Konica Minolta Business Solutions, U.S.A., Inc. v. Applied Imaging Systems, Inc. et al
Filing
442
ORDER: (1) Granting In Part and Denying in Part 431 Plaintiff's Motion for Partial Summary Judgment; and (2) Denying 430 and 432 Defendants' Motions for Partial Summary Judgment. Signed by District Judge Victoria A. Roberts. (LVer)
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UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTICT OF MICHIGAN
SOUTHERN DIVISION
KONICA MINOLTA BUSINESS
SOLUTIONS, U.S.A., INC.,
Plaintiff,
Case No. 15-11254
Honorable Victoria A. Roberts
v.
LOWERY CORPORATION, d/b/a
APPLIED IMAGING SYSTEMS,
INC., et al.,
Defendants.
_____________________________/
ORDER: (1) GRANTING IN PART AND DENYING IN PART
PLAINTIFF’S MOTION FOR PARTIAL SUMMARY JUDGMENT
[ECF No. 431]; AND (2) DENYING DEFENDANTS’ MOTIONS
FOR PARTIAL SUMMARY JUDGMENT [ECF Nos. 430, 432]
I.
INTRODUCTION
Plaintiff Konica Minolta Business Solutions (“KMBS” or “Konica”) and
Defendant Applied Imaging Systems (“AI” or “Applied Imaging”) are direct
competitors in the copier industry. They directly compete in the sale, lease,
and maintenance of multifunction printing and imaging devices and
software in Michigan.
KMBS brings suit against several of its former employees – Steve
Hurt, Robert Bell, Anna Stewart, Randy Magner, Matt Aron, and Linda
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Boyle (“Individual Defendants”) – and AI, alleging breach of contract,
tortious interference with a contractual relationship, misappropriation of
trade secrets, and civil conspiracy.
Three motions for partial summary judgment are before the Court.
- KMBS seeks summary judgment on liability on Count I
(Breach of Contract), Count II (Tortious Interference), and
Count IV (misappropriation). [ECF No. 431].
- AI moves for summary judgment on the misappropriation
of trade secrets claim and the type of damages KMBS can
recover. [ECF No. 432].
- The Individual Defendants seek summary judgment on the
breach of contract and trade secret misappropriation
claims. [ECF No. 430].
As set forth below, the Court: (1) DENIES Defendants’ motions; and
(2) GRANTS IN PART and DENIES IN PART KMBS’s motion.
II.
BACKGROUND
Konica has maintained a significant sales presence in the Detroit
area for years. In early 2011, Applied Imaging decided to expand its
business into the Detroit market. To that end, it proposed hiring five sales
employees from KMBS.
On March 18, 2011, AI hired Steve Hurt to launch its Detroit area
office; Hurt was Konica’s director of sales for the Detroit area. In the
months and years that followed, Hurt hired several other KMBS sales and
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service employees to assist in getting AI’s Detroit office off the ground.
Many of those employees were subject to an employment agreement which
precluded them from retaining and/or disclosing KMBS’s confidential
information, performing certain tasks on behalf of a KMBS competitor in the
Detroit area, or soliciting certain customers of KMBS. Konica alleges AI
and Hurt were aware that these former KMBS employees had ongoing
contractual obligations to KMBS.
The other Individual Defendants – along with their former KMBS titles
and their departure dates from KMBS – are: (1) Anna Stewart, Sales
Representative, August 8, 2012; (2) Randy Magner, Named Account
Executive, August 13, 2012; (3) Matt Aron, Senior Account Executive,
March 2013; (4) Linda Boyle, Major Account Executive, March 2013; and
(5) Robert Bell, Branch Manager, July 12, 2013.
KMBS alleges the Individual Defendants stole its trade secret and
other confidential information and brought it with them to Applied Imaging –
with the full knowledge of AI’s executives. Konica claims that Defendants
possessed, transmitted, disclosed, and used Konica’s confidential and
proprietary information obtained by the Individual Defendants during their
employment with KMBS. Konica says that this information related to every
aspect of its business in Michigan, including KMBS’s confidential customer
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list for the entire state of Michigan, sales forecasts, lease and machine
information, location maps, confidential pricing lists, pricing comparison
tools, meter readings, customer agreements, prospect lists, compensation
and quota information, inventory, schematics, configurations, service data,
proposals, Konica’s custom Excel workbooks, and its sales and service
contract templates.
Konica claims that Defendants used the misappropriated trade secret
information to target and steal Konica’s customers in violation of Michigan
law and certain Individual Defendants’ contractual obligations.
Each party moves for partial summary judgment.
III.
STANDARD OF REVIEW
Under Federal Rule of Civil Procedure 56(a), “[t]he Court shall grant
summary judgment if the movant shows that there is no genuine dispute as
to any material fact and the movant is entitled to judgment as a matter of
law.” The movant bears the initial burden to inform the Court of the basis
for its motion; it must identify particular portions of the record that
demonstrate the absence of a genuine dispute as to any material fact.
Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). If the movant satisfies
its burden, the non-moving party must set forth specific facts showing a
genuine issue for trial. Id. at 324. Unsupported, conclusory statements are
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insufficient to establish a factual dispute to defeat summary judgment, as is
the “mere existence of a scintilla of evidence in support of the [nonmovant’s] position”; the evidence must be such that a reasonable jury could
find in its favor. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 252 (1986);
Alexander v. CareSource, 576 F.3d 551, 560 (6th Cir. 2009).
In deciding a summary judgment motion, the Court “views the factual
evidence and draws all reasonable inferences in favor of the nonmoving
party.” McLean v. 988011 Ontario, Ltd., 224 F.3d 797, 800 (6th Cir. 2000).
The Court need only consider the cited materials, but it may consider other
evidence in the record. Fed. R. Civ. P. 56(c)(3). The Court’s function at
the summary judgment stage “is not to weigh the evidence and determine
the truth of the matter but to determine whether there is a genuine issue for
trial.” Liberty Lobby, 477 U.S. at 249. “The standard of review for crossmotions for summary judgment does not differ from the standard applied
when a motion is filed by only one party to the litigation.” Lee v. City of
Columbus, 636 F.3d 245, 249 (6th Cir. 2011). However, where the moving
party seeks summary judgment in its favor on a claim or issue as to which it
bears the burden of proof at trial, that party’s “showing must be sufficient
for the court to hold that no reasonable trier of fact could find other than for
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the moving party.” Calderone v. United States, 799 F.2d 254, 259 (6th Cir.
1986) (internal quotation marks, citation, and emphasis omitted).
IV.
COUNT I – BREACH OF CONTRACT
In Count I, KMBS alleges a breach of contract claim against all
Individual Defendants except Hurt (the “Contract Defendants”). The
Contract Defendants signed a Confidential Information and Employment
Agreement (“Agreement”). The Agreement is identical for each person and
contains confidentiality and non-compete/non-solicitation provisions.
The Agreement contains a choice of law provision. New York law
governs this claim.
To succeed, KMBS must prove: “(1) the existence of an agreement;
(2) adequate performance of the contract by the plaintiff; (3) breach of
contract by the defendant; and (4) damages.” Swan Media Grp., Inc. v.
Staub, 841 F. Supp. 2d 804, 807 (S.D.N.Y. 2012).
KMBS says the first three elements are easily satisfied and that it is
entitled to summary judgment on liability on its breach of contract claim.
The Contract Defendants seek summary judgment as well. They do
not contest that Konica adequately performed under the Agreement or that
they violated the terms of Agreement. Rather, they argue that the
Agreement is unenforceable – such that there can be no breach – because
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the non-compete and non-solicitation provisions are overbroad, the
protection given to alleged confidential information is overbroad in both
scope and duration, and undefined key terms and conflicting language
render the Agreement ambiguous.
A.
Relevant Terms of the Agreement
The Agreement contains an introduction section that defines
Confidential Information:
I understand that the term “Confidential Information” as used
throughout this Agreement refers to confidential and proprietary
business information of KMBS, including information relating to
KMBS’ customers, potential customers, suppliers and the
management of its business. Confidential Information also
includes, but is not limited to, KMBS’ price lists, customer lists,
customer records, promotional ideas and strategies, service
policies and information, sales policies and information,
marketing policies and information, supplier information,
territory information, policies and procedures and any other
information not generally available to the public or treated by
KMBS as confidential.
I also understand that KMBS has expended substantial sums
and effort to develop and protect Confidential Information and
desires to maintain the confidential status of such Information. I
understand that in connection with my employment, I may
become aware of certain Confidential Information owned by
KMBS, as well as the Confidential Information owned by others
(including entities related to KMBS), which KMBS is obligated
to keep confidential. I acknowledge that I have an express
obligation not to divulge, disclose or use for my own benefit or
for the benefit of anyone other than KMBS any such information
during or after my employment by KMBS.
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Therefore, in consideration of my employment by KMBS and of
the salary, wages and other consideration paid to me and in
consideration of the present and future access provided to me
of Confidential Information, I agree as follows:
[ECF No. 432-23, PageID.23820].
