Carriage Hill v. Hayden, et al. CV-96-101-SD 07/03/96
UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW HAMPSHIRE
Carriage Hill Health Care, Inc.
v. Civil No. 96-101-SD
Christopher Hayden and Benco Dental Supply Co.
REPORT AND RECOMMENDATION
_____ Currently before the court is Plaintiff Carriage Hill Health
Care, Inc.'s ("Carriage Hill") motion for a preliminary
injunction. For the reasons set forth below. Carriage Hill's
motion is granted in part and denied in part.
BACKGROUND
Carriage Hill commenced this action by filing a complaint on
February 20, 1996, alleging breach of contract and interference
with contractual relations. The parties are before the court
based on their diversity of citizenship and because the alleged
amount in controversy exceeds $50,000. See 28 U.S.C. § 1332.
Defendants countered that Carriage Hill also breached its
contract with defendant Christopher Hayden ("Hayden"), committed
abuse of process by initiating this action, sought to unlawfully
restrain trade and also tortiously interfered with contractual relations. On March 1, 1996, Carriage Hill moved for a
preliminary injunction, to which defendants objected on April 26,
1996. A hearing was held over two days, on May 14 and 29, 1996.
The facts ascertained from the evidence proffered in support of
each party's motion regarding the preliminary injunction follow.
Carriage Hill is a small, fairly new, dental supply company
in the New Hampshire and southern Maine seacoast area. It
distributes products from manufacturers, or suppliers, to
dentists and other health care workers. As a result. Carriage
Hill's relationships with both suppliers and purchasers are
important to its business success. In addition to its president,
Lorin Gill ("Gill"), Carriage Hill currently has two full-time
employees and one independent contractor. Hayden had been a
salesman with Carriage Hill from June, 1992 until he left the
company on February 9, 1996 to go to work for defendant Benco
Dental Supply Company ("Benco"). As of the hearing, Hayden had
not yet been replaced.
Benco, on the other hand, is a large, established dental
supplies distributer with over 600 employees in approximately 14
states. Benco had been doing business in Maine and New Hampshire
for three to four years before Hayden began working for it.
Benco describes itself as a "one stop convenience shop" for
dentists, enabling them to purchase an array of products needed
2 in their offices. In addition to selling products, Benco
organizes continuing education seminars and training programs for
dental assistants and hygienists. It also services its
customers' eguipment and designs "programs" for dentists.
Gill described Hayden as an aggressive, hard-working
employee whom Gill trusted and to whom Gill gave free access to
the business and its files. While working for Carriage Hill,
Hayden had not signed any written employment contract,
restrictive covenant or any other nondisclosure agreement. His
duties included principally calling on dentists and placing
orders, although he was involved in some purchasing and related
tasks. He attended sales and industry conferences and had
meetings with vendors and customers.
The facts surrounding Hayden's departure from Carriage Hill
to Benco can be summarized briefly as follows. Sometime in 1995,
Hayden became dissatisfied with his compensation and had lost his
medical insurance coverage after becoming married. He was
offered Carriage Hill stock in response. Then in early January,
1996, Gill informed Hayden that reimbursement for his business
expenses would be restricted in an effort to enhance the
company's profitability.
Immediately thereafter, Hayden contacted and met Benco's
regional sales director Stephen Hoyt ("Hoyt"), to inguire about
3 employment opportunities with Benco. Although Hayden's initial
meeting with Hoyt was not on Carriage Hill time, he did meet with
Hoyt and other Benco officials at an annual dental convention in
late January, where he was representing Carriage Hill. After
that interview, Hayden was offered and accepted a job with Benco.
As part of a signing bonus, Hayden executed a non-compete
agreement.
On February 9, 1996, Hayden submitted a written resignation
to Gill, at which time he offered to stay on for two weeks
provided Gill could meet Benco's compensation package. Gill
declined to do so, and the two agreed Hayden would come in the
following Monday to finalize miscellaneous business and
administrative matters. Although Gill was surprised at Hayden's
departure, they parted on seemingly good terms with Gill wishing
Hayden good luck.
