DCS Sanitation Mgt. v. Eloy Castillo

United States Court of Appeals
FOR THE EIGHTH CIRCUIT
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No. 05-1201
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DCS Sanitation Management, Inc., *
*
Appellant, *
* Appeal from the United States
v. * District Court for the
* District of Nebraska.
Eloy Castillo; Efren George Castillo; *
Adolfo Martinez, *
*
Appellees. *
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Submitted: October 14, 2005
Filed: January 25, 2006
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Before RILEY, JOHN R. GIBSON, and COLLOTON, Circuit Judges.
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RILEY, Circuit Judge.
DCS Sanitation Management, Inc. (DCS) sued three of its former employees,
Eloy Castillo, Efren George Castillo, and Adolfo Martinez (collectively, former
employees), alleging the former employees breached noncompete agreements. DCS
appeals the district court’s1 denial of DCS’s motion for a preliminary injunction and
grant of summary judgment in favor of the former employees. We affirm.
1
The Honorable Laurie Smith Camp, United States District Judge for the
District of Nebraska.
I. BACKGROUND
DCS, a Delaware corporation with its principal place of business in Ohio,
cleans food processing plants in thirteen states, including Nebraska. DCS’s corporate
office in Ohio (1) formulates processes and procedures to improve cleaning crew
efficiency, (2) designs sanitation and safety programs for all cleaning crews,
(3) makes staffing decisions for all cleaning crews, and (4) makes human resource
policies and decisions for all DCS employees.
The former employees worked for DCS as on-site managers at the Tyson Foods
plant in Dakota City, Nebraska (Tyson plant). The former employees (1) had access
to DCS’s staffing, sanitation, and safety programs, including the allocation and
monitoring of proper chemical dilutions; (2) were responsible for enforcing regulatory
safety requirements and satisfying third party audit requirements; (3) were familiar
with staffing requirements for cleaning the Tyson plant; and (4) had knowledge of the
Tyson plant’s key contacts and business requirements.
As a condition of employment with DCS, each of the former employees signed
identical employment agreements (Agreements) with DCS. The Agreements
contained the following noncompete provision:
NONCOMPETITION AFTER TERMINATION: For a period of one (1)
year following the date of termination of employment for any reason, I
will not directly or indirectly engage in, or in any manner be concerned
with or employed by any person, firm, or corporation in competition
with [DCS] or engaged in providing contract cleaning services within a
radius of one-hundred (100) miles of any customer of [DCS] or with any
customer or client of [DCS] or any entity or enterprise having business
dealings with [DCS] which is then providing its own cleaning services
in-house or which requests my assistance or knowledge of contract
cleaning services to provide its own cleaning services in-house. In the
event of violation of this covenant, [DCS], in addition to any other rights
and remedies available at law or otherwise, is entitled to an injunction to
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be issued by a court of competent jurisdiction enjoining and restraining
employee from committing any violation of this provision and employee
hereby consents to the issuance of the injunction.
The Agreements also contained a choice-of-law provision: “APPLICABLE LAW:
This Agreement shall be subject to and interpreted in accordance with the laws of
Ohio.”
In June 2003, after DCS cleaned the processing side of the Tyson plant for
eighteen years, the Tyson plant solicited bids from competing cleaning companies. As
a result of the bidding process, on September 18, 2003, the Tyson plant selected
Packers Sanitation Services, Inc. (Packers) for the cleaning contract. Packers hired
all of DCS’s employees, including the former employees, and on November 8, 2003,
Packers started cleaning the Tyson plant.
On May 14, 2004, DCS sued the former employees, alleging (1) breach of the
noncompete agreements, (2) a “substantial probability” the former employees would
disclose DCS’s trade secrets and confidential information, and (3) breach of contract.
DCS sought (1) to enjoin the former employees in accordance with the noncompete
agreements, (2) to enjoin the former employees from disclosing DCS’s trade secrets
and confidential information, and (3) money damages.
DCS moved for a preliminary injunction, and the former employees moved for
summary judgment. The district court denied DCS’s motion for a preliminary
injunction and granted summary judgment in favor of the former employees,
concluding Nebraska has a materially greater interest in the noncompete agreements
at issue, and application of Ohio law would violate a fundamental policy of Nebraska
law. The district court thus applied Nebraska law to determine the validity of the
noncompete agreements and concluded the noncompete agreements were overbroad
and, therefore, unenforceable.
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DCS appeals the district court’s ruling, urging this court to reverse the district
court’s entry of summary judgment and denial of a preliminary injunction, and to
remand with instructions to enjoin the former employees under Ohio law. DCS argues
reversal and remand is warranted here, because (1) the district court erred in applying
Nebraska law instead of Ohio law, (2) the noncompete agreements are enforceable
under Ohio law, and (3) the district court abused its discretion in denying injunctive
relief for the period of the covenant from the date of the court’s order. In response,
the former employees contend (1) the appeal is moot, (2) the district court correctly
applied Nebraska law, (3) the noncompete agreements are overly broad and
unenforceable, and (4) the noncompete agreements are contracts of adhesion.
