upholding a five-year non-compete provisionSummary of this case from Chicago Title v. Magnuson
Decided December 16, 1942.
Contracts — Agreement by employee not to engage in employer's business, valid, when — Activities of employee, after employment terminated, may not be unduly restricted — Factors considered in determining necessity for protecting business of employer — Contract for personal services in advertising and soliciting patronage, valid — Restrictive provisions limited to same kind or similar competitive business.
1. A contract between an employer and employee whereby the latter agrees that subsequent to the termination of such employment he will not engage in a competitive business within a reasonably limited time and space is valid and enforceable where the restraint is not beyond that reasonably necessary for the protection of the employer's business, is not unreasonably restrictive upon the rights of the employee and does not contravene public policy.
2. A contract between an employer and employee may not unduly restrict the activities of the employee subsequent to the termination of the employment or limit the same to a greater extent than is reasonably necessary for the protection of the business of the employer, and the determination of such necessity is dependent upon the nature and extent of the business and the nature and extent of the service of the employee in connection therewith and other pertinent conditions.
3. Where the contract involved is one for personal service in advertising and solicitation of patronage and the restrictive provisions thereof relate only to the "same kind or similar business, in competition with" the employer and do not undertake to otherwise restrict or limit the trade, occupation, profession, business or activities of the employee, the contract is not unreasonably restrictive upon the rights of the employee and does not thereby contravene public policy.
APPEAL from the Court of Appeals of Lucas county.
This case originated in the Court of Common Pleas of Lucas county. The plaintiff, Thomas W. Briggs, operates an advertising company called The Welcome Wagon Service Company. The defendant, Charlotte Meyers Butler of Toledo, is a former employee of the plaintiff.
The plaintiff and the defendant, on September 10, 1938, entered into a contract of employment, the pertinent portions of which are as follows:"Hostess Contract
"This contract made and entered into by and between The Welcome Wagon Service Company (trade name of Thomas W. Briggs) of New York, N.Y., hereinafter known as company, and Charlotte Meyers of Toledo, Ohio, hereinafter known as hostess, Witnesseth:
"The company hereby employs hostess, and hostess accepts the employment, to act for it in the capacity of hostess in Toledo, Ohio, the terms and conditions of said employment being as follows:
"1. It is understood and agreed that the plan of advertising and merchandising which is being operated by the company is of national scope with consequent advantages and that it is unique and original and accordingly worthy of the respectful observance of the highest ethics and caution required to prevent any assimilation or appropriation of its principles by others. Therefore, the company, through its duly authorized and trained members, will impart the required instructions and training to enable the hostess to successfully operate the service according to the proven successful methods of operation and will supply the hostess with printed, typewritten, and mimeographed manuals, instruction books and other literature for her guidance. The company will also furnish sales presentations, sales letters and other material to assist in securing and retaining the patronage of advertisers and will, through its paid field representatives, give personal sales and supervision assistance and through its trained correspondence staff will give every possible courteous and efficient cooperation and aid. The company will keep the books, render statements, assist in collections, furnish all stationery, report forms, contract forms, survey questionnaires, survey analyses, and all necessary research data and will supply the advertisers with especially prepared typewritten merchandising plans of application, customer control record forms, model sales letters for the advertiser's use. Constant efforts of its experienced and trained office executives will be exerted to assist the advertisers and the hostess to attain the utmost success.
"2. Hostess agrees to devote her entire time and attention to the business of the company and perform and discharge all the duties incident to said position of hostess, as contemplated by the service which the company is rendering to advertisers, and in accordance with the special training which she receives, among which duties will be to secure the names of newcomers and newly married housekeepers from all available sources, to call upon them and present the advertising matter for the company's customers, to cooperate with the customers or advertisers whom the company is serving in every reasonable way so as to make the service rendered by the company effective and efficient. She will lend her assistance in every reasonable way to building up the business and maintaining the service of the company, and she will exert her efforts toward procuring advertising contracts for the company. She will pay all local expenses, including the cost of procuring names, telephone, office, automobile, stamps, printing mayor's letters and hostess cards. Hostess will have company's name listed in telephone directory, using her number and will have a "Welcome Wagon" sign on the front door of her car when it is being used in the interest of company business. Hostess will make no purchases, hire no help, nor incur any liability for or in the name of the company. * * *
"8. It is understood and agreed that the plan of advertising through the means of a welcome wagon service involves methods, systems, and trade usages which the company and its predecessors have had in general use for a long period of time and which have been developed and extended at great expense, with which methods, systems, plans and trade usages, hostess, by virtue of this employment, will necessarily become acquainted; that the company has been and is now, operating its service in different cities, towns, etc., throughout the United States and certain parts of the Dominion of Canada, and intends to introduce and operate its service in other cities, towns, boroughs, provinces and townships throughout the United States and Canada, as soon as it is practical so to do. Now, therefore, for and in consideration of this employment and the compensation to be earned and paid to the hostess hereunder, the hostess covenants and agrees (which covenant and agreement is the essence of this contract) that she will not, during the term of this employment and for a period of five whole years thereafter, engage, directly or indirectly, for herself, or as representative or employee of others, in the same kind or similar business, in competition with the company in Toledo, Ohio, and/or in any city, town, borough, township or other place in the United States and Canada, in which the company is then engaged in rendering its service.
