Kovarik v. American Family Ins. Group

Decision Date19 March 1997
Docket NumberNo. 96-2059,96-2059
Citation108 F.3d 962
Parties1997-1 Trade Cases P 71,756, 12 IER Cases 1179 Kenneth J. KOVARIK, Appellee, v. AMERICAN FAMILY INSURANCE GROUP; American Family Mutual Insurance Company; American Standard Insurance Company of Wisconsin; American Family Life Insurance Company; American Family Financial Service, Inc., Appellants.
CourtU.S. Court of Appeals — Eighth Circuit

Thomas O. Smith, Bismarck, ND, argued, for appellant.

Jeff A. Bredahl, Fargo, ND, argued, for appellee.

Before BOWMAN and LAY, Circuit Judges, and STROM, 1 District Judge.

BOWMAN, Circuit Judge.

American Family Mutual Insurance Company, American Standard Insurance Company of Wisconsin, and American Family Life Insurance Company (collectively American Family) appeal from a grant of summary judgment in favor of American Family's former agent, Kenneth J. Kovarik. Because we conclude that the contractual provisions in dispute are not an unlawful restraint of trade under North Dakota law, we reverse.

I.

Kovarik was an American Family insurance agent in North Dakota for over seventeen years. During his tenure at American Family, Kovarik's employment relationship was governed by an "Agent Agreement" which outlined the duties and privileges of American Family agents. Under this agreement, the employment relationship could be terminated by Kovarik or American Family at any time, with or without cause, if written notice was provided. Upon termination, the former agent was eligible to receive extended earnings based on a percentage of renewal service fees earned during the twelve months preceding termination of the agreement, provided that the agent had been associated with American Family for at least ten years and provided that the agent returned all American Family property, including policies and policy records, to a designated representative of the company within ten days of termination. In addition, the agreement required that, for a period of one year from the date of termination, the former agent refrain from soliciting, either directly or indirectly, any American Family policyholders that were credited to the agent's account at the time of termination. 2 The former agent's failure to comply with this limited nonsolicitation provision would result in the forfeiture of his right to extended earnings. 3

By letter dated May 19, 1995, Kovarik terminated his employment relationship with American Family. At that time, Kovarik had 1,533 policies in force with American Family. By letter dated May 26, 1995, American Family accepted Kovarik's resignation and advised Kovarik that the agent agreement required that he return all American Family property and refrain from soliciting his former clients for a period of one year.

Shortly after terminating his relationship with American Family, Kovarik accepted employment with H & H Insurance Company (H & H) and began to solicit his former American Family clients to change insurance carriers, including those clients credited to Kovarik's account for purposes of calculating his extended earnings. On June 8, 1995, American Family notified Kovarik that the company was aware that Kovarik was soliciting his former American Family policyholders. The letter advised Kovarik that American Family considered Kovarik's activity a violation of the agent agreement and that, as a result of such violation, payment of Kovarik's extended earnings would be suspended until an investigation was completed.

On June 22, 1995, Kovarik, seeking to compel payment of his extended earnings, brought an action against American Family in North Dakota state court alleging that the provisions in the agent agreement prohibiting solicitation of former clients and authorizing forfeiture of extended earnings in the event of such solicitation were unenforceable under North Dakota law. American Family removed the case to federal court based on diversity of citizenship and denied that the provisions in question amounted to a restraint of trade. American Family further asserted that, in soliciting American Family policyholders to whom he had previously sold insurance policies, Kovarik was exploiting the company's confidential information.

Kovarik admitted, in a Stipulation of Material Facts filed with the District Court, that he intended "to solicit most, if not all, of his former American Family policyholders to induce or attempt to induce those policyholders to replace their American Family policy or policies with" H & H policies. App. at 33. Both Kovarik and American Family moved for summary judgment. The District Court granted Kovarik's motion, holding that the contractual provisions in question are unenforceable as an unlawful restraint of trade. Entry of final judgment was withheld pending determination of the amount of extended earnings Kovarik was entitled to recover. The District Court did not reach Kovarik's claim that the forfeiture clause also was unenforceable as a penalty.

