NSEM, LLC v. Butler
Filing
54
Memorandum Opinion and ORDER granting in part and denying in part Defendant's 34 Motion for Summary Judgment. Signed by District Judge Halil S. Ozerden on 8/15/2018. (JD)
IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF MISSISSIPPI
NORTHERN DIVISION
NSEM, LLC, previously known as
New South Equipment Mats, LLC
v.
PLAINTIFF
Civil No. 3:17cv798-HSO-LRA
STEPHEN E. BUTLER
DEFENDANT
MEMORANDUM OPINION AND ORDER GRANTING IN PART AND
DENYING IN PART DEFENDANT’S MOTION [34] FOR SUMMARY
JUDGMENT
BEFORE THE COURT is the Motion [34] for Summary Judgment filed by
Defendant Stephen Butler (“Butler”).
Plaintiff NSEM, LLC, formerly known as
New South Equipment Mats, LLC (“New South”), claims that when it hired Butler
as a salesman, it required him to sign a Confidentiality and Non-Solicitation
Agreement.
New South Equipment Mats later sold substantially all of its assets to
a different company, changed its name to NSEM, and terminated Butler from his
employment.
After Butler went to work for Sterling Lumber, a competitor of New
South, he allegedly began contacting some of his former customers from New South.
In this case, New South asserts that Butler has violated his Confidentiality
and Non-Solicitation Agreement and has misappropriated trade secrets. Butler
moves for summary judgment, arguing that New South cannot enforce the
Agreement against him because New South has terminated its business and
because the Agreement is unreasonable. Furthermore, Butler contends that New
South no longer owns any trade secrets. After due consideration of the record, the
submissions on file, and relevant legal authority, the Court finds that Butler’s
Motion [34] should be granted in part as to New South’s breach of contract, unjust
enrichment, and conversion claims.
These claims will be dismissed with prejudice.
Butler’s Motion will be denied in part without prejudice as to New South’s claim for
misappropriation of trade secrets.
I. BACKGROUND
A.
Factual Background
1.
New South hires Butler and he executes a Confidentiality and NonSolicitation Agreement.
Most of the relevant facts in this case are not in dispute.
In January 2014,
New South hired Butler as a sales agent. Def.’s Aff. [34-1] ¶ 3. New South was a
company that sold “access mats,” which are wooden mats used to create temporary
roads for transporting construction equipment. Id. ¶ 4.
On January 23, 2014,
Butler and New South executed a “Confidentiality and Non-Solicitation
Agreement.”
Id. ¶ 6; Confidentiality and Non-Solicitation Agreement [34-2] at 1, 2.
This Agreement stated that New South “is in the business of selling and leasing
equipment mats,” Confidentiality and Non-Solicitation Agreement [34-2] at 1, and
provided in relevant part as follows:
1.
Agreement. Employee expressly agrees to the following:
a.
Employee agrees that, during the term of his employment
with the Company and for a period of twenty-four (24)
months after the termination thereof, he will not directly
or indirectly solicit or otherwise induce any employees of
the Company to leave their employment with the
2
Company, nor will Employee directly or indirectly solicit or
otherwise induce any of the Company’s customers,
accounts, suppliers or contacts to reduce or cease doing
business with the Company.
b.
....
2.
Employee acknowledges and agrees that all accounts,
suppliers or customers secured or serviced by Employee
while employed by the Company, as well as the opportunity
to solicit, secure or service same through Employee’s efforts
while employed by the Company, are the exclusive
property of the Company. Employee recognizes that the
Company necessarily will entrust him with confidential
business information and trade secrets, including but not
limited to the identity of accounts, suppliers, customers
and others having business dealings with the Company,
pricing information pertaining to the Company’s business,
and other information, which information is the exclusive
property of the Company, and the entrusting of which
necessitates absolute confidentiality. Employee agrees
never to disclose any of this information except as
authorized by the Company, agrees that he will never use
any of the information in any manner which is adverse to
the interests of the Company, and that he shall return any
and all originals and copies (and any extracts, summaries
or data pertaining thereto), in any format whatsoever,
containing or pertaining to said information to the
Company immediately upon the termination of his
employment for any reason.
Miscellaneous. . . . (b) Parties in Interest; Assignment. This
Agreement shall be binding upon and shall inure to the benefit of
the parties, their respective heirs, representatives, successors
and assigns. No party may assign its rights hereunder without
the written consent of the other.
Id. at 1-2.
2.
New South sells substantially all of its assets in an Asset Purchase
Agreement with NSAES.
On July 15, 2016, New South sold substantially all of its assets to New South
Access & Environmental Solutions, LLC (“NSAES”), through an Asset Purchase
3
Agreement. St. John Aff. [48-3] ¶ 4; Asset Purchase Agreement [48-2]. According
to § 2.01 of the Asset Purchase Agreement, New South sold, except for certain
specifically identified assets, all of its
right, title and interest in, to and under all of the assets, properties and
rights of every kind and nature, whether real, personal or mixed,
tangible or intangible (including goodwill), 1 wherever located and
whether now existing or hereafter acquired, which relate to, or are used
or held for use in connection with, the Business . . . .
