Federal Courts May Consider Hearsay Evidence at Preliminary Injunction Hearings

Under Federal Rule of Evidence 802, hearsay evidence is generally not admissible in court. In preliminary injunction proceedings, however, the rules of evidence don’t necessarily apply. Here in the Fourth Circuit, courts relax evidentiary rules when faced with motions for preliminary injunctive relief, mostly due to practical considerations such as the exigent nature of the proceeding and the unavailability of a detailed factual record at the very outset of the case. There is some disagreement among federal circuit courts on this issue, but here in Virginia, “district courts may look to, and indeed in appropriate circumstances rely on, hearsay or other inadmissible evidence when deciding whether a preliminary injunction is warranted.” (See G.G. ex rel. Grimm v. Gloucester Cty. Sch. Bd., 822 F.3d 709, 725 (4th Cir. 2016), vacated on other grounds, 137 S. Ct. 1239 (2017)). Failure to consider hearsay evidence at preliminary injunction proceedings may even be deemed an abuse of discretion.

Relying on hearsay evidence is exactly what the district court did when it granted the plaintiff’s motion for a temporary restraining order and/or preliminary injunction in the case of Edward D. Jones & Co. v. Samuel (Ed) Clyburn, Jr., a non-solicitation case filed in the Roanoke Division of the Western District of Virginia. Here’s what happened, according to the facts recited in the opinion:

Mr. Clyburn had worked as a financial advisor for Edward Jones for the past 11 years at an office in Wytheville, Virginia. On June 26, 2020, he resigned from Edward Jones and moved his practice to Ameriprise Financial Services, working out of the same building he formerly occupied while at Edward Jones. According to affidavits submitted by two current Edward Jones employees, Mr. Clyburn called numerous Edward Jones clients within days of his resignation. Twenty clients had informed Edward Jones that Mr. Clyburn had called them, and several had indicated that they would be moving their accounts to Mr. Clyburn’s new practice. As of July 20, 2020, hearsay-300x242roughly $25 million in assets had been transferred to Mr. Clyburn at Ameriprise. By August 13th, Edward Jones’ branch office had lost $42 million out of $70 million.

Absent an agreement prohibiting such conduct, this might have been perfectly acceptable competitive conduct. In this case, however, Mr. Clyburn had signed an employment agreement containing a very tight non-solicitation provision. It read as follows:

[Y]ou agree for a period of one year following the termination of your employment, that you will not solicit by mail, phone, electronic communication, personal meeting, or any other means, either directly or indirectly, any clients of Edward Jones with whom you had direct contact during your employment with Edward Jones or about whom you have information or knowledge of confidential information or Edward Jones Trade Secrets, provided that the foregoing provision shall not apply to clients with whom you did securities and/or insurance business before you became an employee of Edward Jones. Your agreement not to solicit means that you will not, during your employment with Edward Jones, and for a period of one year thereafter, initiate any contact or communication of any kind whatsoever for the purpose of inviting, encouraging or requesting any Edward Jones client to transfer from Edward Jones to you or to your new employer, to open a new account with you or with your new employer or to otherwise discontinue his/her/its patronage and business relationship with Edward Jones.

Note that it’s always a good idea to define “competition” or “solicitation” when drafting agreements prohibiting former employees from engaging in those activities. Many judges will decline to enforce such agreements if they believe the wording is too vague to be understood by the employee. This particular non-solicitation clause specifically explains what is meant by “solicitation” and, consequently, is extremely clear in what it prohibits. Mr. Clyburn’s attorney didn’t even try to argue that the clause was over-broad or unreasonable. Instead, he argued that Mr. Clyburn hadn’t violated the agreement, and that the only evidence to the contrary was inadmissible hearsay.

The hearsay argument was a non-starter. “Under existing caselaw,…Mr. Clyburn’s hearsay challenge is plainly without merit,” the court wrote. It proceeded to analyze the factors necessary to obtain preliminary injunctive relief.

A temporary restraining order or preliminary injunction may only be awarded upon a clear showing that (1) the plaintiff is likely to succeed on the merits, (2) that it is likely to suffer irreparable harm in the absence of injunctive relief, (3) that the balance of equities tips in its favor, and (4) that an injunction is in the public interest. (See Winter v. Nat. Res. Defense Council, Inc., 555 U.S. 7, 20-21 (2008)). The court found that Edward Jones had produced sufficient evidence (mostly in the form of hearsay) to satisfy each of these elements.

Likelihood of success on the merits doesn’t mean certainty of success. Here, the affidavits were enough. They contained specific allegations that Mr. Clyburn had asked at least three clients to move their accounts to Ameriprise, and Mr. Clyburn’s declaration did not specifically refute this. (Rather, he denied generally that he “wrongfully solicited Edward Jones clients” in violation of the Agreement). This conduct would have violated the clear language of the non-solicitation clause.

Next, the court was satisfied that Edward Jones would suffer irreparable harm in the absence of injunctive relief. Mr. Clyburn argued that money damages would be sufficient to remedy the alleged harm, as Edward Jones was merely complaining of lost revenue resulting from clients moving their business to a different brokerage. The court pointed out, however, that money damages for clients who had already departed was only part of the harm and part of the remedy. The Fourth Circuit has recognized that “the threat of a permanent loss of customers and the potential loss of goodwill…support a finding of irreparable harm.” (See Multi-Channel TV Cable Co. v. Charlottesville Quality Cable Operating Co., 22 F.3d 546, 552 (4th Cir. 1994)). Because Edward Jones could lose future business opportunities as well as future referrals from the clients Mr. Clyburn diverted, Edward Jones had made a sufficient showing of irreparable harm.

On the final two factors, the court readily found that because the public has an interest in protecting the legitimate expectations of parties to a contract, and because all the temporary injunction would really do is require Mr. Clyburn to honor his contractual obligation to refrain from soliciting Edward Jones’ clients, Edward Jones had made an adequate showing.

The court granted the preliminary injunction and waived the bond requirement.

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