Mans v. Lawson ( 2014 )

NOTICE: NOT FOR PUBLICATION.
UNDER ARIZONA RULE OF THE SUPREME COURT 111(c), THIS DECISION DOES NOT CREATE
LEGAL PRECEDENT AND MAY NOT BE CITED EXCEPT AS AUTHORIZED.
IN THE
ARIZONA COURT OF APPEALS
DIVISION ONE
EDWARD G. MANS, Plaintiff/Counterdefendant/Appellee,
JEANNETTE MANS, Counterdefendant/Appellee,
v.
LAWSON PRODUCTS, INC., Defendant/Counterclaimant/Appellant.
No. 1 CA-CV 13-0422
FILED 12-09-2014
Appeal from the Superior Court in Maricopa County
No. CV2011-014264
The Honorable Douglas L. Rayes, Judge
AFFIRMED
COUNSEL
Osborn Maledon, Phoenix
By Thomas L. Hudson, John L. Blanchard and Sharad H. Desai
Counsel for Plaintiff/Counterdefendants/Appellees
Littler Mendelson PC, Phoenix
By J. Mark Ogden and Christie L. Kriegsfeld
Counsel for Defendant/Counterclaimant/Appellant
MANS v. LAWSON
Decision of the Court
MEMORANDUM DECISION
Judge Andrew W. Gould delivered the decision of the Court, in which
Presiding Judge Margaret H. Downie and Judge Samuel A. Thumma
joined.
G O U L D, Judge:
¶1 Lawson Products Inc. (“Lawson”) appeals from the trial
court’s judgment in favor of its former employee, Edward Mans. For the
reasons discussed below, we affirm.
BACKGROUND
¶2 Lawson is a seller and distributor of industrial maintenance
and repair products. Mans was employed by Lawson as a regional
manager. In connection with his employment, he entered a Regional
Manager Employment Agreement (“Employment Agreement”) on
January 1, 2001.
¶3 The Employment Agreement contained two restrictive
covenants prohibiting Mans from (1) soliciting Lawson’s
agents/employees and (2) contacting Lawson’s customers. The restrictive
covenants precluded Mans from competing with Lawson for “two (2)
years following the effective date of termination . . . whether such
termination is . . . for or without cause.” In the case of termination
without cause, Mans would receive semi-monthly payments of his Base
Salary for two years. In consideration for these payments, the
Employment Agreement required Mans to “perform only those consulting
or other services specifically authorized and directed by his Supervisor”
from the date of his receiving notice to his effective termination date.
However, if Mans breached the restrictive covenants he would no longer
be entitled to the payments and would be required to return “all such
payments already received.”
¶4 Due to the economic downturn, Lawson reorganized its
workforce and terminated Mans’ employment without cause. On July 24,
2009, Mans received written notice of termination of his employment with
Lawson. The letter stated that pursuant to the Employment Agreement,
the effective date of Mans’ termination would be on July 23, 2011, two
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years from the date of the notice. The letter further stated that in
accordance with the terms of the Employment Agreement, Mans would
receive “a two-year period of semi-monthly payments at [his] current Base
Salary” for the period from receipt of the notice (July 2009) up to his
effective termination date (July 2011).
¶5 In September 2009, Lawson and Mans entered into a
Separation Agreement. The Separation Agreement purported to “modify
the Employment Agreement so that [Mans’] last work day will be July 24,
2009,” and to “confirm the arrangements for compensation and benefits
after July 24, 2009, so that [Mans’] employment with [Lawson] will
terminate effective July 27, 2011.” Under the Separation Agreement, Mans
was relieved of all of his duties – including his duty to consult – as of July
24, 2009. For the period between the notice of termination (July 24, 2009)
and the effective termination date (July 27, 2011), Mans would continue to
receive his salary in accordance with the Employment Agreement. Mans
also remained eligible to participate in employment benefits during this
time period and would be provided outplacement services to be paid for
by Lawson. The Separation Agreement incorporates the restrictive
covenants contained in the Employment Agreement, directing that they
would run from the effective termination date, July 27, 2011, through July
26, 2013.
¶6 The Separation Agreement required Mans to provide a
General Release to Lawson of any claims “arising out of or related to
[Mans’] employment with and/or separation from employment with
[Lawson].” Mans also agreed never to sue or become a party to a lawsuit
“on the basis of any claim . . . arising out of or related to [his] employment
with and/or separation from employment with [Lawson].” Breach of this
agreement not to sue would result in Mans’ obligation to pay, at the
option of Lawson, either the resulting litigation expenses or, as an
alternative, repayment of all but $100 of the severance payments paid by
Lawson to Mans under the Employment Agreement.
