First American Title Insurance et al v. Northwest Title Insurance Agency et al
Filing
302
MEMORANDUM DECISION AND ORDER granting in part and denying in part 217 Motion for Partial Summary Judgment. Signed by Judge David Nuffer on 10/18/16. (dla)
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF UTAH, CENTRAL DIVISION
FIRST AMERICAN TITLE INSURANCE
COMPANY and FIRST AMERICAN TITLE
COMPANY, LLC,
Plaintiff,
MEMORANDUM DECISION AND
ORDER GRANTING IN PART AND
DENYING IN PART FIRST
AMERICAN’S MOTION FOR
PARTIAL SUMMARY JUDGMENT
v.
Case No. 2:15-cv-00229-DN
NORTHWEST TITLE INSURANCE
AGENCY, LLC, MICHAEL SMITH, JEFF
WILLIAMS, and KRISTI CARRELL,
District Judge David Nuffer
Defendant.
BACKGROUND
Plaintiffs First American Title Insurance Company and First American Title Company,
LLC (collectively “First American”) brought suit against Northwest Title Insurance Agency,
LLC (Northwest) and Michael Smith, Jeff Williams, and Kristi Carrell (collectively “Individual
Defendants”). 1 The first three causes of action are only against the Individual Defendants: Count
I, Michael Smith breach of contract; Count II, Jeff Williams breach of contract; Count III, Kristi
Carrell breach of contract.
In this motion, 2 First American seeks partial summary judgment on three narrow issues
related only to those first three causes of action: (1) “that all rights to enforce the Individual
Defendants’ employment agreements transferred to First American by operation of law as part of
1
2
Complaint, docket no. 2, filed April 3, 2015.
Plaintiffs’ Motion for Partial Summary Judgment and Memorandum in Support (Motion), docket no. 217, filed
June 9, 2016.
the merger” between Equity Title and First American; 3 (2) “that the Individual Defendants
violated the non-competition provisions in their contracts”; 4 and (3) that “Smith and Williams
violated non-solicitation provisions in their contracts.” 5 Defendants opposed this motion. 6 First
American replied to their Opposition. 7
This order grants the motion except that it finds that Smith did not violate a noncompetition obligation.
Contents
Background ..................................................................................................................................... 1
Undisputed Material Facts .............................................................................................................. 3
Standard of Review ....................................................................................................................... 12
Discussion ..................................................................................................................................... 13
The Individual Defendants’ employment agreements with Equity transferred to First
American by operation of law as part of the merger. ........................................... 14
(1)
The Individual Defendants’ employment contracts remained in force after
the stock purchase. .................................................................................... 15
(2)
The Individual Defendants’ employment contracts remained in force after
the merger. ................................................................................................ 23
Smith and Williams breached the non-solicitation provisions of their employment
agreements; and Williams and Carrell breached the non-compete provisions of
their employment agreements. .............................................................................. 25
(1)
Smith and Williams violated the non-solicitation provisions of their
employment agreements. .......................................................................... 25
(2)
Williams and Carrell breached the non-compete provisions of their
employment agreements; Smith did not. .................................................. 26
Conclusion .................................................................................................................................... 28
Order ........................................................................................................................................... 29
3
Id. at 1.
4
Id.
5
Id.
6
Opposition to Plaintiffs’ Motion for Partial Summary Judgment (Opposition), docket no. 235, filed July 11, 2016.
7
Reply Memorandum in Further Support of First American’s Motion for Partial Summary Judgment (Reply),
docket no. 293, filed October 3, 2016.
2
UNDISPUTED MATERIAL FACTS 8
1.
Michael Smith signed an Employment Agreement (Smith Agreement) with
Equity Title Insurance Agency, Inc. (Equity) on August 15, 2004. 9
2.
Smith is an attorney. 10
3.
Smith negotiated the terms of the Smith Agreement, read it before signing it, and
agreed to its terms. 11
4.
Section 7 of the Smith Agreement is titled “Noncompetition.” 12
5.
Section 7 of the Smith Agreement provides:
During his employment with Equity, and for a period of one (1) year thereafter, if
terminated for “Cause” (as defined in Section 10 below), Smith shall not, directly,
or indirectly, either as an employee, employer, consultant, director, or in any other
individual or representative capacity, engage or participate in any business that is
in competition in any manner whatsoever with the business of Equity, covering an
area in all directions 100 miles from any of the offices of Equity. If Smith is
terminated without Cause, the period for which he shall not compete with Equity
as described above shall be reduced to six (6) months from the date of his
termination. Notwithstanding the foregoing, nothing herein shall restrict Smith’s
right to practice law subsequent to termination of his employment with Equity;
provided, however, that Smith shall not be employed by any person or entity
engaged in the title insurance business. 13
6.
Section 8 of the Smith Agreement is titled “Non-solicitation.” 14
7.
Section 8 of the Smith Agreement provides:
8
This summary of the undisputed material facts is derived from the parties’ memoranda. Edits have been made to
remove disputed material. Those edits are not indicated in the summary. The defendants include many factual and
legal glosses in the sections of the Opposition labeled “Defendants’ Response to Plaintiffs’ Statement of Elements
and Undisputed Material Facts” and “Defendants’ Additional Material Undisputed Facts.” Opposition at vi–xc. Per
Docket Text Order granting in part and denying in part 242 Motion to Strike, docket no. 286, entered September 27,
2016, “[a]ll unnecessary factual and legal glosses in [the Opposition] will be disregarded.”
9
Motion at 2; Opposition at vii.
10
Motion at 2; Opposition at vii.
11
Motion at 2; Opposition at vii.
12
Motion at 2; Opposition at vii.
13
Motion at 2–3; Opposition at vii–viii.
14
Motion at 3; Opposition at viii.
3
During his employment with Equity, and for a period of one (1) year thereafter,
Smith, on behalf of himself or any other person or entity, shall not hire, attempt to
hire, recommend for hire, or employ, directly or indirectly, any employee of
Equity. During this one-year period of time, Smith shall not encourage or induce
any employee of Equity to resign from Equity or assist any other employer in
recruiting or hiring any employee away from Equity.
