Communication Technical Systems, Inc. v. Densmore

1998 SD 87, 583 N.W.2d 125, 14 I.E.R. Cas. (BNA) 522, 1998 S.D. LEXIS 89, 1998 WL 448866

• Court: South Dakota Supreme Court
• Decided: August 5, 1998
• Docket: 20234, 20258
• Status: Published

Opinions

GILBERTSON, Justice.

[¶ 1.] Communication Technical Systems, Incorporated, (CTS), appeals from the grant of summary judgment in favor of Rickey Densmore (Densmore) and' Gateway 2000, Incorporated, (Gateway), in an action based upon Gateway’s hiring of a former CTS employee, Densmore, as a computer programming consultant. We affirm.

FACTS AND PROCEDURE

[¶ 2.] Densmore began his career with CTS in 1992 as manager of its Programming Services Department in Georgia. On July 11, 1994, CTS entered into an agreement to provide programming services for Gateway. This agreement was confirmed by a written purchase order. CTS then sent Densmore to Chicago, Illinois to work with Gateway’s accountants. Two to three weeks later, Dens-more was sent to Gateway’s South Dakota production site where he worked with Ken Mink (Mink), another CTS employee.

[¶ 3.] During September, 1994, Gateway wrote a letter to CTS memorializing a discussion between them concerning Mink and Densmore where CTS agreed: (1) Gateway could interview Mink for possible employment; (2) Densmore would continue to program for Gateway through November 30, 1994; (3) Gateway had the option of declaring the services offered under the July 11, 1994 purchase order completed or could extend those services; and (4) Gateway would give a 30-day notice before ending CTS’s services. In September, 1994, Mink left CTS and began working for Gateway.

[¶ 4.] On September 30, 1994, Gateway entered into a written agreement, provided by CTS, entitled “Agreement Not to Recruit” (Agreement). Gateway agreed that during the time CTS was providing services for Gateway and for a period of one year following the termination of such services, Gateway would not hire, solicit, or recruit any CTS employee or encourage another to do the same without written approval by CTS.

[¶ 5.] During December, 1994, Densmore became unhappy with CTS for several reasons including, social conduct of some of the senior management, compensation issues, substantial travel requirements, and his Georgia office had been taken away. Dens-more then had a conversation with Leon Tibbet of Gateway who told him to “go talk to legal services” and see if there was any reason Densmore could not come work for Gateway. Densmore stated he went to the legal department where he was told, “Gateway has an agreement with [CTS] not to hire any of you people away, so we don’t want to even talk to you.”

[¶ 6.] On December 15,1994, Gateway gave 30 days’ notice of termination of the purchase order with CTS. On January 20, 1995, Dens-more resigned from CTS. That same day, Densmore wrote a letter to Gateway informing them he was available for employment, through his business entitled Corinium Consulting Incorporated, and that he was “bound by no previous contracts with CTS with regards to clients, services, disclosure, or any other limitation.” On January 23, 1995, Gateway issued a purchase order to Corini-um Consulting Inc. Densmore then performed services for Gateway for approximately five months in both South Dakota and Illinois.

[¶ 7.] On June 27, 1996, CTS brought suit against Gateway and Densmore: (1) seeking a declaratory judgment on the validity of the agreement not to recruit; (2) claiming Gateway breached its contract with CTS ánd tortiously interfered with CTS’ employment relationship with Densmore; and (3) that Densmore had tortiously interfered with CTS’ contractual relationship with Gateway by accepting employment with Gateway to perform the same services he had performed while worldng with CTS. Densmore counterclaimed that CTS tortiously interfered with his business relationship with Gateway when CTS sued Gateway¹ and him in both South Dakota and Georgia in retaliation for his leaving CTS. Gateway cross-claimed against Densmore for negligent misrepresentation, fraudulent misrepresentation, contribution, and indemnity.

