COURT WON'T KEEP FIRED WORKER FROM REPORTING ON IRS INVESTIGATION.

                 UNITED STATES DISTRICT COURT

[1] Defendant Vicki J. Dye was employed as a tax consultant by Plaintiff J. K. Harris & Company, LLC ("JKH") for eight months in 2001. On February 20, 2001, Dye entered into an agreement with JKH that contained both a "non-disclosure of confidential information" provision and a "covenant against solicitation." JKH terminated Dye on October 2, 2001. Thereafter, JKH learned that Dye has been sending letters to several of the clients she formerly served, informing them that she is no longer employed by JKH and that JKH is the subject of an IRS criminal investigation. Dye has allegedly also had conversations with some of JKH's clients in which she has indicated that "someone will be getting in touch with you to assist you with your tax problems." JKH alleges that Dye is employed by an unknown competitor -- Defendant ABC Company ("ABC Company") -- and is soliciting JKH's clients on her new employer's behalf.

[2] Before the Court is JKH's Motion for a Temporary Restraining Order. JKH seeks an order enjoining and restraining Dye and ABC Company from directly or indirectly (1) soliciting business from any JKH client, (2) accepting business from any JKH client whom either Dye or ABC solicited, and (3) contacting, writing to, calling upon, diverting, or taking away any of JKH's sources of referral, customers, or clients. JKH also asks the Court to direct Dye and ABC Company (1) to disclose every JKH client they have contacted, written to, called upon, diverted, solicited, and/or taken away from JKH since October 2, 2001, and (2) to produce all JKH customer lists they have in their possession or to which they have access. The following constitutes the Court's findings of fact and conclusions of law as required by Federal Rule of Civil Procedure 52(a). For the reasons set forth below, the Court will deny JKH's motion.

Background

I. The Parties

[3] JKH is a Delaware corporation with its principal place of business in Charleston, South Carolina, and engages in helping taxpayers settle delinquent accounts with various taxing authorities. (Compl. ¶ 2.) On behalf of individuals and small businesses, JKH negotiates requests for the abatement of penalties, submits offers in compromise, and generally helps clients resolve problems and come into compliance with the requirements of taxing authorities. (Linder Aff. ¶ 2.) JKH "enables delinquent taxpayers to pay for its services in installments and set up a finance company to provide loans to its clients to help them pay their delinquent tax bills." (Compl. ¶ 2.)

[4] Dye is an individual who, it is alleged, resides in Minnesota. (Id. ¶ 3.) The Complaint asserts that ABC Company, Dye's unknown new employer, is a Minnesota corporation or legal entity that is engaged in the tax resolution business and is a competitor of JKH. (Id. ¶ 4.) Based on the foregoing, JKH asserts that the Court has subject matter jurisdiction over this action pursuant to 28 U.S.C. §1332(a) on the grounds that this is a civil action between citizens of different states in which the amount in controversy exceeds $75,000. ¹ (Id. ¶ 5.)

II. Factual Background

[5] JKH hired Dye as a tax consultant on February 6, 2001. (Compl. ¶ 3; Linder Aff. ¶ 3.) After spending nearly two weeks in on-the-job training, JKH's Regional Manager, Phil Bowsher, gave Dye a "Confidentiality/Non-Disclosure, Non-Solicitation and Non-Compete Agreement for Tax and Financial Consultants and Regional Mangers" (the "Agreement"). ² (Compl. ¶ 7; Dye Aff. ¶ 2.) On February 20, 2001, Dye signed the Agreement. (Dye Aff. ¶ 2.) The Agreement contains a paragraph entitled "Covenants Against Solicitation" that provides as follows:

     Employee acknowledges that the services he/she is to render are

     The success of JKH in the tax resolution and consulting business

[6] JKH terminated Dye on October 2, 2001. After the termination, Monica Linder, manager of JKH's Problem Resolution Division, learned of eleven letters sent by Dye to JKH clients with whom she had worked. (Linder Aff. ¶¶ 1, 5.) The letters appear to be a form letter and read as follows:

     Dear Client:

[7] On October 16, 2001, JKH sent Dye a letter informing her that JKH considered her actions to be a serious breach of her "Confidentiality Statement," to be libelous and slanderous, and to be a violation of the "Covenant against Solicitation" in the Agreement. (Linder Aff. Ex. D.) JKH demanded that Dye cease any further communications with JKH clients and stated that, should any JKH client contact her, she should advise them that she is no longer with the company. (Id.) JKH indicated that it would be acceptable for Dye to provide any former client with the appropriate contact information for JKH. (Id.) After sending the letter to Dye, JKH has learned of at least one letter that Dye sent to a former client on or about October 23, 2001. (Linder Aff. Ex. C.)

