Court Opinion

ID: 1020738
Source: CourtListenerOpinion
Date Created: 2013-07-04 22:55:49.942793+00
Date Added: 2024-06-11T15:13:03.440078
License: Public Domain

UNPUBLISHED

                  UNITED STATES COURT OF APPEALS
                      FOR THE FOURTH CIRCUIT

                               No. 06-1466

KENNETH M. MCGOUGH,

                                                 Plaintiff - Appellee,

     versus

NALCO  COMPANY, an   Illinois  Corporation,
formerly Nalco Chemical Company and Ondeo
Nalco Company,

                                                 Defendant - Appellant.

Appeal from the United States District Court for the Northern
District of West Virginia, at Elkins.  Joseph Robert Goodwin,
District Judge. (2:05-cv-00074-JRG)

Argued:   September 18, 2006                 Decided:   October 19, 2006

Before NIEMEYER, MICHAEL, and MOTZ, Circuit Judges.

Vacated and remanded by unpublished per curiam opinion.            Judge
Niemeyer wrote a separate concurring opinion.

ARGUED: Philip J. Murray, III, THORP, REED & ARMSTRONG, L.L.P.,
Pittsburgh, Pennsylvania, for Appellant.     Gerard Ray Stowers,
BOWLES, RICE, MCDAVID, GRAFF & LOVE, P.L.L.C., Charleston, West
Virginia, for Appellee. ON BRIEF: Robert J. Hannen, THORP, REED &
ARMSTRONG, L.L.P., Pittsburgh, Pennsylvania, for Appellant.

Unpublished opinions are not binding precedent in this circuit.
See Local Rule 36(c).
PER CURIAM:

      Nalco Company appeals from an order denying its motion for

preliminary injunction against Kenneth McGough, a former Nalco

employee.    Nalco had sought to enjoin McGough from “competing with

Nalco within any geographic region” in which McGough had worked

while employed by Nalco, and from disclosing “any of Nalco’s

confidential information.” Nalco based its claims on a contractual

non-competition provision, a contractual non-disclosure provision,

and a West Virginia trade secrets statute.            We find no error in the

denial of preliminary injunction on the contractual non-competition

claim but must vacate the order denying injunctive relief and

remand for further proceedings because of the district court’s

failure to address the anti-disclosure or trade secrets claims.

                                       I.

      Nalco is a water-treatment chemical company, incorporated in

Delaware and headquartered in Illinois, with approximately twenty-

six separate lines of business. It engages in fine coal recovery,

which allows preparation plants to recover bits of coal as small as

.01   millimeter      in   size.   Nalco    assists   with   this   process   by

developing a unique chemical program to be used in each plant, the

composition of which is not disclosed to the customer.

      McGough, a domiciliary of West Virginia, began work with Nalco

in    1978   as   a   twenty-four-year-old       entry-level    employee.     He

                                      -2-
continued to work for Nalco for twenty-seven years until he left in

2005     to   work   for   a   competitor.          McGough’s   title   and

responsibilities changed a number of times over his long career,

but he worked primarily to provide fine coal recovery services to

coal preparation plants. A full description of McGough’s evolving

duties is set forth in the district court’s opinion.            See McGough

v. Nalco Co., 420 F.Supp.2d 556 (N.D.W.Va. 2006). We will limit our

factual recitation to those relevant to this appeal.

       From 1978 to 1989 McGough worked as a sales representative in

the coalfields of Alabama.       In 1989, McGough assumed new sales

territory in West Virginia and relocated there with his family.

Apart from a brief stint in Birmingham, Alabama in 1991, McGough

has been working, at least in part, in West Virginia ever since.

During the last two years of his employment with Nalco, McGough was

an “industry technical consultant” servicing the coal industry in

the eastern coal fields. During this period McGough assisted plants

in Indiana, Illinois, Kentucky, Ohio, West Virginia, Pennsylvania,

Virginia, Alabama, Washington, and eastern Canada.

       Citing dissatisfaction with the work, McGough left Nalco’s

employment on July 12, 2005. Soon thereafter, he entered into a

non-exclusive    consulting    agreement     with    Appalachian   Chemical

Services (“ACS”), a Nalco competitor.          ACS, a new company, was

founded in March 2005 by Larry Hyatt, McGough’s former boss at

Nalco.    Prior to McGough’s leaving Nalco, ACS did not have any

                                   -3-
customers.   After McGough began consulting for ACS, however, ACS

gained at least four coal preparation plant customers that had been

Nalco customers prior to McGough’s departure. McGough’s duties at

ACS primarily consisted of “rendering service” to these ex-Nalco

plants.    McGough’s employment by ACS, a Nalco competitor, became

the source of this dispute with Nalco.

