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Strategic Appeals in Litigation Involving Restrictive Covenants

Strategic Appeals in Litigation Involving Restrictive Covenants

DRI's For the Defense
(July 26, 2016)

Vignette 1: Your client, Emma Employee, is an executive who signed restrictive covenants alongside her initial employment agreement several years ago. Recently, she left to take a new position with another company. Shortly afterward, she is served with a summons, complaint, and an exparte temporary restraining order in favor of her former employer. It appears that her former employer seeks an injunction enforcing the 18-month non-competition and non-solicitation clauses that your client signed so long ago. You have your doubts about the enforceability of those restrictive covenants under your state's precedents. At the hearing on the employer's motion for a preliminary injunction, however, the judge rules against you, entering an order completely preventing Emma Employee from working with her new employer or in any other position doing substantially similar work in her specialized field. You are confident that you can win at summary judgment, but the discovery process is slow in your courts. You could also appeal the preliminary injunction order to your esteemed appellate court, but that process takes even longer. By the time that you achieve justice for your client, the restrictive covenants may very well have expired. In the meantime, your client is stuck.

Vignette 2: Your client, Employer Options, Co., discovers that Travis Traitor, a high-ranking executive, has quit and taken a position with a direct competitor in the same market. Employer Options also suspects that Travis Traitor has taken confidential commercial information that will be devastating if it is released to a rival company. Luckily, Travis Traitor signed non-competition and non-disclosure agreements when he was hired, which would be effective for one year after he left his employment. You initiate an action against him on behalf of your client, but at the preliminary injunction hearing, the judge concludes that the geographic scope and the restricted activities are overbroad and thus denies the injunction. Your client wants to proceed on the claims, but by the time that you get to summary judgment, the covenants will have expired, and your claims for equitable relief will be moot.

Either or both of these situations may seem familiar to employment and commercial litigators. For restrictive covenants with a duration of approximately two years or less, the party who prevails at the preliminary injunction hearing can essentially win the case by obtaining (or avoiding) the primary relief sought, at least during the pendency of the merits litigation. Because the restrictive covenants often expire by the time that a traditional "final judgment" is entered, these decisions granting or denying preliminary injunctions may be the only decisions that matter for the parties. Moreover, because the restrictive covenants period will have expired during the course of litigation, many of these covenants can evade appellate review because the ultimate issue of enforceability of the covenants will be moot well before an appeal is concluded. See Premier Health Care Servs., Inc. v. Schneiderman, No. 18795, 2001 WL 1479241, at *3 (Ohio Ct. App. Aug. 21, 2001) ("The appellant would essentially be deprived of a remedy because the passage of time would render moot any review sought."); Allen Indus., Inc. v. Kluttz, 759 S.E.2d 711, 711, 2014 WL 1797740, at * 2 (N.C. Ct. App. 2014) ("Where the restrictions imposed by a preliminary injunction expire within the pendency of an appeal, issues concerning the propriety of the injunctive relief granted are rendered moot by the passage of time." (quotations omitted)).

The Supreme Court of North Carolina, for example, has explained the stakes in restrictive covenants this way, in a case in which the plaintiff employer was denied a preliminary injunction against a departing employee:

There is little doubt that the denial of the motion for a preliminary injunction in this case deprived plaintiff of a substantial right. In fact, as of the filing of this opinion, plaintiff has essentially lost its case because the eighteen month time limitation under the employment agreements expired in March of 1983. Likewise, as the trial judge noted in his order, had the preliminary injunction been granted, "the plaintiff would ineffect have prevailed in the action no matter what the final determination might be."

A.E.P.Indus.,Inc.v.McClure, 308 N.C. 393, 401, 302 S.E.2d 754, 759 (1983) (emphasis added).