8.
Under Section 12(b) of the Smith Agreement, Smith agreed that “[t]he terms,
conditions, and obligations of this Agreement shall inure to the benefit of, and be binding upon
the parties hereto and the respective heirs, executors, administrators, successors and assigns
thereof.” 15
9.
Jeff Williams signed an Employment Agreement (Williams Agreement) with
Equity on May 16, 2006. 16
10.
Williams read the Williams Agreement before signing it and agreed to its
terms. 17
11.
Section 7 of the Williams Agreement is titled “Noncompetition.” 18
12.
Section 7 of the Williams Agreement provides:
During his employment with Equity, and for a period of one (1) year thereafter, if
terminated for cause, Williams shall not, directly, or indirectly, either as an
employee, employer, consultant, director, or in any other individual or
representative capacity, engage or participate in any business that is in
competition in any manner whatsoever with the business of Equity, covering an
area in all directions 100 miles from any of the offices of Equity. If Williams is
terminated without cause, this non-competition provision shall not apply after
such termination. 19
13.
Section 8 of the Williams Agreement is titled “Non-solicitation.” 20
15
Motion at 3; Opposition at ix.
16
Motion at 3; Opposition at ix.
17
Motion at 3: Opposition at ix.
18
Motion at 3; Opposition at ix.
19
Motion at 3; Opposition at ix–x.
20
Motion at 4; Opposition at x.
4
14.
Section 8 of the Williams Agreement provides:
During his employment with Equity, and for a period of one (1) year thereafter,
Williams, on behalf of himself or any other person or entity, shall not hire,
attempt to hire, recommend for hire, or employ, directly or indirectly, any
employee of Equity. During this one-year period of time, Williams shall not
encourage or induce any employee of Equity to resign from Equity or assist any
other employer in recruiting or hiring any employee away from Equity. If
Williams is terminated without cause, this non-solicitation provision shall not
apply after such termination. 21
15.
Section 12 of the Williams Agreement provides:
Williams may terminate his employment with Equity at any time upon 30 days’
prior written notice to Equity. Upon such termination, the one-year period of noncompetition and non-solicitation described in Section 7 and Section 8 above shall
apply. 22
16.
Under Section 13(b) of the Williams Agreement, Williams agreed that “[t]he
terms, conditions, and obligations of this Agreement shall inure to the benefit of, and be binding
upon the parties hereto and the respective heirs, executors, administrators, successors and assigns
thereof.” 23
17.
Kristi Carrell signed a letter agreement with Equity (Carrell Agreement) regarding
“Terms of Employment” on August 1, 2003. 24
18.
Carrell read the Carrell Agreement before signing it and did not inform anyone
that she did not agree to its terms. 25
19.
Section 7 of the Carrell Agreement is titled “Non-Competition.” 26
20.
Section 7 of the Carrell Agreement provides:
21
Motion at 4; Opposition at x–xi.
22
Motion at 4; Opposition at xi.
23
Motion at 4; Opposition at xi.
24
Motion at 4; Opposition at xi.
25
Motion at 4; Opposition at xi–xii.
26
Motion at 4; Opposition at xii.
5
During your employment with Equity Title and for a period of one year thereafter,
you may not participate in any competing title insurance or escrow business
within a 40-mile radius of any of Equity Title’s offices. 27
21.
In September 2003, First American acquired a 25% ownership interest in
Equity. 28
22.
First American acquired an additional 25% ownership interest in Equity in March
2005, making it a 50% owner. 29
23.
In October 2008, First American purchased an additional 45% ownership interest
in Equity through a Stock Purchase Agreement, making it the majority owner. 30
24.
The Stock Purchase Agreement (SPA) is dated October 15, 2008. It was executed
by First American Title Insurance Company as the Buyer, Orange Coast Title Company as the
Seller, and Equity Title Insurance Agency, Inc., as the Company. 31
25.
Under Section 2.9(b) and as reflected in Schedule 2.9(a) of the SPA, the Smith
Agreement and the Williams Agreement were defined as “Material Contracts” that remained in
“full force and effect.” 32
26.
Equity was not dissolved as a consequence of the SPA. It remained a separate
legal entity and a division of First American until it merged with First American in 2012. 33
27
Motion at 4–5; Opposition at xii.
28
Motion at 5; Opposition at xii.
29
Motion at 5; Opposition at xii.
30
Motion at 5; Opposition at xii.
31
Motion at 5; Opposition at xiii.
32
Motion at 5; Opposition at xv–xvii.
33
Motion at 5; Opposition at xvii–xviii.
6
27.
First American acquired the remaining 5% ownership interest in Equity in
February 2009, making it the sole owner. 34
28.
The Individual Defendants worked for the Equity–First American entity until
Equity and First American merged in 2012. 35
29.
In 2012, First American Title Company, LLC, and Equity Title Insurance
Agency, LLC, filed Articles of Merger and an Agreement and Plan of Merger with the Utah
Department of Commerce. 36
30.
The Preamble and Section 6 of the Agreement and Plan of Merger provide that
Equity and First American were to “merge into a single entity.” The effect was that Equity’s
“separate existence” ceased and it “merged with and into the Surviving Entity,” which kept the
name “First American Title Company, LLC.” 37
31.
Section 6 of the Agreement and Plan of Merger provides that “[a]ll the assets,
rights, privileges, powers, immunities, purposes and property (real, personal, intellectual and
mixed), of each of the Constituent Entities, and all debts due to either of them, shall be
transferred to and vested in the Surviving Entity.” 38
32.
Each of the Individual Defendants continued their employment, in some capacity,
with First American after the merger. 39
34
Motion at 5; Opposition at xviii.
35
Motion at 5–6; Opposition at xviii–xxxv.
36
Motion at 6; Opposition at xxxv.
37
Motion at 6; Opposition at xxxv.
38
Motion at 6; Opposition at xxxvi.
39
Motion at 6; Opposition at xxxvi.
7
33.
On December 21, 2011—more than three years after the execution of the SPA—
Smith sent an e-mail to Mark Webber asking “how to submit mileage reimbursement requests.” 40
34.
Regarding the monthly car allowance provided for in the Smith Agreement, Smith
stated: “As I mentioned to you when we discussed this, I was under the impression the car
allowance had been wrapped into the base salary a long time ago.” So, he continued, “although it
may appear as if I am asking for more, it really is no more than it once was.” Webber responded:
“Apparently your car allowance had not been rolled up because of your employment contract,
but I have asked Kurt to seek approval to have it rolled up so that you can start getting mileage
on top of it.” 41
35.
On two occasions in 2011, Smith sent e-mails regarding First American’s right to
enforce non-competition provisions in contracts that other employees had signed with Equity. 42
36.
On June 17, 2011, Smith sent an e-mail to Mark Webber concerning an escrow
officer. The escrow officer had signed an employment contract with Equity on December 5,
2005. The contract included a non-competition provision prohibiting the escrow officer from
competing with Equity “anywhere within 40 miles of any office of Equity Title located in the
State of Utah” for a “period of one (1) year following the termination” of his employment with
Equity. 43
37.
The escrow officer told Smith “about an offer he received from a title company
that supposedly would pay him a lot more.” Smith relayed:
[The escrow officer] has done a nice job of developing some clients, but we have
put a lot of great business in his lap. He has done a good job of maintaining that
40
Motion at 7; Opposition at xxxvi–xxxvii.
41
Motion at 7; Opposition at xxxvii–xxxviii.
42
Motion at 7; Opposition at xxxviii–xxxix.
43
Motion at 7; Opposition at xxxix.
8
business, but it is business we could have definitely passed on to other closers in
the office . . . . My response was firm – I told him we were not in a position to
offer him any more money, and that we would take him to the mat on the
noncompete if he left for another title company. 44
38.
In that same e-mail, Smith stated:
In response [the escrow officer] wondered out loud if I thought the non-compete
restriction would hold up given, in his words “Equity is not the same company
after First American took over.” I responded that I absolutely believed the
noncompete would be enforceable and that we would seek to enforce it if he
leaves.
39.
In 2012, Williams entered into a bonus plan with First American. 45
40.
In 2012, Carrell entered into a bonus plan with First American. 46
41.
In 2014, Smith entered into a bonus plan with First American. 47
42.
Smith’s employment with First American ended on March 9, 2015. 48
43.
Northwest Title opened to the public on March 9, 2015. 49
44.
Smith is employed as a Principal of Northwest Title. He manages the day-to-day
business of Northwest Title. 50
45.
Williams voluntarily terminated his employment with First American on March
10, 2015. 51
44
Motion at 7–8; Opposition at xxxix–xl.
45
Exhibit 11 Jeff Williams’ Director, Escrow Staff Development Production Bonus Plan (the “Williams/FATCO
Bonus Plan”) [Filed Under Seal], docket no. 239-2, filed July 11, 2016.
46
Exhibit 12 Kristi Carrell’s Escrow Branch Manager Production Bonus Plan (the “Carrell/FATCO Bonus Plan”)
[Filed Under Seal], docket no. 239-3, Filed July 11, 2016.
47
Exhibit 10 Mike Smith’s Utah legal Counsel Production Bonus Plan (the “Smith/FATCO Bonus Plan” [Filed
Under Seal], docket no. 239-1, filed July 11, 2016.
48
Motion at 8; Opposition at xl–xli.
49
Motion at 8; Opposition at xl–xlii.
50
Motion at 8; Opposition at xliii.
51
Motion at 8; Opposition at xliii.
9
46.
Williams is employed as Executive Vice President of Escrow Operations for
Northwest Title. He oversees the day-today operations of escrow for Northwest Title. 52
47.
Carrell resigned from First American on March 10, 2015. 53
48.
Carrell is employed as a Vice President, an Escrow Officer, and Branch Manager
of Northwest Title’s Sugar House office. 54
49.
Northwest Title’s main corporate office also operates as its Sugar House branch
office. It is located at 2150 South 1300 East, Suite 350, Salt Lake City, Utah 84106. Each of the
Individual Defendants works out of Northwest Title’s Corporate/Sugar House office. 55
50.
First American’s office in Sugar House is located at 2180 South 1300 East, Suite
130, Salt Lake City, Utah 84106. 56
51.
Northwest Title’s Corporate/Sugar House office is less than a mile from and
actually just a few hundred feet from First American’s Sugar House office. Smith testified that it
is in the “building next door.” 57
52.
After resigning from First American, the Individual Defendants have been
providing title insurance, escrow, and closing services on behalf of Northwest Title in direct
competition with First American. And, prior to being employed by First American, they also
provided the same or similar services to customers in direct competition with First American. 58
52
Motion at 8; Opposition at xliii–xliv.
53
Motion at 8; Opposition at xliv.
54
Motion at 8; Opposition at xliv.
55
Motion at 9; Opposition at xliv–xlv.
56
Motion at 9; Opposition at xlv.
57
Motion at 9; Opposition at xlv.
58
Motion at 9; Opposition at xlv–xlvi.
10
53.
The Individual Defendants and others regularly solicit various customers and
potential customers of First American and of numerous title companies. 59
54.
The Individual Defendants do not dispute that they have been competing with
First American. 60
55.
The Individual Defendants do not dispute that they have been competing since
they resigned from First American. 61
56.
Smith is an owner of Northwest Title. 62
57.
Williams is an owner of Northwest Title. 63
58.
Besides Smith and Williams, twenty-six other First American employees left First
American to join Northwest at its inception. 64
59.
Between March 10, 2015, and March 24, 2015, Northwest Title hired twenty-
eight employees from First American. 65
60.
Most of the Northwest Title employees who came from First American work in
the same positions and locations as they did at First American. 66
61.
