Aydin Corp. v. Loral Corp.

• Decision Date: 12 July 1983
• Docket Number: No. 81-4592,81-4592
• Citation: 718 F.2d 897
• Parties: 1983-2 Trade Cases 65,492 AYDIN CORPORATION, a Delaware corporation, Plaintiff-Appellant, v. LORAL CORPORATION, a New York corporation, and Conic Corporation, a Delaware corporation, Defendants-Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 897

718 F.2d 897

1983-2 Trade Cases 65,492

AYDIN CORPORATION, a Delaware corporation, Plaintiff-Appellant, v. LORAL CORPORATION, a New York corporation, and Conic

Corporation, a Delaware corporation, Defendants-Appellees.

No. 81-4592.

United States Court of Appeals,

Ninth Circuit.

Argued and Submitted Sept. 16, 1982.

Decided July 12, 1983.

Michael L. Harrison, Harrison, Hearn & Berthold, San Jose, Cal., for plaintiff-appellant.

Ernest Leff, Hahn, Cazier & Leff, Los Angeles, Cal., for defendants-appellees.

Appeal from the United States District Court for the Northern District of California.

Before WALLACE, KENNEDY, and NELSON, Circuit Judges.

WALLACE, Circuit Judge:

Aydin Corporation (Aydin) sued Loral Corporation (Loral) and Conic Corporation (Conic), a subsidiary of Loral, alleging violations of the federal antitrust laws. Aydin also alleges that they violated California statutory and common law. The district judge granted summary judgment for Loral and Conic on all counts. We affirm in part and reverse in part and remand.

I

Moyes served as head of the TerraCom Division of Conic (TerraCom) for several years prior to 1979. He also served as a director of Conic. On March 29, 1979, Moyes and directors of Loral and Conic signed a handwritten agreement terminating Moyes's employment. The agreement contained provisions resolving salary and stock obligations, as well as an agreement by Moyes not to "disrupt, damage, or impair" Conic's business.

On May 4, 1979, Moyes signed a more formal agreement with Loral and Conic which generally followed the provisions of the March 29th agreement. The May 4th agreement provided in part that Moyes would "preserve the confidentiality of all trade secrets and other confidential information" and that he would not:

now or in the future disrupt, damage, impair or interfere with the business of Conic Corporation, or its TerraCom Division whether by way of interfering with or raiding its employees, disrupting its relationships with customers, agents, representatives or vendors or otherwise[. Moyes is] not however, restricted from being employed by or engaged in a competing business.

After termination of his employment with Conic, Moyes became employed by Aydin as head of Aydin's newly formed Microwave Division. During the next several months, ten TerraCom employees left and went to work for Moyes at Microwave.

Loral and Conic filed suit in California state court in October 1979 against Moyes and two of the Aydin employees who had been employed by TerraCom, alleging breach of the May 4th agreement and unfair competition. Loral and Conic filed another state court action against Aydin in Pennsylvania. The Pennsylvania suit was dismissed after Loral and Conic joined Aydin as a defendant in the California action.

Aydin filed this suit in federal court in April 1980, alleging that the May 4th agreement is an unlawful restraint of trade, that Loral and Conic's state court actions violate the antitrust laws, and that Loral and Conic are liable under California law for tortious interference with prospective business relations, for injury to a servant, and for unfair competition. Loral and Conic moved for summary judgment which was granted on all counts. We review the district court's order of summary judgment de novo. State ex rel. Edwards v. Heimann, 633 F.2d 886, 888 & n. 1 (9th Cir.1980).

II

We find no merit in Aydin's contention that the agreement prohibiting Moyes from disrupting, damaging, impairing or interfering with Conic's business is a per se violation of section 1 of the Sherman Act. 15 U.S.C. Sec. 1. Section 1 prohibits an unreasonable contract, combination or conspiracy in restraint of trade. See Standard Oil Co. v. United States, 221 U.S. 1, 63-68, 31 S.Ct. 502, 517-19, 55 L.Ed. 619 (1911).

Aydin first alleges that the May 4th agreement constitutes a per se violation of section 1 because it results in a horizontal market division. To support this claim, Aydin must establish that Moyes competes at the same market level as Loral and Conic. United States v. Topco Associates, Inc., 405 U.S. 596, 608, 92 S.Ct. 1126, 1133, 31 L.Ed.2d 515 (1972); accord Krehl v. Baskin-Robbins Ice Cream Co., 664 F.2d 1348, 1354 (9th Cir.1982) ("The hallmark of a horizontal market allocation is collusion among competitors to confer upon each a monopoly in a specific area."); National Tire Wholesale, Inc. v. Washington Post Co., 441 F.Supp. 81, 87 (D.D.C.1977) ("In order to establish a horizontal restraint, there must be a collaboration among competitors.") (emphasis in original), aff'd without opinion, 595 F.2d 888 (D.C.Cir.1979). Moyes is not a competitor of Loral and Conic in any significant measure and does not operate at the same level of the market structure. Further, the May 4th agreement expressly permits Moyes to be employed by or engage in a competing business. There is no evidence that Aydin or any other competitor of Loral and Conic participated in any way in the formation of the agreement. We express no opinion on whether, on another set of facts, a noninterference agreement between a company and a departing executive could ever amount to a horizontal market division.

