Zimmer, Inc. v. Sharpe

• Decision Date: 04 August 2009
• Docket Number: Cause No. 3:09-CV-117 RM.
• Citation: 651 F.Supp.2d 840
• Parties: ZIMMER, INC. and Zimmer Dental, Inc., Plaintiffs v. Scott SHARPE and Scott Beaudean, Defendants.
• Court: U.S. District Court — Northern District of Indiana

Page 840

651 F.Supp.2d 840

ZIMMER, INC. and Zimmer Dental, Inc., Plaintiffs v. Scott SHARPE and Scott Beaudean, Defendants.

Cause No. 3:09-CV-117 RM.

United States District Court, N.D. Indiana, South Bend Division.

August 4, 2009.

Lucy R. Dollens, Melanie D. Margolin, Frost Brown Todd LLC, Indianapolis, IN, for Plaintiffs.

Kathleen Marie Anderson, Mark D. Scudder, Barnes & Thornburg LLP, Fort Wayne, IN, for Defendants.

OPINION AND ORDER

ROBERT L. MILLER, JR., Chief Judge.

Zimmer, Inc. and Zimmer Dental, Inc. brought this action against former employees Scott Sharpe and Scott Beaudean for breach of the non-disclosure, non-competition and non-solicitation employment agreements, threatened or actual misappropriation of trade secrets, breach of fiduciary duty, and breach of duty of loyalty, seeking both injunctive relief and monetary damages. In the May 15, 2009, 2009 WL 1424199, order declining to transfer jurisdiction of this matter to the Eastern District of Louisiana, this court noted that the defendants raised the issue of whether Louisiana or Indiana law applies to enforceability of the restrictive covenants in their employment agreements. The court invited the parties to submit briefs on that issue and now finds that Indiana law applies.

I. BACKGROUND

For purposes of this opinion, the court assumes the reader's familiarity with its March 31, 2009 temporary restraining order and May 15, 2009 transfer of venue order and the background facts set forth in those opinions. The employment agreements executed by Mr. Sharpe and Mr. Beaudean contain a choice of law provision stating that Indiana law shall govern construction and enforcement of the agreements, notwithstanding any states's choice-of-law rules to the contrary. (Employment Agreement, ¶ 14). The defendants argue that although Indiana generally enforces such contractual stipulations, Indiana's public policy exception to this general rule requires application of Louisiana law. The defendants reason that Louisiana's interest in this litigation is materially greater than Indiana's interest because Mr. Sharpe and Mr. Beaudean are and were citizens of Louisiana, they executed the agreements in Louisiana, most services and work contemplated by the agreements were performed in Louisiana, and the agreements restrict the defendants' employment in Louisiana. Further, Zimmer, Inc. and Zimmer Dental are Delaware corporations, and the only connection with Indiana is that Zimmer Inc.'s principal place of business is located here. The defendants conclude that Louisiana law should apply because the non-competition agreements Zimmer seeks to enforce violate a fundamental public policy of Louisiana.

Zimmer responds that Indiana has a materially greater interest in this litigation because Zimmer, Inc.—with whom Mr. Sharpe and Mr. Beaudean contracted—is located in Indiana, the employment agreements were administered out of and executed by Zimmer in Indiana, the defendants' stock options were granted from Indiana, the defendants' compensation was processed out of Indiana, and much of the relevant discovery and several witnesses are located in Indiana. Zimmer further contends that Louisiana's interest in this litigation is minimal in light of the restricted scope of the non-competition and non-solicitation provisions and the clear, ongoing and admitted violations by the defendants of their employment agreements. Zimmer reasons that applying Louisiana law would undermine Indiana's long standing public policy of enforcing restrictive covenants that are reasonably limited.

II. DISCUSSION

A federal court sitting in diversity must apply the forum state's choice of law rules. See Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941); see also S.A. Healy Co. v. Milwaukee Metro. Sewerage Dist., 50 F.3d 476, 478 (7th Cir.1995) ("[A] federal court sitting in diversity must first apply the forum state's choice of law rules, which may or may not select the forum state's substantive law to govern the dispute." (internal citations omitted)). This court therefore applies Indiana's choice of law rules to determine whether Indiana or Louisiana law governs the enforceability of the restrictive covenants.

A. Genuine Conflict between Louisiana and Indiana law

Before addressing choice of law principles, the court first considers whether there is a genuine conflict between Louisiana and Indiana law. If not, it isn't necessary to address choice of law. Allen v. Great American Reserve Ins. Co., 766 N.E.2d 1157, 1162 (Ind.2002) ("Ordinarily a choice of law issue will be resolved only if it appears there is a difference in the laws of the potentially applicable jurisdictions."). There is a conflict between Louisiana and Indiana law.

