Installed Building Products, LLC v. Cottrell et al
Filing
18
REPORT AND RECOMMENDATIONS RE: 11 MOTION TO DISMISS FOR FAILURE TO STATE A CLAIM filed by American Building Systems, Scott Cottrell.Objections due per 28 U.S.C. § 636(b) and Fed. R. Civ. P. 72.Signed by Hon. Hugh B. Scott on 4/18/2014. (GAI)
UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF NEW YORK
INSTALLED BUILDING PRODUCTS, LLC,
Plaintiff,
REPORT AND
RECOMMENDATION
v.
13-CV-1112A
SCOTT COTTRELL and
AMERICAN BUILDING SYSTEMS,
Defendants.
I.
INTRODUCTION
The Hon. Richard J. Arcara has referred this case to this Court under 28
U.S.C. § 636(b). Pending before the Court is a motion (Dkt. No. 11) by
defendants Scott Cottrell (“Cottrell”) and American Building Systems (“ABS”) to
dismiss the complaint under Rule 12(b)(6) of the Federal Rules of Civil Procedure
(“FRCP”). Plaintiff Installed Building Products, LLC (“IBP”) sued defendants to
enforce a restrictive covenant between it and Cottrell after it fired Cottrell and he
joined ABS. Defendants believe that IBP has failed to allege any violations of the
restrictive covenant beyond Cottrell’s decision to start working for ABS.
Additionally, defendants argue that the restrictive covenant in question is
unenforceable as contrary to New York public policy because it restricts a mere
salesman’s livelihood for too long a period of time over too large a geographical
area. Finally, to the extent that IBP attached to its motion papers factual
affidavits and information that did not appear in the complaint, defendants accuse
IBP of trying to “back-fill” its complaint and urge the Court to stay within the four
corners of the complaint.
IBP opposes defendants’ motion in all respects. IBP considers the
restrictive covenant enforceable because of the managerial responsibility that
Cottrell had while he worked for the company and because of the proprietary
inside information that he acquired during that time. IBP further argues that it has
stated valid claims related to Cottrell’s fiduciary duties based on the likelihood
that Cottrell will use inside information from IBP to give ABS an unfair advantage.
The Court held oral argument on March 7, 2014. For the reasons below,
the Court respectfully recommends granting defendants’ motion.
II.
BACKGROUND
This case concerns allegations that Cottrell hurt IBP by bringing its inside
sales and operating information to a direct competitor right after IBP fired him.
Both companies in this case sell and install home-improvement products. IBP, a
Delaware company with a principal place of business in Ohio and over 80
locations nationwide, “is engaged in the business of selling, marketing and
installing a wide range of building products, including, but not limited to: wall
insulation; attic insulation; spray fiberglass; spray foam; masonry insulation;
seamless gutters and leaf protection; metal roofs; soffit and fascia; vinyl shutters;
2
shower doors and bath hardware; shelving and mirrors; custom closets; garage
doors; acoustical ceilings; fireplaces and fire stopping.” (Dkt. No. 1 at 2 ¶ 1.)
ABS, apparently a New York company, “is engaged in the business of selling and
installing a wide range of building products, including insulation, and is in direct
competition with IBP.” (Id. ¶ 3.) The basic chronology of events is not in dispute.
Cottrell worked for IBP from September 20, 2004 until September 19, 2013.
When Cottrell began working for IBP, he started as a salesman at a location in
Sanborn, New York. In May 2007, Cottrell became a Branch Manager at IBP’s
location in Erie, Pennsylvania. On November 1, 2010, Cottrell signed a
document called a Confidentiality, Nonsolicitation and Noncompetition Agreement
(the “Agreement”) because IBP required him to do that to maintain his
employment. The Court will address the relevant details of the Agreement below.
In December 2011, IBP closed its Erie location and brought Cottrell back to the
Sanborn location. When Cottrell returned to the Sanborn location, he assumed
the titles of Insulation and Gutter Foreman and Residential and Commercial
Salesperson. The record is not clear as to whether anyone at the Sanborn
location had the title of “Manager” or “Branch Manager” when Cottrell returned.
Nonetheless, and for purposes of the pending motion, the Court accepts IBP’s
assertion that “Cottrell was the highest ranking person at the Sanborn, New York
facility and he supervised the activities of at least 12 employees, [and] in addition
to his responsibilities for servicing the Sanborn, New York market, and managing
3
the employees, Cottrell continued to have responsibility for servicing the Erie,
Pennsylvania market.” (Id. at 7 ¶ 15.)
The alleged events that prompted this case began in September 2013. On
September 19, 2013, IBP fired Cottrell “because of unsatisfactory performance,
including, but not limited to, selling work to one of IBP’s customers at a
below-market rate to IBP’s detriment.” (Id. at 7 ¶ 16.) On or around October 15,
2013, IBP learned that Cottrell was working for ABS. A few days later, on
October 18, 2013, counsel for IBP sent Cottrell and ABS cease and desist letters
advising each of them of what it considered Cottrell’s obligations under the
Agreement. Defendants either did not respond to the letters or expressed an
opinion to the effect that the Agreement is not enforceable.
The Agreement contains several provisions that relate to the pending
motion. The second recital paragraph contains an acknowledgment that “[i]n the
course of Employee’s employment with the Company, Employee has been given
access to proprietary information regarding the Company’s business, and has
been provided with training in the Company’s business methodologies. The
parties agree that if the Company’s proprietary information were to be disclosed
to a competitor, or if the training received by Employee were to be used for the
benefit of a competitor, that such events would likely have a material adverse
affect on the Company’s business.” (Dkt. No. 1-1 at 1.) Other relevant provisions
consist of the following:
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1.
Section 1 specifies that Cottrell received compensation for
entering the Agreement, a combination of $12,500.01 cash
and 15,860 shares in the holding company that was “an
indirect owner of 15%” of IBP. (Id.)
