VECTOR SECURITY, INC., Plaintiff v. DWAYNE STEWART JR., et al., Defendants
88 F. Supp. 2d 395; 2000 U.S. Dist. LEXIS 2534
March 8, 2000, Decided
DISPOSITION: [**1] Plaintiff's motion for a preliminary injunction
PROCEDURAL POSTURE: Plaintiff moved for a preliminary injunction to enforce
a restrictive covenant not to compete in a dealer agreement against
defendant former dealer.
OVERVIEW: Plaintiff sought to enforce by preliminary injunction a
restrictive covenant in a dealer agreement against defendant former dealer.
Defendant admitted that he had converted plaintiff's subscribers to whom he
had previously sold by convincing them to cancel their agreement and to
contract with other companies. The motion was granted because plaintiff
demonstrated that it had a reasonable probability of success on the
covenant's enforceability, and the non-competition clause was adequately
supported by consideration and it was necessary to protect plaintiff's
relationships with its customers. Plaintiff showed that the harm was actual
and that irreparable harm would result if the injunction did not issue. The
relative harm to the parties did not favor denial of the motion. Although
the covenant did not specify any geographical scope or duration, the court
exercised its equitable powers and imposed restrictions.
OUTCOME: Preliminary injunction issued because plaintiff demonstrated
probable success on enforceability of restrictive covenant not to compete
and that irreparable harm would result if injunction did not issue, and
relative harm to parties did not favor denial of motion.





March 8, 2000

On February 22, 2000 Plaintiff Vector Security, Inc. brought a motion for a
temporary restraining order (TRO) and preliminary injunction before this
court against defendants Dwayne Stewart, Jr., City-Wide Home Securities
Services, Inc., and Cinnaminson Alarm Co. The court denied the motion for a
TRO. See Order of Feb. 23, 2000. A hearing on the motion for the preliminary
injunction was held on March 8, 2000. Although defendants were served with
all papers, including the complaint, motion for the preliminary injunction,
and notice of the hearing, neither they nor their counsel attended the
hearing. Upon consideration of the submissions of plaintiff, and after the
hearing, the court makes the following findings of fact and conclusions of
law pursuant to Rule 52(a) of the Federal Rules of Civil Procedure.

[*397] I. Findings of Fact

Vector Security Systems, Inc. is a Pennsylvania corporation with its
principal place of business in Pennsylvania. Dwayne Stewart, Jr. is a
citizen of New Jersey. City-Wide Home Security Services, [**2] Inc. is a
New Jersey corporation with its principal place of business in New Jersey.
Stewart is an officer and director of City-Wide and owns all or
substantially all of its stock. Stewart has also traded in the security
alarm business under the name Cinnaminson Alarm Co., whose principal place
of business is New Jersey. Vector seeks to enforce, through a preliminary
and permanent injunction, a restrictive covenant in a dealer agreement
entered into by Vector and City-Wide.

A. Vector's Dealer Program

Vector is a company which provides security alarm services. Through its
employees, independent contractors, or authorized alarm dealers, Vector
facilitates the installation of a security alarm system in a subscriber's n1
residence or business. Vector then provides services to the subscriber,
generally alarm monitoring services, for a monthly fee in accordance with a
subscriber agreement.

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n1 Customers are generally referred to as "subscribers" in the alarm
security industry.

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Vector's dealer program has been in existence [**3] for seven years.
Authorized dealers are independent alarm businesses that have entered into
agreements with Vector and that essentially act as independent sales
representatives. Dealers solicit subscribers, install Vector-approved alarm
security systems, and obtain an executed standard security services
agreement from the subscriber which they then sell to Vector. Once Vector
accepts and executes a subscriber agreement from a dealer, the agreement
becomes binding upon Vector, and the dealer earns its right to receive a
commission for that agreement. Vector calculates price of the subscriber
agreements it purchases from its dealers by multiplying the monthly fee by a
number previously agreed upon by both parties. The multiplier varies and is
dependent on a number of factors.

Each subscriber agreement that Vector purchases from its dealers has a term
of thirty-six months and an automatic renewal provision for an additional
thirty-six months. Vector anticipates that it will not receive a return on
its investment until it has provided approximately sixty months of service
to the customer. Accordingly much of Vector's incentive to enter into these
agreements is its expectation, based on [**4] past experience, that
subscribers remain with Vector for a considerable amount of time; the
average, in fact, is fifteen years. Vector also generates substantial
revenue from additional equipment and services for which its subscribers
contract, as well as referrals from its subscribers. Vector anticipated that
the attrition rate for subscribers obtained through its dealer program would
be 10% per year, although the actual rate it has experienced is somewhat
lower. It's overall net attrition rate of subscribers it has obtained from
all sources is 7.6% per year.