Asset Purchase Agreement [48-2] at 3.
The Asset Purchase Agreement defines “Business” as “laying and installing
Mats and similar products, the sales and distribution of Mats, providing project
management services and providing environmental solutions such as site
evaluation, access planning, and other related site services.” Id. at 2.
“Mats” are
defined in the Agreement as any and all types of mats, including rig mats. Id. at
61.
The assets sold included all of New South’s “right, title and interest in and to
(i) its customer accounts arising from or relating to the Business, . . and (ii) the
outstanding contracts relating to such customer accounts.” Id. at 2.
New South
also sold its real property, “[t]he value of the Business as a going concern,” records
of its customer lists and customer purchasing histories, and all intellectual
property. Id. at 2-3.
Excluded from the sale were “Rig Mats” and “NSA Mats.” Id. at 4.
1
The
Though the Agreement does not define goodwill, Black’s Law Dictionary defines the term as “[a] business’s
reputation, patronage, and other intangible assets that are considered when appraising the business, esp. for
purchase; the ability to earn income in excess of the income that would be expected form the business viewed as a
mere collection of assets.” Black’s Law Dictionary 715 (8th ed. 2004).
4
Agreement defines “Rig Mats” generally as all mats owned by New South encased in
a steel frame.
Id. at 63.
The specific “Rig Mats” excluded from the asset sale were
“[a]ll Rig Mats used in the Business located in North America.” Id. at 79.
“NSA Mats” are defined as “the Mats owned by NSA on the Closing Date
having a value approximately equal to the NSA Mat Value,” which is $502,000.00.
Id. at 62. “NSA” is New South America, a Colombian joint stock company. Id. at
4.
Though the NSA Mats were excluded from the items sold, the Asset Purchase
Agreement included a provision that contained certain requirements for the NSA
Mats.
Id. at 12.
The Asset Purchase Agreement required New South, by
December 31, 2016, to either: 1) pay NSAES the full “NSA Mat Value;” 2) sell all of
the NSA Mats, and within ten days of New South’s receipt of any proceeds from
that sale, pay NSAES an amount equal to the sale proceeds; or 3) deliver the NSA
Mats to NSAES. Id. at 12.
In the event New South chose the second option (to
sell the NSA Mats) and the sales price exceeded the NSA Mat Value, New South
would be entitled to retain any excess proceeds from such sale after paying NSAES
the NSA Mat Value.
Id.
The Agreement provided that if New South did not pay
for, sell, or deliver the NSA Mats by December 31, 2016, then the next earn-out
payment by NSAES to New South would be reduced by the NSA Mat Value. Id. at
13.
The Asset Purchase Agreement contained a non-competition covenant
prohibiting New South from engaging in the “Covered Business,” meaning the
business of “Mats,” within “the Territory” for five years. Id. at 32.
5
“Territory” is
defined as “the area within the continents (sic) of North America.”
Id. at 64.
The Agreement also required New South to change its company name. Id.
at 33.
As part of the sale, NSAES agreed to pay New South earn-out payments
based on NSAES’s earnings. Id. at 8. Pursuant to the Asset Purchase
Agreement, New South terminated all employees, including Butler, in July 2016.
Id. at 35. Butler attests that he “was initially reassigned to” NSAES and then
“reassigned to Jones Energy.”
3.
Def. Aff. [34-1] ¶ 13-14.
Butler joins a New South competitor and contacts his former
customers.
In July 2017, Butler left Jones and “joined Sterling Lumber, a company based
in Phoenix, Illinois that [sells] access mats nationwide.” Id. ¶ 20.
Drew St. John,
General Manager of New South, states that Sterling “is a business competitor of
New South in the mat business.” St. John Aff. [48-3] ¶ 18.
On July 28, 2017, Butler emailed Irby Construction, Butler Email to Irby [485], a company Butler was first introduced to while working for New South, St. John
Aff. [48-3] ¶ 12.
Butler informed Irby that he was now with Sterling, mentioned
the comparative benefits of one of Sterling’s products, and asked Irby to keep Butler
in mind for any future matting projects. Butler Email to Irby [48-5].
St. John
alleges that Butler also successfully solicited AEP Transmission, another company
Butler was introduced to during his employment with New South, for a mat job.
St. John Aff. [48-3] ¶ 12, 18.
Because AEP Transmission accepted the sale from
Butler, New South allegedly lost a large sum of money “in earn-out income from
that lost mat project.”
Id. ¶ 18.
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B.
Procedural History
1.
New South’s Complaint and Amended Complaint
On October 3, 2017, New South filed a Complaint against Butler in the
Circuit Court of Madison County, Mississippi.
