Appeal from the United States District Court for the Southern District of Indiana, Indianapolis Division. No. IP 83-391-C - James E. Noland, Judge.
Before WOOD, Circuit Judge, FAIRCHILD, Senior Circuit Judge, and GORDON, Senior District Judge,*fn*
WOOD, Circuit Judge. Mantek, a division of NCH Corporation ("Mantek"), brought this action in the district court to obtain a preliminary injunction against Share Corporation ("Share") and four of Share's employees who had formerly worked for Mantek. Mantek and Share are competitors in the chemical sales industry, and the four former Mantek employees sell products for Share in their former Mantek sales territories. Mantek claims that these employees are violating covenants not to compete contained in their former employment contracts with Mantek.
The district court held an evidentiary hearing on whether to grant the requested preliminary injunction. At the hearing, the court refused to allow Share to present any evidence supporting its defense that the Mantek covenants not to compete were part of a pervasive scheme of commercial bribery. The district court then granted Mantek's request for a preliminary injunction prohibiting the salesmen from selling Share products in their former Mantek territories.*fn1
Because we hold that the district court erred in refusing to consider evidence supporting Share's commercial-bribery defense, we vacate the preliminary injunction and remand the case for a new evidentiary hearing on Mantek's request. Furthermore, should the trial court again grant the injunction, the scope of the preliminary injunction must be limited to customers and potential customers with whom the Share salesmen had contact while working for Mantek.
Mantek, the plaintiff, is a Delaware corporation with its principal place of business in Texas. Mantek is engaged in the business of selling and distributing a wide variety of chemical products. Share, the corporate defendant, is a Wisconsin corporation with its principal place of business in Wisconsin. Share, like Mantek, is engaged in the selling and distribution of chemical products. The four individual defendants, David Denton, Dennis Lenahan, Kenneth Roten, and Malcolm Slayden, formerly worked for Mantek and now sell Share products or supervise Share salesmen in the same territories in which they formerly worked for Mantek.
The chemical products market is a highly competitive one, and Mantek and Share compete directly in several states, including Illinois, Indiana, and Kentucky. Because of the diversity of chemical products available, virtually every type of business or municipal entity is a potential customer for Mantek and Share. To protect the goodwill built up by its salesmen, Mantek has each salesman it hires sign a contract containing a covenant not to compete with Mantek for a limited period after the salesman's association with Mantek ends. Mantek's contracts with Denton, Roten, and Slayden prohibited them for selling competing products in their former Mantek territories for eighteen months after they left Mantek. Lenahan's contract only prohibited selling to customers or potential customers he had contacted on behalf of Mantek. Because of the vast number of potential customers for chemical products in any given territory, each individual defendant had contacted only a fraction of the potential customers in his Mantek territory before transferring his allegiance to Share. The defendants do not dispute that they sold Share products both to former Mantek customers and to previously uncontacted customers within their former Mantek territories.
Share admits that it knew of its new employees' covenants not to compete with Mantek. Share nevertheless actively recruited the four individual defendants and placed three of them as salesmen in their former Mantek territories. Slayden, the fourth, supervised Share salesmen in his former Mantek territory. Furthermore, Share promised to pay the defendants' legal fees if Mantek sued to enforce the covenants. Share did this because it viewed the covenants as unenforceable. First, Share believed that the covenants were part of a pervasive plan of commercial bribery in which Mantek engaged. Second, Share believed that the territory-wide restriction was unreasonable and thus unenforceable as against public policy.
Mantek sought a preliminary injunction to enforce the covenants and to prevent Share from inducing other Mantek salesmen to breach their contracts. The district court applied Texas law, according to the choice of law provisions in the defendants' contracts. The court held two days of evidentiary hearings and then granted the preliminary injunction, enforcing the covenants on a territory-wide basis. At the hearing, the court refused to allow Share*fn2 to present any evidence supporting its defense that the covenants were part of a Mantek commercial-bribery scheme. Share appeals both the trial court's refusal to consider evidence of the alleged commercial-bribery scheme and the territory-wide scope of the trial court's preliminary injunction.
At the evidentiary hearing, the trial court stated that "the court sees this as a simple contractual situation, and is going to approach it in that fashion . . . ." Transcript of April 18, 1985 Preliminary Injunction Hearing, at 5. After ruling that Share could not raise its commercial-bribery defense, the court allowed Share to make a narrative offer of proof of purpose of the record. After the offer of proof, the court explained that the reason it had sustained Mantek's objection was its hesitancy to try commercial sales practices. Id. at 23-25. A review of the record shows that the trial court's only decision was to exclude completely the evidence - the court made no determination as to the merits of Share's defense or the sufficiency of Share's offer of proof.*fn3 The trial court then found that Mantek had established its prima facie case, and granted the injunction.
We set out the sequence of events above because it is necessary to place the issue we face in the proper perspective. We express no opinion as to whether Share's offer of proof would have been sufficient to necessitate a full evidentiary hearing on the commercial-bribery defense had the trial judge heard Share's offer of proof prior to his decision to exclude all evidence of Share's defense. We decide merely that Share's offer of proof, in this after-the-fact context, demonstrates that Share had a defense which, if Share could establish it, would necessarily influence the trial court's decision on the preliminary injunction. We hold that where a defendant in a preliminary injunction hearing raises a colorable defense,*fn4 which if established would necessarily influence the court's decision, the court must exercise its discretion to hear enough evidence of the defense for the court to determine the weight, if any, the defense deserves in the court's decision. Once the court allows the defendant to present some evidence of its defense, whether the court in its discretion merely takes an offer of proof or grants a full evidentiary hearing, we will only review the court's decision for an abuse of discretion.
Share's offer of proof,*fn5 in a nutshell, was as follows. Mantek had a well-developed practice of giving "gifts" to purchasing agents to bribe the agents to purchase from Mantek. This alleged bribery was essential for Mantek because Mantek's products sold for higher prices than its competitors' products. After a new Mantek salesman began working a territory, Mantek's managers would instruct the salesman that the only way to sell Mantek's overpriced goods in the competitive chemical-products market was to use increasingly larger "gifts." Mantek kept records to ensure that each salesman spent an adequate percentage ...