[¶ 8.] Gateway, CTS, and Densmore each made motions for summary judgment. The circuit court granted the motions of Dens-more and Gateway for summary judgment in which it concluded the Agreement was not enforceable under SDCL 53-9-8, infra. The circuit court did not rule on Densmore’s counterclaim against CTS. CTS appeals raising the following issues:

1. Whether SDCL 53-9-8 renders the agreement not to recruit unenforceable.

2. Whether summary judgment against CTS was proper on the breach of contract claim by CTS against Gateway.

3. Whether summary judgment was proper against CTS on its tortious interference claims.

[¶ 9.] Gateway, by notice of review, raises the following issues:

4. Whether the agreement not to recruit is unenforceable as an unreasonably overbroad prohibition against hiring, as well as soliciting or recruiting any CTS employee.

5. Whether the agreement not to recruit is unenforceable as an unreasonably overbroad prohibition against advising or encouraging any other person or organization to hire, solicit, or recruit any CTS employee.

6. Whether the agreement not to recruit is unenforceable because Densmore did not have a non-competition agreement with CTS.

7. Whether the agreement not to recruit is unenforceable under federal antitrust law.

STANDARD OF REVIEW

[¶ 10.] Our standard of review for summary judgment is well-established:

In reviewing a grant or a denial of summary judgment under SDCL 15 — 6—56(c), we must determine whether the moving party demonstrated the absence of any genuine issue of material fact and showed entitlement to judgment on the merits as a matter of law. The evidence must be viewed most favorably to the nonmoving party and reasonable doubts should be resolved against the moving party. The non-moving party, however, must present specific facts showing that a genuine, material issue for trial exists. Our task on appeal is to determine only whether a genuine issue of material fact exists and whether the law was correctly applied. If there exists any basis which supports the ruling of the trial court, affirmance of a summary judgment is proper.

Specialty Mills v. Citizens State Bank, 1997 SD 7, ¶ 7, 558 N.W.2d 617, 620 (quoting Lamp v. First Nat’l Bank of Garretson, 496 N.W.2d 581, 583 (S.D.1993) (citation omitted)). “The burden of proof is upon the movant to show.clearly that there is no genuine issue of material fact and that he is entitled to judgment as a matter of law[.]” Id. (citation omitted).

ANALYSIS AND DECISION

[¶ 11.] 1. Whether SDCL 53-9-8 renders the agreement not to recruit unenforceable?

[¶ 12.] We have not previously had occasion to address an agreement not to recruit such as presented here. The circuit court concluded the agreement not to recruit at issue was but a variation of the more well known covenant not to compete which exists between an employer and employee. See SDCL 53-9-11, infra. The circuit court then ruled that enforcement of the agreement was prohibited under SDCL 53-9-8 which provides:

Every contract restraining exercise of a lawful profession, trade, or business is void to that extent, except as provided by §§ 53-9-9 to 53-9-11, inclusive.

[t 13.] SDCL 53-9-8 is generally denoted as a prohibition against agreements in “restraint of trade.” However, its provisions are much broader as the statute actually prohibits any agreements which restrain “a lawful profession, trade or business.” In applying the statute to a factual setting, we are called upon to analyze three criteria:

1. Does the conduct of the parties concern a “lawful profession, trade or business”?

2. If so, has there been a material restraint upon exercising that “lawful profession, trade or business”?

3. If so, is the conduct authorized by the statutory exceptions contained in SDCL 53-9-9, 53-9-10 or 53-9-11?

[¶ 14.] Gateway is engaged in the computer sales and service business. See Gateway 2000, Inc. v. Limoges, 1996 SD 81, ¶2, 552 N.W.2d 591, 592 (recognizing Gateway is a corporation with its principal place of business in North Sioux City which “manufactures and distributes personal computers throughout the world and employs more than 6000 people”). Densmore is in the business of providing specialized services to large manufacturers and marketers of computers. The agreement not to recruit clearly attempts to restrain Gateway’s ability to seek suitable employees for its “business.” It would also in reality restrain Densmore from working in South Dakota as the record identifies no other computer manufacturer of Gateway’s magnitude in South Dakota which would require the expertise of Densmore.

