TSG Finishing

NO. COA14-623
NORTH CAROLINA COURT OF APPEALS
Filed: 31 December 2014
TSG FINISHING, LLC,
Plaintiff,
v. Catawba County
No. 14 CVS 104
KEITH BOLLINGER,
Defendant.
Appeal by plaintiff from order entered 20 February 2014 by
Judge Calvin E. Murphy in Catawba County Superior Court. Heard
in the Court of Appeals 3 November 2014.
Law Offices of Matthew K. Rogers, PLLC, by Matthew K.
Rogers, for plaintiff-appellant.
Patrick, Harper & Dixon, LLP, by Michael P. Thomas, for
defendant-appellee.
HUNTER, Robert C., Judge.
TSG Finishing, LLC (“plaintiff” or “TSG”) appeals from an
order denying its motion for a preliminary injunction aimed at
preventing its former employee, Keith Bollinger (“defendant”),
from breaching a non-competition and confidentiality agreement
(“the non-compete agreement”) and misappropriating TSG’s trade
secrets. On appeal, plaintiff contends that the trial court
erred by denying its motion for a preliminary injunction
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because: (1) it has demonstrated a likelihood of success on the
merits of its claims for breach of contract and misappropriation
of trade secrets; and (2) it would suffer irreparable harm
without issuance of the preliminary injunction.
After careful review, we reverse the trial court’s order
and remand with instructions to issue the preliminary
injunction.
Background
TSG is in the business of fabric finishing. It has three
plants in Catawba County, North Carolina. Rather than
manufacturing fabrics, TSG applies chemical coatings to achieve
whichever result is desired by the customer, such as coloring,
stiffening, deodorizing, and abrasion resistance.
Defendant began working in the field of fabric finishing
for Geltman Corporation after graduating from high school in
1982. He has no formal education beyond high school. TSG,
Incorporated (“TSG, Inc.”)1 acquired Geltman in 1992, and
defendant stayed on to work for TSG, Inc. By the late 1990’s,
defendant was promoted to Quality Control Manager.
Defendant was responsible for assessing a customer’s
finishing needs and developing a finishing protocol for that
1
As will be discussed below, plaintiff is a wholly owned
subsidiary of TSG, Inc.
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customer. Defendant also helped in the creation of a “style
data card” for each customer. The style data cards contained
information on each step of the finishing process, such as: (1)
the chemical finish compound, 70 percent of which was
proprietary to TSG; (2) “cup weight” density; (3) needle punch
technique; (4) type of machine needed for the needle punch
technique; (5) speed of needle punch; (6) types of needles used;
(7) needle punch depths; (8) method of compound application; (9)
speed of compound application; (10) blade size; (11) fabric
tension; and (12) temperature and type of drying required.
Defendant testified during deposition that some of these
factors required trial and error to achieve a customer’s desired
result. For example, on one of the style data cards used to
explain defendant’s work-related duties during the deposition,
defendant had marked a number of changes to the various factors
listed and signed his initials to the changes. He testified
that he changed the data entered by the customer because
subsequent testing revealed different and more efficient methods
to achieve the result. He also testified that the results of
the trials he conducted and the knowledge he gained regarding
how to achieve these results were not known outside of TSG.
Michael Goldman, the Director of Operations at TSG, filed an
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affidavit in which he asserted that some of the customer
projects that defendant worked on required over a year’s worth
of trial and error to achieve a customer’s desired result.
TSG expends great effort to keep its customer and finishing
information confidential. Specifically, it uses a code system
in its communications with customers that allows the customer to
identify the type of finish it wants, but does not reveal the
chemicals or processes involved in creating that finish. TSG
has confidentiality agreements in place with many of its
customers. Third parties must sign confidentiality agreements
and receive a temporary identification badge when visiting TSG’s
facilities. TSG’s computers are password protected, with
additional passwords being required to access the company’s
production information.
In 2007, TSG, Inc. and defendant entered into a non-
disclosure and non-compete agreement. In exchange for an annual
increase in compensation of $1,300.00 and a $3,500.00 signing
bonus, defendant agreed not to disclose TSG, Inc.’s confidential
or proprietary trade secrets and further assented to employment
restrictions after his tenure at the company ended.
TSG, Inc. filed for bankruptcy in 2009. By a plan approved
by the United States Bankruptcy Court on 1 May 2011, TSG, Inc.