Section 3 of the Agreement is titled “Non-Disclosure of Confidential
Information” and provides:
During my employment by KMBS and at all times after my
employment by KMBS ends, I will not disclose to anyone
outside of KMBS or use for my own behalf or on behalf of any
other person any Confidential Information (which includes
Confidential Information that KMBS has received from others),
except upon written consent of KMBS or as required by my
duties for KMBS and with KMBS’ knowledge. I also will not
disclose any such Confidential Information to anyone within
KMBS except to other employees or agents of KMBS who need
to know such Confidential Information in order to do their jobs
for KMBS. I acknowledge that no such Confidential Information
is owned by me, and that all such Confidential Information shall
remain the exclusive property of the owner thereof (whether or
not KMBS) and constitutes valuable trade secrets of its owner. I
will not use the confidential information for my own benefit or
the benefit of any third party. I will safeguard the confidentiality
of all Confidential Information by taking all precautions that
KMBS currently requires or may in the future require and I will
take any additional precautions that I would take to safeguard
my own confidential information.
[ECF No. 432-23, PageID.23821].
Sections 6, 8, and 10 of the Agreement address how employees must
handle KMBS property and confidential information:
6.
Return of KMBS Property. Upon termination of my
employment with KMBS for any reason, I will return to KMBS
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all property of KMBS immediately . . . , including, but not
limited to, all files, databases, records, documents, drawings,
specifications, lists, equipment and supplies, promotional
materials and similar items relating to the business of KMBS.
8.
Maintaining Records. I recognize that during the
course of my employment I am likely to create and maintain
certain records of my activities which contain Confidential
Information and I recognize that all such records are the
exclusive property of KMBS. I will keep and maintain adequate
and current records of all such Confidential Information in the
manner and form requested by KMBS. I further agree that all
such records shall be the exclusive property of KMBS, shall not
be copied and/or removed by me except for KMBS business
and shall be made available to KMBS at all times. When my
employment by KMBS ends for any reason, I will return to
KMBS all books, records or notes containing the names and
addresses of any customers of KMBS, all duplicate invoices
and statements pertaining to such customers, and all other
information, documents and writings of any nature whatsoever
relative to the business of KMBS, and any other information of
a confidential or secret nature applicable to KMBS’ business,
its customers and the manner of conducting its business. I will
not keep in my possession or control any copies of any of
KMBS’ records, correspondence or written material of any kind
after my employment with KMBS ends.
10. KMBS Policies. In addition to complying with the terms
and conditions of this Agreement, I also will abide by and
comply with any and all existing and future KMBS policies and
procedures relating to Confidential Information.
[ECF No. 432-23, PageID.23821-23].
Section 9 of the Agreement sets forth non-compete and nonsolicitation provisions:
a.
To the maximum extent permitted by applicable law,
for a period of one year after my employment with KMBS ends
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(or for a period equal to the length of my employment with
KMBS, if shorter), I will not: (i) call on or communicate with any
customer or prospective customer of KMBS with whom I have
dealt or whose identity I have learned while employed by
KMBS; or (ii) directly or indirectly, render services in the
geographic territory where I performed my duties for KMBS if
my services would relate to the development, manufacture,
marketing, sales, merchandising, promotion or maintenance of
any products or processes which are similar to, or compete with
products or processes offered by KMBS.
b.
The period of one year (or shorter period equal to
the length of my employment) referred to in the preceding
paragraph shall be extended for a period equal to the duration
of any breach of my obligation if I breach any obligation
imposed by this section 9.
[Id., PageID.23822].
Finally, Section 17 of the Agreement provides that it “is the final,
complete and exclusive agreement between KMBS and [the employee]
with respect to the subject matter” and that the employee and KMBS are
not “bound by any prior or collateral statements, warranties,
representations, agreements, arrangements or course of dealings between
them.” [Id., PageID.23824].
B.
Breach of Contract Claims Under New York Law
Under New York law, “‘negative covenants restricting competition are
enforceable only to the extent that they satisfy [an] overriding requirement
of reasonableness.’” Johnson Controls, Inc. v. A.P.T. Critical Sys., Inc.,
323 F. Supp. 2d 525, 533 (S.D.N.Y. 2004) (quoting Reed, Roberts Assocs.,
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Inc. v. Strauman, 40 N.Y.2d 303, 307 (1976)). In determining whether a
“restrictive covenant is reasonable, and thus enforceable, courts applying
New York law typically employ the three-factor reasonableness test set
forth in BDO Seidman v. Hirshberg, 93 N.Y.2d 382 [] (1999).” Oliver
Wyman, Inc. v. Eielson, 282 F. Supp. 3d 684, 694 (S.D.N.Y. 2017). Under
this test, a restrictive covenant is reasonable “only if it: (1) is no greater
than is required for the protection of the legitimate interest of the employer,
(2) does not impose undue hardship on the employee, and (3) is not
injurious to the public.” BDO Seidman, 93 N.Y.2d at 388-89 (emphasis
omitted); see also Johnson Controls, 323 F. Supp. 2d at 533 (courts will
enforce a restrictive covenant only “to the extent that it is reasonable in
time and area, necessary to protect the employer’s legitimate interests, not
harmful to the general public and not unreasonably burdensome to the
employee”).
In applying this standard, the Court must focus on the particular facts
and circumstances surrounding the agreement. Estee Lauder Companies
Inc. v. Batra, 430 F. Supp. 2d 158, 179-80 (S.D.N.Y. 2006). “[T]here are no
per se lines demarcating what constitutes an unreasonable durational or
geographic scope.” Id. at 180.
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Moreover, the Court “need not employ an all or nothing approach to
the enforcement of employee restrictive covenants.” Estee Lauder, 430 F.
Supp. 2d at 180. Under New York law, courts may sever and grant partial
enforcement of an overbroad restrictive covenant. Id.
Indeed, “[w]here courts find restrictions to be unreasonable, . . . they
may ‘blue pencil the covenant to restrict the term to a reasonable limitation,
and grant partial enforcement for the overly broad restrictive covenant.’”
Poller v. BioScrip, Inc., 974 F. Supp. 2d 204, 221 (S.D.N.Y. 2013) (citation
omitted). “[P]artial enforcement, as opposed to invalidating the entire
covenant, is justified” absent “overreaching, coercive use of dominant
bargaining power, or other anti-competitive misconduct.” Johnson
Controls, 323 F. Supp. 2d at 540 (citing BDO Seidman, 93 N.Y.2d at 394).
Importantly, in cases like this, where a party argues that an entire
restrictive covenant or agreement is invalid because certain parts are
overbroad, the Court can partially enforce the restrictive covenant and
grant summary judgment, declaring that the restrictive covenant and
agreement are valid and enforceable as modified (i.e., as partially
enforced). See BDO Seidman, 93 N.Y.2d at 394, 397 (ordering the lower
court to modify its decision by “granting plaintiff's motion for partial
summary judgment declaring the restrictive covenant enforceable as here
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provided,” and explaining that the lower court erred in holding that the
entire covenant must be invalidated, and in declining partially to enforce the
covenant to the extent necessary to protect BDO’s legitimate interest”);
Poller, 974 F. Supp. 2d at 221-22, 225 (denying employee’s summary
judgment argument that an overbroad non-solicitation provision made the
entire agreement unenforceable, and granting partial enforcement of the
non-solicitation provision “limited to those clients that [the employee]
developed during her employment with [employer]”).
Contract Defendants make numerous arguments regarding why the
Agreement is unenforceable. For sake of clarity, it is easiest to break their
arguments into three categories: (1) the noncompete and non-solicitation
provisions are overbroad; (2) the scope and duration of the non-disclosure
of confidential information provision and the protection given to alleged
confidential information is overbroad; and (3) the Agreement is ambiguous
because key terms are missing and certain provisions conflict with one
another.
1.
Breadth of Non-Compete and Non-Solicitation
Provisions
The Contract Defendants first argue that the duration and/or scope of
the non-compete and non-solicitation provisions are overbroad and
unreasonable because, among other things: (1) in addition to a one-year
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duration, the other terms of the Agreement place strict limitations on
communication with and access to KMBS clients; (2) the duration is not
equally imposed on all KMBS employees; (3) the Agreement prohibits
solicitation of former, non-current, customers; (4) the language of the
Agreement could prohibit a former employee from competing in a
geographic area where that employee’s sole contact with the area was as
superficial and trivial as dropping off lunch at a meeting at the request of a
supervisor; and (5) the provisions prohibit solicitation of prospective or
potential customers as well as Konica customers with whom the former
employee had no relationship.
KMBS argues that the non-compete and non-solicitation provisions
are reasonable and necessary to protect its legitimate interests and are
neither unreasonably burdensome to the Contract Defendants nor harmful
to the public.
a.
The Non-Compete and Non-Solicitation
Provisions are Reasonable in Duration and
Geographic Scope
The Court finds that the Agreement’s non-compete and nonsolicitation provisions are reasonable in time and geographic scope. See
Crown IT Servs., Inc. v. Koval-Olsen, 11 A.D.3d 263, 264 (N.Y. App. Div.