B. Dealer Agreement between Vector and City-Wide

In June 1999, Stewart submitted an application to become a Vector authorized
alarm dealer to Ronald LiPari, a Vector senior vice-president. LiPari
visited City-Wide's office in New Jersey and then met with Stewart in
Philadelphia to negotiate a dealer agreement. On June 24, 1999, Stewart
executed the dealer agreement, and LiPari executed the agreement on behalf
of Vector on June 28, 1999.

Vector agreed to purchase subscriber agreements from City-Wide, subject to
specific terms and conditions. Subscribers were required to have an
acceptable credit rating score. City-Wide was [**5] responsible for
verifying the subscriber's credit rating and including the score with
subscriber agreements it submitted for purchase. The multipliers used to
calculate the purchase price of the agreements ranged from [*398]
twenty-nine to thirty-four. City-Wide agreed that Vector would withhold a
portion of a subscriber agreement's purchase price (holdback). Vector would
retain the holdback for twelve months in order to guarantee the subscriber's
performance. If the subscriber canceled during this time period, Vector
would deduct the total amount of the purchase price payable to City-Wide
from the holdback. During a ninety-day probationary period, the holdback
amount was twenty percent. After the probationary period, the holdback was
ten percent. The probationary period was imposed because Stewart had a high
attrition rate when he sold subscriber agreements to Vector through another
authorized dealer.

The dealer agreement prohibited City-Wide from soliciting or accepting
subscriber agreements from renters n2 and from modifying the standard
subscriber agreement. The dealer agreement also specified that City-Wide was
to handle all service calls received from the subscriber for the first
twelve [**6] months following installation. The dealer agreement provided
that Vector had the right to terminate the agreement for any or no reason
upon thirty days written notice to City-Wide. During the ninety-day
probationary period, Vector had the right to terminate the agreement on ten
days notice. City-Wide also agreed that for five years after the dealer
agreement's expiration or termination for any reason, neither it nor its
employees would "solicit, directly or indirectly[,] or cause any other
entity to do so, Vector customers to buy or install any products or services
which are of a similar type or serve the same purpose or perform the same
function as the products and services covered by this agreement." Dealer
Agreement between Vector and City-Wide P 13.1.

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n2 Renters are undesirable customers in the home security industry because
they often move before the terms of their subscriber agreements expire, they
often do not have the authority to approve the material alterations to the
premises that may be necessary in order to install the security equipment,
and an alarm company is often unable to retrieve its equipment after a
renter moves.

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C. Termination of the Dealer Agreement by Vector

In September 1999, Vector learned that ITI, City-Wide's equipment supplier,
refused to extend any additional credit to City-Wide. Vector only allowed
its dealers to install equipment from ITI or DSC and believed that City-Wide
lacked the expertise to install DSC alarm equipment. Thus, Vector was
concerned that ITI's refusal to ship equipment would severely affect
City-Wide's ability to sell and install security alarm systems. From late
summer until the termination of the agreement on October 13, 1999, Vector
also received a number of complaints about City-Wide from subscribers whose
agreements it purchased from City-Wide. The complaints included allegations
that City-Wide failed to service the systems it installed, that City-Wide
failed to provide promised free products or services to the subscribers, and
that the subscribers were unable to reach City-Wide. Vector itself was
unable to contact anyone at City-Wide: telephone calls to the City-Wide
office were answered by a voice-mail recording, and, generally, the
voice-mail would not accept any messages because it was full. The few
voice-mail messages left by Vector staff did not generate [**8] any
response by City-Wide.

In the first week of October, LiPari ordered his staff to conduct a survey
of the accounts Vector had purchased from City-Wide. The survey revealed
that many of the subscribers Vector obtained through City-Wide were renters
rather than homeowners and that Stewart or other City-Wide employees had
told the subscribers that, if queried by Vector, they should say that they
owned their home. LiPari also learned that City-Wide's liability insurance
had been canceled due to its failure to pay the premiums. On October 13,
1999, LiPari sent written notice to City-Wide [*399] terminating the
dealer agreement effective immediately. LiPari cited the cancellation of
City-Wide's insurance and "the fact that your place of business has not been
open for weeks now[.]" Oct. 13, 1999 Ltr. from LiPari to Stewart .

