United States District Court, W.D. New York
DECISION AND ORDER
RICHARD J. ARCARA, District Judge.
Plaintiff Installed Building Products (IBP), a building supply company, alleges that its former employee, Defendant Scott Cottrell, breached a noncompete agreement when he began working for IBP's competitor, Defendant American Building Systems (ABS). The Defendants filed a motion to dismiss arguing that the Plaintiff's pleadings are insufficient to state a cause of action and that the non-compete agreement between Cottrell and IBP is unenforceable under New York law. Magistrate Judge Scott filed a Report and Recommendation that recommends granting the motion to dismiss.
Whether the non-compete agreement at issue is enforceable will ultimately depend on whether the agreement is "reasonable." This requires a fact-intensive analysis that the Court cannot conduct on the current record. Thus, the Court cannot conclude at this time that IBP's non-compete agreement is unenforceable. Instead, the Court holds that by alleging that Cottrell is working for IBP's competitor, IBP has adequately stated a claim that Cottrell breached the non-compete agreement. Therefore, for the reasons stated below, the Court does not adopt the Report and Recommendation and denies the Defendants' motion to dismiss.
Because this case is before the Court on the Defendants' motion to dismiss, the Court must "accept as true the complaint's factual allegations and draw all reasonable inferences in the plaintiff's favor." New York Life Ins. Co. v. United States, 724 F.3d 256 (2d Cir. 2013).
IBP has over eighty locations around the country from which it "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; [and] fireplaces and firestopping." Dkt. No. 1 ¶ 1.
Cottrell began his employment with IBP in 2004 as a salesperson at IBP's Sanborn, New York location. ¶ 6. Approximately two-and-a-half years later, Cottrell became the branch manager of IBP's Erie, Pennsylvania location. ¶ 7. In November 2010, "as a term and condition of his continued employment with IBP, " Cottrell signed the non-compete agreement that is central to the parties' dispute in this case. ¶ 8. As consideration for $12, 500.01, paid in three annual installments, ¶ 14, Cottrell agreed to a number of terms, including, as is relevant to the present motion, the following:
First, an "acknowledgment" by Cottrell that during his employment with IBP he had "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... 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 3.
Second, for two years following Cottrell's departure from IBP and within a 100-mile radius of IBP's Sanborn and Erie locations, Cottrell agreed to not "directly or through others, engage or invest in the business of selling, marketing or installing the building products sold, marketed or installed by" IBP. Id. at 5. (The overlapping 100-mile radii shut Cottrell out of most of Western New York, a large portion of Northwestern Pennsylvania, and the Northeastern area of Ohio. Dkt. No. 18 at 6.) The agreement provides that Cottrell may not "solicit, call upon, or initiate communication or contact with any customer or prospective customer of [IBP]... with whom [Cottrell] had contact during the last twelve months of [Cottrell's] employment, with a view to selling, marketing or installing any service or product that is sold, marketed or installed by [IBP]." Dkt. No. 1 at 5. It further provides that Cottrell may not "attempt to divert any customer, supplies or vendor of" IBP from doing business with IBP. The agreement also prohibits Cottrell, during the restrictive period, from "induc[ing] or attempt[ing] to induce" IBP's employees to leave IBP. Id.
Third, Cottrell agreed not to "disclose any of [IBP's] Confidential Information" and not to "use any of the Confidential Information for [Cottrell's] own purposes or benefit or for the purposes or benefit of any third party." Id. at 6. The agreement defines "Confidential Information" to include "information concerning the financial affairs of [IBP], " as well as "information concerning... product specifications, processes, past, current and planned manufacturing, distribution, sales and installation methods and processes, customer lists, current and anticipated customer requirements, price lists and pricing information, market studies, business plans, computer software and database technologies, the names and backgrounds of key personnel, and any other similar information... whether or not a trade secret under the state trade secret law." Id. at 4.
In December 2011, about a year after Cottrell signed the non-compete agreement, IBP closed its Erie location, and Cottrell returned to IBP's Sanborn location where he became the "Insulation and Gutter Foreman and a Residential and Commercial Salesperson." ¶ 15. In this role, Cottrell was the highest-ranking IBP employee in Sanborn. Id. However, slightly less than two years later, in September 2013, IBP terminated Cottrell's employment "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." ¶ 16. Less than one month after his termination, "Cottrell began employment with IBP's direct competitor, ABS [American Building Systems]." ¶ 17.
