Richard Gehrke and Pacific Companies, Inc. v. Merritt Hawkins and Associates, LLC

Affirmed in Part, Reversed and Remanded in Part and Opinion Filed January 23, 2020
In The
Court of Appeals
Fifth District of Texas at Dallas
No. 05-18-01160-CV
RICHARD GEHRKE AND PACIFIC COMPANIES, INC., Appellants
V.
MERRITT HAWKINS AND ASSOCIATES, LLC, Appellee
On Appeal from the 298th Judicial District Court
Dallas County, Texas
Trial Court Cause No. DC-18-09562
MEMORANDUM OPINION
Before Chief Justice Burns, Justice Richter,1 and Justice Rosenberg2
Opinion by Justice Richter
This interlocutory appeal arises from the entry of a temporary injunction enjoining Richard
Gehrke from competing with his former employer, Merritt Hawkins and Associates, LLC (MHA).
Gehrke and his current employer, Pacific Companies, Inc. (Pacific), raise two issues generally
arguing the trial court abused its discretion by enforcing the covenant not to compete. MHA cross-
appeals arguing the trial court arbitrarily narrowed the covenant’s geographic restraint. Because
we conclude the injunction’s geographic restraint was arbitrary and too narrow, we affirm in part
and reverse and remand in part.
1
The Hon. Martin Richter, Justice of the Court of Appeals for the Fifth District of Texas at Dallas, Retired, sitting by assignment.
2
The Hon. Barbara Rosenberg, former Justice of the Court of Appeals for the Fifth District of Texas at Dallas, sitting by assignment.
BACKGROUND
MHA, a national physician recruiting and placement firm, makes temporary and permanent
physician placements for healthcare facilities. MHA developed and protected confidential business
information, proprietary information, and trade secrets necessary to its successful operation. In
2013, Gehrke began his employment as a salesman, executive, and regional vice president
supervising other salesmen in MHA’s sales and marketing departments. In his assigned territories,
Gehrke oversaw all sales operations and client and prospective client management. Because
Gehrke needed MHA’s confidential business information to perform his job, MHA required him
to enter into a confidentiality agreement (the Confidentiality Agreement) that prohibited him from
using the information to compete with MHA within a distinct geographic territory3 or soliciting
MHA actual or prospective clients for eighteen months following his separation from MHA.
Gehrke signed the Confidentiality Agreement. During his employment, Gehrke gained access to
and learned MHA’s confidential business information and trade secrets, including business
development strategies, business plans, customer lists, marketing and sales strategies, margins,
prices, and costs. He also developed substantial relationships with MHA’s clients and key client
contacts.
MHA terminated Gehrke’s employment in May 2018 when it discovered he had
disseminated confidential information. In his final year of employment, Gehrke worked in, was
responsible for, and knew MHA’s confidential business information–including client lists,
contracts, pricing, and business strategies–for Missouri, Arkansas, Illinois, Colorado, and Southern
California. In June 2018, Gehrke began working for Pacific, a competitor of MHA, and contacted
“numerous [MHA] customers with whom he previously worked while at MHA.” Further, Pacific
3
The agreement prohibited Gehrke from competing within “all or a portion of the geographic territories for which [he] had direct or indirect
responsibility during the 12 months prior to [his] termination of employment.”
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assigned Gehrke to work in the same states he had worked during his last year at MHA. MHA
sued Gehrke and Pacific and requested injunctive relief. After a three-day temporary injunction
hearing, the trial court issued a temporary injunction that enjoined Gehrke from, among other
things:
Until January 24, 2020, directly or indirectly, performing any services of the same,
similar, or greater nature to those performed by Gehrke during his employment at
Merritt Hawkins for a competitor of Merritt Hawkins in the states of Colorado,
Kansas, Nebraska, Oklahoma, and southern California, and within a ten (10)
mile radius of the customers and prospects set forth on the customer list
referenced in the preceding paragraph. For purposes of clarity, the services that
Gehrke may not perform pursuant to this paragraph include recruiting or providing
permanent healthcare placements or staffing services to healthcare facilities or
organizations.