During the time the dealer agreement was in effect, Vector purchased 232
subscriber agreements from City-Wide for which it paid more than $ 179,000.
Vector withheld approximately $ 40,000 and to date, Vector has deducted $
39,495.09 from the holdback for cancellations and other amounts due to
Vector by City-Wide pursuant to the dealer agreement.

D. Violation of the [**9] Restrictive Covenant

Upon receiving the termination letter, Stewart left a voice-mail message for
LiPari in which he threatened to take back his customers. In February 2000,
an employee of Stewart's new alarm company, Cinnaminson Alarm Co., contacted
LiPari. The employee gave LiPari a list of customers Steward had directed
her to contact. The names and addresses on this list are subscribers whose
contracts Vector purchased from City-Wide and Vector has lost almost all of
these subscribers. After Vector instituted this action, Stewart admitted to
LiPari that he converted subscribers whose contracts he had sold to Vector
by convincing them to cancel their Vector agreements and contract with other
alarm companies. Currently, ninety-seven of the accounts Vector purchased
from City-Wide have been cancelled or otherwise lost.

II. Conclusions of Law

In order to prevail on a motion for a preliminary injunction, the movant
bears the burden of demonstrating (1) a reasonable probability of success on
the merit; (2) that it will be irreparably injured if relief is not granted
to prevent a change in the status quo. A court should also consider, where
relevant, (3) the effect of granting [**10] or denying relief on other
interested persons; and (4) the public interest. See Acierno v. New Castle
County, 40 F.3d 645, 653 (3d Cir. 1994); ECRI v. McGraw-Hill, Inc., 809 F.2d
223, 226 (3d Cir. 1987). While state law applies to the substantive issues
in this diversity action, federal law governs the standards for issuing a
preliminary injunction. See Instant Air Freight Co. v. C.F. Air Freight,
Inc., 882 F.2d 797, 799 (3d Cir. 1989).

A. Probability of Success on the Merits

Vector has demonstrated that it has a reasonable probability of success on
the issue of the covenant's enforceability. Under Pennsylvania law, n3 a
covenant not to compete is enforceable if it is: "(1) ancillary to the main
purpose of a lawful [*400] transaction; (2) necessary to protect a party's
legitimate interest; (3) supported by consideration; and (4) appropriately
limited as to time and territory." Volunteer Firemen's Ins. Serv., Inc. v.
Cigna Prop. and Cas. Ins. Agency, 693 A.2d 1330, 1337 (Pa. Super. 1997).

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n3 The dealer agreement does not specify what law governs it. A federal
court, sitting in diversity, applies the choice of law rules of the forum
state. See Klaxon v. Stentor Elect. Mfg. Co., 313 U.S. 487, 496, 85 L. Ed.
1477, 61 S. Ct. 1020 (1941). "Under general conflict of laws principles,
where the laws of two jurisdictions would produce the same result on the
particular issue presented, there is a 'false conflict' and the court should
avoid the choice-of-law question." Williams v. Stone, 109 F.3d 890, 893 (3d
Cir. 1997). Here, there is a false conflict since either state would apply
Pennsylvania law to the contract. New Jersey applies the law of state that
has the most significant connections with the transaction and the parties.
See Kaufman v. Provident Life and Cas. Ins. Co., 828 F. Supp. 275, 282 n. 10
(D.N.J. 1992). Similarly, Pennsylvania applies the law of the place with the
most interest in the contract and that is most intimately concerned with the
outcome. See Atlantic Paper Box Co. v. Whitman's Chocolates, 844 F. Supp.
1038, 1042 (E.D. Pa. 1994). In this case, although one party to the contract
is a Pennsylvania citizen and the other a New Jersey citizen, the terms of
the contract were negotiated in Pennsylvania and the parties intended that
it would be performed primarily in Pennsylvania. See Vector Security Dealer
Agreement, Ex. C P 14 (specifying that City-Wide was to direct its marketing
efforts so that 50% or more of the installations were to be in the 215 area
code). Under the law of either state, Pennsylvania law governs the dealer

In addition, Vector agrees that Pennsylvania law governs the contract. The
defendants have not commented on this issue.

