Kadco Contract v. Dow Chemical Corp

UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
No. 99-20041
Summary Calender
KADCO CONTRACT; ECT: ET AL,
Plaintiffs,
KADCO CONTRACT DESIGN CORPORATION,
NICHOLAS ENGINEERING INC.,
Plaintiffs-Appellants,
VERSUS
THE DOW CHEMICAL CORPORATION;
KELLY SERVICES, INC.,
Defendants-Appellees.
Appeal from the United States District Court
for the Southern District of Texas
(H-96-CV-3684)
October 4, 1999
Before DAVIS, EMILIO M. GARZA and DENNIS, Circuit Judges.
PER CURIAM:*
Appellants, Kadco Contract Design Corporation and Nicholas
Engineering, Inc., appeal from the lower court’s order granting
summary judgment in favor of appellee, Kelly Services, Inc.
*
Pursuant to 5TH CIR. R. 47.5, the Court has determined that this opinion
should not be published and is not precedent except under the limited
circumstances set forth in 5TH CIR. R. 47.5.4.
I. BACKGROUND
Appellants and Appellees are both temporary employment
agencies. Appellants had been engaged in a contract with Dow
Chemical Corporation (“Dow”) to supply temporary employees, such as
engineers. The employees were employed by the Appellants, and not
by Dow directly, on a “per-hour” basis and were assigned to work at
Dow as a client of the Appellants.
In 1996, in order to cut costs, Dow decided to hire all future
temporary employees from Appellees rather than the Appellants.
Appellees then hired several of the temporary employees who had
been employed by the Appellants and assigned to work at Dow in
order that they may continue working at Dow under the employ of
Appellees rather than the Appellants.
Appellants filed suit in the 80th District Court of Harris
County on September 30, 1996 alleging tortious interference of
contract on the part of Appellees and conspiracy to commit tortious
interference of contract on the part of the Appellees and Dow.
Kelly properly removed the case to the Southern District of Texas
on October 28, 1996 based on diversity jurisdiction at which time
the Appellees removed Dow as a named defendant. The District Court
granted summary judgment in favor of the Appellees on November 18,
1998.
II. STANDARD OF REVIEW
A district court's decision of a question of state law is
subject to de novo review by this court. Salve Regina College v.
Russell, 499 U.S. 225, 231, 113 L. Ed. 2d 190, 111 S. Ct. 1217
(1991). A summary judgment ruling is also reviewed de novo,
applying the same criteria employed by the district court.
Conkling v. Turner, 18 F.3d 1285, 1295 (5th Cir. 1994).
III. DISCUSSION
A party is entitled to summary judgment if (1) there are no
genuine issues of material fact and (2) the moving party is
entitled to judgment as a matter of law. Fed. R. Civ. P. 56(c).
The district court granted summary judgment to the Appellees.
Appellants argue on appeal that Appellees are not entitled to
judgment as a matter of law because:
(1) the Appellants made a prima facie case of tortious
interference with an at-will employment contract;
(2) the Appellants made a prima facie case of tortious
interference with a covenant not to compete; and
(3) the Appellees have not met their burden of production with
respect to the affirmative defense of justification.
A. Tortious Interference With At-Will Employment Contract
Under Texas law, the elements of tortious interference of
contract are (1) a contract subject to interference exists; (2) the
alleged act of interference was willful and intentional (3) the
willful and intentional act proximately caused damage; and (4)
actual damage or loss occurred. See Powell Indus. v. Allen, 985
S.W.2d 455 (Tex. 1998) (per curiam). It appears clear that an at-
will employment contract is a lawful contract subject to
interference. See Sterner v. Marathon Oil Co., 767 S.W.2d 686
(Tex. 1989). Elements three and four are not disputed. Thus, only
element (2) is discussed below.
It is undisputed that the alleged interference with
Appellants’ employment contracts was intentional. Appellees claim,
however, that element (2) requires that the willful or intentional
interference also be wrongful. Appellee’s argument misstates the
law, however. Relying on persuasive authority only, appellees
point to rulings in which interference which was not “wrongful” was
held not to constitute a tort. See, e.g., C.E. Services, Inc. v.
Control Data Corp., 759 F.2d 1241 (5th Cir. 1985), Caller-Times
Publishing Co., Inc. v. Triad Communications, Inc., 855 S.W.2d 18
(Tex. App. - Corpus Christi 1993). This argument attempts to shift
the burden of proving the “wrongful” nature of the act to the
plaintiff as an element of the prima facie case. Texas appears to
have rejected this approach, however, and has determined that
whether the act was wrongful or not (i.e., justified) is not an
element of the prima facie case of tortious interference of
contract, but rather an affirmative defense. See ACS Investors
Inc. v. McLaughlin, 943 S.W.2d 426 (Tex. 1997). Thus, Appellants
have stated a prima facie case of tortious interference with
contract under Texas law.
B. Tortious Interference With Covenant Not to Compete
In order to make a prima facie case of tortious interference
of contract, there must be a contract subject to interference.
