Product Action Intern., Inc. v. Mero

• Decision Date: 05 August 2003
• Docket Number: No. 1:03-CV-0881-DFH.,1:03-CV-0881-DFH.
• Citation: 277 F.Supp.2d 919
• Parties: PRODUCT ACTION INTERNATIONAL, INC., Plaintiff, v. Carl MERO, Defendant.
• Court: U.S. District Court — Southern District of Indiana

277 F.Supp.2d 919

PRODUCT ACTION INTERNATIONAL, INC., Plaintiff, v. Carl MERO, Defendant.

No. 1:03-CV-0881-DFH.

United States District Court, S.D. Indiana, Indianapolis Division.

August 5, 2003.

COPYRIGHT MATERIAL OMITTED

Alan S. Brown, Heather L. Wilson, Locke Reynolds LLP, Indianapolis, IN, for Plaintiff.

Daniel C. Emerson, Andrew M. McNeil, Bose McKinney & Evans, LLP, Indianapolis, IN, for Defendant.

ENTRY ON MOTIONS FOR PARTIAL SUMMARY JUDGMENT

HAMILTON, District Judge.

This diversity action presents a question concerning the extent to which Indiana law allows courts to "blue pencil" or revise a former employee's covenant not to compete with a former employer. The principal question is whether an employer can avoid the limits of the Indiana "blue pencil" doctrine by including in the agreement language to the effect that a court should enforce the agreement "to the extent permitted by law." This court predicts that the answer under Indiana law is no.

Plaintiff Product Action International, Inc. ("PAI") has sued a former salesman, defendant Carl Mero, to enforce a covenant not to compete in an employment agreement. After PAI moved for a preliminary injunction, the parties agreed that the court should first decide as a matter of law the enforceability of the covenant not to compete. That issue has been presented by the parties' cross-motions for partial summary judgment, which were argued to the court on July 17, 2003. That same day, the court orally granted defendant Mero's motion for partial summary judgment and denied PAI's motion for partial summary judgment, and now states more fully its reasons.

In summary, the covenant not to compete lacks any reasonable limit in terms of geography or customers. Indiana law does not authorize the court to add terms to the parties' contract to fashion a reasonable limit. The contract states that any overly broad restriction "shall be enforced to the maximum extent permitted by law." That provision, however, is merely an invitation to the court to rewrite the parties' agreement so as to transform a facially unreasonable agreement into a reasonable one. Indiana law does not authorize courts to play such a role. The covenant not to compete therefore is not enforceable.

Stipulated and Undisputed Facts

PAI is an Indiana corporation with its principal office in Hamilton County, Indiana. Defendant Carl Mero is a resident and citizen of Michigan. The amount in controversy exceeds $75,000.

Mero was employed by PAI as a Regional Sales Manager working out of PAI's Plymouth, Michigan office from April 22, 2002 through February 6, 2003, when PAI fired him. Mero sold PAI's inspection containment services to the automotive industry. Mero's territory for PAI consisted of the northwest side of Michigan, including part of Flint, Lansing, Holland, Muskegon, and Saginaw.

Mero and PAI entered into a Confidentiality/Non-Competition Agreement dated April 22, 2002 and drafted by PAI. The agreement provides that it shall be interpreted and enforced under Indiana law, and the parties agree that Indiana law applies. Paragraph 9(B) of the agreement provides:

For a period of twenty-four (24) months immediately following the termination of this Agreement or Employee's employment, regardless of the reason for termination, or for such other period of time permitted by the fullest extent of law, Employee shall not, directly or indirectly, in any individual or representative capacity, own, organize, initiate, accept employment with, engage with, participate with, consult with or assist a "Competitive Business" in any way. As used in this Agreement, the term "Competitive Business" means any individual, company, entity, or business that is engaged in providing quality control assistance or services to manufacturers, and:

(i) does business with, or seeks to do business with, any Present Customer of PAI; or

(ii) does business in or seeks to do business within an one hundred (100) mile radius of any warehouse, office or facility where PAI does business; or

(iii) during the twelve (12) months immediately preceding did business in any state of the United States or in any foreign country in which PAI does business or is planning to do business at the time Employee leaves PAI.

Pl.Ex. 1, Confidentiality/Non-Competition Agreement, ¶ 9(B). Paragraph 10 of the agreement further provides in part: "If the scope of any stated restriction is too broad to permit enforcement of such restriction to its fullest extent, then such restriction shall be enforced to the maximum extent permitted by law and that the court making such determination shall have the power to modify this Agreement in order for it to conform with the applicable law."

