Coates v. Bastian Brothers, Inc
741 N.W.2d 539, 276 Mich. App. 498 (2007)
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Rule of Law:
Unambiguous contract terms, including rights of first refusal and noncompetition clauses, are to be enforced as written according to their plain and ordinary meaning. Parties can contractually waive common law doctrines, such as the first-breach rule, by including explicit language like 'regardless of the reason for termination' in their agreement, even when a material breach occurs.
Facts:
- Plaintiff began working for Bentley & Associates, Inc. in 1980.
- In 1987, Plaintiff and Bentley & Associates, Inc. entered into an employment contract, which included a noncompetition clause for Plaintiff and a right of first refusal for Plaintiff to purchase Bentley stock if Bentley sold it.
- In 2001, Bentley & Associates, Inc. had 4,000 shares outstanding. John F. Waugh and Elnor Waugh, parents of the company's president and vice president, gave 320 shares to their sons, John R. Waugh and Jeffrey Waugh.
- Bentley & Associates, Inc. subsequently redeemed the remaining 3,680 shares of its outstanding stock.
- In October 2002, Bentley & Associates, Inc. terminated Plaintiff's employment without just cause.
- Plaintiff then accepted a position with a competitor.
- The employment contract's noncompetition clause stipulated that the employee would not compete for one year after termination, 'regardless of the reason for termination of employment,' within a 100-mile radius.
- The contract's right of first refusal clause stated it would activate 'In the event the Company shall elect to sell the business or the common capital stock of the Company...'
- The term 'sell' was not defined within the contract.
Procedural Posture:
- Defendants, Bentley & Associates, Inc., initiated a lawsuit against Plaintiff for breaching a noncompetition clause.
- Plaintiff subsequently filed a lawsuit against Bentley & Associates, Inc. for breaching the just-cause and first-refusal provisions of her employment contract.
- The trial court consolidated both lawsuits for a single trial.
- At trial, Plaintiff moved for a partial directed verdict arguing the noncompetition clause was unenforceable, and Defendants moved for a partial directed verdict arguing Plaintiff's right of first refusal had not been activated.
- The trial court denied both motions for partial directed verdicts.
- The jury found that Plaintiff breached the noncompetition clause, awarding Bentley & Associates, Inc. $60,000.
- The jury also found that Bentley & Associates, Inc. breached the right-of-first-refusal provision ($60,000 award to Plaintiff), the just-cause provision ($27,332 award to Plaintiff), and its obligation to pay bonuses ($6,000 award to Plaintiff).
- The trial court entered a net judgment of $33,332 in Plaintiff's favor.
- Defendants appealed to the Michigan Court of Appeals, and Plaintiff cross-appealed to the Michigan Court of Appeals.
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Issue:
1. Does a right of first refusal to purchase stock accrue when the company redeems its own shares, rather than 'electing to sell' them, according to the plain language of an employment contract? 2. Is a noncompetition clause enforceable as a matter of law if its duration, geographical area, and type of employment restrictions are reasonable under state statute and common law? 3. Is an employer barred from enforcing an otherwise valid noncompetition clause by the 'first-breach doctrine' when the employment contract explicitly states the clause applies 'regardless of the reason for termination of employment'?
Opinions:
Majority - Wilder, J.
No, the right of first refusal to purchase stock did not accrue because Bentley & Associates, Inc. redeemed its shares, which is not equivalent to an 'election to sell' as required by the contract's plain language. The court held that the term 'sell' in the contract was unambiguous and, using dictionary definitions, it means 'to transfer in exchange for money' or 'to offer for sale.' Redemption, as defined in corporate law (MCL 450.1344) and Black's Law Dictionary, is the reacquisition of a security by the issuer, which fundamentally differs from a sale to an outside party. Therefore, the condition for the right of first refusal was never met. Yes, the noncompetition clause was enforceable as a matter of law because its terms were reasonable. Under MCL 445.774a(1), noncompetition agreements are permissible if they protect an employer’s reasonable competitive business interests and are reasonable in terms of duration, geographical area, and type of employment. The clause's one-year duration and 100-mile geographic scope were deemed reasonable, especially given Plaintiff's 22 years of employment. While the trial court erred by not deciding this as a matter of law and leaving it to the jury, the jury ultimately enforced the clause, achieving the correct legal outcome. No, Bentley & Associates, Inc. is not barred from enforcing the noncompetition clause by the first-breach doctrine, even though the jury found Bentley breached the employment agreement first by firing Plaintiff without cause. First, Plaintiff's argument regarding the first-breach doctrine was unpreserved on appeal. Second, and more critically, the noncompetition clause explicitly stated that it applied 'regardless of the reason for termination of employment.' This unambiguous language means the parties contractually agreed to opt out of the first-breach doctrine. Courts are bound to enforce unambiguous contract terms as written, respecting the parties' freedom to contract and limiting judicial interference to rewrite agreements.
Concurring-in-part-and-dissenting-in-part - Saad, J.
I concur with the majority on all issues except its holding regarding the enforceability of the noncompetition agreement. I dissent on the noncompetition agreement because defendants failed to preserve the issue. Furthermore, I believe the noncompetition provision should not be enforceable. Since Bentley & Associates, Inc. breached the just-cause provision of the employment agreement first, it should not be allowed to benefit from its wrongful conduct by preventing the wrongfully discharged employee from seeking employment in her field with a competitor.
Analysis:
This case significantly clarifies Michigan's robust stance on contractual interpretation and the sanctity of unambiguous contract terms. By distinguishing 'redemption' from 'sale,' the court reinforces the importance of precise language in contractual rights like first refusal. More broadly, the ruling on the noncompetition clause and the first-breach doctrine underscores the principle that parties can explicitly contract around common law rules. This means that carefully drafted contracts can insulate certain provisions from challenges based on a party's prior material breach, providing greater predictability and enforcement power for employers, especially concerning restrictive covenants. The decision limits judicial discretion in evaluating the 'fairness' of a contract when its terms are clear, prioritizing the 'freedom to contract' over doctrines that might otherwise mitigate harsh outcomes.
