Kenyon Intl Emer Services Inc. v. Mark Malcolm, et

Case: 12-20306 Document: 00512241102 Page: 1 Date Filed: 05/14/2013

IN THE UNITED STATES COURT OF APPEALS United States Court of Appeals Fifth Circuit FOR THE FIFTH CIRCUIT FILED May 14, 2013 No. 12-20306 Lyle W. Cayce Clerk

KENYON INTERNATIONAL EMERGENCY SERVICES, INCORPORATED, Plaintiff–Appellant, versus MARK MALCOLM; GRADY BRAY; RONALD CRANE, JR.; DISASTER MANAGEMENT INTERNATIONAL CORPORATION; CRISIS HUMAN SERVICES, INCORPORATED; MARJORIE BRAY; LEAH HAWLEY; KATHY ROCK; JAMES FAIRBROTHER; SHARON FAIRBROTHER; BRAY ASSOCIATES, Doing Business as Grady Bray, Defendants–Appellees.

Appeal from the United States District Court for the Southern District of Texas USDC No. 4:09-CV-3550 Case: 12-20306 Document: 00512241102 Page: 2 Date Filed: 05/14/2013

No. 12-20306 Before STEWART, Chief Judge, SMITH and WIENER, Circuit Judges.

JERRY E. SMITH, Circuit Judge:*

Kenyon International Emergency Services, Inc. (“Kenyon”), sued the vari- ous defendants to enforce non-competition clauses (“NCCs”). The district court granted summary judgment and attorney’s fees for defendants and sanctioned Kenyon’s attorney, Dax Faubus. Kenyon appeals the fee award, which we affirm; we reverse the order imposing sanctions.

I.

Kenyon provides emergency services for governments and companies that have suffered mass-casualty catastrophes. Because mass casualties are rare, most of its employees are independent contractors. For example, from 2005 to 2008, defendant Mark Malcolm worked about seventy-five full or partial days of intermittent disaster response for Kenyon. All individual defendants except Grady Bray and, for a short time, Kathy Rock were part-time and worked for Kenyon substantially less than Malcolm did.

In connection with their work for Kenyon, defendants Malcolm, Rock, Ronald Crane, Jr., and Marjorie Bray signed activation agreements containing NCCs. In 2009, several independent contractors left Kenyon or started to work on their own.

II.

Kenyon sued eight of the independent contractors and some of their affili- ated companies under eleven legal theories. Protracted proceedings ensued.

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No. 12-20306 In February 2010, the district court issued a detailed opinion denying Ken- yon injunctive relief. It found that “[t]he [NCC] is unenforceable because it is too broad in all respects: it does not limit the area, the tasks, or the time that it pro- hibits its employees from competing with it.”1 On appeal, this court affirmed.2 In June 2010, pursuant to Texas Business and Commerce Code § 15.51(c), the district court awarded the eight defendants attorney’s fees and costs incurred “in defending against Kenyon’s attempt to enforce a covenant not to compete that was unsupported by the contract, facts, or beyond rationality in its breadth.”3 In March 2011, the court awarded defendants supplemental fees in connection with their defense of Kenyon’s first appeal.

In December 2011, the district court granted summary judgment on all remaining claims.4 Defendants sought post-judgment discovery based on their theory that Kenyon was seeking to evade the fee award by selling its assets and fleeing the jurisdiction. Attached to defendants’ motion was an affidavit from defendant Grady Bray that conveyed various anecdotes relating to the supposed “long range plan” of Kenyon to relocate to the United Kingdom, including infor- mation provided by a former Kenyon vice-president (“Employee A”).

Kenyon’s response characterized defendants’ allegations as “absurd” and “utterly false.” Kenyon averred that it “recently discharged two employees, including [Employee A], for performance reasons. . . . [Employee A] was first Case: 12-20306 Document: 00512241102 Page: 4 Date Filed: 05/14/2013

No. 12-20306 reprimanded and demoted . . . [and] subsequently discharged . . . for failing to correct his non-performance.” Attached to Kenyon’s response were (1) an affi- davit from Kenyon’s president, Jerry Novosad; (2) a reprimand letter from Ken- yon’s Chief Executive Officer Robert Jensen to Employee A; and (3) a two-page email that contained the record of a sexually-explicit Internet chat between two individuals. The username of one of the chat participants was identical to the first name of Employee A. The email was not sealed when filed.

