Soda cans

Shortly before leaving the employ of Swanel Beverage, Inc. (a manufacturer of soft drinks, juice products, and energy beverages), Bodemer — Swanel’s national sales and marketing manager who “was involved with almost every facet of Swanel’s business” — incorporated Innovative Beverage, Inc.  Right after Bodemer resigned from Swanel, Innovative commenced operations as a competitor.  Then, he and Innovative filed a declaratory judgment action in the Southern District of Indiana alleging that his confidentiality and non-competition agreements with Swanel were unenforceable and were not violated.  Swanel, of course, counterclaimed for breach of contract and violation of the Indiana Uniform Trade Secrets Act.  Following discovery, Bodemer moved for summary judgment with respect to both his complaint and Swanel’s counterclaim.  Federal Judge James Moody’s multi-faceted decision on Bodemer’s motion included the rulings mentioned in the title to this blog and others.  Bodemer v. Swanel Beverage, Inc., Case No. 2:09 CV 90 (S.D. Ind., July 31, 2012).

Swanel claimed that the mandated confidentiality was worldwide and lasted forever, and that it applied to every piece of information Bodemer had learned, and every document he had received, in the 15 years he had been employed by a corporation Swanel acquired and then by Swanel itself.  Thus, enforcement would confer confidentiality on much information and many documents that were not secret and would prevent Bodemer from being employed in the industry with which he was most familiar.  Judge Moody held that the agreement was invalid under Indiana law.  While recognizing that the state’s courts might be willing to enforce an unconditional promise to maintain business confidences if necessary in order to protect the employer’s reasonable interests, the confidentiality agreement here did not pass that test.  Further, it unduly restricted Bodemer’s future employment opportunities and was contrary to the public interest.

Swanel tried one more gambit, requesting the court to blue-pencil the confidentiality agreement by inserting appropriate restrictions.  According to Judge Moody, however, Indiana law authorizes a court to strike unreasonable provisions in a contract but not to add new ones.

The non-compete commitment provided a reasonable geographic limitation, 100 miles from the present location of the company, and it expressly permitted the court to modify that restriction if it was found to be unenforceable.  Judge Moody ruled that the agreement was not violated because the only Swanel customer Bodemer was accused of stealing was located more than 100 miles away.  (Swanel argued that, although the customer was more than 100 statute miles distant, it was closer than 100 nautical miles, but that argument was summarily rejected based on the “plain meaning” rule and because nautical miles are used only in sea and air navigation.)

Swanel had more success in resisting Bodemer’s summary judgment motion with respect to alleged misappropriation of Swanel’s list of distributors, the name of the vendor supplying Swanel with flavoring agents, Swanel’s recipe for drink products, and its pricing structure.  Bodemer insisted that these were not trade secrets, but the court held that a reasonable jury could disagree.  It could find that a competitor would have to make a substantial investment of time, expense and effort to create Swanel’s list of distributors.  There was value in identifying the source of the flavoring agents because replication of Swanel’s products by a competitor would be somewhat easier if the vendor’s name was public.  The fact that the name of the flavor house Swanel used was known to its employees was of no consequence because each had signed a non-disclosure agreement.

According to Judge Moody, since Swanel did not own the flavor house’s formula, it could not be the basis for a trade secret misappropriation case filed by Swanel.  However, notwithstanding Swanel’s president’s deposition testimony that the recipe for its drink products was “no big deal” because it simply consisted of the flavoring plus sugar and water, the court said that was just one man’s opinion and the jury had to decide whether the recipe was a trade secret.  Bodemer’s claim that he could not be said to have misappropriated Swanel’s pricing structure because he took no documents with him was rejected because that is not essential in order to prove misappropriation.

This case provides several lessons.  It reminds us that a confidentiality agreement lacking reasonable time, geographic and subject-matter limitations may be unenforceable as a matter of law.  Additionally, while some courts are unwilling to blue-pencil a contract under any circumstances, a court that will is more likely to exercise that power when the agreement can be made enforceable by modifying or excising provisions without adding new ones.  Perhaps Judge Moody’s very brief explanation for rejecting Swanel’s claimed right to sue Bodemer with regard to the secret formula — because Swanel did not own it — would have been different if Swanel proved that it was the exclusive purchaser of that flavoring and that its contract with the flavor house permitted Swanel to bring a misappropriation lawsuit despite not being the owner of the trade secret.  In that event, Swanel might have been held to have standing just as the holder of an exclusive patent, trademark or copyright license might have standing to sue for infringement, even though the licensee is not the owner of the patent, trademark or copyright, if the license includes a grant of the right to file such an action.