Hardy v. Mann Frankfort Stein & Lipp

• Citation: 263 S.W.3d 232
• Decision Date: 03 May 2007
• Docket Number: No. 01-05-01080-CV.,01-05-01080-CV.
• Parties: David HARDY and Brendan J. Fielding, Appellants, v. MANN FRANKFORT STEIN & LIPP ADVISORS, INC., MFSL GP, L.L.C., and MFSL Employee Investments, Ltd., Appellees.
• Court: Court of Appeals of Texas

263 S.W.3d 232

David HARDY and Brendan J. Fielding, Appellants, v. MANN FRANKFORT STEIN & LIPP ADVISORS, INC., MFSL GP, L.L.C., and MFSL Employee Investments, Ltd., Appellees.

No. 01-05-01080-CV.

Court of Appeals of Texas, Houston (1st Dist.).

May 3, 2007.

Bruce E. Ramage, Elizabeth Mata Kroger, William Jackson Wisdom Jr., Levon G. Hovnatanian, Martin, Disiere, Jefferson & Wisdom, L.L.P., Warren W. Harris, Christina M. Putman, Walter J. Cicack, Seyfarth Shaw, L.L.P., Houston, for Appellants.

Laura B. Herring, Warren W. Harris, Bracewell & Giulliani, L.L.P., Houston, for Appellees.

Panel consists of Justices TAFT, ALCALA, and HANKS.

OPINION

ELSA ALCALA, Justice.

Appellants, Brendan J. Fielding and David Hardy, appeal from a summary judgment denying their request for attorney's fees and costs. In a cross-appeal, the former employer of Fielding and Hardy, Mann Frankfort Stein & Lipp Advisors, Inc. ("Mann Frankfort"), and related entities, MFSL Employee Investments, Ltd. and MFSL GP, L.L.C., appellees (collectively "Mann"), appeal from a summary judgment denying their counterclaim for breach of contract. Mann's breach of contract claim asserted that Fielding and Hardy signed agreements that included "client-purchase provisions" and, when Fielding and Hardy terminated their employment with Mann, breached those agreements by conducting business with Mann's former clients without "purchasing" the rights to those clients. In addition to denying Mann's breach of contract claims, the trial court entered summary judgments in favor of Fielding and Hardy in their suit seeking declaratory judgment that the covenants not to compete were unenforceable as a matter of law.

In three issues, Fielding and Hardy contend that the trial court erred (1) by declining to award attorney's fees to Fielding under the terms of his employment agreement, (2) by refusing to award Fielding and Hardy their attorney's fees under the Uniform Declaratory Judgments Act,¹ and (3) by determining that the Covenants Not to Compete Act² preempted an award of attorney's fees under either Fielding's agreement or the Uniform Declaratory Judgments Act. In four issues in the cross-appeal, Mann contends that the trial court erred by (1) granting summary judgment in favor of Fielding and Hardy in their declaratory judgment action, (2) denying Mann's motion for summary judgment on the breach of contract claim against Fielding and Hardy, and (3) sustaining objections to portions of Mann's summary judgment evidence. We conclude that the client-purchase provisions are covenants not to compete that are unenforceable. We also conclude that the trial court did not abuse its discretion by denying Fielding and Hardy's request for attorney's fees in their declaratory judgment action, but that the trial court erred by denying attorney's fees to Fielding under the terms of his employment agreement with Mann Frankfort that provided for an award of attorney's fees to the prevailing party. We therefore affirm in part and reverse and remand in part.³

Background

In 1992, Mann Frankfort, an accounting firm, hired Fielding as a staff accountant in the tax department. At the time he joined, Fielding signed Mann Frankfort's standard employment agreement that provided that he could not "at any time" disclose "any secret or confidential information or knowledge obtained ... while employed" by Mann Frankfort. The agreement further provided that "[i]f at any time within one (1) year after the termination or expiration hereof, [Fielding] directly or indirectly performs accounting services for remuneration for any party who is a client of [Mann Frankfort] during the term of this Agreement, [Fielding] shall immediately purchase from [Mann Frankfort] and [Mann Frankfort] shall sell to [Fielding] that portion of [Mann Frankfort's] business." The agreement provided that 90% of amounts due to Fielding from the client would be payable to Mann Frankfort. The agreement specified that the intent of the sale of the clients was "not to be construed as a promise or agreement of [Fielding] not to engage in any avocation [or] employment."

