Court Opinion

ID: 9691606
Source: CourtListenerOpinion
Date Created: 2023-08-24 20:42:43.832124+00
Date Added: 2024-06-11T18:19:23.326857
License: Public Domain

SABERS, Justice
(dissenting).
[¶ 44.] I dissent. , The contract between Gateway and CTS is not an agreement in restraint of trade; on the contrary, it is an agreement in furtherance of trade — because without it, CTS was apparently unwilling to continue providing its services to Gateway.
[¶ 45.] “[T]he mere fact that some restraint results does not render a contract void[.]” Lien v. Northwestern Eng’g Co., 73 S.D. 84, 92, 39 N.W.2d 483, 488 (1949). “Every agreement concerning trade, every regulation of trade, restrains. To bind, to restrain, is of their very essence.” Board of Trade of City of Chicago v. United States, 246 U.S. 231, 238, 38 S.Ct. 242, 244, 62 L.Ed. 683, 687 (1918); see also Milton v. Hudson Sales Corp., 152 Cal.App.2d 418, 313 P.2d 936, 951 (1957) (“[N]early every business contract eliminates competition in the sense that it prevents other parties from coming into the transaction.”); Loral Corp. v. Moyes, 174 Cal.App.3d 268, 219 Cal.Rptr. 836, 841 (1985) (“[R]easonably limited restrictions which tend more to promote than restrain trade and business do not violate the [restraint of trade] statute.”); Campbell v. Board of Trustees of Leland Stanford Junior Univ., 817 F.2d 499, 502 (9th Cir.1987):
Even though the California Legislature rejected the common-law rule that “reasonable” restraints of trade are generally enforceable, it did not make all restrictions unenforceable. Section 16600 only makes illegal those restraints which preclude one from engaging in a lawful profession, trade, or business. Thus, the court in Boughton v. Socony Mobil Oil Co., Inc., 231 Cal.App.2d 188, 192, 41 Cal.Rptr. 714, 716 (1964), stated that
while the cases are uniform in refusing to enforce a contract wherein one is restrained from pursuing an entire business, trade, or profession, as falling within the ambit of section 16600, where one is barred from pursuing only a small or limited part of the business, trade or profession, the contract has been upheld as valid.7
(Emphasis in original).
[¶46.] In Loral, 219 Cal.Rptr. at 840, a former employee contracted, among other *134provisions, not to interfere with his previous employer by “interfering with or raiding its employeesf.]” When he breached the agreement by “raiding” employees, the employer brought suit against him. The court held that the agreement did not constitute a restraint on trade:
The restriction presumably was sought by plaintiffs in order to maintain a stable ■ work force and enable the employer to remain in business. This restriction has the apparent impact of limiting [employee’s] business practices in a small way in order to promote [employer’s] business. This non-interference agreement has no overall negative impact on trade or business. We hold that this contract, as construed, is not void on its face under [§ 16600].
Id. 219 Cal.Rptr. at 844. “Only restrictive covenants which prohibit an individual from pursuing an entire business, trade, or profession are invalid under section 16600.” General Comm’l Packaging, Inc. v. TPS Package Eng’g, Inc., 126 F.3d 1131, 1133 n. 1 (9th Cir.1997) (quoting Scott v. Snelling & Smiling, Inc., 732 F.Supp. 1034, 1042 (N.D.Cal.1990); Boughton, 41 Cal.Rptr. at 716 (emphasis added)); accord Great Frame Up Systems, Inc. v. Jazayeri Enters., 789 F.Supp. 253, 256 (N.D.Ill.1992) (relying on Campbell, supra, and noting that contracts are not invalid under § 16600 unless a party is “prevented from engaging in an entire profession, trade or business.”) (emphasis in original).8
[¶ 47.] A similar agreement was held not to possess the attributes of a similar statute in Smith, Barney, Harris Upham & Co., Inc. v. Robinson, 12 F.3d 515 (5th Cir.1994) (per curiam). In Smith, an employee (Robinson) agreed not to
directly or indirectly solicit or induce any Smith Barney employee to resign from either (a) the Smith Barney branch office at which I worked; or (b) any other Smith Barney branch office within a fifty (50) mile radius of the competitor organization’s office at which I work, in order for that employee to accept employment at the competitor organization at which I work.
*135After Robinson left Smith Barney’s employ, he conceded that he knowingly breached the agreement by actively recruiting Smith Barney’s employees. The district court granted Smith Barney preliminary injunctive relief, which Robinson appealed. In affirming, the Fifth Circuit could have been speaking in this case when it stated:
We agree with Smith Barney that this Agreement does not possess the attributes of an agreement prohibited by La.R.S. 23:921.9 Contrary to Robinson’s assertions, the Agreement does not restrain Robinson from exercising a lawful profession, trade, or business. As Smith Barney maintains, the Agreement assumes that Robinson will exercise his profession, presumably even as a branch manager, with a competitor firm. Robinson is free to recruit stockbrokers or employees for Morgan Keegan — anywhere, any time, and from any organization — save only that-small class comprising Smith Barney’s employees, a class which he willingly agreed not to solicit. The district court recog--nized that Robinson was not restrained from exercising a lawful profession, trade,, or business when it issued the preliminary injunction. The Agreement simply does not meet the definition of the kinds of contracts covered by the statute.
To find that the narrowly tailored Agree-. ment falls within the ambit of the statute, we would have to conclude not only that recruiting is an indispensable ingredient of Robinson’s profession but also that the Agreement prohibited Robinson from recruiting employees or stockbrokers to work for Morgan Keegan, which it clearly does not do. Smith Barney did not generally restrain Robinson from recruiting employees for Morgan Keegan. Instead, Smith Barney microscopically focused the Agreement at that aspect of Robinson’s job that would be most damaging to Smith Barney — Robinson’s recruitment of Smith Barney’s employees to work for a competitor organization. Contrary to Robinson’s hyperbole, that restriction does not prevent him from performing one of his “primary responsibilities” as a branch manager for a competitor organization, i.e., recruiting stockbrokers. We note in passing that subsection (C) of La. R.S. 23:921 10 mentions engaging in a similar business and soliciting customers but never mentions soliciting fellow employees. We consider this an implicit legislative recognition that, without more, a narrowly tailored covenant not to solicit employees of the employer is not among the kinds of agreements covered by the statute. We therefore conclude that the Agreement is not governed by La.R.S. 23:921.
Id. at 519 (emphasis in original).
[¶ 48.] Likewise, in this case we would have to conclude not only that recruitment is an indispensable ingredient of Gateway’s business, which it clearly is not, but also that the agreement prohibited Gateway from recruiting employees or computer programming consultants to work for Gateway, which it clearly does not do. The parties’ contract does not require Gateway to cease operations of its “profession, trade, or business.” As stated by the majority opinion, Gateway’s “business” is computer sales and service.
[¶ 49.] The majority opinion states that it is up to the Legislature to set public policy and that it would have to create another exception in order for this agreement to be permissible. I disagree, because this agreement does not contravene the policy underlying SDCL 53-9-8. The Alabama Supreme Court
*136(the only authority relied upon in the majority opinion), stated:
[The statute] expresses the public policy of Alabama disfavoring contracts in restraint of trade; such contracts are disfavored because they tend not only to deprive the public of efficient service but also to impoverish the individual.
Construction Materials, Ltd., Inc. v. Kirkpatrick Concrete, Inc., 631 So.2d 1006, 1009 (Ala.1994) (citation & internal quotation omitted). Here, neither the public nor Gateway is deprived of efficient service and Gateway certainly would not be “impoverished” by its promise not to solicit CTS employees for one year.
[¶ 50.] In Central Monitoring Service, Inc. v. Zakinski, 1996 SD 116, ¶ 33, 553 N.W.2d 513, 518, we adopted the Restatement (Second) of Contracts § 188 criteria to determine whether an agreement is unreasonably in restraint of trade:
(1) A promise to refrain from competition that imposes a restraint that is ancillary to an otherwise valid transaction or relationship is unreasonably in restraint of trade if
(a) the restraint is greater than is needed to protect the promisee’s legitimate interest, or
(b) the promisee’s need is outweighed by the hardship to the promisor and the likely injury to the public.

