Pactiv LLC v. Perez
| Decision Date | 04 December 2020 |
| Docket Number | No. 20 CV 01296,20 CV 01296 |
| Parties | PACTIV LLC, Plaintiff, v. MICHAEL PEREZ, Defendant. |
| Court | U.S. District Court — Northern District of Illinois |
MEMORANDUM OPINION & ORDER
Pactiv LLC ("Pactiv"), is suing its former employee, Michael Perez ("Perez"), for breach of contract and fraudulent inducement to contract through misrepresentation. Perez has filed a motion to dismiss. (Dkt. 10). For the reasons stated below, the motion is granted.
A motion to dismiss tests the sufficiency of a complaint, not the merits of the case. See Gibson v. City of Chicago, 910 F.2d 1510, 1520 (7th Cir. 1990). "To survive a motion to dismiss under Rule 12(b)(6), the complaint must provide enough factual information to state a claim to relief that is plausible on its face and raise a right to relief above the speculative level." Haywood v. Massage Envy Franchising, LLC, 887 F.3d 329, 333 (7th Cir. 2018) (quotation marks and citation omitted); see also Fed. R. Civ. P. 8(a)(2) (). A court deciding a Rule 12(b)(6) motion accepts plaintiff's well-pleaded factual allegations as true and draws all possible inferences in the plaintiff's favor. Cole v. Milwaukee Area Tech. Coll. Dist., 634 F.3d 901, 903 (7th Cir. 2011).
Ordinarily, a plaintiff need not plead "detailed factual allegations" but "still must provide more than mere labels and conclusions or a formulaic recitation of the elements of a cause of action for her complaint to be considered adequate under Federal Rule of Civil Procedure 8." Bell v. City of Chi., 835 F.3d 736, 738 (7th Cir. 2016) (quotation marks and citation omitted). However, under the heightened pleading standard of Rule 9(b), a plaintiff alleging fraud as Pactiv does in Count Two, "must state with particularity the circumstances constituting fraud." Wigod v. Wells Fargo Bank, N.A., 673 F.3d 547, 569 (7th Cir. 2012).
Dismissal for failure to state a claim is proper "when the allegations in a complaint, however true, could not raise a claim of entitlement to relief." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 558, 127 S. Ct. 1955, 1966 (2007).
Pactiv is a limited liability company that manufactures food containers.1 Its headquarters are in Illinois. Michael Perez worked for Pactiv in various roles for 29 years and spent the last 12 years managing one of its California factories. During that time, he lived in Bakersfield, California.2 When he was promoted to plant manager in 2008, Perez signed a "Confidentiality, Non-Competition, Non-Solicitation, and Invention Assignment Agreement" ("Employment Agreement"). This agreement contained non-disclosure and non-competition provisions as well as a provision specifying that Illinois law would govern disputes.
On November 4, 2019, Pactiv terminated Perez's employment. After negotiations, both parties executed a "Separation Agreement and Release of All Claims" ("Separation Agreement"). The Separation Agreement provided Perez $90,000 in severance pay. The Separation Agreement reiterated that Perez was still bound by both the non-competition and non-disclosure clauses of his Employment Agreement. It also contained a clause requiring Perez to "notify [Pactiv] upon acceptance of employment or the establishment of Perez's own business venture." Finally, the Separation Agreement specified that Illinois law would govern disputes.
Pactiv asserts that during this negotiation process, Perez sought and accepted a job as a factory manager for one of its competitors, Dart Container Corporation ("Dart"), without giving proper notification.3 Count One alleges Perez violated the non-competition provisions of the Employment Agreement and the Separation Agreement by accepting employment with Dart and is "in a position to use and disclose Pactiv's confidential and trade secret information".4 Count Two alleges thatPerez's failure to disclose his application and acceptance of employment with Dart during the Separation Agreement negotiations amounted to misrepresentation and fraudulent inducement.
Perez and Pactiv disagree about whether the Court should apply Illinois law or California law when evaluating the sufficiency of the Complaint.