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transferred its interests to plaintiff, a wholly owned operating
subsidy of TSG, Inc., which remained in operation. According to
defendant, every aspect of his day-to-day job remained the same
after bankruptcy reorganization.
In July 2013, defendant and a direct competitor of TSG,
American Custom Finishing, LLC (“ACF”), began negotiations
regarding defendant’s potential to leave TSG and work for ACF.
According to TSG, defendant resigned from his position on 21
November 2013 and announced that he was leaving to become plant
manager for ACF at a plant five miles away from TSG. Defendant
claims that he gave TSG two weeks’ notice on 21 November 2013
but was terminated immediately and escorted off of the premises.
Defendant began working for ACF the following Monday, on 25
November 2013. During his deposition, defendant testified that
TSG and ACF shared certain customers, and that defendant is
responsible for performing similar customer evaluations for ACF
as he did at TSG.
TSG filed suit against defendant on 16 January 2014,
alleging claims for breach of contract, misappropriation of
trade secrets, and unfair and deceptive practices. TSG also
moved for a preliminary injunction to prevent defendant from
breaching the non-compete and misappropriating TSG’s trade
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secrets. A confidential hearing was held on plaintiff’s motion,
and by order entered 20 February 2014, the trial court denied
the motion for preliminary injunction. Plaintiff filed timely
notice of appeal.
Grounds for Appellate Review
We must first address the interlocutory nature of
plaintiff’s appeal. Orders granting or denying preliminary
injunctions are “interlocutory and thus generally not
immediately reviewable. An appeal may be proper, however, in
cases, including those involving trade secrets and non-compete
agreements, where the denial of the injunction deprives the
appellant of a substantial right which he would lose absent
review prior to final determination.” VisionAIR, Inc. v. James,
167 N.C. App. 504, 507, 606 S.E.2d 359, 361 (2004) (citations
and internal quotation marks omitted).
[W]here time is of the essence, the
appellate process is not the procedural
mechanism best suited for resolving the
dispute. The parties would be better
advised to seek a final determination on the
merits at the earliest possible time.
Nevertheless, [where a] case presents an
important question affecting the respective
rights of employers and employees who choose
to execute agreements involving covenants
not to compete, we have determined to
address the issues.
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A.E.P. Indus., Inc. v. McClure, 308 N.C. 393, 401, 302 S.E.2d
754, 759 (1983). Citing the rule in A.E.P. Indus., Inc., this
Court has held that “the same reasoning applies to agreements
between an employer and employee regarding protection of the
employer’s alleged trade secrets.” Horner Intern. Co. v. McKoy,
__ N.C. App. __, __, 754 S.E.2d 852, 855 (2014). Accordingly,
because both a non-compete and the potential misappropriation of
trade secrets are implicated by this case, we conclude that
plaintiff has succeeded in demonstrating how a substantial right
may be lost without immediate appellate review; thus, we will
reach the merits of the appeal.
Discussion
I. Misappropriation of Trade Secrets
Plaintiff first argues that the trial court erred by
concluding that it has not demonstrated a likelihood of success
on the merits of its claim for trade secret misappropriation.
After careful review, we agree.
As a general rule, a preliminary
injunction is an extraordinary measure taken
by a court to preserve the status quo of the
parties during litigation. It will be
issued only (1) if a plaintiff is able to
show likelihood of success on the merits of
his case and (2) if a plaintiff is likely to
sustain irreparable loss unless the
injunction is issued, or if, in the opinion
of the Court, issuance is necessary for the
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protection of a plaintiff’s rights during
the course of litigation.
A.E.P. Indus., Inc., 308 N.C. at 401, 302 S.E.2d at 759-60
(citations and internal quotation marks omitted). The standard
of review from a denial of a preliminary injunction is
“essentially de novo,” VisionAIR, Inc., 167 N.C. App. at 507,
606 S.E.2d at 362, wherein this Court is not bound by the
factual findings of the trial court, but may review and weigh
the evidence and find facts for itself, A.E.P. Indus., Inc., 308
N.C. at 402, 302 S.E.2d at 760. “Nevertheless[,] a trial
court’s ruling on a motion for preliminary injunction is
presumed to be correct, and the party challenging the ruling
bears the burden of showing it was erroneous.” VisionAIR, Inc.,
167 N.C. App. at 507, 606 S.E.2d at 362.
The Trade Secrets Protection Act (“TSPA”) allows for a
private cause of action where a plaintiff can prove the
“acquisition, disclosure, or use of a trade secret of another
without express or implied authority or consent, unless such
trade secret was arrived at by independent development, reverse
engineering, or was obtained from another person with a right to
disclose the trade secret.” N.C. Gen. Stat. §§ 66-152(1), -153
(2013).
