Hensley v. E. R. Carpenter Co., Inc., 80-3446

• Decision Date: 25 November 1980
• Docket Number: No. 80-3446,80-3446
• Parties: James D. HENSLEY, Plaintiff-Appellant, v. E. R. CARPENTER CO., INC., Defendant-Appellee. Summary Calendar. . Unit A
• Court: U.S. Court of Appeals — Fifth Circuit

Page 1106

633 F.2d 1106

James D. HENSLEY, Plaintiff-Appellant, v. E. R. CARPENTER CO., INC., Defendant-Appellee.

No. 80-3446

Summary Calendar.

United States Court of Appeals, Fifth Circuit.

Unit A

Nov. 25, 1980.

Michael G. Soper, Tupelo, Miss., for plaintiff-appellant.

Lumpkin, Holland, Ray & Upchurch, James Hugh Ray, W. Reed Hillen, Tupelo, Miss., for defendant-appellee.

Appeal from the United States District Court for the Northern District of Mississippi.

Before GEE, RUBIN and RANDALL, Circuit Judges.

GEE, Circuit Judge:

James D. Hensley appeals from both a summary judgment against him in a breach of contract suit he brought against his employer and an injunction entered against him upon a counterclaim by the employer that requires him to abide by a restrictive covenant in the contract.

In September 1978, Hensley's employer, E. R. Carpenter Company, a manufacturer and processor of urethane foam, promoted Hensley to division manager of the company's Tupelo (Mississippi) Division Profit Center. In December of the same year, Hensley signed an employment contract with the company that contained the following clause: "2. Duties. The Employee is employed to manage the Tupelo division profit center. The precise services of the Employee may be extended or curtailed from time to time, at the direction of the Company." The contract also contained a covenant that Hensley would not work for a competitor of Carpenter anywhere in the continental United States or Canada for at least two years after leaving the company. ¹

In November 1979, the company removed Hensley as division manager and placed him in the newly created position of sales manager, which involved supervising a staff of two employees, later reduced to one. Hensley's salary was not diminished, but he received neither a cost-of-living increase that was accorded all of Carpenter's other Tupelo employees nor a customary year-end bonus. The company also assigned Hensley to an office that lacked both a desk and a desk chair.

Since Hensley regarded Carpenter's treatment of him to have breached his employment contract, he left the company and, in January 1980, accepted employment as general manager of Superior Products Company, a Tupelo-based competitor of Carpenter. The next month he brought this diversity suit against Carpenter for damages attendant to the breach of contract and for a declaration that he was no longer bound by the contract and its restrictive covenant because Carpenter's breach warranted rescission of the contract and because the contract in general and the covenant in particular were unconscionable. Hensley formally requested a jury trial. Carpenter counterclaimed for an injunction enforcing the covenant and thus barring Hensley from continued employment with Superior Products.

The district court first held a hearing on Carpenter's equitable counterclaim and entered a preliminary injunction forbidding Hensley to work for a competitor of Carpenter within a 300-mile radius of Tupelo for the two-year period prescribed in the restrictive covenant. The court decided that Carpenter had not breached its contract with Hensley by removing him as division manager because it had not reduced his salary, because it had not asked him to resign, and because the second sentence in the duties clause of the contract, quoted above, authorized the company to treat Hensley as it did. The court also found that the covenant not to compete was not unconscionable (and therefore unenforceable) except with regard to its geographic scope-the continental United States and Canada-which the court found to be unreasonable as applied to Hensley. The court decided, however, that a reasonable scope for the covenant would be the trade area served by the Tupelo Division, which encompassed a 300-mile radius of the City of Tupelo, and, with the geographic scope of the covenant thus modified, the court issued the preliminary injunction enforcing the covenant against Hensley. Shortly thereafter, the court granted Carpenter's motion for summary judgment on the merits of Hensley's claims and made the preliminary injunction permanent.

Hensley appeals the district court's finding that Carpenter did not breach its contract with him and thus the court's conclusion that Carpenter was entitled to summary judgment and enforcement of the restrictive covenant. Hensley also appeals the court's specification of a reasonable geographic scope for the covenant insofar as it extends beyond the boundaries of the State of Mississippi. Although we previously denied Hensley's motion for suspension of the district court's injunction pending our disposition of this appeal, we did order that the appeal be expedited.

