Devin Hamden v. Total Car Franchising Corp ( 2013 )

UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 12-2085
DEVIN HAMDEN,
Plaintiff - Appellee,
v.
TOTAL CAR FRANCHISING CORPORATION,
Defendant - Appellant.
Appeal from the United States District Court for the Western
District of Virginia, at Roanoke. James C. Turk, Senior
District Judge. (7:12-cv-00003-JCT)
Argued: September 19, 2013 Decided: November 22, 2013
Before NIEMEYER, GREGORY, and FLOYD, Circuit Judges.
Affirmed in part; reversed in part by unpublished opinion.
Judge Gregory wrote the opinion, in which Judge Niemeyer and
Judge Floyd joined.
ARGUED: Thomas Meredith Winn, III, WOODS ROGERS P.L.C.,
Roanoke, Virginia, for Appellant. Robert Edwin Dean, II, FRITH
& ELLERMAN LAW FIRM, PC, Roanoke, Virginia, for Appellee. ON
BRIEF: Frank K. Friedman, Frank H. Hupfl, III, WOODS ROGERS,
P.L.C., Roanoke, Virginia, for Appellant. T. Daniel Frith, III,
Lauren M. Ellerman, FRITH & ELLERMAN LAW FIRM, PC, Roanoke,
Virginia, for Appellee.
Unpublished opinions are not binding precedent in this circuit.
GREGORY, Circuit Judge:
Appellant Total Car Franchising Corporation d/b/a Colors on
Parade (“TCF”) appeals the district court’s order finding that a
franchising agreement’s restrictive covenants do not apply to a
former franchisee. The contract at issue dictated various
restrictions that would occur upon termination of the agreement.
The issue before us is whether the natural end of the contract
qualifies as termination. We find that the district court
correctly defined termination within this context, but
termination was not necessary to trigger one of the restrictive
covenants at issue. Accordingly, we affirm in part and reverse
in part.
I.
Appellee Devin Hamden operated a TCF franchise in Virginia
and West Virginia from 1996 until 2011. TCF is a South Carolina
corporation providing auto repair and restoration services,
focusing on paint restoration and paintless dent repair. Hamden
learned of TCF through a friend, Phil Barker, who worked for
TCF. Hamden worked as an apprentice to Barker in 1995.
Subsequently, TCF offered Hamden an opportunity to become a TCF
franchisee.
2
On May 9, 1996, Hamden executed two documents granting him
status as a TCF franchisee performing paintless dent repair. 1
The first of these was the Limited Rights Franchise Agreement
(“Franchise Agreement”). The Franchise Agreement set the term
of the agreement at fifteen years. It further noted that Hamden
could renew the agreement at the end of the fifteen-year term if
he provided notice of his intent to do so during a certain time
period “before this Agreement’s expiration[.]” The Franchise
Agreement further designated the area in which Hamden could
provide paintless dent repair services.
Section 9 of the Franchise Agreement, entitled “Rights and
Duties of Parties Upon Expiration, Termination or Non-renewal,”
contained a post-term non-competition clause operational “[f]or
2 years following the termination of this Agreement.” This
covenant prohibited Hamden’s participation in a paint
restoration business. Section 9 also imposed certain duties,
such as the return of TCF property, upon termination of the
Agreement “for any reason.”
1
The parties agreed to certain modifications deviating from
TCF’s standard franchise agreement. Having consulted with an
attorney prior to entering into the agreements, Hamden lowered
the royalty fees due to TCF from 40% to 27%. Hamden also
included a provision protecting his unrestricted right to use,
upon cessation of his franchisee status, any knowledge, skills,
and training acquired prior to signing the agreements.
3
The parties contemporaneously executed a Non-Competition
and Confidentiality Agreement (“Confidentiality Agreement”),
which the Franchise Agreement incorporated by reference. The
Confidentiality Agreement contained three relevant restrictive
covenants. 2 The Confidentiality Agreement’s non-competition
clause provided that
If the Franchise Agreement is terminated before its
expiration date, or if you assign or transfer your
interest in the Franchise Agreement, to any person or
business organization except according to Section 7 of
the Franchise Agreement, then You covenant, for a
period of 2 years after termination, transfer or
assignment, not to engage as an owner, operator, or in
any managerial capacity, in any business engaged in
the same or similar type of appearance technologies
within the metropolitan statistical area in which the
Franchise Agreement’s Designated Marketing Area is
located, other than as an authorized franchisee or
employee of another Colors on Parade franchise.
