Carriage Hill v. Hayden, et al. CV-96-101-SD 07/03/96

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW HAMPSHIRE

Carriage Hill Health Care, Inc.

v. Civil No. 96-101-SD

Christopher Hayden and Benco Dental Supply Co.

REPORT AND RECOMMENDATION

_____ Currently before the court is Plaintiff Carriage Hill Health

Care, Inc.'s ("Carriage Hill") motion for a preliminary

injunction. For the reasons set forth below. Carriage Hill's

motion is granted in part and denied in part.

BACKGROUND

Carriage Hill commenced this action by filing a complaint on

February 20, 1996, alleging breach of contract and interference

with contractual relations. The parties are before the court

based on their diversity of citizenship and because the alleged

amount in controversy exceeds $50,000. See

.

Defendants countered that Carriage Hill also breached its

contract with defendant Christopher Hayden ("Hayden"), committed

abuse of process by initiating this action, sought to unlawfully

restrain trade and also tortiously interfered with contractual relations. On March 1, 1996, Carriage Hill moved for a

preliminary injunction, to which defendants objected on April 26,

1996. A hearing was held over two days, on May 14 and 29, 1996.

The facts ascertained from the evidence proffered in support of

each party's motion regarding the preliminary injunction follow.

Carriage Hill is a small, fairly new, dental supply company

in the New Hampshire and southern Maine seacoast area. It

distributes products from manufacturers, or suppliers, to

dentists and other health care workers. As a result. Carriage

Hill's relationships with both suppliers and purchasers are

important to its business success. In addition to its president,

Lorin Gill ("Gill"), Carriage Hill currently has two full-time

employees and one independent contractor. Hayden had been a

salesman with Carriage Hill from June, 1992 until he left the

company on February 9, 1996 to go to work for defendant Benco

Dental Supply Company ("Benco"). As of the hearing, Hayden had

not yet been replaced.

Benco, on the other hand, is a large, established dental

supplies distributer with over 600 employees in approximately 14

states. Benco had been doing business in Maine and New Hampshire

for three to four years before Hayden began working for it.

Benco describes itself as a "one stop convenience shop" for

dentists, enabling them to purchase an array of products needed

2 in their offices. In addition to selling products, Benco

organizes continuing education seminars and training programs for

dental assistants and hygienists. It also services its

customers' eguipment and designs "programs" for dentists.

Gill described Hayden as an aggressive, hard-working

employee whom Gill trusted and to whom Gill gave free access to

the business and its files. While working for Carriage Hill,

Hayden had not signed any written employment contract,

restrictive covenant or any other nondisclosure agreement. His

duties included principally calling on dentists and placing

orders, although he was involved in some purchasing and related

tasks. He attended sales and industry conferences and had

meetings with vendors and customers.

The facts surrounding Hayden's departure from Carriage Hill

to Benco can be summarized briefly as follows. Sometime in 1995,

Hayden became dissatisfied with his compensation and had lost his

medical insurance coverage after becoming married. He was

offered Carriage Hill stock in response. Then in early January,

1996, Gill informed Hayden that reimbursement for his business

expenses would be restricted in an effort to enhance the

company's profitability.

Immediately thereafter, Hayden contacted and met Benco's

regional sales director Stephen Hoyt ("Hoyt"), to inguire about

3 employment opportunities with Benco. Although Hayden's initial

meeting with Hoyt was not on Carriage Hill time, he did meet with

Hoyt and other Benco officials at an annual dental convention in

late January, where he was representing Carriage Hill. After

that interview, Hayden was offered and accepted a job with Benco.

As part of a signing bonus, Hayden executed a non-compete

agreement.

On February 9, 1996, Hayden submitted a written resignation

to Gill, at which time he offered to stay on for two weeks

provided Gill could meet Benco's compensation package. Gill

declined to do so, and the two agreed Hayden would come in the

following Monday to finalize miscellaneous business and

administrative matters. Although Gill was surprised at Hayden's

departure, they parted on seemingly good terms with Gill wishing

Hayden good luck.

Thereafter the relationship deteriorated rapidly. The

evidence adduced indicated that Hayden may have used his key to

Carriage Hill's office to enter the building over the weekend and

remove certain customer files and vendor lists, although Hayden

denied this. Hayden failed to come in that Monday, as agreed.

When he called Gill, Gill instructed Hayden to return Carriage

Hill's customer lists and his vendor slot lists, and informed

Hayden that if he used these "trade secrets" to take unfair

4 advantage of Carriage Hill he would be sued. Gill determined

that Hayden had taken Carriage Hill's pricing catalogue and the

key to the office with him as well. Rather than returning these

items to Carriage Hill, Hayden gave them to his attorney.

