Pinnacle Performance, Inc. v. Hessing

• Decision Date: 12 January 2001
• Docket Number: No. 25824.,25824.
• Citation: 17 P.3d 308,135 Idaho 364
• Parties: PINNACLE PERFORMANCE, INC., an Idaho corporation, Plaintiff-Counterdefendant-Appellant, v. Lynn C. HESSING, dba BAHF, Defendant-Respondent, and Casinovations, Incorporated, a Washington corporation, Defendant-Counterclaimant-Respondent. Casinovations Incorporated, a Washington corporation, Third Party Plaintiff-Respondent, v. Cliff Seusy, Third Party Defendant.
• Court: Idaho Court of Appeals

17 P.3d 308

135 Idaho 364

PINNACLE PERFORMANCE, INC., an Idaho corporation, Plaintiff-Counterdefendant-Appellant, v. Lynn C. HESSING, dba BAHF, Defendant-Respondent, and Casinovations, Incorporated, a Washington corporation, Defendant-Counterclaimant-Respondent.

Casinovations Incorporated, a Washington corporation, Third Party Plaintiff-Respondent, v. Cliff Seusy, Third Party Defendant.

No. 25824.

Court of Appeals of Idaho.

January 12, 2001.

Huntley, Park, Thomas, Burkett, Olsen & Williams, Boise, for appellant. William H. Thomas argued.

Brassey, Wetherell, Crawford & McCurdy, Boise, for respondent. Andrew C. Brassey argued.

PERRY, Judge.

Pinnacle Performance, Inc., an Idaho corporation, appeals from the district court's order granting summary judgment in favor of Lynn C. Hessing, dba BAHF, and Casinovations, Incorporated, a Washington corporation. We affirm.

I. BACKGROUND

In an effort to manufacture and sell a single-deck card shuffler, Casinovations contacted Western Electronics, Inc., who agreed to find an engineering firm to develop a prototype card shuffler. Western Electronics contacted Pinnacle, who agreed to develop the prototype. On February 26, 1997, Pinnacle entered into a written employment agreement with Hessing. Pinnacle agreed to hire Hessing as an independent contractor, and Hessing agreed to develop a prototype of the single-deck card shuffler. Clause 9 of the written agreement between Pinnacle and Hessing provided the following:

Non-Competition. Contractor [Hessing] agrees to not offer, sell, or trade his services directly to Company [Pinnacle] clients, both current and past, for a period of two (2) years from completion of Contractor's work for the Company, without first providing an opportunity to contract the work through the Company. In the event that the Company declines to pursue the contract within 30 days of written notice, the Company must provide a written release to the Contractor, within the aforementioned 30 day period, giving permission to the Contractor to contract the work directly without Company involvement. After releasing a particular project to the Contractor, the Company still reserves the right of first refusal for any subsequent business opportunities within the original non-competition period.

Pursuant to its language, the employment agreement was to be in effect for a period of approximately four months, terminating on June 11, 1997.

In March 1997, Casinovations abandoned the development of the single-deck shuffler in favor of producing a six-deck card shuffler from a pre-existing design. Pinnacle notified Hessing, who then began work on the six-deck card shuffler. In April 1997, Hessing delivered, at Pinnacle's request, a prototype of the six-deck card shuffler to Casinovation's offices in Las Vegas. Although the prototype did not operate perfectly, Casinovations remained interested in the project. In June 1997, Casinovations contacted Hessing about employment as an in-house mechanical engineer. Hessing took the offer under consideration. At some point, Hessing faxed to Casinovations a copy of his employment agreement with Pinnacle. Around June 15, 1997, Hessing informally began working directly for Casinovations. On June 30, 1997, Hessing signed an employment agreement with Casinovations. While working for Casinovations, Hessing completed the development of the six-deck card shuffler and began working on another multi-deck card shuffler.

On September 12, 1997, Pinnacle filed a complaint against Hessing alleging that Hessing had breached the covenant not to compete contained in the employment agreement by going to work for Casinovations and had thereby caused damages to Pinnacle in the amount of $24,296.61. On August 3, 1998, Pinnacle filed an amended complaint, adding Casinovations as a defendant and alleging that Casinovations had committed the tort of interference with contract by hiring Hessing. On May 21, 1999, Hessing and Casinovations filed a motion for summary judgment, arguing that the covenant not to compete was unenforceable as a matter of law. After a hearing, the district court granted the motion for summary judgment. Pinnacle appeals.

II. ANALYSIS

A. Covenant Not to Compete

On appeal, Pinnacle argues that the district court erred in granting summary judgment in favor of Hessing and Casinovations. We note that summary judgment is only proper when there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. I.R.C.P. 56(c). On appeal, we exercise free review in determining whether a genuine issue of material fact exists and whether the moving party is entitled to judgment as a matter of law. Edwards v. Conchemco, Inc., 111 Idaho 851, 852, 727 P.2d 1279, 1280 (Ct.App.1986). When assessing a motion for summary judgment, all controverted facts are to be liberally construed in favor of the nonmoving party. Furthermore, the trial court must draw all reasonable inferences in favor of the party resisting the motion. G & M Farms v. Funk Irrigation Co., 119 Idaho 514, 517, 808 P.2d 851, 854 (1991); Sanders v. Kuna Joint School Dist., 125 Idaho 872, 874, 876 P.2d 154, 156 (Ct.App.1994).