The non-disclosure clause stated, in pertinent part, that
During the term of the Franchise Agreement and
thereafter, you agree not to communicate directly or
indirectly, divulge to or use for your benefit or the
benefit of any other person or legal entity, any trade
secrets which are proprietary to Colors on Parade or
any information, knowledge or know-how deemed
confidential under Section 5 of the Franchise
Agreement, except as we permit. If there is any
termination of this Agreement, You agree that you will
never use our confidential information or trade
secrets, in the design, development or operation of
2
The Confidentiality Agreement also contained a
severability clause, providing for enforcement of the remainder
of the agreements in the event any given provision or clause is
stricken.
4
any business specializing in appearance technologies
as Colors on Parade applies them.
The non-solicitation clause provided that
During the term of the Franchise Agreement and for 2
years after its termination or after its assignment or
transfer, You agree that You will neither directly nor
indirectly solicit, induce, divert or take away any
customer within the statistical marketing area in
which the DMA is located where [Hamden] actually
served during the term of this Agreement.
Hamden performed paintless dent repair as a TCF franchisee
for the entirety of the fifteen-year term, which ended May 9,
2011. Unaware of the term’s end, Hamden continued working
thereafter as a franchisee. Only upon receiving an email from
TCF in October 2011, reminding him that the term ended and he
could still renew the Franchise Agreement, did Hamden realize
the term ended. On November 30, 2011, having decided to pursue
his own business, Hamden, through a conversation with Barker,
informed TCF he would not seek renewal. Hamden reiterated this
position a few days later in a meeting with TCF Chief Executive
Officer Jeffrey Cox. Hamden’s franchisee status ended on
December 3, 2011. TCF informed Hamden of its intent to pursue
an injunction and damages in the event Hamden proceeded with his
business. Hamden thereafter sought a declaratory judgment in
the district court.
5
After a one-day bench trial, the district court held that
the restrictive covenants did not bind Hamden. 3 The district
court first held that “termination” as used in the restrictive
covenants did not encompass an “expiration” brought about by the
natural end of the term. On this basis, the district court
found the non-competition and non-solicitation clauses non-
binding on Hamden. With respect to the non-disclosure covenant,
the district court held that Hamden either complied with the
covenant by his return of TCF property or was not bound by it
due to lack of termination. The district court further
concluded that Section 9’s post-term restriction applied only to
“paint restoration,” not the paintless dent repair work Hamden
performed.
TCF timely filed an appeal over which we retain
jurisdiction pursuant to 28 U.S.C. § 1291.
II.
In reviewing rulings from a bench trial, we review factual
findings for clear error and conclusions of law de novo. Helton
v. AT&T Inc., 709 F.3d 343, 350 (4th Cir. 2013). Conclusions of
3
The district court denied Hamden’s request for attorney’s
fees and costs, a ruling that is not on appeal.
6
law include contract construction. Roanoke Cement Co. LLC v.
Falk Corp., 413 F.3d 431, 433 (4th Cir. 2005).
III.
TCF advances two arguments supporting its position that the
district court erred with respect to the non-disclosure and non-
solicitation provisions. First, TCF avers that termination
under the agreements encompasses the natural end of the
contract. As such, all of the restrictive covenants requiring
termination of the agreements should apply to Hamden. Second,
TCF contends that the restrictive covenants impose reasonable
limitations on Hamden and are thus enforceable.
We apply Virginia interpretation principles to this
dispute, as state law governs contractual matters. James v.
Circuit City Stores, Inc., 370 F.3d 417, 421-22 (4th Cir. 2005).
Under Virginia law, we “construe the contract as a whole” when
ascertaining the meaning of any portion or provision of a
contract, such as those situations where parties dispute the
meaning of a term or phrase. Doctors Co. v. Women’s Healthcare
Assocs., Inc., 740 S.E.2d 523, 526 (Va. 2013); Am. Spirit Ins.
