Badger Holding LLC v. Edmund Kirsch

Citation: Not availableDocket: CA 2017-0147-SG

Court: Court of Chancery of Delaware; October 1, 2018; Delaware; State Appellate Court

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The Court of Chancery of Delaware addressed a case involving Badger Holding LLC and S&E Bridge Scaffold LLC (Plaintiffs) against Edmund Kirsch (Defendant) regarding the enforcement of a non-compete covenant. Kirsch, who worked as Director of Sales for S&E, had negotiated a provision allowing him to receive a year of severance pay upon voluntary termination, which would release him from non-compete obligations if not paid. In January 2017, Kirsch notified S&E of his intention to leave and subsequently solicited S&E's customers for a new employer, although S&E declined to pay the severance.

The Plaintiffs sought to enforce the non-compete for two years post-employment, arguing that the severance provision in the employment agreement had expired and that the stock award agreement, which did not expire, should be enforced. The court found that the employment agreement and the stock award agreement were treated as ongoing and that S&E's obligation to choose between paying severance or enforcing the non-compete remained active as of January 2017. Since S&E did not pay the severance, they could not enforce the non-compete post-termination.

Despite this, the court noted that Kirsch breached the non-compete before his official termination, and while S&E could not prevent his competition after January 31, 2017, they were entitled to seek damages for his prior breaches. The case is set for further proceedings to determine the extent of any damages.

Plaintiff Badger Holdings, LLC, a Delaware limited liability company based in Waukesha, Wisconsin, owns S&E Bridge Scaffold, LLC, a New York limited liability company located in Carlstadt, New Jersey, which specializes in scaffolding and related services in New York, New Jersey, and Pennsylvania. Defendant Edmund Kirsch, a former Director of Sales at S&E, left the company in early 2017 to work for non-party DHS Fraco, prompting this lawsuit.

Kirsch, who joined S&E on January 20, 2012, was an experienced scaffolding professional and negotiated an Employment Agreement that included a non-compete clause. This clause required Kirsch to maintain confidentiality regarding proprietary information during and for five years after his employment. Additionally, he was prohibited from engaging with competing entities for two years post-employment without S&E's written consent, and from soliciting S&E's customers during the same period.

The Agreement included provisions for severance payments, which were necessary for the enforcement of the non-compete and non-solicitation clauses after Kirsch's departure. If severance was not paid, Kirsch would be permitted to compete. The Employment Agreement is governed by New York law.

An irreparable harm provision is included in Kirsch's Employment Agreement, acknowledging that a material breach could cause ongoing damages to his employer, with no adequate legal remedy available. The Agreement was effective for four years from January 20, 2012, to January 20, 2016, and could be extended under 'employment at will' terms, with no express or implied agreement for continued employment absent mutual written consent. Kirsch also entered into the Phantom Unit Agreement on the same date, governed by Delaware law, which awarded him 1,000 Class A shares in OIP Holdings, LLC. This Agreement contains similar non-competition and non-solicitation clauses as the Employment Agreement and incorporates the severance provisions, meaning Kirsch's obligations under these covenants are contingent upon his entitlement to severance. The Phantom Unit Agreement defines OIP Holdings to include its affiliates and subsidiaries, relating to Kirsch's employment with S&E, a subsidiary of Badger (formerly OIP). During his tenure as Sales Manager at S&E, Kirsch was responsible for pricing and securing work primarily in New York City and occasionally in New Jersey. While employed, he received multiple job offers from Daniel Chirila of Dynamic Hoisting Scaffolding Company, who intended to expand into Kirsch's market. Despite the increasing aggressiveness of these offers, Kirsch initially declined, stating he was content with S&E. Eventually, he was introduced to Armand Rainville, CEO of Fraco, USA, Inc., a subsidiary of Canadian Hoist Company, with whom he met regularly.

Kirsch accepted an employment offer from Chirila and Rainville to join DHS Fraco, a new entity formed from the merger of Dynamic and Fraco, while still employed by S&E. Kirsch was aware of a non-compete agreement with S&E but did not disclose this to his new employers. He received the draft DHS Fraco Operating Agreement by late November 2016 and negotiated the Employment Agreement, signing it on October 13, 2016. Kirsch resigned from S&E effective January 31, 2017, and during January, while still employed by S&E, he reached out to clients to inform them of his move to DHS Fraco, which became a competitor of S&E. Kirsch's resignation process included discussions about returning company property and expense reimbursements, but he was not informed of any severance payments, which he did not receive. He began working at DHS Fraco on February 3, 2017, subsequently contacting several of S&E’s clients. The plaintiffs filed a lawsuit on February 24, 2017, with three counts: seeking a declaratory judgment on Kirsch's obligations under the Phantom Unit Agreement, alleging a breach of that agreement, and requesting injunctive relief. A motion to dismiss was denied, and the plaintiffs later moved for partial summary judgment regarding the breach and injunctive relief, while Kirsch sought summary judgment on all counts.