The missing customer lists, vendor lists and pricing

catalogue are the basis for this dispute. Gill testified that

this information is confidential information "guite valuable as a

reference" to it. The customer list is a list of Carriage Hill's

actual customers indicating the customer's buying and payment

histories. The vendor slot list indicates when Carriage Hill

could call on various customers and was developed only after the

salesperson had invested significant time with the corresponding

office. Much of this data is also on Hayden's personal computer.

The missing pricing catalogue contains information available only

to Carriage Hill employees regarding discount calculations for

various products. Carriage Hill alleges that Hayden is using

these various sources of information on Benco's behalf to

undercut its prices and unfairly take business away from it.

Benco, however, maintains its own customer and pricing

databases which also reflect buying and payment histories of

customers. Hoyt testified that he asked Hayden for none of

Carriage Hill's customers, pricing, product or vendor

information. Hoyt explained that Benco's larger size put it in a

5 different league from Carriage Hill and that it was not

interested in competing with Carriage Hill. The evidence also

demonstrated that since Hayden began working with Benco, he has

been in sales training, often outside his market area of southern

Maine and part of New Hampshire.

Gill testified that since Hayden's departure Carriage Hill

has lost business which he estimated to aggregate $30,000

annually, based on the 1995 sales to those customers which have

been lost since Hayden's departure. Gill also testified that

Carriage Hill has lost alot of good will to Benco. Gill also

admitted, however, that other dental supply companies compete in

the same market and that he does not know what percentage of

Carriage Hill's business is being lost to other suppliers.

Carriage Hill seeks an injunction to prevent Hayden from calling

on its customers in Maine and New Hampshire.

DISCUSSION

"The purpose of a preliminary injunction is to preserve the

status guo, freezing an existing situation so as to permit the

trial court, upon full adjudication of the case's merits, more

effectively to remedy discerned wrongs." CMM Cable Rep., Inc. v.

Ocean Coast Properties, Inc.,

(1st Cir. 1995)

(citing Chalk v. United States Dist. Court Cent. Dist. of

6 California,

, 704 (9th Cir. 1988); American Hosp.

A s s 'n v . Harris,

, 1330 (7th Cir. 1980)).

In determining whether to grant a preliminary injunction,

the court considers four factors. Legault v. aRusso,

(D.N.H. 1994). The four factors are: "(1) the

likelihood of the movant's success on the merits; (2) the

potential for irreparable harm to the movant; (3) a balancing of

the relevant eguities, i.e., the 'hardship to the nonmovant if

the restrainer issues as contrasted with the hardship to the

movant if interim relief is withheld,1 Narraqansett Indian Tribe

v. Guilbert,

(1st Cir. 1991); and (4) the effect on

the public interest of a grant or denial of the injunction."

(guoting Gatelv v. Massachusetts,

(1st Cir.

1993); see also Campbell S o u p C o . v . Giles,

(1st

Cir. 1995); Sunshine Development, Inc. v. F.D.I.C.,

(1st Cir. 1994); Aoude v. Mobil Oil Corp.,

(1st Cir. 1988). Although each of these factors is significant,

the sine qua non of the preliminary injunction standard is

whether the movant is likely to succeed on the merits. Legault,

. Given that the likelihood of the movant's

success is the essential element of the guadripartite test, the

court starts with a consideration of this component. Weaver v.

Henderson,

(1st Cir. 1993); Lancor v. Lebanon

7 Housing Authority,

(1st Cir. 1985)

1. Likelihood of Success on the Merits.

Carriage Hill contends that defendants actions have (1)

breached an implied covenant of good faith, and (2) tortiously

interfered with its contractual relations with its customers and

two suppliers. The second claim is actually two counts, one each

against Hayden and against Benco for their respective intentional

and improper interference with Carriage Hill's business

relationships. Based on the evidence proffered in support of the

reguested preliminary injunction, the court concludes that

Carriage Hill is unlikely to succeed on either claim.

First, breach of the implied covenant of good faith is

inapposite to Hayden's decision to leave Carriage Hill and go to

work for a competitor. In this diversity action, the substantive

law of New Hampshire controls. Fragoso v. Lopez,

(1st Cir. 1993) (citing Erie R.R. Co. v. Tompkins,

(1938)); K.J. Quinn & Co. v. Continental Casualty, 80

, 1040 (D.N.H. 1992). New Hampshire law recognizes an

implied duty to exercise good faith in the performance of

contractual obligations in three distinct categories of contract

cases: (1) "those dealing with standards of conduct in contract

formation," (2) "with termination of at-will employment contracts," and (3) "with limits on discretion in contractual

performance." Centronics Corp. v. Genicom Corp.,

,

(1989). Carriage Hill's cause of action based

on an alleged breach of the implied covenant of good faith

claims: "Hayden knew this confidential proprietary information

about Carriage Hill was confidential yet he willfully disclosed

it to Benco breaching his agreement with Carriage Hill to act in

good faith." This allegation most closely approaches the third

category of cases in which a good faith duty has been implied in

the discretionary performance of a contract.