Sterner, 767 S.W.2d at 689. Under Texas Law, a covenant not to
compete is valid and enforceable only if it (1) is ancillary to an
otherwise enforceable contract and (2) does not impose any greater
restraint than necessary to protect the goodwill of the business
(i.e., limited by geography, time, etc.). Texas Bus. & Com. Code
Ann. § 15.50 (Vernon Supp. 1998). A covenant fails this test,
however, if it is ancillary solely to an at-will employment
agreement because any future consideration provided for in the
agreement is illusory. See Light v. Centel Cellular Co. of Texas,
883 S.W.2d 642, 644 (Tex. 1994).
Applying Light, the district court held that there was not an
enforceable covenant not to compete in the Appellants’ employment
contracts. Analyzing the employment contracts used by the
Appellants, the district court found only one element of
consideration other than at-will employment -- a requirement to
return all uniforms and equipment to Dow. The district court held
that this was not sufficient to make the covenant not to compete
“ancillary” to the contract and thus was invalid under Texas law.
We agree with this analysis and find that the covenant not to
compete was not enforceable under Texas law. See Light, 883 S.W.2d
at 647.
Appellants argue that despite the unenforceabilty of the
covenant not to compete, Appellees are still not entitled to
judgment as a matter of law, citing authority holding that there
can be tortious interference with an unenforceable contract. See,
e.g., Clements v. Withers, 437 S.W.2d 818 (Tex. 1969) (finding
tortious interference with a contract unenforceable due to the
statute of frauds). However, the Texas Supreme Court and this
Circuit have rejected this argument in the past. See Travel
Masters, Inc. v. Star Tours, Inc., 827 S.W.2d 830, 832 (Tex. 1991),
NCH Corp. v. Share Corp., 757 F.2d 1540 (5th Cir. 1985) (applying
Texas law). Accordingly, we agree with the district court and hold
that there has been no tortious interference with the covenant not
to compete because it was unenforceable under Texas law and thus
summary judgment was proper with respect to this claim.
C. Affirmative Defense of Justification
Efforts to induce someone to exercise their rights to dissolve
a contract do not constitute tortious interference of contract
because the efforts are justified. See ACS Investors, Inc., 943
S.W.2d at 430. Efforts are justified if (1) the relationship
concerns a matter involved in the competition between the actor and
the other (2) the actor does not employ wrongful means (3) his
action does not create or continue unlawful restraint of trade and
(4) his purpose is at least in part to advance his interest in
competing with the other. See Caller-Times, 855 S.W.2d at 21
(citing Restatement (Second) of Torts § 768(1)). Efforts are
wrongful if they involve physical violence, fraud, civil suits and
criminal prosecutions, but not limited economic pressure. Id.
However, the mere fact that an employment contract is at-will is
not an absolute defense to the tort of interference with contract.
Sterner, 767 S.W.2d at 689.
Appellants rely heavily on Sterner for the proposition that
merely inducing a party to terminate employment under an at-will
employment contract is tortious interference of contract.
Appellants overstate the scope of Sterner however. In applying
Texas law, this Circuit has held that Sterner stands for the
proposition that a third party (in this case Dow) could not force
a temporary employment agency (here the Appellants) to fire an
employee altogether rather than just have the employee reassigned;
the former constituting tortious interference of contract and the
latter not. See DBI v. Amerada Hess, 907 F.2d 506 (5th Cir. 1990).
Sterner does not change the rule that mere economic inducement to
exercise rights under a contract (i.e, by offering superior
employment) does not constitute tortious interference of contract.
See C.E. Services, Inc., 759 F.2d at 1248.
This court has recently addressed a case with strikingly
similar facts under an Erie guess as to Louisiana law, finding that
such acts do not constitute tortious interference of contract.
Huffmaster v. Exxon Co., 170 F.3d 499 (5th Cir. 1999). In
Huffmaster, a temporary agency had a contract with a client. The
client decided to change temporary agencies and the new agency
hired several of the employees of the old agency to continue
working at the client. This court held that the offer of
employment by the new agency did not constitute tortious
interference of contract because a competitive offer of employment
is justified competition and thus an affirmative defense to the
tort of interference with contract. Huffmaster is persuasive
authority with respect to this similar scenario under Texas law
because it was decided under the assumption that Louisiana law
would follow the Restatement and Texas has actually adopted the
Restatement definition of tortious interference of contract. See,
e.g., Sterner, 767 S.W.2d at 689; Caller-Times, 855 S.W.2d at 23.
In the present case, Appellees offered to hire the at-will
employees and assign them to the same positions at Dow they held
with Appellants. If the employees did not accept this offer then
they would remain employed with the Appellants, be reassigned to
different clients and thus no longer work at Dow. However, this is
not the Hobson’s choice Appellants make it out to be; the employees
were not faced with the choice of accepting Appellees’ offer or
becoming unemployed. Rather, they could have remained employed
with the Appellants and been reassigned to a different client.
Unlike Sterner, the Appellees were not attempting to force the
Appellants to fire their employees -- they merely induced the
employees to exercise their rights under the at-will employment
contracts. Accordingly, we find that, as in Huffmaster, the
Appellees have met their burden in proving the affirmative defense
of justification and thus were entitled to judgment as a matter of
law.
IV. CONCLUSION
For the foregoing reasons, we AFFIRM the holding of the
district court.
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EMILIO M. GARZA, Circuit Judge, concurs as to the judgment only.
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