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7th Circuit: Ex-owner did not breach noncompete clause by assisting distributor

September 20, 2017

The 7th Circuit Court of Appeals has settled a dispute between two competing companies previously owned by the same man, finding the former owner did not breach the noncompete clause by providing assistance to one of the companies.

Doug Miller built his career as owner of two Bremen-based businesses: E.T. Products, which sold fuel-additives, and Petroleum Solutions, which sold lubricants and supplied customers with E.T. fuel additives. When Miller decided to retire, a group of investors led by Tom Blakemore purchased E.T. and asked Miller and his son, Tracy, to sign five-year noncompetition agreements that prohibited them from directly or indirectly assisting anyone engaged in the same industry as E.T. anywhere in North America.  

Miller then sold Petroleum Solutions to John Kuhns and provided low-interest financing for the purchase, a lease for the business’ land, training and consulting. Miller’s son also assisted in the training.

E.T. continued to serve as Petroleum’s supplier until 2012, when Blakemore fired one of its product salesman. Upon learning of the termination, Miller connected the salesman to Kuhns, who hired him to work for Petroleum. E.T. eventually sued the salesman and Petroleum, claiming he was working for Petroleum in violation of the salesman’s noncompete clause.

Petroleum then found a new supplier, and when Miller learned of the severed relationship between his former companies, he told Kuhns he could no longer assist him under his noncompetition agreement. Kuhns’ lease of the property continued, but all other assistance from the Millers ceased.

Nevertheless, litigation ensued between the Millers and E.T., with the Millers filing a state suit accusing E.T. of violating a release and with E.T. filing a federal suit accusing the Millers of breach of the noncompetition agreement. The cases were consolidated in federal court to the case of E.T. Products, LLC v. D.E. Miller Holdings, Inc., et al., 16-1204, and both parties filed cross-motions for summary judgment.

In a split decision, the district court judge found in favor of the defendants in each case, allowing the Millers to prevail over E.T. in the suit for breach of the agreement, the subject of the instant appeal. Though the district judge rejected the Millers’ argument that the agreement was overbroad and unenforceable, he also found the evidence conclusively established the Millers did not breach the agreement because Petroleum was not a direct or indirect E.T. competitor when the assistance was offered.

The 7th Circuit Court of Appeals affirmed that decision in a Wednesday opinion, with Judge Diane Sykes writing the agreement, particularly the geographic area covering all of North America, was enforceable because Blakemore stated his intent to expand E.T. across the continent, and then succeeded in doing so by expanding to all 50 states and seven Canadian provinces. Further, “Doug spent decades building his reputation and…grew the company into 13 states, so the scope of the business corresponded to significant goodwill,” Sykes said. Those factors, coupled with the fact that the Indiana Supreme Court has found a five-year period to be reasonable, finds in favor of enforceability, she said.

But the 7th Circuit agreed the Millers had not violated the agreement because Petroleum served as E.T.’s distributor, not its competitor, while the Millers provided assistance to Kuhns. And even though the Millers continued to allow Kuhns to lease the property once the two companies severed their relationships, the court found the noncompete agreement cannot be read to cover the lease.

 

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