gpac, LLP v. Andersen et al

UNITED STATES DISTRICT COURT
DISTRICT OF SOUTH DAKOTA
SOUTHERN DIVISION
gpac, LLP, 4:21-CV-4201-LLP
Plaintiff,
vs. MEMORANDUM OPINION
AND ORDER
BLAKE ANDERSEN and
CYBERCODERS,INC.,
Defendants.
Pending before the Court are Defendant, Blake Andersen's ("Andersen") Motion for
Judgment on the Pleadings (Doc. 19) and Defendant, CyberCoders, Inc.'s ("CyberCoders")
Motion for Judgment on the Pleadings(Doc. 24.) For the following reasons, the motions will be
denied.
BACKGROUND
Gpac is a recruiting company that provides personnel placement services. (Doc. l-I,
Complaint, f I.) Gpac is a limited liability partnership with its principal place of business in
Lincoln County, South Dakota, but gpac does business throughout the United States.(Id. ]ff 1, 5.)
Andersen, a Colorado resident, formerly worked as a recruiter for gpac. On January 17, 2019,
Andersen signed an Account Executive Employment Agreement ("Agreement") with gpac. A
copy ofthe Agreement is attached as Exhibit A to the Complaint. (Doc. 1-1.)
Pursuant to the Agreement, Andersen was employed at gpac's "Office," which is defined
at its location in Sioux Falls, South Dakota. (Agreement §§ 1.1 and 2.1.) In its Answer to
CyberCoder's Counterclaim, gpac admits that "Andersen lived and worked in Colorado while
employed by gpac at the time he resigned from gpac," but gpac asserts that "Andersen lived and
worked in South Dakota when the Agreement was executed." (Doc. 7, Answer to Counterclaim,
p. 4, If 19.) In his Memorandum in Support of Motion for Judgment on the Pleadings, Andersen
admits that he signed the Agreement while working for gpac in South Dakota. (Doc. 20, p.10.)
And again, in his Reply Brief, Andersen states:
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Although Blake executed his EA while he lived in, and worked for GPAC,in South
Dakota, he was intentionally transferred by GPAC to Colorado. By opening an
office in Colorado, and by hiring Colorado residents to work for the company,
GPAC assumed the legal obligation to follow Colorado's employment laws. While
Blake's EA may not have been void when it was first executed, it became avoidable
and unenforceable once GPAC chose to have Blake and others live and work for it
in Colorado.
(Doc. 30, p. 7.)
The Agreement contains four provisions that are relevant to the breach of contract
allegations in Count 1 ofthe Complaint. The first is a nondisclosure provision in Section 8 of the
Agreement which prohibits employees from using or disclosing "to any person the Company's
Proprietary Information either during or after Employee's employment."(Agreement § 8.2.) This
provision also requires employees to return Proprietary Information to gpac upon termination of
employment, and to delete such information from their personal property and social media sites.
{Id. at § 8.1.) "Company's Proprietary Information" is defined elsewhere in the Agreement as"the
Company's confidential information" including a long list of items ranging from customer lists,
identity of candidates and clients, billing rates, computer programs and data, to "all such
information developed by its employees, whether or not during working hours, that is related to
the Company's business." (Agreement § 1.12.) The Agreement reflects that gpac considers its
Propriety Information as constituting "trade secrets." {Id.)
The second provision is a non-solicitation covenant in Section 9 of the Agreement which
provides:
For a period of two years following the effective date of the termination of the
Employee's employment, the Employee shall not, in the course of the personnel
placement service business, solicit or provide services to any client, interim
employee or candidate or solicit for employment or employ any interim employee
or candidate, who resides in the United States, and who contacted the Company or
had been contacted by the Company for personnel placement service business and
shall not assist, directly or indirectly, any other person other than the Company in
so doing, provided that the Company remains in the personnel placement service
business in the United States.
(Agreement § 9.)
The third provision is a convenant not to compete in Section 10 which prevents the
employee from engaging "in the activities of an Account Executive, outside sales representative,
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coordinator, research assistant, project coordinator, manager, or trainer in the personnel placement
service business within a two hundred mile radius ofthe Office, any Remote Office,or any Home"
for a period of two years following termination of employment with gpac. (Agreement §§ 10.1,
10.1.1.)"Office" is defmed as "the office of the Company located at 116 West 69^ Street, Sioux
Falls, South Dakota. (Jd. § 1.1.) The "Remote Office" is "any location approved by the Company
in which the employee is regularly doing business on behalf of the Company other than the
'Office.'" {Id. § 1.2.) "Home" means"any location which is the employee's primary residence at
any time while the employee is employed by the Company." {Id. § 1.3.)
Finally, under Section 12 of the Agreement, the employee agrees not to induce any other
employees ofgpac to quit their employment with gpac or otherwise contribute to other employees
violating their contractual obligations to gpac. (Agreement § 12.2.)
Andersen resigned employment at gpac on January 4,2021.(Complaintf 14.) He went to
work for CyberCoders as an Executive Recruiter on or about September 2021. (Doc. 5, Answer
and Counterclaim by CyberCoders, p. Il,lff 18-19.) CyberCoders, a California company with its
principal place of business in Irvine, California, is a nationwide permanent placement recruiting
firm. (Doc. 5, p. 9,f 8.)
Gpac originally brought this action in the Second Judicial Circuit Court, Lincoln County,
South Dakota on October 20, 2021. (Doc. 1-1.) On November 23, 2021, CyberCoders removed
the case to this Court pursuant to 28 U.S.C. §§ 1441 and 1446 based on diversity jurisdiction.
(Doc. 1.)
Gpac asserts five counts in its Complaint. The breach of contract claim in Count 1 alleges
that Andersen breached Sections 8, 9, 10 and 12 of the Agreement:
Employee has breached the Agreement through; (a) using or disclosing gpac's
confidential information in violation of Section 8 of the Agreement;(b)solicitation
of gpac's current or prospective clients and candidates within two years of
termination of employment with gpac within the restricted geographic area in
violation of Section 9 of the Agreement; (c) being employed by or in a service
relationship with New Employer within two years of termination of employment
with gpac within the restricted geographic area in violation of Section 10 of the
Agreement; or (d) engaging in acts to induce other gpac employees to terminate
their employment with gpac or otherwise contributing to other employees of gpac
violating their contractual obligations to gpac.