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1st Dep’t 2004) (finding a restrictive covenant reasonable in time and area;
it prohibited defendant from servicing plaintiff’s clients for one year in same
area where prior service was provided).
New York courts consistently hold that one-year non-compete and
non-solicitation provisions are reasonable. See Reed Elsevier Inc. v.
Transunion Holding Co., No. 13 Civ. 8739, 2014 WL 97317, at *8 (S.D.N.Y
Jan. 9, 2014). They also routinely find restrictive covenants to be
reasonable where they are limited in geographic scope to where the
employee performed services for his or her former employer. See, e.g.,
Poller, 974 F. Supp. 2d at 220-21 (finding non-compete provision that was
limited to employee’s sales territory reasonable in geographic scope).
Particularly, the limited duration and geographic scope of the noncompete and non-solicitation provisions are reasonable because KMBS
establishes that the provisions are necessary to protect against the
disclosure or use of KMBS’s trade secrets and confidential customer
information and to protect client relationships developed by employees at
KMBS’s expense. New York law recognizes these as legitimate business
interests worth safeguarding. See Estee Lauder, 430 F. Supp. 2d at 177
(citation omitted); Poller, 974 F. Supp. 2d at 215-16.
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Indisputably, employees in the printing and copying industry
commonly change employers, making the use of restrictive covenants
necessary to protect employers’ legitimate business interests. Without
them, employers would not be able to protect their proprietary information
or the goodwill established through customer relationships. Indeed, even
AI recognizes the need to protect customer relationships developed by
employees; it utilizes restrictive covenant agreements to protect those
interests. [See ECF No. 434-13, PageID.26999].
KMBS also establishes that the Contract Defendants expressly
targeted KMBS customers with whom they had developed a significant
client relationship while at KMBS; they used existing relationships to divert
business away from KMBS – further demonstrating KMBS’s need for
restrictive covenants in the Agreement.
The Contract Defendants argue that the non-compete and nonsolicitation provisions are overbroad in several respects. They say the
duration of the non-compete and non-solicitation provisions is overbroad
and untenable because KMBS does not apply the same duration to all
former employees. For employees who worked for KMBS for less than one
year, the duration is equal to the employee’s term of employment; for
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employees who worked for KMBS for one year or longer, the duration is
one year.
This argument is baseless. For it, the Contract Defendants rely on
Estee Lauder. There, the employer had a practice of reducing the noncompete periods of other comparable employees. See Estee Lauder, 430
F. Supp. 2d at 181-82. Here, there are only two groups of employees.
The first encompasses those who worked for KMBS for less than one year.
The duration of their non-compete and non-solicitation provision equals the
length of their employment. The other group encompasses employees who
worked for KMBS for more than one year. This group captures employees
like Contract Defendants; they all worked for KMBS for between nine and
twenty-five years. These two groups are not similarly situated, and Estee
Lauder is inapplicable.
Similarly baseless is Contract Defendants’ argument that “[t]he
Agreement … is void for overbreadth where it prohibits former KMBS
employees from ‘directly or indirectly rendering services’ in any
geographical territory in which they ‘performed duties’ while at KMBS.”
[ECF No. 430, PageID.23349]. This argument relies on the Contract
Defendants’ erroneous misstatement and then interpretation of “performed
duties.”
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Contrary to Contract Defendants’ argument, the Agreement does not
say “performed duties”; it says “performed my duties.” This distinction is
important. As KMBS points out, “[i]t is axiomatic that a contract is to be
interpreted so as to give effect to the intention of the parties as expressed
in the unequivocal language employed.” See Johnson Controls, 323 F.
Supp. 2d at 539. The use of the modifier “my” before “duties” – as opposed
to an unlimited modifier, such as “any,” or no modifier at all – demonstrates
a restriction to the types of duties being referenced. In this context, the
unequivocal language “my duties” could only mean the employee’s
principal or primary employment duties.
Under the plain meaning of the Agreement, the Contract Defendants
argument fails. A KMBS sales representative who merely picked up lunch
one time in an area outside her sales territory, where she had never
conducted business, would not be performing her primary duties in that
location; thus, the Agreement would not prohibit her from working in that
area after leaving KMBS. It is the Contract Defendants’ own misstatement
and expansive reading of the Agreement which causes them to make this
flawed overbreadth argument.
The Contract Defendants next argue that the Agreement is overbroad
and it unduly burdens former employees because it: (1) applies to KMBS’s
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former customers; and (2) prohibits former KMBS employees “years after
the fact, potentially forever” from contacting current KMBS customers with
whom they once had a relationship.
Both aspects of this argument misinterpret the Agreement. First, as
KMBS acknowledges, the Agreement only applies to its current and
prospective customers, not former customers.
Second, the Agreement explicitly limits the duration of the nonsolicitation and non-compete period to one year after the end of
employment with KMBS; thus, it does not prohibit former KMBS employees
from contacting current KMBS customers for “years after the fact,
potentially forever.”
After the one-year period, the Contract Defendants could work for AI
in the same location as they served KMBS and they could compete with
KMBS with respect to its customers. Alternatively, during the one-year
restricted period, the Agreement allows the Contract Defendants to work for
AI in a different geographic area than where they performed services for
KMBS or in the same area if the products and services they are selling do
not compete with KMBS. The Agreement only prohibits the Contract
Defendants from working both in the same geographic area and the same
industry as KMBS for one year. Indeed, even during the restricted period,
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the Agreement allows the Contract Defendants to utilize their sales skills
and earn a livelihood.
Moreover, although the Agreement temporarily prohibits the Contract
Defendants from providing competing services in the eastern Michigan
market, Applied Imaging is free to compete with KMBS in the market as
long as the Contract Defendants are not involved during the one-year
period.
The Agreement does not impose an undue hardship on, or
unreasonably burden, the Contract Defendants. See Poller, 974 F. Supp.
2d at 220.
In addition, several other printing and copying companies compete in
this market, ensuring that the public’s freedom of choice is not impaired.
Thus, the Agreement is not harmful to the public. See Johnson Controls,
323 F. Supp. 2d at 538.
b.
Partial Enforcement of Three Aspects of the
Non-Solicitation Provision
While the Court finds that the non-compete and non-solicitation
provisions of the Agreement are reasonable in duration and geographic
scope, the Contract Defendants demonstrate that certain aspects of the
non-solicitation portion of the Agreement are overbroad and unnecessary.
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This showing, however, does not make the Agreement unenforceable due
to overbreadth. Instead, the Court has the power to partially enforce it.
Partial enforcement is justified because the evidence demonstrates
that KMBS “has in good faith sought to protect [] legitimate business
interest[s]” and did not engage in “coercive use of dominant bargaining
power, or other anti-competitive misconduct.” See BDO Seidman, 93
N.Y.2d at 394; Poller, 974 F. Supp. 2d at 221-22, 225 (exercising authority
to partially enforce restrictive covenant on cross-motions for summary
judgment, and deeming restrictive covenant enforceable “as modified by
the Court”).
First, the Court agrees with the Contract Defendants that the
Agreement is overly broad to the extent it prohibits solicitation of
prospective or potential customers of KMBS. The case law is clear that
“protection of client relationships” does not justify prohibiting former
employees from soliciting potential or prospective customers:
The protection of client relationships does not justify
enforcement of the portions of the non-compete clauses
relating to potential clients of the employer who are merely
solicited [by or] at the direction of [defendants]. An employer
does not forge a protectable client relationship with a
prospective customer simply by sending the company a
business proposal or making a pitch for its business in a sales
meeting. And if the law were to provide otherwise, it would be
difficult, if not impossible, to draw the appropriate line for how
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much contact the employee must have had with a prospective
customer to establish a protectable client relationship.
Mercer Health & Benefits LLC v. DiGregorio, 307 F. Supp. 3d 326, 350
(S.D.N.Y. 2018) (internal citations and quotation marks omitted).
KMBS does not argue that “protection of client relationships” justifies
the part of the Agreement which prohibits the solicitation of its prospective
customers. Rather, KMBS relies on Johnson Controls and Marsh – each of
which refused to enforce the part of a restrictive covenant prohibiting
former employees from soliciting prospective customers of their former
employer – for the proposition that such restrictions are permitted “to
protect trade secrets and confidential information.” See Johnson Controls,
323 F. Supp. 2d at 540; Marsh USA Inc. v. Karasaki, No. 08 CIV. 4195,
2008 WL 4778239, at *18 (S.D.N.Y. Oct. 31, 2008).
Although both of those cases refused to enforce the “prospective
customers” part of the non-solicitation clause – and neither case cites to
additional authority supporting its finding – KMBS decided not to provide
the Court with any case where such a provision was actually enforced.
Nevertheless, the Court need not resolve the parties’ dispute regarding the
controlling law.