[¶ 15.] Unless one of the following three statutory exceptions apply, the agreement is invalid under the general rule. Two of the exceptions to the general rule can be found in SDCL 53-9-9 (sale of good will)² and 53-9-10 (dissolution of a partnership).³ Plainly, neither of these exceptions apply here. The final exception to the general rule prohibiting such restraints can be found under SDCL 53-9-11 which concerns an employee’s covenant not to compete with his employer.

An employee may agree with an employer at the time of employment or at any time during his employment not to engage directly or indirectly in the same business or profession as that of his 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, city 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.

(Emphasis added). The circuit court compared the agreement not to recruit to a covenant not to compete and incorrectly decided the matter against CTS under the SDCL 53-9-11 exception. The agreement not to recruit was entered into by CTS and Gateway, not between CTS and Densmore. The plain language of the covenant not to compete section concerns agreements between employer and employee, not employers and their customers. As we stated in Central Monitoring Service v. Zakinski, 1996 SD 116, ¶ 9, 553 N.W.2d 513, 516, the exceptions listed in SDCL 53-9-8 “must be construed narrowly so as to promote the prohibition against contracts in restraint of trade.” (citing American Rim & Brake, Inc. v. Zoellner, 382 N.W.2d 421, 424 (S.D.1986)). See also De Smet Ins. of South Dakota v. Gibson, 1996 SD 102, ¶ 7, 552 N.W.2d 98,100 (“[T]he cardinal purpose of statutory construction — ascertaining legislative intent— ought not be limited to simply reading a statute’s bare language; we must also reflect upon the purpose of the enactment, the matter sought to be corrected and the goal to be attained.”) (citations omitted).

[¶ 16.] The same issue arose in Dyson Conveyor Maint. v. Young & Vann, 529 So.2d 212 (Ala.1988). Therein two companies entered into an agreement not to hire each others employees for a specified period. Dyson nevertheless hired one of Young’s employees. Young sued per the agreement.

Dyson argued that the agreement was void under Alabama’s restraint of trade statute.⁴ In striking down the agreement as violative of the restraint of trade statute, the Court’s reasoning justifies the same result concerning the facts and issues now before us:

This does not mean that there is no field of operation for agreements such as that involved here. They can be enforceable, however, only to the extent that they sup- . plement employer/employee contracts that are valid under [SDCL 53-9-11]. Thus, if [Densmore] had validly agreed with [CTS] not to compete with that company after he left its employ, and [CTS] and [Gateway] had appropriately entered into an agreement like the one at issue, then, when [Gateway] hired [Densmore], [CTS] could have sued not only [Densmore] for breach of Ms contract, but also [Gateway] for breach of its contract. In such a case, the no switching agreement would not restrain trade, because the employer/employee agreement, which is valid under [SDCL 53-9-11] would have already imposed the restraint. That is, once an employee enters with his employer into a partial restraint of his trade that would be allowed under [SDCL 53-9-8 & 11] _, a no switching agreement would add no further restraint on that employee, and so would not violate [SDCL 53-9-8], at least with respect to him.

Id. at 215 (emphasis original).

[¶ 17.] A similar agreement was sought to be enforced in Defco v. Decatur Cylinder, Inc., 595 So.2d 1329 (Ala.1992). There, the employer seeking enforcement argued that

Dyson should be limited to those cases where the employee had no other employment opportunities in his profession other than the two employers who were parties to the contract. The Defco court rejected this rationale and held such contracts void per the applicable statutes, not because other employment might not be available.

[¶ 18.] SDCL 53-9-8 is a legislative determination of public policy. American Rim & Brake, 382 N.W.2d at 424. Thus, if the legislature decides to create another exception which would permit agreements not to recruit among competitors, it is its prerogative. Until such time, we decline to judicially create or broaden the existing exceptions to the general prohibition against contracts in restraint of trade. See Isaac v. State Farm Mut. Auto. Ins. Co., 522 N.W.2d 752, 756 n. 1 (S.D.1994) (noting that the Legislature is the final arbiter of public policy).