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(Doc. 1-1, Complaint, p. 3, jf 17.) In Count 2 of the Complaint, gpac asserts that both Andersen
and CyberCoders misappropriated gpac's trade secrets. Count 3 is a claim against CyberCoders
for tortious interference with gpac's Agreement by hiring and continuing to employ Andersen.
Gpac asserts an unfair competition claim against both Andersen and CyberCoders in Count 4.
Finally, gpac seeks punitive damages from both Defendants in Count 5 of the Complaint.
Andersen filed an Answer to the Complaint. (Doc. 16.) CyberCoders filed an Answer and
a Counterclaim seeking, among other things, a declaration that the restrictive covenants in the
Agreement are unenforceable. (Doc. 7.) Both Defendants now move for judgment on the
pleadings pursuant to Federal Rule of Civil Procedure 12(c).
Defendants argue that Colorado law governs the Agreement based on Andersen's residence
in Colorado for the majority ofhis employment with gpac,and that the Agreement is unenforceable
under Colorado law. Alternatively, Defendants argue that, even if South Dakota law applies,
Andersen is still entitled to judgment in his favor on gpac's breach of contract claim, and thus
CyberCodere also is entitled to judgment in its favor on gpac's tortious interference with contract
claim because that claim is premised on an Agreement that is invalid and unenforceable.
Defendants further argue that Count 2, misappropriation of trade secrets, is not supported by
sufficient facts alleged in the Complaint, and therefore they are entitled to judgment on that claim.
Andersen also contends that Count 4, unfair competition, is not a separate, independent cause of
action, but "is more ofa label used to generally describe more specific claims or causes ofaction."
(Doc. 20, p. 31.) Finally, Anderson asserts that the claim for punitive damages in Count 5 cannot
be a stand-alone claim.
STANDARD OF REVIEW
A motion for judgment on the pleadings is appropriately granted "where no material issue
offact remains to be resolved and the movant is entitled to judgment as a matter oflaw." demons
V. Crawford, 585 F.3d 1119, 1124(8th Cir. 2009). In considering a motion under Federal Rule of
Civil Procedure 12(c), It is analyzed under the same rubric as that of a Rule 12(b)(6) motion to
dismiss for failure to state a claim upon which relief can be granted. See id. See also E.E.O.C. v.
Northwest Airlines. Inc., 216 P. Supp. 2d 935, 937(D. Minn. 2002). Under Rule 12(bX6), the
factual allegations ofa complaint are assumed true and construed in favor ofthe plaintiff,"even if
it strikes a savvy judge that actual proof of those facts is improbable." Bell Atlantic Corp. v.
Twombly,550 U.S.544,556(2007), cited in Data Mfg., Inc. v. United Parcel Serv., Inc.,557 F.3d
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849, 851 (8th Cir. 2009). "While a complaint attacked by a Rule 12(b)(6) motion to dismiss does
not need detailed factual allegations, a plaintiff's obligation to provide the 'grounds' of his
'entitlement to relief requires more than labels and conclusions, and a formulaic recitation ofthe
elements of a cause of action will not do." Twombly, 550 U.S. at 555 (internal citations omitted).
The complaint must allege facts, which, when taken as true, raise more than a speculative right to
relief. Id.(intemal citations omitted); Benton v. Merrill Lynch <& Co., Inc., 524 F.3d 866, 870(8th
Cir. 2008). Although Federal Rule of Civil Procedure 8 may not require "detailed factual
allegations," it "demands more than an unadomed, the-defendant-unlawflilly-harmed-me
accusation." Ashcroft v. Iqbal,556 U.S. 662,678(2009). A claim must have facial plausibility to
survive a motion to dismiss. Id. Determining whether a claim has facial plausibility is "a context-
specific task that requires the reviewing court to draw on its judicial experience and common
sense." Ashcroft, 556 U.S. at 679.
In considering a motion to dismiss for failure to state a claim under Rule 12(b)(6), courts
primarily look to the complaint and "'matters incorporated by reference or integral to the claim,
items subject to judicial notice, matters of public record, orders, items appearing in the record of
the case, and exhibits attached to the complaint whose authenticity is unquestioned;' without
converting the motion into one for summary judgment." Miller v. Redwood Toxicology Lab., Inc.,
688 F.3d 928, 931 n. 3 (8th Cir. 2012)(quoting 5B Charles Alan Wright & Arthur R. Miller,
Federal Practice and Procedure § 1357(3d ed. 2004)).
"On a motion to dismiss for breach of contract, courts look not only at the sufficiency of
the complaint but also at the contract itself, which by definition is integral to the complaint."Axiom
Inv. Advisors, LLC by & through Gildor Mgmt., LLC v. Deutsche Bank AG,234 F. Supp. 3d 526,
533(S.D.N.Y. 2017). See also Stahl v. U.S. Dep't ofAgric., 327 F.3d 697, 700 (8th Cir. 2003)
("In a case involving a contract, the court may examine the contract documents in deciding a
motion to dismiss."). A copy of the Agreement is attached as Exhibit A to the Complaint and the
Court will consider it.'
' After Andersen filed his motion for judgment on the pleadings, gpac filed two separate
declarations with attached exhibits that relate to the Agreement. (Docs. 22 and 26.) Attached to
the first declaration as Exhibit A is a document entitled "Account Executive Employment
Agreement for Leadership." (Doc. 22-1.) The declaration states that Exhibit A is a copy of an
Addendum to Andersen's Agreement, and that it was executed on February 11,2020. Gpac argues
that the Addendum was signed before Andersen moved to Colorado, and that it raises a question
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CHOICE OF LAW
Before addressing the merits of Defendants' motions for judgment on the pleadings, the
Court must resolve the dispute over what law applies to gpac's breach of contract claim.^
Defendants ai^ue that Colorado law governs the Agreement based on Andersen's residence
in Colorado for the majority of his employment with gpac. Defendants assert that the Agreement
is unenforceable under Colorado law because the law and public policy in Colorado so strongly
disfavor the restrictive covenants in the Agreement.
