Many restrictive covenant agreements rely on various abbreviations to streamline the contractual language, including most notably the use of “Company” as a stand-in for the employer’s name. Additionally, these agreements often state that they inure to the benefits of the employer’s parents, subsidiaries, and other affiliates. However, a recent case in federal court demonstrates the importance of carefully defining terms to best protect the employer’s legitimate business interests.
in Schnitzer Steel Indus., Inc. v. Dingman, the United State District Court for the District of Rhode Island considered the plaintiff/former employer Schnitzer’s motion for a temporary restraining order against its former employee, James Dingman. Dingman, initially a resident of Rhode Island, was first hired by one of Schnitzer’s subsidiaries, Metals Recycling LLC (“Metals”), and signed an employment agreement in Metals’ favor prohibiting him from engaging in a similar business for the year following termination of his employment with the company. Later, Dingman moved to New Hampshire and transferred to another Schnitzer subsidiary, Prolerized New England Company, LLC (“Prolerized”). Schnitzer ultimately terminated Dingman, who formed his own company, North Country Catalyst, LLC (“North Country”), which competes with Schnitzer.
Schnitzer then sued Dingman in federal court and sought a temporary restraining order and preliminary injunction against him. In considering the motion for a temporary restraining order, the court seized upon an ambiguity in the contract’s definition of “Company.” Specifically, the contract stated that it was entered into between Dingman and “Metals Recycling LLC (for the benefit of itself, its parents, divisions, subsidiaries, affiliates, successors and assigns) (the ‘Company’).”[1] The court determined that while the agreement might be for the benefit of parents such as Schnitzer, “it would be peculiar to read all, children’s children, affiliates, etc. into the definition of the ‘Company,’ written as a singular.” Thus, the court held, absent an assignment by Metals or change in its legal status, the agreement was a contract between Metals and Dingman, and therefore the one-year limited period began to run when Dingman moved from Metals to Prolerized in November 2021—not when he was terminated from Prolerized in June 2022. In other words, only 4 months remained of the restricted period (when taking into account tolling for his alleged violations).[2]
Ultimately, the court determined that for the purposes of a temporary restraining order, Schnitzer had not proven that the restrictive covenants contained in the agreement supported a legitimate business interest and were thus enforceable. The court declined to order any injunctive relief, although it reserved judgment on the preliminary injunction motion so that the parties could engage in discovery, which might develop a factual record that bolsters Schnitzer’s claims.
Takeaways
While the court’s decision to deny Schnitzer’s request for a temporary restraining order was ultimately based on the company’s failure to demonstrate a legitimate business interest in the restrictive covenants (which is always something businesses should be mindful of in seeking to enforce non-competes or non- solicits), the court’s analysis regarding the definition of “Company” is more interesting and unusual in my view. Had the agreement not contained a tolling provision, even if Schnitzer limit demonstrated that the covenants were otherwise reasonable and enforceable, its case would be dead in the water based on the passage of time between the termination of Dingman’s employment with Metals and his establishment of a competing company. Perhaps with better drafting (including potentially defining the Company as Schnitzer, such that the agreement was between the parent and Dingman), Schnitzer would have the benefit of the full restricted period in pursuing an injunction. As it stands, Schnitzer is left without a temporary restraining order and will be embarking on discovery and seeking a preliminary injunction with just four months remaining in Dingman’s covenants.
[1] The court noted that Metals was not named as a plaintiff to the action, although ultimately that did not appear to effect the court’s ruling.
[2] However, it was not all good news for Dingman. He had argued that both the material change doctrine and the Massachusetts Noncompetition Agreement Act (“MNAA”) applied to the agreement, both of which invalidated the covenants therein. Nonetheless, the court noted that the agreement was governed by Rhode Island, not Massachusetts, law, and thus neither the material change of doctrine nor the MNAA were relevant to analysis of the contract.