II. DISCUSSION
A. Mootness
The former employees contend this appeal is moot, because the one-year time
frame of the noncompete agreements has expired. See Agrigenetics, Inc. v. Rose, 62
F.3d 268, 270-71 (8th Cir. 1995) (holding, under Nebraska law, when a noncompete
agreement’s time period runs out, an appeal from the denial of a preliminary
injunction is moot). Although an appeal from a denial of injunctive relief may
become moot by the passage of time, a claim for damages remains viable. See Curtis
Indus., Inc. v. Livingston, 30 F.3d 96, 97 (8th Cir. 1994). Because DCS sought
money damages in addition to injunctive relief, this appeal is not moot.
B. Choice-of-Law Determination
DCS argues the district court erred when it evaluated DCS’s claim under
Nebraska law rather than Ohio law, because the Agreements specify Ohio law
governs. A district court sitting in diversity jurisdiction applies the conflict of law
rules for the state in which it sits. Inacom Corp. v. Sears, Roebuck & Co., 254 F.3d
683, 687 (8th Cir. 2001) (citing Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487,
496 (1941)). Thus, we apply Nebraska’s conflict of law rules and review de novo the
district court’s choice-of-law determination. Id.
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In deciding choice-of-law questions, Nebraska follows the Restatement
(Second) of Conflict of Laws (Restatement). Id. Nebraska courts generally give
effect to the parties’ choice of law. Vanice v. Oehm, 526 N.W.2d 648, 651 (Neb.
1995); Restatement § 187(1). Restatement section 187(1) provides “[t]he law of the
state chosen by the parties to govern their contractual rights and duties will be applied
if the particular issue is one which the parties could have resolved by an explicit
provision in their agreement directed to that issue.” Restatement § 187(1). Section
187(2) provides the parties’ contractual choice of law will apply unless (1) “the
chosen state has no substantial relationship to the parties or the transaction and there
is no other reasonable basis for the parties’ choice,” or (2) “application of the law of
the chosen state would be contrary to a fundamental policy of a state which has a
materially greater interest than the chosen state in the determination of the particular
issue and which . . . would be the state of the applicable law in the absence of an
effective choice of law by the parties.” Restatement § 187(2)(a), (b).
The district court applied Restatement section 187(2) without analyzing
whether section 187(1) or section 187(2) applies in this case. Section 187(2) applies
only when section 187(1) does not govern. See Restatement § 187, comment d.
Section 187(1) is inapplicable in this case, because, under Nebraska law, the parties
could not have resolved to apply Ohio law even with an explicit provision. See CAE
Vanguard, Inc. v. Newman, 518 N.W.2d 652, 656 (Neb. 1994) (holding “[t]he
provision of the agreement which states that a court may reform the covenant is of no
effect. Private parties may not confer upon the court powers which it does not
possess.”); see also Baxter Intern., Inc. v. Morris, 976 F.2d 1189, 1196 (8th Cir.
1992).
The first condition under section 187(2), whether “the chosen state has no
substantial relationship to the parties or the transaction and there is no other
reasonable basis for the parties’ choice,” is met in this case. Restatement § 187(2)(a).
Nebraska has a substantial relationship to the parties and the transaction, because the
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former employees and DCS entered into the Agreements in Nebraska, the services at
issue were to be performed in Nebraska, the former employees reside in Nebraska, the
prohibition of the noncompete clause directly and materially affects employment in
Nebraska, and DCS does business in Nebraska. Nebraska clearly possesses a direct
and substantial interest in the employment of its citizens. The only relationship
between Ohio and the parties is the location of DCS’s corporate headquarters and
principal place of business in Ohio. The Agreements were not negotiated, entered
into, or performed in Ohio. Under these circumstances, the district court properly
concluded Ohio has no substantial relationship to the parties or the transaction, and
Nebraska has a greater material interest in the Agreements. See Powell v. Am.
Charter Fed. Sav. & Loan Ass’n, 514 N.W.2d 326, 332 (Neb. 1994) (deciding the state
with the most significant relationship to the transaction and the parties is the state
where the parties contracted, negotiated, and resided; where the subject matter was
located; and where performance was to take place).
The second condition also is satisfied. Under section 187(2)(b), application of
the chosen law is precluded if “application of the law of the chosen state would be
contrary to a fundamental policy of a state which has a materially greater interest than
the chosen state” when the factors articulated in section 1882 are applied. Restatement
2
Section 188 provides in pertinent part:
(2) In the absence of an effective choice of law by the parties (see
§ 187), the contacts to be taken into account in applying the
principles of § 6 to determine the law applicable to an issue
include:
(a) the place of contracting,
(b) the place of negotiation of the contract,
(c) the place of performance,
(d) the location of the subject matter of the contract, and
(e) the domicil, residence, nationality, place of incorporation
and place of business of the parties.