Defendants point to the following provision ofthe Colorado Code:
(2)Any covenant not to compete which restricts the right of any person to receive
compensation for performance of skilled or unskilled labor for any employer shall
be void, but this subsection(2)shall not apply to:
(a) Any contract for the purchase and sale ofa business or the assets of a business;
(b) Any contract for the protection of trade secrets;
(c) Any contractual provision providing for recovery of the expense of educating
and training an employee who has served an employer for a period of less than
two years;
(d) Executive and management personnel and officers and employees who
constitute professional staff to executive and management personnel.
of fact whether Andersen was "professional staff' of gpac. {Doc. 21, pp. 12-13.) Thus, gpac
asserts, even if Colorado law applies, the Colorado statute does not void Ae Agreement because
the law contains an exception allowing non-compete agreements for professional staff.
Six exhibits are attached to the second declaration.(Docs. 26-1-26-6.) The first exhibit appears
to be a duplicate ofthe January 17, 2019 Agreement attached to the Complaint. (Doc. 26-1.)The
declaration explains that Exhibits 2 through 6 are exhibits to the January 17, 2019 Agreement.
Those exhibits are dated January 17,2019, January 28,2020, February 11,2020, March 20,2020,
and May 20,2020.(Docs. 26-2- 26-6.) They appear to pertain to Andersen's compensation for his
work with gpac, but gpac does not explain their relevance.
Andersen objects to consideration of gpac's declarations and referenced exhibits in deciding the
pending motion "because he cannot in good faith admit or agree that these materials are authentic,
genuine, and complete."(Doc.30, p. 2.)The Court need not reach this issue because it has no need
to consider Docs.22 or 26 in order to rule on Defendants' motions forjudgment on the pleadings.
2 Andersen asserts that gpac's other claims or Counts "do not require a conflict of law analysis
because South Dakota and Colorado substantive laws are the same." (Doc. 20, p. 7.) CyberCoders
does not argue to the contrary. (Doc. 24.) If no conflict exists, the Court need not engage in a
choice of an&\y%\%. See Prtidential Ins. Co. ofAmerica v. Kamrath,475 F.3d 920,924(8th Cir.
2007).
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Colo. Rev. Stat. § 8-2-113(2). Defendants assert that none of the exceptions in Sections 2(a)-(d)
apply here, and thus the non-compete covenant in the Agreement is void. Andersen adds that
"Colorado's public policy against non-competes is so strong that its Legislature has made it
'unlawful to use force,threats, or other means ofintimidation to prevent any person from engaging
in any lawful occupation at any place he sees fit.'"(Doc. 20, p. 12, citing Colo. Rev. Stat. § 8-2-
113(4)).
Andersen's Agreement with gpac includes two provisions that are relevant to Defendants'
choice-of-law argument. First, the choice-of-law provision states: "This Agreement, and any
controversies, claims, disputes or matters in question arising out of or relating to this Agreement
shall be construed, governed, and enforced in accordance with the laws of the Slate of South
Dakota." (Agreement § 16.) Second, the choice-of-forum clause states:
The sole and exclusive forum for resolving any and all controversies, claims,
disputes and matters in question arising out of, or relating to, the employment of
the Employee by the Company or the termination of such employment, or this
Account Executive Employment Agreement or the breach thereof, or the relations
between the parties, arising either during or after the employment relationship, shall
be in either the South Dakota Circuit Court for Second Judicial Circuit or the United
States District Court for the District of South Dakota, Southern Division.
(Agreement § 17.1.) According to gpac, these provisions require the application of South Dakota
law to its breach of contract claim.
\n Broin and Associates, Inc. v. Genencor Intern.. Inc., 232F.R.D.335(D.S.D.2005), this
Court set forth the general rule applicable to resolving choice of law issues: "When confronted
with a conflict oflaws issue in a diversity action, a federal district court must apply the conflict of
law rules of the forum state." Id. at 338 (citing Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S.
487,496 (1941)). See also Black Hills Truck & Trailer, Inc. v. Mac Trailer Manufacturing, Inc.,
2015 WL 8483353,*l (D.S.D. Dec. 9, 2015). In Miller v. Honkamp Krueger Financial Services.
Inc.,the Eighth Circuit reiterated the rule that,"[i]n determining which state's law applies, we look
to the choice oflaw principles ofthe forum state." 9F.4th 1011,1016(8th Cir.2021)(quoting/4m.
Fire & Cas. Co. v. Hegel, 847 F.3d 956,959(8th Cir. 2017)). In designating South Dakota law as
governing, the Miller court determined that "[ujnder South Dakota law, courts honor contractual
choice-of-law provisions unless friey contravene South Dakota public policy." Miller, 9 F.4lh at
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1016(citing Dunei/foi/?., L.L.C. v. Country Kitchen Int'l,Inc.,623 N.W.2d484,488(S.D.2001)).
The South Dakota Supreme Court has stated that "[i]n South Dakota, a stipulation that provides
the governing law is permitted." Dunes, 623 N.W.2d at 488 (citing State ex rel Meierhenry v.
Spiegel, Inc., 211 N.W.2d 298,299(S.D. 1979)).
Recognizing that choice of law issues can be complex. South Dakota has turned to the
Restatement (Second) of Conflicts to navigate the nuances of Conflicts of Laws. As this court
recently noted,"South Dakota applies the provisions of the Restatement(Second) of Conflicts of
Laws in order to resolve questions about which state's laws govern in particular factual
situations." O/wego Liner Company, Inc. v. Monte Vista Group. LLC, 2019 WL 4415378, *5
(D.S.D. Sept. 16,2019)(citing D«»es,623 N.W.2d at 488 {<yao\\ng Stockmen's Livestock Exch. v.
Thompson, 520 N.W.2d 255, 257 (S.D. 1994))). Because the Agreement in this case contains a
choice of law provision. Section 187 of the Restatement applies.
Restatement of Conflicts(Second)§ 187 states:
(1) The law of the state chosen by the parties to govern their contractual rights and
duties will be applied ifthe particular issue is one which the parties could have
resolved by an explicit provision in their agreement directed to that issue.