Compl. [1-1]. New South claimed
that Butler had violated the Confidentiality and Non-Solicitation Agreement by
contacting Irby Construction about doing business with Sterling within twenty-four
months after termination of his employment with New South. Id. at 2. The
Complaint sought injunctive relief enjoining Butler from disclosing New South’s
confidential business information and soliciting New South’s customers. Id. at 2-5.
On October 4, 2017, Butler removed the case to this Court on grounds of diversity
jurisdiction.
Not. of Removal [1].
On October 6, 2017, New South filed a Motion [4] for Temporary Restraining
Order and/or Preliminary Injunction, incorporating by reference its Complaint.
Following a hearing, the Court denied New South’s Motion, Hearing Tr. [34-6] at
60, on grounds that under Mississippi law, the termination of an employer’s
business generally terminates the restrictive employment covenant, id. at 48 (citing
Herring Gas Co. v. Pine Belt Gas, Inc., 2 So. 3d 636 (Miss. 2009)).
The Court found
that it was not clear to what extent New South’s assets were sold and to what
extent New South retained an interest in any assets, as the parties had not
submitted the Asset Purchase Agreement to the Court. Id. at 56-57.
Noting that
the Confidentiality and Non-Solicitation Agreement did not contain a geographic
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limitation, id. at 52, the Court found that it was also not clear whether the lack of
such a limit would be reasonable, given the nature of New South’s business, id.
New South filed an Amended Complaint on December 20, 2017, adding the
allegation that on August 23, 2017, Butler solicited monthly jobs from AEP
Transmission and shared confidential information such as customer contacts with
Sterling.
Am. Compl. [30] at 2-3.
The Amended Complaint alleges that Butler
misappropriated confidential information provided to him by New South such as
product specifications, customer contacts, pricing terms, and profit margins. Id. at
3.
New South claims that Butler shared this information with Sterling Lumber.
Id.
The Amended Complaint seeks an injunction enjoining Butler from disclosing
or utilizing New South’s confidential information or trade secrets, requiring Butler
to return New South’s property and files, and requiring Butler to account for New
South’s confidential information. Id. at 4.
In Count II of the Amended Complaint,
New South advances a claim for misappropriation of trade secrets, id. at 5, alleging
that its trade secrets include the identity of its “accounts, suppliers, customers and
others having dealings with” New South. Id.
Count III asserts a claim for
conversion, alleging that Butler removed and retained New South’s confidential
information and converted it to his personal economic advantage. Id. at 7.
New
South claims in Count IV that Butler breached the Confidentiality and NonSolicitation Agreement by disclosing the identity of New South’s customers, failing
to return all confidential business information, and soliciting New South’s
8
customers. Id. at 8-9.
The Amended Complaint also brings a claim for unjust
enrichment. Id. at 9-10.
2.
Butler’s Motion for Summary Judgment
On January 19, 2018, while discovery was ongoing, Butler filed a Motion [34]
for Summary Judgment, arguing that “[t]here is simply no basis, either under the
actual terms of the Non-Solicitation Agreement or Mississippi law, to find that New
South can now enforce the agreement against Mr. Butler.”
12.
Def.’s Mem. [36] at 11-
According to Butler, New South sold virtually all of its assets to NSAES on
July 25, 2016, id. at 4-5, and restrictive employment covenants are unenforceable if
the former employer sells its assets and exits the business, id. at 9.
Butler further
contends that the “Agreement is unenforceable as ambiguous and unreasonable
under Mississippi law.” Id. at 12.
With respect to New South’s claims for
misappropriation of trade secrets, unjust enrichment, and conversion, Butler takes
the position that New South cannot show that it owned any trade secrets at the
time of the alleged misappropriation. Id. at 16-19.
New South initially responded to Butler’s Motion for Summary Judgment by
filing a Motion [39] to Allow Time for Discovery under Rule 56(d).
New South
requested that Butler produce his non-competition agreement with Sterling, on the
theory that comparing the two Non-Solicitation and Confidentiality Agreements
would assist New South in defending against Butler’s Summary Judgment Motion.
Pl.’s Mem. [40] at 11.
New South further sought discovery of Butler’s employment
negotiations and contracts with Sterling, what information Butler provided Sterling
9
that may have violated his Agreement with New South, what solicitations Butler
may have made, and information on how Butler’s alleged misuse of confidential
information has damaged New South. Id. at 2, 13.
In an Order [47] entered on March 30, 2018, this Court denied New South’s
Motion to Allow Time for Discovery, finding that New South should already be in
possession of any facts necessary to address whether New South retained any
proprietary information or enforceable rights under the Non-Solicitation and
Confidentiality Agreement.
Order [47] at 5.
In light of the Court’s Order Denying Motion to Allow Time for Discovery,
New South filed its Response [48] to Butler’s Motion for Summary Judgment on
April 13, 2018.
New South takes the position that it remains in business today
because it files taxes, receives earn-out payments, recently incurred large shipping
costs to retrieve mats from Colombia, and must manage and sell the Rig Mats and
NSA Mats.
Pl.’s Resp. [48] at 6-11.
