Excellence Cmty. Mgmt. v. Gilmore , 2015 NV 38 ( 2015 )

131 Nev., Advance Opinion 38
IN THE SUPREME COURT OF THE STATE OF NEVADA
EXCELLENCE COMMUNITY No. 62189
MANAGEMENT, LLC, A NEVADA
LIMITED LIABILITY COMPANY,
Appellant, FILED
vs.
JUN 2 5 2015
KRISTA GILM ORE, INDIVIDUALLY;
BAADIE K. LINDEMAN
AND MESA MANAGEMENT, LLC, A CL cEE 'E CCdJR
NEVADA LIMITED LIABILITY BY
CHIEF
1-7-tra— DITErY
COMPANY,
Respondents.
Appeal from a district court order denying a preliminary
injunction in an employment matter. Eighth Judicial District Court,
Clark County; Michael Villani, Judge.
Affirmed.
Durham Jones & Pinegar and Michael D. Rawlins and Bradley S.
Slighting, Las Vegas,
for Appellant.
Alessi & Koenig, LLC, and Huong X. Lam, Las Vegas,
for Respondents.
BEFORE HARDESTY, C.J., PARRAGUIRRE and CHERRY, JJ.
OPINION
By the Court, HARDESTY, C.J.:
In this appeal, we must determine whether the sale of 100
percent of the membership interest in a limited liability company affects
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the enforcement of an employee's employment contract containing a
restrictive covenant. We conclude that it does not because such a sale
does not create a new entity. Thus, we extend our holding in HD Supply
Facilities Maintenance, Ltd. v. Bymoen, 125 Nev. 200, 210 P.3d 183 (2009),
and agree with the Pennsylvania Superior Court that the sale of
membership interests in a limited liability company is "akin to a sale of
stock [in a corporation] rather than an asset sale." Missett v. Hub Int?
Pa., LLC, 6 A.3d 530, 537 (Pa. Super. Ct. 2010). Accordingly, the
employer limited liability company may enforce a restrictive covenant in
an employment contract without its employee's consent of assignment.
However, we conclude that the district court in this case did not abuse its
discretion in denying a preliminary injunction because appellant failed to
demonstrate irreparable harm for which compensatory damages are an
inadequate remedy. We affirm
FACTS AND PROCEDURAL HISTORY
Excellence Community Management (ECM) is a Las Vegas-
based Nevada limited liability company (LLC) that provides condominium
and homeowners' association (HOA) management services. Respondent
Krista Gilmore was employed by ECM as a community association
manager from 2005 to 2012 and was directly responsible for managing
multiple associations. In April 2011, Gilmore signed an employment
agreement that prohibited her from revealing trade secrets and disclosing
ECM's confidential information for a period of 24 months after
termination of her employment. The employment agreement also included
an 18-month nonsolicitation clause and an 18-month noncompetition
clause, requiring Gilmore to refrain from soliciting persons or entities
contractually engaged in business with ECM. The employment agreement
did not include an assignment clause.
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At the time Gilmore signed the employment agreement, ECM
was owned and operated by Jamie and Warren McCafferty. In May 2011,
90 percent of the McCaffertys' membership interest in ECM was
purchased by First Service Residential Management Nevada (FSRM).
One year later, the McCaffertys sold or relinquished their remaining
membership interest in ECM to FSRM. The purchase agreement between
the McCaffertys and FSRM specifically stated that the McCaffertys "will
sell, assign and transfer the [p]urchased [ilnterest to [FSRM], and WSRMI
will purchase the [plurchased [ihiterest from the [McCaffertys], free and
clear of any [e]ncumbrance."
In early June 2012, Gilmore submitted her resignation to
ECM and informed ECM that, upon final termination of her employment,
she would begin working for respondent Mesa Management, LLC. Upon
receiving Gilmore's notification, ECM's president decided to terminate
Gilmore. Approximately three weeks later, ECM sent Gilmore a cease-
and-desist letter, which alleged that Gilmore violated her 2011
employment agreement by contacting ECM's clients to inform them she
was no longer employed by ECM and soliciting them to hire Mesa.
Notwithstanding ECM's cease-and-desist letter, Mesa's owner sent a
solicitation letter to numerous HOA boards announcing the start of
Gilmore's employment with Mesa.
ECM filed a complaint seeking damages and injunctive relief
against Gilmore and Mesa, and subsequently filed a motion for a
preliminary injunction to enforce the employment agreement pending the
district court's resolution of the case. During the preliminary injunction
hearing, the district court asked ECM whether, if successful on its case,
money damages could be calculated and could make ECM whole. Counsel
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conceded that money damages would make ECM whole, but also pointed
to caselaw from other jurisdictions holding that irreparable harm is
presumed where an employee has breached a restrictive covenant.
