Opinion
No. C6-95-2128.
Filed May 21, 1996.
Appeal from the District Court, Hennepin County, File No. 9210829.
J. Patrick McDavitt, Michael J. Tostengard, Briggs and Morgan, (for Respondents).
James J. Thomson, Robert A. Alsop, Kennedy Graven, Chartered, (for Appellants).
Considered and decided by Amundson, Presiding Judge, Crippen, Judge, and Willis, Judge.
This opinion will be unpublished and may not be cited except as provided by Minn. Stat. § 480A.08, subd. 3 (1994).
UNPUBLISHED OPINION
On appeal from a partial summary judgment, franchisees claim the district court erred by declaring franchisor had properly and legally terminated two franchise agreements and by granting summary judgment to franchisor on 13 of 15 counterclaims. We affirm.
FACTS
Respondent Adcom Express, Inc., is a Minnesota corporation and the franchisor of a nationwide, air freight forwarding franchise system. Respondent Robert F. Friedman is the president and sole shareholder of Adcom. Appellants are either Adcom's former franchisees or the owners or the principal officers of former franchisees.
Los Angeles station
Appellant EPK, Inc., operated an Adcom franchise station for the Los Angeles, California, area. Appellant Edward P. Kasper is EPK's president and sole shareholder.
The Los Angeles franchise agreement contained a provision allowing Adcom to terminate the franchise agreement for "good cause," which the contract defined as any breach of any material provision of the Franchise Agreement or any intentional, repeated or continuous breach of any provision of the Agreement * * *.
In addition, the agreement had an "Adcom Delivery Agent" clause, requiring EPK to use Adcom stations for deliveries in destination territories when those stations, in Adcom's opinion, met Adcom delivery standards.
For more than two years, EPK did not use the New York Adcom station for deliveries to New York. In June 1992, Adcom sent Kasper written notice that EPK was in material default of the franchise agreement and gave it 30 days in which to cure the default by resuming use of the New York station. When EPK failed to cure, Adcom terminated the franchise agreement and sought a judgment declaring the termination to have been lawful.
In August 1992, Adcom and EPK entered an interim agreement for operations during the pendency of the lawsuit. This agreement disclaimed anything in the interim agreement that could be "construed toward establishing [EPK] as a franchisee of [Adcom]." An at-will provision allowed either party to terminate the agreement without cause, and a noncompete covenant required that EPK not engage or participate in, assist or have any interest in any air freight forwarding business other than that operated under this Agreement.
San Francisco station
Appellant MJT, Inc., operated the Adcom franchise station for the San Francisco, California, area. The San Francisco franchise agreement contained a noncompete covenant requiring that its principal officers not engage in, operate or be financially interested in or in a manner be associated with, any business similar to or substantially similar to or reasonably competitive with any other Adcom station within a 50-mile radius.
Appellant Cyrus D. Fish (now deceased) was MJT's principal shareholder. In 1991, Friedman unsuccessfully negotiated for the purchase of Fish's MJT shares. In March 1992, Kasper agreed to buy Fish's shares. Pursuant to the terms of the San Francisco franchise agreement, the parties sought Adcom's approval of the stock transfer. Adcom withheld its consent.
The litigation
In 1992, Adcom sought a judgment declaring (1) that Adcom properly and legally terminated the Los Angeles franchise agreement for good cause and (2) that Adcom properly and reasonably refused to consent to the transfer of shares of the San Francisco franchise from Fish to Kasper.
During this litigation, Adcom learned that Kasper had provided assistance, financial and otherwise, to a former Adcom employee in setting up an air freight forwarding business called "Advanced Express" in the Washington, D.C., area, where Adcom operated an "Adcom Express" station. In addition to owning 100% of EPK's stock, Kasper was at the time chief executive officer and/or chief financial officer of MJT. Consequently, Adcom notified EPK and Kasper they were in default of the Los Angeles interim agreement and notified MJT and Kasper they were in default of the San Francisco franchise agreement for violating the respective noncompete covenants. Adcom terminated both agreements.
Adcom then amended its complaint, asking for a judgment declaring that it had also properly and legally terminated the San Francisco franchise. Appellants brought 15 counterclaims. Both sides moved for summary judgment.
In April 1995, the district court granted summary judgment to Adcom, declaring that termination of the Los Angeles and San Francisco franchises was proper; the court declined, however, to declare that Adcom had properly and reasonably refused to consent to the transfer of the San Francisco franchise to Kasper. The court also dismissed or granted summary judgment to Adcom on all but two of appellants' counterclaims.
On May 16, 1995, the district court made a rule 54.02 finding that there was no just reason for delay and ordered entry of final judgment on matters decided in its April 1995 order. Judgment was entered on July 6, 1995, and this appeal followed.
DECISION
On an appeal from summary judgment, an appellate court determines whether genuine issues of material fact remain and whether the district court misapplied the law. State by Cooper v. French 460 N.W.2d 2, 4 (Minn. 1990). The district court must grant summary judgment against a party who "`fails to make a showing sufficient to establish the existence of an element essential to that party's case.'" Iacona v. Schrupp , 521 N.W.2d 70, 72 (Minn.App. 1994) (quoting Celotex Corp. v. Catrett , 477 U.S. 317, 322 (1986)). Summary judgment also is proper "when the non-moving party fails to provide the court with specific facts indicating that there is a genuine issue of fact." Hunt v. IBM Mid Am. Employees Fed. Credit Union , 384 N.W.2d 853, 855 (Minn. 1986); Nicollet Restoration, Inc. v. City of St. Paul , 533 N.W.2d 845, 847 (Minn. 1995) (stating that party may not rely on speculation or mere assertion to create a genuine issue of material fact for trial).
I.
The district court declared that Adcom properly and legally terminated its Los Angeles franchise agreement with EPK for good cause because EPK had breached a material provision of the contract. Appellants contend the district court erred (1) by failing to apply the proper good cause standard, (2) by allowing Adcom to rely on a provision it had ignored for two years, and (3) by determining that EPK had breached a material contract provision. We disagree.
First, in support of their proposition that no franchise agreement is properly terminated for cause unless a reasonably prudent franchisor acting honestly, fairly, and in good faith would have terminated the franchisee under similar circumstances, appellants mistakenly rely on Carlson Equip. Co. v. International Harvester Co. , 710 F.2d 481 (8th Cir. 1983) (applying Minnesota law). Even though Carlson applied an objective reasonableness test to its specific facts, it did so only because the contract at issue expressly referred to an objective standard for termination. Id. at 483 (distinguishing two cases applying a subjective satisfaction standard to contracts that expressly allowed termination on that standard).
Parties are free to fashion agreements defining the standard for termination applicable to their situation. Here, by defining "good cause" for termination as a breach of any material provision of the contract or the continuous breach of any provision, the Los Angeles agreement provided a standard different from the one applied in Carlson , and the district court properly applied the agreed-upon standard.
Second, the franchise agreement itself contained a nonwaiver provision that preserved Adcom's right to demand strict compliance with the "Adcom Delivery Agent" clause even if Adcom had not enforced the provision in the past.
The Los Angeles franchise agreement provided:
14.3) INTERPRETATION. * * * The failure of either party to exercise any rights given either party hereunder, or any custom or practice of either party at variance with the terms hereof, shall not constitute a waiver of the right of either party to demand exact compliance with the terms hereof.(Emphasis added.)
Third, appellants offer no law or facts to contradict the district court's conclusion that the unified nature of a nationwide, air freight forwarding system makes the required use of Adcom stations a material provision. Appellants merely allege there are numerous unspecified facts to support their contention that discontinued use of the New York office was not a breach of a material provision.
Materiality aside, EPK's continued use of an independent delivery service in New York (even when warned that it was in default) would have constituted good cause to terminate the agreement under the plain contractual language allowing termination for "any intentional, repeated or continuous breach of any provision of the Agreement." Appellants' argument that EPK's "decision" to use an independent service was a single act is without merit.
Appeals involving contract interpretation present questions of law for this court. Turner v. Alpha Phi Sorority House , 276 N.W.2d 63, 66 (Minn. 1979). The district court properly declared that Adcom had good cause, as defined by the contract, to terminate the Los Angeles franchise agreement. Because appellants failed to make a showing sufficient to establish a genuine issue of material fact as to the existence of an element essential to their claim, summary judgment was appropriate.
II.
The district court declared that Adcom properly and legally terminated both the Los Angeles interim agreement and the San Francisco franchise agreement for a violation of the agreements' noncompete covenants. Because EPK and Kasper (as owner of EPK and as principal officer of MJT) lent $42,500 and provided other assistance to a business in competition with Adcom in the Washington, D.C., area, the court determined that EPK and Kasper had "assisted" that business in violation of the interim agreement's noncompete clause and was "financially interested in" or "associated with" that business in violation of the San Francisco franchise agreement. The district court noted that the noncompete provisions in both agreements applied only during the existence of the franchise or agency relationship and [did] not attempt to restrict the parties from competing with each other after termination of the relationship.
Appellants contend the district court erred because (1) the noncompete provisions in the two agreements are both unreasonable and unenforceably vague and overbroad, and (2) a genuine fact issue exists as to whether the provisions were breached. We disagree.
