Opinion
No. A04-2334.
Filed July 12, 2005.
Appeal from the District Court, Stevens County, File No. C0-04-115.
Thomas A. Jacobson, Swenson Lervick Syverson Anderson Trosvig Jacobson, P.A., (for respondents).
Amy J. Doll, Fluegel, Helseth, McLaughlin, Anderson Brutlag, Chtd., (for appellant).
This opinion will be unpublished and may not be cited except as provided by Minn. Stat. § 480A.08, subd. 3 (2004).
UNPUBLISHED OPINION
Appellant challenges the district court's temporal modification of a noncompete clause from three years to one. Appellant argues that the district court erred by (1) declaring the clause unreasonable and modifying its temporal restriction and (2) finding respondents to be the prevailing party for purposes of costs and disbursements. We affirm.
FACTS
Eugene Anderson, D.V.M., owner and president of appellant Morris Veterinary Center, Inc. (MVC), hired respondents Kathleen Head, D.V.M., and Michael Hein, D.V.M., after completion of their formal veterinary education. Respondents each signed an employment agreement with MVC, which included the following noncompete clause:
Dr. Hein was hired in 1995, and Dr. Head was hired in 1998.
Employee agrees that in the event of a termination of this [employment] agreement, for any reason whatsoever, that he/she shall not provide any veterinarian services which shall compete with [MVC's] business herein, for a 25 mile radius of the City of Morris for three (3) years from the date of such termination.
The clause also contains a liquidated-damages provision, which appellant waived prior to trial.
The clause also contains a liquidated-damages provision, which appellant waived prior to trial.
Respondents testified that they received no formal training, mentoring, or evaluation at MVC but that Dr. Anderson was available for "general consultation" and as a "reference to use." Dr. Anderson explained his philosophy for incorporating new veterinarians into the practice as follows:
As soon as [the new hires] arrived, we — we try to introduce them to as many contacts as we can as quickly as we can. We push them into situations we know will have a good outcome. . . . [W]e put them in situations where we are fairly certain the outcome is going to be good so that the word out there is that they're doing a good job and they're real likeable people.
In tougher situations where there are more challenging environments they might get into, I try to provide support in anyway possible.
Anderson then testified that it can take a "long time" for a client of the clinic to emotionally overcome the departure of an established veterinarian. He explained that "the first year [is] very devastating," but that this "mourning period" diminishes as clients get accustomed to a new veterinarian.
Respondents testified that they felt fully trained by MVC after having been placed in the night — and weekend-rotation schedule. Dr. Head testified that she had her first "weekend on call" three months after starting and was brought into the rotation on a regular basis "about six months" after starting at MVC. Dr. Hein testified that he felt proficient as a veterinarian "within a couple weeks" after starting at MVC.
In 2002 and 2003, respondents approached Dr. Anderson about the possibility of purchasing or buying a portion of MVC. In December 2002, Dr. Anderson shared limited financial information with respondents, including financial statements, tax returns, and an amortization schedule of possible payments. This financial information was kept confidential, and respondents were not given access to other password-protected data on MVC's computer system. Because the sale never materialized, respondents decided to open their own clinic, forming HH Veterinary Service, LLP, in the fall of 2003. Respondents leased a building for their clinic in Benson, which they believed fell outside the 25-mile radius restriction. Dr. Anderson became aware of respondents' plan to open the new clinic in November, and respondents soon after received notice of his intent to enforce the noncompete clause. On January 15, 2004, respondents resigned from MVC. By September 2004, Dr. Anderson had hired two veterinarians to replace respondents.
When Dr. Head asked Dr. Anderson why he was not interested in selling a portion of the practice, Dr. Head testified that Dr. Anderson replied, "[Because I] could find a small animal vet anywhere."
By complaint filed in district court, respondents sought to invalidate the noncompete clause. MVC moved for a temporary injunction in an effort to enforce it. The district court granted the motion and temporarily enjoined respondents from providing any veterinary services from their clinic located in Benson "or any other location within a 25-mile radius of the City of Morris." Respondents then opened a temporary site for their clinic that is outside the restricted area. A bench trial was subsequently held, and the district court found that the noncompete clause is valid and enforceable, but also found that the three-year temporal restriction is unreasonable and reduced it to one year. The court explained that "[i]t does not take three years for [MVC's] employees [to] learn the fundamentals of the business. They are fully incorporated into the business routine within six months." The court then awarded costs and disbursements to respondents as the "prevailing party" because they obtained a more favorable result than MVC. This appeal follows.
