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Summary: NOT PRECEDENTIAL UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT _ No. 10-1388 _ PHARMETHOD, INC. v. MICHAEL CASERTA, Appellant. On Appeal from the United States District Court for the Eastern District of Pennsylvania No. 2:09-cv-05815 District Judge: Judge Curtis Joyner Argued May 28, 2010 Before: McKEE, RENDELL, and STAPLETON, Circuit Judges. (Opinion filed : June 2, 2010) Bruce E. Rodger, Esq. Ronald H. Surkin, Esq. (Argued) Gallagher, Schoenfeld, Surkin, Chupein & DeMis 25 West Second S
Summary: NOT PRECEDENTIAL UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT _ No. 10-1388 _ PHARMETHOD, INC. v. MICHAEL CASERTA, Appellant. On Appeal from the United States District Court for the Eastern District of Pennsylvania No. 2:09-cv-05815 District Judge: Judge Curtis Joyner Argued May 28, 2010 Before: McKEE, RENDELL, and STAPLETON, Circuit Judges. (Opinion filed : June 2, 2010) Bruce E. Rodger, Esq. Ronald H. Surkin, Esq. (Argued) Gallagher, Schoenfeld, Surkin, Chupein & DeMis 25 West Second St..
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NOT PRECEDENTIAL
UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT
_____________
No. 10-1388
_____________
PHARMETHOD, INC.
v.
MICHAEL CASERTA,
Appellant.
On Appeal from the United States District Court
for the Eastern District of Pennsylvania
No. 2:09-cv-05815
District Judge: Judge Curtis Joyner
Argued May 28, 2010
Before: McKEE, RENDELL, and STAPLETON, Circuit Judges.
(Opinion filed : June 2, 2010)
Bruce E. Rodger, Esq.
Ronald H. Surkin, Esq. (Argued)
Gallagher, Schoenfeld, Surkin, Chupein & DeMis
25 West Second Street
P.O. Box 900
Media, PA 19063-0000
Attorneys for Defendant-Appellant
James P. Golden, Esq. (Argued)
Jane C. Silver, Esq.
1
Hamburg & Golden
1601 Market Street
Suite 3310
Philadelphia, PA 19103-0000
Attorneys for Plaintiff-Appellee
OPINION
McKEE, Chief Circuit Judge.
Michael Caserta appeals the district court’s order preliminarily enjoining him from
competing with his former employer PharMethod, soliciting its customers, disclosing its
confidential information, or disparaging it. For the reasons that follow, we will vacate
and remand for further proceedings consistent with this opinion.
I.
Inasmuch as we write primarily for the parties who are familiar with the factual
and procedural history of this case, we need only recite as much of the underlying dispute
as is helpful to our discussion.
At the hearing on PharMethod’s motion for preliminary injunctive relief, the
district court heard testimony and accepted exhibits, but did not make findings. It also
heard legal arguments, but did not rule on them. The judge indicated that he was
unmoved by Caserta’s claim that the restrictive covenant at issue was unenforceable.
Instead, the judge focused on the fact that Caserta had knowingly agreed to the covenant,
and should therefore be bound by its terms.
Following the hearing, the district court issued a one and one-half page order
2
granting PharMethod’s motion for a preliminary injunction. That order provides as
follows:
1. The Court finds that Michael Caserta violated the restrictive covenant
contained in the employment agreement entered into by the parties on April
25, 2005.
2. The Court finds that injunctive relief is necessary to prevent immediate
and irreparable harm that cannot be compensated by money damages.
Greater injury will occur from refusing the injunction than from granting it.
The injunction will restore the parties to the status quo as it existed
immediately before Michael Caserta’s wrongful conduct. The wrong is
actionable and the injunction is reasonably suited to abate the wrong.
PharMethod’s right to relief is clear.
3. No bond is required.
4. Michael Caserta is enjoined from competing with PharMethod, soliciting
PharMethod’s customers, disclosing or using PharMethod’s confidential
business information and trade secrets, disparaging PharMethod, and
otherwise violating the restrictive covenant for a period of one year from
the date of August 13, 2009.
