Coates v. Bastian Brothers, Inc
741 N.W.2d 539
Mich. Ct. App.
2007
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COATES v BASTIAN BROTHERS, INC

Docket No. 266046

Michigan Court of Appeals

Submitted March 14, 2007. Decided August 30, 2007.

276 MICH APP 498

Leave to appeal sought.

Bentley & Associates, Inc., brought an action in the Saginaw Circuit Court against Richard M. Drinan and Pamela Coates, alleging in part that Coates had breached the noncompetition provision of her employment agreement by accepting employment with a competitor of Bentley after Bentley terminated Coates‘s employment. Coates subsequently brought an action in the same court against Bastian Brothers, Inc., and others, including Bentley, alleging in part that Bentley had breached the provision of the employment agreement requiring just cause for termination and had breached a provision giving Coates a right of first refusal when Bentley sold its stock. The court, Lynda L. Heathscott, J., consolidated the actions for trial. The court denied motions by both sides for partial directed verdicts. The jury found that Coates had breached the noncompetition provision. It also found that Bentley had breached the provisions concerning termination for just cause and the right of first refusal and had failed to pay Coates bonuses it owed her. The jury awarded Bentley $60,000 for Coates‘s breach of the noncompetition provision and awarded Coates $60,000 for Bentley‘s breach of the right-to-first-refusal provision, $27,332 for Bentley‘s breach of the just-cause provision, and $6,000 for Bentley‘s failure to pay the bonuses. The court entered a net judgment of $33,332 in Coates‘s favor. Bentley and Bastian Brothers appealed in the action brought by Coates, and Coates cross-appealed.

The Court of Appeals held:

1. The trial court erred by denying Bentley and Bastian Brothers’ motion for a partial directed verdict on Coates‘s claim concerning the right of first refusal. The employment agreement granted Coates a right of first refusal only upon Bentley‘s sale of the business or its stock. Bentley, however, redeemed its outstanding stock, and a redemption differs from a sale. Thus, Coates‘s right of first refusal did not accrue, and the trial court‘s judgment must be reversed with respect to this claim, requiring the entry of a net judgment of $26,668 in Bentley‘s favor.

2. The trial court did not err by denying Coates‘s motion for a partial directed verdict on her claim concerning the noncompetition provision. Agreements not to compete are permissible as long as they are reasonable with regard to duration, geographical area, and the type of employment or line of business. MCL 445.774a(1). The burden of demonstrating the validity of the agreement is on the party seeking enforcement. The noncompetition provision was reasonable as a matter of law, given its limited temporal scope of one year, its modest geographic scope of 100 miles, and the 22-year length of Coates‘s employment with Bentley. The effect of the trial court‘s denial was to leave the issue of reasonableness to the jury, which enforced the provision. Even though the trial court should have decided the issue of reasonableness as a matter of law, the proper result was reached and it will not be disturbed.

3. Coates argued that Bentley should be barred from enforcing the noncompetition provision because, under the jury‘s verdict, Bentley was the first to materially breach the employment agreement. However, she failed to preserve this issue. Alternatively, Coates‘s interpretation of the noncompetition provision contravenes the plain language of the agreement, which makes the noncompetition provision applicable regardless of the reason for Bentley‘s termination of Coates‘s employment. The parties’ freedom to contract must be respected. Under the plain terms of their agreement, Coates was barred from working for a competitor for one year even though Bentley terminated her employment without cause.

Affirmed in part, reversed in part, and remanded for further proceedings.

SAAD, J., concurring in part and dissenting in part, agreed with the majority regarding all issues except its holding regarding the enforceability of the noncompetition agreement. Because this issue was not preserved, Judge SAAD would hold that Bentley and Bastian Brothers waived their claim concerning the noncompetition provision. Inasmuch as the majority addressed the issue, however, he would hold that Coates is not bound by the provision because Bentley breached the just-cause termination provision of the employment agreement. An employer should not be allowed to wrongfully terminate employment and by this wrongful conduct gain the advantage of preventing the wrongfully discharged employee from securing employment with the employer‘s competitor.

1. CONTRACTS — RIGHTS OF FIRST REFUSAL — SALE OF STOCK — STOCK REDEMPTION.

A right of first refusal conditioned on the sale of a company‘s stock does not accrue upon the company‘s redemption of its outstanding stock.

2. CONTRACTS — NONCOMPETITION AGREEMENTS.

An agreement not to compete entered into by an employer and an employee is enforceable as long as it is reasonable with regard to its duration, geographical area, and the type of employment or line of business; the burden of demonstrating the agreement‘s validity is on the party seeking enforcement (MCL 445.774a[1]).

