Central States Indus. Supply, Inc. v. McCullough

• Decision Date: 03 September 2003
• Docket Number: No. C02-0052-MWB.,C02-0052-MWB.
• Citation: 279 F.Supp.2d 1005
• Parties: CENTRAL STATES INDUSTRIAL SUPPLY, INC., and CPI Sales, Inc., Plaintiffs, v. Steve McCULLOUGH, Defendant.
• Court: U.S. District Court — Northern District of Iowa

279 F.Supp.2d 1005

CENTRAL STATES INDUSTRIAL SUPPLY, INC., and CPI Sales, Inc., Plaintiffs, v. Steve McCULLOUGH, Defendant.

No. C02-0052-MWB.

United States District Court, N.D. Iowa, Cedar Rapids Division.

September 3, 2003.

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Jennifer Rinden, Mark L. Zaiger, Shuttleworth & Ingersoll, Cedar Rapids, IA, for Plaintiffs.

Rebecca A. Brommel, Scott Lamoine Long, Brown, Winick, Graves, Gross, Baskerville, Schoenebaum, Des Moines, IA, for Defendant.

MEMORANDUM OPINION AND ORDER REGARDING DEFENDANT'S MOTION FOR SUMMARY JUDGMENT

BENNETT, Chief Judge.

TABLE OF CONTENTS

                I. INTRODUCTION .............................................................. 1012
                     A. Factual Background ..................................................... 1012
                        1. CSIS's acquisition of CPI ........................................... 1012
                        2. McCullough's 1998 Employment Agreement .............................. 1013
                        3. The 1999 Stock Repurchase Agreement and Addendum .................... 1014
                        4. McCullough's alleged wrongdoing ..................................... 1014
                     B. Procedural Background .................................................. 1016
                        1. The plaintiffs' claims and the defendant's response ................. 1016
                        2. The motions for summary judgment and to strike affidavits ........... 1017
                 II. THE MOTION TO STRIKE AFFIDAVITS ........................................... 1017
                     A. Arguments Of The Parties ............................................... 1017
                     B. Analysis ............................................................... 1018
                        1. Anderson's affidavit ................................................ 1018
                           a. Rule 56(e) requirements .......................................... 1018
                           b. Contradiction of prior testimony ................................. 1019
                           c. Specific paragraphs of the affidavit ............................. 1020
                        2. Langer's affidavit .................................................. 1024
                        3. McCullough's request for sanctions .................................. 1026
                        4. Alternative analysis ................................................ 1026
                III. THE MOTION FOR SUMMARY JUDGMENT ........................................... 1026
                     A. Standards For Summary Judgment ......................................... 1026
                     B. The Breach-Of-Contract Claims .......................................... 1027
                        1. Enforceability of the 1998 Employment Agreement ..................... 1028
                           a. Arguments of the parties ......................................... 1028
                           b. Stenger's capacity to contract on CPI's behalf ................... 1029
                

                c. Adequacy of consideration ........................................ 1030
                        2. Was the 1998 Employment Agreement superseded? ....................... 1031
                           a. Arguments of the parties ......................................... 1031
                           b. Effect of the 1999 Stock Repurchase Agreement and Addendum ....... 1032
                               i. Rules of interpretation and construction ..................... 1032
                              ii. Interpretation and construction of the pertinent terms ....... 1033
                        3. Did McCullough breach the 1998 Employment Agreement? ................ 1034
                           a. Count I: Removal or retention of confidential information ........ 1035
                               i. Arguments of the parties ..................................... 1035
                              ii. Analysis ..................................................... 1035
                           b. Count II: Disclosure of confidential matters ..................... 1036
                               i. Arguments of the parties ..................................... 1036
                              ii. Analysis ..................................................... 1036
                     C. The Trade Secrets Act Claim ............................................ 1037
                        1. Arguments of the parties ............................................ 1037
                        2. Analysis ............................................................ 1038
                           a. "Trade secrets" .................................................. 1038
                           b. "Misappropriation" ............................................... 1039
                     D. Breach Of Fiduciary Duty ............................................... 1041
                        1. Arguments of the parties ............................................ 1041
                        2. Analysis ............................................................ 1042
                           a. Fiduciary duties ................................................. 1042
                           b. Disclosure of proprietary information ............................ 1043
                           c. Solicitation of employees ........................................ 1043
                IV. CONCLUSION ................................................................. 1047
                

Convinced that the defendant, the departing president and chief operating officer of the company, pirated confidential information before jumping ship to work for a competitor and that he also solicited other employees to join him at his new employer, the plaintiffs did not just get mad, they got an attorney. In his motion for summary judgment, however, the defendant contends that the plaintiffs really have nothing to be mad about. The court must decide whether the plaintiffs' claims of breach of contract, breach of fiduciary duty, and violation of the Iowa Trade Secrets Act are subject to genuine issues of material fact, which a jury must decide, or fail as a matter of law.

I. INTRODUCTION

A. Factual Background

Whether or not a party is entitled to summary judgment ordinarily turns on whether or not there are genuine issues of material fact for trial. See, e.g., Quick v. Donaldson Co., 90 F.3d 1372, 1376-77 (8th Cir.1996). Nevertheless, the court will not attempt here a comprehensive review of the undisputed and disputed facts in the record. Rather, the court will present here only sufficient factual background to put in context the parties' arguments for and against summary judgment on the plaintiffs' claims. More attention will be given to specific factual disputes, where necessary, in the court's legal analysis, below.

1. CSIS's acquisition of CPI

In early 1998, plaintiff Central States Industrial Supply, Inc. (CSIS), an industrial supply company incorporated in Nebraska, acquired all of the shares of plaintiff CPI Sales, Inc. (CPI), an Iowa corporation.¹ Prior to CSIS's acquisition of CPI defendant Steve McCullough was the president of CPI. The principals of CSIS, Richard Stenger and Harry S. Anderson — who each owned or controlled fifty percent of the shares of CSIS at the times pertinent to the claims in this action — desired to retain McCullough in that position after CSIS acquired CPI. Therefore, on January 5, 1998, Stenger, acting as the "Secretary/Treasurer" of CPI, entered into an Employment Agreement (the 1998 Employment Agreement) with McCullough concerning his continued employment with CPI after CSIS acquired CPI.

2. McCullough's 1998 Employment Agreement

Somewhat more specifically, the recitals at the beginning of the Employment Agreement included the following:

WHEREAS, Employer [elsewhere identified as CPI] operates and owns an industrial supply business with its headquarters in Cedar Rapids, Iowa, and has recently changed ownership but desires to continue with Steve McCullough as an employee of CPI Sales, Inc. and Steve McCullough is desirous of continuing employment with CPI Sales, Inc. under its new ownership and is willing to be so employed;

NOW THEREFORE, in consideration of the mutual promises of the parties and other good and valuable consideration, the parties agree as follows....

Defendant's Appendix at 51, Exhibit F (1998 Employment Agreement). The parties apparently do not dispute that, before and after the acquisition, McCullough was employed as the president of CPI and that his duties remained essentially the same after the acquisition as they were before it. However, CSIS and CPI contend, and McCullough does not appear to dispute, that McCullough's annual salary was increased by $10,000 and that he obtained certain new bonus provisions under the terms of the 1998 Employment Agreement.² The 1998 Employment Agreement provided for McCullough's employment "commenc[ing] on the 5th day of January, 1998 and continu[ing] indefinitely, unless terminated for reasons hereinafter set forth." Id. at ¶ 4. The parties agree that McCullough's employment was "at-will." See also id. at ¶ 7 ("Termination" clause providing that "[t]his arrangement may be terminated by Employer at any time during the term hereof upon failure of Employee to devote his full time efforts to the sale of Employer's services and products, or upon conduct by Employee of a fraudulent, dishonest, or incompetent nature, or at will of the employer.") (emphasis added).

The key provision of the 1998 Employment Agreement, however, at least from the plaintiffs' present perspective, was neither the recitals nor the compensation and termination provisions, but the provision concerning proprietary information. That provision states the following:

5. Proprietary Information. Employee acknowledges that the list of Employer's customers and the manufacturing representative contracts which it has with, but no [sic] limited to, Viking, Wilden, Waukesha, Goulds and Allis Chalmers, as they now exist or as they now exist [sic] or as they CPI exist from time to time [sic] are valuable, special and unique assets of the business and that certain papers, records, information, programs and other products are also valuable, special and unique to Employer's business. Employee agrees that during and after the term of this Agreement, he will not disclose the list of those customers or manufacturing representative contracts or any part...