Opinion
No. C0-99-206.
Filed July 13, 1999.
Appeal from the District Court, Hennepin County, File No. 9711126.
Craig D. Greenberg, Huffman, Usem, Saboe, Crawford Greenberg, P.A., and
Steven M. Hunegs, Richard G. Hunegs, Hunegs, Stone, Koenig, LeNeave Kvas, P.A., (for appellant)
Timothy D. Kelly, Thomas W. Pahl, Kelly Berens, P.A., (for respondents)
Considered and decided by Anderson, Presiding Judge, Crippen, Judge, and Schultz, Judge.
This opinion will be unpublished and may not be cited except as provided by Minn. Stat. § 480A.08, subd. 3 (1998).
UNPUBLISHED OPINION
Appellant challenges the district court's grant of summary judgment in favor of respondents, arguing that he was not the first to breach the consulting agreement and that the agreement's non-compete provision is unenforceable. We affirm.
FACTS
Before July 1989, appellant Michael Kunin and his five siblings owned Maxim's Beauty Salons, Inc. (Maxim's), a corporation that operated beauty salons in Montgomery Ward's and other department stores. Appellant's cousin, respondent Myron Kunin, was president of Regis Corporation (Regis), which operated freestanding beauty salons in shopping malls.
By purchase agreement dated July 7, 1989, respondent purchased Maxim's from appellant and his siblings. In connection with the purchase, Maxim's and appellant entered into an employment agreement, whereby Maxim's agreed to employ appellant for six and a half years. As part of the purchase agreement, respondent personally guaranteed the performance of Maxim's obligations under the employment agreement.
In January 1990, the employment agreement between Maxim's and appellant was terminated. At the same time, the parties entered into a consulting agreement, whereby appellant was to provide six years of "consulting services" in exchange for monthly payments of $12,707. Both the employment and consulting agreements contained a restrictive covenant that prohibited appellant from working in another hairstyling business for 11 years after the sale of Maxim's.
In August 1990, respondent and Regis entered into a joint venture agreement with MEI Diversified, Inc. (MEI). The agreement combined several companies (including Maxim's) that operated department store beauty salons. As part of the joint venture, Regis assumed and promised to pay a percentage of all future payments due appellant under his consulting agreement. In exchange, Maxim's assigned to Regis and respondent the right to enforce the obligations found in the consulting agreement, including the covenant not to compete.
The joint venture did not go well, and in February 1993, the joint venture, MEI, and Maxim's filed for bankruptcy. In September 1993, appellant filed a motion with the bankruptcy court requesting that Maxim's be compelled to assume or reject his consulting agreement. Maxim's rejected the agreement on October 20, 1993.
In late October 1993, appellant went to work for Hairstylists Management Systems, Inc. (HMS). Respondent stopped the consulting agreement payments in November 1993, after he learned that appellant was working for HMS. Appellant subsequently brought suit against respondents, alleging breach of the consulting agreement and breach of the duty of good faith and fair dealing. The district court granted summary judgment in favor of respondents on both claims. Appellant now appeals the award of summary judgment on the breach of contract claim.
Maxim's made the monthly consulting agreement payments to appellant until May 1992, when it notified appellant that it would no longer make the payments. From then until November 1993, respondent made the payments.
DECISION
On appeal from summary judgment, a reviewing court must determine: "(1) whether there are any genuine issues of material fact; and (2) whether the lower court erred in its application of the law." Lubbers v. Anderson , 539 N.W.2d 398, 401 (Minn. 1995). An issue of fact is material if it would affect the outcome of the case. Zappa v. Fahey , 310 Minn. 555, 556, 245 N.W.2d 258, 259-60 (1976). The evidence is to be viewed in the light most favorable to the non-prevailing party. Fabio v. Bellomo , 504 N.W.2d 758, 761 (Minn. 1993). Interpretation of a contract is a question of law that we review de novo. Johnson v. Piper Jaffray, Inc. , 530 N.W.2d 790, 795 (Minn. 1995).
Appellant argues that the district court erred in ruling that, because appellant breached the consulting agreement, he cannot collect the amount due him under the agreement. According to appellant, the court's decision is in error because respondent, not appellant, was the first to breach the consulting agreement. He further asserts that, if he did breach the agreement, the decision is still in error because respondents suffered no damages as a result of the breach and the non-competition provision is unenforceable.
I. Breach of the Consulting Agreement
Appellant argues that Maxim's breached the purchase agreement on May 29, 1992, when it notified appellant that it would discontinue making the consulting agreement payments. Also, once Maxim's filed for bankruptcy, it was in default under the terms of the purchase agreement. The contract at issue, however, is the consulting agreement, and appellant provides no explanation as to how a breach by Maxim's of the purchase agreement translates into a breach by respondent of the consulting agreement.
