Integrated Management Systems, Inc. v. Basavegowda
Filing
17
ORDER Denying 10 Plaintiff's Motion for Summary Judgment. Signed by District Judge Denise Page Hood. (MacKay, K)
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MICHIGAN
SOUTHERN DIVISION
INTEGRATED MANAGEMENT SYSTEMS, INC.,
Plaintiff,
CASE NO. 17-13764
HON. DENISE PAGE HOOD
v.
MAHESH BASAVEGOWDA,
Defendant.
/
ORDER DENYING PLAINTIFF’S MOTION FOR SUMMARY
JUDGMENT [#10]
I.
BACKGROUND
On November 20, 2017, Plaintiff Integrated Management Systems, Inc.
(“IMSI”)
filed
a
Complaint
against
Defendant
Mahesh
Basavegowda
(“Basavegowda”) alleging that Basavegowda breached the terms of his Employment
Agreement. (Doc # 1) On October 3, 2018, IMSI filed a Motion for Summary
Judgment. (Doc # 10) Basavegowda filed his Response on October 24, 2018. (Doc
# 12) IMSI filed its Reply on November 7, 2018. (Doc # 13) Basavegowda filed a
Sur-Reply on November 21, 2018. (Doc # 16)
IMSI is a professional services and staffing firm that hires technically trained
information technology workers and provides those workers to third-party business
clients (“end-clients”). (Doc # 1, Pg ID 2) The workers perform their job duties on
1
the end-clients’ premises, but are paid employees of IMSI. (Id.) Since IMSI serves
as an intermediary between the workers and the end-clients, IMSI competes with
other staffing agencies and faces the risk of disintermediation. (Id.) IMSI describes
“disintermediation” as when end-clients can contract directly with workers without
an intermediary. (Id.)
Some of IMSI’s employees are foreign workers in the United States on H-1B
visas. (Id.) On or around March 1, 2016, IMSI sponsored Basavegowda for an H1B visa and expended thousands of dollars to bring him to the United States. (Id. at
2-3.)
The costs included: recruitment costs, visa filing fees, lawyer fees,
administrative costs, and local agency fees.
(Id. at 3.)
IMSI also assisted
Basavegowda with his green card petition in 2013. (Id.) Basavegowda’s petition
was approved in 2017, which enabled him to obtain permanent immigrant status in
the United States. (Id.) In order for Basavegowda to receive his H-1B visa and
green card, he was required to obtain a skilled job. (Id.) Due to the efforts of IMSI,
Basavegowda fulfilled these requirements by obtaining employment with one of
IMSI’s end-clients, SAP-Ariba, a software and information technology services
company. (Id.)
On April 26, 2017, Basavegowda signed an Employment Agreement with
IMSI. (Id.) Under the terms of the Agreement, IMSI hired Basavegowda as a
Programmer/Analyst at a salary of $131,810 annually, and provided him with
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medical and life insurances. (Id.) In the “Non-Compete/Termination” provision of
the Agreement, Basavegowda consented to “not to enter into any employment
agreement directly with IMSI’s [end-client] or through any other contract company
who provides similar services for a minimum period of 24 months after [the] start of
employment with IMSI for an end-client.” (Doc # 1-1, Pg ID 8) Basavegowda also
agreed that should he “resign or terminate employment with [IMSI] prior to the 24
month minimum period, in consideration of the benefits that [he] is deriving, [he]
shall pay a lump-sum amount of liquidated damages equal to two years of gross
margin based on IMSI project billing rate to cover for loss of business.” (Id.) IMSI
alleges that the Agreement’s liquidated damages provision was directly
proportionate to the damages that IMSI would suffer because the provision only
seeks the amount of money that IMSI would suffer from a loss of profits earned from
placing Basavegowda with SAP-Ariba. (Doc # 1, Pg ID 4)
On or around October 27, 2017, Basavegowda resigned his employment with
IMSI and accepted direct employment with SAP-Ariba after only approximately six
months of employment with IMSI. (Id. at 5.) IMSI claims SAP-Ariba filed for a
transfer of Basavegowda’s H-1B Visa to SAP-Ariba months before Basavegowda
resigned from IMSI. (Id.) It is now alleged by IMSI that Basavegowda breached
his Agreement by accepting employment with SAP-Ariba within 24 months after
the start of his employment with IMSI. (Id.)
3
IMSI seeks monetary damages for breach of the Employment Agreement in
the amount of $112,944,1 reasonable attorneys’ fees and costs, and any further relief
that this Court deems just and equitable. (Doc # 10, Pg ID 62)
II.