At a subsequent hearing, the district court engaged in an extended collo- quy with Kenyon’s attorney about the explicit email. Near the end of the hear- ing, the court stated that “for having filed the irrelevantly scurrilous e-mail, Mr. Faubus, you will contribute $3,500 to the Center for AIDS Research . . . .” Later that same day, the district court sua sponte entered an “Order on Sanctions,” stating in its entirety:

Dax Faubus must give $3,500 to: Center for AIDS Research Baylor College of Medicine–UTHouston Medical School One Baylor Plaza Houston, TX 77030-3411 The court also entered final judgment consolidating its two previous awards of attorney’s fees to defendants.

III.

The district court awarded attorney’s fees and prejudgment interest pur- suant to Texas and Business and Commerce Code § 15.51(c), which provides: If the primary purpose of the agreement to which [a] covenant [not to compete] is ancillary is to obligate the promisor to render per- sonal services, the promisor establishes that the promisee knew at the time of the execution of the agreement that the covenant did not Case: 12-20306 Document: 00512241102 Page: 5 Date Filed: 05/14/2013

No. 12-20306 contain limitations as to time, geographical area, and scope of activ- ity to be restrained that were reasonable and the limitations imposed a greater restraint than necessary to protect the goodwill or other business interest of the promisee, and the promisee sought to enforce the covenant to a greater extent than was necessary to protect the goodwill or other business interest of the promisee, the court may award the promisor the costs, including reasonable attor- ney’s fees, actually and reasonably incurred by the promisor in defending the action to enforce the covenant.

Kenyon contends that because an award of attorney’s fees under Section § 15.51(c) is conditioned on defendants’ meeting evidentiary burdens, the district court’s ruling is akin to a summary-judgment motion, so the standard of review is de novo. The authorities cited by Kenyon establish merely that summary judgments are reviewed de novo.5 Kenyon cites no authority that the fee award is akin to a summary-judgment motion. We review attorney’s fees for abuse of discretion and underlying factual determinations for clear error. Mathis v. Exxon Corp., 302 F.3d 448, 461–62 (5th Cir. 2002).

The NCC is contained in Section 10 of the activation agreements signed by Malcolm, Rock, Crane, and Marjorie Bray: Team Member shall not actively or passively solicit for employment purposes, attempt to recruit, or hire directly, through third parties or for third parties any other Team Member of employee of Kenyon.

Nor will Team Members utilize their position with Kenyon or exper- ience gained while working for Kenyon to solicit or obtain contracts or work that will compete with Kenyon for a period of at least one year has elapsed following effective termination of this Agreement, or until a period of one year has elapsed following termination of any Client contract on which Kenyon has worked in any commercial, management, advisory or technical capacity, whichever is the latter, without the prior written consent of the other party.

As explained, we have already affirmed the denial of injunctive relief, which was Case: 12-20306 Document: 00512241102 Page: 6 Date Filed: 05/14/2013

No. 12-20306 based in part on the district court’s conclusion that “[t]he [NCC] is unenforceable because it is too broad in all respects: it does not limit the area, the tasks, or the time that it prohibits its employees from competing with it.”6 The subsequent grant of summary judgment, which Kenyon does not appeal, reiterated that find- ing.7 Kenyon also does not appeal the refusal to segregate costs or the award of attorney’s fees to defendants who did not sign activation agreements.

Thus, the only remaining issue is whether the district court abused its dis- cretion by concluding that defendants made a sufficient showing under Section 15.51(c). Kenyon contends the court erred in imposing attorney’s fees because (1) “[t]here is no evidence that [Kenyon] knew the [NCCs] were unreasonable in time, geography and scope at the time they were executed” and (2) Kenyon “did not attempt to enforce [Defendants]’ [NCC] to a greater extent than was neces- sary to protect its goodwill and other business interests.”