“Trade secret” means business or technical
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information, including but not limited to a
formula, pattern, program, device,
compilation of information, method,
technique, or process that:
a. Derives independent actual or potential
commercial value from not being generally
known or readily ascertainable through
independent development or reverse
engineering by persons who can obtain
economic value from its disclosure or use;
and
b. Is the subject of efforts that are
reasonable under the circumstances to
maintain its secrecy.
N.C. Gen. Stat. § 66-152(3) (2013). To determine what
information should be treated as a trade secret for the purposes
of protection under the TSPA, the Court should consider the
following factors:
(1) the extent to which the information is
known outside the business;
(2) the extent to which it is known to
employees and others involved in the
business;
(3) the extent of measures taken to guard
secrecy of the information;
(4) the value of the information to business
and its competitors;
(5) the amount of effort or money expended
in developing the information; and
(6) the ease or difficulty with which the
information could properly be acquired or
duplicated by others.
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Area Landscaping, L.L.C. v. Glaxo-Wellcome, Inc., 160 N.C. App.
520, 525, 586 S.E.2d 507, 511 (2003).
“[A]ctual or threatened misappropriation of a trade secret
may be preliminarily enjoined during the pendency of the action
and shall be permanently enjoined upon judgment finding
misappropriation[.]” N.C. Gen. Stat. § 66-154(a) (2013).
Misappropriation of a trade secret is prima
facie established by the introduction of
substantial evidence that the person against
whom relief is sought both:
(1) Knows or should have known of the trade
secret; and
(2) Has had a specific opportunity to
acquire it for disclosure or use or has
acquired, disclosed, or used it without the
express or implied consent or authority of
the owner.
N.C. Gen. Stat. § 66-155 (2013).
Here, the trial court determined that plaintiff failed to
demonstrate likelihood of success on the merits of its
misappropriation of trade secrets claim for the following
reasons: (1) plaintiff asserted that its finishing process “as a
whole” was the trade secret for which it sought protection, and
under the holding of Analog Devices, Inc. v. Michalski, 157 N.C.
App. 462, 468, 579 S.E.2d 449, 453 (2003), general processes are
too vague to receive TSPA protection; and (2) defendant’s
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familiarity with customer preferences was “more akin to general
knowledge and skill acquired on the job than any trade secret
maintained by [p]laintiff.” For the following reasons, we
disagree with the trial court’s conclusions.
First, contrary to the trial court’s assessment of the
preliminary injunction hearing, plaintiff did not “continually
assert” that it was the “combination of [the] components,” or
the “process as a whole,” for which it sought protection.
Although TSG’s Chief Executive Officer Jack Rosenstein
(“Rosenstein”) did say that the entire equation of processes was
a trade secret in and of itself, he also testified that the
particular steps in the process were also trade secrets. As an
example, Rosenstein highlighted the needle punch technique on a
style data card that defendant had worked on during his time at
TSG. The customer initially requested that the fabric be put
through the needle punch machine one time at a specific setting.
Through trial and error, defendant discovered that the
customer’s desired result could not be accomplished by running
the needle punch machine one time at this setting, so he changed
the process after experimenting with varying settings.
Rosenstein testified the needle punch research for this client,
in addition to the similar types of experimentation done to
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various processes throughout the finish equation, were trade
secrets. Specifically, he testified as follows:
[ROSENSTEIN]: That’s all part of the trade
secrets. That’s all part of what
[defendant], in his own mind when he’s
looking at a new fabric, needs to determine
– which Latex should be used, what density
needs to be used, whether it needs to be
needle punched or not and then within that
which – which needle punch, what depth of
penetration – exactly what the parameters
are. Then he needs to determine what range
it needs to go on, what speed needs to be
run, what the finish is. . . .
Q: And so each one of those variables
impacts the other variables in the equation?
[ROSENSTEIN]: Yes.
