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Top 20 Stories of 2014: #5 Electrical Distributor Loses Non-Compete Suit

Every weekday in December, tED magazine is counting down the Top 20 Stories of 2014. Below, the #5 story of 2014, originally posted on July 8, 2014.

In an earlier version of this story, it was incorrectly reported that Wholesale Electric Co. of Houston was involved in a suit regarding a non-compete clause. The suit had had nothing to do with Wholesale Electric in Houston, TX. The company that should have been referred to in the article is Wholesale Electric headquartered in Texarkana, TX. and is in no way connected with Wholesale Electric in Houston, TX. We apologize for the error.

By Jack Keough

Electrical distributor loses non-compete suit; ordered to pay $200,000 in legal expenses

A federal district court judge in Arkansas has ruled in favor of three electrical distributor employees who were sued for violating a non-compete agreement when they left their employer and went to work for a competitor.

Not only was the case dismissed but Judge Billy Roy Wilson ordered The Stuart Irby Company, which initiated the suit, to pay more than $200,000 to the attorneys representing the three former employees for legal expenses and court costs. Irby, which is a subsidiary of Sonepar USA, may appeal the decision to the 8th District Court of Appeals.

Irby had sued Brandon Tipton, Michael Gilbert, and Stephen Padgett, former employees of Treadway Electric/Irby for breach of contract and Wholesale Electric Supply Company, Inc., the competitor, for interfering with a contractual relationship.

The three were employed by Treadway Electric in December 2011, when it was purchased by the Stuart Irby Company.  Treadway, headquartered in Little Rock, Ark., was reportedly the oldest electrical distributor in Arkansas with 14 locations scattered in the state.

The employees had previously signed a non-compete agreement with Treadway Electric that said they could not solicit or accept business from any of Treadway’s customers for one year after leaving. It also said that they would not solicit the employment of any Treadway employees for one year.

After the purchase was completed in January of 2012, Irby hired the three who all worked at the Conway, Ark. branch location.

In March of 2013, Tipton met with representatives of Wholesale Electric Supply Company, Inc., with headquarters in Texarkana, Texas, and 36 branches throughout Arkansas, Texas, Oklahoma and Louisiana. He was offered-and accepted-a job. Gilbert and Padgett also left after being offered jobs by Wholesale Electric Supply Company, Inc.

Irby was then left with two fill-ins and two employees at their Conway branch. One of the three named in the suit told the two remaining employees that although they were currently employed by Irby, if they ever wanted to leave they should contact him. Within a week those two employees left Irby and began working for Wholesale Electric Supply Company, Inc.

Irby then filed a federal suit that month claiming breach of contract, breach of fiduciary duty, tortious interference with contracts, and civil conspiracy.

In his decision, however, Judge Wilson dismissed those claims. He ruled that “a non-compete agreement that prohibits ordinary competition is not enforceable.”

The three salespeople were at-will employees, Wilson wrote, and had no guarantee that they would have jobs after Irby purchased Treadway.

“Instead, they were as free to walk away from Irby as Irby was to walk away from them; but each applied to work for Irby and, Irby, after screening the employees hired them,” the judge wrote in his decision.

“As an at-will employee, Tipton did not breach any duty to Treadway (or Irby) by entertaining, and ultimately accepting, another job offer. Likewise, there are no allegations, and nothing in the record, to support a finding that Tipton solicited customers or employees of Irby before leaving Irby,” the judge said.

“Because there are no allegations or facts to support a finding that anyone breached the Treadway agreements within one year of December 31, 2011, summary judgment is appropriate.”

In effect, the court ruling said that the non-compete clause that Irby was seeking to enforce was actually between the employees and Treadway Electric. But even if the agreement was between the employees and Irby it was too broad to be enforceable, the court said.

Judge Wilson also wrote that “nothing in the record” indicated that Wholesale Electric Supply Company, Inc., nor its employees had caused anyone to breach a contract with Irby.

Arkansas has a statute that allows the winning party in a breach of contract suit to ask for legal fees and court costs from the losing side. In this case, the attorneys representing the employees asked the court for $203,892 to pay for those costs.  Judge Wilson ruled the legal fees were reasonable based on a review by the court.

Irby’s attorneys had argued that the attorney fees and court costs should only be about $24,000.

Sonepar purchased the Stuart Irby Company nine years ago. At that time, Irby was a $400 million electrical distributor with some 35 branches in the south central and northeast regions of the country.

Jack Keough was the editor of Industrial Distribution magazine for more than 26 years. He often speaks at industry events and seminars. He can be reached at john.keough@comcast.net or keoughbiz@gmail.com.

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