Thereafter the relationship deteriorated rapidly. The
evidence adduced indicated that Hayden may have used his key to
Carriage Hill's office to enter the building over the weekend and
remove certain customer files and vendor lists, although Hayden
denied this. Hayden failed to come in that Monday, as agreed.
When he called Gill, Gill instructed Hayden to return Carriage
Hill's customer lists and his vendor slot lists, and informed
Hayden that if he used these "trade secrets" to take unfair
4 advantage of Carriage Hill he would be sued. Gill determined
that Hayden had taken Carriage Hill's pricing catalogue and the
key to the office with him as well. Rather than returning these
items to Carriage Hill, Hayden gave them to his attorney.
The missing customer lists, vendor lists and pricing
catalogue are the basis for this dispute. Gill testified that
this information is confidential information "guite valuable as a
reference" to it. The customer list is a list of Carriage Hill's
actual customers indicating the customer's buying and payment
histories. The vendor slot list indicates when Carriage Hill
could call on various customers and was developed only after the
salesperson had invested significant time with the corresponding
office. Much of this data is also on Hayden's personal computer.
The missing pricing catalogue contains information available only
to Carriage Hill employees regarding discount calculations for
various products. Carriage Hill alleges that Hayden is using
these various sources of information on Benco's behalf to
undercut its prices and unfairly take business away from it.
Benco, however, maintains its own customer and pricing
databases which also reflect buying and payment histories of
customers. Hoyt testified that he asked Hayden for none of
Carriage Hill's customers, pricing, product or vendor
information. Hoyt explained that Benco's larger size put it in a
5 different league from Carriage Hill and that it was not
interested in competing with Carriage Hill. The evidence also
demonstrated that since Hayden began working with Benco, he has
been in sales training, often outside his market area of southern
Maine and part of New Hampshire.
Gill testified that since Hayden's departure Carriage Hill
has lost business which he estimated to aggregate $30,000
annually, based on the 1995 sales to those customers which have
been lost since Hayden's departure. Gill also testified that
Carriage Hill has lost alot of good will to Benco. Gill also
admitted, however, that other dental supply companies compete in
the same market and that he does not know what percentage of
Carriage Hill's business is being lost to other suppliers.
Carriage Hill seeks an injunction to prevent Hayden from calling
on its customers in Maine and New Hampshire.
DISCUSSION
"The purpose of a preliminary injunction is to preserve the
status guo, freezing an existing situation so as to permit the
trial court, upon full adjudication of the case's merits, more
effectively to remedy discerned wrongs." CMM Cable Rep., Inc. v.
Ocean Coast Properties, Inc., 48 F.3d 618, 620 (1st Cir. 1995)
(citing Chalk v. United States Dist. Court Cent. Dist. of
6 California, 840 F.2d 701, 704 (9th Cir. 1988); American Hosp.
A s s 'n v . Harris, 625 F.2d 1328, 1330 (7th Cir. 1980)).
In determining whether to grant a preliminary injunction,
the court considers four factors. Legault v. aRusso, 842 F.
Supp. 1479, 1485 (D.N.H. 1994). The four factors are: "(1) the
likelihood of the movant's success on the merits; (2) the
potential for irreparable harm to the movant; (3) a balancing of
the relevant eguities, i.e., the 'hardship to the nonmovant if
the restrainer issues as contrasted with the hardship to the
movant if interim relief is withheld,1 Narraqansett Indian Tribe
v. Guilbert, 934 F.2d 4, 5 (1st Cir. 1991); and (4) the effect on
the public interest of a grant or denial of the injunction." Id.
(guoting Gatelv v. Massachusetts, 2 F.3d 1221, 1224 (1st Cir.
1993); see also Campbell S o u p C o . v . Giles, 47 F.3d 467, 470 (1st
Cir. 1995); Sunshine Development, Inc. v. F.D.I.C., 33 F.3d 106,
110 (1st Cir. 1994); Aoude v. Mobil Oil Corp., 862 F.2d 890, 892
(1st Cir. 1988). Although each of these factors is significant,
the sine qua non of the preliminary injunction standard is
whether the movant is likely to succeed on the merits. Legault,
842 F. Supp. at 1485. Given that the likelihood of the movant's
success is the essential element of the guadripartite test, the
court starts with a consideration of this component. Weaver v.
