Potomac Legal Group Defeats Preliminary Injunction at Hearing:
Employee Restrictive Covenant Unenforceable
Natalie Koss, managing partner of Potomac Legal Group, recently defeated a preliminary injunction motion brought against her clients, two former employees of a Virginia-based financial advisory firm, by their former employer, who alleged that they breached restrictive covenant provisions of their employment agreements.
The employee defendants represented by Ms. Koss in this matter were Michael Danjczek and Kristen Money, who defended claims brought by Clark & Associates, Inc. Financial Solutions, based in Reston, Virginia. The company’s CEO is Megan Clark.
Clark & Associates claimed that Mr. Danjczek and Ms. Money had violated their non-compete agreements immediately after resigning from the employer to form their new business. After resigning from Clark & Associates, Mr. Danjczek and Ms. Money had founded the competing business, First Light Financial, LLC.
Ms. Koss, however, prevailed in a two-day preliminary injunction hearing in Fairfax County Circuit Court by arguing that the employer failed to demonstrate the four required elements of a preliminary injunction necessary in Virginia.
The outcome of the preliminary injunction hearing determined whether or not the financial advisors could continue their business activities.
Ultimately, Ms. Koss and Potomac Legal Group succeeded and claimed a resounding victory for Mr. Danjczek and Ms. Money. Winning the decision allowed the advisors to continue running their thriving business, and Clark & Associates withdrew all claims against the employees.
The Order and Memorandum Opinion denying the motion for preliminary injunction is embedded at the end of this page.
Purpose of a Preliminary Injunction
In a non-compete dispute, the plaintiff (the former employer) typically seeks a preliminary injunction to prevent the defendant (former employees) from engaging in competitive activities during the litigation. Our primary goal was to convince the court to deny the preliminary injunction, which would allow our clients to continue their work while the case proceeded.
To succeed on a motion for preliminary injunction, the plaintiff must demonstrate four elements.
- The plaintiff must show it is likely to succeed on the merits of their claim.
- The plaintiff must show it is likely to suffer irreparable harm in the absence of a preliminary injunction.
- The balance of equities must tip in favor of the plaintiff.
- The issuance of an injunction should be in the public interest. Winter v. NRDC, Inc., 555 U.S. 7 (2008).
Moreover, in Virginia “no temporary injunction shall be awarded unless the court shall be satisfied of the plaintiff’s equity.” Va. Code Ann. § 8.01-628. While the Virginia Supreme Court has not specifically established these elements, Fairfax County Circuit Court has adopted the factors established by Supreme Court precedent.
The purpose of a preliminary injunction is to preserve the status quo pending a suit, yet due to Plaintiff’s delay in pursuing this Motion, the status quo they seek to preserve has disappeared. See May, 297 Va. 1, 18 (Va. 2019).
Here, the former employer unduly delayed in pursuing this injunction: the employees resigned in March and the former employer waited nearly three months after the employees left to file the instant injunction. Courts have refused preliminary injunctions where the movant’s delay “create[s] a situation where [a] defendant… would experience considerable damage should the injunction be granted….” Coalition to Preserve McIntire Park v. City of Charlottesville, 97 Va. Cir. 364, 367 (Charlottesville 2009).
Facts Presented at Hearing
Mr. Danjczek and Ms. Money entered into an employment agreement that contained a restrictive covenant limiting the ability of the employees to engage in any competitive business activities following the separation of the employees from the former employer. Clark & Associates filed suit against the two former employees and sought to obtain a preliminary injunction to prevent them from working with their previous customers.
Notably, the agreement states as follows:
“Consultant agrees that during his employment, except on behalf of Employer and during the Restriction Period, Consultant will not (i) provide or assist any other Person to provide, or (ii) enter into a contract or agreement or assist any other Person to enter into a contract or agreement with any Client to provide, the services or products that are competitive with those sold or provided by the Consultant to such Client on behalf of Employer during the Look-Back Period. This restriction shall apply only to any Client of the Company with whom Consultant had contact during the Look-Back Period. For the purposes of this paragraph, “contact” means interaction between Consultant and the Client which is intended to further the business relationship, or the performance of services for the client on behalf of the company.”
The former employer alleged that the employees breached the restrictive covenant and requested the court to issue a preliminary injunction to halt the employees’ new business arguing that it would be irreparably harmed if the injunction was not ordered.
Victory for Our Client:
The Restrictive Covenant is Ambiguous
The court found that Clark & Associates failed to satisfy the first element necessary for a preliminary injunction. The former employer could not demonstrate a likelihood of success on the merits because of the unenforceability of the restrictive covenant. Here, the employer has the burden of proving that the restrictive covenant is enforceable. Home Paramount Pest Control Companies, Inc. v. Shaffer, 282 Va. 412 (2011).
The court was tasked with analyzing the proposed restrictive covenant for its enforceability. The court considered elements of the restrictive covenant such as the “function, geographic scope, and duration” of the covenant to determine its enforceability. See Simmons v. Miller, 261 Va. 561, 581 (2001). The former employer argued that the restrictive covenant is specific to the services the employees provided to the former employer during their respective tenures, and that the duration of 12 months for the non-compete clause is reasonable. Attorney Natalie Koss asserted that the restrictive covenant is ambiguous and overbroad.
The court, adopting many of the arguments raised by attorney Natalie Koss, determined that the restrictive covenant is ambiguous, and this ambiguity imposes broad, unreasonable restrictions on the former employees. In its opinion, the Court stated, “[I]t is a well-established principle of contract law that ambiguity in an agreement must be construed against the drafter. See e.g., Martin & Martin, Inc. v. Bradley Enterprises, Inc., 256 Va. 288, 291 (1998). Furthermore, restrictive covenants must be strictly construed and if ambiguous it must be construed in favor of the employee. Motion Control Sys., Inv. V. East, 262 Va. 33, 37 (2001).”