5. Michael Caserta must make a full accounting of the full amount that he
earned while competing with PharMethod Inc., including, but not limited to,
all earnings from the speaker program conducted on November 18, 2009.
A4-5. This appeal followed.1
II.
Caserta alleges numerous errors arising from the district court’s grant of
preliminary injunctive relief. We first address Caserta’s contention that we must remand
1
The district court had subject matter jurisdiction over this diversity action pursuant to 28
U.S.C. § 1332. We have appellate jurisdiction over the district court’s interlocutory order
granting a preliminary injunction pursuant to 28 U.S.C. § 1292(a)(1).
We “review an order granting a preliminary injunction for abuse of discretion, the factual
findings for clear error, and the determinations of questions of law de novo.” Zambelli
Fireworks Mfg. Co. v. Wood, 592 F.3d 412, 418 (3d Cir. 2010) (internal quotation marks and
citation omitted).
3
because the district court failed to fulfill its obligations under Federal Rule of Civil
Procedure 52(a)(2).2
Rule 52(a) provides that: “[i]n granting or refusing an interlocutory injunction,”
the court must “find the facts specially and state its conclusions of law separately. The
findings and conclusions may be stated on the record after the close of the evidence or
may appear in an opinion or a memorandum of decision filed by the court.” Fed. R. Civ.
P. 52(a)(1) - (2). The rule requires that the district court make these findings and
conclusions, see H. Prang Trucking Co. v. Local Union No. 469, 613 F.2d 1235, 1238 (3d
Cir. 1980), as the findings in part “serve[] as a necessary aid to the appellate courts,”
Berguido v. Eastern Air Lines, Inc.,
369 F.2d 874, 877 (3d Cir. 1966).
However, “[t]he failure of the trial judge to comply literally with the provisions of
Rule 52(a), although it has been characterized as a ‘dereliction of duty,’ is not always a
ground for reversal and remand with instructions to make specific findings as required by
the Rule.” Hazeltine Corp. v. Gen. Motors Corp., 131 F.2d 34, 37 (3d Cir. 1942)
(emphasis added) (internal citation omitted). As long as the district court’s opinion
affords a “clear understanding of the basis of the decision . . . and resolve[s] the major
2
PharMethod claims that Caserta waived any violation of Rule 52(a) by not raising it
before the district court. However, as we conclude that the district court did not make sufficient
findings of fact or conclusions of law to allow us to review the court’s preliminary injunction,
any waiver is irrelevant. See Educ. Testing Servs. v. Katzman, 793 F.2d 533, 537 (3d Cir. 1986)
(“While a party may waive the compliance issue, we nonetheless must examine the findings to
ascertain if they are adequate to explain sufficiently the basis for the injunction so that we can
perform our review function.”)
4
factual disputes, the mere formal requirement of separation of findings of fact and
conclusions of law has been held not sufficient to necessitate a reversal.” Id. (internal
quotation marks and citation omitted).
Nonetheless, an appellate court should “‘vacate the judgment and remand the case
for findings if the trial court has failed to make findings when they are required or if the
findings it has made are not sufficient for a clear understanding of the basis of the
decision.’” H. Prang Trucking Co., 613 F.2d at 1238 (quoting 9 Charles Alan Wright &
Arthur R. Miller, Federal Practice & Procedure § 2574 (1971)). Moreover, a district
court does not satisfy Rule 52(a) merely “by the statement of the ultimate fact without the
subordinate factual foundations for it which also must the subject of specific findings.”
O’Neill v. United States,
411 F.2d 139, 146 (3d Cir. 1969). In O’Neill, the district court
concluded that the plaintiff was contributorily negligent based on three factual findings:
(1) at the time of the accident O’Neill was not using his drill in a safe
manner, (2) he had every reason to believe that he might meet an
obstruction which would cause the drill to kick and throw him off balance,
[and] (3) he did not take adequate protection and safeguards to meet this
contingency.