We agree with Hensley that the district court erred in finding that Carpenter did not breach the employment contract when it demoted him ² and that the court erred, because of its reliance on that finding, in granting summary judgment for Carpenter on Hensley's breach of contract claim and in enforcing the restrictive covenant. Since this is a diversity case, the substantive issues herein are of course governed by state law. In Matheney v. McClain, 248 Miss. 842, 161 So.2d 516 (1964), the Supreme Court of Mississippi, considering a claim by an employee that he was not bound by a covenant not to compete contained in his contract because his employer had breached the contract, held that "if the breach of the contract is such that upon a reasonable construction of the contract, it is shown that the parties considered the breach as vital to the existence of the contract, such a breach will discharge the other party from the performance of his promise." Id. at 849, 161 So.2d at 520 (citations omitted); see Olin Corp. v. Central Industries, Inc., 576 F.2d 642, 646-47 (5th Cir. 1978). Although the Mississippi courts have not to our knowledge specifically decided whether an unjustified reduction in rank conferred by an employment contract can constitute a breach of that contract, the weight of authority in other jurisdictions is that it can. 53 Am.Jur.2d Master and Servant § 44 (1970); Annot., 63 A.L.R.3d 539 (1975). Absent evidence to the contrary, we presume that the Mississippi courts would adopt the prevailing rule if called upon to do so. United States v. Southeast Mississippi Livestock Farmers Association, 619 F.2d 435, 437, 439 (5th Cir. 1980). The Supreme Court of Mississippi has held, moreover, albeit some time ago, that an employment contract that gave an employee exclusive supervisory control over other employees was breached and the employee wrongfully discharged when the employer transferred supervision of some of those employees to another. Estes v. Jones, 119 Miss. 142, 80 So. 526 (1919).

Although normally a question of fact, 53 Am.Jur.2d Master and Servant § 44 (1970); Annot., 63 A.L.R.3d 539, 543-44 (1975), we have no trouble concluding as a matter of law, Boeing Co. v. Shipman, 411 F.2d 365 (5th Cir. 1969), that Carpenter's demotion of Hensley from division manager to sales manager, unless justified, violated the first sentence of the duties clause of Hensley's contract. Since the district court made no finding that the demotion was justified, ³ the court's summary judgment for Carpenter on Hensley's breach of contract claim is reversed.

Even if Carpenter did breach Hensley's contract, however, Hensley is entitled to rescission and thus avoidance of the restrictive covenant only if the breach was "vital," i.e., "material." Matheney v. McClain, supra; Gulf South Capital Corp. v. Brown, 183 So.2d 802, 804-805 (Miss.1966). Materiality of a breach is ordinarily a question of fact. J. Calamari & J. Perillo, The Law of Contracts 409 (1977); 17A C.J.S. Contracts § 630(a) (1963); see E. T. Burrowes Co. v. Crittenden, 37 So. 504 (Miss.1904). Since, under the second sentence of the duties clause, Carpenter was authorized to extend or curtail the services Hensley could be called upon to render, we regard the materiality of Carpenter's change in Hensley's status to be an open question ⁴ that should be resolved by the trier of fact on remand. ⁵ Since a finding with regard to materiality has not yet been made and Carpenter is not entitled to invoke the covenant if its breach was material, ⁶ the injunction entered by the district court must be vacated.

The court did not err, however, as Hensley contends, in reforming the scope of the covenant to cover the area within a 300-mile radius of Tupelo. Under Mississippi law, when the territorial scope of a covenant not to compete is unreasonable, the covenant may nevertheless be enforced within an area that is reasonable. Redd Pest Control Co. v. Heatherly, 248 Miss. 34, 157 So.2d 133 (1963); accord, Hill v. Central West Public Service Co., 37 F.2d 451 (5th Cir. 1930) (pre-Erie case). The reasonableness of a contractual restraint on competition is a question of law to be decided by the court. Palmer v. Chamberlin, 191 F.2d 532, 539-40 (5th Cir. 1951); see Redd Pest Control Co. v. Heatherly, supra. Given the deference we typically accord to district courts' decisions regarding the law of the states in which they sit, Smith v. Amerada Hess Corp., 612 F.2d 212, 214 (5th Cir. 1980); Kaufman & Broad Home Systems, Inc. v. International Brotherhood of Firemen & Oilers, 607 F.2d 1104, 1108 (5th Cir. 1979), we cannot quarrel with the court's conclusion that the region it designated was a reasonable one under Mississippi law within which to enforce the covenant. Hensley does not dispute the evidence that the market area served by the Tupelo Division extends to approximately a 300-mile radius of the city, and Mississippi case law amply supports the use of such an area as an appropriate locus for enforcement of a restrictive covenant. See Redd Pest Control, supra; Donahoe v. Tatum, 242 Miss. 253, 134 So.2d 442 (1961).

Nevertheless, for the reasons previously set forth, the decision of the district court is REVERSED, and the case is REMANDED to...