New South contends that the Confidentiality
and Non-Solicitation Agreement is reasonable in scope because it is limited to New
South’s customers during the time of Butler’s employment. Id. at 13. New South
maintains that Butler misappropriated the identity of New South’s customers,
which was confidential, by divulging customer information to Sterling.
Id. at 14.
Butler counters in his Reply that New South has not produced any evidence
to show that it restricted the terms of the Asset Purchase Agreement such as would
allow New South to reenter the equipment mat business.
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Reply [53] at 4.
II. DISCUSSION
A.
Summary judgment standard
Federal Rule of Civil Procedure 56(a) provides that summary judgment is
appropriate “[i]f 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).
In deciding a motion for summary judgment, a court “view[s] the
evidence and draw[s] reasonable inferences in the light most favorable to the
nonmoving party.” Cox v. Wal–Mart Stores E., L.P., 755 F.3d 231, 233 (5th Cir.
2014). A court may not make credibility determinations or weigh the evidence.
Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986). “The evidence of the
non-movant is to be believed, and all justifiable inferences are to be drawn in his
favor.”
Id.
Before it can determine that there is no genuine issue for trial, a court must
be satisfied that “the record taken as a whole could not lead a rational trier of fact
to find for the non-moving party.” Matsushita Elec. Indus. Co. v. Zenith Radio
Corp., 475 U.S. 574, 587 (1986).
If the movant carries this burden, “the nonmovant
must go beyond the pleadings and designate specific facts showing that there is a
genuine issue for trial.” Little v. Liquid Air Corp., 37 F.3d 1069, 1075 (5th Cir.
1994) (en banc); see also Lujan v. National Wildlife Federation, 497 U.S. 871, 888
(1990) (the nonmovant must set forth specific facts to contradict the specific facts
set forth by the movant, general averments are not sufficient).
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To rebut a properly supported motion for summary judgment, the opposing
party must show, with “significant probative evidence,” that there exists a genuine
issue of material fact. Hamilton v. Segue Software, Inc., 232 F.3d 473, 477 (5th
Cir. 2000).
“A genuine dispute of material fact means that evidence is such that a
reasonable jury could return a verdict for the nonmoving party.” Royal v. CCC&R
Tres Arboles, LLC, 736 F.3d 396, 400 (5th Cir. 2013) (quotation omitted). An
actual controversy exists “when both parties have submitted evidence of
contradictory facts.” Salazar-Limon v. Houston, 826 F.3d 272, 277 (5th Cir. 2016)
(quotation omitted).
B.
Analysis
1.
Can New South enforce the Confidentiality and Non-Solicitation
Agreement?
New South’s Amended Complaint advances a claim for breach of contract on
grounds that Butler breached the Confidentiality and Non-Solicitation Agreement.
Am. Compl. [30] at 8.
Butler seeks summary judgment on the breach of contract
claim, contending that New South cannot enforce the Confidentiality and NonSolicitation Agreement against him because New South has exited the equipment
mat business and, alternatively, because the Agreement is ambiguous and
unreasonable.
Def.’s Mem. [36] at 11, 15.
Contracts which contain non-compete agreements are viewed by Mississippi
courts “as contracts that restrict trade and individual freedom and are not favored
by the law.” Redd Pest Control Co. v. Foster, 761 So. 2d 967, 972 (Miss. Ct. App.
2000).
Non-competition agreements “may be used to protect confidential
12
information, trade secrets,” and “customer lists.” Bus. Commc’ns, Inc. v. Banks, 91
So. 3d 1, 11 (Miss. Ct. App. 2011), aff’d, 90 So. 3d 1221 (Miss. 2012); see also
Donahoe v. Tatum, 134 So. 2d 442, 443 (Miss. 1961) (upholding validity of
restrictive employment covenant that prevented disclosure of confidential
information).
Mississippi courts have treated non-solicitation agreements as non-
competition covenants. Kennedy v. Metro Life Ins. Co., 759 So. 2d 362, 364-65
(Miss. 2000).
Therefore, the Confidentiality and Non-Solicitation Agreement,
which contains separate provisions restricting the solicitation of customers and the
disclosure of confidential information, can be analyzed under Mississippi precedent
addressing non-competition agreements.
The law in Mississippi is that “[g]enerally, the termination of an employer’s
business also terminates the restrictive employment covenant, because the
abandonment or termination of the business extinguishes the covenant altogether.”
Herring, 2 So. 3d at 640.
The determinative issue here, then, is whether a genuine
dispute of material fact exists that New South terminated or abandoned its
business in light of its Asset Purchase Agreement with NSAES.
In Herring, Jimmy Rutland signed a covenant not to compete when he began
his employment with Broome Gas. Id. at 637.
Broome Gas later sold its assets to
Herring Gas through an asset-purchase agreement. Id.
This asset-purchase
agreement “included a non-compete clause which acknowledged that Broome Gas
would not compete with Herring Gas in the propane gas business for a specified
period of time and within a specified geographical area.” Id. at 638.