Therefore, it was not just the process as a whole, but the
specific knowledge defendant gained as to each discrete step in
the process, that TSG sought to protect.
Based on Analog Devices, Inc., the trial court concluded
that plaintiff had failed to “put forward enough facts to
support trade secret protection over the process as a whole or
any particular component such that the [trial court] would be
justified in granting the injunction sought.” However, the
Analog Devices, Inc. Court upheld the denial of a preliminary
injunction in part because the differences between the
defendant’s former and new employers “render[ed] the alleged
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trade secrets largely non-transferable.” Analog Devices, Inc.,
157 N.C. App. at 467, 579 S.E.2d at 453. Furthermore, the Court
determined that the plaintiff did not carry its burden of
producing evidence specifically identifying the trade secrets it
sought to protect. Id. at 469, 579 S.E.2d at 454. The evidence
before the Court showed that some of the plaintiff’s production
techniques were “easily and readily reverse engineered,” while
others were “either generally known in the industry, are process
dependent so as to preclude misappropriation, or are readily
ascertainable by reverse engineering.” Id. at 470, 579 S.E.2d
at 454. Finally, regarding the processes used by the plaintiff,
the Court found that there was substantial differences between
the products of the two companies that would “require new
experimentation and development of new ways to effectively
identify efforts that will lead to successful development.” Id.
Thus, the Court affirmed the trial court’s denial of the
preliminary injunction. Id. at 472, 579 S.E.2d at 455.
The facts of this case are readily distinguishable from
Analog Devices, Inc., and they demonstrate that TSG would likely
prevail on the merits of its claim for misappropriation of trade
secrets. Using the factors enunciated by Area Landscaping,
L.L.C., 160 N.C. App. at 525, 586 S.E.2d at 511, TSG presented
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sufficient evidence on its specific trade secrets to warrant
protection. First, Rosenstein testified that the company spends
$500,000.00 per year on research and development in order to
create unique finishes and applications for his customers.
Defendant testified that the results of his experimentation at
TSG regarding specific process refinements were not known
outside of TSG. Rosenstein also testified that defendant’s work
was not something that anyone else in the industry would know
without years of trial and error by experienced technicians.
Security measures were in place such that only top-level
employees were familiar with the proprietary information
defendant was in charge of developing. The trial court
acknowledged in its order that TSG “maintains significant
security measures over its finishing process.” Indeed, TSG made
its employees, customers, and facility visitors sign
confidentiality forms to protect this information.
Additionally, Rosenstein testified that defendant’s disclosure
of the trade secrets would give ACF the opportunity to save
“untold amounts of hours, days, weeks, and months to come up
with these finishes and these applications.” Rosenstein
testified that defendant could help ACF achieve their customers’
desired results, which they sometimes shared with TSG, without
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spending the money on research and development that TSG
invested. Defendant admitted as much in his deposition when he
testified that he performs many of the same duties for ACF for
some of the same customers that he formerly served at TSG.
Therefore, unlike in Analog Devices, Inc., there was significant
evidence showing that TSG’s trade secrets were transferrable to
ACF. Over the past two decades, TSG invested millions of
dollars to develop and protect the information defendant
compiled through his years of employment. The director of
operations at TSG testified in deposition that defendant would
sometimes work for more than a year on a process in order to
achieve a desired result. There is no indication in the record
that these process are able to be “reverse engineered” like
those in Analog Devices, Inc., and it is undisputed that they
are not generally known throughout the industry.
In sum, each of the factors identified by the Area
Landscaping, L.L.C. Court weigh in plaintiff’s favor. Plaintiff
specifically identified the production factors for which it
claims trade secret protection. Defendant acknowledged during
his deposition that he performed research and development for
these factors during his time at TSG and was responsible for
keeping customer- and fabric-specific proprietary information
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regarding these processes on the style data cards. Therefore,
we conclude that plaintiff has carried its burden of presenting
evidence sufficient to identify the specific trade secrets
protected by the TSPA.
Additionally, we hold that plaintiff presented prima facie
evidence of misappropriation of its trade secrets. “Direct
evidence . . . is not necessary to establish a claim for
misappropriation of trade secrets; rather, such a claim may be
proven through circumstantial evidence.” Medical Staffing
Network, Inc. v. Ridgway, 194 N.C. App. 649, 658, 670 S.E.2d
321, 329 (2009). Defendant testified that he is being asked to
perform similar duties for ACF that he did at TSG, including
evaluating customer needs and organizing production processes.