"9. A breach of the foregoing good-will clause of this contract by the hostess would result in substantial damages to the company, but same might be incapable of exact proof. Therefore, if hostess should breach said clause she will pay the company, as liquidated damages, the sum of $3,000 for each and every city, town or other place in which she commits said breach, it being agreed that the above sum is reasonable and fair. It is agreed and understood, however, that this provision for liquidated damages is cumulative and does not exclude the remedy by injunction or other remedy the company may be entitled to. * * *
"12. This employment will continue as long as it is the mutual desire of the parties hereto. Either party may terminate said employment by giving two weeks' notice in writing to the other party; and the payment or tender of an amount equal to an average of two weeks' commissions by the company to the hostess shall be equivalent to two weeks' written notice.
"13. This agreement constitutes and expresses the whole agreement of said parties hereto, in reference to any employment of hostess by said company, and in reference to any of the matters or things herein provided for, or hereinabove discussed or mentioned in reference to such employment, all promises, representations and understandings relative thereto being herein merged, and no amendments or modifications of this contract shall be binding upon either party hereto, unless the same is in writing, signed by both parties to this contract.
"14. No agent or representative of the company has any authority to make any promise or representation other than those expressly set out in this contract.
"Read your contract carefully before signing.
"Signed in duplicate this the tenth day of September, 1938.
"The Welcome Wagon Service Company
"(Signed) By T.W. Briggs
"(Signed) Charlotte Meyers
The defendant was married after the date of this contract and for the purposes of the plaintiff's records, a like contract was executed April 21, 1939, using the defendant's new name. The defendant, by letter dated December 18, 1939, terminated this contract and requested the return of the original thereof.
The defendant's husband, Paul K. Butler, in December 1939 organized a competing service under the name of the Toledo Newcomers Service Company, and the defendant began employment with that company, her service being similar to that theretofore performed by her for the plaintiff. Both services were operating in the city of Toledo at the time this suit was commenced.
Plaintiff brought this action to secure a permanent injunction preventing the defendant from engaging in or conducting and continuing to conduct either directly or indirectly for herself or as representative or employee of others the advertising business in which she was then employed for a period of five years from December 18, 1939, either in the city of Toledo, Ohio, or in any city or town in the United States or Canada in which the plaintiff was then engaged in rendering its service. The defendant by answer alleged misrepresentation by the agents of the plaintiff in that defendant had been told she would make substantially in excess of $100 per month but her actual wages were very much below that figure, and therefore, she was compelled to terminate her employment because of her small earnings. Defendant also claimed that at the time she entered the employment of the Toledo Newcomers Service Company, the plaintiff was not operating his business in the city of Toledo, and further that neither she nor the Toledo Newcomers Service Company had engaged in any unfair methods of competition with the plaintiff or interferred with any contracts of the plaintiff and that they have not made use of any trade secrets of the plaintiff.
This answer was put in issue by a reply, and the case came on for trial in the Common Pleas Court. That court, on the 28th day of October, 1941, found for the plaintiff and enjoined the defendant from assisting directly or indirectly in the operation of the advertising business known as "Toledo Newcomers Service Company" or for others in the city of Toledo, Ohio, so long as the plaintiff operated in that city, but in no event beyond the 18th day of December, 1944.
On appeal to the Court of Appeals of Lucas county, that court heard the case de novo and rendered judgment against the plaintiff, dismissing the petition, and for costs. The case is before this court following the allowance of a motion to certify the record of the Court of Appeals.
