In Figueroa v. Precision Surgical, Inc., No. 10–4449, 2011 WL 1368778 (3rd Cir. April 12, 2011), the Third Circuit Court of Appeals affirmed the denial of a motion for preliminary injunction against the former employee of a surgical supplies and equipment distributor. Joseph Figueroa was an independent sales representative for Precision Surgical, Inc. (“Precision”). Mr. Figueroa and Precision had entered into a written Independent Contractor Agreement (“ICA”) containing certain restrictive covenants. In late 2010, the parties’ relationship soured and Precision terminated the ICA.
Mr. Figueroa brought an action in state court seeking a declaratory judgment that the restrictive covenants in the ICA were unenforceable. Precision removed the case to the District Court for the District of New Jersey and counterclaimed that Mr. Figueroa was violating the restrictive covenants by working as a sales representative for a competitor. Precision sought a preliminary injunction, which the District Court denied. Precision appealed. The Third Circuit affirmed, finding that the District Court did not abuse its discretion in denying the preliminary injunction for three reasons.
First, the District Court had found that Precision was not substantially likely to succeed on the merits because it had failed to abide by the terms of the ICA. Specifically, Precision likely breached the ICA by treating Mr. Figueroa as an employee rather than as an independent contractor, as contemplated in the ICA. The District Court also found that Precision had likely breached the agreement by failing to pay him commissions owed. Noting that under Pennsylvania contract law a material breach by one party entitles the non-breaching party to suspend performance, the Third Circuit observed that “an apparent material breach of contract by the employer undermines its claim to [the] extraordinary relief [of a preliminary injunction to enforce a restrictive covenant].” The Third Circuit thus held that the District Court’s findings regarding these issues were not clearly erroneous and that its denial of the request for preliminary injunctive relief on this basis was not improper.
The Third Circuit also found that denial of the preliminary injunction was proper because there was a question as to whether the restrictive covenants were supported by adequate consideration. The agreement containing the restrictive covenants was signed six months after the parties’ employment relationship was initially formed. Evidence at the injunction hearing indicated that there was no change in how Mr. Figueroa was compensated from before and after when the ICA was signed. These facts raised a substantial question about the adequacy of the consideration supporting the covenants under Pennsylvania law. As such, the District Court properly denied the request for preliminary injunctive relief.
Finally, in addition to finding that Precision had not demonstrated a likelihood of success on the merits for the above reasons, the Third Circuit also found that Precision had not demonstrated the irreparable injury necessary for injunctive relief. The Third Circuit observed that the evidence demonstrated that any injury that Precision had suffered was compensable through a monetary damages award. As such, the company “failed to meet the high standard required for the granting of a preliminary injunction to enforce a covenant not to compete.”
Figueroa v. Precision Surgical, Inc. is thus instructive on a number of issues that often arise in non-compete cases where injunctive relief is sought. The decision may be particularly applicable in cases involving restrictive covenants in independent contractor agreements where there is a dispute about whether the former employer has treated the individual as an employee rather than as an independent contractor.