Defendant acknowledged that TSG and ACF share customers and that
he is currently working with multiple customers for ACF that he
served at TSG. Specifically, he admitted that he had done
independent research and experimentation for TSG on the needle
punch, finish, and heating processes for one specific customer
that he now serves at ACF, and that he talks about the various
components of the TSG style data cards with ACF management
personnel. This is precisely the type of threatened
misappropriation, if not actual misappropriation, that the TSPA
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aims to prevent through issuance of a preliminary injunction.
See N.C. Gen. Stat. § 66-154(a) (2013) (“[A]ctual or threatened
misappropriation of a trade secret may be preliminarily enjoined
during the pendency of the action and shall be permanently
enjoined upon judgment finding misappropriation . . . .”); see
also Horner Intern. Co., __ N.C. App. at __, 754 S.E.2d at 859
(“Courts have upheld grants of a preliminary injunction where
plaintiffs have presented some evidence that former employees
have or necessarily will use trade secrets.”).
Based on the foregoing, we conclude that plaintiff
demonstrated a likelihood of success on the merits of his claim
for trade secret misappropriation.
II. Breach of Contract
Plaintiff next argues that the trial court erred by
concluding that it failed to present a likelihood of success on
the merits of its claim for breach of the non-compete. We
agree.
Due to a choice of law provision in the agreement,
Pennsylvania law governs enforcement of the non-compete.
“[R]estrictive covenants are not favored in Pennsylvania and
have been historically viewed as a trade restraint that prevents
a former employee from earning a living.” Hess v. Gebhard & Co.
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Inc., 808 A.2d 912, 917 (Pa. 2002). However, “restrictive
covenants are enforceable if they are incident to an employment
relationship between the parties; the restrictions imposed by
the covenant are reasonably necessary for the protection of the
employer; and the restrictions imposed are reasonably limited in
duration and geographic extent.” Id. Thus, in assessing
whether to enforce a non-compete agreement, Pennsylvania law
requires the court to balance “the employer’s protectable
business interests against the interest of the employee in
earning a living in his or her chosen profession, trade or
occupation, and then balance[e] the result against the interest
of the public.” Id. at 920.
Here, the trial court rejected plaintiff’s argument that
the non-compete was enforceable for three reasons: (1) the
agreement does not contain an explicit “assignability” clause
that would allow defendant to be bound to the contract after
bankruptcy reorganization, wherein all of the company’s assets
and contracts were transferred from TSG, Inc. to its
subsidiaries; (2) even if there were an assignability clause,
there is no indication in the record that the non-compete was
actually assigned from TSG, Inc. to plaintiff; and (3) even if
the court concluded that there was an effective assignment, the
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balancing of the equities would require the trial court to find
the non-compete unenforceable.
First, defendant relies on Hess for the proposition that an
explicit assignability clause was necessary for plaintiff to
enforce the non-compete. In Hess, the Pennsylvania Supreme Court
determined that employment contracts are “personal to the
performance of both the employer and the employee.” Hess, 808
A.2d at 922. Thus, if an employer with a valid non-compete in
an employment contract is later acquired by a separate entity,
it does not necessarily follow that “the employee would be
willing to suffer a restraint on his employment for the benefit
of a stranger to the original undertaking.” Id. Thus, the Hess
Court held that “a restrictive covenant not to compete,
contained in an employment agreement, is not assignable to the
purchasing business entity, in the absence of a specific
assignability provision, where the covenant is included in a
sale of assets.” Id.
The situation in this case is not one where plaintiff was a
“stranger to the original undertaking.” Unlike the sale of
assets between two companies at arms’ length, like the
transaction that took place in Hess, the assignment in this case
took place in the context of a bankruptcy reorganization, where
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the same company policies and management were retained.
Plaintiff is a wholly owned subsidiary of TSG, Inc., with whom
defendant entered into the non-compete. As Rosenstein testified
at the hearing, “[i]t’s not a new entity. . . . it’s basically
the same company it was.” According to defendant, every aspect
of his job remained unchanged after the assignment. Therefore,
the facts here are more analogous to those cases where
Pennsylvania courts have declined to make assignability
provisions a requirement, such as with a stock sale or merger,
because the contract rights are not given to a completely new
entity. See J.C. Ehrlich Co., Inc. v. Martin, 979 A.2d 862,
865-66 (Pa. 2009) (holding that where an employee’s obligations
and duties did not change in any material way after a stock
purchase, a non-compete agreement was enforceable by the company
with whom the agreement was made without an explicit
assignability clause). Accordingly, we reject the trial court’s
conclusion that the non-compete is unenforceable because it did
not contain a specific assignability provision.
