Summary
holding basis for allegations in counterclaim arose out of same transactions or series of events that led to initial suit between these parties: employment relation and employment contracts between parties
Summary of this case from McCoy v. Deffenbaugh Industries, Inc.Opinion
Case No. 01-4077-SAC
February 12, 2003.
MEMORANDUM AND ORDER
This case comes before the court on defendants' Schuckman Vsetecka, McClure, Cooley, and Derringer's motion to dismiss certain counts, and plaintiff's motion to dismiss certain counterclaims. Defendants' motion, premised upon Fed.R.Civ.P. 12(b)(6), seeks to dismiss plaintiff's contract-based claims for damages or injunctive relief in counts I and VI of the second amended complaint. Plaintiff's motion seeks to dismiss pursuant to Fed.R.Civ.P. 12(b)(6) defendant Schuckman's counterclaim alleging defamation and additionally seeks to dismiss pursuant to Fed.R.Civ.P. 12(b)(1) defendants Derringer, Vsetecka, Cooley and McClure's counterclaims alleging violations of the Kansas Wage Payment Act.
• DEFENDANTS' MOTION TO DISMISS
Rule 12(b)(6) Standards
A court may dismiss a complaint for "failure to state a claim upon which relief can be granted." Fed.R.Civ.P. 12(b)(6). Dismissal should not be granted "unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief," GFF Corp. v. Associated Wholesale Grocers, Inc., 130 F.3d 1381, 1384 (10th Cir. 1997) (quoting Conley v. Gibson, 355 U.S. 41, 45-46 (1957)), or unless an issue of law is dispositive, Neitzke v. Williams, 490 U.S. 319, 326 (1989). "The purpose of Rule 12(b)(6) is to allow a defendant to test whether, as a matter of law, the plaintiff is entitled to legal relief even if everything alleged in the complaint is true." Mayer v. Mylod, 988 F.2d 635, 638 (6th Cir. 1993); see Hospice of Metro Denver, Inc. v. Group Health Ins. of Oklahoma, 944 F.2d 752, 753 (10th Cir. 1991) ("Dismissal of a case pursuant to Fed.R.Civ.P. 12(b)(6) requires the legal determination that the plaintiff can prove no set of facts in support of his claim to entitle him to relief.") (citations omitted). The Tenth Circuit has observed that the federal rules "`erect a powerful presumption against rejecting pleadings for failure to state a claim.'" Maez v. Mountain States Tel. and Tel., Inc., 54 F.3d 1488, 1496 (10th Cir. 1995) (quoting Morgan v. City of Rawlins, 792 F.2d 975, 978 (10th Cir. 1986)).
A court judges the sufficiency of the complaint accepting as true all well-pleaded facts, as distinguished from conclusory allegations, Maher v. Durango Metals, Inc., 144 F.3d 1302, 1304 (10th Cir. 1998), 1219, and drawing all reasonable inferences from those facts in favor of the plaintiff. Witt v. Roadway Express, 136 F.3d 1424, 1428 (10th Cir.), cert. denied, 525 U.S. 881 (1998); see Southern Disposal, Inc. v. Texas Waste Management, 161 F.3d 1259, 1262 (10th Cir. 1998) (court "need not accept . . . conclusory allegations as true."). It is not the court's function "to weigh potential evidence that the parties might present at trial." Miller v. Glanz, 948 F.2d 1562, 1565 (10th Cir. 1991). The court construes the allegations in the light most favorable to the plaintiff. Scheuer v. Rhodes, 416 U.S. 232, 236 (1974); Hall v. Bellmon, 935 F.2d 1106, 1109 (10th Cir. 1991).
These deferential rules, however, do not allow the court to assume that a plaintiff "can prove facts that it has not alleged or that the defendants have violated the . . . laws in ways that have not been alleged." Associated General Contractors v. California State Council of Carpenters, 459 U.S. 519, 526 (1983) (footnote omitted). Dismissal is a harsh remedy to be used cautiously so as to promote the liberal rules of pleading while protecting the interests of justice. Cayman Exploration Corp. v. United Gas Pipe Line Co., 873 F.2d 1357, 1359 (10th Cir. 1989).
