Beef Products, Inc. v. Hesse

Filing 159

ORDER denying 106 Defendant's Motion for Partial Summary Judgment; denying as moot 107 Motion to Stay; denying as moot 139 Motion to Stay. Signed by U.S. District Judge Karen E. Schreier on November 14, 2019. (DLC)

UNITED STATES DISTRICT COURT
DISTRICT OF SOUTH DAKOTA
SOUTHERN DIVISION
BEEF PRODUCTS, INC.,

4:17-CV-04130-KES

Plaintiff,
vs.

ORDER DENYING DEFENDANT’S
MOTION FOR PARTIAL SUMMARY
JUDGMENT

MICHAEL HESSE,
Defendant.

Plaintiff, Beef Products, Inc., filed a complaint alleging that defendant,
Michael Hesse, improperly solicited Beef Products’ employees for employment
with Hesse and Hesse’s business, Automatic Equipment Manufacturing Co.
Docket 64. Beef Products’ amended complaint alleges four causes of action:
breach of contract, breach of duty of loyalty, fraud in the inducement of
contract, and declaratory judgment. Id. ¶¶ 31-58. Hesse filed counterclaims
alleging a breach of contract claim and a breach of implied covenant of good
faith and fair dealing claim. Docket 70 at 18-20. Hesse also requested a
declaratory judgment that the non-solicitation provision of the contract was per
se unenforceable. Id. at 17-18. Hesse moves for partial summary judgment.
Docket 106. Beef Products opposes the motion. Docket 137. For the following
reasons, the court denies Hesse’s motion for partial summary judgment.

FACTUAL BACKGROUND
The facts, viewed in the light most favorable to the non-moving party, are
as follows:
Hesse began his employment at Beef Products on June 1, 1998. Docket
135 ¶ 7. During his time at Beef Products, Hesse served as Head of Sales and
oversaw a fourteen-person sales group for over a decade. Docket 70 at 3;
Docket 137 at 2. In June of 2016, Hesse informed Beef Products that he
intended to leave Beef Products and run his family’s company, Automatic. Id.
at 3.
Automatic sells roller mills, hammer mills, rotary mills, towing products,
and braking products. Id. at 4. Beef Products does not sell any of those
products. Id. Beef Products produces and sells “lean finely textured beef.”
Docket 135 ¶ 1. Beef Products’ customers include ground beef processors,
supermarkets, and restaurants. Id. ¶ 3. Beef Products alleges that the limited
amount of discovery received “suggests that Automatic was targeting the beef
industry as a customer for its roller mills.” Docket 137 at 5. Beef Products and
Automatic compete over the allocation of resources and spending by customers
in the beef industry. Id.
On August 3, 2016, Hesse and Beef Products entered into an agreement
called the “Transitional Employment, On-Call Services Agreement and General
Release” (Transition Agreement). Id.; Docket 64-1. The Transition Agreement
stated that Hesse’s full-time, regular employment at Beef Products would
terminate on November 23, 2016 (Termination Date). Docket 64-1 at 1. For
2

thirty-six months after the Transition Agreement’s effective date, Hesse agreed
to continue on-call employment with Beef Products. Id. at 2-3. The Transition
Agreement also contained a non-solicitation provision that applied to
customers, vendors, suppliers, and employees. Id. at 3-4. The non-solicitation
provision stated:
Employee agrees that during the On-Call Period and for a period of
one (1) year following the conclusion of the On-Call Period (the
“Restrictive Period”), Employee will not, directly or indirectly, on
Employee’s own behalf or by aiding any other individual or entity
. . . Solicit for employment any Company employee with whom
Employee had personal contact during the twelve (12) month
period immediately prior to the Termination Date.
Id. The Restrictive Period is from August 11, 2016 to August 11, 2020. Docket
137 at 6. The Transition Agreement did not contain any geographical
limitations. Id.
On November 23, 2016, Hesse began to provide full-time services to
Automatic and serve as the Chairman of Automatic. Id. at 11. Beef Products
also used Hesse’s services from November 23, 2016, to September 22, 2017 in
line with the terms of the Transition Agreement. Docket 70 at 2-3.
Beef Products alleges that Hesse improperly solicited several employees
of Beef Products’ sales group to work at Automatic. Docket 64 ¶ 34. These
employees include Chuck Szitas, Cameron Jacobs, Bryce Snyder, Britton Wall,
and Alec Hannah (collectively, “Subject Individuals”). Id. ¶¶ 20-21. The Subject
Individuals were at-will employees at Beef Products. Docket 137 at 12, 14, 16,
18, 19. Additionally, Szitas, Jacobs, Snyder, and Wall never signed noncompete or non-solicitation agreements with Beef Products. Id. at 20-30.
3