     Shortly after beginning his employment with Nalco in Alabama,

McGough signed a “Field Representative Agreement” (“Agreement”)

which contained a covenant not to compete for a period of two years

following termination of employment and non-disclosure provisions

that applied during employment as well as after termination.    None

of these clauses is limited specifically to coal recovery; each

covers Nalco’s full business line.     The Agreement was not job-

specific, nor was it ever supplemented, amended, or re-adopted by

McGough.

     The lengthy non-competition clause (paragraph 5) provides in

relevant part:

     Employee will not, directly or indirectly, during his
     employment and for the period of two (2) years
     immediately after its termination, engage or assist in
     the same or any similar line of business, competing with
     the line of business now or hereafter conducted or
     operated by Nalco during the term of Employee’s
     employment by Nalco, whether as consultant, employee,
     officer, director, or representative of such competing
     business, within the United States of America, provided,
     however, that in the event that the Employee’s position
     with Nalco immediately prior to termination is that of
     field representative, then the geographic area of this
     non-competition covenant shall be limited to that
     geographic area within the United States of America for

                                -4-
     which Employee was responsible at any time during the two
     year period immediately preceding termination . . . 1

The parties dispute whether McGough was a “field representative” at

the time of his termination, such that a restriction on his

employment would be limited to a nine-state geographic area.

     Also in the Agreement, two clauses address the non-disclosure

issue.      Paragraph           3    of    the       Agreement   addresses       business

information, generally.              It reads:

     Employee shall not, directly or indirectly, under any
     circumstances or at any time, either during the term of
     his employment or after its termination, communicate or
     disclose to any person, firm, association or corporation,
     or use for his own account, without Nalco’s consent, any
     information acquired by him in the course of or incident
     to his employment, relating to or regarding the names of
     customers of Nalco or Third Parties, the sales or service
     data of Nalco or Third Parties, furnished to him or
     secured by him in the course of his employment, or any
     other data or information concerning the business and
     activities of Nalco or Third Parties.

Paragraph      2     of   the        Agreement         is   similar      but    prohibits

communication,       disclosure           or   use    of    “technical    information,”

defined   as       “inventions,        discoveries,         improvements,       machines,

devices, processes, products, formulae, designs, projects, mixtures

and/or compounds, whether patentable or not.”

     On the day he gave Nalco notice of his resignation, McGough

instituted a declaratory judgment action to determine whether the

Agreement   placed        any       enforceable       restrictions       on    his   future

     1
      The provision closes with a clause explicitly inviting any
court that finds the reach of the provision to be too broad to pare
the covenant down to acceptable limits.

                                               -5-
employment.   Nalco subsequently removed the case to the District

Court for the Northern District of West Virginia, based upon the

diversity of citizenship, see 28 U.S.C. § 1332(a) (2005), and added

counter-claims for injunction, breach of contract, and violation of

West Virginia’s Uniform Trade Secrets Act (the “UTSA”), see W.Va.

Code § 47-22-1 et seq. (2006).      Nalco also moved for a preliminary

injunction seeking to prevent McGough, in effect, from continuing

to work at ACS during the pendency of the litigation.      After a two-

day hearing that included testimony and admission of documentary

evidence, the district court denied Nalco’s motion for preliminary

injunction.

     A   preliminary   injunction    is   an   “extraordinary   remed[y]

involving the exercise of very far-reaching power to be granted

only sparingly and in limited circumstances.”        Microstrategy Inc.

v. Motorola, Inc., 245 F.3d 335, 339 (4th Cir. 2001).       We review a

denial of a motion for preliminary injunction for an abuse of

discretion.   Nat’l Audubon Soc. v. Dep’t of Navy, 422 F.3d 174, 200

(4th Cir. 2005).   A district court’s order will be considered an

abuse of discretion only if it is guided by erroneous legal

principles or if it rests upon a clearly erroneous factual finding.

Bryte ex rel. Bryte v. Amer. Household Inc., 429 F.3d 469, 475 (4th

Cir. 2005).   Although we review legal conclusions de novo, factual

findings cannot be reversed unless we find clear error. See, e.g.,

Nat’l Audubon, 422 F.3d at 200.