A 12(b)(6) motion must be converted to a motion for summary judgment if "matters outside the pleading are presented to and not excluded by the court" and "all parties . . . [are] given reasonable opportunity to present all material made pertinent to such a motion by Rule 56." Fed.R.Civ.P. 12(b). Written documents attached to the complaint as exhibits are considered part of the complaint and may therefore be considered in connection with a motion to dismiss under Rule 12(b). Hall, 935 F.2d at 1112 (citing Fed.R.Civ.P. 10(c)). "[I]f a plaintiff does not incorporate by reference or attach a document to its complaint, but the document is referred to in the complaint and is central to the plaintiff's claim, a defendant may submit an indisputably authentic copy to the court to be considered on a motion to dismiss." GFF Corp., 130 F.3d at 1384.
Defendants have submitted affidavits for "clarification of the pleadings before the court, but defendants do not wish to submit extrinsic evidence for the court's consideration." (Dk. 132, p. 3.) Accordingly, the affidavits shall play no part in the court's decision on the dispositive issues. See Interior Contractors, Inc. v. Board of Trustees of Newman Memorial County Hosp., 185 F. Supp.2d 1216, 1218-1219 (D.Kan. 2002). Thus the court follows the standards governing Rule 12(b)(6), without resorting to the standards and procedures governing summary judgment motions.
Facts
The controlling issue in this motion is whether certain covenants not to compete included in employment agreements signed by defendants are valid and enforceable. Defendants assert the covenant not to compete was not ancillary to an otherwise enforceable agreement and was unreasonably broad in scope. The parties agree that this issue is to be determined by reference to the substantive law of the state of Texas, pursuant to a choice of law clause in the relevant employment contract. See, Dk. 1, Exh. A. The court will assume, for purposes of this motion, that Texas state law applies. Under Texas law, the enforceability of a covenant not to compete is a question of law. Light v. Centel Cellular Co. of Texas, 883 S.W.2d 642, 644 (Tex. 1994).
The court notes, however, that the relevant contract additionally contains a forum selection clause, indicating that any litigation arising under the contract shall be in Texas.
A covenant not to compete is enforceable only if (1) it is ancillary to or part of an otherwise enforceable agreement at the time the agreement is made, and (2) it contains reasonable limitations on time, geographical area, and scope of activity that do not impose a greater restraint than necessary to protect the goodwill or other business interest of the promisee. Tex. Bus. Com. Code Ann. § 15.50 (Vernon 2002). Strickland v. Medtronic, Inc., 2003 WL 187436 (Tex.App.-Dallas, Jan. 29, 2003).
Defendants concede that the parties entered into an otherwise enforceable agreement. (Dk. 118, p. 9.) Accordingly, the court decides whether the covenant not to compete was ancillary to or part of that otherwise enforceable agreement. Light, 883 S.W.2d at 646-47.
A covenant not to compete is ancillary to an otherwise enforceable agreement only when (1) the employer's consideration in the otherwise enforceable agreement gives rise to the employer's interest in restraining the employee from competing, and (2) the covenant is designed to enforce the employee's consideration in the otherwise enforceable agreement. Id. at 647. Strickland, 2003 WL 187436 at *3.
The parties address whether the following constitute sufficient consideration between the parties: the contract's notice of termination requirements, defendants' promises to return proprietary information and not disclose it, plaintiff's agreement to provide training to defendants, and plaintiff's agreement to place defendants in the position of "soliciting agent." Curiously, none of the parties mention the language in the severability clause, which indicates that the defendants received additional monetary consideration for the covenant not to compete. This language states:
Employee agrees that the noncompetition covenants, nondisclosure covenants, and covenant not to hire set forth above each constitute separate agreements independently supported by good and adequate consideration in the amount of $10, the receipt and sufficiency of which is hereby acknowledged by Employee, and shall be severable from the other provisions of, and shall survive, this Agreement.