¶7 In August 2011, shortly after his effective termination date,
Mans filed a complaint requesting (1) a declaratory judgment that the
restrictive covenants in the Employment Agreement were unenforceable
and (2) an injunction prohibiting Lawson from enforcing the restrictive
covenants. Lawson filed an answer and counterclaim alleging that Mans
had breached the agreement not to sue in the Separation Agreement
(Count One) and the restrictive covenants (Count Two). Lawson sought
liquidated damages pursuant to the Separation Agreement in the amount
of Mans’ severance payments less $100.
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¶8 Mans moved for summary judgment seeking a declaration
that, because he was terminated by Lawson without cause, the restrictive
covenants in the Employment Agreement were unenforceable. The court
granted Mans’ motion, and, as a result, Mans was granted the declaratory
judgment and injunctive relief he requested in his complaint, as well as
dismissal of Count Two in Lawson’s counterclaim.
¶9 Lawson then filed a motion for partial summary judgment
as to Count One of its counterclaim, seeking liquidated damages for Mans’
breach of the agreement not to sue in the Separation Agreement. Mans
filed a response and cross-moved for summary judgment, arguing the
agreement not to sue and the liquidated damages provision in the
Separation Agreement were unenforceable. The court granted Lawson’s
motion, finding the Separation Agreement was a valid enforceable
contract and that the liquidated damages provision was not an
unenforceable penalty because of exculpatory language in the contract.
¶10 Mans then filed a motion for new trial, arguing the court
erred in denying his cross-motion because it incorrectly concluded the
liquidated damages clause was not an unenforceable penalty. The motion
did not seek to disturb any other aspect of the court’s ruling; however, in
seeking a declaration that the liquidated damages provision was
unenforceable, Mans re-urged the argument in his cross-motion for
summary judgment that the agreement not to sue was also unenforceable.
The court granted Mans’ motion for new trial; it concluded its prior ruling
was contrary to law because the liquidated damages clause was an
unenforceable penalty. The court also granted Mans’ cross-motion for
summary judgment. Lawson timely appealed.
DISCUSSION
I. Choice of Law
¶11 Both the Employment Agreement and the Separation
Agreement contain choice of law provisions; the Employment Agreement
states Nevada law applies, while the Separation Agreement specifies that
Illinois law applies. The Separation Agreement modifies the Employment
Agreement and directs that any conflict between the terms of the two
agreements will be controlled by the Separation Agreement. Accordingly,
the parties and the court applied the chosen law, Illinois, to substantive
issues, but the forum law, Arizona, to procedural matters. See Nanini v.
Nanini, 166 Ariz. 287, 290, 802 P.2d 438, 441 (App. 1990) (stating that the
chosen state’s law will govern a contractual relationship as long as the
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chosen law has some nexus with the parties or the contract); Aries v.
Palmer Johnson, Inc., 153 Ariz. 250, 257, 735 P.2d 1373, 1380 (App. 1987)
(“Procedural matters are usually governed by the law of the forum.”). We
therefore apply Arizona law to procedural matters and Illinois law to
substantive issues.
II. Standard of Review
¶12 Where no material facts are in dispute, we “review a trial
court’s grant of summary judgment de novo and independently determine
whether a court’s legal conclusions were correct.” Ledvina v. Cerasani, 213
Ariz. 569, 570, ¶ 3, 146 P.3d 70, 71 (App. 2006). This case presents
questions of contract interpretation. “The interpretation of any contract is
a question of law to be determined by the appellate court independently
of the trial court’s judgment and in accordance with general rules
applicable to contract construction.” Schwinder v. Austin Bank of Chicago,
809 N.E.2d 180, 189-90 (Ill. App. Ct. 2004). The enforceability of a
restrictive covenant is a question of law, and we review the trial court’s
determination de novo. Reliable Fire Equip. Co. v. Arredondo, 965 N.E.2d 393,
395-96 (Ill. 2011).
III. The Employment Agreement
¶13 Mans argues any alleged breach of the restrictive covenants
is moot because the time period for the restrictive covenants has expired.
We disagree. Mans has admitted to breaching the restrictive covenants
when he began working for a competitor in August 2011. Accordingly,
our determination of whether the restrictive covenants are enforceable
against Mans will have a direct impact on Lawson’s breach of contract
claims that are based on Mans’ violation of those restrictive covenants. See
Berlin v. Sara Bush Lincoln Health Cntr., 688 N.E.2d 106, 109 (Ill. 1997)
(stating that “where a decision ‘could have a direct impact on the rights
and duties of the parties’ there is life in the appeal”).
A. Restrictive Covenants
¶14 Although all restrictive covenants in employment contracts
are not void, Illinois has a public policy of providing employees greater
protection from the negative effects of restrictive covenants. Brown &
Brown, Inc. v. Mudron, 887 N.E.2d 437, 440 (Ill. App. Ct. 2008). Consistent
with this public policy, under Illinois law, an employer that terminates an
employee without cause cannot enforce restrictive covenants against the
employee. Bishop v. Lakeland Animal Hosp., P.C., 644 N.E.2d 33, 36-37 (Ill.