                                    -6-
     Blackwelder Furniture Company of Statesville, Inc. v. Selig

Manufacturing Company, Inc., 550 F.2d 189 (4th Cir. 1977), sets

forth the law governing the grant of preliminary injunctions in the

Fourth Circuit. A court considers four factors: the likelihood of

irreparable harm to the moving party if the preliminary injunction

is denied, the likelihood of harm to the non-moving party if the

injunction is granted, the likelihood that the moving party will

succeed on the merits of his claim, and the public interest.            See,

e.g., Rum Creek Coal Sales, Inc. v. Caperton, 926 F.2d 353, 359

(4th Cir. 1991).

                                    II.

     Initially, Nalco contends that the district court erred in

refusing to grant injunctive relief on its non-competition claim.

In fact, the district court carefully applied the Blackwelder

analysis to that claim.

     First,   the    court     determined    that   Nalco     would   suffer

irreparable harm in the absence of a preliminary injunction on the

non-compete claim.       Specifically the district court found that

losing an employee considered “irreplaceable,” as Nalco considered

McGough, would detrimentally affect any company.         See McGough, 420

F.Supp.2d at 564. Further, the court found it “almost without

question”   that,   if   the   non-compete    clause   were    enforceable,

McGough breached it.      Id. At the same time, however, the court

                                    -7-
found the amount of harm to Nalco tempered by evidence that Nalco

might have lost accounts to ACS even without McGough’s employment

there, on the strength of Larry Hyatt’s expertise and contacts

alone.

     Moving    to    the   other   side    of   the   scale,   the   court   then

determined that McGough, the non-moving party, would also suffer

significant harm if a preliminary injunction were issued enforcing

the non-compete clause because he would be forced to resign from

his job with ACS and find a new job.              The court found that this

hardship would occur regardless of whether McGough was treated as

a field representative, subject to a more limited geographic non-

compete   bar,      or   whether   he     was   subject   to   the   nationwide

restriction.     In balancing the hardships that would be faced by

each party, the court found that they approached equipoise.

     Because Nalco, the moving party, had not established that the

hardships clearly weighed in its favor, it had to prove that it was

highly likely to succeed on the merits in order to win a grant of

preliminary injunction.       This, the district court found, it could

not do.   In assessing the likelihood of success on the non-compete

claim, the district court first carefully analyzed applicable West

Virginia conflict-of-law principles and determined that a West

Virginia court asked to enforce the Agreement would apply West

Virginia contract law to the dispute because that state had the

“most significant relationship” to the Agreement. See McGough, 420

                                        -8-
F.Supp.2d at 566 (citing New v. Tac & C Energy Inc., 355 S.E.2d

629, 631 (W.Va. 1987)).    We find no legal error in the district

court’s analysis as to choice of law,2 although we recognize that

West Virginia law provides no clear answer on this question.

Compare Paul v. Nat’l Life, 352 S.E.2d 550, 551 (W.Va. 1986)

(reaffirming lex loci delicti as the general conflicts rule in West

Virginia) with New, 355 S.E.2d at 631 (explicitly applying section

196 of the Second Restatement to employment agreement dispute).

      Applying West Virginia law, the district court then concluded

that a West Virginia court would find the non-compete clause

unreasonable on its face and consequently refuse to “blue pencil”

it.   See Reddy v. Cmty. Health Found. of Man, 298 S.E.2d 906, 911-

15 (W.Va. 1982) (describing the requirement that a restrictive

covenant fall within the governing principle of the rule of reason

before a court may undertake to “blue pencil” it).    The district

court recognized that the reasonableness of the non-compete clause,

and hence the likelihood that it would be blue pencilled, would

depend, in part, upon how geographically broad the fact-finder

determined its application to be. Compare O. Hommel Co. v. Fink,

177 S.E. 619 (W.Va. 1934) (finding reasonable, and blue pencilling,

      2
      Indeed, we note that in initially requesting injunctive
relief, Nalco itself relied entirely on West Virginia law,
conceding sub silentio its applicability; only after the district
court raised the issue and asked for additional briefing on the
question of what law should govern the     Agreement, did   Nalco
contend that Alabama law controlled.

