Herring Gas Co., Inc. v. Magee

United States Court of Appeals,

Fifth Circuit.

No. 93-7207.

HERRING GAS COMPANY, INC. and Edward G. Herring, Plaintiffs-
Appellees,

v.

W. Otto MAGEE and Michael B. Burris, Defendants-Appellants.

June 9, 1994.

Appeal from the United States District Court for the Southern
District of Mississippi.

Before DUHÉ and EMILIO M. GARZA, Circuit Judges, and STAGG,
District Judge.*

EMILIO M. GARZA, Circuit Judge:

W. Otto Magee and Michael B. Burris appeal a judgment which

declares that a noncompete agreement is enforceable in Louisiana.

Magee and Burris argue that the Mississippi Supreme Court, if

presented with this case, would hold the noncompete agreement

unenforceable in Louisiana, and therefore the district court,

sitting in diversity, should have held the contract unenforceable

in Louisiana as well. We affirm.

I

The following facts are undisputed. Edward G. Herring is the

principal stockholder in Herring Gas Company, Inc. ("Herring Gas"),

a concern which sells propane to residential and commercial

customers in Louisiana and Mississippi. At times relevant to this

appeal Herring Gas operated retail stores in nine or ten

*
District Judge of the Western District of Louisiana,
sitting by designation.

1
communities in Mississippi, with annual sales of 10,000,000 gallons

of propane. Herring Gas operated retail stores in three or four

communities in Louisiana, with annual sales of 2,000,000 gallons.1

Magee worked for Herring Gas as supervisor of retail sales in

Louisiana and Mississippi, and owned about five percent of the

company's stock, until his employment was terminated by a written

agreement. The agreement—among Magee, Burris,2 Herring, and

Herring Gas—provides for Herring Gas to purchase all of Magee's

stock and stock rights. The agreement also contains a covenant not

to compete, wherein Magee and Burris agree not to "engage in any

activity competitive with or adverse to Herring Gas Company, Inc.,

business" within 50 miles of any location of Herring Gas. The term

of the noncompete agreement is six years, and it is stipulated that

the agreement "shall be subject to and governed by the laws of the

State of Mississippi."

After the agreement was signed, Magee and Burris discovered

that a Louisiana statute forbids enforcement of noncompete

agreements beyond a term of two years. La.Rev.Stat.Ann. § 23:921

(West Supp.1994) provides:

A. Every contract or agreement, or provision thereof, by which

1
The precise number of retail stores in Mississippi and
Louisiana is unclear. The district court noted that there was
"some question regarding whether ... Herring Gas operated retail
stores in Purvis, Mississippi, and Ferriday, Louisiana." Whether
stores were operated in those two communities, however, is not
material to any issue raised on appeal.
2
Burris was an employee and stockholder of Herring Gas until
he sold his stock to Magee. At that point Magee agreed to pay
Burris 257 of the proceeds of a subsequent sale of his stock in
Herring Gas.

2
 anyone is restrained from exercising a lawful profession,
trade, or business of any kind, except as provided in this
section, shall be null and void.

* * * * * *

C. Any person, including a corporation and the individual
shareholders of such corporation, who is employed as an agent,
servant, or employee may agree with his employer to refrain
from carrying on or engaging in a business similar to that of
the employer and/or from soliciting customers of the employer
within a specified parish or parishes, municipality or
municipalities, or parts thereof, so long as the employer
carries on a like business therein, not to exceed a period of
two years from termination of employment.

Over two years after the agreement was signed, Magee and Burris

informed Herring and Herring Gas of the existence of § 23:921.

Herring and Herring Gas then filed suit in federal district

court in Mississippi, seeking a declaratory judgment that the

noncompete agreement is fully enforceable against Magee and Burris.

Magee and Burris counterclaimed for a declaratory judgment that the

noncompete agreement is unenforceable in Louisiana, alleging that

the agreement is contrary to the public policy of Louisiana, as

expressed in § 23:921. The parties submitted cross-motions for

summary judgment, and the district court granted summary judgment

in favor of Herring and Herring Gas. See Herring Gas Co., Inc. v.

Magee, 813 F.Supp. 1239 (S.D.Miss.1993). Magee and Burris appeal.