A noncompete covenant that is for a just and honest purpose, for the protection of a legitimate interest of the party in whose favor it is imposed, reasonable as between the parties, and not injurious to the public,
is generally held valid despite the public policy disfavoring restraints on trade. Bennett v. Storz Broadcasting Co. , 270 Minn. 525, 533-34, 134 N.W.2d 892, 898-99 (1965). Courts apply this reasonableness standard to both in-term and post-term covenants not to compete. Kutka v. Temporaries, Inc. , 568 F. Supp. 1527, 1536 (S.D.Tex. 1983).
Based on these principles, we hold that the noncompete provisions in both agreements are not unreasonably in restraint of trade because (1) a franchisor has a legitimate interest in protecting itself or one of its franchisees from the individual competition of another franchisee already operating in a different market, and (2) the restrictions were reasonable in light of the franchisees' option of ending the contracts (and the restrictions) at any time with advance written notice. See 2 W. Michael Garner, Franchise Distribution Law Practice § 8:34 (Supp. 1995) (stating that in-term covenants are "impliedly limited to the term of the franchise agreement," protect confidential information, and ensure franchisee's loyalty to the franchise).
Appellants argue that the noncompete covenants in both agreements are unenforceably overbroad and vague. The absence of a territorial limit in the interim agreement is permissible, however, in light of EPK's right to cancel the agreement at will in order to pursue another such business. Furthermore, the language used in both restrictions is not unenforceable as applied. Because the district court exercised its authority to limit enforcement of the covenants to a geographic area where another Adcom station is located, the restrictions are enforceable as modified. See Bess v. Bothman , 257 N.W.2d 791, 794-95 (Minn. 1977) (adopting view that court may modify an unreasonable noncompetition agreement and enforce it only to the extent it is reasonable).
Second, appellants contend that a genuine fact issue exists concerning whether Advanced Express was actually in competition with Adcom in the Washington, D.C., area. The bald assertion by the owner of Advanced Express that he did not "consider" Advanced Express to be a competitor of Adcom does not satisfy appellants' burden sufficiently to avoid summary judgment.
III.
Appellants contend Adcom violated the California Franchise Investment Law with respect to the San Francisco agreement by failing to file a supplementary registration before increasing franchise fees in 1987 or 1988 and by incorporating the operations manual into the agreement in the early 1980s.
Under California law it is unlawful for any person to "fail to notify the commissioner [of corporations] of any material change" to the franchise application. Cal. Corp. Code § 31200 (West 1977). A franchisee may bring a civil action for damages against any person who offers or sells a franchise in violation of section 31200. Cal. Corp. Code § 31300 (West Supp. 1996). However, [n]o action shall be maintained to enforce any liability created under Section 31300 unless brought before the expiration of four years after the act or transaction constituting the violation * * *.
Cal. Corp. Code § 31303 (West 1977).
Appellants' specific allegations were first raised in their September 26, 1994, pleadings, more than four years after the act allegedly causing the violation. They do not relate back to Adcom's original 1992 complaint. See Noble v. C.E.D.O., Inc. , 374 N.W.2d 734, 742 (Minn.App. 1985) (ruling that "defensive claims generally relate back, while affirmative claims [seeking relief through an independent action] must satisfy the applicable statute of limitations"), review denied (Minn. Nov. 18, 1985).
Nor was the alleged violation, as appellants suggest, a series of ongoing acts that continued each time Adcom collected the higher franchise fee. In this case, Adcom's failure to register before imposing the change triggered the statute, and the district court properly found that appellants' claims are barred by the statute.
IV.
Appellants contend Adcom violated California franchise law by failing to register the Los Angeles interim agreement and to issue an offering circular in connection with the registration.
Under the California Franchise Investment Law, no person may offer or sell any franchise in California unless the offer is registered with the commissioner of corporations. Cal. Corp. Code § 31110 (West 1977). Likewise, it is unlawful to sell a franchise without providing the prospective franchisee with an offering circular. Cal. Corp. Code § 31119 (West Supp. 1996). A franchisee may bring a civil action and sue for damages caused by a violation of sections 31110 and 31119. Cal. Corp. Code § 31300. Additionally, if a violation is willful, the franchisee may sue for rescission. Id.
The district court granted summary judgment on this claim because it found that the interim agreement was not a franchise agreement. Even if we were to hold that the interim agreement constituted a franchise agreement, summary judgment is appropriate: appellants have not pointed to evidence in the record showing that they suffered damages caused by Adcom's alleged violations of California franchise law or that Adcom's alleged violations were willful. See Lubbers v. Anderson , 539 N.W.2d 398, 401 (Minn. 1995) ("A defendant is entitled to summary judgment as a matter of law when the record reflects a complete lack of proof on an essential element of the plaintiff's claim.").
