E.T. Products, LLC v. D.E. Miller Holdings, Inc. , 872 F.3d 464 ( 2017 )

In the
United States Court of Appeals
For the Seventh Circuit
____________________
No. 16-1204
E.T. PRODUCTS, LLC,
Plaintiff-Appellant.
v.
D.E. MILLER HOLDINGS, INC., et al.,
Defendants-Appellees.
____________________
Appeal from the United States District Court for the
Northern District of Indiana, Hammond Division.
No. 2:13-CV-00424 — Philip P. Simon, Judge.
____________________
ARGUED SEPTEMBER 23, 2016 — DECIDED SEPTEMBER 20, 2017
____________________
Before RIPPLE, ROVNER, and SYKES, Circuit Judges.
SYKES, Circuit Judge. Doug Miller and his son Tracy
signed a broad noncompetition agreement when Doug sold
his fuel-additives business, E.T. Products, to a group of
investors in January 2011. Doug sold his other company,
Petroleum Solutions, to John Kuhns about a year later.
E.T. Products’s new owners sued the Millers for breaching
the noncompete by providing assistance to Kuhns as he
learned the Petroleum Solutions business.
2 No. 16-1204
The Millers responded by attacking the noncompete as
overbroad and unenforceable. They also pointed out that
their assistance to Kuhns came at a time when Petroleum
Solutions was E.T. Product’s distributor, not its competitor.
When E.T. Products severed its relationship with Petroleum
Solutions at the end of 2012, Doug told Kuhns that the
noncompetition agreement prevented further help and
ceased assisting him. E.T. Products insisted that the act of
advising its distributor was off limits and that Doug also
violated the noncompete by failing to break a lease with
Kuhns when he found another supplier. Ruling on cross-
motions for summary judgment, the district judge held that
the noncompetition agreement was enforceable but the
Millers did not breach it.
This appeal requires us to apply some familiar principles
of contract interpretation: contract terms are read reasonably,
in the context of the entire document, and with the contract’s
textually evident purposes in mind. Read that way, the
noncompetition agreement is not overbroad. Though en-
forceable, the evidence introduced at summary judgment
establishes as a matter of law that the Millers did not breach
the agreement. A company’s distributor is not its competitor,
so the Millers’ assistance to Kuhns in 2012 was fair game.
And the noncompete, read reasonably, did not require Doug
to break his preexisting lease with Kuhns. We therefore
affirm.
I. Background
Doug Miller owned two companies located in Bremen,
Indiana: E.T. Products, which blended and sold fuel-additive
products, and Petroleum Solutions, which blended and sold
lubricant products. Petroleum Solutions also supplied a few
No. 16-1204 3
customers with E.T. Products fuel additives. After a long
career, Doug put his two businesses up for sale so that he
could soon retire.
In January 2011 a group of investors led by Tom
Blakemore purchased E.T. Products for $4.95 million. As part
of the sale, Doug and his son Tracy signed essentially identi-
cal noncompetition agreements. (For ease of reference, we
will refer to them as a single agreement.) The noncompete
had a five-year duration and was quite broad in geographic
scope and in the range of activities it proscribed. The agree-
ment prohibited the Millers from assisting anyone involved
in any company either directly or indirectly engaged in the
same industry as E.T. Products anywhere in North America.
The Millers were also forbidden to directly or indirectly
own, operate, invest in, advise, render services for, or other-
wise assist any such competitor.
After selling E.T. Products, Doug continued to own
Petroleum Solutions for about a year until John Kuhns
purchased it in January 2012. Doug was generous to Kuhns:
He provided low-interest financing for the purchase, a lease
for the land on which the business operated, training in
lubricant blending, and consulting help as Kuhns learned
the business. Tracy helped by training Kuhns on the compa-
ny’s computer programs for a few months after the sale.
At first Petroleum Solutions continued to purchase
E.T. Products fuel additives for resale; that is, E.T. Products
was its supplier. That changed in late 2012. At around that
time, Blakemore fired Tom Patton, an E.T. Products sales-
man. When Doug learned of this development, he connected
Patton to Kuhns, who hired him as a salesman for Petroleum
Solutions. E.T. Products contends that Patton thereafter
4 No. 16-1204
began competing for its customers in violation of his own
noncompetition agreement. In December 2012 E.T. Products
ceased using Petroleum Solutions as its distributor and sued
Patton and Petroleum Solutions to enjoin this competitive
activity. The details of that litigation are not relevant here.