(2) The law of the state chosen by the parties to govern their contractual rights ^d
duties will be applied, even ifthe particular issue is one which the parties could
not have resolved by an explicit provision in their agreement directed to that
issue, unless either
(a) the chosen state has no substantial relationship to the parties or the
transaction and there is no other reasonable basis for the parties' choice,
or
(b) application of the law of the chosen state would be contrary to a
fundamental policy of a state which has a materially greater interest than
the chosen state in the determination of the particular issue and which,
under the rule of § 188, would be the state of the applicable law in the
absence of an effective choice oflaw by the parties.
Restatement (Second) of Conflicts § 187(I)-(2). As summed up by the court in Larson
Manufacturing Compare of South Dakota, Inc. v. Western Showcase Homes, Inc., "[t]he
Restatement honors choice-of-law clauses contained within contracts unless, either(a)the chosen
state has no substantial relationship to the parties or the transaction and there is no other reasonable
basis for the parties' choice, or(b) application ofthe law of the chosen state would be contrary to
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a fundamental policy of a state which has a materially greater interest than the chosen state in the
determination of the particular issue. 2018 WL 6528885, at *10-11 (D.S.D. Dec. 11, 2018)
(quoting Restatement(Second)of Conflict ofLaws § 187(2)(a)-(b)).
Andersen argues that the second exception under § 187 applies here because "an
application of South Dakota law would be contrary to the fundamental public policy ofthe State
of Colorado, and Colorado has a materially greater interest with regard to the particular issues in
this case." (Doc.30, p. 8.) In support ofthis argument Andersen relies, in part, on DCSSanitation
V. Castillo, 435 F.3d 892 (8th Cir. 2006.) There, Nebraska residents sought relief in Nebraska
federal court from employment agreements which dictated that Ohio law would govern their
employment disputes. Id. at 894. The District Court determined both that Nebraska had a
materially greater interest in the dispute and that applying Ohio law would violate a fundamental
policy of Nebraska law, and therefore declined to apply Ohio law. Id. at 895. Factors cited by the
court included entering into the Agreements in Nebraska,the services were performed in Nebraska,
and further,"the former employees reside in Nebraska, the prohibition of the noncompete clause
directly and materially affects employment in Nebraska, and DCS does business in Nebraska." Id.
at 896. The court also noted the "only relationship between Ohio and the parties is the location of
DCS's corporate headquarters and principal place of business in Ohio. The Agreements were not
negotiated, entered into, or performed in Ohio." Id. Therefore, it was proper to conclude that
"Ohio has no substantial relationship to the parties or the transaction, and Nebraska has a greater
material interest in the Agreements." Id. The Eighth Circuit affirmed, and also addressed the
second factor in § 187 of the Restatement, explaining that, "Nebraska and Ohio courts have
materially different approaches to the reformation of unreasonable noncompete agreements," such
that an Ohio court may reform the agreement, but a Nebraska court may not. Id. at 897 (citing H
& R Block Tax Servs.. Inc. v. Circle A Enters., Inc., 269 Neb. 411,693 N.W.2d 548, 552(2005)).
As a consequence,"application ofOhio law would violate a fundamental policy ofNebraska law."
Id. (citing Rain & Hail Ins. Serv., Inc. v. Casper,902 F.2d 699,700-01 (8th Cir. 1990)).
DCS Sanitation is unlike the present case and it does not support application of Colorado
law to the Agreement between Andersen and gpac. In DCS Sanitation, the forum state rejected
the choice of law provision in the contract and instead applied the forum state's law. In the case
at bar. Defendants seek the opposite result: rejection of the forum state's law in favor of the law
of another state based on the extent ofthe latter's interest in the dispute.
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To support their argument that Colorado has a materially greater interest than South
Dakota, Defendants point to gpac's transfer of Andersen from South Dakota to live in Colorado
and work at gpac's satellite office in Colorado, and gpac's decision to have Andersen and other
employees work from their homes in Colorado after it closed the satellite office. One problem
with this information is that Defendants do not cite to any pleadings that allege gpac opened a
satellite office in Colorado or that it decided to have Andersen and other employees work from
their homes after closing the satellite office, and the Court was unable to find this information in
the pleadings. The Court is not convinced that Colorado has a materially greater interest in the
issues related to the Agreement.
Gpac points out the factors that weigh in favor of application of South Dakota law,
including the contract provisions choosing South Dakota law, Andersen's execution of the
Agreement in South Dakota while he lived and worked in South Dakota at the beginning of his
employment, location of gpac's business in South Dakota, including all of its data and customer
information, and the fact that South Dakota is the forum state. Colorado clearly has an interest in
the issues relating to the Agreement, but the Court does not find that Colorado's interest is a
materially greater interest in the issues. If Andersen was a resident at all times in Colorado, and
signed there, the weighing of interests could change.
The choice of law issue in this case is similar to that in Emerson Electric Co., v. Rogers,
418 F.3d 841 (8th Cir. 2005). A former employee of a Missouri business who had signed an
employment agreement providing that Missouri law would govern any employment disputes
argued that the federal court in Missouri should apply Georgia law because some ofthe employee's
sales efforts took place there and in several other states. Id. at 847. The district court rejected the
former employee's argument. In affirming, the Eighth Circuit commented as follows: "Even
assuming that Missouri were the default state and that a Georgia court would be more likely to
find the covenant unenforceable,there is no indication Missouri lacks all interest in the transaction
or that Georgia's interest in the dispute is materially greater than that of Missouri." Id. (citing
Restatement (Second) of Conflict of Laws § 187 (1971)). The Eighth Circuit added that the
District Court did not err in concluding the "public policy of Missouri encouraged the enforcement
of the covenant not to compete," id., nor in "applying Missouri law to determine whether the
injunction should be issued." Id.
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Likewise, the Agreement in the present case designates South Dakota courts as the forum
and South Dakota law as governing. There is a showing that South Dakota has a substantial rela
tionship to the parties and to the Agreement. In contrast. Defendants have not shown that Colo
rado's interest is materially greater than that of South Dakota. Thus,the Court will give effect to
the choice oflaw provision unless the public policy ofSouth Dakota dictates otherwise. See Miller
V. Honkamp,9 F.4th at 1016("Under South Dakota law, courts honor contractual choice-of-law
provisions unless they contravene South Dakota public policy.") (citing Dunes, 623 N.W.2d at
488)).
