GENERAL MEDICAL CORPORATION, Plaintiff-Appellant, v. James KOBS, Defendant, BADGER MEDICAL SUPPLY COMPANY, a Wisconsin corporation, Defendant-Respondent.
No. 92-2857
Court of Appeals
Submitted on briefs July 9, 1993. — Decided September 23, 1993.
507 N.W.2d 381
For the defendant-respondent the cause was submitted on the brief of H. Dale Peterson and Richarld L. Bolton of Stroud, Stroud, Willink, Thompson & Howard of Madison.
Before Eich, C.J., Gartzke, P.J., and Sundby, J.
EICH, C.J. General Medical Corporation sued Badger Medical Supply Company for tortious interference with a contract. General claimed that when Badger, one of its competitors in the medical supply business, hired a former General employee, James Kobs, it wrongly interfered with a restrictive covenant in Kobs‘s employment contract prohibiting him from competing with General for a period of time after leaving his job.1
The trial court granted Badger‘s motion for summary judgment dismissing the action, ruling that the covenant was invalid per se under
We conclude that, under Rollins Burdick Hunter of Wisconsin, Inc. v. Hamilton, 101 Wis. 2d 460, 304 N.W.2d 752 (1981), absent a trial of material disputed facts in the case, we are unable to determine whether the covenant was reasonable. We therefore reverse and remand to the trial court for further proceedings.
Kobs was employed by General to sell medical supplies in the La Crosse area. His employment contract contained the clause we have briefly described above. It provided, in its entirety, as follows:
I [Kobs] will not, for a period of 18 months after the end or termination of my employment, irrespective of the time, manner or cause of such termination, directly or indirectly, either as principal, agent, employee, employer, stockholder, partner or in any other individual or representative capacity whatsoever, solicit, sell or render services to, or engage, assist, be interested in or connected with any other person, firm, or corporation soliciting or servicing, any of the customers solicited, sold to or serviced by me at any time during the 18 months immediately preceding termination of my employment with [General], with respect to any product or service similar to or competitive with any product or service sold or offered for sale by [General].
Kobs informed Badger of the covenant and told them he had been advised by an attorney that it was unenforceable. Aware that General had not enforced similar covenants in the past, Badger hired Kobs. When Kobs resigned from General, indicating that he had accepted a position with Badger, he was reminded, in writing, of the noncompetition provisions in his contract. However, when he began working for Badger, Kobs continued to call on approximately thirty of his former customers. While Badger claims to have established accounts with some of these customers prior to employing Kobs, General asserts that several of its customers followed Kobs to Badger.
General sued Kobs for violating the employment agreement and Badger for inducing him to do so. Kobs was eventually dismissed from the action pursuant to his agreement not to solicit his former accounts for a specified time, and General pursued its case against Badger.
Badger moved for summary judgment on grounds that the provisions of the covenant were overly broad and thus unenforceable. The trial court granted Badger‘s motion, concluding that the covenant was invalid per se because it was not limited to a specific geographical territory.
Before reaching the merits of the contract issue, we must ascertain the applicable law. General is a Virginia corporation and Kobs‘s employment contract provides that Virginia law should control its interpretation. The trial court concluded that Wisconsin law applies3 and General disagrees. The issue is one of law, which we decide independently. Ondrasek v. Tenneson, 158 Wis. 2d 690, 694, 462 N.W.2d 915, 917 (Ct. App. 1990).
Wisconsin law permits parties to a contract to agree that the law of a particular jurisdiction will control their contractual relationship. Bush v. National School Studios, Inc., 139 Wis. 2d 635, 642, 407 N.W.2d 883, 886 (1987); see also RESTATEMENT (SECOND) OF CONFLICT OF LAWS § 187 (1988). However, the supreme court has held that parties cannot, by contract, override fundamental policies of the state whose law would be applicable absent the choice of law provision. Bush, 139 Wis. 2d at 642, 407 N.W.2d at 886. Thus, if an important public policy in Wisconsin will be negated or contravened by applying Virginia law to determine the validity of the parties’ agreement, we will apply Wisconsin law despite their agreement to the contrary.
In Wisconsin, a covenant not to compete is valid if it meets five requirements. Pollack v. Calimag, 157 Wis. 2d 222, 236, 458 N.W.2d 591, 598 (Ct. App. 1990).