Fordney, Prine & Coffey (by Andrew W. Prine) for Pamela Coates.

Braun Kendrick Finkbeiner P.L.C. (by Scott C. Strattard) for Bastian Brothers, Inc., and Bentley & Associates, Inc.

Before: SMOLENSKI, P.J., and SAAD and WILDER, JJ.

WILDER, J. Defendants appeal as of right and plaintiff cross-appeals as of right a judgment awarding plaintiff $33,332 following a jury trial. This action arises out of an employment agreement between plaintiff and defendant Bentley & Associates, Inc. (Bentley). On appeal, defendants argue that the trial court erred in denying their motion for a directed verdict, because plaintiff‘s right of first refusal to buy Bentley‘s stock did not accrue. On cross-appeal, plaintiff argues that the trial court erred in denying her motion for a directed verdict regarding a noncompetition clause and that Bentley is barred from enforcement of the noncompetition clause because the jury found that Bentley was the first to breach the employment agreement (by firing plaintiff without cause). We hold that (1) the trial court erred in denying defendants’ motion for a directed verdict on the right-of-first-refusal clause, (2) the trial court did not err in denying plaintiff‘s motion for a directed verdict on the noncompetition clause, and (3) Bentley is not barred from enforcement of the noncompetition clause by reason of its first breach. Therefore, we (1) reverse the judgment as it relates to plaintiff‘s right-of-first-refusal claim, (2) affirm the judgment in all other respects, and (3) remand for (a) entry of a directed verdict for defendants on plaintiff‘s right-of-first-refusal claim and (b) modification of the judgment to accord with this opinion.

I

(A)

The relevant facts are undisputed. Plaintiff began working for Bentley in 1980. In 1987, plaintiff and Bentley entered into an employment contract (an agreement prohibiting the firing of plaintiff without just cause), with plaintiff being employed as general manager. The contract contained both a noncompetition clause imposed on plaintiff and a right of first refusal in plaintiff‘s favor, whereby plaintiff would be given an opportunity to purchase Bentley stock if Bentley sold it.

John R. Waugh is the president of Bentley. Jeffrey Waugh is the vice president. John F. Waugh and Elnor Waugh are the parents of John R. and Jeffrey.

In 2001, Bentley had 4,000 shares outstanding. John F. Waugh and Elnor Waugh gave 320 shares to John R. and Jeffrey. Bentley redeemed the remaining 3,680 shares.

In October 2002, Bentley terminated plaintiff‘s employment. Plaintiff then accepted a position with a competitor.

(B)

Defendants brought an action for breach of the noncompetition clause. Plaintiff subsequently brought this action for breach of the just-cause and first-refusal provisions, and the trial court consolidated the actions for trial.

At trial, both sides moved for partial directed verdicts, with plaintiff arguing that the noncompetition provision was unenforceable and defendants arguing that the right of first refusal had not been activated. The trial court denied both motions.

The jury found (1) that plaintiff had breached the noncompetition clause and (2) that Bentley had breached (a) the right-of-first-refusal provision, (b) the just-cause provision, and (c) its obligation to pay plaintiff bonuses. The jury awarded Bentley $60,000 for plaintiff‘s breach of the noncompetition clause and awarded plaintiff $60,000 for Bentley‘s breach of the first-refusal provision, $27,332 for Bentley‘s breach of the just-cause provision, and $6,000 for Bentley‘s failure to pay bonuses. The trial court entered a net judgment of $33,332 in plaintiff‘s favor.

II

(A)

Defendants contend that the trial court erred in denying their motion for a partial directed verdict because plaintiff‘s right of first refusal did not accrue. We agree.

We review de novo a ruling on a motion for a directed verdict. . The motion is properly granted if, viewing the evidence in a light most favorable to the nonmoving party, reasonable minds cannot differ. Id. The proper interpretation of a contract is a question of law, which we also review de novo. ; .

(B)

That contracts are enforced according to their terms is a corollary of the parties’ liberty to contract. . This Court examines contractual language and gives the words their plain and ordinary meanings. .1 “[A]n unambiguous contractual provision is reflective of the parties’ intent as a matter of law,” and “[i]f the language of the contract is unambiguous, we construe and enforce the contract as written.” .2 Courts may not impose an ambiguity on clear contract language. . A contract is ambiguous when two provisions “irreconcilably conflict with each other,” , or “when [a term] is equally susceptible to more than a single meaning,” .

Whether a contract is ambiguous is a question of law. . Only when contractual language is ambiguous does its meaning become a question of fact. .3 Agreements granting rights of first refusal are enforceable. See .

