Earthworks, Inc. v. Sehn

• Decision Date: 03 September 1996
• Docket Number: No. 950417,950417
• Citation: 553 N.W.2d 490
• Parties: 1996-2 Trade Cases P 71,568, 12 IER Cases 1756 EARTHWORKS, INC., Plaintiff, Appellant and Cross-Appellee v. Kevin SEHN, Defendant, Appellee and Cross-Appellant. Civil
• Court: North Dakota Supreme Court

Page 490

553 N.W.2d 490

1996-2 Trade Cases P 71,568, 12 IER Cases 1756

EARTHWORKS, INC., Plaintiff, Appellant and Cross-Appellee v. Kevin SEHN, Defendant, Appellee and Cross-Appellant.

Civil No. 950417.

Supreme Court of North Dakota.

Sept. 3, 1996.

James L. Norris (argued), of James L. Norris, P.C., Bismarck, for plaintiff, appellant and cross-appellee. Appearance by Jack Marquart, president of Earthworks, Inc.

Albert A. Wolf (argued), of Wheeler Wolf, Bismarck, for defendant, appellee and cross-appellant. Appearance by appellee Kevin Sehn.

MESCHKE, Justice.

Earthworks, Inc., appeals from a summary judgment dismissing its action against Kevin Sehn for breach of a covenant not to compete. Sehn cross-appeals from the summary dismissal of his counterclaim against Earthworks for fraud. We affirm.

Jack Marquart and Sehn were each 50 percent stockholders of Earthworks, a Bismarck-based construction company that works on Federal-Aid Highway System projects. Marquart primarily handled the bidding and scheduling of projects, while Sehn primarily supervised field crews and did winter equipment repairs for Earthworks. Sehn also visited proposed project sites and gathered facts necessary for formulating bids.

In 1992, Marquart and Sehn ended their business relationship. After negotiations, while each was represented by an attorney, they signed a December 31, 1992, agreement that said:

WHEREAS Earthworks, Inc. and Kevin Sehn have negotiated an agreement relative to Kevin Sehn terminating his association with Earthworks, Inc. by Earthworks, Inc. paying Kevin Sehn a bonus of $65,504, a non compete agreement between Earthworks, Inc. and Kevin Sehn in the amount of $100,000 and Earthworks, Inc. will pay Kevin Sehn $140,000 for his stock in Earthworks, Inc.;

* * * * * *

COVENANT NOT TO COMPETE. Earthworks, Inc. agrees to pay Kevin Sehn $100,000 for his agreeing not to compete against Earthworks, Inc. for any work on the Federal Aid Highway System in the state of North Dakota that are [sic] funded by the Federal Highway Trust Fund for a period of two years beginning January 1, 1993. As part of this covenant not to compete, Kevin Sehn agrees not to disclose to anyone information relative to the past profit history of Earthworks, Inc. The geographical area for this covenant is to be the state of North Dakota and such covenant not to compete is to continue for a period of two years from January 1, 1993. In the event that Kevin Sehn breaches this covenant not to compete, Kevin Sehn agrees to repay the $100,000 to Earthworks, Inc. The $100,000 is payable to Kevin Sehn by a payment of $20,000 on December 31, 1992 and $80,000 payable on [January] 4, 1993.

In April 1993, Sehn began working as a construction supervisor for Landstar Corporation, another Bismarck company that engages in landscaping and other small dirt work. Sehn has no ownership interest in Landstar, who also bids for and works on Federal-Aid Highway System projects.

All bidding for Federal-Aid Highway System projects in North Dakota is conducted by the State Highway Department in Bismarck. Although another Landstar employee prepares Landstar's bids on the various projects, Sehn, as a construction supervisor, performs pre-bid investigations of the proposed work sites for Landstar. Landstar has been competing with Earthworks for Federal-Aid Highway System jobs since late 1992. Although Landstar has been awarded bids from the Highway Department, Landstar has not won any bids for projects in Burleigh County during the two-year noncompetition period, so that Sehn has not worked on any highway projects in Burleigh County.

Earthworks sued Sehn alleging he breached the covenant not to compete and was liable to repay $100,000 under the terms of the covenant. Earthworks alternatively alleged Sehn fraudulently induced Earthworks into signing the covenant not to compete by falsely promising that if Sehn competed against Earthworks, Sehn would return the $100,000. Earthworks also alleged Sehn received a $30,000 salary that he was required to return to Earthworks because he violated a corporate resolution that authorized him to receive only disability benefits when he was disabled for an eight-month period. Sehn counterclaimed against Earthworks, alleging if the $100,000 was paid for the goodwill of the business instead of only for the physical corporate assets, and was consideration for the covenant not to compete, then Earthworks underpaid Sehn $100,000 for the physical assets of the corporation.

