Case Report: Smith & Nephew, Inc. v. Northwest Ortho Plus, Inc.
Background. On December 18, 2012, the Honorable Jon Phipps McCalla, sitting in the Western District of Tennessee, decided a motion for preliminary injunction submitted by the plaintiff, Smith & Nephew, Inc. (“Smith”). The motion sought to prevent defendants, Andrew Corbett (“Corbett”), Emory Barrett Downs (“Downs”), James Joseph Workland (“Workland”), Brian Craig Kym (“Kym”), and Michael Jay Barr (“Barr”) from “directly or indirectly calling upon, soliciting, or initiating efforts to divert,” in any way, approximately one hundred customers from Smith. Smith & Nephew, Inc. v. Northwest Ortho Plus, Inc., No. 2:12 cv 02476 JPM dkv, 2012 WL 6607289 at *1 (W.D. Tenn. Dec. 18, 2012). The court held in favor of Smith, and granted the preliminary injunction. Id.
Relevant Facts. Plaintiff Smith manufactures and distributes medical devices. Corbett and Downs, acting as guarantors of the entity Northwest Ortho Plus, Inc., signed a Sales Representative Agreement (“SRA”) with Smith in May of 2010. The SRA specified that Corbett and Downs would act as sales representatives until December 31, 2015. In addition, Smith could terminate the contract for cause, in which case it could enforce the contract’s non-compete clause for one year. Defendants Workland, Kym and Barr signed similar SRAs on the basis of Corbett’s and Downs’ warning that Smith would terminate anyone who did not sign it. Corbett and Downs received a $150,000 payment that was contingent upon Workland, Kym, and Barr signing the SRAs. Id.
In April 2012, Workland, Kym, and Barr signed contracts to be sales reps for A1A, Inc., which distributes products of Smith’s competitor, DePuy Orthopaedics, Inc. (“DePuy”). In that same month, Corbett and Downs signed contracts with Avenue Medical Products, LLC, and MD Systems, LLC. Their contracts with MD Systems specified that they were also under contract with Smith’s competitor DePuy. Corbett and Downs notified Smith of their intention to resign from Smith, after signing contracts with Avenue Medical and MD Systems. Id. at *2.
Smith then filed a complaint for injunctive relief, alleging that Corbett, Downs, Workland, Kym, and Barr violated their non-compete agreements with Smith by working for A1A, Avenue Medical, and MD Systems. Id.
Chief Judge McCalla’s Order:
In considering the granting of a preliminary injunction, the district court applied a four-factor balancing regime. The only factor at issue was whether Smith had a strong likelihood of success on the merits. In making that determination, the Court considered whether Plaintiff could demonstrate a strong likelihood that the defendants were violating the non-compete clauses in their respective SRAs and whether the non-compete clauses were enforceable under Tennessee law.
The Court found that Smith had a strong likelihood of proving Corbett and Downs violated their non-compete clause in the SRA, because Smith proved that the non-compete clause could be enforced. In Tennessee, although they are not favored, non-compete agreements may be enforced if there is a legitimate business interest to be protected and the time and territorial limitations are reasonable. The court acknowledged that the non-compete clause in the SRA: protects a legitimate business interest, is reasonable, and imposes time and territorial limits that are no greater than necessary. Id. at *16-18. The Court also found that Smith proved that there is a strong likelihood that it will be able to prove Corbett and Downs were terminated for cause. The Court acknowledged that Smith can prove termination for not exercising best efforts constitutes termination for cause, and that Corbett and Downs did not exercise best efforts during their term of the SRA. The Court also, found that Smith demonstrated a strong likelihood that it can prove Corbett and downs violated their non-compete clause. The Court acknowledged that Corbett and Downs: intended to circumvent their non-compete agreements with Smith, had financial incentives to violate their non-compete agreements with Smith, and are likely violating their non-compete agreements by using Workland, Kym, and Barr to initiate efforts to divert former customers to DePuy products.
The Court then looked to the issue of whether Workland, Kym and Barr violated non-compete clauses. The waiver letters that the defendants signed were not officially approved by Smith, and the defendants admitted that they were selling competing products to customers they served for Smith. It found that since, in Tennessee, continued employment is sufficient consideration for a non-compete agreement, there is a strong likelihood that Smith will prove that Workland, Kym, and Barr violated their non-compete clauses in their SRAs. Id. at *24-25.
The Takeaway. This ruling elucidated that, under Tennessee law, non-compete clauses in sales representative agreements may be enforced to protect legitimate business interests, such as protecting the goodwill and reputation of the employing entity. The Court showed its concern about protecting employers from former employees who retain their confidential information and are not honest about their intentions.