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Zep, Inc. v. First Aid Corp.

March 19, 2010

ZEP, INC., PLAINTIFF,
v.
FIRST AID CORP., D/B/A 1ST AYD CORP. AND WILLIAM CARLYON, STEVEN BARTHOLOMEW, EDWARD BATES, GERALD GREIL, AND JENNIE THOMPSON, DEFENDANTS.



The opinion of the court was delivered by: Honorable David H. Coar

MEMORANDUM OPINION AND ORDER

Zep, Inc. ("Zep") brings a three count complaint against Edward Bates ("Bates"), Steven Bartholomew ("Bartholomew"), William Carlyon ("Carlyon"), Jennie Thompson ("Thompson"), collectively the "individual defendants", and First Aid Corporation ("First Aid").*fn1 Count I of the complaint is a breach of contract claim against the individual defendants. Count II is a claim for misappropriation of trade secrets under the Illinois Trade Secrets Act ("ITSA") against all defendants. Count III is a tortious interference with contract claim against First Aid. Before the Court are motions to dismiss filed by Bates [Dkt. 88], Bartholomew [Dkt. 91], Carlyon [Dkt. 94], Thompson [Dkt. 97]; and First Aid [Dkt. 100]. For the reasons stated below, the motion is GRANTED in part, and DENIED in part. All counts against Bates, Bartholomew, and Thompson are dismissed for lack of personal jurisdiction. The Court denies the motions to dismiss filed by Carlyon and First Aid.

BACKGROUND

Zep is a Georgia-based corporation selling industrial cleaning products. Zep formerly employed the individual defendants as sales representatives before they were subsequently hired by First Aid, a direct competitor based in Illinois. Allegedly, during their employment with Zep, the individual defendants had access to the company's confidential information and trade secrets, including the identities of customers; knowledge of customer needs, buying history, and buying patterns; customer contact lists; supplier lists; competitive pricing information; and training provided to sales representatives. In their employment contracts, known as Sales Representative's Exclusive Account Agreements, the individual defendants each agreed to non-disclosure, non-solicitation, non-recruitment, and non-compete covenants.*fn2 They also promised to return all materials relating to their work with Zep upon termination of their employment.

Zep alleges that First Aid, with full knowledge of these agreements, intentionally induced the individual defendants to breach them. During their employment with First Aid, the individual defendants have allegedly used or disclosed Zep's trade secrets and confidential information, solicited client accounts previously accessed during their time with Zep, induced or attempted to induce employees of Zep to terminate their employment, and retained Zep's confidential information and trade secrets. Zep has alleged damages arising from these acts.

STANDARD OF REVIEW

The purpose of a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) is to test the sufficiency of a complaint. Weiler v. Household Finance Corp., 101 F.3d 519, 524 n. 1 (7th Cir. 1996). To survive the motion, a complaint need only describe the claim in sufficient detail to give the defendant fair notice of the claim and its basis. Fed. R. Civ. P. 8(a)(2); Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555, (2007). A plaintiff's factual allegations must suggest a plausible, rather than merely speculative, entitlement to relief. Tamayo v. Blagojevich, 526 F.3d 1074, 1083 (7th Cir. 2008); see also Ashcroft v. Iqbal, 129 S.Ct. 1937, 1949 (2009); Twombly, 550 U.S. at 555. In ruling on a motion to dismiss, the court must construe the complaint in the light most favorable to the plaintiff, accepting as true the well-pleaded allegations, and drawing all reasonable inferences in plaintiff's favor. Tamayo, 526 F.3d at 1081.

ANALYSIS

I. Personal Jurisdiction -- Bates, Bartholomew, & Thompson

Typically, actions against former employees for breach of restrictive covenants are filed in the employer's home state, because that is where the defendant was employed, where the relevant contracts were negotiated or signed, or where continuing obligations are owed. See, e.g., Kelly Services, Inc. v. Noretto, 495 F.Supp.2d 645, 653-55 (E.D. Mich. 2007); FBR Capital Markets & Co. v. Short, No. 09 CV 1016, 2009 WL 3254458, at *3 (E.D.Va. 2009); Crossfield Hastech, Inc. v. Harris Corp., 672 F.Supp. 580. 585-88 (D.N.H. 1987). Likewise, lawsuits for misappropriation of trade secrets are often brought in the injured party's home state, as that is where the effect of the harm is usually suffered. See, e.g., Riddell v. Monica, No. 03 C 3309, 2003 WL 21799935, at *3-4 (N.D. Ill. July 25, 2003); Int'l Molding Machine Co. v. St. Louis Conveyor Co., No. 01 C 8305, 2002 WL 1838130, at *4 (N.D. Ill. Aug. 12, 2002).Rather than file this suit in its home state of Georgia, however, Zep has elected to litigate in Illinois. Bates, Bartholomew, and Thompson ("Defendants"), residents of Michigan and Ohio, move to dismiss all counts against them on the grounds that this Court lacks personal jurisdiction over them.