The good faith duty recognized in the discretionary

performance of a contract is the duty "to provide the level of

services consistent with good faith . . . to vindicate . . . the

parties' reasonable expectations."

(discussing New

Hampshire's seminal case on the implied obligation of good faith

performance, Griswold v. Heat Corp.,

,

(1967)).

[T]he obligation of good faith performance is better understood simply as excluding behavior inconsistent with common standards of decency, fairness, and reasonableness, and with the parties' agreed-upon common purposes and justified expectations.

at 140 (citing authority). The duty arises, however, only

where a contractual duty to perform lies. See

(discussing cases finding a good faith duty to reasonably perform).

Here, Hayden was not bound by an employment contract when

the complained-of activity allegedly occurred. First, Carriage

Hill asserts that Hayden contacted its customers and suppliers on

behalf of Benco while still employed by Carriage Hill; however,

neither the testimony adduced at the hearing nor the exhibits

proffered in support of the preliminary injunction motion

substantiate that allegation. Instead, Gill testified that

Hayden had been a good employee and that they parted amicably.

C f . Ferrofluidics Corp. v. Advanced Vacuum Components, Inc.,

(D.N.H.), aff'd,

(1st Cir.

1992) (enjoining former employee who aggressively set up

competitive company while on company time). Second, the evidence

suggested that, to the extent Hayden pursued those business

relationships, it was after he had resigned from Carriage Hill.

At that point, he was not bound by even the at-will, oral

agreement previously governing his conduct and arguably giving

rise to an implied good faith duty to perform. See Centronics

Corp.,

(recognizing the parties' intent to be

bound by an enforceable contract gives rise to an implied

obligation of good faith performance). Third, there was not a

restrictive covenant, non-compete agreement or any form of

nondisclosure agreement binding Hayden's activities after leaving

10 Carriage Hill's employ from which an obligation of good faith

performance could be implied. Id.; cf. Ferrofluidics Corp.,

(enforcing a restrictive covenant to protect

former employer's goodwill and confidential proprietary

technology); Technical Aid Corp. v. Allen,

,

(1992) (enforcing a restrictive covenant where

narrowly drawn to protect plaintiff's proprietary interest in

customer lists and marketing information whose value former

employee learned of while employed by plaintiff); Allied

Adjustment Serv. v. Henev

,

(1984)

(finding a covenant not to compete reasonable where it protected

former employer's goodwill).

Carriage Hill asserts that it has lost customers,

reputation, good will, income and opportunities for increased

sales because of Hayden's move to Benco with its "trade secrets"

in hand. Yet despite this allegation. Carriage Hill did not

bring a cause of action for misappropriation of its trade

secrets. See N.H. Rev. Stat. Ann. ("RSA") 350-B:l, I, II and IV

(defining misappropriation of a trade secret); see also Fisher

Stoves, Inc. v. All Niqhter Stove Works, Inc.,

(1st Cir. 1980) (reguiring plaintiff to prove its customer list

was truly secret before protecting it as a trade secret).

Without an extant contract, there is no basis for "an implied

11 obligation of good faith to observe reasonable limits in

exercising [a party's] discretion, consistent with the parties'

purpose or purposes in contracting." Centronics Corp. 133 N.H.

at 143.

Carriage Hill's second and third counts assert Hayden and

Benco tortiously interfered with its contractual relations with

both its customers and two suppliers, Tilloston and MGIS. In

order to prove a cause of action for tortious interference with

contractual relations. Carriage Hill must establish:

(1) it had an economic relationship with a third party;

(2) defendants knew of that relationship;

(3) defendants intentionally and improperly interfered with that relationship; and

(4) it was damaged by such interference.

Solanti v. Smith,

(D.N.H. 1993) (citing

Jay Edwards, Inc. v. Baker,

,

(1987)

(emphasis in original) (guoting Emery v. Merrimack Valley Wood

Products, Inc.,

(1st Cir. 1983))).

Under New Hampshire law, "economic relationship" is

construed as a contractual relationship. See Solanti,

(explaining that plaintiff's employment contract

established the economic relationship); see also Roberts v.

General Motors Corp.,

,

(1994)

12 (requiring plaintiff show that he had a contractual relationship

with which defendant wrongfully interfered). Even where

plaintiff alleges tortious interference with a prospective

agreement, the plaintiff must prove he had a contractual

relationship with the third party. See Montrone v. Maxfield,

,

(1982) (citing authority). "To

establish that the defendant's conduct was improper, the

plaintiff had to 'show that the interference with his contractual

relations was either desired by the [defendant] or known by him

to be a substantially certain result of his conduct.1"

Demetracopoulos v. Wilson,

,

(1994)

(citing Restatement (Second) of Torts, § 7 67 comment d at 32

(1977)) (emphasis added).

