LAWSON PRODUCTS, INC., a Delaware corporation, Lawson
Products, Inc., a Georgia corporation, Lawson Products,
Inc., a Texas corporation, Lawson Products, Inc., a New
Jersey corporation, Lawson Products, Inc., a California
corporation, Plaintiffs-Appellants,
v.
AVNET, INC., Defendant-Appellee.
No. 85-1402.
United States Court of Appeals,
Seventh Circuit.
Argued Dec. 4, 1985.
Decided Feb. 10, 1986.
Byron L. Gregory, McDermott, Will & Emery, Chicago, Ill., for plaintiffs-appellants.
Michael B. Roche, Schuyler, Roche & Zwirner, Chicago, Ill., for defendant-appellee.
Before FLAUM and RIPPLE, Circuit Judges, and FAIRCHILD, Senior Circuit Judge.
FLAUM, Circuit Judge.
Lawson Products, Inc. ("Lawson") appeals from the district court's denial of its motion for a preliminary injunction against its competitor, Avnet, Inc. ("Avnet"). This dispute arose out of an alleged scheme by Avnet to lure customers and sales people away from Lawson in a manner that tortiously interfered with the business and contracts of Lawson. This case, arising in the wake of Roland Machinery Co. v. Dresser Industries,
I.
Lawson and the Mechanic's Choice division of Avnet are competitors in the business of developing and distributing industrial and automotive supplies. Both companies' primary method of selling their products is through a sizable number of sales representatives who deal directly with customers. These sales representatives appear to be the key to success in the industry since, according to the evidence adduced before the district court, customer loyalty tends to attach to the sales person rather than the products of any individual company. According to Lawson, Avnet commenced a "raid" on Lawson's sales staff in January of 1983. During the course of the alleged raid at least fifty-seven of the eight hundred sales representatives employed by Lawson were contacted and seven of these individuals left Lawson for employment with Avnet.
This activity led to the filing of this diversity action in August, 1983, Lawson having voluntarily dismissed a similar action brought in Arkansas a few months earlier. Lawson's complaint alleged tortious interference with business and contractual relations, various acts of unfair competition, and a pendent state action under Illinois law for deceptive trade practices and unfair competition. Both parties inundated Judge Kocoras with affidavits resulting in a mass of often conflicting evidence. By stipulation of the parties the case was submitted to the court solely on the basis of this documentary evidence.
Lawson's affidavits portray Avnet's scheme not as a pro-competitive attempt to "out-bid" a rival for valuable talent, but as a many-pronged plot to co-opt the extensive technical training Lawson provides its sales representatives, to acquire confidential information, and to destroy the financial stability of Lawson by encouraging manufacturers, customers, and sales people to breach their contractual, or at least quasi-contractual, obligations to Lawson. This was allegedly accomplished through a series of deceptive practices including misstatements and fabrications about the activities of Lawson's management, as well as at least one instance of commercial bribery and one instance of passing off a Lawson product as that of Avnet. As a result of Avnet's alleged activity seven employees, two of whom eventually returned, left Lawson. No manufacturers abandoned Lawson, however, and Lawson continued to be a highly profitable enterprise. Nevertheless, Lawson claims that it is suffering an ongoing injury as a result of the competitive disadvantage caused by its competitor's access to confidential information, the decreased morale among its employees, and the continuing threat of further corporate "raids."
The essential facts according to Lawson are that Avnet's Mechanic's Choice division had suffered from a depleted staff of sales representatives which caused Avnet to embark on the plan to co-opt its competitors' sales staff and, consequently, their customers. Lawson's sales representatives are independent contractors rather than employees and only a fraction of these actually signed contracts with the company. Of the seven people Avnet succeeded in luring away only two had written contracts. Conceding this, Lawson still claims that a contractual employment relationship existed and that the company had a legitimate expectancy in the continuation of the relationship.