App. Ct. 1994) (“[I]n order for a noncompetition clause to be enforceable,
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first, the employee must have been terminated for cause or by his own
accord.”); cf. Francorp, Inc. v. Siebert, 126 F.Supp. 2d 543, 546 (N.D. Ill. 2000)
(stating that pursuant to Illinois law “an employer cannot enforce a
noncompetition agreement against an employee who has been dismissed
without cause”).
¶15 Lawson argues that because it did not terminate Mans in
bad faith, the rule in Bishop does not apply. However, the holding in
Bishop is not limited to the bad faith termination of an employee. Rather,
the court’s holding is based on the reasoning that the implied promise of
good faith “’modifies [the employer’s] discretionary right to dismiss [the
employee] and then to invoke the restrictive covenant.’” Bishop, 644
N.E.2d at 36 (quoting Rao v. Rao, 718 F.2d 219, 223 (7th Cir. 1983)). As a
result, Bishop concluded “that the implied promise of good faith inherent
in every contract precludes the enforcement of a noncompetition clause
when the employee is dismissed without cause.” Bishop, 644 N.E.2d at 36.
¶16 To avoid Bishop, Lawson seeks to validate the applicability
and enforceability of the restrictive covenants under the reasonableness
analysis contained in Reliable Fire Equip. Co. v. Arredondo, 965 N.E.2d 393(Ill. 2011). Lawson’s reliance on Reliable Fire is misplaced. Reliable Fire
does not alter or address the rule set forth in Bishop, and is factually
distinguishable; the employees were not terminated without cause, but
rather were violating their non-compete clause while still employed. Id. at
395, ¶ 4-6.
¶17 Here, Lawson does not dispute that Mans was terminated
without cause, and accordingly the rule in Bishop, which is still good law,
clearly applies. The restrictive covenants are unenforceable against Mans.
B. Lawson’s Laches Argument
¶18 Lawson argues Mans’ claim should be barred by laches
because he waited to file his complaint until after he received the entirety
of his severance payments. “The two fundamental elements of laches are
(1) a lack of due diligence by the party asserting the claim and (2)
prejudice to the opposing party.” Jameson Realty Grp. v. Kostiner, 813
N.E.2d 1124, 1137 (Ill. App. Ct. 2004).
¶19 Lawson suffered no prejudice and, as a result, its laches
claim fails. In re Marriage of Smith, 806 N.E.2d 727, 733 (Ill. App. Ct. 2004)
(stating that the failure to show resulting prejudice “obviates the need to
address” whether the claim was diligently filed). Under the Employment
Agreement, Lawson was contractually required to pay Mans his severance
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salary for two years. Lawson states that Mans’ delay “caused significant
financial detriment to [Lawson],” but Lawson has not shown how it is
prejudiced by the fact that it paid Mans his contractually owed severance
payments. Additionally, because the restrictive covenants were
unenforceable from the moment Mans was terminated without cause, the
timing of the suit did not prejudice Lawson; Mans remained entitled to his
severance pay. See supra, ¶¶ 14-17.
IV. The Separation Agreement
¶20 About a month after receiving his notice of termination,
Mans signed the Separation Agreement. The Separation Agreement did
not modify the substantive terms of the restrictive covenants contained in
the Employment Agreement; rather, it incorporated the restrictive
covenants and specified their applicable dates and duration. The
Separation Agreement did alter the conditions and benefits of Mans’
severance payments by providing that he was relieved of all consulting
duties and entitled to some additional benefits.
¶21 The Separation Agreement also included Mans’ agreement
not to sue and the accompanying liquidated damages for breach of that
agreement, as well as the General Release from all claims related to Mans’
employment. In its counterclaim, Lawson sought to enforce these
provisions against Mans.
A. The Liquidated Damages Provision
¶22 Lawson argues the court improperly granted Mans’ motion
for new trial because the law and evidence supported the court’s first
conclusion that the liquidated damages provision was not an
unenforceable penalty.
¶23 We review an order granting a new trial for abuse of
discretion. Koepnick v. Sears Roebuck & Co., 158 Ariz. 322, 325, 762 P.2d 609,
612 (App. 1988). We review the court’s legal determination of whether the
contractual provision is a valid liquidated damages clause or an
unenforceable penalty de novo. Med+Plus Neck & Back Pain Ctr., v.
Noffsinger, 726 N.E.2d 687, 693 (Ill. App. Ct. 2000). Each liquidated
damages provision must be evaluated on its own facts and circumstances.
Karimi v. 401 N. Wabash Venture, LLC, 952 N.E.2d 1278, 1285 (Ill. App. Ct.