In January 2015, Mike Smith introduced Jeff Williams and Casey Buhler, his
long-time administrative assistant at First American, to Doug Smith. 67
59
Motion at 9; Opposition at xlvi–xlvii.
60
Motion at 9; Opposition at xlviii
61
Motion at 9; Opposition at xlviii.
62
Motion at 10; Opposition at l.
63
Motion at 10; Opposition at l.
64
Motion at 10; Opposition at l–li.
65
Motion at 10; Opposition at li–liii.
66
Motion at 10; Opposition at liii.
67
Motion at 10; Opposition at liii–lvi.
11
62.
Prior to that meeting, Smith had informed Williams and Buhler that he was
considering forming a new title business. Smith told Doug Smith of Williams’s and Buhler’s
interest in the new venture. Doug Smith later hired Williams and Buhler on behalf of Northwest
Title. 68
63.
Mike Smith also directed other First American employees to Doug Smith, who
hired them on behalf of Northwest Title. Carrell got Doug Smith’s information from Mike Smith.
Carrell contacted Doug Smith, who she had never met or spoken to before, and he hired her. 69
64.
After Smith announced his resignation, he was contacted by several people,
including branch managers, who expressed an interest in going to the new company. Mike Smith
referred some of them to Doug Smith. 70
65.
Mike Smith announced his resignation from FATCO on March 9, 2015. Almost
immediately, he was contacted by several people, including a number of branch managers, who
expressed an interest in joining him at the new company. Mike Smith told him or her that he
could make no offers on behalf of Northwest, but they could contact Doug Smith. Mike Smith
testified that he “gave [some of] them Doug [Smith]’s contact information.” 71
STANDARD OF REVIEW
Summary judgment is appropriate if “there is no genuine dispute as to any material fact and
the movant is entitled to judgment as a matter of law.” 72 A factual dispute is genuine when “there is
sufficient evidence on each side so that a rational trier of fact could resolve the issue either way.” 73 In
68
Motion at 10; Opposition at lvi.
69
Motion at 10–11; Opposition at lvi–lvii.
70
Motion at 11; Opposition at lvii–lviii.
71
Motion at 11; Opposition at lix.
72
Fed. R. Civ. P. 56(a).
73
Adler v. Wal-Mart Stores, Inc., 144 F.3d 664, 670 (10th Cir. 1998).
12
determining whether there is a genuine dispute as to material fact, the court should “view the factual
record and draw all reasonable inferences therefrom most favorably to the nonmovant.” 74
The moving party “bears the initial burden of making a prima facie demonstration of the
absence of a genuine issue of material fact and entitlement to judgment as a matter of law.” 75
DISCUSSION
“The elements of a prima facie case for breach of contract are (1) a contract, (2)
performance by the party seeking recovery, (3) breach of the contract by the other party, and (4)
damages.” 76 Acknowledging “that genuine issues of fact may exist as to” the second and fourth
elements, 77 First American’s Motion only relates to the first and third elements. Specifically,
First American seeks summary judgment on the following:
1.
“that all rights to enforce the Individual Defendants’ employment
agreements transferred to First American by operation of law as part of the merger”; 78
2.
“that the Individual Defendants violated the non-competition provisions in
their contracts”; 79 and
3.
“that Messrs. Smith and Williams violated the non-solicitation provisions
in their contracts.” 80
Following that request, this memorandum decision and order will not address every
element in the breach of contract claim. It does not address the full breadth of the question of
whether the employment contracts were valid at formation or whether they were valid after the
stock purchase and merger. And it will not address First American’s performance or the question
74
Id.
75
Id. at 670-71.
76
Bair v. Axiom Design, L.L.C., 20 P.3d 388, 392 (Utah 2001).
77
Plaintiffs’ Motion to Strike Portions of Defendants’ Opposition to Plaintiffs’ Motion for Partial Summary
Judgment at 5, docket no. 242, filed July 2, 2016.
78
Motion at 1.
79
Id.
80
Id.
13
of damages. It is limited to the narrow parameters listed above. Thus, the following sections in
Northwest’s Opposition will not be considered:
1.
Argument Section II, titled: “FATCO Also Fails to Establish the Element
of Damages.” 81
2.
Argument Section III, titled: “FATCO Also Does Not and Cannot
Establish the Element of Its Performance . . .” 82
3.
Argument Sub-section IV(A), titled: “FATCO Would not Be Entitled to
Step into the Shoes of Equity and Thereby Expand or Extend the Individual Defendants’
Obligations.”
4.
Argument Sub-section IV(B), titled: “The Noncompetition and
Nonsolicitation provisions in the Old Equity Contracts Are Unenforceable Because the
Individual Defendants Were not Key Employees.” 83
5.
Argument Sub-section IV(D), titled: “Even if the Noncompetition and
Nonsolicitation Provisions Were Somehow Enforceable . . .” 84
The Individual Defendants’ employment agreements with Equity transferred to First
American by operation of law as part of the merger.
To establish that the Individual Defendants’ employment agreements with Equity
transferred to First American, First American must show that (1) the Individual Defendants’
employment contracts remained in force after First American bought Equity through a stock
purchase; and (2) that the Individual Defendants’ employment contracts remained in force after
Equity and First American merged.
81
Opposition at 10–12.
82
Opposition at 12–21.
83
Opposition at 23–24.
84
Opposition at 25.
14
(1) The Individual Defendants’ employment contracts remained in force after the stock
purchase.
“There are three basic approaches the participants can take to structure” the acquisition of
one corporation by another: 85 statutory merger, asset purchase, or stock purchase. 86 Regarding
asset purchases and stock purchases, the Court of Common Pleas of Pennsylvania in Joyner
Sports Med. Inst. Inc. v. Stejbach 87 determined that the distinction between the two, is “a
distinction without a difference.” 88 Utah law disagrees:
The distinctions between corporate stock and asset purchases are well recognized.