Before being sent out to the field each representative was given what Lawson claims is the most extensive training in the industry. Upon completion of the training program the sales person was assigned a territory and given a core group of customers as a base for expansion of the individual's business. Also supplied were a price book, a display book, product and operations manuals, and computor printouts that regularly updated customer purchasing patterns. These materials all contained a warning prohibiting unauthorized duplicating, and Lawson produced affidavits indicating that 92 percent of its sales staff viewed these materials as "confidential." The evidence also indicated that none of the documents were marked "confidential" and that the information contained therein was frequently shared with customers. It is the information contained in these materials that Lawson claims was one of the primary aims of the Avnet raid. According to Lawson, Avnet now has access to its price information, customer tendencies, and product specifications, thus allowing the rival to have a competitive advantage in soliciting Lawson customers and the ability to duplicate Lawson products in derogation of Lawson's exclusive manufacturing contracts. Lawson also claims that its technical staff is increasingly unwilling to share information with the sales people in light of Avnet's activities.
Lawson's affidavits catalogue a number of alleged unsavory practices utilized by Avnet. First, Lawson claims that Avnet engaged in an active campaign of misrepresentations concerning Lawson's management, product quality, and prices, which was designed to encourage Lawson's customers, suppliers, and sales representatives to switch to Avnet. Second, Avnet is alleged to have "covertly" used the Lawson people it did recruit to encourage further defections while they were still in the employ of Lawson. Third, Lawson claims that one of its employees was offered a twenty-five dollar bribe to agree to speak with an Avnet recruiter. Finally, the affidavits claim that on two separate occasions Avnet employees attempted to "pass off" Lawson products as those of Avnet; one instance involved a demonstration, the other a shipment. In both cases the product itself had Lawson's name printed upon it.
These activities, according to Lawson's argument, establish a continuing malicious scheme designed to irreparably injure Lawson by seizing a competitive advantage, by destroying the company's "good will" with its customers, and by injuring employee morale through misrepresentations. In an effort to bolster the argument for a continuing operation, Lawson detailed an earlier consent decree entered into by the parties in New Jersey whereby Avnet would refrain from attempting to recruit Lawson sales people who were under contract. Avnet violated the agreement and successful enforcement proceedings were eventually brought.
Avnet countered the evidence and arguments presented by Lawson with its own collection of affidavits that conflict with those of Lawson on practically every matter. The picture Avnet paints is one of normal competition for sales talent where Lawson failed to protect its interests through binding employment contracts. Based on the documentary evidence before him Judge Kocoras concluded that "[p]laintiffs have presented evidence on each required element of the action and defendant has presented equally credible evidence in response." Faced with this morass of evidence, the district judge extensively discussed each element of the requirements for a preliminary injunction under Roland Machinery Co. v. Dresser Industries,
The court first analyzed the likelihood of success on the merits and held that the affidavits failed to establish the commercial malice required for the tort of interference with business relations, the actual breach of contract necessary to the tort of interference with contract, and the confidential nature of the Lawson material that was the key element to the claim for unfair competition. Second, the court concluded that there was no irreparable harm to Lawson and that an adequate remedy at law existed. This was based on the ability of Lawson to actively carry on its business activity and sue for any damages caused by the defendant's activities. The judge also evaluated the harm to the defendant and public policy considerations entailed by the scope of the injunctive relief proposed. The requested injunction required more than a restraint on Avnet from illegal activity; it essentially mandated that Avnet maintain a complete "hands-off" policy with respect to Lawson. The court deemed this to be contrary to the legitimate public interest in competition and unnecessarily injurious to Avnet.
On appeal Lawson contends that the district court committed reversible error with respect to each of its factual and legal determinations. Lawson argues that since the case was submitted on affidavits without a hearing this court should undertake a de novo review of the record and reverse the district court. We find no merit in Lawson's arguments and thus affirm the district court.
II.
In two recent opinions this circuit has engaged in an exhaustive and scholarly examination of the law of preliminary injunctions. See Roland Machinery Co. v. Dresser Industries, Inc.,
Roland and American Hospital provide important insights into the theoretical underpinnings of injunctive relief and a valuable source of guidance for district judges. To remove any possible confusion, we conclude that these opinions are in harmony with the traditionally flexible and discretionary responsibilities of the district judge, sitting as chancellor in equity, in preliminary injunction matters. In reaching this conclusion we must discuss three issues arising out of this case: (1) the nature of the district judge's inquiry and evaluation in preliminary injunction cases; (2) the standard of appellate review; and (3) whether the standard of review should be different when the district judge rules solely on the basis of documentary evidence.
