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LABOR READY, INC. v. WILLIAMS STAFFING

May 31, 2001

LABOR READY, INC., A WASHINGTON CORPORATION, AND ITS WHOLLY OWNED SUBSIDIARY, LABOR READY MIDWEST, INC., A WASHINGTON CORPORATION PLAINTIFFS,
v.
WILLIAMS STAFFING, LLC, A DELAWARE LIMITED LIABILITY CORPORATION, D/B/A STAFFING NETWORK, INC., AN ILLINOIS CORPORATION, ANTWAN K. PATTON, JOHN NARGAN, RAY CASTRO, FRANK MCCUMBER, AND JAMES SCHLICKER, DEFENDANTS.



The opinion of the court was delivered by: Robert W. Gettleman, United States District Judge.

        MEMORANDUM OPINION AND ORDER

Labor Ready, Inc. and its wholly owned subsidiary, Labor Ready Midwest, Inc., both Washington corporations (collectively, "plaintiff"), has brought a thirteen-count complaint against defendants Williams Staffing, LLC, a Delaware corporation doing business as Staffing Network, Inc., an Illinois corporation ("Staffing Network"), and the following the former employees of plaintiff: Antwan Patton ("Patton"), John Nargan ("Nargan"), Ray Castro ("Castro"), Frank McCumber ("McCumber"), and James Schlicher ("Schlicher") (collectively, "the the former employees").*fn1

Plaintiff alleges the following claims against Staffing Network: tortious interference with contractual relations (Count I); tortious interference with prospective business relations (Count II); aiding and abetting breach of fiduciary duty (Count IV); misappropriation of trade secrets (Count V); unfair competition (Count VI); tortious interference with employment relationship (Count VII); and violation of the Uniform Deceptive Trade Practices Act (Count VIII). Plaintiff alleges the following claims against the former employees: breach of fiduciary duty (Count III); misappropriation of trade secrets (Count V); and breach of contract (Counts IX-XIII). Defendants have filed a motion to dismiss for failure to state a claim pursuant to Fed. R. Civ. P. 12(b)(6). For the reasons set forth below, defendants' motion is granted in part and denied in part.

FACTS

For purposes of a motion to dismiss, the court accepts the factual allegations of the complaint as true and draws all reasonable inferences in favor of plaintiff. See Travel All Over the World, Inc. v. Kingdom of Saudi Arabia, 73 F.3d 1423, 1428 (7th Cir. 1996). Plaintiff and Staffing Network do business in the competitive temporary manual labor staffing industry. Plaintiff operates in forty-six states, Puerto Rico, Canada, and the United Kingdom. The former employees signed comparable employment contracts with plaintiff that included nonsolicitation,*fn2 noncompetition,*fn3 and nondisclosure*fn4 restrictive covenants. Each contract states that it "shall be governed and construed in accordance with the laws of the State of Washington."

Plaintiff alleges that Staffing Network, a newer company to the temporary manual labor staffing business, hired the former employees, who were all management-level employees of plaintiff, and others who previously worked for plaintiff Plaintiff claims that in their managerial positions, the former employees gained access to confidential information and trade secrets*fn5 that plaintiff had spent a "substantial amount of time and money" developing. Plaintiff asserts that it provides confidential information and trade secrets to its employees and agents only as necessary, and that it takes various precautions, including the use of restrictive covenants, to protect the information from its competitors.

According to plaintiff, both during and after the time the former employees' worked for plaintiff, they attempted to recruit a number of plaintiffs other employees to work for Staffing Network. Staffing Network allegedly also had the former employees and other of plaintiffs employees steal or attempt to steal personnel files and other records from plaintiff Additionally, plaintiff claims that Castro is employed three blocks from his former office in violation of the restrictive covenant's ten-mile radius work limitation. Other of the former employees — McCumber, Castro, and Patton — are accused of soliciting plaintiffs customers for the benefit of Staffing Network, either during or after their employment with plaintiff. Finally, plaintiff alleges that Patton disparaged plaintiff to plaintiffs customers in order to obtain those customers' business for Staffing Network. In sum, plaintiff alleges that Staffing Network induced the former employees to breach their employment contracts with plaintiff, that the breach of those contracts harmed plaintiff, and that Staffing Network and the former employees illegally used plaintiffs trade secrets to the benefit of Staffing Network.

LEGAL STANDARDS

In ruling on a motion to dismiss for failure to state a claim, the court considers "whether relief is possible under any set of facts that could be established consistent with the allegations." Bartholet v. Reishauer A.G., 953 F.2d 1073, 1078 (7th Cir. 1992). A claim may be dismissed only if it is beyond doubt that under no set of facts would the plaintiffs allegations entitle him to relief. Conley v. Gibson, 355 U.S. 41, 45-46 (1957); Travel All Over the World, 73 F.3d at 1429-30. The purpose of a motion to dismiss is to test the sufficiency of the complaint, not to decide its merits. See Gibson v. City of Chicago, 910 F.2d 1510, 1520 (7th Cir. 1990).

DISCUSSION

I. Enforceability of the Employment Contracts

Before the court can address defendants' arguments for dismissal of each of the individual counts in the complaint, the court must first address defendants' contention that the employment contracts between plaintiff and the former employees are overbroad and therefore unenforceable. The parties dispute which state's law applies, however. Plaintiff notes that the contracts dictate that Washington law governs; defendants argue that Illinois choice of law analysis requires the court to apply Illinois law.

