perro, 934 F. Supp.
883, 891 (N.D. Ohio 1996))).
* * *
We AFFIRM in part, REVERSE in part, and REMAND for further proceedings
consistent with this opinion.