In other words, if a plaintiff employer loses the preliminary injunction hearing, it will have "essentially lost its case" by the time that the trial court can reach the merits. Id. Conversely, if a defendant employee is restrained throughout the trial court proceedings, the plaintiff "would in effect have prevailed" even if the covenants are eventually found overbroad and unenforceable. Id. Other jurisdictions have also recognized the primacy of these early injunction decisions. See Hamer Holding Grp., Inc. v. Elmore, 202 Ill. App. 3d 994, 1006, 560 N.E.2d 907, 915 (Ill. App.Ct. 1990) (Hamer I), and Hamer Holding Grp, Inc. v. Elmore, 244 Ill. App. 3d 1069, 1076, 613 N.E.2d 1190, 1196 (Ill. App. Ct. 1993) (Hamer II) (both applying a heightened standard of review of order denying preliminary injunction enforcing a noncompetition agreement because evidence presented and considered in preliminary injunction proceedings demonstrated that resulting order was "in effect, a decision on the merits of the case"). See also AllPak, Inc. v. Johnston, 694 A.2d 347, 350 (Pa. Super. Ct. 1997) ("[A] preliminary injunction is somewhat like a judgment and execution before trial.") (quoting Herman v. Dixon, 393 Pa. 33, 36, 141 A.2d 576, 577 (Pa. 1958)).

Losing a preliminary injunction hearing in a restrictive covenant case leaves you with several strategic decisions to make. You could give up, and save your client the cost and the pain inherent in further lower court litigation. You could press forward in the lower court, hoping to have the injunction dissolved once you have conducted more in-depth discovery. Perhaps you have a mechanism for expediting those proceedings, or perhaps you think that an award of damages will ultimately repair the harm caused by the court's faulty ruling at the preliminary injunction stage. Or you could take an immediate appeal from the preliminary injunction order to the appellate court. This article focuses on that path: a strategic appeal of the order granting or denying a preliminary injunction in a case involving short-term restrictive covenants.

The Appeal of Appealing
Because of the timing issues set forth above, lawsuits involving short-term restrictive covenants often terminate shortly after the preliminary injunction hearing. The losing party may give up, or the parties may reach some settlement if the injunction issued is harmful for both. Rather than admitting early defeat, however, the losing party may use an early appeal of an interlocutory order granting or denying an injunction strategically to continue the case in a more focused and cost-effective way. To be sure, there is an argument that an appeal is not the best mechanism for achieving a resolution. As the North Carolina Supreme Court has noted:

[I]t appears that in a case such as the one now under consideration, although involving a substantive right of the appealing party, where time is of the essence, the appellate process is not the procedural mechanism best suited for resolving the dispute. The parties would be better advised to seek a final determination on the merits at the earliest possible time.

A.E.P. Indus., Inc. v. McClure, 308 N.C. 393, 401, 302 S.E.2d 754, 759 (N.C. 1983) (emphasis added). There, the court reasoned that efficiency was likely better served by resolution in the trial court. Nevertheless, there may be strategic benefits that warrant consideration of an early appeal from the injunction order.

Docket Speed
Appeals are generally time-consuming. In many jurisdictions, however, the expected duration of a focused appeal may actually be faster than full trial court litigation, replete with substantial discovery and numerous pre-trial motions. Further, some jurisdictions allow accelerated appeals from interlocutory orders that may be more expedient than proceeding in the trial court. See, e.g., EMS USA, Inc. v. Shary, 309 S.W.3d 653, 655 (Tex. App. 2010) (noting availability of accelerated appeal pursuant to Tex. Civ. Prac. & Rem. Code
§51.014(a)(4)); Fed. R. Civ. App. P. 2 (permitting court to order expedited treatment in its discretion).

However, the relative speed of the appellate docket must be weighed against the potential to expedite discovery and proceedings in the trial court. See, e.g., Fed. R. Civ. P. 57 (providing that a "court may order a speedy hearing of an action for declaratory judgment and may advance it on the calendar."). The preliminary showing to justify such acceleration varies among jurisdictions. See Ehrenhaus v. Baker, 2008 NCBC 19 at ¶¶ 33-37, 2008 WL 4787594, at *4–5 (N.C. Super. Nov. 3, 2008) (discussing various federal and state procedures for expedited discovery).

Delayed or Avoided Discovery
If your client is a defendant employee, immediately appealing the grant of a preliminary injunction and obtaining a stay of trial court proceedings at least temporarily suspends the costly and invasive discovery procedures. If the appellate court agrees that the restrictive covenants are unenforceable, discovery might be avoided altogether (if the bulk of the claims rest on enforceable covenants). Similarly, if your client is a plaintiff employer, delaying or avoiding discovery may prevent additional disclosure of customer lists, sensitive commercial information, and trade secrets in the litigation process. A plaintiff who successfully obtains a reversal and remand for entry of the preliminary injunction may be able to avoid this disclosure altogether.

