ISCO Industries, Inc. v. Shugart
Filing
19
MEMORANDUM OPINION & ORDER denying 9 Motion to Dismiss for Failure to State a Claim. Signed by Senior Judge Thomas B. Russell on 5/27/2014. cc:counsel (KJA)
UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF KENTUCKY
LOUISVILLE DIVISION
CIVIL ACTION NO. 3:14-CV-00249-TBR
Plaintiff
ISCO INDUSTRIES, INC.
v.
CHARLES SHUGART
Defendant
MEMORANDUM OPINION AND ORDER
This matter is before the Court upon Defendant Charles Shugart’s Motion to Dismiss.
(Docket No. 9.) Plaintiff ISCO Industries, Inc. has responded. (Docket No. 10.) Defendant
Shugart has replied. (Docket No. 18.) This matter is now fully briefed and ripe for adjudication.
For the following reasons, the Court will DENY Defendant Charles Shugart’s Motion to
Dismiss. (Docket No. 9.)
BACKGROUND
Plaintiff ISCO Industries, Inc. is a piping solutions provider based out of Louisville,
Kentucky, which sells/provides various piping products and solutions through the United States
and internationally. (Docket No. 1, at 2.) ISCO employs salespersons to market and sell its
product and provides these salespersons certain business information, such as ISCO’s prices,
fabrication capabilities, supply chain management, and customer lists. (Id.)
Previously, Defendant Charles Shugart was hired by Plaintiff ISCO Industries as a
salesman and began working on March 5, 2007. (Id.) Shugart signed a non-compete, nonsolicitation agreement (the “NCA Agreement”), (Docket No. 9-2), on February 15, 2008.
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(Docket No. 1, at 3.) Shugart worked for ISCO for approximately six years as a salesman
before leaving on December 2, 2013. (Id. at ¶ 32.) Subsequently, Shugart began working for
Gajeske, Inc., as a salesperson. (Id.) Gajeske is a distributor of polyethylene pipe, pumps,
valves, fittings, fabrications, and fusion equipment. (Id.)
On December 13, 2013, ISCO issued Shugart a cease and desist letter alleging a breach
of the NCA Agreement. Specifically, this letter alleged “ISCO has direct evidence that you have
been contacting customers of ISCO to solicit the very business that ISCO provided to these
customers while you were employed with ISCO.” (Docket No. 1-3, at 2.)
On March 13, 2014, ISCO filed a Complaint seeking enforcement of the NCA Agreement
and recovery of monetary damages. (Docket No. 1.) ISCO asserts claims for breach of contract,
specific performance, and unjust enrichment against Shugart. (Id.) Shugart argues the NCA
Agreement is unenforceable under Kentucky law and, therefore, ISCO fails to state a claim.
STANDARD
The Federal Rules of Civil Procedure require that pleadings, including complaints,
contain a “short plain statement of the claim showing that the pleader is entitled to relief.” FED.
R. CIV. P. 8(a)(2). A defendant may move to dismiss a claim or case because the complaint fails
to “state a claim upon which relief can be granted.” FED. R. CIV. P. 12(b). When considering a
Rule 12(b)(6) motion to dismiss, the court must presume all of the factual allegations in the
complaint are true and draw all reasonable inferences in favor of the nonmoving party. Total
Benefits Planning Agency, Inc. v. Anthem Blue Cross & Blue Shield, 552 F.3d 430, 434 (6th Cir.
2008) (citing Great Lakes Steel v. Deggendorf, 716 F.2d 1101, 1105 (6th Cir. 1983)). “The court
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need not, however, accept unwarranted factual inferences.” Id. (citing Morgan v. Church’s Fried
Chicken, 829 F.2d 10, 12 (6th Cir. 1987)).
Even though a “complaint attacked by a Rule 12(b)(6) motion to dismiss does not need
detailed factual allegations, a plaintiff’s obligation to provide the grounds of his entitlement to
relief requires more than labels and conclusions, and a formulaic recitation of the elements of a
cause of action will not do.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007) (citations
omitted). Instead, the plaintiff’s “[f]actual allegations must be enough to raise a right to relief
above the speculative level on the assumption that all the allegations in the complaint are true
(even if doubtful in fact).” Id. (citations omitted). A complaint should contain enough facts “to
state a claim to relief that is plausible on its face.” Id. at 570. A claim becomes plausible “when
the plaintiff pleads factual content that allows the court to draw the reasonable inference that the
defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, 129 S.Ct. 1937, 1949 (2009)
(citing Twombly, 550 U.S. at 556). If, from the well-pleaded facts, the court cannot “infer more
than the mere possibility of misconduct, the complaint has alleged—but has not ‘show[n]’—‘that
the pleader is entitled to relief.’” Id. at 1950 (citing FED. R. CIV. P. 8(a)(2)). “Only a complaint
that states a plausible claim for relief survives a motion to dismiss.” Id.
