An Indiana federal district court ruled, in CDW, LLC, et al v. NETech Corporation, that neither a parent company nor one of its subsidiaries may sue to enforce the employment contracts of another of its subsidiaries, when one subsidiary is clearly the party to the agreement. The dispute involved covenants of noncompetition in a company’s employment contract and a claim for tortious interference with a business contract.
Berbee Information Networks Corporation employed several individuals as sales executives. These three individuals signed employment contracts that included a paragraph stating that they agreed, upon termination of their employment with Berbee, not to accept employment in direct competition with Berbee for up to twelve months. “Competition” included solicitation of Berbee employees or clients and use of Berbee’s proprietary business information. In September 2006, Berbee became a subsidiary of CDW, LLC when CDW purchased it and merged it with another subsidiary. Berbee, all parties to the eventual lawsuit agreed, was the surviving corporation of the merger.
CDW operated several subsidiaries that, like Berbee, engaged in the business of technology sales. Each subsidiary served a different market, such as commercial businesses, nonprofits, or government agencies. CDW transferred the three Berbee employees at the center of the dispute to another subsidiary, CDW Direct, between 2008 and 2009. These employees all left CDW Direct at different times to work for NETech Corporation. They each received letters after commencing work at NETech from an attorney for CDW alleging that they were in violation of their noncompetition agreement, demanding that they cease work for NETech and return all confidential materials obtained from Berbee or CDW.
CDW, along with CDW Direct and Berbee, obtained a preliminary injunction against NETech in federal district court in the spring of 2010, enjoining the company from using any confidential information from the three employees, interfering with the noncompetition agreements, and recruiting or hiring any other CDW sales employees in Indiana who also had noncompetition agreements. CDW’s lawsuit asserted a claim of tortious interference with a business contract against NETech.
NETech moved for partial summary judgment in late 2010, asking the district court to rule, in part, that the employees’ post-employment obligations in the noncompetition agreements began when CDW transferred them from Berbee to CDW Direct, and to dismiss the cause of action for tortious interference with a business contract. The court agreed with NETech and dismissed that claim. It held that Berbee and CDW Direct were distinct corporate entities, and that the transfer of the employees constituted the termination of their employment with Berbee. The court was rather critical of CDW’s claims, noting a Wisconsin case that held that a company cannot “pick and choose” when to operate its subsidiaries as a single entity or separately. The court also held that the noncompetition agreements were exclusively between Berbee and the employees. As a result, neither CDW nor CDW Direct had the legal authority to enforce any provisions of Berbee’s employment contracts.
At DiTommaso Lubin, our business litigation attorneys represent business owners and professionals in this and other claims throughout the Chicagoland area including Cook, DuPage, Lake, Kane, McHenry and Will Counties and in the Mid-West region including Indiana, Wisconsin and Iowa.
Related Blog Posts: