Nalco Chemical Co. v. Hydro Technologies, Inc.

• Decision Date: 18 March 1993
• Docket Number: No. 92-2278,92-2278
• Citation: 984 F.2d 801
• Parties: 1993-1 Trade Cases P 70,102, 25 U.S.P.Q.2d 1719 NALCO CHEMICAL COMPANY, Plaintiff-Appellee, v. HYDRO TECHNOLOGIES, INCORPORATED, Daniel H. Girmscheid and Thomas S. Broge, Defendants-Appellants.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 801

984 F.2d 801

1993-1 Trade Cases P 70,102, 25 U.S.P.Q.2d 1719

NALCO CHEMICAL COMPANY, Plaintiff-Appellee, v. HYDRO TECHNOLOGIES, INCORPORATED, Daniel H. Girmscheid and Thomas S. Broge, Defendants-Appellants.

No. 92-2278.

United States Court of Appeals Seventh Circuit.

Argued Dec. 9, 1992.

Decided Jan. 25, 1993.

Rehearing and Rehearing En Banc

Denied March 18, 1993.

Stephen N. Landsman (argued), Christian L. Campbell, James M. Newton, Nalco Chemical Corp., Naperville, IL, Ronald L. Piette, William J. Richards, Piette & Jacobson, Milwaukee, WI, for plaintiff-appellee.

John A. Rothstein (argued), Jeffrey O. Davis, Quarles & Brady, Milwaukee, WI, for defendants-appellants.

Before BAUER, Chief Judge, RIPPLE, Circuit Judge, and GRANT, Senior District Judge. ^*

BAUER, Chief Judge.

This appeal results from the grant of a preliminary injunction. We reverse the district court decision, 791 F.Supp. 1352, vacate the preliminary injunction, and remand for entry of judgment in favor of the defendants on only the issues addressed in this proceeding. We offer no opinion on the merits of the remaining issues in the case.

I.

Nalco Chemical Company ("Nalco") produces water treatment chemicals and services, offering to its customers more than 3100 products and programs. (Record "R." 11 at 1). It is a big company, employing more than 6000 people in twelve operating groups. (R. 31 at 5). Two of those employees were Daniel Girmscheid and Thomas Broge. When Girmscheid and Broge began working for Nalco, they signed employment agreements containing clauses stating that they would not compete with Nalco if they left the company. The agreements are a form that Nalco uses for all employees. The form is not tailored to any particular person or job. (Transcript "Tr." 29-30). Girmscheid and Broge were employed in the "Watergy" group, part of the Water and Waste Treatment Division. (Tr. 12). The Watergy group geographically divides its United States markets into three regions, and those regions are divided into 24 districts. (Tr. 13). Girmscheid and Broge were assigned to district G-14, which encompasses eastern Wisconsin and parts of northern Illinois. (Tr. 16). In district G-14, Girmscheid was an account manager (Tr. 184), and Broge was a district sales representative. (Tr. 146).

On February 5 and February 6, 1992 respectively, Girmscheid and Broge left Nalco to work for a competitor, Hydro Technologies, Inc. ("Hydro"). Hydro conducts the same type of business as Nalco's Watergy division, and more than twenty Nalco customers switched their patronage to Hydro when Broge and Girmscheid joined the company. In April 1992, Nalco sued for immediate enforcement of the employment agreements to bar Broge and Girmscheid from having contact with any more Nalco customers. In its decision and order, the district court construed two clauses in the employment agreement as prohibiting Girmscheid and Broge from contacting former or potential customers for two years in a four-county region in Wisconsin, then awarded Nalco a preliminary injunction. The court used broad language, ordering Girmscheid and Broge restrained from "committing a breach of [their] employment agreement[s]." An emergency hearing was held to clarify the order, but a different district judge determined that the order needed no further clarification. This appeal followed.

II.

Nalco is a Delaware corporation that has its principal place of business in Illinois. Girmscheid and Broge are citizens of Wisconsin, and Hydro is incorporated in Wisconsin, where it also has its principal place of business. The parties are in federal court on diversity jurisdiction pursuant to 28 U.S.C. § 1332(a), and we have jurisdiction over this appeal pursuant to 28 U.S.C. § 1292(a)(1).

To establish that the preliminary injunction is warranted, Nalco must show that 1) the case has some likelihood of success on the merits; 2) no adequate remedy at law exists and without the injunction Nalco will suffer irreparable harm; 3) any irreparable harm Girmscheid, Broge, and Hydro will suffer if enjoined is outweighed by the harm Nalco will suffer if the preliminary injunction is not awarded; 4) the public interest requires granting the injunction. The district court weighs each of these factors, and we defer to that assessment as we perform our review. We will reverse the district court decision only if we find an abuse of discretion, evidenced by a clear error of fact or law. John Maye Co. v. Nordson Corp., 959 F.2d 1402, 1405 (7th Cir.1992).