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The asset-
purchase agreement also stated that Broome sold to Herring “all right, title and
interest in” all of its propane assets which related in any way to the sale of propane
gas, customers lists, and all accounts receivable. Id. at 639. On these facts, the
Supreme Court of Mississippi upheld the chancellor’s finding that the sale
terminated Broome Gas’ business and ended its right to enforce the non-competition
covenant against Rutland. Id. at 640.
Like the parties in Herring, New South also entered into a non-competition
covenant with NSAES, prohibiting New South from engaging “in the business of
laying, installing, grading, culling, picking up, delivering, selling, leasing or
otherwise distributing Mats,” Asset Purchase Agreement [48-0] at 33, which “means
any and all types of mats,” id. at 61.
The non-competition covenant further
required that New South, for a period of five years following the closing date, shall
not “recruit or solicit or attempt to recruit or solicit” any employee hired by NSAES,
“solicit any customer, vendor or referral source” of New South for the purpose of
distributing or selling products or services sold by New South, or “persuade or
attempt to persuade any customer, vendor or referral source of [NSAES] to
terminate or modify his, her or its relationship with” NSAES. Id. at 33-34.
To support its position that it has not left the business, New South relies
heavily on the fact that it continues to earn income pursuant to the earn-out
provision in the Asset Purchase Agreement.
Pl.’s Resp. [48] at 5-8, 10-12. Though
New South does not cite, nor has the Court discovered, any controlling authority for
the proposition that an earn-out provision in an asset sale allows for the
14
enforceability of a non-compete covenant, courts in other jurisdictions have rejected
such arguments.
In Cronimet Holdings, Inc. v. Keywell Metals, LLC, 73 F. Supp.
3d 907, 911 (N.D. Ill. 2014), Keywell, LLC, sold its assets to Keywell Metals, LLC,
through an asset-purchase agreement. After two former employees of Keywell
went to work for Cronimet Holdings, Keywell Metals sought to enforce the former
employees’ non-compete agreements that they had signed with Keywell. Id. at
912.
Keywell Metals argued that Keywell continued to have a legitimate business
interest in the non-compete agreements because the asset-purchase agreement
provided that Keywell Metals would pay Keywell a percentage of the earnings from
its business. Id. at 916.
After discussing Herring Gas, the district court in
Cronimet noted that “as part of the asset purchase agreement, Keywell agreed not
to compete with Keywell Metals for a period of time, demonstrating that it had
removed itself entirely from its previous line of business.” Id. The district court
thus found that “Keywell did not have a legitimate business interest in enforcing . .
. the non-compete agreements once its assets were sold to Keywell Metals, like in
Herring Gas.”
Id.
Similarly, in Hess v. Gebhard & Co. Inc., 808 A.2d 912, 923 (Pa. 2002), the
Supreme Court of Pennsylvania found that the former employer’s financial interest
in receiving commissions earned on insurance accounts sold in an asset sale of the
employer’s insurance business was not a protectable business interest sufficient to
allow the former employer to enforce a non-competition covenant.
Rather, the
court found that the former employer was no longer in the insurance business
15
following the asset sale. Id. While New South asserts that it is still operating in
the mat business because it has filed tax returns and maintains bank accounts, it
has not put forth any evidence that it receives income generated from its own mat
business, as opposed to its income derived from earn-out payments from NSAES.
Unlike Herring, however, New South did not sell all of its assets. Though it
sold substantially all of its assets, including its real property and customer
accounts, contracts, and lists, it did not sell its Rig Mats and NSA Mats.
Nevertheless, New South has not shown that retention of these assets raises a
genuine dispute that New South did not terminate its business.
St. John attests in his affidavit that he must manage and sell the Rig Mats
and NSA Mats.
However, with regard to the Rig Mats, New South’s non-
competition covenant with NSAES prohibits New South from engaging in the mat
business, specifically including Rig Mats. New South has not pointed the Court to,
nor has the Court discovered in its review of the Asset Purchase Agreement, a
provision of the Asset Purchase Agreement that allows New South to sell the Rig
Mats in a manner that would be inconsistent with its non-competition covenant
with NSAES.
Therefore, St. John’s vague assertion that New South must sell the
Rig Mats does not create a genuine dispute of material fact that New South has
terminated its business.
The Asset Purchase Agreement did allow New South to sell the NSA Mats,
but if New South chose to sell these mats, the NSA Mat Value would have to be
remitted to NSAES, although New South would be entitled to retain any profits in
16
excess of the NSA Mat Value.
Viewing the evidence in the light most favorable to
New South, and giving it every benefit of the doubt, a reasonable inference could be
drawn that New South was still in the mat business until it sold the NSA Mats
because New South could have potentially drawn a profit from such sale. But New
South was required to do so by December 31, 2016.
That day has come and gone,
and there is no genuine dispute that Butler’s alleged breaches of his noncompetition agreement occurred after December 31, 2016.