Extent of Restraint

[¶ 51.] Gateway argues that the restraint is greater than required to protect CTS because the agreement encompasses every CTS employee and therefore, it claims, “unlawfully interferes with [their] rights to choose their employment.” However, the employees of CTS are not parties to this contract.
[N]o case has been cited in which a person not a party to the contract at issue has been successful in asserting [the restraint of trade statute] as a bar to the validity of the contract. [That statute] and the cases decided under it indicate that it applies only to a situation where there is a direct restraint imposed on a party to the contract preventing him from exercising a lawful profession, trade, or business.
Dyson Conveyor Maintenance, Inc. v. Young & Vann Supply Co., 529 So.2d 212, 216 (Ala.1988) (Torbert, C.J., dissenting).11
[¶ 52.] Gateway also argues that the restraint is greater than required to protect CTS since the agreement provides no territorial restriction. But see Ward v. Midcom, Inc., 1998 SD 10, ¶ 14, 575 N.W.2d 233, 238 (limiting a noncompete agreement to Coding-ton County and stating, “[t]he provisions of such contracts should be construed in the light of the surrounding circumstances, and ... the intent of the parties should be carried out, if such intent is one which the law sanctions.”) (citation omitted).
[¶ 53.] I submit that this agreement could be limited to those places where CTS provides programming services to Gateway and to those employees in contact with Gateway, but this agreement is not against public policy and it is not unreasonably in restraint of trade.