(emphasis added). This interlocutory appeal, which focuses solely on the quoted provision,
followed.4
DISCUSSION
I. Standard of Review Controlling Temporary Injunctions
A temporary injunction is an extraordinary remedy granted to preserve the status quo
pending a trial on the merits. Butnaru v. Ford Motor Co., 84 S.W.3d 198, 204 (Tex. 2002). We
review a temporary injunction for abuse of discretion, id., and reverse only if the trial court acted
arbitrarily, unreasonably, or “without reference to any guiding rules and principles.” Downer v.
Aquamarine Operators, Inc., 701 S.W.2d 238, 241-42 (Tex. 1985). The trial court abuses its
discretion if (i) it misapplies the law to established facts or (ii) the evidence does not reasonably
support the court's determinations as to probable right of recovery or probable injury. Loye v.
Travelhost, Inc., 156 S.W.3d 615, 619 (Tex. App.—Dallas 2004, no pet.). No abuse of discretion
exists if some evidence reasonably supports the trial court’s decision. Butnaru, 84 S.W.3d at 211.
Further, the trial court does not abuse its discretion when it makes a decision based on conflicting
4
Although this appeal was accelerated, at the parties’ request, submission and oral argument were postponed four times.
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evidence. Loye, 156 S.W.3d at 619. We draw all legitimate inferences from the evidence in the
light most favorable to the order and review any legal determinations de novo. Id.
II. Enforceability of Covenants Not to Compete
Enforcement of a covenant not to compete turns on its reasonableness. Marsh United
States, Inc. v. Cook, 354 S.W.3d 764, 777 (Tex. 2010). Whether a covenant is reasonable presents
a question of law. Zep Mfg. Co. v. Harthcock, 824 S.W.2d 654, 660 (Tex. App.—Dallas 1992, no
writ). An enforceable covenant not to compete must contain reasonable limitations “as to time,
geographical area, and scope of activity to be restrained” without “impos[ing] a greater restraint
than is necessary to protect the goodwill or business interest” of the employer for whose benefit
the restraint is imposed. TEX. BUS. & COM. CODE ANN. § 15.50(a); Zep Mfg. Co., 824 S.W.2d at
660. As such, an industry-wide exclusion from subsequent employment is unreasonable. Haass,
818 S.W.2d at 386-88 (Tex. 1991). “Business goodwill, confidential or proprietary information,
trade secrets, customer information, and specialized training” are interests worthy of protection by
a non-compete agreement. Neurodiagnostic Tex, L.L.C. v. Pierce, 506 S.W.3d 153, 164 (Tex.
App.—Tyler 2016, no pet.). Additionally, “a restrictive covenant must bear some relation to the
activities of the employee.” Peat Marwick Main & Co. v. Haass, 818 S.W.2d 381, 387 (Tex. 1991)
(internal quotations omitted).
A. Enforcement of Non-Solicitation Restrictions
Because disposition of appellants’ second issue also governs, to some extent, disposition
of their first, we consider it first. In their second issue, Gehrke and Pacific contend the temporary
injunction is void as a matter of law and unenforceable because, regardless of whether the
restriction is a ten-mile radius around existing clients or state-wide, it prevents Gehrke from
soliciting clients with whom he had no dealings during his employment with MHA. Appellants
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also argue the injunction is unreasonable because it prevents Gehrke from soliciting academic and
temporary physician placements.
Covenants not to compete prohibiting solicitation of clients with whom a former salesman
had no dealings are unreasonable and unenforceable. Haass, 818 S.W.2d at 386-88 (Tex. 1991).