Butler attests in his
affidavit that he remained employed with Jones Company until July 2017, at which
time he joined Sterling Lumber, Def. Aff. [34-1] ¶ 20, and New South does not
dispute this, Pl.’s Mem. [48] at 3. Thus, all of the breaches of Butler’s
Confidentiality and Non-Solicitation Agreement alleged by New South occurred
after December 31, 2016, and during Butler’s employment with Sterling Lumber.
St. John Aff. [51-2] ¶¶ 18-19.
New South has not pointed to any evidence that prior to December 31, 2016,
NSAES amended the Asset Purchase Agreement or otherwise further extended New
South’s opportunity to sell the NSA Mats and retain a profit. Nor has New South
argued or demonstrated that the broad non-compete clause in the Asset Purchase
Agreement, which prohibits New South from engaging in the mat business, allows
New South to sell the NSA Mats after December 31, 2016. There is no genuine
dispute in the present record, then, that after December 31, 2016, New South could
not engage in the mat business. At that point, at the latest, New South’s business
was terminated, and with the termination of New South’s business, the
17
Confidentiality and Non-Solicitation Agreement was extinguished. See Herring, 2
So. 3d at 640.
St. John’s general assertions that he now will sell the NSA Mats are
unavailing, and are not probative of whether New South’s business terminated after
it did not sell the NSA Mats on or before December 31, 2016.
New South’s vague
allegation that it may potentially reenter the mat business is not sufficient “to
breathe life into the dead contract.” Id. New South cannot enforce the
Confidentiality and Non-Solicitation Agreement, and the Court finds that summary
judgment should be entered in favored of Butler on New South’s breach of contract
claim.
2.
Does New South still have trade secrets to protect?
Count II of the Amended Complaint claims that Butler misappropriated New
South’s trade secrets.
Am. Compl. [30] at 5-7.
The Amended Complaint alleges
that Butler misappropriated certain confidential information, including proprietary
product specifications, customer contacts, pricing terms, and profit margins, id. at 3,
and that New South’s trade secrets include “the identity of New South’s accounts,
suppliers, customers, and others having dealings with New South,” id. at 5. Butler
moves for summary judgment on this claim, asserting that New South has not
supplied any evidence to indicate that it owned any trade secrets at the time of the
alleged misappropriation.
Def.’s Mem. [36] at 16. Butler notes that New South
sold its trade secrets and confidential business information as part of the Asset
Purchase Agreement. Id. at 17.
18
Under the Mississippi Uniform Trade Secrets Act, “misappropriation”
includes
[d]isclosure or use of a trade secret of another without express or implied
consent by a person who . . . [a]t the time of disclosure or use, knew or
had reason to know that his knowledge of the trade secret was . . .
[a]cquired under circumstances giving rise to a duty to maintain its
secrecy or limit its use.
Miss. Code Ann. § 75-26-3(b)(ii).
To establish a claim for misappropriation of trade secrets, a plaintiff must
demonstrate: “1) that a trade secret existed; 2) that the trade secret was acquired
through a breach of a confidential relationship or discovered by improper means;
and 3) that the use of the trade secret was without the plaintiff’s authorization.”
Union Nat. Life Ins. Co. v. Tillman, 143 F. Supp. 2d 638, 643 (N.D. Miss. 2000).
The Mississippi Uniform Trade Secrets Act does not appear to require that a
plaintiff hold ownership of the trade secret, as the statute speaks in terms of
preventing the improper use “of a trade secret of another.”
26-3(b)(ii) (emphasis added).
Miss. Code Ann. § 75-
In analyzing similar statutory language in
Wisconsin’s trade secrets act, the district court in Metso Minerals Industries v.
FLSmidth-Excel LLC, 733 F. Supp. 2d 969, 972 (E.D. Wis. 2010), stated that “the
phrase ‘of another’ on its face simply describes the relationship between the
misappropriator and the trade secret – namely that the trade secret belongs to one
other than the misappropriator.
The phrase does not, implicitly or otherwise, limit
protection only to the ‘owner’ of the trade secret.”
Persuasive authority indicates that a plaintiff must generally prove that it
19
possessed a trade secret.
See, e.g., Integrated Cash Mgmt. Servs., Inc. v. Digital
Transactions, Inc., 920 F.2d 171, 173 (2d Cir. 1990). In this regard, courts have
distinguished possession of a trade secret from its ownership. “Courts confronting
the question of whether possession or ownership is required in a trade secrets
misappropriation claim have rejected the argument that traditional ownership is
required to prevail.” Fast Capital Mktg., LLC v. Fast Capital LLC, No. CIV. A. H08-2142, 2008 WL 5381309, at *12 (S.D. Tex. Dec. 24, 2008).
Rather, courts “have
generally come to the same conclusion: a party has standing to bring a trade secrets
claim if it has possession of the trade secret.” Williams-Sonoma Direct, Inc. v.
Arhaus, LLC, 304 F.R.D. 520, 527 (W.D. Tenn. 2015).