There are several sources of public policy in South Dakota. The South Dakota Supreme
Court has summarized them as follows: "In South Dakota,'[t]he primary sources for declarations
of... public policy ... are the constitution, statutory law, and judicial decisions.'" Black Hills
Truck & Trailer, 2015 WL 8483353, *l(quoting Spiegel, 111 N.W.2d at 300)). In discerning
public policy governing contracts, the Black Hills Truck court took note that, "[a]ny contract
provision which is contrary to an express statute or to the policy of an express statute is unlawful."
Id. (quoting Spiegel, 111 N.W.2d at 300). These comments dovetail with SDCL § 53-9-3
(identifying certain contracts as against public policy).
In Miller v. Honkamp,the Eighth Circuit addressed public policy concerns in the context
ofan employment agreement. 9 F.4that 1011. The court noted "the South Dakota Supreme Court
has made clear that '[t]he general rule against contracts in restraint of a lawfiil profession, trade,
or business is a legislative expression of public policy.'"(quoting Farm Bureau Life Ins. Co. v.
Dolly, 910 N.W.2d 196,201 (S.D. 2018)).
Employment contracts are addressed in South Dakota statutes, as well. Pertinent to this
case is the following restriction on employment contracts:"Any contract restraining exercise of a
lawful profession, trade, or business is void to that extent, except as provided by §§ 53-9-9 to 53-
9-12, inclusive." SDCL § 53-9-8. The exception that appears at SDCL § 53-9-11 provides as fol
lows:
... an employee may agree with an employer at the time ofemployment or
at any time during employment not to engage directly or indirectly in the same
business or profession as that of the employer for any period not exceeding two
years from the date of termination of the agreement and not to solicit existing
customers of the employer within a specified county, first- or second-class
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municipality, or other specified area for any period not exceeding two years from
the date of termination of the agreement, if the employer continues to carry on a
like business therein.
SDCL§ 53-9-11.
As discussed in Dunes,the public policy of South Dakota is to permit parties to choose the
law that governs their agreements. 623 N.W.2d at 488. The public policy expressed in SDCL
§ 53-9-8 is that contracts in restraint oftrade are disfavored. The public policy expressed in SDCL
§ 53-9-11, specific to employment agreements, is that a limit of two years is allowed for
noncompete and non-solicitation agreements,and geographic restrictions apply. South Dakota has
enacted some general rules through statutes, but the courts primarily address the validity ofspecific
provisions of employment contracts on a case-by-case basis. See, e.g.. Raven Industries, Inc. v.
Lee,783 N.W.2d 844(S.D.20\0);Franklin v. Forever Venture, Inc.,696N.W.2d 545(S.D. 2005);
Setliffv. Akins, 616 N.W.2d 878(S.D. 2000). For these reasons. South Dakota public policy does
not require that this Agreement's choice of South Dakota law provision be invalidated.
Accordingly, the Court will apply South Dakota law to gpac's causes of action in the Complaint,
as well as applying South Dakota law on conflicts oflaw.
Having resolved the choice of law question, the Court now turns to the merits of
Defendants' motions for judgment on the pleadings.
ANALYSIS
1. Count 1; Breach of Contract lAndersenl
In its Complaint, gpac claims that Andersen breached four provisions of his Agreement:
the confidentiality provision in Section 8, the non-solicitation provision in Section 9, the
noncompete provision in Section 10, and the provision prohibiting him from inducing other gpac
employees to terminate employment with gpac or violate their contractual obligations to gpac in
Section 12.
In South Dakota, "[tjhe elements of a breach of contract are (1) an enforceable promise;
(2) a breach of the promise; and (3) resulting damages." Bowes Constr.. Inc. v. S.D. Dept. of
Transp., 793 N.W.2d 36,43(S.D. 2010).
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SectioQ 8; Confidentiality Provision and Section 12; Inducing gpac Employees
Andersen argues that gpac's Complaint fails to allege facts showing a violation of the
confidentiality provision in Section 8.^ Andersen also asserts that gpac failed to allege any facts
that he, in fact,engaged in any conduct in violation ofSection 12 ofthe Agreement which prohibits
him from inducing other gpac employees to violate their employment contracts/
In response,gpac contends that its Complaint sufficiently alleges conduct by Andersen that
breached Sections 8 and 12 of the Agreement, and that the allegations put Andersen on notice of
the claims against him and the grounds on which they rest. Gpac points out that Section 8 of the
Agreement prohibits disclosure of confidential information, and the Complaint sets out that
provision and alleges Andersen breached it. Furthermore, the agreement not to induce other
employees to quit or violate their contracts of employment with gpac, found in Section 12 of the
Agreement, is set out in the Complaint, as well as gpac's allegations that Andersen engaged in
those prohibited acts.
For purposes of Defendants' motions for judgment on the pleadings, the issue is not
whether gpac ultimately will prevail on its claims that Andersen breached Section 8 and Section
12 of the Agreement, but whether it appears beyond doubt that gpac can prove no set of facts in
support of its claims which would entitle it to relief. It is too early to determine whether gpac can
show that Andersen committed all of the alleged acts in breach of the Agreement with gpac, but
gpac's assertions meet the plausibility standards required to avoid Judgment in favor ofDefendants
on the claims for breach of Sections 8 and 12 of the Agreement. For these reasons, Defendants
are not entitled to judgment in their favor on the claims for breach of Section 8 or Section 12 as
they adequately plead causes of action.
3 A covenant not to disclose information, unlike a covenant not to compete,"is free from challenge
as a general restraint on trade." Aqreva, LLC v. Eide Bailly, LLP, 950 N.W.2d 774, 786 (S.D.
2020). "However,such covenants are strictly construed and enforced only to the extent reasonably
necessary to protect the employer's interest in confidential information." Id
" The portion of Andersen's brief addressing the confidentiality provision cites to Section 10 of
the Agreement. (Doc. 20, pp. 22-23.) The Court assumes Andersen meant to cite to Section 12
because the prohibition against inducing other employees is found in Section 12 and not in Section
10 of the Agreement.