DISCUSSION
The NCA Agreement provides, in relevant part, that:
6. Covenants of Employee. (a) During employee’s term of service with
the Company, and for a period of three (3) years thereafter Employee shall
not directly or indirectly engage in any activity or business in competition
with any aspect of the business of the Company at the time of Employee’s
termination by soliciting, contacting or otherwise dealing with any
customer of the Company, or other people that Employee sought to make a
customer of the Company within three (3) years of the termination hereof . .
.
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(Docket No. 9-2, at 3) (emphasis added.) Shugart points out that, while this section contains a
temporal limitation of three years, there is no geographical limitation.
The NCA Agreement also provides in Section 3, Non-Disclosure of Confidential
Material, that:
Unless authorized by the Company in writing, Employee will not, during or
at any time after separation from employment, use for himself or others, or
divulge or disclose to others, any information, knowledge or data relating
to the Company’s business in any way obtained by Employee while
employed by the Company, other than published material properly in the
public domain. This includes, but is not limited to, know-how, information,
knowledge and data relating to processes, methods, formulae, apparatus,
products manufactured, used, developed, investigated or considered by the
Company, its subsidiaries and affiliates, product use or application,
customer lists, financial information, customer requirements, terms of sales,
and other trade relations matters, and to any confidential information of any
kind relating to the Company, its subsidiaries and affiliates or the customers
or suppliers of any of them.
(Docket No. 9-2, at 2) (emphasis added.) Shugart points out that Section 3, unlike Section 6,
does not have a temporal limitation, placing an indefinite restriction on him. (Docket No. 9-1, at
4.)
Shugart argues that ISCO does not state a claim against him because these provisions are
facially invalid and unenforceable under Kentucky law “because (i) there is no geographic scope
whatsoever; and (ii) the intended operation of the subject provisions is an equitable restraint of
trade as applied to Shugart.” (Id. at 7.) Because ISCO bases its claims against Shugart on the
NCA Agreement, the Court will address the enforceability of these provisions.
I.
Enforceability of Provisions
Under Kentucky law, covenants not to compete “are valid and enforceable if the terms
are reasonable in light of the surrounding circumstances.” Crowell v. Woodruff, 245 S.W.2d
447, 449 (Ky. 1951). To be enforceable, the restraint must be “no greater than reasonably
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necessary to” prevent unfair competition by the employee or his subsequent employer. Id.
“[T]he test of reasonableness is whether the restraint, considering the particular situation and
circumstances, is such only as to afford fair protection to the legitimate interests of the
[employer] and not so extensive as to interfere with the interests of the public.” Stiles v. Reda,
228 S.W.2d 455, 456 (Ky. 1950).
In determining whether the covenants are valid and
enforceable, courts consider: (a) the “nature of the business or profession and employment,”
including the character of the service that is performed by the particular employee; (b) the
duration of the restriction; and (c) the scope and/or territorial extent of the restriction.1 Id.
In Kentucky, the general rule is that covenants not to compete without any geographic
scope are invalid and unenforceable because they constitute unreasonable restraints of trade.
Calhoun v. Everman, 242 S.W.2d 100, 102 (Ky. 1951) (considering alleged oral agreement not
to compete). But see Hodges v. Todd, 698 S.W.2d 317, 318-320 (Ky. Ct. App. 1985) (finding
covenant not to compete contained in contract for sale of business was enforceable,
notwithstanding absence of geographic scope, and that trial court had authority to enforce the
covenant by establishing a reasonable geographical limitation).
However, courts draw a
distinction between broader, more general covenants not to compete and non-solicitation
provisions aimed at previous and/or potential customers, finding the latter inherently more
reasonable.
1
Recently, a similar, but more comprehensive, approach has been articulated by the Kentucky Court of Appeals.