[8] On October 25, 2001, Dye became an employee of End Tax Problems, a company having its headquarters in Orlando, Florida. ( Dye Aff. ¶ 10.) Dye contends that she has not initiated any telephone contact with any of the clients to whom she has sent the letter. (Id. ¶ 9.) If contacted by a former client who asks what they should do, Dye has encouraged them to contact the IRS to check on the status of their case. (Id.) Where a few of her former clients have asked Dye to recommend another company, she has referred those clients to the website of her employer, End Tax Problems, Inc. (Id. ¶ 10.) Seven persons who were clients to JKH are now clients of End Tax Problems. (Id.)

[9] JKH argues that Dye's actions demonstrate that she is (a) contacting its clients in an attempt to divert, solicit and/or take away those clients, and that (b) Dye has disclosed confidential client information to a third party -- namely, her current employer -- who will be "getting in touch" with JKH's clients. JKH has asserted a breach of contract claim against Dye and claims of tortious interference with prospective business advantage and misappropriation of trade secrets against Dye and ABC Company.

Analysis

[10] Whether a temporary restraining order should issue depends upon an evaluation of the following factors. (1) the threat of irreparable harm to the movant; (2) the state of the balance between this harm and the injury that granting the injunctive relief will inflict on other parties litigant; (3) the probability that the movant will succeed on the merits; and (4) the public interest. See Dataphase Sys., Inc. v. C.L. Sys., Inc., 640 F.2d 109, 113 (8th Cir. 1981). "When applying the Dataphase factors, as they have come to be called, a court should flexibly weigh the case's particular circumstances to determine whether the balance of equities so favors the movant that justice requires the court to intervene." Hubbard Feeds, Inc. v. Animal Feed Supplement, Inc., 182 F.3d 598, 601 (8th Cir. 1999) (internal quotation marks and citations omitted). The party requesting the restraining order bears the "complete burden" of proving all the factors listed above. Gelco Corp. v. Coniston Partners, 811 F.2d 414, 418 (8th Cir. 1987).

1. Irreparable Harm

[11] "'The basis of injunctive relief in the federal courts has always been irreparable harm and inadequacy of legal remedies.' Thus, to warrant . . . preliminary [injunctive relief], the moving party must demonstrate a sufficient threat of irreparable harm." Bandag, Inc. v. Jack's Tire & Oil, Inc., 190 F.3d 924, 926 (8th Cir. 1999) (quoting Beacon Theatres, Inc. v. Westover, 359 U.S. 500, 506-07 (1959)); Glenwood Bridge, Inc. v. City of Minneapolis, 940 F.2d 367, 371 (8th Cir. 1991); see also In re Travel Agency Commission Antitrust Litig., 898 F. Supp. 685, 689 (D. Minn. 1995) ("[A]n injunction cannot issue based on imagined consequences of an alleged wrong. Instead, there must be a showing of imminent irreparable injury."). Based upon the record before it, the Court concludes that JKH has failed to demonstrate such a threat of irreparable harm.

[12] JKH contends that Dye has sent letters regarding the IRS's criminal investigation to her former clients in order to solicit and divert those customers away from JKH. ³ The record supporting this argument, however, is not compelling. Although Linder avers that a few customers have told her that Dye had said that "someone else would be getting in touch with them to assist them with their tax problems" (Linder Aff. ¶ 6), that evidence is inadmissible hearsay. See Fed. R. Evid. 801(c). Even if the customers' statements to Linder were not hearsay, a comment that someone else would be "getting in touch" with them hardly compels an inference that Dye is trying to steal away those clients. Such a statement from Dye can also reasonably be understood as an indication that another employee of JKH would be "getting in touch" with them as a result of Dye's departure. Indeed, the form letter JKH has submitted to the Court reminds her former client that their contractual relationship is with JKH, not with her. To the extent some JKH's clients have asked Dye to recommend another company, the number appears to be very small.