The district court denied ECM's motion for preliminary
injunction for two reasons. First, the court relied upon Traffic Control
Services, Inc. v. United Rentals Northwest, Inc., 120 Nev. 168, 87 P.3d
1054 (2004), to conclude that the agreement was not assignable to FSRM
absent a clause permitting the assignment or an agreement with the
employee consenting to the assignment. Second, the district court
determined that a preliminary injunction was unwarranted because ECM
had failed to show irreparable harm for which compensatory damages
were not an adequate remedy.
ECM appealed, arguing that the district court erred in relying
on Traffic Control in denying ECM's motion for a preliminary injunction
because the LLC membership sale that took place in this case was not an
asset sale for which an employee must consent to the assignment of his or
her employment agreement to the asset purchaser. Furthermore, ECM
contends that the district court abused its discretion in determining that
the requirements for a preliminary injunction were not met because there
was insufficient evidence of irreparable harm.
DISCUSSION
ECM appeals the district court's denial of a preliminary
injunction. A preliminary injunction is proper where the moving party can
demonstrate that it has a reasonable likelihood of success on the merits
and that, absent a preliminary injunction, it will suffer irreparable harm
for which compensatory damages would not suffice. See NRS 33.010;
Boulder Oaks Cmty. Ass'n v. B & J Andrews Enters., LLC, 125 Nev. 397,
403, 215 P.3d 27, 31 (2009). Because the district court has discretion in
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determining whether to grant a preliminary injunction, this court will only
reverse the district court's decision when "the district court abused its
discretion or based its decision on an erroneous legal standard or on
clearly erroneous findings of fact." Boulder Oaks, 125 Nev. at 403, 215
P.3d at 31 (internal quotation omitted). In an appeal from a preliminary
injunction, this court reviews questions of law de novo. Id.
The 100-percent membership sale of the LLC did not result in the creation
of a new entity
The district court relied upon Traffic Control, 120 Nev. 168, 87
P.3d 1054, to conclude that the employment agreement was not assignable
to FSRM absent a clause permitting the assignment because a new entity
was introduced after the sale. ECM argues that HD Supply Facilities
Maintenance, Ltd. v. Bymoen, 125 Nev. 200, 210 P.3d 183 (2009), and the
case it primarily relied upon, Corporate Express Office Products, Inc. v.
Phillips, 847 So. 2d 406 (Fla. 2003), provide that in the type of corporate
transaction where 100 percent of the shares of a corporation are sold, the
enforceability of any restrictive covenants are unaffected, because under
such circumstances, there is no new employer. ECM further argues that
the membership interest sale of an LLC, such as was conducted here, is
equivalent to a stock sale in a corporation, not an asset sale as was the
case in Traffic Control. We agree and conclude that the 100-percent
membership sale of the LLC that took place in this case is equivalent to
the sale of 100 percent of the stock in a corporation. Neither transaction
results in a new entity.
In HD Supply, we recognized that the rule of nonassignability
of an employee's covenant not to compete, articulated in Traffic Control,
was limited to asset purchase transactions. 125 Nev. at 203-04, 210 P.3d
at 185. We explained that the Traffic Control rule was "grounded in the
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law of contractual assignments," and as such, it "logically applies in the
contractual setting of an asset purchase transaction because, in an asset
purchase, ``the transaction introduces into the equation an entirely
different entity, the acquiring business." Id. at 205, 210 P.3d at 186
(quoting Corporate Express, 847 So. 2d at 412). 4 Thus, "the acquiring
corporation in an asset purchase becomes, in effect, a wholly new
employer," which makes it distinct from other corporate transactions, such
as mergers, where the employer does not change. Id. at 206, 210 P.3d at
186-87.
In distinguishing between asset sales and mergers, this court
relied upon Corporate Express's discussion of "whether different forms of
corporate transactions affect whether consent is necessary to effect a valid
assignment of a covenant not to compete." HD Supply, 125 Nev. at 205-
06, 210 P.3d at 186. In addition to analyzing mergers, the Corporate
Express court also addressed 100-percent stock purchases. 847 So. 2d at
411. The court explained that, unlike in asset sales where an entirely
different entity is introduced into the equation, in a 100-percent stock sale
there is no new entity because "the existence of a corporate entity is not
affected by changes in its ownership," and, instead, "the corporation whose
stock is acquired continues in existence, even though there may be a
change in its management." Id. at 411-12. While HD Supply did not
discuss 100-percent stock sales because doing so was not relevant to the
inquiry in that case, this court's adoption of the reasoning from Corporate
Express also extends to 100-percent stock sales. 125 Nev. at 205-06, 210
P.3d at 186.
