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Stryker Spine v. Surgical Orthomedics, Inc.

C-218-09 (N.J. Super. Ch. Div. 2009) (Unpublished)

NON-COMPETITION; INJUNCTIONS — Where a party violates a non-competition agreement, but the protected party allows a long period of competitive conduct before suing, the otherwise protected party may lose the right to obtain injunctive relief while retaining the right to seek damages.

A manufacturer entered into two non-competition agreements with a distributor for the exclusive right to sell its product in a particular territory. Each of the agreements had a clause providing that during the term of their agency agreement and one year beyond, the distributor would not manufacture, sell, market or deliver any competing product. The agreements also required the manufacturer to make certain post-termination payments to the distributor and to retain the distributor’s two principals as consultants after the agreement expired. Near the end of the term of the agreement, the manufacturer chose not to make the agreed upon post-termination payment or hire the distributor’s principals. The manufacturer claimed the right to do so because the distributor was: (a) involved in the formation of competing entities; and (b) repackaging the manufacturer’s product and putting the newly established competitor’s logo on the product in violation of the agreements. Several months after it learned of the alleged competitive conduct by the distributor, the manufacturer sued and asked the Chancery Division to preliminarily enjoin the distributor from competing with it and to prohibit the distributor’s repackaging and subsequent use of its products. Contemporaneously with the injunction request, the parties submitted the rest of their dispute to arbitration.

The Chancery Division refused to enjoin the distributor from forming the competing entities. It did, however, order the distributor to return any and all of the manufacturer’s products unlawfully in its possession and to account for any such misappropriated products already sold to consumers. As to the injunctive relief sought, the Court pointed out that the manufacturer waited and allowed “months of competitive conduct” before suing. It found that, although there may have been some reasons for the delay, these delays, in the context of seeking an injunction, belied an assertion of irreparable harm and served to prejudice the distributor by allowing it to invest extensive efforts in activities which then might be curtailed. Further, the Court held that since there was less than three months remaining under the agreement, the potential harm did not rise to the threshold level of the kind of irreparable harm necessary to grant to relief sought. Although the manufacturer had made a compelling showing that the agreement was reasonable as far as its duration and scope, the Court agreed with the distributor that where, as here, an independently-owned distributor develops its own customers, that distributor’s supplier may not enforce a non-competition agreement against it. The Court found it unrefuted that the distributor used its own funds to develop its client base. Thus, it concluded that the customers did not belong to the manufacturer. Finally, the Court found that the manufacturer’s own non-compliance with the agreement by failing to make all post-termination payments and by not hiring the distributor’s principals as consultants, might have rendered the agreement unenforceable prior to the distributor’s competitive conduct which would mean the manufacturer was not likely to succeed on the merits. The Court, however, did find that the manufacturer demonstrated irreparable harm associated with the distributor’s continued use of the repackaged products and held that it was entitled to injunctive relief as to that conduct. While the distributor claimed that the products were gifted to it by the manufacturer’s agent, the Court found nothing in the record that suggested that anyone had authority to make such gifts. It also believed that the repackaged products were a clear degradation and misrepresentation of the manufacturer’s brand. According to the Court, the quality of, control of, and branding of merchandise is inherent to a manufacturer’s reputation. Further, it determined that the harm to this manufacturer far outweighed any rights the distributor had to the products. Therefore, it believed that the manufacturer was likely to succeed on the merits as to this aspect of its claim. Accordingly, it prohibited the distributor from putting its own logo on the manufacturer’s product and ordered the return of the manufacturer’s products.

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