Decreased Costs
Because the issue on appeal will likely be limited to much narrower issues of law, such as the facial enforceability of the restrictive covenants, the costs of an appeal can be significantly less than fullblown trial court litigation. And a successful appeal of an adverse ruling on a preliminary injunction may put the appellant in a better position to avoid additional trial court litigation or to reach a less costly settlement.

Breaking "Precedent" by Repeat Players
Many companies have used the same or similar restrictive covenants for years, without ever undergoing an appellate challenge to enforceability. The procedure is simple but effective: a company successfully obtains a preliminary injunction from a friendly local court based on the standard restrictive covenant language against its first departing employee. Later, when another employee leaves, the company applies for a preliminary injunction again—citing and attaching the previously issued injunction based on the same covenant language. To be sure, the prior injunction order is not precedential, but it may certainly be persuasive that another judge has implicitly found the language enforceable. Repeat ad seriatim for each employee that leaves, until the company has amassed a stack of (lower court) decisions declaring the covenant "enforceable." In this scenario, when a departing employee or his or her new employer is determined to challenge the enforceability of the covenant, the immediate appeal of an injunction order may be the only effective remedy to breaking this chain of support for a flawed restrictive covenant.

Strategic  Considerations
As shown above, there are certain advantages that make an immediate appeal of an adverse ruling on a preliminary injunction an attractive alternative to continued litigation in the trial court. If an appeal seems desirable, practitioners must assess several strategic questions to determine whether such an appeal is warranted.

Can You Immediately Appeal an Adverse Injunction Order?
The first strategic question is whether an immediate appeal is available in your jurisdiction. An appeal of a preliminary injunction conflicts with the traditional appellate axiom that no appeal lies for an order unless it is a final judgment ending the litigation on the merits. See Cunningham v. Hamilton County, Ohio, 527 U.S. 198, 203 (1999). However, most jurisdictions have carved out exceptions to this general principle. In federal courts, immediate appeals are proper if they are authorized by a specific statute. In the non-competition context, in the federal courts immediate appeals are proper as appeals of orders granting, denying, or modifying preliminary injunctions. See 28 U.S.C. §1292(a)(1). However, much of the litigation about restrictive covenants in employment contracts occurs in state courts, where the rules are often not so clearly defined. Thus, the first strategic question to consider is whether an immediate appeal of the court's decision granting or denying a preliminary injunction is proper in your jurisdiction.

Explicit Permission for Immediate Appeal
Some state jurisdictions have explicitly adopted a statute or a rule that allows an immediate appeal of a preliminary injunction order. For example, Maryland has enacted a statute substantially similar to the federal statute, which permits immediate appeal as of right of any judgment granting or denying a preliminary injunction. See Schisler v. State, 907 A. 2d 175 (Md. 2006) ("Maryland Code, §12-303(3) (i) and (iii) permits an immediate appeal from an order ‘[g]ranting or dissolving an injunction' or ‘[r]efusing to grant an injunction.'"). Similarly, Pennsylvania, Colorado, and Alabama permit such an appeal by rules of appellate procedure. See Pennsy Supply, Inc. v. Mumma, 2007 PA Super 77,¶ 12, 921 A. 2d 1184, 1191–92 (Pa. Super. Ct. 2007) ("The Rules of Appellate Procedure allow for the immediate appeal of [an order denying an injunction].") (citing Pa. App. P. 311(a)(4)); Phoenix Capital, Inc. v. Dowell, 176 P.3d 835, 839 (Colo. App. 2007) (appeal of partial grant and partial denial of preliminary injunction proper under Colo. App. R. 1(a)(3)); Ormco Corp. v. Johns, 869 So. 2d 1109, 1113 (Ala. 2003) (noting proper appeal of denial of preliminary injunction under Ala. R. App. P. 4(a)(1)(A)).

Additional Analysis of the Ability to Appeal
For many states, however, the issue is not resolved by such clear guidance by statute or rule. Each state has its own approach. Still, three examples can illustrate some common approaches and the issues to be considered when analyzing whether an immediate appeal is available.

In Ohio, immediate appeal of an order granting or denying a preliminary injunction is generally proper if two conditions are met:

  1. The order in effect determines the action with respect to the provisional remedy and prevents a judgment in the action in favor of the appealing party with respect to the provisional remedy; [and]
  2. The appealing party would not be afforded a meaningful or effective remedy by an appeal following final judgment as to all proceedings, issues, claims, and parties in the action.