2.
Section 2(a) specifies that Cottrell “has been given, and will
continue to be given, training in the Company’s methodologies
as well as access to certain confidential and proprietary
information concerning the business and financial affairs of the
Company and its Affiliates (as defined herein) which
constitutes trade secrets under state law, as well as certain
other confidential and proprietary information concerning the
business and financial affairs of the Company and its Affiliates
that may not constitute trade secrets under state law, but are
nonetheless confidential.” (Id. at 2.)
3.
Section 2(b) defines various types of information from IBP as
confidential and proprietary, including product and sales
methods and processes; customer lists, and financial
information.
4.
Section 2(c) sets forth that “[t]he Company and its Affiliates
have a legitimate business interest in (i) the Confidential
Information, (ii) relationships with their customers, suppliers
and employees, and (iii) their business goodwill.” (Id.)
5.
Section 3 of the Agreement contains restrictions on
competition and solicitation that the Court will label collectively
as the “restrictive covenant.” Section 3(a) states that “for a
period beginning on the date hereof and continuing through
the second anniversary of the termination of Employee’s
employment with the Company or any of its Affiliates for any
reason (the “Restrictive Period”), Employee will not, either for
Employee’s own account or in the service of or on behalf of
any other person or entity, directly or through others, engage
or invest in the business of selling, marketing or installing the
building products sold, marketed or installed by the Company
(which products shall include residential and commercial
insulation, gutters, garage doors, fireplaces, closet shelving,
shower doors and mirrors)(the “Business”) within a 100 mile
radius of the branch of the Company that is currently managed
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by Employee in Erie, Pennsylvania and within a 100 mile
radius of each branch of the Company and its Affiliates that
are hereafter managed or supervised by Employee, wherever
located.” (Id.)
6.
For the sake of the record, the Court takes judicial notice1 that
the geographic portion of the restrictive covenant looks like
this when placed on a map:
Fig. 1. A 100-mile radius (green) around Sanborn, NY and Erie, PA. Courtesy
http://www.freemaptools.com/radius-around-point.htm.
7.
Section 3(b) states that “during the Restrictive Period,
Employee will not, either for Employee’s own account or in the
service of or on behalf of any other person or entity, directly or
through others, take any action to (i) solicit, call upon, or
1
“We may, of course, take judicial notice of geography.” Boyce Motor
Lines v. U.S., 342 U.S. 337, 344 (1952); cf. W. Mohegan Tribe & Nation v.
Orange Cnty., 395 F.3d 18, 22 (2d Cir. 2004) (taking judicial notice of
“submerged lands” not specified in the complaint).
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initiate communication or contact with any customer or
prospective customer of the Company or any Affiliate with
whom Employee had contact during the last twelve months of
Employee’s employment, with a view to selling, marketing or
installing any service or product that is sold, marketed or
installed by the Business, or (ii) attempt to divert any
customer, supplier or vendor of the Company or its Affiliates
from doing business with such entity.” (Id. at 3.)
8.
Section 3(c) states that “during the Restrictive Period,
Employee will not, either for Employee’s own account or in the
service of or on behalf of any other person or entity, directly or
through others, (i) induce or attempt to induce any employee
of the Company or its Affiliates to leave the employ of such
entity, or (ii) employ, or otherwise engage as an employee,
independent contractor, or otherwise, any employee of the
Company or its Affiliates.” (Id.)
9.
The restrictive covenant in Section 3 concludes with an
exception stating that “[t]he provisions of this Section 3 shall
not be effective if the Company or its successor closes its all
[sic] of its branches and ceases operations in the territory
described in paragraph (a).” (Id.)
10.
Section 7 contains a severability provision stating that “[i]f any
court determines that any provision of Section 2 or 3 hereof is
unenforceable for any reason, including the duration or scope
of such provision, the provision shall not be deemed void, and
the court shall have the power to amend such provision, and,
in its amended form, the provision shall remain in full force and
effect. In the event that any provision of this Agreement is
found to be void or unenforceable to any extent for any reason
and such provision is not, or cannot be, so reformed, it is
agreed that such provision shall be severable and that all
remaining provisions of the Agreement shall remain in full
force and effect.” (Id. at 4.)
11.
Section 12 sets forth in one sentence that “[t]his Agreement
shall be governed by and construed in accordance with the
laws of the State of Ohio without giving effect to conflict of law
provisions.”
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IBP commenced this case by filing its complaint on November 12, 2013. In
the background section of the complaint, IBP pleads several prospective actions
that Cottrell might take now that he works for a direct competitor like ABS:
12.
“Upon information and belief, Cottrell will attempt to solicit
customers of IBP with whom he had contact during his last
twelve months of employment at IBP, and will attempt to divert
customers, suppliers, or vendors of IBP from doing business
with IBP. Such solicitations and attempted diversions would
violate the Agreement and likely damage IBP.” (Dkt. No. 1 at
7 ¶ 18.)
13.
“Upon information and belief, Cottrell will attempt to induce
employees of IBP or its Affiliates to leave the employ of such
entities. Such inducement would violate the Agreement.” (Id.
¶ 19.)
14.
“Upon information and belief, Cottrell is using IBP’s
confidential information to gain an unfair advantage, and has
in his possession or control confidential information which
belongs to IBP. By virtue of his relationship with ABS, Cottrell
is using or will inevitably disclose or use IBP’s confidential
information for his own benefit and/or for the benefit of ABS
unless restrained by an order of this Court.” (Id. at 8 ¶ 20.)