Aydin next argues that even if the May 4th agreement does not result in a horizontal market division, the categories of per se antitrust violations should be expanded to include post-employment noninterference agreements. We have been reluctant to extend the per se categories of antitrust violations beyond price-fixing, market division, group boycotts, and tying arrangements. See Ron Tonkin Gran Turismo, Inc. v. Fiat Distributors, Inc., 637 F.2d 1376, 1381-88 (9th Cir.), cert. denied, 454 U.S. 831, 102 S.Ct. 128, 70 L.Ed.2d 109 (1981); DeVoto v. Pacific Fidelity Life Insurance Co., 618 F.2d 1340, 1344 (9th Cir.), cert. denied, 449 U.S. 869, 101 S.Ct. 206, 66 L.Ed.2d 89 (1980); Gough v. Rossmoor Corp., 585 F.2d 381, 386-88 (9th Cir.1978), cert. denied, 440 U.S. 936, 99 S.Ct. 1280, 59 L.Ed.2d 494 (1979); accord White Motor Co. v. United States, 372 U.S. 253, 263, 83 S.Ct. 696, 702, 9 L.Ed.2d 738 (1963). As we stated in Krehl v. Baskin-Robbins Ice Cream Co.:

The test for determining whether the rule of per se illegality should be extended to a business practice not heretofore afforded per se treatment is "whether the practice facially appears to be one that would always or almost always tend to restrict competition and decrease output ... or instead one designed to 'increase economic efficiency and render markets more, rather than less, competitive.' "

664 F.2d at 1356, quoting Broadcast Music, Inc. v. Columbia Broadcasting System, Inc., 441 U.S. 1, 19-20, 99 S.Ct. 1551, 1562-63, 60 L.Ed.2d 1 (1979); accord Betaseed, Inc. v. U & I Inc., 681 F.2d 1203, 1220 (9th Cir.1982); see also Broadcast Music, Inc. v. Columbia Broadcasting System, Inc., 441 U.S. at 8-10, 99 S.Ct. at 1556-58 (per se classification appropriate when practice is plainly anticompetitive and courts have considerable experience with the challenged business relationship); Continental T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36, 49-50, 97 S.Ct. 2549, 2557-58, 53 L.Ed.2d 568 (1977) ("Per se rules of illegality are appropriate only when they relate to conduct that is manifestly anticompetitive.").

Employee covenants not to compete or interfere with the employer's business after the end of the employment relationship should not be tested under the per se rule. Such covenants often serve legitimate business concerns such as preserving trade secrets and protecting investments in personnel. Newburger, Loeb & Co. v. Gross, 563 F.2d 1057, 1082 (2d Cir.1977), cert. denied, 434 U.S. 1035, 98 S.Ct. 769, 54 L.Ed.2d 782 (1978). In addition, the courts have had inadequate experience with noncompetition and noninterference covenants to warrant a per se categorization. See Bradford v. New York Times Co., 501 F.2d 51, 59-60 (2d Cir.1974); Business Foods Service, Inc. v. Food Concepts Corp., 533 F.Supp. 992, 995 (E.D.N.Y.1982).

Other circuits have likewise declined to apply a per se rule to noncompetition agreements. See, e.g., Lektro-Vend Corp. v. Vendo Co., 660 F.2d 255, 264-65 (7th Cir.1981) cert. denied, 455 U.S. 921, 102 S.Ct. 1277, 71 L.Ed.2d 461 (1982) (noncompetition covenants ancillary to sale of business); Bradford v. New York Times Co., 501 F.2d at 59-60 (post-employment noncompetition agreement).

Without citing any authority, Aydin asserts that because most covenants ancillary to a valid agreement are tested by the rule of reason, all non-ancillary restraints must be tested under a per se standard. Even assuming that the restraints in this case may be deemed "non-ancillary," Aydin's analysis is confused. The proper function of ancillarity in antitrust analysis "is to remove [in some instances] the per se label from restraints otherwise falling within the category." Bork, Ancillary Restraints and the Sherman Act, 15 A.B.A. Antitrust Section Proceedings 211, 212 (1959). Whether a restraint that does not fall within a per se category is ancillary to a valid agreement is relevant only in the sense that ancillarity increases the probability that the restraint will be found reasonable. See, e.g., Lektro-Vend Corp. v. Vendo Co., 660 F.2d at 264-65; Sound Ship Building Corp. v. Bethlehem Steel Corp., 387 F.Supp. 252, 255 (D.N.J.1975), aff'd, 533 F.2d 96 (3d Cir.), cert. denied, 429 U.S. 860, 97 S.Ct. 161, 50 L.Ed.2d 137 (1976). See generally Gough v. Rossmoor Corp., 585 F.2d at 388 (practices not conclusively presumed unreasonable must be proved unreasonable).

Aydin has not alleged conduct by Loral or Conic that fits within the market division category of per se restraints. We decline to expand the categories of per se violations and, therefore, affirm that part of the judgment of the district court rejecting the per se claim.

III

The district court's entry of summary judgment for Loral and Conic on Aydin's claim that the May 4th agreement is an...