IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

 

Nos. 93-7741 & 93-7784

 

LDDS COMMUNICATIONS, INC.

and DIAL-NET, INC.,

Plaintiffs-Appellees,

versus

AUTOMATED COMMUNICATIONS, INC.

and JUDY VAN ESSEN,

Defendants-Appellants.

 

Appeals from the United States District Court

for the Southern District of Mississippi 

 

(October 3, 1994)

Before HIGGINBOTHAM, JONES, and BARKSDALE, Circuit Judges.

HIGGINBOTHAM, Circuit Judge:

This is an appeal from a preliminary injunction enforcing

covenants not to compete, which are contained in provisions of

contracts for the sale of assets in the market for long distance

and direct dial services. Covenants not to compete can be an

element of purchased assets and are enforceable as a general

proposition, despite hostility toward most such collusive carvings

of markets. At the same time, a sale of assets is not a pass from

the antitrust laws. The key is that such covenants must be

ancillary to the sale, a reasonable protection of what was sold,

goodwill, for example. 
2

The disputed language of two of the covenants is unclear in

meaning at its most critical point, the geographical area in which

competition was not to occur. The district court read the two

covenants as exacting a nationwide cease fire although they were

part of a sale of assets in Arizona and New Mexico. We resolve

their ambiguity in favor of the lesser restraint and are persuaded

that these two covenants not to compete are not fairly read to

reach beyond Arizona and New Mexico. A third covenant not to

compete, part of a sale of assets in Minnesota, did not contain a

geographical limit but excepted from its limits activity of

defendant Judy Van Essen conducted through defendant Automated

Communications, Inc. (ACI). ACI was not a party to that agreement.

Because the parties have not adduced any evidence of activity

inside New Mexico or outside the ACI exception, we vacate the

injunction. 

I

LDDS Communications and ACI provide long-distance

telecommunications services throughout the country. In November

1991, ACI agreed to sell various business assets in New Mexico to

LDDS. As part of that deal, ACI and Judy Van Essen, ACI's

president and majority shareholder, entered into noncompetition

covenants with LDDS. The agreements also provided that they were

to be governed by Mississippi law. 

In 1993, LDDS through a statutory merger acquired Dial-Net, an

independent South Dakota telecommunications company based in

Minnesota. Van Essen owned 10.8% of the stock in Dial-Net. On
3

March 19, 1993, as part of the closing, Van Essen executed a

covenant not to compete with LDDS or Dial-Net. ACI was not

involved in the transaction. The parties appear to have applied

South Dakota law to these covenants not to compete. There is no

suggestion that the laws of South Dakota and Mississippi differ in

ways relevant to our disposition of this appeal.

Meanwhile, in early 1993, Dial-Net employees were concerned

about the upcoming acquisition. ACI representatives, including Van

Essen, contacted Dial-Net employees about joining ACI. By April,

ACI had hired several former Dial-Net employees, including some

sales representatives. Several former Dial-Net clients began using

ACI in subsequent months.

In July 1993, LDDS and Dial-Net sued ACI and Van Essen and

moved for a temporary restraining order and preliminary injunction

to keep ACI and Van Essen from soliciting Dial-Net's employees and

clients. An agreed injunction was entered in August. After a

hearing in September, the district judge signed findings of fact

and conclusions of law prepared by LDDS and decided to continue the

injunction. This appeal followed.

II

The requirements for a preliminary injunction are rote. A

party seeking a preliminary injunction must show (1) a substantial

likelihood of prevailing on the merits; (2) a substantial threat of

irreparable harm if the injunction is not granted; (3) that the

threatened injury outweighs any harm that may result to the

nonmovant from the injunction; and (4) that the injunction will not
4

be adverse to the public interest. See, e.g., Roho, Inc. v.

Marquis, 902 F.2d 356, 358 (5th Cir. 1990). 

Whether success is likely first depends on whether the

noncompetition covenants barred ACI and Van Essen from soliciting

Dial-Net employees. Three contractual clauses are relevant, all of

which are the fifth paragraphs of the contracts in which they

appear. The first two were executed during the ACI asset purchase

in New Mexico. The one executed by ACI provides that it will not:

directly or indirectly, for a period of three (3) years

following the date hereof, (i) own, manage, operate,

control, be employed or engaged by or otherwise

participate or have any interest in any Person which is

engaged in, or otherwise engaged in, the Business in this

State of New Mexico, or (ii) otherwise solicit, divert,

take away, interfere with or disrupt relationships with,

or attempt to do any of the foregoing with respect to,

any customer, supplier, employee, independent contractor,

agent or representative of LDDS.

Van Essen agreed not to:

(i) own, manage, operate, control, be employed or engaged

by or otherwise participate or have any interest in any

Person which is engaged, or otherwise engaged in, the

Business in the States of Arizona or New Mexico, or (ii)

otherwise solicit, divert, take away, interfere with or

disrupt relationships with, or attempt to do any of the

foregoing with respect to, any customer, supplier,

employee, independent contractor, agent or representative

of LDDS.

In connection with the Dial-Net merger, the agreement Van Essen

signed said that for two years she would not:

(i) own, manage, operate, control, be employed or engaged

by or otherwise participate or have any interest in any

Person which is engaged in, or otherwise engage in, the

Business in any state in the United States in which as of

the date of this Agreement, LDDS or Dial-Net currently

conducts operations, or (ii) otherwise knowingly solicit,

divert, take away, interfere with or disrupt

relationships with, or attempt to do any of the foregoing
 

1In its reply brief, ACI observes that all three provisions

refer only to the solicitation of LDDS employees. The employees

ACI solicited worked for Dial-Net, a wholly-owned subsidiary of

LDDS. This covenant also refers to "agent[s]," however, and the

Dial-Net employees would seem to qualify.