KMBS’s only justification for this restriction is to protect its trade
secrets and confidential information. However, such a restriction is not
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necessary where the Agreement contains a broader provision that prohibits
the Contract Defendants from using or disclosing confidential information
and trade secrets at any point following their separation from KMBS.
Because the non-disclosure of confidential information portion of the
Agreement makes the non-solicitation of potential KMBS customers
provision unnecessary, the Court will not enforce the non-solicitation of
potential customers provision. See Johnson Controls, 323 F. Supp. 2d at
540 (“negative covenants restricting competition are enforceable only to the
extent that they satisfy the overriding requirement of reasonableness”).
The Court also finds that the non-solicitation provision is overbroad to
the extent it applies to those KMBS customers with whom the Contract
Defendants had no relationship. Under New York law, KMBS has no
legitimate interest to prohibit former employees from soliciting KMBS
customers with whom the former employee had no relationship. See
Poller, 974 F. Supp. 2d at 216-17, 221.
The Court exercises its authority to grant partial enforcement of the
provision and severs the phrase “or whose identity I have learned” from the
non-solicitation provision. See id. In so doing, the Court limits enforcement
of the non-solicitation provision to KMBS’s customers “with whom [the
Contract Defendants] have dealt while employed by KMBS” – i.e., those
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customers with whom a former employee had some relationship while at
KMBS. As the Contract Defendants acknowledge, numerous cases deem
similar one-year non-solicitation provisions with such a limitation to be
reasonable. [See ECF No. 439, PageID.28414]. See, e.g., Johnson
Controls, 323 F. Supp. 2d at 529-30, 536; Marsh, 2008 WL 4778239, at *3.
Finally, the Court exercises its authority to “blue pencil the covenant”
with respect to the Agreement’s use of the term “or communicate with” in
the non-solicitation provision.
The Contract Defendants contend that the language “communicate
with” makes the non-solicitation provision overly broad because it deems
any communication – including those unrelated to the service or sale of
copier products – improper solicitation. Thus, they say the Agreement
even prohibits a former employee’s “get-together with former clients who
are also personal friends,” as well as where a former KMBS employee
answers an unsolicited call from a disgruntled KMBS customer and says
only that she left KMBS and she is unable to talk because she is subject to
a non-compete agreement.
While this clearly is not the type of conduct KMBS seeks to prohibit –
and KMBS makes no such frivolous claims – out of an abundance of
caution, the Court severs the term “or communicate with” from the
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Agreement’s non-solicitation provision and grants partial enforcement of
the provision as it remains. The remaining portion of the non-solicitation
provision still adequately protects KMBS’s legitimate interests; it prohibits
former employees from calling on customers with whom they dealt while
employed by KMBS.
With this language excised, the Court finds the non-solicitation and
non-compete provisions of the Agreement to be reasonable in time and
geographic scope, necessary to protect KMBS’s legitimate interests, not
unduly burdensome to the Contract Defendants or harmful to the public,
and enforceable.
2.
Duration of Non-Disclosure of Confidential
Information Provisions
The Contract Defendants next argue that the scope and duration of
the non-disclosure of confidential information provisions are overly broad
because they: (1) require former KMBS employees to take all precautions
that KMBS “currently requires or may in the future require”; (2) would allow
KMBS to shield publicly available information from use by designating it as
confidential; and (3) prohibit former KMBS employees from disclosing or
using confidential information “at all times after [their] employment [with]
KMBS ends.” These arguments fail.
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KMBS appropriately points out that the Contract Defendants’ first
argument is misleading. If the Contract Defendants had returned all
confidential information to Konica when they left KMBS employment, there
would be no need to be concerned with, or stay abreast of, future policies
on maintenance of information. Thus, this requirement does not make the
non-disclosure provisions overbroad.
The Contract Defendants’ second argument is also misleading and
wrong. The Agreement’s definition of confidential information excludes
information “generally available to the public.” Thus, KMBS cannot shield
publicly available information by designating it confidential.
Finally, the open-ended nature of the non-disclosure of confidential
information provision does not by itself mean the restriction is overly broad
or unenforceable. KMBS says the Agreement’s non-disclosure of
confidential information provision “is justified by the need to protect [its]
trade secrets and confidential information.” See Johnson Controls, 323 F.
Supp. 2d at 540. The Court agrees with KMBS.
Restrictive covenants aimed at protecting against misappropriation of
an employer’s trade secrets or confidential customer information are
“enforceable to the extent necessary to prevent the disclosure or use of
[such information].” Ashland Mgmt. Inc. v. Altair Investments NA, LLC, 59
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A.D.3d 97, 102 (N.Y. App. Div. 1st Dep’t 2008). “[T]he mere fact that …
confidentiality agreements [are] not limited in duration does not necessarily
make them ipso facto unenforceable.” Id. at 104. Indeed, “[p]rotecting
trade secrets and truly confidential information . . . does not have to be time
limited in every instance where the covenant does not otherwise prevent a
former employee from pursuing his or her livelihood or interfere with
competition.” Id.
Like Ashland, the non-disclosure of confidential information provision
“do[es] not perpetually restrict defendants from working for someone else
or in a similar business. . . .Rather, the [A]greement[] at issue merely
attempt[s] to prevent defendants from unfairly using plaintiff's trade secrets
[and confidential information].” See Ashland, 59 A.D.3d at 105 n.2.
Particularly, as discussed above, the Agreement does not prohibit the
Contract Defendants from using publicly available information related to
KMBS’s customers and business. There is no reason to believe the
restrictive covenant would unreasonably prevent the Contract Defendants
from pursuing their livelihood or from fairly competing with KMBS after the
one-year non-compete and non-solicitation restrictions expire.
The Court finds that the non-disclosure of confidential information
portion of the Agreement is not overly broad. See id. at 105.
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3.
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The Agreement is Not Ambiguous
The Contract Defendants’ third and final argument is that the
Agreement is ambiguous and unenforceable because – despite requiring
its signatories to take “all precautions KMBS currently requires,” to keep
confidential information “in the manner and form requested by KMBS,” and
to be bound by “the attached definitions” – the terms “manner and form”
and “precautions required” are undefined and there are no attached
definitions.
Contract Defendants also say the Agreement is ambiguous because
the requirement that employees abide by “any and all existing and future
KMBS policies and procedures relating to Confidential Information” in
Section 10 of the Agreement “is countermanded in Section 18 [sic], which
states the Agreement is ‘the final, complete and exclusive agreement
between KMBS and [employee] with respect to the subject matter hereof,’
and that neither the employee nor KMBS are bound by ‘any prior or
collateral statements, warranties, representations, agreements,
arrangements or course of dealings between them.’” The Contract
Defendants mistakenly say the merger clause is in Section 18; it actually is
in Section 17.
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Contract Defendants made the same argument regarding the lack of
attached definitions in its motion for judgment on the pleadings. The Court
found that their argument failed because they did not demonstrate that the
Agreement was so vague or indefinite so as to make it impossible to
determine whether a breach occurred. See Swan Media, 841 F. Supp. 2d
at 808. This continues to be true.
As KMBS says, the key non-disclosure of confidential information
provisions of the Agreement are unambiguous and demonstrate that the
Contract Defendants entered into an agreement. Additionally, there are no
essential terms missing that would preclude a determination concerning
breach by the Contract Defendants. Indeed, KMBS does not allege that
the Contract Defendants violated some unidentified policy concerning
confidential information. KMBS alleges the Contract Defendants breached
the unambiguous provisions regarding return of property, non-disclosure of
confidential information, and non-competition and non-solicitation.
Because Contract Defendants fail to show that an essential term is
undefined, the Agreement is not unenforceable due to ambiguity. See
Kowalchuk v. Stroup, 61 A.D.3d 118, 121 (N.Y. App. Div. 1st Dep’t 2009)
(“[M]eeting of the minds must include agreement on all essential terms.”).
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Moreover, while it is unnecessary to determine whether Section 10 of
the Agreement is inconsistent with Section 17’s general merger clause,
even if there is an inconsistency between the provisions, it would not
render the Agreement unenforceable because: (1) the parties agreed on
the essential terms of the Agreement; and (2) the more specific provision
relating to the applicability of KMBS’s policies and procedures would
govern over the general merger clause based on the “well-established
principle of contract interpretation that specific provisions concerning an
issue are controlling over general provisions,” see Huen New York, Inc. v.
Bd. of Educ. Clinton Cent. Sch. Dist., 67 A.D.3d 1337, 1338 (N.Y. App. Div.
4th Dep’t 2009).
4.
The Agreement is Valid and Enforceable
Except as modified with respect to the three aspects of the nonsolicitation provision, the Agreement is valid and enforceable.
The Contract Defendants are not entitled to summary judgment on
their argument that the Agreement is unenforceable as a matter of law due
to overbreadth.
KMBS is entitled to partial summary judgment declaring the
Agreement partially enforceable, as set forth (i.e., modified) above.
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Additionally, as explained further below, because KMBS establishes
each of the remaining elements of its breach of contract claim, other than
with respect to the precise amount of damages it suffered, and shows that
there is no genuine dispute as to any material fact, KMBS is entitled to
summary judgment as to liability on their breach of contract claim against
the Contract Defendants.