A. Choice of Law Analysis-Contractual Provision

In diversity cases, the court applies the choice of law doctrines of the state in which the court sits (in this case Illinois). See Echo, Inc. v. Whitson Co., 52 F.3d 702, 706 (7th Cir. 1995) (citing Klaxon v. Stentor Electric Mfg. Co., 313 U.S. 487 (1941)). Under Illinois law, a court will enforce a contractual choice of law provision unless the law to be applied is "repugnant to a strong and fundamental policy of Illinois" or there is no relationship between the parties and the state whose law is to be applied.*fn6 ISC-Bunker Ramo Corp. v. Altech, Inc., 765 F. Supp. 1310, 1335 (N.D. Ill. 1990); Curtis 1000, Inc. v. Seuss, 843 F. Supp. 441, 445 (C.D. Ill. 1994) (citing Potomac Leasing Co. v. Chuck's Pub. Inc., 509 N.E.2d 751 (Ill. App. Ct. 2d Dist. 1987)). The latter exception does not apply in the instant case because plaintiff is a Washington corporation, indicating that there is a relationship between the parties and Washington law. See ISC-Bunker Ramo, 765 F. Supp. at 1315. Thus, the court must now consider whether Washington law is so repugnant to a strong Illinois public policy that the court should not honor the choice of law provision in the employment contracts.

Defendants argue that Washington law is repugnant to Illinois public policy because Washington law employs a more liberal level of scrutiny to restrictive covenants than Illinois law. It is true that Illinois law disfavors private covenants restraining trade, and as a result Illinois courts carefully scrutinize such provisions to ensure that they are reasonable and not contrary to public policy. See Peterson-Jorwic Group, Inc. v. Pecora, 586 N.E.2d 676, 677 (Ill. App. Ct. 1st Dist. 1991). Washington courts take the same approach, however. See Sheppard v. Blackstock Lumber Co., 540 P.2d 1373, 1375-76 (Wash. 1975) (recognizing that covenants that partially restrain trade are valid only if reasonable); Wood v. May, 438 P.2d 587 (Wash. 1968) (addressing whether restrictive covenant is void due to public policy concerns).

Further, both Illinois and Washington courts consider the same factors when determining the enforceability of a restrictive covenant. They consider its reasonableness, using such factors as area, time, scope, and the effects on the covenantee and the public. See, e.g., ISC-Bunker Ramo, 765 F. Supp. at 1315, 1335-36; Lawrence & Allen v. Cambridge Human Resource Group, 685 N.E.2d 434, 441 (Ill. App. Ct. 2d Dist. 1997); Perry v. Moran, 748 P.2d 224 (Wash. 1987) (considering area and time restrictions as well as scope), modified on other grounds, 766 P.2d 1096 (Wash. 1989) (altering determination of the reasonableness of liquidated damages); Wood, 438 P.2d at 589 (considering effect on covenantee, public, and employer); Lebrer v. Washington, Dent. of Social 7 Health Servs., 5 P.3d 722, 725 (Wash. App. Ct. Div. 3 2000) (applying Perry factors).

Also, both Illinois and Washington courts will, under some circumstances, modify a fair restrictive covenant to the extent it is overbroad-though Washington courts may do so more willingly than Illinois courts. Compare, e.g., House of Vision, Inc. v. Hiyane, 225 N.E, 2d 21, 25 (Ill. 1967) ("[W]hile we do not hold that a court of equity may never modify the restraints embodied in a restraint . . . and enforce them as modified, the fairness of the restraint initially imposed is a relevant consideration to a court of equity."), cited in Eichmann v. National Hosp. & Health Care Servs., 719 N.E.2d 1141, 1149 (Ill. App. Ct. 1st Dist. 1999), with Sheppard, 540 P.2d at 1377 (stating that restrictive covenants that are reasonable and lawful are enforced in full and allowing modifications so long as doing so does not bring"injury to the public [or] . . . injustice to the parties").

Defendants argue that Washington law is repugnant to Illinois public policy because the laws of the two states could produce different outcomes in the instant case with regard to the enforceability of specific provisions in the restrictive covenants. Even if defendants were correct, the Seventh Circuit has held that that fact alone does not carry the day. Vencor, Inc. v. Webb, 33 F.3d 840, 844-45 (7th Cir. 1994) (noting that even if Illinois law dictates a different outcome on a particular question than the law of the state designated applicable by the employment contract, that difference does not require the court to find the other state's law "so odious that a court will not respect the parties' election to be governed by" it). Further, Illinois courts have held that "a court should not refuse to apply the law of a foreign state, however unlike its own, unless it is contrary to pure morals and abstract justice, or unless the enforcement would be of evil example and harmful to its people." Potomac Leasing, 509 N.E.2d at 754.

Thus, although there may be slight differences between the approach of Illinois courts and Washington courts regarding restrictive covenants, and even if those differences are outcome determinative with regard to specific provisions, the court finds that Washington law is not so repugnant to a strong and fundamental policy of Illinois that the court cannot abide by the parties' contractual choice of law provision. This finding is shared by Judge Marovich, who held: "Washington law concerning the enforcement of a confidentiality and restrictive covenant, although not identical to Illinois law, is entitled to be enforced under Illinois conflicts of law principles. Washington law is not repugnant to a fundamental policy of Illinois." ISC-Bunker Ramo, 765 F. Supp. at 1335-36 (citation omitted). Thus, the court will apply Washington law to determine whether the employment contracts are enforceable.

B. Defendants' Contentions that the Employment Contracts are Unenforceable

Defendants argue that the restrictive covenants are overbroad and therefore unenforceable because they contain unreasonable time, geographic, and scope limitations, and also because of their effect on the former employees and the public.

In determining the validity of the restrictive covenants under Washington law, the court considers whether the restrictions: (1) are necessary for the protection of plaintiffs business and goodwill; (2) do not impose any greater restraint on the former employees than is reasonably necessary to protect plaintiff; and (3) "whether the degree of injury to the public is such loss of the service and skill of the former employees as to warrant nonenforcement of the covenant." Perry, 748 P.2d at 228 (citing Racine v. ...


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