[13] JKH also complains that Dye's letters are harming JKH's goodwill and business reputation. The Court observes, however, that JKH itself, through Linder's affidavit, has acknowledged that the IRS investigation of JKH has been "a topic of several newspaper articles." (Linder Aff. ¶ 6.) JKH has made no argument and presented no evidence suggesting that the statements in Dye's letters about the IRS investigation are untrue. Finally, JKH has not established that it would be impossible to calculate any loss in revenues that it might suffer from Dye's conduct, such that JKH lacks an adequate remedy at law. The Court concludes that JKH has failed to establish a threat of imminent irreparable harm in the absence of a temporary restraining order.⁴

2. Likelihood of success on the merits

[14] JKH has asserted three claims against Dye: breach of the Agreement, tortious interference with prospective business relationships, and violation of South Carolina's Trade Secrets Act. JKH has cited no case law or statutory provisions to substantiate its assertion that it is likely to succeed on the merits of any of these claims. Starting from nothing, the Court assesses JKH's likelihood of success on each claim in turn.

a. Breach of Contract

[15] The parties evidently agreed that South Carolina law would govern the Agreement. ⁵ (Agreement ¶ 8.) JKH has invoked this choice of law provision in its Complaint. Applying South Carolina law to the Agreement, there appears to be a serious problem with JKH's ability to enforce the covenants against Dye. ⁶ "It is well settled that a restrictive covenant . . . ancillary to a contract of employment, will be upheld and enforced if, inter alia, it is supported by a valuable consideration." Standard Register Co. v. Kerrigan, 119 S.E. 2d 533, 542 (S.C. 1961) (emphasis added). Earlier this year, the South Carolina Supreme Court specifically addressed "whether continued at-will employment is sufficient consideration to enforce a covenant entered into days, months, or even years after the initial employment offer." Poole v. Incentives Unlimited, Inc., 548 S. E. 2d 207, 209 (S.C. 2001) (emphasis added). After reviewing its own prior decisions and cases from other jurisdictions, the South Carolina Supreme Court held that "when a covenant is entered into after the inception of employment, separate consideration, in addition to continued at-will employment, is necessary in order for the covenant to be enforceable." Id. Such separate consideration may include a change in the employee's position, duties, or salary. Id.

[16] Dye was hired on February 6, 2001; two weeks later, she entered into the restrictive covenants that JKH seeks to enforce. JKH asserts that Dye signed the Agreement "as a condition of her employment." (Linder Aff. ¶ 3.) The record before the Court, however, shows that Dye was not presented with the Agreement at the time she completed the rest of her paperwork as a new employee.

[17] Looking to the Agreement itself, it recites that, in consideration for Dye's covenants, JKH has changed her status from that of "independent contractor" to that of employee. There is no evidence before the Court, however, establishing that Dye was initially hired as an "independent contractor" or anything other than an employee on February 6. Indeed, the Affidavit of Mark Monaghan demonstrates that Dye was hired as an employee from the very first. JKH has identified no separate consideration given in exchange for Dye's covenants. The Court therefore concludes that there is little likelihood of success on the breach of contract claim.

b. South Carolina Trade Secrets Act

[18] JKH alleges that Dye is using and disclosing (or threatening to use and disclose) confidential information about JKH's clients in competition with JKH. (See Compl. ¶¶ 33, 36.) JKH claims that this conduct violates the South Carolina Trade Secrets Act and constitutes a misappropriation of trade secrets. ⁷ Section 39-8-30(B) of the South Carolina Code provides that

     [e]very employee who is informed of or should reasonably have

          c. Tortious Interference with Prospective Business

[21] JKH has not identified any prospective customers who have declined to retain JKH for tax resolution services -- or are likely to do so -- as a result of Dye's conduct. As for ongoing contractual relationships with existing customers, the only evidence of lost business is Dye's averment that seven customers have ceased their contractual relationship with JKH. There is no evidence, however, to establish that these seven clients changed firms as a result of Dye's conduct. Otherwise, "the mere general loss of possible unspecified customers does not establish the tort of intentional interference with prospective economic relations under Minnesota law." International Travel Arrangers v. NWA, Inc., 991 F.2d 1389, 1405 (8th Cir.), cert. denied, 510 U.S. 932 (1993). Therefore, the Court concludes there is little likelihood of success on this claim.