The parties’ employment contract granted plaintiff a right of first refusal only upon the sale of stock or the business:

“In the event the Company shall elect to sell the business or the common capital stock of the Company, the Company grants to Employee a right of first refusal on like terms and conditions as any reasonable third party offer to purchase.” (Emphasis added.)

We hold that this term is unambiguous, because it is not susceptible to more than one interpretation and does not conflict with any other term. It affords plaintiff a right of first refusal upon the happening of Bentley‘s “elect[ion] to sell the business or... stock” and its receipt of a reasonable offer to purchase.

The question before us is whether Bentley “elect[ed] to sell... stock....” 4 Dictionary definitions may be used to ascertain the plain and ordinary meaning of terms undefined in an agreement. . “Sell” means “to transfer (goods or property) or render (services) in exchange for money” or “to... offer for sale....” Random House Webster‘s College Dictionary (1997). “Purchase” means “to acquire by the payment of money or its equivalent; buy.” Id. Under the unam-

biguous language of the contract, plaintiff therefore enjoyed a right of first refusal in the event Bentley elected “to transfer” for money or “offer for sale” its common stock and received a reasonable offer to purchase.

Viewing the evidence in the light most favorable to plaintiff, , reasonable minds cannot differ concerning the conclusion that the conditions required for the right of first refusal never occurred. Instead of “elect[ing] to sell” its stock, Bentley actually redeemed outstanding stock. A redemption differs from a sale. See MCL 450.1344 (“[A] corporation may acquire its own shares....“); Black‘s Law Dictionary (8th ed) (defining “redemption” as “[t]he act or an instance of reclaiming or regaining possession by paying a specific price,” including “[t]he reacquisition of a security by the issuer“).5 Thus, because Bentley did not “elect to sell the business or [its] stock,” plaintiff‘s first-refusal right did not accrue. Accordingly, a directed verdict was proper on plaintiff‘s claim because plaintiff made no prima facie showing of liability on this claim. . The trial court erred in denying defendants’ motion for a partial directed verdict.

III

(A)

On cross-appeal, plaintiff argues that (1) the trial court erred in denying her motion for a partial directed verdict regarding the noncompetition clause, because the clause was unenforceable as a matter of law, and (2)

Bentley was barred from enforcement of the clause when the jury found that Bentley had breached the employment agreement first. We disagree.

The reasonableness of a noncompetition provision is a question of law when the relevant facts are undisputed. See . Questions of law are reviewed de novo. .

(B)

(1)

MCL 445.774a(1) governs the enforceability of agreements not to compete made between employers and employees:

An employer may obtain from an employee an agreement or covenant which protects an employer‘s reasonable competitive business interests and expressly prohibits an employee from engaging in employment or a line of business after termination of employment if the agreement or covenant is reasonable as to its duration, geographical area, and the type of employment or line of business. To the extent any such agreement or covenant is found to be unreasonable in any respect, a court may limit the agreement to render it reasonable in light of the circumstances in which it was made and specifically enforce the agreement as limited. [Emphasis added.]

“Agreements not to compete are permissible under Michigan law as long as they are reasonable.” . In other words:

[A] restrictive covenant must protect an employer‘s reasonable competitive business interests, but its protec-

tion in terms of duration, geographical scope, and the type of employment or line of business must be reasonable. Additionally, a restrictive covenant must be reasonable as between the parties, and it must not be specially injurious to the public.

Because the prohibition on all competition is in restraint of trade, an employer‘s business interest justifying a restrictive covenant must be greater than merely preventing competition. To be reasonable in relation to an employer‘s competitive business interest, a restrictive covenant must protect against the employee‘s gaining some unfair advantage in competition with the employer, but not prohibit the employee from using general knowledge or skill. [ (citation omitted).]

The noncompetition clause in this case provided:

Employee will not for a period of one (1) year after termination of employment with the Company, regardless of the reason for termination of employment, participate either personally or financially in any enterprise in competition with the Company. If the physical location of an enterprise is not within one hundred (100) miles of any business location of the Company, that enterprise will not be viewed as in competition with the Company.

As a general matter, courts presume the legality, validity, and enforceability of contracts. . But noncompetition agreements are disfavored as restraints on commerce and are only enforceable to the extent they are reasonable. ; (concluding that, in enacting MCL 445.774a, the Legislature intended to revive the common-law standards for the enforceability of noncompetition agreements); see also MCL 445.774a(1). A court must assess the reasonableness of

the noncompetition clause if a party has challenged its enforceability. See MCL 445.774a(1); . The burden of demonstrating the validity of the agreement is on the party seeking enforcement. Id. at 391.