In Haass, the Texas Supreme Court held a restriction that prevented an employee from soliciting
any of the employer’s customers worldwide, including those with whom he had no dealings during
his employment, was unreasonable because it was not reasonably necessary to protect the
employer’s business interest of preventing the employee from taking his clients with him to a
competitor. Id. at 387-88. However, when an employer seeks to protect its confidential business
information in addition to its customer relations, broad non-solicitation restrictions are reasonable.
See Accruent, LLC v. Short, No. 1:17-CV-858-RP, 2018 WL 297614, at *6 (W.D. Tex. Jan. 4,
2018) (applying Texas law). In Short, the court held a provision preventing an employee from
soliciting customers with whom he had no personal involvement was reasonable because the
employer’s business interests included not only the employee’s client base but also the employee’s
knowledge of proprietary information, which he might use to help a competitor. Id. And in M-I
LLC v. Stelly, the court held a similar restraint was reasonable because the employer’s business
interests involved not only preserving its client base but also maintaining sensitive business
information provided to an upper management employee. 733 F. Supp. 2d 759, 798-800 (S.D. Tex.
2010) (applying Texas law).
Gehrke relies on his role as a salesman to assert Haass controls here. However, the record
demonstrates Gehrke was much more than a mere salesman–he was an executive and vice
president with intimate knowledge of MHA’s confidential business information and trade secrets
who also supervised other salesmen. The trial court also found the Confidentiality Agreement was
animated by MHA’s concerns that Gehrke might use its goodwill to take clients with him to a
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competitor and use MHA’s confidential business information and/or trade secrets to help that
competitor. We conclude MHA’s business interests involved not only preserving its client base
but also maintaining confidential information and trade secrets. Therefore, prohibiting Gehrke
from soliciting MHA’s current and prospective clients, so long as the restriction was otherwise
reasonable and necessary to protect MHA’s goodwill and confidential information, was neither
unenforceable nor void. See Short, 2018 WL 297614, at *6; Stelly, 733 F. Supp. 2d at 798-800.
Additionally, we cannot hold the covenant not to compete is unreasonable because it
restrains Gehrke from soliciting academic and temporary placements. Appellants contend the
“undisputed” evidence demonstrated Gehrke did not solicit academic placements while at MHA
and MHA does not engage in temporary placements. Though Gehrke attempted to distinguish
temporary and permanent placements, the record reflects there is an overlap between the two and
that they also occasionally directly compete. Further, the record shows Gehrke not only received
information about temporary placements but was also commended for facilitating temporary
placements while with MHA. The record also shows MHA’s clients often had both temporary and
permanent as well as private and academic placement needs. Here, the trial court did not abuse its
discretion because it based its decision on conflicting evidence. See Loye, 156 S.W.3d at 619.
Additionally, the restriction did not impose an unenforceable, industry-wide exclusion because it
only bars Gehrke from working in other sections of the staffing industry or medical industry.
Therefore, we overrule appellants’ second issue.
B. Enforcement of Geographic Restrictions
In their first issue, Gehrke and Pacific contend the trial court abused its discretion by
including the ten-mile radius restriction because no evidence supported the restriction or its
reasonableness. Meanwhile, MHA asserts the ten-mile radius restriction is reasonable as a subset
of the larger area in which Gehrke should be restrained from competing. In its sole cross-issue,
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MHA argues the trial court abused its discretion by arbitrarily including the narrow ten-mile radius
restriction rather than enforcing the multi-state, statewide geographic restriction included in the
confidentiality agreement. We agree with appellants and MHA.
Generally, the territory in which an employee works provides a reasonable geographic area
for a covenant not to compete. Zep Mfg. Co., 824 S.W.2d at 660. However, the permissible breadth
of geographic restraint also “depend[s] on the nature and extent of the employer’s business and
the degree of the employee’s involvement in that business.” AmeriPath, Inc. v. Hebert, 447 S.W.3d
319, 335 (Tex. App.—Dallas 2014, no pet.). Thus, broad geographic restrictions have been upheld
when the area constitutes the employee’s actual work territory or when the employee held a
management or executive position with the employer. See id. (upholding broad geographic
restriction beyond the scope of employee’s work where employer’s interest in limiting former
employee’s competition “grew out of not only his employment as a pathologist, but also his service
as a member of appellants' highest level management team.”); see also, e.g., Vais Arms, Inc. v.