Henderson, 984 F.2d 11, 12 (1st Cir. 1993); Lancor v. Lebanon
7 Housing Authority, 760 F.2d 361, 362 (1st Cir. 1985)
1. Likelihood of Success on the Merits.
Carriage Hill contends that defendants actions have (1)
breached an implied covenant of good faith, and (2) tortiously
interfered with its contractual relations with its customers and
two suppliers. The second claim is actually two counts, one each
against Hayden and against Benco for their respective intentional
and improper interference with Carriage Hill's business
relationships. Based on the evidence proffered in support of the
reguested preliminary injunction, the court concludes that
Carriage Hill is unlikely to succeed on either claim.
First, breach of the implied covenant of good faith is
inapposite to Hayden's decision to leave Carriage Hill and go to
work for a competitor. In this diversity action, the substantive
law of New Hampshire controls. Fragoso v. Lopez, 991 F.2d 878,
886 (1st Cir. 1993) (citing Erie R.R. Co. v. Tompkins, 304 U.S.
64, 78 (1938)); K.J. Quinn & Co. v. Continental Casualty, 80 6 F.
Supp. 1037, 1040 (D.N.H. 1992). New Hampshire law recognizes an
implied duty to exercise good faith in the performance of
contractual obligations in three distinct categories of contract
cases: (1) "those dealing with standards of conduct in contract
formation," (2) "with termination of at-will employment contracts," and (3) "with limits on discretion in contractual
performance." Centronics Corp. v. Genicom Corp., 132 N.H. 133,
139, 562 A.2d 187 (1989). Carriage Hill's cause of action based
on an alleged breach of the implied covenant of good faith
claims: "Hayden knew this confidential proprietary information
about Carriage Hill was confidential yet he willfully disclosed
it to Benco breaching his agreement with Carriage Hill to act in
good faith." This allegation most closely approaches the third
category of cases in which a good faith duty has been implied in
the discretionary performance of a contract.
The good faith duty recognized in the discretionary
performance of a contract is the duty "to provide the level of
services consistent with good faith . . . to vindicate . . . the
parties' reasonable expectations." Id. at 141 (discussing New
Hampshire's seminal case on the implied obligation of good faith
performance, Griswold v. Heat Corp., 108 N.H. 119, 229 A.2d 183
(1967)).
[T]he obligation of good faith performance is better understood simply as excluding behavior inconsistent with common standards of decency, fairness, and reasonableness, and with the parties' agreed-upon common purposes and justified expectations.
Id. at 140 (citing authority). The duty arises, however, only
where a contractual duty to perform lies. See id. at 141-143
(discussing cases finding a good faith duty to reasonably perform).
Here, Hayden was not bound by an employment contract when
the complained-of activity allegedly occurred. First, Carriage
Hill asserts that Hayden contacted its customers and suppliers on
behalf of Benco while still employed by Carriage Hill; however,
neither the testimony adduced at the hearing nor the exhibits
proffered in support of the preliminary injunction motion
substantiate that allegation. Instead, Gill testified that
Hayden had been a good employee and that they parted amicably.
C f . Ferrofluidics Corp. v. Advanced Vacuum Components, Inc., 789
F. Supp. 1201, 1211-12 (D.N.H.), aff'd, 968 F.2d 1463 (1st Cir.
1992) (enjoining former employee who aggressively set up
competitive company while on company time). Second, the evidence
suggested that, to the extent Hayden pursued those business
relationships, it was after he had resigned from Carriage Hill.
At that point, he was not bound by even the at-will, oral
agreement previously governing his conduct and arguably giving
rise to an implied good faith duty to perform. See Centronics
Corp., 132 N.H. at 143 (recognizing the parties' intent to be
bound by an enforceable contract gives rise to an implied
obligation of good faith performance). Third, there was not a
restrictive covenant, non-compete agreement or any form of
nondisclosure agreement binding Hayden's activities after leaving
10 Carriage Hill's employ from which an obligation of good faith
performance could be implied. Id.; cf. Ferrofluidics Corp., 789
F. Supp. at 1210-12 (enforcing a restrictive covenant to protect
former employer's goodwill and confidential proprietary
technology); Technical Aid Corp. v. Allen, 134 N.H. 1, 9-10, 13,
591 A.2d 262 (1992) (enforcing a restrictive covenant where
narrowly drawn to protect plaintiff's proprietary interest in
customer lists and marketing information whose value former
employee learned of while employed by plaintiff); Allied
Adjustment Serv. v. Henev 125 N.H. 698, 701, 484 A.2d 1189 (1984)
(finding a covenant not to compete reasonable where it protected
former employer's goodwill).