Hardship to Gateway and the Public

[¶ 54.] As noted, this agreement does not impose an undue' hardship on Gateway. Gateway is free to carry on its computer business and hire any computer programmer in the entire world, so long as it does not hire a CTS programmer for the relatively short period of one year. Nor does this agreement impose an undue hardship on the public.
*137Gateway’s ability to produce computers will not be affected by its inability to hire CTS programmers for a limited period of time.12
[¶ 55.] As stated in Lien, 73 S.D. at 93, 39 N.W.2d at 488:
If the restriction imposed was not greater than protection to the covenantee required and was compatible with the pubhc interest, it cannot be deemed a contract in restraint of trade.
(Emphasis added); see also 17 C.J.S. Con- ■ tracts § 238, at 1107 (1963):
Public policy favors competition and opposes restraints on trade when the pubhc welfare is injuriously affected; but before parties will be absolved from their solemn obhgations on this ground, it must be shown that their agreements are manifestly injurious to the pubhc welfare, since it is also the policy of the law to hold persons to their contracts.
[¶ 56.] Not every contract is unreasonably in restraint of trade; if a contract is challenged on that basis, then whether it falls into one of the legislatively created exceptions of SDCL 53-9-9 to -11, while relevant, is not dispositive. See Lien, 73 S.D. at 92, 39 N.W.2d at 487:
[Forerunner to SDCL 53-9-8] did not introduce a new principle of law, but it simply eliminates from the controversy the question of reasonableness where a case falls within one of the exceptions.
If, as here, the contract is not addressed by one of the exceptions, then reasonableness is the question. Id., 39 N.W.2d at 488 (a contract will be sustained to the extent it is reasonable to the public and the parties).
CONCLUSION
[¶ 57.] In light of the foregoing, it is clear that this agreement does not constitute a restraint on trade, unreasonable or otherwise. It is actually an agreement in furtherance of trade, borne of CTS’ natural desire to protect its own business interests while serving those of Gateway. It does not restrict Gateway’s ability to pursue its business and does not violate the letter or the spirit of SDCL 53-9-8. Accordingly, we should reverse the trial court’s order granting summary judgment to Gateway and remand for trial.
[¶ 58.] KONENKAMP, J., joins this dissent.

. As noted by the majority opinion, this court has not previously construed an agreement not to recruit employees. SDCL 53-9-8 is patterned after Cal. Civ.Code § 1673, now codified at Cal. Bus. & Prof.Code § 16600. See Lien, 73 S.D. at 92, 39 N.W.2d at 487. While we are not bound by California court decisions under § 16600, we look to them for guidance. Cf. In re Estate of Gossman, 1996 SD 124, ¶ 8, 555 N.W.2d 102, 105 (In re Estate of May, 331 N.W.2d 578 (S.D.1983),] presented our first opportunity to construe this statute, and we looked to New York law for guidance, noting that New York statutes 'provided the genesis for SDCL 10-40-23(3).’ ”); see also Kovarik v. American Family Ins. Group, 108 F.3d 962, 965 (8th Cir.1997):
Because North Dakota Century Code section 9-08-06 is derived from the same source as California Business and Professional Code section 16600 and uses nearly identical language, *134the North Dakota Supreme Court has stated that "California court decisions construing [this section], while not binding, are entitled to respectful consideration, and may be persuasive and should not be ignored.”
(Quoting Werlinger v. Mutual Serv. Cas. Ins. Co., 496 N.W.2d 26, 30 (N.D.1993)); see Lien, 73 S.D. at 92, 39 N.W.2d at 487-88 (relying on California case law to interpret contract).