Additionally, the complaint contains six counts. In Count I, IBP accuses Cottrell
of violating the Agreement and its restrictive covenant by joining ABS and by
taking confidential information with him. IBP further makes the prospective
accusation that Cottrell “will solicit or is soliciting customers and employees of
IBP or its Affiliates.” (Id. at 8 ¶ 26.) In Count II, IBP accuses Cottrell of stealing
confidential information and trade secrets and using them to its detriment. In
Count III, IBP accuses Cottrell of breaching his duty of loyalty and fiduciary duty
8
by taking its confidential information and by selling work to an IBP customer at a
below-market rate shortly before it fired him. In Count IV, IBP accuses ABS of
tortious interference with its existing customers, suppliers, vendors, and
employees; IBP asserts that ABS now knows about IBP’s relationships and
intends to interfere with them. In Count V, IBP accuses ABS of tortious
interference with the Agreement by hiring Cottrell despite knowing about the
Agreement and its restrictive covenant. In Count VI, IBP accuses Cottrell and
ABS of unjust enrichment by exploiting IBP’s confidential information. The
complaint ends with a request for permanent injunctive relief that substantially
repeats the language of the restrictive covenant.
Defendants filed their motion to dismiss on January 29, 2014. While
acknowledging that fact pleading is not necessary, defendants argue that the
complaint contains only one concrete allegation, namely that Cottrell started
working for ABS. According to defendants, every other allegation in the
complaint is just a guess. Defendants concede that IBP is allowed to plead upon
information and belief when a reasonable accusation can be substantiated only
by factual details within defendants’ control. Defendants, however, argue that
IBP falls short of that standard and has pled such events as customer and
employee solicitation without asking its customers and employees and without
any reason at all to think that these events happened. Defendants additionally
reject the Agreement and its restrictive covenant as unenforceable because
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Cottrell was a demoted and fired salesman whose inside knowledge never rose
to the level of confidential information. By extension, defendants argue, if the
Agreement is unenforceable then IBP’s other claims collapse because they all
rest on the presumption that defendants acquired and are exploiting protected
and confidential information in violation of the Agreement.
IBP opposes defendants’ motion in several ways. IBP contrasts this case
from most of the cases that defendants cite in their papers by noting that most of
the cases cited addressed post-discovery dispositive motions or motions for
injunctive relief. By making this point, IBP indirectly is asking the Court, at a
minimum, to keep this case open long enough to allow discovery to confirm or to
refute its claims. IBP also argues that the Agreement is reasonable because it
gives Cottrell the option of leaving the region or choosing a different industry. In
IBP’s view, “the restrictions in the agreement do not impose an undue hardship
on Cottrell as they are tailored to the business of installing building products, and
do not restrict Cottrell from working in a sales capacity in any other industry or
business, or from engaging in the business of installing building products outside
the limited geographic area provided for in the Agreement.” (Dkt. No. 15 at 21.)
IBP then argues the viability of the other claims in the complaint by inverting
defendants’ arguments. According to IBP, Cottrell had access to, inter alia,
customer requirements, price lists, and pricing information that no one could
obtain in the public domain. If Cottrell thus had access to confidential information
10
and then knowingly went to work for a direct competitor then the intended and
likely exploitation of that information is a reasonable inference that would sustain
claims for tortious interference, breach of duties, and unjust enrichment.
III.
DISCUSSION
A.
Dismissal Generally
When addressing motions to dismiss plaintiffs’ claims, courts proceed by
“construing the complaint liberally, accepting all factual allegations in the
complaint as true, and drawing all reasonable inferences in the plaintiff’s favor.”
Chambers v. Time Warner, Inc., 282 F.3d 147, 152 (2d Cir. 2002) (citation
omitted). The acceptance of allegations carries the limitation that “the tenet that
a court must accept as true all of the allegations contained in a complaint is
inapplicable to legal conclusions. Threadbare recitals of the elements of a
cause of action, supported by mere conclusory statements, do not suffice.”
Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (citation omitted). “To survive a
motion to dismiss, a complaint must contain sufficient factual matter, accepted as
true, to state a claim to relief that is plausible on its face. A claim has facial
plausibility when the plaintiff pleads factual content that allows the court to draw
the reasonable inference that the defendant is liable for the misconduct alleged.
The plausibility standard is not akin to a ‘probability requirement,’ but it asks for
more than a sheer possibility that a defendant has acted unlawfully.” Id. (internal
quotation marks and citations omitted).
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B.
New York or Ohio Law?
Before turning to the merits of the pending motion, the Court needs to
address two procedural issues, the first of which concerns choice of law. Does
New York or Ohio law govern the Agreement? Section 12 of the Agreement
again states that “[t]his Agreement shall be governed by and construed in
accordance with the laws of the State of Ohio without giving effect to conflict of
law provisions.” (Dkt. No. 1-1 at 5.) In contrast, IBP’s cease and desist letters
cited New York law, and both sides’ motion papers cite New York law. In their
motion papers and at oral argument, defendants made a brief argument in favor
of New York law. IBP has taken no position on the issue because it believes that
it would prevail under either state’s law.
“As a court is to apply the choice-of-law rules prevailing in the state in
which the court sits, New York law governs the choice of law determination.”
Estee Lauder Cos. Inc. v. Batra, 430 F. Supp. 2d 158, 170 (S.D.N.Y. 2006) (citing
Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496 (1941)). “In the absence
of a violation of a fundamental state policy, New York courts generally defer to
the choice of law made by the parties to a contract. However, New York law
allows a court to disregard the parties’ choice when the ‘most significant contacts’
with the matter in dispute are in another state. Furthermore, even when the
parties include a choice-of-law clause in their contract, their conduct during
litigation may indicate assent to the application of another state’s law.” Cargill,
12
Inc. v. Charles Kowsky Res., Inc., 949 F.2d 51, 55 (2d Cir. 1991) (citing Haag v.
Barnes, 9 N.Y.2d 554, 559, 216 N.Y.S.2d 65, 68, 175 N.E.2d 441, 443 (1961);
other citation omitted). Factors that affect the analysis of significant contacts
include “the places of negotiation and performance; the location of the subject
matter; and the domicile or place of business of the contracting parties.” Zurich
Ins. Co. v. Shearson Lehman Hutton, Inc., 642 N.E.2d 1065, 1068 (N.Y. 1994)
(citations omitted).
