Litigation

Eighth Circuit Refuses to Enforce Arkansas Noncompete Agreement

By H. William Allen et al.

The Eighth Circuit affirmed summary judgment, to both parties, in a unique case involving a noncompete agreement. See Guardian Fiberglass, Inc. v. Whit Davis Lumber Co., __F.3d__ (12/12/07). This is a long post because this brief opinion brings out some interesting points regarding noncompete agreements.  

The Parties and the Contract

Guardian Fiberglass holds a dominant market position in the insulation products market. Whit Davis Lumber is a lumber company in central Arkansas that sold insulation but never provided installation services to its customers. Guardian ran a program to assist companies like Whit Davis in providing installation services. The parties entered into a contract where Guardian shared information with Whit Davis, including a notebook containing extensive information about providing insulation services. Whit Davis agreed to purchase insulation exclusively from Guardian.

Additionally, the contract had a noncompete clause. If Whit Davis terminated the contract, it would not provide installation services for 2 years after termination. If Guardian terminated the contract, the noncompete provision would not apply. Note that the noncompete agreement only applied to installation services; it did not affect Whit Davis's other business operations.

The parties performed under the contract from 1998 - 2004, and Whit Davis purchased $2.2 million of insulation products from Guardian during this period. Then Whit Davis started purchasing insulation from other suppliers in breach of the contract. Guardian then terminated the contract and brought suit for breach of contract and breach of the noncompete agreement.

The District Court Opinion

The district court granted summary judgment to Whit Davis on the noncompete claim, holding that Guardian did not have a protectable interest to enforce the noncompete agreement. (Note: Michigan law applied, but its law of noncompete agreements is essentially the same as Arkansas) The district court also granted partial summary judgment to Guardian on the breach of contract claim.

The Eighth Circuit Decision

The Eighth Circuit affirmed. First, the court held the noncompete does nothing to protect Guardian's goodwill because Whit Davis never used the Guardian name to promote its installation services. Second, the information Guardian provided was not a trade secret. The court described the information as ordinary knowledge.

Observations

This case has a couple of interesting features. First, the court applied the same standard as an absolute noncompete. These agreements usually prevent the defendant from engaging in the business that he knows (which is why they are generally disfavored). However, the noncompete agreement here was not absolute; it only applied to a small segment of Whit Davis's business operations.    

Second, it is surprising that the court was so dismissive of the information Guardian provided. Whit Davis had never before provided installation services to its customers. Guardian gave them information on how to provide these services, and Whit Davis used this information to develop a profitable new business segment. Although the information was not a trade secret, it apparently had considerable value.

Full post as published by Arkansas Business Litigation Blog on December 17, 2007 (boomark / email).