Generally speaking, when all the assets of an ongoing business are purchased, the
purchaser does not acquire the liabilities of the corporation as a stock purchaser
would . . . . Additionally, the purchaser in an asset transaction takes legal title to
the property, i.e., title to property transfers from one party to another . . . .
Conversely, in a stock purchase transaction the corporation's assets remain titled
in the [original] corporation's name. 89
The Court of Chancery of Delaware also values the distinction:
The relationship created by a purchase and sale of assets differs materially from
that resulting from a stock purchase. In the former the buyer becomes the owner
of the sellers' assets. In the latter it does not. In a sale of assets an identity of
corporate interests is created. In a stock purchase the interests remain separate and
distinct. The former has most, if not all of the incidents of a merger, and its result
is the same as a merger. The incidents and result of the latter are substantially
different. In a stock purchase the buyer, having no other business interests as here,
becomes merely a holding company. In a sale of assets the buyer carries on its
business as before, with additional assets. 90
85
Franklin A. Gevurtz, Corporation Law 675 (2d ed. 2010).
86
Id.
87
45 Pa. D. & C.4th 242, 249 (Com. Pl. 1999).
88
Id. at 249.
89
Sachs v. Lesser, 163 P.3d 662, 674 n.18 (Utah Ct. App. 2007) (emphasis added). This case was reversed, on
different grounds, in Sachs v. Lesser, 207 P.3d 1215 (Utah 2008). The Utah Supreme Court preserved the distinction
between asset and stock purchases in the corporate setting. It held that “[d]espite the fact that stocks or shares in a
corporation are generally considered personal property, there are occasions when their transfer is entirely secondary
to the transfer of real property assets.” Id. at 1219. Specifically, it determined that in the real estate transaction
setting, “[a] sale of all of the stock of a corporation has been held to be a sale of its assets.” Id.
90
Orzeck v. Englehart, 41 Del.Ch. 223, 227–28 (Del. Ch. 1963) (citations omitted).
15
Because the corporation whose stock was acquired continues to exist, its interests persist,
including its interests in ongoing contractual obligations. This is a basic tenet of corporation law:
“Shareholders are promised equal participation, not in the ownership, but rather in the use of
Company assets. This is the interest that stock ownership evidences”; 91 “while the individual’s
interest in the partnership or corporation (which could be 100%) would be property of the estate,
the assets of the partnership or corporation would not be.” 92 This is due to the nature of
corporations: “The corporation is a person and its ownership is a nonconductor that makes it
impossible to attribute an interest in its property to its members.” 93 Thus, any contractual
obligation owed the target corporation remains the target corporation’s after a stock purchase.
Otherwise, if each stock purchase undermined the validity of contractual obligations owed the
target corporation, general business continuity would suffer considerably after a single day’s
trading on the NYSE. This cannot be.
Thus, on the day of the Stock Purchase (October 15, 2008), the Individual Defendants’
employment contracts with Equity were valid. Northwest does not appear to dispute this
possibility. Instead, Northwest focusses on what immediately followed the Stock Purchase. 94
According to Northwest, on October 16, 2016, the day after the Stock Purchase, the Individual
Defendants were “terminated”—they were no longer employed by Equity, the target
corporation—and they were from that point forward employed by First American. 95 To reach
91
Dansie v. City of Herriman, 134 P.3d 1139, 1143 (Utah 2006) (emphasis in original).
92
Fowler v. Shadel, 400 F.3d 1016 (7th Cir. 2005) (internal quotation marks omitted).
93
Klein v. Board of Tax Sup’rs of Jefferson County, Ky., 282 U.S. 19 (1930).
94
Opposition at 2–4.
95
Id. In the alternative, Northwest makes essentially the same argument about the Individual Defendants becoming
First American employees upon signing First American bonus plans in 2012 (Williams and Carrell) and 2014
(Smith). Opposition at 5. Because the legal analysis is the same, that argument will not be treated separately.
16
this conclusion, Northwest relies on First American statements from the Complaint, other papers,
and depositions, and pay statements, emails, and other exhibits. 96 This argument and all its
associated citations, however, only form a premise that leads to a false conclusion: i.e., that if
Northwest shows that the Individual Defendants were hired by First American then the noncompete and non-solicitation provisions were triggered. And if those obligations were triggered,
the limitation periods are now lapsed.
But this argument yields an absurd result. If being hired by First American triggered the
Individual Defendants’ non-compete and non-solicitation agreements, 97 then First American
itself obliterated the value of the non-competition agreements. And this logic would mean the
Individual Defendants breached their agreements not to compete by working for First American,
in the same locations, performing essentially similar services, at similar compensation as they
had with Equity. This is not a just result. If they were liable to Equity for breaching their
agreements, who would bring that suit? Surely not Equity, which was controlled by its sole
shareholder, First American. First American would not prohibit work by the valuable employees
in the acquired locations.
After the stock purchase, Equity and all the employees associated with it, became part of
First American’s general corporate purpose. That is, Equity became, according to the undisputed
material facts, a division of First American. 98 It was possible for the individual defendants to
have contractual obligations to both Equity and First American.
On the one hand, the stock purchase left all Equity’s assets, including contractual
obligations owed to it, intact and separate from First American, the acquiring parent corporation.
96
Opposition at xviii–xxxv, responding to the Motion’s Statements of Undisputed Material Facts ¶¶ 29–33.
97
Acknowledging that Carrell’s employment agreement did not include a non-solicitation provision.
98
Undisputed Material Facts ¶ 26.
17
But on the other hand, the stock purchase—which made First American the sole 99 shareholder—
also made Equity part of First American’s larger corporate enterprise.
