Good Will Warrants Injunction, Says District of New Jersey
On February 15, 2017, the U.S. District Court for the District of New Jersey in Menasha Packaging Co., LLC v. Pratt Indus., No. 17-0075, 2017 U.S. Dist. LEXIS 22318 (D.N.J. Feb. 15, 2017) granted a preliminary injunction in favor of Menasha Packaging Company, LLC (“Menasha”), enjoining three former employees from working on a customer account for its direct competitor. The District Court found that the former employees were “heavily involved” in Menasha’s business relationship with this customer and thus, it was not unreasonable to enjoin them from working on this account with Menasha’s competitor for 18 months.
Menasha designs and manufactures packaging and retail merchandising display products and provides related supply chain services. Pratt Industries, Inc. and Pratt Industries (USA), Inc. (collectively, “Pratt”) is Menasha’s direct competitor. In 2011, the former employees had signed employment agreements with a predecessor company, which Menasha acquired in July 2012. The 2011 employment agreements prohibited the former employees from soliciting, contacting, or working with any of the employer’s customers for 18 months after their employment ended, or from disclosing any of the employer’s proprietary information. The Court found that the non-solicitation provisions in the 2011 agreements were properly assigned to Menasha through the business acquisition. In June 2016, the former employees all agreed to additional confidentiality provisions with Menasha that further prohibited them from disclosing confidential information during or after their employment, and requiring them to return all confidential information upon termination.
Menasha entered into a contract with Mondelez Industries, Inc. (“Mondelez”) that remained effective through 2017. The former employees worked on-site at Mondelez as members of Menasha’s account team and had unfettered access to Menasha’s confidential and proprietary information. In September 2016, Mondelez issued a request for proposal (“RFP”) for a multi-million dollar two-year contract. The RFP included two distinct rounds. The employees were still employed by Menasha when it submitted its first round submission. In November 2016, all three employees voluntarily resigned from Menasha, each taking confidential and proprietary information with them. Shortly thereafter, all three individuals began to work for Pratt. Pratt conceded that at least one of Menasha’s former employees assisted Pratt with its second round submission for the RFP.
The Court’s Ruling
The Court applied Illinois law but held it would have arrived at the same result under New Jersey law, and found that the non-solicitation provisions were reasonable and enforceable. The Court first found that Menasha had a significant business interest in protecting its goodwill and reputation with Mondelez. The Court noted that the non-solicitation provisions Menasha sought to enforce only concerned Mondelez, the one account that the employees worked on directly, and no others. The employees had a long-term relationship with Mondelez and were in a position to acquire specialized knowledge and information concerning Mondelez. The Court also noted that the non-solicitation provisions only remained in effect for a reasonable period of 18 months. On this basis, the Court concluded that the non-solicitation provisions did not pose an undue hardship on the employees or harm the public interest.
The Court also found that Menasha successfully proved that the employees’ actions would cause irreparable harm to Menasha’s reputation and damage its goodwill with Mondelez. The three employees obtained confidential and proprietary information while working at Menasha, and thus, these employees as well as Pratt would benefit from this information. Indeed, Pratt admitted that it hired the three employees to solidify its relationship with Mondelez. The Court concluded, therefore, it would be too difficult to measure damages because it will require a showing that Mondelez provided work to Pratt because of these employees.
Furthermore, the Court held that the balance of interests weighed in favor of granting injunctive relief. The fact that Pratt may no longer retain the employees if they could not work on the Mondelez account did not outweigh the potential damage to Menasha’s good will and reputation, but rather, supported Menasha’s argument that Pratt valued the employees based on the relationship they had developed with Mondelez while working for Menasha. The Court again emphasized that Menasha prohibited the employees from working on the Mondelez account only and for a reasonable period of 18 months. Thus, enforcement of the non-solicitation provisions posed no harm to the public interest.
This case demonstrates that courts employ a facts and circumstances driven analysis as to whether the employer has a legitimate, protectable interest in a restrictive covenant, such as non-solicitation or confidentiality covenants, regardless of whether Illinois or New Jersey law controls. Moreover, the more narrowly tailored the non-solicitation provision – or in this case only seeking to enforce the restraints as to one account – the more likely the court will find the restrictions reasonable and enforceable.