Court Vacates Preliminary Injunction Enforcing Non-Disclosure Covenant Where Former Employer Did Not Allege Any Prior Violation and Did Not Establish a Legitimate Business Interest in Customer Relationships

In an appeal of a preliminary injunction, the Eleventh Circuit dismissed part of the appeal as moot while vacating the remaining provisions of the preliminary injunction. Vital Pharm., Inc. v. Alfieri, 2022 U.S. App. LEXIS 1771 (11th Cir. Jan. 20, 2022). Vital Pharmaceuticals, Inc. brought suit against four former employees and a competitor based on certain restrictive covenants in its employment agreements with the employees. The employment agreements contained the following three restrictive covenants: (1) the employees agreed not to work for a competing company during the term of employment and for a period of one year after termination; (2) the employees agreed not to solicit Vital employees to join a competing company for a period of one year from termination; and (3) the employees agreed to never disclose or utilize any of Vital’s confidential information (the “non-disclosure covenant”).

Vital moved for a preliminary injunction to enjoin the former employees from violating the covenants. Vital also asked the district court to enjoin the competing company from interfering with the former employees’ restrictive covenants and from using confidential information belonging to Vital. The district court granted the motion. Some portions of the preliminary injunction had a one-year expiration period while others had no end date.

In an opinion written by Chief Judge William Pryor and joined by Judge Britt Grant and Judge R. Lanier Anderson, the Eleventh Circuit first analyzed whether the appeal had been mooted. The court concluded that an appeal of a preliminary injunction is moot when the effective period of the injunction has passed. Because a year had passed since the preliminary injunction went into effect, the court found that the appeal was moot to the extent it challenged the portions of the injunction with a one-year expiration date. However, because the provisions of the injunction that related to enforcement of the non-disclosure covenant had no end date, the entire appeal was not moot.

The court then turned to the merits of the appeal and ultimately found that Vital had not shown it has a substantial likelihood of success on the merits to entitle it to an injunction. Under Florida law, the party seeking enforcement of a covenant must plead and prove the existence of one or more legitimate business interests justifying the restrictive covenant. Fla. Stat. § 542.335(1)(b). The Eleventh Circuit found that Vital never alleged a breach of the non-disclosure covenant in the employment agreement, so the trial court abused its discretion by including the prohibitions in the preliminary injunction.

The Eleventh Circuit also went on to find that Vital did not establish a legitimate business interest in its customer relationships. Under Florida law, relationships with customers are only a “legitimate business interest” when the relationships are substantial with specific prospective or existing customers. Vital did not name and prove any substantial relationship with specific clients, so the court found that Vital could not rely on its customer relationships to establish a legitimate business interest.

After deciding that Vital had not established a likelihood of success on the merits, the court turned to whether Vital had shown that it would suffer irreparable injury without the injunction. Vital argued that Florida law provides that the violation of a restrictive covenant creates a presumption of irreparable injury to the person seeking enforcement of the covenant. Fla. Stat. § 542.335(1)(j). Noting that this argument “raises a knotty choice-of-law question,” the court decided that it was unnecessary to decide whether the court must follow the statutory presumption because in any event Vital had not met the requirements for the presumption. The statutory presumption only applies to enforceable restrictive covenants that have been violated. Vital never pled or argued that the non-disclosure covenant had been violated, and no evidence suggested that it had. Therefore, the Eleventh Circuit found that the presumption did not apply. Vital had not presented any other evidence that it would face an actual and imminent injury without the injunction. The court therefore vacated the portions of the injunction that were not moot.

Chief Judge Pryor wrote a separate concurrence to specifically address the knotty choice-of-law question that the court declined to answer—whether federal courts must follow state statutory presumptions in analyzing whether to grant a preliminary injunction. Chief Judge Pryor concluded that, though “the answer is surprisingly evasive,” a federal court must apply the federal standard and not the Florida presumption because federal courts have traditionally applied uniform standards to the award of equitable relief and modern choice-of-law principles do not require the “traditional approach” to yield to the Florida rule. Chief Judge Pryor also found that because the decision of whether to award a preliminary injunction is meant to keep the status quo, it is a procedural rule and not substantive for choice-of-law purposes. Even though this conclusion leaves open the possibility that the failure to apply the presumption will lead to a denial of a preliminary injunction in federal court that would have been granted in Florida state court, Chief Judge Pryor noted that the standards are similar overall, so the outcomes at the preliminary injunction stage are likely to be similar as well.

Posted by Rebekah Whittington.

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