Subsequently, the parties stipulated that Kovarik was eligible to receive $66,050.77 in extended earnings when he terminated his relationship with American Family and that no payments of such earnings had been made to him. 4 The District Court entered final judgment in accordance with this stipulation. American Family appeals the District Court's determination that the nonsolicitation clause and the forfeiture clause together constitute an unlawful restraint of trade.

II.

North Dakota law determines the rights of the parties in this diversity action, and we review de novo both the District Court's interpretation of North Dakota law, see Salve Regina College v. Russell, 499 U.S. 225, 231, 111 S.Ct. 1217, 1221, 113 L.Ed.2d 190 (1991), as well as its grant of summary judgment, see Habiger v. City of Fargo, 80 F.3d 289, 295 (8th Cir.), cert. denied, --- U.S. ----, 117 S.Ct. 518, 136 L.Ed.2d 407 (1996). In resolving the substantive issues of state law presented in this appeal, we are bound in our interpretations of North Dakota law by the decisions of the North Dakota Supreme Court. If the North Dakota Supreme Court has not spoken on these issues, we must attempt to predict what that court would decide if it were faced with them. "In making our prediction, we may consider relevant state precedent, analogous decisions, considered dicta, ... and any other reliable data." Ventura v. Titan Sports, Inc., 65 F.3d 725, 729 (8th Cir.1995), cert. denied, 516 U.S. 1174, 116 S.Ct. 1268, 134 L.Ed.2d 215 (1996).

Kovarik claims that the nonsolicitation clause is unenforceable as a restraint of trade and that American Family violated North Dakota law by basing its refusal to pay him his extended earnings upon that clause. This is the claim that the District Court sustained. Kovarik makes no separate claim that the forfeiture clause itself is unenforceable as a restraint of trade. Accordingly, we, like the briefs and arguments of the parties, focus on the nonsolicitation clause as an unlawful restraint of trade vel non. If it survives restraint-of-trade scrutiny, then it operates as a valid trigger of the forfeiture clause, and is not transformed into an unlawful restraint of trade when combined with the latter clause.

American Family argues that the District Court erred in concluding that the nonsolicitation clause 5 contained in the American Family agent agreement is void and unenforceable under North Dakota Century Code section 9-08-06. This section, with two exceptions not relevant here, provides that "[e]very contract by which anyone is restrained from exercising a lawful profession, trade, or business of any kind is to that extent void." N.D.Cent.Code § 9-08-06 (1987). The North Dakota Supreme Court has indicated that this section is intended to promote commercial activity by restricting an individual's ability to enter into agreements which hinder commercial exchange or which operate to impede competition. See Herman v. Newman Signs, Inc., 417 N.W.2d 179, 181 (N.D.1987).

The North Dakota Supreme Court has applied section 9-08-06 to invalidate clauses in employment agreements that absolutely bar an employee from competing in any way with his former employer after termination of the employment relationship or that prohibit a former employee from accepting a position with his former employer's competitors. See Werlinger v. Mutual Serv. Cas. Ins. Co., 496 N.W.2d 26, 27 (N.D.1993) (holding contract preventing insurance agent from accepting job with former employer's competitors for one year void); Spectrum Emergency Care, Inc. v. St. Joseph's Hosp. and Health Ctr., 479 N.W.2d 848, 851 (N.D.1992) (holding contract prohibiting emergency room physicians from accepting positions in competition with former employer for one year void); Olson v Swendiman, 62 N.D. 649, 244 N.W. 870 (1932) (holding contract preventing dentist from practicing dentistry in named cities for two years after termination of employment void).

Werlinger is similar to this case in that it concerns a dispute between an insurance agent and his former company over post-termination payments. Under the employment agreement in Werlinger, the agent was eligible to receive "termination compensation" based on a percentage of service fees already paid to him provided that he refrain from engaging in any way in the property, casualty, health, or life insurance business for one year after termination of the employment relationship. Werlinger, 496 N.W.2d at 27. The Court concluded that prohibiting a former employee from competing in any way or "imposing a penalty if he does so," constitutes a clear violation of section 9-08-06. Id. at 30.

The North Dakota Supreme Court, however, has not ruled on the application of section 9-08-06 to an employment agreement comparable to the one with which we are now presented. Unlike the situation in Werlinger, the American Family agent agreement does not penalize post-termination employment in an entire industry for an...

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