Under Court of Chancery Rule 56, summary judgment is granted when there is no genuine issue of material fact, and the moving party is entitled to judgment as a matter of law. The moving party must first demonstrate the absence of a material factual dispute, after which the burden shifts to the nonmovant to provide specific, admissible evidence of a genuine issue for trial. The Court must review evidence favorably for the non-moving party and will deny summary judgment if any reasonable hypothesis allows the opposing party to recover or if material facts remain disputed. In the context of cross-motions for summary judgment, if no material issue of fact is argued, the motions are treated as a stipulation for a decision on the merits based on the submitted record. However, summary judgment will still be denied if a material factual dispute exists.

The primary issue for determination is whether there was a breach of contract and the appropriate remedy, with Plaintiffs alleging that Kirsch breached the covenant not to compete in the Phantom Unit Agreement, seeking injunctive relief and damages. The Plaintiffs did not seek summary judgment on damages. To establish a breach of contract claim, the Plaintiffs must demonstrate the existence of a valid contract, a breach by the defendant, and resulting damages. While the applicability of the Employment Agreement is contested, it is undisputed that the Phantom Unit Agreement is relevant.

The Employment Agreement, effective for four years from January 20, 2012, was set to expire on January 20, 2016. Despite the expiration, the Agreement allows for an extension under "employment at will," contingent upon mutual written agreement. The Plaintiffs argue that because the initial term had expired without a written extension, the Employment Agreement does not apply. However, evidence indicates that Kirsch remained employed beyond the initial term, continuing his role as Director of Sales and performing his job duties without interruption. He communicated his satisfaction with his employment and properly resigned on January 31, 2017. S&E accepted Kirsch's continued employment, thereby implying recognition of the Employment Agreement's terms.

Kirsch continued to receive his salary and benefits after the initial four-year term of the Employment Agreement, which required a written extension or renegotiation that did not occur. The Plaintiffs argue that the Employment Agreement's provisions were void after this period, relieving S&E of its obligations, including severance. They aim to apply similar provisions from the Phantom Agreement, which does not have a four-year limit. Kirsch contends that the Plaintiffs, by accepting his continued performance, are estopped from denying their obligations under the Employment Agreement. However, the Phantom Unit Agreement incorporates the Employment Agreement's terms, including non-compete and non-solicitation covenants, which remain binding after the initial period.

Regarding potential breaches, the Employment Agreement prohibits Kirsch from engaging in competitive activities or soliciting S&E customers during his employment. Kirsch breached these terms by associating with DHS Fraco, a competitor, while still employed at S&E. Evidence shows that he and others decided to form DHS Fraco, and he signed an employment agreement with them on October 13, 2016, while still employed by S&E, indicating a clear breach of his obligations.

Kirsch breached his Employment Agreement by contacting S&E customers, specifically through an email to Pav-Lak on January 26, 2017, while still employed by S&E. This communication promoted DHS Fraco's lower prices and led to Pav-Lak moving its business to DHS Fraco, violating Section 3.1(d) of the Employment Agreement. After resigning on January 3, 2017, Kirsch negotiated a severance provision in Section 5(c) of the Employment Agreement, which stated that the non-compete clause would only apply post-employment if S&E chose to pay him severance. S&E opted not to pay severance, thus releasing Kirsch from the non-compete obligations after his employment ended. Although Kirsch breached his contractual obligations prior to leaving S&E, S&E was unaware of these breaches when it decided against severance. Additionally, while the Plaintiffs alleged Kirsch retained their confidential information, they failed to provide evidence showing he used it, as simply soliciting customers did not constitute per se use of that information. Consequently, Kirsch's Motion for Summary Judgment regarding his post-employment conduct is granted.

Kirsch's obligations under the Phantom Unit Agreement, executed on January 20, 2012, were similar to those in his Employment Agreement, including non-compete and non-solicitation provisions. These provisions prohibited him from engaging in advisory roles or soliciting S&E customers during his employment and for two years thereafter. Kirsch breached these obligations by joining DHS Fraco and soliciting S&E client Pav-Lak while still employed by S&E. However, S&E chose not to pay Kirsch severance, which meant that the obligations of the Phantom Unit Agreement ceased after his departure on January 30, 2017.

The Plaintiffs sought injunctive relief to prevent Kirsch from working at DHS Fraco, requiring proof of success on the merits, irreparable harm, and a favorable balance of hardships. They demonstrated that Kirsch breached the non-compete covenants during his employment, but with the termination of these obligations upon S&E's decision not to pay severance, an injunction was deemed unnecessary.

Regarding damages for breaches prior to January 31, 2018, there was no evidence presented. Any potential damages would be limited to the period of Kirsch’s employment, as his contractual obligations ended with the lack of severance payment. The court ruled partially in favor of both the Plaintiffs and Defendant regarding the motions for summary judgment and requested the parties to discuss further proceedings concerning damages.