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Slagle and Aviation Associates v. Temso Helicopters, Inc. (10/7/94), 881 P 2d 1127
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NOTICE: This opinion is subject to formal correction
before publication in the Pacific Reporter. Readers
are requested to bring errors to the attention of the
Clerk of the Appellate Courts, 303 K Street, Anchorage,
Alaska 99501.
THE SUPREME COURT OF THE STATE OF ALASKA
AVIATION ASSOCIATES, LIMITED, )
a California Limited ) Supreme Court No. S-5223
Partnership, and CHARLES F. )
SLAGLE, ) Superior Court No.
) 1KE-91-161 CI
Appellants, )
) O P I N I O N
v. )
) [No. 4132 - October 7, 1994]
TEMSCO HELICOPTERS, INC., )
)
Appellee. )
______________________________)
Appeal from the Superior Court of the
State of Alaska, First Judicial District,
Ketchikan,
Thomas M. Jahnke, Judge.
Appearances: James A. Parrish, Parrish
Law Office, Fairbanks, for Appellants. H.
Clay Keene, Keene & Currall, Ketchikan, for
Appellee.
Before: Moore, Chief Justice,
Rabinowitz, Matthews and Compton, Justices.
RABINOWITZ, Justice.
I. BACKGROUND
The central issues in this appeal concern whether the
superior court correctly instructed the jury regarding a covenant-
not-to-compete entered into between Charles Slagle and TEMSCO
Helicopters, Inc. and the calculation of liquidated damages for
violations of the covenant.
Slagle developed Westflight, a Ketchikan commercial air
taxi business. Aviation Associates (AA) subsequently assumed
ownership of Westflight with Slagle as the only general partner.
As a consequence of intense competition from Westflight, in
September 1986 TEMSCO Helicopters, Inc. (TEMSCO) purchased
Westflight, agreeing to a purchase price of $1,000,000 for its
goodwill and $500,000 for its other assets. As part of the sale,
Slagle agreed to a seven-year covenant-not-to-compete.
This covenant provides in part:
AVIATION and Charles F. Slagle
("SLAGLE") for a period of seven (7) years
from the effective date of this agreement
shall not, directly or indirectly, whether as
an owner, shareholder, director, agent,
employee, investor, or in any other capacity
whatsoever compete with TEMSCO, or its
successors or assigns, in the operation of a
commercial air taxi business authorized to do
business under Sections 401 and 135 of the
Federal Aviation Act of 1958, within all
areas of Alaska south of Yakutat.1
The sales agreement (agreement) between Westflight and
TEMSCO further provides for liquidated damages as follows:
In the event AVIATION or SLAGLE violate
the noncompetition covenant set forth in
Paragraph 14, . . . AVIATION shall pay for
each day of a violation the sum of One
Thousand Dollars ($1,000.00) which the
parties hereto agree to be reasonable
compensation to TEMSCO, not a penalty, for
such violation. . . .
On October 1, 1988, Slagle began working for Seley
Corp. (SECO). Subsequently, he managed SECO's Salmon Falls
Resort. SECO conceived of a "Five Star Tour,"which would include
lunch and a nature walk at the Salmon Falls Resort, a
flightseeing trip to Misty Fjords, and a bus tour. On November
13, 1989, Slagle and others met and agreed that the tour price
would be $159.00. On April 30, 1990, Wilderness Resorts, Inc.
was incorporated with SECO and ProMech, Inc. as owners. At this
time Wilderness Resorts d/b/a ProMech Air, a business name used
by ProMech and Wilderness Resorts, was issued a Section 135 air
taxi permit. The Five Star Tour operated eighty-six days in
1990, with three companies, including ProMech Air, providing air
taxi services.
TEMSCO instituted the underlying suit on February 28,
1991, claiming that Slagle's involvement in the Five Star Tour
constituted a violation of his covenant-not-to-compete.2 Slagle
terminated his employment with SECO on that date. The jury
returned a special verdict in TEMSCO's favor, finding that Slagle
had violated the covenant for a period of 473 days, commencing on
November 13, 1989 and continuing through February 28, 1991. The
superior court subsequently entered judgment for TEMSCO in the
principal amount of $473,000.00, with $71,980.32 in prejudgment
interest, $5,111.31 in costs, and $51,800.00 in attorney's fees,
for a total judgment of $601,891.63. This appeal followed.
