The U.S. Court of Appeals for the Sixth Circuit recently vacated a trial court's injunction granted to enforce various noncompete, non-solicitation, and confidentiality provisions in a mortgage lender's employment agreement with a loan officer.
A copy of the opinion is available at: Link to Opinion
The appeal arose out of an employment agreement (the "Agreement") signed by a loan officer ("Employee") during the course of his employment with a mortgage company ("Employer"). The Agreement was entered into by Employee and Employer in March 2019, when Employee was made "a team leader/managing loan officer."
Pursuant to the "Restrictive Covenants" provision in the Agreement, Employee agreed that (1) for approximately three years and six months he would not "become employed in the same or similar capacity as [he] was employed with [Employer] by … any entity that competes with [Employer] in the home mortgage banking or brokering business" within "a one hundred (100) mile radius from either [Employer]'s headquarters or any branch office…to which [Employee] [wa]s assigned," and (2) for approximately four years and six months, Employee would not "employ or seek to employ any person who [wa]s employed by [Employer] or otherwise directly or indirectly induce such person…to leave his/her employment."
In 2020, Employee contacted another loan company ("Competing Company") informing them that he was seeking to move himself and his team in a short time frame. By January 2021, Employee and two of his team members had left Employer and begun working at Competing Company.
Employer asserted numerous claims against including for violation of the noncompete covenant, the non-solicitation covenant and the confidentiality covenant. Employer also sued Competing Company for tortious interference with business relationships and with contract.
Employer moved for a preliminary injunction which the trial court granted enjoining Employee and anyone in active concert of participation with him, including Competing Company, from "(1) competing with [Employer] within 100 miles of the office in which [Employee] worked; (2) soliciting [Employer]'s employees; and (3) using or disclosing [Employer]'s confidential information for their or [Company]'s competitive benefit."
Employee and Competing Company asked the trial court to clarify the meaning of "competing with [Employer]" and to specify the time period of the injunction but the trial court declined. Employee and Company appealed.
The Sixth Circuit found that, as a threshold matter, the injunction was impermissibly vague and overly broad. Pursuant to Fe. R. Civ. Pro. Rule 65(d): "Every order granting an injunction . . . must: (A) state the reasons why it issued; (B)state its terms specifically; and (C) describe in reasonable detail—and not by referring to the complaint or other document—the act or acts restrained or required." Fed. R. Civ. P. 65(d)(1). In addition, the injunction must be couched in unambiguous and specific terms, such that "an ordinary person reading the court's order [is] able to ascertain from the document itself exactly what conduct is proscribed." Scott v. Schedler, 826 F.3d 207, 211 (5th Cir. 2016).
The Sixth Circuit found the word "competing" was too vague as the main dispute in the matter was the scope of the restriction that Employer could be "employed in the same or similar capacity as [he] was employed with" Employer. The trial court never interpreted this phrase and instead issued a blanket injunction prohibiting Employee from "competing with [Employer]. The Appellate Court found that instead of resolving the vagueness of the language in the Agreement, the trial court substituted an equally vague prohibition which left to much "guesswork" for Employee and Competing Company to structure their conduct. Patriot Homes, Inc. v. Forest River Hous., Inc., 512 F.3d 412, 415 (7th Cir. 2008).
The Appellate Court also ruled that the injunction was "addressed to mortal human beings, yet it ha[d] no limitation on time." N.L.R.B. v. Teamsters, Chauffeurs, Helpers & Taxicab Drivers, Loc. Union 327, 419 F.2d 1281, 1283 (6th Cir. 1970). As the parties to the injunction were "left to guess about its intended direction," the Sixth Circuit found that Rule 65(d) did not permit them to endorse the trial court's injunction. See Granny Goose Foods v. Bhd. of Teamsters & Auto Truck Drivers, 415 U.S. 423, 444 (1974).
Employer argued that the injunction was clear as the specific conduct it prohibited could be inferred from "the facts of the case" and the "entirety" of the court's opinion. The Sixth Circuit disagreed, finding that the lower court never explained how the noncompete provision could be interpreted to bar "competing with [Employer]" writ large. In addition, the Sixth Circuit held, the lower court failed to state that the scope and duration were co-extensive with the language of the Agreement and in fact, stated that the conduct enjoined without any reference to previously quoted language.
The Sixth Circuit noted that even if that were not the case, the defect could not be cured by using language like "in keeping with opinions expressed herein," Mitchell v. Seaboard Sys. R.R., 883 F.2d 451, 454 (6th Cir. 1989), nor could the injunction describe the enjoined conduct by reference to the Agreement as that was another document. See Fed. R. Civ. P. 65(d)(1)(C). Thus, the Appellate Court found the injunction impermissibly vague under Rule 65(d).
The Sixth Circuit also held that the injunction was overbroad. When there is a risk that the injunction restrains legal conduct, or prohibits illegal conduct not the subject of the litigation or closely related to the conduct, the injunction is overbroad. See Allard Enters., Inc. v. Advanced Programming Res., Inc., 146 F.3d 350, 360-61 (6th Cir. 1998). The Appellate Court found that although the Agreement prohibited a specific action, the injunction was an unmitigated restraint on Employee "competing with [Employer])."
Thus, the Appellate Court found there was an inherent risk that the injunction scope exceeded the Agreement between the parties. The Sixth Circuit declined to modify the injunction to rectify its defects, and instead determined the question of scope of certain provisions was for the trial court to address.
The Sixth Circuit additionally ruled that the trial court had to reconsider the propriety of the injunction as it failed to analyze if the noncompete clause was enforceable under Ohio law. Among the four factors a court must balance when considering a motion for preliminary injunction is whether the moving party has a strong likelihood of success on the merits. City of Pontiac Retired Emps. Ass'n v. Schimmel, 751F.3d 427, 430 (6th Cir. 2014) (en banc) (per curiam) (cleaned up).
Moreover, the Sixth Circuit held that the trial court erred in failing to consider whether the noncompete covenant was reasonable, and thus, enforceable. The Appellate Court stated that Employer had no likelihood of success on the merits of the claim for breach of restrictive covenant unless it could show that the covenants were enforceable and that Employee breached them. A noncompete covenant is reasonable if it (1) is "no greater than is required for the protection of the employer"; (2) does "not impose undue hardship on the employee"; and (3) is not "injurious to the public." Chi. Title Ins. Corp. v. Magnuson, 487 F.3d 985, 991 (6th Cir. 2007) (quoting Raimonde v. Ban Vlerah, 325 N.E.2d 544, 547 (Ohio 1975)).
As the lower court failed to analyze the Raimonde factors and make necessary findings to conclude that the noncompete restrictions were enforceable, the Sixth Circuit there could be no likelihood of success on the breach of restrictions claim. Because a court cannot issue a preliminary injunction where there is no likelihood of success on the merits, the Appellate Court vacated the preliminary injunction as to the noncompete provision.
Thus, the Sixth Circuit vacated the injunction and remanded the case for further proceedings.
Ralph T. Wutscher
Maurice Wutscher LLP
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