                                -9-
a three-year restrictive covenant encompassing Canada and the

eastern United States) with Pancake Realty Co. v. Harber, 73 S.E.2d

438, 443 (W.Va. 1952) (finding unreasonable and refusing to blue

pencil a covenant not to compete that contained no territorial

limitation).        On   the   basis    of    the   facts   presented   at    the

preliminary injunction hearing, the district court determined that

the clause, if applied to McGough, would act as a nationwide bar on

competition, rather than applying only to the more limited nine-

state area in which McGough had worked over the previous two years.

McGough, 420 F.Supp.2d at 578.          Based upon this assessment of the

clause’s geographic and industry breadth, the district court found

that the non-compete clause offended the rule of reason under West

Virginia law and would be unlikely to be blue pencilled. Id. at

578-79.

       To the extent that Nalco argues the district court erred in

this   or   other   findings    of     fact   underlying     its   analysis   of

injunctive relief with respect to the non-compete clause, we

disagree. Based on the limited evidence adduced at the preliminary

injunction hearing, we cannot say that the district court clearly

erred with respect to any factual finding.              We caution, however,

that this does not mean that, after development of a fuller record,

a fact finder (or court on summary judgment) might not come to

contrary conclusions with respect to the facts.

                                       -10-
                               III.

     Nalco also contends that the district court erred in failing

to address two additional grounds for the grant of a preliminary

injunction:    McGough’s   alleged   breach   of   the    non-disclosure

provisions of the Agreement and his alleged misappropriation of

trade secrets under West Virginia’s UTSA.

     “[I]n granting or refusing interlocutory injunctions the court

shall similarly set forth the findings of fact and conclusions of

law which constitute the grounds of its action.”         Fed. R. Civ. P.

52(a).   A failure to consider and rule upon a purported ground for

a preliminary injunction may require remand.       First-Citizens Bank

& Trust Co. v. Camp, 432 F.2d 481, 484-85 (4th Cir. 1970); see also

Mayo v. Lakeland Highlands Canning Co., 309 U.S. 310, 316 (1940)

(“It is of the highest importance to a proper review of the action

of a court in granting or refusing a preliminary injunction that

there should be fair compliance with Rule 52(a) of the Rules of

Civil Procedure.”).

     In its motion for preliminary injunction, Nalco asked that

McGough be enjoined from “directly or indirectly competing with

Nalco within any geographic region that Mr. McGough worked while

employed by Nalco, and from disclosing and/or using any of Nalco’s

confidential information / trade secrets at any location or in any

capacity” (emphasis added).    In the memorandum accompanying its

motion, Nalco indicated that it relied on two independent legal

                               -11-
theories      for    enjoining   McGough’s    disclosure   of    confidential

information or use of trade secrets:           a contract theory based upon

the Agreement and a statutory theory premised on the UTSA.

      As has been previously discussed, the district court made

numerous factual and legal findings on the issue of McGough’s

competition with Nalco. We find no evidence of similar findings of

fact or law with regard to Nalco’s second request, that McGough be

enjoined from “disclosing and/or using” confidential information or

trade secrets.       This was error.

      Although the district court made passing reference to the

trade secret claim, its discussion and analysis focuses almost

exclusively on the covenant not to compete. McGough, 420 F.Supp.2d

at 573-79.      The court never specifically analyzed the disclosure

provisions of the Agreement or referred to or cited the UTSA.                The

district court’s failure to make specific findings of fact or law

on   either    the   non-disclosure    or    trade   secrets   grounds    for   a

preliminary injunction cannot be considered harmless.                    Indeed,

consideration of these grounds may alter the Blackwelder balancing

of hardships.

                                      -12-
                                  IV.

     For the foregoing reasons, we must vacate the denial of a

preliminary injunction and remand for further proceedings not

inconsistent with this opinion.

                     VACATED AND REMANDED FOR FURTHER PROCEEDINGS

                              -13-
NIEMEYER, Circuit Judge, concurring:

      I concur in the opinion for the court and write separately

only to note that the district court’s conclusion that the non-

compete clause was unreasonable was dependent on the court’s

finding that McGough was not a “field representative.”            Because of

that finding, the non-compete clause had a geographical scope

covering the entire nation.        As we point out, however, this fact

could only have been determined preliminarily in the context of

whether to grant a preliminary injunction. Any ultimate finding on

that point, whether by the court or by the jury, could be different

and   therefore   could   result    in     a   much   reduced   geographical

application of the non-compete clause.            In that circumstance, a

different analysis under West Virginia law would be required.

                                    -14-