In this case there was not a 100-percent stock sale, but rather
a 100-percent membership sale of an LLC. Gilmore contends that a 100-
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percent membership sale of an LLC is more equivalent to an asset sale
than a stock sale. Gilmore points out that the Nevada statutes on LLCs
never use the word "stock" but instead purposefully define a new term,
"member's interest." NRS 86.091. We disagree.
A "[m] ember's interest' is defined as "a share of the economic
interests in a limited-liability company, including profits, losses and
distributions of assets." NRS 86.091 However, Gilmore's argument fails
to address the fact that LLCs, like corporations, have perpetual existence
and are distinct from their managers and members. NRS 86.155; NRS
86.201(3). Those features mandate that we treat assignability of
employment agreements in a sale of the LLC membership interests like
we treat assignability of employment agreements in a stock sale. Even
after the sale, the same employer exists. See Missett v. Hub Inel Pa., LLC,
6 A.3d 530, 537 (Pa. Super. Ct. 2010) (holding that a company's purchase
of all of the membership interests in an LLC was "akin to a sale of stock
rather than an asset sale"). Thus, as no new entity is introduced and the
LLC continues in existence after the acquisition of a 100-percent
membership interest, the reasoning from Corporate Express would
similarly be applied in Nevada to the sale of LLC membership interests.
See Corporate Express, 847 So. 2d at 411-12. Accordingly, we conclude
that the district court erred in relying on Traffic Control to deny ECM's
motion for a preliminary injunction because Gilmore's employment
agreement was enforceable by ECM without an assignment clause.
Nevertheless, the district court's decision to deny the request
for a preliminary injunction was also based upon its conclusion that
"[s] ufficient evidence was not presented by [ECM] to show irreparable
harm for which compensatory damages [were] an inadequate remedy."
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Thus, we next address whether the district court abused its discretion in
making that determination.
ECM failed to show it would suffer irreparable harm for which
compensatory damages would not suffice
ECM contends that "[n]umerous other courts have held that
when a former employer solicits clients in breach of a noncompetition
agreement, the breach results in irreparable harm to the former
employer." In doing so, ECM urges this court to presume irreparable
harm resulting from the loss of several of its customers. We decline to do
so.
Irreparable harm is an injury "for which compensatory
damage is an inadequate remedy." Dixon v. Thatcher, 103 Nev. 414, 415,
742 P.2d 1029, 1029 (1987). Other jurisdictions have held that where a
party competes with the former employer despite a restrictive covenant, or
an employee misappropriates trade secrets or confidential customer
information, courts may presume irreparable harm. See Johnson
Controls, Inc. v. A.P.T. Critical Sys., Inc., 323 F. Supp. 2d 525, 532
(S.D.N.Y. 2004) ("Generally, when a party violates a non-compete clause,
the resulting loss of client relationships and customer good will built up
over the years constitutes irreparable harm."); Hillard v. Medtronic, Inc.,
910 F. Supp. 173, 179 (M.D. Pa. 1995) ("To the extent that the restrictive
covenant is being violated, [the former employer] is suffering irreparable
harm by the potential loss of customers posed by [the former employees
activities."). Irreparable harm is also presumed where a party
misappropriates a trade secret. Johnson Controls, 323 F. Supp. 2d at 532-
33. This presumptive rule recognizes the difficulty in calculating money
damages to redress the loss of a client relationship "that would produce an
indeterminate amount of business in years to come." Ticor Title Ins. Co. v.
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Cohen, 173 F.3d 63, 69 (2d Cir. 1999). However, "[Older limited
circumstances, such as where the loss to an employer can be quantified in
terms of a specific amount of lost sales, no irreparable harm is
threatened." Johnson Controls, 323 F. Supp. 2d at 532.
Some courts have clarified that such a presumption is not
automatic and irreparable harm ultimately depends on the underlying
facts of the case. See, e.g., Baker's Aid v. Hussmann Foodservice Co., 830
F.2d 13, 15-16 (2d Cir. 1987); Veramark Techs., Inc. v. Bouk, 10 F. Supp.
3d 395, 400-01 (W.D.N.Y. 2014); Golden Krust Patties, Inc. v. Bullock, 957
F. Supp. 2d 186, 194 (E.D.N.Y. 2013). And upon further examination of
the cases cited by ECM on appeal and in the district court proceedings, we
note that in each case there was undisputed evidence presented to
demonstrate that the former employee solicited, and in some cases
obtained contracts with, the former employer's customers. See Ticor, 173
F.3d at 67 (stating that employee admitted to soliciting business before
the six-month noncompete restriction ended); Johnson Controls, 323 F.
Supp. 2d at 531 (stating that former employees admitted they solicited
and provided service to former employer's customers); Hillard, 910 F.
Supp. at 179 (stating that evidence in the record demonstrated that the
former employee was actively soliciting the former employer's customers).
