The Narrowing of Dissenting Shareholder’s Non-compete Enforcement
By Zackary G. Smith, Greensfelder, Hemker & Gale, P.C.
In Crocker v. Greater Colorado Anesthesia, P.C., 2018 Colo. App. 33, the Colorado Court of Appeals affirmed a trial court ruling that a shareholder/employee was no longer bound by a non-compete agreement because the exercise of his dissenter’s rights terminated his employment. Therefore, the terms of the non-compete agreement essentially penalized the shareholder/employee for dissenting. Mr. Crocker was an anesthesiologist and shareholder of Greater Colorado Anesthesia, P.C. (“old GCA”). During his employment, he signed a shareholder employment agreement (the “Agreement”), which stated that “[a]s a condition of employment, ‘Employee must agree to hold their share of the Corporation’s stock in accordance with the Corporation’s Stock Sale Agreement.’” Crocker, 2018 Colo. App. 33, ¶ 13. The Agreement also stated that Mr. Crocker could not compete with old GCA by practicing within fifteen (15) miles of a hospital serviced by old GCA. In 2015, Mr. Crocker objected to a merger between old GCA and USAP (“new GCA”). Notwithstanding Mr. Crocker’s objection, the merger proceeded, and Mr. Crocker demanded payment of his shares of old GCA, which effectively terminated his employment with old GCA. Thereafter, Mr. Crocker began employment at Guardian Anesthesia Services and Greater Colorado Anesthesia, Inc. New GCA sued for breach of the non-compete agreement. The court found that under the terms of the non-compete agreement, Mr. Crocker’s shareholder rights were tied to his employment. SincHe Mr. Crocker exercised his dissenter’s rights, he was forced from his employment. The court then examined his dissenter’s rights to determine if the non-compete agreement was reasonable and enforceable. The court found that as a dissenter, Mr. Crocker was protected from oppressive conduct by the majority of shareholders who voted for the merger. The court found that an anesthesiologist must reside within 30 minutes of where they work. The court reasoned “[a]s a practical matter, because Crocker lives well within the region covered by the non-compete provision of the Agreement, enforcement of the non-compete provision would require Crocker either to move or to pay GCA damages to practice his profession.” Crocker, 2018 Colo. App. 33, ¶ 21. Thus, the court held that the Agreement was unenforceable because it would penalize Mr. Crocker for exercising his right to dissent. This opinion suggests that companies should narrow their non-compete agreements for shareholder/employees, if their rights, as shareholders, are tied to their employment. Colorado courts following Crocker may find non-compete agreements unenforceable to the extent they penalize shareholder employees for opposing or dissenting against a proposed merger.
Second Circuit Upholds Serious Sanctions for Discovery Misconduct
By Caroline Paillou, Greensfelder, Hemker & Gale, P.C.
In Klipsch Group, Inc. v. ePRO E-Commerce Ltd., 880 F.3d 620 (2d Cir. 2018), the United States Court of Appeals for the Second Circuit affirmed an award of $2.7 million in discovery sanctions against a defendant who engaged in “persistent discovery misconduct” during a case in which the underlying damages were only $20,000. In 2012, Klipsch sued ePRO in the U.S. District Court for the Southern District of New York, alleging that ePRO had sold at least $5 million in counterfeit Klipsch products. As the case progressed, it became apparent that ePRO repeatedly failed to disclose the majority of responsive documents in its possession, restricted a discovery vendor’s access to its electronic data, and failed to impose an adequate litigation hold even after the court ordered it to do so, resulting in the deletion of relevant electronic information. Although the damages resulting from ePRO’s counterfeit sales were likely to amount to only $20,000, the district court imposed $2.7 million in monetary discovery sanctions against ePRO to compensate Klipsch for the corrective discovery efforts Klipsch had to engage in after ePRO’s misconduct. In its opinion affirming the district court’s sanctions, the Second Circuit noted that compliance with discovery obligations is “not optional or negotiable; rather, the integrity of our civil ligation process requires that the parties before us, although adversarial to one another, carry out their duties to maintain and disclose the relevant information in their possession in good faith.”
This decision reinforces the importance of appropriate and prompt litigation hold procedures and illustrates that the risks of engaging in discovery misconduct can far outweigh the damages a party might be liable for in the underlying case.
Fourth Circuit Affirms Multiplied Liquidated Damages Award for Repeated Violations of Injunction and Findings of Contempt
By Caroline Paillou, Greensfelder, Hemker & Gale, P.C.
In Rainbow School, Inc. v. Rainbow Early Education Holding LLC, No. 17-1055 (4th Cir. Apr. 10, 2018), the United States Court of Appeals for the Fourth Circuit affirmed a district court’s finding of contempt and award of damages greater than the damages provided in a liquidated damages provision due to a party’s repeated violations of the district court’s injunction.
Rainbow School, Inc. had operated a childcare facility in Fayetteville, North Carolina, for 20 years before Rainbow Early Education Holding LLC opened a competing facility in Fayetteville. When Rainbow School sued Early Education for trademark infringement, the U.S. District Court for the Eastern District of North Carolina issued a preliminary injunction against Early Education. The parties later entered into a settlement agreement which provided that Rainbow School would be entitled to $30,000 in liquidated damages if Early Education violated the injunction. The district court entered a consent judgment consistent with the settlement agreement and permanently enjoined Early Education from using the term “Rainbow” or rainbow images in connection with its business in Fayetteville.
When Early Education continued to use the “Rainbow” trademark to market its daycare facility, the district court found Early Education in contempt and awarded Rainbow School $60,000, or twice the parties’ liquidated damages amount, due to Early Education’s repeated violations of the injunction. When Rainbow School filed its third motion for contempt, the district court also ordered Early Education to pay for an audit to assess whether violations remained and could be cured. The Fourth Circuit affirmed the district court’s decision, finding that the district court did not err in awarding damages to Rainbow School greater than the parties’ liquidated damages provision, because the district court had found multiple violations of the injunction.
The Rainbow decision reminds practitioners that courts have broad powers to craft remedies when a party repeatedly violates a court order or injunction.