II. DISCUSSION
A. The Issues on Appeal3
In this appeal AA argues that the superior court's jury
Instruction Nos. 16, 18, and 19, regarding the scope and the
proper application of Slagle's covenant-not-to-compete, and
Instruction No. 22, regarding the calculation of liquidated
damages for violation of the covenant, constitute reversible
errors.4
B. Interpretation of the Covenant-Not-To-Compete
Before examining AA's specifications of error relating
to the superior court's jury instructions, reference should be
made to the superior court's interpretation of the covenant-not-
to-compete, which shaped the instructions now in question.
Initially, the superior court ruled that
a fair reading of [the covenant] in
light of the evidence adduced at the
preliminary injunction hearing and in light
of reason and common sense regarding
commercial affairs leads the court to
conclude that the intent of the parties and
the meaning of the provision is that Aviation
and Slagle were forbidden by the covenant to
have any substantial connection with an air
taxi business in Southeast Alaska operating
under Sections 401 and 135 of the Federal
Aviation Act. It was the purpose of this
provision to prevent Aviation and Slagle from
having any direct or indirect influence or
impact on Temsco's business, its strategic
decision making, or its profits.
Subsequently, the superior court further ruled:
The claim by Aviation Associates and
Slagle that they are forbidden only to
operate an air tax [sic] simultaneously
holding certificates under both Section 401
and Part 135 is a possible reading of the
covenant, but it was not the reasonable
expectation of the parties and it is not a
reasonable reading in light of the whole
record of the relationship between the
parties and the commercial context in which
the transaction took shape.
We are of the view that the superior court's
construction of the covenant-not-to-compete was not erroneous and
that it correctly applied its interpretation in fashioning the
instructions which are questioned in this appeal. The key to the
superior court's interpretation of the covenant-not-to-compete is
its conclusion that Slagle's activities in air taxi competition
with TEMSCO necessarily had to be "substantial"in nature before
the jury was permitted to find that a violation of the covenant
had occurred.5
C. The Instructions
(i) Instruction No. 166
Instruction No. 16 defines the term "substantial
involvement" and defines the level and nature of the restricted
involvement as only that which has "an important impact on the
services of an air taxi business."
AA argues that this instruction is error because it
would be liable if Slagle's "substantial involvement in the
operation of an air taxi business"had a "major impact on the
planning, equipping or operation of an air taxi business."
According to AA, this instruction deemphasizes that Slagle must
himself "operate" a competing air taxi business before a
violation of the covenant exists.
Under Alaska Civil Rule 51(a), "[n]o party may assign
as error the giving or the failure to give an instruction unless
the party objects thereto before the jury retires to consider its
verdict, stating distinctly the matter to which the party objects
and the grounds of the objection." (Emphasis added). The
purpose of this rule is to afford the trial judge an opportunity
to correct the instruction before it goes to the jury.
Drickersen v. Drickersen, 604 P.2d 1082, 1085 n.3 (Alaska 1979).
In the absence of a proper objection, this court will not review
a jury instruction unless the instruction constitutes plain
error.7 Conam Alaska v. Bell Lavalin, Inc., 842 P.2d 148, 153
(Alaska 1992). TEMSCO contends that AA generally failed to
adequately object to the jury instructions at trial, thereby
waiving the right to appeal from the giving of this instruction.
We agree with TEMSCO with regard to this instruction.
AA advocated the requirement that Slagle be "involved
substantially in the operation of a commercial air taxi business"
so it cannot now complain of this portion of the instruction.
