Communication Technical Systems, Inc. v. Densmore, s. 20234

• Decision Date: 09 September 1998
• Docket Number: 20258,Nos. 20234,s. 20234
• Citation: 583 N.W.2d 125,1998 SD 87
• Parties: 1998-2 Trade Cases P 72,246, 14 IER Cases 522, 1998 SD 87 COMMUNICATION TECHNICAL SYSTEMS, INC., a Georgia Corporation, Plaintiff and Appellant, v. Rickey Lamar DENSMORE and Gateway 2000, Inc., a South Dakota Corporation, Defendants and Appellees.
• Court: South Dakota Supreme Court

Page 125

583 N.W.2d 125

1998-2 Trade Cases P 72,246, 14 IER Cases

522, 1998 SD 87

COMMUNICATION TECHNICAL SYSTEMS, INC., a Georgia Corporation, Plaintiff and Appellant, v. Rickey Lamar DENSMORE and Gateway 2000, Inc., a South Dakota Corporation, Defendants and Appellees.

Nos. 20234, 20258.

Supreme Court of South Dakota.

Argued April 29, 1998.

Decided Aug. 5, 1998.

Rehearing Denied Sept. 9, 1998.

Thomas K. Wilka of Hagen, Wilka & Archer, P.C., Sioux Falls, for plaintiff and appellant.

Mark V. Meierhenry of Danforth, Meierhenry & Meierhenry, Sioux Falls, for defendant and appellee, Densmore.

Cheryle Wiedmeier of Davenport, Evans, Hurwitz & Smith, Sioux Falls, for defendant and appellee, Gateway 2000.

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, Densmore 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. Densmore 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, Densmore 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 Corinium 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 and 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 working with CTS. Densmore counter-claimed that CTS tortiously interfered with his business relationship with Gateway when CTS sued Gateway ¹ 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 Densmore 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 anti-trust 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 nonmoving 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, p 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.

¶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, p 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...