DECISION I.
The primary issue on appeal is whether the district court erred by finding MVC's noncompete clause to be unreasonable and by modifying its terms to reduce the temporal restriction from three years to one. An appellate court "may not reverse a [district] court due to mere disagreement with its findings. Rather, [it] will reverse a [district] court's findings of fact only when those findings are clearly erroneous. Findings of fact are considered clearly erroneous only if they are not reasonably supported by the evidence." Fletcher v. St. Paul Pioneer Press, 589 N.W.2d 96, 102 (Minn. 1999) (citing Minn. R. Civ. P. 52.01). We view the record in the light most favorable to the judgment of the district court. Rogers v. Moore, 603 N.W.2d 650, 656 (Minn. 1999). In addition, "[if] there is reasonable evidence to support the district court's findings, we will not disturb them." Id.
Covenants not to compete are agreements in partial restraint of trade that historically have been looked upon with disfavor in Minnesota. See Bennett v. Storz Broad. Co., 270 Minn. 525, 533, 134 N.W.2d 892, 898 (1965). But such agreements will be upheld if they are necessary to protect the reasonable interests of an employer and do not impose an unreasonable restraint on the rights of an employee. Klick v. Crosstown State Bank of Ham Lake, 372 N.W.2d 85, 87 (Minn.App. 1985). As the supreme court has explained, "Where the restraint 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, the restraint has been held valid." Id. (quoting Bennett, 270 Minn. at 533, 134 N.W.2d at 898).
The reasonableness of the duration of a restrictive covenant may be tested under two alternate standards: (1) the length of time necessary to obliterate the identification between employer and employee in the minds of the employer's customers, or (2) the length of time necessary for an employee's replacement to obtain licenses and learn the fundamentals of the business. Dean Van Horn Consulting Ass'n v. Wold, 395 N.W.2d 405, 408-09 (Minn. App. 1986). As we explained in Klick, the reasonableness of a temporal restriction depends on three factors: (1) the nature of the job, (2) the amount of time necessary to find and train a replacement for the employee, and (3) the amount of time necessary for the employee's customers to become accustomed to the employee's replacement. 372 N.W.2d at 88. If the noncompete clause is overbroad, a court can enforce it only to the extent that it is reasonable. Id.; see also Davies Davies Agency, Inc. v. Davies, 298 N.W.2d 127, 131 n. 1 (Minn. 1980) ("[I]n employment cases, a court should be permitted to make changes . . . rather than be compelled to strike down the entire agreement as unreasonable.").
Focusing on the first and third Klick factors and highlighting Dr. Anderson's testimony, MVC urges that three years is the time required for its clients to become accustomed to respondents' replacements, based on the nature of veterinary-medicine practice. But the district court found respondents' testimony more credible, concluding that new veterinarians are "fully incorporated into the business routine within six months." Dr. Head testified that she felt fully trained and proficient after six months on the job. Dr. Hein felt the same way "within a few weeks." As the district court explained, "There is a period of time necessary for the new veterinarians to become familiar to and accepted by [MVC's] clients. . . ." Dr. Anderson himself testified that clients go through a "mourning period" upon the departure of one of the clinic's veterinarians, explaining that this mourning period can go on indefinitely — "for a long, long time" — and that it changes with time. In fact, Dr. Anderson testified that some clients still refer to veterinarians who departed MVC more than 18-20 years ago. But importantly to this analysis, Dr. Anderson opined that "the first year [is] very devastating." The district court found this opinion to be conclusive in evaluating the reasonableness of the temporal restriction of the noncompete clause. It then blue-penciled, or modified, the restriction from three years to one. Supported by the testimony offered by respondents and Dr. Anderson himself, the district court's decision to declare the noncompete clause unreasonable and to modify its terms is not error.
Focusing on the second Klick factor, MVC notes that Dr. Anderson did not replace respondents until June 15 and September 1, 2004, and that the district court found six months to be a sufficient time to assimilate the new veterinarians into MVC's practice. Again, because there is evidence in the record to suggest that six months is an adequate time period to train a new veterinarian at MVC, we will not disturb the district court's finding that new employees are "fully incorporated into the business routine within six months." Dr. Anderson hired replacement veterinarians in June and September 2004, respectively. By now, MVC has had sufficient time to train and incorporate the new hires. Given this time frame, to disturb the district court's factual finding now would be futile.