Additionally, AA cannot claim on appeal that the "major impact"
language was error because it advocated this language below. The
record does not indicate that AA adequately objected to the
language "planning, equipping or operation of an air taxi
business."8 AA therefore failed to preserve this point for
appeal. Furthermore, we conclude that no plain error exists.9
(ii) Instruction 18
Instruction 18 states in part:
An air taxi business is in
competition with Temsco if it is . . . taking
substantial steps that ultimately result in
the provision of air taxi services in
competition with Temsco. Such substantial
steps include: the acquisition of aircraft
for air taxi operations by purchase, charter,
lease, joint venture, or other means;
entering into agreements with suppliers;
entering into agreements with joint venturers
to provide or complement the air taxi
services; acquiring the use of premises for
the conduct of the business; and acquiring
financing or insurance for the business. At
the time any substantial steps were taken,
the air taxi business need not have had a
valid certificate under Section 401 or Part
135 of the federal aviation statutes or
regulations to be a competitor; but the
substantial steps mentioned above had to
ultimately result in the provision of Section
401 or Part 135 air taxi services in
competition with Temsco.
AA argues that preparatory steps should not constitute
competition in violation of the covenant.10 If we agreed with
AA's interpretation, the instruction would be prejudicial, since
the jury found that Slagle's breach began on November 13, 1989,
months before Wilderness Resorts d/b/a ProMech was incorporated
and issued a Section 135 air taxi permit.
We conclude, however, that the instruction correctly
interprets the covenant. The superior court derived the
substantial step test from De Long Corp. v. Lucas, 176 F. Supp.
104 (S.D.N.Y. 1959), aff'd, 278 F.2d 804 (2d Cir. 1960), cert.
denied, 364 U.S. 833 (1960). That case also involved a covenant-
not-to-compete.11 Id. at 122. The covenantor, Lucas, claimed
that he did not violate the covenant although he engaged in
actions ultimately resulting in competition with De Long, because
those actions "amounted merely to preparation to compete which
never ripened into actual competition until after the no-
competition period had expired . . . ." Id. at 122-23. The De
Long court rejected this argument and held:
Mere planning may not in itself
constitute competition. But where, as here,
affirmative steps are taken which go beyond
the planning stage, planning ripens into
actual competition.
Id. at 123.
As in De Long, Instruction No. 18 does not allow the
jury to find that mere planning constitutes a violation of the
covenant except where substantial steps are taken which
"ultimately result" in competitive air taxi services. The
covenant itself and the extrinsic evidence support interpreting
the covenant as prohibiting such substantial steps, since the
parties intended that the covenant would prevent Slagle from
setting up a new air taxi business in competition with TEMSCO.
We further note that the case at bar is distinguishable
from Wirum & Cash Architects v. Cash, 837 P.2d 692 (Alaska 1992),
which also involved a covenant-not-to-compete. In that case, we
stated in dictum that where no services were rendered prior to
expiration of the no-compete period, no violation existed. Id.
at 710. Specifically, the covenantor had submitted a bid during
the no-compete period, but "no negotiations had occurred, no
contract was signed, no work was performed, nor was a proposal
predicate to negotiating the fee for services prepared." Id. In
the instant case, Slagle's preparatory steps matured into active
competition through the creation and implementation of the Five
Star Tour during the period the covenant was in force.
Furthermore, more than mere submission of a bid has been proven
here. Testimony at trial demonstrates that Slagle was
extensively involved in the planning, formation, and management
of Wilderness Resorts' and the Five Star Tour's air taxi
operations.
To interpret the covenant as suggested by AA would render
the covenant meaningless in important respects. For example,
under AA's theory Slagle could develop a competing air taxi
business and withdraw prior to its certification under Sections
401 or 135, without violating the covenant. Such a result would
defeat the parties' intent and reasonable expectations embodied
in the covenant. Based on the circumstances in this case, we
hold that Instruction 18 is not erroneous since it accords with
the covenant's provisions and the parties' reasonable
expectations as interpreted by the superior court.
