2-page Case Study

Page 1

1 of 1 DOCUMENT

DCS Sanitation Management, Inc., Appellant, v. Eloy Castillo; Efren George Cas-

tillo; Adolfo Martinez, Appellees.

No. 05-1201

UNITED STATES COURT OF APPEALS FOR THE EIGHTH CIRCUIT

435 F.3d 892; 2006 U.S. App. LEXIS 1758; 152 Lab. Cas. (CCH) P60,135; 23 I.E.R.

Cas. (BNA) 1772

October 14, 2005, Submitted

January 25, 2006, Filed

SUBSEQUENT HISTORY: Rehearing denied by, Rehearing, en banc, denied by DCS Sanitation Mgmt. v. Castillo,

2006 U.S. App. LEXIS 8154 (8th Cir., Apr. 4, 2006)

US Supreme Court certiorari denied by DCS Sanitation Management, Inc. v. Castillo, 2006 U.S. LEXIS 7161 (U.S.,

Oct. 2, 2006)

PRIOR HISTORY: [**1] Appeal from the United States District Court for the District of Nebraska.

CASE SUMMARY:

PROCEDURAL POSTURE: Appellant former employer challenged a decision from the United States District Court

for the District of Nebraska, which denied its motion for a preliminary injunction and granted summary judgment to

appellee former employees in a case alleging a violation of a noncompete agreement.

OVERVIEW: As a condition of employment, the employees each signed employment agreements containing a non-

compete clause. The contract also contained a choice of law provision. After the employees were hired by another

company, the employer filed an action for breach of contract. The district court denied the employer injunctive relief,

and it granted the employees summary judgment. Thereafter, the employer sought review. In affirming, the court deter-

mined that, although the one-year time frame in the agreement had expired, the claim for money damages was not moot.

However, the request for injunctive relief was moot. Next, Nebraska law applied, notwithstanding the fact that the

agreement provided for the application of Ohio law. Because the laws of each state with regard to noncompete agree-

ments were so diverse, the district court properly found that the application of Ohio law would violate the public policy

of Nebraska. Moreover, Nebraska had a greater material interest in the agreements. Finally, the agreements were invalid

under Nebraska law because they were overly broad; the employees were prohibited from working for any cleaning

service within 100 miles for one year.

OUTCOME: The decision was affirmed.

CORE TERMS: former employees, noncompete agreements, cleaning, overly broad, plant, former employer's, funda-

mental policy, choice-of-law, materially, moot, choice of law, personal contact, noncompete, soliciting, preliminary

injunction, summary judgment, sanitation, place of business, substantial relationship, injunctive relief, particular issue,

unenforceable, injunction, correctly, customer, covenant, miles, staffing, enjoin, crew

LexisNexis(R) Headnotes

Civil Procedure > Justiciability > Mootness > Real Controversy Requirement

Civil Procedure > Remedies > Injunctions > Preliminary & Temporary Injunctions

Page 2

435 F.3d 892, *; 2006 U.S. App. LEXIS 1758, **;

152 Lab. Cas. (CCH) P60,135; 23 I.E.R. Cas. (BNA) 1772

Labor & Employment Law > Employment Relationships > Employment Contracts > Conditions & Terms > Trade

Secrets & Unfair Competition > Noncompetition & Nondisclosure Agreements

[HN1] Under Nebraska law, when a noncompete agreement's time period runs out, an appeal from the denial of a pre-

liminary injunction is moot. Although an appeal from a denial of injunctive relief may become moot by the passage of

time, a claim for damages remains viable.

Civil Procedure > Federal & State Interrelationships > Choice of Law > General Overview

Civil Procedure > Appeals > Standards of Review > De Novo Review

[HN2] A district court sitting in diversity jurisdiction applies the conflict of law rules for the state in which it sits. An

appellate court reviews de novo the district court's choice-of-law determination.

