Capistrant v. Lifetouch Nat'l Sch. Studios, Inc.

Citation916 N.W.2d 23
Decision Date25 July 2018
Docket NumberA16-1829
Parties John J. CAPISTRANT, Respondent/Cross-Appellant, v. LIFETOUCH NATIONAL SCHOOL STUDIOS, INC., Appellant/Cross-Respondent.
CourtSupreme Court of Minnesota (US)

Paul R. Smith, John A. Kvinge, Nic S. Puechner, Larkin Hoffman Daly & Lindgren Ltd., Minneapolis, Minnesota, for respondent/cross-appellant.

Charles F. Knapp, Aaron D. Van Oort, Lauren W. Linderman, Faegre Baker Daniels LLP, Minneapolis, Minnesota; and

Joel P. Schroeder, Best & Flanagan LLP, Minneapolis, Minnesota, for appellant/cross-respondent.

OPINION

GILDEA, Chief Justice.

We are asked to decide whether a former employee's delay in returning his employer's property excuses the employer from paying a commission otherwise due to the employee. Respondent John J. Capistrant argues that he was due the commission when his employment relationship with appellant Lifetouch National School Studios, Inc. ("Lifetouch") ended. Lifetouch contends that because Capistrant did not return Lifetouch's property immediately upon leaving the company, Lifetouch is excused from paying the commission.

The district court agreed with Lifetouch, determining that the return-of-property clause in the employment contract between the parties was a condition precedent to Lifetouch's contractual obligation to pay the residual commission, and that Capistrant's failure to comply with the clause excused Lifetouch's obligation to pay that commission. The court of appeals reversed, applying Restatement (Second) of Contracts § 229 (Am. Law Inst. 1981), and concluding, as a matter of law, that the loss of the commission was a disproportionate forfeiture for Capistrant's failure to comply with the return-of-property clause in the employment contract. We agree with the court of appeals that in the circumstances of this case, the guidance provided by section 229 of the Restatement is consistent with our precedent that disfavors forfeitures. But we disagree with the court of appeals that the materiality and proportionality analysis contemplated by section 229 can be decided as a matter of law on this record. We therefore reverse the court of appeals in part, affirm in part, and remand to the district court for further proceedings.

FACTS

Lifetouch sells photography services to schools and other organizations across the nation. In 1980, Capistrant began working as a photographer and sales representative for Lifetouch in its Minneapolis office. In 1981, Capistrant transferred within the company to the California office. Capistrant took over as Territory Manager of the San Francisco Bay Area in 1986 and entered into the contract with Lifetouch that is at issue in this appeal. The pertinent portions of the contract for our purposes include Paragraphs 8 and 11, and Exhibit B.

The contract provides that Capistrant would manage certain territory. In exchange for his management, Paragraph 8 provides that he would be compensated as described in exhibits attached to the agreement. One of those exhibits, Exhibit B, clarifies that Lifetouch would compensate Capistrant entirely with "commissions."

Section III of Exhibit B, entitled "Residual Commission and Payments For Restriction Against Competition," explains Capistrant's right to, and the calculation of, a post-employment "residual commission." This paragraph also specifically makes reference to Paragraph 11 of the contract, acknowledging that "the provisions of Paragraph 11 of the Agreement shall be extended and shall apply during the period Territory Manager is entitled to receive Residual Commission payments." The parties also agreed that if, "at any time," Capistrant "breaches the provisions of Paragraph 11 of the Agreement, in addition to Lifetouch's other remedies, Lifetouch shall be entitled to terminate Lifetouch's obligation to make any payments of Residual Commission that have not yet been paid by giving Territory Manager written notice of such termination."

Under Paragraph 11, entitled "Restriction Against Competition," Capistrant agreed for a period of 24 months after his employment that he would not "[d]isclose any trade secrets and confidential information," "solicit or deal with any school included in Lifetouch's Business," or "solicit any present or future employee of Lifetouch for the purpose of hiring or attempting to hire such employee." A separate clause at the end of Paragraph 11 additionally provides that Capistrant would "immediately deliver to Lifetouch all of Lifetouch's property" that was in Capistrant's possession or control at the end of his employment. We refer to this last clause of Paragraph 11 as "the return-of-property clause."

