Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca8-05-01201/USCOURTS-ca8-05-01201-0/pdf.json

Parties Involved:
Efren George Castillo
Appellee
Eloy Castillo
Appellee
DCS Sanitation Management
Appellant
Adolfo Martinez
Appellee

Document Text:

1

The Honorable Laurie Smith Camp, United States District Judge for the

District of Nebraska.

United States Court of Appeals

FOR THE EIGHTH CIRCUIT

___________

No. 05-1201

___________

DCS Sanitation Management, Inc., *

*

Appellant, *

* Appeal from the United States

v. * District Court for the 

* District of Nebraska.

Eloy Castillo; Efren George Castillo; * 

Adolfo Martinez, *

*

Appellees. *

___________

 Submitted: October 14, 2005

 Filed: January 25, 2006

___________

Before RILEY, JOHN R. GIBSON, and COLLOTON, Circuit Judges.

___________

RILEY, Circuit Judge.

DCS Sanitation Management, Inc. (DCS) sued three of its former employees,

Eloy Castillo, Efren George Castillo, and Adolfo Martinez (collectively, former

employees), alleging the former employees breached noncompete agreements. DCS

appeals the district court’s1

 denial of DCS’s motion for a preliminary injunction and

grant of summary judgment in favor of the former employees. We affirm.

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I. BACKGROUND

DCS, a Delaware corporation with its principal place of business in Ohio,

cleans food processing plants in thirteen states, including Nebraska. DCS’s corporate

office in Ohio (1) formulates processes and procedures to improve cleaning crew

efficiency, (2) designs sanitation and safety programs for all cleaning crews,

(3) makes staffing decisions for all cleaning crews, and (4) makes human resource

policies and decisions for all DCS employees. 

The former employees worked for DCS as on-site managers at the Tyson Foods

plant in Dakota City, Nebraska (Tyson plant). The former employees (1) had access

to DCS’s staffing, sanitation, and safety programs, including the allocation and

monitoring of proper chemical dilutions; (2) were responsible for enforcing regulatory

safety requirements and satisfying third party audit requirements; (3) were familiar

with staffing requirements for cleaning the Tyson plant; and (4) had knowledge of the

Tyson plant’s key contacts and business requirements. 

As a condition of employment with DCS, each of the former employees signed

identical employment agreements (Agreements) with DCS. The Agreements

contained the following noncompete provision:

NONCOMPETITION AFTER TERMINATION: For a period of one (1)

year following the date of termination of employment for any reason, I

will not directly or indirectly engage in, or in any manner be concerned

with or employed by any person, firm, or corporation in competition

with [DCS] or engaged in providing contract cleaning services within a

radius of one-hundred (100) miles of any customer of [DCS] or with any

customer or client of [DCS] or any entity or enterprise having business

dealings with [DCS] which is then providing its own cleaning services

in-house or which requests my assistance or knowledge of contract

cleaning services to provide its own cleaning services in-house. In the

event of violation of this covenant, [DCS], in addition to any other rights

and remedies available at law or otherwise, is entitled to an injunction to

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be issued by a court of competent jurisdiction enjoining and restraining

employee from committing any violation of this provision and employee

hereby consents to the issuance of the injunction. 

The Agreements also contained a choice-of-law provision: “APPLICABLE LAW:

This Agreement shall be subject to and interpreted in accordance with the laws of

Ohio.” 

In June 2003, after DCS cleaned the processing side of the Tyson plant for

eighteen years, the Tyson plant solicited bids from competing cleaning companies. As

a result of the bidding process, on September 18, 2003, the Tyson plant selected

Packers Sanitation Services, Inc. (Packers) for the cleaning contract. Packers hired

all of DCS’s employees, including the former employees, and on November 8, 2003,

Packers started cleaning the Tyson plant. 

On May 14, 2004, DCS sued the former employees, alleging (1) breach of the

noncompete agreements, (2) a “substantial probability” the former employees would

disclose DCS’s trade secrets and confidential information, and (3) breach of contract.

DCS sought (1) to enjoin the former employees in accordance with the noncompete

agreements, (2) to enjoin the former employees from disclosing DCS’s trade secrets

and confidential information, and (3) money damages. 

DCS moved for a preliminary injunction, and the former employees moved for

summary judgment. The district court denied DCS’s motion for a preliminary

injunction and granted summary judgment in favor of the former employees,

concluding Nebraska has a materially greater interest in the noncompete agreements

at issue, and application of Ohio law would violate a fundamental policy of Nebraska

law. The district court thus applied Nebraska law to determine the validity of the

noncompete agreements and concluded the noncompete agreements were overbroad

and, therefore, unenforceable. 

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DCS appeals the district court’s ruling, urging this court to reverse the district

court’s entry of summary judgment and denial of a preliminary injunction, and to

remand with instructions to enjoin the former employees under Ohio law. DCS argues

reversal and remand is warranted here, because (1) the district court erred in applying

Nebraska law instead of Ohio law, (2) the noncompete agreements are enforceable

under Ohio law, and (3) the district court abused its discretion in denying injunctive

relief for the period of the covenant from the date of the court’s order. In response,

the former employees contend (1) the appeal is moot, (2) the district court correctly

applied Nebraska law, (3) the noncompete agreements are overly broad and

unenforceable, and (4) the noncompete agreements are contracts of adhesion. 

