Wolf v. Colonial Life and Acc. Ins. Co.

• Citation: 420 S.E.2d 217,309 S.C. 100
• Decision Date: 11 February 1992
• Docket Number: No. 1826,1826
• Court: Court of Appeals of South Carolina
• Parties: Karl WOLF, Appellant, v. COLONIAL LIFE AND ACCIDENT INSURANCE COMPANY, Respondent. . Heard

Page 217

420 S.E.2d 217

309 S.C. 100

Karl WOLF, Appellant, v. COLONIAL LIFE AND ACCIDENT INSURANCE COMPANY, Respondent.

No. 1826.

Court of Appeals of South Carolina.

Heard Feb. 11, 1992.

Decided May 26, 1992.

E. Ellison Walker, of Prioleau & Walker, Columbia, for appellant.

Michael H. Quinn and Duncan S. McIntosh of Quinn, Arndt & Manning, Columbia, for respondent.

PER CURIAM:

This is a breach of employment contract case between a former employee and employer. The defendant employer (Colonial) terminated payment of vested insurance premium commissions to its former employee (Mr. Wolf) for alleged violations of the Covenants Not To Compete and Prohibited Acts sections of two employment contracts. Mr. Wolf sued Colonial to reinstate his commissions, and Colonial counterclaimed for an injunction, damages, and attorney's fees. The Circuit Court referred the case to the Master-in-Equity for final judgment and direct appeal.

The primary issue at trial was the enforceability of the Covenants Not To Compete and the Prohibited Acts sections of the employment contracts. Both provisions authorized the termination of commission payments. The Master held these sections were enforceable and upheld the termination of Mr. Wolf's commission payments. The Master also awarded costs and attorney's fees to Colonial under the Covenants Not To Compete. He did not award any damages due to a failure of proof, and Colonial does not appeal this ruling. He issued an injunction against Mr. Wolf but, as stipulated by the parties, this issue is now moot. Mr. Wolf appeals. We reverse the enforcement of the Covenants Not To Compete but affirm the enforcement of the Prohibited Acts sections.

A preliminary issue involves the Master's failure to hold a second hearing before entering final judgment. Mr. Wolf contends the Order of Reference and the parties' stipulation required the Master to hold a first hearing on the legality and enforceability of the Covenants and Prohibited Acts sections of the contracts and, thereafter, hold a second hearing on the remaining issues before entering judgment. The Master concluded these contract provisions were enforceable and, therefore, there was nothing left to be decided in a second hearing and no need for additional discovery. We agree that the Master's decision left nothing else to be decided and, therefore, affirm this portion of his order.

The operative facts are undisputed. Mr. Wolf began selling insurance in 1981 for a wholly-owned subsidiary of Colonial located in Canada. He had no insurance experience prior to this time. In early 1983, Mr. Wolf became Colonial's Director of Training for the state of Maryland. Later that year, Mr. Wolf entered into contracts with Colonial to be a salesman and a marketing director. A marketing director recruits, trains, and oversees other salesmen, receiving a commission on policies sold by them.

In 1986, Mr. Wolf entered into the two contracts at issue in the present case: a Career Sales Representative (CSR) contract; and a Marketing Director (MD) contract. These contracts replaced Mr. Wolf's existing salesman and marketing director contracts. They appointed and authorized Mr. Wolf to operate in the territories of Maryland, Delaware, and the District of Columbia.

Colonial's primary product line is health and accident insurance. A key sales method is the "payroll deduction method," whereby an organization (employer) gives permission to an insurance company to sell its products to the organization's employees. The organization withholds premium payments from the employees' paychecks, and periodically sends one check to the insurance company for all of the withheld premium payments. Colonial is one of the market leaders in the payroll deduction sales method.

Colonial terminated Mr. Wolf's MD contract in February 1988. There is no dispute about the legality of this termination in the present case. The CSR contract remained in effect.

In March 1988, the CSR contract was amended to cover the states of Maryland, Alabama, Virginia, and Wisconsin, thereby eliminating Delaware and the District of Columbia. ¹ Mr. Wolf terminated this contract in April 1988.

In March 1988, Mr. Wolf met with officials of Capitol American Life Insurance Company (Capitol) about possible employment. Capitol is a direct competitor of Colonial, specializing in health and accident insurance, and using the payroll deduction sales method. Mr. Wolf signed an agreement to be Capitol's State Manager for Maryland. He later rescinded the agreement, because his attorney advised him it would violate the non-compete provisions of his contracts with Colonial.

