Saturday, May 7, 2022

FYI: 6th Cir Vacates Injunction Against Loan Officer on Noncompete and Other Employment Terms

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
The Loop Center Building
105 W. Madison Street, 6th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

Alabama   |   California   |   Florida   |   Illinois   |   Massachusetts   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Tennessee   |   Texas   |   Washington, DC

 

 

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.


Our updates and webinar presentations are available on the internet, in searchable format, at:

 

Financial Services Law Updates

 

and

 

The Consumer Financial Services Blog

 

and

 

Webinars

  

 

 

 

Sunday, May 1, 2022

FYI: Cal App Ct (4th Dist) Affirms Order Compelling Compliance With District Attorneys' Rosenthal Act and TCPA Subpoena

The Court of Appeals of California, Fourth District, recently affirmed a trial court's order requiring compliance with an investigative subpoena served by a number of county district attorney's offices.

 

In so ruling, the Fourth District held:

 

1)  The subpoena respondent could not avoid investigation into whether it was subject to the California Rosenthal Fair Debt Collection Practices Act by asserting that it was not;

 

and

 

2)  The subpoena's investigation into the respondent's interactions with certain national banks was not preempted or prohibited by the federal National Bank Act.

 

A copy of the opinion is available at:  Link to Opinion, and Order Certifying Opinion for Publication

 

This action arose out of an investigation by the district attorney's offices in several counties ("DAs") in California regarding a company's ("Company") compliance with the California Rosenthal Fair Debt Collection Practices Act ("Rosenthal Act") and the federal Telephone Consumer Protection Act ("TCPA").

 

During the course of the investigation, DAs issued subpoenas to company seeking (1) collection services agreements, and other agreements between Company and its top five clients; (2) all of the call records of debt collection calls made by the top five clients to California residents; (3) the identity of any company that monitored/audited Company for compliance with debt collection practice laws; (4) policies and procedures related to collecting debt in California followed by Company; and (5) organizational charts regarding Company's corporate structure and specific identifying information regarding the structure.

 

DAs also sought information relating to a specific client ("Client") and a bank, relating to specific policies followed or dialing systems used and all call records of all debt collection calls Company made for Client and bank to residents of California.

 

Company served its objections and responses, arguing that the requests were a violation of Company's right to privacy and against unreasonable searches and seizures. Company also asserted it did not have any debt collection clients and thus denied having any of the requested agreements with clients, policies and procedures or call logs, relating to consumer debt collection. As to Client and bank, Company provided documents that were in its "custody, possession or control."

 

DAs eventually petitioned for an order compelling full compliance with the subpoena. Company opposed on the basis that as it was not a debt collector under the Rosenthal Act, and so the subpoena was invalid because it was not reasonably related to an investigation regarding debt collection.

 

The trial court granted DAs' petition and concluded that Company was a debt collector under the Rosenthal Act, the requests were relevant, and Company's original responses were incomplete.  This appeal followed.

 

On appeal, Company argued that it was not a debt collector under the Rosenthal Act, and thus the trial court erred in ordering compliance with the subpoena. Company also argued that the subpoena was improper in seeking Client's call records in violation of the federal National Bank Act. The Appellate Court found both arguments lacked merit.

 

The Rosenthal Act defines a debt collector as "any person who, in the ordinary course of business, regularly, on behalf of that person or others, engages in debt collection." Civ. Code, § 1788.2, subd. (c). "The term 'debt collection' means any act or practice in connection with the collection of consumer debts." Civ. Code, § 1788.2, subd. (b).

 

Company did not dispute that DAs had the authority to investigate whether debt collectors complied with the Rosenthal Act but instead argued that because Company was not a debt collector, the information sought in the subpoena was not reasonably relevant to the authority to investigate compliance with the Rosenthal Act. To support its argument, Company claimed only one percent of its business consisted of outbound collection-related calls, and these calls were made on behalf of only four of Company's many clients.

 

The Appellate Court found this argument lacked merit, noting an enforcement agency has the power to investigate a matter within its jurisdiction "merely on suspicion that the law is being violated, or even just because it wants assurance that it is not." Brovelli, supra, 56 Cal.2d at p. 529. This power also allows "the authority to conduct an investigation and to subpoena records to determine whether the entity under investigation is subject to the agency's jurisdiction and whether there have been violations of provisions over which the agency has jurisdiction. Millan, Supra, 14 Cal. App: 4thh at p. 487.

 

Thus, the Appellate Court found that the DAs had the authority to subpoena Company to determine whether it was a debt collector under the Rosenthal Act, and that as such, Company could not resist the subpoena by claiming it was not a debt collector.

 

The Appellate Court rejected Company's argument that the subpoena violated the federal National Bank Act. As you may recall, the National Bank Act provides: "No national bank shall be subject to any visitorial powers except as authorized by Federal law, vested in the courts of justice or such as shall be, or have been exercised or directed by Congress or by either House thereof or by any committee of Congress or of either House duly authorized."  See 12 U.S.C.§ 484, subd. (a).  State officials "may not exercise visitorial powers with respect to national banks, such as conducting examinations, inspecting or requiring the production of books or records of national banks, or prosecuting enforcement actions, except in limited circumstances authorized by federal law."  See 12 C.F.R. § 7.4000(a)(1).

 

The parties agreed that Company was not a national bank subject to the National Bank Act, nut Company argued that the subpoena made an impermissible visitation on Client because (1) such officials were prohibited by the National Bank Act from examining the "records of national banks"; and (2) "[a]ny records [Company] possesse[d] regarding [Bank]" constituted records "of" a national bank within the meaning of the National Bank Act.

 

The Appellate Court found this argument implausible on its face. The Appellate Court noted the prohibition on "visitation" by state agents is for the protection of the Office of the Comptroller of the Currency's ("OCC") regulatory authority concerning national banks. The OCC however, has no authority to prosecute wrongdoing by third parties that provide services to national banks. Thus, in the view of the Appellate Court, Company's argument would curtail state law enforcement authority arbitrarily, with no federal authority to fill the gap.

 

The Appellate Court held that the National Bank Act regulations prohibit state officials from examining or requiring production of the records possessed by national banks, but they do not prohibit state officials from examining or requesting the production of other entities records of dealings with national banks.

 

Thus, the Appellate Court found the trial court's order consistent with the regulations, as it required Company to produce only records in Company's possession.

 

Accordingly, the Appellate Court affirmed the trial court's order compelling Company comply with the subpoena.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 6th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

Alabama   |   California   |   Florida   |   Illinois   |   Massachusetts   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Tennessee   |   Texas   |   Washington, DC

 

 

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.


Our updates and webinar presentations are available on the internet, in searchable format, at:

 

Financial Services Law Updates

 

and

 

The Consumer Financial Services Blog

 

and

 

Webinars