Nationwide Mut. Ins. Co. v. Cornutt

Decision Date02 August 1990
Docket NumberNo. 89-7624,89-7624
Citation907 F.2d 1085
Parties1990-2 Trade Cases 69,123 NATIONWIDE MUTUAL INSURANCE COMPANY, Nationwide Mutual Fire Insurance Company, Nationwide Life Insurance Company, Nationwide General Insurance Company, Nationwide Property and Casualty Insurance Company, Colonial Insurance Company of California, Plaintiffs-Appellants, v. H. Bruce CORNUTT, Defendant-Appellee.
CourtU.S. Court of Appeals — Eleventh Circuit

Thomas A. Carraway, Rives & Peterson, Birmingham, Ala., for plaintiffs-appellants.

Roy O. McCord, McCord & Martin, Gadsden, Ala., for defendant-appellee.

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

Before KRAVITCH, Circuit Judge, RONEY * and ALDISERT **, Senior Circuit Judges.

RONEY, Senior Circuit Judge:

The issue on this Alabama diversity appeal is the enforceability of a non-competition clause in an insurance agent's employment contract with his former employer. The district court found the clause unenforceable and granted summary judgment to the employee. We vacate and remand.

Insurance agent H. Bruce Cornutt's employment contract with the Nationwide Insurance Companies prohibited him from engaging in the fire, casualty, health and life insurance business within a 25-mile radius of Nationwide's Gadsden, Alabama office for the first year after he left Nationwide. On December 30, 1988, after 26 months at Nationwide, Cornutt resigned. He continued to work in the insurance business in Gadsden, however, selling, servicing and soliciting for sale the fire, casualty, health and life insurance policies offered by some of Nationwide's competitors. It is unclear from the record whether or to what extent Cornutt solicited Nationwide's existing policyholders during this time. Cornutt did retain, however, the telephone number, books and manuals with which Nationwide had supplied him, despite Nationwide's request that he cease using and return these items.

In April 1989, Nationwide instituted this diversity action seeking monetary and injunctive relief. Cornutt filed a motion for summary judgment based on a prior unpublished decision of the district court which had held to be unenforceable the language of p 11, the operative paragraph, in an identical Nationwide "Agent Employment Agreement." 1 Nationwide did not appeal that decision. Nationwide Ins. Co. v. Hudson, CV 86-AR-1375-M (N.D.Ala. Nov. 14, 1986). Relying upon its reasoning in Hudson, the district court again held p 11 unenforceable.

As it did in Hudson, the district court concluded that p 11 constituted an unenforceable restraint of trade because the restraint itself within the 25-mile radius is total, would work an undue hardship on the insurance agent, and would effectively deprive him of his livelihood. The district court held it would enforce an alternative more narrowly tailored clause, p 12, which by its terms would be triggered if p 11 were found unenforceable. Paragraph 12 restricted Cornutt's post-Nationwide Gadsden-area insurance activity, but only with respect to Nationwide's existing policies and policyholders. 2 A settlement between the parties eliminated the need for a trial of factual issues as to p 12, paving the way for this appeal of the district court's ruling as to p 11.

It is the public policy of Alabama that contracts restraining employment are disfavored. 3 All such agreements are potentially void. 4 Nevertheless, Alabama courts will enforce a non-compete agreement if it (1) falls within a statutory exception to the general prohibition, 5 and (2) is reasonably limited as to territory, duration and subject matter. 6 See generally Edwards, Covenants Not to Compete in Alabama, 44 Ala. Law. 306 (1983).

The statutory exception applicable to this case provides:

[A]n agent, servant or employee may agree with his employer to refrain from carrying on or engaging in a similar business and from soliciting old customers of such employer within a specified county, city, or part thereof so long as the ... employer carries on a like business therein.

Ala.Code Sec. 8-1-1(b). Cornutt concedes that he is an agent within the meaning of this statute, who may agree to a non-compete covenant with his employer.

