Standard Register Co. v. Keala

• Decision Date: 08 June 2015
• Docket Number: CIV. NO. 14-00291 JMS-RLP
• Court: U.S. District Court — District of Hawaii
• Parties: THE STANDARD REGISTER COMPANY, ET AL., Plaintiffs, v. LYNDEN KEALA, ET AL., Defendants.

THE STANDARD REGISTER COMPANY, ET AL., Plaintiffs, v. LYNDEN KEALA, ET AL., Defendants.

CIV. NO. 14-00291 JMS-RLP

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF HAWAII

June 8, 2015

ORDER DENYING DEFENDANTS' MOTIONS FOR SUMMARY JUDGMENT, DOC. NOS. 93, 95

I. INTRODUCTION

Plaintiffs the Standard Register Company ("Standard Register") and WorkflowOne LLC (collectively, "Plaintiffs") filed this action against their former employees Lynden Keala ("Keala"), Jaxcine Kaulili-Guzon ("Kaulili-Guzon"), and Sharon Brown-Henry ("Brown-Henry") (collectively, the "Individual Defendants"), as well as against the Individual Defendants' current employer, American Business Forms, Inc., dba American Solutions for Business ("ASB"), based on diversity of citizenship under 28 U.S.C. § 1332.¹

Plaintiffs allege that the Individual Defendants violated non-solicitation and/or non-disclosure provisions of their employment agreements when, after leaving to work for Defendant ASB (a business competitor), they solicited and/or accepted business from Plaintiffs' clients and/or disclosed trade secrets. The Amended Complaint makes claims against the Individual Defendants for breach of contract, and against all Defendants for misappropriation of trade secrets and tortious interference with business relations.

Before the court are Motions for Summary Judgment filed by the Individual Defendants and Defendant ASB. Doc. Nos. 93, 95. On May 13, 2015, the court limited the scope of the Motions to whether the relevant provisions of the employment agreements are invalid for lack of sufficient consideration (the "consideration issue"). Doc. No. 105. A hearing was held on May 26, 2015. Based on the following, both Motions are DENIED.

II. PROCEDURAL AND FACTUAL BACKGROUND

A. Prior Proceedings

On July 11, 2014, the court denied Plaintiffs' Motion for Temporary Restraining Order ("TRO"), which had sought to prohibit Defendants from (1) breaching the non-solicitation and non-disclosure provisions of the Individual Defendants' employment agreements; (2) misappropriating WorkflowOne's trade secrets; and (3) tortiously interfering with WorkflowOne's valid business relationships. Doc. No. 44, Order at 2-3 ("July 11, 2014 Order"). The July 11, 2014 Order sets forth the basic allegations of the dispute, and the court need not reiterate the details regarding the alleged violations.

Rather, the instant Order focuses on the consideration issue -- whether the non-competition provisions of the Individual Defendants' employment agreements are unenforceable for lack of consideration.² See, e.g., Douglass v. Pflueger Haw., Inc., 110 Haw. 520, 534, 135 P.3d 129, 143 (2006) ("It is well-settled that consideration is an essential element of, and is necessary to the enforceability or validity of, a contract.") (quotations omitted). Morespecifically, the question is whether non-competition agreements require additional consideration beyond continued at-will employment before binding agreements are formed (and if so, whether there is evidence of such consideration here). The issue arises if a current employee is required to sign such an agreement as a condition of continued employment, without any further benefits or consideration. (The parties agree that the issue does not arise if a prospective employee signs such an agreement at the beginning of employment.)

This issue, with both a legal and a factual component, is one that Plaintiffs had failed to establish previously when attempting to meet the exacting standards necessary to obtain an "extraordinary" remedy of a TRO. See Doc. No. 44, July 11, 2014 Order at 9 (citing Winter v. Natural Res. Def. Council, Inc., 555 U.S. 7, 24 (2008) ("A [TRO] is an extraordinary and drastic remedy never awarded as of right.") (editorial marks omitted)). And it was discussed extensively during the July 11, 2014 hearing, where the parties agreed to consider structuring the litigation to focus first on the threshold consideration issue. See Doc. No. 53, Tr. at 28-32.

Consistent with that discussion, on October 18, 2014, Magistrate Judge Puglisi issued a Rule 16 Scheduling Order (based largely on a stipulation from the parties) that split the litigation into two phases, with the first phasefocused on the consideration issue. See Doc. No. 72, Order at 2-3. The Scheduling Order required substantive Motions regarding the consideration issue to be filed by February 27, 2015 -- as were the two Motions now before the court.³ Under the Scheduling Order, the second phase proceeds only after a decision on the consideration issue. Id. at 5. But, despite this aspect of the Scheduling Order, Defendants' Motions seek summary judgment as to many other issues as well. Plaintiffs object to the scope of the Motions.

