shutterstock_84499888Business involves competition. But not all competition is lawful. Two former employees found this out the hard way after a judge determined on May 22, 2015 that they had wrongfully started a competing business while they continued to work for their employer along with misappropriating trade secrets and engaging in other wrongful acts (Nedschroef Detroit Corp. v. Bemas Enterprises LLC, 2015). But for employers, the significance of this case isn’t the result. Instead and as explained below, it is a cautionary tale of how not to protect your company against unfair competition.

Factual Time Line

Specifically, on January 9, 2014, Plaintiff Nedschroef Detroit Corporation and its related subsidiaries filed a trade secret misappropriation lawsuit against two former employees (Marc Rigole and Bernard LePage) after discovering those former employees had formed a competing company, Bemas Enterprises LLC (Bemas) while still working for Nedschroef Detroit. According to Plaintiffs, Rigole and LePage used Plaintiffs’ equipment, personnel, and trade secrets to start up and run Bemas.

Rigole was Nedschroef’s Detroit manager from 1991-1996 and from 2004-2013. LePage was hired to work as a project and service engineer for Nedschroef Detroit in 2005. Rigole was the highest ranking Nedschroef employee in North America, and supervised the other Nedschroef Detroit employees. The job duties for both Rigole and LePage included servicing Nedschroef machines and providing replacement parts for those machines. Both had the authority to issue quotations, order replacement parts from suppliers, enter into contracts, and sign checks on behalf of Nedschroef. They also had access to Nedschroef’s passcode-protected proprietary part design drawings, customer lists, supplier lists, pricing information, and financial information, customer lists, supplier lists, pricing information, and financial information.

In December 2010 or January 2011, Rigole, LePage, and other Nedschroef Detroit employees were informed that their office would be closed within a year unless its business improved. These employees also received a pay cut at that time. About a month later, Rigole, LePage, Rigole’s wife (Christine Van Looveren) and LePage’s then girlfriend and eventual wife (Cynthia Lupo) began to discuss the idea of forming a company to service Nedschroef machines and supply replacement parts for those machines in the event that Nedschroef Detroit closed. They formed Bemas a few months later, in about June 2011, naming Van Looveren and Lupo as its owners.

According to Rigole, Bemas was formed under Van Looveren’s and Lupo’s names instead of Rigole’s and LePage’s names because an “unidentified lawyer” advised them that it was illegal for Rigole and LePage to open the company under their own names. They further testified that the women never participated in the daily operations of Bemas and knew little about Bemas’ business.  Or in the word’s of LePage, Van Looveren and Lupo were “not really active” in the business of Bemas and that they probably never sent an email from Bemas’ address.

Rigole and LePage began selling goods and performing services on behalf of Bemas beginning in mid-June 2011, while they were still employed by Nedschroef Detroit. The goods sold were replacement parts for Nedschroef machines and the services performed were on Nedschroef machines. Dozens of purchase orders, quotations, and invoices reflect that Rigole and LePage, on behalf of Bemas, competed directly with Nedschroef Detroit from mid-June 2011 forward.

Whatever “arguments” the defendant former employees offered to defend their actions were readily disregarded by the judge who found in favor of their former employer on all but two claims (Lanham Act and Michigan Consumer Protection Act claims) and ordered a permanent injunction and significant damages in favor of the former employer.

The Take Away for Employees and Employers

To some extent, this case could be filed under the “water is wet” category, i.e., if you start a business that competes directly with your current employer, there is a high probability the venture will not end well. But the most significant issue in this case for me was that the Nedschroef plaintiff asserted 11 claims in total, but no claim for a breach of a noncompete agreement. The safe assumption is that there was no noncompete restriction to enforce. A noncompete agreement would have restricted two high-level employees who were essentially given the “keys to the employer’s kingdom” in terms of trade secrets and confidential business information from starting a competing business in the first place.

This point is significant because Michigan courts have refused to find liability in the absence of a noncompete restriction against former employees for “unfair competition” style claims for planning to start a competing business. Even where such preparation included securing funding for the new venture, establishing a line of credit, and securing a potential location for the new business. With this in mind, this case may have turned out differently if the following facts had changed:

  • The employees waited until after resigning to start the competing company.
  • There was no evidence that the former employees took any trade secrets or other confidential business information.
  • The former employees did not take or refrain from taking action that impaired or sabotaged the former employer’s business ongoing success or such evidence was lacking or subject to conflicting interpretations.
  • The employees did not take any action that would have benefited them rather than the employer.

These are all areas that involve “fact questions” that take resources (time and money) to answer. And that answer may be subject to interpretation.

In contrast, enforcing the terms of a noncompete agreement often comes down to whether the former employee signed a noncompete agreement and, if so, what does the agreement provide? Answering these questions are going to be less expensive than dealing with a range of issues that must be supported by facts, testimony, and other evidence, which may be subject to further interpretation by a judge or jury.

This case should also be a cautionary tale for employees who are thinking about starting a competing business in order to understand what actions can safely be taken, where restraint is appropriate, whether there are any contractual restrictions that preclude starting a new company, and other legal issues that start-ups must consider.

For more information about protecting your business from unfair competition using and enforcing noncompete agreements, contact Michigan attorney Jason Shinn. Since 2001, Mr. Shinn has advised individuals and companies about legal issues when it comes to drafting, negotiating, and enforcing noncompete agreements. He has enforced noncompete agreements in state and federal courts, as well as defended individuals accused of violating such agreements.