Second, we find that the trial court erred by concluding
that there is insufficient evidence in the record of an
assignment between TSG, Inc. and plaintiff. The Bankruptcy
Court order makes implicit mention of plaintiff as an “operating
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subsidiary” and of the assignability of the non-compete as an
“executory contract.” Specifically, the order contains the
following:
As of the Effective Date, all Executory
Contracts that are not designated to be
rejected by the Debtor in the Plan
Supplement shall be deemed assumed. Any
assumed Executory Contract to which the
Debtor is a party shall be, as of the
Effective Date, deemed assumed by the
Reorganized Debtor and assigned to the TSG
Real Estate Subsidiary or the TSG Operating
Subsidiary, as the case may be. Entry of
this Order shall constitute, pursuant to
Section 365 of the Bankruptcy Code, approval
of the assumptions and assignments described
herein as of the Effective Date. The Debtor
shall not be required to obtain any third
party consents to affect such assignment.
At the hearing, Rosenstein specifically testified that the non-
compete between TSG, Inc. and defendant was assigned to
plaintiff. We conclude that Rosenstein’s testimony, in addition
to the Bankruptcy Court’s approval of the executory contract
assignments in its order, was sufficient to find that the non-
compete was assigned to plaintiff in the course of the
bankruptcy reorganization.
Additionally, we believe that the restrictions imposed in
the non-compete are reasonable. Under Pennsylvania law, the
burden is on the employee to show how a non-compete is
unreasonable in order to prevent its enforcement. John G.
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Bryant Co., Inc. v. Sling Testing & Repair, Inc., 369 A.2d 1164,
1169 (Pa. 1977). The non-compete provided that upon
termination, defendant would be prevented from participating in
the field of “textile finishing” for two years in the prohibited
territory, which was defined, in part, as all of North America.
Specifically, the non-compete prevents defendant from:
[E]ngaging, as an employee or contractor, in
the performance of Textile Finishing,
engaging in the manufacture of Textile
Finishing machinery or equipment, including
but not limited to a jobber, reseller, or
dealers of used textile machinery or
equipment or engaging in sales, marketing or
managerial services for any individual or
entity that competes with TSG directly or
indirectly within the Prohibited Territory.
In contrast to unenforceable non-competes restricting “any work”
competitive to the employer, Zimmerman v. Unemployment
Compensation Bd. Of Review, 836 A.2d 1074, 1081 (2003), the non-
compete here permissibly restricts defendant from engaging in
the specific industrial practices that could harm the legitimate
business interests TSG seeks to protect.
Furthermore, defendant has failed to carry his burden of
demonstrating that the time and geographic restrictions are
unreasonable and render the non-compete unenforceable.
Pennsylvania courts have consistently enforced non-compete
agreements restricting employment for two or more years. See
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John G. Bryant Co., Inc., 369 A.2d at 1170 (holding that a
three-year restriction was reasonably necessary for the
protection of the employers to strengthen customer contact after
a principal sales representative stopped working for the
employer). Additionally, Pennsylvania courts have established a
correlation between reasonableness of a geographic restriction
and the employer's verifiable market. See Volunteer Firemen’s
Ins. Servs., Inc. v. CIGNA Prop. & Cas. Ins. Agency, 693 A.2d
1330, 1338 (Pa. Super. 1997). Specifically, Pennsylvania
federal courts have upheld covenants restricting competition
nationwide or throughout the region of North America, where
appropriate. See Quaker Chem. Corp. v. Varga, 509 F. Supp. 2d
469, 476 (E.D.Pa. 2007). TSG presented evidence that it serves
customers throughout at least 38 states, in addition to Canada
and Mexico. Defendant claims that TSG failed to explain how the
geographic restrictions are reasonable, and also argues that the
cases TSG cites in support of the time restriction are
inapposite. However, the burden is not on TSG to establish that
the restrictions in the non-compete are reasonable; rather, the
burden rests with defendant to show that they are unreasonable
and that the contract he signed is unenforceable. See John G.