II

Magee and Burris argue that the district court erred by

granting a declaratory judgment that the noncompete agreement is

enforceable in Louisiana. Although the parties to the agreement

stipulated that the contract would be governed by Mississippi law,

Magee and Burris contend that La.Rev.Stat.Ann. § 23:921 bars

3
enforcement of the noncompete agreement in Louisiana. According to

Magee and Burris, the Mississippi Supreme Court, applying

Mississippi conflict of laws rules, would follow § 23:921 insofar

as the agreement is to be enforced in Louisiana, because (1)

Louisiana has a fundamental policy against noncompete agreements

with a term greater than two years, and (2) Louisiana has a

materially greater interest than Mississippi in the enforcement of

the noncompete agreement in Louisiana. See Restatement (Second) of

Conflict of Laws § 187(2)(b) (1971). Magee and Burris contend that

the Mississippi Supreme Court would have held the agreement

unenforceable in Louisiana under Louisiana law, but enforceable in

Mississippi according to Mississippi law.

We review the district court's grant of a summary judgment

motion de novo. Davis v. Illinois Cent. R.R., 921 F.2d 616, 617-18

(5th Cir.1991). Summary judgment is appropriate if the record

discloses "that there is no genuine issue of material fact and that

the moving party is entitled to a judgment as a matter of law."

Fed.R.Civ.P. 56(c).

Because federal jurisdiction in this case is premised on

diversity of citizenship, the district court was bound to apply the

conflict of laws rules of the forum state—Mississippi. See Klaxon

Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496, 61 S.Ct. 1020,

1021, 85 L.Ed. 1477 (1941) (citing Erie R.R. Co. v. Tompkins, 304

U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938)); Allison v. ITE

Imperial Corp., 928 F.2d 137, 138 (5th Cir.1991) (citing Erie and

Klaxon ). The district court held that the Mississippi Supreme

4
Court would follow § 187 of the Restatement (Second) of Conflict of

Laws in deciding whether Mississippi substantive law—which the

parties chose—or Louisiana substantive law would govern the

enforcement of the noncompete agreement.3 Magee and Burris do not

challenge the district court's determination that the Mississippi

Supreme Court would follow § 187, and we assume arguendo that that

determination is correct.4

Section 187 provides:

The law of the state chosen by the parties to govern
their contractual rights and duties will be applied ... unless
... application of the law of the chosen state would be
contrary to a fundamental policy of a state which has a
materially greater interest than the chosen state in the
determination of the particular issue and which, under the
rule of § 188, would be the state of the applicable law in the
absence of an effective choice of law by the parties.5

3
Because "the Mississippi Supreme Court ha[d] not expressly
addressed Section 187," the district court attempted to predict
how the Mississippi Supreme Court would rule if it were to
consider § 187. Cf. Thomas v. Hoffman-LaRoche, Inc., 949 F.2d
806, 812 (5th Cir.) (discussing "the most likely result to be
reached by a Mississippi court"), cert. denied, --- U.S. ----,
112 S.Ct. 2304, 119 L.Ed.2d 226 (1992); Hanley v. Forester, 903
F.2d 1030, 1032 (5th Cir.1990) ("In resolving the question of
which state's law is best applied to the particular facts of this
case ... we are confronted with deciding how the Supreme Court of
Mississippi would rule...." (citations omitted)).
4
But see Miller v. Fannin, 481 So.2d 261, 262 (Miss.1985)
("The intention of the parties as to the law governing the
validity, construction and effect of a property settlement or
separation agreement will be respected in the absence of anything
violating the public policy of the forum jurisdiction." (emphasis
added)).
5
Section 188 provides:

(1) The rights and duties of the parties with respect
to an issue in contract are determined by the local law
of the state which, with respect to that issue, has the
most significant relationship to the transaction and
the parties under the principles stated in § 6.

5
Restatement (Second) of Conflict of Laws § 187(2)(b). The district

court held that under § 187 Mississippi law governs the contract,

and La.Rev.Stat.Ann. § 23:921 "has no bearing on the Court's

analysis," because (1) "Louisiana does not have a materially

greater interest in the enforceability of the covenant not to

compete;" and (2) Louisiana "would not be the state of the

applicable law under Section 188" of the Restatement. The district

court reasoned that Louisiana did not have a materially greater

interest in enforcement of the contract because "two of the parties

to the termination agreement [Herring and Herring Gas] are

Mississippi residents, the termination agreement was executed in

(2) In the absence of an effective choice of law by the
parties (see § 187), the contacts to be taken into
account in applying the principles of § 6 to determine
the law applicable to an issue include:

(a) the place of contracting,

(b) the place of negotiation of the contract,

(c) the place of performance,

(d) the location of the subject matter of the
contract, and

(e) the domicil, residence, nationality, place of
incorporation and place of business of the
parties.

