Follmer, Rudzewicz & Co., P.C. v. Kosco, LTA-QUAIL-SAUER

• Decision Date: 28 December 1984
• Docket Number: Docket Nos. 68111,68117,NOLTA-QUAIL-SAUER,3,Nos. 2,LTA-QUAIL-SAUER,s. 2
• Citation: 420 Mich. 394,362 N.W.2d 676
• Parties: FOLLMER, RUDZEWICZ & COMPANY, P.C., a Michigan professional corporation, Plaintiff-Appellee, v. Gerald M. KOSCO, Defendant-Appellant.AND ASSOCIATES, a Michigan corporation, and Mattingly-Chew & Associates, Inc., a Michigan corporation, Plaintiffs-Appellants, v. Patrick J. ROCHE, an individual and Independent Agencies, Inc., a Michigan corporation, Defendants-Appellees. Calendar420 Mich. 394, 362 N.W.2d 676
• Court: Michigan Supreme Court

Page 676

362 N.W.2d 676

FOLLMER, RUDZEWICZ & COMPANY, P.C., a Michigan professional

corporation, Plaintiff-Appellee, v. Gerald M. KOSCO, Defendant-Appellant.

NOLTA-QUAIL-SAUER AND ASSOCIATES, a Michigan corporation,

and Mattingly-Chew & Associates, Inc., a Michigan

corporation, Plaintiffs-Appellants, v. Patrick J. ROCHE, an individual and Independent Agencies,

Inc., a Michigan corporation,

Defendants-Appellees.

Docket Nos. 68111, 68117.

Calendar Nos. 2, 3.

420 Mich. 394, 362 N.W.2d 676

Supreme Court of Michigan.

Argued April 5, 1983.

Decided Dec. 28, 1984.

Butzel, Long, Gust, Klein & Van Zile by James M. Wienner, Bloomfield Hills, for plaintiff-appellee Follmer, Rudzewicz & Company, P.C.

Simon, Deitch, Siefman, Tucker & Friedman, P.C. by Jay N. Siefman and Stephen P. Ormond, Southfield, for defendant-appellant Kosco.

Honigman, Miller, Schwartz & Cohn by Herschel P. Fink, Detroit, for plaintiffs-appellants Nolta-Quail-Sauer and Associates and Mattingly-Chew & Associates, Inc.

Plunkett, Cooney, Rutt, Watters, Stanczyk & Pedersen, P.C. by Michael T. Lynch, Detriot, for defendants-appellees Roche and Independent Agencies, Inc.

LEVIN, Justice.

In these cases, consolidated on appeal, the plaintiffs, who were employers of the defendants, seek to enforce against the defendants the employee's agreement to compensate his employer if, within a given period of time after termination of employment, the employee provided services for a client of his employer.

Defendant Kosco is an accountant. Defendant Roche is an insurance agent. Defendant Independent Agencies, Inc., is a Michigan corporation engaged in the insurance business. Both Kosco and Roche admit they provided services for clients of their former employers.

The contracts of employment ¹ provided that the employee would be deemed to have agreed to purchase from his employer the goodwill or business of the employer in respect to a client or customer of the employer to whom the terminated employee rendered service within three years, in Follmer, or five years, in Nolta-Quail-Sauer, following termination of employment for a purchase price determined in accordance with a formula set forth in the agreement. The defendants claim that those contractual provisions violate the statute providing that

"[a]ll agreements and contracts by which any person, copartnership or corporation promises or agrees not to engage in any avocation, employment, pursuit, trade, profession or business, whether reasonable or unreasonable, partial or general, limited or unlimited, are hereby declared to be against public policy and illegal and void." M.C.L. Sec. 445.761; M.S.A. Sec. 28.61.

In Follmer, the circuit court denied defendant's motion for summary judgment and granted plaintiff's motion for partial summary judgment, holding that the contractual provision did not violate the statute, that the provision was neither unreasonable nor an unreasonable restraint of trade under common-law standards, and that the provision set forth an agreed valuation and not liquidated damages or a penalty.

The Court of Appeals affirmed, holding that the challenged provision did not prevent the defendant "from engaging in his chosen profession" nor "from openly and notoriously competing with plaintiff". Although the provision for compensation will discourage defendant from acquiring plaintiff's clients, that is permissible under the statute. The covenant does not violate the common law as an unreasonable restraint of trade, and the "damage figures are not a penalty, but an agreed upon valuation of damages". ²

In Nolta-Quail-Sauer, the circuit court granted plaintiffs' motion for summary judgment saying that "the subject agreement as sought to be enforced under Count V is not illegal or contrary to public policy * * *." The court denied defendants' motion for summary judgment. The Court of Appeals rejected defendant's argument that the agreement was without adequate consideration, but held that the clause which plaintiffs sought to enforce was proscribed by the statute and void as against public policy. ³

We hold that the contractual provisions are not violative of the statute relied on by the defendants, and for reasons hereafter stated remand for further proceedings.