Mr. Robert H. Stickley and Mr. Paul R. Gingher, for appellant.
Messrs. Fraser, Effler, Shumaker Winn, for appellee.
The question for the determination by this court is whether the record discloses undisputed evidence which entitles the plaintiff to the remedy of injunction.
The defendant entered upon her employment pursuant to the terms of the contract after receiving the information, advice and training in accordance with the plan of operation adopted by the plaintiff and continued until she resigned therefrom. In her letter of resignation the defendant stated as follows:
"As you know I have been married since taking this position in September 1938, and now at best I would only be able to continue working a few months. All things considered I feel I should terminate my contract. In order to do this effectively and cleanly, will you please return my contract to me, and instruct me as to what disposition to make of your supplies which I have here?"
The record discloses that during the period of her employment by the plaintiff the defendant not only had full knowledge of the plaintiff's business and his methods of operation, but also had immediate and personal contact with the customers of the plaintiff in the city of Toledo, being the so-called sponsors who constituted the financial support and maintenance of the whole enterprise.
The true reason for the severance of service with the plaintiff was disclosed by her subsequent action, for immediately upon the termination of that service, the Toledo Newcomers Service Company was established in that name, the organization being effected ostensibly by defendant's husband who was in fact devoting full time and attention to an occupation other than the advertising business. The record discloses that the new company pursued substantially the same plan as that adopted and employed by the plaintiff, and in the performance and promotion of which contracts with business establishments as sponsors had been procured and patrons thereof solicited. The defendant, during the period of her contract, had been in frequent personal contact with the sponsors of the plaintiff. Contracts with several business houses as sponsors were secured by the defendant for the newly organized company within a few days after her resignation from her employment with the plaintiff, some of whom had been contacted by her while still in the service of the plaintiff, and others, at least two, who were then under contracts with the plaintiff. The evidence is therefore undisputed that the defendant is engaged in a business in direct competition with the plaintiff and is doing the very same work in her present employment that she had previously performed for the plaintiff. The violation of the express terms and provisions of the contract is fully established by the evidence. The validity of such contract is challenged and its enforcement by injunction accordingly resisted.
It is stated in 17 Corpus Juris Secundum, 636, Section 254, that "it is the rule in the absence of contrary statute that agreements by which an employee as part of his contract of employment undertakes not to enter into a competing business on leaving his employer's service are sustained if they are no wider than reasonably necessary for the protection of the employer's business, and do not impose undue hardship on the employee, due regard being had to the interests of the public."
The determination of the necessity for such restriction is dependent upon the nature and extent of the business and the nature and extent of the service of the employee in connection therewith and other pertinent conditions.
Many cases are cited in the text which involve the application of this rule wherein it is quite generally held that contracts whereby salesmen, agents, canvassers and other employees who come into personal contact with their employer's customers agree not to engage in a competing business within a limited time or area after leaving their employer's service are valid and enforceable; contracts of restricted employment which are deemed invalid are those which impose a restraint held to be wider than reasonably required for the protection of the employer's business, or unreasonably restrictive upon the rights of the employee, or in contravention of the public interest. The cases involving contracts containing covenants restricting subsequent employment are almost limitless in number and are cited in annotations in 9 A. L. R., 1456, 20 A. L. R., 861, 29 A. L. R., 1331, 52 A. L. R., 1362, 67 A. L. R., 1002 and 98 A. L. R., 963.
Those cited in 98 A. L. R., 963, are under the annotation of the opinion of the case of Grand Union Tea Co. v. Walker, 208 Ind. 245, 195 N.E. 277, 98 A. L. R., 958, decided by the Indiana Supreme Court in 1935. The general rule heretofore stated was applied, resulting in the holding by the court that an agreement by one employed as head salesman in certain territory by a company engaged in retailing teas, coffees, baking powders, spices and extracts not to engage for a period of 18 months after the termination of his employment in the business of selling or soliciting orders for like merchandise in the territory under his charge, is not against public policy, being reasonably necessary for the protection of the employer's business, and not unreasonably restrictive upon the rights of the employee.