The present dispute stems from a disagreement between Capistrant and Lifetouch about the interpretation of the residual commission provision described in Exhibit B. Over the years, Capistrant and Lifetouch disagreed about how his commissions, including the residual commission, were or would be calculated. The disputes arose as Lifetouch expanded Capistrant's territory or asked Capistrant to execute new agreements regarding his commissions. Capistrant refused to sign a new agreement.

By 2014, Capistrant was planning for retirement, and some of these past disputes remained unresolved. In September of 2014, Capistrant commenced a declaratory-judgment action in district court requesting a declaration of the parties' respective rights and duties under the employment contract, including the proper calculation of the residual commission he was to be paid under the contract.

In March of 2015, while this litigation was still in the discovery phase, Capistrant retired. Three months later, in response to Lifetouch's discovery requests, Capistrant's counsel disclosed that Capistrant had in his possession a large number of Lifetouch's documents, including customer lists, sales data, payroll records, financial statements, and business plans that he had kept after his retirement.1

On June 26, 2015, Lifetouch demanded that Capistrant return the documents he had retained. Capistrant returned the documents within three business days of this request.

On August 4, 2015, Lifetouch also demanded that Capistrant give it access to his e-mail account; Capistrant complied. Lifetouch's forensic expert then determined from a review of electronic files that the Lifetouch materials Capistrant had sent to his personal e-mail account had not been shared with outside sources.

In January of 2016, the parties each moved for summary judgment on the issue of Capistrant's right to a residual commission. Capistrant asserted in his motion that he is entitled to summary judgment against Lifetouch because it is contractually obligated to pay him a residual commission. Lifetouch argued in its motion that its obligation to pay the residual commission was excused because Capistrant failed to comply with the return-of-property clause.

The district court concluded that the return-of-property clause was a condition precedent to Lifetouch's payment of the residual commission. The court rejected Capistrant's argument that the court should not enforce the condition because to do so would result in an inequitable forfeiture. Specifically, the court concluded that the language of the contract is "clear," and "[e]quity cannot rescue [Capistrant] from his contractual obligations." The court granted summary judgment to Lifetouch on this issue, holding that Capistrant was not entitled to the residual commission under Exhibit B, Section III because he failed to satisfy his obligations under the return-of-property clause.

Capistrant appealed, and the court of appeals reversed. Capistrant v. Lifetouch Nat'l Sch. Studios, Inc. , 899 N.W.2d 844 (Minn.App. 2017). The court of appeals concluded that the district court did not err in considering the return-of-property clause as a "condition precedent to Lifetouch's duty to pay [Capistrant] his residual commission." Id. at 854. But the court of appeals determined that the district court did err in failing to recognize that, read as a whole, the non-compete provisions and the residual commission provision "function as a non-compete agreement with a forfeiture clause." Id. And the court of appeals also determined that the district court erred in not applying "binding precedent on the unenforceability of disproportionate forfeiture clauses and overbroad non-compete agreements." Id.

The court of appeals turned to section 229 of the Restatement (Second) of Contracts, and held that the "the timing of the return of property was not a material part of the contract" and "a forfeiture of potentially $2.6 million for retaining proprietary documents and e-mails, when there is no evidence of an intent to compete and when it is undisputed that there is no evidence of any dissemination of the retained documents" would cause a disproportionate forfeiture. 899 N.W.2d at 857. The court of appeals therefore concluded that Capistrant's failure to immediately return Lifetouch's property was excused as a matter of law. Id. at 859–60. We granted Lifetouch's petition for review.2

ANALYSIS

This case comes to us after the district court granted Lifetouch's motion for summary judgment. On appeal from summary judgment, we review de novo whether there are any genuine issues of material fact and whether the district court erred in its application of the law to the facts. Commerce Bank v. W. Bend Mut. Ins. Co. , 870 N.W.2d 770, 773 (Minn. 2015). Lifetouch contends that Capistrant's knowing failure to immediately return Lifetouch's property at the end of his employment relieves Lifetouch of its contractual obligation to pay the residual commission to Capistrant. Specifically, Lifetouch asserts that the return-of-property clause operates as an absolute precondition to its duty to pay the residual commission. Capistrant argues that his immediate return of Lifetouch's property was not a material term of the contract, and thus any breach cannot excuse Lifetouch's performance. The court of appeals agreed with Capistrant, holding that ...

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