McKie Ford Lincoln, Inc. v. Hanna

#28267-a-SRJ
2018 S.D. 14
IN THE SUPREME COURT
OF THE
STATE OF SOUTH DAKOTA

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McKIE FORD LINCOLN, INC., Plaintiff and Appellant,

v.

SCOTT HANNA and GATEWAY
AUTOMOTIVE, LLC, Defendant and Appellees.

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APPEAL FROM THE CIRCUIT COURT OF
THE SEVENTH JUDICIAL CIRCUIT
PENNINGTON COUNTY, SOUTH DAKOTA
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THE HONORABLE CRAIG A. PFEIFLE
Judge

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JOHN K. NOONEY
ROBERT J. GALBRAITH of
Nooney & Solay, LLP
Rapid City, South Dakota Attorneys for plaintiff
and appellant.

ROGER A. TELLINGHUISEN
MICHAEL V. WHEELER of
DeMersseman, Jensen, Tellinghuisen
& Huffman, LLP
Rapid City, South Dakota Attorneys for defendants
and appellees.

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CONSIDERED ON BRIEFS
JANUARY 8, 2018
OPINION FILED 02/07/18
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JENSEN, Justice

[¶1.] McKie Ford Lincoln, Inc. (McKie Ford) filed suit against Scott Hanna

and Gateway Automotive, LLC (Gateway) seeking to enforce a non-competition and

disclosure agreement (Agreement). Hanna and Gateway filed a counterclaim

alleging a cause of action for barratry. The parties filed cross-motions for summary

judgment. The circuit court granted Hanna and Gateway’s motion and denied

McKie Ford’s motion. McKie Ford appeals.

Background

[¶2.] Scott Hanna was hired as a sales manager for McKie Ford in June of

2009. On June 18, 2009, as part of his employment, Hanna signed the Agreement,

which included a covenant not to compete, stating in pertinent part:

On termination of my employment, for any cause whatsoever, I
will not engage to work for any individual, firm, or entity
engaged in the same or similar business or be a principal,
member, or owner of any entity who is engaged in the same or
similar line of business within 200 miles of the city limits of
Rapid City for a period of one year subsequent to such
termination, not to include any period of violation or period of
time required for litigation to enforce the covenants.

[¶3.] On February 1, 2013, Hanna approached Mark McKie (McKie) to

resign his position. Hanna told McKie he was leaving McKie Ford to sell cars,

trucks, SUVs, campers, RVs, boats, and other recreational vehicles at another

location in Rapid City. In March of 2013, Hanna and Adam Ray began operating

Gateway Autoplex, LLC (Gateway Autoplex) in Rapid City. Ray was an employee of

Granite Buick GMC (Granite Buick) and had also signed a non-compete agreement.

[¶4.] On April 4, 2013, in response to the operation of Gateway Autoplex,

McKie Ford sued Hanna seeking injunctive relief to enforce the covenant not to

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compete against Hanna. Granite Buick sued Ray seeking to enforce the covenant

not to compete against Ray. The two cases were consolidated. Hanna and Ray each

asserted affirmative defenses to the enforcement of the covenants not to compete,

including estoppel, waiver, and fraudulent inducement. The circuit court bifurcated

the proceedings to allow the jury to make fact determinations on the affirmative

defenses raised by Hanna and Ray. A jury found for Hanna and Ray on several of

their defenses to the enforcement of the covenants not to compete. The circuit court

treated the jury’s determination as binding and entered an order denying injunctive

relief against both Hanna and Ray. Granite Buick and McKie Ford appealed,

asserting they did not consent to a trial by jury on the equitable issues. In Granite

Buick GMC, Inc. v. Ray (Granite I), 2014 S.D. 78, ¶ 16, 856 N.W.2d 799, 805, this

Court reversed and remanded for the circuit court to make findings of fact and

conclusions of law on the claims and defenses for injunctive relief.

[¶5.] On remand, the circuit court found in favor of Hanna and Ray and

denied injunctive relief. Granite Buick and McKie Ford appealed. In Granite Buick

GMC, Inc. v. Ray (Granite II), 2015 S.D. 93, ¶ 13, 872 N.W.2d 810, 816, we affirmed

the circuit court’s determination that McKie Ford had waived its right to enforce

Hanna’s covenant not to compete. The case was remitted by the Court on December

30, 2015.

[¶6.] On July 24, 2015, Hanna became an owner in Gateway1 in Pierre.

1. The Gateway automobile dealership in Pierre is a separate legal entity from
Gateway Autoplex in Rapid City. The Gateway entity involved in this
litigation was not a party to any of the proceedings in either Granite I or
Granite II.