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Finally, Etefendants argue that the non-solicitation provision (Section 9)and noncompete
provision (Section 10)of the Agreement are too broad in scope and geographical area and are not
enforceable under South Dakota law. South Dakota law provides;
Except as otherwise provided in § 53-9-11.1, an employee may agree with an
employer at the time of employment or at any time during employment not to
engage directly or indirectly in the same business or profession as that of the
employer for any period not exceeding two years ftom the date of termination of
the agreement and not to solicit existing customers of the employer within a
specified county, first- or second-class municipality, or other specified area for any
period not exceeding two years from the date of termination of the agreement, if
the employer continues to carry on a like business therein.
S.D.C.L§ 53-9-11.
Section 9; Non-Solicitation Provision
The non-solicitation covenant in Section 9 ofthe Agreement provides:
For a period of two years following the effective date of the termination of the
Employee's employment, the Employee shall not, in the course of the personnel
placement service business, solicit or provide services to any client, interim
employee or candidate or solicit for employment or employ any interim employee
or candidate, who resides in the United States, and who contacted the Company or
had been contacted by the Company for personnel placement service business and
shall not assist, directly or indirectly, any other person other than the Company in
so doing, provided that the Company remains in the personnel placement service
business in the United States.
(Agreement § 9.)
Under South Dakota law, an agreement may restrict an employee from soliciting existing
customers within a specified county,first- or second-class municipality,or other specified area for
aperiod oftwo years after employment. SDCL 53-9-11. Non-solicitation clauses are not a general
restraint on trade because "under SDCL § 53-9-8, an agreement not to disclose information or
solicit, unlike a covenant not to compete,is free from challenge as a general restraint on trade." 1st
Am. Sys., Inc. v. 311 N.W.2d51,57(S.D. 1981)."Because a non-disclosure clause, unlike
a non-compete clause, is not a general restraint on trade in South Dakota, it is not held to the same
strict standard as a non-compete clause ifthe language is too broad." Billion v. Oytford, 2016 WL
3976636, at *4 (D.S.D. July 22, 2016). This same reasoning can be applied to non-solicitation
clauses, which are more akin to non-disclosure provisions because, while they limit a former
employee's ability to solicit certain customers, they do not restrain the former employee fit)m
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engaging in carrying on any business that they so choose. BeefProducts, Inc. v. Hesse,2019 WL
6037424, at *3 (D.S.D. Nov. 14, 2019) (citing Barney, Harris Upham & Co., Inc. v.
Robinson, 12 F.3d 515, 518 (5th Cir. 1994)) (finding that non-recruitment covenants do not
necessarily restrict a former employee's ability to compete and do not significantly restrain trade).
The two-year restriction on solicitation in Section 9 ofthe Agreement in this case complies
with SDCL § 53-9-11,and thus on its face it appears to be a reasonable duration. However,Section
9 does not contain a geographical restriction and it appears to apply throughout the United States.
Indeed, gpac alleges in the Complaint that Section 9 prohibits Andersen from soliciting clients and
candidates "anywhere within the United States, as gpac's business is national in scope." (Doc. 1-
1, Complaint, § 5.)
The South Dakota Supreme Court has held that "agreements which are unreasonable as to
the period of restriction or the area encompassed may be partially enforced." Walling Ghent. Co.
V. Bigner,349 N.W.2d 647,650(S.D. 1984)(citing Rezatto,311 N.W.2d at 56). The nondisclosure
clause in the employment agreement at issue in Walling lacked a territorial limitation.^ The court
applied a three-prong reasonableness test to determine the enforceability of the nondisclosure
clause: "[A] covenant is reasonable only if it (1)is no greater than required for the protection of
the employer,(2) does not impose undue hardship on the employee and(3)is not injurious to the
public." Walling, 349 N.W.2d at 650 (citing Rezatto, 311 N.W.2d at 59). The court in Walling
assumed that the geographical area for the nondisclosure agreement was the same area within
which the former employee had been authorized to represent the former employer, and the court
held that restriction to be reasonable. Walling, 349 N.W.2d at 650.
If a non-solicitation provision, or other restrictive covenant, exceeds the scope as
authorized by the applicable statute or common law rule, the proper remedy is for a court to only
enforce those terms that are compliant with the statute. See, e.g.. Ward v. Midcom, Inc., 575
N.W.2d 233, 238(S.D. 1998)(discussing "partial enforcement" doctrine). Although limited facts
are available at this stage in the litigation, it appears that a 200 mile limitation from the home office
in Sioux Falls, South Dakota is a reasonable limitation in which to restrict Andersen's solicitation
of business. See, e.g. Rezatto, 311 N.W.2d at 59(remanding for the trial court to set a reasonable
5 The nondisclosure clause prevented sales representatives from using Walling's confidential
customer information.
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duration for non-solicitation clause). It should be noted that a 200 mile limitation would diminish
the competing interest Colorado has in this Agreement.
One final matter regarding the non-solicitation clause involves gpac's interpretation of
Section 9 as prohibiting Andersen from soliciting both its "current and prospective clients and
candidates." (Doc. 1-1, Complaint, § 5.) In Rezatto, the South Dakota Supreme Court held that
covenants against ctccepn'«g the former employer's customers and against soliciting the former
employer's prospective customers were overbroad, and thus it struck down those portions of the
contract because they placed an undue burden on the former employee and the public.
311 N.W.2d at 59. See also Miller v. Honkamp, 9 F.4th at 1017(holding that South Dakota law
prohibits an agreement not to accept unsolicited business). Accordingly,the non-solicitation clause
in Section 9 of the Agreement is unenforceable to the extent that it prevents Andersen from
accepting business from gpac's former customers and soliciting gpac's prospective customers.
Section 10: Noncompete Provisions
The noncompete provisions in Section 10 ofthe Agreement provide;
10. RESTRICTIVE COVENANTS.
10.1. For a period of two years following the effective date of termination of
Employee's employment, and provided that the Company continues to remain the
personnel placement service business, the Employee shall not:
10.1.1. engage in the activities of an Account Executive, outside sales
representative, coordinator, research assistant, project coordinator, manager, or
trainer in the personnel placement service business within a two hundred mile
radius of the Office, any Remote Office, or any Home;
10.1.2. provide any personnel- placement-services to any person or company who
or which is located within a two hundred mile radius of the Office, any Remote
Office, or any Home;
10.1.3. have any ownership interest in any personnel placement service business
which is located within a two hundred mile radius ofthe Office,any Remote Office,
or any Home.
