Company's Noncompete Claims Revived on Appeal

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By Jon Steingart

Aug. 6 — An industrial products distributor that purchased assets from another company, and took on some of its employees, raised triable claims that some of the new workers breached their fiduciary duty and a noncompetition agreement when they resigned to work for a third company, the U.S. Court of Appeals for the Eighth Circuit ruled Aug. 6.

Reversing summary judgment to the employees and the third company, the appeals court said a trial is necessary to determine whether one of the employees crossed from merely informing his colleagues about his plans to start a new job to actively luring them away with him.

The Eighth Circuit also said a lower court was wrong to conclude the noncompetition agreement didn't apply because it had expired and it covered an overbroad territory.

Judge Raymond W. Gruender wrote the court's opinion, joined by Judges Roger L. Wollman and James E. Gritzner.

New Employer, Same Duties

Brandon Tipton worked as a branch manager and Michael Gilbert and Steven Padgett worked as salespeople for Treadway Electric Co. While working for the company, they signed noncompete agreements that said “you will not compete with Treadway or its subsidiaries by soliciting or accepting business from Treadway’s customers within your territory” for at least one year after leaving. The agreement said the territory would be determined at the company's discretion.

During their tenure, Stuart C. Irby Co. purchased some of Treadway's assets, including certain contracts. Tipton, Gilbert and Padgett became Irby employees when the agreement took effect about three weeks after the companies signed it.

After working for Irby for about a year, Tipton began looking for new employment. He connected with an official at a competing firm, Wholesale Electric Supply Co., and announced his resignation 15 months after becoming an Irby employee. Gilbert and Padgett resigned the next day to also join Wholesale.

Lower Court Measured Year From Wrong Date

Irby contended that, as a company manager, Tipton owed the employer a fiduciary duty of loyalty, which he breached by inducing Gilbert and Padgett to leave.

The trial court, however, concluded that Tipton didn't owe a fiduciary duty because he wasn't bound by an enforceable noncompete agreement. Because the agreement was limited to a period of one year following an employee's separation from Treadway, the lower court said, it had expired by the time Tipton joined Wholesale.

Gruender rejected this reasoning. When Treadway assigned Irby its contracts, Irby “fully stepped into Treadway's shoes and received Treadway's rights,” the appeals court said. It found that the correct reference point was the day Tipton resigned from Irby, not the day he separated from Treadway.

The court also discussed the need to balance a fiduciary's duty of loyalty to the company and his right to resign and go into competition. A fiduciary is free to notify his colleagues of his intent to leave, but until he quits, the duty of loyalty precludes him from soliciting them to join him, Gruender said. He found that a reasonable jury could conclude from the nature of Tipton's interactions with the Wholesale official while he worked for Irby that they intended to recruit additional Irby employees.

In addition to the fiduciary duty placed on Tipton as a manager, the territorial restriction described in the noncompete agreement all three workers signed presented a genuine dispute because it was poorly constructed, the court said.

The restriction on operating within a territory defined by the company meant that it applied only to the territory that Irby assigned during employment, but a reasonable jury could reach a different conclusion, Gruender said. As a result, summary judgment was inappropriate, he said.

Phelps & Dunbar, and Mitchell & Williams represented Irby. Wilson & Engstrom, and Langdon & Davis represented Tipton, Gilbert and Padgett.

To contact the reporter on this story: Jon Steingart in Washington at jsteingart@bna.com

To contact the editor responsible for this story: Susan McGolrick at smcgolrick@bna.com

Text of the opinion is available at http://www.bloomberglaw.com/public/ document/Stuart_C_Irby_Company_Inc_v_Brandon_ Tipton_et_al_Docket_No_140197.