II. DISCUSSION

A. Mootness

The former employees contend this appeal is moot, because the one-year time

frame of the noncompete agreements has expired. See Agrigenetics, Inc. v. Rose, 62

F.3d 268, 270-71 (8th Cir. 1995) (holding, under Nebraska law, when a noncompete

agreement’s time period runs out, an appeal from the denial of a preliminary

injunction is moot). Although an appeal from a denial of injunctive relief may

become moot by the passage of time, a claim for damages remains viable. See Curtis

Indus., Inc. v. Livingston, 30 F.3d 96, 97 (8th Cir. 1994). Because DCS sought

money damages in addition to injunctive relief, this appeal is not moot.

B. Choice-of-Law Determination

DCS argues the district court erred when it evaluated DCS’s claim under

Nebraska law rather than Ohio law, because the Agreements specify Ohio law

governs. A district court sitting in diversity jurisdiction applies the conflict of law

rules for the state in which it sits. Inacom Corp. v. Sears, Roebuck & Co., 254 F.3d

683, 687 (8th Cir. 2001) (citing Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487,

496 (1941)). Thus, we apply Nebraska’s conflict of law rules and review de novo the

district court’s choice-of-law determination. Id. 

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In deciding choice-of-law questions, Nebraska follows the Restatement

(Second) of Conflict of Laws (Restatement). Id. Nebraska courts generally give

effect to the parties’ choice of law. Vanice v. Oehm, 526 N.W.2d 648, 651 (Neb.

1995); Restatement § 187(1). Restatement section 187(1) provides “[t]he law of the

state chosen by the parties to govern their contractual rights and duties will be applied

if the particular issue is one which the parties could have resolved by an explicit

provision in their agreement directed to that issue.” Restatement § 187(1). Section

187(2) provides the parties’ contractual choice of law will apply unless (1) “the

chosen state has no substantial relationship to the parties or the transaction and there

is no other reasonable basis for the parties’ choice,” or (2) “application of the law of

the chosen state would be contrary to a fundamental policy of a state which has a

materially greater interest than the chosen state in the determination of the particular

issue and which . . . would be the state of the applicable law in the absence of an

effective choice of law by the parties.” Restatement § 187(2)(a), (b).

The district court applied Restatement section 187(2) without analyzing

whether section 187(1) or section 187(2) applies in this case. Section 187(2) applies

only when section 187(1) does not govern. See Restatement § 187, comment d.

Section 187(1) is inapplicable in this case, because, under Nebraska law, the parties

could not have resolved to apply Ohio law even with an explicit provision. See CAE

Vanguard, Inc. v. Newman, 518 N.W.2d 652, 656 (Neb. 1994) (holding “[t]he

provision of the agreement which states that a court may reform the covenant is of no

effect. Private parties may not confer upon the court powers which it does not

possess.”); see also Baxter Intern., Inc. v. Morris, 976 F.2d 1189, 1196 (8th Cir.

1992).

The first condition under section 187(2), whether “the chosen state has no

substantial relationship to the parties or the transaction and there is no other

reasonable basis for the parties’ choice,” is met in this case. Restatement § 187(2)(a).

Nebraska has a substantial relationship to the parties and the transaction, because the

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Section 188 provides in pertinent part:

(2) In the absence of an effective choice of law by the parties (see

§ 187), the contacts to be taken into account in applying the

principles of § 6 to determine the law applicable to an issue

include: 

(a) the place of contracting,

(b) the place of negotiation of the contract,

(c) the place of performance, 

(d) the location of the subject matter of the contract, and

(e) the domicil, residence, nationality, place of incorporation

 and place of business of the parties. 

These contacts are to be evaluated according to their

relative importance with respect to the particular issue.

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former employees and DCS entered into the Agreements in Nebraska, the services at

issue were to be performed in Nebraska, the former employees reside in Nebraska, the

prohibition of the noncompete clause directly and materially affects employment in

Nebraska, and DCS does business in Nebraska. Nebraska clearly possesses a direct

and substantial interest in the employment of its citizens. The only relationship

between Ohio and the parties is the location of DCS’s corporate headquarters and

principal place of business in Ohio. The Agreements were not negotiated, entered

into, or performed in Ohio. Under these circumstances, the district court properly

concluded Ohio has no substantial relationship to the parties or the transaction, and

Nebraska has a greater material interest in the Agreements. See Powell v. Am.

Charter Fed. Sav. & Loan Ass’n, 514 N.W.2d 326, 332 (Neb. 1994) (deciding the state

with the most significant relationship to the transaction and the parties is the state

where the parties contracted, negotiated, and resided; where the subject matter was

located; and where performance was to take place). 