Under South Dakota law, a contract is void if it restricts an individual from working in a
lawful profession, trade, or business. SDCL 53-9-8. A statutory exception applies to non-compete
agreements between an employer and an employee. SDCL 53-9-11. A non-compete is only
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enforceable if it strictly complies with the statute by including geographical and temporal limits.
American Rim & Brake, Inc. v. Zoellner, 382 N.W.2d 421,424(S.D. 1986).
The noncompete provisions in Section 10 of the Agreement appear to include more
territory than that allowed by South Dakota law. The South Dakota Supreme Court has adopted a
practice of revising non-compete agreements when necessary to bring them in compliance with
the statutory restrictions placed on restraints of trade by the South Dakota Legislature. For
example, vaSimpsonv. C&RSupply,Inc.,598N.W.2d914(S.D. 1999),the South Dakota Supreme
Court held invalid a covenant not to compete "within any county in the United States." The court
modified the noncompete "by reducing the boundaries to include only those markets within the
city limits of Sioux Falls" Id. at 920. See also Loescher v. Policky, 173 N.W.2d 50, 53-54(S.D.
1969)(enforcing non-compete that exceeded the statutory geographical and temporal limits to the
extent it complied with the statutory language).
It appears that gpac in essence urges that Andersen should be restricted from competing in
a similar business anywhere in the United States. Courts tend to be "skeptical" of nationwide
restrictions on competition. See, e.g., Intermetro Industries Corp. v. Kent,2007 WL 1140637,*6
(M.D. Pa. 2007)(citing National Business Services, Inc. v. Wright, 2 F. Supp. 2d 701, 708(E.D.
Pa 1998)("nationwide covenants are disfavored")). Courts faced with such restrictive covenants
engage in an extensive review of the facts. See, e.g., Zambelli Fireworks Mfg. Co., Inc. v. Wood,
2009 WL 159182(W.D. Pa. 2009).
The noncompete provisions in the Agreement also appear to prohibit more activities than
necessary. The statutory limits of a noncompete agreement only allow the employee to agree "not
to engage directly or indirectly in the same business or profession as that ofthe employer." SDCL
§ 53-9-11. The South Dakota Supreme Court has stated that when reading an exception to the
public policy against restraints of trade, "we must construe it narrowly so as to promote the
proscription against general restraints on trade." American Rim & Brake, 382 N.W.2d at 424
(S.D.I986)(discussing the exception found at SDCL 53-9-11)(citing iJezarto, 311 N.W.2dat55).
The South Dakota Supreme Court has further instructed that "[wjhether the business actually
detrimentally competes will depend on the facts ofa particular case." Franklin v. Forever Venture,
696 N.W.2d at 549. In Franklin, the court found the noncompete at issue overly broad, but
enforced it to the extent allowed by statute. Id.
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The two-year restriction on competition in Andersen's Agreement with gpac complies with
SDCL § 53-9-11. It is unclear whether the employment activities and the geographical scope of
the Agreement comply with South Dakota law, and those are matters that may be resolved in later
proceedings. Though the scope of the activities and area restricted appear to be overbroad,
Defendants have not cited authority establishing that overbreadth is a basis for rendering a
noncompete agreement completely unenforceable under South Dakota law.
For all of the reasons set forth above, the Court denies the motions for judgment on the
pleadings as to the breach ofcontract claim in Count 1 of the Complaint.
2. Count 2; Misappropriation of Trade Secrets
Gpac also alleges that Andersen and CyberCoders misappropriated its trade secrets, and it
asserts a claim against Defendants under the Uniform Trade Secrets Act, SDCL chapter 37-29
("the UTSA"). Defendants argue that gpac has not identified any trade secrets or plausibly alleged
that any misappropriation occurred, and that they are entitled to judgment in their favor.
SDCL § 37-29-1 defines Misappropriation ofTrade Secrets in pertinent parts as follows:
...(2)"Misappropriation,"
(i) Acquisition of a trade secret of another by a person who knows or has
reason to know that the trade secret was acquired by improper means; or
(ii) Disclosure or use of a trade secret of another without express or implied
consent by a person who;
(A)Used improper means to acquire knowledge of the trade secret; or
(B) At the time of disclosure or use, knew or had reason to know that such
knowledge of the trade secret was; (I) Derived from or through a
person who had utilized improper means to acquire it; (II) Acquired
under circumstances giving rise to a duty to maintain its secrecy or
limit its use; or (III) Derived from or through a person who owed a
duty to the person seeking reliefto maintain its secrecy or limit its use;
...(4) "Trade secret," information, including a formula, pattern, compilation,
program, device, method, technique, or process, that:
(i) Derives independent economic value, actual or potential, from not
being generally known to, and not being readily ascertainable by proper
means by, other persons who can obtain economic value from its
disclosure or use; and
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(ii) Is the subject of efforts that are reasonable under the circumstances to
maintain its secrecy.
In Aqreva, LLC v. Eide Bailly, LLP,the South Dakota Supreme Court addressed a claim for mis
appropriation of trade secrets in the context of a motion for summary Judgment. 950 N.W.2d 774,
789 (S.D. 2020). The court reiterated the rule that "[t]he existence of a trade secret is a mixed
question of law and fact." Id. (quoting Paint Brush Corp., Parts Brush Div. v. Neu, 599 N.W.2d
384, 389(S.D. 1999)). The court explained further that "[t]he legal question is whether the infor
mation in question could constitute a trade secret under the first part of the definition of a trade
secret under S.D.C.L. § 37-29-1(4)." Id. {cxlxngDaktronics, Inc. v. McAfee, 599N.W.2d 358,361
(S.D. 1999)). The court then proceeded to divide Its task into two parts:"we first determine, as a
matter of law, whether the alleged secret constitutes 'information, including a formula, pattern,
compilation, program, device, method, technique or process.'" Id. The court stated the second part
of its endeavor was a "factual inquiry" that "involves the remaining subsections of S.D.C.L.§ 37-
29-U4)(i) and (ii)." Id.
In the present case, gpac alleges that its "confidential information is highly confidential"
and has "independent economic value from not being generally known to competitors"or to others.
