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Noncompete Agreement Interpretation and Enforceability

Margherita M. Albarello

Seventh Circuit Court of Appeals (Illinois, Indiana, Wisconsin) Rules that Company’s Distributor Is Not its “Competitor” in E.T. Products, LLC v. D.E. Miller Holdings, Inc., No. 16-1204 (Sept. 20, 2017)

November 1, 2017

What is a business “competitor”?  What does “indirectly” mean?  Is the difference between “and” and “or” a big deal?  Are you competing with the buyer of your business by leasing operation space to its competitor?  In E.T. Products, the Indiana trial court and the 7th Circuit weighed in on all these issues.

Background:

Doug Miller and his son Tracy owned two Indiana-based companies, E.T. Products and Petroleum Solutions.  The former blended and sold fuel additives.  The latter blended and sold lubricants.  The latter also had a few customers to whom it sold fuel additives supplied by E.T. Products, making Petroleum Solutions E.T.’s distributor.  After 13 or so years in operation, Miller put both companies up for sale.  In January 2011, Miller sold E.T. to an investment group for $5 million.  Ancillary to the sale contract, Doug and Tracy signed 5-year noncompete agreements covering the continent of North America that prohibited them from “directly or indirectly, as agent, employee, consultant, distributor, representative, equity holder, manager, partner, or in any other capacity, … assist[ing] any Person, … that engages in or owns, … any venture that directly or indirectly engages in the Business.”  The “Business” was defined in the sales contract as “the business of blending, packaging, marketing and selling chemical fuel additive products, with its primary focus on diesel fuel additives.”

In January 2012, Miller sold Petroleum Solutions to an individual named Kuhns.  Doug was generous to Kuhns.  He provided low-interest financing for the purchase; a lease for the land on which the business was operated; training in lubricant blending and consulting help as Kuhns learned the business; and Tracy helped by training Kuhns on the company’s computer programs for a few months after the sale.  Throughout most of 2012, Petroleum Solutions continued to be a customer and distributor of E.T. fuel additive products.   In late 2012, E.T. presented Kuhns with a non-compete agreement which Kuhns refused to sign. Presumably, E.T. wanted Kuhns to distribute only E.T. products. In December 2012, E.T. stopped supplying fuel additives to Petroleum Solutions.  Petroleum Solutions found a new supplier. When Doug learned that E.T. severed its relationship with Petroleum Solutions, Kuhns and the Millers parted ways.

E.T. sued, alleging that the generous financing and lease terms, and the Millers’ assistance to Kuhns during 2012, breached the noncompete agreement.  Miller, in turn, argued that the noncompete agreements were overly broad and unenforceable.  On motions for summary judgment, the Indiana trial court (applying Indiana law) ruled that the agreements were enforceable but that the Millers had not breached them.  The court found that all of the complained-of conduct occurred while Petroleum Solutions sold only E.T. fuel additive products and that acting as E.T.’s distributor did not violate the agreements.  The court also strictly construed the “in the Business” term in the noncompete agreements against E.T., finding that by the use of “and” in the definition, unless Petroleum Solutions engaged in all of the same aspects of the additive business as E.T. Products, it was not competing with E.T.

The 7th Circuit affirmed the decision, holding that “a firm whose sole conduct in the relevant market consists of distributing one manufacturer’s product plainly isn’t that manufacturer’s competitor.  The 7th Circuit called E.T.’s argument that the Millers’ assistance to Petroleum Solutions was a form of “indirect” involvement in the industry “a bit much.”

The 7th Circuit went on to discuss whether Petroleum Solutions became E.T.’s competitor once it began blending its own fuel additives and distributing additives from other suppliers:

The [trial court] thought that the noncompete wasn’t triggered unless Petroleum Solutions engaged in all the same aspects of the additive business as E.T. Products:  blending, packaging, marketing, and selling.  That’s not correct.  Two companies need not perfectly mirror each other before they are considered competitors, and the inclusion of the phrase “directly or indirectly” in the noncompete was designed to preclude precisely this kind of narrow construction.  That language means, if nothing else, that complete overlap isn’t required.

The 7th Circuit also found that Miller did not breach the noncompete by failing to revoke the property lease:

Taking affirmative steps to lease to a competitor is quite different from what Doug Miller did here.  Recall that Kuhns and Doug entered into the lease agreements in January 2012.  At that point Petroleum Solutions and E.T. Products were business partners.  …  On E.T. Products’s reading of the noncompete, Doug was required to break the existing lease with Kuhns – itself a breach of contract – once Petroleum Solutions became E.T. Products’s competitor.  That’s an overbroad and unreasonable reading of the agreement.

Takeaways:

  • This noncompete agreement arose in the context of the sale of a business, but the analysis of who is a “competitor” applies in the context of employment agreements, as well.
  • Be mindful of how you define the “business” you seek to protect from competition, especially when the noncompete agreement is in the context of an employment contract.  Courts dislike these agreements and will look for reasons to find the noncompete agreement overly broad and unenforceable. But even in the context of a sale of a business, Illinois courts are loathe to enforce an overly broad covenant.
  • Be mindful of the use of the word “and,” and “or.”  Consider using “and/or.”
  • In many jurisdictions (including Indiana), the law requires covenants, even in the sale of business context, to be “strictly construed against the covenantee” or the preparing party. Consider stating that the language in the noncompete agreement is chosen by the parties to express their mutual intent and that no rule of strict construction will be applied against either party.

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