Donald Calhoun v. Jack Doheny Companies, Inc.

Case: 20-20068 Document: 00515519841 Page: 1 Date Filed: 08/07/2020
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
United States Court of Appeals
Fifth Circuit
No. 20-20068 FILED
August 7, 2020
DONALD CALHOUN,
Lyle W. Cayce
Clerk
Plaintiff - Appellee
v.
JACK DOHENY COMPANIES, INCORPORATED,
Defendant - Appellant
Appeal from the United States District Court
for the Southern District of Texas
Before JOLLY, GRAVES, and DUNCAN, Circuit Judges.
E. GRADY JOLLY, Circuit Judge:
This interlocutory appeal arises from the denial of a preliminary
injunction, which Jack Doheny Companies (JDC) sought against its former
employee, Donald Calhoun, for breach of a non-compete agreement. Although
the district court found the agreement likely to be overbroad and unenforceable
under Texas law, it declined to preliminarily reform the agreement into one
with reasonable terms pursuant to the Texas Covenants Not to Compete Act,
holding that the record was not yet developed enough for such reformation to
be appropriate. In short, the district court denied the motion for a preliminary
injunction in all its parts and with no concessions.
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We hold that the district court, after acknowledging the agreement to be
overbroad, erred in declining to adjudicate reformation of the agreement. As
we shall show, it should have considered reformation of the agreement in the
process of deciding the preliminary injunction motion. We therefore vacate
and remand to the district court to allow relevant evidence and argument from
the parties concerning reformation. The district court should then decide what
reformation, if any, would be reasonable under Texas law, and proceed to
adjudicate the preliminary injunction motion in the light of its findings on
reformation.
I.
Jack Doheny Company (JDC) sells, rents, and repairs “industrial utility
vehicles” like garbage trucks and street sweepers. Donald Calhoun worked for
JDC in a sales position in Texas from 2010 to 2019. During the course of his
employment, Calhoun signed a contract labelled “Employee Confidentiality
and Non-Competition Agreement.” Part of that agreement stated that
Calhoun “shall not perform, in North America, service for, become engaged by,
or aid, assist, own, operate or have any financial interest in a company that is
in the [industrial utility vehicle business]” for two years after leaving JDC.
Soon after Calhoun left JDC, he began working for Custom Truck One
Source (Custom Truck). JDC discovered that Calhoun was working for Custom
Truck when an email to Calhoun from a potential customer was inadvertently
sent to Calhoun’s old JDC email address instead of his new Custom Truck
address.
After this discovery, JDC sent Calhoun a cease-and-desist letter
requesting that he “refrain from competing with [JDC] per the terms of the
Non-Competition Agreement.” Calhoun then sued JDC in Texas state court,
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seeking a declaratory judgment that the non-compete agreement is
unenforceable for overbreadth. 1
JDC removed the case to federal court and filed a counterclaim alleging
breach of the employment agreement. JDC asked the court to enjoin Calhoun
from employment with Custom Truck for two years and to enjoin him from
“soliciting, servicing, or contacting JDC’s customers and leads[.]”
In September 2019, JDC moved for a preliminary injunction. The
district court held a hearing on the motion, but rather than allowing the parties
to call and cross-examine witnesses, the court instead told counsel for both
parties “I’ll let you guys just tell me what your witnesses, if they were called,
would testify to,” which they did. Because of this approach, JDC was, among
other impairments to the presentation of its case, unable to elicit testimony
from Calhoun that JDC hoped would establish that Calhoun had been first to
reach out to—i.e. to solicit—the customer who sent the misdirected email.
After a recess, the court denied the preliminary injunction in an oral
ruling from the bench, finding that although the agreement was likely to be
found unenforceable for overbreadth at final judgment, it was not reformable
at this stage of the proceedings. At JDC’s request, a written order denying the
preliminary injunction followed, from which JDC took this interlocutory
appeal.
II.
We “review a preliminary injunction for abuse of discretion, reviewing
findings of fact for clear error and conclusions of law de novo.” Texans for Free
Enter. v. Tex. Ethics Comm’n, 732 F.3d 535, 537 (5th Cir. 2013). “A preliminary
1 Calhoun’s violation of the non-compete agreement as it is written is not in dispute,
as it requires Calhoun to refrain from working in any capacity for any competitor of JDC.
Calhoun’s defense rests instead on the alleged overbreadth and unenforceability of that
agreement.