C.
KMBS Performed Under the Agreement
KMBS establishes the second element of its breach of contract claim
– i.e., that it adequately performed under the Agreement. See Swan
Media, 841 F. Supp. 2d at 807.
The Contract Defendants do not dispute this element.
D.
The Contract Defendants Breached the Agreement
The third element of its breach of contract claim requires KMBS to
establish that the Contract Defendants breached the Agreement. Id. A
single instance of breach is sufficient for KMBS to satisfy this element.
KMBS more than satisfies this element.
Among other things, by signing the Agreement, each of the Contract
Defendants agreed that for one year after their employment with KMBS
ended, they would: (1) not call on any customer of KMBS with whom they
dealt while employed by KMBS; and (2) not, directly or indirectly, render
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services in the geographic territory where they performed their duties for
KMBS (i.e., the eastern Michigan area) if those services would compete
with products or processes offered by KMBS. Additionally, the Contract
Defendants agreed to return to KMBS at the end of their employment all
KMBS property, including documents, records, and materials related to
KMBS’s business and/or customers.
KMBS sets forth undisputed evidence demonstrating that each of the
Contract Defendants breached at least one or more of the above provisions
of the Agreement.
1.
Matt Aron
KMBS shows that Matt Aron resigned from his Senior Account
Executive position at KMBS’s Troy, Michigan branch on March 1, 2013. He
began working for AI three days later as a Major Account Executive.
There, Aron handled single machine placement business in the Detroit area
– the same area he worked for KMBS. He sold competing printing and
imaging products and services to customers in the same geographic area,
in direct violation of the Agreement.
Aron also violated the Agreement by soliciting KMBS customers in
March, April and May 2013. For example, on March 26, 2013, Aron began
communicating with Advanced Assembly Products, Inc., a KMBS customer,
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regarding their KMBS contracts, and by April 11, 2013, Aron had scheduled
a meeting with the customer to discuss their “Konica Minolta Exit Proposal.”
In an email exchange spanning from the end of April 2013 to the
beginning of May 2013, Aron solicited the business of a different KMBS
customer, even promising that “Applied will make all [KMBS] lease
payments thru and including the December payment and return the Konica
[equipment] to them (KMBS) as well.” [ECF No. 433-40, PageID.26229].
On May 23, 2013, Aron emailed Presbytery of Detroit, a KMBS
customer with whom he had worked while at KMBS, attaching a price
proposal on behalf of AI and a statement promising to pay off the
remainder of its lease with KMBS.
While Aron attempts to dispute some of these allegations, he
explicitly admits the final allegation regarding his solicitation of Presbytery
of Detroit – a KMBS customer with whom he dealt with at KMBS. This
alone demonstrates a breach of the Agreement as a matter of law: Aron
solicited a KMBS customer with whom he dealt and also rendered
competing services in the same geographic area as he worked for KMBS
within a year after his employment with KMBS ended.
Aron’s attempts to dispute the other instances of breach are
unavailing; they are conclusory and fail to acknowledge or contradict the
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objective evidence which blatantly contradicts Aron’s version of events, and
clearly shows breach. See Universal Settlements Int'l, Inc. v. Nat'l Viatical,
Inc., 568 Fed. Appx. 398, 402 (6th Cir. 2014) (disregarding declaration
testimony that was clearly contradicted by the record and noting that
“[w]hen opposing parties tell two different stories, one of which is blatantly
contradicted by the record, so that no reasonable jury could believe it, a
court should not adopt that version of the facts for purposes of . . .
summary judgment” (citation omitted)); Marvin v City of Taylor, 509 F.3d
234, 239 (6th Cir. 2007) (in deciding a summary judgment motion, a court
must only draw reasonable inferences in favor of the nonmoving party; it
need not construe the record “in such a manner that is wholly
unsupportable—in the view of any reasonable jury” considering the
objective evidence); Peterson v. Hall, No. 11-15154, 2013 WL 6050136, at
*4 (E.D. Mich. Nov. 15, 2013) (MDOC records “blatantly contradict[ed]
plaintiff’s version of events” and established that the defendant was
elsewhere and could not have been the person who allegedly shut the
plaintiff's hand in his cell door).
No genuine issue of material fact exists. Aron breached the
Agreement.
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2.
PageID.28636
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Rob Bell
Rob Bell began working at Applied Imaging as a Major Account Sales
Manager on July 16, 2013 – just four days after he resigned from his
Branch Sales Manager position at KMBS. When he started at AI, Bell ran a
team of five Major Account representatives which sold printing and imaging
products and services to companies that had 25 devices or more.
KMBS establishes that Bell breached the Agreement by keeping
KMBS property at the end of his employment. Bell admits that he retained
KMBS property – including, but not limited to: (1) a KMBS document titled
“Copy of Contract Report for Wix Ann Tol,” which has 5385 rows of
information about a significant amount of KMBS customers; (2) a KMBS
deployment guide that provides KMBS service managers with procedures
and specific customer requirements; (3) a KMBS spreadsheet titled MPS
Template, which contains KMBS pricing and embedded formulas created
by KMBS; and (4) KMBS cost analysis spreadsheets – among other
documents – which Bell used by “tweak[ing] the KM labeled stuff to be
Applied Imaging branded materials.”
While Bell contends that these materials are not trade secrets, that is
irrelevant. By failing to return the documents to KMBS at the end of his
employment, he breached the Agreement.
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Moreover, KMBS demonstrates that Bell, like Aron, breached the
Agreement in the year after he left KMBS by rendering services that
compete with KMBS in the same geographic area in which he performed
duties for KMBS.
No genuine dispute of material fact on these issues exists. Bell
breached the Agreement.
3.
The Three Other Contract Defendants
KMBS also establishes that Linda Boyle, Randy Magner, and Anna
Stewart breached the Agreement.
At a minimum, undisputed evidence shows that Boyle breached by:
(1) rendering services for AI that competed with KMBS and which were in
the same territory she performed her duties for KMBS in the year following
her employment with KMBS; (2) retaining KMBS property – including
downloading the contents of her KMBS computer onto a personal flash
drive on her last day of work for KMBS – after she ended her employment
with KMBS; and (3) soliciting business from South Lyon Community
Schools – a KMBS customer within the territory she provided service at
KMBS and with whom she dealt while at KMBS – in February 2014, which
fell within her one-year non-compete and non-solicitation period.
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KMBS establishes that Randy Magner breached the Agreement by:
(1) rendering competing printing and imaging services for AI in the same
sales territory he had at KMBS during the one-year non-compete period;
(2) retaining KMBS property after his employment with KMBS ended; and
(3) directly and/or indirectly soliciting several KMBS customers (e.g., Zion,
Arbor Oakland Group/Arbor Press, and The Wyndgate) during the one-year
restricted period following his employment with KMBS.
KMBS demonstrates that Anna Stewart breached the Agreement by:
(1) engaging in prohibited competition in the same geographic territory as
she worked for KMBS during the one-year restricted period; (2) directly
and/or indirectly soliciting several KMBS customers during one-year
restricted period – including, but not limited to: Troy School District,
Amerisure, Avondale Schools, Great Lakes Wine and Spirits, and East
Detroit Public Schools (with whom, she admits she began soliciting in
September 2012 and “had numerous meetings with [them]” over the
following two years); and (3) retaining KMBS property – including, among
other things, a “KMBS CPP calculator” – after her employment with KMBS
ended.
Boyle, Magner, and Stewart’s feeble response to this overwhelming
evidence is: “[They] similarly dispute Konica’s breach of contract proofs.”
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This is insufficient to overcome KMBS’s motion. See United States v.
Robinson, 390 F.3d 853, 886 (6th Cir. 2004) (“We have cautioned that
issues adverted to in a perfunctory manner, unaccompanied by some effort
at developed argumentation, are deemed waived, and that it is not
sufficient for a party to mention a possible argument in the most skeletal
way, leaving the court to . . . put flesh on its bones.” (citations and internal
quotation marks omitted)).
In addition to the above instances of breach, KMBS claims that the
Contract Defendants breached the Agreement by – among other things –
retaining, using, and/or disclosing KMBS’s confidential information.
However, the Contract Defendants demonstrate genuine issues of material
fact on these claims. This does not matter. A defendant’s single breach is
sufficient to sustain KMBS’s breach of contract claim against that
defendant, and because no genuine issue of material fact exists as to the
breaches discussed, KMBS establishes the third element of its breach of
contract claim: i.e., each of the Contract Defendants breached the
Agreement.
E.
Damages
KMBS says that although additional discovery and expert testimony is
necessary to determine the exact amount of its damages, it is undisputed
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that KMBS suffered at least some damages as a result of the Contract
Defendants’ breach of the Agreement. Therefore, it seeks summary
judgment on liability.
