Mertz v. Pharmacists Mut. Ins. Co.

• Decision Date: 04 May 2001
• Docket Number: No. S-00-097.,S-00-097.
• Citation: 261 Neb. 704,625 N.W.2d 197
• Parties: Patrick J. MERTZ, Appellee, v. PHARMACISTS MUTUAL INSURANCE COMPANY, Appellant.
• Court: Nebraska Supreme Court

625 N.W.2d 197

261 Neb. 704

Patrick J. MERTZ, Appellee, v. PHARMACISTS MUTUAL INSURANCE COMPANY, Appellant.

No. S-00-097.

Supreme Court of Nebraska.

May 4, 2001.

Edward G. Warin and Patrick J. Barrett, of McGrath, North, Mullin & Kratz, P.C., Omaha, for appellant.

George B. Achola, of Walentine, O'Toole, McQuillan & Gordon, P.C., Omaha, for appellee.

HENDRY, C.J., WRIGHT, CONNOLLY, GERRARD, McCORMACK, and MILLER-LERMAN, JJ.

CONNOLLY, J.

Pharmacists Mutual Insurance Company (Pharmacists) appeals from a summary judgment order in favor of appellee, Patrick J. Mertz, a former employee. The district court found a covenant not to compete clause in the party's employment agreement unenforceable.

The threshold question in this appeal is whether we apply Nebraska or Iowa substantive law. We look to the Restatement (Second) of Conflict of Laws §§ 6 and 196 (1971) to determine the enforceability of the noncompete clause. Applying the above sections, we determine Nebraska law controls, and the covenant's restriction is greater than is reasonably necessary to protect Pharmacists' interest. We affirm.

BACKGROUND

In 1996, Pharmacists and Mertz entered into a written employment agreement in Iowa for Mertz to work as an insurance agent for Pharmacists. Pharmacists is an Iowa corporation authorized to underwrite and sell insurance in Nebraska. Pharmacists offers a full line of business and personal insurance products, but particularly focuses on pharmacists and pharmacies. At the time the agreement was negotiated and executed, Mertz lived in Iowa. After Mertz was hired, he moved to Nebraska to work as Pharmacists' only sales representative for most of Nebraska, except for some of the western counties. Mertz voluntarily resigned his employment in 1999.

The agreement contained a covenant not to compete clause, which stated:

It is agreed between the Representative and the Company that the Company has a continuing interest and right in the relationship it has with the customers and the goodwill that exists between its customers and the Company. In recognition of this interest and right and in consideration of employment and attendant benefits of employment, the Representative agrees that he/she will not sell or solicit Property and Casualty Insurance or Life and Health Insurance to pharmacists or pharmacies or any current customer of Pharmacists Mutual Insurance Company, The Pharmacists Life Insurance Company or Pro Advantage Services, Inc. for a period of three (3) years within the geographical territory serviced by the Representative at the time of termination of this agreement or in any territory serviced by him/her within three (3) years prior to his/her termination. The Representative acknowledges that many of PHARMACISTS MUTUAL INSURANCE COMPANY's policies are written for a term of three (3) years, and that a three (3) year prohibition as set forth in this paragraph is reasonable.

The agreement did not contain a choice of law provision.

Mertz filed a petition for declaratory judgment in district court seeking to have the covenant not to compete clause declared unenforceable as a matter of law. Pharmacists filed a counterclaim for breach of contract. Mertz then filed a motion for partial summary judgment on the covenant's enforceability. In his affidavit, Mertz specifically states that he conducted business only within the State of Nebraska. This fact was not contradicted by Pharmacists. The court determined that Nebraska's substantive law should apply and that under Nebraska law, the covenant not to compete clause was overly broad and was therefore unenforceable.

ASSIGNMENTS OF ERROR

Pharmacists assigns as error the district court's finding that (1) there were no genuine issues of material fact; (2) Nebraska's substantive law controlled the issue of whether the covenant not to compete clause was enforceable; (3) under Nebraska law, the covenant not to compete clause was unenforceable as a matter of law; and (4) the covenant did not fall into an exception to un-enforceability recognized by Nebraska law.

STANDARD OF REVIEW

Summary judgment is proper where the facts are uncontroverted and the moving party is entitled to judgment as a matter of law. Prochaska v. Douglas Cty., 260 Neb. 642, 619 N.W.2d 437 (2000); Alegent Health Bergan Mercy Med. Ctr. v. Haworth, 260 Neb. 63, 615 N.W.2d 460 (2000). In reviewing a summary judgment, an appellate court views the evidence in a light most favorable to the party against whom the judgment is granted and gives such party the benefit of all reasonable inferences deducible from the evidence. Bates v. Design of the Times, Inc., 261 Neb. 332, 622 N.W.2d 684 (2001); Allstate Ins. Co. v. LaRandeau, 261 Neb. 242, 622 N.W.2d 646 (2001).