Wells Fargo Ins.USA Servs., Inc. v. Gingrich, 2012-Ohio-677, ¶ 9, 2012 WL 562423, at *2 (Ohio Ct. App. 2012) (quoting Ohio Rev. Code Ann. §2505.02(B)(4)).

A short-term restrictive covenant case seems to meet these criteria at first glance because the order on the injunction (1) determines the action with respect to the provisional injunctive remedy, and (2) the party who loses the injunction hearing cannot effectively avoid the damages from a wrongful restraint or wrongful competition. However, in practice, the analysis often turns on the appealing parties' showing of irreparable harm.

For example, in Premier Health Care Servs., Inc. v. Schneiderman, No. 18795, 2001 WL 1479241, at *1 (Ohio Ct. App. 2001), the plaintiff corporation sought to enforce non-compete covenants against departing physicians, among other claims, and moved for a preliminary injunction. The defendants obtained a partial summary judgment early in the case on the enforceability of the restrictive covenants, which resulted in a denial of the plaintiff's request for an injunction. On appeal, the Court of Appeals of Ohio found that the immediate appeal of the denial of the preliminary injunction was necessary to avoid "depriv[ing] [the plaintiff] of a meaningful and effective remedy[.]" Id. at *3. The court accepted the argument that the plaintiff would "lose market share, be forced to compete with former employees, and be subject to the possible dissemination of trade secrets" without an injunction. Id. Notably, the court found that monetary damages after a final judgment would not be an adequate measure for the loss of the plaintiff's market share or the loss of trade secrets—which the court noted are "notoriously difficult to prove." Id.

In contrast, in a somewhat similar case, the Court of Appeals of Ohio determined that a plaintiff had no right to an immediate appeal when the denied preliminary injunction only sought to prohibit the defendant from soliciting a limited number of select customers. Wells Fargo Ins. USA Servs., Inc. v. Gingrich, 2012-Ohio-677, ¶ 14, 2012 WL 562423, at *3 (Ohio Ct. App. 2012). Rejecting similar "market share" arguments, the Gingrich court found no evidence that money damages would not suffice to compensate the plaintiff at the end of the case. Rather, the court reasoned that competition could be adequately remedied without an injunction by using a standard industry multiplier to account for lost revenues for a discrete number of customers. The distinction between the Schneiderman and Gingrich cases was that in Schneiderman the plaintiff recited (and offered evidence) of suffering potential damages in the absence of an injunction. Accordingly, in Ohio, achieving an immediate appeal of your case may require artful characterizations of exactly why money damages are not sufficient to remedy either a wrongful restraint on a defendant employee or the losses associated with improper competition against a plaintiff employer during the duration of a case.

In Maine, an interlocutory order such as a preliminary injunction is generally not appealable. State v. Maine State Employees Association, 482 A.2d 461, 463 (Me.1984). However, case law has carved out a few narrow exceptions, including the "death knell" exception. Moshe Myerowitz, D.C., P.A. v. Howard, 507 A.2d 578, 579–80 (Me.1986). As explained elsewhere, "The death knell doctrine allows an appeal to be taken from an interlocutory order where substantial rights of a party will be irreparably lost if review is delayed until final judgment." Id. (internal quotation marks omitted). In Moshe Myerowitz, the court found that the preliminary injunction order restraining the defendant from chiropractic practice in a certain geographical area was "identical to the merits on the issuance of the permanent injunction[.]" Id. at 580. To the extent that the defendant was wrongfully restrained, the court found that the defendant would be adequately compensated from the security posted by the plaintiff in seeking the injunction. Id. And to the extent that the damages from a wrongful restraint appeared to exceed the posted security during the course of the litigation, the court suggested that the plaintiff could move to modify the injunction and increase the security. Id. Thus, Maine appears to apply an even more restrictive approach than in Gingrich, the Ohio case, suggesting that there would be an extraordinarily high bar to showing harm from a temporary injunction that could not be remedied by money, making an immediate appeal unlikely.