KMBS identifies evidence showing that Applied Imaging began
realizing income from certain KMBS customers in the years after the
Contract Defendants began working for it, and that KMBS had decreased
revenue from those customers during that time. KMBS says this, along
with evidence showing that the Contract Defendants solicited some of
those customers during their one-year restricted period, is sufficient to
establish causation. KMBS says, “it is reasonably certain that if the
Contract Defendants had not breached the Agreements, KMBS would have
retained or expanded its business with the Common Customers and/or, in
some cases, would not have found it necessary to make monetary
concessions to retain their business.”
This does not satisfy KMBS’s initial burden to demonstrate the
absence of a genuine dispute as to any material fact related to causation
and damages. While KMBS identifies evidence that would allow a
reasonable juror to find that the Contract Defendants’ breach of the
Agreement caused KMBS damages, it fails to show that a reasonable jury
could find only in its favor as to causation. See Calderone, 799 F.2d at 259
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(“Where the moving party has the burden . . . [its] showing must be
sufficient for the court to hold that no reasonable trier of fact could find
other than for the moving party.” (internal quotation marks, citation, and
emphasis omitted)).
KMBS’s general reliance on the drop in its hardware and service
revenue after the time the Contract Defendants left for AI – and AI’s rise in
revenue during the following years – is insufficient to satisfy its burden.
KMBS fails to show which breaches of the Agreement led to corresponding
damages. For example, to establish the causal link between Contract
Defendants’ breaches of the Agreement and its damages, KMBS must
show – among other things – that: (1) the Contract Defendants used
KMBS’s property and/or confidential information to acquire business to its
detriment; and/or (2) but for the Contract Defendants leaving, KMBS would
have maintained the business and/or customer(s) it alleges it lost.
Because genuine issues of material fact exist with respect to KMBS’s
damages and causation, KMBS is not entitled to summary judgment on
liability on its breach of contract claim. See Suffolk Cty. Water Auth. v. J.D.
Posillico, Inc., 267 A.D.2d 301, 302 (N.Y. App. Div. 2nd Dep’t 1999) (finding
that issues of fact as to causation preclude granting summary judgment on
liability on breach of contract claim).
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F.
PageID.28642
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Conclusion on Breach of Contract Claim
The Court GRANTS KMBS partial summary judgment on two issues;
the Court declares that the Agreement is valid and partially enforceable –
as modified (partially enforced) – and declares that the Contract
Defendants breached the Agreement as specified above. Because
causation is not established, the Court DENIES KMBS’s request for
summary judgment on liability on its breach of contract claim.
The Court DENIES the Individual Defendants’ motion for summary
judgment with respect to KMBS’s breach of contract claim.
V.
COUNT II – TORTIOUS INTERFERENCE WITH A CONTRACTUAL
RELATIONSHIP
KMBS alleges a tortious interference with contractual relations claim
against AI and Steve Hurt, and seeks summary judgment as to liability on
this claim.
The Court previously held that, while this claim was not preempted,
KMBS cannot recover under this claim for conduct based on
misappropriation of trade secrets.
The choice of law provision in the Agreement which dictates that New
York law governs the breach of contract claim applies only to the breach of
contract claim. Because this is a diversity action, Michigan’s substantive
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tort law applies to the remaining claims. Via The Web Designs, LLC v.
Beauticontrol Cosmetics, Inc., 148 Fed. Appx. 483, 487 (6th Cir. 2005).
The Court has decided that KMBS establishes the first two elements
of a tortious interference with a contract relationship claim: (1) the
existence of a contract between itself and a third party; and (2) a breach of
that contract. Id.
The outcome of this claim rests on the third element: that the breach
was unjustifiably instigated by the defendant. Id. “[T]he third element
requires more than just purposeful or knowing behavior on the part of the
defendant.” Auburn Sales, Inc. v. Cypros Trading & Shipping, Inc., 898
F.3d 710, 715 (6th Cir. 2018) (citation and internal quotation marks
omitted). “Instead, ‘the interference with a business relationship must be
improper in addition to being intentional.’” Id. (citation omitted).
Thus, to satisfy the third element, KMBS must establish “two distinct
requirements . . . : an intentional interference and an improper
interference.” Id. at 716.
First, “intentional” interference means that the defendant’s
purpose or desire is to cause an interference with a contract or
business relationship. Indeed, “[s]ince interference with
contractual relations is an intentional tort, it is required that ...
the injured party must show that the interference with his
contractual relations was either desired by the actor or known
by him to be a substantially certain result of his conduct.”
Michigan appellate courts describe this intent as an “essential
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element of a claim of tortious interference”—often
characterizing a defendant’s intentional conduct as having
“unjustifiably instigated or induced” a breach of contract. But
regardless of how Michigan courts describe this intent, “[t]he
essential thing is the purpose to cause the result. If the actor
does not have this purpose, his conduct does not subject him to
liability ... even if it has the unintended effect of deterring the
third person from dealing with the other.”
Second, “improper” interference means conduct that is either
“(1) wrongful per se; or (2) lawful, but done with malice and
unjustified in law.” “A ‘per se wrongful act’ is an act that is
inherently wrongful or one that is never justified under any
circumstances.’” “On the other hand, ‘if the defendant’s
conduct was not wrongful per se, the plaintiff must demonstrate
specific, affirmative acts that corroborate the unlawful purpose
of the interference.’” Said another way, the “improper” nature
of an interference is shown by proving either (1) conduct that is
inherently wrongful, or (2) conduct that is inherently legitimate,
but which becomes wrongful in the context of the defendant’s
actions and malice. But either way, “[t]he interference must be
both intentional and improper.”
Auburn Sales, 898 F.3d at 716-17 (internal citations and footnotes omitted).
KMBS says AI and Hurt consciously and unjustifiably induced the
Contract Defendants to breach the Agreement by: (1) employing them in
violation of the Agreement; (2) orchestrating a shadow commission scheme
to conceal the Contract Defendants’ breaches: commission for KMBS
customers purportedly solicited by the Contract Defendants was paid to the
Contract Defendants but assigned on the books to a different sales
representative; (3) participating in the Contract Defendants’ solicitation of
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KMBS customers; and (4) participating in their use and disclosure of
KMBS’s confidential information.
Hurt and AI say KMBS cannot establish the third element because
their conduct was motivated by a legitimate business purpose, such that it
does not constitute improper motive or interference. However, the fact that
they acted for their “personal or pecuniary benefit” is not a per se defense
to their actions. See Jim-Bob, Inc. v. Mehling, 178 Mich. App. 71, 96
(1989) (“[T]he fact that certain actions are taken with the intent that they
inure to the personal or pecuniary benefit of the defendant cannot, per se,
in our view, weave a broad and impenetrable blanket of immunity from
liability for those actions. Certainly, in nearly all cases of interference, the
defendant hopes to benefit by way of a resulting advancement of its
personal or business interests. But these ends do not necessarily justify the
means undertaken. A defendant may not, with impunity, sabotage the
contractual agreements of others, [and then cure its wrong merely by
saying] that its actions were motivated by purely business interests. . . .”);
Tata Consultancy Servs., v. Systems. Int’l, Inc., 31 F.3d 416, 425 (6th Cir.
1994) (“Malice could be inferred from the wrongful act of inducing breach of
the contract, and it would be no defense that [defendant] acted not out of
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hatred or ill-will toward [plaintiff], but solely in the interest of feathering its
own economic nest at the expense of a competitor.”).
Importantly, “the defendant’s motive is but one of several factors
which must be weighed in assessing the propriety of the defendant’s
actions.” Jim-Bob, 178 Mich. App. at 96-97; Auburn Sales, 898 F.3d at 717
n.3 (“When determining whether otherwise lawful conduct becomes
wrongful and thus improper, a court can consider several factors, such as
the nature of the conduct, the actor’s motive, the parties’ competing
interests, social interests and policy considerations, proximate cause, and
the relationship between the parties.”).
Nevertheless, the Court finds that KMBS is not entitled to summary
judgment on this claim. In addition to certain material facts which remain in
dispute – such as whether AI and Hurt solicited the Contract Defendants or
the Contract Defendants initiated the relationship, and whether the “shadow
commission scheme” actually existed – KMBS fails to establish the
“intentional interference” requirement of the third element. See Auburn
Sales, 898 F.3d at 716.
KMBS’s motion for partial summary judgment is DENIED with respect
to its tortious interference with a contractual relationship claim.
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VI.
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COUNT IV – MISAPPROPRIATION OF TRADE SECRETS
In Count IV, KMBS alleges Defendants misappropriated its trade
secrets in violation of the Michigan Uniform Trade Secret Act (“MUTSA”).
As a threshold matter, contrary to the Individual Defendants’
argument, New York law does not govern any part of this claim. MUTSA is
a Michigan statute; Michigan law applies.
A.
