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March 22, 1989

KEITH GUTREUTER, Plaintiff and Counterdefendant, and SHARON GUTREUTER, AIR TECHNOLOGIES, INC., a Kansas corporation, and A. J. DRALLE, INC., an Illinois corporation, Counterdefendants,
FIBER BOND CORPORATION, an Illinois corporation, Defendant and Counterplaintiff

James H. Alesia, United States District Judge.

The opinion of the court was delivered by: ALESIA



 Fiber Bond Corporation ("Fiber Bond") is an Illinois corporation with its principal place of business in Michigan City, Indiana. Fiber Bond manufactures air filter products. Fiber Bond sells its products to independent distributors, who in turn sell to the ultimate consumers.

 Kleen Line, Inc. ("Kleen Line") was an Ohio corporation with its principal place of business in Newark, Ohio which manufactured and sold pleated air filters. Sharon Gutreuter was President and owned all of the outstanding shares of Kleen Line. Keith Gutreuter was employed as sales manager for Kleen Line. *fn1" Prior to its acquisition of Kleen Line, Fiber Bond did not manufacture or sell pleated air filter products.

 On May 8, 1984, Fiber Bond, Kleen Line, and the Gutreuters executed a Purchase Agreement whereby Fiber Bond purchased the Kleen Line business. *fn2" In paragraph 3 of the Purchase Agreement, Fiber Bond agreed to employ Keith Gutreuter and Keith Gutreuter agreed to be employed by Fiber Bond as the sales manager for Fiber Bond's Filter Products Division in accordance with the terms and conditions set forth in an Employment Contract. Paragraph 3 expressly provides that "execution and delivery of the . . . employment agreement shall be a condition of [Fiber Bond's] obligations [under the Purchase Agreement]." In paragraph 4, Fiber Bond and the Gutreuters agreed to enter into an agreement not to compete. Paragraph 4 contains no language suggesting that the purchase of Kleen Line by Fiber Bond was contingent upon the execution of the agreement not to compete. Nevertheless, the parties did assign nearly 7% of the total purchase price to the Non-Competition Agreement.

 Pursuant to the Employment Contract, Fiber Bond employed Keith Gutreuter as its sales manager for its Filter Products Division. By letter dated February 9, 1987, Keith Gutreuter gave Fiber Bond ninety days notice of his intent to terminate his employment pursuant to paragraph 5 of the Employment Contract.

 Keith Gutreuter's employment with Fiber Bond ceased on March 13, 1987. *fn3" On April 13, 1987, Keith Gutreuter formed Air Technologies, Inc. ("Air Technologies"). Air Technologies is incorporated in the State of Kansas and has its principal place of business in Ottawa, Kansas. On June 1, 1987, Air Technologies began manufacturing air filters.

 On July 31, 1987, Keith Gutreuter filed a two-count complaint against Fiber Bond seeking both declaratory and monetary relief. Keith Gutreuter asserts that the Non-Competition Agreement is unenforceable because its scope is unreasonably broad and is not reasonably drafted to protect any protected interests.

 On August 23, 1987, Fiber Bond filed its answer to Keith Gutreuter's complaint and filed its counterclaims against the Gutreuters, Air Technologies and A. J. Dralle, Inc. ("Dralle"). Dralle is an Illinois corporation and its presence in this action could destroy diversity between the parties. Accordingly this Court must examine preliminarily the claims raised against Dralle to determine if this Court may continue to exercise diversity jurisdiction.


 If Fiber Bond's claims against Dralle are compulsory, this Court may exercise ancillary jurisdiction over the claims and over Dralle. See Fed. R. Civ. P. 13(a) & (h); Payne v. AHFI Netherlands, B. V., 482 F. Supp. 1158, 1160 & 1162 (N.D. Ill. 1980). Counts III and IV of Fiber Bond's counterclaim are directed at Dralle. In count III, Fiber Bond alleges that Dralle induced Keith Gutreuter to breach Gutreuter's Non-Competition Agreement with Fiber Bond. In count III, Fiber Bond seeks compensatory and punitive damages. In count IV, Fiber Bond alleges that Dralle breached its exclusive distributorship contract by encouraging the Gutreuters to form Air Technologies to compete with Fiber Bond. Fiber Bond seeks to recover damages which will compensate it for the injuries sustained as a result of Dralle's breach of the alleged exclusive distributorship contract.

 A counterclaim falls within the ambit of Fed. R. Civ. P. 13(a) "if it arises out of the transaction or occurrence that is the subject matter of the opposing party's claim." Fed. R. Civ. P. 13(a). To determine if a claim is compulsory, this Court must evaluate the "logical relationship" between Keith Gutreuter's claim and Fiber Bond's counterclaims. See Warshawsky & Co. v. Arcata National Corp., 552 F.2d 1257, 1261 (7th Cir. 1977). Generally, a counterclaim is compulsory if it speaks to the validity or essence of plaintiff's complaint. See Martino v. McDonald's System, Inc., 598 F.2d 1079, 1085 (7th Cir.), cert. denied, 444 U.S. 966, 100 S. Ct. 455, 62 L. Ed. 2d 379 (1979).

 If we examine the conduct giving rise to this action as such conduct occurred, the logical relationship between count III of Fiber Bond's counterclaim and Keith Gutreuter's action becomes apparent. In February of 1987, Keith Gutreuter notified Fiber Bond of his intent to terminate his employment relationship with them. That relationship actually was terminated in March of 1987. In April of 1987, Gutreuter formed Air Technologies, a company which competes with Fiber Bond. Assuming arguendo that the Non-Competition Agreement is enforceable, this conduct constituted a breach of the Non-Competition Agreement because Ottawa, Kansas (the locale of Air Technologies) is within a 500 mile radius of Michigan City, Indiana. According to Fiber Bond, Dralle actively induced Keith Gutreuter to form Air Technologies. Dralle's conduct necessarily occurred prior to or contemporaneously with Keith Gutreuter's alleged breach and allegedly is the predicate for the subsequent breaches of contract or tortious conduct by the Gutreuters and Air Technologies ...

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