Civil Procedure > Federal & State Interrelationships > Choice of Law > General Overview

Contracts Law > Contract Conditions & Provisions > Forum Selection Clauses

[HN3] Nebraska courts generally give effect to the parties' choice of law. The law of the state chosen by the parties to

govern their contractual rights and duties will be applied if the particular issue is one which the parties could have re-

solved by an explicit provision in their agreement directed to that issue. The parties' contractual choice of law will apply

unless (1) the chosen state has no substantial relationship to the parties or the transaction and there is no other reasona-

ble basis for the parties' choice, or (2) application of the law of the chosen state would be contrary to a fundamental

policy of a state which has a materially greater interest than the chosen state in the determination of the particular issue

and which would be the state of the applicable law in the absence of an effective choice of law by the parties. The sec-

ond part applies only when the first part does not govern.

Civil Procedure > Federal & State Interrelationships > Choice of Law > General Overview

[HN4] Under the second part of the test for choice of law cases, application of the chosen law is precluded if application

of the law of the chosen state would be contrary to a fundamental policy of a state which has a materially greater inter-

est than the chosen state when certain factors are applied.

Labor & Employment Law > Employment Relationships > Employment Contracts > Conditions & Terms > Trade

Secrets & Unfair Competition > Noncompetition & Nondisclosure Agreements

[HN5] Nebraska and Ohio courts have materially different approaches to the reformation of unreasonable noncompete

agreements. In Nebraska, if a court determines a noncompete agreement is unreasonable, the court will not reform the

noncompete agreement in order to make it enforceable. Contrary to the Nebraska courts' approach, Ohio courts are em-

powered to reform overly broad or unreasonable noncompete agreements to make them reasonable. Because Nebraska

courts expressly have rejected judicial reformation of noncompete agreements, application of Ohio law would violate a

fundamental policy of Nebraska law.

Civil Procedure > Federal & State Interrelationships > Choice of Law > General Overview

[HN6] In the absence of an effective choice of law by the parties, the contacts to be taken into account in applying the

principles of to determine the law applicable to an issue include: (a) the place of contracting, (b) the place of negotiation

of the contract, (c) the place of performance ,(d) the location of the subject matter of the contract, and (e) the domicile,

residence, nationality, place of incorporation and place of business of the parties. These contacts are to be evaluated

according to their relative importance with respect to the particular issue.

Labor & Employment Law > Employment Relationships > Employment Contracts > Conditions & Terms > Trade

Secrets & Unfair Competition > Noncompetition & Nondisclosure Agreements

[HN7] Pursuant to Nebraska law, a noncompete agreement is valid if it is (1) not injurious to the public, (2) not greater

than is reasonably necessary to protect the employer in some legitimate interest, and (3) not unduly harsh and oppres-

sive on the employee. An employer has a legitimate business interest in protection against a former employee's compe-

tition by improper and unfair means, but is not entitled to protection against ordinary competition from a former em-

ployee. A noncompete agreement may be valid only if it restricts the former employee from working for or soliciting

the former employer's clients or accounts with whom the former employee actually did business and has personal con-

tact.

Page 3

435 F.3d 892, *; 2006 U.S. App. LEXIS 1758, **;

152 Lab. Cas. (CCH) P60,135; 23 I.E.R. Cas. (BNA) 1772

COUNSEL: For DCS SANITATION MANAGEMENT, Inc., Plaintiff - Appellant: Michael P. Schmiedt, CRARY &

HUFF, South Sioux City, NE; Daniel L. Hartnett, CRARY & HUFF, Sioux City, IA; James E. McCarthy, III, KATZ &

TELLER, Cincinnati, OH.

For ELOY CASTILLO, EFREN GEORGE CASTILLO, ADOLFO MARTINEZ, Appellees: James Conrad Zalewski,

DEMARS & GORDON, Lincoln, NE.

JUDGES: Before RILEY, JOHN R. GIBSON, and COLLOTON, Circuit Judges.

