Sandhills Glob., Inc. v. Garafola

SANDHILLS GLOBAL, INC., Plaintiff, v. LAWRENCE GARAFOLA, et al., Defendants.

Civil Action No. 19-20669 (MAS) (TJB)

UNITED STATES DISTRICT COURT DISTRICT OF NEW JERSEY

April 10, 2020

NOT FOR PUBLICATION

MEMORANDUM OPINION

SHIPP, District Judge

This matter comes before the Court upon Plaintiff Sandhills Global, Inc.'s ("Plaintiff" or "Sandhills") Motion for Temporary Restraining Order ("TRO") and Preliminary Injunction, seeking to restrain Defendants Lawrence Garafola ("Garafola") and Facts Technology, LLC ("Facts Technology") (collectively, "Defendants"). (ECF No. 3.) On December 16, 2019, the Court issued temporary restraints against Garafola, pending a preliminary injunction hearing. (ECF No. 23.) Plaintiff filed a pre-hearing brief (ECF No. 33); Defendants filed opposition (ECF No. 35); and Plaintiff replied (ECF No. 39). On February 6, 2020 and February 21, 2020, the Court held an evidentiary hearing. The Court received documentary exhibits and heard live testimony from two witnesses: Evan Welch, Sandhills's Director of New Product Sales, and Garafola. Both witnesses were cross-examined. Following the hearing, the parties submitted proposed findings of fact and conclusions of law (ECF Nos. 53, 54), oppositions (ECF Nos. 58, 59), and additional witness certifications (ECF Nos. 54-1, 59-1). The Motion was fully briefed on March 12, 2020. After careful consideration and for the reasons set forth below, the Court finds that Sandhills has met its burden of showing that injunctive relief is warranted, although not to the extent requested. Subject to the Court's "blue pencil" modifications to the parties' agreements, Sandhills's Motion for a Preliminary Injunction will be granted.

I. FINDINGS OF FACT¹

The following facts are supported by the record.

A. Sandhills's Acquisition of Equipmentfacts

1. Sandhills is a Nevada corporation with a diverse range of products and services. (APA 2; Ex. D-5 ¶ 3.)

2. Sandhills operated a simulcast auction webcast service called Bidcaller (Exs. P-20 ¶¶ 4-5; P-21 ¶ 3; Tr. I 15:20-21) and a timed auction service called AuctionTime (Tr. I 13:19-21).

3. Beginning in and around 2001, Garafola was the sole owner and the Chief Executive Officer ("CEO") of Equipmentfacts LLC ("Equipmentfacts"), a New Jersey limited liability company. (EA 1.)

4. In July 2017, Evan Welch ("Welch"), Sandhills's Director of New Product Sales, began negotiating the purchase of Equipmentfacts from Garafola. (Tr. I 17:1-20.)

5. Sandhills's initial purchase offer was approximately $1.23 million. (Tr. I 18:8.)

6. On April 25, 2018, the parties executed a Letter of Intent setting forth the preliminary terms and conditions for Sandhills's purchase of Equipmentfacts. (Tr. I 17:15-21:22; see also APA § 6.7.)

7. On July 16, 2018, Sandhills purchased Equipmentfacts for $1.5 million (the "Acquisition"), and Sandhills and Garafola entered into an Asset Purchase Agreement (the "APA"). (APA §§ 1.6, 2.)

8. Sandhills and Garafola contemporaneously entered into: (1) a Noncompetition, Noninterference and Confidentiality Agreement (the "APA Restrictive Covenant"); (2) an Employment Agreement (the "EA"); and (3) an Employee Proprietary Information, Inventions and Non[-]solicitation Agreement (the "EA Restrictive Covenant"). (APARC; EA; EARC.)

9. Both parties were represented by counsel in their negotiations of the APA and the APA Restrictive Covenant. (APA 24-25; APARC 4-5.)

10. At the time of the Acquisition, Equipmentfacts used Bidpath software. (Tr. I 217:24-25.)

11. Sandhills purchased Equipmentfacts for the purpose of replacing Sandhills's Bidcaller. (See Exs. P-20 ¶¶ 4-5; P-21 ¶ 3; Tr. I 218:4-7.)

B. The Asset Purchase Agreement and the Ancillary Restrictive Covenant

12. Under the APA, Sandhills acquired substantially all assets of Equipmentfacts, including:

(b) All Intellectual Property of [Equipmentfacts], . . .

(c) All rights to and under all customer contracts and purchase orders . . .

. . .

(i) All books, records, and other documents, including fixed asset records, sales and advertising materials (including all price lists, customer lists, bidder lists, auctioneer lists, and any related lists and records), copies of . . . technical research and data, books of account and records, ledgers, files, correspondence, specifications, creative materials, studies, reports and other items only to the extent they relate to the Business or the Included Assets . . .

. . .

(j) All goodwill of [Equipmentfacts], including the names "Equipmentfacts", "Relaybid", "Auction Facts Monthly" and any other trade names and any derivations or combinations thereof[,]

. . .