ANALYSIS
A. Standard of Review
Rule 56(a) of the Federal Rules of Civil Procedures provides that the 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.”
Fed. R. Civ. P. 56(a). The presence of factual disputes will preclude granting of
summary judgment only if the disputes are genuine and concern material facts.
Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). A dispute about a
material fact is “genuine” only if “the evidence is such that a reasonable jury could
return a verdict for the nonmoving party.” Id. Although the court must view
admissible evidence in the light most favorable to the nonmoving party, where “the
moving party has carried its burden under Rule 56(c), its opponent must do more
than simply show that there is some metaphysical doubt as to the material facts.”
Matsushita Electric Industrial Co. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986);
Celotex Corp. v. Catrett, 477 U.S. 317, 323-24 (1986). Summary judgment must be
1
IMSI originally requested $80,635.50 in damages in its Complaint. (Doc # 1, Pg ID 7)
4
entered against a party who fails to make a showing sufficient to establish the
existence of an element essential to that party’s case, and on which that party will
bear the burden of proof at trial. In such a situation, there can be “no genuine issue
as to any material fact,” since a complete failure of proof concerning an essential
element of the nonmoving party’s case necessarily renders all other facts immaterial.
Celotex Corp., 477 U.S. at 322-23. A court must look to the substantive law to
identify which facts are material. Anderson, 477 U.S. at 248.
B. Breach of Contract Claim
IMSI argues that Basavegowda’s alleged breach of the Agreement is
actionable
because
the
Agreement’s
non-compete
provision
is
neither
unconscionable nor excessive. Specifically, IMSI asserts that the non-compete
provision is valid since it: (1) furthers a legitimate business interest; and (2) has a
reasonable scope. See M.C.L. § 445.774a. First, IMSI claims that its reasonable
competitive business interest is preventing disintermediation. According to IMSI,
while the Sixth Circuit has yet to set any precedent on the topic, federal appellate
courts and various state courts have held that disintermediation is a reasonable
competitive business interest. See Consultants & Designers v. Butler Serv. Grp.,
720 F.2d 1553, 1558-59 (11th Cir. 1983).
Second, regarding the scope of the non-compete provision, IMSI argues that
its provision is lawful pursuant to M.C.L. § 445.774a, which states that non-compete
5
agreements are valid if they are reasonable as to their duration, geographic area, and
the type of employment or line of business. IMSI contends that the non-compete
provision’s two-year duration is a temporal scope which Michigan courts have
consistently upheld as reasonable. Certified Restoration Dry Cleaning Network,
L.L.C. v. Tenke Corp., 511 F.3d 535, 549 (6th Cir. 2007) IMSI argues that the noncompete provision’s geographic scope is permissible since the non-compete clause
has no limiting geographic scope, which meant that Basavegowda was free to work
anywhere in the United States. IMSI contends that the non-compete provision does
not improperly limit the type of employment or line of business that Basavegowda
could enter after leaving IMSI because he was only prevented from seeking
employment with SAP-Ariba or through any other contract company who provides
similar services.
IMSI additionally claims that it is entitled to liquidated damages for
Basavegowda’s alleged breach of the Agreement. IMSI asserts that the Agreement’s
liquidated damages provision is reasonable because it was costly to bring
Basavegowda to the United States. IMSI further contends that its request for
liquidated damages is justified to remedy the fact that the staffing agency lost
potential profits due to Basavegowda’s alleged breach of the Agreement. Regarding
the amount, IMSI claims that Basavegowda’s gross margin that is attributable to
IMSI’s employment, is approximately $27.15 per hour, which equals two years of
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gross margin based on IMSI’s project billing rate to cover for loss of business. The
total amount of liquidated damages that IMSI seeks is $112,944.2
In response, Basavegowda argues that the non-compete provision was invalid
pursuant to Michigan law. First, Basavegowda contends that courts have only
recognized confidential information, goodwill, or trade secrets as reasonable
competitive business interests under Michigan law, and he argues that these interests
are not present here. (Doc # 12, Pg ID 213-214) Basavegowda claims that the cases
that IMSI cites to in order to demonstrate that federal courts have held that
disintermediation is a reasonable competitive business interest are distinguishable
from the instant case. Basavegowda alleges that IMSI relies on two federal cases,
but in one case,3 the two parties were staffing firms, and in the other,4 the employee
was privy to a substantial amount of confidential information. Basavegowda argues
that these facts are dissimilar from the facts here. Further, Basavegowda asserts that
in Teachout Sec. Servs., Inc. v. Thomas, No. 293009, 2010 WL 4104685, at *4
(Mich. Ct. App. Oct. 19, 2010), the Michigan Court of Appeals straightforwardly
2
According to IMSI, Basavegowda agreed to pay IMSI an hourly rate of $63.3710/hour, for a total
annual salary of $131, 810. (Doc # 10-25, Pg ID 164) IMSI also alleges that “[d]ividing those
two numbers equals 2080 total working hours per year. Two years of working hours is 4160.