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Bryant Co., Inc., 369 A.2d at 1169. Defendant has failed to
carry that burden here.
Finally, we turn to the trial court’s determination that
the equities weighed against enforcing the non-compete.
“Fundamental . . . to any enforcement determination is the
threshold assessment that there is a legitimate interest of the
employer to be protected as a condition precedent to the
validity of a covenant not to compete.” Hess, 808 A.2d at 920.
“Generally, interests that can be protected through covenants
include trade secrets, confidential information, good will, and
unique or extraordinary skills.” Id. “[T]he issue of
enforceability is one to be determined on a case-by-case basis,”
Missett v. Hub Intern. Pennsylvania, LLC, 6 A.3d 530, 539 (Pa.
Super. 2010), wherein the Court is to consider all relevant
facts and circumstances, Insulation Corp. of America v.
Brobston, 667 A.2d 729, 734 (Pa. Super. 1995) (also noting that
“[a] restrictive covenant found to be reasonable in one case may
be unreasonable in others”).
Among the important factors that Pennsylvania courts
consider in assessing the enforceability of a non-compete are:
(1) the circumstance under which the employment relationship was
terminated; (2) the employee’s skills and capacity; (3) the
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length of time of the previous employment; (4) the type of
consideration paid to the employee; (5) the effect of restraint
on the employee’s life; and (6) circumstantial economic
conditions. See Brobston, 667 A.2d at 737.
It bears noting that there is a significant
factual distinction between the hardship
imposed by the enforcement of a restrictive
covenant on an employee who voluntarily
leaves his employer and that imposed upon an
employee who is terminated for failing to do
his job. The salesman discharged for poor
sales performance cannot reasonably be
perceived to pose the same competitive
threat to his employer’s business interests
as the salesman whose performance is not
questioned, but who voluntarily resigns to
join another business in direct competition
with the employer. . . . [O]nly when the
novice has developed a certain expertise,
which could possibly injure the employer if
unleashed competitively, will the employer
begin to think in terms of a restrictive
covenant[.]
Id. at 735-36 (citation and quotation marks omitted).
Based on the record before us, we believe that these
notions weigh in favor of enforcement of the non-compete.
Defendant worked at TSG for 27 years and became one of its most
trusted and skilled managers. Throughout his tenure he
developed valuable expertise in the field of textile finishing
through trial-and-error and industrial experimentation that was
highly guarded by TSG and not known throughout the industry. In
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exchange for his assent to the non-compete, defendant was
offered an annual increase of $1,300.00 to his regular salary
and a signing bonus of $3,500.00; defendant considered TSG’s
offer for at least two weeks before eventually agreeing to the
non-compete and accepting this increase in compensation. Rather
than being terminated for poor work, defendant was specifically
recruited and voluntarily left TSG to work for a direct
competitor at a plant five miles away without giving prior
notice or asking for a raise from TSG. ACF did not require
defendant to provide a resume or interview for the position;
defendant was hired after meeting with an ACF representative one
time. Given that defendant possessed advanced expertise in the
field of textile finishing and abruptly and voluntarily left his
position at TSG after 27 years of service to work for a direct
competitor, we find that he poses a significant competitive
threat to TSG’s legitimate business interests should the non-
compete be unenforceable.
Despite these factors, defendant argues, and the trial
court agreed, that enforcement of the non-compete essentially
renders him unemployable for two years because he has “no
experience outside of textile finishing, rudimentary computer
skills, and no college education.” We are unpersuaded.
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Defendant argued in his brief that ACF hired him for “his
management skills in dealing with employees, human resources
issues, equipment dealers, customer complaints and suppliers,
not for any trade secrets or other confidential information
which he might know from his time at TSG[.]” Skill in
management and human resources is desirable in many fields, not
just textile finishing. Although the non-compete does restrict
defendant from working as an employee for any company that
competes with TSG “in sales, marketing or managerial services,”
TSG’s competitors only comprise a small subset of companies and
industries where such skills are valuable. Defendant admitted
that before leaving TSG for ACF, he did not look for other
employment. TSG presented evidence of multiple job openings
within 25 miles of Hickory, N.C., that were not competitive to
TSG and listed experience in plant management and manufacturing
as desirable traits. Therefore, we disagree with the trial
court’s conclusion that enforcement of the non-compete would
effectively prevent defendant from attaining employment anywhere
in North America.