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The first and third requirements are easily satisfied. The non-competition
clause was ancillary to the main purpose of establishing a dealer
arrangement between the parties. The clause was adequately supported by
consideration, namely Vector's agreement to purchase subscriber contracts
from City-Wide.

Vector has also shown a probability of success on the second question,
whether the clause was necessary to protect Vector's relationships with its
customers. Vector obviously has a business interest in sustaining a
long-term relationship with its subscribers. "Trade secrets of an employer,
customer goodwill and specialized training and skills are all legitimate
interests protectible through a general restrictive covenant." Thermo-Guard,
Inc. v. Cochran, 408 Pa. Super. 54, 596 A.2d 188, 193-94 (Pa. Super. 1991)
(finding injunction prohibiting former employee from contacting any of the
employer's current or prospective customers to protect employer's interest
in customer goodwill). Vector does not receive a return on its investment in
a subscriber contract until after approximately sixty months of service.

The court should also examine the hardship to the defendants [**12] in
evaluating the reasonableness of the covenant in protecting the plaintiff's
business interest. When a non-competition covenant is part of an employment
agreement, consideration of the employer's interest must be balanced against
the need to avoid imposing an undue hardship on the employee. See Bettinger
v. Carl Berke Assoc., Inc., 455 Pa. 100, 314 A.2d 296, 298 (Pa. 1974);
Alexander & Alexander, Inc. v. Drayton, 378 F. Supp. 824, 830 (E.D. Pa.
1974). n4 While the covenant limits to some degree the customer base from
which the defendants may draw, the clause does not prohibit them from
working in the alarm security field or from competing with Vector for new
subscribers. Enforcement of the covenant will reasonably protect Vector's
legitimate interests without imposing an unreasonable hardship on

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n4 In contrast, a restrictive covenant which is ancillary to the sale of a
business is held to a less stringent standard. See Alexander & Alexander,
Inc. v. Drayton, 378 F. Supp. 824, 829-30 (E.D. Pa. 1974). Here, the dealer
agreement governs a relationship that is closer to an employment
relationship than one between the seller and buyer of a business. While
City-Wide was an independent entity, it acted, in large part, as Vector's
sales representative, and therefore the hardship the covenant imposes on the
defendants is weighed against the plaintiff's interests.

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The court also finds that the plaintiff has demonstrated a reasonable chance
on prong four. While consideration of the applicant's business interest and
the reasonableness of the covenant's scope are generally separate inquiries,
they are necessary interdependent. "Thus, reasonableness in time or
reasonableness in geographic extent are not separate constellations to the
other balancing test of weighing the protection of the employer against an
undue hardship on the employee." Alexander & Alexander, 378 F. Supp. at 831.
Moreover, where the covenant imposes restrictions that are broader than
necessary to protect the party seeking enforcement, the court may exercise
its equitable powers and modify the restrictions. See Kramer v. Robec, Inc.,
824 F. Supp. 508, 512-13 (E.D. Pa. 1992); Sidco Paper Co. v. Aaron, 465 Pa.
586, 351 A.2d 250, 254 (Pa. 1976); Bell Fuel Corp. v. Cattolico, 375 Pa.
Super. 238, 544 A.2d 450, 457 (Pa. Super. 1988). "In order to do equity
between the parties by balancing the interest of the employee in his
occupation and of the employer in his established business, the court must
have the flexibility [**14] to award the employer reasonable protection,
although not all the [*401] protection for which he may have contracted."
Bell Fuel, 544 A.2d at 457.

Here, the covenant does not specify any geographical scope. Accordingly, the
court will exercise its equitable powers and restrict the covenant to the
territory described in the dealer agreement--Eastern Pennsylvania, Delaware,
and South New Jersey.

As to duration, the court finds that five years is a reasonable time period.
As noted, the covenant does not bar defendants from working in the security
alarm business but only prohibits the defendants' from soliciting Vector's
customers for five years. Cf. Kramer, 824 F. Supp. at 512-13 (finding
restriction of two years reasonable where covenant barred defendant from
working in similar field). Given that the defendants may continue to work in
their area of expertise, the five-year period of the restriction is