Despite undertaking a similar analysis to the one involved in Maine's "death knell" doctrine, North Carolina "appellate courts have routinely reviewed interlocutory court orders both granting and denying preliminary injunctions [involving non-compete and nondisclosure agreements] holding that substantial rights have been affected." QSP, Inc. v. Hair, 152 N.C. App. 174, 175, 566 S.E.2d 851, 852 (N.C. Ct. App. 2002). While Maine concludes that substantial rights are not affected because monetary damages are available, the overwhelming trend among courts in North Carolina cases finds that they generally have viewed substantial rights as affected by the grant or the denial of a preliminary injunctions based on a restrictive covenants despite potential monetary remedies. However, the trend is not absolute; North Carolina courts have also recently confirmed that "[n]ot every order which affects a person's right to earn a living is deemed to affect a substantial right." A & D Envtl. Servs., Inc. v. Miller, 776 S.E.2d 733, 735 (N.C. Ct. App. 2015). The North Carolina courts seem to take a nuanced approach: "Rather, whether such an order affects a substantial right [and is therefore immediately appealable] depends on the extent that a person's right to earn a living is affected." Id.

And while North Carolina's substantial rights analysis is perhaps less rigid than Maine's death knell doctrine, predicting whether such immediate appeals will be found to be proper in North Carolina is uncertain at best. The Supreme Court of North Carolina has said that "the ‘substantial right' test for appealability of interlocutory orders is more easily stated than applied" and that "[n]o hard and fast rules exist" for such determinations. Waters v. Qualified Pers., Inc., 294 N.C. 200, 208, 240 S.E.2d 338, 343 (N.C. 1978).

For example, in Masterclean of N. Carolina, Inc. v. Guy, 82 N.C. App. 45, 46, 345 S.E.2d 692, 693 (N.C. Ct. App. 1986), the plaintiff obtained a preliminary injunction that did not prohibit the defendant from working entirely with his new employer, but it specifically restricted the defendant from working on certain projects in certain states where defendant's skills and knowledge acquired during his employment with plaintiff would be competitive. The North Carolina Court of Appeals held that the injunction affected the defendant's substantial right and permitted the immediate appeal. 82 N.C. App. at 47, 345 S.E.2d at 694. In contrast, the North Carolina Court of Appeals dismissed an immediate appeal by a defendant employee of a preliminary injunction that restricted only contact with customers that the employee had actively solicited in the year prior to resignation and disclosure of trade secrets. Consol. Textiles, Inc. v. Sprague, 117 N.C. App. 132, 134, 450 S.E.2d 348, 349 (N.C. Ct. App. 1994). There, the court reasoned that the injunction "appears to restrict him from contacting approximately three hundred customers—a fraction of the thousands that remain available, and this case is clearly different from others in which the Court found a substantial right was affected." Id. Thus, the propriety of an immediate appeal depends on the "extent" to which an injunction order affects the appellant's substantial rights, but the line defining how much is too much is not necessarily readily apparent. A & D Envtl. Servs., Inc. v. Miller, 776 S.E.2d 733, 735 (N.C. Ct. App. 2015)

Complicating matters further in North Carolina, despite this uncertainty about which injunction orders affect substantial rights too greatly, appellants and the courts alike must make accurate determinations or they risk creating procedural and jurisdictional problems. Determining whether an appeal is improper "is properly a matter for the appellate division, not the trial court[,]" and thus a trial court cannot dismiss an appeal. Estrada v. Jacques, 70 N.C. App. 627, 639–40, 321 S.E.2d 240, 248– 49 (N.C. Ct. App. 1984). However, the trial court can assess whether a substantial right is affected and continue with trial court proceedings if it remains unconvinced that the appeal is proper. See RPR & Assocs. v. Univ. of N. Carolina-Chapel Hill, 153 N.C. App. 342, 348 (N.C. Ct. App. 2002) (recognizing that a "trial court has the authority… to determine whether or not its order affects a substantial right of the parties or is otherwise immediately appealable"). If the appellant cannot convince the trial court that the appeal is proper, the underlying litigation may go forward during the appeal. Of course, having the appeal and trial court litigation proceeding on parallel tracks presents the potential for inconsistent judgments or preclusion issues. And further, if the trial court incorrectly proceeds, any orders entered after the appeal was filed are void. See France v. France, 209 N.C. App. 406, 412, 705 S.E.2d 399, 405 (N.C. Ct. App. 2011) (finding trial court's order denying request to close courtroom had been properly appealed and additional orders after appeal were void). Thus, practitioners in states operating under a similar analysis must navigate several potential overlapping issues to determine whether an immediate appeal of an injunction order is proper and desirable.