In a diversity action, a federal district court sitting in Illinois may only exercise personal jurisdiction where an Illinois state court could exercise such jurisdiction. Hyatt Intl. Corp. v. Coco, 302 F.3d 707, 713 (7th Cir. 2002); RAR, Inc. v. Turner Diesel, Ltd., 107 F.3d 1272, 1275 (7th Cir. 1997). The Illinois long-arm statute permits Illinois courts to exercise personal jurisdiction up to the limits of the United States Constitution. Hyatt, 302 F.3d at 714-15; 735 ILCS 5/2-209 (2008). Therefore, this Court need only inquire whether contacts between the Defendants and Illinois satisfy due process under the state and federal constitutions. See Bombliss v. Cornelsen, 824 N.E.2d 1175, 1179 (Ill. App. Ct. 2005).

The Fourteenth Amendment Due Process Clause requires that a defendant have "minimum contacts" within a state in order for its courts to assert jurisdiction, so as not to offend "traditional notions of fair play and substantial justice." Int'l Shoe Co. v. Wash., 326 U.S. 310, 316 (1945). Where a defendant has deliberately "engaged in significant activities within a State, or has created continuing obligations between himself and residents of the forum," he has "purposefully avail[ed] [himself] of the privilege of conducting activities within the forum State, thus invoking the benefits and protections of its laws." Burger King, 471 U.S. at 474-76 (quoting Hanson v. Denckla, 357 U.S. 235, 253 (1958)) (internal citations and quotation marks omitted). Due process is respected because such an individual "should reasonably anticipate being haled into court [in the forum state]." Id. at 474 (quoting World-Wide Volkswagen Corp. v. Woodson, 444 U.S. 286, 297 (1980)).

Depending on the relationship between the contacts and the facts forming the basis for the lawsuit, a court may assert "general" or "specific" jurisdiction over defendants. Int'l Medical Group, Inc. v. American Arbitration Assoc., Inc., 312 F.3d 833, 846 (7th Cir. 2002). General jurisdiction may be exercised if the defendant's contacts neither arise out of nor are related to the suit, yet the defendant has "continuous and systematic general business contacts" in the forum.

Id. (citing RAR, 107 F.3d at 1277). In contrast, specific jurisdiction may exist where the lawsuit is related to or arises from the defendant's contacts with the forum state. See id. Given the limited amount of contacts alleged by Zep, the Defendants' specific personal jurisdiction is at issue.

Specific personal jurisdiction requires a certain degree of relatedness between a defendant's contacts and the subject of the suit. See RAR, 107 F.3d at 1277. The Seventh Circuit has held that, for the purpose of determining specific jurisdiction, "the action must directly arise out of the specific contacts between the defendants and the forum state." RAR, 107 F.3d at 1278 (quoting Sawtelle v. Farrell, 70 F.3d 1381, 1389 (1st Cir.1995) (emphasis in original)). "Specific jurisdiction is not appropriate 'merely because a plaintiff's cause of action arose out of the general relationship between the parties.' " Id. Accordingly, the Court must consider whether Zep's claims "directly arise" out of Defendants' alleged contacts with the state of Illinois.

A. Breach of Contract

Defendants have not provided affidavits disputing the jurisdictional facts as alleged in Zep's Complaint. The Court therefore accepts as true all allegations in plaintiff's complaint. See Fed. R. Civ. P. 12(b)(2). Zep alleges that, after signing non-disclosure, non-solicitation, non-recruitment, non-compete, and promise-to-return agreements with Zep, Defendants entered into employment contracts with First Aid, whose principal place of business is in Elgin, Illinois. Zep further alleges that, at the direction of their subsequent employer, Defendants disclosed confidential information and engaged in other activities in direct violation of their contractual obligations with Zep.

