Specialty Rental v. Shoemaker ( 2009 )

REVISED JANUARY 8, 2009
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
December 17, 2008
No. 08-60061
Charles R. Fulbruge III
Clerk
SPECIALTY RENTAL TOOLS & SUPPLY, LP
Plaintiff-Appellant
v.
WILLIAM P SHOEMAKER, SR
Defendant-Appellee
Appeal from the United States District Court
for the Southern District of Mississippi
Before WIENER, GARZA, and DeMOSS, Circuit Judges.
WIENER, Circuit Judge:
Plaintiff-Appellant Specialty Rental Tools & Supply, LP (“STS”) sued its
former employee, Defendant-Appellee William P. Shoemaker, Sr., to enforce a
covenant not to compete. STS appeals the district court’s grant of Shoemaker’s
summary judgment motion that dismissed STS’s action with prejudice. We
affirm.
I. FACTS
For a period of almost ten years preceding March 1, 2002, Shoemaker
owned and operated Southeastern Rentals, LLC (“Southeastern”), an oilfield
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related service company. In March, 2001, a representative of STS, also an
oilfield related business, approached Shoemaker to discuss the possible purchase
of Southeastern by STS. These discussions culminated early in January, 2002,
with the submission to Shoemaker of a “Letter of Intent,” proposing that STS
purchase Southeastern and employ Shoemaker. In response, Shoemaker had his
attorney review the Letter of Intent and reply to STS. The terms of the non-
competition covenant became an issue: Later that month, Shoemaker’s lawyer
wrote to STS about the Letter of Intent, informing STS of, inter alia,
Shoemaker’s disagreement with the proposed non-competition agreement . STS
promptly responded with an alternate version of a non-competition clause, which
version never made it into the final contracts.
The parties eventually agreed on the terms and conditions of the sale of
Southeastern to STS and the employment of Shoemaker by STS, including a
non-competition arrangement. The details of the purchase of Southeastern and
the employment of Shoemaker by STS were memorialized in three agreements
that the parties executed contemporaneously on March 6, 2002, effective March
1, 2002 (sometimes referred to as the Date of Closing and sometimes as the
Effective Date), to wit: the (1) Members Interest Purchase Agreement (“Purchase
Agreement”), (2) Non-Competition Agreement, and (3) Employment Agreement.
The latter two agreements were first shown to Shoemaker and his lawyer at the
closing on March 6, 2002.
Pertinent provisions of Purchase Agreement state:
9.7 Covenant Not to Compete. During the period commencing on the
Date of Closing and continuing until either the second anniversary of the
Date of Closing or on the second anniversary of the termination of
[Shoemaker’s] employment by [STS], whichever occurs later, (the “Non-
competition Period”), [Shoemaker] shall not (and shall cause each Non-
competition Party (as defined below) not to), directly or indirectly own,
manage, operate or control or be employed by any business in competition
with the business activities conducted by [STS] on the Date of Closing or
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No. 08-60061
the date [Shoemaker] is no longer an employee of [STS]....
10.4 Entire Agreement. This Agreement (including the documents
referred to herein) and the Non-Compete [sic] Agreement constitute the
entire agreement between [STS] and its Affiliates, on the one hand, and
[Shoemaker] and his Affiliates, on the other hand. This Agreement
supersedes any prior understandings, agreements, or representations by
or between [STS] and its Affiliates, on the one hand, and [Shoemaker] and
his Affiliates, on the other hand, whether written or oral, with respect to
the subject matter hereof (other than the Confidentiality Agreement).1
Pertinent provisions of the Non-Competition Agreement state:
WHEREAS, the parties hereto intend this Non-Competition
Agreement to supersede any other non-compete agreements
previously entered into by the parties, whether such agreements
are written or orally made;...
NOW, THEREFORE....
The term of this Agreement shall be the period commencing [March
1, 2002] and ending two (2) years after March 1, 2002, the Effective
Date of the [Purchase Agreement] (the “Term”)....
This Agreement constitutes the entire agreement between [STS]
and Shoemaker with respect to the subject matter hereof, except as
provided in Section 5 [regarding validity and judicial severance], no
amendment or modification shall be valid unless made by
supplemental written agreement, executed by the parties hereto or
their successors or permitted assigns....2
Pertinent provisions of the Employment Agreement state:
3. TERM. [Shoemaker’s] Employment under this Agreement shall
be for five (5) years, beginning on March 1, 2002 and ending on
March 1, 2007....
1
Emphasis added.
2
Emphasis added.
