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Capistrant v. Lifetouch National School Studios, Inc.

Court of Appeals of Minnesota

July 3, 2017

John J. Capistrant, Appellant,
Lifetouch National School Studios, Inc., Respondent.

         Hennepin County District Court File No. 27-CV-14-17918

          Paul R. Smith, John A. Kvinge, Nic S. Puechner, Larkin Hoffman Daly & Lindgren Ltd., Minneapolis, Minnesota (for appellant)

          Charles F. Knapp, Aaron D. Van Oort, Marjan A. Batchelor, Lauren W. Linderman, Faegre Baker Daniels LLP, Minneapolis, Minnesota; and

          Joel P. Schroeder, Best & Flanagan LLP, Minneapolis, Minnesota (for respondent)

          Considered and decided by Cleary, Chief Judge; Kirk, Judge; and Toussaint, Judge. [*]


         When an employer's duty in an employment contract to pay an employee a noncompete fee is triggered by a condition precedent, the non-occurrence of the condition will be excused if enforcement results in a disproportionate forfeiture and if the time frame for the employee to fulfill the condition is not a material part of the contract.


          CLEARY, Chief Judge

         On appeal from the district court's entry of judgment in favor of respondent-employer Lifetouch National School Studios Inc. (Lifetouch), appellant-employee John J. Capistrant argues that the district court erred by (1) granting summary judgment in favor of Lifetouch based on impermissible factual determinations, (2) enforcing a forfeiture clause in a non-compete agreement, absent harm to Lifetouch, and (3) failing to determine the correct method of calculating the residual commission due under the employment contract's non-compete agreement. The district court did not err in determining that there were no genuine issues of material fact as to whether Capistrant immediately returned Lifetouch's property. However, because the employment contract's terms allowed forfeiture of Capistrant's residual commission disproportionate to Lifetouch's harm, we reverse. We remand so that the district court can determine the correct method of calculating the residual commission that Lifetouch owes to Capistrant.


         Capistrant began working at Lifetouch in 1980 in its Minneapolis office. In 1981, Lifetouch transferred Capistrant to work as a photographer and sales representative in California under a Lifetouch territory manager. When that territory manager retired in 1986, Lifetouch broke up the manager's territory and Capistrant took over as the territory manager in the San Francisco Bay Area.

          On June 30, 1986, Capistrant and Lifetouch executed the "Territory Manager Employment Agreement" (the contract). The contract provided that Capistrant would manage a certain territory in exchange for compensation, as defined and calculated in exhibits attached to the contract.

         Under one exhibit attached to the contract, Lifetouch was to compensate Capistrant entirely with "commissions, " which were defined as "the percentage of New Sales Receipts set forth in this paragraph, " minus chargebacks and other charges. This exhibit provided that during the first 72 months of the contract, Capistrant would receive 37.5% "not in excess of the Commission Base, " which in turn was defined as the net sales receipts of the prior territory manager during the fiscal year ending on or before the effective date of the contract. The exhibit also provided that Capistrant would receive a reduced 35% commission from business that Lifetouch transferred to him from previous territory managers. After 72 months of reduced commissions, Capistrant would receive a 40% commission rate.

         The contract contained a non-compete agreement stating:

11. Restriction Against Competition.
. . . .
Territory Manager agrees that during the Term and for twenty-four (24) months following the end of the Term, Territory Manager shall not:
A. Disclose any trade secrets and confidential information of Lifetouch, including Lifetouch's school and customer lists and merchandising techniques, to any person, firm, corporation, association or other entity for any reason or purpose whatsoever.
B. Directly or indirectly, either as an individual for Territory Manager's own account, or on behalf of another person or persons, corporation, partnership or other entity, solicit or deal with any school included in Lifetouch's Business whom Territory Manager solicited or serviced while in the employ of Lifetouch or whom Territory Manager knew to be a customer of Lifetouch or any of Lifetouch's affiliates.
C. Directly or indirectly, either as an individual for Territory Manager's own account, or on behalf of another person or persons, corporation, partnership or other entity, solicit any present or future employee of Lifetouch for the purpose of hiring or attempting to hire such employee.