In 1996, when Hardy was hired to work in the tax department of an accounting firm, he executed an employment agreement with that firm. In the agreement, Hardy acknowledged he would have access to the firm's clients and that he would gain experience that was valuable to the clients and to the firm. The agreement also provided that Hardy, in consideration of the benefits of his employment and the experience he would gain, would not "during or after the period of active employment, disclose ... proprietary information of [his employer] such as financial records, data, programs, etc." Hardy also agreed that he would "neither call nor solicit, either for himself or for any other Person any of the clients of the firm for a period of twenty-four (24) months immediately following [his] period of active employment." The agreement provided that if Hardy provided accounting services for any of his employer's clients during the 24-month period, he would pay the employer 150% of the amount of the fees billed to the client by the employer in the previous year. Later, when Hardy's employer was acquired by Mann Frankfort, Mann Frankfort also acquired Hardy's employment agreement by assignment.

Mann Frankfort was merged into another entity, Centerprise Advisors, Inc. ("Centerprise"). As part of the merger, Mann Frankfort decided to provide employees with the opportunity to become indirect owners of Centerprise by allowing them to become limited partners of the partnership known as MFSL Employee Investments, Ltd. MFSL Employee Investments holds an interest in MFSL Investments, Ltd., which owns stock in Centerprise. In October 1999, to receive an interest in MFSL Employee Investments, Fielding and Hardy executed the MFSL Employee Investments, Ltd. Agreement of Limited Partnership. They also executed an Amendment to the Agreement of Limited Partnership several months later.

Under the Limited Partnership Agreement, Fielding and Hardy are referred to as limited partners. Fielding and Hardy acknowledged and agreed that Mann Frankfort expended and would continue to expend substantial time, effort, and monies to acquire, develop, and safeguard secret and confidential information pertaining to customers. Fielding and Hardy also acknowledged and agreed that Mann Frankfort's secret and confidential information and client relationships constitute valuable assets. According to the Limited Partnership Agreement, if a limited partner leaves Mann Frankfort and performs accounting, tax, or related services for a client of Mann Frankfort, fees must be paid to Mann Frankfort. Specifically, under these circumstances, the limited partner is required to pay 90% of accounts receivable due from the client and of unbilled time and "the total of the billable time spent by [Mann Frankfort] and/or its employees in servicing each such client during the twelve (12) month period immediately preceding the date the Limited Partner ceases to be employed by [Mann Frankfort]." The Limited Partnership Agreement, however, limited the clients affected by this clause to those clients who were both (1) clients of Mann Frankfort in the one year period before the employment relationship between the limited partner and Mann Frankfort ended and (2) clients for whom the limited partner provided accounting, tax, or other services.

In January 2004, Fielding and Hardy resigned from Mann Frankfort. By January 21, Fielding and Hardy had incorporated their own accounting firm, Fielding & Hardy, P.C. Both Fielding and Hardy have performed tax work for clients for whom they had performed similar work while employed with Mann Frankfort.

Fielding and Hardy filed this suit seeking a declaration of their obligations under the client-purchase provisions of their employment agreements and the Limited Partnership Agreement. Mann counterclaimed, asserting claims for breach of contract, breach of fiduciary duty, tortious interference with existing and prospective business relationships, use of Mann Frankfort's confidential information, misappropriation of trade secrets, and a request for a declaratory judgment that the agreements were valid. The counterclaim sought damages under the client-purchase provisions of the agreements. Fielding and Hardy moved for partial summary judgment on the ground that the client-purchase provisions in each of the agreements were unenforceable as unreasonable restraints on trade. Fielding and Hardy contended that the provisions were unenforceable because they were overbroad, unreasonable, and not ancillary to an otherwise enforceable agreement. Mann filed a cross-motion for summary judgment for breach of contract, seeking enforcement of the client-purchase provisions. The trial court rendered summary judgment in favor of Fielding and Hardy. Mann subsequently non-suited all claims, except for the claim for breach of contract.

Fielding sought attorney's fees under paragraph 15 of his employment agreement. Fielding filed a second motion for summary judgment asserting that he was the prevailing party for the purpose of paragraph 15 of the employment agreement and thus was entitled to attorney's fees. Mann filed a cross-motion for summary judgment, which contended that because the trial court had declared the client-purchase provisions of the agreement invalid, the entire agreement — including the provision for attorney's fees — was invalid. The trial court granted Mann's motion for summary judgment, thereby denying attorney's fees to Fielding under his agreement with Mann.

Fielding and Hardy also requested attorney's fees under the Uniform Declaratory Judgments Act. See TEX. CIV. PRAC. & REM.CODE ANN. § 37.009 (Vernon 2006). Fielding and Hardy contended that they were entitled to an award of their attorney's fees because they were the prevailing party in the declaratory judgment action. The trial...