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16. TERMINATION. This Agreement may be terminated by either
party upon 14 days written notice. If [STS] shall so terminate this
Agreement, [Shoemaker] shall be entitled to compensation for the
remainder of the contract term, unless [Shoemaker] is in violation
of this Agreement or is terminated “for cause....”3
By virtue of the interrelated transactions embodied in these three
contemporaneously executed contracts, STS purchased Southeastern from
Shoemaker, and Shoemaker went to work for STS, on the terms and conditions
set forth in those contracts.
Fast forward five years. On or about February 28, 2007, Shoemaker
received, by hand-delivery, a letter dated February 21, 2007, signed by STS Vice
President Edward Petru. The letter stated in pertinent part:
This letter is to advise you that your employment contract with
[STS] will expire March 1, 2007, and will not be renewed. This
notice does not constitute a termination of your contract, rather a
notice of non-renewal.4
Petru’s February 21, 2007 letter directed Shoemaker’s attention to only two
sections of the Employment Agreement: Section 19, entitled “Return of
Property” and Section 9, entitled “Confidentiality.” The letter made no reference
whatsoever to the Purchase Agreement or the Non-Competition Agreement.
Within days after receiving Petru’s letter (and after the Employment
Agreement expired on its own terms), Shoemaker went to work for a direct
competitor of STS. This triggered the mailing of a cease-and-desist letter from
STS to Shoemaker, threatening legal action and referring to the non-competition
clause in the Purchase Agreement, but making no reference whatsoever to the
3
Emphasis added. According to deposition testimony of STS Vice President of
Finance and Administration Edward Petru, these three closing documents were prepared
for STS by an attorney in Houston, Texas, who served as counsel to STS in its transaction
with Shoemaker and Southeastern.
4
Emphasis added.
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Non-Competition Agreement or the Employment Agreement.
When Shoemaker failed to respond to its cease-and-desist letter, STS filed
the instant lawsuit. In its complaint, STS sought (1) injunctive relief prohibiting
Shoemaker from competing against STS, (2) damages sustained as a result of
Shoemaker’s interfering with the business or contractual relations of STS, (3)
punitive damages, and (4) all expenses of the litigation. (While this case was
pending in the district court, STS withdrew its claims for monetary damages.)
II. DISTRICT COURT PROCEEDINGS
In considering Shoemaker’s motion for summary judgment, the district
court established the framework for its analysis by noting that this diversity
case turns on the substantive law in Mississippi, specifically, that State’s law
applicable to interpreting contracts by determining the intent of the parties.5 In
more narrowly framing its task, the district court quoted the Mississippi
Supreme Court’s pronouncement that “restrictive covenants are in restraint of
trade and individual freedom and are not favorites of the law.”6 It emphasized
that the enforceability of such agreements is “largely predicated upon the
reasonableness and specificity of its terms.”7
Turning to the pertinent provisions of the contracts entered into
simultaneously by the parties, the court focused on the contentions of STS that
(1) the non-competition clauses of the agreements are ambiguous or at least in
conflict, and (2) the Covenant Not to Compete in section 9.7 of the Purchase
Agreement is “dominant.” The district court examined the wording of the non-
competition clauses in pari materia and concluded that the intent of the parties
was
5
Holland v. Mayfield, 826 So. 2d 664, 669 (Miss. 1999).
6
Frierson v. Sheppard Bldg. Supply Co., 154 So. 2d 151, 172 (Miss. 1963).
7
Empiregas, Inc. of Kosciusko v. Bain, 599 So. 2d 971, 975 (Miss. 1992).
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No. 08-60061
for Shoemaker to work for [STS] for a period of five years and that
if he quits [sic] or was terminated during that five-year period, he
would be subject to the non-compete clause for two years thereafter.
However, the court finds that the parties clearly intended that once
Shoemaker concluded his five-year term of employment, he would
no longer be prohibited from competing with [STS].
In reaching this determination, the district court focused on the meaning
of “terminate,” “termination,” and “terminated,” as used in the agreements and
concluded that they were:
defined in the employment documents to include termination for cause but
also allow[] for termination by either party for any reason upon fourteen
days written notice. There is no dispute that Shoemaker was not
terminated for cause nor was he terminated under the fourteen day notice
provision.
