Rent-A-Center, Inc. v. Canyon Television and Appliance Rental, Inc.

• Decision Date: 13 September 1991
• Docket Number: RENT-A-CENTE,Nos. 91-15150,91-15416,INC,s. 91-15150
• Citation: 944 F.2d 597
• Parties: , a Delaware corporation, Plaintiff-Counter-Defendant-Appellee, v. CANYON TELEVISION AND APPLIANCE RENTAL, INC., a Delaware corporation; Canyon Rent to Own, an Arizona corporation; David Manthei; Carl Manthei, Defendants-Counter- Claimants- Appellants.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 597

944 F.2d 597

RENT-A-CENTER, INC., a Delaware corporation Plaintiff-Counter-Defendant-Appellee, v. CANYON TELEVISION AND APPLIANCE RENTAL, INC., a Delaware corporation; Canyon Rent to Own, an Arizona corporation; David Manthei; Carl Manthei Defendants-Counter- Claimants- Appellants.

Nos. 91-15150, 91-15416.

United States Court of Appeals Ninth Circuit.

Argued and Submitted July 18, 1991.

Decided Sept. 13, 1991.

Charles W. Herf, Gaston & Snow, Phoenix, Ariz., for defendants-counter-claimants-appellants.

Mark A. Nadeau, David L. Abney, Stephen B. White, Morrison & Hecker, Phoenix, Ariz., for plaintiff-counter-defendant-appellee.

Appeal from the United States District Court for the District of Arizona.

Before GOODWIN and SNEED, Circuit Judges, and TAYLOR, ^* District Judge.

SNEED, Circuit Judge:

Defendant Canyon Television and Appliance Rental, Inc. (Canyon) appeals from a district court grant of a preliminary injunction in favor of the plaintiff, Rent-A-Center, Inc. (RAC), in a diversity action to enforce a covenant not to compete associated with RAC's purchase of a Canyon location. We affirm.

I. FACTS

RAC rents durable household goods, such as televisions, stereos, appliances, and furniture, to consumers nationwide. Defendant Canyon also rents durable goods, from locations in Nevada, Hawaii, and Arizona.

On March 7, 1990, RAC purchased the assets of a Canyon location in Phoenix, Arizona. The purchase agreement contained a noncompetition covenant, in which Canyon agreed not to engage in the rental or sale of durable goods for a period of three years within a region described as the Phoenix Area of Dominant Influence (ADI). ADI is a term used by the Arbitron Company, a television research service, to define advertising markets. Within a given ADI, over fifty per cent of all households with televisions watch programs from stations originating within that particular area. The Phoenix ADI covers much of central and western Arizona, encompassing approximately 69,000 square miles.

In August, 1990, RAC learned of Canyon's plans to open a new location in Bullhead City, Arizona, which is included in the Phoenix ADI. Despite RAC's protests, Canyon opened the Bullhead City location on August 15, 1990.

On September 11, 1990, RAC filed a complaint in the United States District Court for the District of Arizona, seeking to enjoin Canyon's breach and recover damages. Canyon counterclaimed for rescission and reformation of the contract based on mistake and misrepresentation.

On December 18, 1990, the district court issued a preliminary injunction enjoining Canyon from operating the Bullhead City store, or opening any store within the Phoenix ADI, after February 25, 1991. Canyon appeals, claiming primarily that the scope of the restrictive covenant was unreasonably large, given the local nature of the Phoenix store's operations, and should not be enforced.

II. JURISDICTION AND CHOICE OF LAW

The district court had diversity jurisdiction under 28 U.S.C. § 1332(a) (1988). This court has appellate jurisdiction over the district court's grant of a preliminary injunction under 28 U.S.C. § 1292(a)(1).

As set forth in the purchase agreement, Kansas contract law governs the substantive issues of law in this diversity action. The parties also agree that, for purposes of this case, Arizona law is equally acceptable.

III. STANDARD OF REVIEW

The district court's grant of preliminary injunctive relief is reviewed for abuse of discretion. Religious Technology Center, Church of Scientology Int'l, Inc. v. Scott, 869 F.2d 1306, 1309 (9th Cir.1989). The related factual findings are reviewed under the clearly erroneous standard. Id. Issues of law underlying a district court grant of a preliminary injunction are reviewed de novo. See Guam Fresh, Inc. v. Ada, 849 F.2d 436, 437 (9th Cir.1988).

In this case, both parties agree to de novo review of the restrictive covenant's reasonableness. Generally, the classification of this issue as legal or factual depends upon state law. See In re Talmage, 758 F.2d 162, 165 (6th Cir.1985) (reasonableness of noncompetition covenant is legal issue under Illinois law); see also NCH Corp. v. Share Corp., 757 F.2d 1540, 1542 n. 2 (5th Cir.1985).