Co. v. Owens, 541 S.E.2d 553, 555 (Va. 2001). An agreement
“complete on its face” is unambiguous and thus precludes the
need for any search beyond the instrument itself in construing
the contract. Ross v. Craw, 343 S.E.2d 312, 316 (Va. 1986).
7
Any ambiguity that arises in the contractual language is
construed against the drafter. Doctor’s Co., 740 S.E.2d at 526.
However, a contractual provision is not ambiguous merely because
the parties disagree as to the provision’s meaning. TM Delmarva
Power, L.L.C. v. NCP of Va., L.L.C., 557 S.E.2d 199, 200 (Va.
2002). Virginia law presumes parties do not include meaningless
contract provisions. Ross, 343 S.E.2d at 317. Thus, we will
not interpret a clause in a manner rendering it meaningless so
long as a reasonable meaning can be attributed thereto. Hitachi
Credit Am. Corp. v. Signet Bank, 166 F.3d 614, 624 (4th Cir.
1999) (citing Berry v. Klinger, 300 S.E.2d 629, 633 (Va. 1965)
and Winn v. Aleda Constr. Co., 315 S.E.2d 193, 195 (Va. 1984)).
Ascertaining enforceability requires us to first address
the threshold issue of whether termination encompasses the
expiration of the Franchise Agreement at the end of its fifteen-
year term. Only then may we consider which provisions, if any,
are applicable and whether they are enforceable. 4
A.
TCF argues that this threshold issue may be resolved by a
straightforward application of dictionary definitions and cases
4
Finding that “termination” did not include “expiration”,
the district court held that the provisions were not triggered,
and thus did not address the enforceability of the provisions’
substantive restrictions.
8
finding no difference between “terminate” and “expire” when
construing a contract. TCF further contends that the language
of the contract as a whole presents an expansive definition of
termination, evidenced by its use of the broad modifier “any”
when referring to termination.
Hamden counters by reasoning that “termination” and
“expiration” are not necessarily analogous, and the contract’s
use of both indicates a different meaning for the terms. In
light of the fact that another section within the contract used
“expiration” to refer to the natural end of the fifteen-year
term, Hamden maintains that “terminate” and “expire” carried
different meanings in the parties’ agreements. 5
In the lexicological sense, termination would include
expiration, as the latter is a type of termination. Black’s Law
Dictionary defines termination as both “the act of ending
something” and “the end of something in time or existence;
5
We decline Hamden’s invitation to find ambiguity simply
because the contractual language could be understood as bearing
multiple meanings. Hamden cites Lincoln National Life Insurance
Company v. Commonwealth Corrugated Container Corporation, 327
S.E.2d 98 (Va. 1985), where the Supreme Court of Virginia held
that ambiguous language within an insurance policy should be
construed strictly against an insurer. Id. at 101. However, we
must find more than mere disagreement between the parties;
ambiguity must arise from the contract as a whole, not from the
consideration of isolated terms or provisions within a vacuum.
Resource Bankshares Corp. v. St. Paul Mercury Ins. Co., 407 F.3d
631, 636 (4th Cir. 2005).
9
conclusion or discontinuance.” Black’s Law Dictionary 1609 (9th
ed. 2009). It exemplifies this meaning by stating that the
termination of employment is “the complete severance of an
employer-employee relationship.” Id. The unqualified nature of
“conclusion or discontinuance,” without tying such conclusion to
an affirmative act, could reasonably encompass the natural
expiration of an agreement. “Expiration” is defined as “a
coming to an end; esp., a formal termination on a closing date.”
Id. at 660. This definition clearly suggests that expiration is
reasonably viewed as a form of termination, rather than a
distinctly different event altogether. See Mountain Fuel Supply
v. Reliance Ins. Co., 933 F.2d 882, 890 n.11 (10th Cir. 1991)
(citing cases for the proposition that, in contrast to
cancellation, “[e]xpiration is the natural termination of the
policy at [a date] set forth in the policy’s own terms”). We do
not find that the mere use of both terms within the agreements
necessitates a different meaning for each. See NaturaLawn of
America, Inc. v. West Group, LLC, 484 F. Supp. 2d 392, 401 (D.