Petroleum Solutions found a new supplier and also be-
gan blending its own products. When Doug heard that
E.T. Products had severed its relationship with Petroleum
Solutions, he told Kuhns that he could no longer assist him
in the additives business due to his obligations to
E.T. Products under the noncompetition agreement. Kuhns’s
lease of the business property continued uninterrupted, but
the Millers thereafter ceased all assistance to Kuhns and his
business.
Litigation soon followed. The Millers filed suit in state
court accusing E.T. Products of violating a release.
E.T. Products responded with this federal suit accusing the
Millers of breaching the noncompetition agreement. The
cases were eventually consolidated in federal court, and the
parties filed cross-motions for summary judgment.
After carefully reviewing the record, the judge delivered
a split decision, ruling for the defense in each case. First, the
judge awarded judgment to E.T. Products in the suit for
violation of the release. The Millers have not sought review
of that ruling, so we need say no more about it.
In the suit for breach of the noncompetition agreement,
the Millers prevailed against E.T. Products, and that ruling is
the subject of this appeal. The Millers maintained that the
noncompete was overbroad and unenforceable, but the
judge rejected that argument. The judge went on to hold,
No. 16-1204 5
however, that the evidence conclusively established that the
Millers did not commit a breach because Petroleum
Solutions did not directly or indirectly compete with
E.T. Products during the time period when the Millers were
assisting Kuhns.
II. Discussion
Two issues are presented for our review: (1) is the non-
compete enforceable and (2) did the Millers violate it? Issues
of contract interpretation and enforceability are questions of
law and the case comes to us from a summary judgment, so
our review is de novo. See Cincinnati Ins. Co. v. H.D. Smith,
L.L.C., 829 F.3d 771, 773 (7th Cir. 2016) (“The issue is contract
interpretation and the posture is an appeal of summary
judgment, so our review is de novo.”); Quality Oil, Inc. v.
Kelley Partners, Inc., 657 F.3d 609, 612 (7th Cir. 2011). And
since we’re sitting in diversity and applying Indiana law,
our task is to predict how the Indiana Supreme Court would
rule if the case were before it. Doermer v. Callen, 847 F.3d 522,
527 (7th Cir. 2017).
A. Enforceability of the Noncompete
One of the assets typically transferred in a business sale
is goodwill, an intangible asset that includes the value of the
company’s reputation and customer relationships. That
value is diminished if the seller, who developed that reputa-
tion and those relationships, competes with the buyer after
the sale. For that reason the buyer often pays a premium for
a noncompete agreement that removes the seller from the
market.
Indiana courts generally disfavor noncompete re-
strictions and enforce them only if they are reasonable. Dicen
6 No. 16-1204
v. New Sesco, Inc., 839 N.E.2d 684, 687 (Ind. 2005). But
business-sale noncompete agreements, which usually in-
volve parties with relatively equal bargaining power, “stand
in better stead” than those in other contexts. Id. Compared to
noncompete provisions in employment contracts—another
common place to find them—those arising from business
sales are “enforced on a more liberal basis.” Id. at 685.
Indiana courts recognize that in a business sale, “a broad
noncompetition agreement may be necessary to assure that
the buyer receives that which he purchased.” Id. at 687
(quotation marks omitted).
The Millers challenge the scope of the geographic and
competition restrictions in the noncompete agreement.1 Our
review of the scope of the competition restrictions is
straightforward. The Indiana Court of Appeals has enforced
a noncompete agreement with competition restrictions
nearly identical to those here, Kuntz v. EVI, LLC, 999 N.E.2d
425 (Ind. Ct. App. 2013), and we have no reason to think the
Indiana Supreme Court would see it differently. That means
we must follow suit. See City of Chicago v. StubHub!, Inc.,
624 F.3d 363, 365 (7th Cir. 2010) (“When sitting in diversity, a
federal court should follow the decision of an intermediate
state appellate court unless it is convinced by other persua-
1 E.T. Products contends that by failing to file a cross-appeal, the Millers
waived this issue. Not so. A cross-appeal was unnecessary because the
Millers do not seek to alter the district court’s judgment. Wellpoint, Inc. v.