Misappropriation of Trade Secrets Claims Under MUTSA
To establish a claim for misappropriation of trade secrets under
MUTSA, a plaintiff must prove that: (1) it has a protectable trade secret;
and (2) the defendant improperly acquired, disclosed, or used its trade
secret and knew, or had reason to know, that the trade secret was acquired
by “improper means.” Ajuba Int’l, LLC v. Saharia, 871 F. Supp. 2d 671,
691 (E.D. Mich. 2012); Mich. Comp. Laws § 445.1902(b). In relevant part,
“improper means” includes “breach, or inducement of a breach of a duty to
maintain secrecy.” Mich. Comp. Laws § 445.1902(a).
MUTSA defines a “trade secret” as “information, including a formula,
pattern, compilation, program, device, method, technique, or process” that:
(i) Derives independent economic value, actual or potential,
from not being generally known to, and not being readily
ascertainable by proper means by, other persons who can
obtain economic value from its disclosure or use[;] [and]
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(ii) Is the subject of efforts that are reasonable under the
circumstances to maintain its secrecy.
Mich. Comp. Laws § 445.1902(d).
To obtain protection as a trade secret, information must “‘be a
secret.’” Dura Global Techs., Inc. v. Magna Donnelly Corp., 662 F. Supp.
2d 855, 859 (E.D. Mich. 2009) (quoting Kubik, Inc. v. Hull, 56 Mich. App.
335, 347 (Mich. Ct. App. 1974)). “Trade secrets do not ‘encompass
information which is readily ascertainable, i.e., capable of being acquired
by competitors or the general public without undue difficulty of hardship.’”
Id. (quoting Kubik, 56 Mich. App. at 348). The owner of a trade secret must
take “sufficient measures . . . to guard the secrecy of the information and
preserve its confidentiality.” Kubik, 56 Mich. App. at 347-48.
B.
KMBS’s Misappropriation of Trade Secret’s Claim
KMBS identifies hundreds of specific documents and files which it
claims are trade secrets Defendants misappropriated. Generally, KMBS’s
alleged trade secrets fall into one of four categories: (1) customer lists –
including documents called “Everest,” “the List,” and the “Target Account
Spreadsheet”; (2) KMBS “LESA” pricing; (3) KMBS “Price Books”; and (4)
KMBS cost per page (“CPP”) calculators.
Defendants say KMBS fails to identify any protectable trade secrets
and that they are entitled to summary judgment. They argue that KMBS
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relies on generic terms and conclusory allegations, rather than describing
its trade secrets with specificity. See Ajuba Int’l, LLC v. Saharia, No. 2:11CV-12936, 2014 WL 3420524, at *7 (E.D. Mich. July 14, 2014) (“[T]he
plaintiff must identify the trade secrets with specificity.”). This argument
fails. KMBS does identify its alleged trade secrets with sufficient
particularity.
Alternatively, Defendants say that even if KMBS identified its alleged
trade secrets with sufficient detail, its misappropriation claim still fails
because Konica’s alleged trade secrets are not entitled to trade secret
protection for several reasons.
Notably, Defendants do not seek summary judgment on the ground
that they did not misappropriate KMBS’s information. However, AI says it
reserves the right to address the issue of misappropriation following the
close of discovery or at a time identified by the Court. The record is filled
with evidence – some disputed, some not – of the Individual Defendants’
alleged misappropriation of KMBS information, and there is minimally a
question of fact regarding AI’s participation in and/or consent to the
misappropriation. Defendants, unquestionably, would be unable to
demonstrate an entitlement to summary judgment on the issue of
misappropriation; their only hope is that the information they
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misappropriated is not a trade secret, such that any misappropriation of
that information was not a violation of MUTSA. The Court will not allow
dispositive motions on misappropriation.
KMBS also seeks summary judgment on liability on its MUTSA claim.
KMBS says it sufficiently describes its trade secrets and demonstrates that:
(1) its trade secret information provides independent economic value and is
not readily ascertainable by proper means; (2) it expended considerable
resources to compile and maintain its alleged trade secrets; and (3) despite
taking sufficient measures to preserve the confidential nature of its trade
secrets, Defendants misappropriated them.
Neither side is entitled summary judgment.
1.
KMBS’s LESA Pricing and CPP Calculators
Defendants argue that KMBS’s LESA pricing information and CPP
calculators are not trade secrets because: (1) the LESA pricing information
is publicly available and not secret; and (2) the CPP calculators are widely
used in the industry, not secret, and contain only a simple mathematical
formula. The Court agrees.
Defendants show – and Konica fails to rebut – that the LESA pricing
information is publicly available, and that CPP calculators are widely used
in the industry, contain no secret formula, and could be easily and quickly
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created by someone who knows how to use Microsoft Excel. These
materials are not trade secrets. See PrimePay, LLC v. Barnes, No. 1411838, 2015 WL 2405702, at *21 (E.D. Mich. May 20, 2015) (“Matters of
public knowledge or general knowledge in the industry, or ideas which are
well known or easily ascertainable, cannot be trade secrets.” (citation
omitted)).
2.
KMBS’s Price Books
Defendants say KMBS’s Price Books are not trade secrets because:
(1) Konica discloses its pricing to customers and lists some of its pricing on
its website; (2) KMBS pricing has no economic value to Defendants since
AI does not sell Konica products; and (3) KMBS failed to adequately protect
the secrecy of this information.
KMBS shows genuine issues of material fact exist regarding whether
its Price Books are protectable trade secrets.
Although KMBS discloses some pricing to the public and its
customers know prices under their specific contracts, Konica demonstrates
that its Price Books contains information which it does not disclose to
customers and which it has not made public. Particularly, KMBS shows
that its Price Books include multi-tiered pricing options for its equipment
and services that depend on several factors, as well as internal discounted
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prices that could be offered to customers based on particular
circumstances. And, contrary to Defendants’ argument, even though AI
does not sell KMBS products, Konica’s internal, confidential pricing
information has value to a competitor, like AI, because it would allow a
competitor to formulate customer proposals with very competitive pricing
and with knowledge of what KMBS would likely charge for similar products.
See Dice Corp. v. Bold Techs., 556 Fed. Appx. 378, 385 (6th Cir. 2014)
(“Of critical importance here, to be worthy of trade secret status, the secret
information must afford the owner a competitive advantage by having value
to the owner and potential competitors.” (citation omitted)); PrimePay, 2015
WL 2405702, at *22 (noting that an employer’s “pricing schemes” and “its
markups” are examples of possible trade secrets under MUTSA (citation
omitted)). KMBS also shows that questions of fact exist regarding whether
it took sufficient steps to maintain the secrecy of this information.
Questions of fact exist regarding whether KMBS’s Price Books are
entitled to trade secret protection.
3.
KMBS’s Customer Lists
Michigan courts typically find customer lists which only contain basic
customer information and lists created by a former employee defendant are
not trade secrets under MUTSA. See, e.g., McKesson Med.-Surgical Inc.
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v. Micro Bio-Medics, Inc., 266 F. Supp. 2d 590, 594, 596 (E.D. Mich. 2003)
(finding a customer list compiled by the former employee defendant from
personal and public sources was not a protectable trade secret). “Whether
a customer list qualifies as a trade secret depends on if the information is
‘readily obtainable by proper means’ or ‘discoverable only through
extraordinary efforts and [significant] expenditure of time and money.’”
Innovation Ventures, LLC v. Aspen Fitness Prod., Inc., No. 11-CV-13537,
2015 WL 11071470, at *6 (E.D. Mich. Mar. 31, 2015) (citation and internal
ellipsis omitted).
For the reasons below, the Court finds that whether Konica’s
customer lists are protectable trade secrets is a triable issue of fact. See
Ashland, 59 A.D.3d at 102 (“Whether a plaintiff's customer list and/or other
proprietary information constitutes a trade secret or is readily ascertainable
from public sources is ordinarily a triable issue of fact.”). Particularly, the
following material facts, among others, remain in dispute and preclude
summary judgment on Konica’s customer lists: (1) whether the information
is readily ascertainable by proper means; (2) whether KMBS expended
significant resources (time and/or money) to compile its customer lists; (3)
whether the customer lists provide economic value to KMBS and/or a
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competitor; and (4) whether Konica took sufficient steps to protect its
customer lists.
KMBS’s customer lists contain more than just basic customer
information; additionally, they include the relevant customer contact person
and phone number, model and serial numbers for KMBS equipment, usage
and service history, Konica’s assigned service technicians, customer
contract information, and detailed information about Konica’s sales
territories and “machines in field.”
Konica’s customer lists appear similar to the types of lists which
courts have found to be protectable under MUTSA. For example, in
Innovation Ventures, the court found the plaintiff established at summary
judgment that its customer list was a protected trade secret where the list
“contained information beyond contacts and content generally known to the
public, [such as] specifically identified distributors and confidential
customer-specific pricing information.” 2015 WL 11071470, at *6. See
also Kelly Servs., Inc. v. Noretto, 495 F.Supp.2d 645 (E.D. Mich. 2007);
Merrill Lynch v. Ran, 67 F.Supp.2d 764, 775 (E.D. Mich. 1999) (finding that
brokerage firm’s list of client names, phone numbers, and other confidential
information was entitled to protection as a trade secret under MUTSA)).