Between December of 2016 and August of 2017, the Subject Individuals ended
their employment at Beef Products and started employment at Automatic.
Docket 70 at 5.
LEGAL STANDARD
Summary judgment is appropriate if the movant “shows that there is no
genuine dispute as to any material fact and the movant is entitled to judgment
as a matter of law.” Fed. R. Civ. P. 56(a). The moving party can meet its burden
by presenting evidence that there is no dispute of material fact or that the
nonmoving party has not presented evidence to support an element of its case
on which it bears the ultimate burden of proof. Celotex Corp. v. Catrett, 477
U.S. 317, 322-23 (1986). The moving party must inform the court of the basis
for its motion and also identify the portions of the record that show there is no
genuine issue in dispute. Hartnagel v. Norman, 953 F.2d 394, 395 (8th Cir.
1992) (citation omitted).
To avoid summary judgment, “[t]he nonmoving party may not ‘rest on
mere allegations or denials, but must demonstrate on the record the existence
of specific facts which create a genuine issue for trial.’ ” Mosley v. City of
Northwoods, 415 F.3d 908, 910 (8th Cir. 2005) (quoting Krenik v. Cty. of Le
Sueur, 47 F.3d 953, 957 (8th Cir. 1995)). Summary judgment is precluded if
there is a genuine dispute of fact that could affect the outcome of the case.
Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). When considering a
summary judgment motion, the court views the facts and the inferences drawn
from such facts “ ‘in the light most favorable to the party opposing the
4

motion.’ ” Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587
(1986) (quoting United States v. Diebold, Inc., 369 U.S. 654, 655 (1962)).
DISCUSSION
Hesse moves for summary judgment on two claims. Docket 106. First,
Hesse moves for summary judgment on his declaratory judgment claim and
argues that the Transition Agreement’s non-solicitation provision is
unenforceable as a matter of law. Docket 119 at 2, 4. Second, Hesse moves for
summary judgment on Beef Products’ breach of duty of loyalty claim and
argues that the claim fails as a matter of law to the extent that the claim is
based on Hesse’s conduct after the Termination Date and based on mere
solicitation of employees without competition. Id. at 3, 15, 22.
I.

The Non-Solicitation Provision
Hesse argues that the non-solicitation provision is per se unenforceable

under South Dakota law. Id. at 4. Hesse contends that the non-solicitation
provision is a restraint on trade because it restricts Hesse, and Automatic by
extension, from recruiting and hiring certain individuals. Id. at 5-11. Beef
Products argues that the non-solicitation provision is not a restraint on trade.
Docket 134 at 11. Beef Products argues that the provision does not restrain
Hesse or Automatic in their business or trade; instead, the provision narrowly
prohibits Hesse from soliciting Beef Products’ employees to Automatic. Id. at
12.
South Dakota law prohibits “[a]ny contract restraining exercise of a
lawful profession, trade, or business[.]” SDCL § 53-9-8. There are three
5

exceptions to this general prohibition: (1) sale of good will; (2) dissolution of
partnership; and (3) employees’ covenants not to compete with an employer.
See SDCL §§ 53-9-9 to 53-9-12. Unless one of the exceptions applies, “the
agreement is invalid under the general rule.” Commc’n Tech. Sys., Inc. v.
Densmore, 583 N.W.2d 125, 128 (S.D. 1998). The court must construe these
exceptions narrowly. Id.
Non-disclosure clauses and non-solicitation clauses are not a general
restraint on trade because “under SDCL [§] 53-9-8, an agreement not to
disclose information or solicit, unlike a covenant not to compete, is free from
challenge as a general restraint on trade.” 1st Am. Sys., Inc. v. Rezatto, 311
N.W.2d 51, 57 (S.D. 1981); see also Billion v. Oxford, No. 4:15-CV-04179-KES,
2016 WL 3976636, at *4 (D.S.D. July 22, 2016). “[S]uch covenants are strictly
construed and enforced only to the extent reasonably necessary to protect the
employer’s interest in confidential information.” Hot Stuff Foods, LLC v. Mean
Gene’s Enters., Inc., 468 F. Supp. 2d 1078, 1101 (D.S.D. 2006) (citing Rezatto,
311 N.W.2d at 57).
“Because a non-disclosure clause, unlike a non-compete clause, is not a
general restraint on trade in South Dakota, it is not held to the same strict
standard as a non-compete clause if the language is too broad.” Billion, 2016
WL 3976636, at *4. This same analysis can be applied to non-solicitation
clauses. See, e.g., id.; Smith, Barney, Harris Upham & Co., Inc. v. Robinson, 12
F.3d 515, 518 (5th Cir. 1994) (finding that non-recruitment covenants do not
necessarily restrict a former employee’s ability to compete and do not
6