Comm’r, 599 F.3d 641, 651 (7th Cir. 2010); see also id. at 650 (“The judg-
ment is not the court’s opinion or reasoning; it is the court’s bottom
line … .”). A successful challenge to the enforceability of the noncompete
wouldn’t alter the district court’s judgment. The bottom line—the Millers
prevail—would remain unchanged.
No. 16-1204 7
sive data that the highest court of the state would decide
otherwise.”) (internal quotation marks omitted).
The contract at issue in Kuntz contained “a nearly ex-
haustive list of roles in which [the seller] is prohibited from
acting as a competitor.” 999 N.E.2d at 430. Like the contract
here, the noncompete in Kuntz prevented the seller from
assisting a competitor directly or indirectly, and the state
appellate court wrote that the “legal effect of the provision is
to restrict all competitive activity in any capacity.” Id. The
Millers point to nothing that makes the competition re-
strictions in their noncompete more severe than those in
Kuntz.
The geographic restraint, which covered the entire North
American continent, requires a closer look. In assessing
enforceability, Indiana courts first ask as a threshold matter
whether the buyer purchased a protectable interest. Fogle v.
Shah, 539 N.E.2d 500, 503 (Ind. Ct. App. 1989). Here, as with
most business sales, that’s goodwill. See id. at 502. Then
comes a more difficult inquiry: whether the restrictions are
reasonable. That question is analyzed under a three-part
balancing test that considers the effect of the restrictions on
the buyer, the seller, and the public. Id. at 503.
In this case all three parts of the test favor enforcement.
The agreement only minimally affects the seller and the
public since Doug planned to exit the market even without a
noncompete. The nub of the case is the first factor—namely,
whether the restrictions are broader than necessary to pro-
tect the buyer. This part of the test is “[o]f primary im-
portance” and contains a multifactor inquiry of its own. Id.Indiana courts consider “(1) the type of business sold, (2) the
effect of including territory into which the transferring
8 No. 16-1204
business did not extend, (3) the extent of the purchaser’s
original business as a factor, and (4) the period of restraint.”
Id.Indiana courts separate businesses into one of three cate-
gories for purposes of evaluating whether a noncompete is
too broad: service businesses, distributors of goods, and
manufacturers. Id. at 504. Noncompete restrictions in service
businesses “normally will be localized because services
generally are performed within a small geographic area.” Id.A company like E.T. Products that distributes or manufac-
tures goods, on the other hand, can be expected to reach
customers over a larger map, and a correspondingly broader
geographic restriction may be necessary.
Moving to the second factor, the Millers point out that at
the time of the sale, E.T. Products sold no goods in Mexico,
had only one customer in Canada, and was inactive in many
American states. But Blakemore attested that he bought the
company with plans to expand it throughout the continent.2
When that’s the case and the seller can “fairly anticipate” the
extent of the geographic expansion, the buyer “is entitled to
bargain with the seller against competition within the terri-
tory into which he plans to extend” the business. Id.Blakemore cited the company’s excess capacity, recent
favorable environmental regulation, and his ownership of a
multinational entity of a similar type as indicators that the
2 In the district court, the Millers moved to strike Blakemore’s affidavit as
extrinsic evidence offered to modify the terms of the agreement. The
judge denied the motion. He reasoned that the evidence was being used
not to modify contractual terms but rather to determine the buyer’s plans
at the time of the sale. See Fogle v. Shah, 539 N.E.2d 500, 504 (Ind. Ct. App.
1989). We agree.
No. 16-1204 9
company was well positioned for expansion. The fact that
Blakemore did expand the company across the continent
within two years—to all 50 states and 7 Canadian provinc-
es—provides further evidence that he had realistic plans to
do so at the time of the purchase.
The third and fourth factors also weigh in E.T. Products’s
favor. Doug spent decades building his reputation and
customer relationships and grew the company into 13 states,
so the scope of the business corresponded to significant
goodwill. Finally, the Indiana Supreme Court has concluded
that a five-year time period is reasonable. Dicen, 839 N.E.2d
at 688. So all four factors support the conclusion that the
geographic restraint was reasonable. Blakemore bought the
broad noncompetition restrictions at a price, and failing to
enforce them would “deny him the benefit of his bargain.”
Fogle, 539 N.E.2d at 503.
B. Breach of the Noncompete
The parties agree that the Millers assisted Kuhns from
the time he purchased Petroleum Solutions in January 2012
until E.T. Products and Petroleum Solutions split in late
2012. They also agree that during this time period, Petrole-
um Solutions ventured no further into the additives business
than to serve as a distributor of E.T. Products additives.
