DAVIS & WARDE, INC., Appellant, v. Nadine TRIPODI, William Darney, and Butler Technologies, Inc., Appellees.
Superior Court of Pennsylvania.
Argued Jan. 15, 1992. Filed Oct. 5, 1992.
Reargument Denied Dec. 18, 1992.
616 A.2d 1384
Kenneth D. Perkins, Butler, for appellees.
Before CAVANAUGH, WIEAND and HESTER, JJ.
WIEAND, Judge:
In this action by Davis & Warde, Inc. to enforce restrictive covenants in contracts of employment with William Darney and Nadine Tripodi, the trial court refused to enforce the covenants. Its decision was based upon a perceived inadequacy of consideration to support the covenant. Davis & Warde, Inc. appealed. After careful review, we conclude that the consideration was sufficient to validate the restrictive covenants in the contracts of employment. Therefore, we reverse and remand for further proceedings.
Darney, a vice-president, and Tripodi, a top-level salesperson, were deemed key employees of the printing business conducted by Davis & Warde in Pittsburgh. Their responsibilities included marketing, customer contact, sales and distribution of Davis & Warde‘s products and services. Prior to April, 1989, Davis & Warde created a new specialty division under the name and style of DAWAR Technologies. This entailed the investment of substantial additional capital. In order to protect its investment in the new division, Davis and Warde asked certain key employees to execute written employment contracts which contained, inter alia, restrictive cov-
Appellant filed a complaint in equity seeking to enjoin its former employees from competing in violation of their agreements not to do so. It also petitioned for temporary relief in the form of a preliminary injunction. On January 18, 1991, a hearing was held before the motions judge, and a temporary restraining order was entered against Tripodi and Butler Technologies.1 Because Darney‘s ill health prevented his attendance and participation, no relief was granted against him.
When Davis & Warde thereafter petitioned for a hearing against Darney, the hearing was assigned to another judge who, with the parties’ consent, limited the scope of hearing to
The sole issue to be considered is the validity of the employment contracts. A preliminary injunction will issue as to Defendant Darney if [the] Court preliminarily finds for plaintiff on this issue, and [a] preliminary injunction as to Defendants Tripodi and Butler Technologies will remain in full force and effect. Prior preliminary injunction issued as to Defendants Tripodi and Butler Technologies will be dissolved if [the] Court finds for Defendants on this issue.
At the close of appellant‘s evidence, the trial court invited appellees to move for dismissal, and, when the motion was made, the court entered an order denying the request for preliminary relief.
In reviewing orders involving preliminary injunctions, the Superior Court has said:
A trial court has broad discretion in granting or denying a preliminary injunction. We will reverse such a decision only if the trial court abused its discretion or committed a palpable legal error. Merrill Lynch, Pierce, Fenner & Smith v. Moose, 365 Pa.Super. 40, 47, 528 A.2d 1351, 1355 (1987) (citing, inter alia, Unionville--Chadds Ford School District v. Rotteveel, 87 Pa.Commw. 334, 336-7, 487 A.2d 109, 111 (1985)). We must uphold the trial court‘s decision if it can be sustained on “any apparently reasonable ground.” Id.; John G. Bryant Co., Inc. v. Sling Testing and Repair, Inc., 471 Pa. 1, 369 A.2d 1164 (1977); Sidco
The employment agreement signed by Darney and Tripodi contained covenants preventing the use of proprietary information acquired during employment. In addition, a noncompetition clause was inserted for a period of one year but without geographic limitations. This covenant provided:
13. Noncompetition. The Employer recognizes that the Company is and will in the future be engaged in highly competitive businesses and products. During his employment with the Company and for a period of one year thereafter, the Employee agrees that he will not, directly or indirectly, sell the products of, own, manage, operate, control, be employed by, participate in, or be connected in any manner with the ownership, management, operation or control of, any business competitive with the Company or any of its products or services. Further, if the Employee‘s employment with the Company terminates for any reason, the Employee shall not, for a period of one year from the date of termination, have any business dealings whatsoever, either directly or indirectly or through corporate entities or associates, with any customer or client of the Company or its subsidiaries or any person or firm which has contacted or been contacted by the Company as a potential customer or client of the Company.