Dk. 1, Exh. A. p. 3. The court is convinced that the parties have not fully considered the effect of this clause, and queries whether other factors relevant to the court's determination of this issue have also been overlooked.
Similarly, the separate issue of the reasonableness of the agreement's limitations on time, geographical area, and scope of activity cannot be determined without additional facts regarding the goodwill or other business interest of the plaintiff, the nature of the business conducted by both entities, and other crucial factors. In short, the issues raised in defendants' motion to dismiss are more appropriately resolved on a motion for summary judgment, after all relevant facts have been presented to the court. Therefore, defendants' motion to dismiss shall be denied.
PLAINTIFF'S MOTION TO DISMISS
Plaintiff seeks to dismiss defendant Schuckman's counterclaim alleging defamation, pursuant to Fed.R.Civ.P. 12(b)(6), and defendants Derringer, Vsetecka, Cooley and McClure's counterclaims alleging violations of the Kansas Wage Payment Act, pursuant to Fed.R.Civ.P. 12(b)(1).
Defamation
Defendant Schuckman's counterclaim which plaintiff seeks to dismiss alleges that plaintiff made defamatory statements to third parties with the intent to damage defendant Schuckman's reputation and cause injury to his business. (Dk. 20, p. 9.) "In particular, on or about June 25, 2001, one Gary Davis, an employee of Plaintiff, publicized a statement that ACA does not pay on claims and is going bankrupt or out of business. At least two other employees of Plaintiff publicized similar statement. (sic)."
Plaintiff contends that this counterclaim fails to allege that any statement resulted in harm to any person defamed. Instead, the allegedly defamatory statements relate solely to ACA, a separate defendant which is not an individual person, but a business entity. Defendant counters that the case caption identifies defendant Schuckman as Dominic Schuckman d/b/a/ Schuckman Marketing Group/ACA, and that the counterclaim "can and should be construed as against Dominic Schuckman d/b/a/ Schuckman Marketing Group/ACA." Dk. 95, p. 5.
Defendant's counterclaim for defamation invokes the common law of the State of Kansas, and plaintiff does not dispute application of that law. The rules applicable to this motion to dismiss for failure to state a claim will not be repeated, having been set forth above.
The elements of defamation under Kansas law are not in dispute. The tort of defamation includes both libel and slander. The elements of the wrong include [1] false and defamatory words [2] communicated to a third person [3] which result in harm to the reputation of the person defamed. A corporation may be liable for the defamatory utterances of its agent which are made while acting within the scope of his authority. Luttrell v. United Telephone System, Inc., 9 Kan. App. 2d 620, 620-21 (1984), aff'd, 236 Kan. 710 (1985) (citations omitted).
This motion poses the converse scenario: whether a legal entity has a reputation which may be defamed and harmed by an individual person's words. Kansas cases have not specifically addressed this issue. Cf, State v. Williams, 85 P. 938, 940 (Kan. 1906) (discussing section 2271, Gen. St. 1901, which defined the word "person," as used in the statute establishing the crime of libel, to include a private corporation as well as an individual).
The Restatement of Torts recognizes the tort of defamation of a corporation, in defining it as follows:
One who publishes defamatory matter concerning a corporation is subject to liability to it:
(a) if the corporation is one for profit, and the matter tends to prejudice it in the conduct of its business or to deter others from dealing with it, or
(b) if, although not for profit, it depends upon financial support from the public, and the matter tends to interfere with its activities by prejudicing it in public estimation.
REST 2d TORTS § 561 (1977). The Tenth Circuit has cited this section with approval. See Atlas Sewing Centers, Inc. v. National Association of Independent Sewing Machine Dealers, 260 F.2d 803, 807 (10th Cir. 1958); Utah State Farm Bureau Federation v. National Farmers Union Service Corp., 198 F.2d 20, 22 (10th Cir. 1952).