Carriage Hill's tortious interference claim is unlikely to

succeed because it did not have an ongoing contractual

relationship with its customers or its two critical suppliers

with which defendants improperly interfered. There was no

evidence to support Carriage Hill's allegation that Benco,

through Hayden, tried to take Carriage Hill's place with either

of its major suppliers. With respect to its customers. Carriage

Hill stipulated that "one does not own dentists," and Gill

conceded that Carriage Hill did not have any "ownership interest"

in its business relationship with its customers. See Transcript

13 of Preliminary Injunction Hearing on May 14, 1995 ("Vol. 1") at

43. Gill also testified that the dentists were "barraged on an

almost daily basis by sales reps" from many companies. Id. Gill

even described the relationship as one of "courting" the dental

offices. "Courting" is not a contractual relationship, and

implies something much more facile than the type of valid

business relationship undergirding a tortious interference claim.

See Curtis 1000, Inc. v. H. Suess,

(C.D.

111. 1994) (recognizing that something less than an enforceable

contract may support a tortious interference claim under Illinois

law) .

The evidence showed that in fact the dental supply business

is remarkably competitive, with at least three large suppliers

and 25 small distributors in the New England region alone. The

testimony was consistent that sales representatives of these

multiple players compete vigorously, which explained why Carriage

Hill deemed its "vendor slot list" so valuable. Carriage Hill

wants to protect its customer, vendor and pricing data precisely

because it wants a competitive advantage in order to obtain sales

contracts. Without the reguisite "economic relationship,"

Carriage Hill is unlikely to succeed on its tortious interference

with contractual relations counts. See Solanti,

(setting forth the elements necessary to plead successfully

14 a tortious interference cause of action).

Accordingly, the court finds that Carriage Hill has not

satisfied the first prereguisite to the issuance of a preliminary

injunction, namely its likelihood of success on the merits. See

Legault,

(holding that likelihood of success

on the merits is the indispensable reguisite for preliminary

injunctive relief).

2. Other Factors.

Because the court has determined that Carriage Hill is

unlikely to succeed on the merits of any one of its three counts,

further analysis of the reguirements for a preliminary injunction

is unnecessary. See id.; see also Weaver v. Henderson,

(1st Cir. 1993) (affirming denial of preliminary

injunction and ending inguiry after reviewing the merits of

plaintiff's claims); Performance Unlimited, Inc. v. Ouestar

Publishers, Inc.,

(6th Cir. 1995) ("A district

court is reguired to make specific findings concerning each of

the four factors, unless fewer are dispositive of the issue."

(guotation omitted)). The court notes, however, that Gill's

testimony that Carriage Hill will suffer approximately $30,000.00

in damages from lost sales seriously undermines a claim of

irreparable harm. See

(defining an irreparable

injury as one which cannot be undone through monetary remedies);

15 see also Hughes Network Svs. v. Interdiqital Communications

Corp.,

(4th Cir. 1994) (refusing to find

irreparable harm where the harm suffered may be compensated by an

award of damages); but see Ferrofluidics,

(enforcing restrictive covenant because of uncertainty associated

with the loss of income caused by defendant's breach). The

public interest factor also weighs heavily against effectively

construing a restrictive covenant where none exists. See

Centors-Vacuum Indus., Inc. v. Lavoie,

,

(1992) (citing New Hampshire authority for the long­

standing view disfavoring contracts in restraint of trade).

Accordingly, the court concludes that a preliminary injunction is

not warranted under the circumstances presented here.

CONCLUSION

The court has carefully considered the parties' legal

arguments, the testimony by the witnesses, and the various

exhibits submitted in support of the pending motion for

preliminary injunction (document no. 2). The court concludes,

however, that Carriage Hill has not made the reguisite showing to

justify preliminary injunctive relief. Accordingly, the court

recommends that Carriage Hill's motion seeking to enjoin both

Hayden and Benco from competing with it be denied. The court

16 recommends granting Carriage Hill's motion with respect to return

of the property listed in paragraph B therein and currently held

by defense counsel, since Hayden admitted it is plaintiff's

property to which it is entitled. The court recommends denying

all other grounds for relief, because they would be more

appropriately addressed in a discovery pleading.

Any objections to this report and recommendation must be

filed within ten days of receipt of this notice. Failure to file

objections within the specified time waives the right to appeal

the district court's order. See Unauthorized Practice of Law

Committee v. Gordon,

(1st Cir. 1992); United

States v. Valencia-Copete,

(1st Cir. 1986) .

James R. Muirhead United States Magistrate Judge

Date: July 3, 1996

cc: Donald E. Mitchell, Esg. Francis X. Quinn, Esg

17