Conclusory Allegations Were Insufficient to Obtain a Temporary Restraining Order Against a Former Employee Despite Non-Compete and Non-Solicitation Covenants in Employment Agreement

Abstract

A Kansas court denied a bank’s request for a temporary restraining order seeking to enforce non-compete and non-solicitation covenants in a former employee’s employment contract. While the bank’s conclusory allegations could be supported by the facts on the record, there was an equally plausible inference that the former employee did not breach those covenants. Thus, the bank failed to establish a clear and unequivocable showing that it was entitled to the extraordinary relief sought.

Background

Gaylyn K. McGregor worked as the Director of Trust and Wealth management at Equity Bank. Under her employment agreement, she promised not to disclose confidential information, not to interfere with the bank’s business, and not to solicit the bank’s customers for other business. The non-interference and non-solicitation covenants lasted for two years and extended to current or prospective customers. After almost three years of working at Equity Bank, Ms. McGregor resigned, and five months later joined Mariner Wealth Advisors as a Senior Wealth Adviser.

A few weeks after Ms. McGregor began working for Mariner, Equity Bank asserted that a representative of Mariner provided wealth management marketing materials to one of Equity Bank’s clients. Then, a few days later, another one of Equity Bank’s clients requested a transfer of her account to Mariner after that client had called Ms. McGregor’s old number at Equity Bank and was informed Ms. McGregor no longer worked there.

Equity Bank sent a cease-and-desist to McGregor and Mariner, but they both denied wrongdoing.  A week later, a local journal ran a story about Ms. McGregor joining Mariner, and days later, three other clients requested a transfer of their accounts from Equity Bank to Mariner.

Equity Bank sued Ms. McGregor and Mariner for (1) breach of contract; (2) misappropriation of trade secrets; and (3) tortious interference. Equity Bank also moved for a temporary restraining order (TRO) and a preliminary injunction against both Ms. McGregor and Mariner seeking to enforce Ms. McGregor’s employment contract and enjoin both Ms. McGregor and Mariner from using Equity Bank’s customer information and soliciting or interfering with Equity Bank’s actual and prospective customers. 

The Equity Bank Order

A party seeking a TRO must establish (1) substantial likelihood of success on the merits; (2) irreparable injury absent a TRO; (3) the threatened injury outweighs the injury the opposing party will suffer if the TRO issues; and (4) the TRO, if issued, is not adverse to the public interest.  The court explained that preliminary relief (whether as a TRO or a preliminary injunction) is an extraordinary remedy and requires a clear and unequivocal showing that the party is entitled to such relief.

Irreparable harm is the touchtone of preliminary relief, and it refers to a significant risk of harm that cannot be compensated after the fact by monetary damages. For example, loss of customers, loss of goodwill, and threats to a business’ viability may constitute irreparable harm.  Equity Bank initially relied on language in Ms. McGregor’s contract to establish irreparable harm, but the court explained that contractual statements regarding the nature of harm that will arise as a result of a breach alone are insufficient to support a finding of irreparable harm. Equity Bank also alleged loss of clients including the transfer by another client of two more accounts to Mariner after the filing of the TRO. Based on this additional evidence of a steady loss of clients in its new trust and wealth management practice, which threatened the longevity of the practice, the court agreed that Equity Bank demonstrated irreparable harm.

As to substantial likelihood of success on the merits, however, the court found that Equity Bank’s conclusory allegations premised on “information and belief” were insufficient.  For example, regarding the breach of contract claim, even accepting Equity Bank’s allegations as true, Equity Bank did not allege that Ms. McGregor solicited the clients. One client transferred the account to Mariner when informed by Equity Bank that Ms. McGregor no longer worked there.  Another client requested transfer after the local journal article on Ms. McGregor’s new employment at Mariner.  Thus, it was possible that the clients transferred their accounts on their own, without solicitation from Ms. McGregor.  Thus, at this stage, Equity Bank had not shown a substantial likelihood that Ms. McGregor breached her employment agreement.  The same was true regarding Equity Bank’s allegations for its trade secret misappropriation and tortious interference claims.

Strategy and Conclusion

When seeking preliminary relief, such as a temporary restraining order, circumstantial evidence may not be sufficient to show likelihood of success, even when contractual agreements are in place including statements regarding harm and remedies that will arise as a result of a breach.

Further Information

The Equity Bank order can be found here.