OPINION BY: Riley

OPINION

[*894] RILEY, Circuit Judge.

DCS Sanitation Management, Inc. (DCS) sued three of its former employees, Eloy Castillo, Efren George Castillo, and

Adolfo Martinez (collectively, former employees), alleging the former employees breached noncompete agreements.

DCS appeals the district court's 1 denial of DCS's motion for a preliminary injunction and grant of summary judgment in

favor of the former employees. We affirm.

1 The Honorable Laurie Smith Camp, United States District Judge for the District of Nebraska.

[**2] I. BACKGROUND

DCS, a Delaware corporation with its principal place of business in Ohio, cleans food processing plants in thirteen

states, including Nebraska. DCS's corporate office in Ohio (1) formulates processes and procedures to improve cleaning

crew efficiency, (2) designs sanitation and safety programs for all cleaning crews, (3) makes staffing decisions for all

cleaning crews, and (4) makes human resource policies and decisions for all DCS employees.

The former employees worked for DCS as on-site managers at the Tyson Foods plant in Dakota City, Nebraska (Tyson

plant). The former employees (1) had access to DCS's staffing, sanitation, and safety programs, including the allocation

and monitoring of proper chemical dilutions; (2) were responsible for enforcing regulatory safety requirements and sat-

isfying third party audit requirements; (3) were familiar with staffing requirements for cleaning the Tyson plant; and (4)

had knowledge of the Tyson plant's key contacts and business requirements.

As a condition of employment with DCS, each of the former employees signed identical employment agreements

(Agreements) with DCS. The Agreements contained the following noncompete provision: [**3]

NONCOMPETITION AFTER TERMINATION: For a period of one (1) year following the date of termination of employment for

any reason, I will not directly or indirectly engage in, or in any manner be concerned with or employed by any person, firm, or

corporation in competition with [DCS] or engaged in providing contract cleaning services within a radius of one-hundred (100)

miles of any customer of [DCS] or with any customer or client of [DCS] or any entity or enterprise having business dealings w ith

[DCS] which is then providing its own cleaning services in-house or which requests my assistance or knowledge of contract clean-

ing services to provide its own cleaning services in-house. In the event of violation of this covenant, [DCS], in addition to any other

rights and remedies available at law or otherwise, is entitled to an injunction to be issued by a court of competent jurisdiction en-

joining and restraining employee from committing any violation of this provision and employee hereby consents to the issuance of

the injunction.

The Agreements also contained a choice-of-law provision: "APPLICABLE LAW: This Agreement shall be subject to

and interpreted in [**4] accordance with the laws of Ohio."

In June 2003, after DCS cleaned the processing side of the Tyson plant for eighteen years, the Tyson plant solicited bids

from competing cleaning companies. As a result of the bidding process, on September 18, 2003, the Tyson plant select-

ed Packers Sanitation Services, Inc. (Packers) for the cleaning contract. Packers [*895] hired all of DCS's employees,

including the former employees, and on November 8, 2003, Packers started cleaning the Tyson plant.

On May 14, 2004, DCS sued the former employees, alleging (1) breach of the noncompete agreements, (2) a "substan-

tial probability" the former employees would disclose DCS's trade secrets and confidential information, and (3) breach

Page 4

435 F.3d 892, *; 2006 U.S. App. LEXIS 1758, **;

152 Lab. Cas. (CCH) P60,135; 23 I.E.R. Cas. (BNA) 1772

of contract. DCS sought (1) to enjoin the former employees in accordance with the noncompete agreements, (2) to en-

join the former employees from disclosing DCS's trade secrets and confidential information, and (3) money damages.

DCS moved for a preliminary injunction, and the former employees moved for summary judgment. The district court

denied DCS's motion for a preliminary injunction and granted summary judgment in favor of the former employees,

concluding Nebraska has a materially [**5] greater interest in the noncompete agreements at issue, and application of

Ohio law would violate a fundamental policy of Nebraska law. The district court thus applied Nebraska law to deter-

mine the validity of the noncompete agreements and concluded the noncompete agreements were overbroad and, there-

fore, unenforceable.