Appellant next argues that Maxim's rejection of the consulting agreement on October 20, 1993, constitutes a breach of that agreement. Because appellant did not become associated with HMS until "late October 1993," he argues that Maxim's was the first to breach the consulting agreement. Appellant did not make this argument to the district court. Issues not raised in district court may not be considered for the first time on appeal. Thiele v. Stich , 425 N.W.2d 580, 582 (Minn. 1988).
The issue, however, can be resolved without determining whether sometime in "late October" comes before or after October 20. Under bankruptcy law, Maxim's rejection of the consulting agreement operated as a breach of that agreement. 11 U.S.C. § 365(g) (1994). The rejection and resulting breach, however, did not in any way discharge or extinguish Maxim's continuing obligations under the agreement. In re Modern Textile, Inc. , 900 F.2d 1184, 1191 (8th Cir. 1990). And, because Maxim's obligations continued, respondent's liabilities under the consulting agreement also continued. See id. (because obligation survives rejection, guarantor's liability remains). But, under the terms of the consulting agreement, once appellant went to work for a competitor, Maxim's obligations under the agreement ceased. If Maxim's had no further obligation to continue the monthly payments, neither then did respondent. See id. at 1188 (guarantor not liable unless principal liable) (quoting Rhode Island Hosp. Trust Nat'l Bank v. Ohio Cas. Ins. Co. , 789 F.2d 74, 78 (1st Cir. 1986)). Respondent discontinued his consulting agreement payments to appellant in November 1993; after appellant went to work for HMS, a competitor.
According to the consulting agreement, should appellant violate the agreement's restrictive covenant by engaging "in any business whose activities consist in whole or in part in operating or managing hairstyling salons," Maxim's has "the right to discontinue any payments" to appellant that are required by the agreement.
Finally, appellant argues that, even if he did breach the consulting agreement, the district court should not have awarded respondents $343,000 in damages when respondents suffered no damage as a result of the breach. Appellant cites B Y Metal Painting, Inc. v. Ball , 279 N.W.2d 813, 816 (Minn. 1979), which holds that, before a party can recover monetary damages from an alleged breach of a non-competition agreement, the party must prove damages.
This argument misstates the district court's order. The court did not award respondents $343,000 in damages. The court granted respondents' motion for summary judgment, thereby dismissing appellant's complaint. Respondents were not attempting to recover monetary damages; therefore, there was no need for them to prove damages.
II. Enforceability of Non-Compete Provision
Appellant argues that the non-competition provision is unenforceable because (1) it contains a penalty clause and (2) it is broader than necessary to protect respondents' business. Appellant first asserts that, because the non-competition provision authorizes termination of payments based on a breach that does not cause any damage, the provision is an unenforceable penalty clause. Appellant did not argue this issue before the district court, and we need not review it on appeal. Thiele , 425 N.W.2d at 582.
Appellant also asserts that the non-competition provision in the consulting agreement is over broad and therefore unenforceable. The provision is over broad, according to appellant, because it prohibited him from having any interest in any hair salon anywhere in the United States for 11 years.
Minnesota law recognizes a distinction between non-compete agreements associated with employment contracts and those arising as part of the sale of a business. Bennett v. Storz Broadcasting Co. , 270 Minn. 525, 534, 134 N.W.2d 892, 899 (1965). The reasonableness of a non-compete agreement arising out of the sale of a business is determined by a three-step test:
[1] whether the restriction exceeds the protection necessary to secure the goodwill purchased; [2] whether the restriction places an undue hardship on the covenantor; and [3] whether the restriction has a deleterious effect on the interests of the general public.
Bess v. Bothman , 257 N.W.2d 791, 795 (Minn. 1977).
Here, the restriction does not exceed the protection necessary to secure the goodwill purchased. Maxim's and Regis have beauty salons in department stores and shopping malls throughout the country. Respondent's purchase of Maxim's goodwill extends nationwide, and the non-compete provision is not over broad in prohibiting appellant from participation in the hairstyling business anywhere in the country. Nor does the restriction place an undue hardship on appellant. Although appellant claims he is prohibited from having an interest in any hair salon, the non-compete provision merely states that he cannot work in the hair salon business and collect his monthly consulting agreement payments. Under the terms of the consulting agreement, appellant can either collect $12,707 a month for staying out of the hair salon business or he can get a job in the hair salon business and forfeit the payments. Appellant is not kept from earning a living. Finally, the non-compete provision has no deleterious effects on the public.
Appellant also asserts that the provision is over broad because it prohibits him from working in department store salons, a segment of the industry that has been "wholly rejected" by respondents. Although respondents' salons are freestanding salons in shopping malls, it is incorrect to say they are not in direct competition with department store salons. Both freestanding and in-store salons are found in malls and would be listed in the mall directory. Persons looking for beauty salon service would have to choose between the in-store and freestanding salons. The salons offer substantially identical services in the same locations; they are clearly in competition with each other.
The district court did not err in granting summary judgment in favor of respondents.