Both sides moved for summary judgment. The trial court ruled the covenant not to compete was valid and enforceable only within Burleigh County. The court ruled there was no violation of the covenant because no competition would occur until Landstar was awarded a contract to perform work in Burleigh County, that event had not occurred and, anyhow, it would be Landstar, rather than its employee, Sehn, who would be competing against Earthworks. The court also ruled the $100,000 Sehn had agreed to pay for a breach of the covenant not to compete was not a valid liquidated damages provision, but was a penalty provision and unenforceable. On the disability benefits and salary subject, the court ruled, as a matter of law, an accord and satisfaction had occurred. The trial court granted summary judgment dismissing both Earthworks' complaint and Sehn's counterclaim.

Summary judgment is, as we said in Ohio Farmers Insurance Company v. Dakota Agency, Inc., 551 N.W.2d 564, 565 (N.D.1996), a procedural device to promptly and expeditiously dispose of a controversy without trial if either party is entitled to judgment as a matter of law, if no dispute exists as to either material facts or the inferences to be drawn from undisputed facts, or if resolving disputed facts would not alter the result. We review the trial court's decision in that context.

I

In North Dakota, covenants not to compete are governed by NDCC 9-08-06 that, in part, says:

Every contract by which anyone is restrained from exercising a lawful profession, trade, or business of any kind is to that extent void, except:

1. One who sells the goodwill of a business may agree with the buyer to refrain from carrying on a similar business within a specified county, city, or a part of either, so long as the buyer or any person deriving title to the goodwill from him carries on a like business therein.

This statute's purpose is to promote commercial activity by restricting the ability of individuals to form agreements not to compete. Herman v. Newman Signs, Inc., 417 N.W.2d 179, 181 (N.D.1987). The statute represents one of the oldest and most continuous applications of public policy in contract law, and it invalidates provisions in employment contracts prohibiting an employee from working for a competitor after completion of his employment or imposing a penalty if he does so. Werlinger v. Mutual Service Cas. Ins. Co., 496 N.W.2d 26, 29-30 (N.D.1993). As we held in Spectrum Emergency Care v. St. Joseph's, 479 N.W.2d 848, 852 (N.D.1992), the statute prohibits an excessive restraint on a person's exercise of a lawful profession, trade, or business as an employer as well as an employee.

The two exceptions specified in NDCC 9-08-06 permit a limited restraint with the dissolution of a partnership or the sale of a business. The exception relied on here by Earthworks makes valid a limited non-competition agreement only if it is connected with the sale of the goodwill of a business. See Hayashi v. Ihringer, 79 N.D. 625, 58 N.W.2d 788, 791-792 (1953); Mapes v. Metcalf, 10 N.D. 601, 88 N.W. 713, 714 (1901). In this case, the parties' agreement does not mention goodwill. Earthworks argues goodwill was implicitly sold as part of the transaction, even though the agreement did not mention the term. Sehn argues the business had no goodwill to sell, and if it did, Earthworks refused to pay for it, and therefore the non-competition covenant was void. We agree with the trial court that, as a matter of law, Sehn sold his interest in the goodwill of the corporation to Earthworks.

When a party sells a business, and as part of the sale, agrees not to engage in the same or similar business in the same area for a particular and reasonable length of time, "good will, although not specifically mentioned, [is] a subject of the sale and passe[s] as an incident of the transfer of real and personal property involved." Igoe v. Atlas Ready-Mix, Inc., 134 N.W.2d 511, 514 (N.D.1965); see also Lire v. Bob's Pizza Inn Rest., Inc., 541 N.W.2d 432, 433 n. 1 (N.D.1995); Engstrom v. Larson, 77 N.D. 541, 44 N.W.2d 97, 108 (1950). Other jurisdictions follow the rule that, even if goodwill is not specifically mentioned, absent any expression to the contrary in the contract for sale of the business the goodwill passes. See, e.g., Handyspot Co. of Northern California v. Buegeleisen, 128 Cal.App.2d 191, 274 P.2d 938, 941 (1954); Carr v. Carr, 108 Idaho 684, 701 P.2d 304, 308 (1985). In Bessel v. Bethke, 56 N.D. 1, 215 N.W. 868, 869-870 (1927), we construed the predecessor to NDCC 9-08-06(1) to apply to a stockholder's sale of his stock:

Where one sells his stock he necessarily disposes of his interest in the good will of the business conducted by the corporation to the same extent as he parts with his interest in any other property of the corporation. And where, as in the instant case, he disposes of all his stock and severs his connection with a business that had been in a measure dependent for its success upon his skill or ability and contracts at the same time not to re-engage in the same business within an area permitted by the statute, he has, in fact, sold the good will within the exception, and the contract is valid.

In this case, Sehn sold his stock to Earthworks and agreed to the non-competition covenant. The agreement does not specifically except...