Md. 2007) (finding that the use of expiration and termination
“does not undercut th[e] conclusion” that the terms are
analogous).
Viewed as a whole, however, the contract provides support
for the notion that termination correlates to an affirmative act
and the terms are thus distinct here. TCF relies primarily upon
10
NaturaLawn; however, that case, like other cases cited by the
parties, holds limited persuasive value because not all
contracts use the same terms in the same manner. Unlike the
contract in NaturaLawn, no covenant TCF attempts to enforce
explicitly purports to apply upon expiration. Cf. id. at 397(NaturaLawn’s contract language unequivocally noted the
restrictions applied “for two years after the termination or
expiration of the Franchise Agreement”). Thus, we consider how
the Franchise Agreement defines and uses the terms in
ascertaining whether the parties use them interchangeably in a
manner similar to that in NaturaLawn.
Lacking a section defining the terms, the Franchise
Agreement’s sole indicator of what constitutes a termination is
Section 8. Section 8 states that all rights granted to Hamden
would terminate automatically upon the occurrence of the events
listed therein. Section 8 also granted Hamden the ability to
terminate the agreement voluntarily so long as he remained in
compliance with the remaining terms of the agreement and
provided proper notice. Expiration, while not explicitly
defined, appears in Section 2, which explains that renewal could
occur if Hamden provided notice within a set time frame “before
this Agreement’s expiration.”
Under Virginia law, it is fair to read the contract as
indicating that termination only occurred upon the occurrence of
11
these listed events in Section 8, none of which were the natural
end of the term. See Clinch Valley Physicians, Inc. v. Garcia,
414 S.E.2d 599 (Va. 1992). In Clinch Valley, the Supreme Court
of Virginia found a non-competition provision inapplicable to
nonrenewal where the provision indicated its applicability to
termination “for any reasons whatsoever.” Id. at 601. The
court reasoned that the section defining termination solely
referenced the employer’s right to terminate the contract for
cause. Id. Therefore, the court held, “any reasons” must be
construed with respect to any of the reasons for which the party
invoking termination might end the employment contract, and not
as inclusive of mere nonrenewal. Id. Turning to the case sub
judice, Section 8 indicates that termination occurs upon an
action: either Hamden’s violation of the Franchise Agreement or
his notice of his intent to terminate. Applying Clinch Valley’s
principles, the Franchise Agreement’s failure to indicate that
termination arises passively through expiration, which it
recognizes as a separate event in Section 2, indicates that
expiration does not trigger the restrictive covenants. Cf.
Specialty Rental Tools & Supply, LP v. Shoemaker, 553 F.3d 415,
421 (5th Cir. 2008) (limiting “terminate” to an affirmative act
rather than the mere passage of time where the contract referred
to the end of the employment “as ‘ending’—not as ‘terminating’”
on a particular date, and the section defining termination only
12
listed a number of affirmative acts, available to both parties,
necessary to end the agreement).
While its binding effect on Hamden is not at issue, we
consider Section 9 in ascertaining the meaning of “termination.”
The rights and duties in Section 9 apply “[i]f this Agreement
terminates for any reason, and regardless of any dispute which
may exist between [Hamden] and [TCF].” Virginia courts afford
an expansive interpretation where a broad modifier such as “any”
is used. See Sussex Cmty. Servs. Ass’n v. Va. Soc. for Mentally
Retarded Children, Inc., 467 S.E.2d 468, 469-70 (Va. 1996).
When considered in isolation and applying the plain meaning of
“terminate” and “expire,” one may find that termination envelops
expiration. 6 However, we consider the modification power of
“any” in light of Clinch Valley’s holding noted above, and
remain mindful that “any” may broadly apply to any reason for an
affirmative act of termination.