Accordingly, consistent with the Scheduling Order's phased approach, and to avoid any possible prejudice to Plaintiffs because of the Scheduling Order's limitations on discovery, the court limits the instant Order to the consideration issue only. If necessary, Defendants may renew their arguments on other issues in separate Motions at an appropriate time.

B. The Individual Defendants' Prior Employment With Plaintiffs, and the Non-Competition Provisions

WorkflowOne's business is "providing print, print-related, and promotional marketing solutions, including print and promotional marketing anddistribution of promotional products." Doc. No. 32, Am. Compl. ¶ 10. ASB is a competitor of WorkflowOne in the same business. Id. ¶ 11. Each Individual Defendant now works for ASB, having previously been employed by WorkflowOne. Id. ¶¶ 12-17. Keala and Brown-Henry were employed as sales representatives, and Kaulili-Guzon as a customer service representative. Id. ¶¶ 12, 14, 16. They began working for ASB in 2014, when ASB opened an office in Honolulu. Doc. No. 24-1, Kathryn Hallstrom Decl. ¶ 4.

Each Individual Defendant has a different work history with Relizon, Workflow Solutions LLC, and/or WorkflowOne. WorkflowOne was formed as a "new company" in 2011, having purchased the assets of Relizon and Workflow Solutions LLC after they filed for bankruptcy in 2010. Doc. No. 32, Am. Compl. ¶¶ 2-3; Doc. No. 100-8, Pls.' Ex. E. In conjunction with that purchase, certain employment agreements were to be assigned to WorkflowOne.⁴

At different points during their employment, the IndividualDefendants signed documents agreeing (1) not to disclose the confidential trade secrets of their employer, and (2) for a period of twelve months after their last day of employment, not to solicit business from any customers whom they solicited or accepted business from during the final twelve months of their employment. See, e.g., Doc. Nos. 32-1 to 32-3, Pls.' Exs. A-C. Kaulili-Guzon's and Brown-Henry's agreements include the further restriction that they not only refrain from soliciting, but also refrain from accepting, business from WorkflowOne customers. See Doc. Nos. 32-2, -3, Pls.' Exs. B, C. Plaintiffs allege that the Individual Defendants have been violating these provisions on behalf of ASB. Doc. No. 32, Am. Compl. ¶¶ 32-52. The court details each Individual Defendant's work history separately.

1. Lynden Keala

Keala began working for Vanier Graphics in 1986, and "sometime after that" became employed by Relizon through a series of corporate buyouts. Doc. No. 28-1, Keala Decl. ¶ 1. Keala left Relizon in "about 2000" and then returned for a term of new employment in January of 2005. Id. His offer letter from Relizon is dated January 4, 2005, and it indicates a starting date of January 10, 2005. Doc. No. 100-7, Ryan Green Decl. Ex. D. Although the exact date isunclear, Keala signed a January 10, 2005⁵ "Relizon Company Agreement with Sales Representatives" that includes the following clauses regarding trade secrets:

3. Trade Secret Policy

Employee acknowledges that the business of Relizon involves valuable, confidential and proprietary data and information of various kinds. Such data and confidential information, called "Relizon Trade Secrets," concern, among other things:

(a) the names and contact information of Relizon's customer and the nature of Relizon's relationships (including types and amount of products acquired from Relizon) with such customers and in addition sales, marketing and product development plans, price lists (non-public), market forecasts and sales volumes;

. . . .

4. Non-Disclosure.

Employee will not, during or after his or her employment with Relizon, use for his or her own benefit or for the benefit of any other person, or without the prior written consent of Relizon disclose to any person, (other than in the ordinary conduct of Relizon's business) any Relizon Trade secrets. In like manner, Employee will not disclose to or for the benefit of Relizon any trade secrets of any person other than Relizon.

Doc. No. 32-1, Am. Compl. Ex. A at 1. The agreement also provided the following non-solicitation clause:

8. Non Solicitation

Because of and in consideration of, among other things, the extensive knowledge of Relizon Trade Secrets provided to and possessed by Employee during employment with Relizon . . . Employee agrees that, for a period of twelve (12) months after the termination (for any reason) of Employee's employment with Relizon, Employee shall not directly or indirectly . . . solicit business from any Relizon customer or prospective Relizon customer which employee contacted (in writing, by phone or in person) during Employee's final twelve (12) months of employment with Relizon, wherever such customers or prospective customers may be located.

Id. at 2.

WorkflowOne's purchase of the assets of Relizon and Workflow Solutions, LLC included purchasing Keala's employment agreement. See Doc. No. 100-9, Pls.' Ex. F at 4. Accordingly, on February 22, 2011, WorkflowOne sent a letter to Keala (and other employees) "offer[ing] you employment with WorkflowOne LLC, effective upon the date of the asset transfer under our chapter11 Plan of Reorganization." Id. The letter indicated...