Here, several circumstances weigh in favor of using New York law. Of the
two locations that Cottrell allegedly managed, one was in New York while the
other—in Pennsylvania—was not in Ohio. While not clear from the record, the
Agreement likely was discussed and signed in New York. Cf. Am. Equities Grp.,
Inc. v. Ahava Dairy Prods. Corp., No. 01 CIV.5207(RWS), 2004 WL 870260, at *8
(S.D.N.Y. Apr. 23, 2004) (favoring New York for reasons including “that the
Agreement was negotiated in New York [and] was signed by Ahava in New
York”). Cottrell worked at the New York location for most of his time with IBP.
Many of the customers whom IBP thinks Cottrell might steal are in New York.
IBP fired Cottrell in New York for alleged underselling that occurred in New York.
Both defendants are from New York, and the most concrete allegation of a
contractual violation—ABS’s hiring of Cottrell—occurred in New York. Cf. Cargill,
949 F.2d at 55 (choosing New York over Massachusetts law where “[defendant]
is a New York corporation. Its principal place of business is in Burnt Hills, New
13
York. [Defendant] placed its orders for gasoline in New York. [Plaintiff] delivered
the gasoline to [defendant] in New York. [Plaintiff’s] obligation to pay GRT on
[defendant’s] purchases is imposed by New York statutory law. Moreover,
[plaintiff] and [defendant] have, without exception, based their briefs and
arguments in both the district court and this court on New York law.”). Finally, the
parties have been using New York law in their motion papers without a single
citation to Ohio law. Cf. Juergensen Def. Corp. v. Carleton Techs., Inc., No.
08–CV–959A, 2010 WL 2671339, at *11 n.5 (W.D.N.Y. June 21, 2010) (Arcara,
J.) (“Notwithstanding the Florida choice of law and choice of forum clause in
Section 17 of the [contract], the parties have litigated this case since December
2008 without ever arguing that this Court lacked jurisdiction or that New York law
should not apply. At no time in the lengthy briefing for the pending motion did the
parties cite to Florida law.”) (citation omitted). These circumstances offset IBP’s
location of its principal place of business in Ohio, the only factor that would favor
that state. The Court thus will proceed using federal procedural law and New
York substantive law, in accordance with the Erie doctrine.2
C.
Allegations in the Complaint upon Information and Belief
The second procedural issue that the Court needs to address concerns
IBP’s decision to make some of its allegations upon information and belief. As
2
See generally Erie R.R. Co. v. Tompkins, 304 U.S. 64 (1938).
14
mentioned above, IBP made the following assertions in its complaint upon
information and belief:
1.
“Upon information and belief, Cottrell will attempt to solicit
customers of IBP with whom he had contact during his last
twelve months of employment at IBP, and will attempt to divert
customers, suppliers, or vendors of IBP from doing business
with IBP. Such solicitations and attempted diversions would
violate the Agreement and likely damage IBP.” (Dkt. No. 1 at
7 ¶ 18.)
2.
“Upon information and belief, Cottrell will attempt to induce
employees of IBP or its Affiliates to leave the employ of such
entities. Such inducement would violate the Agreement.” (Id.
¶ 19.)
3.
“Upon information and belief, Cottrell is using IBP’s
confidential information to gain an unfair advantage, and has
in his possession or control confidential information which
belongs to IBP. By virtue of his relationship with ABS, Cottrell
is using or will inevitably disclose or use IBP’s confidential
information for his own benefit and/or for the benefit of ABS
unless restrained by an order of this Court.” (Id. at 8 ¶ 20.)
4.
“Upon information and belief, Cottrell, in direct violation of his
obligations under the Agreement, knowingly and willfully
entered into a relationship with ABS during the restrictive
period and within the geographic region set forth in the
Agreement.” (Id. ¶ 25.)
5.
“Upon information and belief, Cottrell, in direct violation of his
obligations under the Agreement, will solicit or is soliciting
customers and employees of IBP or its Affiliates, is using or
will inevitably disclose or use IBP’s confidential information to
gain an unfair advantage for himself or for ABS, and has in his
possession or control confidential information which belongs to
IBP.” (Id. at 8–9 ¶ 26.)
6.
“Upon information and belief, Cottrell has knowingly and
willfully taken and retained IBP’s confidential information to
15
assist ABS, a direct competitor of IBP.” (Id. at 10 ¶ 37.)
7.
“Upon information and belief, ABS intends to interfere with
these relationships, causing them to cease doing business
with IBP.” (Id. at 11 ¶ 44.)
Defendants seek dismissal in part because the complaint, in their view,
lacks “any alleged misconduct beyond Cottrell simply working for ABS—which is
more than 100 miles from Erie. The Complaint is devoid of the customers or
employees of Plaintiff who were supposedly approached by Cottrell, when this
occurred, the result of such conduct and what forbidden information was allegedly
disclosed.” (Dkt. No. 11-1 at 6.) Defendants acknowledge generally that
pleading upon information and belief is allowed but argue that too much of the
complaint rests on speculation about future events that have not happened and
may never happen. In response, IBP argues that assertions upon information
and belief can be appropriate when defendants control the details of a possible
violation of a restrictive covenant. IBP also takes the step of attaching to its
motion papers affidavits from employees that provide information not available in
the complaint. For example, IBP includes with its motion papers an affidavit from
a Marc Williamson who states, inter alia, that “I reasonably believe Cottrell,
through ABS, has been selling, marketing or installing the building products sold,
marketed or installed by IBP in the Rochester, New York area. Cottrell’s
Business Card, which was left near one of IBP’s locations, reflects that he is
working as an Energy Specialist for ABS, at the office address of 270 Buell Road,
16
Suite D, Rochester, NY 14624. A true and accurate copy of the Business Card is
attached hereto as Exhibit B.” (Dkt. No. 15-1 at 3–4 ¶ 16.) The Exhibit B in
question is a photograph of what appears to be Cottrell’s current business card,
though the Williamson affidavit offers no context about the acquisition of the card.