5

with respect to, any customer, supplier, employee,

independent contractor, agent or representative of LDDS.

1

Our first question is whether the first two covenants bar ACI

and Van Essen from soliciting Dial-Net employees and business. ACI

argues that the geographical limitations in the first clause of

each covenant applies to the second clause. As it reads the

covenants, the first clause operates to keep ACI and Van Essen from

directly competing in certain places, while the second clause

operates to keep them from indirectly competing in those same

places.1 LDDS counters that the first clause contains a

geographical limitation while the second clause does not. It also

argues that imposing a geographic limitation on the second clause

would make it redundant of the first because it is not possible to

steal clients inside a state without doing business within that

state. 

ACI's interpretation is more plausible. It argues, quoting

Professor Corbin, that a noncompetition covenant signed at the same

time a business is sold is designed to give the buyer "the

enjoyment of that for which he pays" by keeping the seller from

immediately reacquiring its old customers. See 6A A. Corbin,

Corbin on Contracts § 1385, at 48 (1962); see also Sivley v.

Cramer, 61 So. 653 (Miss. 1913). It makes sense that ACI would
6

agree to stay away while LDDS got its new business underway. We

are pointed to no sensible business reason why ACI would contract

away its right to compete with LDDS across the country, just for

the sake of selling some assets in one state. LDDS argues that the

noncompetition covenant "remove[s] any possible temptation that the

seller may have to take advantage of the relationship with its

former employees to obtain information on the purchaser's business

elsewhere," but this argument only justifies a ban on soliciting

former employees rather than one on any solicitation across the

country.

Further, the redundancy LDDS complains about is not

impressive. The first clause can be read as referring to a direct

ownership or control interest, while the second clause refers to

the work of agents, consultants, and other entities in which ACI

would not have an ownership interest. 

2

The Dial-Net noncompetition covenant signed by Van Essen does

not have a geographical limit. It is subject, however, to "the ACI

exception," which provides:

6. Certain Exceptions. (a) Notwithstanding any

provisions of this Agreement, individual shall not be

prohibited from: . . . (iii) owning, managing, operating,

controlling, being employed by or engaging in or

otherwise participating or having any interest in

Automated Communications, Inc. or AC America, Inc., each

a Colorado corporation.

ACI argues that this exception allows Van Essen to solicit anyone

she wants to, as long as she does so for ACI. 
7

LDDS makes two counterarguments. First, it contends that

paragraph 6 only modifies the first clause of the noncompetition

covenant because the language is similar to that of the first

clause. This claim is belied by the use of the words "any

provisions" at the beginning of this section. It also does not

square with the undisputed fact that Van Essen bargained for the

right to stay with her company, not the abstract right to solicit

business using subcontractors. She had no reason to insist on

language mirroring that of the second clause once she had the right

to stay with her company. As discussed, the second clause refers

to subcontractors while the first clause refers to direct ownership

and action.

LDDS also argues that paragraph 6 is inconsistent with the New

Mexico agreements. Its argument would have force if the New Mexico

agreements barred solicitation of employees nationwide, because it

would not be sensible to allow the company president a power that

the company does not have. Even then, though, the clause would not

be inconsistent; it would just be moot. Van Essen would have the

power to run ACI, but that power would not include the power to

solicit LDDS's business. If the New Mexico agreements do not have

nationwide effect, however, there is no inconsistency. We have

found that they do not reach beyond New Mexico and Arizona. 

In sum, paragraph 6 reads as if it was grafted on to an

earlier agreement drafted by LDDS. The agreement just does not

make sense otherwise. Paragraph 5 is drafted to keep Van Essen

insiders out of the industry entirely for two years, yet paragraph
8

6 gives Van Essen an exemption to work at a key competitor of DialNet. We construe this inconsistency against LDDS. 

IV 

We will not write a contract for the parties. We may think

that a contract was unwise or foolish, but that is no business of

the courts. The impracticability of an urged reading becomes

relevant when its level of foolishness and ambiguity creates

uncertainty about what the parties agreed to. Here the hostility

toward restraints of trade takes over, as we insist that the

restraint be tailored to protection of the asset sold. This

tailoring resolves the ambiguity inherent in the contract language

in favor of the lesser and legal restraint, and we enforce the

contract by its terms. This approach cuts in both directions. It

limits LDDS's and Dial-Net's protection but gives it protection for

the lesser area, rather than voiding the entire covenant not to

compete. This resolution of ambiguity is also supported by the

parties' conduct after entering into the contract. See UHSQualicare, Inc. v. Gulf Coast Community Hosp., Inc., 525 So. 2d

746, 754 (Miss. 1987). LDDS and Dial-Net did not read the

contracts as they now do until this suit was filed in 1993. 

The two noncompetition covenants signed as part of the New

Mexico asset purchase do not prohibit solicitation of LDDS clients

and employees nationwide. The agreement signed by Van Essen does

do so, but contains a sweeping exception that allows her to

continue with ACI. There is no evidence that defendants breached
9

any enforceable provision of a noncompetition covenant, and the

district court erred in issuing the injunction. We do not reach

the parties' other contentions. 

REVERSED AND REMANDED.