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Installed Building Products, LLC v. Cottrell

United States District Court, W.D. New York

April 18, 2014

INSTALLED BUILDING PRODUCTS, LLC, Plaintiff,
v.
SCOTT COTTRELL and AMERICAN BUILDING SYSTEMS, Defendants.

REPORT AND RECOMMENDATION

HUGH B. SCOTT, Magistrate Judge.

I. INTRODUCTION

The Hon. Richard J. Arcara has referred this case to this Court under 28 U.S.C. § 636(b). Pending before the Court is a motion (Dkt. No. 11) by defendants Scott Cottrell ("Cottrell") and American Building Systems ("ABS") to dismiss the complaint under Rule 12(b)(6) of the Federal Rules of Civil Procedure ("FRCP"). Plaintiff Installed Building Products, LLC ("IBP") sued defendants to enforce a restrictive covenant between it and Cottrell after it fired Cottrell and he joined ABS. Defendants believe that IBP has failed to allege any violations of the restrictive covenant beyond Cottrell's decision to start working for ABS. Additionally, defendants argue that the restrictive covenant in question is unenforceable as contrary to New York public policy because it restricts a mere salesman's livelihood for too long a period of time over too large a geographical area. Finally, to the extent that IBP attached to its motion papers factual affidavits and information that did not appear in the complaint, defendants accuse IBP of trying to "back-fill" its complaint and urge the Court to stay within the four corners of the complaint.

IBP opposes defendants' motion in all respects. IBP considers the restrictive covenant enforceable because of the managerial responsibility that Cottrell had while he worked for the company and because of the proprietary inside information that he acquired during that time. IBP further argues that it has stated valid claims related to Cottrell's fiduciary duties based on the likelihood that Cottrell will use inside information from IBP to give ABS an unfair advantage.

The Court held oral argument on March 7, 2014. For the reasons below, the Court respectfully recommends granting defendants' motion.

II. BACKGROUND

This case concerns allegations that Cottrell hurt IBP by bringing its inside sales and operating information to a direct competitor right after IBP fired him. Both companies in this case sell and install home-improvement products. IBP, a Delaware company with a principal place of business in Ohio and over 80 locations nationwide, "is engaged in the business of selling, marketing and installing a wide range of building products, including, but not limited to: wall insulation; attic insulation; spray fiberglass; spray foam; masonry insulation; seamless gutters and leaf protection; metal roofs; soffit and fascia; vinyl shutters; shower doors and bath hardware; shelving and mirrors; custom closets; garage doors; acoustical ceilings; fireplaces and fire stopping." (Dkt. No. 1 at 2 ¶ 1.) ABS, apparently a New York company, "is engaged in the business of selling and installing a wide range of building products, including insulation, and is in direct competition with IBP." ( Id. ¶ 3.) The basic chronology of events is not in dispute. Cottrell worked for IBP from September 20, 2004 until September 19, 2013. When Cottrell began working for IBP, he started as a salesman at a location in Sanborn, New York. In May 2007, Cottrell became a Branch Manager at IBP's location in Erie, Pennsylvania. On November 1, 2010, Cottrell signed a document called a Confidentiality, Nonsolicitation and Noncompetition Agreement (the "Agreement") because IBP required him to do that to maintain his employment. The Court will address the relevant details of the Agreement below. In December 2011, IBP closed its Erie location and brought Cottrell back to the Sanborn location. When Cottrell returned to the Sanborn location, he assumed the titles of Insulation and Gutter Foreman and Residential and Commercial Salesperson. The record is not clear as to whether anyone at the Sanborn location had the title of "Manager" or "Branch Manager" when Cottrell returned. Nonetheless, and for purposes of the pending motion, the Court accepts IBP's assertion that "Cottrell was the highest ranking person at the Sanborn, New York facility and he supervised the activities of at least 12 employees, [and] in addition to his responsibilities for servicing the Sanborn, New York market, and managing the employees, Cottrell continued to have responsibility for servicing the Erie, Pennsylvania market." ( Id. at 7 ¶ 15.)

The alleged events that prompted this case began in September 2013. On September 19, 2013, IBP fired Cottrell "because of unsatisfactory performance, including, but not limited to, selling work to one of IBP's customers at a below-market rate to IBP's detriment." ( Id. at 7 ¶ 16.) On or around October 15, 2013, IBP learned that Cottrell was working for ABS. A few days later, on October 18, 2013, counsel for IBP sent Cottrell and ABS cease and desist letters advising each of them of what it considered Cottrell's obligations under the Agreement. Defendants either did not respond to the letters or expressed an opinion to the effect that the Agreement is not enforceable.