These contacts are to be evaluated according to their
relative importance with respect to the particular
issue.

(3) If the place of negotiating the contract and the
place of performance are in the same state, the local
law of this state will usually be applied, except as
otherwise provided in §§ 189-199 and 203.

Restatement (Second) of Conflict of Laws § 188. Section 6
of the Restatement, referred to in § 188, is quoted infra.

6
Mississippi, and the covenant not to compete restricts the rights

of [Magee and Burris] to do business in Mississippi to a greater

degree than it does in Louisiana." With regard to the latter

conclusion, the district court noted that most of the Herring Gas

retail stores, and the bulk of its sales, are in Mississippi.

Magee and Burris contend that the district court erred because

the Mississippi Supreme Court would have found that Louisiana has

a materially greater interest in the enforcement of the noncompete

agreement in Louisiana.6 Magee and Burris essentially contend that

the district court erred in identifying "the particular issue" when

deciding whether Louisiana "has a materially greater interest than

[Mississippi] in the determination of the particular issue."

Restatement (Second) of Conflict of Laws § 187(2)(b). The district

court identified the particular issue as the enforcement vel non of

the noncompete agreement. Magee and Burris describe the particular

issue more narrowly—as the enforcement vel non of the noncompete

agreement in Louisiana. They contend that the Mississippi Supreme

Court would regard the operation of the noncompete agreement in

Louisiana and in Mississippi as two separate issues, and would

6
Magee's and Burris's brief could also be construed as
challenging the district court's conclusion that Louisiana "would
not be the state of the applicable law under Section 188" of the
Restatement. However, because Magee and Burris fail to show that
the district court erred by concluding that Louisiana does not
have a materially greater interest in the enforcement of the
noncompete agreement, see infra, Magee and Burris would not be
entitled to relief, even if the district court's conclusion
regarding § 188 was erroneous. See Restatement (Second) of
Conflict of Laws § 187(2)(b) (describing conjunctively the
conditions for departing from the parties' choice of law).
Therefore we do not decide whether the district court's holding
regarding § 188 is correct.

7
conclude that Louisiana has a materially greater interest in the

former.7 We disagree.

The cases which Magee and Burris cite do not suggest that the

Mississippi Supreme Court would divide the "materially greater

interest" analysis along state lines, although Grace v. Orkin

Exterminating Co., 255 S.W.2d 279 (Tex.Civ.App.—Beaumont 1953, writ

ref'd n.r.e.), at first blush may appear to support their

argument.8 There it was held that, although Louisiana law governed

the enforcement of a noncompete agreement in Louisiana, it did not

govern enforcement of the agreement in Texas. See id. at 291. The

court stated: "The operation of these covenants can be

conveniently divided by the boundary between Texas and Louisiana."

See id. However, the logic of Grace does not require a similar

division of the agreement in this case.

In Grace, the parties did not stipulate which state's law

governed their agreement, so the district court sought to divine

the parties' unstated preference regarding choice of law. The

7
The district court decided that Louisiana has "at most, an
interest equal to that of Mississippi" in the enforcement of the
agreement in both states. Therefore, the district court
concluded that the Mississippi Supreme Court would apply
Mississippi law to the enforcement of the agreement in Louisiana
and in Mississippi. Magee and Burris contend that Louisiana has
a materially greater interest than Mississippi in the enforcement
of the contract in Louisiana because two of the four parties to
the agreement are domiciled in Louisiana, and insofar as the
contract is enforced in Louisiana, the place of performance and
the location of the subject matter are entirely in Louisiana.
Cf. Restatement (Second) of Conflict of Laws § 188.
8
Of course we recognize that the Texas court's application
of Texas conflict of laws principles in Grace provides, at most,
an instructive analogy which the Mississippi courts would not be
bound to follow.

8
court presumed that the parties intended to make a valid agreement.