In interpreting the Maryland Trade Secrets Act, which contains language
very similar to that in the Mississippi Uniform Trade Secrets Act, the United States
Court of Appeals for the Fourth Circuit has concluded that “fee simple ownership” of
a trade secret is not required, explaining that
whether “fee simple ownership” is an element of a claim for
misappropriation of a trade secret may not be particularly relevant in
this context. While trade secrets are considered property for various
analyses, the inherent nature of a trade secret limits the usefulness of
an analogy to property in determining the elements of a trade-secret
misappropriation claim. The conceptual difficulty arises from any
assumption that knowledge can be owned as property. The “proprietary
aspect” of a trade secret flows, not from the knowledge itself, but from
its secrecy. It is the secret aspect of the knowledge that provides value
to the person having the knowledge. The Maryland Uniform Trade
Secrets Act thus defines a trade secret as information that has value
because it is not “generally known” nor “readily ascertainable.” While
the information forming the basis of a trade secret can be transferred,
as with personal property, its continuing secrecy provides the value, and
any general disclosure destroys the value. As a consequence, one “owns”
a trade secret when one knows of it, as long as it remains a secret. Thus,
20
one who possesses non-disclosed knowledge may demand remedies as
provided by the Act against those who “misappropriate” the knowledge.
DTM Research, L.L.C. v. AT & T Corp., 245 F.3d 327, 332 (4th Cir. 2001) (internal
citations omitted).
Accordingly, in determining whether a party possesses a trade secret, courts
focus on whether the party had knowledge of such secret.
Fast Capital, 2008 WL
5381309, at *13; DaimlerChrysler Servs. v. Summit Nat., No. 02-71871, 2006 WL
1420812, at *8 (E.D. Mich. May 22, 2006). In cases applying the decision in DTM,
courts have allowed a possessor to pursue a misappropriation action, but in several
of those cases, the plaintiff had explicitly retained a possessory interest. For
example, in Metso, the plaintiff “sold all of the engineering, design information, and
intellectual property rights” to Macon, but “Macon granted a non-exclusive, royaltyfree right to continue to use the technology for service and warranty repair for the
products sold by Metso.”
733 F. Supp. 2d at 970-71.
And in Advanced Fluid
Systems, Inc. v. Huber, 28 F. Supp. 3d 306, 313 (M.D. Pa. 2014), though the plaintiff
gave “legal ownership to all inventions or works” under a contract with another
company, the plaintiff “remained in physical possession and control of the trade
secrets and continued to us[e] them in a confidential manner to fulfill its
obligations.”
Here, however, New South sold all “right, title and interest in, to and under
all of the assets, properties and rights of every kind and nature,” and specifically
sold records of its customer lists, customer purchasing histories, all intellectual
property, and all “right, title and interest in and to” its customer accounts.
21
For
that reason, this case seems more analogous to BlueEarth Biofuels, LLC v.
Hawaiian Electric Co., No. CIV. 09-00181 DAE, 2011 WL 2116989 (D. Haw. May 25,
2011), aff’d, 531 F. App’x 784 (9th Cir. 2013).
There, the district court noted that
“at the very least a plaintiff must be a lawful possessor of the trade secrets or
confidential information.” Id. at *21 (citing DTM, 245 F.3d at 331; Metso, 733 F.
Supp. 2d at 970-71). The court found that “BlueEarth was no longer legally in
possession of the trade secrets because it had transferred, without reservation, all of
the relevant confidential information and trade secrets to BEMB.” Id.
The
relevant agreement in that case provided that the plaintiff “assigns and transfers to
BEMB all intellectual property and proprietary rights” and that BEMB is the
“exclusive owner” of such property and rights. Id. Given such language, the
district court found that “BlueEarth cannot now claim lawful possession of the trade
secrets or confidential information at issue” and the plaintiff did not have standing
to pursue a misappropriation claim.
Id.
Butler contends that summary judgment should be entered on New South’s
claim for misappropriation of trade secrets because New South did not own any
trade secrets or confidential business information at the time of the alleged
misappropriation.
Def.’s Mem. [36] at 16. And New South does not contend, in
response to Butler’s Motion, that it has retained some ownership of the trade
secrets. See Pl.’s Resp. [48] at 14-15.
Rather, New South merely asserts that it
took steps to maintain the confidentiality of the information. Id. at 15. In light of
the Asset Purchase Agreement, there is no genuine dispute that New South did not
22
own such information at the time of the alleged misappropriation.
Nevertheless,
the weight of authority indicates that the lack of ownership is not necessarily
dispositive of a misappropriation claim. DTM contemplates that a plaintiff need
merely have “knowledge” of the trade secret in order to bring a cause of action for
misappropriation.
Attached as Exhibit C to St. John’s Affidavit is a list of all customers Butler
called on or serviced for New South over the course of his employment there.
John Aff. Ex. C [48-3] at 19-20.
St.