During oral argument, attorney Natalie Koss argued that the “absence of a particular comma rendered the clause meaningless.”
In the pleadings, the former employer added a comma to change the meaning of the restrictive covenant. The former employer changed the language to “Consultant agrees that during his employment, except on behalf of Employer[,] and during the Restriction Period…” In its brief in opposition to the motion for preliminary injunction, attorney Natalie Koss argued that the “Restriction Period” in the “except” clause also refers to the one-year period following termination of the Consultant’s employment with the former employer.
Accordingly, the post-termination “Restriction Period” by definition does not occur “during” the consultant’s employment and does not occur during the prohibition on competition that applies “during” employment with the former employer. Explicitly recognizing that the language as drafted by the former employer does not effectively prohibit the employees from post-termination competitive activities, the former employer has revised and misstated the text of the “except” clause throughout its complaint, inserting an additional comma that does not appear in the actual contract, in order to change the meaning of the agreement to suit its claim.
The Court stated that “the question surrounding the comma demonstrates a fundamental problem with the restrictive covenant: it is ambiguous.”
The Court further found that the restrictive covenant failed to clearly define what “contact” and “service” was prohibited. The court stated that “there remains significant ambiguity with respect to what constitutes ‘contact’ and consequently, there remains significant ambiguity as to which clients are off-limits to the Defendants.”
Additionally, the court found that there was ambiguity as to what “services” were prohibited by the restrictive covenant as well.
During closing argument, the court expressed skepticism as to what “services” and “interactions” would actually be prohibited based upon the plain language of the non-compete. The restrictive covenant states, “[T]his restriction shall apply only to any Client of the Company with whom Consultant had contact during the Look-Back Period. For the purposes of this paragraph, contact means interaction between Consultant and the Client which is intended to further the business relationship, or the performance of services for the client on behalf of the Company.” While the former employer argued that services should be defined as “common sense” the court appropriately pointed out that “even when applying ‘common sense’ the definition of services is circular and self-defining.”
Importantly, Ms. Koss argued that plaintiff could not easily enforce the non-compete where it had failed to even produce a list of clients with which Defendant had contact during the year prior to the departure. The court highlighted this failure as another reason why there was “significant ambiguity as to which clients were off-limits to the Defendants.” Even the testimony at hearing presented by plaintiff was disparate. In the one instance, the former employer argued that there were about 255 people who were serviced that the former employees would be prevented from securing as customers, but, later, the former employer presented evidence that the number was actually much greater.
Given the former employer’s failure to establish by a “clear showing the enforceability of the covenant, the Court cannot find that the agreement is reasonable – or in other words, not unduly burdensome – and therefore, enforceable.” This determination led the court to conclude that the former employer failed to sufficiently demonstrate a likelihood of success on the merits.
Clark & Associates did not Demonstrate Irreparable Harm
Secondly, the court analyzed the alleged irreparable harm that the former employer claimed would result if the injunction was not granted. The former employer stated that monetary damages are inadequate because they would be difficult to quantify and argued that “money damages are plainly inadequate.”
Based upon the testimony at the preliminary injunction hearing, in her closing argument, Ms. Koss argued that Clark & Associates failed to demonstrate irreparable harm because the former employer testified that she was able to calculate the losses associated with the customers taking their business to the new financial advisory firm. In the opposition to defendants’ motion for preliminary injunction, Ms. Koss argued that “[T]he loss of sales commissions and service fees resulting from customers who left Clark to defendants is easily quantifiable and is the most basic measure by which lost profits can be derived.”
This understanding is rooted in Virginia state law precedent, where courts have previously determined that an assertion of irreparable harm based on a loss of customers and business can be quantified in monetary damages. See Wings, LLC v. Capitol Leather, LLC, 88 Va. Cir. 83 (2014). The court applied this standard and stated there is no basis to distinguish the harm in this case from that in Wings. Thus, the court concluded that Clark & Associates had not demonstrated irreparable harm.
Preliminary Injunction Defeated & Employees Saved
The court considered the final two elements for a preliminary injunction together. The applicable rule is that “plaintiffs must demonstrate that the harm to them before the trial on the merits without the requested preliminary relief is greater than the harm to the defendant during the same time period with the requested relief.” Dillon v. Northam, 105 Va. Cir. 402 (2020).
Here, the public interest element relies solely on the reasonableness of the restrictive covenant. Stating that “as the Court cannot find that the Plaintiff met their substantial burden in proving, by clear showing, a likelihood of success on the merits and demonstrated irreparable harm,” the court determined that it did not need to reach a conclusion as to the two remaining elements.
Ultimately, the court denied the plaintiff’s motion for preliminary injunction.
As a result of the court’s opinion denying the motion for preliminary injunction, Clark & Associates dismissed the entirety of the case against Mr. Danjczek and Ms. Money.
Through dedication to the case and the client, Ms. Koss and Potomac Legal Group worked tirelessly over a period of only a few weeks to review documents, identify witnesses and develop an insurmountable defense that addressed why the elements necessary for a preliminary injunction were not present in this case.
The former employer lost its motion for the preliminary injunction, as well as their hope of pursuing damages against our clients.
In winning the battle, Potomac Legal Group won the war. The employer retreated, and Mr. Danjczek and Ms. Money are now free to continue prospering as new business owners providing an important and essential financial advisory service in Virginia.
If you are facing a potential dispute regarding restrictive covenants in an employment agreement, contact Potomac Legal Group.