Thus the agreement falls within the statutory exception and is due to be enforced provided it is reasonable. To be found reasonable, four things must be true of the non-compete covenant and the circumstances surrounding it:

(1) the employer has a protectable interest;

(2) the restriction is reasonably related to that interest;

(3) the restriction is reasonable in time and place; [and]

(4) the restriction imposes no undue hardship. 7

1. Protectable Interest

In order to have a protectable interest, the employer must possess "a substantial right in its business sufficiently unique to warrant the type of protection contemplated by [a] non-competition agreement." Cullman Broadcasting Co. v. Bosley, 373 So.2d 830, 836 (Ala.1979); accord Calhoun v. Brendle, Inc., 502 So.2d 689, 691 (Ala.1986); Greenlee v. Tuscaloosa Office Products & Supply Inc., 474 So.2d 669, 671 (Ala.1985). Protectable interests may exist where the employee was provided access to valuable trade information or customer relationships during the course of employment. Calhoun, 502 So.2d at 692. Similarly,

if an employee [was] in a position to gain confidential information, access to secret lists, or to develop a close relationship with clients, the employer may have a protectable interest in preventing that employee from competing.

DeVoe v. Cheatham, 413 So.2d 1141, 1143 (Ala.1982); accord Calhoun, 502 So.2d at 692; James S. Kemper & Co. v. Cox & Associates, 434 So.2d 1380, 1384 (Ala.1983). This is particularly so in fields where the acquisition and protection of customer lists and a regular clientele are of crucial importance. Daniel v. Trade Winds Travel, Inc., 532 So.2d 653, 654 (Ala.Civ.App.1988).

A protectable interest can also arise from the employer's investment in its employee in terms of time, resources and responsibility. In James S. Kemper & Co., the court found it significant that the employer established the employee in the insurance field, trained him, and carried him at a loss for several years until he could build up a base of clients. 434 So.2d at 1382. In Daniel, the court observed that the employer possessed a substantial investment in office space, and equipment, all of which was placed at the employee's disposal. 532 So.2d at 654.

The district court found that whatever protectable interest Nationwide had in Mr. Cornutt's insurance endeavors would be sufficiently protected by enforcement of p 12. Our review of the record persuades us that this conclusion was premature. Nationwide submitted material sufficient to create a triable issue as to the scope of its protectable interest. The deposition of Mr. Cornutt, for example, reveals that Cornutt was, for some two years, involved in sales and development of customer relationships; client contact was a substantial part of his job; Nationwide had introduced Cornutt to the insurance business, trained him, and furnished him with the resources necessary to proceed. Although Nationwide's customer-relationship interests might indeed be protected by the enforcement of p 12, the other equally protectable investment interests would remain unvindicated.

2. Reasonable Relation of Restriction to Interest

Whether and to what extent the restrictions of p 11 are reasonably related to Nationwide's protectable interests will depend upon what those interests prove to be on remand. The district court will have the discretion, guided by the parameters of what it determines Nationwide's protectable interests to be, either to enforce p 11 as written, or to tailor the clause more narrowly. E.g., Booth v. WPMI Television Co., 533 So.2d 209 (Ala.1988) (modifying restriction on working for rival television broadcaster, selling television advertising and owning an advertising business to enjoin only the sale of television advertising); Cullman Broadcasting Co., supra (modifying restriction on working for any radio, television or cable television station to restrict only radio station employment); Hoppe v. Preferred Risk Mutual Ins. Co., 470 So.2d 1161 (Ala.1985) (modifying restriction on soliciting former employer's policyholders to except individuals who were agent's "personal customers by reason of [his] own individual sales attributes and not because of his being a[n] agent [for his former employer]"); Central Bank of the South v. Beasley, 439 So.2d 70 (Ala.1983) (enforcing two-county restriction on engaging in banking business within one county only).

3. Reasonableness as to Time and Place

To secure enforcement of a non-compete clause within a particular territory, the employer must demonstrate that it continues to engage, in that locale, in the activity that it seeks to enjoin. Ala.Code Sec. 8-1-1(b); see Central Bank, supra (enforcing non-compete covenant only in County where employer actually conducted business). In this case, Cornutt does not contest that Nationwide continues to engage in the life, casualty, fire and health insurance business in the Gadsden area.

Paragraph 11's time and place restriction--one year in the area within 25 miles of Nationwide's Gadsden office--does not reach a per se unreasonable level under Alabama law, assuming one exists. The Alabama courts have enforced restrictions of significantly greater scope. E.g., Parker v. Ebsco Industries, 282 Ala. 98, 209 So.2d 383 (1968) (one year in entire continental United States east of the Rocky Mountains); James S. Kemper & Co., supra (two years in the entire state of Alabama); Cullman Broadcasting Co., supra (one year in Cullman County); Central Bank, supra (two years in Baldwin County); Booth, supra (60-mile radius for one year); Tyler v. Eufaula Tribune Publishing Co., 500 So.2d 1005 (Ala.1986) (50-mile radius for two years).

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