Roto-Die Co., Inc. v. Lesser

• Decision Date: 17 April 1995
• Docket Number: Civ. A. No. 93-0049-D.
• Citation: 899 F. Supp. 1515
• Parties: ROTO-DIE COMPANY, INC., Plaintiff, v. David LESSER, Defendant.
• Court: U.S. District Court — Western District of Virginia

899 F. Supp. 1515

ROTO-DIE COMPANY, INC., Plaintiff, v. David LESSER, Defendant.

Civ. A. No. 93-0049-D.

United States District Court, W.D. Virginia, Danville Division.

April 17, 1995.

COPYRIGHT MATERIAL OMITTED

Anthony Paul Giorno, U.S. Attorney's Office, Roanoke, VA, Jane Siobhan Glenn, Fishwick, Jones & Glenn, Roanoke, VA, for plaintiff.

Robert Frank Rider, Rider, Thomas, Cleaveland, Ferris & Eakin, P.C., Roanoke, VA, Michael J. Quinan, Woods, Rogers & Hazlegrove, P.L.C., Roanoke, VA, Anthony H. Monioudis, Woods, Rogers & Hazlegrove, Danville, VA, Joseph Walton Milam, Jr., Woods, Rogers & Hazlegrove, P.L.C., Danville, VA, for defendant.

MEMORANDUM OPINION

KISER, Chief Judge.

This case is before me on the parties' cross-motions for summary judgment. The case involves the enforceability of a covenant not to compete that the defendant entered into with the plaintiff's predecessor. The parties have fully briefed the issues involved and the Court has heard oral argument. The case is, therefore, ripe for decision. For the reasons below, I will grant the defendant's motion in part and deny the plaintiff's motion.

FACTS:

In 1982, Melvin Stanley and David Lesser incorporated Micrometrics Systems, Inc. ("Micrometrics") as a Virginia corporation. Its principal business was in rotary tooling. On October 14, 1983, in connection with the sale of part of the company to Roto-Die Company, Inc. ("Roto-Die"), Lesser, Stanley and Lesser's wife entered employment agreements with Micrometrics. These agreements contained covenants not to compete. At the time Lesser signed his agreement, he was the secretary and head of marketing and sales. There is some dispute as to whether he was directly involved in any of the technical aspects of Micrometrics.

In February 1987, a notice for a special shareholders' meeting was sent out. The meeting's purpose was to remove Lesser as a member of the board of directors. The cause of the strained relationship is open to some dispute, but the fact that a cloud appeared over Lesser's head in early February 1987 is undisputedly established by the shareholders' meeting notice. On April 28, 1987, Lesser entered into a Termination Agreement. Lesser sold his minority stock interest to Stanley.¹ At this time, Micrometrics and Roto-Die merged other parts of their operation. They were doing business under the trade name "Roto-Metrics Group" and had shared customer lists and sales information. The combination of these two firms captured nearly 40% of the U.S. market during Lesser's tenure.

The Termination Agreement superseded the Employment Agreement, but incorporated the restrictive covenant from the Employment Agreement in paragraph seven. The covenant contains four subparagraphs, all of which are relevant to the discussion below. Paragraph seven forbids the defendant, for a period of five years, from doing the following acts:

(a) Disclose or divulge to any person, entity, firm or company whatsoever, or use for EXECUTIVE'S own benefit or for the benefit of any other person, entity, firm or company, which is directly or indirectly in the trade or business of the manufacture or sale of EDM'd or mechanically engraved or milled rotary tooling, any knowledge, information, business methods, techniques, customer lists, price lists, procedures, information relating to the business of the CORPORATION or any other information regarding any of the CORPORATION'S customers or clients or any other firm, company, or entity with whom the CORPORATION has held financial dealings, which information may have been divulged to EXECUTIVE or to which EXECUTIVE may have been exposed during the term of employment by the CORPORATION;

(b) Solicit, divert, take away or interfere with any of the officers, directors, employees, authorized sales representatives, agents or wholesalers of the CORPORATION;

(c) Solicit, canvass, contact, divert, take away or do business with any account, customer, client or company with the intent to sell or cause to be manufactured either EDM'd rotary tooling or mechanically milled or engraved rotary tooling; or (d) Engage in or be associated with any trade or business involved in the manufacture or sale of EDM'd or mechanically engraved or milled rotary tooling (hereinafter referred to as "Competitive Business"). EXECUTIVE shall be deemed as being directly or indirectly engaged in or associated with a Competitive Business if EXECUTIVE becomes a principal, director, officer, employee, agent, consultant, partner or individual proprietor of or becomes financially interested in any such business....

(emphasis added). Lesser testified in deposition that he read both agreements, understood them, and had an attorney review them before signing them.