The Agreement contains several provisions that relate to the pending motion. The second recital paragraph contains an acknowledgment that "[i]n the course of Employee's employment with the Company, Employee has been given access to proprietary information regarding the Company's business, and has been provided with training in the Company's business methodologies. The parties agree that if the Company's proprietary information were to be disclosed to a competitor, or if the training received by Employee were to be used for the benefit of a competitor, that such events would likely have a material adverse affect on the Company's business." (Dkt. No. 1-1 at 1.) Other relevant provisions consist of the following:

1. Section 1 specifies that Cottrell received compensation for entering the Agreement, a combination of $12, 500.01 cash and 15, 860 shares in the holding company that was "an indirect owner of 15%" of IBP. ( Id. )
2. Section 2(a) specifies that Cottrell "has been given, and will continue to be given, training in the Company's methodologies as well as access to certain confidential and proprietary information concerning the business and financial affairs of the Company and its Affiliates (as defined herein) which constitutes trade secrets under state law, as well as certain other confidential and proprietary information concerning the business and financial affairs of the Company and its Affiliates that may not constitute trade secrets under state law, but are nonetheless confidential." ( Id. at 2.)
3. Section 2(b) defines various types of information from IBP as confidential and proprietary, including product and sales methods and processes; customer lists, and financial information.

4. Section 2(c) sets forth that "[t]he Company and its Affiliates have a legitimate business interest in (i) the Confidential Information, (ii) relationships with their customers, suppliers and employees, and (iii) their business goodwill." ( Id. )

5. Section 3 of the Agreement contains restrictions on competition and solicitation that the Court will label collectively as the "restrictive covenant." Section 3(a) states that "for a period beginning on the date hereof and continuing through the second anniversary of the termination of Employee's employment with the Company or any of its Affiliates for any reason (the "Restrictive Period"), Employee will not, either for Employee's own account or in the service of or on behalf of any other person or entity, directly or through others, engage or invest in the business of selling, marketing or installing the building products sold, marketed or installed by the Company (which products shall include residential and commercial insulation, gutters, garage doors, fireplaces, closet shelving, shower doors and mirrors)(the "Business") within a 100 mile radius of the branch of the Company that is currently managed by Employee in Erie, Pennsylvania and within a 100 mile radius of each branch of the Company and its Affiliates that are hereafter managed or supervised by Employee, wherever located." ( Id. )
6. For the sake of the record, the Court takes judicial notice[1] that the geographic portion of the restrictive covenant looks like this when placed on a map:
7. Section 3(b) states that "during the Restrictive Period, Employee will not, either for Employee's own account or in the service of or on behalf of any other person or entity, directly or through others, take any action to (i) solicit, call upon, or initiate communication or contact with any customer or prospective customer of the Company or any Affiliate with whom Employee had contact during the last twelve months of Employee's employment, with a view to selling, marketing or installing any service or product that is sold, marketed or installed by the Business, or (ii) attempt to divert any customer, supplier or vendor of the Company or its Affiliates from doing business with such entity." ( Id. at 3.)
8. Section 3(c) states that "during the Restrictive Period, Employee will not, either for Employee's own account or in the service of or on behalf of any other person or entity, directly or through others, (i) induce or attempt to induce any employee of the Company or its Affiliates to leave the employ of such entity, or (ii) employ, or otherwise engage as an employee, independent contractor, or otherwise, any employee of the Company or its Affiliates." ( Id. )
9. The restrictive covenant in Section 3 concludes with an exception stating that "[t]he provisions of this Section 3 shall not be effective if the Company or its successor closes its all [sic] of its branches and ceases operations in the territory described in paragraph (a)." ( Id. )
10. Section 7 contains a severability provision stating that "[i]f any court determines that any provision of Section 2 or 3 hereof is unenforceable for any reason, including the duration or scope of such provision, the provision shall not be deemed void, and the court shall have the power to amend such provision, and, in its amended form, the provision shall remain in full force and effect. In the event that any provision of this Agreement is found to be void or unenforceable to any extent for any reason and such provision is not, or cannot be, so reformed, it is agreed that such provision shall be severable and that all remaining provisions of the Agreement shall remain in full force and effect." ( Id. at 4.)
11. Section 12 sets forth in one sentence that "[t]his Agreement shall be governed by and construed in accordance with the laws of the State of Ohio without ...

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