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

• Court: Court of Appeals of Texas
• Decided: January 23, 2020
• Docket: 05-18-01160-CV
• Status: Published

Opinion

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.”

–2– 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.

–3– 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

–4– 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

–5– 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,

–6– 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

–7– 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

–8– 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.

–9–