Pinnacle contends that the district court erred in concluding that the covenant not to compete in the employment agreement between Pinnacle and Hessing was unenforceable as a matter of law. Covenants not to compete in an employment contract are disfavored and will be strictly construed against the employer. See Stipp v. Wallace Plating, Inc., 96 Idaho 5, 6, 523 P.2d 822, 823 (1974); Shakey's Inc. v. Martin, 91 Idaho 758, 762, 430 P.2d 504, 508 (1967); Marshall v. Covington, 81 Idaho 199, 203, 339 P.2d 504, 506 (1959); McCandless v. Carpenter, 123 Idaho 386, 391, 848 P.2d 444, 449 (Ct.App. 1993). In order to be enforceable, a covenant not to compete must be ancillary to a lawful contract, supported by adequate consideration, and consistent with public policy. McCandless, 123 Idaho at 390, 848 P.2d at 447. In addition, a covenant not to compete contained in an employment contract must be reasonable as applied to the employer, the employee, and the public. See Stipp, 96 Idaho at 6, 523 P.2d at 823; Insurance Ctr., Inc. v. Taylor, 94 Idaho 896, 899, 499 P.2d 1252, 1255 (1972); Marshall, 81 Idaho at 203, 339 P.2d at 508; McCandless, 123 Idaho at 390, 848 P.2d at 447. In other words, a covenant not to compete is reasonable only if the covenant: (1) is not greater than is necessary to protect the employer in some legitimate business interest; (2) is not unduly harsh and oppressive to the employee; and (3) is not injurious to the public. See RESTATMENT (SECOND) OF CONTRACTS § 188 (1981). A covenant not to compete will be held unenforceable if the covenant is unreasonable in duration, geographical area, or scope of activity. See Magic Lantern Prods., Inc. v. Dolsot, 126 Idaho 805, 807, 892 P.2d 480, 482 (1995); Insurance Ctr., Inc., 94 Idaho at 900, 499 P.2d at 1256.

We begin our analysis by determining whether Pinnacle had a legitimate business interest worthy of protection. The burden is on the employer to prove the extent of its protectable interest. McCandless, 123 Idaho at 391, 848 P.2d at 449. The general rule is that an employer is not entitled to protection against ordinary competition. 54A AM. JUR.2d MONOPOLIES § 916 (1996). However, employers are entitled to protect their businesses from the detrimental impact of competition by employees who, but for their employment, would not have had the ability to gain a special influence over clients or customers. See Amex Distributing Co., Inc. v. Mascari, 150 Ariz. 510, 724 P.2d 596, 605 (Ct.App.1986); American Software USA, Inc. v. Moore, 264 Ga. 480, 448 S.E.2d 206, 208 (1994); Holloway v. Faw, Casson & Co., 319 Md. 324, 572 A.2d 510, 515 (1990); Professional Business Services Co. v. Rosno, 256 Neb. 217, 589 N.W.2d 826, 831 (1999); General Med. Corp. v. Kobs, 179 Wis.2d 422, 507 N.W.2d 381, 387 (Ct.App. 1993). Thus, "the employer has a protectable interest in the customer relationships its former employee established and/or nurtured while employed by the employer, and is entitled to protect itself from the risk that a former employee might appropriate customers by taking unfair advantage of the contacts developed while working for the employer." W.R. Grace & Co. v. Mouyal, 262 Ga. 464, 422 S.E.2d 529, 531 (1992). See also 54A AM. JUR.2d MONOPOLIES § 919 (1996).

In the instant case, Pinnacle entered into an employment contract with Hessing, placing Hessing in direct contact with Casinovations. We conclude that Pinnacle possessed a legitimate business interest in the customer relationship developed by Hessing through his contact with Casinovations and that Pinnacle's interest in that customer relationship is worthy of protection.

The second step of our analysis is to determine whether the covenant not to compete in the employment contract between Pinnacle and Hessing was a reasonable means of protecting Pinnacle's legitimate business interest. The core provision in the covenant not to compete provided the following: "Contractor agrees to not offer, sell, or trade his services directly to Company clients, both current and past, for a period of two (2) years from completion of Contractor's work for the Company, without first providing an opportunity to contract the work through the Company."

On its face, the covenant not to compete lacks a geographical limitation. Hessing and Casinovations argue that a covenant not to compete which lacks such a limitation is per se unenforceable. We disagree. "In order to be enforceable, a covenant not to compete must be reasonable in geographic scope." Magic Lantern, 126 Idaho at 807, 892 P.2d at 482 (emphasis added). A number of jurisdictions have held that a broad geographical limitation may be considered reasonable if the scope of activity is limited to a small class of persons with whom contact is prohibited. See Eichmann v....