(iii) Instruction No. 19
Instruction No. 19 states:
Under the agreement, Slagle is
forbidden to have substantial involvement,
direct or indirect, in any capacity, with a
competing air taxi business. This means he
cannot manage or fly for a competing air taxi
business. But it also means he cannot own,
finance, direct, control, supervise, or give
advice of a significant nature to a competing
air taxi business personally or through
others. And this prohibition applies even
against involvement for the benefit of
another, such as his employer; Slagle is
forbidden to compete himself, and he is
forbidden to help others compete.
(Emphasis added). AA argues that the highlighted language was
contrary to its theory that Slagle, as manager of the Salmon
Falls Resort, merely acted as a consumer of air taxi services.
The superior court was under no obligation to tailor the jury
instructions to arguments made by AA. Cf. Clary Ins. Agency v.
Doyle, 620 P.2d 194, 201 (Alaska 1980) (holding that plaintiffs
are ordinarily entitled to instructions consonant with their
theory of the case, where evidentiary support for the theory
exists). AA advocated instructing the jury that "[i]solated acts
of assistance by Slagle, if any, done occasionally and
voluntarily for the convenience or accommodation of a commercial
air taxi business . . . are not in violation of the parties'
agreement." AA's proposed instruction, in contrast to
Instruction No. 19's interpretation of the covenant's scope,
would grant Slagle far too much leeway to compete with TEMSCO.
We hold that, read in conjunction with Instruction Nos. 16 and
18, Instruction No. 19 correctly delineates the scope of Slagle's
permissible activities under the covenant.
(iv) Instruction No. 22
Under Instruction No. 22, the jury determined that
liquidated damages should be assessed for 473 days of violations.12
Instruction No. 22 states:
You must also decide how long any
competition caused by Slagle's substantial
involvement continued. Specifically, you
must decide the date or dates when the
competition, if any, began and the date or
dates it ended.
Please note that your focus must be
on competition caused by Slagle's substantial
involvement; any competition by an air taxi
business that was not caused by Slagle's
substantial involvement in the business does
not count.
For purposes of this instruction,
Slagle's involvement, if any, caused the
competition if his involvement was a
substantial factor in bringing about the
competition such that the competition would
not have occurred had Slagle not become
involved. Slagle's involvement need not have
been the sole substantial factor; it had only
to be one substantial factor.
The competition, if any, began when
Slagle's involvement caused an air taxi
business: (1) to offer in the market place
the same or similar air taxi services as
Temsco; or, (2) to solicit trade or patronage
from the same class of customers as Temsco;
or, (3) to take substantial steps toward
providing air taxi services in competition
with Temsco.
The competition, if any, stopped
when the competing air taxi business either
stopped offering the services or soliciting
the trade or patronage referred to in the
preceding paragraph, or its competition
ceased being the result of Slagle's
involvement and became instead the product of
that business's own separate initiatives.
Please note also that, under this
instruction, competition may have begun
before any planes flew and may have continued
after Slagle ceased working for Seley
Corporation or its affiliated corporations on
February 28, 1991.
I instruct you that, as a matter of
law, the competition, if any, did not begin
prior to November 13, 1989. You may find
that competition began on that date, a later
date, or at no time; but you cannot find that
competition began before November 13, 1989.
AA's primary attack on this instruction appears to be
that damages could be assessed under this instruction "for each
day of competition that was caused by Slagle's involvement even
if, at the time of the competition, he was not violating the
covenant." AA also uses the metaphor discussed by the parties
below -- if Slagle created a monster, AA claims that Instruction
No. 22 allowed liquidated damages for each day of that monster's
life. This argument is misplaced for two reasons. Instruction
No. 22 limits the time when damages may be assessed to the period
during which competition is the result of Slagle's substantial
involvement.13 When read with the other instructions which
explain the concept of substantial involvement, Instruction No.
22 does not encourage a "runaway verdict, far out of proportion
to any violations Slagle may have committed,"as contended by AA.
We note that although Instruction No. 22 explicitly permitted
liquidated damages on days after Slagle terminated his employment
with SECO, the jury in its special verdict did not find that any
violations occurred after that date. The jury's special verdict
found violations only for a period of time in which ample
evidence supported finding that Slagle was substantially involved
in a competing air taxi operation.