We also find TSG’s policy arguments in this case
persuasive. TSG employs around 160 people. According to
Rosenstein, the customers that defendant now serves at ACF could
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account for up to forty percent of TSG’s business, and some of
the customer relationships that TSG has had for many years are
now “strained” due to defendant’s transition from TSG to ACF.
In weighing the equities, we are permitted to consider the
effect that breach of a non-compete may have on an employer’s
protectable business interests. Hess, 808 A.2d at 920. Among
these, we consider the potential harm done to other TSG
employees should defendant be permitted to retain employment at
ACF in contravention of the non-compete. The significant risk
that defendant’s actions pose to TSG’s competitive advantage
indirectly threaten the job security of many others who work for
TSG. Thus, in balance, we find that the equities favor
enforcement of the non-compete.
In sum, we hold that the non-compete was validly assigned
to plaintiff through bankruptcy reorganization, the non-compete
itself is reasonable to protect TSG’s legitimate business
interests, and the equities weigh in favor of enforcement under
these facts. Therefore, because it is undisputed that defendant
is in breach of the non-compete by working for ACF, a direct
competitor of TSG, we hold that TSG has demonstrated a
likelihood of success on the merits of its claim for breach of
contract.
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III. Irreparable Loss
Having set out that TSG has demonstrated a likelihood of
success on the merits of its claims, we must now turn to whether
it has shown irreparable loss should the injunction fail to
issue. See A.E.P. Indus., Inc., 308 N.C. at 401, 302 S.E.2d at
759-60. This Court has recognized that “[i]ntimate knowledge of
the business operations or personal association with customers
provides an opportunity to [a] . . . former employee . . . to
injure the business of the covenantee.” QSP, Inc. v. Hair, 152
N.C. App. 174, 178, 566 S.E.2d 851, 854 (2002) (internal
quotation marks omitted). Both the QSP, Inc. and A.E.P. Indus.,
Inc. Courts have “emphasized that this potential harm warrants
injunctive relief,” Id. Specifically, in QSP, Inc., the Court
held that the plaintiff company was likely to sustain
irreparable loss unless a preliminary injunction was issued
where the evidence showed that: (1) the defendant violated a
non-compete agreement by soliciting customers for a rival
company, (2) the defendant misappropriated the plaintiff
company’s confidential information for the rival company, and
(3) the plaintiff would continue to suffer injury should the
defendant not be restrained from further violating a
confidentiality and non-compete agreement. QSP, Inc., 152 N.C.
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App. at 179, 566 S.E.2d at 854. Here, the evidence shows that:
(1) defendant has the opportunity to misappropriate the
confidential information and trade secrets that he developed for
TSG; (2) ACF could benefit by having defendant’s knowledge of
TSG’s trade secrets because it could produce similar products
without expending resources on research and development; (3)
defendant performs similar work at ACF for some of the same
customers that he served at TSG; (4) Rosenstein testified that
those customers could amount to as much as forty percent of
TSG’s business; (5) TSG had relationships with these customers
for decades; and (6) TSG’s relationships with these customers
became “strained” once defendant left TSG to work for ACF. Like
in QSP, Inc., it is clear here that TSG has demonstrated that it
is likely to suffer irreparable loss unless the injunction is
issued, because TSG is at risk of losing its long-held customers
and whatever competitive advantage it may have had in the
textile finishing industry. See also John G. Bryant Co., Inc.,
369 A.2d at 1167 (“[A non-compete] is designed to prevent a
disturbance in the relationship that has been established
between [the employer] and their accounts through prior
dealings. It is the possible consequences of this unwarranted
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interference with customer relationships that is unascertainable
and not capable of being fully compensated by money damages.”).
Conclusion
For the foregoing reasons, we conclude that the trial court
erred by denying plaintiff’s motion to issue a preliminary
injunction. Plaintiff has demonstrated a likelihood of success
on the merits for its claims of trade secret misappropriation
and breach of contract and has shown irreparable loss absent the
issuance of the preliminary injunction. Accordingly, we reverse
the trial court’s order and remand with instructions to issue
the preliminary injunction.
REVERSED AND REMANDED.
Chief Judge McGEE and Judge BELL concur.