Opinion
Civil Action No. 3:00CV-548-H
May 10, 2001
MEMORANDUM OPINION
Defendants Kevin Stiff and Bradley Hamilton have moved for summary judgment on all claims. Papa Johns International, Inc., sued Stiff and Hamilton for allegedly violating the terms of their agreements not to compete with Papa Johns or disclose proprietary information. Stiff and Hamilton argue that their employment with Pizza Magia International, LLC, after their relationship with Papa Johns does not violate the agreements because the terms they allegedly violated were unreasonable and the agreement is therefore unenforceable.
Papa Johns has also sued Pizza Magia and PMFS, LLC, for tortiously interfering with these contracts and benefitting from the proprietary information allegedly disclosed inappropriately. The parties disagree vehemently about the relevance of Pizza Magia's current business practices. As an initial matter, the methods of operation of Pizza Magia are largely irrelevant to this case unless they can be traced back to inappropriate disclosure of proprietary information belonging to Papa Johns. Papa Johns' trade dress claims depend on, obviously, the market appearance of the final product and will not depend on, for instance, whether the dough-slappers work on fresh or previously frozen dough. The unlawful link from Papa Johns to Pizza Magia, Papa Johns claims, goes through Stiff and Hamilton and for that reason, the Court addresses their claims initially.
I.
Stiff worked as an operating partner for Train Stop, a Papa John's franchisee in Las Vegas, beginning in 1995. After a transfer in majority ownership, the owners, including Stiff, signed an owner agreement with, among other provisions, noncompete and nondisclosure provisions. Stiff left work with Train Stop in January 2000 and began work with Pizza Magia in April 2000. Stiff separated from Pizza Magia in January 2001.
The owner agreement provides that while Train Stop owns any Papa Johns franchises and for two subsequent years, the owners will not engage in any competitive pizza business within ten miles of any Papa Johns business. In addition, the owner agreement prevents the use, at any time, of Papa Johns' operating system, methods of operation, plans, or other proprietary ideas or information. The owner agreement also contained a clause that prohibits Stiff from challenging the reasonableness of the scope and duration of the noncompete and nondisclosure provisions.
Hamilton left work as an area supervisor for Papa Johns in Charlottesville, Virginia in May 1996 to work with an independent franchisee of Papa Johns. In Spring 1997, Papa Johns purchased the franchisee and Hamilton remained employed until August 1998. In September 1999, Pizza Magia, then wholly owned by Hamilton, sold its first pizza. Hamilton currently works as Director of Operations in Lexington, Kentucky for Pizza Magic, a franchisee of Pizza Magia. During his work with Papa Johns, Hamilton signed two noncompete and nondisclosure agreements, one in June 1995 and the other in April 1997. The 1995 agreement provides that Hamilton cannot work in the pizza business within ten miles of a Papa Johns location and cannot, at any time, disclose any proprietary information. The 1997 agreement reiterates the perpetual prohibition on disclosing confidential information of Papa Johns. Both agreements contain clauses preventing Hamilton from challenging the reasonableness of the agreement.
Summary judgment is appropriate if no genuine issue of material fact exists and the moving party is entitled to a judgment as a matter of law. Fed.R.Civ.Pro. 56(c); Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). A dispute is genuine when "the evidence is such that a reasonable jury could return a verdict for the non-moving party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). The issue is whether the evidence submitted presents a sufficient disagreement about the material facts so that submission to a jury is necessary, or whether the evidence is so one-sided that a party must prevail as a matter of law. Id. at 251-52.
II.
This Court, exercising supplemental jurisdiction over the state law claims, must apply Kentucky law, including Kentucky's choice of law rules. Menuskin v. Williams, 145 F.3d 755, 761 (6th Cir. 1998). For actions arising out of contract, Kentucky has adopted the most significant relationship test of § 188 of the Restatement (Second) of Conflict of Laws. Lewis v. American Family Ins. Group, 555 S.W.2d 579, 581-82 (Ky. 1977). The Kentucky Supreme Court has applied this test even where the contract at issue contains a choice of law clause, defying the strong deference given by the Second Restatement to such clauses. See Breeding v. Massachusetts Indem. and Life Ins. Co., 633 S.W.2d 717 (Ky. 1982). For the breach of contract actions, this Court will apply the Second Restatement's most significant relationship test to determine the applicable law.