A.

Kenyon avers that defendants had the burden, which they failed to carry, of showing that Kenyon had actual knowledge of the NCC’s unreasonableness.

The plain language of Section 15.51(c), however, indicates that the key determin- ation is Kenyon’s knowledge of reasonable limits, not—as Kenyon suggests—its knowledge of the reasonableness of the agreement. A party seeking attorney’s fees is required to establish that the opposing party “knew at the time of the execution of the agreement that the covenant did not contain limitations . . . that were reasonable.” § 15.51(c).

Kenyon’s CEO, former president, and majority owner Jensen testified extensively regarding his understanding of the NCCs: that they were worldwide, Case: 12-20306 Document: 00512241102 Page: 7 Date Filed: 05/14/2013

No. 12-20306 overreaching in scope of activity, and basically indefinite in time. Because Ken- yon knew the NCC at issue had essentially no limitations, a fortiori it knew that the clause did not contain reasonable limitations.8 As the district court put it: Kenyon knew when the agreements were signed that the coven- ants were unreasonable. Kenyon’s knowledge of the clause’s base- less expansionism can be inferred from its breadth. The same cove- nant applied to two-day workers and multi-year ones equally. That it is a worldwide restriction is open and obvious. That it continues as long as the client has business with Kenyon is clearly excessive.

Kenyon knew what it taught people, where they had worked, and what they did. Kenyon knew it was imposing total, gratuitous lim- its on people whom it did not equip, train, or imbue with its good- will. The [NCC] is unreasonable on its face; Kenyon operated on no mistaken fact.[9] On appeal, Kenyon relies on two district-court decisions. In Safeworks, LLC v. Max Access, Inc., No. H-08-2860, 2009 WL 959969, at *7 (S.D. Tex. Apr. 8, 2009), the court denied attorney’s fees on summary judgment because “there is no evidence SafeWorks representatives actually knew that the relevant non-solicitation provisions were unreasonable under Texas law.” Relying on Safeworks, the court in Rimkus Consulting Group, Inc. v. Cammarata, 688 F. Supp. 2d 598, 678 (S.D. Tex. 2010), also denied summary judgment: Evidence that [an employer] knew about [an employee’s] responsi- bilities and location is insufficient to establish that [the employer] knew that the noncompetition and nonsolicitation provisions of the Agreement contained unreasonable provisions. Although Texas case law on noncompetition and nonsolicitation restrictions was clear in 1996, there is no evidence that [the employer] knew that the rele- vant provisions of [the employee’s] Employment Agreement were unreasonable under Texas law.

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No. 12-20306 The procedural posture of Safeworks and Rimkus makes them easily distinguish- able: In both, the district court was faced with a motion for summary judgment.

Here, we are reviewing an award of attorney’s fees for abuse of discretion.

Assuming without deciding that Safeworks’s “actual knowledge” require- ment is an accurate statement of Texas law, it follows that Kenyon’s knowledge of the NCC’s overbreadth cannot be inferred merely from its text.10 Even so, the factual findings underlying the fee award were not clearly erroneous. In his deposition, Jensen expressed an understanding of the NCCs as “worldwide” “until [the district court] told us otherwise”; Jensen indicated that the NCC was intended to keep Kenyon’s contractors from working for a competitor in any capacity, even if they had not performed the same function for Kenyon; and Jen- sen agreed with a characterization that the NCC was intended to “run indefi- nitely.” Based on that testimony, the district court’s conclusion that “Kenyon knew when the agreements were signed that the covenants were unreasonable” is “plausible in light of the record viewed as a whole . . . . ”11

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No. 12-20306 B.

To obtain attorney’s fees, defendants were required to show that Kenyon “sought to enforce the covenant to a greater extent than was necessary to protect [its] goodwill or other business interest . . . .” § 15.51(c). Kenyon does not appeal the determination that the NCCs were “unreasonable and unenforceable” because they were “too broad on all three limitations: time, scope, and geography.”12 Kenyon’s briefing focuses on the numerous times it suggested reformation.