Multiplying that total number of hours by Plaintiff’s $27.15 hourly margin yields total lost margins
of $112,944.” (Doc # 10, Pg ID 62)
3
Consultants & Designers, 720 F.2d at 1553 (11th Cir. 1983).
4
HR Staffing Consultants LLC v. Butts, 627 Fed. Appx. 168 (3d Cir. 2015).
7
held that “no Michigan court has cited ‘disintermediation’ as a reasonable
competitive business interest for limiting competition of former employees.”
Second,
Basavegowda
claims
that
the
non-compete
provision
is
unenforceable because its duration, geographic area, and the type of employment or
line of business stipulations are unreasonable. St. Clair Med., P.C. v Borgiel, 270
Mich. App. 260, 266 (2006).
Basavegowda contends that the non-compete
provision’s duration is unreasonable because in most of the cases cited by IMSI, the
acceptable non-compete periods were less than two years. Basavegowda also argues
that the geographic area and type of employment or line of business conditions of
the non-compete provision are unreasonable considering that pursuant to 8 U.S.C §
1184(n)(1), H-1B employees can only accept new employment upon the approval of
the United States Citizenship and Immigration Services (“USCIS”).
Basavegowda responds to IMSI’s liquidated damages request by arguing that
its request violates federal and Michigan law. Basavegowda claims that under
federal law, employers cannot require H-1B employees to pay a penalty for ceasing
employment with his or her employer prior to a date agreed upon between the
employer and employee. See 8 U.S.C. §1182(n)(2)(C)(vi)(I). Basavegowda then
accurately argues that 8 U.S.C. §1182(n)(2)(C)(vi)(I) requires the Court to determine
whether a required payment is considered a penalty pursuant to relevant State law.
8
Basavegowda claims that under Michigan law, the difference between
liquidated damages and non-allowable penalties is determined by examining
whether requests are reasonable in relation to the possible injury suffered. Curran
v. Williams, 352 Mich. 278, 282 (1958). Basavegowda argues that the liquidated
damages provision at issue here is unreasonable because the conditions existing
between both parties at the time the contract was made, which he contends is the
proper way to evaluate these types of provisions, were one-sided and in favor of
IMSI. According to Basavegowda, these conditions include: (1) IMSI illegally
requiring/permitting Basavegowda to pay visa fees (i.e. filing, processing, attorney,
etc.); (2) inadequate consideration; (3) no negotiations or validation of the terms
between the parties; (4) the vast inequality of bargaining power between the parties;
(5) an inconspicuous and arbitrary liquidated damages clause; (6) IMSI failing to
suggest or recommend that Basavegowda consult with an attorney before signing
the Agreement; (7) IMSI seeking to enforce a penalty as opposed to liquidated
damages in violation of federal and Michigan law; and (8) IMSI being aware of the
significant amount of hardship liquidated damages imposing two years of gross
profit margin would cause Basavegowda. (Doc # 12, Pg ID 222)
Basavegowda next argues that since under Michigan law, the distinction
between a valid liquidated damages clause and an illegal penalty depends on the
relationship between the amount stipulated to in the liquidated damages clause and
9
the subject matter of the action, the liquidated damages provision should be
considered unreasonable based on accepted customs.
(Id. at 222-223.)
Basavegowda claims that disintermediation is customarily addressed through a
conversion or placement fee clause in the staffing services agreement between the
agency and client—not between the agency and the employee. Consequently,
Basavegowda argues that based on custom considerations, IMSI should be seeking
liquidated damages from SAP-Ariba. Additionally, Basavegowda contends that
because fees paid to the staffing firm in these instances are typically waived after six
months, Basavegowda should not be responsible for paying liquidated damages.
To state a claim for breach of contract in Michigan, a plaintiff must allege: (1)
the existence of a valid contract, (2) the terms of the contract, (3) breach of the
contract, and (4) an injury caused by the breach. See Webster v. Edward D. Jones
& Co., L.P., 197 F.3d 815, 819 (6th Cir. 1999).