E.T. Products insists that the Millers violated the noncom-
pete by providing assistance to Kuhns during this time,
notwithstanding that Petroleum Solutions was its own
distributor, not a competitor. E.T. Products characterizes this
as a prohibited form of an “indirect” involvement in its
industry.
10 No. 16-1204
That’s a bit much. We’re talking about a noncompete
agreement after all. Staying true to its name, it was written
with the express purpose of preventing the Millers from
using their knowledge or relationships “to compete with”
E.T. Products. And a firm whose sole conduct in the relevant
market consists of distributing one manufacturer’s product
plainly isn’t that manufacturer’s competitor. The Millers’
assistance during this period can’t possibly violate the
agreement.
There’s no question, however, that Petroleum Solutions
became engaged in E.T. Products’s industry as a competitor
after the two companies parted ways and it began blending
its own additives and distributing additives from other
suppliers. The judge thought that the noncompete wasn’t
triggered unless Petroleum Solutions engaged in all the same
aspects of the additive business as E.T. Products: blending,
packaging, marketing, and selling. That’s not correct. Two
companies need not perfectly mirror each other before they
are considered competitors, and the inclusion of the phrase
“directly or indirectly” in the noncompete was designed to
preclude precisely this kind of narrow construction. That
language means, if nothing else, that complete overlap isn’t
required. As a manufacturer and distributor of additives,
Petroleum Solutions squarely competed with E.T. Products
after the two companies parted ways.
But once Petroleum Solutions became E.T. Products’s
competitor, the Millers stopped training and advising
No. 16-1204 11
Kuhns. E.T. Products argues that Doug Miller continued to
assist Kuhns by failing to revoke his property lease. 3
But reading the noncompete to cover that kind of action
(inaction, really) would “produce absurd results, in the sense
of results that the parties, presumed to be rational persons
pursuing rational ends, are very unlikely to have agreed to
seek.” Beanstalk Grp. v. AM Gen. Corp., 283 F.3d 856, 860 (7th
Cir. 2002) (applying Indiana law). If the prohibition of
indirect assistance were taken to its logical extreme, the
Millers would be in breach, for example, if they helped a
friend move into a new house and that friend happened to
be an investor in a business indirectly engaged in the addi-
tives industry. The broadest possible reading of the non-
compete would preclude all sorts of innocuous behavior,
making the agreement overbroad and unenforceable. See
Dicen, 839 N.E.2d at 688. We’re required to give the non-
compete a reasonable construction that doesn’t entail a
limitless reach. Collecting rent payments on a preexisting
lease isn’t the kind of assistance that the noncompete covers.
E.T. Products contends that Kuntz holds to the contrary.
The contract at issue in Kuntz provided that the seller and
buyer of a business would enter into a lease of the business
property for a five-year term. 999 N.E.2d at 426. The seller
didn’t renew the lease at the end of the five years and in-
stead leased the property to one of the buyer’s competitors.
Id. at 428. The Indiana Court of Appeals concluded that this
3 E.T. Products also argues that Doug breached the noncompete agree-
ment by eventually selling the property to Kuhns at what E.T. Products
considers a low price. But E.T. Products did not develop this argument
below, so we don’t address it. See Torry v. Northrop Grumman Corp.,
399 F.3d 876, 879 (7th Cir. 2005).
12 No. 16-1204
violated the parties’ noncompete agreement, which (as
we’ve noted) contained restrictions nearly identical to those
in this case. Id. at 430.
Taking affirmative steps to lease to a competitor is quite
different from what Doug Miller did here. Recall that Kuhns
and Doug entered into the lease agreements in January 2012.
At that point Petroleum Solutions and E.T. Products were
business partners. No one knew that the relationship would
be severed at the end of that year and they would later
become competitors. On E.T. Products’s reading of the
noncompete, Doug was required to break the existing lease
with Kuhns—itself a breach of contract—once Petroleum
Solutions became E.T. Products’s competitor. That’s an
overbroad and unreasonable reading of the agreement.
The stated purpose of the noncompete was to prevent
business competition. Read reasonably and in light of that
purpose, the agreement did not prohibit Doug from assisting
Petroleum Solutions while it was an E.T. Products distribu-
tor or from continuing to honor Kuhns’s preexisting lease.
AFFIRMED.