All parties agree that Wisconsin law applies to the substantive issues in the case. The primary issue is whether the restraint prohibiting Broge and Girmscheid from competing is legally enforceable. Wisconsin has a statute that specifically addresses covenants restricting competition. That statute provides A covenant by an assistant, servant or agent not to compete with his employer or principal during the term of the employment or agency, or thereafter, within a specified territory and during a specified time is lawful and enforceable only if the restrictions imposed are reasonably necessary for the protection of the employer or principal. Any such restrictive covenant imposing an unreasonable restraint is illegal, void and unenforceable even as to so much of the covenant or performance as would be a reasonable restraint.

Wis.Stat. § 103.465.

The employment agreement contains two paragraphs, numbers three and five, that Broge and Girmscheid construe as noncompetition clauses that are overbroad. Nalco acknowledges that paragraph five is a noncompetition clause. Nalco argues, however, that paragraph three is not a noncompetition clause, but rather it is a prohibition barring dissemination of confidential customer information that constitutes trade secrets. Broge and Girmscheid claim the provision prohibits them from soliciting for an indeterminate period any Nalco clients whose identities were learned through Nalco employment. The distinction is important, because if paragraph three concerns trade secrets, it is analyzed under the Uniform Trade Secrets Act, Wisconsin Statutes section 134.90, a different statute requiring different results.

A. Paragraph three:

We agree with Nalco that paragraph three is a prohibition from releasing confidential customer information, not a prohibition of solicitation of Nalco customers. ¹ In Gary Van Zeeland Talent, Inc. v. Sandas, 84 Wis.2d 202, 218, 267 N.W.2d 242 (1978), the Wisconsin Supreme Court considered a similar restriction that prohibited former employees from ever disclosing their former employer's customer list to any person. In that case, the court found that the restriction, with no geographic or time limitations, was unreasonable and void. Id. Like that restriction, the Nalco restriction sets no geographic parameters, and although a geographic limitation is not required, Rollins Burdick Hunter of Wisconsin, Inc. v. Hamilton, 101 Wis.2d 460, 464, 304 N.W.2d 752 (Wis.1981), a time limitation must be reasonable for a valid covenant. The clause is therefore void and unenforceable unless the confidential customer information qualifies as a trade secret. Under section 134.90, no time limit is required on trade secret restrictions.

Because the court used sweeping language in its order restraining Broge and Girmscheid from breaching the entire employment agreement (not just the noncompetition clauses), we must determine whether Broge and Girmscheid were properly ordered to follow the terms of paragraph three. If paragraph three protects trade secrets, then the defendants may be enjoined if they misappropriate the secrets. But if paragraph three protects information that does not constitute trade secrets, then the terms of the clause must be reasonable in time and scope to be enforceable. The question of whether the information in paragraph three is a trade secret is a question of law underlying the preliminary injunction.

The Wisconsin Supreme Court has determined that customer lists may constitute trade secrets if certain criteria are fulfilled. Minuteman, Inc. v. Alexander, 147 Wis.2d 842, 851, 434 N.W.2d 773 (Wis.1989); see also Rollins, 101 Wis.2d at 468-69, 304 N.W.2d 752 (what constitutes trade secrets depends on the particular circumstances). In Minuteman, the court determined that the factors listed in the Restatement (First) of Torts, section 757, are helpful, but not all the factors must be fulfilled for information to constitute trade secrets. Minuteman, 147 Wis.2d at 851, 857, 434 N.W.2d 773. In that case, a former employee allegedly misappropriated the names of customers and their product orders. The court stated that the names and orders constituted a customer list, then remanded that issue to the district court to apply Wisconsin Statute section 134.90 to determine if the customer list was a trade secret. Section 134.90 states that "[I]n certain sectors of the business community identical or nearly identical products and/or services are sold to a small, fixed group of purchasers. In such an intensely purchaser-oriented market, a supplier's customer list could well constitute a trade secret." Id. We have found no published opinions since Minuteman applying the section 134.90 test using the Restatement factors as guidance. Our application of the law is not difficult, however, and we forge ahead.

The group of purchasers for Hydro and Nalco Watergy products is neither fixed nor small. The products are used in such common items as industrial boiler, heating, and cooling systems, and processed waste treatment systems. The target market for the products is broad, encompassing commercial buildings, universities and schools, hospitals and clinics, and industry. (Tr. 13). Even under the simple terms of the statute, Nalco's customer information does not qualify as trade secrets.

Next, we consider the Nalco employment agreement using the Restatement factors as guidance because the factors formerly...