I

The challenged contractual provisions seek to protect the employers from the use by their employees of information acquired in the course of their employment. While an employee is entitled to the unrestricted use of general information acquired during the course of his employment ⁴ or information generally known in the trade or readily ascertainable, ⁵ confidential information, including information regarding customers, constitutes property ⁶ of the employer ⁷ and may be protected by contract. ⁸ Even in the absence of a contract, an employee has a duty not to use or disclose confidential information acquired in the course of his employment. ⁹ Such information is often treated as a "trade secret". ¹⁰

Both accountants and insurance agents have an opportunity to learn information of a confidential nature in the course of their employment. ¹¹ An accountant establishes a relation of confidence with his clients. Because of the nature of the relationship, an accountant may obtain information concerning the client's personal finances and methods of keeping records. It has been said:

"the business of a certified public accountant is such that the person who actually performs the labor incident thereto acquires an intimate knowledge of the business of the client, preparing audits of the business, income tax returns and other matters very confidential in their nature, and vital to the business itself * * *. [A]s the client learns to know the accountant the desire of a client to have the particular accountant do his work increases to the point where it is almost impossible to change the accountant, owing to the confidential knowledge he has of all the important and vital matters concerning the business * * *." Racine v. Bender, 141 Wash. 606, 608, 252 P. 115 (1927). ¹²

An insurance agent similarly has an opportunity to learn confidential information regarding the customer's special needs and desires, the expiration dates of his insurance policies, and other valuable information. In reversing a trial court's decision voiding the nondisclosure provisions of an insurance agent's employment contract, the Supreme Court of South Dakota said:

"In selling these contracts, he relied on the entire file, not merely a customer list or the expiration dates * * *. Moreover the files contain personal data on each customer obtained in a confidential business relationship. See Masden v Travelers Ins Co, 52 F2d 75, 77 (CA 8, 1931). They also contain expiration dates which are valuable in the highly competitive insurance business since policies are seldom cancelled during their term. State Farm Mutual Automobile Ins Co v Dempster , 344 P2d [821,] 825." 1st American Systems, Inc. v. Rezatto, 311 N.W.2d 51, 58 (SD, 1981). ¹³

An employee who possesses confidential information regarding a client is in a position to exploit that information for the purpose of obtaining the patronage of the client after leaving his employer's service. ¹⁴ In view of the risks presented by an employee's knowledge of confidential customer information, and the perceived unfairness of allowing the employee to gain a competitive advantage by using it, ¹⁵ an employer may protect himself from the unauthorized use of such confidential information by obtaining an agreement that, in the event the employee obtains the patronage of former clients, he will be obliged to pay the employer according to an agreed formula.

An employer is not, however, entitled to enforce a contractual provision which would require an employee to pay for using information labelled confidential which is not in fact confidential. ¹⁶ Accordingly, in each case, a determination must be made whether the employee has in fact had access to confidential information which provides him with an unusual opportunity to obtain the patronage of particular clients of his former employer. ¹⁷

Since no such determination was made in the instant cases, they will be remanded for determination of that factual issue. If, on remand, the plaintiff makes the requisite showing, the contractual provision designed to compensate the plaintiff for defendant's use of confidential information in obtaining the patronage of plaintiff's clients may be enforced.

II

An agreement requiring an employee to pay for using confidential information in obtaining the patronage of his employer's customers does not violate the statute. ¹⁸ See Glucol Manufacturing Co. v. Schulist, 239 Mich. 70, 74, 214 N.W. 152 (1927).

Whether such an agreement is characterized as in restraint of trade ¹⁹ or not, it must be reasonable to be enforced. ²⁰ To the extent such an agreement provides reasonable protection for the confidential information of the employer, it does not violate the statute and is enforceable. To the extent it goes beyond what is reasonably necessary for the protection of confidential information, it is unenforceable. The courts thus must scrutinize such agreements and enforce them only to the extent they are reasonable.

In determining whether the provisions of such an agreement are reasonable, the courts consider three interests: the public interest, the former employee's interest in continued employment, and the interest of the employer. ²¹ Of particular importance is the client's interest in being free to form business relationships with whomever he pleases.

An agreement that unduly limits a former employee's freedom to go into business for himself or another, or extracts an excessive price for the privilege of doing so, is unreasonable and hence unenforceable. A court may, however, enforce such a contractual provision to the extent that it is reasonable ²² by substituting a reasonable amount for the amount provided in the...