Don’t Overlook The Need to Show Irreparable Harm When Seeking Injunctive Relief to Enforce a Non-Compete

When seeking preliminary injunctive relief to enforce a non-compete, the moving party is often focused on how obvious it is that the defendant breached the parties’ agreement. As 7-Eleven recently learned, however, even when there is a valid and enforceable noncompetition provision and a clear breach of it, unless you can show that you will suffer irreparable harm without an injunction, and that such harm outweighs the irreparable harm to the defendant that an injunction would inflict, a court will not issue injunctive relief. In 2005, 7-Eleven entered into a franchise agreement with the Grewal Corporation, giving Grewal the right to operate a 7-Eleven convenience store on Pleasant Street in Holyoke, Massachusetts. The agreement specifically stated that Grewal would pay 7-Eleven a percentage of revenue from certain products and that if the franchise agreement was terminated, Grewal could not operate a competing business at the same location.

While Grewal performed quite well for several years, by 2014 7-Eleven became suspicious of certain abnormalities in its reporting. As a result, 7-Eleven launched an investigation, which revealed that 18 percent of the transactions at Grewal’s store between January and June of 2014 were conducted fraudulently. Because this was a clear breach of contract, 7-Eleven terminated the franchise agreement and brought suit in 7-Eleven, Inc. v. Grewal.

Even after the contract was terminated and 7-Eleven had commenced suit, Grewal continued to operate what appeared to the public to be a 7-Eleven store. Understandably, 7-Eleven sought preliminary injunctive relief to preclude Grewal from (i) using 7-Eleven’s trademarks and (ii) operating any convenience store at the location of the former franchise. While the court found that 7-Eleven was justified in terminating the franchise agreement and was entitled to have the defendants enjoined from using 7-Eleven’s trademarks, the issue of enforcing the non-compete through a preliminary injunction (as opposed to enforcing it after a full trial) was another matter.

It is well-established in Massachusetts that in order for a preliminary injunction to enter, the moving party must show (a) likelihood of success on the merits; (b) that irreparable harm will result if an injunction is not entered; and (c) that the balance of harm favors injunctive relief. In 7-Eleven, while the court had little difficulty finding that 7-Eleven was likely to succeed on the merits, including expressly finding that the restrictive covenant probably was enforceable, the court refused to grant preliminarily enforce the non-compete because 7-Eleven had not shown that it would suffer irreparable harm absent enforcement of the covenant not to compete on a preliminary basis. The court also noted that any harm to 7-Eleven was “not significant” when compared to the potential irreparable harm that the defendants would suffer if the preliminary injunction were granted.

In-house counsel should not make the rookie mistake of thinking that the above dilemma could have been mooted by including a provision in the non-compete to the effect that all parties agree that a violation of it will cause irreparable harm and that injunctive relief to enforce a breach of it may enter. 7-Eleven had included such a clause in its non-compete, but the court essentially ignored it. Thus, while it certainly is good practice to include such a clause (and some judges will give weight to it), it is far from any kind of silver bullet.

So, next time in-house counsel is considering whether to authorize a motion for preliminary injunction, s/he should not simply look at how strong the merits of the claim are. It also is critical to evaluate the potential irreparable harm that your company may suffer without a preliminary injunction and whether such harm is likely to outweigh the potential irreparable harm to the defendant. Failing to do so can lead to false expectations of success.