Carriage Hill asserts that it has lost customers,
reputation, good will, income and opportunities for increased
sales because of Hayden's move to Benco with its "trade secrets"
in hand. Yet despite this allegation. Carriage Hill did not
bring a cause of action for misappropriation of its trade
secrets. See N.H. Rev. Stat. Ann. ("RSA") 350-B:l, I, II and IV
(defining misappropriation of a trade secret); see also Fisher
Stoves, Inc. v. All Niqhter Stove Works, Inc., 626 F.2d 193, 196
(1st Cir. 1980) (reguiring plaintiff to prove its customer list
was truly secret before protecting it as a trade secret).
Without an extant contract, there is no basis for "an implied
11 obligation of good faith to observe reasonable limits in
exercising [a party's] discretion, consistent with the parties'
purpose or purposes in contracting." Centronics Corp. 133 N.H.
at 143.
Carriage Hill's second and third counts assert Hayden and
Benco tortiously interfered with its contractual relations with
both its customers and two suppliers, Tilloston and MGIS. In
order to prove a cause of action for tortious interference with
contractual relations. Carriage Hill must establish:
(1) it had an economic relationship with a third party;
(2) defendants knew of that relationship;
(3) defendants intentionally and improperly interfered with that relationship; and
(4) it was damaged by such interference.
Solanti v. Smith, 812 F. Supp. 1280, 1296 (D.N.H. 1993) (citing
Jay Edwards, Inc. v. Baker, 130 N.H. 41, 46, 534 A.2d 706 (1987)
(emphasis in original) (guoting Emery v. Merrimack Valley Wood
Products, Inc., 701 F.2d 985, 988 (1st Cir. 1983))).
Under New Hampshire law, "economic relationship" is
construed as a contractual relationship. See Solanti, 812 F.
Supp. at 1297 (explaining that plaintiff's employment contract
established the economic relationship); see also Roberts v.
General Motors Corp., 138 N.H. 532, 539, 643 A.2d 956 (1994)
12 (requiring plaintiff show that he had a contractual relationship
with which defendant wrongfully interfered). Even where
plaintiff alleges tortious interference with a prospective
agreement, the plaintiff must prove he had a contractual
relationship with the third party. See Montrone v. Maxfield, 122
N.H. 724, 726, 449 A.2d 1216 (1982) (citing authority). "To
establish that the defendant's conduct was improper, the
plaintiff had to 'show that the interference with his contractual
relations was either desired by the [defendant] or known by him
to be a substantially certain result of his conduct.1"
Demetracopoulos v. Wilson, 138 N.H. 371, 374, 640 A.2d 279 (1994)
(citing Restatement (Second) of Torts, § 7 67 comment d at 32
(1977)) (emphasis added).
Carriage Hill's tortious interference claim is unlikely to
succeed because it did not have an ongoing contractual
relationship with its customers or its two critical suppliers
with which defendants improperly interfered. There was no
evidence to support Carriage Hill's allegation that Benco,
through Hayden, tried to take Carriage Hill's place with either
of its major suppliers. With respect to its customers. Carriage
Hill stipulated that "one does not own dentists," and Gill
conceded that Carriage Hill did not have any "ownership interest"
in its business relationship with its customers. See Transcript
13 of Preliminary Injunction Hearing on May 14, 1995 ("Vol. 1") at
43. Gill also testified that the dentists were "barraged on an
almost daily basis by sales reps" from many companies. Id. Gill
even described the relationship as one of "courting" the dental
offices. "Courting" is not a contractual relationship, and
implies something much more facile than the type of valid
business relationship undergirding a tortious interference claim.