As another example, IBP includes an affidavit from a Jay Oberholtzer that ABS,
through Cottrell, outbid IBP for certain job in Sanborn, New York. Defendants
object to the inclusion of these affidavits in IBP’s motion papers, arguing that IBP
cannot supplement or “back-fill” its complaint through its motion papers.
The parties’ arguments require reviewing two sets of principles. Generally,
courts may not review papers outside of the pleadings when assessing a motion
to dismiss, unless the complaint refers to those papers or otherwise makes those
papers integral to its claims. Compare LaBounty v. Adler, 933 F.2d 121, 123 (2d
Cir. 1991) (“Rule 12(b)(6) does not give the district court authority to consider
matters outside the pleadings; it simply delineates the procedures which must be
followed in testing the legal sufficiency of a complaint.”) with Chambers v. Time
Warner, Inc., 282 F.3d 147, 152–53 (2d Cir. 2002) (“For purposes of [Rule 12(b)],
the complaint is deemed to include any written instrument attached to it as an
exhibit or any statements or documents incorporated in it by reference. Even
where a document is not incorporated by reference, the court may nevertheless
consider it where the complaint relies heavily upon its terms and effect, which
renders the document integral to the complaint.”) (internal quotation marks and
17
citations omitted). This rule exists because a motion to dismiss challenges the
legal sufficiency of a plaintiff’s allegations under Rule 8, not the factual evidence
behind them. The rule limiting courts to review of the pleadings sets up why
plaintiffs can make some allegations upon information and belief. As long as
plaintiffs have some factual basis for making an accusation, pleading the
evidentiary details behind the accusation is not necessary if those details are
under a defendant’s control. Cf. Arista Records, LLC v. Doe 3, 604 F.3d 110, 121
(2d Cir. 2010) (“To the extent that ¶ 22’s allegations are made on information and
belief, virtually all of them are supported by factual assertions in Exhibit A . . . .
The principal assertion made only on information-and-belief is that defendants’
copying and/or distribution of plaintiffs’ music were without permission.”). That
said, matters pled upon information and belief have to be matters that plaintiffs
reasonably believe have occurred. Cf., e.g., Menard v. CSX Transp., Inc., 698
F.3d 40, 45 (1st Cir. 2012) (“Here, one might not expect precise recollection from
a man badly injured by a switched track and shortly thereafter hit and dragged
under the train. By contrast, CSX likely made its own investigation which, if not
privileged, could easily reveal just what its employees saw between the switch
accident and the denouement.”). In contrast, the Court cannot find any support
for the idea that a plaintiff may go beyond inferences from limited information and
plead simply what it fears the most.
18
The above principles guide how the Court will treat IBP’s pleadings and
motion papers. IBP both referred to the Agreement in the complaint and attached
it as an exhibit to the complaint. IBP’s treatment of the Agreement in the
complaint is a perfect example of making outside papers integral to the
allegations of the complaint, and the Court will consider the full Agreement
accordingly. In contrast, neither the affidavits that IBP submitted with its motion
papers nor the exhibits attached to those affidavits received any mention in the
complaint. The affidavits and exhibits play no role in the events described in the
complaint; they merely try to fortify some of the allegations in the complaint to
help them withstand defendants’ motion to dismiss. Except as discussed below,
the Court will disregard the affidavits and attached exhibits. As for the allegations
identified above that IBP made upon information and belief, paragraphs 18, 19,
and the first half of paragraph 26 of the complaint contain little more than guesses
about future events that do not follow from and draw no support from any other
part of the complaint. The Court thus recommends dismissing the allegations in
those paragraphs and will discuss below how disregarding those paragraphs may
affect the formal claims in the complaint. In contrast, paragraphs 20 and 25, the
last part of paragraph 26, and paragraphs 37 and 44 contain allegations of past
events that are reasonable inferences stemming from other allegations in the
complaint. The Court thus will consider these paragraphs, subject to further
analysis of the sufficiency of the claims to which they relate.
19
D.
Claim for Breach of Contract, and Whether the Restrictive
Covenant is Enforceable
The Court now turns to the most contested issue in defendants’ motion,
whether the Agreement and its restrictive covenant are enforceable and whether
IBP can sue for a breach of them. Defendants make two arguments as to why
the Agreement cannot be enforced. First, defendants argue that IBP has no
legitimate interests at stake that require the protection of the restrictive covenant.
According to defendants, Cottrell knew little more than the inside operations
necessary to manage sales. Cottrell sold products that were fairly standard in the
industry to customers approached through public means. Cottrell likely has some
recollection of day-to-day operations at IBP, but recollections of basic operations
do not rise to the level of confidential information requiring protection. Second,
defendants argue that the geographic and time restrictions in the restrictive
covenant are unreasonable. Cottrell was a manager only at the Erie location,
which closed. Cottrell held the Foreman position in Sanborn for only about 20
months before he was fired. Whatever his title, according to defendants, he was
essentially a salesman, and apparently a bad one whom IBP needed to fire.
Defendants conclude that there is no reason to lock a bad (in IBP’s view)
salesman of standard home-improvement products from such a wide
geographical area for so long a period of time.
20
IBP counters defendants’ arguments in several ways. IBP first notes that
many of the cases that defendants have cited denied summary judgment or
injunctive relief after discovery. If nothing else, IBP argues for the chance to
conduct discovery to determine the extent of defendants’ violations of the
restrictive covenant. As for the restrictive covenant, IBP argues that the
geographic and time restrictions will protect its trade secrets without harming any
public interest. IBP argues further that “the restrictions in the agreement do not
impose an undue hardship on Cottrell as they are tailored to the business of
installing building products, and do not restrict Cottrell from working in a sales
capacity in any other industry or business, or from engaging in the business of
installing building products outside the limited geographic area provided for in the
Agreement.” (Dkt. No. 15 at 21.)