Certainly, Defendants have availed themselves of the privilege of conducting activities in Illinois by accepting and maintaining employment with an Illinois-based company. Stated differently, their employment created "continuing obligations" between themselves and First Aid, a company principally operating out of Illinois. Yet, "in a breach of contract case, it is only the 'dealings between the parties in regard to the disputed contract' that are relevant to minimum contacts analysis." RAR, 107 F.3d at 1278 (citing Vetrotex Certainteed Corp. v. Consolidated Fiber Glass Prods. Co., 75 F.3d 147, 153 (3d Cir. 1996)) (italics in original). Thus, if the covenants at issue had been negotiated between Defendants and First Aid as terms of their employment, their employment contracts would constitute contacts vesting personal jurisdiction in Illinois.

But Defendants and Zep are the only parties to the disputed contracts in the instant case. They presumably negotiated and signed their agreements in Georgia, or perhaps in Defendants' respective home states. Regardless of the actual location, Zep never alleges that any part of the dealings related to Defendants' agreements to return materials or non-disclosure, non-solicitation, non-recruitment, and non-compete covenants occurred in Illinois.

Zep places great emphasis on allegations that Defendants violated their agreements "at the direction" of First Aid, "in concert" with First Aid, "on behalf" of First Aid, and "in conspiracy" with First Aid. In a breach of contract action, minimum contacts analysis contemplates "the parties' prior negotiations and contemplated future consequences, along with the terms of the contract and the parties' actual course of dealing...." Burger King, 471 U.S. at 479 (internal quotation marks omitted). The location of the entity allegedly facilitating, inducing, or otherwise benefitting from a defendant's breach is not a consideration. See, e.g., Citadel Group Ltd. v. Washington Regional Medical Center, 536 F.3d 757, 762-63 (7th Cir. 2008) (considering who initiated the transaction, where the contract was entered into, where the performance of the contract was to take place, where the contract was negotiated, and where continuing obligations were owed). Moreover, despite peppering its complaint with references to a civil conspiracy, Zep does not specifically allege a conspiracy claim, nor has it argued or adequately pled a conspiracy theory of jurisdiction. See Olson v. Jenkins & Gilcrist, 461 F.Supp.2d 710, 725 (N.D. Ill. 2006) (listing cases in this district requiring prima facie factual showing of conspiracy, specific facts warranting the inference that defendant was a member, and a showing that the instate conspirator committed a tortious act in furtherance of the conspiracy); Ahmed v. Quinn, No. 96-2796, 1997 WL 471335, at *3 (7th Cir. Aug.13, 1997) (nonprecedential disposition) (holding that, to demonstrate a prima facie case of personal jurisdiction based on conspiracy, plaintiff must allege some facts from which the court can find a meeting of the minds among the defendants).

To be sure, the relationship between a defendant's instate activity and the anticipated performance or breach of a contract is a relevant factor. See Citadel, 536 F.3d at 762-63; Phillips Exeter Acad. v. Howard Phillips Fund, Inc., 196 F.3d 284, 289 (1st Cir. 1999); Papachristou v. Turbines Inc., 902 F.2d 685, 686 (8th Cir. 1990) (en banc); Jones v. Petty-Ray Geophysical, Geosource, Inc., 954 F.2d 1061, 1068 (5th Cir. 1992). Defendants' restrictive covenants bound their actions within certain "territories," which conceivably encompassed Illinois. But the complaint does not specify one way or the other. Indeed, Zep's exhibits indicate that Defendants' respective "territories" coincided with their states of residence.

In addition, Defendants allegedly breached their restrictive covenants through acts of disclosure, solicitation, recruitment, misappropriation, or use of confidential information and trade secrets.*fn3 Zep never alleges where any of these acts took place. The omission further undermines Zep's efforts to secure jurisdiction. See Arnold v. Goldstar Financial Sys., Inc., No. 01 C 7694, 2002 WL 1941546, at *5 (N.D. Ill. Aug. 22, 2002) (citing Madison Consulting Group v. South Carolina, 752 F.2d 1193, 1202-03 (7th Cir. 1990)) (holding that active solicitation of a forum resident customer, resulting in a single agreement, was sufficient to establish personal jurisdiction); Teksystems, Inc. v. Modis, Inc., No. 08 C 5476, 2008 WL 5155667, at *3 (N.D. Ill. Dec. 5, 2008) (holding that recruitment of plaintiff's forum resident employee from plaintiff's forum state office, to work in ...


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