1. The Role of the District Judge
The constant theme that permeates both Roland and American Hospital is that while preliminary injunctions are an equitable, interlocutory form of relief, they are an "exercise of very far-reaching power" (Warner Bros. Pictures, Inc. v. Gittone,
The idea underlying these equivalent approaches is that the task for the district judge in deciding whether to grant or deny a motion for preliminary injunction is to minimize errors: the error of denying an injunction to one who will in fact (though no one can know this for sure) go on to win the case on the merits, and the error of granting an injunction to one who will go on to lose. The judge must try to avoid the error that is more costly in the circumstances.
Roland,
After an exhaustive discussion of the inability of courts of appeals to arrive at a consensus about how to review the granting or denial of a motion for a preliminary injunction, the court in Roland detailed the classic hornbook elements of a proper preliminary injunction. As a threshold matter the movant must establish that there is "no adequate remedy at law," a danger of "irreparable harm," and some "likelihood of success on the merits." As is well-documented in Roland, these are all terms that in the context of preliminary injunctions have acquired their own special meaning. See
a. The Roland and American Hospital Approach
Roland and American Hospital adopted a "sliding scale" approach where the possibility of mistake would be minimized by weighing the costs of injunctive relief against the benefits. The benefit of injunctive relief can be determined by combining the probability of success on the merits with the magnitude of the harm to the plaintiff. "The more likely the plaintiff is to win, the less heavily need the balance of harms weigh in his favor; the less likely he is to win, the more need it weigh in his favor." Roland,
P X H p > (1-P) X H d."
The left hand of the equation is the magnitude of erroneously denying the injunction, arrived at by multiplying the probability that plaintiff will prevail at trial (P) by the harm to the plaintiff caused by the denial of the injunction (H p). The right hand represents the magnitude of an erroneously granted injunction measured by multiplying the probability that the defendants will prevail at trial (1-P, the inverse of the plaintiff's probability of success) by the harm to the defendant caused by the granting of the motion (H d). Id. at 593-594.
Along with the stress on mistake minimization the majority in Roland questioned the "discretionary" role of the district judge in deciding preliminary injunction motions, an issue that has an impact not only on the equitable nature of the remedy but necessarily on the scope of appellate review, see infra Part II, Standard of Review. The granting or denying of these motions has traditionally been left to the sound discretion of the district judge. 7 J. Moore, J. Lucas & K. Sinclair, Jr., Moore's Federal Practice p 65.04 (2d ed. 1985). The court in Roland questioned the use of the shop-worn term "discretion" in this context, see Friendly, Indiscretion About Discretion, 31 Emory L.J. 747, 773 (1982), and what that term implies about the limited nature of the role of the court of appeals.
These cases would be troublesome if the verbal and mathematical formulae and the discussion of discretion are misinterpreted to establish a rigid approach to the preliminary injunction question. Roland and American Hospital, in accord with the assurances of the panel in each case that no change in the substantive law was intended, maintain the traditional equitable character of the remedy and provide some important insights into the unique nature of the preliminary injunction that district courts may find useful.