For the reasons stated earlier, we also conclude that
Instruction No. 22 correctly permitted liquidated damages to be
assessed during the period before a Section 135 permit was
issued. Likewise, we reject AA's argument that violations could
only occur on days in which competing air taxis operated flights.
Competition entails more than actual air taxi flights -- it can
involve soliciting customers, obtaining supplies, negotiating
agreements regarding air taxi-related business ventures, and
acquiring financing or insurance for entities in competition with
TEMSCO. Under AA's theory, Slagle would not have been in
competition with TEMSCO even if he contacted TEMSCO customers
seeking their business, provided an air taxi flight did not
operate on that day.
III. CONCLUSION
We hold that AA failed to preserve its arguments
regarding Instruction No. 16 and that Instruction No. 16 does not
constitute plain error. Instruction Nos. 18, 19, and 22 are not
erroneous. The judgment entered by the superior court is
AFFIRMED.
_______________________________
1 Section 401 refers to the Federal Aviation Act of
1958, 401(d), 49 U.S.C. 1371(d) (1976), which governs
certification of commercial air taxis. Section 135 refers to 14
C.F.R. 135, which governs various commercial air taxi services
including "air commerce of persons or property for compensation
or hire as a commercial operator"that do not exceed specified
seating and payload capacities. 14 C.F.R. 135.1(a)(3) (1992).
2 Witnesses at trial testified that Slagle personally
contacted and negotiated with local air taxis, with the exception
of TEMSCO, to solicit their participation in the Five Star Tour;
actively solicited TEMSCO's customer, Grayline/Holland America;
actively undertook the creation and implementation of Wilderness
Resorts' air taxi business; controlled Wilderness Resorts' air
taxi participation in the Five Star Tour and flights to the
Metlakatla Reservation for Grayline/Holland America's Metlakatla
Tour; inquired into purchasing planes for SECO; negotiated how to
divide the Five Star Tour fare; undertook efforts to obtain Part
135 insurance; led insurance agents to believe that he would
personally select ProMech Air's pilots; made quality control
suggestions to the air taxis; gave orders to ProMech Air
employees; and was responsible for Five Star Tour's scheduling
logistics.
3 AA has also specified as error the superior court's
denial of its motion to compel TEMSCO to respond to its discovery
requests. The superior court ruled that AA's requests for
discovery were overly broad and as a consequence granted TEMSCO's
request for a protective order.
We decline to review this specification of error. AA's
appellate briefing of this issue is entirely too cursory to
warrant review. See Gates v. City of Tenakee Springs, 822 P.2d
455, 460 (Alaska 1991).
4 Jury instructions involve questions of law, which we
review under an independent judgment standard. Beck v. State,
Dep't of Transp. & Pub. Facilities, 837 P.2d 105, 114 (Alaska
1992). An erroneous statement of law in jury instructions will
not be reversed unless prejudice is demonstrated. Id.
Generally, interpretation of contractual agreements,
including covenants-not-to-compete, presents a question of law.
Fairbanks North Star Borough v. Tundra Tours, Inc., 719 P.2d
1020, 1024 (Alaska 1986). The primary goal of contract
interpretation is to give effect to the parties' reasonable
expectations. Stepanov v. Homer Elec. Ass'n, Inc., 814 P.2d 731,
734 (Alaska 1991). The parties' reasonable expectations are
assessed based upon the subject documents, extrinsic evidence,
and relevant case law. Tundra Tours, 719 P.2d at 1024.
5 AA argues that the covenant-not-to-compete should be
narrowly construed because it constitutes a restraint on trade.
Our decisions have distinguished between covenants-not-to-compete
which are ancillary to sales agreements and employer-employee
covenants. Compare Wirum & Cash Architects v. Cash, 837 P.2d 692
(Alaska 1992) (involving a partner's withdrawal from a
partnership); National Bank of Alaska v. J.B.L. & K., Inc., 546
P.2d 579 (Alaska 1976); Barber v. Northern Heating Oil, Inc., 447
P.2d 72 (Alaska 1968); with Data Management v. Greene, 757 P.2d
62 (Alaska 1988); and DeCristofaro v. Security National Bank, 664
P.2d 167 (Alaska 1983). As one court has noted,
where . . . the noncompetition covenant
was ancillary to the sale of a business, it
may be interpreted more liberally. . . .