(Doc. l-I, Complaint, p. 4,^ 23). A long list of gpac's "confidential information" is found in the
Agreement,and the information is referred to as "trade secrets." (Agreement§ 1.12.) Gpac alleges
that if its confidential information were known to competitors "it would be of economic value to
them." (Complaint, p. 4,f 23.) Gpac asserts it has tried to maintain the secrecy of this infor
mation, id. H 24,that the information qualifies as a trade secret, id., If 25, and that Defendants have
"used, disclosed, or misappropriated" trade secrets "in a manner that has harmed" gpac. (Jd., If
26.) Gpac further alleges the use or disclosure of trade secrets has violated the Agreement.(Doc.
I-I, Complaint, p. 3, ^ 17, citing § 8 of Agreement). The Agreement reveals that employees
acknowledge they have access to proprietary and confidential information (Agreement §§ 3.2 and
3.3), and they agree not to disclose proprietary information either before or after employment with
gpac (id. at § 8.2).
The Agreement, which is integral to the Complaint, lists wfiat gpac considers to be trade
secrets. Gpac alleges that Andersen had access to the trade secrets and that Andersen and Cyber-
Coders have used or disclosed that information. These allegations suffice to state a plausible claim
oftrade secret misappropriation against Defendants, and to avoid judgment in favor of Defendants
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on this claim. See, e.g.. Sterling Computers Corp. v. Haskell, 2018 WL 671210, at *4 (D.S.D.
Feb. 1, 2018)('"All that is required at this [motion to dismiss] stage of the proceedings is an
allegation that [the defendant] misappropriated ]the plaintiffs] trade secrets sufficient to put the
defense on notice as to the nature of the claim.'"). The Court denies Defendants' motions for
judgment in their favor on the claim for misappropriation of trade secrets in Count 2.
3. Count 3; Tortious Interference with Contract tCvberCoders)
Because CyberCoders is not a party to the Agreement, gpac brought a tortious interference
with contract claim against CyberCoders for third party interference with the Agreement. Cyber
Coders seeksjudgment in its favor on gpac's claim against it for tortious interference with contract.
The elements of tortious interference with contract are: (1) the existence of a valid contractual
relationship; (2) intentional interference with the relationship; (3) by a third party; (4) accom
plished through improper means or for an improper purpose,(5)a causal effect between the inter
ference and damage to the relationship, and (6) damages. Gruhlke v. Sioux Empire Fed. Credit
Union, Inc., 756 N.W.2d 399,406(S.D. 2008).
CyberCoders first argues that the tortious interference claim is moot because the Agree
ment signed by Andersen is not valid or enforceable. This argument fails because the Court has
held that the breach of contract claim survives Andersen's motion forjudgment on the pleadings.
Next, CyberCoders contends that there are no allegations of any "improper means" or an
"improper purpose" in CyberCoders' employment of Andersen. In its Complaint, gpac alleges
that CyberCoders had knowledge of gpac's contractual rights to confidentiality, non-competition,
non-solicitation, and non-interference set forth in the Agreement,as well as Andersen's obligations
to gpac under the Agreement. (Doc. 1-1, Complaint, p. 5,ff 29-30.) Gpac asserts that, despite
this knowledge, CyberCoders "intentionally and unjustifiably interfered with gpac's rights under
the Agreement by ... engaging in business or other acts and omissions with [Andersen] in breach
of[Andersen's] obligations under the Agreement."
Gpac's allegations, while sparse, are sufficient to lead to the inference that CyberCoders
intentionally interfered with the Agreement by employing Andersen, and that the interference
caused gpac harm. Thus, gpac has pleaded a plausible claim for tortious interference with contract,
and CyberCoders' motion for judgment in its favor is denied as to Count 3.
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4. Count 4; Unfair ComoetitioD
Gpac claims that both Defendants engaged in the tort of unfair competition. As this Court
has noted previously, in South Dakota the tort of unfair competition does not have specific
elements. Copperhead Agricultural Products, LLC v. KBAg Corp., LLC,2019 WL 7038241, *7
(D.S.D. Dec. 20, 2019) (quoting Setliff, 616 N.W.2d at 887). Rather, the concept of unfair
competition "describes a general category of torts which courts recognize for the protection of
commercial interests." 616 N.W.2d at 887. The court acknowledged that "tortious
interference can be the basis for a claim for unfair competition." Id. at 888 (citing United Wild
Rice, Inc. v. Nelson, 313 N.W.2d 628,631 (Minn. 1983)).
Gpac claims unfair competition by Defendant Andersen's "employment or service rela
tionship with [CyberCoders] in violation of the Agreement." (Doc 1-1, Complaint, p. 5, 35).
While insufficient on its own, this assertion is sufficient when coupled with the Agreement and
the allegations of tortious interference discussed above. Because the tortious interference can be
the basis for unfair competition, gpac's pleading is sufficient to avoid dismissal, and Defendants'
motion for judgment on the pleadings is denied as to Count 4.
5. Count 5; Punitive Damages
Gpac's final claim is for punitive damages. Andersen argues that a claim for punitive
damages is not a stand-alone claim; rather, punitive damages are a measure of recovery derivative
of a separate legal claim. According to Andersen, the entry ofJudgment in his favor on Counts I
through 4 requires the dismissal of Count 5.
Andersen is correct that there is no freestanding cause ofaction for punitive damages under
South Dakota law. See Olson-Roti v. Kilcoin,653 N.W.2d 254,259(S.D. 2002)("This Court has
stated that punitive damages are allowable only when supported by a cause of action.")(citing
Henry v. Henry, 604 N.W.2d 285, 288 (S.D. 2000)). However, gpac has sufficiently pleaded
Counts I through 4, and therefore separate legal claims exist in Counts 2 through 4 as a basis to
recover punitive damages. The punitive damages claim will be considered to be a damage claim
and a part of the prayer for relief but will not be considered to be a separate cause of action.
Accordingly,
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IT IS ORDERED:
1. That Defendant Blake Andersen's Motion for Judgment on the Pleadings is denied(Doc. 19);
2. That Defendant CyberCoder's Motion for Judgment on the Pleadings is denied (Doc. 24).
r*
Dated this _|Sfday of May,2022.
BY THE COUM;:
wrence L. Piersol
nited States District Judge
ATTEST:
MAJTHEW W.THELEN,CLERK
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