significantly restrain trade); Baker Petrolite Corp. v. Spicer, 2006 WL 1751786,
at *4 (S.D. Tex. June 20, 2006) (finding the non-recruitment agreement
between an employer and employee was not a restraint on trade).
The court finds that the non-solicitation provision is not a general
restraint on trade and is not prohibited under SDCL § 53-9-8. The nonsolicitation provision does not restrain Hesse from exercising a lawful
profession, trade, or business. The provision only prohibits Hesse from
soliciting Beef Products’ employees to Automatic. As Beef Products argues, the
non-solicitation provision allows Hesse and Automatic “to carry on their
business as usual at Automatic.” Docket 134 at 12. Hesse is free to work at
Automatic and perform numerous services. Hesse is even free to recruit
personnel for Automatic—anywhere, any time, and from any organization—
except the small group of employees at Beef Products, whom Hesse willingly
agreed to not solicit. Similarly, Automatic can recruit employees from any
organization, including Beef Products, as long as Hesse is not involved in the
solicitation. Beef Products’ employees are free to leave Beef Products and work
at Automatic, as long as Hesse is not involved in the solicitation. The nonsolicitation provision “simply does not meet the definition of the kinds of
contracts covered by the statute.” Robinson, 12 F.3d at 519. The court denies
Hesse’s motion for summary judgment on the non-solicitation provision’s
enforceability.

7

II.

Breach of Duty of Loyalty
Hesse moves the court to grant summary judgment on part of Beef

Products’ breach of duty of loyalty claim. Docket 119 at 15. First, Hesse asks
the court “to narrow the window” of Beef Products’ “duty of loyalty claim to
conduct that occurred before the Termination Date[.]” Id. at 16. Second, Hesse
asks the court to “eliminate the legal theory that solicitation of co-employees
without competition or impeding competition can give rise to a breach of duty
of loyalty claim.” Id.
A. Hesse’s Employment Status After the Termination Date
Hesse argues that Beef Products’ breach of loyalty claim fails as a matter
of law as it relates to Hesse’s conduct after November 23, 2016. Docket 119 at
16-17. Hesse argues that he had no duty of loyalty to Beef Products outside of
the Transition Agreement after the Termination Date because he was an
independent contractor. Id. at 17. Beef Products argues that whether Hesse
was Beef Products’ employee after the Termination Date is a disputed issue of
material fact. Docket 134 at 26. Beef Products argues that it has put forth
enough evidence in the record that a jury could determine that Hesse was a
Beef Products employee and therefore, owed Beef Products a duty of loyalty. Id.
In South Dakota, an “employee owes a duty of loyalty to [his] employer.”
Setliff v. Akins, 616 N.W.2d 878, 886 (S.D. 2000). “An employee who has any
business to transact on the employee’s own account, similar to that entrusted
to the employee by the employer, shall always give the employer the