B. Irreparable Injury

Vector has met its burden of showing that a failure to grant the preliminary
injunction would cause actual irreparable harm. Mere risk of irreparable
injury is insufficient to sustain a motion for a preliminary injunction.
[**15] Rather, the movant bears the burden of making "a clear showing of
immediate irreparable (not merely serious or substantial) injury of a
peculiar nature so that compensation in money cannot atone for it." Campbell
Soup Co. v. ConAgra, Inc., 977 F.2d 86, 91-92 (3d Cir. 1992). The defendants
are actively soliciting the subscribers whose agreements City-Wide sold to
Vector. Thus, there is an actual rather than speculative breach of the
covenant. The harm suffered by Vector as a result of the defendants'
continued solicitation of the Vector accounts cannot be easily quantified in
economic terms. Generally, the harm caused by a breach of a covenant not to
compete is difficult to assess for damages purposes. See Merrill Lynch,
Pierce, Fenner & Smith, Inc. v. Masri, 1996 U.S. Dist. LEXIS 7184, No. Civ.
A. 96- CV-3804, 1996 WL 283644, at *4 (E.D. Pa. May 28, 1996); Records Ctr,
Inc. v. Comprehensive Management, Inc., 363 Pa. Super. 79, 525 A.2d 433, 436
(Pa. Commw. 1987). Where, as in this case, the covenant seeks to prevent
former employees from soliciting customers they obtained while working for
their employers, this difficulty stems from the fact that the covenant
[**16] seeks not only to prevent the sales that might result from the
prohibited contact, but to prevent disturbing the established relationship
between the employer and the customer. See John G. Bryant Co. v. Sling
Testing & Repair, Inc., 471 Pa. 1, 369 A.2d 1164, 1167 (Pa. 1977) (holding
that "unwarranted interference with customer relationships . . . is
unascertainable and not capable of being fully compensated by money
damages"); see also Masri, 1996 U.S. Dist. LEXIS 7184, at *12, 1996 WL
283644 at *4 (finding plaintiff would suffer irreparable harm if defendant
is allowed to solicit plaintiff's customers). As described, Vector's
business is premised on maintaining a long-term relationship with its
subscribers. The relationship is also valuable to Vector because of the
possibility that it may sell additional services to the subscribers or
receive referrals to new customers. Thus, the total harm to Vector for the
loss of a subscriber relationship cannot be predicted easily.

C. Harm to Interested Parties and the Public Interest

Issuing the preliminary injunction will not result in greater harm to the
defendants or other interested parties and is generally in the public
interest. As noted, [**17] the covenant does not prevent defendants from
selling security alarm systems, but only from soliciting Vector subscribers.
Vector customers remain free to terminate their relationship with the
company and enter into a relationship with any other alarm business. The
public at large will benefit from allowing Vector and defendants to compete
freely for non-Vector customers. In addition, it is generally in the public
interest to uphold an agreement freely entered into by the parties. See
National Bus. Serv.v. Wright, 2 F. Supp. 2d 701, 709 (E.D. Pa. 1998).
Consideration of the relative harm to the defendant [*402] and the public
interest favor granting Vector's motion for a preliminary injunction.

III. Conclusion

Vector has demonstrated probability of success on the enforceability of the
restrictive covenant and that it will be irreparably harmed if the
preliminary injunction does not issue. The relative harm to interested
parties does not favor denying the motion for preliminary injunction, and it
is in the public interest to uphold the restrictive covenant. Accordingly,
the court will grant Vector's motion.

An appropriate order follows.


AND NOW, [**18] this 8th day of March, 2000, upon consideration of
plaintiff's motion for a preliminary injunction and its submissions, and
after a hearing, it is hereby ORDERED that:

1. The motion is GRANTED. Until October 13, 2004, defendants Dwayne Stewart,
Jr., City-Wide Home Securities Services, Inc., and Cinnaminson Alarm Co. are
ENJOINED from directly or indirectly soliciting, or causing any other entity
or person to solicit, any customer of Vector Security, Inc. in Eastern
Pennsylvania, Delaware and South New Jersey, for the purposes of inducing
any such customer to buy or install products or services that are similar to
or serve the same or similar function or purpose as the products and
services provided by Vector. Defendants are further ENJOINED from using for
their own purpose any Vector customer information, or selling, conveying or
transferring any Vector customer information to any third party. Defendants
are ENJOINED from committing the afore-mentioned acts for period of five
years from October 13, 1999.

2. The above-described preliminary injunction shall issue and take effect
when the plaintiff posts security in the amount of $ 10,000, pursuant to
[**19] Federal Rules of Civil Procedure 65(c) and 65.1.