On February 24, 2003, Mero became employed as a salesman by Quality Industrial Services, Inc. ("QIS"), a business located in Romulus, Michigan. QIS and PAI both perform quality assurance and quality control inspection work for the automotive industry. QIS qualifies as a "Competitive Business" under the non-competition agreement because QIS is a "company, entity, or business that is engaged in providing quality control assistance or services to manufacturers." QIS also fits each of the three alternative criteria in Paragraph 9(B) so as to bar Mero from working for it. First, QIS "does business with, or seeks to do business with, any Present Customer of PAI." See id., ¶ 9(B)(i). Second, QIS also "does business in, or seeks to do business within an one hundred (100) mile radius of any warehouse, office, or facility where PAI does business." See id., ¶ 9(B)(ii). QIS also, during the twelve months immediately preceding Mero's discharge, did business in one or more states of the United States or in a foreign country in which PAI does business or was planning to do business at the time he left PAI. See id., ¶ 9(B)(iii).¹

QIS employs Mero as a salesman in its office located in Troy, Michigan. Troy is approximately 20 to 30 miles from Plymouth, where Mero had his PAI office. His sales territory with QIS encompasses northern Michigan, extending north from Troy, Michigan (excluding Detroit). Mero performs services for QIS within 100 miles of Plymouth.

PAI has warehouses in: Plymouth, Michigan; Marysville, Ohio; Tuscaloosa, Alabama; and Indianapolis, Indiana. PAI has offices in: Battle Creek, Holland, Princeton, and Plymouth, Michigan; Indianapolis and Mishawaka, Indiana; Toledo and Dayton, Ohio; Georgetown, Kentucky; Vance, Huntsville, and Lincoln, Alabama; Nashville, Tennessee; and Greenville, South Carolina. In addition, PAI does business in warehouses, offices or facilities belonging to customers, including locations in Chicago, Illinois; the state of Wisconsin; Canton, Mississippi; and Windsor and St. Catherine, Ontario, Canada.

PAI provided Mero with one week of sales training, during which PAI showed him how to sell its products and discussed marketing strategies. After that initial week of training by PAI, Mero traveled to various PAI locations as part of his training, including Ohio, Kentucky and Indiana. While employed at PAI, Mero worked with PAI customers including but not limited to Borg-Warner; Visteon; Metaldyne; Polynorm; Emhart Banal; General Motors Assembly at Lake Orion, Michigan; Ford Livonia Transmission; and the Bing Group.

Less than two weeks after his discharge by PAI, Mero contacted QIS about coming to work for it as a salesman. Mero knew that QIS was in the same industry of inspection, containment and light assembly as PAI, and he considered QIS to be a competitor of PAI. Mero received no specific sales training from QIS. Mero is working in the suburban Detroit area for QIS, and his work for QIS has primarily been within a 100 mile radius of where he worked for PAI.

While working for QIS, Mero has contacted some businesses that also do business or have done business with PAI. While working for QIS, Mero has called on six of the same customers that he called upon while working for PAI. In fact, after being fired by PAI, Mero has obtained business for QIS from customers he also called upon while employed at PAI.

Discussion

The stipulated facts show that Mero's current activities—competing with PAI in his old territory, including calling on some of his old PAI customers—fall within the scope of Paragraph 9(B) of the covenant as written. The question now before the court is whether Paragraph 9(B) is enforceable against Mero.

I. Indiana Law on Covenants Not to Compete

Under Indiana law, non-competition covenants are not favored by the law because they restrain trade. Licocci v. Cardinal Associates, Inc., 445 N.E.2d 556, 561 (Ind.1983); accord, Harvest Ins. Agency, Inc. v. Inter-Ocean Ins. Co., 492 N.E.2d 686, 688 (Ind.1986). Such agreements are construed strictly against the covenantee. Nevertheless, they will be enforced if they are reasonable in scope and if they are ancillary to an employment agreement or the sale of a business. JAK Productions, Inc. v. Wiza, 986 F.2d 1080, 1085 (7th Cir.1993) (applying Indiana law); see also Licocci, 445 N.E.2d at 561.

Under the "strict construction" approach, even if it would have been possible to write a reasonable covenant that barred the former employee's activities, a covenant will not be enforced if its enforcement would be unreasonable under any set of facts. Young v. Van Zandt, 449 N.E.2d 300, 304 (Ind.App.1983), citing 4408, Inc. v. Losure, 175 Ind.App. 658, 373 N.E.2d 899, 900-01 (1978). "[T]he court may not create a reasonable restriction under the guise of interpretation, since this would subject the parties to an agreement they had not made." Young, 449 N.E.2d at 304 citing Licocci, 445 N.E.2d at 561 and Donahue v. Permacel Tape Corp., 234 Ind. 398, 127 N.E.2d 235, 241 (1955). Accordingly, Indiana law strongly discourages employers' attempts to draft unreasonably broad and oppressive covenants.

As a counterweight to this strict construction, however, Indiana courts have adopted what has become...