Part 16 of “The Restricting Covenant” Series: Civil Contempt and Covenants Not to Compete

Make no bones about it, non-compete disputes can be litigious, contentious, and downright nasty. Someone breached another’s trust or loyalty; or stole something valuable from someone else; or didn’t uphold his or her end of the bargain. Battle lines are drawn. Nevertheless, there are codes of civility, professionalism, and rules of law that must be followed. So, you would think that when a court enters an order granting injunctive relief consistent with the parties’ non-compete agreement, the order would be followed, right? Read on. In this sixteenth article of the Series, I discuss a few extreme examples of litigants in non-compete disputes who failed to comply with court orders, resulting in significant monetary damages and other sanctions.

Oh, You Mean I Couldn’t Do That! 

Salesman John Osborne signed an employment agreement containing a non-competition provision with his employer Uarco, Inc., which sold business forms. After Osborne’s employment ended, Uarco filed a lawsuit against him for breach of his non-compete for selling similar business forms for a competitor. The trial court entered an injunction that, in part, prohibited Osborne from contacting certain Uarco customers for two years. However, the trial court’s order had a carve-out, which allowed Osborne to sell to any Uarco customer if the customer wanted to purchase business forms in a purely “open bid situation” (i.e., an RFP for the lowest price).

Uarco filed a contempt action against Osborne, alleging that he had contacted its customers in violation of the injunction order. The trial court found over 100 violations of its order. Osborne admitted that he had violated the court’s order for two customers, but argued the remaining customers did not fall within the restrictions. The trial court disagreed and imposed monetary sanctions and additional injunctive relief. The Supreme Court of Kansas found that the trial court was well within its broad discretionary authority to extend the original injunction for an additional 190 days, award Uarco almost $10,000 for its attorney’s fees, and assess a $10,000 fine against Osborne (held in abeyance pending future compliance with the injunction). Uarco, Inc. v. Osborne (1978).

The Bitter Pill of Contempt Proceedings

Non-compete disputes among physicians can be particularly acrimonious and costly. On more than one occasion, courts have held physicians in civil contempt for disregarding an injunction order related to a non-compete agreement.

One such dispute involved obstinate ophthalmologists in Illinois. Prairie Eye Center, Ltd. v. Butler (2002). Following several appeals and a lengthy trial, Dr. Butler was enjoined from practicing ophthalmology for two years, ordered to pay his former eye clinic $554,000 in damages for lost profits, $1,100,000 for the diminished value to the Eye Center’s business, and almost $165,000 for the Eye Center’s attorney’s fees and costs for enforcing the non-compete agreement and prosecuting the contempt proceedings. Ouch!

Another example involved dueling dentists in Massachusetts. Whitman v. Goldberg (2009). According to the trial judge, “an irretrievable breakdown” occurred in the professional relationship between Dr. Whitman and Dr. Goldberg. Dr. Goldberg obtained a preliminary injunction against Dr. Whitman, which prohibited him from, among other things, practicing dentistry within a 15-mile radius of Dr. Goldberg’s office. Despite receiving this injunction order, Dr. Whitman continued to practice dentistry within the restricted area until he was served with a complaint alleging he was in contempt.

At the contempt hearing, Dr. Whitman argued that he had to perform certain complex procedures that he started but had not yet completed when the court issued the injunction order. He also admitted that he saw more than 80 patients “generally,” but contended he felt he had an ethical and moral obligation to see them. The judge found that Dr. Whitman “knowingly and willfully acted at his peril on his view that the Order did not strictly apply to him absent ‘clarification’ of what he viewed to be his conflicting ethical obligations, a clarification he did not seek from the court following service of the Order upon him.” The judge explained that, rather than take matters into his own hands, Dr. Whitman’s “only lawful options (and, indeed, his responsibility) were to seek 1) reconsideration or clarification from the motion judge of the Order on the merits, or 2) an appeal of the Order, if he believed he did not have the ability to comply.” Accordingly, the trial court awarded Dr. Goldberg his reasonable costs and attorney’s fees for his prosecution of the contempt complaint.

Do Not Pass Go!  Do Not Collect $200! 

Although non-compete contempt cases arise in the civil litigation context, some egregious violations in certain jurisdictions could even result in imposition of criminal-like sanctions, including jail time.

For example, in Trost v. O’Connor (2007), a Louisiana trial judge sentenced the defendant to one year in the parish jail after finding that he had repeatedly and flagrantly violated a preliminary injunction. In this jurisdiction, Louisiana law gives the trial court the authority to assess penalties against those found guilty of violating a preliminary injunction, including monetary damages and imprisonment.

The conduct of defendant Donald O’Connor in the Trost case was particularly egregious. O’Connor was an independent contractor affiliated with Trost who owned a business that provided insulation, drywall installation, and painting services to customers in a specific geographic area.  O’Connor signed a “Covenant Not to Compete” with Trost. O’Connor offered to buy Trost’s business for $75,000, even though it was generating well over $1 million annually in gross income. Trost declined the offer.

Scorned by Trost’s rejection, O’Connor engaged in a pattern of conduct designed to compete directly with Trost and take his clients. O’Connor, for example, took client files from Trost’s office. Trost obtained an injunction against O’Connor that prohibited him from competing for two years within 75 miles. Undeterred, O’Connor formed a competing company and continued to actively seek business from Trost’s clients in the restricted area. The court found O’Connor in contempt, and sentenced him to one year in jail. O’Connor served 11 days, and then was released and placed on probation for a year and a half. After he was released from jail, he transferred his competing business to his brother for only $100 and “other valuable consideration,” which the trial court found was a “sham.” The trial court entered another injunction against O’Connor.

Thereafter, Trost brought another contempt complaint against O’Connor for his repeated violations. After a hearing on damages to Trost’s business, the trial court held that O’Connor owed Trost $470,000 in lost profits, and reinstated the previously suspended jail sentence based on O’Connor’s “intentional violation of the terms of the preliminary injunction.” However, the jail sentence had an “out” clause. O’Connor could avoid doing jail time if he paid the entire damages award to Trost in monthly installments of $25,000. O’Connor appealed and unsuccessfully was ordered to pay Trost an additional $4,000 in attorney’s fees for defending the appeal. Double ouch!

A similar display of “disrespect, deceit and flat-out hostility toward the court, its officers, and opposing counsel” was discussed by the Seventh Circuit in Teledyne Techs. Inc. v. Shekar (June 25, 2018) (affirming the trial court’s injunction order and award of significant counsel fees to the plaintiff, and sending a copy of the Court’s order to the United States Attorney “so that he may consider whether a criminal prosecution for perjury and contempt of court is appropriate”).

Takeaways 

The takeaways from these cases should be self-evident and hopefully easy to apply.  First, obey the law and do not violate court orders. Second, if you are not sure about the scope of a court’s injunction order, request clarification or modification of the order from the court before you make your next move. Following these steps could save you money and major headaches.

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The goal of this Series is to provide a brief overview and some interesting insights and practical pointers when dealing with unique issues that might arise in the context of restrictive covenants. It is not intended to provide and should not be construed as providing legal advice. Each situation is different, including the governing state law, and if legal advice is needed, you should seek the services of a qualified attorney who is knowledgeable and experienced in this area of the law to address your specific issues or needs. Stay tuned for future articles in this Series, which will discuss the restrictive covenant landscape for many other occupations and industries, including phlebotomists, photographers, physical therapists, physicians, and more.