Court Opinion

ID: 2824350
Source: CourtListenerOpinion
Date Created: 2015-08-11 04:42:55.915357+00
Date Added: 2024-06-11T08:40:44.644622
License: Public Domain

131 Nev., Advance Opinion           38
                       IN THE SUPREME COURT OF THE STATE OF NEVADA

                EXCELLENCE COMMUNITY                                 No. 62189
                MANAGEMENT, LLC, A NEVADA
                LIMITED LIABILITY COMPANY,
                Appellant,                                                  FILED
                vs.
                                                                            JUN 2 5 2015
                KRISTA GILM ORE, INDIVIDUALLY;
                                                                            BAADIE K. LINDEMAN
                AND MESA MANAGEMENT, LLC, A                           CL        cEE       'E CCdJR

                NEVADA LIMITED LIABILITY                              BY
                                                                           CHIEF
                                                                           1-7-tra—   DITErY
                COMPANY,
                Respondents.

                           Appeal from a district court order denying a preliminary
                injunction in an employment matter. Eighth Judicial District Court,
                Clark County; Michael Villani, Judge.
                           Affirmed.

                Durham Jones & Pinegar and Michael D. Rawlins and Bradley S.
                Slighting, Las Vegas,
                for Appellant.

                Alessi & Koenig, LLC, and Huong X. Lam, Las Vegas,
                for Respondents.

                BEFORE HARDESTY, C.J., PARRAGUIRRE and CHERRY, JJ.

                                                OPINION

                By the Court, HARDESTY, C.J.:
                           In this appeal, we must determine whether the sale of 100
                percent of the membership interest in a limited liability company affects
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                 the enforcement of an employee's employment contract containing a
                 restrictive covenant. We conclude that it does not because such a sale
                 does not create a new entity. Thus, we extend our holding in HD Supply
                 Facilities Maintenance, Ltd. v. Bymoen, 125 Nev. 200, 210 P.3d 183 (2009),
                 and agree with the Pennsylvania Superior Court that the sale of
                 membership interests in a limited liability company is "akin to a sale of
                 stock [in a corporation] rather than an asset sale."   Missett v. Hub Int?
                 Pa., LLC, 6 A.3d 530, 537 (Pa. Super. Ct. 2010). Accordingly, the
                 employer limited liability company may enforce a restrictive covenant in
                 an employment contract without its employee's consent of assignment.
                 However, we conclude that the district court in this case did not abuse its
                 discretion in denying a preliminary injunction because appellant failed to
                 demonstrate irreparable harm for which compensatory damages are an
                 inadequate remedy. We affirm
                                  FACTS AND PROCEDURAL HISTORY
                             Excellence Community Management (ECM) is a Las Vegas-
                 based Nevada limited liability company (LLC) that provides condominium
                 and homeowners' association (HOA) management services. Respondent
                 Krista Gilmore was employed by ECM as a community association
                 manager from 2005 to 2012 and was directly responsible for managing
                 multiple associations. In April 2011, Gilmore signed an employment
                 agreement that prohibited her from revealing trade secrets and disclosing
                 ECM's confidential information for a period of 24 months after
                 termination of her employment. The employment agreement also included
                 an 18-month nonsolicitation clause and an 18-month noncompetition
                 clause, requiring Gilmore to refrain from soliciting persons or entities
                 contractually engaged in business with ECM. The employment agreement
                 did not include an assignment clause.
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                                  At the time Gilmore signed the employment agreement, ECM
                      was owned and operated by Jamie and Warren McCafferty. In May 2011,
                      90 percent of the McCaffertys' membership interest in ECM was
                      purchased by First Service Residential Management Nevada (FSRM).
                      One year later, the McCaffertys sold or relinquished their remaining
                      membership interest in ECM to FSRM. The purchase agreement between
                      the McCaffertys and FSRM specifically stated that the McCaffertys "will
                      sell, assign and transfer the [p]urchased [ilnterest to [FSRM], and WSRMI
                      will purchase the [plurchased [ihiterest from the [McCaffertys], free and
                      clear of any [e]ncumbrance."
                                  In early June 2012, Gilmore submitted her resignation to
                      ECM and informed ECM that, upon final termination of her employment,
                      she would begin working for respondent Mesa Management, LLC. Upon
                      receiving Gilmore's notification, ECM's president decided to terminate
                      Gilmore. Approximately three weeks later, ECM sent Gilmore a cease-
                      and-desist letter, which alleged that Gilmore violated her 2011
                      employment agreement by contacting ECM's clients to inform them she
                      was no longer employed by ECM and soliciting them to hire Mesa.
                      Notwithstanding ECM's cease-and-desist letter, Mesa's owner sent a
                      solicitation letter to numerous HOA boards announcing the start of
                      Gilmore's employment with Mesa.
                                  ECM filed a complaint seeking damages and injunctive relief
                      against Gilmore and Mesa, and subsequently filed a motion for a
                      preliminary injunction to enforce the employment agreement pending the
                      district court's resolution of the case. During the preliminary injunction
                      hearing, the district court asked ECM whether, if successful on its case,
                      money damages could be calculated and could make ECM whole. Counsel