Will an Appeal Conclusively Determine the Contested Issue?
A second strategic consideration is whether your appeal will be effective in resolving the primary issue: the enforceability of the restrictive covenant. Once again, state jurisdictions vary. For example, in North Carolina, appellate review necessarily includes a threshold determination of the enforceability of the covenants as a matter of law. See, e.g., Milner Airco, Inc. v. Morris, 111 N.C. App. 866, 869, 433 S.E.2d 811, 813 (N.C. Ct. App. 1993) ("[T]he employment agreement itself must be valid and enforceable in order for the employer to be able to show the requisite likelihood of success on the merits."). Thus, a successful appeal in North Carolina would necessarily create a binding appellate decision on the enforceability of a covenant.

In contrast, in Texas, "any appeal of an order granting or denying a temporary injunction based on a non-compete covenant does not present for appellate review the ultimate question of whether the covenant is enforceableunder Texas[Covenants Notto Compete Act]." EMS USA, Inc. v. Shary, 309 S.W.3d 653, 658 (Tex. App. 2010). Rather, Texas appellate courts only review, de novo, whether "a trial court's determination of whether a non-compete covenant is reasonable" is sufficient to support a finding of the likelihood of success on the merits and irreparable harm. Id. at 659. Thus, in jurisdictions that take the Texas approach, even a successful appeal may only remand a case for further bolstering of a trial court's reasoning, rather than an appellate determination of enforceability. Such a limited appellate review in these jurisdictions may not justify an immediate appeal.

Will an Immediate Appeal Stay the Underlying Proceeding or the Injunction?
Prosecuting an appeal of an early interlocutory order is most beneficial as an alternative to trial court proceedings—not as a separate, parallel action. The costs and the workload associated with litigating in two forums at once are likely to dissuade most clients. And as mentioned above, two parallel actions that will ultimately reach a similar issue—the enforceability of the restrictive covenants—pose procedural and preclusion issues that may make a case even more complicated. Thus, a third strategic consideration is whether an immediate appeal stays the underlying litigation or the enforcement of the injunction.

Generally, "[t]he filing of a notice of appeal is an event of jurisdictional significance—it confers jurisdiction on the court of appeals and divests the district court of its control over those aspects of the case involved in the appeal." Griggs v. Provident Consumer Disc. Co., 459 U.S. 56, 58–59 (1982). However, not all appeals are equal. Sometimes a trial court can proceed with an underlying litigation despite an appeal. Thus, practitioners should consider whether the availability and the process for seeking such a stay.

The Federal Rules of Appellate Procedure provide the opportunity to seek a stay of an appealed injunction or to seek an injunction during an appeal in the district court. See Fed. R. App. P. 8(a)(1). Of course, obtaining a stay of an injunction issued immediately before an appeal is highly unlikely because a "grant of a stay of a preliminary injunction pending appeal will almost always be logically inconsistent with a prior finding of irreparable harm." Rodriguez v. DeBuono, 175 F.3d 227, 235 (2d Cir. 1999). Nevertheless, district courts have "broad discretion to stay proceedings as an incident to its power to control its own docket." See Clinton v. Jones, 520 U.S. 681, 706 (1997). In the event that the reviewing district court does not grant such a motion for a stay, or when moving first is impracticable, the federal rules also permit a motion to stay to the court of appeals. Fed. R. App. P. 8(a)(2). See, e.g., Chemical Weapons Working Group (CWWG) v. Department of the Army, 101 F3d 1360, 1361 (10th Cir. 1996).

State courts vary on the approach that they take to granting stays, and the complexity of the analysis involved also varies. For example, Texas has explicitly excluded appeals of temporary injunction orders from the otherwise general rule that an appeal stays parts or all of the underlying litigation. See Tex. Civ. Prac. & Rem. Code §51.014(b) (providing that immediate appeals listed in prior subsection stay either the commencement of trial or all other proceedings in the trial court, but excepting appeal of the grant or denial of a temporary injunction).