3. Balance of Harms and Public Interest

[22] In light of the absence of a threat of imminent irreparable harm, an order restricting Dye's conduct and affirmatively compelling Dye to provide certain information is onerous and places a significant burden on her. Preliminary injunctive relief is an extraordinary remedy that should not be granted as a matter of routine. See Sanborn Mfg. Co. v. Campbell Hausfeld/Scott Fetzer Co., 997 F.2d 484, 486 (8th Cir. 1993); Intel Corp. v. ULSI Sys. Tech., Inc., 995 F.2d 1566, 1568 (Fed. Cir. 1993), cert. denied, 510 U.S. 1092 (1994). Thus, the balance of harms does not favor granting the motion. As for the public interest, in light of the unenforceability of the restrictive covenants, there appears to be little public interest in the issuance of an temporary injunction to enforce those covenants.

Conclusion

[23] The balance of the equities does not favor JKH such that justice requires the Court to intervene with temporary injunctive relief. Based on the foregoing, and all of the files, records and proceedings herein, IT IS ORDERED that Plaintiff J. K. Harris & Company's Motion for a Temporary Restraining Order (Doc. No. 2) is DENIED.

Dated: November 16, 2001

²The Vice President of Human Resources for JKH, Mark Mohaghan, sent a "new hire packet" to the regional manager for Dye's region, Phil Bowsher on or about January 29, 2001. That packet included the Agreement. (Aff. of Mark Mohaghan ¶¶ 1- 4.)

³Counsel for JKH asserted at the hearing that the customer list Dye has as a result of her employment by JKH contains 256 names. JKH has not provided competent evidence, by way of affidavit or otherwise, that would establish the number of customers to whom Dye has potentially sent letters. The Court does not consider counsel's representations to be evidence and can make no finding regarding the number of letters Dye may have sent.

⁴At the hearing, counsel for JKH argued for the first time that Plaintiff could be irreparably harmed by Dye's conduct because that conduct might subject JKH to a Federal Trade Commission enforcement action under the Gramm-Leach-Bliley Financial Modernization Act ("the Gramm-Leach-Bliley Act"). The Gramm-Leach- Bliley Act was enacted by Congress on November 12, 1999. Pub. L. No. 106-102, 1999 U.S.C.C.A.N. (113 Stat.) 1338. JKH did not reference the Gramm-Leach-Bliley Act in its memorandum in support of the TRO motion, let alone identify the relevant provision or provisions of the Act on which it purports to rely. The Court declines to evaluate whether and to what extent the Gramm-Leach-Bliley Act may apply to JKH and its activities.

⁵After three requests by the Court for a complete copy of the Agreement Dye signed, the Court finally received such a copy after business hours on Wednesday, November 14. Together with the Agreement, counsel for JKH also sent to the Court a three-page document entitled "Employee Compliance and Acknowledgment Disclosure." That document consists of three sections: (1) a Telephone Monitoring Agreement; (2) a Confidentiality Requirement and Agreement; and (3) a Receipt of Employee Handbook acknowledgment. While Dye signed the first and third sections of the form, neither she nor a representative of JKH signed the section captioned "Confidentiality Requirement and Agreement."

⁶At the hearing, counsel for JKH argued that there was a "legion" of cases in the Eighth Circuit holding that restrictive covenants executed under the circumstances presented in this case are supported by adequate consideration and, hence, valid and enforceable. This position is contrary to JKH's invocation in its Complaint of the choice of law provision in the Agreement, which designates South Carolina law as the law governing the Agreement.

⁷"Misappropriation" is defined to include

     the disclosure or use of a trade secret of another without

⁸To determine whether the defendant's conduct is improper, the Court must examine several factors:

          (a) the nature of the actor's conduct,