Appeal from an order of the United States District Court for the Southern District of New York, Gerard L. Goettel, Judge, granting preliminary injunction prohibiting defendant from continuing or entering into contractual relationships with certain of plaintiff's former suppliers. Vacated.
Mansfield, Kearse, and Pratt, Circuit Judges.
Defendant Stephen I. Karp appeals from an order of the United States District Court for the Southern District of New York, Gerard L. Goettel, Judge, preliminarily enjoining him from entering into or continuing any business relationship with certain of the former suppliers of plaintiff Buckingham Corporation ("Buckingham"). On appeal, Karp contends (1) that the district court applied the wrong legal standard in assessing Buckingham's likelihood of success on the merits of its claims, and (2) that the court's conclusion that Buckingham would be irreparably injured in the absence of a preliminary injunction cannot be sustained. Because we agree with Karp's second contention, we vacate the injunction.
Most of the following facts, as found by the district court, do not appear to be in dispute. Buckingham is an importer and distributor of wines and liquors; until early 1985 it had distribution agreements with Baron Phillipe de Rothschild S.A. ("Rothschild"), French supplier of Mouton Cadet wines, and Oy Alko Ab ("Alko"), Finnish supplier of Finlandia vodka. Until November 30, 1984, Karp was Senior Vice President of Buckingham.
Buckingham's distribution agreements with Rothschild and Alko permitted the supplier to terminate its contract if Buckingham underwent a change of control. In June 1984, Buckingham's then-parent, Beatrice Companies, Inc. ("Beatrice"), announced its intention to sell Buckingham. The district court found that from July 1984 until his resignation from Buckingham on November 30, Karp devoted much of his time and effort to establishing his own relationship with Alko and Rothschild.
In July, Karp informed Alko and Rothschild that he was planning to leave Buckingham, and in August the three entered into discussions of the possibility of forming a joint venture. Karp used Buckingham's records to prepare profit and loss projections for the proposed venture. He formed a new corporation, Principal Imports Ltd. ("PIL"), for the purpose of, inter alia, importing and distributing alcoholic beverages. In October, Karp, Alko, and Rothschild discussed a memorandum of understanding prepared by Karp's attorney which provided (1) that Karp would resign from Buckingham, (2) that upon his resignation, Alko and Rothschild would retain him as their consultant, and (3) that as soon thereafter as possible, Karp, Alko, and Rothschild would enter into, inter alia, a joint venture agreement, distribution agreements, and an employment agreement.
In October 1984, Beatrice agreed to sell Buckingham to Whitbread (U.S.) Holdings, Inc. ("Whitbread"), and the sale was consummated on November 26, 1984. Buckingham gave Alko and Rothschild notice of the change of control, and the two suppliers responded that they were exercising their rights to terminate the distribution agreements. Karp resigned from Buckingham on November 30 and became a consultant to each supplier by agreements dated November 30. The three parties proceeded to move toward the planned joint venture. The court found that Karp had removed several documents containing confidential information from Buckingham's offices, including Buckingham's consolidated profit and loss review for fiscal 1985, its sales analysis, and parts of its marketing plans for Finlandia and Mouton Cadet.
Buckingham commenced the present suit in February 1985, seeking permanent injunctive relief, and quickly moved by order to show cause for a preliminary injunction (1) enjoining Karp
(a) from taking any action, directly or indirectly, to commence, enter into or continue, a contractual, consulting, joint venture, or other similar relationship with Baron Philippe de Rothschild S.A., or any of its subsidiaries, affiliates or agents; and (b) from taking any steps, directly or indirectly, to divulge to anyone confidential or proprietary trade information belonging to Buckingham; and (2) requiring [Karp] immediately to return to plaintiff all Buckingham documents in his possession.
Buckingham contended that it had been irreparably injured by Karp's actions in that, inter alia, it had lost the opportunity to continue distributing the Rothschild and Alko products, which were unique and could not be replaced; Karp would continue to use Buckingham's trade secrets; employee morale had suffered from the loss of the French and Finnish business; and Buckingham's image and stature within in trade and among its other suppliers had suffered and would continue to decline as a result of the appearance that a former employee could with impunity convert both Buckingham's customer accounts and its proprietary information.
In a Memorandum Decision dated March 15, 1985 ("Decision"), the district court concluded that Buckingham had demonstrated a likelihood of success on most, if not all, of its claims. The court concluded that it had been shown likely that Karp, while he was employed as an executive of Buckingham, had impermissibly entered into competition with Buckingham, had misappropriated its corporate opportunity to seek to continue its relationship with Rothschild and Alko through alternative forms of distribution arrangements, and had taken and used for his own purposes documents and confidential information of Buckingham in order to seize its corporate opportunity.
The court concluded that Buckingham had demonstrated that it would suffer irreparable harm from Karp's solicitation of its suppliers and his use of its documents and confidential information. The court likened the present case to Arnold's Ice Cream Co. v. Carlson, 330 F. Supp. 1185 (E.D.N.Y. 1971), in which two former employees of the plaintiff had established a competing business and solicited the plaintiff's customers while they were still employed by the plaintiff. It noted that in Arnold's "'the defendants stepped so far over the line of loyalty owed by an employee to the firm ...