DCS appeals the district court's ruling, urging this court to reverse the district court's entry of summary judgment and

denial of a preliminary injunction, and to remand with instructions to enjoin the former employees under Ohio law.

DCS argues reversal and remand is warranted here, because (1) the district court erred in applying Nebraska law instead

of Ohio law, (2) the noncompete agreements are enforceable under Ohio law, and (3) the district court abused its discre-

tion in denying injunctive relief for the period of the covenant from the date of the court's order. In response, the former

employees contend (1) the appeal is moot, (2) the district court correctly applied Nebraska law, (3) the noncompete

agreements are overly broad and unenforceable, and (4) the noncompete agreements are contracts of adhesion.

II. DISCUSSION

A. Mootness

The former [**6] employees contend this appeal is moot, because the one-year time frame of the noncompete agree-

ments has expired. See Agrigenetics, Inc. v. Rose, 62 F.3d 268, 270-71 (8th Cir. 1995) (holding, [HN1] under Nebras-

ka law, when a noncompete agreement's time period runs out, an appeal from the denial of a preliminary injunction is

moot). Although an appeal from a denial of injunctive relief may become moot by the passage of time, a claim for

damages remains viable. See Curtis Indus., Inc. v. Livingston, 30 F.3d 96, 97 (8th Cir. 1994). Because DCS sought

money damages in addition to injunctive relief, this appeal is not moot.

B. Choice-of-Law Determination

DCS argues the district court erred when it evaluated DCS's claim under Nebraska law rather than Ohio law, because

the Agreements specify Ohio law governs. [HN2] A district court sitting in diversity jurisdiction applies the conflict of

law rules for the state in which it sits. Inacom Corp. v. Sears, Roebuck & Co., 254 F.3d 683, 687 (8th Cir. 2001) (citing

Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496, 61 S. Ct. 1020, 85 L. Ed. 1477 (1941)). Thus, we apply Ne-

braska's conflict of law [**7] rules and review de novo the district court's choice-of-law determination. Id.

In deciding choice-of-law questions, Nebraska follows the Restatement (Second) of Conflict of Laws (Restatement). Id.

[HN3] Nebraska courts generally give effect to the parties' choice of law. Vanice v. Oehm, 247 Neb. 298, 526 N.W.2d

648, 651 [*896] (Neb. 1995); Restatement § 187(1). Restatement section 187(1) provides "the law of the state chosen

by the parties to govern their contractual rights and duties will be applied if the particular issue is one which the parties

could have resolved by an explicit provision in their agreement directed to that issue." Restatement § 187(1). Section

187(2) provides the parties' contractual choice of law will apply unless (1) "the chosen state has no substantial relation-

ship to the parties or the transaction and there is no other reasonable basis for the parties' choice," or (2) "application o f

the law of the chosen state would be contrary to a fundamental policy of a state which has a materially greater interest

than the chosen state in the determination of the particular issue and which . . . would be the state of the applicable law

in the absence of [**8] an effective choice of law by the parties." Restatement § 187(2)(a), (b).

The district court applied Restatement section 187(2) without analyzing whether section 187(1) or section 187(2) ap-

plies in this case. Section 187(2) applies only when section 187(1) does not govern. See Restatement § 187, comment d.

Section 187(1) is inapplicable in this case, because, under Nebraska law, the parties could not have resolved to apply

Ohio law even with an explicit provision. See CAE Vanguard, Inc. v. Newman, 246 Neb. 334, 518 N.W.2d 652, 656

(Neb. 1994) (holding "the provision of the agreement which states that a court may reform the covenant is of no effect.