First, the concern with the economic cost associated with an erroneously granted injunction is well-placed. The use of the traditional elements coupled with the weighing of interests and harms serves to make the decision-making more principled and thus, hopefully, more accurate. We are convinced that the system, despite its real and semantic shortcomings, see Roland,
However, as those opinions also emphasize, a formula is not a substitute for, but an aid to, judgment. A mathematical formula can create a false impression that the elements of the formula, the magnitudes and probabilities, can be accurately quantified and that through a specified type of mental calculus the singularly "correct" result can be arrived at with some exactitude. The obvious problem with this is that the impression is false: a figure representing the probability of success can be arrived at only through a subjective estimate by the court and the magnitudes of harm are rarely susceptable to quantification because of the subjective values, externalities, and effects on the public interest that may be involved in an injunction case. See, e.g., United States Steel Corp. v. Fraternal Association of Steelhaulers,
When a motion for preliminary injunction is presented to a court in advance of hearing on the merits, it is called upon to exercise its discretion "upon the basis of a series of estimates: the relative importance of the rights asserted and the acts sought to be enjoined, the irreparable nature of the injury allegedly flowing from denial of preliminary relief, the probability of the ultimate success or failure of the suit, the balancing of damage and convenience generally. A mere listing of the guiding considerations demonstrates their intangible nature especially when no attempt is made at this stage to decide finally the questions raised."
Perry v. Perry,
While the use of an equation has no impact upon the nature of the district court's inquiry, the implication that a "correct" answer can be achieved would represent a change in the law and is thus of greater concern. It must be remembered that preliminary injunctions have the dual characteristic of being equitable, such that there is no "right" to obtain one, Weinberger v. Romeo-Barcelo,
b. The Discretion of District Judges
Besides our concern with the possible misinterpretation of the American Hospital equation, the second major area where there is a potential for distortion of our precedent is in the discretion of the district court, a concept intractably interwoven with the scope of appellate review. It is beyond argument that the term "discretion" has been sapped of its vitality through over-use and misuse. Nor is it subject to doubt that the existence of an evidentiary hearing, broad guidelines concerning what the relevant factors are, and a need to apply the substantive law applicable to the case in order to determine likelihood of success all make the discretion, for lack of a better word, in an injunction setting appear to be different than the type of discretion exercised over evidentiary matters. This apparent difference is vital because it emphasizes the importance of the preliminary injunction to any litigation by stressing the need for the principled exercise of equity power where there are great ramifications to the parties' substantive rights. The difference, however, is actually illusory since the distinction rests on an over-generalization concerning the number of decisions involved in a preliminary injunction determination.
During the course of deciding whether to grant the motion the district court must take a number of non-discretionary actions: (1) it must evaluate the traditional factors enunciated in the case law; (2) it must make factual determinations on the basis of a fair interpretation of the evidence before the court; and (3) it must draw legal conclusions in accord with a principled application of the law. See, e.g., Zepeda v. INS,
2. Standard of Review
As a necessary corollary to the discussion of the discretion of the district court, the Roland and American Hospital opinions questioned the further use of an "abuse of discretion" standard of review. See Roland,
There can be no quarrel with the conclusions that the appellate role is in some sense broader than in the review of evidentiary rulings and that a cohesive definition of abuse of discretion has escaped the judicial imagination. Nevertheless, in an attempt to avoid any possible confusion, it is important to reiterate this court's assurances that Roland and American Hospital did not change any of the law governing preliminary injunctions. An analysis of the incongruities pointed out in those opinions reveals that the problems are more semantic than real.
As was stated in the discussion of the discretion of the trial court, the preliminary injunction decision involves the resolution of a number of different issues, some of which are non-discretionary; others, like the final weighing and balancing of the equities, are classically left to the discretion of the district judge. Appellate review therefore must vary with the nature of the lower court decision. When a court of appeals considers a preliminary injunction order, which should set forth the judge's reasoning under Fed.R.Civ.P. 65(d), the factual determinations are reviewed under a clearly erroneous standard and the necessary legal conclusions are given de novo review. SEC v. Suter,
The traditional deferential review is in harmony with the stress in Roland and American Hospital on mistake minimization. The depth of appellate scrutiny varies with the degree to which the appellate court's perspective approximates the district court's first-hand experience. For example, a court of appeals is in a better position to review legal conclusions than findings of fact, which may have been based on intangibles, like the demeanor of a witness. When it comes to reviewing the weighing and balancing of equities in a preliminary injunction case an appellate court lacks a complete perspective since a cold record cannot totally reflect the district judge's sense of the equities or the merits of a case. Cf. Cone v. West Virginia Pulp & Paper Co.,
Under any feasible or conceivable system, our trial courts must always have the last word in the great bulk of cases. I doubt whether there will be much satisfaction with the judgments of trial courts among a public which is educated to believe that only appellate judges are trustworthy ministers of justice.