The court reinforced its determination that, in using variations of the word
“terminate” in the agreements, the parties contemplated that Shoemaker’s
employment at STS would be deemed to have been “terminated” only if it ended
(1) prior to the completion of five years (2) as the result of an act taken by one
of the parties to the agreements. In underscoring its conclusion that the parties’
intention was for the word “terminate” to cover only a pre-expiration cessation
of Shoemaker’s employment as the result of an affirmative act of either STS or
Shoemaker, the court observed that STS:
was very careful in its wording of the “termination” letter of
February 21, 2007, by stating that Shoemaker was not being
terminated, only that his contract was not being renewed. Thus, it
is clear that [STS] understood and appreciated the differentiation,
meaning, and effect of the term ‘termination’ versus a non-renewal
under the contract.
The court reasoned that the parties did not intend for their non-competition
covenants to survive beyond the five-year period of Shoemaker’s employment if
it ran the full course without either party having taken an affirmative act to end
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No. 08-60061
his employment earlier. Based on this analysis, the district court held that
neither non-competition provision applied to the instant situation, in which
Shoemaker’s employment by STS simply expired on his completion of its
specified five-year term. The court granted Shoemaker’s motion for summary
judgment and dismissed STS’s action with prejudice. STS timely filed a notice
of appeal.
III. ANALYSIS
A. Standard of Review
We review de novo the district court’s grant of a summary judgment
dismissing the plaintiff’s lawsuit with prejudice.8 We may affirm the judgment
of the district court for any valid reason.9
B. Merits
We agree with the district court that (1) the instant diversity case is
controlled by the substantive law of Mississippi, (2) the laws of that state
disfavor restrictions on competition, (3) this case turns on interpretation of the
contracts entered into by the parties and thus requires a determination of their
intent, and (4) the intent of the parties as to the provisions prohibiting
Shoemaker’s competition after he no longer worked for STS turns on the
meaning of “termination” as used in the controlling documents. We also agree
with the district court’s ultimate conclusion that the parties intended to limit the
meaning of “termination” to cessations of Shoemaker’s employment resulting
from an affirmative act of one of the parties by or before the end of its specified
term, and not to include the expiration of Shoemaker’s employment at the end
of its five-year term.
8
Burden v. Johnson & Johnson Med., 530 F.3d 389, 393 (5th Cir. 2008) (citing
Jenkins v. Cleco Power, LLC, 487 F.3d 309, 313 (5th Cir. 2007).
9
McGruder v. Will, 204 F.3d 220, 222 (5th Cir. 2000).
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In reaching its ultimate conclusion, the district court determined that (1)
the language of the agreements is somehow ambiguous regarding non-
competition, (2) any ambiguity must be construed against STS as the drafter of
the agreements, and (3) the enforceability of the non-competition provision of one
of the agreements in priority over such a provision in another of the agreements
turns on a determination of which covenant is “dominant.” When we construe
the instruments as a whole, as we must, we are satisfied that there is no
ambiguity as a matter of law. As we shall explain, we are convinced that the
non-competition covenant of only one of the agreements is applicable under these
facts. That being the case, we need not address the district court’s answers to
the questions (1) should one or more of the agreements be construed against STS
as the “drafter,” (2) which non-competition provision is “dominant,” (3) does the
signing of all three agreements on March 6, 2002 constitute contemporaneous
execution and thus mandate interpretation in pari materia or, to the contrary,
does the sequence of their signing on that day make any of them “prior” or
“previous” to the other, and (4) may evidence outside the four corners of each of
the three agreements be considered if there is no ambiguity in the controlling
provisions of those documents.
As both the Purchase Agreement and the Non-Competition Agreement
contain covenants against competition, we must determine preliminarily
whether either or both of those covenants remained in effect and enforceable
when Shoemaker’s employment by STS ended on February 28, 2007. Although
both covenants expressly commenced when Shoemaker’s employment began on
March 1, 2002, they specified terms of at least potentially different durations.