(l) To the extent not otherwise included in this Section . . ., all other assets of [Equipmentfacts] of every kind, character, nature and description, whether tangible or intangible, choate or inchoate, corporeal or incorporeal, matured or unmatured, known or unknown, contingent or fixed, required for, used in, held for use in or otherwise constituting the Business.

(APA § 1.1.)

13. Under the APA, Equipmentfacts's "Business" is defined as "the business of providing online auction solutions for the heavy equipment, truck, agriculture[,] and related auction industries, including providing industry-specific online bidding systems, websites for virtualattendance at auctions, the 'Auction Facts Monthly' publication, third-party advertisement services and podcast content[.]" (APA 2; see also APA § 7.1(f).)

14. The APA and the APA Restrictive Covenant are separate documents and together constitute the Acquisition agreement. (See APA; APARC.)

15. The parties contemplated the APA Restrictive Covenant as a condition of the APA. (APARC 1; see also Tr. I 36:14-37:3; Tr. II 202:2-20.)

16. At the time of the Acquisition, Sandhills and Garafola "agree[d] that the goodwill of [Equipmentfacts] [was] an integral component of the assets being acquired pursuant to the [APA] and without such goodwill the value of the assets of [Equipmentfacts] [would] be greatly diminished and [Sandhills's] reasons for entering into the [APA] and completing the Acquisition [would] be extinguished." (APARC 1; see also Tr. I 140:1-8.)

17. The APA Restrictive Covenant contains noncompetition, non-solicitation, and noninterference provisions which are effective for a period of five consecutive years from July 16, 2018. (See APARC §§ 1-5.)

18. The APA Restrictive Covenant restrains Garafola's conduct within the United States of America. (APARC § 1.)

19. The APA Restrictive Covenant defines "Restrictive Period," "Party" or "Parties," and "Territory." (APARC § 1.)

20. "[A]ll other capitalized terms used in [the APA Restrictive Covenant], but not otherwise defined in [the] Agreement, shall have the meanings ascribed to them in the [APA]." (APARC § 1.)

21. The "Business" of "Sandhills and its Affiliates" is not defined in the APA Restrictive Covenant. (See supra Findings of Fact ¶¶ 18-20.)

22. The APA Restrictive Covenant's noncompetition clause provides that

[Garafola] shall not . . . directly or indirectly . . . provide or perform services for the benefit of, manage, operate, or in any way participate in, a business that competes with the Business (as conducted by [Sandhills] or its Affiliates), either on [Garafola's] own behalf or on behalf of any other Person; or acquire a financial interest in, own or control any business that competes with the Business . . . .

(APARC § 2.)

23. The APA Restrictive Covenant's non-solicitation clause provides that "Garafola shall not . . . directly or indirectly solicit for [Garafola] or any other Person, business which is competitive with the Business from any customers, clients[,] or accounts of the Business as conducted by [Sandhills] or its Affiliates." (APARC § 3.)

24. The APA Restrictive Covenant's noninterference clause provides that:

[Garafola] shall not . . . directly or indirectly:

a. encourage, in any way or for any reason, any customer, client[,] or account of [Sandhills] or its Affiliates, to sever or alter the relationship of such customer, client[,] or account with [Sandhills] or its Affiliates;

b. discourage . . . any prospective customers, clients[,] or accounts of [Sandhills] or its Affiliates from becoming a customer, client[,] or account of [Sandhills] or its Affiliates;

c. aid any other Person attempting to take customers, clients[,] or accounts in relation to the Business from [Sandhills] or its Affiliates.

. . . .

(APARC § 5.)

C. The Employment Agreement and Corresponding Restrictive Covenant

25. Garafola and Sandhills also agreed that Garafola would join Sandhills as an employee. The parties entered into the EA. (EA 1; TI 156:24-157:1; see also DRPFF ¶ 15.)

26. Under the EA, Garafola was to work for Sandhills as the full-time Manager of Auction Services and report to Sandhills's Director of New Products. (EA §§ 3-4.)

27. The EA states that "[a] job description of [Garafola's position] is attached hereto as Schedule A and made a part hereof." (EA § 3.)

28. Garafola's annual base salary was $170,000. (EA § 5.)

29. The EA was to "continue uninterrupted for a period of two (2) years." (EA § 2.)

30. The EA and the EA Restrictive Covenant are separate documents and together constitute the agreement on Garafola's employment with Sandhills. (See EA; EARC.)

31. Only if the EA was terminated due to "[t]he cessation of [Sandhills's] business, [Sandhills's] BidCaller division, or any business transferred pursuant to the Transaction" would Garafola be released from the EA Restrictive Covenant. (EA § 2.c.)

32. The EA Restrictive Covenant's nondisclosure clause provides, "[a]t all times during [his] employment and thereafter, [Garafola] . . . will not discuss, disclose, use[,] or publish any of [Sandhills's] Proprietary Information (defined [in § 1.2]), except as such discuss[ion], disclosure, use[,] or publication may be required in connection with [his] work for [Sandhills]." (EARC § 1.1.)

33. The EA Restrictive Covenant defines "Proprietary Information" as:

any and all confidential and/or proprietary knowledge, data or

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