Las Vegas Novelty, Inc. v. Fernandez

• Decision Date: 22 February 1990
• Docket Number: No. 20054,20054
• Citation: 787 P.2d 772,106 Nev. 113
• Parties: LAS VEGAS NOVELTY, INC., a Nevada corporation, Appellant/Cross-Respondent, v. Alfred FERNANDEZ, Jr., Respondent/Cross-Appellant. and M & F Enterprises, Inc., a Nevada corporation, Respondent.
• Court: Nevada Supreme Court

Page 772

787 P.2d 772

106 Nev. 113

LAS VEGAS NOVELTY, INC., a Nevada corporation, Appellant/Cross-Respondent, v. Alfred FERNANDEZ, Jr., Respondent/Cross-Appellant. and M & F Enterprises, Inc., a Nevada corporation, Respondent.

No. 20054.

Supreme Court of Nevada.

Feb. 22, 1990.

K. Michael Leavitt and Jason G. Landess, Las Vegas, for appellant/cross-respondent.

Charles M. Damus, Las Vegas, for respondent/cross-appellant.

Bell and Young, and Craig A. Hoppe, Las Vegas, for respondent.

OPINION

PER CURIAM:

Appellant/cross-respondent Las Vegas Novelty (LVN) appeals an order by the district court dismissing LVN's action against respondent M & F Enterprises, Inc. (M & F), and an order granting LVN a permanent injunction against respondent/cross-appellant Alfred Fernandez, Jr. (Alfred). We hold that both orders must be reversed and the case remanded for further proceedings.

THE FACTS

LVN is a wholesale souvenir business. Alfred worked for LVN since LVN's inception in 1983. On January 7, 1987, LVN's principals signed a settlement agreement to resolve their disagreements regarding LVN. Among other things, the settlement required LVN to continue to employ Alfred for seven years.

On July 9, 1987, Alfred entered into an employment contract with LVN as required by the settlement. The agreement contained a covenant not to compete. The covenant provided that, if Alfred ever left LVN, Alfred could not sell any souvenirs on a wholesale basis for four years within 20 miles of LVN. At the time the covenant was executed, Alfred also ran a retail souvenir business, a joint venture named M & F Enterprise. According to affidavits submitted by LVN, M & F Enterprise was solely a retail, not wholesale, business. Presumably because Alfred's retail business was not in direct competition with LVN's wholesale activities, the covenant expressly provided that Alfred could continue to run M & F Enterprise if he ever left LVN. This exception provides that Alfred "shall be allowed to pursue an interest in all of M & F Enterprise, and Souvenir T-Shirt Place's retail store." M & F Enterprise did not sign the employment agreement containing the covenant.

In 1988, after the covenant was executed, Alfred and two others incorporated M & F Enterprise into the legally distinct entity of "M & F Enterprises Inc.," the corporation which is party to this action. Unlike the original M & F Enterprise, M & F's stated purpose now included wholesale of souvenirs, putting M & F into direct competition with LVN.

Around June 7, 1988, Alfred stopped working for LVN. Soon thereafter, according to affidavits submitted by LVN, Alfred and M & F began servicing LVN's wholesale customers in direct violation of the covenant not to compete. LVN filed suit, seeking to enjoin both Alfred and M & F from these actions. The court dismissed LVN's suit against M & F without prejudice for failure to state a cause of action. The court permanently enjoined Alfred, but to a lesser degree than called for in the covenant. Specifically, the court enjoined Alfred from engaging in the wholesale souvenir business for one year and within 10 miles of LVN.