See Curtis 1000, Inc. v. H. Suess, 843 F. Supp. 441, 451 (C.D.
111. 1994) (recognizing that something less than an enforceable
contract may support a tortious interference claim under Illinois
law) .
The evidence showed that in fact the dental supply business
is remarkably competitive, with at least three large suppliers
and 25 small distributors in the New England region alone. The
testimony was consistent that sales representatives of these
multiple players compete vigorously, which explained why Carriage
Hill deemed its "vendor slot list" so valuable. Carriage Hill
wants to protect its customer, vendor and pricing data precisely
because it wants a competitive advantage in order to obtain sales
contracts. Without the reguisite "economic relationship,"
Carriage Hill is unlikely to succeed on its tortious interference
with contractual relations counts. See Solanti, 812 F. Supp. at
1296 (setting forth the elements necessary to plead successfully
14 a tortious interference cause of action).
Accordingly, the court finds that Carriage Hill has not
satisfied the first prereguisite to the issuance of a preliminary
injunction, namely its likelihood of success on the merits. See
Legault, 842 F. Supp. at 1485 (holding that likelihood of success
on the merits is the indispensable reguisite for preliminary
injunctive relief).
2. Other Factors.
Because the court has determined that Carriage Hill is
unlikely to succeed on the merits of any one of its three counts,
further analysis of the reguirements for a preliminary injunction
is unnecessary. See id.; see also Weaver v. Henderson, 984 F.2d
11, 12, 14 (1st Cir. 1993) (affirming denial of preliminary
injunction and ending inguiry after reviewing the merits of
plaintiff's claims); Performance Unlimited, Inc. v. Ouestar
Publishers, Inc., 52 F.3d 1373, 1381 (6th Cir. 1995) ("A district
court is reguired to make specific findings concerning each of
the four factors, unless fewer are dispositive of the issue."
(guotation omitted)). The court notes, however, that Gill's
testimony that Carriage Hill will suffer approximately $30,000.00
in damages from lost sales seriously undermines a claim of
irreparable harm. See id. at 1382 (defining an irreparable
injury as one which cannot be undone through monetary remedies);
15 see also Hughes Network Svs. v. Interdiqital Communications
Corp., 17 F.3d 691, 694 (4th Cir. 1994) (refusing to find
irreparable harm where the harm suffered may be compensated by an
award of damages); but see Ferrofluidics, 789 F. Supp. at 1212
(enforcing restrictive covenant because of uncertainty associated
with the loss of income caused by defendant's breach). The
public interest factor also weighs heavily against effectively
construing a restrictive covenant where none exists. See
Centors-Vacuum Indus., Inc. v. Lavoie, 135 N.H. 651, 654, 609
A.2d 1213 (1992) (citing New Hampshire authority for the long
standing view disfavoring contracts in restraint of trade).
Accordingly, the court concludes that a preliminary injunction is
not warranted under the circumstances presented here.
CONCLUSION
The court has carefully considered the parties' legal
arguments, the testimony by the witnesses, and the various
exhibits submitted in support of the pending motion for
preliminary injunction (document no. 2). The court concludes,
however, that Carriage Hill has not made the reguisite showing to
justify preliminary injunctive relief. Accordingly, the court
recommends that Carriage Hill's motion seeking to enjoin both
Hayden and Benco from competing with it be denied. The court
16 recommends granting Carriage Hill's motion with respect to return
of the property listed in paragraph B therein and currently held
by defense counsel, since Hayden admitted it is plaintiff's
property to which it is entitled. The court recommends denying
all other grounds for relief, because they would be more
appropriately addressed in a discovery pleading.
Any objections to this report and recommendation must be
filed within ten days of receipt of this notice. Failure to file
objections within the specified time waives the right to appeal
the district court's order. See Unauthorized Practice of Law
Committee v. Gordon, 979 F.2d 11, 13-14 (1st Cir. 1992); United
States v. Valencia-Copete, 792 F.2d 4, 6 (1st Cir. 1986) .
James R. Muirhead United States Magistrate Judge
Date: July 3, 1996
cc: Donald E. Mitchell, Esg. Francis X. Quinn, Esg