[¶ 19.] CTS improperly seeks the best of both worlds. Reserving its rights under the “at will” employment doctrine, it wants to be able to fire Densmore for any reason, arbitrary or otherwise, or for no reason at all. However, should Densmore seek employment or a consulting contract with a former customer, CTS wants that to be forbidden fruit even though Densmore never agreed to any such limitation. The legislature has given no hint that it intended to tip the scales so drastically in favor of an employer and against the employee in such an unfair manner. Neither should this be Court approved under the guise of statutory interpretation. The door entitled “at will” should swing both ways.⁵ As such, while under these facts, CTS may experience disappointment concerning the lack of future employment of Densmore, its- disappointment does not rise to the level of an invasion of its legal rights.⁶

[¶ 20.] The circuit court reached the right result for the wrong reason; that the agreement not to recruit was overbroad under

SDCL 53-9-11. “This court has consistently held that where the trial court reaches the right result it will not be reversed even though based on erroneous conclusions or wrong reasons.” Owens v. City of Beresford, 87 S.D. 8, 15, 201 N.W.2d 890, 893 (1972). The circuit court reached the right result.

[¶21.] 2. Whether summary judgment was proper on the breach of contract claim against Gateway?

[¶ 22.] As we have held the Agreement Not to Recruit was void under SDCL 53-9-8, we need not address this issue.

[¶ 23.] 3. Whether summary judgment was proper against CTS on its tor-tious interference claims?

[¶ 24.] CTS argues summary judgment was improper against both Gateway and Densmore on its claims of tortious interference with business relationships. We recognized the cause of action of tortious interference with business relationships.or expectancies in Tibke v. McDougall, 479 N.W.2d 898 (S.D.1992). Landstrom v. Shaver, 1997 SD 25, ¶ 73, 561 N.W.2d 1, 16. We held the plaintiff must prove the following essential elements to prevail on such a claim:

1. the existence of a valid business relationship or expectancy;

2. knowledge by the interferer of the relationship or expectancy;

3. an intentional and unjustified act of interference on the part of the interferer;

4. proof that the interference caused the harm sustained; and,

5. damage to the party whose relationship or expectancy was disrupted.

Id. (citing Tibke, 479 N.W.2d at 908; Nelson v. WEB Water Dev. Ass’n, Inc., 507 N.W.2d 691, 699 (S.D.1993)).

[¶ 25.] CTS claimed Gateway tortiously interfered with its employment relationship with Densmore. The circuit court concluded CTS failed to establish the first element of this cause of action, the existence of a valid business relationship. We agree. As we have held the agreement not to recruit was void, the business relationship it sought to protect is not within the realm of protection afforded by this cause of action. The circuit court concluded Densmore was an at will employee prior to being employed by Gateway. CTS has failed to show otherwise. In Defco, the court dismissed the same type of claim for the identical reason. 595 So.2d at 1332.

[¶ 26.] CTS also claimed Densmore tor-tiously interfered with its contractual relationship with Gateway by accepting employment with them and performing essentially the same services CTS had previously been contracted to perform. CTS correctly concedes that Gateway had the right to terminate its purchase order with CTS upon 30 days notice. The purchase order was fulfilled, Gateway provided adequate notice and subsequently hired CTS’ former at will employee. Upon termination of the contract, Gateway was not contractually obligated to retain the services of CTS. Therefore, this claim must fail.

[¶ 27.] CTS states in its brief, “[c]onsulting firms such as CTS must be able to remedy the situation in which it trains its employees, introduces them to clients, and signs a written agreement with the client to not steal the employee, only to find that the employee has changed employers over the weekend.” What CTS conveniently overlooks is that a remedy was available to them up to the moment Densmore left their employ. CTS could have taken preventative measures with Densmore, such as giving him the option of security of employment in return for a covenant not to compete, to alleviate its concerns. Instead, CTS sought to bind its employee through an agreement with a third party. As we have stated, this it may not do.