Id. at 145 (internal quotation marks and citations omitted). We held that these findings of
“ultimate facts” were insufficient to permit meaningful review. Accordingly, we vacated
the judgment and remanded so that the district court could make “adequate, specific
findings under Rule 52(a) relating to the defense that O’Neill was contributorily
negligent.”
Id. at 146. We have also vacated and remanded a district court’s order for
5
failure to clearly articulate its conclusions of law in accordance with Rule 52(a). See
Prof’l Plan Exam’rs, Inc. v. Lefante, 750 F.2d 282 (3d Cir. 1984).
When we review the order that was entered here against this standard, it is clear
that the district court failed to set forth sufficient findings of fact or conclusions of law to
explain its decision to grant a preliminary injunction, or to permit us to engage in
meaningful review.
A district court must examine the following four factors when deciding whether to
grant a preliminary injunction:
(1) whether the movant has shown a reasonable probability of success on
the merits; (2) whether the movant will be irreparably injured by denial of
the relief; (3) whether granting preliminary relief will result in even greater
harm to the nonmoving party; and (4) whether granting the preliminary
relief will be in the public interest.
Allegheny Energy, Inc. v. DQE, Inc., 171 F.3d 153, 158 (3d Cir. 1999) (internal quotation
marks and citation omitted).
In explaining its grant of injunctive relief here, the district court merely stated its
ultimate determinations on the first three factors without explaining how it arrived at
these ultimate determinations.3 For instance, the court stated that PharMethod would
3
We also note that the district court improperly addressed the merits of PharMethod’s
claim, A4 (“The Court finds that Michael Caserta violated the restrictive covenant contained in
the employment agreement entered into by the parties on April 25, 2005.”), rather than the
likelihood of success on the merits. See Univ. of Tex. v. Camenisch, 451 U.S. 390, 395 (1981)
(“[I]t is generally inappropriate for a federal court at the preliminary-injunction stage to give a
final judgment on the merits.”).
6
suffer irreparable harm if the injunction were not granted, and that the harm from denying
the injunction would be greater than the harm from granting it. However, the court did
not identify the harm that would result to PharMethod, nor did it explain why that harm
was greater than the harm Caserta would face if prohibited from earning an income in his
chosen profession.4
PharMethod nonetheless argues that the district court satisfied the requirements of
Rule 52(a) by including its “essential findings” in its order. It further argues that the
court made other findings during the hearing. We are not persuaded. First, Rule 52(a) is
not satisfied “by the statement of the ultimate fact without the subordinate factual
foundations for it which also must the subject of specific findings.” O’Neill, 411 F.2d at
146. Moreover, PharMethod’s position is not advanced by its claim (both in its brief and
again at oral argument) that the district court made additional findings on the record. The
record simply does not contain findings that satisfy the requirements of Rule 52(a).
Given the paucity of findings of fact and conclusions of law, there is an
insufficient basis for meaningful appellate review. We accordingly must remand so that
4
The restrictive covenant stated that any breach of its terms would result in irreparable
harm. PharMethod accordingly argues that Caserta, by signing the covenant, conceded that his
actions would be irreparably harmful. It therefore maintains that the district court need not have
explained its finding of irreparable harm. PharMethod’s argument, however, does not diminish
the need for the district court to state these reasons. If the district court based its conclusion on
irreparable harm on Caserta’s conceding the issue by signing the restrictive covenant, we need to
know, so that we can review de novo its conclusion that proof of actual irreparable harm is
waiveable. If, however, the district court concluded that PharMethod faced irreparable harm
because it found that Caserta was poised to steal several of its clients, we need to know, so that
we can review that finding for clear error. See O’Neill, 411 F.2d at 146.
7
the district court can fulfill its obligations under Rule 52(a)(2).
III.
