Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—DNJ: Seller of Orthotics Denied Temporary Restraints Against Competitor for Alleged Breach of Non-Compete Provision, (Apr 18, 2013)

By Peter Reap, J.D., LL.M.

Aetrex Worldwide, Inc., a seller of orthotics and comfort footwear, was not entitled to temporary restraints against its competitors, Sourcing for You Ltd., and Sourcing for You Consulting Ltd. (collectively "Sourcing") for their alleged breach of a noncompete provision in a Supply Agreement between the parties, the federal district court in Newark has decided (Aetrex Worldwide, Inc. v. Sourcing For You, Ltd., April 16, 2013, Cavanaugh, D.). Aetrex failed to show that it would be irreparably harmed by the denial of its request because it failed to show that the damages it was suffering were of the nature that could not be remedied with monetary damages.

Background. The parties entered into a Supply Agreement whereby Sourcing would manufacture and supply orthotics, and Aetrex would guarantee certain minimum purchases to Sourcing. The agreement contained a non-compete clause, in which Sourcing agreed not to permit any use of Aetrex’s intellectual property or confidential information that might adversely affect Aetrex’s good will and not to duplicate or otherwise make, sell or promote any products that are confusingly or deceptively similar to Aetrex’s products. Pursuant to the agreement, Sourcing had access to Aetrex’s intellectual property, confidential and proprietary information and trade secrets.

Sourcing is involved in the manufacture of Beats orthotics, which Aetrex alleges arc direct knock-offs of its Lynco line.

Injunctive Relief

In determining whether a preliminary injunction should be granted, a district court must consider four factors: (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 preliminary relief will be in the public interest.

Likelihood of success. To state a claim of breach of contract, a plaintiff must allege: (1) the existence of a contract; (2) a breach of that contract; (3) damages flowing from that breach; and (4) that the plaintiff performed their own contractual duties, the court noted.

The parties disagreed over whether the contract was breached, specifically whether Sourcing’s actions were within the scope of the prohibited conduct in the noncompete provision. Sourcing had three arguments, none of which had merit, as to why Aetrex was unlikely to succeed on the merits, according to the court.

First, Sourcing argued that it was not in breach of the Agreement because the non-compete language of the Agreement did not apply to Sourcing’s manufacture of the Beats orthotics. However, Sourcing’s reading of the contract to limit the noncompete provision only to the products that Sourcing was currently manufacturing for Aetrex would be a tortured reading of the language of the Agreement, the court determined. Sourcing’s first argument was rejected.

Second, Sourcing argued that Aetrex’s material breach of the Agreement precluded it from enforcing the non-compete provision in the Agreement. However, it was well established in New Jersey that when there was a breach of a material term of an agreement, the non-breaching party was relieved of its obligations under the agreement.

Finally, Sourcing argued that Aetrex was not entitled to preliminary injunctions because this matter fell within the scope of the Agreement’s arbitration clause and should be stayed pending arbitration. To the contrary, this action fell squarely within the arbitration exclusion and did not need to be stayed pending arbitration, the court held. Thus, Aetrex demonstrated that it was likely to succeed on the merits of its breach of contract claim.

Without the benefit of discovery, it seemed that this action is one of breach of contract and not unfair competition, and the court was not convinced that Aetrex could succeed on the merits of an unfair competition claim. But as Aetrex showed that it was likely to succeed on the merits of the breach of contract claim, the first prong of the temporary restraint analysis weighed in favor of Aetrex.

Irreparable harm. Aetrex failed to meet its burden of proving that it would suffer irreparable harm if a preliminary injunction was not entered. While it was true that loss of good will and customer relationships could cause irreparable harm, Aetrex did not show that the damages it was suffering from were of the nature that could not be remedied with monetary damages.

This case appeared to be a true breach of contract case, and for every customer that bought a Beats product instead of a Lynco product, a monetary amount could be assessed in favor of Aetrex if it was determined that Sourcing did in fact breach the parties’ agreement, the court held. While the loss of good will and customer relationships could also occur, Aetrex did not make a convincing argument that this harm was irreparable.

As a failure to demonstrate irreparable injury must necessarily result in the denial of a preliminary injunction, Aetrex’s motion for temporary restraints was denied.

The case is Civil Action No. 13-cv-1943 (DMC)(MF).

Attorneys: C. Michael Rowan (Saul Ewing LLP) for Aetrex Worldwide, Inc. James Douglas Young (Fox Rothschild LLP) for Sourcing For You Limited.

Companies: Aetrex Worldwide, Inc. James Douglas Young (Fox Rothschild LLP) for Sourcing For You Limited.

Cases: FranchisingDistribution NewJerseyNews