[¶ 28.] The status of Densmore’s counterclaim against CTS.

[¶ 29.] The circuit court declined to rule on Densmore’s counterclaim against CTS by explaining as follows:

However, the court is deferring any proceedings between CTS and Densmore on his counterclaim. There are issues between CTS and Densmore which are more properly settled in the Georgia court and decided under that state’s laws and case precedents. The Georgia courts did not act upon that matter. But, the CTS corporation is in that state. Densmore resided there when the facts of the case were evolving and developing. Discovery has been completed to a great extent. The counterclaim by Densmore is an issue unique to Georgia in this case as the vacation time accrued under an agreement signed in Georgia between CTS and Dens-more and while Densmore worked there.

[¶ 80.] We need not address this aspect of the circuit court’s decision as neither CTS nor Densmore challenged the circuit court’s refusal to rule on Densmore’s counterclaim. Densmore did not brief the issue and thus it is waived.

[¶ 31.] As we have held the Agreement was void under SDCL 53-9-8, we need not address the issues raised by Gateway by notice of review.

[¶ 32.] Affirmed.

[¶ 33.] AMUNDSON, J., concurs. [¶ 34.] MILLER, C.J., concurs specially. [¶ 35.] SABERS and KONENKAMP, 33., dissent.

1 . Gateway was dismissed from the Georgia action on November 30, 1995, after the court concluded it lacked personal jurisdiction. The parties have stipulated that South Dakota provides the proper choice of law.

2 . SDCL 53-9-9 provides:

Any person who sells the good will of a business may agree with the buyer to refrain from carrying on a similar business within a specified county, city, or other specified area, as long as the buyer or person deriving title to the good will from the seller carries on a like business within the specified geographical area.

3 . SDCL 53-9-10 provides:

Partners may, upon or in anticipation of a dissolution of the partnership, agree that none of them will carry on a similar business within the same city or town where the partnership business has been transacted or within a specified part thereof.

4 . Ala.Code 1975 § 8-1-1 stated:

(a) Every contract by which anyone is restrained from exercising a lawful profession, trade or business of any kind otherwise than is provided by this section is to that extent void.

(b) One who sells the good will of a business may agree with the buyer and one who is employed as an agent, servant or employee may agree with his employer to refrain from carrying on or engaging in a similar business and from soliciting old customers of such employer within a specified county, city or part thereof so long as the buyer, or any person deriving title to the good will from him, or employer carries on a like business therein.

(c) Upon or in anticipation of a dissolution of the partnership, partners may agree that none of them will carry on a similar business within the same county, city or town, or within a specified part thereof, where the partnership business has been transacted.

5 . The dissent dismisses any consideration of the rights of Densmore with the observation that “[t]he fact that some outsider to the contract may be incidentally affected has no bearing in an action for breach of contract.” Being effectively precluded from doing business in the entire state is hardly "incidentally affected." Beyond that, Densmore was no mere bystander, he was sued directly by CTS on the grounds he tortiously interfered with CTS's contractual relationship with Gateway. Furthermore, Densmore is seeking vindication of his rights by counterclaiming against CTS that it tortiously interfered with his business relationship with Gateway when CTS sued Gateway and him in both South Dakota and Georgia in retaliation for his leaving CTS and entering into a consulting contract with Gateway.

6 . The dissent claims the contract between Gateway and CTS is not an agreement in restraint of trade. The authority cited by the dissent is unpersuasive and in most cases inapplicable as it predominately concerns real estate contracts or the interpretation of employment contract provisions entered into between employers and their former employees which never existed in the case now before us. The dissent cites the case of Board of Trade of City of Chicago v. United States, 246 U.S. 231, 38 S.Ct. 242, 62 L.Ed. 683 (1918), where the United States Supreme Court upheld the Board of Trade's implementation of the “call rule" which required commodity bids to be fixed at the end of the trading day. Other than stating the obvious, that every trade agreement and regulation necessarily restrains trade to some extent, it has no further relevance.