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injunction is an ‘extraordinary remedy’ that should be granted only if the
movant establishes,” among other things, “a substantial likelihood of success
on the merits[.]” Id. at 536–37.
We begin with the district court’s holding that the agreement as written
was likely to be found overbroad at final judgment. Both parties agree that
Texas law applies. In Texas, “[c]ovenants that place limits on former
employees’ professional mobility or restrict their solicitation of the former
employers’ customers and employees are restraints on trade and are governed
by the [Covenants Not to Compete] Act.” Marsh USA Inc. v. Cook, 354 S.W.3d
764, 768 (Tex. 2011).
The Act provides that
a covenant not to compete is enforceable . . . to the extent that it
contains limitations as to time, geographical area, and scope of
activity to be restrained that are reasonable and do not impose a
greater restraint than is necessary to protect the goodwill or other
business interest of the promisee.
Tex. Bus. & Com. Code § 15.50(a).
As our court has previously noted, “[u]nder Texas law, covenants not to
compete that extend to clients with whom the employee had no dealings during
her employment or amount to industry-wide exclusions are overbroad and
unreasonable.” D’Onofrio v. Vacation Publications, Inc., 888 F.3d 197, 211–12
(5th Cir. 2018) (brackets and quotation marks omitted). For that reason, the
district court was correct to find that JDC is unlikely to prove the agreement
enforceable as written and therefore not entitled to a preliminary injunction
enforcing the terms of the agreement.
III.
We next address whether, having found the agreement likely overbroad,
the district court, at this preliminary stage, should have tentatively reformed
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the agreement and, in its preliminary injunction analysis, considered that
reformation.
The Texas Covenants Not to Compete Act states that if a non-compete
covenant is found to be unreasonably overbroad, “the court shall reform the
covenant to the extent necessary to cause” the covenant to be reasonable. Tex.
Bus. & Com. Code § 15.51(c). But in its order denying a preliminary injunction,
the district court held that, solely because the record was inadequate, the
agreement could not “be reformed at present into a simple ban on solicitation
of JDC customers.” In support of this finding, the court said reformation “will
not be possible until, at a minimum, the Court knows exactly what Calhoun
did [with respect to customer contact] and which JDC clients Calhoun dealt
with while he worked at JDC.”
In the light of Texas authority, the district court erred. Although the
court obviously would have needed to know what Calhoun did to violate a
reformed non-solicitation agreement in order to enter any injunction, it could
have taken evidence that the parties were apparently ready to offer.
Furthermore, the district court did not need a complete list of Calhoun’s former
customers because “customer lists and names need not be specifically proved
in evidence or stated in the permanent injunction.” Safeguard Bus. Sys., Inc.
v. Schaffer, 822 S.W.2d 640, 644 (Tex. App.—Dallas 1991, no writ). A court
may simply reform an agreement into one “generally restraining solicitation of
customers and not specifically listing the individual customers[.]” Bertotti v.
C.E. Shepherd Co., Inc., 752 S.W.2d 648, 656 (Tex. App.—Houston [14th Dist.]
1988, no writ). It can be assumed that Calhoun “is sufficiently familiar with
[JDC’s] business and its customers to avoid violating” a generally worded
covenant. Schaffer, 822 S.W.2d at 644.
Moreover, we should point out that the preliminary injunction inquiry
requires the court to determine the likelihood of final success on the merits.
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This determination would necessitate an examination of Texas law. If the
agreement at issue is overbroad, then final adjudication on the merits—per
Texas law—will clearly involve reformation. See Tex. Bus. & Com. Code
§ 15.51(c). That is to say, to determine the likelihood of success of JDC’s claim
requires an examination of Texas law, which would have shown that success
could only be achieved through reformation. This conclusion would lead to
Texas authority that strongly suggests, if not requires, reformation of an
agreement at the preliminary injunction stage. See Tranter, Inc. v. Liss, No.
02-13-00167-CV, 2014 WL 1257278, at *7 (Tex. App.—Fort Worth Mar. 27,
2014, no pet.) (finding that although a noncompete agreement was overbroad,
the employer had “established a probable right to recovery” because of the
likelihood that the agreement could be “reformed to contain reasonable
limitations”).