Private parties may not confer upon the court powers which it does not possess."); see also Baxter Intern., Inc. v. Mor-

ris, 976 F.2d 1189, 1196 (8th Cir. 1992).

The first condition under section 187(2), whether "the chosen state has no substantial relationship to the parties or the

transaction and there is no other reasonable basis for the parties' choice," is met in this case. Restatement § 187(2)(a).

Nebraska has a substantial relationship to the parties and the transaction, because the former [**9] employees and

Page 5

435 F.3d 892, *; 2006 U.S. App. LEXIS 1758, **;

152 Lab. Cas. (CCH) P60,135; 23 I.E.R. Cas. (BNA) 1772

DCS entered into the Agreements in Nebraska, the services at issue were to be performed in Nebraska, the former em-

ployees reside in Nebraska, the prohibition of the noncompete clause directly and materially affects employment in Ne-

braska, and DCS does business in Nebraska. Nebraska clearly possesses a direct and substantial interest in the employ-

ment of its citizens. The only relationship between Ohio and the parties is the location of DCS's corporate headquarters

and principal place of business in Ohio. The Agreements were not negotiated, entered into, or performed in Ohio. Under

these circumstances, the district court properly concluded Ohio has no substantial relationship to the parties or the

transaction, and Nebraska has a greater material interest in the Agreements. See Powell v. Am. Charter Fed. Sav. &

Loan Ass'n, 245 Neb. 551, 514 N.W.2d 326, 332 (Neb. 1994) (deciding the state with the most significant relationship

to the transaction and the parties is the state where the parties contracted, negotiated, and resided; where the subject

matter was located; and where performance was to take place).

The second condition also is satisfied. [HN4] Under section [**10] 187(2)(b), application of the chosen law is pre-

cluded if "application of the law of the chosen state would be contrary to a fundamental policy of a state which has a

materially greater interest than the chosen state" when the factors articulated in section 188 2 are applied. Restatement

[*897] § 187(2)(b). [HN5] Nebraska and Ohio courts have materially different approaches to the reformation of un-

reasonable noncompete agreements. In Nebraska, if a court determines a noncompete agreement is unreasonable, the

court will not reform the noncompete agreement in order to make it enforceable. H & R Block Tax Servs., Inc., v. Circle

A Enters., Inc., 269 Neb. 411, 693 N.W.2d 548, 552 (Neb. 2005). Contrary to the Nebraska courts' approach, Ohio

courts are empowered to reform overly broad or unreasonable noncompete agreements to make them reasonable. Rai-

monde v. Van Vlerah, 42 Ohio St. 2d 21, 325 N.E.2d 544, 547 (Ohio 1975). The district court correctly recognized that

because Nebraska courts expressly have rejected judicial reformation of noncompete agreements, application of Ohio

law would violate a fundamental policy of Nebraska law.

2 Section 188 provides in pertinent part:

[HN6] (2) In the absence of an effective choice of law by the parties (see § 187), the contacts to be taken into account in

applying the principles of § 6 to determine the law applicable to an issue include:

(a) the place of contracting,

(b) the place of negotiation of the contract,

(c) the place of performance,

(d) the location of the subject matter of the contract, and

(e) the domicil, residence, nationality, place of incorporation and place of business of the parties.

These contacts are to be evaluated according to their relative importance with respect to the particular issue.

[**11] Because Nebraska has a greater material interest in the Agreements and application of Ohio law would violate

a fundamental policy of Nebraska law, we hold the district court correctly applied Nebraska law to the question of the

validity and enforceability of the noncompete agreements. See First Nat'l Bank v. Daggett, 242 Neb. 734, 497 N.W.2d

358, 363 (Neb. 1993) (disregarding choice-of-law provision because the chosen state had no contacts with the transac-

tion and the parties, and application of the chosen state's law would offend a strong public policy in the forum state).