An email exchange between Kevin Lagerwey, First American’s head of mergers and
acquisitions, and Mike Williams, the representative from Merrill Lynch overseeing the First
American retirement plan, underscores the Janus nature of this transaction:
Mike Williams: “When we spoke yesterday you did not tell me the employees
would be terminated w. Utah and hired directly w. First American Title.” 100
Kevin Lagerwey: “That is not the process. First American currently owns 50% of
the stock of Equity. We are buying another 45% now with the right to buy the 5%
remaining at a time in the future. All employees will remain employed by Equity
Title, Utah. They are terminated from Equity and hired by First American as part
of this transaction.” 101
There does not appear to be any Utah case directly on point. Joyner, from the Court of
Common Pleas of Pennsylvania, seems to be the most factually similar case. In Joyner, two
employees worked for Joyner Sports Medicine Inc. 102 Both employees entered into non-compete
agreements. 103 Eventually, Nova Care Inc., acquired 100 percent of Joyner’s stock. 104 “Although
the Joyner name continued to be presented to the public, it was immediately clear to the
employees of Joyner that they had a new employer.” 105 The employees were required to
99
For sake of clarity, the remaining 5% purchased in 2009 is treated as if it were part of the Stock Purchase. See
Undisputed Material Facts ¶ 27.
100
October 14, 2008, Email String Among Equity Employees, Orange Coast Title Employees, FATCO Employees,
and Representatives from Merrill Lynch at 3, docket no. 235-7, filed July 11, 2016.
101
Id. (emphasis added). Though Northwest argues Lagerwey is referring to two separate entities, “Equity Title of
Utah” and “Equity Title Insurance Agency, Inc.,” Opposition at xxxii–xxxv, it provides no supporting
documentation. The argument is also undermined by Lagerwey’s use of “remain.”
102
Joyner, 45 Pa. D. & C.4th at 244.
103
Id.at 244–45.
104
Id. at 245.
105
Id.
18
acknowledge Nova Care’s employee handbook; 106 Nova Care unilaterally changed the
employees’ benefits package; 107 Nova Care discontinued merit-based salary increases; 108
paychecks were issued by another subsidiary of Nova Care, Nova Care Employee Services
Inc.; 109 and the employees’ W-2 forms reflected Nova Care Employee services Inc. as employer,
“while those paid prior to the acquisition were separated on a W-2 showing Joyner as
‘employer.’” 110
The court in Joyner “conclude[d] as a matter of law that, as of the acquisition date, [the
employees] were no longer employees of Joyner and that they were effectively terminated.” 111
The court then calculated the non-compete period starting from the acquisition date. 112 This
construction rendered later competition by those employees outside the reach of the noncompetition agreement.
First American distinguishes Joyner because the contracts in Joyner did not have
assignability clauses and the Individual Defendants’ contracts do. 113 Under Pennsylvania law,
Strong policy considerations underlie the conclusion that restrictive covenants are
not assignable. Given that restrictive covenants have been held to impose a
restraint on an employee's right to earn a livelihood, they should be construed
narrowly; and, absent an explicit assignability provision, courts should be hesitant
to read one into the contract. 114
106
Id.
107
Id.
108
Id.
109
Id.
110
Id. at 246.
111
Id. at 250.
112
Id. at 250–51.
113
Reply at 8.
114
Joyner, 45 Pa. D. & C.4th at 248.
19
The Individual Defendants’ contracts, however, were not assigned. After the SPA, Equity
remained a viable entity and its interests in contractual assets persisted.
Joyner’s flawed reasoning further weakens its value. The Joyner court begins its “legal
discussion by noting that none of the defendants contest the underlying validity of their
employment agreement or the reasonableness of its terms.” 115 But then, because it disregards the
distinction between an asset purchase and a stock purchase, 116 the court proceeds with a
reasonableness analysis. It states: “The point of focus should not be on the relationship between
the old employer and the new employer, but rather as between the employee and the new
employer.” 117 That analysis, however, is better suited for the second prong of a breach of
contract claim, i.e. “performance by the party seeking recovery.” 118 If the terms of the
employment contract were not honored by the parent entity or if the nature of the non-compete
changed without consent (to name only two possible scenarios), then the employees could show
that the parent corporation had not properly performed its side of the bargain. Thus, the Joyner
court’s conclusion that the employees were “effectively terminated” as of the acquisition date
suffers from an incorrect premise. The court, working under the asset purchase case law, looked
for renewed consent from the acquired corporation’s employees to be bound by the non-compete
agreements, when consent, in the context of a stock purchase, is irrelevant. The point of focus
115
Id. at 246.
116
Id. at 249 (characterizing the distinction between an asset purchase and a stock purchase as a “distinction without
a difference”).
117
Id.
118
Bair, 20 P.3d at 392.
20
should be on the relationship between the old employer and the new employer, specifically on
how one acquired the other. 119
Corporate Express Office Products, Inc. v. Phillips, 120 provides better analysis. In
Corporate Express, two employees signed a non-compete with Bishop Office Furniture
Company. 121 The non-compete prohibited those bound by it from competing with Bishop or
from soliciting Bishop’s customers for one year. Corporate Express of the South, Inc. (CES)
eventually purchased 100 percent of Bishop’s stock. 122 The stock purchase agreement listed the
employees’ non-compete agreements. 123 Before and after the stock purchase, CES and Bishop
both sold furniture and business equipment. 124 CES continued to operate the business under the
Bishop name until one year later when CES and Bishop merged. 125 Shortly thereafter CES
merged with another related entity and changed its name to Corporate Express Office Products,
Inc. 126 After the merger, the employees bound by the non-compete terminated their employment
with Corporate Express Office Products, Inc. 127 The employees then went to a different
employer, allegedly in violation of their non-competition agreements. 128
119
See Siemens Medical Solutions Health Services Corp. v. Carmelengo, 167 F.Supp.2d 752, 759–60 (E.D. Penn.
2001) (finding similar issues with the Joyner decision and determining “that the Supreme Court of Pennsylvania
would decline to follow [the Joyner] court’s reasoning.”).
120
847 So.2d 406 (Fla. 2003).
121
Id. at 407.
122
Id.
123
Id.
124
Id. at 408.
125
Id. at 407.
126
Id.
127
Id. at 408.
128
Id.