Therefore it inferred that the parties intended the agreement to be

governed in Texas by Texas law, which permitted the enforcement of

the parties' bargain.9 In this case, by contrast, dividing the

operation of the noncompete agreement along state lines would

violate the parties' expressed intent: the parties stipulated that

Mississippi law should govern the enforcement of the contract in

both Louisiana and Mississippi. Furthermore, whereas in Grace the

court bifurcated the operation of the contract in order to give the

parties' agreement "such legal effect and validity as could be

given it," dividing the operation of the noncompete agreement here

would (at least according to Magee's and Burris's argument) nullify

the parties' bargain—both as to choice of law and as to the effect

of the noncompete agreement in Louisiana. Grace therefore does not

support Magee's and Burris's position.10

We, like the parties to this appeal, have been unable to find

a case where the issue now before us, or one similar to it, has

been decided. However, we have recourse to decisions describing

Mississippi's conflict of laws principles, and to the Restatement

9
See Grace, 255 S.W.2d at 292-93 ("We conclude that the
parties to the written contract intended their written agreement
to be given such legal effect and validity as could be given it,
and as an incident of this intention should be taken to have
necessarily intended that validity be determined by the system of
law which would give effect to the agreement rather than by a
system which would hold it invalid.").
10
Magee and Burris cite numerous other cases in arguing that
the "particular issue" in this case is the operation of the
noncompete agreement in Louisiana. The cases cited do not
support that argument.

9
(Second) of Conflict of Laws, which the Mississippi Supreme Court

has adopted.11

Under Mississippi law, contracting parties can decide which

state's law will govern their agreement. In Castleman v. Canal

Bank & Trust Co., 171 Miss. 291, 156 So. 648 (1934), the Supreme

Court of Mississippi stated:

[W]e regard it as the settled law that, when a substantial
portion of a transaction has been had and is to be had in one
state and a substantial portion in another, the parties may by
express terms agree as to which of the laws of the two states
are to govern in respect to the obligations of that
contract.... [S]o long as made in good faith and under
admissible facts, such a stipulation is as good in law as any
other provision which, under the liberty of contract, the
parties may elect to insert in their agreement.

Id. at 649 (citations omitted). "The general rule is that courts

will give effect to an express agreement that the laws of a

specified jurisdiction shall govern, particularly where some

material element of the contract has a real relation to, or

connection with, such jurisdiction." Miller v. Fannin, 481 So.2d

261, 262 (Miss.1985), cited in Cox v. Howard, Weil, Labouisse,

Friedrichs, Inc., 619 So.2d 908, 911 (Miss.1993).

The Mississippi Supreme Court has also made it clear that its

conflict of laws jurisprudence will be guided by the considerations

outlined in § 6 of the Restatement. See Ford v. State Farm Ins.

Co., 625 So.2d 792, 794 (Miss.1993) (stating that the Mississippi

Supreme Court, "[e]mbracing" § 6, "enumerated a number of factors

11
See Newman v. Newman, 558 So.2d 821, 823 (Miss.1990)
("[I]n 1968 this Court embraced the choice of law principles now
generally advanced in Restatement (Second) of Conflict of Laws
(1971).").

10
relevant to a choice of law determination"); Spragins v. Louise

Plantation, Inc., 391 So.2d 97, 99-100 (Miss.1980) ("In cases

involving a choice-of-law or conflict-of-law problem, this court

has adopted the center of gravity doctrine or the most significant

relationship test.... Especially helpful in identifying

choice-influencing considerations and the most significant

relationship is § 6 of [the Restatement]."); Mitchell v. Craft,

211 So.2d 509, 516 (Miss.1968) (adopting § 6).

Therefore, were the Mississippi Supreme Court to apply

Restatement § 187 to this case, we believe that that court's ruling

would be guided by (1) the principle that the contacting parties'

choice of law should generally be honored; and (2) the

considerations enumerated in Restatement § 6. Section 6 provides:

(1) A court, subject to constitutional restrictions, will
follow a statutory directive of its own state on choice of
law.

(2) When there is no such directive, the factors relevant to
the choice of the applicable rule of law include

(a) the needs of the interstate and international
systems,

(b) the relevant policies of the forum,

(c) the relevant policies of other interested states and
the relative interests of those states in the
determination of the particular issue,

(d) the protection of justified expectations,

(e) the basic policies underlying the particular field of
law,

(f) certainty, predictability and uniformity of result,
and

(g) ease in the determination and application of the law
to be applied.