The rotary tooling industry is a fairly small market with only about 3,000 customers and 10-30 manufacturers of rotary dies. All of the manufacturers are in North America or Europe. Growth opportunities exist largely in export markets because the United States' market is reaching saturation. This was particularly true for Roto-Metrics. Lesser recognized the international nature of the business by recruiting Jeff Lane to serve as Chief Executive Officer of Preston Engraver's, Inc., a company Lesser became involved with after leaving Micrometrics. Lane is from the United Kingdom. Another effort by Lesser was the union of Gerhardt Industries, a European manufacturer, with Preston in an alliance to sell products in the United States.

The technology and development of products is closely guarded. Information such as customer lists, exact market share, market size, current technology, technological projects and progress, and plans for market expansion, if disclosed to competitors, would destroy a company's ability to compete. Lesser admits on brief that he came into contact with information that Micrometrics could consider sensitive and worthy of protection.

Lesser's college degree is in chemistry and political science. He has done graduate work in business. Prior to joining Micrometrics, he worked with Webtech, a user of rotary tooling equipment. While at Micrometrics, he was a member of the board, director of marketing and sales, an officer, and a shareholder. His expertise was in selling. Stanley's expertise was in manufacturing.

DISCUSSION:

Summary Judgment Standard

Summary judgment is appropriate where there is no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law. Fed. R.Civ.P. 56(c). Where the record taken as a whole could not lead a rational trier of fact to find for the nonmoving party, there is no genuine issue for trial and summary judgment is appropriate. Matsushita Elec. Indus. Co. v. Zenith Radio Co., 475 U.S. 574, 587, 106 S.Ct. 1348, 1356, 89 L.Ed.2d 538 (1986). In considering a motion for summary judgment, "the court is required to view the facts and draw reasonable inferences in a light most favorable to the nonmoving party. The plaintiff is entitled to have the credibility of all his evidence presumed." Shaw v. Stroud, 13 F.3d 791, 798 (4th Cir.) (citations omitted), cert. denied, ___ U.S. ___, 115 S.Ct. 67, 130 L.Ed.2d 24, and cert. denied, ___ U.S. ___, 115 S.Ct. 68, 130 L.Ed.2d 24 (1994). There is a genuine issue of fact "if the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 2510, 91 L.Ed.2d 202 (1986).

Covenant not to Compete Standard

A three-part test determines the validity of restrictive covenants. The inquiries are:

(1) Is the restraint, from the standpoint of the employer, reasonable in the sense that it is no greater than is necessary to protect the employer in some legitimate business interest?

(2) From the standpoint of the employee, is the restraint reasonable in the sense that it is not unduly harsh and oppressive in curtailing his legitimate efforts to earn a livelihood?

(3) Is the restraint reasonable from the standpoint of sound public policy?

Blue Ridge Anesthesia & Critical Care, Inc. v. Gidick, 239 Va. 369, 389 S.E.2d 467, 469 (1990). The employer bears the burden of proving the restraint is reasonable. Grant v. Carotek, Inc., 737 F.2d 410, 411 (4th Cir. 1984). The enforceability of a noncompetition agreement is determined in light of the facts of each case. New River Media Group, Inc. v. Knighton, 245 Va. 367, 429 S.E.2d 25, 26 (1993).

Virginia law requires that "non-competition clauses be strictly construed against the employer." Grant, 737 F.2d at 411. However, Virginia law recognizes that the law applicable when a sale of a business is involved is somewhat different. Alston Studios, Inc. v. Lloyd V. Gress & Assocs., 492 F.2d 279, 284 (4th Cir.1974). The difference is that the scope of permissible restrictions increases. Richardson v. Paxton, 203 Va. 790, 127 S.E.2d 113, 117 (1962).

In the present case, both the 1983 Employment Agreement and the 1987 Termination Agreement were executed in connection with larger transactions. In 1983, the Employment Agreements were obtained as part of a sale of a portion of the company to Roto-Die. In 1987, the parties entered into the Termination Agreement as part of the sale of Lesser's interest in the company to Stanley. However, the 1987 transaction, and the resulting restrictive covenant directly in issue here, involved the sale of Lesser's minority position in the company under questionable circumstances. In similar cases, courts have held the minority shareholder to be in no better bargaining position than a mere employee. See S. Hammond Story Agency, Inc. v. Baer, 202 Ga.App. 281, 414 S.E.2d 287, 288 (1991). Accordingly, I will treat this case as equivalent to a case involving an employer and employee.²

Estoppel

Plaintiff argues that Lesser is estopped from denying the validity of the covenant not to compete. It rests this argument upon paragraph 6 of the Termination Agreement and paragraph 7(d) of the...