Which state's law governs an issue is a question of law. See Powell v. American Charter Fed. Sav. & Loan Assn., 245 Neb. 551, 514 N.W.2d 326 (1994). When reviewing questions of law, an appellate court has an obligation to resolve the question independently of the conclusion reached by the trial court. North Bend Senior Citizens Home v. Cook, 261 Neb. 500, 623 N.W.2d 681 (2001); Doksansky v. Norwest Bank Neb., 260 Neb. 100, 615 N.W.2d 104 (2000).

ANALYSIS

Pharmacists argues that Iowa's substantive law should determine the validity of the agreement's covenant not to compete clause and that under Iowa law, the covenant is enforceable. Mertz argues that the district court correctly found that Nebraska law should govern this issue and that under Nebraska law, the covenant is overbroad and therefore unenforceable.

CONFLICT OF LAWS

Pharmacists correctly notes that this court has adopted the Restatement (Second) of Conflict of Laws § 188 (1971). See Powell v. American Charter Fed. Sav. & Loan Assn., supra.

The Restatement, supra at 575, provides, in relevant part:

(1) The rights and duties of the parties with respect to an issue in contract are determined by the local law of the state which, with respect to that issue, has the most significant relationship to the transaction and the parties under the principles stated in § 6.

(2) In the absence of an effective choice of law by the parties ... the contacts to be taken into account in applying the principles of § 6 to determine the law applicable to an issue include:

(a) the place of contracting,

(b) the place of negotiation of the contract,

(c) the place of performance,

(d) the location of the subject matter of the contract, and

(e) the domicile, residence, nationality, place of incorporation and place of business of the parties.

These contacts are to be evaluated according to their relative importance with respect to the particular issue.

(Emphasis supplied).

But the indication of this rule is that the importance of any particular factor will depend upon the contract issue in dispute. For instance, when the issue in dispute is contract formation, the state where the negotiations and contracting occurred would have the most significant relationship to the transaction. In this case, no one disputes whether a contract was validly executed. Rather, the issue is whether the covenant not to compete is enforceable. Thus, we must determine which state has the most significant relationship to this transaction with respect to the covenant not to compete.

We find guidance from the Restatement, supra, § 196. While § 188 sets out the general contacts to consider in contract cases involving conflict of law disputes, §§ 189 through 197 deal with conflict of laws disputes with regard to specific types of contracts. The Restatement, supra, § 196 at 623, applies to contracts for the rendition of services and provides:

The validity of a contract for the rendition of services and the rights created thereby are determined, in the absence of an effective choice of law by the parties, by the local law of the state where the contract requires that the services, or a major portion of the services, be rendered, unless, with respect to the particular issue, some other state has a more significant relationship under the principles stated in § 6 to the transaction and the parties, in which the [sic] event the local law of the other state will be applied.

The comments to § 196 indicate this rule was intended to apply to questions regarding the validity of a noncompetition clause. See id., comment a. at 624 ("[t]he law selected by application of the present rule determines such questions as ... the validity of a clause forbidding the employee from entering a business competitive with that of the employer for a stated period after the termination of the employment...").

The effect of § 196 is to create a presumption that the state where services are to be performed is the state having the most significant relationship to the transaction when the issue is the validity of a covenant not to compete. If another state has a more significant relationship under the general principles stated in the Restatement, supra, § 6, then the law of that state would be applied.

Under the Restatement (Second) of Conflict of Laws § 6(2) at 10 (1971), the general factors to consider for any type of dispute when choosing the applicable rule of law are as follows:

(a) the needs of the interstate and international systems,

(b) the relevant policies of the forum,

(c) the relevant policies of other interested states and the relative interests of those states in the determination of the particular issue,

(d) the protection of justified expectations,

(e) the basic policies underlying the particular field of law,

(f) certainty, predictability and uniformity of result, and

(g) ease in the determination and application of the law to be applied.

In this case, no evidence was submitted showing that Mertz ever performed any services in Iowa. In his affidavit, Mertz stated he had conducted business only in Nebraska. The uncontroverted evidence shows that Mertz was hired to work in Nebraska and that all of his services were performed in this state. Thus,...