Additionally, where courts have concluded that a loss of client
relationships constitutes irreparable harm, those courts have also
concluded that the employee provided unique services. See, e.g., Ticor, 173
F.3d at 70 ("New York, following English law, recognizes the availability
of injunctive relief where the non-compete covenant is found to be
reasonable and the employee's services are unique." (emphasis added));
Johnson Controls, 323 F. Supp. 2d at 532 ("[WIhere an employee with
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unique client relationships violates a non-compete clause, injunctive relief
is ordinarily appropriate because if the unique services of such employee
are available to a competitor, the employer obviously suffers irreparable
harm." (internal quotation omitted)). 1 In the instant case, although
Gilmore was employed by ECM for seven years, based on the evidence in
the record, it does not appear that Gilmore's job as a condominium and
HOA manager required any "unique" skills
Furthermore, there is conflicting evidence in the record as to
whether Gilmore solicited or directly provided services to any of ECM's
customers. ECM argued that Gilmore had solicited business from ECM
clients and disclosed confidential information. ECM provided a
declaration from its president alleging that 3 of the 11 associations that
Gilmore managed while at ECM had terminated their contracts with ECM
and hired Mesa, and two other associations were in the process of
terminating their service contracts with ECM and were considering Mesa
as an alternative at the time the litigation commenced.
ECM's president also asserted in her declaration that Gilmore
and Mesa improperly engaged in discussions with two other ECM-
managed HOAs. In support of this contention, ECM presented evidence of
an e-mail exchange between Gilmore and a board member of the Ventana
'Other courts have analyzed the "unique" factor as part of the
reasonableness or validity of a restrictive covenant. See, e.g., 7's Enters.,
Inc. v. Del Rosario, 143 P.3d 23, 29-32 (Haw. 2006) (adopting unique or
specialized training requirement as part of reasonable test for
noncompetition clauses); Sys. Concepts, Inc. v. Dixon, 669 P.2d 421, 426
(Utah 1983) (holding that to obtain injunctive relief, employer must show
covenant is necessary to protect the goodwill of the business and that
employee's services were unique).
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Canyon HOA that alluded to Gilmore hoping to remain the association's
manager. And the ECM president alleged that while attending an BOA
meeting for another ECM client, a Mesa representative solicited the HOA
and implied that although Gilmore could not be the community manager,
Mesa intended to have Gilmore work on their account "behind the scenes."
Gilmore and Mesa countered by providing declarations from
various board members of the HOAs that Gilmore had represented and
managed while employed at ECM and which subsequently left ECM. All
asserted that the reason their associations terminated their contracts with
ECM was because of ECM's change in ownership from the McCaffertys to
FSRM, not because Gilmore had solicited their business. In response to
the e-mail with the Ventana Canyon board member, Gilmore explained
that the board member voluntarily disclosed to her that Ventana had
already decided to terminate ECM and had solicited proposals from other
management companies, including Mesa. In response to ECM's allegation
that Mesa's president stated that Gilmore could work "behind the scenes,"
Mesa submitted an affidavit from its president wherein she stated that
she told the HOA that Gilmore could not be their community manager and
did not indicate that Gilmore would work behind the scenes. 2
Furthermore, Gilmore and Mesa demonstrated that no confidential
information was shared. The information allegedly revealed consisted of
the names of the HOAs Gilmore managed at the time she was terminated,
which was available to the public on the Secretary of State's website.
2While there is discrepancy as to whether Mesa stated that Gilmore
would assist with the contract, this court will not reweigh the credibility of
witnesses on appeal Castle v. Simmons, 120 Nev. 98, 103, 86 P.3d 1042,
1046 (2004).
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Unlike the cases ECM cites, Gilmore and Mesa have not
conceded that there was a breach of a restrictive covenant. To the
contrary, the facts here are disputed, and the district court eventually
found that Gilmore did not solicit the HOAs identified during the
preliminary injunction hearing. The district court further found that,
unlike many of the cases cited by ECM, if ECM is successful in its case,
ECM's damages were quantifiable for customers it had lost to date. Thus,
the court concluded that the evidence was insufficient to demonstrate
irreparable harm.
We conclude that the district court did not abuse its discretion
in denying ECM's motion for a preliminary injunction on the basis that
ECM failed to show that it would suffer irreparable harm for which
compensatory damages were not an adequate remedy if the district court
did not enter a preliminary injunction. See Boulder Oaks, 125 Nev. at 403,
215 P.3d at 31 (providing that this court reviews a district court's decision
regarding a preliminary injunction for an abuse of discretion).
Accordingly, we affirm the district court's order denying the
request for a preliminary injunction.
C.J.
Hardesty
We concur:
.C2441)teitsCirCi* 'J.
Parraguirre
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