Inasmuch as remand is required, we think it appropriate to provide some guidance
for the district court’s inquiry and its resolution of Caserta’s arguments that the restrictive
covenant is unenforceable.5
Caserta first argues that PharMethod cannot enforce the restrictive covenant
because PharMethod was not a party to the employment agreement, and Rentacom never
assigned its interest in that agreement to PharMethod. In support of this proposition,
Caserta relies primarily on Hess v. Gebhard & Co., 808 A.2d 912 (Pa. 2002). In Hess, an
employee signed a non-competition agreement with his employer. Later, another
corporation purchased the entirety of that employer’s assets, including the non-
competition agreement. The Pennsylvania Supreme Court refused to let the successor
corporation enforce the restrictive covenant against Hess, as Hess had not consented to
the assignment.
Id. at 921-23.
Caserta also argues that Zambelli Fireworks Mfg. Co. v. Wood, 592 F.3d 412, 418 (3d
Cir. 2010), supports his position. There, we distinguished Hess because Zambelli’s
corporate restructuring was a stock sale rather than an asset purchase, and following a
stock sale, a corporation’s identity remains unaltered. Accordingly, we held that
assignment was unnecessary and that the corporation, notwithstanding its altered
5
It is uncontested that Pennsylvania law applies to the employment agreement at issue
here.
8
ownership, continued to have the right to enforce the covenant. 592 F.3d at 423. Caserta
argues that Zambelli, like Hess, stands for the proposition that corporate identity matters
when enforcing a restrictive covenant, and that absent an assignment, only an entity that is
legally the same as the contracting entity can enforce a non-competition agreement.
Caserta entered into the agreement with one corporation, Rentacom “presumably
because Caserta’s contract was with ‘Dyventive,’ a fictitious name owned by Rentacom”.
He later became an employee of PharMethod, an entity that despite having similar
ownership as Rentacom, appears to be a separate and unrelated corporation. Caserta did
not sign a non-competition agreement with PharMethod, and despite the assignability
provision in the agreement with Rentacom, there was no evidence offered to show that
Rentacom ever actually assigned its interest in that agreement to PharMethod.
Accordingly, insofar as it is a separate legal entity from Rentacom, PharMethod may have
absolutely no legal right to enforce the covenant.6 On remand, the district court must
make findings of fact and conclusions of law about the relationship between PharMethod
and Rentacom d/b/a Dyventive, and determine if PharMethod is entitled to enforce this
agreement at all.
6
In Hess, the court indicated that its primary reason for not making a default rule of
assignability for non-competition agreements was that they are “personal.” Thus, “[t]he fact that
an individual may have confidence in the character and personality of one employer does not
mean that the employee would be willing to suffer a restraint on his employment for the benefit
of a stranger to the original undertaking.” 808 A.2d at 922. To the extent that the record shows
that Caserta’s personal relationship with Rentacom was sufficiently similar to its personal
relationship with PharMethod, the facts of this case may be distinguishable from Hess. This too
the district court must resolve on remand.
9
Assuming, arguendo, that PharMethod can enforce a restrictive covenant in an
agreement between Caserta and Rentacom, Caserta next argues that the resulting
restrictions are unreasonable and therefore unenforceable absent modification by the
court.
In Pennsylvania, post-employment restrictive covenants are enforceable if: (1) they
are incident to an employment relationship between the parties; (2) the restrictions
imposed by the covenant are reasonably necessary for the protection of the employer; and
(3) the restrictions imposed are reasonably limited in duration and geographic extent. See
Sidco Paper Co. v. Aaron, 351 A.2d 250, 252 (Pa. 1976).
However, even though restrictive covenants satisfying these concerns can be
enforceable, they are nonetheless “not favored in Pennsylvania and have been historically
viewed as a trade restraint that prevents a former employee from earning a living.” Hess,
808 A.2d at 917. Moreover, they are closely scrutinized because Pennsylvania courts
recognize “the inherently unequal bargaining positions” of employer and employee,
Reading Aviation Serv., Inc. v. Bertolet,
311 A.2d 628, 630 (Pa. 1973), and the significant
hardship that can result when an employee is bound by such an agreement, see Morgan’s
Home Equip. Corp. v. Martucci,
136 A.2d 838, 846 (Pa. 1957). A court must therefore
make an in-depth inquiry before entering a preliminary injunction that may have an
impact on a person’s livelihood. The court must “balance[] the employer’s protectible
business interests against the interest of the employee in earning a living in his or her
10
chosen profession, trade or occupation, and then balance[] the result against the interest of
the public.” Hess, 808 A.2d at 920.