Virginia law also applies “reasonableness” criteria in judging the validity of restrictive covenants:
- Is the restraint, from the standpoint of the employer, reasonable in the sense that it is no greater than is necessary to protect the employer in some legitimate business interest?
- From the standpoint of the employee, is the restraint reasonable in the sense that it is not unduly harsh and oppressive in curtailing his [or her] legitimate efforts to earn a livelihood?
- Is the restraint reasonable from the standpoint of a sound public policy? Paramount Termite Control Co. v. Rector, 380 S.E.2d 922, 924 (Va. 1989).
Given that similarity, General contends that this case fits the general rule that choice of law provisions in a contract will be enforced where the two jurisdictions differ only in degree concerning the enforceability of covenants not to compete, and that the parties’ choice of law will be disregarded only where application of that law would seriously conflict with a fundamental policy of the law of the state which would otherwise apply. Barnes Group, Inc. v. C & C Prods., Inc., 716 F.2d 1023, 1031 (4th Cir. 1983).4 According to
There is, however, a critical difference between
General also contends that where, as here, the contract provides that each of its provisions is severable from the rest, both Wisconsin and Virginia law will allow courts to selectively enforce such of its terms as
It follows that applying Virginia law to the parties’ contract would contravene a fundamental policy of the law of Wisconsin; as a result, we cannot enforce their choice of law provision.
II. Summary Judgment
Summary judgment is appropriate when there is no genuine issue of material fact and only questions of law remain for decision. Bantz v. Montgomery Estates, Inc., 163 Wis. 2d 973, 978, 473 N.W.2d 506, 508 (Ct. App. 1991). In reviewing a motion for summary judgment, we apply the standards set forth in
The supreme court has held that territorial limits need not be expressed in geographical terms as an absolute prerequisite to a valid and enforceable agreement. Hunter, 101 Wis. 2d at 466, 304 N.W.2d at 755. In Hunter, two employees of an insurance company signed a restrictive covenant agreeing not to solicit, contact or do any competitive business with any individual who was a customer or client of their employer for a period of two years after leaving its employ. Id. at 462-63, 304 N.W.2d at 753. The agreement precluded the employees from contacting approximately 6,000 clients, despite the fact that, during their employment with the insurance company, they had knowledge of, and contact with, only 175 clients. Id. at 463, 304 N.W.2d at 754.
Relying on Chuck Wagon Catering, Inc. v. Raduege, 88 Wis. 2d 740, 277 N.W.2d 787 (1979), the trial court in Hunter found the territorial limitation unreasonable because it extended beyond those clients actually serviced by the employees. Hunter, 101 Wis. 2d at 463-64, 304 N.W.2d at 754.8 On appeal, we held that the territorial limit need not be expressed in geographical terms, although we affirmed the trial court‘s conclusion that the agreement was invalid because it extended to clients with whom the employees had had no contact. Hunter, 101 Wis. 2d at 464, 304 N.W.2d at 754.
The supreme court agreed that under
More importantly for our purposes, the supreme court, applying the traditional methodology for summary judgment cases, concluded that the record before it was inadequate to determine whether the restrictive covenant was reasonable as a matter of law. Id. at 471, 304 N.W.2d at 757. In so holding, the court stressed that because “the reasonableness of [restrictive covenants] turns upon the totality of the facts and circumstances surrounding them, the parties must be given a full opportunity to develop the necessary evi
The same situation confronts us here, for, like the Hunter court, we are unable to determine on the record before us whether the agreement between General and Kobs is reasonably necessary to protect General‘s interests. The purpose of a covenant not to compete is to prevent, for a time, the competitive use of information or contacts gained as a result of the departing employee‘s association with the former employer. Pollack, 157 Wis. 2d at 237, 458 N.W.2d at 599. Protection of a business’ stock of customers and their good will is a legitimate interest of the employer. Id. at 237-38, 458 N.W.2d at 599.
In many businesses the relationship with customers is the most valuable asset of the enterprise. ... Customer goodwill has value to the extent that a customer knows and feels he can rely upon the salesperson he is dealing with. In many cases a business‘s agent may be the sole contact customers have with that business. Chuck Wagon, 88 Wis. 2d at 751-752, 277 N.W.2d at 792 (footnote omitted).
The evidence in this case demonstrates that a substantial number of General‘s La Crosse-area customers began doing more business with Badger when Kobs began his employment there. Indeed, it is undisputed that Kobs, while working for Badger, continued to contact at least thirty of his former clients. The parties dispute, however, the reason for the shift of business from General to Badger: while General claims that customer loyalty caused its former clients to follow Kobs to Badger, Badger contends that it acquired the additional business because it was able to offer better prices and service.