Vais, 383 F.3d 287, 295 (5th Cir. 2004) (holding national restraint reasonable given the national
character of employee’s work); Daily Instruments Corp. v. Heidt, 998 F. Supp. 2d 553, 567 (S.D.
Tex. 2014) (finding worldwide geographic restraint reasonable given employee’s international
clientele and intimate knowledge of sensitive company information); Stelly, 733 F. Supp. 2d at
798 (S.D. Tex. 2010) (finding undefined geographic restraint reasonable given employee’s upper
management position and because his actual territory covered the entire Western Hemisphere).
The Confidentiality Agreement prohibits Gehrke from competing in the states in which he
worked during his last year with MHA, which MHA demonstrated to be Missouri, Illinois,
Arkansas, Colorado, and Southern California. Yet, the injunction’s ten-mile radius restraint
restricts Gehrke’s access to customers within Missouri, Arkansas, and Illinois (the Contested
States) but not those states as a whole. Because Gehrke actually worked within the Contested
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States, a multi-state, statewide geographic restriction including the Contested States imposed no
greater restraint than necessary to protect MHA’s business interests of precluding Gehrke’s use of
confidential business information or client relationships in furtherance of work for MHA’s
competitor. AmeriPath, Inc., 447 S.W.3d at 335; Zep Mfg. Co., 824 S.W.2d at 660. We also
observe that Pacific, like MHA, operates in all fifty states and could place Gehrke in any state
where he did not work in his final year with MHA. Thus, neither the Confidentiality Agreement
nor the injunction imposed an unreasonable, industry-wide restriction.
We conclude the trial court abused its discretion by misapplying the law to the facts in
failing to enforce a geographic restriction for all states where Gehrke had worked during his final
year at MHA, including the entirety of the Contested States. See Loye, 156 S.W.3d at 619.
Additionally, we conclude the trial court abused its discretion by imposing the arbitrary ten-mile
radius restriction because neither party presented evidence supporting that restriction. Butnaru, 84
S.W.3d at 211; Downer, 701 S.W.2d at 241-42. We sustain appellants’ first issue and MHA’s
cross-appeal.
CONCLUSION
We affirm the entry of the temporary injunction, including its enforceability, except for the
ten-mile radius restriction, for which we find no supporting evidence or legal justification.
Sustaining appellant’s first issue and appellee’s cross-issue, we reverse and remand for further
proceedings consistent with this opinion.
/Martin Richter/
MARTIN RICHTER
JUSTICE, ASSIGNED
181160F.P05
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Court of Appeals
Fifth District of Texas at Dallas
JUDGMENT
RICHARD GEHRKE AND PACIFIC On Appeal from the 298th Judicial District
COMPANIES, INC., Appellant Court, Dallas County, Texas
Trial Court Cause No. DC-18-09562.
No. 05-18-01160-CV V. Opinion delivered by Justice Richter.
Chief Justice Burns and Justice Rosenberg
MERRITT HAWKINS AND participating.
ASSOCIATES, LLC, Appellee
In accordance with this Court’s opinion of this date, the judgment of the trial court is
AFFIRMED in part and REVERSED AND REMANDED in part. We AFFIRM the entry of
the temporary injunction, including its enforceability, except for the ten-mile radius restriction,
for which we find no supporting evidence or legal justification. Sustaining appellant’s first issue
and appellee’s cross-issue, we REVERSE and REMAND for further proceedings consistent
with this opinion.
It is ORDERED that appellee MERRITT HAWKINS AND ASSOCIATES, LLC
recover its costs of this appeal from appellants RICHARD GEHRKE AND PACIFIC
COMPANIES, INC.
Judgment entered this 23rd day of January, 2020.
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