8

preference.” SDCL § 60-2-13. While employed, an employee cannot act contrary
to his employer’s interests. Setliff, 616 N.W.2d at 886.
Thus, whether Hesse owed Beef Products a duty of loyalty depends on
his status as an employee or independent contractor. “[T]he ultimate
determination of whether an individual is an employee or an independent
contractor is a mixed question of law and fact[.]” Egemo v. Flores, 470 N.W.2d
817, 820 (S.D. 1991). “[E]ach case must be determined on its own facts and all
the features of the relationship are to be considered.” Id.
The parties dispute whether Hesse was an employee or an independent
contractor of Beef Products. Hesse alleges that he was an independent
contractor of Beef Products and provides factual allegations to support his
position. See Docket 119 at 17. Conversely, Beef Products alleges that Hesse
remained a Beef Products employee after the Termination Date. Docket 134 at
14. Beef Products also provides factual allegations to support its position. See
id. at 14-16. There are substantial factual questions that a jury must decide in
determining whether Hesse was an employee or independent contractor after
November 23, 2016. Thus, the court denies summary judgment on this issue.
B. Solicitation and Competition
Next, Hesse argues that Beef Products’ breach of duty claim fails “insofar
as it is based on mere solicitation of employees of [Beef Products], without
competition or impending competition.” Docket 119 at 22. He argues that such
a claim requires an advancement of a competing business. Id. at 22-23. Beef
Products argues that Hesse’s duty of loyalty goes beyond an agreement not to
9

compete. Docket 134 at 27. Beef Products contends that Hesse violated this
duty when he “engaged in conduct that was contrary” to Beef Products’ interest
and was in direct competition to Beef Products. Id. at 29. Beef Products
contends that this is a factual issue for a jury. Id.
Employees can violate their duty of loyalty to their employers in various
ways. For example, “[e]mployees violate their duty of loyalty to their employer
when they compete against their employer.” Carda v. E.H. Oftedal & Sons, Inc.,
No. 5:04-CV-05036-KES, 2005 WL 2086280, at *6 (D.S.D. Aug. 26, 2005).
Additionally, employees, while employed, may not act contrary to their
employer’s interests. Setliff, 616 N.W.2d at 886. And “[a]n employee must
prefer his employer’s business interests to his own.” Bushman v. Pure Plant
Food Intern. Ltd., 330 N.W.2d 762, 764 (S.D. 1983). “Therefore, while
employees may lay plans and take limited steps to begin competing with their
employers, employees who go too far risk violating their duty of loyalty.” Setliff,
616 N.W.2d at 886. An employee may go “too far” by secretly communicating
with, soliciting, and/or hiring employees or customers of his employer for such
rival business before the end of his employment. Carda, 2005 WL 2086280, at
*6 (citing Setliff, 616 N.W.2d at 886).
Beef Products alleges that Hesse breached his duty of loyalty to Beef
Products by secretly communicating with and soliciting members of Beef
Products’ sales team for employment and by acting contrary to Beef Products’
interests in making preparations to solicit Beef Products’ employees while
Hesse worked at Beef Products. Docket 64 ¶ 41. A jury could construe these
10

allegations as Hesse competing with Beef Products, acting against Beef
Products’ interests, or prioritizing his interests over Beef Products’ interests, all
of which are evidence of a breach of duty of loyalty.
Additionally, there are several genuine issues of material fact: (1) whether
Hesse went too far in preparing to compete with Beef Products; (2) whether he
solicited Beef Products’ employees; and (3) whether Beef Products and
Automatic are competitors. See Setliff, 616 N.W.2d at 886. Hesse alleges that it
is undisputed that Automatic is not a competitor of Beef Products. Docket 109
¶ 4. Beef Products objects to this allegation. Docket 137 at 4. Beef Products
argues that “Automatic was looking to expand its sales in the agricultural
industry, generally, and ‘beef market,’ specifically,” which is Beef Products’
market. Docket 134 at 19. Additionally, Automatic was organizing its sales by
geographic region and assigning the Subject Individuals to the same regions
they were assigned by Beef Products. Id. Thus, the court denies summary
judgment on this issue because Beef Products’ breach of the duty of loyalty
claim does not fail as a matter of law and genuine issues of material fact exist.
CONCLUSION
The non-solicitation provision is not a general restraint on trade, and
therefore, is enforceable. Additionally, the court does not grant summary
judgment on Beef Products’ breach of duty claim because there are genuine
issues of material fact. Thus, it is
ORDERED that Hesse’s motion for partial summary judgment (Docket
106) is denied.
11

IT IS FURTHER ORDERED that Hesse’s motion to stay discovery (Docket
107) and the third parties’ motion to stay discovery (Docket 139) are denied as
moot.
Dated November 14, 2019.
BY THE COURT:
/s/ Karen E. Schreier
KAREN E. SCHREIER
UNITED STATES DISTRICT JUDGE

12