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                conceded that money damages would make ECM whole, but also pointed
                to caselaw from other jurisdictions holding that irreparable harm is
                presumed where an employee has breached a restrictive covenant.
                            The district court denied ECM's motion for preliminary
                injunction for two reasons. First, the court relied upon Traffic Control
                Services, Inc. v. United Rentals Northwest, Inc., 120 Nev. 168, 87 P.3d
1054 (2004), to conclude that the agreement was not assignable to FSRM
                absent a clause permitting the assignment or an agreement with the
                employee consenting to the assignment. Second, the district court
                determined that a preliminary injunction was unwarranted because ECM
                had failed to show irreparable harm for which compensatory damages
                were not an adequate remedy.
                            ECM appealed, arguing that the district court erred in relying
                on Traffic Control in denying ECM's motion for a preliminary injunction
                because the LLC membership sale that took place in this case was not an
                asset sale for which an employee must consent to the assignment of his or
                her employment agreement to the asset purchaser. Furthermore, ECM
                contends that the district court abused its discretion in determining that
                the requirements for a preliminary injunction were not met because there
                was insufficient evidence of irreparable harm.
                                               DISCUSSION
                            ECM appeals the district court's denial of a preliminary
                injunction. A preliminary injunction is proper where the moving party can
                demonstrate that it has a reasonable likelihood of success on the merits
                and that, absent a preliminary injunction, it will suffer irreparable harm
                for which compensatory damages would not suffice.        See NRS 33.010;
                Boulder Oaks Cmty. Ass'n v. B & J Andrews Enters., LLC,      125 Nev. 397,
                403, 215 P.3d 27, 31 (2009). Because the district court has discretion in
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                determining whether to grant a preliminary injunction, this court will only
                reverse the district court's decision when "the district court abused its
                discretion or based its decision on an erroneous legal standard or on
                clearly erroneous findings of fact."   Boulder Oaks, 125 Nev. at 403, 215
                P.3d at 31 (internal quotation omitted). In an appeal from a preliminary
                injunction, this court reviews questions of law de novo. Id.
                The 100-percent membership sale of the LLC did not result in the creation
                of a new entity
                            The district court relied upon Traffic Control, 120 Nev. 168, 87
P.3d 1054, to conclude that the employment agreement was not assignable
                to FSRM absent a clause permitting the assignment because a new entity
                was introduced after the sale. ECM argues that HD Supply Facilities
                Maintenance, Ltd. v. Bymoen, 125 Nev. 200, 210 P.3d 183 (2009), and the
                case it primarily relied upon, Corporate Express Office Products, Inc. v.
                Phillips, 847 So. 2d 406 (Fla. 2003), provide that in the type of corporate
                transaction where 100 percent of the shares of a corporation are sold, the
                enforceability of any restrictive covenants are unaffected, because under
                such circumstances, there is no new employer. ECM further argues that
                the membership interest sale of an LLC, such as was conducted here, is
                equivalent to a stock sale in a corporation, not an asset sale as was the
                case in Traffic Control.   We agree and conclude that the 100-percent
                membership sale of the LLC that took place in this case is equivalent to
                the sale of 100 percent of the stock in a corporation. Neither transaction
                results in a new entity.
                            In HD Supply, we recognized that the rule of nonassignability
                of an employee's covenant not to compete, articulated in Traffic Control,
                was limited to asset purchase transactions. 125 Nev. at 203-04, 210 P.3d
                at 185. We explained that the Traffic Control rule was "grounded in the
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                law of contractual assignments," and as such, it "logically applies in the
                contractual setting of an asset purchase transaction because, in an asset
                purchase, `the transaction introduces into the equation an entirely
                different entity, the acquiring business."      Id. at 205, 210 P.3d at 186
                (quoting Corporate Express, 847 So. 2d at 412). 4 Thus, "the acquiring
                corporation in an asset purchase becomes, in effect, a wholly new
                employer," which makes it distinct from other corporate transactions, such
                as mergers, where the employer does not change.        Id. at 206, 210 P.3d at
                186-87.
                               In distinguishing between asset sales and mergers, this court
                relied upon Corporate Express's discussion of "whether different forms of
                corporate transactions affect whether consent is necessary to effect a valid
                assignment of a covenant not to compete."       HD Supply, 125 Nev. at 205-
                06, 210 P.3d at 186. In addition to analyzing mergers, the Corporate
                Express court also addressed 100-percent stock purchases. 847 So. 2d at
                411. The court explained that, unlike in asset sales where an entirely
                different entity is introduced into the equation, in a 100-percent stock sale
                there is no new entity because "the existence of a corporate entity is not
                affected by changes in its ownership," and, instead, "the corporation whose
                stock is acquired continues in existence, even though there may be a
                change in its management."        Id. at 411-12. While HD Supply did not
                discuss 100-percent stock sales because doing so was not relevant to the
                inquiry in that case, this court's adoption of the reasoning from Corporate
                Express also extends to 100-percent stock sales. 125 Nev. at 205-06, 210
P.3d at 186.
                               In this case there was not a 100-percent stock sale, but rather
                a 100-percent membership sale of an LLC. Gilmore contends that a 100-