21
Corporate Express Office Products, Inc. brought suit against the former employees and
their new employer “for unlawful use of trade secrets and breach of the noncompete
agreements.” 129 The former employees “asserted that Corporate Express had no legal right to
enforce the noncompete agreements because Corporate Express was not their employer when the
agreements were made.” 130
The court held:
[T]here is a clear distinction between the transfer of an asset of a corporation,
such as a franchise agreement, and a transfer of the stock in a corporation itself....
With a stock purchase, the corporation whose stock is acquired continues in
existence, even though there may be a change in its management.... [T]he fact that
there is a change in ownership of corporate stock does not affect the corporation’s
existence or its contract rights, or its liabilities. 131
The employees, therefore, were bound to not compete with Corporate Express because of
the non-compete agreements they signed with Bishop.
Although the Individual Defendants focus on the “termination” argument and related
citations, their argument is essentially the same as that made by the Corporate Express
employees; i.e. that the parent corporation cannot enforce the non-compete because the noncompete agreement was between them and another entity. But First American, as Equity’s sole
shareholder, could “hire” the Individual Defendants to get them, as First American alleges, 132 on
its payroll system without destroying Equity’s contractual assets. Thus the Individual
Defendants’ contracts were valid on October 15, 2008, the day of the stock purchase, and they
were not terminated on October 16, 2008, the date they were “hired” by First American.
129
Id.
130
Id.
131
Id. at 412 (internal quotation marks omitted).
132
Excerpts from Deposition of Kurt Aaron Andrewsen at 56–60, docket no. 235-6, filed July 11, 2016.
22
(2) The Individual Defendants’ employment contracts remained in force after the
merger.
The Agreement and Plan of Merger states that
The board of directors and managers of [First American and Equity] deem[] it
advisable for the general welfare of [First American and Equity] and [their]
shareholders, that [First American and Equity] merge into a single entity pursuant
to [the Agreement and Plan of Merger] and the applicable laws of the States of
Utah and Delaware. 133
Under Utah law, all assets, including contractual obligations owed to the corporations,
transfer and vest in the surviving corporation by virtue of the merger, without any other action by
any party:
(1) When a merger takes effect:
...
(b) The title to all real estate and other property owned by each corporation
party to the merger is transferred to and vested in the surviving corporation
without reversion or impairment. The transfer to and vesting in the surviving
corporation occurs by operation of law. No consent or approval of any other
person is required in connection with the transfer or vesting unless consent or
approval is specifically required in the event of merger by law or by express
provision in any contract, agreement, decree, order, or other instrument to
which any of the corporations so merged is a party or by which it is bound. 134
The Utah Supreme Court interpreted similar statutory language in Aetna Life and Cas. v.
United Pac. Reliance Ins. Companies. 135 The court held that
inasmuch as the merger of corporations results in the transfer of liability of the
merged corporation . . . and also all of its rights, the logical conclusion is that the
surviving corporation . . . simply stands in the same position as that occupied by
the merged corporation . . . prior to the merger. 136
133
Articles of Merger and Agreement and Plan of Merger, docket no. 217-9, filed June 9, 2016.
134
Utah Code Ann. 1953 § 16-10a-1106(1)(b).
135
580 P.2d 230 (Utah 1978) (interpreting the old Business Corporation Act, now-repealed Utah Code 16-10-71(d)).
136
Aetna Life, 580 P.2d at 232.
23
The Tenth Circuit also stated that “[i]n the case of a merger . . . the surviving corporation
automatically succeeds to the rights of the merged corporations to enforce employees’ covenants
not to compete.” 137
Delaware law similarly states:
(a) When any merger or consolidation shall have become effective under this
chapter, for all purposes of the laws of this State the separate existence of all the
constituent corporations, or of all such constituent corporations except the one
into which the other or others of such constituent corporations have been merged,
as the case may be, shall cease and the constituent corporations shall become a
new corporation, or be merged into 1 [sic]of such corporations, as the case may
be, possessing all the rights, privileges, powers and franchises as well of a public
as of a private nature, and being subject to all the restrictions, disabilities and
duties of each of such corporations so merged or consolidated; and all and
singular, the rights, privileges, powers and franchises of each of said
corporations, and all property, real, personal and mixed, and all debts due to any
of said constituent corporations on whatever account, as well for stock
subscriptions as all other things in action or belonging to each of such
corporations shall be vested in the corporation surviving or resulting from such
merger or consolidation; and all property, rights, privileges, powers and
franchises, and all and every other interest shall be thereafter as effectually the
property of the surviving or resulting corporation as they were of the several and
respective constituent corporations.... 138
The United States district court in Delaware interpreted this to mean: “A statutory merger
. . . results in a combination of the two corporations with the surviving corporation attaining the
property, rights, and privileges of the absorbed corporation, as well as retaining its own property,
rights, and privileges.” 139
Even without these statutory provisions, Smith’s and Williams’s employment contracts
explicitly provide that “[t]he terms, conditions, and obligations of this Agreement shall inure to
137
Equifax Services, Inc. v. Hitz, 905 F.2d 1355, 1361 (10th Cir. 1990).
138
Del. Code Ann. tit. 8, § 259 (2016) (emphasis added).
139
Texaco Refining and Marketing, Inc. v. Delaware River Basin Commission, 824 F. Supp. 500, 507 (D. Del.
1993).
24
the benefit of, and be binding upon the parties hereto and their respective heirs, executors,
administrators, successors, and assigns thereof.” 140
Neither party disputes that the merger took place. And Northwest does not resist the case
law for a statutory merger. Instead, Northwest argues that at the time of the merger there was
nothing left for First American to enforce because the agreements had long lapsed. 141
The Individual Defendants’ employment agreements survived the stock purchase and
remained in force between October 15, 2008, until the merger on October 12, 2012. Thus, upon
merging, First American stood “in the same position as that occupied by” 142 Equity to enforce
the Individual Defendants’ non-compete provisions, and for Smith and Williams, the nonsolicitation provisions.
Smith and Williams breached the non-solicitation provisions of their employment
agreements; and Williams and Carrell breached the non-compete provisions of their
employment agreements.