         Two additional and unnumbered provisions at the end of Paragraph 11 provide:

In the event that Territory Manager shall violate any of the provisions of this section, then Lifetouch shall have the right to seek injunctive relief and any other remedy allowed to it in law or equity or by this Agreement.
At the end of the Term, Territory Manager shall immediately deliver to Lifetouch all of Lifetouch's property . . ., products, merchandise, and all originals and copies of business forms, school or customer lists, shooting schedules, financial statements and any and all other written or printed material in Territory Manager's possession or control and belonging to Lifetouch.[1]

         Lifetouch expanded Capistrant's territory a number of times throughout his employment, including on July 1, 1991, May 29, 2003, and July 26, 2004. Each time the parties would amend and execute the contract exhibit describing the territory. Capistrant understood that, like the territory he initially obtained in 1986, the territories that he subsequently obtained while a territory manager were subject to a "65/35 split" for a period of 72 months. Capistrant understood that this meant he would take a reduced commission of 35% (instead of the full 40%) on added territories in order to "buy into" each territory. Capistrant agreed at his deposition that after the "buy-in" period, the added territories would be included in the residual-commission calculation. Lifetouch had similar "buy-in" agreements with other territory managers.

         While still employed at Lifetouch, Capistrant disputed how Lifetouch calculated his residual commission. Exhibit B, Section III, of the contract, providing for "Residual Commission and Payments for Restriction Against Competition, " reads:

If Territory Manager has duly performed all of Territory Manager's obligations under the Agreement and under any prior Territory Manager Employment Agreement between the parties for a period of at least 6 Fiscal Years prior to the end of the Term, following the end of the Term, Lifetouch shall pay to Territory Manager a Residual Commission equal to 30% of Net Sales Receipts in the Territory during the last Fiscal Year before the end of the Term . . . .[2]
In consideration for payments of Residual Commission to Territory Manager, Territory Manager agrees that the provisions of Paragraph 11 [the non-compete agreement] of the Agreement shall be extended and shall apply during the period Territory Manager is entitled to receive Residual Commission payments. If at any time Territory Manager breaches the provisions of Paragraph 11 of the Agreement, in addition to Lifetouch's other remedies, Lifetouch shall be entitled to terminate Lifetouch's obligation to make any payments of Residual Commission that have not yet been paid by giving Territory Manager written notice of such termination.[3]

          Lifetouch proposed replacing the 1986 contract with a new Territory Manager Employment Agreement with an effective date of November 2003. The proposed contract included a new version of the contract exhibit describing Capistrant's territory that explicitly excluded net sales receipts from transferred territories from the calculation of Capistrant's commissions under the residual-commission clause. Capistrant did not agree to this change and refused to sign the proposed contract.

         In 2014, Lifetouch's calculation of Capistrant's residual commission was $1, 208, 402. Lifetouch excluded from its calculation the net sales receipts from certain transferred territories to which Capistrant failed to "buy in." Capistrant claims that without Lifetouch's improper exclusion of the transferred territories, the net sales at the end of fiscal year 2014 would have been $8, 743, 069, resulting in a total residual commission of $2, 622, 920.70.

         On September 29, 2014, before retiring, Capistrant commenced a declaratory-judgment action in district court requesting a declaration of the rights and duties of the parties under the contract and "the proper calculation of the Residual Commissions due to Capistrant."

         March 31, 2015, was Capistrant's last day at Lifetouch before retiring. A regional director, who was on site, collected a Lifetouch-issued laptop, a company credit card, and building keys from Capistrant. The director did not ask for documents or anything that Capistrant might have at home. The director allowed Capistrant to forward personal emails from his work e-mail to a personal e-mail address. Capistrant and his wife forwarded several business-related documents via e-mail to Capistrant's personal e-mail account, including customer lists, business strategy documents, and financial information.

         In April 2015, Lifetouch counterclaimed for a declaratory judgment and subsequently asserted several other claims not relevant to this appeal.

         Lifetouch served discovery on Capistrant in May 2015, and Capistrant responded on June 25, 2015, disclosing that he had forwarded certain documents via e-mail on his last day of employment. The following day, Capistrant disclosed to Lifetouch that he had several banker's boxes that contained approximately 19, 000 pages of documents, including customer lists, sales data, payroll records, financial statements, and business plans. Capistrant claims that he accumulated the documents over the years he worked at Lifetouch, and that he stored the documents in his attic. Lifetouch asserts that the documents are its property and that Capistrant violated the return-of-property clause in the contract. Lifetouch received the boxes of documents by July 1, 2015, and Capistrant's attorneys blocked Capistrant from accessing his personal e-mail account and allowed Lifetouch access to inspect the account.

         The parties each moved for summary judgment on their declaratory-judgment claims. On May 12, 2016, the district court granted summary judgment on the declaratory-judgment claims in favor of Lifetouch, determining that Capistrant's failure to immediately return Lifetouch's property constituted an unfulfilled condition ...

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