Thus, any decision on the totality of the facts as to the reasonableness of the covenant will rest to a significant degree on whether such of General‘s customers as may have shifted some business to Badger did so because of loyalty to Kobs or for some other reason. And although the record contains affidavits relevant to the dispute, we are not convinced that the parties have had the opportunity to fully develop the necessary evidence.
By the Court.—Judgment reversed and cause remanded for further proceedings.
SUNDBY, J. (dissenting). I conclude that the covenant not to compete contained in Kobs‘s employment
I agree with the majority that the trial court erred when it concluded that the covenant not to compete was invalid per se because it did not contain a territorial limitation. In Rollins Burdick Hunter of Wisconsin, Inc. v. Hamilton, 101 Wis. 2d 460, 467, 304 N.W.2d 752, 755 (1981), the court said: “[W]e hold that the territorial limitation of a restrictive covenant need not be expressed in geographic terms as an absolute prerequisite to a valid and enforceable agreement.”
The majority concludes that Hunter requires that “the parties must be given a full opportunity to develop the necessary evidentiary record.” Id. at 471, 304 N.W.2d at 757. However, in Hunter, the noncompetition agreements prohibited the employees from soliciting, contacting or otherwise doing any competitive business with “any individual, firm, corporation, partnership, organization or association who was a customer or client of Agency” during the prescribed period. (Emphasis added.) The covenant not to compete in Kobs‘s employment contract, however, only prohibits him from soliciting, selling or rendering services to:
[A]ny of the customers solicited, sold to or serviced by me at any time during the 18 months immediately preceding termination of my employment with [General Medical Corporation], with respect to any product or service similar to or competitive with any product or service sold or offered for sale by [General Medical Corporation].
This case is more similar to Chuck Wagon Catering, Inc. v. Raduege, 88 Wis. 2d 740, 277 N.W.2d 787 (1979), than it is to Hunter. In Chuck Wagon, the employee serviced a lunch route which Chuck Wagon had established and maintained as its own for six years. Over the two and one-half year period during which he acted as Chuck Wagon‘s agent, the employee had daily contact with the customers at each stop on the route. The court construed the restrictive covenant in Chuck Wagon to prohibit the employee from soliciting Chuck Wagon‘s former customers until its new drivers had an opportunity to become acquainted with the customers. Id. at 754, 277 N.W.2d at 793. The court concluded that the covenant was reasonable. Chuck Wagon allows us to conclude as a matter of law that it was reasonable for General Medical Corporation to protect its customer contacts by prohibiting Kobs from soliciting customers formerly serviced by Kobs for eighteen months after the termination of his employment. I would not put the parties to the inconvenience and
Notes
A covenant by an agent not to compete with his [or her] employer ... during the term of the employment ... or thereafter, within a specified territory and during a specified time is lawful and enforceable only if the restrictions imposed are reasonably necessary for the protection of the employer.... Any such restrictive covenant imposing an unreasonable restraint is illegal, void and unenforceable even as to so much of the covenant ... as would be a reasonable restraint.
The Barnes Group court upheld the parties’ choice of Ohio law to govern covenants with regard to salesmen in Maryland, South Carolina and Louisiana. Each of the four states employed a similar reasonableness standard in judging the validity of restrictive covenants. Thus, because each state “follow[ed] the same basic approach [in determining the validity of covenants not to compete] and differ[ed] only in particulars,” the application of Ohio law did not upset any of the states’ public policies. Id. at 1032 n.24.
With regard to the fundamental policy exception to enforcing the parties’ choice of law provisions, the court stated:
[T]he “fundamental policy” exception ... does not come into play merely because the contractually chosen law touches on a matter of fundamental state concern. Rather, fundamental policy is impinged upon only when there are significant differences between the chosen law and that of the jurisdiction whose law otherwise would apply. Id. at 1031 n.19.
[T]he determination of whether a restraint of this type is reasonably necessary for the protection of an employer can[not] be intelligently made without a consideration of the nature and character of such information, including the extent to which it is vital to the employer‘s ability to conduct its business, the extent to which the employee actually had access to such information, and the extent to which such information could be obtained through other sources. Hunter, 101 Wis. 2d at 470, 304 N.W.2d at 757.