Under Kansas law, the reasonableness of a noncompetition covenant is apparently a question of fact. See Eastern Distributing Co. v. Flynn, 222 Kan. 666, 670, 673, 567 P.2d 1371, 1376, 1378 (1977) (stating that the "test is ... whether the restraint is reasonable under the facts and circumstances of the particular case"). However, under Arizona law, reasonableness is a question of law. See Gann v. Morris, 122 Ariz. 517, 518, 596 P.2d 43, 44 (Ct.App.1979). Without addressing the merits of this dispute, we conclude, after de novo review, that the district court's order was appropriate. Our holding implicitly recognizes that the judge's decision would have also survived scrutiny under the less rigorous, clearly erroneous standard.

IV. DISCUSSION

A. The Reasonableness of the Restrictive Covenant's Scope

Canyon first argues that the noncompetition covenant should not be enforced because the geographic area covered--that is, the Phoenix ADI--greatly exceeds the customer base of the store sold, which Canyon asserts is no more than a thirty-mile radius, and thus represents an unreasonable restraint of trade.

Under Kansas law, when a contract is freely entered into with full knowledge, there is a presumption favoring legality. Eastern Distributing Co., 222 Kan. at 671, 567 P.2d at 1376 (evaluating a noncompetition clause in an employment agreement). In determining whether a noncompetition covenant is enforceable, the rights of the promisee, the promisor, and the general public must be taken into account; and "area and time limitations must be reasonable under the facts and circumstances of the particular case." H & R Block, Inc. v. Lovelace, 208 Kan. 538, 544, 493 P.2d 205, 210 (1972). When deciding what is reasonable, courts give greater deference to restrictions that are part of the sale of a business than to restrictive covenants between employers and employees. See id. at 544-45, 493 P.2d at 211; see also Gann, 122 Ariz. at 518, 596 P.2d at 44 ("Where limited as to time and space, [such a] covenant is ordinarily valid unless it is to refrain from all business whatsoever."). This is because the seller of a business is more likely to have equal bargaining power in negotiating such covenants, and is presumably compensated by an increase in the selling price, while an employee merely receives the opportunity for continued employment. See H & R Block, 208 Kan. at 545, 493 P.2d at 211.

We have examined the facts and circumstances of this case, and we conclude that the geographic restriction passes the reasonableness test of H & R Block. Canyon freely entered into a clear and unambiguous covenant. Television advertising is a significant means of attracting customers in the rent-to-own industry. Advertising by Canyon's Phoenix location, extending throughout the Phoenix ADI, created an asset by enhancing Canyon's potential for expansion in that region, and by reducing the effectiveness of other voices, including RAC's, in the advertising market. Canyon sold that asset to RAC as part of the sale of the Phoenix location. Given the factual nature of the reasonableness inquiry, Canyon cannot overcome the presumption of legality in an arm's-length agreement, or the deference shown by Kansas courts to contracts related to business sales. We will not rewrite the contract to give back to Canyon that which it chose to sell.

While we uphold the use of ADI to define market scope in this particular instance, we specifically do not address the validity of ADI as a general rule. The advertising industry may consider ADI a relevant geographic area for analysis in various situations, but ADI may not invariably be an appropriate standard for the courts to use in evaluating contractual restraints arising from the sale of a business. Our holding as to the reasonableness of ADI applies only to the facts and circumstances of this particular case.

B. Admissibility of RAC's Rebuttal Evidence

Canyon next claims that the district court's exclusion of evidence relating to RAC's internal marketing structure and ADI became "the law of the case" and that the later admission of similar evidence during rebuttal was therefore an abuse of discretion. This claim lacks merit.

During a hearing held on September 12, 1990 on RAC's motion for a temporary restraining order, RAC presented testimony relating to the importance of ADI to the structure of its marketing organization. The district court sustained Canyon's objections to this evidence on relevancy grounds. During rebuttal in the December, 1990 hearings, RAC again presented expert testimony relating to its use of ADI to define markets and to define the scope of its advertising efforts in Phoenix. This time, the district court admitted the evidence over Canyon's objections.

Evidentiary rulings by the district court are reviewed for an abuse of discretion. Roberts v. College of the Desert, 870 F.2d 1411, 1418 (9th Cir.1989). The district court has broad discretion in deciding what constitutes proper rebuttal evidence. See Datamatic Servs., Inc. v. United States, 909 F.2d 1029, 1033 (7th Cir.1990). The district court also has broad discretion in admitting expert testimony and its decision will be sustained unless it is "manifestly erroneous." Taylor v. Burlington N.R.R., 787 F.2d 1309, 1315 (9th Cir.1986).

In this case the district court's rulings are not manifestly erroneous, nor are they an abuse of discretion. Although the significance of ADI to RAC's internal organization may not have been relevant to the initial issue of whether Canyon breached the noncompetition covenant, the reasonableness of ADI as a measure of that covenant's scope was a significant issue in Canyon's defense. The district court was free to consider evidence...