Reliance upon Lien v. Northwestern Engineering. Co., 73 S.D. 84, 39 N.W.2d 483 (1949) is misplaced. In Lien the plaintiff contracted with ranchers for the exclusive right to mine and remove lime rock deposits for highway construction from the ranchers’ land. Ranchers allowed lime rock to be removed from their land by another contractor. In upholding a jury verdict in favor of the plaintiff we noted that the agreement was a "restrictive covenant” upon realty and that SDC 10.0706 (now SDCL 53-9-8) did not apply; "[t]his statute is not relied upon by appellants, and a contention that the covenant herein is void as in violation of its terms would clearly be untenable.” 73 S.D. at 91, 39 N.W.2d at 487. We went on to explain our reasoning as follows:

Appellants [ranchers] in the instant case did not agree not to engage in the business of quarrying or selling rock, but only that they would not lease any contiguous or adjacent land ‘to third parties for the production of sand or gravel, or other similar materials.’ 73 S.D. at 93, 39 N.W.2d at 488.

The doctrine of reasonableness discussed by the Lien court was in the context of a restrictive covenant upon realty and as noted above, has nothing to do with SDCL 53-9-8. While a lime rock has no standing to complain who mines it, in our case, Densmore certainly has standing to complain when he is precluded from carrying on his profession in South Dakota because Gateway is the only computer manufacturer of a significant enough size in South Dakota to need his specialized services.

Brookings Mall, Inc., v. Cpt. Ahab's Ltd., 300 N.W.2d 259 (S.D.1980), deals with a real estate lease in a mall. What limited relevance it has actually supports our result as it says a "restraint of trade by contract is generally illegal if [it] ... imposes undue hardship upon the restricted party;” in this case Densmore. Id. at 263. As Brookings Mall is a realty case, nowhere is there any mention of SDCL 53-9-8 or its statutory exceptions.

Further, the dissent relies on Ward v. Midcom, Inc., 1998 SD 10, 575 N.W.2d 233, for the proposition that this Court could modify the agreement if the lack of territorial restrictions were greater than required to protect CTS. The Ward case dealt with a covenant not to compete between a former employee and employer. CTS is seeking to prohibit a former employee from working for a customer. Densmore was under no contract with CTS.

The remaining authority cited by the dissent is easily distinguished from the present facts. The authority relied upon by the dissent concerns a party to a contract, bringing suit upon that contract, against another party to the contract. See Smith, Barney, Harris Upham & Co. v. Robinson, 12 F.3d 515 (5th Cir.1994) (concerned an employer bringing an action against a former employee seeking preliminary injunction restraining him from soliciting employer's employees); Campbell v. Trustees of Leland Stanford Jr. Univ., 817 F.2d 499 (9th Cir.1987) (developer of a vocational interest test brought suit against a former employer contesting validity of an anti-competition clause in employment agreement); Loral Corp. v. Moyes, 174 Cal.App.3d 268, 219 Cal. Rptr. 836 (1985) (former employer suing former employee for breach of noninterference agreement); General Commercial Packaging v. TPS Package, 126 F.3d 1131 (9th Cir.1997) (breach of contract action between contractor and subcontractor); Scott v. Snelling and Snelling, 732 F.Supp. 1034 (N.D.Cal.1990) (breach of contract action between franchisees and franchiser); Great Frame Up Systems, Inc. v. Jazayeri Enterprises, 789 F.Supp. 253 (N.D.Ill.1992) (breach of restriction in licensing agreement between licensee and licensor); As none of these cases concern attempts to bind parties not privy to a contract, this authority actually strengthens this Court’s holding rather than undermines it.