LEGAL DISCUSSION

LVN first challenges the order dismissing LVN's action against M & F. LVN argues that M & F is not exempt from injunctive relief merely because M & F did not sign the contract containing the covenant not to compete. LVN next challenges the injunctive order, arguing that the court erred by limiting the scope of the covenant to one year and 10 miles, instead of the four years and 20 miles called for by the covenant. Alfred cross-appeals, raising two principal contentions. First, Alfred contends that the covenant was unenforceable in any degree because it was violative of public policy and because the covenant expressly excepted Alfred's work with M & F. Second, Alfred urges that, at the very least, the injunction was overbroad in enjoining Alfred's sale of T-shirts, since LVN is not currently selling T-shirts.

I. The order dismissing M & F.

The district court did not set forth the reasons for its order dismissing LVN's action against M & F. However, there appear four grounds upon which the order may have been based. We conclude that none of these grounds supports the order and accordingly reverse the order.

The court might first have dismissed the complaint against M & F pursuant to M & F's principal argument that, as a matter of law, it could not be subject to the covenant contained in Alfred's employment agreement, because M & F did not sign the agreement. We reject this argument for two reasons. First, the better and, apparently, majority view allows a party not privy to a covenant not to compete to be enjoined, if that party breaches the covenant in active concert with the principal party enjoined and with knowledge of the covenant. See, e.g., McCart v. H & R Block, Inc., 470 N.E.2d 756 (Ind.Ct.App.1984) (summarizing the cases espousing this view). These cases correctly reason that allowing a third party knowingly to aid and abet violations of a covenant not to compete entirely emasculates the covenant. Second, this view finds further support in the language of NRCP 65(d). NRCP 65(d) provides in part:

(d) Form and Scope of Injunction or Restraining Order. Every order granting an injunction ... is binding only upon the parties to the action, their officers, agents, servants, employees, and attorneys, and upon those persons in active concert with them who receive actual notice of the order by personal service or otherwise.

(Emphasis added). NRCP 65(d) is not precisely on point, because it addresses the scope of enforcement of an injunction after the injunction has been properly issued. Nevertheless, this section makes no mention of a privity requirement and provides significant support for the majority view. Operating under the federal analogue rule to NRCP 65(d), which is identical to NRCP 65(d), federal courts have applied the majority rule that we adopt. See Day Cos. v. Patat, 440 F.2d 1343 (5th Cir.1971), cert. den., 404 U.S. 830, 92 S.Ct. 71, 30 L.Ed.2d 59 (1971). In summary, M & F was properly subject to an injunction even though M & F was not privy to the contract containing the duty to be enforced, provided that M & F breached the covenant in active concert with Alfred and with knowledge of the covenant. M & F was not exempt from injunctive relief as a matter of law.

The second ground upon which the court might have granted M & F relief relates to the exception to the covenant contained in Alfred's employment contract.

M & F argues that the exception allowing Alfred to pursue his interest in the joint venture M & F Enterprise also includes M & F in its current corporate form. We disagree. The record does not contain substantial evidence to support the conclusion that the parties intended this exception to include M & F in its current form. All the evidence in the record indicates that at the time the employment contract was executed, M & F Enterprise was solely a retail business. It was only later that M & F incorporated and began to sell souvenirs on a wholesale basis in direct competition with LVN. We cannot conclude that LVN wished to prohibit Alfred individually from selling souvenirs on a wholesale basis, but allow him to do the same thing through M & F.

The third ground upon which the court may have based its order is an evidentiary one. Because the court considered evidence beyond the pleadings in issuing this order, we shall treat the court's order of dismissal as a grant of summary judgment, not as a grant of a motion to dismiss. See Paso Builders, Inc. v. Hebard, 83 Nev. 165, 426 P.2d 731 (1967). Given that the court considered affidavits beyond the pleadings, the court may have dismissed LVN's action against M & F on the ground that LVN failed to raise a genuine issue of fact indicating that M & F was breaching the covenant in active concert with Alfred and with knowledge of the covenant. We hold that LVN's affidavits sufficed to raise a genuine question of fact on this issue. LVN's affidavits alleged that Alfred had been seen soliciting LVN clients on behalf of M & F, and that M & F was supplying merchandise...