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                   percent membership sale of an LLC is more equivalent to an asset sale
                   than a stock sale. Gilmore points out that the Nevada statutes on LLCs
                   never use the word "stock" but instead purposefully define a new term,
                   "member's interest." NRS 86.091. We disagree.
                               A "[m] ember's interest' is defined as "a share of the economic
                   interests in a limited-liability company, including profits, losses and
                   distributions of assets." NRS 86.091 However, Gilmore's argument fails
                   to address the fact that LLCs, like corporations, have perpetual existence
                   and are distinct from their managers and members. NRS 86.155; NRS
                   86.201(3). Those features mandate that we treat assignability of
                   employment agreements in a sale of the LLC membership interests like
                   we treat assignability of employment agreements in a stock sale. Even
                   after the sale, the same employer exists. See Missett v. Hub Inel Pa., LLC,
                   6 A.3d 530, 537 (Pa. Super. Ct. 2010) (holding that a company's purchase
                   of all of the membership interests in an LLC was "akin to a sale of stock
                   rather than an asset sale"). Thus, as no new entity is introduced and the
                   LLC continues in existence after the acquisition of a 100-percent
                   membership interest, the reasoning from         Corporate Express would
                   similarly be applied in Nevada to the sale of LLC membership interests.
                   See Corporate Express, 847 So. 2d at 411-12. Accordingly, we conclude
                   that the district court erred in relying on Traffic Control to deny ECM's
                   motion for a preliminary injunction because Gilmore's employment
                   agreement was enforceable by ECM without an assignment clause.
                               Nevertheless, the district court's decision to deny the request
                   for a preliminary injunction was also based upon its conclusion that
                   "[s] ufficient evidence was not presented by [ECM] to show irreparable
                   harm for which compensatory damages [were] an inadequate remedy."