These contacts are to be evaluated according to their
relative importance with respect to the particular issue.
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§ 187(2)(b). Nebraska and Ohio courts have materially different approaches to the
reformation of unreasonable noncompete agreements. In Nebraska, if a court
determines a noncompete agreement is unreasonable, the court will not reform the
noncompete agreement in order to make it enforceable. H & R Block Tax Servs., Inc.,
v. Circle A Enters., Inc., 693 N.W.2d 548, 552 (Neb. 2005). Contrary to the Nebraska
courts’ approach, Ohio courts are empowered to reform overly broad or unreasonable
noncompete agreements to make them reasonable. Raimonde v. Van Vlerah, 325
N.E.2d 544, 547 (Ohio 1975). The district court correctly recognized that because
Nebraska courts expressly have rejected judicial reformation of noncompete
agreements, application of Ohio law would violate a fundamental policy of Nebraska
law.
Because Nebraska has a greater material interest in the Agreements and
application of Ohio law would violate a fundamental policy of Nebraska law, we hold
the district court correctly applied Nebraska law to the question of the validity and
enforceability of the noncompete agreements. See First Nat’l Bank v. Daggett, 497
N.W.2d 358, 363 (Neb. 1993) (disregarding choice-of-law provision because the
chosen state had no contacts with the transaction and the parties, and application of
the chosen state’s law would offend a strong public policy in the forum state). See
also Rain & Hail Ins. Serv., Inc. v. Casper, 902 F.2d 699, 700-01 (8th Cir. 1990)
(applying Nebraska law to an employment agreement’s noncompete clause choosing
the application of Iowa law, which allowed modification of overly restrictive
noncompete provisions, and affirming conclusion “Iowa law would be contrary to a
fundamental policy of Nebraska”).
C. Validity of the Noncompete Agreements
Having concluded Nebraska law applies, we now turn to whether the
noncompete agreements are valid under Nebraska law. Pursuant to Nebraska law, a
noncompete agreement is valid if it is (1) “not injurious to the public,” (2) “not greater
than is reasonably necessary to protect the employer in some legitimate interest,” and
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(3) “not unduly harsh and oppressive on the employee.” Prof’l Bus. Servs. Co. v.
Rosno, 680 N.W.2d 176, 184 (Neb. 2004) (quotation omitted). “An employer has a
legitimate business interest in protection against a former employee’s competition by
improper and unfair means, but is not entitled to protection against ordinary
competition from a former employee.” Id. at 185. A noncompete agreement “may be
valid only if it restricts the former employee from working for or soliciting the former
employer’s clients or accounts with whom the former employee actually did business
and has personal contact.” Polly v. Ray D. Hilderman & Co., 407 N.W.2d 751, 756
(Neb. 1987).
We conclude the district court properly held the noncompete agreements were
overbroad and unenforceable. The district court recognized the noncompete
agreements prohibit the former employees from, directly or indirectly, being
concerned in any manner with any company in competition with DCS, and from
providing contract cleaning services within one hundred miles of any entity or
enterprise “having business dealings” with DCS, including attorneys, accountants,
delivery services and the like. The breadth of the noncompete agreements effectively
put the former employees out of the cleaning business within an extensive region. We
hold the district court did not err in concluding Nebraska courts would not enforce
such overly broad noncompete agreements. See Rosno, 680 N.W.2d at 186-87
(holding noncompete agreement was overly broad where the agreement prohibited the
former employee from soliciting or contacting any of the former employer’s clients
and where the former employer could not establish the former employee had done
business with or had substantial personal contact with all of the former employer’s
clients); Mertz v. Pharmacists Mut. Ins. Co., 625 N.W.2d 197, 205 (Neb. 2001)
(holding noncompete agreement was overly broad where it was not limited to clients
with whom the former employee actually did business or personally contacted);
Moore v. Eggers Consulting Co., Inc., 562 N.W.2d 534, 540 (Neb. 1997) (holding
noncompete agreement was overly broad where it prohibited soliciting or accepting
business opportunities with any client of the former employer with whom the former
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employee worked or had knowledge of, and where the agreement contained an overly
broad geographical restriction); Whitten v. Malcolm, 541 N.W.2d 45, 48 (Neb. 1995)
(holding noncompete agreement was overly broad where it prohibited practicing
dentistry within geographic location and was not limited to clients with whom the
former employee did business and had personal contact and was not even limited to
the former employer’s existing customer base); Vlasin v. Len Johnson & Co., Inc.,
455 N.W.2d 772, 776 (Neb. 1990) (holding noncompete agreement was overly broad
where it prohibited the former employee from entering into insurance business within
fifty miles and was not limited to the former employer’s clients with whom the former
employee did business and had personal contact); Polly, 407 N.W.2d at 756 (holding
noncompete agreement was overly broad where it prohibited soliciting or working for
the former employer’s clients with whom the former employee did not work and did
not even know).
III. CONCLUSION
Therefore, we affirm the well reasoned judgment of the district court.
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