Washington v Covelli Appeal on Employee Poaching & Franchise Agreement

Substantive/Facts: On August 18, 1998, Appellant Herbert L. Washington (Washington) and Appellee Sam Covelli (Covelli) entered into a Purchase and Sale Agreement. Washington purchased nineteen of Covelli’s thirty McDonald’s restaurants. This agreement included a “Piracy and Nondisclosure” clause that stated that Covelli could not “cherry-pick” employees for his benefit. The hiring of specific employees was restricted for up to six months.

Covelli and Washington both allegedly engaged in the hiring of restricted employees. Washington filed a complaint against Covelli stating that he had stolen employees from him.

 Covelli responded to the complaint with an answer and counterclaim, stating that Washington interfered with business relationships and stole employees from him in violation of the Franchise Agreement between McDonald’s and Washington. Covelli argued that he was a third-party beneficiary of the Franchise Agreement. Both the appellant and appellee sought a preliminary injunction.

Through this stipulated preliminary injunction, the magistrate found that both the appellant and appellee owed each other damages. After a request for findings of fact and conclusions of law, the magistrate issued another decision to explain their findings.

The magistrate stated that the appellee violated the terms of the piracy clause and the appellant violated the terms of the Franchise Agreement of which the appellee was a third-party beneficiary.

The appellant then filed objections which were overruled. The appellant then filed an appeal which went before the Seventh District Court of Appeals of Ohio for consideration. Procedural History: On October 9, 1998, the appellant and his company filed a complaint against Covelli.

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This complaint asked for damages due to a violation of the piracy clause.

Washington also received a temporary restraining order and pursued a preliminary injunction. On October 9, 19,98, and October 4, 2002, Covelli filed an answer and counterclaim (amended answer and counterclaim in 2002) stating the appellant’s violation of the Franchise Agreement. He also sought a preliminary injunction.

This stipulated preliminary injunction was entered into on the 20th of October and halted “employee poaching” while the case was contested. On October 1, 1999, the appellee was found by the magistrate to have violated the stipulated injunction and was ordered to pay the appellant $7,500. Trial Court approved this decision. A trial then took place on June 14, 2004, with a decision on September 24, 200,7 which was in favor of the appellant for $86,000 plus interest and attorney fees plus interest and favor of the appellee for $35,400 plus interest.

The appellant then filed objections which were overruled. The appellant then filed an appeal which went before the court for consideration.

Issues:

1. Did the trial court err in finding that the stipulated preliminary injunction limited the piracy clause’s restricted periods?
2. Did the trial court err in awarding Covelli damages?

Held: (1) YES; and (2) NO.

Rationale:

1. Standard of Appellate Review: A Court of Appeals reviews a trial court’s decision to find that the stipulated preliminary injunction limited the piracy clause’s restricted periods and to award damages to a de novo standard of review.
2. Limits to the Piracy Clause: The trial court determined that the stipulated preliminary injunction was to halt “employee poaching”. This then limited the piracy clause stating that damages were owed per employee, every day after the offense (Section 2.2 of the Purchase and Sale Agreement). The appellee argued that the stipulated preliminary injunction did not supersede the original agreement—but only was there to “cease fire”. The Court found this assignment of error to be true.
3. Damages Awarded: The second assignment of error referred to damages awarded to Covelli for being a third-party beneficiary to the Franchise Agreement. The appellee was found by the Court to be an intended beneficiary. This is because the appellee and appellant are similarly situated parties that are entitled to the same protection against their enterprises as the other. This would include situations like the pirating of employees. Due to Washington’s pirating of Covelli’s employees, Covelli was subject to disruptions of his business including practiced staff shortages and unclear scheduling, entitling him to damages.

The Court found this assignment of error to be false. Although many things came into consideration to determine the rate of damages and cost of pirating, the Court of Appeals found that due to both of the parties pirating employees, they both had to live up to the repercussions.