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                   Thus, we next address whether the district court abused its discretion in
                   making that determination.
                   ECM failed to show it would suffer irreparable harm for which
                   compensatory damages would not suffice
                               ECM contends that "[n]umerous other courts have held that
                   when a former employer solicits clients in breach of a noncompetition
                   agreement, the breach results in irreparable harm to the former
                   employer." In doing so, ECM urges this court to presume irreparable
                   harm resulting from the loss of several of its customers. We decline to do
                   so.
                               Irreparable harm is an injury "for which compensatory
                   damage is an inadequate remedy." Dixon v. Thatcher, 103 Nev. 414, 415,
                   742 P.2d 1029, 1029 (1987). Other jurisdictions have held that where a
                   party competes with the former employer despite a restrictive covenant, or
                   an employee misappropriates trade secrets or confidential customer
                   information, courts may presume irreparable harm.             See Johnson
                   Controls, Inc. v. A.P.T. Critical Sys., Inc., 323 F. Supp. 2d 525, 532
                   (S.D.N.Y. 2004) ("Generally, when a party violates a non-compete clause,
                   the resulting loss of client relationships and customer good will built up
                   over the years constitutes irreparable harm."); Hillard v. Medtronic, Inc.,
                   910 F. Supp. 173, 179 (M.D. Pa. 1995) ("To the extent that the restrictive
                   covenant is being violated, [the former employer] is suffering irreparable
                   harm by the potential loss of customers posed by [the former employees
                   activities."). Irreparable harm is also presumed where a party
                   misappropriates a trade secret. Johnson Controls, 323 F. Supp. 2d at 532-
                   33. This presumptive rule recognizes the difficulty in calculating money
                   damages to redress the loss of a client relationship "that would produce an
                   indeterminate amount of business in years to come." Ticor Title Ins. Co. v.
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                Cohen, 173 F.3d 63, 69 (2d Cir. 1999). However, "[Older limited
                circumstances, such as where the loss to an employer can be quantified in
                terms of a specific amount of lost sales, no irreparable harm is
                threatened." Johnson Controls, 323 F. Supp. 2d at 532.
                            Some courts have clarified that such a presumption is not
                automatic and irreparable harm ultimately depends on the underlying
                facts of the case. See, e.g., Baker's Aid v. Hussmann Foodservice Co., 830
F.2d 13, 15-16 (2d Cir. 1987); Veramark Techs., Inc. v. Bouk, 10 F. Supp.
3d 395, 400-01 (W.D.N.Y. 2014); Golden Krust Patties, Inc. v. Bullock, 957
F. Supp. 2d 186, 194 (E.D.N.Y. 2013). And upon further examination of
                the cases cited by ECM on appeal and in the district court proceedings, we
                note that in each case there was undisputed evidence presented to
                demonstrate that the former employee solicited, and in some cases
                obtained contracts with, the former employer's customers.    See Ticor, 173
F.3d at 67 (stating that employee admitted to soliciting business before
                the six-month noncompete restriction ended); Johnson Controls, 323 F.
                Supp. 2d at 531 (stating that former employees admitted they solicited
                and provided service to former employer's customers); Hillard, 910 F.
                Supp. at 179 (stating that evidence in the record demonstrated that the
                former employee was actively soliciting the former employer's customers).
                            Additionally, where courts have concluded that a loss of client
                relationships constitutes irreparable harm, those courts have also
                concluded that the employee provided unique services. See, e.g., Ticor, 173
F.3d at 70 ("New York, following English law, recognizes the availability
                of injunctive relief where the non-compete covenant is found to be
                reasonable and the employee's services are unique." (emphasis added));
                Johnson Controls, 323 F. Supp. 2d at 532 ("[WIhere an employee with