MVC further insists that respondents established a close personal relationship with MVC's clients and that three years is the time required to acquaint new veterinarians with MVC's client base. Because the good will of patients belongs to the employer, MVC argues that the district court erred by concluding that the three-year restriction was unreasonable. MVC cites Granger v. Craven, 159 Minn. 296, 199 N.W. 10 (1924), to support the presumption that respondents "acquired a close `personal hold' upon many of [MVC's patients] and in consequence a substantial portion of [respondents] good will." Id. at 303, 199 N.W. at 13. In that case, the supreme court explained the propriety of covenants not to compete in professional settings:
[I]n the professions . . . without solicitation and with even meticulous good faith on the part of the employe[e], the good will and establishment of the employer will be substantially impaired the moment the employe[e], who has served faithfully and well, begins competition with [the employer]. Therefore, it is only reasonable protection of a legitimate interest for a professional , about to employ another on such terms as to give the latter access to the acquaintance and confidence of his clients, to require of the employe[e] a covenant not to enter into competition with the employer for a reasonable time after the relationship is terminated.
Id. at 301, 199 N.W. at 12. But this does not mean that three-year noncompete clauses will always be upheld. See, e.g., Dean Van Horn, 395 N.W.2d at 409 (affirming the district court's modification of a restrictive covenant from a three-year period to a one-year period). The appropriate inquiry strikes a balance between an employer's need to protect its business interests and an employee's need to earn a livelihood in the field in which he or she has expertise. See Bennett, 270 Minn. at 535-36, 134 N.W.2d at 899-900 ("The validity of the contract in each case must be determined on its own facts and a reasonable balance must be maintained between the interests of the employer and the employee."). As the testimony suggested, acquainting new hires with MVC's client base could, but may not, take several years. The district court limited this indefinite time frame and found one year to be sufficient. The record before us supports the district court's balancing in favor of respondents.
While it is true that some of MVC's clients have followed respondents to their new clinic, many have remained with MVC. The district court found that the noncompete clauses here satisfied "a legitimate business interest of [MVC] to protect its client base from competition from individuals who have been afforded the opportunity by [MVC] to form an intimate professional relationship with that client base." But again, the record supports the district court's conclusion that such protection was needed for only one year. As we have previously stated, "it is not within the scope of our review to make the essential factual finding of whether the covenant was reasonable." Klick, 372 N.W.2d at 87-88. Because evidence was offered to support the district court's finding that the provision was temporally unreasonable, we will not disturb that finding.
II.
MVC also argues that the district court erred by awarding respondents costs and disbursements as the "prevailing party." This court may overturn a district court's award of costs and disbursements when the award is an abuse of discretion. Striebel v. Minn. State High Sch. League, 321 N.W.2d 400, 403 (Minn. 1982). The district court's discretion is addressed with respect to the reasonableness of the disbursements paid or incurred. Jonsson v. Ames Constr., Inc., 409 N.W.2d 560, 563 (Minn.App. 1987), review denied (Minn. Sept. 30, 1987).
Upon respondents' motion, the district court found that respondents obtained a more favorable result than MVC and awarded $1,193.50 in costs and disbursements pursuant to Minn. Stat. § 549.02 (2004) (statutory costs of $200) and Minn. Stat. § 549.04 (2004) ("the prevailing party . . . shall be allowed reasonable disbursements paid or incurred"). The reasonable disbursements included respondents' fees for their filing, venue motion, clarification motion, and service of process, as well as $607.80 for Dr. Anderson's deposition transcript.
MVC argues that respondents were not the "prevailing party" in the underlying action because, although the district court modified the temporal restriction of the noncompetition clause, it previously found "a likelihood that [MVC] will prevail on the merits" when it granted MVC's motion for a temporary injunction. But in that same order, the district court explained, "Although there still is a question relating to the reasonableness of the duration of the agreements, initially at least one-year would not be unreasonable." The temporary injunction remained in effect until final adjudication on the merits.
Given the final outcome here — when the noncompete clause was ultimately found unreasonable and modified in temporal scope — the district court did not abuse its discretion by finding that respondents' costs and disbursements were reasonable and taxable against MVC.