“Generally negative covenants restricting competition are enforceable only
to the extent that they satisfy the overriding requirement of reasonableness . . . .
However, where an anticompetition covenant given by an employee to his
employer is involved a stricter standard of reasonableness will be applied. In this
context a restrictive covenant will only be subject to specific enforcement 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. Undoubtedly judicial disfavor of these covenants
is provoked by powerful considerations of public policy which militate against
21
sanctioning the loss of a man’s livelihood. Indeed, our economy is premised on
the competition engendered by the uninhibited flow of services, talent and ideas.
Therefore, no restrictions should fetter an employee’s right to apply to his own
best advantage the skills and knowledge acquired by the overall experience of his
previous employment. This includes those techniques which are but skillful
variations of general processes known to the particular trade.” Reed, Roberts
Assocs., Inc. v. Strauman, 353 N.E.2d 590, 592–93 (N.Y. 1976) (internal
quotation marks and citations omitted); accord BDO Seidman v. Hirshberg, 712
N.E.2d 1220, 1223 (N.Y. 1999). “Restrictive covenants are narrowly read
because sound public policy considerations strongly militate against sanctioning
the loss of a person’s livelihood and because enforcement contravenes New
York’s policy of promoting free trade.” Consol. Brands, Inc. v. Mondi, 638 F.
Supp. 152, 156 (E.D.N.Y. 1986) (citations omitted).
Here, construing all allegations in the complaint as true and as favorably as
circumstances permit, several factors weigh against finding the Agreement and
the restrictive covenant enforceable. First, the restrictive covenant is excessively
broad on its face. By its terms, the restrictive covenant does not restrict the types
of home-improvement products forbidden to Cottrell. The restrictive covenant
“includes” certain products as examples of products that IBP sells, markets, or
installs, but places no limit on the range of those products. The restrictive
covenant also does not limit Cottrell to any products that IBP sold while he was a
22
manager. If Cottrell currently were selling home-improvement products that IBP
did not sell from 2004–2013 but started selling now then the restrictive covenant
would apply. The breadth of these terms and the phrase “directly or through
others” limits Cottrell’s ability to plan what kind of home-improvement career he
can have that would not infringe on the restrictive covenant. To highlight the
extent of the problem, the Court compares the restrictive covenant here with the
one struck down in Columbia Ribbon & Carbon Mfg. Co., Inc. v. A-1-A Corp., 369
N.E.2d 4, 6 (N.Y. 1977), which contained similar language about undefined
products and direct or indirect conduct:
IBP Covenant
Columbia Ribbon
“[F]or a period beginning on the date
hereof and continuing through the
second anniversary of the termination of
Employee’s employment with the
Company or any of its Affiliates for any
reason (the “Restrictive Period”),
Employee will not, either for
Employee’s own account or in the
service of or on behalf of any other
person or entity, directly or through
others, engage or invest in the business
of selling, marketing or installing the
building products sold, marketed or
installed by the Company (which
products shall include residential and
commercial insulation, gutters, garage
doors, fireplaces, closet shelving, shower
doors and mirrors)(the “Business”) within
a 100 mile radius of the branch of the
Company that is currently managed by
Employee in Erie, Pennsylvania and
within a 100 mile radius of each branch
of the Company and its Affiliates that are
hereafter managed or supervised by
Employee, wherever located.” (Emphasis
added.)
“The Employee further expressly
covenants that he will not, for a period
of twenty-four months after the
termination of his employment with the
Company, directly or indirectly, for
himself, or his agent or employee
of, or on behalf of, or in conjunction
with any person, firm, or
corporation, sell or deliver any
goods, wares and merchandise of the
kind or character sold by the
Company at any time during the term
of his employment with the Company,
or in any other manner, engage in the
sale and delivery thereof within any
territory to which the Employee was
assigned during the last twenty-four
months prior to termination.”
(Emphasis added.)
23
The Court’s view of the restrictive covenant here matches the New York Court’s
view of the covenant in Columbia Ribbon: “It is clear that its broad-sweeping
language is unrestrained by any limitations keyed to uniqueness, trade secrets,
confidentiality or even competitive unfairness. It does no more than baldly
restrain competition. This it may not do.” Columbia Ribbon, 369 N.E.2d at 6.
Beyond the comparison to Columbia Ribbon, the restrictive covenant also
includes the term “invest.” Taken at face value, if Cottrell bought stock in or
worked for well-established corporations like Lowe’s or The Home Depot then he
would be violating the restrictive covenant, even if he worked entirely in-house
and had no responsibility for recruiting customers. The prohibition on
“investment” also, on its face, jeopardizes the 15,860 shares in IBP’s holding
company that Cottrell received in Section 1 of the Agreement in exchange for
signing it. No part of the Agreement contemplates a situation in which Cottrell
would have to give up his ownership in the holding company for at least two
years. The Court hesitates to enforce what would amount to a penalty imposed
on Cottrell for being fired that partly would nullify the consideration given for
entering the Agreement.
The restrictive covenant on its face also creates an excessively large
prohibited zone in two different ways. As Figure 1 above demonstrates, the
restrictive covenant would keep Cottrell from plying his trade in all of Western
New York; a major portion of Southeastern Ontario including the Hamilton,
24
Mississauga, and Toronto markets; all of Northwestern Pennsylvania almost as
far south as Pittsburgh; and a major portion of northeastern Ohio including
Cleveland. IBP does not even sell in Ontario. IBP would rope off all this territory
for someone described in the complaint as having a location close on his watch,
losing the “manager” title, and then being fired for underselling and thus not using
whatever proprietary information he supposedly could access. At the same time,
IBP ignores the concluding sentence of Section 3, which, despite some
awkwardness stemming from sloppy editing, explicitly lifts the prohibitions of the
restrictive covenant if IBP closes its branches “and ceases operations in the
territory described in paragraph (a).” (Dkt. No. 1-1 at 3.) The geographical
restriction around Erie—an area described in paragraph (a) where IBP closed its
branch and ceased operations—thus no longer applies. IBP’s argument about
servicing the Erie population after closing the Erie branch makes no difference,
since IBP would be happy to take calls from customers in any number of towns
and cities where it does not have branches or “operations.” Surely IBP would not
argue that the restrictive covenant would expand to include any town or city that
ever called IBP while Cottrell was a manager.
