Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 83 C 5485 - Charles P. Kocoras, Judge.
Before FLAUM and RIPPLE, Circuit Judges, and FAIRCHILD, Senior Circuit Judge.
Lawson Products, Inc. ("Lawson") appeals from the district court's denial of its motion for a preliminary injunction against its competitor, Avnet, Inc. ("Avnet"). This dispute arose out of an alleged scheme by Avnet to lure customers and sales people away from Lawson in a manner that tortiously interfered with the business and contracts of Lawson. This case, arising in the wake of Roland Machinery Co. v. Dresser Industries, 749 F.2d 380 (7th Cir. 1984) and American Hospital Supply Corp. v. Hospital Products Ltd., 780 F.2d 589 slip op. (7th Cir. Jan. 2, 1986), requires us to examine the status of the preliminary injunction remedy in this circuit. Finding that, despite possible contrary readings of recent precedent, the granting on injunctive relief remains a discretionary equitable remedy and one to which we will give the district court's decision great deference, we affirm the denial of the preliminary injunction in this case.
Lawson and the Mechanic's Choice division of Avnet are competitors in the business of developing and distributing industrial and automotive supplies. Both companies' primary method of selling their products is through a sizable number of sales representatives who deal directly with customers. These sales representatives appear to be the key to success in the industry since, according to the evidence adduced before the district court, customer loyalty tends to attach to the sales person rather than the products of any individual company. According to Lawson, Avnet commenced a "raid" on Lawson's sales staff in January of 1983. During the course of the alleged raid at least fifty-seven of the eight hundred sales representatives employed by Lawson were contacted and seven of these individuals left Lawson for employment with Avnet.
This activity led to the filing of this diversity action in August, 1983, Lawson having voluntarily dismissed a similar action brought in Arkansas a few months earlier. Lawson's complaint alleged tortious interference with business and contractual relations, various acts of unfair competition, and a pendent state action under Illinois law for deceptive trade practices and unfair competition. Both parties inundated Judge Kocoras with affidavits resulting in a mass of often conflicting evidence. By stipulation of the parties the case was submitted to the court solely on the basis of this documentary evidence.
Lawson's affidavits portray Avnet's scheme not as a pro-competitive attempt to "out-bid" a rival for valuable talent, but as a many-pronged plot to co-opt the extensive technical training Lawson provides its sales representatives, to acquire confidential information, and to destroy the financial stability of Lawson by encouraging manufacturers, customers, and sales people to breach their contractual, or at least quasi-contractual, obligations to Lawson. This was allegedly accomplished through a series of deceptive practices including misstatements and fabrications about the activities of Lawson's management, as well as at least one instance of commercial bribery and one instance of passing off a Lawson product as that of Avnet. As a result of Avnet's alleged activity seven employees, two of whom eventually returned, left Lawson. No manufacturers abandoned Lawson, however, and Lawson continued to be a highly profitable enterprise. Nevertheless, Lawson claims that it is suffering an ongoing injury as a result of the competitive disadvantage caused by its competitor's access to confidential information, the decreased morale among its employees, and the continuing threat of further corporate "raids."
The essential facts according to Lawson are that Avnet's Mechanic's Choice division had suffered from a depleted staff of sales representatives which caused Avnet to embark on the plan to co-opt its competitors' sales staff and, consequently, their customers. Lawson's sales representatives are independent contractors rather than employees and only a fraction of these actually signed contracts with the company. Of the seven people Avnet succeeded in luring away only two had written contracts. Conceding this, Lawson still claims that a contractual employment relationship existed and that the company had a legitimate expectancy in the continuation of the relationship.
Before being sent out to the field each representative was given what Lawson claims is the most extensive training in the industry. Upon completion of the training program the sales person was assigned a territory and given a core group of customers as a base for expansion of the individual's business. Also supplied were a price book, a display book, product and operations manuals, and computer printouts that regularly updated customer purchasing patterns. These materials all contained a warning prohibiting unauthorized duplicating, and Lawson produced affidavits indicating that 92 percent of its sales staff viewed these materials as "confidential." The evidence also indicated that none of the documents were marked "confidential" and that the information contained therein was frequently shared with customers. It is the information contained in these materials that Lawson claims was one of the primary aims of the Avnet raid. According to Lawson, Avnet now has access to its price information, customer tendencies, and product specifications, thus allowing the rival to have a competitive advantage in soliciting Lawson customers and the ability to duplicate Lawson products in derogation of Lawson's exclusive manufacturing contracts. Lawson also claims that its technical staff is increasingly unwilling to share information with the sales people in light of Avnet's activities.
