Summary
holding valid and enforceable a restrictive covenant prohibiting employee within two years after his termination from directly or indirectly diverting or attempting to divert from employer any business, particularly as to the customers with whom he dealt
Summary of this case from Barnes Group Inc. v. RinehartOpinion
No. 38505
Decided July 1, 1964.
Contracts — Agreement in restraint of trade — Facts and circumstances considered in determining validity — Agreement may be divisible — Doctrine of partial validity — Agreement imposing unreasonable restrictions or limitations invalid.
1. In determining the validity of a covenant or agreement in restraint of trade, each case must be decided on its own facts, and a reasonable balance must be maintained among the interests of employers, employees and the public.
2. An agreement in restraint of trade may be divisible, that is, subject to the application of the doctrine of partial validity, in which event any unreasonable limitation or restriction may be stricken from the contract, leaving the remainder thereof binding upon the parties.
3. An indivisible covenant or agreement in restraint of trade which imposes unreasonable restrictions or limitations as to time or area is invalid.
CERTIFIED by the Court of Appeals for Williams County.
Glenn Extine, appellant herein, instituted this action in the Court of Common Pleas of Williams County. In his petition he prays for a declaratory judgment to determine his rights under the following provisions of a written agreement entered into with his employer, appellee herein.
"Agreement between Glenn Extine hereinafter called `Employee,' and Williamson Company, including Williamson Engineering Corp., Caldwell Compounding Corp., Williamson Midwest, Inc., Williamson Pacific, Inc., and Williamson Southern, Inc., which, together with the parent company are hereinafter collectively called `Employer';
"Witnesseth:
"In consideration of his employment by Employer, Employee agrees that on the termination for any cause whatsoever of his said employment, he will not, within two years after such termination, directly or indirectly, engage in the same or similar or competitive line of business to that now carried on by Employer, either on his own account or through or for or in behalf of any former employee of Employer and that he will not, within said period of employment and two years thereafter, in any way, directly or indirectly, divert or attempt to divert from Employer any business whatsoever and particularly not by influencing or attempting to influence any of the customers with whom he may have had dealings.
"In witness whereof, Employee has hereunto set his hand and seal, and Employer has caused these presents to be executed by a duly authorized officer this day of Feb. 13, 1961.
"[Sig.] Glenn Extine L.S.
Employee
"[Sig.] Thomas P. Cullahen
Authorized signer for Employer."
This action was commenced in December of 1962 after appellant had terminated his employment with appellee.
The Court of Common Pleas entered judgment for the appellee-employer. Upon appeal on questions of law, the Court of Appeals affirmed the judgment. The Court of Appeals, however, found that its judgment is in conflict with the judgment entered by the Court of Appeals for Hamilton County in the case of Segal v. Fleischer (1952), 93 Ohio App. 315, and ordered that the record be certified to this court for review and final determination.
Messrs. Parker Fenton, for appellant.
Messrs. Eastman, Stichter, Smith Bergman and Mr. F.E. Wolf, for appellee.
The basic question presented here is whether the agreement, supra, is valid in whole or in part. The courts both here and in England have definitely modified the early English rule of rigid construction of agreements in restraint of trade to meet an ever growing and expanding economy.
Originally it was held that all agreements in restraint of trade were void as being against public policy. Mitchel v. Reynolds (1711), 1 P. Wms., 181, 24 Eng. Rep., 347.