The trial court denied plaintiff‘s motion for a partial directed verdict, which argued that the noncompetition provision was unreasonable as a matter of law. The effect of the trial court‘s ruling was to leave the issue of reasonableness to the trier of fact. Plaintiff, however, elected not to present to the jury her argument concerning the agreement‘s unreasonableness, even though the trial court had rejected the argument that it was unreasonable as a matter of law. The jury enforced the clause.

The facts relevant to the reasonableness of the noncompetition clause are undisputed. It is undisputed that Bentley is a graphic communications and advertising firm. It is undisputed that plaintiff had worked for Bentley since 1980, and thus at the time of her firing had worked for Bentley for 22 years. It is undisputed that the noncompetition clause only applied for one year and applied to competitors within 100 miles. Because the relevant facts were undisputed, the trial court erred in not deciding the reasonableness of the noncompetition clause as a matter of law. .

We hold that the noncompetition clause was reasonable as a matter of law, given its limited temporal scope, its modest geographic scope, and the undisputed length of plaintiff‘s employment with Bentley. However, even though the trial court erroneously failed to decide this issue as a matter of law, the jury enforced the clause, and we will not reverse if the right result is reached,

albeit for the wrong reason. . In short, the trial court did not err in denying plaintiff‘s motion for a partial directed verdict on the reasonableness and the enforceability of the noncompetition clause.

(2)

Plaintiff next argues that Bentley was barred from enforcing the noncompetition clause because, under the jury‘s verdict, Bentley was the first to materially breach the employment contract. Plaintiff cites (“‘[O]ne who first breaches a contract cannot maintain an action against the other contracting party for his subsequent breach....‘“) (citation omitted). We disagree.

(a)

First, plaintiff‘s argument is unpreserved. Plaintiff presented this argument (that because Bentley breached first, it cannot enforce the noncompetition clause) to neither the jury (before its verdict) nor the trial court (after the verdict).6 We therefore reject plaintiff‘s unpreserved claim.

(“Issues raised for the first time on appeal are not ordinarily subject to review.“); .

(b)

Alternatively, the plain language of the noncompetition clause vitiates the first-breach doctrine:

“Employee will not for a period of one (1) year after termination of employment with the Company, regardless of the reason for termination of employment, participate... in any enterprise in competition with the Company.” (Emphasis added.)

We hold that this provision is not ambiguous, because it is not susceptible to more than one interpretation and does not conflict with any other provision. ; . Plaintiff was barred from competing with Bentley, regardless of the reason for the termination of plaintiff‘s employment. In other words, even though plaintiff‘s employment was terminated without cause, plaintiff was still barred from working for a competitor for one year. Thus, under this clause‘s plain terms, plaintiff cannot argue that because her employment was terminated without cause, Bentley was barred from enforcing the noncompetition clause. Such an interpretation contravenes the plain terms of the clause and therefore must be rejected. . Bentley is entitled to the benefit of its unambiguous bargain. .

We respect the parties’ freedom of contract. Id. Here, the parties opted out of the first-breach doctrine by using the language “regardless of the reason for termination of employment.” The parties are free to avoid, by

contract, what might otherwise be an applicable rule of law.7 See id. at 468-472.

IV

We hold that the trial court erred in denying defendants’ motion for a partial directed verdict on the right-of-first-refusal clause, because the undisputed facts indicate that the right of first refusal did not accrue. The trial court did not err in denying plaintiff‘s motion for a partial directed verdict, because the noncompetition clause was enforceable as a matter of law. We also reject plaintiff‘s argument that Bentley was barred from enforcing the noncompetition clause (given

Thus, the role of courts is to enforce unambiguous contracts as written. Wilkie also stated:

The rights and duties of parties to a contract are derived from the terms of the agreement. . As this Court has previously stated, “The general rule [of contracts] is that competent persons shall have the utmost liberty of contracting and that their agreements voluntarily and fairly made shall be held valid and enforced in the courts.” , quoting . Under this legal principle, the parties are generally free to agree to whatever they like, and, in most circumstances, it is beyond the authority of the courts to interfere with the parties’ agreement. . Respect for the freedom to contract entails that we enforce only those obligations actually assented to by the parties. . [Id. at 62-63.]

Thus, the courts’ limited role in contract disputes is only to enforce all those, but only those, obligations actually assented to by the parties. Id.