The second condition also is satisfied. Under section 187(2)(b), application of

the chosen law is precluded if “application of the law of the chosen state would be

contrary to a fundamental policy of a state which has a materially greater interest than

the chosen state” when the factors articulated in section 1882

 are applied. Restatement

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§ 187(2)(b). Nebraska and Ohio courts have materially different approaches to the

reformation of unreasonable noncompete agreements. In Nebraska, if a court

determines a noncompete agreement is unreasonable, the court will not reform the

noncompete agreement in order to make it enforceable. H & R Block Tax Servs., Inc.,

v. Circle A Enters., Inc., 693 N.W.2d 548, 552 (Neb. 2005). Contrary to the Nebraska

courts’ approach, Ohio courts are empowered to reform overly broad or unreasonable

noncompete agreements to make them reasonable. Raimonde v. Van Vlerah, 325

N.E.2d 544, 547 (Ohio 1975). The district court correctly recognized that because

Nebraska courts expressly have rejected judicial reformation of noncompete

agreements, application of Ohio law would violate a fundamental policy of Nebraska

law. 

Because Nebraska has a greater material interest in the Agreements and

application of Ohio law would violate a fundamental policy of Nebraska law, we hold

the district court correctly applied Nebraska law to the question of the validity and

enforceability of the noncompete agreements. See First Nat’l Bank v. Daggett, 497

N.W.2d 358, 363 (Neb. 1993) (disregarding choice-of-law provision because the

chosen state had no contacts with the transaction and the parties, and application of

the chosen state’s law would offend a strong public policy in the forum state). See

also Rain & Hail Ins. Serv., Inc. v. Casper, 902 F.2d 699, 700-01 (8th Cir. 1990)

(applying Nebraska law to an employment agreement’s noncompete clause choosing

the application of Iowa law, which allowed modification of overly restrictive

noncompete provisions, and affirming conclusion “Iowa law would be contrary to a

fundamental policy of Nebraska”). 

C. Validity of the Noncompete Agreements

Having concluded Nebraska law applies, we now turn to whether the

noncompete agreements are valid under Nebraska law. Pursuant to Nebraska law, a

noncompete agreement is valid if it is (1) “not injurious to the public,” (2) “not greater

than is reasonably necessary to protect the employer in some legitimate interest,” and

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(3) “not unduly harsh and oppressive on the employee.” Prof’l Bus. Servs. Co. v.

Rosno, 680 N.W.2d 176, 184 (Neb. 2004) (quotation omitted). “An employer has a

legitimate business interest in protection against a former employee’s competition by

improper and unfair means, but is not entitled to protection against ordinary

competition from a former employee.” Id. at 185. A noncompete agreement “may be

valid only if it restricts the former employee from working for or soliciting the former

employer’s clients or accounts with whom the former employee actually did business

and has personal contact.” Polly v. Ray D. Hilderman & Co., 407 N.W.2d 751, 756

(Neb. 1987). 

We conclude the district court properly held the noncompete agreements were

overbroad and unenforceable. The district court recognized the noncompete

agreements prohibit the former employees from, directly or indirectly, being

concerned in any manner with any company in competition with DCS, and from

providing contract cleaning services within one hundred miles of any entity or

enterprise “having business dealings” with DCS, including attorneys, accountants,

delivery services and the like. The breadth of the noncompete agreements effectively

put the former employees out of the cleaning business within an extensive region. We

hold the district court did not err in concluding Nebraska courts would not enforce

such overly broad noncompete agreements. See Rosno, 680 N.W.2d at 186-87

(holding noncompete agreement was overly broad where the agreement prohibited the

former employee from soliciting or contacting any of the former employer’s clients

and where the former employer could not establish the former employee had done

business with or had substantial personal contact with all of the former employer’s

clients); Mertz v. Pharmacists Mut. Ins. Co., 625 N.W.2d 197, 205 (Neb. 2001)

(holding noncompete agreement was overly broad where it was not limited to clients

with whom the former employee actually did business or personally contacted);

Moore v. Eggers Consulting Co., Inc., 562 N.W.2d 534, 540 (Neb. 1997) (holding

noncompete agreement was overly broad where it prohibited soliciting or accepting

business opportunities with any client of the former employer with whom the former

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employee worked or had knowledge of, and where the agreement contained an overly

broad geographical restriction); Whitten v. Malcolm, 541 N.W.2d 45, 48 (Neb. 1995)

(holding noncompete agreement was overly broad where it prohibited practicing

dentistry within geographic location and was not limited to clients with whom the

former employee did business and had personal contact and was not even limited to

the former employer’s existing customer base); Vlasin v. Len Johnson & Co., Inc.,

455 N.W.2d 772, 776 (Neb. 1990) (holding noncompete agreement was overly broad

where it prohibited the former employee from entering into insurance business within

fifty miles and was not limited to the former employer’s clients with whom the former

employee did business and had personal contact); Polly, 407 N.W.2d at 756 (holding

noncompete agreement was overly broad where it prohibited soliciting or working for

the former employer’s clients with whom the former employee did not work and did

not even know). 

III. CONCLUSION

Therefore, we affirm the well reasoned judgment of the district court.

______________________________

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