In the course of a century and a quarter, a second rule was evolved wherein general restraints were considered void as being against public policy, while partial restraints were judged according to their "reasonableness" as a restraint of trade. Ward v. Byrne (1839), 5 Mees. Wels., 548, 151 Eng. Rep., 232. The early American judiciary adopted this second rule, with the validity of the restraint dependent upon the existence of certain limitations as to time and space of the restraint. 17 Corpus Juris Secundum, 1109, Contracts, Section 240 (1963). The time and space rule was strictly applied at its inception, although its inequities were apparent. Every restraint, limited in time and space, was deemed partial and, therefore, valid, although patently unreasonable. The courts have also favored the rule of construction that illegal promises, if severable, may be stricken from an otherwise valid agreement in order to avoid the harshness of the time and space rule. See Briggs v. Butler (1942), 140 Ohio St. 499 (judgment of Common Pleas Court applying blue pencil test affirmed). Under the majority view this "blue pencil" test, or the doctrine of partial validity, requires that the terms be severable or the entire agreement fails. Somerset v. Reyner, 233 S.C. 324, 104 S.E.2d 344. A growing minority view does not require divisibility of terms; the agreement is held enforceable as to a reasonable restraint providing the agreement is not so unreasonable so as to preclude modification. Fullerton Lumber Co. v. Torborg, 270 Wis. 133, 70 N.W.2d 585. See 17 Corpus Juris Secundum, 1220, Contracts, Section 289 (1963).
For the time being, at least, we believe that the "blue pencil" or partial validity test should apply. Conforming Matrix Corp. v. Faber (1957), 104 Ohio App. 8, 14. The near unanimous view recognized by the courts today concerning trade restraints is embodied in the following statement of principle:
"An agreement in restraint of trade is reasonable if, on consideration of the subject matter, the nature of the business, the situation of the parties and the circumstances of the particular case, the restriction is such only as to afford fair protection to the interests of the covenantee and not so large as to interfere with the public interests or impose undue hardship on the party restricted." 17 Corpus Juris Secundum, 1124, Contracts, Section 247 (1963).
In addition to the absence or presence of limitations as to time and space, when attempting to decide the reasonableness of the restraint, the courts have considered the following factors: Whether the employee represents the sole contact with the customer; whether the employee is possessed with confidential information or trade secrets; whether the covenant seeks to eliminate competition which would be unfair to the employer or merely seeks to eliminate ordinary competition; whether the covenant seeks to stifle the inherent skill and experience of the employee; whether the benefit to the employer is disproportional to the detriment to the employee; whether the covenant operates as a bar to the employee's sole means of support; whether the employee's talent which the employer seeks to suppress was actually developed during the period of employment; and whether the forbidden employment is merely incidental to the main employment. Arthur Murray Dance Studios of Cleveland, Inc., v. Witter (1952), 62 Ohio Law Abs., 17, 33 to 38. See, generally, 17 Corpus Juris Secundum, 1135, Contracts, Section 254 (1963); annotation, 43 A.L.R. (2d), 94, 115 to 121 (1955); Ellis Trade Secrets, 125 to 169 (1953); Blake, Employee Agreements Not to Compete, 73 Harvard Law Review, 625, 646 to 674 (1960).
The agreement in the case at bar lends itself to the "blue pencil" or partial validity test. The agreement in effect provides that the appellant will refrain from participating in four distinct activities within a two-year period after termination of employment, to wit: (1) He will not engage in the same or similar competitive line of business on his own account; (2) he will not engage in the same or similar or competitive line of business for or in behalf of any former employee of the employer; (3) he will not divert or attempt to divert from employer any business whatsoever; and (4) he will not divert or attempt to divert from the employer any business whatsoever by influencing or attempting to influence any of the customers with whom he may have been dealing. Restraints Nos. (1) and (2) upon the employee-appellant have no limitation whatsoever as to space. These restraints, if enforced, would apply to areas in the world where the employer-appellee has no activity whatsoever and may never intend to engage in any activity in such a location. Consequently, it follows that restraints Nos. (1) and (2) are unreasonable and being severable are stricken from the agreement and are inoperative.
Restraints Nos. (3) and (4) are plainly for the protection of the employer in its own legitimate occupation and enterprise and, therefore, are valid and enforceable. Briggs v. Butler, supra ( 140 Ohio St. 499), 507.
It follows, therefore, that appellant is not subject to and is freed from restraints Nos. (1) and (2) and that he is subject to restraints Nos. (3) and (4) as herein indicated.
The judgment of the Court of Appeals is, therefore, affirmed in part and reversed in part as herein set out.
Judgment affirmed in part and reversed in part.
TAFT, C.J., ZIMMERMAN, MATTHIAS, O'NEILL, GRIFFITH and GIBSON, JJ., concur.