. The majority opinion attempts to ignore Lien and to distinguish many of these other cases by stating they involve employment contracts not binding on persons not privy to the contracts. Therefore, the majority opinion accuses the dissent of attempting to create a new, non-statutoiy exception to the restraint of trade statute. "Horse feathers.” In fact, California has no employment contract exception to § 16600, yet California courts routinely validate these contracts. This court has validated contracts alleged to be unreasonably in restraint of trade even though not addressed by SDCL 53-9-9 to -11. See Brookings Mall, Inc. v. Cpt. Ahab's, Ltd.., 300 N.W.2d 259, 263 (S.D.1980) (holding that restraint imposed on store by the terms of its lease with mall neither unreasonable nor in violation of public policy); see also Lien, 73 S.D. at 92-93, 39 N.W.2d at 488 (contract precluding lessor from leasing land to lessee's competitors neither unreasonable nor illegal restraint of trade). The majority opinion errs in assuming only contracts included in those statutes are lawful restraints of trade.
The majority opinion finally, and perhaps unwittingly, hits the nail on the head. Its attempts at distinguishing Lien and Brookings Mall conclude these statutes did not apply because they were realty cases. Exactly!! Likewise, these statutes do not apply to this contract because this is not a partnership, corporation, or employment contract. The majority opinion quotes Lien out of context and omits the fact that this court, after concluding these statutes did not apply, spent a substantial amount of time explaining why that contract was not a restraint of trade as defendants claimed. See Lien, 73 S.D. at 89, 39 N.W.2d at 485 (“Defendants ... asserted that plaintiff’s contract is unlawful and void in that it is against public policy and in restraint of trade[.]”). A majority of the court held that the statutes did not apply, contrary to the opinions of the dissenting justices, and determined that the contract was not a restraint of trade according to the common law, and enforced it.
Furthermore, Lien sued the lessor and the competitor (Northwest Engineering Co.) to whom the lessor leased land in violation of its contract with Lien. Even though Northwest was sued for tortious interference with contract, the court still concluded the contract was not an unlawful restraint of trade. If every contract were "unreasonably in restraint of trade” as incorrectly suggested by the majority opinion, the Lien contract would have been voided, rather than enforced and recovered upon.

. The Louisiana statute provides in part:
A. Every contract or agreement, or provision thereof, by which anyone is restrained from exercising a lawful profession, trade, or business of any kind, except as provided in this Section, shall be null and void.

. This subsection provides in part:
C. Any person, including a corporation and the individual shareholders of such corporation, who is employed as an agent, servant, or employee may agree with his employer to refrain from carrying on or engaging in a business similar to that of the employer and/or from soliciting customers of the employer within a specified parish or parishes, municipality or municipalities, or parts thereof, so long as the employer carries on a like business therein, not to exceed a period of two years from termination of employment.

. The majority opinion errs by basing its decision on the rights of persons not party to this contract. See ¶¶ 13 & 17. The benefits and burdens of contracts are analyzed from the viewpoint of the parties. A contract which precludes a former employee from recruiting a former coworker obviously restrains the latter from employment with the former. That fact does not violate public policy and is not the basis for invalidation of the contract. See, e.g., Smith, 12 F.3d at 519; Loral, 219 Cal.Rptr. at 840. The fact that some outsider to the contract may be incidentally affected has no bearing in an action for breach of contract, Cf. Pittsburgh Plate Glass Co. v. Paine & Nixon Co., 182 Minn. 159, 234 N.W. 453, 455 (1931):
[A] contract may incidentally restrain competition or trade without violating the statute if its chief purpose is to promote and increase the business of those who enter into it, and if it is not injurious to the public interests.

. Despite Chief Justice Miller’s "deep concerns,” he concludes:
... I cannot ignore the impact that this contract has on Densmore ... there is no way to enforce the contract as between Gateway and CTS, but not between CTS and Densmore[.] This conclusion is defective for at least three reasons.
1) Chief Justice Miller's "deep concerns” can easily be alleviated. The contract between Gateway and CTS may be enforced without any effect whatsoever on Densmore. Simply subject Gateway to liability for damages in accordance with the pleadings. Gateway may hire whomever it pleases, but if it promises and contracts not to hire CTS employees, it should be held to respond in damages when it breaks that promise and breaches that contract.
2) Densmore is not even a party to this contract. How in the world, and under what authority, can a court base its decision on perceived repercussions to a non-party to this contract?
3)How do you ignore the California authority cited in the dissent and instead rely on California Supreme Court cases dated 1894, 1899, and 1937? This state based its restraint of trade statutes on the California model. California routinely upholds identical agreements and has done so in cases dated in this century, as recently as 1985 in the state courts (Loral, 219 Cal.Rptr. 836), and 1997 in the federal courts (General Comm'l Packaging, 126 F.3d 1131). As noted, California routinely validates covenants not to compete executed in conjunction with employment contracts even though California has no employment contract exception to § 16600. Therefore, any reliance on Merchants’ Ad-Sign Co. v. Sterling, 124 Cal. 429, 57 P. 468 (1899), in Chief Justice Miller's writing is misplaced as it is obviously no longer good law..