Non-compete agreements are specifically authorized under Michigan law if
they: (a) protect the employer's reasonable competitive business interests, and (b)
are reasonable in duration, geographical scope, and type of employment or line of
business. St. Clair Med., P.C., 270 Mich. App. at 266. These agreements are
generally “disfavored as restraints of commerce and are only enforceable to the
extent they are reasonable.” Teachout Security Services, 2010 WL 4104685, at *1
(quoting Coates v. Bastian Brothers, Inc., 276 Mich.App. 498, 507 (2007)). “The
10
burden of demonstrating the validity of the agreement is on the party seeking
enforcement.” Coates v. Bastian Bros., Inc., 276 Mich.App 498, 507 (2007).
“To be reasonable in relation to an employer's competitive business interest,
a restrictive covenant must protect against the employee's gaining some unfair
advantage in competition with the employer, but not prohibit the employee from
using general knowledge or skill.” St. Clair Med., 270 Mich.App. at 266. The
employer's reasonable competitive business interests include “preventing the
anticompetitive use of confidential information.” Rooyakker & Sitz, PLLC v. Plante
& Moran, 276 Mich.App. 146, 158 (2007) (quotation marks omitted). Reasonable
competitive business interests also include protecting “close contact with the
employer's customers or customer lists, or cost factors and pricing.” Certified
Restoration Dry Cleaning Network, L.L.C., 511 F.3d at 547 (quotation marks
omitted).
The Court finds that here, there is a genuine dispute as to whether
disintermediation is considered a reasonable competitive business interest. IMSI
relies on various nonbinding cases to support its argument that its Agreement with
Basavegowda was designed to protect its legitimate and reasonable competitive
business interest in preventing a customer and employee from “cutting out the
‘middleman’ ” and dealing directly with each other. Consultants & Designers, 720
F.2d at 1558-1559; Borg-Warner Protective Servs. Corp. v. Guardsmark, Inc., 946
11
F. Supp. 495, 502 (E.D. Ky. 1996); Columbus Med. Servs., LLC v. David Thomas &
Liberty Healthcare Corp., 308 S.W.3d 368, 389 (Tenn. Ct. App. 2009). However,
the Sixth Circuit has not addressed this issue, and at least one Michigan court has
found that disintermediation is not a reasonable competitive business interest. See
Teachout Security Services, 2010 WL 4104685, at *1.
While there is a genuine issue of material fact as to the first prong, protecting
the employer's reasonable competitive business interests, the Court will still address
the arguments raised by both parties as to the second prong of the non-compete
analysis. Regarding duration, as mentioned, IMSI asserts that two years is a
reasonable amount of time for the Agreement to be in effect. The Court agrees.
Courts have found that time periods ranging from six months to three years are
reasonable, and this Court finds that the Agreement’s two-year period is not
excessive.
Lowry Computer Products v. Head, 984 F.Supp. 1111, 1116
(E.D.Mich.1997).
Next, the Court finds that the Agreement’s geographic limitation is
reasonable. Geographic limitations in non-competition agreements must be tailored
so that the scope of the agreement is no greater than is reasonably necessary to
protect the employer's legitimate business interests. Superior Consulting Co. v.
Walling, 851 F.Supp. 839, 847 (E.D.Mich.1994). Here, the Agreement does not
have a limiting geographic scope. As IMSI points out, following Basavegowda’s
12
departure, he had the ability to work anywhere in the United States. Basavegowda
argues that because he was an H-1B employee, his job search process was limited
because he could only accept new employment upon the approval of the USCIS.
Though Basavegowda’s claim might be true, it does not change the fact that the
Agreement did not limit where he could work.
Therefore, the Agreement’s
geographic scope was reasonable.
The Agreement was also reasonable as to line of work. Courts have held that
a limitation on working in any capacity for a competitor of a former employer is too
broad to be enforceable. Superior Consulting Co., 851 F.Supp. at 847; see also
Telxon Corp. v. Hoffman, 720 F.Supp. 657 (N.D.Ill.1989). Here, the Court finds that
the Agreement only narrowly restricted the type of employment or line of business
that Basavegowda could enter considering that he was only barred from seeking
employment “with [IMSI’s] end-client or through any other contract company who
provides similar services.” (Doc # 1-1, Pg ID 8)
The Court does not find it appropriate to address whether IMSI is entitled to
liquidated damages at this stage in the litigation because the Court has not found that
Basavegowda breached the terms of the Agreement.
For the reasons set forth above, Plaintiff’s Motion for Summary Judgment is
DENIED.
III.
CONCLUSION
13
For the reasons set forth above,
IT IS HEREBY ORDERED that Plaintiff Integrated Management Systems,
Inc.’s Motion for Summary Judgment (Doc # 10) is DENIED.
s/Denise Page Hood
DENISE PAGE HOOD
Chief Judge
Dated:
August 16, 2019
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