A restrictive covenant is reasonably necessary for the protection of the employer
when it is narrowly tailored to protect an employer’s legitimate interests. Interests that a
covenant may legitimately protect include trade secrets, confidential information, good
will, and unique or extraordinary skills. Victaulic Co. v. Tieman, 499 F.3d 227, 235 (3d
Cir. 2007). Eliminating competition or gaining an economic advantage, however, are not
legitimate business interests.
Hess, 808 A.2d at 920-21. Courts similarly scrutinize
geographical restrictions in non-competition agreements with care. Courts uphold
agreements lacking geographic limits, or with very broad geographic limits, only where
the employee’s duties and customers were equally broad. Quaker Chem. Corp. v. Varga,
509 F. Supp. 2d 469, 476 (E.D. Pa. 2007).
When a covenant imposes restrictions broader than necessary to protect the
employer, a court of equity may “blue pencil” the agreement by granting enforcement that
is limited to those portions of the restrictions which are reasonably necessary for the
protection of the employer. Sidco Paper Co., 351 A.2d at 254. However, gratuitous
over-breadth militates against any enforcement whatsoever. Such over-breadth suggests
“an intent to oppress the employee and/or to foster a monopoly, either of which is an
illegitimate purpose.”
Id. at 257. Accordingly, “[a]n employer who extracts a covenant
in furtherance of such a purpose comes to the court of equity with unclean hands and is,
11
therefore, not entitled to equitable enforcement of the covenant.” Id.
Here, we do not know if the court assessed whether the covenant’s restrictions
were necessary to PharMethod’s legitimate business interests, or if it assessed how those
interests compared to Caserta’s interests and the interests of the public. The transcript
from the preliminary injunction hearing, however, suggests that it did not. Rather, the
transcript indicates that the court disregarded everything but the contractual language.7
The judge focused on the fact that Caserta knowingly agreed to the covenant, and
accordingly seemed to conclude that it was improper for Caserta to now object to its
terms. However, as we have explained, this is contrary to Pennsylvania law. The
enforcement of these covenants is not based on a detached deference to contractual
language; it involves an active and engaged inquiry aimed at ensuring that the end result
is fair to both parties.
The order that we now vacate enjoined Caserta from, inter alia, “competing with
PharMethod.” A5. On remand, the court must assess whether such a broad and
unqualified restriction is necessary to protect PharMethod’s legitimate interests.
PharMethod is legitimately concerned about its confidential client and pricing
information. Like the employee in Insulation Corp. of Am. v. Brobston, 667 A.2d 729
7
The court also appears to have ignored (or least minimized) many problems with the
actual language of the agreement. Caserta points out numerous drafting errors in the non-
competition clause. For instance, the anti-solicitation sub-clause forbids him from soliciting
“Companies.” However, the word “Company” is defined in the agreement to mean Dyventive,
and “Companies” is not defined at all, though in other places, it is clearly used to refer to
Dyventive.
12
(Pa. Super. Ct. 1995), however, Caserta is bound by a non-disclosure agreement. It is
certainly possible that PharMethod’s legitimate concerns could be addressed merely by
enforcing that agreement alone. PharMethod is also legitimately concerned about the
customer good will that Caserta generated during his employment on behalf of
PharMethod. That concern, however, might be addressed by an appropriately tailored
injunction prohibiting Caserta from soliciting PharMethod clients. See Morgan’s Home
Equip. Corp., 136 A.2d at 846-47.