* * *
If trial judges are carefully selected, as in the federal system, it is hard to think of any reason why they are more likely to make errors of judgment than are appellate judges.... [T]he trial judge has the advantage of having lived with the case, and thus should be better able than the appellate judges to gauge its complexity and procedural needs.
Wright, The Doubtful Omniscience of Appellate Courts, 41 Minn.L.Rev. 751, 781 (1957). Deference is necessary to avoid exacerbating the danger of mistake: while an appellate court can distinguish a good injunction decision from a bad one, the appellate process is not well suited to an appreciation of the subtle shadings of a case that may lead to a judgment which lies between the extremes.
Finally, there is question of how to describe the traditional deferential standard. At one level the issue is somewhat unimportant because regardless of whether the standard is framed in terms of "abuse of discretion" or "bounds of permissible choice," reviewing courts have never appeared to be stymied in reaching results in preliminary injunction cases. See Roland,
This is not the first time this court has had to deal with a term that seems to escape easy definition. An analogous situation was faced with regard to the attempt to define "reasonable doubt" in jury instructions. In United States v. Lawson,
Because of the very commonness of the words, the straining for making the clear more clear has the trap of producing complexity and consequent confusion. That this difficulty may be surmounted is evidenced by the attempts which have been approved, although the language of approval has frequently implicitly suggested the difficulties of articulation. That the difficulties may be surmounted, however, does not mean in our opinion that the effort has to be made.
The term "abuse of discretion," despite its many shortcomings, still accurately reflects the need for deference to the judgment of the district judge. Attempts at further definition have tended to "produce complication and corresponding confusion." In the absence of a compelling and precise articulation of a standard of review we find no reason in the context of preliminary injunctions to reject the abuse of discretion standard or require an all-encompassing definition of that standard. This approach may be intellectually and theoretically unsatisfying, but it does have the virtue of avoiding unnecessary tinkering with at least one aspect of the judicial system that seems to be functioning smoothly.
3. The Documentary Evidence
Lawson contends that because the motion was submitted solely on affidavits this court should engage in a de novo review. This argument is based exclusively on the Second Circuit's decision in Norlin Corp. v. Rooney, Pace, Inc.,
As a general rule, a preliminary injunction will be sustained on appeal absent an abuse of discretion by the lower court. Jack Kahn Music Co., Inc. v. Baldwin Piano & Organ Co.,
Forty years ago this circuit faced the same issue and while it was acknowledged that the court of appeals was in a different position with respect to a preliminary injunction motion based on documentary evidence, the abuse of discretion standard was retained.
Ordinarily, the district court's action on an application for a temporary injunction is well-nigh final. It will be modified or vacated only when it appears there was an abuse of discretion. United States v. Corrick,
National Grain Yeast Corp. v. City of Crystal Lake,
Rule 52(a) of the Federal Rules of Civil Procedure provides, in part, that "[f]indings of fact shall not be set aside unless clearly erroneous and due regard shall be given to the opportunity of the trial court to judge of the credibility of witnesses." In Anderson v. City of Bessemer City, --- U.S. ----,
It must be stressed that while an appellate court need not sit as a court of first impression with respect to the record there is an obligation under Rule 52(a) to engage in a comprehensive review of the documentary evidence to determine if clear error has been committed. Anderson,
III.
Turning to the merits of Lawson's appeal we find no reason to overturn the district court's denial of the preliminary injunction motion. For purposes of reviewing the denial of the preliminary injunction Lawson's claims can be separated into: (1) the past injury and future threat resulting from Avnet's solicitation of Lawson's sales force and acts of commercial disparagement; (2) the competitive advantage given Avnet when it appropriated for its own use Lawson's "confidential" information; and (3) the loss of goodwill resulting from the raid.