See also Rain & Hail Ins. Serv., Inc. v. Casper, 902 F.2d 699, 700-01 (8th Cir. 1990) (applying Nebraska law to an em-

ployment agreement's noncompete clause choosing the application of Iowa law, which allowed modification of overly

restrictive noncompete provisions, and affirming conclusion "Iowa law would be contrary to a fundamental policy of

Nebraska").

C. Validity of the Noncompete Agreements

Having concluded Nebraska law applies, we now turn to whether the noncompete agreements are valid under Nebraska

law. [HN7] Pursuant to Nebraska law, a noncompete agreement is valid if [**12] it is (1) "not injurious to the pub-

lic," (2) "not greater than is reasonably necessary to protect the employer in some legitimate interest," and (3) "not un-

duly harsh and oppressive on the employee." Prof'l Bus. Servs. Co. v. Rosno, 268 Neb. 99, 680 N.W.2d 176, 184 (Neb.

Page 6

435 F.3d 892, *; 2006 U.S. App. LEXIS 1758, **;

152 Lab. Cas. (CCH) P60,135; 23 I.E.R. Cas. (BNA) 1772

2004) (quotation omitted). "An employer has a legitimate business interest in protection against a former employee's

competition by improper and unfair means, but is not entitled to protection against ordinary competition from a former

employee." Id. at 185. A noncompete agreement "may be valid only if it restricts the former employee from working for

or soliciting the former employer's clients or accounts with whom the former employee actually did business and has

personal contact." Polly v. Ray D. Hilderman & Co., 225 Neb. 662, 407 N.W.2d 751, 756 (Neb. 1987).

We conclude the district court properly held the noncompete agreements were overbroad and unenforceable. The dis-

trict court recognized the noncompete agreements prohibit the former employees from, directly or indirectly, being

concerned in any manner with any company in competition with DCS, and from providing [**13] [*898] contract

cleaning services within one hundred miles of any entity or enterprise "having business dealings" with DCS, including

attorneys, accountants, delivery services and the like. The breadth of the noncompete agreements effectively put the

former employees out of the cleaning business within an extensive region. We hold the district court did not err in con-

cluding Nebraska courts would not enforce such overly broad noncompete agreements. See Rosno, 680 N.W.2d at

186-87 (holding noncompete agreement was overly broad where the agreement prohibited the former employee from

soliciting or contacting any of the former employer's clients and where the former employer could not establish the for-

mer employee had done business with or had substantial personal contact with all of the former employer's clients);

Mertz v. Pharmacists Mut. Ins. Co., 261 Neb. 704, 625 N.W.2d 197, 205 (Neb. 2001) (holding noncompete agreement

was overly broad where it was not limited to clients with whom the former employee actually did business or personally

contacted); Moore v. Eggers Consulting Co., Inc., 252 Neb. 396, 562 N.W.2d 534, 540 (Neb. 1997) (holding [**14]

noncompete agreement was overly broad where it prohibited soliciting or accepting business opportunities with any

client of the former employer with whom the former employee worked or had knowledge of, and where the agreement

contained an overly broad geographical restriction); Whitten v. Malcolm, 249 Neb. 48, 541 N.W.2d 45, 48 (Neb. 1995)

(holding noncompete agreement was overly broad where it prohibited practicing dentistry within geographic location

and was not limited to clients with whom the former employee did business and had personal contact and was not even

limited to the former employer's existing customer base); Vlasin v. Len Johnson & Co., Inc., 235 Neb. 450, 455 N.W.2d

772, 776 (Neb. 1990) (holding noncompete agreement was overly broad where it prohibited the former employee from

entering into insurance business within fifty miles and was not limited to the former employer's clients with whom the

former employee did business and had personal contact); Polly, 407 N.W.2d at 756 (holding noncompete agreement

was overly broad where it prohibited soliciting or working for the former employer's clients with whom the former em-

ployee [**15] did not work and did not even know).

III. CONCLUSION

Therefore, we affirm the well reasoned judgment of the district court.