The Confidentiality Agreement contains two non-competition
clauses, which, like Section 9, are not at issue for their
6
We remain unconvinced by TCF’s argument that Section 9’s
heading proves the broad meaning of “termination.” Section 9’s
heading refers to “Expiration, Termination or Non-Renewal,” yet
nowhere in the text of Section 9 are the terms “expiration” or
“non-renewal.” Thus, Section 9 can be read as inferring that
“termination” refers to any of those three terms. However, for
the reasons stated below, we find that the contextual use of the
terms does not support this conclusion.
13
binding effect but are informative in ascertaining the context
for term construction. In its use of “termination,” the non-
competition clause in this agreement suggests that termination
does not encompass expiration. The second clause of this
provision indicates that “[i]f the Franchise Agreement is
terminated before its expiration date, or if [Hamden] assign[s]
or transfer[s] [his] interest in the Franchise Agreement, . . .
then [Hamden] covenant[s], for a period of 2 years after
termination, transfer or assignment.” This language certainly
contemplates the agreement ending before the expiration fifteen-
year term. Based upon this language, “termination” and
“expiration” bear two separate meanings. The prefatory clause
limits the later use of “termination” to include only the end of
the parties’ relationship prior to the natural expiration.
Considering its argument that termination means “the
relationship ends, for whatever reasons,” TCF’s reading would
render “before its expiration date” superfluous. If termination
included an expiration, then there would be no need to note its
application to a termination prior to the expiration date. 7
Thus, in this context, the terms bear different meanings in the
Confidentiality Agreement’s non-competition provisions.
7
Under TCF’s interpretation, the clause could arguably be
read as “expiration before the expiration date.” This would be
nonsensical.
14
The non-disclosure provision also contains two clauses
employing different triggering language. The first clause of
the non-disclosure provision notes its applicability “[d]uring
the term of the Franchise Agreement and thereafter.” This
language undisputedly contemplates the natural end of the
fifteen-year term and thus binds Hamden from the moment he
signed the Franchise Agreement into perpetuity. The second
sentence, however, begins “[i]f there is any termination of this
Agreement,” suggesting an event necessarily different and apart
from the natural ending implied by the first clause. Thus, if
the first non-disclosure provision references the natural end,
then this second provision implicitly requires an ending prior
to May 9, 2011. Had TCF intended for this second provision to
apply regardless of how the parties’ relationship ended, it
would have reiterated or modified the language introducing the
first non-disclosure provision.
Furthermore, reading “any termination” as broader than
simply “terminate” or “termination” in other places within the
contract would create more ambiguities than it would solve. As
noted above, “termination” in the Confidentiality Agreement’s
non-competition provision does not encompass an expiration. In
light of Clinch Valley’s principles noted above, a narrow
construction of “termination”—applying only to the active rather
than passive use—would be appropriate. To read “termination” in
15
this second clause more broadly than in other provisions would
force a signatory to determine whether a term actually carries
multiple definitions at different places on the same page of the
same document.
The non-solicitation provision restricted Hamden “[d]uring
the term of the Franchise Agreement and for 2 years after its
termination or after its assignment or transfer[.]” Not having
any reference to expiration, one may find reason to believe that
termination broadly refers to the point at which the Franchise
Agreement ceased to govern the parties’ relationship.
Application only where the parties ended the relationship before
the full term would be nonsensical, as businesses would
reasonably seek to protect their interests and client bases
regardless of the reason for the end of the franchise
relationship. However, we cannot read this provision in
isolation from other instances that suggest that expiration is
not necessarily a termination. We must afford a uniform
definition to “terminate” so as to avoid creating ambiguity
through a patchwork of rights dependent upon various triggers
for the restrictive covenants.
Having considered the context of the agreements, we find
that “termination,” as used in the agreements before us, does
not encompass expiration. The renewal clause cites the
expiration of the agreement, not the termination, and thus
16
suggests that the terms sufficiently differ. Section 8
identifies a number of actions giving rise to a termination.
The Confidentiality Agreement’s non-compete provision plainly
limits its use of termination internally, by the prefatory
clause’s use of “termination before expiration.” The non-
disclosure provision first contemplates the natural end of the
Franchise Agreement, then introduces “if there is any
termination” in a manner suggestive that the phrases references
an event different and apart from “the term of the Agreement and
thereafter.” The non-solicitation provision does not internally
reference expiration in an either explicit or implicit manner
like the non-competition and non-disclosure provisions.
