Court Grants Preliminary Injunction in Non-Compete Case, Grants equitable Extension of Non-Compete Covenant’s Duration – Travelhost v. Modglin

A Texas federal court, after initially dismissing a motion for preliminary injunction as moot, granted the plaintiff’s motion for reconsideration in Travelhost, Inc. v. Modglin. The court ruled that, although the two-year time period of the non-compete agreement had already expired, the plaintiff was entitled to a preliminary injunction and an equitable extension of the non-compete agreement for an additional two years. The court based its reversal of its prior ruling on evidence subsequently obtained from the defendant through discovery, which suggested that the defendant had engaged in an ongoing pattern of behavior in violation of the non-compete agreement.

The plaintiff, Travelhost, publishes print and online materials related to travel. It entered into a contract with the defendants, The Real Chicago Publishing LLC (RCP) and Trent Modglin, in 2007, in which RCP would distribute Travelhost’s Chicago magazine and sell advertising in the downtown Chicago area. The contract included a two-year covenant not to compete with Travelhost within the Chicago area. Modglin is RCP’s sole member, and he reportedly agreed to be individually bound by the non-compete agreement.

RCP distributed eight issues of the magazine between 2007 and late 2009. According to Travelhost, RCP began distributing and selling advertising for a competing magazine, “The REAL Chicago,” sometime after November 2009. Travelhost sued RCP and Modglin in March 2011, requesting preliminary and permanent injunctions. RCP never filed an answer to the suit, so the court entered a default preliminary injunction and default judgment against it. The suit proceeded against Modglin alone.

To prevail on a motion for preliminary injunction, Travelhost had to meet a four-pronged test to prove (1) likelihood of eventually prevailing on the merits of the case, (2) irreparable injury without an injunction, (3) a greater harm to the plaintiff from the injury than to the defendant from the injunction, and (4) a lack of harm to the public interest from an injunction. To uphold the non-compete covenant, the court had to find two elements: (1) that the agreement is ancillary to an enforceable contract; and (2) that its restrictions are reasonably limited as to duration, geographical scope, and types of activity prohibited.

The court initially denied the preliminary injunction on February 29, 2012, ruling the motion moot. Modglin’s contract with Travelhost was terminated on February 22, 2010, meaning that the two-year non-compete agreement had already expired. One day before the court’s February 29 ruling, Modglin produced additional documents to Travelhost, pursuant to discovery requests. Travelhost filed a motion to reconsider the denial of the preliminary injunction based on these documents, which showed that Modglin began preparations for a competing magazine as early as January 2010 and had continuously published the magazine since the termination of his contract with Travelhost. Evidence already suggested that Modglin targeted the same markets and distribution channels as Travelhost, contained similar information, and used many of the same people for creative and business services.

The court, in granting the motion to reconsider, found that Travelhost had met the four prongs to obtain a preliminary injunction. It held that the non-compete agreement is likely to be enforceable, and that the evidence of Modglin’s conduct suggest irreparable harm to Travelhost’s business goodwill and reputation. It also held that it has the authority under circumstances such as these to equitably extend the duration of the non-compete agreement.

At Lubin Austermuehle, our business litigation attorneys represent business owners and professionals in this and other claims throughout the Chicagoland area including Cook, DuPage, Lake, Kane, McHenry and Will Counties and in the Mid-West region including Indiana, Wisconsin and Iowa.