Stiff signed the Owner Agreement in July 1997 as an owner of Train Stop, allegedly a Papa Johns franchisee in Clark County, Nevada. The owners listed their individual addresses in Kentucky, Nevada, and North Carolina. The owners covenanted that Train Stop was "duly organized and validly existing in good standing under the laws of the commonwealth of Kentucky" and agreed that "to the extent required by the laws of the state in which the Restaurant is located, the duration or the geographical areas . . . shall be deemed amended." The Owner Agreement contains no traditional choice of law clause and does not indicate where (or when) it was signed, where the parties negotiated the contract, where the agreement was to be performed, or the place of business or place of business of the parties. Given the near-absolute absence of information, this Court cannot conclusively determine whether Kentucky or Nevada law applies to this contract.
Hamilton's 1995 agreement contains a choice of law clause that selects Kentucky law. Like Stiff's agreement, however, the agreement is silent on the place of contracting, negotiating, or performing the contract and does not identify his domicile or residence. The 1997 agreement is likewise silent on the place of contracting, negotiating, and performing and similarly fails to identify Hamilton's domicile or residence. Though the choice of law clause selection likely governs the applicable law, without additional information, this Court cannot make that determination with absolute confidence. In addition, because Hamilton alleges that the 1997 agreement should fail due to lack of consideration, this Court will only examine the 1995 agreement.
Because of the uncertainty regarding the applicable law, this Court will only consider the nondisclosure elements of the agreements, since the result will be the same regardless of which state's law applies. As a general rule, courts analyze noncompete and nondisclosure agreements under two different standards. While noncompete agreements are, by definition, restraints of trade that receive close scrutiny from courts, nondisclosure agreements usually do not create the same types of harms and therefore receive greater deference from courts. See, e.g., Eden Hannon Co. v. Sumitomo Trust Banking Co., 914 F.2d 556, 561-62 (4th Cir. 1990); Chemimetals Processing, Inc. v. McEneny, 476 S.E.2d 374, 376-77 (N.C.App. 1996). Time and geographic restrictions which would be reasonable, under any standard, for nondisclosure agreements would frequently be unreasonable when applied to a noncompete agreement. See, e.g., Zep Mfg. Co. v. Harthcock, 824 S.W.2d 654, 661-63 (Tex.App. 1992); 1st Am. Sys., Inc. v. Rezatto, 311 N.W.2d 51 (S.D. 1981) (holding noncompete clause void but remanding the question of the validity of the nondisclosure clause). Indeed, the nondisclosure agreements at issue only concern trade secret and proprietary information which, therefore, contain implicit temporal limitations. As the information loses its proprietary status, the nondisclosure agreements no longer reach that information. See, e.g., Henry Hope X-ray Prods., Inc. v. Marron Carrel, Inc., 674 F.2d 1336, 1342 (9th Cir. 1982). While not all states accord nondisclosure agreements such deference, this Court agrees with the majority view that nondisclosure agreements implicate far fewer public policy concerns and should receive more deferential review. See Roger G. Milgrim, Milgrim on Trade Secrets § 4.02[1][d][vi][C] (2001).
Finally, both of the agreements at issue contain enforceability clauses that render the rest of the agreement valid even if part of it is determined to be unreasonable. Whether the agreements' noncompete restrictions are ultimately deemed to be reasonable does not affect the enforceability of the nondisclosure agreements. The two clauses are independent, seek to protect against different harms, and are therefore separately enforceable. See, e.g., Smith v. Corbin, 123 S.W. 277, 280 (Ky. 1909) (holding "where there are contained in the same instrument distinct engagements or covenants by which a party binds himself to do certain acts, some of which are legal and some illegal, the performance of those which are legal may be enforced, although the performance of those which are illegal may not"). Against this backdrop of general principles, the Court turns to the law of the individual states.