Under such circumstances, the parties
presumably bargain from positions of equal
bargaining power.
Centorr-Vacuum Industries, Inc. v. Lavoie, 609 A.2d 1213, 1215
(N.H. 1992) (citations omitted).
Even construing the covenant-not-to-compete strictly,
we are not persuaded that the superior court's interpretation is
erroneous.
6 Instruction No. 16 reads in full:
The term "substantial involvement
in the operation of an air taxi business"has
no precise definition; there is no checklist
of technical characteristics that tells you
exactly when such involvement has occurred.
Rather, the test is a practical one that
requires you to consider all the facts and
circumstances in reaching a judgment about
the extent of any involvement.
Initially, you should understand
that involvement in the operation of a
commercial air taxi business can be almost
non-existent, as where the person is the
custodian of the building or delivers the
mail or office supplies to the operation. At
the other extreme, one can have intense,
constant, day-to-day involvement, as when one
is the manager or pilot for the operation.
In the first example, the involvement is not
substantial; in the latter examples, the
involvement is very substantial. As you can
see, there is a range or continuum of
involvement from slight involvement to
intense involvement. A slight involvement by
Slagle would clearly not be a violation of
the agreement; an intense involvement would
clearly be a violation of the agreement.
Thus, to be substantial, the
involvement must be more than slight
involvement. It must be involvement that has
a major impact on the planning, equipping, or
operation of an air taxi business. To be
substantial, the involvement need not be
constant; it may be intermittent. It need
not be involvement on site; it may be by
means of written or telephonic consultation
or direction. And it need not directly
impact routine operations; it may consist of
decision-making on questions of finance,
marketing, and strategic planning for an air
taxi business. But, as noted, the
involvement must have an important impact on
the success of an air taxi business.
7 Plain error exists when a jury instruction
obviously creates "_a high likelihood that the jury will follow
an erroneous theory resulting in a miscarriage of justice._"
Conam Alaska, 842 P.2d at 153 (quoting Ollice v. Alyeska Pipeline
Serv. Co., 659 P.2d 1182, 1185 (Alaska 1983)).
8 AA stated below, "[he] was involved -- I just don't
know that it is an impact on the planning or equipment is [sic] a
violation." This vague objection alone cannot satisfy the
requirements of Civil Rule 51(a).
9 Instruction Nos. 16, 18, 19, and 22 should be read
against an evidentiary record which discloses ample support for
the jury's finding that Slagle had substantial involvement in the
operations of competing air taxi businesses after he had entered
into the non-competition agreement with TEMSCO. See supra note
2.
10 AA additionally argues that the court omitted the
concept of "commercial"from the concept of "air taxi business."
When read as a whole, the jury instructions clearly require a
finding that the air taxi service was commercial, that is,
certified under Sections 401 or 135, before any violation would
ensue. In any case, AA fails to allege any prejudice resulting
from use of the term "business."
11 The De Long covenant stated that Lucas was "_not to
compete or assist anyone to compete' with [De Long] _in any
business_ relating to his former employment . . . ."for a period
of two years. Id. at 108.
12 In regard to Slagle's violations of the covenant the
jury returned in part a special verdict in which it found as
follows:
2. Was the air taxi business, as a
result of Slagle's involvement, in
competition with Temsco?
YES (yes or no)
If your answer is "yes,"go on to
3, 4, 5 and 6; if your answer is "no,"enter
judgment for Slagle on p.2.
3. When did the competition first
start?
Nov. 13, 1989 (enter date)
4. On how many days, if any, was
the air taxi business in competition with
Temsco (as a result of Slagle's involvement)
up to and including February 28, 1991.
473 (enter number)
13 Substantially, Instruction No. 22 does not permit
liquidated damages if the competition was no longer the result of
Slagle's involvement, but another's efforts.
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