“The proper approach to the rule articulated in Hammons and elsewhere can be reduced to a series of factors which
should be considered in nearly every case. They are: (1) the nature of the industry; (2) the relevant characteristics of
the employer; (3) the history of the employment relationship; (4) the interests the employer can reasonably expect to
protect by execution of the noncompetition agreement; (5) the degree of hardship the agreement imposes upon the
employee, in particular the extent to which it hampers the employee's ability to earn a living; and (6) the effect the
agreement has on the public.” Charles T. Creech Inc. v. Brown, 2012 Ky. App. Unpub. LEXIS 1033, at *13-14 (Ky.
Ct. App. Aug. 17, 2012) (discretionary review granted April 17, 2013).
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For example, previously this Court found an agreement signed by an employee during the
course of his employment which prevented him from selling, for a period of one year, “any
products which are the same as or similar to the Company’s products” to current or former
customers of the company was enforceable, despite the lack of a geographical scope. Snider Bolt
& Screw, Inc. v. Quality Screw & Nut, 2009 WL 1657549, at *1-2 (W.D. Ky. June 12, 2009); see
also Central Adjustment Bureau, Inc. v. Ingram Associates, Inc., 622 S.W.2d 681, 683 (Ky. Ct.
App. 1981) (finding covenant not to compete with former employer for two years, nonsolicitation, and nondisclosure provisions were reasonable). Specifically, this Court found that
the covenant was reasonable and no more restrictive than was necessary. Id. at *1. This Court
recognized that, while the agreement had no geographical limitations, its limited scope applying
only to sales and solicitations to current or former customers “saved” it from being potentially
unenforceable. Snider Bolt & Screw, Inc. v. Quality Screw & Nut, 2010 WL1032799, at *5
(W.D. Ky. March 17, 2010).
Simply put, non-solicitation provisions aimed at previous
customers of a former employer are inherently more reasonable than broader, more general noncompete provisions, which was at issue in Calhoun v. Everman, 242 S.W.2d 100, 102 (Ky. 1951)
(considering alleged oral agreement that prohibited former employee from entering into
competition in any way, either directly or indirectly, with the dry cleaning and laundry business
of the plaintiff).
Analogizing to the non-solicitation provision aimed at previous customers in Quality
Screw, ISCO argues the lack of a geographic scope does not make the NCA Agreement
unenforceable.
(Docket No. 10, at 9.)
Relatedly, ISCO disagrees with Shugart’s broad
interpretation of Section 6 as preventing him from working for a competitor for a period of three
years and alleges that Section 6 only prevents Shugart from soliciting former customers of ISCO
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and persons whom he tried to make customers of ISCO. Despite Shugart’s arguments to the
contrary, the Court does not read Section 6 as precluding him from “selling piping products
anywhere in the world for three (3) years.” (Docket No. 9-1, at 10.) Rather, the Court reads
Section 6 as prohibiting Shugart from “soliciting, contacting, or otherwise dealing within any
customer of the Company, or other people that Employee sought to make a customer within three
(3) years of the termination hereof” if it would result in competition with ISCO.2
Therefore, Section 6 is more similar to the non-solicitation provision in Quality Screw,
rather than the broader, more general covenant not to compete in Calhoun, because it does not
prohibit Shugart from working for competitors but only from soliciting former customers of
ISCO or persons that Shugart sought to make a customer if it would result in competition with
ISCO.3 With respect to the three-year temporal limitation in Section 6, this Court previously
reviewed relevant case law and found it suggested a three-year limitation can be reasonable in
the context of a covenant not to compete. Gardner Denver Drum LLC v. Goodier, 2006 WL
1005161, at *2, *8 (W.D. Ky. Apr. 14, 2006) (finding reasonable three-year prohibition against
employee working with any business that competes with former employer in the United States);
see also Lareau v. O’Nan, 355 S.W.2d 679, 680 (Ky. 1962) (finding five-year restriction on
doctor practicing in same county as his former employer was not too inequitable to be enforced);
Ceresia v. Mitchell, 242 S.W.2d 359, 361, 364 (Ky. 1951) (affirming trial court’s reformation of
2
Shugart’s emphasis, in his reply brief, (Docket No. 18, at 4), on the language “[e]mployee shall not directly or
indirectly engage in any activity or business in competition with . . . the Company” ignores the subsequent language
that states “by soliciting, contracting or otherwise dealing with any customer of the Company . . .” Thus, while the
language emphasized by Shugart, when read in isolation, would be a broad noncompete preventing any
competition, the subsequent language defines exactly what type of competition the Agreement prevents and narrows
the prohibition’s applicability.