A second factor weighing against enforcement of the Agreement concerns
the nature of IBP’s business itself. In the non-exclusive examples of products
listed in the restrictive covenant, IBP defines its business as including “residential
and commercial insulation, gutters, garage doors, fireplaces, closet shelving,
25
shower doors and mirrors.” (Dkt. No. 1-1 at 2.) At no time does IBP plead that it
designs or manufacturers any of the listed products, meaning that it works with
commercially available products that any customer or competitor could buy.
These commercially available products have market prices that require no
proprietary pricing models; IBP admitted as much when it pled that it fired Cottrell
for “selling work to one of IBP’s customers at a below-market rate to IBP’s
detriment.” (Dkt. No. 1 at 7 ¶ 16.) Additionally, IBP never pled that Cottrell ever
communicated with top IBP officials or worked with top IBP management to
cultivate unique customer relationships. Instead, the complaint describes
Cottrell’s highest responsibilities as selling, supervising sales agents, and
“servicing” sales markets. IBP downplays the scope of the restrictive covenant by
noting that Cottrell can pick another industry, but if Cottrell’s generic sales skills
are so portable then IBP must be conceding that it kept him away from any
unique sales information that could not carry over to another industry.
Although the Court decided earlier that it would disregard the affidavits
attached to IBP’s motion papers, it will note the irony of two of the exhibits
attached to those papers. The first exhibit (Dkt. No. 15-1 at 10) consists of a
photograph of what appears to be Cottrell’s current business card at ABS, a card
“left near one of IBP’s locations.” (Id. at 4.) Putting aside the vagueness of what
“near one of IBP’s locations” means, IBP does not assert that the “location” is the
location of an existing IBP client. IBP also unwittingly acknowledges that
26
businesses in the home improvement industry try to recruit new jobs or clients by
taking promotional materials like business cards and spreading them around
publicly available home and business addresses. Cf. Buffalo Imprints, Inc. v.
Scinta, 534 N.Y.S.2d 55, 57 (N.Y. App. Div. 4th Dep’t 1988) (“Lists of customers
who might be interested in purchasing advertising specialties are readily
ascertainable from many sources, including the yellow pages of telephone
directories and lists of businesses prepared by chambers of commerce. Plaintiff
concedes that lists of suppliers of novelty items are compiled and distributed by a
national trade organization known as ASI, and that most suppliers exhibit their
wares at trade shows which are open to the general public. Therefore, plaintiff
failed to prove that its lists of suppliers were confidential.”).
The second exhibit that has drawn the Court’s attention (Dkt. No. 15-2 at 3)
further undermines IBP’s arguments about proprietary information. This exhibit
consists of a photograph purportedly showing an ABS truck at a work scene that
is “right around the corner from IBP’s Sanborn, New York location, for work which
IBP also bid.” (Id. at 1.) The keyword in the exhibit is “bid.” IBP would not have
to bid for work from long-time customers with whom it has good relations and
“whose trade and patronage have been secured by years of business effort and
advertising, and the expenditure of time and money, constituting a part of the
good will of a business which enterprise and foresight have built up.” Town &
Country House & Home Serv., Inc. v. Newbery, 147 N.E.2d 724, 726 (N.Y. 1958)
27
(internal quotation marks and citations omitted). Except perhaps for
governmental agencies that are required to solicit multiple offers, IBP would not
have to bid for work that it targeted through skillful application of proprietary
research and marketing strategies. By the very fact that it had to place a bid
against competing companies, IBP admits that it had no prior relationship with
whoever this customer in Sanborn was and that the customer would pick a
contractor based on prevailing market prices.
All of the above information together portrays an industry that, at least in
part, relies on cold contacts and simple bidding to recruit customers who might
need commercially available home-improvement products. Compare Kelly v.
Evolution Mkts., Inc., 626 F. Supp. 2d 364, 372 (S.D.N.Y. 2009) (“EvoMarkets
claims to have spent over $200,000 in non-compensatory expenses to help Kelly
forge trusting and special, indeed unique, relationships with both our existing and
new clients. EvoMarkets has invested heavily in Kelly’s training and networking,
trusting him with valuable company information about its customers. The
restrictive covenants to which Kelly agreed were established to protect
EvoMarkets’ investment in Kelly, and, in the event that Kelly leaves the company,
to allow EvoMarkets an opportunity to retain its clients’ trust and business through
another broker that replaces Kelly.”) (internal quotation marks and docket
citations omitted) with Best Metro. Towel & Linen Supply Co., Inc. v. A & P Coat,
Apron & Linen Supply, Inc., 540 N.Y.S.2d 300, 302 (N.Y. App. Div. 1989)
28
(“Additionally, it appears that the likely customers for the plaintiff’s linen supply
services, i.e., restaurants, are readily ascertainable from sources as available as
a telephone book.”). Whether selling himself or supervising other sales agents,
Cottrell was an interchangeable part that IBP concedes can switch to other
industries with the same skills. Cottrell almost certainly would remember any
customers that came to him at IBP through bids, business cards, and similar
methods of recruitment, but “an employee’s recollection of information pertaining
to specific needs and business habits of particular customers is not confidential.”