Indiana and Louisiana law both generally disfavor non-competition provisions and strictly construe such provisions against the employer. See Central Indiana Podiatry, P.C. v. Krueger, 882 N.E.2d 723, 728-729 (Ind.2008); SWAT 24 Shreveport Bossier, Inc., 759 So.2d 1047, 1049 (La.App. 2 Cir.2000), aff'd by, 808 So.2d 294 (La.2001). The two states diverge sharply on the test they apply in determining whether the agreements are enforceable. Indiana applies a reasonableness test. Gleeson v. Preferred Sourcing, LLC, 883 N.E.2d 164, 172 (Ind.Ct.App. 2008). Louisiana requires that the provisions contain narrowly drawn criteria as outlined in Louisiana Revised Statute § 23:921(C). See Restivo v. Hanger Prosthetics & Orthotics, Inc., No. 06-32, 2007 WL 1341506, at *4 (E.D.La. May 4, 2007) (noting that Louisiana takes a technical approach to determining validity of non-compete agreement).

Under Indiana law, "[c]ovenants must be reasonable with respect to the legitimate interests of the employer, restrictions on the employee, and the public interest." Gleeson v. Preferred Sourcing, 883 N.E.2d at 172.

To be enforceable, a noncompetition agreement must be reasonable. . . . In arguing the reasonableness of a non-competition agreement, the employer must first show that it has a legitimate interest to be protected by the agreement. The employer also bears the burden of establishing that the agreement is reasonable in scope as to the time, activity, and geographic area restricted.

Central Indiana Podiatry v. Krueger, 882 N.E.2d at 729 (internal citations omitted). "The employer bears the burden of showing that the covenant is reasonable and necessary in light of the circumstances[,] . . . [meaning that] the employer must demonstrate that the employee has gained a unique competitive advantage or ability to harm the employer before such employer is entitled to the protection of a noncompetition agreement." Gleeson v. Preferred Sourcing, 883 N.E.2d at 172-173 (internal citations omitted). Under the "blue pencil" doctrine, if a covenant is clearly separated into parts, and if some parts are reasonable and others are not, the contract may be severed so that the reasonable portions may be enforced. Licocci v. Cardinal Assoc., Inc., 445 N.E.2d 556, 561 (Ind.1983); Central Indiana Podiatry v. Krueger, 882 N.E.2d at 730. Efforts to save a covenant are limited to applying terms that already exist in the contract; the court will not add terms. Id.

This court has already made a preliminary finding in its March 31, 2009 temporary restraining order that the covenants are reasonable under Indiana law. For a further discussion of the application of Indiana law to the employment agreements, see this court's previous order (document # 16).

In Louisiana, non-competition and non-solicitation of customer provisions "will be enforced only if [they] meet[] narrowly drawn criteria." SWAT 24 Shreveport Bossier, Inc. v. Bond, 759 So.2d 1047, 1049 (La.App. 2 Cir.2000), aff'd by, 808 So.2d 294 (La.2001) (citations omitted). Louisiana Revised Statute § 23:921(A) states that "[e]very contract or agreement, or provision thereof, by which anyone is restrained from exercising a lawful profession, trade, or business of any kind, except as provided in this Section, shall be null and void." LA.REV.STAT. § 23:921(A). Louisiana Revised Statute § 23:921(C) then provides the terms under which restrictive covenants are permissible:

Any person . . . who is employed . . . may agree with his employer to refrain from carrying on or engaging in a business similar to that of the employer and/or from soliciting customers of the employer within a specified parish or parishes, municipality or municipalities, or parts thereof, so long as the employer carriers on a like business therein, not to exceed a period of two years from termination of employment. . . .

LA.REV.STAT. § 23:921(C) (emphasis added). The defendants' employment agreements contain several provisions that generally prevent the defendants from working for or assisting a competing organization in the same or similar capacity in a restricted geographic area (non-competition provision), from soliciting Zimmer customers or potential customers (non-solicitation of customers provision), from soliciting Zimmer employees or former employees (non-solicitation of employees provision), and from disclosing Zimmer's confidential information (non-disclosure provision). Louisiana Revised Statute § 23:921(C) applies to the non-competition and non-solicitation of customers provisions, see L & B Transport, LLC v. Beech, 568 F.Supp.2d 689, 692 (M.D.La. 2008), but not to the non-solicitation of employees or non-disclosure provisions. Frederic v. Hladky, No. 00-0481, 2000 WL 805233, at *5 (E.D.La.2000) (citing Smith, Barney, Harris Upham & Co. v. Robinson, 12 F.3d 515 (5th Cir.1994)) (stating that provisions prohibiting the defendants from soliciting the former employer's employees are not governed by the statute); see also CDI Corp. v. Hough, 9 So.3d 282, 292 (La.App. 1 Cir. 2009) (same);¹ Engineered Mech. Services, Inc. v. Langlois, 464 So.2d 329, 334, n. 15 (La.App. 1 Cir.1984) ("Confidentiality agreements have been held enforceable...