In April 1988, Mr. Wolf entered an agreement with Capitol covering the states of Georgia and Florida. Under this agreement he would sell insurance and oversee other salesmen, receiving a commission for policies sold by him and the people working under him. Mr. Wolf's activities in Georgia and Florida are the basis for Colonial's allegations that he violated the "Prohibited Acts" and "Covenant Not to Compete" provisions of both contracts. In reliance on these activities, Colonial terminated payment of commissions due Mr. Wolf under the CSR and MD contracts.

The "Prohibited Acts" and "Covenants" provisions of both contracts mirrored each other in terms of prohibited conduct. They prohibited the following post-employment conduct, among others:

1. Attempt to induce or induce other employees to terminate their agreements with Colonial.

2. Attempt to induce or induce policyholders to relinquish their policies.

3. Solicit or accept sales of competing products in any account in which Colonial has payroll deduction privileges.

There is no dispute that Mr. Wolf violated the letter of these prohibitions. Mr. Wolf, however, argues that the prohibitions are unenforceable or do not apply for several reasons.

At trial and on motion for reconsideration and amendment, Mr. Wolf argued that the Covenants Not To Compete were limited to his former territory with Colonial. The Master appeared to rule there was no geographic limitation in the Covenants, and he summarily denied the motion for reconsideration and amendment. On appeal, Mr. Wolf blurs this separate issue somewhat, by arguing against the Prohibited Acts sections and Covenants jointly as anti-competitive provisions. We conclude, however, that the issue is sufficiently argued for us to reach it, and we find that the Covenants are limited to Mr. Wolf's former territory with Colonial. The Covenants sections of both contracts assert that both parties agree "the geographic area described" is reasonable and necessary. The only geographic area described in either contract is Mr. Wolf's territory with Colonial. None of Mr. Wolf's alleged misconduct occurred in this territory. Thus, we reverse the award of costs and attorney's fees, because only the Covenants Not To Compete authorized this relief.

Mr. Wolf challenges the enforcement of the Prohibited Acts sections on the following grounds:

1. There is no time or geographic limitation; the limitation to existing policyholders, employees, and accounts is not a valid substitute under the facts of this case; and the prohibitions unreasonably restrict competition and prevent a former employee from using his skills in the marketplace.

2. The sections are not limited to Mr. Wolf's customers while working with Colonial.

3. The MD and CSR contracts are unconscionable contracts of adhesion, because signing them was a prerequisite to continued employment with Colonial.

Grounds 2 and 3 are not preserved for appeal. Mr. Wolf did not raise ground 2 at trial, and he cannot raise it for the first time on appeal. State v. Vanderbilt, 287 S.C. 597, 340 S.E.2d 543 (1986). Mr. Wolf did not raise ground 3 during the trial of the case, but he did raise it during the hearing on his motion for reconsideration and amendment. This motion cannot be used to raise an issue for the first time and, therefore, the issue is not preserved for appeal. Hickman v. Hickman, 301 S.C. 455, 392 S.E.2d 481 (Ct.App.1990). Thus, ground 1 presents the only issues before this Court.

The Master held generally that the absence of geographic and/or time limitations was not fatal, because the prohibited conduct applied to existing employees, policyholders, and payroll deduction accounts. He explicitly applied this rationale to existing policyholders and implicitly applied it to existing employees and accounts. This ruling is the critical issue in this case.

As noted by the Master, the Prohibited Acts sections are often referred to as forfeiture clauses. Such clauses are subject to the same requirements and strict analysis as covenants not to compete. Almers v. South Carolina Nat'l Bank of Charleston, 265 S.C. 48, 217 S.E.2d 135 (1975). The Master concluded the facts of this case satisfied the five-part test set forth in Rental Uniform Serv. of Florence, Inc. v. Dudley, 278 S.C. 674, 301 S.E.2d 142 (1983). Although the Master couched his ruling on the five-part test in terms of the Covenants Not To Compete, we view his rulings as equally applicable to the Prohibited Acts sections.

Dudley requires the prohibitions to be necessary for the protection of the employer's legitimate interest. Id. at 675, 301 S.E.2d at 143. The Master held the prohibitions were necessary for Colonial's legitimate interest in protecting its existing business contacts, including the protection of its customers, among other things, from pirating by a former employee. Although not specified in the Master's order, we view the phrase "among other things" as including the protection of existing employees and existing payroll deduction accounts.

The Supreme Court has construed prohibitions against recruiting existing employees as prohibiting only interference with contractual relations, i.e., the prohibition embodies the common law right to be free from malicious interference with contractual relations. Oxman v. Sherman...