Lawson's affidavits catalogue a number of alleged unsavory practices utilized by Avnet. First, Lawson claims that Avnet engaged in an active campaign of misrepresentations concerning Lawson's management, product quality, and prices, which was designed to encourage Lawson's customers, suppliers, and sales representatives to switch to Avnet. Second, Avnet is alleged to have "covertly" used the Lawson people it did recruit to encourage further defections while they were still in the employ of Lawson. Third, Lawson claims that one of its employees was offered a twenty-five dollar bribe to agree to speak with an Avnet recruiter. Finally, the affidavits claim that on two separate occasions Avnet employees attempted to "pass off" Lawson products as those of Avnet; one instance involved a demonstration, the other a shipment. In both cases the product itself had Lawson's name printed upon it.
These activities, according to Lawson's argument, establish a continuing malicious scheme designed to irreparably injure Lawson by seizing a competitive advantage, by destroying the company's "good will" with its customers, and by injuring employee morale through misrepresentations. In an effort to bolster the argument for a continuing operation, Lawson detailed an earlier consent decree entered into by the parties in New Jersey whereby Avnet would refrain from attempting to recruit Lawson sales people who were under contract. Avnet violated the agreement and successful enforcement proceedings were eventually brought.
Avnet countered the evidence and arguments presented by Lawson with its own collection of affidavits that conflict with those of Lawson on practically every matter. The picture Avnet paints is one of normal competition for sales talent where Lawson failed to protect its interest through binding employment contracts. Based on the documentary evidence before him Judge Kocoras concluded that "plaintiffs have presented evidence on each required element of the action and defendant has presented equally credible evidence in response." Faced with this morass of evidence, the district judge extensively discussed each element of the requirements for a preliminary injunction under Roland Machinery Co. v. Dresser Industries, 749 F.2d 380 (7th Cir. 1984) and concluded that Lawson had failed to meet any single element.
The court first analyzed the likelihood of success on the merits and held that the affidavits failed to establish the commercial malice required for the tort of interference with business relations, the actual breach of contract necessary to the tort of interference with contract, and the confidential nature of the Lawson material that was the key element to the claim for unfair competition. Second, the court concluded that there was no irreparable harm to Lawson and that an adequate remedy at law existed. This was based on the ability of Lawson to actively carry on its business activity and sue for any damages caused by the defendant's activities. The judge also evaluated the harm to the defendant and public policy considerations entailed by the scope of the injunctive relief proposed. The requested injunction required more than a restraint on Avnet from illegal activity; it essentially mandated that Avnet maintain a complete "hands-off" policy with respect to Lawson. The court deemed this to be contrary to the legitimate public interest in competition and unnecessarily injurious to Avnet.
On appeal Lawson contends that the district court committed reversible error with respect to each of its factual and legal determinations. Lawson argues that since the case was submitted on affidavits without a hearing this court should undertake a de novo review of the record and reverse the district court. We find no merit in Lawson's arguments and thus affirm the district court.
In two recent opinions this circuit has engaged in an exhaustive and scholarly examination of the law of preliminary injunctions. See Roland Machinery Co. v. Dresser Industries, Inc., 749 F.2d 380 (7th Cir. 1984) ("Roland")" and American Hospital Supply Corp. v. Hospital Products Ltd., 780 F.2d 589 slip op. (7th Cir. Jan. 2, 1986) ("American Hospital"). While both of these opinions specifically disavow any attempt to revise previous law, they have been criticized for engrafting legalistic formalism onto this traditional equitable remedy. See Swygert, Senior Circuit Judge, dissenting in both Roland and American Hospital. This case, arising on the heels of American Hospital, requires that we evaluate the effect of these decisions on the nature of the preliminary injunction. We cannot analyze the merits of a district court's determination without a clear view of the nature of the district judge's role and the implications of that for our appellate review.
Roland and American Hospital provide important insights into the theoretical underpinnings of injunctive relief and a valuable source of guidance for district judges. To remove any possible confusion, we conclude that these opinions are in harmony with the traditionally flexible and discretionary responsibilities of the district judge, sitting as chancellor in equity, in preliminary injunction matters. In reaching this conclusion we must discuss three issues arising out of this case: (1) the nature of the district judge's inquiry and evaluation in preliminary injunction cases; (2) the standard of appellate review; and (3) whether the standard of review should be different when the district judge rules solely on the basis of documentary evidence.
1. The Role of the District Judge
The constant theme that permeates both Roland and American Hospital is that while preliminary injunctions are an equitable, interlocutory form of relief, they are an "exercise of very far-reaching power" (Warner Bros. Pictures, Inc. v. Gittone, 110 F.2d 292, 293 (3rd Cir. 1940) (per curiam)) and one in which the stakes are sufficiently high to make mistakes very costly.
The idea underlying these equivalent approaches is that the task for the district judge in deciding whether to grant or deny a motion for preliminary injunction is to minimize errors; the error of denying an injunction to one who will in fact (though no one can know this for sure) go on to win the case on the merits, and the error of granting an injunction to one who will ...