V.
Appellants contend Adcom and Friedman breached the Los Angeles franchise agreement by not adhering to the standards, policies, and procedures in the company manuals. As the district court correctly noted, the contract provision cited by appellants imposes on EPK the obligation to comply with the requirements outlined in the manuals; Adcom's only obligation under this provision is to loan the manuals to EPK. The district court properly granted summary judgment to Adcom on this claim.
The district court dismissed the claim against Friedman because, as a corporate officer, he was not liable for contract breaches of the corporation. See Grosvenor Properties, Ltd. v. Southmark Corp. , 896 F.2d 1149, 1153-54 (9th Cir. 1990).
VI.
Appellants contend that a fact issue exists regarding whether Adcom misappropriated trade secrets in the form of their customer lists by soliciting their customers after termination of the franchise.
In granting summary judgment to Adcom, the district court, without explanation, applied California law. Both Minnesota and California have substantially adopted the Uniform Trade Secrets Act, which defines a trade secret as information (1) that is valuable because it is unknown to others who can obtain economic value from its use and (2) that the owner has attempted to keep secret. Cal. Civ. Code § 3426.1(d)(1)-(2) (West Supp. 1996); Minn. Stat. § 325C.01, subd. 5(i)-(ii) (1994). A customer list can be a trade secret. Abba Rubber Co. v. Seaquist , 235 Cal.App.3d 1, 18 (Ct.App. 1991).
The district court correctly determined as a matter of law that the customer lists failed to satisfy either prong of the definition. First, because Adcom did the billings for both the Los Angeles and San Francisco stations, it knew the identity of each customer. Nothing in the agreements required Adcom to keep this information confidential or to use it, as appellants suggest, for bookkeeping purposes only. Second, because Adcom legitimately obtained the lists to do the billings and because Kasper admitted giving customer lists to the Washington, D.C., competitor, the lists were not information appellants could or did keep secret. Because appellants failed to establish that their customer lists qualified as a trade secret, summary judgment was appropriate.
VII.
Appellants contend that a fact issue exists regarding whether Adcom breached the implied covenant of good faith and fair dealing with respect to both the San Francisco and Los Angeles franchise agreements by countenancing "regular discrepancies in pricing and service standards, favoritism, [and] lack of territorial integrity." Appellants appear to base this claim on Adcom's alleged tolerance of other franchisees' nonuse of the New York Adcom station, which, even if true, would have affected only the Los Angeles franchise because only that franchise was terminated for failing to use the New York delivery station.
Under Minnesota law (which, under the contract, governs the Los Angeles franchise agreement), implied covenant of good faith and fair dealing precludes a party from "`unjustifiably hinder[ing]' the other party's performance of the contract." In re Hennepin County 1986 Recycling Bond Litig. , 540 N.W.2d 494, 502 (Minn. 1995) (quoting Zobel Dahl Constr. v. Crotty , 356 N.W.2d 42, 45 (Minn. 1984)). Appellants do not point to any facts showing that Adcom unjustifiably hindered EPK's use of the New York Adcom station for deliveries. Instead, their brief merely states, "These acts and omissions are precisely what Appellants have alleged and can prove were carried out by Adcom." Because appellants' argument rests on the "mere averments" of their pleading and on a promise to produce evidence at trial, they have not met their burden of production and their claim cannot survive summary judgment. See Nicollet , 533 N.W.2d at 848 (stating that a party responding to a summary judgment motion cannot raise a genuine issue of material fact by resting on their pleadings or promising to produce evidence at trial).
VIII.
Appellants contend Adcom tortiously interfered with their prospective business relations (1) by soliciting their customers from the protected customer lists after termination of the agreements and (2) by diverting EPK and MJT customers to other air freight providers.
To establish a claim of tortious interference with a prospective business relationship, a plaintiff must prove the defendant intentionally and wrongfully interfered with the prospective relationship. United Wild Rice, Inc. v. Nelson , 313 N.W.2d 628, 633 (Minn. 1982).
Appellants have failed to produce sufficient facts to show Adcom's conduct was either wrongful or intentional. First, as previously determined, the customer lists fail to satisfy the definition of a trade secret; therefore, Adcom's use of them was not improper. In fact, the San Francisco agreement specifically reserved Adcom's right to contact the franchisee's customers after termination of the agreement.
Second, appellants resurrect the same general allegations of favoritism and lack of uniformity they made to support the claimed breach of an implied covenant of good faith and fair dealing. They have not produced facts showing how these allegations — even if true — evidence intentional or wrongful acts designed to disrupt appellants' relationship with its customers.
Because appellants failed to make a showing sufficient to establish the existence of all elements essential to their claim of tortious interference, summary judgment was proper.