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                    unique client relationships violates a non-compete clause, injunctive relief
                    is ordinarily appropriate because if the unique services of such employee
                    are available to a competitor, the employer obviously suffers irreparable
                    harm." (internal quotation omitted)). 1 In the instant case, although
                    Gilmore was employed by ECM for seven years, based on the evidence in
                    the record, it does not appear that Gilmore's job as a condominium and
                    HOA manager required any "unique" skills
                                Furthermore, there is conflicting evidence in the record as to
                    whether Gilmore solicited or directly provided services to any of ECM's
                    customers. ECM argued that Gilmore had solicited business from ECM
                    clients and disclosed confidential information. ECM provided a
                    declaration from its president alleging that 3 of the 11 associations that
                    Gilmore managed while at ECM had terminated their contracts with ECM
                    and hired Mesa, and two other associations were in the process of
                    terminating their service contracts with ECM and were considering Mesa
                    as an alternative at the time the litigation commenced.
                                ECM's president also asserted in her declaration that Gilmore
                    and Mesa improperly engaged in discussions with two other ECM-
                    managed HOAs. In support of this contention, ECM presented evidence of
                    an e-mail exchange between Gilmore and a board member of the Ventana

                           'Other courts have analyzed the "unique" factor as part of the
                    reasonableness or validity of a restrictive covenant. See, e.g., 7's Enters.,
                    Inc. v. Del Rosario, 143 P.3d 23, 29-32 (Haw. 2006) (adopting unique or
                    specialized training requirement as part of reasonable test for
                    noncompetition clauses); Sys. Concepts, Inc. v. Dixon, 669 P.2d 421, 426
                    (Utah 1983) (holding that to obtain injunctive relief, employer must show
                    covenant is necessary to protect the goodwill of the business and that
                    employee's services were unique).

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                   Canyon HOA that alluded to Gilmore hoping to remain the association's
                   manager. And the ECM president alleged that while attending an BOA
                   meeting for another ECM client, a Mesa representative solicited the HOA
                   and implied that although Gilmore could not be the community manager,
                   Mesa intended to have Gilmore work on their account "behind the scenes."
                               Gilmore and Mesa countered by providing declarations from
                   various board members of the HOAs that Gilmore had represented and
                   managed while employed at ECM and which subsequently left ECM. All
                   asserted that the reason their associations terminated their contracts with
                   ECM was because of ECM's change in ownership from the McCaffertys to
                   FSRM, not because Gilmore had solicited their business. In response to
                   the e-mail with the Ventana Canyon board member, Gilmore explained
                   that the board member voluntarily disclosed to her that Ventana had
                   already decided to terminate ECM and had solicited proposals from other
                   management companies, including Mesa. In response to ECM's allegation
                   that Mesa's president stated that Gilmore could work "behind the scenes,"
                   Mesa submitted an affidavit from its president wherein she stated that
                   she told the HOA that Gilmore could not be their community manager and
                   did not indicate that Gilmore would work behind the scenes. 2
                   Furthermore, Gilmore and Mesa demonstrated that no confidential
                   information was shared. The information allegedly revealed consisted of
                   the names of the HOAs Gilmore managed at the time she was terminated,
                   which was available to the public on the Secretary of State's website.

                         2While there is discrepancy as to whether Mesa stated that Gilmore
                   would assist with the contract, this court will not reweigh the credibility of
                   witnesses on appeal Castle v. Simmons, 120 Nev. 98, 103, 86 P.3d 1042,
                   1046 (2004).

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                             Unlike the cases ECM cites, Gilmore and Mesa have not
                conceded that there was a breach of a restrictive covenant. To the
                contrary, the facts here are disputed, and the district court eventually
                found that Gilmore did not solicit the HOAs identified during the
                preliminary injunction hearing. The district court further found that,
                unlike many of the cases cited by ECM, if ECM is successful in its case,
                ECM's damages were quantifiable for customers it had lost to date. Thus,
                the court concluded that the evidence was insufficient to demonstrate
                irreparable harm.
                             We conclude that the district court did not abuse its discretion
                in denying ECM's motion for a preliminary injunction on the basis that
                ECM failed to show that it would suffer irreparable harm for which
                compensatory damages were not an adequate remedy if the district court
                did not enter a preliminary injunction. See Boulder Oaks, 125 Nev. at 403,
                215 P.3d at 31 (providing that this court reviews a district court's decision
                regarding a preliminary injunction for an abuse of discretion).
                             Accordingly, we affirm the district court's order denying the
                request for a preliminary injunction.

                                                                     C.J.
                                         Hardesty

                We concur:

                .C2441)teitsCirCi*                                                    'J.
                Parraguirre

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