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Defendants argue that KMBS’s customer lists are not trade secrets
and/or are not entitled to trade secret protection because, among other
things: (1) the information in the lists is publicly available and/or readily
ascertainable by proper means; (2) courts have found that customer lists
are not protected under MUTSA; and (3) KMBS failed to take sufficient
measures to protect the alleged confidential nature of this information.
Defendants say the information is available publicly from customers and
from commercial resources, such as a UCC subscription or private data
compiling companies.
For this argument, Defendants rely on two lists, which they claim
were available in the “commercial market”; they say one is a UCC list, and
the other was from a private company. However, as KMBS points out, the
origin of the lists is unclear, and the lists are unauthenticated.
Defendants rely upon cases that are distinguishable from the facts
here. See ATC Distrib. Grp., Inc. v. Whatever It Takes Transmissions &
Parts, Inc., 402 F.3d 700 (6th Cir. 2005); McKesson, 266 F. Supp. 2d 590.
In McKesson, the customer list was created and maintained by the
defendant employee from public sources – like phone books – and
personal sources he compiled throughout his career. The court found that
the customer list could not support the former employer’s trade secret claim
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because it “was not a list [the employer] kept itself, nor was it compiled
from any” of the employer’s sources. McKesson, 266 F. Supp. 2d at 594,
596 (E.D. Mich. 2003).
These customer lists, however, were not created by, or the property
of, the Defendants; they belong to Konica. Konica’s customer lists also
contain more information than the list in McKesson, and the majority of the
information is not discoverable from a phone book.
In ATC, the court found a customer list was not protectable under the
Kentucky Uniform Trade Secrets Act because there was “no evidence that
the identities of transmission parts customers contained on [plaintiff’s]
customer list was obtained through great effort or expense, or that the
names on the list were not discoverable from a telephone book or similar
legitimate source.” ATC Distrib. Grp., 402 F.3d at 714.
KMBS’s customer lists contained more information than the lists in
ATC. Moreover, unlike in ATC, KMBS presents evidence that compiling
the information in its lists took great time and effort; that some of the
information was not publicly available or known by customers; and that the
information customers did have was not all available from one source in its
entirety. [See ECF No. 434-11, PageID.26860; ECF No. 433-29,
PageID.26123-24, 26127-29].
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Konica demonstrates a question of fact exists on whether the
information in its customer lists is “readily ascertainable, i.e., capable of
being acquired by competitors or the general public without undue difficulty
of hardship.” See Dura Global, 662 F. Supp. 2d at 859 (citation omitted).
The fact that KMBS customers possess some of the information in
Konica’s customer lists and/or some of the information is obtainable in the
public domain, does not mean that the compiled customer lists are not
trade secrets. See Am. Furukawa, Inc. v. Hossain, No. 14-13633, 2017 WL
4324945, at *5 (E.D. Mich. Sept. 29, 2017) (“A trade secret may consist of
a compilation of information, even if it is compiled from outside sources
available to other persons.”) (citing Mike's Train House, Inc. v. Lionel, LLC,
472 F.3d 398, 410-11 (6th Cir. 2006) (“A trade secret can exist in a
combination of ... components, each of which, by itself, is in the public
domain, but the unified process, design and operation of which, in unique
combination, affords a competitive advantage and is a protectable secret”)).
See also Giasson Aerospace Sci., Inc. v. RCO Eng’g, Inc., 680 F. Supp. 2d
830, 843 (E.D. Mich. 2010) (“Knowledge of vendors, vendor capabilities,
and pricing can be a trade secret even if all of the information can be
obtained through publicly available means so long as the information is not
readily ascertainable.”).
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KMBS also produces evidence that the lists were valuable to it and
competitors because – among other things – they contained all the
information necessary to compete in the market; they gave insight into how
KMBS builds its pricing; and they provided detailed information about sales
territories – including what a territory’s potential was, what customers
bought in the past, what their current equipment was, when leases were
coming up, and what the potential was in the future – to assist in creating
fair and equal territories and quotas based on the machines in field
information. [See ECF No. 434-11, PageID.26860; ECF No. 433-29,
PageID.26123-24, 26127-29; ECF No. 435-2, PageID.27532-33 (Rob Bell
admits that he sent AI’s Vice President of Sales the Everest document
because they were in the process of trying to assign new territories for AI’s
sales representative)]. Indeed, even KMBS’s former Vice President for
Michigan – who Defendants rely upon in their attempt to show Everest is
not a trade secret – testified that Everest would be “priceless” in the hands
of a competitor because it “has everything in it. The hardest thing in the job
for people to do in competitive situations is get that information. If the
competitor gets [Everest], they have it all.” [Id.]. This is strong evidence
that Konica’s customer lists are protectable trade secrets. See Innovation
Ventures, 2015 WL 11071470, at *6 (finding plaintiff’s customer list to be “a
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protected trade secret” because, “[w]ith [it], [defendant] could bypass the
trial and error of working with untested distributors, and could rely instead
on [plaintiff’s] institutional knowledge.”).
Finally, contrary to Defendants’ arguments, KMBS presents evidence
that would allow a reasonable jury to find that it took sufficient steps to
protect the confidential nature of its information; among other things,
Konica required employees to sign the Agreement and also limited access
to certain information based on the position of the employee. See Kubik,
56 Mich. App. at 347-48 (finding that sufficient measures to maintain
secrecy include express agreements between employers and employees,
tacit understandings of confidentiality, inferences from attendant
circumstances, and limits on information access to authorized individuals).
Even with its showings, KMBS fails to demonstrate entitlement to
summary judgment. AI makes strong arguments and presents evidence
that would allow a reasonable jury to conclude that Konica’s customer lists
are not protectable trade secrets.
Because a reasonable jury could conclude either way on whether
KMBS’s customer lists are entitled to trade secret protection, neither side is
entitled to summary judgment on this issue.
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VII.
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DAMAGES
Applied Imaging raises two issues with KMBS’s notice of damages.
First, AI says Konica’s lost profit calculation asserts figures for gross profits
instead of net profits; it says gross profits are not recoverable under
Michigan law. Second, AI contends that instead of presenting “actual lost
sales for any … customers,” Konica only “projected for each of the disputed
customers an average of historical profits into the future” – estimating that
the losses occurred within a seven-and-a-half-year span and continued for
ten years.
KMBS says AI’s argument is premature because the parties have yet
to engage in expert discovery. It also says AI incorrectly assumes that its
lost profit projections represent gross profit numbers.
At this juncture, AI is not entitled to relief on either issue it raises.
First, while AI is correct that gross profits do not appear to be
recoverable in Michigan, see Contract Design Grp., Inc. v. Wayne State
Univ., 635 Fed. Appx. 222, 235-36 (6th Cir. 2015) (collecting cases), this
should not be an issue, because Konica says it is not seeking gross profits.
Second, unless the court misunderstands AI’s argument, there is
nothing wrong with KMBS projecting its lost profits based on historical data,
instead of presenting actual lost profits. Without a crystal ball, Konica
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cannot state with certainty its actual profits lost; a projection based on
historical data – and taking into account appropriate risk factors and
business realities – is acceptable. See Contract Design Grp., Inc. v.
Wayne State Univ., 635 Fed. Appx. 222, 235-37 (6th Cir. 2015).
However, KMBS’s notice does not appear to state when its loss
began for each of its customers; instead, Konica generally says that it
estimates its losses began sometime between April 1, 2011 and November
30, 2018. While this is insufficient, Konica need not supplement its notice
of damages; it can provide this information in its expert report.
Moreover, if Konica intends to project damages for ten years into the
future, it must be certain it can adequately support the projections and – as
AI says – account for attrition and other business realities. The Sixth
Circuit calls such a long projection into question. See Multimatic, Inc. v.
Faurecia Interior Sys. USA, Inc., 358 Fed. Appx. 643, 654 (6th Cir. 2009)
(affirming the exclusion of an expert report on lost profits that included a
“ten-year prediction about the fortunes of the American automotive
industry” upon concluding that the opinion rested on speculation regarding
profit margins and future demand for a product.).
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VIII. CONCLUSION
The Court GRANTS KMBS partial summary judgment on two issues.
The Court DECLARES:
A.
The Agreement is valid and partially enforceable as modified
(partially enforced). The Court: (1) declines to enforce the nonsolicitation of potential customers provision of the Agreement;
(2) severs the phrase “or whose identity I have learned” from
the non-solicitation provision, and limits enforcement of the
non-solicitation provision to KMBS’s customer with whom the
Contract Defendants dealt with while employed by KMBS; and
(3) severs the term “or communicate with” from the
Agreement’s non-solicitation provision.
B.
The Contract Defendants breached the Agreement as specified
above.
In all other respects, the Court DENIES KMBS’s motion [ECF No.
431].
The Court DENIES Defendants’ motions for partial summary
judgment [ECF No. 430, 432].
IT IS ORDERED.
S/ Victoria A. Roberts
Victoria A. Roberts
United States District Judge
Dated: July 7, 2020
61
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