Walter Karl, Inc. v. Wood, 528 N.Y.S.2d 94, 98 (N.Y. App. Div. 1988) (citations
omitted); cf. Veramark Techs., Inc. v. Bouk, ___ F. Supp. 2d ___, 2014 WL
1364930, at *8 (Wolford, J.) (denying a preliminary injunction where, inter alia,
“Mr. Bouk’s knowledge of the intricacies of the sales operation at Veramark, or
even his status as its highest ranking sales executive, does not transform him into
a unique employee for purposes of a restrictive covenant analysis.”) While IBP
would not have to prove anything this early in the litigation, the absence of any
assertion of a more complicated business model means that shutting Cottrell
completely out of the industry for any period of time seems unnecessarily harsh.
Cf. Newco Waste Sys., Inc. v. Swartzenberg, 510 N.Y.S.2d 399, 400 (N.Y. App.
Div. 4th Dep’t 1986) (denying enforcement of a restrictive covenant in part
because the former employee “is shown neither to be irreplaceable nor having
caused special harm to his employer by his leaving” and because “it is the
29
utilization of confidential information constituting a breach of trust, and not the
mere knowledge of a business’s intricacies, which is prohibited”) (citations
omitted).
As for harshness, a third factor weighing against enforcement of the
Agreement concerns the burden to Cottrell. Although he appears to have held
different titles at IBP over the years, Cottrell again was a salesman of standard,
commercially available products. Cf. Brewster-Allen-Wichert, Inc. v. Kiepler, 516
N.Y.S.2d 949, 950 (N.Y. App. Div. 1987) (“Customer lists in the commercial
insurance industry are not confidential, nor are the functions of an insurance
agent extraordinary or unique.”) (citations omitted); Reidman Agency, Inc. v.
Musnicki, 435 N.Y.S.2d 837, 838 (N.Y. App. Div. 4th Dep’t 1981) (“The insurance
business is not unique, nor was Musnicki’s assignment with the plaintiff, and the
names of insurance customers are not a trade secret.”) (citation omitted). Cottrell
has had no notable relationship with IBP’s top management at the principal place
of business in Ohio. Cottrell’s later track record at IBP doesn’t look good: His first
try as a manager ended with the closing of his branch within about four and a half
years; his second try ended with a firing within two years. Perhaps to follow a job
opening or perhaps out of partial deference to IBP, Cottrell left the Buffalo area to
try to continue his career in a new city. Beyond Cottrell’s employment at ABS in
itself, IBP has pled virtually nothing in the way of violations of the Agreement that
actually have happened. Cf. Columbia Ribbon, 369 N.E.2d 4, 7 (1977) (“[The
30
complaint] makes no showing that any secret information was disclosed, that [the
employee] performed any but commonplace services during his Columbia
employment, or, for that matter, that there is any evidence of lost business, lost
customers or other damage.”). Based, nonetheless, on a broad restrictive
covenant, one business card, and one photograph of a truck, IBP would require
Cottrell to leave Western New York, Southern Ontario, and a significant portion of
other Great Lakes territory before taking another chance at a troubled sales
career. New York public policy forbids such a punitive approach to employment
management. “A contrary holding would make those in charge of operations or
specialists in certain aspects of an enterprise virtual hostages of their employers.”
Reed, Roberts, 353 N.E.2d at 594.
In all, the Court finds that any information that Cottrell acquired at IBP
cannot qualify as confidential and proprietary, and that banishing him from his
chosen industry based on that information violates New York public policy.
Accordingly, the Court recommends finding the Agreement unenforceable in its
entirety. As IBP noted when assessing the cases that defendants cited in their
motion papers, the Court is mindful that it is making this recommendation without
the benefit of any substantial discovery. Nonetheless, the parties have provided
enough information through their pleadings and motion papers to persuade the
Court that further discovery would not change the legal significance of the
relationship that Cottrell had with IBP. Because IBP’s first claim relates entirely to
31
a breach of the Agreement and an improper possession of confidential
information, the Court recommends dismissing that claim.
E.
IBP’s Remaining Claims
The Court’s conclusions regarding the Agreement and IBP’s first claim
necessitate similar conclusions regarding IBP’s other claims. As discussed
above, any information about IBP or the home-improvement products industry
that Cottrell obtained at IBP did not result from any unique skill, training, or
cultivation of customer goodwill. Cottrell is a salesman of commercially available
products in an industry that uses business cards, advertising, and bids to sell
those products at market prices. IBP again has conceded that Cottrell’s sales
skills are generic enough that he could apply them to other industries. If Cottrell’s
inside information does not qualify as confidential or as a trade secret then IBP
cannot accuse him of misappropriating trade secrets or of breaching any fiduciary
duties regarding trade secrets. If the Agreement were unenforceable then IBP
cannot accuse either defendant of tortiously interfering with it or of unjustly
enriching itself by violating it. Accordingly, the Court recommends dismissing the
remaining counts in the complaint as well. Cf. Great Lakes Carbon Corp. v. Koch
Indus., Inc., 497 F. Supp. 462, 470 (S.D.N.Y. 1980) (rejecting claims of tortious
interference and violation of fiduciary duties after rejecting a claim of proprietary
information).
32
IV.
CONCLUSION
For all of the foregoing reasons, the Court respectfully recommends
granting defendants’ motion (Dkt. No. 11).
V.
OBJECTIONS
A copy of this Report and Recommendation will be sent to counsel for the
parties by electronic filing on the date below. Any objections to this Report and
Recommendation must be electronically filed with the Clerk of the Court within 14
days. See 28 U.S.C. § 636(b)(1); FRCP 72. “As a rule, a party’s failure to object
to any purported error or omission in a magistrate judge’s report waives further
judicial review of the point.” Cephas v. Nash, 328 F.3d 98, 107 (2d Cir. 2003)
(citations omitted).
SO ORDERED.
/s Hugh B. Scott
HONORABLE HUGH B. SCOTT
UNITED STATES MAGISTRATE JUDGE
DATED: April 18, 2014
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