In contrast, in North Carolina, an appeal typically automatically stays the underlying litigation for all "matter[s] embraced therein" by statute. See N.C. Gen. Stat. §1-294; Peacock v. Shinn, 139 N.C. App. 487, 491, 533 S.E.2d 842, 845 (N.C. Ct. App. 2000). However, as mentioned earlier, a would-be North Carolina appellant must guess correctly that a court will view an interlocutory order appeal favorably because a trial court "need not stay proceedings, but may disregard the appeal and proceed to try the action" if the trial court is unconvinced that the appeal affects substantial rights. Veazey v. City of Durham, 231 N.C. 357, 364, 57 S.E.2d 377, 383 (N.C. 1950). Thus, in North Carolina, an appeal of an injunction order may stay the underlying proceedings because the enforceability of the covenant is a "matter embraced therein"—but a trial court might disagree and proceed anyway. In that instance, a North Carolina appellant must seek a stay of the underlying proceedings by a petition for a writ of supersedeas in the appellate court.

California applies an analysis similar to North Carolina's, staying matters "embraced" by the appeal. However, the appeal of an order granting or denying a preliminary injunction generally does not automatically stay the underlying proceeding, based on the reasoning "that a preliminary injunction is a provisional remedy distinct from the main action." Reed v. Superior Court, 92 Cal. App. 4th 448, 454, 111 Cal. Rptr. 2d 842, 846 (Cal. Ct. App. 2001). However, just as in the North Carolina state courts, a California appellant can request a discretionary stay from the trial court or petition for a writ of supersedeas from the appellate court. 92 Cal. App. 4th at 455, 111 Cal. Rptr. 2d at 847.

The Merits of an Appeal
Underpinning all of these considerations is this ultimate question: is an appeal likely to succeed on the merits? This question, in turn, usually distills to whether or not your arguments on the enforceability of covenants are likely to succeed. An employer with concerns about the validity of its restrictive covenants may think twice about a lengthy and costly appeal, particularly because an appellate decision concluding that the covenants are unenforceable may have a ripple effect throughout the rest of its workforce. Considering the likelihood of success on appeal should involve reviewing the merits of your substantive arguments about the covenants, but also careful consideration of the standard of review relevant in your jurisdiction. Compare Copypro, Inc. v. Musgrove, 232 N.C. App. 194, 198, 754 S.E.2d 188, 191 (2014) (using de novo review of findings in support of grant or denial of injunction, but noting a presumption of correctness of trial court's judgment), with Oxford Fin. Grp., Ltd. v. Evans, 795 N.E.2d 1135, 1141 (Ind. Ct. App. 2003) (applying abuse of discretion standard to issuance of preliminary injunction and clearly erroneous standard to facts and conclusions of law made by trial court).

Additionally, astute practitioners will consider the appellate panel selected in the jurisdictions where you would receive advance notice and the history of the judges' decisions in employment cases. Finally, every practitioner should always consider the merits and the purposes of an appeal and abide by their ethical obligations. The potential expiration of restrictive covenants during the course of an appeal may potentially draw accusations of bad faith from the opposing party. See, e.g., Matrix Network, Inc. v. Ginn, 211 S.W.3d 944, 947 (Tex. App. 2007) (discussing appellee's claim that appeal was frivolous due to expiration of portions of restrictive covenant).

Does an Appeal Toll or Extend the Restrictive Covenant?
Lastly, while the clock will be ticking on many restrictive covenants during the pendency of an appeal, some agreements may contain provisions that toll the running of the restrictive covenants or extend the duration for a period beyond the last date of non-compliance. See, e.g., Philips Elecs. N.Am. Corp. v. Hope, 631 F. Supp. 2d 705, 718 (M.D.N.C. 2009) (enforcing tolling provision in non-compete agreement); QSP, Inc. v. Hair, 152 N.C. App. 174, 177–78, 566 S.E.2d 851, 853 (N.C. Ct. App. 2002) (enforcing provision of non-compete that extended duration of covenant additional year after last date of violation). In these situations, an appeal may be more feasible to a plaintiff employer if there is a possibility of additional restricted periods tacked on to the end of the appeal.

Litigation to resolve disputes about restrictive covenants in the employment arena often involve unique timing issues due to the bulk of early litigation in the preliminary injunction stage of the cases. An appeal may offer certain benefits in a case when the early litigation effectively determines the case, but each case will require thoughtful analysis to determine whether an appeal is the best strategic choice in your jurisdiction.

Copyright 2016, DRI's For The Defense. Reprint permission granted.

Matthew Nis Leerberg
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Jeffrey R. Whitley
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