Of course, Calhoun does not accept this reasoning, as he is perfectly
happy to operate without the restrictions of an injunction. In addition to the
reason stated by the district court for declining to reform the agreement,
Calhoun adds two more arguments on appeal. First, Calhoun asserts that
reformation “is a remedy to be granted at a final hearing, whether on the
merits or by summary judgment, not as interim relief.” This argument runs
against the clear majority practice of Texas courts, which have on many
occasions reformed contracts for the purposes of granting interim relief. The
Texas case that has most thoroughly considered the question has rejected the
argument Calhoun makes here, finding that reformation “is not only a final
remedy” and may be made “as an incident to the granting of injunctive relief.”
Liss, 2014 WL 1257278, at *10 (quoting Weatherford Oil Tool Co. v. Campbell,
340 S.W.2d 950, 952–953 (Tex. 1960)). Second, Calhoun argues that reforming
the agreement into a narrower prohibition would require the court “to pen an
entirely new clause,” violating the Texas rule of contract law that “courts
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interpreting unambiguous contracts are confined to the four corners of the
document.” This argument is off point because we are concerned here with a
question of contract reformation, not contract interpretation. 2
In sum, we hold that the district court, in considering JDC’s motion for
a preliminary injunction, should have decided whether and what reformation
terms were most likely to make the agreement enforceable under Texas law. 3
IV.
Because the district court should have undertaken the reformation of the
agreement, we will remand to allow the district court to do so. On remand, the
district court should receive evidence and argument, in such manner as it sees
proper, but specifically addressing reformation that would “cause the
limitations contained in the covenant as to time, geographical area, and scope
of activity to be restrained to be reasonable and to impose a restraint that is
not greater than necessary to protect the goodwill or other business interest of
the promisee[.]” 4 Tex. Bus. & Com. Code § 15.51(c). And finally, with this
2 To be sure, this case is controlled, not by the common law of contracts, but instead
by statutory law, the Texas Covenants Not to Compete Act, which not only permits
reformation of covenants not to compete, but suggests that, in appropriate cases, it is indeed
required. See Tex. Bus. & Com. Code § 15.51(c). Applying that act, Texas courts have entirely
re-written the text of covenants when reforming them, such as when a Texas court of appeal
reformed a contract requiring a newspaper employee “not to engage in any facet of the
publishing business” into one only preventing the employee “from soliciting advertising to
those concerns which advertised” in newspapers he had worked for. Webb v. Hartman
Newspapers, Inc., 793 S.W.2d 302, 303–05 (Tex. App.—Houston [14th Dist.] 1990, no writ).
3 We stress, of course, that no decision at the preliminary injunction stage is final,
which of course means that both this opinion and any reformation at this stage of the
proceedings are tentative, awaiting final consideration when the court considers a permanent
injunction. See, e.g., Accruent, LLC v. Short, No. 1:17–CV–858–RP, 2018 WL 297614, at *7
(W.D. Tex. Jan. 4, 2018) (noting that a reformation at the preliminary injunction stage is
made only “[p]ending dispositive motions or a trial on the merits”); McKissock, LLC v. Martin,
267 F. Supp. 3d 841, 857–58 (W.D. Tex 2016) (same).
4 To guide this inquiry, we observe that the Texas Supreme Court has explained that
“[t]he fundamental legitimate business interest that may be protected by such covenants is
in preventing employees or departing partners from using the business contacts and rapport
established during the relationship of representing the [former] firm to take the firm’s
customers with him.” Peat Marwick Main & Co. v. Haass, 818 S.W.2d 381, 387 (Tex. 1991).
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evidence presented, the district court will find it necessary then to again
address the familiar four-part test for a preliminary injunction, this time using
the preliminarily reformed agreement as a factor for the analysis.
V.
In this opinion, we have held that the district court correctly found that
the non-compete agreement at issue is likely to be overbroad. We have further
held that the district court erred, however, in declining to preliminarily
consider the reformation of the agreement. Finally, we have held that the case
should be remanded so that the district court may adjudicate the reformation
of the agreement, and then re-evaluate the motion for a preliminary
injunction. 5 The judgment of the district court is therefore reversed and
vacated, and the case is remanded for further proceedings not inconsistent
with this opinion. 6
REVERSED, VACATED, and REMANDED.
5 We recognize that, if the parties have assembled all the evidence they think
necessary to their case during the pendency of this appeal, the district court may, in its
discretion, find that it is more efficient to pretermit addressing the preliminary injunction
and move directly to the permanent injunction, which of course would moot some of what we
have said.
6 Judge Graves concurs in the judgment only.
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