3
In any event, the Court notes that even if Section 6 prevented Shugart from working for any competitor, rather than
just soliciting former or potential customers, this Court has previously found prohibitions against employers working
for any competitor valid. Gardner Denver Drum LLC v. Goodier, 2006 WL 1005161, at *2, 8 (W.D. Ky. Apr. 14,
2006) (finding prohibition against employee working with any business that competes with former employer in the
United States was valid).
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noncompete agreement preventing a former business owner from competing against new
business owner for a period of ten years in the local area); Hodges v. Todd, 698 S.W.2d 317,
318-20 (Ky. Ct. App. 1985) (finding trial court had authority to determine appropriate
geographic scope for a five-year prohibition on former business owner competing in business of
remanufacturing of pickup trucks and trailers, implicitly holding the a five-year temporal
limitation was reasonable). 4
It is worth noting that this case involves a non-solicitation
provision, which is inherently more reasonable than a broader, more general covenant not to
compete which was at issue in the above cited cases. However, it is also worth noting that the
above cited cases had geographic scopes, while the non-solicitation provision in this case does
not have any geographic limitation.
II.
Conclusion
Under Kentucky law, covenants not to compete “are valid and enforceable if the terms
are reasonable in light of the surrounding circumstances.” Crowell v. Woodruff, 245 S.W.2d
447, 449 (Ky. 1951). Determination of whether a covenant not to compete is reasonable requires
a flexible, case-specific approach and an analysis of a series of factors: “(1) the nature of the
industry; (2) the relevant characteristics of the employer; (3) the history of the employment
4
The Court finds unpersuasive Shugart’s citation to a non-binding Northern District of West Virginia case,
McGough v. Nalco Co., 496 F. Supp. 2d 729, 755-56 (N.D. W. Va. 2007), for the proposition that nondisclosure
provisions, such as Sections 3 and 4, amount to covenants not to compete and should be subjected to the same
scrutiny of a covenant not to compete . See Papa Johns’s International, Inc. v. Pizza Magia International, LLC,
2001 WL 1789379, at *3 (W.D. Ky. 2001) (stating “this Court determines that Kentucky would recognize
nondisclosure agreements that do not have specific time limits because the inequities arising from nondisclosure
agreements are far less than those arising from noncompete agreements”). “As a general rule, courts analyze
noncompete and nondisclosure agreements under two different standards. While noncompete agreements are, by
definition, restraints of trade that receive close scrutiny from courts, nondisclosure agreements usually do not create
the same types of harms and therefore receive greater deference from courts.” Id.
In any event, the Court would find McGough distinguishable because, unlike the nondisclosure covenants
in McGough, in this case the nondisclosure covenants do not amount to “a post-employment covenant not to
compete.” McGough, 496 F. Supp. 2d at 756 (“Almost all of the information Mr. McGough acquired during his
years working at Nalco would fall within the definitions of confidential information described in clauses two and
three.”).
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relationship; (4) the interests the employer can reasonably expect to protect by execution of the
noncompetition agreement; (5) the degree of hardship the agreement imposes upon the
employee, in particular the extent to which it hampers the employee's ability to earn a living; and
(6) the effect the agreement has on the public.” Charles T. Creech Inc. v. Brown, 2012 Ky. App.
Unpub. LEXIS 1033, at *13-14 (Ky. Ct. App. Aug. 17, 2012) (discretionary review granted
April 17, 2013).5
On the basis of the record before the Court, the Court is unable to adequately evaluate the
suggested factors above. It appears additional discovery may be needed and a factual hearing
required. It is ordered that the Motion to Dismiss, (Docket No. 9), is DENIED at this time.
Scheduling shall be discussed at the May 30, 2014, telephonic hearing.
CONCLUSION
For these reasons, and consistent with the Court’s conclusions above,
IT IS HEREBY ORDERED that Defendant Charles Shugart’s Motion to Dismiss is
DENIED. (Docket No. 9.)
IT IS SO ORDERED.
Date:
cc:
May 27, 2014
Counsel
5
Shugart’s citation, for the proposition that the NCA Agreement is unenforceable, to ISCO Industries, LLC v. Erdle,
2011 WL 6826430 (E.D. N.C. Dec. 28, 2011), is not binding and distinguishable because the substantive provisions
of the agreement at issue were different. Significant to that court’s finding was that the agreement prohibited the
former employer from attempting to sell any product or services to any existing or prospective customer regardless
of whether the product or services being sold are in competition with ISCO. Id. at *6. (emphasis added) The
Agreement in this case only prevents solicitation/contact of former or prospective customers if it would result in
competition with ISCO.
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