Federal Courts exercising diversity jurisdiction apply the choice-of-law rules of the forum state. See Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496 (1941). Illinois follows the Second Restatement of Conflict of Laws, and will generally honor the choice-of-law provisions in a contract unless: "(1) the chosen state has no substantial relationship to the parties or the transaction; or (2) application of the chosen law would be contrary to a fundamental public policy of a state with a materially greater interest in the issue in dispute." Brown and Brown, Inc. v. Mudron, 887 N.E.2d 437, 439-40 (Ill. App. Ct. 2008) (). See also Int'l Surplus Lines Ins. Co. v. Pioneer Life Ins. Co. of Ill., 568 N.E.2d 9, 13-14 (Ill. App. Ct. 1990) (); Old Republic Ins. Co. v. Ace Prop. & Cas. Ins. Co., 906 N.E.2d 630, 636 (Ill. App. Ct. 2009); Morris B. Chapman & Assocs., Ltd. v. Kitzman, 739 N.E.2d 1263, 1269 (Ill. 2000) (); Hendricks v. Novae Corporate Underwriting, Ltd., 868 F.3d 542, 545 (7th Cir. 2017).
Before performing a conflict of laws analysis, however, the party arguing for a departure from the choice-of-law provision in the contract "bears the burden of demonstrating a conflict, i.e., that there exists a difference in the law that will make a difference in the outcome." MiMedx Group, Inc. v. Fox, No. 16 CV 11715, 2017 WL 3278913, at *2 (N.D. Ill. Aug. 2, 2017); see also Townsend v. Sears, Roebuck & Co., 879 N.E.2d 893, 898 (Ill. 2007) ().
Perez argues that the Agreements are unenforceable in both states, but that in the alternative, a conflict exists because § 16600 of the California Business Code prohibits non-competition agreements outright while "under Illinois [law] there would be more of an analysis of factors." (Dkt. 10, Ex. 3 at 9, 10). Pactiv argues that the Agreements are enforceable in both states, because "both California and Illinois law permit the use of restrictive covenants to protect a company's trade secrets and confidential information, particularly in the context of competitive employment."5 (Dkt. 20 at 6). Therefore, in order to determine whether an actual conflict of laws exists, the Court must first determine the enforceability of the Agreements underIllinois and California law. See Gen. Elec. Co. v. Uptake Techs., Inc., 394 F. Supp. 3d 815 (N.D. Ill. 2019).
The parties agree that the enforceability of the Employment Agreement and the Separation Agreement under California law depends on whether they are void under §16600 of the California Business and Professional Code ("Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void"). In Edwards v. Arthur Anderson LLP., 189 P.3d 235 (Cal. 2008), the California Supreme Court held that § 16600 "prohibits employee noncompetition agreements unless the agreement falls within a statutory exception." Id. at 288.
Pactiv argues that the agreements are in accord with Edwards because they don't "entirely preclude Perez from operating in his chosen profession, trade, or business, [are] limited to a period of one year, and allow Perez to retain any gainful employment that does not require him to disclose Pactiv trade secrets." (Dkt. 20 at 7). The first part of this argument is foreclosed by the text of Edwards itself, which says that "if the Legislature intended [§ 16600] to apply only to restraints that were unreasonable or overbroad, it could have included language to that effect." Edwards, 189 P.3d at 292. Therefore, absent an exception, the non-competition clause found in the Employment Agreement and adopted by the Separation Agreement would be void under California law.
The second part of Pactiv's argument—the trade secrets exception—has received mixed reviews in the courts. The Edwards court expressly declined to "address the applicability of the so-called trade secret exception to section 16600." Edwards, 189 P.3d at fn. 4. Pactiv argues that California allows enforcement of Perez's agreements to the extent necessary to protect trade secrets. However, California courts do not automatically apply a "trade secret" exception, as the cases cited by Pactiv demonstrate. (Dkt. 20 at 6-7). Instead the courts engage in a fact-intensive inquiry into whether the non-competition provision is necessary to protect trade secrets.6
Here, Pactiv has not made any assertions that Perez misused its trade secrets. To the contrary, Pactiv is not making a "single allegation related to misappropriationof trade secrets or inevitable disclosure."7 (Dkt. 20 at 13). Rather, Pactiv is asserting that Perez sought and accepted employment at a competitor without informing Pactiv. The Court finds that there is a high likelihood that the non-competition agreements would be void under § 16600 and would not qualify for any narrow trade secrets exception to § 16600.
Illinois courts treat non-competition clauses as valid and enforceable if reasonable and necessary to protect a legitimate business interest of the employer. This encompasses an interest in protecting trade secrets. See Coady v. Harpo, Inc., 719...
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