September 23, 2010
Business Associations Meets Employment Law
In my employment law course yesterday, I taught the North Dakota case Earthworks, Inc.v. Sehn (here). I use the case as part of my section on covenants not to compete, and I like it because it also provides a straight-forward opportunity to discuss statutory interpretation. Beyond that, it provides a great opportunity to discuss the need to view cases as a whole and not as topic specific, despite the name of the course or client context in which such cases arise. That is, just because I was teaching the class in Employment Law, it is not solely an employment law case -- there are other issues, too.
The non-compete clause in Earthworks arose as part of an agreement through which Earthworks bought Mr. Sehn's 50% stock holdings so that the other 50% owner, Mr. Marquart hold 100% of the remaining stock. The non-compete agreement provided that Mr. Sehn would not compete with Earthworks in the state of North Dakota for two years.
The applicable statute on non-compete clauses is as follows:
North Dakota Century Code 9-08-06. In restraint of business void - Exceptions.
Every contract by which anyone is restrained from exercising a lawful profession, trade, or business of any kind is to that extent void, except:
1. One who sells the goodwill of a business may agree with the buyer to refrain from carrying on a similar business within a specified county, city, or a part of either, so long as the buyer or any person deriving title to the goodwill from the buyer carries on a like business therein.
2. Partners, upon or in anticipation of a dissolution of the partnership, may agree that all or any number of them will not carry on a similar business within the same city where the partnership business has been transacted, or within a specified part thereof.
I provide the students with only the facts, the contract clause at issue, and the statute above to discuss how we might attack the problem. I start with asking them which statute applies. Many of my students haven't taken BA, so Marquart and Sehn look like partners to them -- thus a brief discussion of the differences between partners and corporations. (Some students noted that it doesn't matter, at least in one sense, because the scope of the non-compete agreement -- the entire state of North Dakota -- violates either paragraph of the statute, which is correct.)
Next, we discuss the requirements for a valid North Dakota non-compete clause under paragraph 1. We discuss whether the goodwill was purchased in the sale. Many students say no, again an opportunity to talk about corporate structure and what you get in a stock purchase. Earthworks argued that goodwill did not need to be mentioned specifically because the sale of goodwill was implicitly part of the transaction. The court agreed, quoting Bessel v. Bethke, 56 N.D. 1, 215 N.W. 868, 869-870 (1927):
Where one sells his stock he necessarily disposes of his interest in the good will of the business conducted by the corporation to the same extent as he parts with his interest in any other property of the corporation. And where, as in the instant case, he disposes of all his stock and severs his connection with a business that had been in a measure dependent for its success upon his skill or ability and contracts at the same time not to re-engage in the same business within an area permitted by the statute, he has, in fact, sold the good will within the exception, and the contract is valid.
Finally, we talk about the outcome of the case. The court upheld the clause, but restricted the scope to the county as required by statute. This gave us a chance to discuss the policy implications of rewriting the clause to repair the faulty portion (thus providing a legal result closer to what the parties seem to have negotiated) as opposed to the equally reasonable possible result of throwing out the entire non-compete provision because it violated the statute on its face. (Note also that the latter becomes even more reasonable, in my view, given that both parties were "represented by an attorney." Oops.)
A lot of students seem to really enjoy seeing the overlap of their various course subjects and find it more exciting and realistic. Some students, though, probably find the overlap between courses and topics frustrating. I just hope this group of students still appreciate that real cases are not employment law cases, or civil procedure cases, or business associations cases -- they are client problems that those clients hire lawyers to address.