However, guided by both the need for a consistent definition and
the holding in Clinch Valley, we must construe it narrowly such
that “termination” excludes “expiration”. Thus, we read the
agreements to mean that “termination” refers to the end of the
parties’ relationship prior to May 9, 2011. 8
B.
Having concluded that “termination” does not encompass
expiration under this set of agreements, we find unenforceable
8
Furthermore, even assuming that the context did not
demonstrate the material difference in the terms, ambiguities
are construed against the drafter, in this case, TCF. Doctor’s
Co., 740 S.E.2d at 526.
17
the non-disclosure and non-solicitation provisions to the extent
they rely upon the Franchise Agreement’s termination.
1.
The second clause of the non-disclosure provision requires
“any termination” and could thus only apply in the event that
the parties’ ended the agreement prior to May 9, 2011, the
natural expiration of the fifteen-year term. Being that the
agreement reached its natural conclusion, TCF may not enforce
the second clause of the non-disclosure provision, although this
does not affect its ability to enforce the first clause. 9 The
non-solicitation clause is similarly unenforceable against
Hamden, as it only applied during Hamden’s time as a franchisee
and “for 2 years after [the agreement’s] termination or after
its assignment or transfer[.]” Thus, having read “expiration”
9
The unenforceability of this second clause may not
substantively reduce TCF’s ability to protect its confidential
information. The first clause prohibits Hamden from
1) communicating TCF’s trade secrets to another or 2) otherwise
using them for his gain, unless TCF permits him to do so. The
second clause requires Hamden to “never” use the same
information to design, develop, or operate any business
“specializing in appearance technologies.” The use of
information to design, develop, or operate a business in the
same business as TCF would require either communication to
another or use for Hamden’s own gain. The substantive
difference appears to be that a natural expiration of the
Franchise Agreement could result in permissive use of TCF’s
confidential information, whereas a premature end would not
leave such a possibility. Accordingly, it seems unlikely that
Hamden could perform the actions proscribed in the second clause
in a manner than does not run afoul of the first.
18
as falling beyond the bounds of “termination,” the non-
solicitation clause does not apply to Hamden.
2.
However, the district court erred in finding that the first
non-disclosure clause did not apply to Hamden. 10 The first non-
disclosure clause operates “[d]uring the term of the Franchise
Agreement and thereafter[.]” The parties agree that Hamden
fulfilled his requirements and the franchisor-franchisee
relationship endured for the full fifteen-year term. Unlike the
remaining clauses in dispute, termination is not required to
trigger this restriction. Accordingly, at no time after
entering the agreement can Hamden, without TCF’s permission,
“communicate directly or indirectly, divulge to or use for [his]
benefit or the benefit of any other person or legal entity”
TCF’s proprietary and confidential trade secrets. Hamden
concedes the validity of this first clause of the non-disclosure
provision and its application to him. At no point does he argue
that the substantive restrictions imposed thereby rendered it
10
The district court’s discussion did not explicitly find
error in the first clause. Rather, the court noted, only after
analyzing both clauses, that “Hamden has either already complied
with the non-disclosure clause or is not bound by its
restrictions.” However, the district court concluded its
opinion by finding that “he is not bound by any of the
restrictive covenants in the Franchise Agreement or Non-
Competition Agreement.” Thus, we read the court’s ruling to
have stricken the entirety of the non-disclosure clause.
19
unenforceable. The fact that Hamden fully complied with the
covenant as of the time of the district court’s decision does
not lift the restriction. “Thereafter” denotes indefinite
continuance in the future. Thus, the district court’s ruling
that the first clause of the non-disclosure provision no longer
applied was erroneous.
IV.
To conclude, we find that termination did not encompass
expiration at the end of the fifteen-year term. However, part
of the non-disclosure covenant applies upon expiration. Hence,
Hamden remains bound by the first sentence of the non-disclosure
provision.
AFFIRMED IN PART;
REVERSED IN PART
20