In its first verified pleading, however, Kenyon sought to enforce the NCCs “as worded”; it follows that Kenyon sought to enforce them “to a greater extent than was necessary . . . .” § 15.51(c). That Kenyon sought reformation both alternatively and subsequently is of no moment: The finding that “Kenyon attempted to enforce the non-competition clause to the greatest extent possible”13 was not clearly erroneous. The district court did not abuse its discretion by awarding attorney’s fees.

IV.

We next consider whether we have jurisdiction over attorney Faubus’s appeal of the sanctions order.14 Kenyon’s notice of appeal (“NOA”) stated it appealed “from the March 29, 2012 Order on Sanctions . . . and the March 29, 2012 Final Judgment . . . rendering a take nothing judgment against Kenyon . . . and awarding attorney’s fees to Defendants.” The NOA was signed by Dax Faubus as “Attorney-in-Charge for Kenyon” and did not list Faubus as a cap-

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No. 12-20306 tioned party. Faubus initially filed two appellate briefs: one on behalf of Kenyon challenging the fees and one on his own behalf attacking the sanctions. Faubus subsequently filed an opposed motion to submit a single, amended brief address- ing both fees and sanctions. The amended brief was accepted for filing, and the issue of whether Faubus is an appellant was carried with the case.

“An appeal must not be dismissed for informality of form or title of the [NOA], or for failure to name a party whose intent to appeal is otherwise clear from the notice.” FED. R. APP. P. 3(c)(4). Because Faubus, not Kenyon, was the subject of sanctions, Faubus’s intent to appeal the sanctions order is clear from the NOA he submitted on behalf of Kenyon.15 “We consider not only the notice, but also the appellant’s brief, in deter- mining the fairly inferred scope of the appeal.” Williams v. Henagan, 595 F.3d 610, 616 (5th Cir. 2010) (per curiam). Both the NOA and Kenyon’s amended brief address the sanctions order. We have jurisdiction to entertain Faubus’s appeal, and we treat Kenyon’s amended appellate brief as filed on behalf of Kenyon and Faubus.16

V. The district court’s written order does not specify the basis for sanctions, although its oral statement indicates they were imposed for Faubus’s “having filed the irrelevantly scurrilous e-mail” that graphically documented Employee A’s sexual practices.

There are three possibilities. First, Federal Rule of Civil Proce-

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No. 12-20306 dure 11 permits a court to sanction an attorney for a pleading or other document that (among other potential transgressions) is pre- sented for an improper purpose or makes factual representations that are without reasonable evidentiary support. See FED. R. CIV. P. 11(b)(1) and (3), (c). Second, under 28 U.S.C. § 1927, an attorney “who so multiplies the proceedings in any case unreasonably and vexatiously” may be held to account for the excess fees and other costs resulting from her improper conduct. Finally, a court has the inherent authority to impose sanctions . . . .

Johnson v. Cherry, 422 F.3d 540, 548 (7th Cir. 2005). Section 1927 is inapposite here, which leaves two candidates: Rule 11 and inherent power. We review sanctions imposed under both Rule 11 and the court’s inherent power for abuse of discretion.17

A.

Assuming the sanctions were imposed pursuant to Rule 11, the district court committed reversible error by failing to issue a show-cause order.18 Although the court engaged in a colloquy with Faubus about the offending filing, that extended discussion falls short of satisfying Rule 11(c)(3)’s show-cause requirement. Until the end of the hearing, Faubus was never put on notice that sanctions were at issue, nor did he have a chance to contest their imposition orally or in writing.19 “Providing [a sanctioned party] with an opportunity to Case: 12-20306 Document: 00512241102 Page: 12 Date Filed: 05/14/2013

No. 12-20306 mount a defense ‘on the spot’ does not comport with due process.” 1488, Inc. v. Philsec Inv. Corp., 939 F.2d 1281, 1292 (5th Cir. 1991).