Most other jurisdictions which have examined the issue have recognized that a corporation's business reputation is protected from defamatory statements directed at the corporation's financial soundness, integrity, and other business related matters. See, e.g., Levitt v. S.C. Food Service, Inc., 820 F. Supp. 366, 367 (N.D.Ill. 1993) (finding aspersions which undercut a corporation's reputation for discharging its duties with integrity and have the likely effect of harming the business fall within the ambit of defamation per se); Brown Williamson Tobacco Corp. v. Jacobson, 713 F.2d 262 (7th Cir. 1983) (if a corporation's reputation "for adhering to the moral standards of the community in which it sells its products" is attacked "in a fashion likely to harm the corporation seriously the corporation has been libeled under Illinois law."); Diplomat Elec., Inc. v. Westinghouse Elec. Supply Co., 378 F.2d 377, 382-83 (5th Cir. 1967) (holding that an electrical supplier's statement that a corporation had bad credit was actionable defamation because it impugned the corporation's business ability or its method of doing business); Brayton v. Crowell-Collier Pub. Co. 205 F.2d 644, 646 (2d Cir. 1953) (citing general rule that a corporation may maintain an action for libel without proof of special damage if the charge is defamatory and injuriously and directly affects its credit or the management of its business and necessarily causes pecuniary loss); Pullman Standard Car Mfg. Co. v. Local Union No. 2928 of United Steelworkers of Am., 152 F.2d 493, 495-96 (7th Cir. 1945) (holding that a labor union's statements in union newspaper that Pullman Corporation lied about its profits were actionable defamation against the business reputation of the corporation); Dupont Eng'g Co. v. Nashville Banner Publishing Co., 13 F.2d 186, 188-89 (M.D.Tenn. 1925) (holding that a publication alleging fraud by a corporation in attaining government contracts is actionable defamation because it reflects on the corporation's method of doing business); but see, Martin Marietta Corp. v. Evening Star Newspaper Co., 417 F. Supp. 947, 955-56 (D.D.C. 1976) (raising concerns about treating corporations identical to natural persons in defamation cases).
The court recognizes that ACA, the entity allegedly defamed, is not a corporation, but believes that the same analysis set forth in § 561should apply generally to any business entity, and specifically to ACA, the d/b/a/ at issue here. The court finds that the pleading, in stating that ACA does not pay on claims and is going bankrupt or out of business, sufficiently alleges a matter which may tend to prejudice ACA in the conduct of its business or deter others from dealing with it. The court further finds that because of the nature of a d/b/a/ business and the close personal association between the individual and the business he conducts another name, the targeted counterclaim sufficiently states a claim for relief. Accordingly, plaintiff's motion to dismiss this defamation counterclaim shall be denied
To withstand a summary judgment motion, defendant will, of course, have the burden to show injury to its reputation because of the statements made by plaintiff. See Pfannenstiel v. Osborne Publishing Co., 939 F. Supp. 1497, 1501 (D.Kan. 1996).
Kansas Wage Payment Act
The court next addressed plaintiff's motion to dismiss defendants Derringer, Vsetecka, Cooley and McClure's counterclaims which allege violations of the Kansas Wage Payment Act. Plaintiff contends that these wage payment counterclaims should be dismissed for lack of subject matter jurisdiction pursuant to Fed.R.Civ.P. 12(b)(1) because they do not arise out of the same transaction or occurrence as the acts set forth in the complaint.
The court disagrees. The basis for the allegations in the counterclaim all arise out of the same transactions or series of events that lead to the initial suit between these parties, namely the employment relation and employment contracts between the parties. This court's subject matter jurisdiction is established. See Fed.R.Civ.Pro. 13(a); Shump v. Balka, 574 F.2d 1341, 1346 (10th Cir. 1978).
IT IS THEREFORE ORDERED that defendants' motion to dismiss (Dk. 117) is denied, and that plaintiff's motion to dismiss (Dk. 92) is denied.