A similar case is that of Deuerling v. City Baking Co., 155 Md. 280, 141 A. 542. In violation of the terms of a restrictive contract relative to similar employment in the same territory following severance of connection with the contracting employer, the court held in substance that such a case is not one of restricting an employee from getting subsequent employment by reason of his knowledge or skill acquired by experience in a similar business under a former employer, but is one where the violation of his negative covenant enables him to sell his services to a competitor for a higher wage than he would naturally be able to obtain if he had not violated the covenant and to the detriment and damage of his former employer. The employee in that instance was a driver-salesman who had assigned to him certain territory in which he solicited and made sales of the products of his employer. The court concluded that such restraint was reasonably necessary for the protection of the appellant and that it was not unreasonably restrictive upon the rights of the appellee nor invalid as against public policy.
In the case of Wark v. Ervin Press Corp., decided by the United States Circuit Court of Appeals of the Seventh Circuit, and reported in 48 F.2d 152, the court held that an employee's agreement not to compete with an employer after leaving employment would be enforced when reasonably limited as to time and place, holding specifically that such agreements, when reasonably calculated to protect the lawful business of the employer, will be enforced, even though the service is not of unique and special nature. The court, in the opinion, stated that its conclusion was in harmony with the trend of modern authorities.
The fact that in the operation of a business the public may learn methods, systems and trade usages does not make such methods public property and consequently deprive an employer of any protection. Lists of customers have always been protected in equity, notwithstanding that any person who troubled to follow the salesman could compile a reasonably correct list of his customers.
A business is built upon the confidence of its customers and the employee gains acquaintances and sells the customers by using the good will of the employer. The employer's dealings with his customers through the employee gives the employee confidential knowledge that should not be divulged or used for his own benefit. It is by reason of this personal, if not confidential, relationship which the parties sustain that contracts to protect the employer by restriction of subsequent employment within reasonable limits of time and of space are permitted and sanctioned, and equity will enjoin the employee from competing in violation of his covenant.
Unquestionably the decision of every case of this nature turns upon and in great measure is governed by its own peculiar facts. In the instant case, the manner of operation of the business of the plaintiff and the character of the service to be performed by the defendant in connection therewith show the rather unusual nature of the enterprise which, in the contract before us, is denominated "unique and original."
It is to be observed that the restrictive provisions. of the contract relate only to "the same kind or similar business, in competition with the company in Toledo," etc., and do not undertake otherwise to prevent or limit the trade, occupation, profession, business or activities of the defendant. The clear purpose and effect of the contract is to prevent or at least to limit the appropriation of the benefits of information and experience secured in her service with the plaintiff and the employment thereof for her own personal advantage and to the disadvantage of the plaintiff by becoming a direct competitor, as in fact did occur in this instance.
It may be questioned whether the attribute of uniqueness has no place in the consideration of the question presented in this case. It is applied generally with reference to a contract which precludes the rendition of service to another during the period of the contract. The injunction sought in such cases is in effect an action for specific performance and necessitates a showing that the service of such employee is of an extraordinary, peculiar or unique character for which a substitute cannot readily be procured. That necessity of showing the uniqueness of the employee's service does not exist where the covenant sought to be enforced is one limiting or precluding competitive activity subsequent to the termination of the employment is held in 31 L.R.A. (N.S.), 249; 35 L.R.A. (N.S.), 120; and specifically in Dyar Sales Machinery Co. v. Bleiler, supra.
For the reasons indicated, we are of opinion that under the facts disclosed by the record the restrictive covenants of the contract entered into by and between the plaintiff and defendant do not impose a restraint beyond that reasonably required for the protection of the employer in his business, that such provisions are not unreasonably restrictive upon the rights of the employee and do not contravene public policy and are therefore valid and enforceable.
The conclusion reached upon the particular facts in this case are in no wise inconsistent with the results reached and announced in the following cases, each of which involved conditions imposed in contracts involving the purchase and sale of interests in business: Lange v. Werk, 2 Ohio St. 519; Thomas v. Admr. of William P. Miles, 3 Ohio St. 274; Morgan v. Perhamus, 36 Ohio St. 517; The Lufkin Rule Co. v. Fringeli, 57 Ohio St. 596; or in Curry v. Marquart, 133 Ohio St. 77, which involved an employment contract containing no restrictive covenant whatever.
For the reasons stated, we are in accord with the finding and order of the Court of Common Pleas and direct that a similar decree be entered in this court.
WEYGANDT, C.J., TURNER, WILLIAMS, HART and ZIMMERMAN, JJ., concur.
BELL, J., not participating.