The first point that must be stressed is that this is a preliminary injunction so that we are concerned with the equities of maintaining the status quo pending the ultimate determination on the merits. See Part II, supra. While we realize that the reality of the preliminary injunction determination is that it affects the ultimate outcome, when, as the trial court correctly held here, there are two equally credible versions of the facts the court should be highly cautious in granting an injunction without the benefit of a full trial. See Roland,
With respect to the injury resulting from the loss of its seven employees the affidavit of Lawson's president established the possibility of money damages reflecting the profits actually lost as a result of the raid. While the difficulty in calculating future profits can often justify the finding of an irreparable injury with no adequate remedy at law, Roland,
Likewise the threat that future raids will irreparably injure the plaintiff before a full trial is held is insufficient to justify a preliminary injunction. Two rationales expressed by the district judge establish the lack of necessity for interlocutory injunctive relief. First, Lawson had at its disposal the ability to take self-protective measures without judicial intervention. In his opinion Judge Kocoras stated:
In the absence of the proposed order, plaintiffs will likely continue to operate their business. They may continue their efforts to sign their own sales force to written contracts which include restrictive covenants and specifically provide for the confidentiality of company materials such as price lists, customer lists, and display or promotional materials. Plaintiffs are free to sign outside, new personal to similar contracts. Plaintiffs are free to regain any old customers by competing lawfully against Avnet and others. The plaintiffs may sue and recover from these seven salesmen and any others for breach of their fiduciary duties to a former employer and enjoin them as individuals from revealing information which plaintiffs allege is confidential.
Second, the relative degree of past injury does not indicate that Avnet's activities can result in a serious undermining of Lawson's sales force, at least not during the period between the denial of the motion and trial. Avnet contacted fifty-seven of the eight hundred Lawson salespeople, seven of whom actually left. Under the theories of liability presented by Lawson, tortious interference with contractual and business relationships, there is no actionable wrong in the absence of an actual breach, see Ancraft Products Co. v. Universal Oil Products Co.,
Thus Lawson's primary claims lie in the areas of loss of goodwill and confidential information because of the potential for future harm and the difficulty of measuring damages. Our review of the record, however, finds ample support for the district court's conclusion that Lawson did not suffer a loss of goodwill or confidential information. First, the affidavits support the court's ruling that "goodwill" attached to the relationship between salesperson and customer rather than the relationship between corporation and customer. Under these circumstances any interest Lawson had in the salesperson's "goodwill" would be adequately compensated in lost profit damages since any injury would presumably not extend beyond the insular salesperson-customer relationship to the corporation in general.
Second, Judge Kocoras correctly found that the customer lists and information, the display books, and price lists were not trade secrets, and thus not confidential information, under Illinois law. Given the evidence that (1) all Lawson's sales force and customers had access to the information; (2) much of the information served to supplement data compiled by the salesperson for his or her own use; (3) the information could be acquired by other means such as phone calls or visits to customers or suppliers whose names could be found in the yellow pages; (4) the information became outdated rapidly; and (5) no formal confidential arrangements were made, this case is indistinguishable from a well-established line of cases in Illinois denying protection where the information is not kept under "lock and key." See Hayden's Sport Center v. Johnson,
Lawson also advances a number of other claims relating to injuries to morale, commercial disparagement, passing-off of products, and commercial bribery. Having examined the record we conclude that none of these claims would justify injunctive relief, particularly given the equally credible evidence for viewing Avnet's actions as normal competition.
IV.
In conclusion, it is important to reemphasize the scope and nature of the preliminary injunction remedy in this circuit. Roland and American Hospital provide important insights which may be helpful in the exercise of a district judge's discretion. Nevertheless, these decisions, as well as this opinion, represent a continued affirmation of the traditional equitable factors governing injunctions and the classic roles of both district and appellate courts. Preliminary injunctions should be granted when the plaintiff has suffered an irreparable injury for which there is no adequate remedy at law and where the balance of the equities, reflecting the relative harm to each party entailed in granting or denying the injunction, the probable outcome of a trial on the merits, and the public interest, is determined by the district judge to favor the movant. See Mantek Division of NCH Corp. v. Share Corp.,