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Gateway began operating in August of 2015, selling both new and used automobiles,

including new Ford and Lincoln models. McKie Ford also sold new Ford and

Lincoln models. Gateway is located within 200 miles of McKie Ford in Rapid City.

In August 2015, McKie Ford filed this action against Hanna and Gateway in an

attempt to enforce the Agreement.

[¶7.] The circuit court heard the parties’ cross-motions for summary

judgment on February 4, 2016. The court granted the motion for summary

judgment filed by Hanna and Gateway and denied McKie Ford’s motion. The court

determined that the tolling provision in the Agreement did not extend the one year

term of the non-compete because McKie Ford was unsuccessful in the other

litigation and because the non-compete could not be enforced beyond the two year

limit in SDCL 53-9-11. On April 18, 2017, the circuit court entered a final dismissal

of Hanna and Gateway’s counterclaim upon voluntary stipulation of the parties.

McKie Ford appeals the circuit court’s entry of summary judgment on the

enforceability of the Agreement. We affirm.

Standard of Review

[¶8.] Our standard of review on a grant or denial of summary judgment

under SDCL 15-6-56(c) is well settled. Hofer v. Redstone Feeders, LLC, 2015 S.D.

75, ¶ 10, 870 N.W.2d 659, 661.

Summary judgment is proper where, the pleadings, depositions,
answers to interrogatories, and admissions on file, together with
the affidavits, if any, show that there is no genuine issue as to
any material fact and that the moving party is entitled to
judgment as a matter of law. SDCL 15-6-56(c). We will affirm
only when no genuine issues of material fact exist and the law
was applied correctly. Luther v. City of Winner, 2004 S.D. 1, ¶ 6,
674 N.W.2d 339, 343. We make all reasonable inferences drawn

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from the facts in the light most favorable to the non-moving
party. Paradigm Hotel Mortg. Fund v. Sioux Falls Hotel Co.,
Inc., 511 N.W.2d 567, 569 (S.D.1994). In addition, the moving
party has the burden of clearly demonstrating an absence of any
genuine issue of material fact and an entitlement to judgment as
a matter of law. Muhlbauer v. Estate of Olson, 2011 S.D. 42, ¶ 7,
801 N.W.2d 446, 448.

Id. ¶ 10, 870 N.W.2d at 661-62.

[¶9.] Our standard of review for the interpretation of a contract is also well

settled:

“Contract interpretation is a question of law reviewed de novo.”
Detmers v. Costner, 2012 S.D. 35, ¶ 20, 814 N.W.2d 146, 151.
“When interpreting a contract, this Court looks to the language
that the parties used in the contract to determine their
intention.” Id. “In order to ascertain the terms and conditions
of a contract, we examine the contract as a whole and give words
their plain and ordinary meaning.” Nygaard v. Sioux Valley
Hosps. & Health Sys., 2007 S.D. 34, ¶ 13, 731 N.W.2d 184, 191.

Charlson v. Charlson, 2017 S.D. 11, ¶ 16, 892 N.W.2d 903, 907-08 (quoting Poeppel

v. Lester, 2013 S.D. 17, ¶ 16, 827 N.W.2d 580, 584.

[¶10.] “Questions of statutory interpretation and application are reviewed

under the de novo standard of review with no deference to the circuit court’s

decision.” Long v. State, 2017 S.D. 78, ¶ 5, 904 N.W.2d 358, 361 (quoting Deadwood

Stage Run, LLC v. S.D. Dep’t of Revenue, 2014 S.D. 90, ¶ 7, 857 N.W.2d 606, 609).

Analysis

[¶11.] McKie Ford argues that the non-compete provision of the Agreement

was valid and enforceable against Hanna as to his ownership and operation of

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Gateway starting in July of 2015.2 McKie Ford relies on the language of the

Agreement that the covenant not to compete is enforceable “for a period of one year

subsequent to such termination [of employment], not to include any period of

violation or period of time required for litigation to enforce the covenants.”

(Emphasis added.) Under this language, McKie Ford claims the one year covenant

not to compete began on February 4, 2013, when Hanna left McKie Ford, and it was

tolled two months later on April 4, 2013, when McKie Ford commenced the

litigation against Hanna for his ownership and operation of Gateway Autoplex in

Rapid City. McKie Ford argues the remaining ten-month duration resumed on

December 30, 2015, when the case was remitted by this Court following its decision

in Granite II. Under McKie Ford’s reasoning, Hanna was subject to the non-

compete provision in the Agreement through October 30, 2016. McKie Ford also

argues that the Agreement tolls the running of the two year period in SDCL 53-9-

11, which provides:

An employee may agree with an employer at the time of
employment or at any time during his employment not to engage
directly or indirectly in the same business or profession as that
of his employer for any period not exceeding two years from the
date of termination of the agreement and not to solicit existing
customers of the employer within a specified county, first or
second class municipality, or other specified area for any period
not exceeding two years from the date of termination of the
agreement . . . .