11
Restatement (Second) of Conflict of Laws § 6. The application of

these considerations to the facts of this case leads us to the

conclusion that the Mississippi Supreme Court would not adopt the

approach advocated by Burris and Magee—viewing the "particular

issue" as the enforceability of the noncompete agreement in

Louisiana alone. If presented with this case, the Mississippi

Supreme Court would take the approach which the district court

took—deciding whether Louisiana has a materially greater interest

than Mississippi in the enforceability of the agreement in both

states.

Section 6(2)(c) of the Restatement admonishes the court to

consider "the relevant policies of other interested states and the

relative interests of those states in the determination of the

particular issue." Louisiana is clearly an interested state, and

its policies and interests would be better served by the

application of its laws—specifically La.Rev.Stat.Ann. §

23:921—within its borders. Furthermore, the approach to

Restatement § 187 advocated by Magee and Burris is more likely to

result in the application of Louisiana law to the noncompete

agreement in Louisiana. Magee and Burris point out that two of the

four parties to the agreement are domiciled in Louisiana, and

insofar as the contract is to be enforced in Louisiana, the place

of performance and the location of the subject matter of the

agreement are located entirely within the state's boundaries.

Consequently, identifying enforceability in Louisiana as the

"particular issue" is more likely to result in a finding that

12
Louisiana has a materially greater interest, and in the application

of Louisiana law despite the parties' stipulation to the contrary.

Nevertheless, other factors lead us to the conclusion that the

Mississippi Supreme Court would not adopt the solution proposed by

Magee and Burris. The commentary to § 6 explains that §

6(2)(d)—requiring that consideration be given to "the protection of

justified expectations"—is especially important in cases where the

parties have stipulated as to choice of law. See Restatement

(Second) of Conflict of Laws § 6 cmt. c (stating that "[v]arying

weight will be given to a particular factor ... in different areas

of choice of law," and that "the policies in favor of protecting

the justified expectations of the parties ... come to the fore in

the rule that, subject to certain limitations, the parties can

choose the law to govern their contract (see § 187)"). Here the

justified expectations of the parties are expressed in the explicit

terms of their contract: that (1) the law of a single

state—Mississippi—will govern their agreement; and (2) the

noncompete provision of that agreement will protect Herring Gas's

business interests in Mississippi and in Louisiana. Because the

approach to § 187 advocated by Magee and Burris would imperil these

justifiable expectations, § 6(2)(d) counsels in favor of rejecting

Magee's and Burris's position.

Furthermore, protection of the parties' justified expectations

in this case is conducive to the realization of two other goals

outlined in Restatement § 6: "certainty, predictability and

uniformity of result" and "ease in the determination and

13
application of the law to be applied." See id. § 6(2)(f) and (g).

The commentary to § 187 states:

Prime objectives of contract law are to protect the justified
expectations of the parties and to make it possible for them
to foretell with accuracy what will be their rights and
liabilities under the contract. These objectives may best be
attained in multistate transactions by letting the parties
choose the law to govern the validity of the contract and the
rights created thereby. In this way, certainty and
predictability of result are most likely to be secured.

Id. § 187 cmt. e (emphasis added). Protection of the parties'

expectations lends itself to ease in the determination and

application of the law to be applied because the regime agreed to

by the parties is simpler to administer than the one now proposed

by Magee and Burris. They advocate bifurcating the "materially

greater interest" analysis and applying the laws of two states

rather than one.

Along with Mississippi's general principle in favor of

honoring the choice of law of the parties, the balance of factors

under Restatement § 6 leads us to conclude that the Mississippi

Supreme Court would not bifurcate the "materially greater interest"

analysis under Restatement § 187, even though that solution would

better protect the policies and interests of Mississippi's sister

state. See id. § 187 cmt. e ("It may likewise be objected that, if

given this power of choice [of the governing law], the parties will

be enabled to escape prohibitions prevailing in the state which

would otherwise be the state of the applicable law. Nevertheless,

the demands of certainty, predictability and convenience dictate

that, subject to some limitations, the parties should have the

power to choose the applicable law."). We therefore reject Magee's

14
and Burris's argument that the Mississippi Supreme Court would have

found that Louisiana has a materially greater interest in the

enforcement of the noncompete agreement in Louisiana, and Magee and

Burris fail to show that the district court erred by honoring the

parties' choice of the law of Mississippi, and by holding that the

noncompete agreement is fully enforceable.

III

For the foregoing reasons, we AFFIRM the summary judgment in

favor of Herring and Herring Gas.

15