2011).
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Decision of the Court
¶24 Illinois follows a three-part test, based on the Restatement
(Second) of Contracts § 356 (1981), in determining whether a liquidated
damages clause is valid or is an unenforceable penalty:
(1) the parties intended to agree in advance to the settlement
of damages that might arise from the breach; (2) the amount
of liquidated damages was reasonable at the time of
contracting, bearing some relation to the damages which
might be sustained; and (3) actual damages would be
uncertain in amount and difficult to prove.
Kostiner, 813 N.E.2d at 1130 (quoting Noffsinger, 726 N.E.2d at 693).
Consistent with this directive, exculpatory language stating the liquidated
damages provision is not a penalty should be given some weight, but is
not controlling. Kostiner, 813 N.E.2d at 1131.
¶25 “In Illinois, a provision that allows a defendant the option to
receive liquidated damages or seek actual damages is unenforceable as a
penalty.” Burke v. 401 Wabash Venture, LLC, 714 F.3d 501, 508-09 (7th Cir.
2013) (citing Karimi, 952 N.E.2d at 1287 ¶ 21). Such a “damages” option
does not meet the requirement that the parties agree, at the time of
contracting, to a sum certain; instead, it allows one party to penalize
another party by providing for “a minimum recovery regardless of actual
damages,” and also allowing the enforcing party to “disregard liquidated
damages if actual damages exceeded the specified amount.” Karimi, 952
N.E.2d at 1287, ¶ 21. “This negates the purpose of liquidated damages,
which is to provide parties with an agreed upon, predetermined damages
amount when actual damages may be difficult to ascertain.” Burke, 714
F.3d at 509.
¶26 The liquidated damages provision in the Separation
Agreement is unenforceable because, in the event Mans breaches the
agreement not to sue, Lawson has the option to seek its actual damages in
the form of litigation costs and expenses, or to demand that Mans repay
all but $100 of his severance payments. As a result, the Separation
Agreement impermissibly provides Lawson with a guarantee of
recovering, at a minimum, the return of Mans’ severance pay, amounting
to over $350,000, regardless of the actual damages incurred from Mans’
breach.
¶27 Lawson attempts to save the liquidated damages provision
by claiming that its purpose is to compensate Lawson for the
undeterminable damages that might result from Mans’ breach of the
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restrictive covenants. However, the liquidated damages provision is very
clearly limited to Mans’ breach of the agreement not to sue.
Consequently, any damages resulting from that breach would be the costs
of litigation, a cost that could be determined with precision and would not
be “difficult to prove.” See Kostiner, 813 N.E.2d at 1130 (quoting Noffsinger,
726 N.E.2d at 693).
¶28 Based on the terms of the liquidated damages provision, it is
an unenforceable penalty, and it cannot be saved by the contract language
stating it “shall not be deemed to be a penalty.” Accordingly, the court
did not abuse its discretion in granting Mans’ motion for new trial on the
enforceability of the liquidated damages provision.
B. The Agreement Not to Sue
¶29 Lawson also appeals the court’s grant of Mans’ cross-motion
for summary judgment. Lawson argues that in granting the motion, the
court improperly found the agreement not to sue was unenforceable.
¶30 In granting Mans’ cross-motion for summary judgment, the
court stated that the liquidated damages provision in the Separation
Agreement was unenforceable. The court decided, with no further
explanation, to grant Mans’ cross-motion and dismiss Lawson’s sole
remaining claim for breach of contract based on the covenant not to sue.
¶31 Lawson’s counterclaim alleges no claims for relief
independent of the restrictive covenants and liquidated damages
provisions. Thus, the court’s determination that both the restrictive
covenants and the liquidated damages provision were unenforceable was
tantamount to dismissal of Lawson’s counterclaim.1 As a result, the trial
court appropriately granted summary judgment as to Lawson’s claim for
breach of the covenant not to sue. See Comerica Bank v. Mahmoodi, 224
Ariz. 289, 291, ¶ 12, 229 P.3d 1031, 1033 (App. 2010) (stating that summary
judgment is proper if a party is entitled to judgment as a matter of law);
1 In their briefs, the parties agree that the order finding the
Separation Agreement to be valid and enforceable survived both the
court’s grant of Mans’ motion for new trial and the determination that the
liquidated damages provision was an unenforceable penalty. However,
validity of the Separation Agreement, apart from the restrictive covenants
and the liquidated damages provision, is not the basis for Lawson’s claims
for relief in its counterclaim.
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Gardner v. Royal Dev. Co., 11 Ariz. App. 447, 451, 465 P.2d 386, 390 (1970)
(stating that appellate court will assume the court made all necessary
findings to support the judgment).
CONCLUSION
¶32 For the reasons above, we affirm the trial court’s judgment.
:ama
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