Butler has not addressed the issues of possession
or whether knowledge of a trade secret is sufficient under Mississippi law to
establish a plaintiff’s standing to assert a misappropriation claim.
And though the
facts of this case appear to closely resemble those in BlueEarth, Butler has not
argued if, or why, Mississippi courts would reach the same result as in BlueEarth in
light of New South’s knowledge of the trade secrets.
Because the parties have not
briefed this issue, the Court will deny Butler’s request for summary judgment on
New South’s claim for misappropriation of trade secrets at this time, without
prejudice to his right to reurge the issue at a later date.
3.
New South’s unjust enrichment claim is subject to dismissal.
Butler raises a similar argument regarding New South’s unjust enrichment
claim, contending that New South must be able to show that Butler holds property
that belongs to New South, but the Asset Purchase Agreement demonstrates that
New South did not own any of the alleged trade secrets that it contends Butler
appropriated.
Def.’s Mem. [36] at 18.
23
Though New South cannot enforce the Confidentiality and Non-Solicitation
Agreement, this is not necessarily dispositive of an unjust enrichment claim,
because such a claim “applies in situations where no legal contract exists.” Willis
v. Rehab Sols., PLLC, 82 So. 3d 583, 588 (Miss. 2012). “The basis for an action for
unjust enrichment lies in a promise, which is implied in law, that one will pay to the
person what in equity is his or hers.”
Beasley v. Sutton, 192 So. 3d 325, 332 (Miss.
Ct. App. 2015) (emphasis added) (citation and quotation marks omitted). Under
the doctrine of unjust enrichment, courts require the defendant “to refund the
money or the use value of the property to the person to whom in good conscience it
ought to belong.”
Hans v. Hans, 482 So. 2d 1117, 1122 (Miss. 1986) (emphasis
added) (citation omitted).
New South does not appear to dispute Butler’s assertion that it does not own
any of the alleged confidential information.
The undisputed evidence before the
Court shows that New South sold all right, title, and interest in its customer lists,
customer accounts, intellectual property, and intangible property.
New South has
not created a genuine dispute that the alleged confidential information belongs to
New South or is the property of New South, which under Mississippi law, is
required for an unjust enrichment claim. Owens Corning v. R.J. Reynolds Tobacco
Co., 868 So. 2d 331, 342 (Miss. 2004) (citing Fordice Const. Co. v. Cent. States
Dredging Co., 631 F. Supp. 1536, 1538-39 (S.D. Miss. 1986)).
The Court finds that
summary judgment should be entered in favored of Butler on New South’s unjust
enrichment claim.
24
4.
New South’s claim for conversion cannot withstand summary
judgment.
Lastly, Butler argues that summary judge is warranted on New South’s
conversion claim because New South did not own any proprietary information
capable of being converted.
Def.’s Mem. [36] at 19. New South contends that
Butler owes it a common law duty not to use its customer list.
Pl.’s Resp. [48] at
17.
Unlike a claim for misappropriation of trade secrets, a conversion claim does
require the plaintiff to prove ownership of the property.
“Conversion requires an
intent to exercise dominion or control over goods which is inconsistent with the true
owner’s right.”
Walker v. Brown, 501 So. 2d 358, 361 (Miss. 1987).
“Ownership of
the property is an essential element of a claim for conversion.” Wilson v. Gen.
Motors Acceptance Corp., 883 So. 2d 56, 68 (Miss. 2004).
The Asset Purchase
Agreement provides that New South sold all “right, title and interest in” such
information to NSAES.
New South has not put forth any evidence to demonstrate
that it still owns, rather than possesses or knows of, any customer lists covered by
the Asset Purchase Agreement.
For this reason, the Court finds that Butler is
entitled to summary judgment on New South’s conversion claim.2
III. CONCLUSION
IT IS, THEREFORE, ORDERED AND ADJUDGED that Defendant
2
Even if New South could demonstrate ownership, the Court has doubts whether the conversion claim could
proceed to trial, as a court in this district has concluded in a previous case brought by New South that the
Mississippi Uniform Trade Secrets Act, Mississippi Code section 75-26-15(1), preempted its conversion claim
because it was premised on the same facts as its misappropriation claim. New S. Equip. Mats, LLC v. Keener, 989
F. Supp. 2d 522, 532-34 (S.D. Miss. 2013).
25
Stephen Butler’s Motion [34] for Summary Judgment is GRANTED IN PART as to
Plaintiff’s claims for breach of contract, unjust enrichment, and conversion.
These
claims are DISMISSED WITH PREJUDICE.
IT IS, FURTHER, ORDERED AND ADJUDGED that Defendant Stephen
Butler’s Motion [34] for Summary Judgment is DENIED IN PART WITHOUT
PREJUDICE as to Plaintiff’s claim for misappropriation of trade secrets.
This
claim will proceed.
SO ORDERED AND ADJUDGED, this the 15th day of August, 2018.
s/ Halil Suleyman Ozerden
HALIL SULEYMAN OZERDEN
UNITED STATES DISTRICT JUDGE
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