First American only partially succeeds in showing that the Individual Defendants
breached their contracts.
(1) Smith and Williams violated the non-solicitation provisions of their employment
agreements.
Carrell does not have a non-solicitation provision in her employment contract. Smith and
Williams do. Their non-solicitation agreements state:
During his employment with Equity, and for a period of one (1) year thereafter,
[Smith or Williams], on behalf of himself or any other person or entity, shall not
hire, attempt to hire, recommend for hire, or employ, directly or indirectly, any
employee of Equity. During this one-year period of time, [Smith or Williams]
shall not encourage or induce any employee of Equity to resign from Equity or
140
Undisputed Material Facts ¶¶ 8, 16 (Emphasis added).
141
Opposition at 1.
142
See Aetna Life, 580 P.2d at 232.
25
assist any other employer in recruiting or hiring any employee away from
Equity. 143
Both Smith and Williams are owners of Northwest Title. 144 Northwest Title employs the
26 former First American employees who left First American to work for Northwest, 145 in
violation of their non-solicitation provisions. 146 Furthermore, Smith directed numerous
employees to Doug Smith, who later hired them on behalf of Northwest. 147 This constitutes
assisting another employer in recruiting or hiring a First American employee.
(2) Williams and Carrell breached the non-compete provisions of their employment
agreements; Smith did not.
Jeff Williams’s non-compete agreement states:
During his employment with Equity, and for a period of one (1) year thereafter, if
terminated for cause, Williams shall not, directly, or indirectly, either as an
employee, employer, consultant, director, or in any other individual or
representative capacity, engage or participate in any business that is in
competition in any manner whatsoever with the business of Equity, covering an
area in all directions 100 miles from any of the offices of Equity. If Williams is
terminated without cause, this non-competition provision shall not apply after
such termination. 148
Kristi Carrell’s non-compete agreement states:
During your employment with Equity Title and for a period of one year thereafter,
you may not participate in any competing title insurance or escrow business
within a 40-mile radius of any of Equity Title’s offices. 149
143
Undisputed Material Facts ¶¶ 7, 14.
144
Id. ¶¶ 56–57.
145
Id. ¶ 58.
146
For reasons stated infra, Williams did not avoid his duty to not solicit First American employees by failing to
give notice.
147
Id. ¶¶ 61–65.
148
Id. ¶ 12.
149
Id. ¶ 20.
26
Both Williams and Carrell admit to “providing title insurance, escrow, and closing
services on behalf of Northwest Title in direct competition with” First American. 150 They also
admit to working within the geographical scope of the non-compete agreements. 151
Because he did not give 30 days’ written notice to First American, Williams attempts to
avoid the non-compete and the non-solicitation provisions. 152 His contract states: “Williams may
terminate his employment with Equity at any time upon 30 days’ prior written notice. Upon such
termination, the one-year period of non-competition and non-solicitation described in Section 7
and Section 8 above shall apply.” 153 The requirement of 30 days’ advance notice is for First
American’s benefit, and is not a limitation on the effectiveness of the non-competition and nonsolicitation clauses. First American might have (but has not asserted) a claim for his violation of
his obligation to give 30 days’ advance notice. And allowing Williams to avoid his contractual
obligations for failing to resign with 30 days’ notice would, in effect, reward Williams for
breaching the resignation notice provision. Williams is bound by both the non-solicitation and
the non-compete agreement.
By contrast, Smith is not bound by the non-competition agreement. His agreement is
nearly identical to Williams’s except it does not include the voluntary termination stopgap
provision referenced in the previous paragraph. It only states:
During his employment with Equity, and for a period of one (1) year thereafter, if
terminated for “Cause” (as defined in Section 10 below), Smith shall not, directly,
or indirectly, either as an employee, employer, consultant, director, or in any other
individual or representative capacity, engage or participate in any business that is
in competition in any manner whatsoever with the business of Equity, covering an
area in all directions 100 miles from any of the offices of Equity. If Smith is
150
Id. ¶¶ 43–55.
151
Id.
152
Motion for Summary Judgment and Memorandum in Support at 15–16, docket no. 163, filed on April 19, 2016;
referenced in the Opposition at 24.
153
Undisputed Material Facts ¶ 15.
27
terminated without Cause, the period for which he shall not compete with Equity
as described above shall be reduced to six (6) months from the date of his
termination. 154
By its terms, it is only effective if he is terminated by First American. The change to later
include the voluntary termination provision in Williams’s employment agreement may evidence
First American’s acknowledgment that without it, the non-compete would not be triggered by
voluntary resignation. Thus, Smith’s non-compete agreement could only be triggered “if
terminated” by First American. Smith was not terminated by First American. 155 He voluntarily
resigned. 156
CONCLUSION
This is a very narrow decision. These are the conclusions:
1.
The Individual Defendants’ employment contracts survived the stock
purchase and the merger, thus transferring the right to enforce those contracts to First
American;
2.
Smith and Williams breached the non-solicitation provisions of their
employment contracts; and
3.
Williams and Carrell breached the non-compete provisions of their
employment contracts, and Smith did not.
This order does not resolve all issues related to validity of the contracts, such as
reasonableness of scope and duration; First American’s performance; or whether First American
suffered damages.
154
Id. ¶ 5.
155
Id. ¶¶ 42, 65.
156
Id. ¶ 65.
28
ORDER
THEREFORE, the Plaintiffs’ Motion for Partial Summary Judgment and Memorandum
in Support 157 is GRANTED IN PART and DENIED IN PART. The rights to enforce the
Individual Defendants’ employment agreements transferred to First American by operation of
law as part of the merger. Jeff Williams and Kristi Carrell breached the non-compete provisions
of their employment agreements. Mike Smith did not. And Jeff Williams and Mike Smith
breached the non-solicitation provisions of their employment agreements.
Dated October 18, 2016.
BY THE COURT:
____________________________
David Nuffer
United States District Judge
157
Docket no. 217, filed June 9, 2016.
29
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