The covenant set forth in the Non-Competition Agreement specifies a fixed
expiration, viz., “two (2) years after March 1, 2002...(‘The Term’),” so once
Shoemaker’s employment continued without interruption beyond that two-year
period, that covenant evanesced into irrelevancy. In contrast, the duration of the
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No. 08-60061
Purchase Agreement’s “Covenant Not to Compete” was not fixed in the same
sense; rather, it continued in lockstep with the continuation of Shoemaker’s
employment, enduring until “the second anniversary of the termination of
[Shoemaker’s] employment.” Potentially, then, the Purchase Agreement’s
covenant could have remained enforceable for a maximum of two years after the
stated five-year term of Shoemaker’s employment, i.e., as late as February 28,
2009 —— but only if his employment were to continue for essentially all of the
maximum five-year duration specified in those agreements and be terminated
contemporaneously with its specified date of expiration. Clearly then, the
Purchase Agreement’s Covenant Not to Compete was the only non-competition
provision even potentially enforceable by STS when Shoemaker and STS parted
company on February 28, 2007; the Non-Competition Agreement had expired on
its own terms a full three years earlier.10 Therefore, as after March 1, 2004,
there no longer remained two covenants in potential conflict (if they ever were),
we need address only the wording of the one such covenant still in effect, viz., the
Purchase Agreement’s Covenant Not to Compete. For the same reason, we need
not address any possible ambiguity or conflict between the two covenants or
whether one of the two covenants is or was ever dominant. (STS presumably
recognized all this because, in seeking to prevent Shoemaker from competing
10
If we were to read the above-quoted merger clause of the Non-Competition
Agreement (“the parties hereto intend this Non-Competition Agreement to supersede any
other non-compete agreements previously entered into by the parties...”) as trumping the
non-competition clause of the Purchase Agreement so that the only non-competition
restriction affecting Shoemaker was that in the Non-Competition Agreement, STS would
have no basis for its claims because of that agreement’s automatic expiration on March 1,
2004. But, as we explain infra in footnote 12, we do not view any of the merger clauses of
the agreements as applicable to the other agreements executed contemporaneously on
March 6, 2002, because none was executed “previously” or “prior to” the others signed that
day. The covenant in the Purchase Agreement was not supplanted by the merger clause of
the Non-Competition Agreement, so the latter did not have the effect of leaving STS with
no covenant against competition in existence after the March 1, 2004 expiration of the Non-
Competition Agreement.
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No. 08-60061
with it after his employment ended, STS invoked only the Purchase Agreement’s
non-competition provision —— and not that of the Non-Competition Agreement
—— as grounds for its enforcement action.)
By defining the duration of the “Non-competition Period” as the longer of
(1) two years after March 1, 2002 or (2) two years after the “termination of
[Shoemaker’s] employment by [STS],” section 9.7 of the Purchase Agreement
pinpoints “termination” as the operable word. As it is undisputed that
Shoemaker remained in the employ of STS for the full five-year term specified
in the agreements, the determinative question presented here is whether the
expiration of Shoemaker’s employment at the end of those five years was a
“termination” for purposes of the Purchase Agreement’s Covenant Not to
Compete. If section 9.7 could be enforced at all after Shoemaker’s five-year
employment contract expired, it would only be because, as STS argues, the
agreements employ “terminate,” “termination,” and “terminated” expansively,
incorporating both the transitive and intransitive forms of the verb, “to
terminate.” Under such a broad application, “terminate” would include the
cessation of Shoemaker’s employment not only by an act taken by one of the
parties, such as Shoemaker resigning or STS firing him, but also by the mere
passage of time. An examination of the agreements, particularly the interplay
between the durations and cessations of their non-competition covenants and the
terms and conditions of Shoemaker’s employment, persuades us that such an
expansive interpretation was not what STS and Shoemaker intended when they
executed the documents.
Any doubt that the parties’ intent was to limit the meaning of “terminate”
to its transitive form, i.e., to an affirmative act of a party to halt Shoemaker’s
employment, is firmly laid to rest by the relevant provisions of the third of the
March 6, 2002 contracts, the Employment Agreement. First, that contract refers
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No. 08-60061
to Shoemaker’s five-year period of employment as “ending” —— not as
“terminating” —— on March 1, 2007. This dovetails with that agreement’s
section 16, “TERMINATION,” which states that “[t]his [Employment]
Agreement may be terminated by either party upon 14 days written notice.”11
Here, the use of terminate is ineluctably limited to affirmative acts of the
contracting parties. This is further confirmed by the Employment Agreement’s
contemplation of the (1) possibility that STS “shall so terminate this Agreement”
—— obviously using the transitive form of “to terminate” and thus requiring an
affirmative act —— and (2) the further possibility that Shoemaker could be
“terminated” ‘for cause...,’” indisputably contemplating the affirmative act of STS
firing him before his employment expires on its own terms.
To further highlight the distinct roles of the various contracts, we note
that each of the parties wore two hats when they executed the Purchase
Agreement, but that each wore only one hat when they executed the other two
agreements. In signing the Purchase Agreement, STS wore both its business-
buyer’s hat and its employer’s hat, and Shoemaker wore both his business-
seller’s hat and his employee’s hat. In signing the Employment Agreement and
the Non-Competition Agreement, however, STS wore only its employer’s hat,
and Shoemaker wore only his employee’s hat. This distinction is made clear by
the above-quoted sections of the Purchase Agreement: Section 9.7 binds not only
Shoemaker but also each of his “Non-competition” parties or his “Affiliates”; and
it does not simply prohibit Shoemaker and those parties from accepting
employment “by any business in competition with the business activities
conducted by” STS, but also bars Shoemaker and each Non-competition Party
or Affiliate from “directly or indirectly” owning, managing, operating, or
controlling any such competitor of STS. Moreover, section 10.4 broadly defines
11
Emphasis added.
