In the midst of nationwide efforts to reform the use of non-compete restrictions, a recent decision from the Eastern District of Pennsylvania illustrates the broad approach courts may take when enforcing restrictive covenants against high-level executives.
In an order denying an appeal to the preliminary injunction he issued earlier this year, U.S. District Judge Robert F. Kelly Sr. held that Daniel Gerrity, the former CEO of construction services firm Ardurra Group, Inc. (“Ardurra”), should remain prohibited from working for private equity fund Bernhard Capital (“Bernhard”) because Bernhard’s potential investments in Ardurra’s competitors would result in Gerrity indirectly competing with Ardurra in violation of his non-compete obligations. This opinion is notable in that the two companies are not in the same industry, and the court relied upon indirect competition to justify the enforcement of the non-compete.
Ardurra provides engineering and construction services for large-scale infrastructure projects, involving everything from wastewater to transportation. In 2017, Ardurra merged with King Engineering Associates Inc. (“King”). As part of the transaction, Ardurra and King entered into a Purchase Agreement, which provided a $4.33 million payment to Gerrity in exchange for his agreement to be bound by four-year non-compete and non-solicitation provisions. The non-compete prohibited Gerrity from, directly or indirectly, engaging in, or assisting others in engaging in, any line of business in which Ardurra operates. Gerrity also signed an Employment Agreement with Ardurra, which contained one-year non-compete and non-solicitation provisions.
In March 2019, Ardurra terminated Gerrity. Shortly thereafter, Gerrity joined Bernhard Capital, a private equity fund known for investing in businesses in the infrastructure industry through its “service fund.” Gerrity joined Bernhard to help build a new, separate “infrastructure fund” through which Bernhard would invest in troubled utility companies outside of the infrastructure industry. Upon discovering Gerrity’s new position, Ardurra sought an injunction against Gerrity enjoining him from working for Bernhard.
Judge Kelly granted Ardurra’s motion for preliminary injunction, and denied Gerrity’s subsequent appeal, because Ardurra was likely to succeed in proving that 1) Gerrity engaged in impermissible competition, and 2) Gerrity’s non-compete restrictions with Ardurra were valid and enforceable.
First, the court found that although Bernhard hired Gerrity to work on the infrastructure fund, there was insufficient evidence that money generated from the infrastructure fund wouldn’t be used by Bernhard to benefit companies in the service fund. Because the companies in the service fund compete with Ardurra, the direct or indirect funneling of money by Bernhard to these companies would pose a violation of Gerrity’s non-compete obligations:
By selecting worthwhile investments in the infrastructure fund, Bernhard
Capital makes money that could then be used to invest in new or existing portfolio companies in the service fund. Therefore, Gerrity’s role with the infrastructure fund could ultimately end up benefitting competitors to Ardurra in direct conflict with Gerrity’s obligations under the Employee Agreement and Purchase Agreement.
Second, Judge Kelly found that Gerrity’s non-compete agreements were enforceable because they were necessary to protect a legitimate interest of Ardurra and because the balance of equities weighed in Ardurra’s favor.
Among other things, Judge Kelly’s decision provides an important reminder that depending on the language of a non-compete provision, unlawful competitive activity can include indirect competition. Here, Gerrity’s non-compete not only barred him from directly competing with Ardurra, it also prohibited him from indirectly assisting any of Ardurra’s competitors. Although Ardurra and Bernhard operate in completely different industries (engineering/construction and private equity, respectively), the fact that Bernhard could provide resources to Ardurra’s competitors was sufficient to establish that Gerrity would most likely violate his non-compete obligations in the absence of an injunction.