The parties disagree about the nature of Cottrell's activities after he began his employment with ABS. Nonetheless, IBP pleads-all upon information and belief-that after his employment with IBP was terminated, Cottrell "will attempt to solicit customers of IBP with whom he had contact during his last twelve months of employment at IBP; that Cottrell "will attempt to induce employees of IBP" to leave IBP; and that Cottrell "is using IBP's confidential information to gain an unfair advantage, and has in his possession or control confidential information which belongs to IBP." ¶¶ 18-20. Based on these beliefs, IBP sent Cottrell a letter "requesting that he cease and desist from further violating the [noncompete] agreement." ¶ 21. However, IBP claims that "Cottrell has failed or refused to comply with IBP's request." ¶ 22.
IBP then filed this lawsuit requesting damages and extensive injunctive relief. IBP raises six claims: (1) a claim for breach of contract against Cottrell; (2) a claim for misappropriation of trade secrets against Cottrell; (3) a claim for breach of the duty of loyalty against Cottrell; (4) a claim of tortious interference against ABS as to IBP's "business and contractual relationships with its existing customers, suppliers, vendors, and employees"; (5) a claim of tortious interference against ABS as to IBP's non-compete agreement with Cottrell; and (6) a claim of unjust enrichment against Cottrell and ABS.
Cottrell and ABS filed a motion to dismiss the complaint under Federal Rule of Civil Procedure 12(b)(6) making two principal arguments: (1) that IBP's pleadings, the most critical aspects of which are upon information and belief, are insufficient to state a claim that Cottrell has actually violated the non-compete agreement; and (2) that the non-compete agreement is unenforceable under New York law. Magistrate Judge Scott, to whom the Court referred this case for all pre-trial matters and to hear and report upon dispositive motions, filed a Report and Recommendation, Dkt. No. 18, which recommends granting the Defendants' motion to dismiss in its entirety. IBP filed objections, and this Court heard oral argument on June 16, 2014, Because IBP's objections are to a dispositive motion, the Court reviews the Report and Recommendation de novo. See 28 U.S.C. § 636(b)(1).
Before reaching the merits, the Court must address several preliminary issues. The Court will first discuss the standard of review applicable to the Defendants' motion to dismiss. Although this is typically a noncontroversial issue, the parties disagree on the documents the Court may consider in deciding the motion, as well as the extent to which the Plaintiff may make allegations upon information and belief. The Court will then address which state's law governs this case.
I. The Standard on a Motion to Dismiss
The standard to survive a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) is well settled. "[A] complaint must contain sufficient factual material, accepted as true, to state a claim to relief that is plausible on its face.'" Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). A claim is facially plausible when it "pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Id. In other words, the complaint must allege facts supporting its legal claims; these need not be "detailed factual allegations, ' but [the pleading standard] demands more than an unadorned, the defendant-unlawfully-harmed me accusation." Id. (quoting Twombly, 550 U.S. at 555). Although the general outline of this standard is clear, the Plaintiff's complaint and its response to the Defendants' motion to dismiss have revealed two ancillary issues that the Court must address.
A. Pleading Upon Information and Belief
First, other than the allegation that "IBP learned... following his separation from employment with IBP, [that] Cottrell began employment" with ABS, Dkt. No. ¶ 17, the key allegations in the Plaintiff's complaint are made solely upon information and belief. (For example, the complaint alleges upon information and belief that Cottrell is violating the non-compete agreement by using IBP's confidential information and by soliciting IBP's customers. Id. ¶¶ 19-20.) The Defendants argue vigorously that the Plaintiff's information and belief pleadings are insufficient to state a claim. However, the Iqbal/Twombly standard "does not prevent a plaintiff from pleading facts upon information and belief' where  the facts are peculiarly within the possession and control of the defendant or  where the belief is based on factual information that makes the inference of culpability plausible." Arista Records, LLC v. Doe 3, 604 F.3d 110, 120 (2d Cir. 2010) (citation and internal quotation marks omitted). This is not a case where "the ...