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No. 08-60061
“Breach of the Purchase Agreement” as applying not just to STS and Shoemaker,
but also to their respective “Affiliates.” In contrast, the Employment Agreement
and the Non-Competition Agreement bind only Shoemaker as an employee and
STS as his employer. These distinctions underscore some of the differences in
emphasis between the two non-competition provisions of those disparate
agreements, although in the end they are of no particular significance.12
As STS lost its entitlement to enforce the Non-Competition Agreement’s
covenant when it expired on March 1, 2004, with Shoemaker still employed
there, STS was left with the Purchase Agreement’s Covenant Not to Compete as
its only potential enforcement mechanism. But, after the March 1, 2004
anniversary of the signing of the Purchase Agreement, its covenant could be
enforced only if a “termination of [Shoemaker’s] employment by [STS]” occurred
during the years of its five-year term. And, as this condition precedent never
occurred, the Purchase Agreement’s covenant against competition expired,
simultaneously with the expiration of the Employment Agreement, on March 1,
2007. Again, no one disputes that Shoemaker’s employment by STS continued
without interruption until March 1, 2007: Neither party had ever furnished
written notice to the other purporting to end Shoemaker’s employment, with or
without cause. Moreover, even if we were to accede to STS’s argument and agree
that the Purchase Agreement was the dominant agreement — so that the Non-
Competition Agreement did not supplant the Purchase Agreement and its
expiration did not bar STS from enforcing the Purchase Agreement’s Covenant
Not to Compete — the absence of any overt act of “termination of [Shoemaker’s]
12
The same can be said of the so-called merger provisions of the several agreements.
These provisions refer to “prior understandings, agreements, or representations” or “other
non-compete agreements previously entered into by parties,” but none purports to preempt
or negate either of the other agreements entered into contemporaneously on March 6, 2002.
Consequently, no non-competition covenant of any of these contracts is rendered nugatory
by a merger clause.
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No. 08-60061
employment by the action of either party” before it expired would render the
Purchase Agreement’s non-competition clause wholly inoperable.
Finally, even if, arguendo, we were to accept the urgings of STS (and the
assumption of the district court) that the use of “termination” or “terminate” in
the subject agreements was somehow ambiguous, the propriety of restricting its
meaning to the affirmative act of a party is confirmed beyond cavil by
application of the well-known canon of contractual interpretation that the intent
of the parties can be gleaned from the way that they perform their contract.13
When Mr. Petru, representing STS in his capacity as Vice President of Finance
and Administration, wrote to Shoemaker near the end (but still during the term)
of Shoemaker’s five-year employment by STS and stated unequivocally and
unambiguously that “[y]our Employment Contract with [STS] will expire [not
“terminate”] on March 1, 2007,” even adding for emphasis that “[t]his notice does
not constitute a termination of your contract, rather a notice of non-renewal,”
STS removed any possible doubt that the intention of the parties in using
variations of “terminate” in their agreements did not extend to the passive
expiration of Shoemaker’s employment on its own terms.
IV. CONCLUSION
Shoemaker’s employment with STS ended on March 1, 2007 with the
expiration of its express five-year term. It follows that Shoemaker’s job with
STS was never terminated within the meaning of the three contemporaneously
executed agreements: The intent of the parties was for that term to include only
the pre-expiration halting of his employment by an affirmative act of one of the
parties. Not only does that meaning of terminate become obvious and
13
See, e.g., Aladdin Constr. Co., Inc. v. John Hancock Life Ins. Co., 914 So. 2d 169,
176 (Miss. 2005); see also Roberts v. Roberts, 866 So. 2d 474, 481 (Miss. Ct. App. 2003) (a
party may not assert a fact advantageous to it if its previous conduct is inconsistent with
the fact asserted).
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No. 08-60061
unambiguous when the agreements are read in pari materia, but STS so
interpreted it by its performance of the contract, i.e., by furnishing its February
21, 2007 written notice to Shoemaker, expressly eschewing termination.
Accordingly, the summary judgment rendered by the district court, dismissing
STS’s action with prejudice, is
AFFIRMED.
14