III.
Kentucky courts have yet to address nondisclosure agreements, but their treatment of noncompetition agreement illustrates their consistent deference to the parties' freedom to contract. In Lareau v. O'Nan, 355 S.W.2d 679, 681 (Ky. 1962), Kentucky's highest court held that "the policy of this state is to enforce [noncompetition clauses] unless very serious inequities would result." Starting from such a baseline, this Court determines that Kentucky would recognize nondisclosure agreements that do not have specific time limits because the inequities arising from nondisclosure agreements are far less than those arising from noncompete agreements.
North Carolina expressly allows the enforcement of nondisclosure agreements that are "unlimited as to time and area" if the party seeking enforcement makes a showing that it protects a legitimate business interest. Chemimetals Processing, Inc. v. McEneny, 476 S.E.2d 374, 377 (N.C.Ct.App. 1996). At this preliminary juncture, Papa Johns has more than met its burden of showing a legitimate business interest. As such, this Court determines that the nondisclosure agreement is enforceable under North Carolina law.
Nevada, like Kentucky, has yet to address nondisclosure agreements. Like most states, however, the court balances concerns regarding restraint of trade with the ability of parties to enter binding agreements. See, e.g., Hansen v. Edwards, 426 P.2d 792, 793 (Nev. 1967) (stating "[t]he public has an interest in seeing that competition is not unreasonably limited or restricted, but it also has an interest in protecting the freedom of persons to contract, and in enforcing contractual rights and obligations"). As discussed above, nondisclosure agreements do not necessarily restrain trade and are, in general, viewed with considerable more deference. Given Nevada's adherence to the standard view of agreements regarding restraints of trade and freedom to contract, this Court concludes that the nondisclosure agreements would be valid under Nevada law.
Papa Johns also argues that the agreements themselves contained covenants not to challenge the reasonableness of the restrictions and that those covenants decide the current motions. As a basic matter of law, the individual parties cannot determine what is and is not an unreasonable restraint of trade. That decision is one entrusted to the courts, and not to the litigants. Therefore, this Court gives those clauses no weight in its determination of whether the nondisclosure agreements are enforceable. The Court need not determine the remedy for breach of those covenants, but merely recognizes that those covenants do not bind this Court's determination of reasonableness.
Since this Court determines that the nondisclosure agreements are enforceable under any of the potentially applicable state's laws, this Court will deny the motions for summary judgment on this issue. Obviously, the exact contours of material covered by these nondisclosure agreements has yet to be determined. As the Court discussed in conference, these agreements cannot prevent anyone from using some general information about the pizza industry, but on the other hand, likely prevent the disclosure of closely guarded proprietary information. As this case progresses, this Court will determine the applicable law, specifically define the precise scope of these nondisclosure agreements, and examine any other challenges to their enforceability that arise during discovery.
IV.
The record is not developed sufficiently for the Court to fairly decide the remaining elements of the Defendants' summary judgment motions. The Court simply lacks sufficient information about the underlying events to determine what law to apply and what result arises from the application of the appropriate law. The undeveloped state of the record prevents the Court from dismissing Plaintiff's remaining claims as a matter of law. As discussed in conference, the parties will submit additional briefing on whether the Plaintiffs have stated a trademark claim as a matter of law. When the briefing is concluded, the Court will take up the trademark claims.
The Court will enter an order consistent with this memorandum opinion.
ORDER
Defendants have moved for summary judgment on all claims. The Court currently only considers the claim that the nondisclosure agreements are invalid as a matter of law.
IT IS HEREBY ORDERED that Defendants' motions for summary judgment with regard to the validity of the nondisclosure agreements are DENIED. The Court determines that the nondisclosure portions of Stiff's agreement and Hamilton's 1995 agreement are not invalid as a matter of law.
IT IS FURTHER ORDERED that the remainder of Defendants' motions for summary judgment, except for the trademark claims, are DENIED because this Court lacks sufficient information to address the claims. The Court will address the trademark claims at the completion of the briefing and will turn to further dispositive motions at the completion of discovery.