The district court must also address on remand Caserta’s argument that
enforcement of the restrictive covenant here is inappropriate because he was terminated
by PharMethod, as some Pennsylvania courts have shown a reluctance to enforce
restrictive covenants against an employee who leaves employment involuntarily. See
Brobston, 667 A.2d at 735. If the district court predicts that Brobston would be endorsed
by the Supreme Court of Pennsylvania, it should give due consideration to whether
Caserta’s discharge should play a role in its balancing of the equities in this case.8
Similarly, it should consider whether PharMethod’s breach in terminating
8
In Brobston, the court explained that once the employer has terminated an employee, the
employer’s “need to protect itself from the former employee is diminished by the fact that the
employee’s worth to the corporation is presumably insignificant. Under such circumstances, [the
court] conclude[d] that it is unreasonable as a matter of law to permit the employer to retain
unfettered control over that which it has effectively discarded as worthless to its legitimate
business interests.” 667 A.2d at 735. Although we do not suggest that Kovalcik thought that
Caserta was “worthless,” Kovalcik clearly thought that PharMethod would be better off without
him than with him. Yet, the district court did not explain how, if at all, the fact that PharMethod
so readily rejected Caserta’s talents weighed in its equitable balancing of interests when deciding
to enforce this agreement not to compete.
13
Caserta’s employment without the two weeks’ notice required by the contract relieves
Caserta of his obligation. See Carlson v. Arnot-Ogden Mem. Hosp., 918 F.2d 411, 414
(3d Cir. 1990); Ritz v. Music, Inc.,
150 A.2d 160, 162 (Pa. Super. Ct. 1959).
IV.
Caserta finally argues that the district court erred by issuing a preliminary
injunction without requiring PharMethod to post a bond in accordance with Federal Rule
of Civil Procedure 65(c). Rule 65(c) provides that: “[t]he court may issue a preliminary
injunction or a temporary restraining order only if the movant gives security in an amount
that the court considers proper to pay the costs and damages sustained by any party found
to have been wrongfully enjoined or restrained.” Fed. R. Civ. P. 65(c) (emphasis added).
If, after conducting the analysis described above, the district court decides to again
issue a preliminary injunction, the district court must consider the mandate of Rule 65(c).
See Hoxworth v. Blinder, Robinson & Co., 903 F.2d 186, 210 (3d Cir. 1990) (“On its
face, [Rule 65(c)] admits no exceptions. . . . [T]here are important policies undergirding a
strict application of the bond requirement in most injunction granting contexts. . . . Given
the text and policies of rule 65(c), this court has interpreted the bond requirement very
strictly.”) (internal quotation marks and citations omitted).
We realize that we did not require that a bond be posted in Temple University v.
White, 941 F.2d 201 (3d Cir. 1991). However, that case had broad implications for the
general welfare that are nowhere to be found here. Furthermore, we have made clear that
14
the Temple University exception is quite narrow, and must be supported by specific
findings:
We have never excused a District Court from requiring a bond where an
injunction prevents commercial, money-making activities. Rather, we have
recognized exceptions in other contexts only where the balance of [the]
equities weighs overwhelmingly in favor of the party seeking the injunction
and when the District Court make[s] specific findings. . . . We therefore
hold that a district court lacks discretion under Rule 65(c) to waive a bond
requirement except in the exceptionally narrow circumstance where the
nature of the action necessarily precludes any monetary harm to the
defendant . . . .
Zambelli, 592 F.3d at 426 (internal quotation marks and citations omitted).
We recognize, as PharMethod reminds us, that the restrictive covenant at issue
here states that Caserta “agrees that temporary and permanent injunctive relief would be
appropriate remedies . . . without bond or security.” A27. However, that purported
agreement is in tension with the requirements of Rule 65(c). The district court must
address and resolve this tension if it refuses to require a bond on this basis.
V.
For all the reasons set forth above, the order of the district court granting
PharMethod’s motion for a preliminary injunction will be vacated, and this matter will be
remanded for further proceedings consistent with this opinion.
15