Some of the defendants rely on Rule 11(c)(3)’s conditional language (“may order”) for the proposition that notice and an opportunity to respond are discre- tionary. That interpretation misreads the rule: Issuing a show-cause order is a mandatory prerequisite to imposing monetary sanctions sua sponte.20

B.

Federal courts possess wide-ranging implicit authority incident to “‘The judicial Power.’”21 As a general matter, the Federal Rules of Civil Procedure have not displaced the inherent power to impose sanctions.22 “[T]he inherent power springs from the well of necessity, and sparingly so.” Natural Gas I, F.3d at 1407. We look skeptically on the imposition of sanctions sua sponte “without explanation as to why [a particular sanction] was necessary to accom- plish the court’s legitimate . . . purpose.” Natural Gas II, 86 F.3d at 468.

In Corley v. Rosewood Care Center, Inc., 142 F.3d 1041, 1058–59 (7th Cir. 1998), the court addressed a similar sanction: [I]f the court was relying on its inherent power to sanction a bad- faith filing, it should have specifically so stated, along with delineat-

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No. 12-20306 ing its reasons for finding bad faith. The court also should have explained why Rule 11 was inadequate to serve the court’s purposes, for as the Supreme Court observed in Chambers, “when there is bad-faith conduct in the course of litigation that could be adequately sanctioned under the Rules, the court ordinarily should rely on the Rules rather than the inherent power.” 501 U.S. at 50 . . . .

We agree that “even if Rule 11’s . . . procedural requirements [do] not strictly curtail the procedures necessary for a sanction under the inherent power, even that type of sanction requires notice and an opportunity to respond.” Id. at 1059. Because Faubus was afforded neither, the sanctions order could not stand procedurally even if it were otherwise sound.

VI.

We therefore address, for abuse of discretion,23 the merits of the sanctions order to determine whether we remand for a show-cause proceeding or reverse the order sine die. In Chambers, 501 U.S. at 51, the Court affirmed the district court’s resort to inherent power against a party whose “conduct sanctionable under the Rules was intertwined within conduct that only the inherent power could address.” Faubus’s filing of an “irrelevantly scurrilous e-mail,” even if sanctionable, was not “beyond the reach of the Rules.”24 Rather, it was well within the scope of Rule 11(b)(1), pursuant to which a district court may sanction an attorney for presenting a document for “any improper purpose . . . .”

Rule 11, therefore, provides the only plausible basis for the sanctions. “[A] district court is not to read an ulterior motive into a document” unless “the improper purpose is objectively ascertainable.” Whitehead, 332 F.3d at 805.

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No. 12-20306 [I]n determining compliance vel non with each obligation [of Rule 11], the standard under which an attorney is measured is an objective, not subjective, standard of reasonableness under the cir- cumstances. Our emphasis on an objective inquiry has been emphatic; we have expressly rejected any subjective inquiries into the motivation behind a filing . . . .[25] In Whitehead, for example, the sanctioned attorney attempted to execute a judg- ment against Kmart “by seizing currency in the cash registers and vault,” with “media representatives and two United States Marshals” in tow. Id. at 800. “In ascertaining [an improper] purpose, we implied that the sanctioned party would not have acted as he did in the absence of the improper purpose.” Maxxam, 523 F.3d at 585 (5th Cir. 2008).

Faubus has consistently maintained that his sole purpose in filing the explicit email was to demonstrate that Employee A’s termination was for cause rather than part of Kenyon’s plan to flee the jurisdiction. The district court characterized Faubus’s unsealed filing of the offending document as “a vicious, deliberate smear.” Whatever might have been the negative effect on Employee A’s public reputation, however, we can discern no improper purpose in Faubus’s zealous representation of his client. Because the district court “based its ruling . . . on a clearly erroneous assessment of the evidence,” White- head, 332 F.3d at 803 (internal quotation marks omitted), we reverse the sanc- tions order.

Accordingly, the order granting attorney’s fees is AFFIRMED. The order imposing sanctions is REVERSED.