2. McKie Ford initially argues that the covenant not to compete in the
Agreement is valid under South Dakota law, and was not waived as was
determined in Granite I and Granite II. The circuit court did not address
these issues in ruling on the cross-motions for summary judgment because it
determined that the term of the covenant not to compete had expired. We
also determine it is unnecessary to reach these issues because we affirm
summary judgment.

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Hanna argues that the tolling provision is inapplicable here because McKie Ford

was unsuccessful in other litigation and because McKie Ford seeks to enforce the

covenant beyond the two years permitted by SDCL 53-9-11.

[¶12.] We have not previously considered the validity of a provision tolling

the non-compete period for the time required to enforce the covenant through

litigation. A covenant not to compete is a restraint on trade, and SDCL 53-9-8 voids

any contract that restrains trade, other than the enumerated exceptions set out in

SDCL 53-9-9 to SDCL 53-9-12. The exception in SDCL 53-9-11 permits an

employee and employer to enter into a covenant not to compete within the

parameters set by the statute. In considering this exception under SDCL 53-9-11,

“we must construe it narrowly so as to promote the proscription against general

restraints on trade.” Am. Rim & Brake, Inc. v. Zoellner, 382 N.W.2d 421, 424 (S.D.

1986). The statute allows the parties to agree that the employee is prohibited from

engaging in the same or similar business as the employer “for any period not

exceeding two years from the date of termination of the agreement . . . . ” SDCL 53-

9-11 (emphasis added). The statute does not otherwise address a provision that

would toll the period of the non-compete during the time necessary for litigation to

enforce the covenant.

[¶13.] Both parties argue that under the unambiguous terms of the

Agreement, they are entitled to judgment as a matter of law as to the applicability of

the litigation-tolling provision. McKie Ford relies on the language in the Agreement

“not to include any period of violation or period of time required for litigation to

enforce the covenants.” McKie Ford also cites cases from other jurisdictions that

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recognize the period of the non-compete should be tolled for the time necessary to

enforce the covenant not to compete.

[¶14.] Hanna counters that the language “litigation to enforce the covenants”

means the litigation must have been successful to enforce a violation of the non-

compete. Hanna cites Manpower of Guilford County, Inc. v. Hedgecock, 257 S.E.2d

109 (Ct. App. N.C. 1979), arguing that the Agreement language is a contingency-of-

litigation clause. In Hedgecock, the Court of Appeals of North Carolina interpreted

contract language identical to the language at issue here. That court reasoned that

where a one year non-compete agreement contained a provision stating that the one

year period does not include litigation, the duration can exceed one year only when a

court’s decision is favorable to the employer. See id. at 115.

[¶15.] We agree with Hanna that the circuit court correctly granted summary

judgment. There are no facts showing that Hanna violated the covenant not to

compete during the one year period after he left his employment with McKie Ford.

Further, McKie Ford was unsuccessful in its effort to enforce the covenant against

Hanna in the prior litigation. The Agreement permitted the one year non-compete

to be extended for any period of a violation and for “any period of time required for

litigation to enforce the covenants.” (Emphasis added). Because McKie Ford did not

have a right to enforce the covenant not to compete against Hanna in the prior

litigation, it cannot claim the benefit of this tolling provision. The purpose of tolling

a covenant not to compete during pending litigation is to ensure that the employer

receives the benefit of the bargain for the period of time the parties agreed the

employee would not compete with the employer. See JAK Prods., Inc. v. Wiza, 986

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F.2d 1080, 1090 (7th Cir. 1993); Overholt Crop Ins. Serv. Co. v. Travis, 941 F.2d

1361, 1371-72 (8th Cir. 1991); Anakarli Boutique, Inc. v. Ortiz, 152 So. 3d 107, 109

(Fla. Dist. Ct. App. 2014).

[¶16.] McKie Ford’s one year covenant not to compete with Hanna expired on

February 4, 2014. Hanna was no longer subject to the non-compete when he

commenced ownership and operation of Gateway in Pierre in July of 2015. Because

the circuit court correctly granted summary judgment, on the applicability of the

tolling provision in the non-compete, it is unnecessary to discuss whether a

contractual tolling provision can toll the two year limitation period for a non-

compete under SDCL 53-9-11.

Conclusion

[¶17.] Hanna was entitled to judgment as a matter of law, and his motion for

summary judgment was properly granted by the circuit court. We affirm.

[¶18.] GILBERTSON, Chief Justice, and ZINTER and SEVERSON, Justices,

concur.

[¶19.] KERN, Justice, disqualified, did not participate.

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