Here, the parties’ contract clearly provides that plaintiff may not work for a competitor for one year after the termination of her employment, “regardless of the reason for termination....” To hold that Bentley is barred from enforcing this unambiguous contractual term, because it was the first to breach, would deny Bentley the benefit of its unambiguous bargain and contradict clear Supreme Court precedent providing that the courts must enforce unambiguous contractual terms. ; .

the jury‘s finding that Bentley first breached the contract when it fired plaintiff without cause), because plaintiff‘s argument is unpreserved and is inconsistent with the plain terms of the noncompetition clause. Therefore, we (1) reverse the judgment as it relates to plaintiff‘s right-of-first-refusal claim, (2) affirm the judgment in all other respects, and (3) remand for (a) entry of a directed verdict on plaintiff‘s right-of-first-refusal claim and (b) modification of the judgment to accord with this opinion, i.e., entry of a net judgment of $26,668 in Bentley‘s favor.

Reversed in part, affirmed in part, and remanded for further proceedings consistent with this opinion. We do not retain jurisdiction.

SMOLENSKI, P.J., concurred.

SAAD, J. (concurring in part and dissenting in part). I concur with the majority regarding all issues except its holding regarding the enforceability of the noncompetition agreement. Because defendants failed to preserve this issue, I would hold that defendants waived their claim concerning the noncompetition agreement. However, inasmuch as the majority addresses this issue despite defendants’ waiver, I write separately because I disagree with the majority‘s holding that the noncompetition provision is enforceable. Because defendants breached the just-cause provision of the employment agreement, I would hold that the plaintiff is not bound by the noncompetition provision of the employment agreement. The employer should not be allowed to wrongfully terminate plaintiffs’ employment and then gain by this wrongful conduct the advantage of preventing the wrongfully discharged employee from securing employment, in her field, with defendants’ competitor.

Notes

1
In other words, if “contract language is neither ambiguous nor contrary to... statute, the will of the parties, as reflected in their agreement, is to be carried out, and thus the contract is enforced as written.” , rev‘d on other grounds .
2
In other words, if a contract is unambiguous, its meaning is for the court to decide. .
3
The rule of contra proferentum (construction of an agreement against its drafter) is used only when there is a true ambiguity and the parties’ intent cannot be discerned through all conventional means, including extrinsic evidence. .
4
There is no contention that Bentley “elect[ed] to sell the business[.]”
5
Though defendants John F. and Elnor Waugh (or trusts they controlled) clearly “elect[ed] to sell” their stock to Bentley, plaintiff had no contract with the Waughs under which she enjoyed first-refusal rights.
6
For example, plaintiff could have structured (or advocated the structuring of) the verdict form so that the first question was whether Bentley fired plaintiff without cause, and, if the answer from the jury was yes, the jury would not have gone on to consider Bentley‘s claims. Alternatively, plaintiff could have brought a motion for judgment notwithstanding the verdict, to argue that the verdict was inconsistent or legally unenforceable, because the jury, by its verdict, found that Bentley was the first to breach but still allowed Bentley to recover for plaintiff‘s subsequent breach. Plaintiff brought no such motion.
7
We question the continued viability of the first-breach doctrine under our Supreme Court‘s contracts jurisprudence, which emphasizes the limited role of courts in contract disputes: courts enforce unambiguous contract terms. .

For instance, courts generally may not attempt to evaluate whether a contract is one of “adhesion.” See . “An ‘adhesion contract’ is simply that: a contract. It must be enforced according to its plain terms unless one of the traditional contract defenses applies.” Id. Rory explained:

Therefore, we hold that it is of no legal relevance that a contract is or is not described as “adhesive.” In either case, the contract is to be enforced according to its plain language. Regardless of whether a contract is adhesive, a court may not revise or void the unambiguous language of the agreement to achieve a result that it views as fairer or more reasonable.” [Id. at 489 (emphasis added). ]

Rory concluded: “Consistent with our prior jurisprudence, unambiguous contracts... are to be enforced as written unless a contractual provision violates law or public policy.” Id. at 491.

Other decisions emphasize the limited role of courts in contract disputes. Wilkie held that the doctrine of reasonable expectations is inconsistent with the court‘s limited role of enforcing unambiguous contracts:

This approach, where judges divine the parties’ reasonable expectations and then rewrite the contract accordingly, is contrary to the bedrock principle of American contract law that parties are free to contract as they see fit, and the courts are to enforce the agreement as written absent some highly unusual circumstance, such as a contract in violation of law or public policy. This Court has recently discussed, and reinforced, its fidelity to this understanding of contract law in . The notion, that free men and women may reach agreements regarding their affairs without government interference and that courts will enforce those agreements, is ancient and irrefutable. [ (footnotes omitted; emphasis added). ]