“[I]n order to be enforceable a restrictive covenant must satisfy three requirements: (1) the covenant must relate to either a contract for the sale of goodwill or other subject property or to a contract for employment; (2) the covenant must be supported by adequate consideration; and (3) the application of the covenant must be reasonably limited in both time and territory.” Piercing Pagoda, Inc. v. Hoffner, 465 Pa. 500, 506-507, 351 A.2d 207, 210 (1976). See also: Bell Fuel
[I]n many instances, including the present case, the insertion of a restrictive covenant in the original contract would serve no valid purpose. An employer who hires a novice has no desire to restrict his present competitive force. Only when the novice has developed a certain expertise, which could possibly injure the employer if unleashed competitively, will the employer begin to think in terms of the protection of a restrictive covenant. This is an economic reality, and the law should be influenced by it.
Id. at 450, 235 A.2d at 618. When an employee enters into an employment contract containing a covenant not to compete subsequent to employment, however, the covenant “must be supported by new consideration which could be in the form of a corresponding benefit to the employee or a beneficial change in his employment status.” Modern Laundry & Dry Cleaning v. Farrer, supra, 370 Pa.Super. at 293, 536 A.2d at 411, citing George W. Kistler, Inc. v. O‘Brien, 464 Pa. 475, 347 A.2d 311 (1975); Maintenance Specialties, Inc. v. Gottus, 455 Pa. 327, 314 A.2d 279 (1974). The adequacy of consideration to support a restrictive covenant is an issue of law. With respect thereto, the courts have stated, “as long as the restrictive covenant is an auxiliary part of the taking of employment and not a later attempt to impose additional restrictions on an unsuspecting employee, a contract of employment containing such a covenant is supported by valid consideration and is therefore enforceable.” Modern Laundry & Dry Cleaning v. Farrer, supra, 370 Pa.Super. at 293, 536 A.2d at 411, citing Beneficial Finance Co. v. Becker, 422 Pa. 531, 222 A.2d 873 (1966).
Davis and Warde, as we have already observed, created a new, multimillion dollar specialty division. To protect its
The covenant not to compete in the instant case, although limited in time, was not limited geographically. This does not necessarily impair the validity of the covenant, but any relief granted by the trial court must be geographically limited so as not to exceed that which is reasonably necessary to provide the protection for which appellant contracted. See: Sidco Paper Co. v. Aaron, 465 Pa. 586, 594-595, 351 A.2d 250, 254-255 (1976) (“where the covenant imposes restrictions broader than necessary to protect the employer, we have repeatedly held that a court of equity may grant enforcement limited to those portions of the restrictions which are reasonably necessary for the protection of the employer.“); Bell Fuel Corp. v. Cattolico, supra (trial court may define geographic scope of covenant after receiving proper evidence upon remand); Quaker City Engine Rebuilders, Inc. v. Toscano, 369 Pa.Super. 573, 584-585, 535 A.2d 1083, 1089 (1987) (“In Pennsylvania, an otherwise valid restrictive covenant which is geographically overbroad is ‘divisible and enforceable [once it has been limited by the court] to reasonable geographical limits’ “; therefore case remanded to trial court to determine reasonable geographic scope of covenant). See also: Thermo-Guard, Inc. v. Cochran, 408 Pa.Super. 54, 65-66 n. 9, 596 A.2d 188, 194 n. 9 (1991). On remand, this determination should be made by the trial court.
Because the trial court‘s refusal to enforce the restrictive covenant was based on an error of law, we are constrained to reverse.
Reversed and remanded for further proceedings consistent with the foregoing opinion. Jurisdiction is not retained.
CAVANAUGH, J., files a dissenting opinion.
CAVANAUGH, Judge, dissenting:
I respectfully dissent. The majority rightly declares that if an employer asks an employee to execute a covenant not to compete subsequent to the employee‘s hiring, the covenant
Preliminarily, I note that this appeal is from an order denying the appellant‘s Motion for a Preliminary Injunction. A preliminary injunction is rarely granted, as “a preliminary injunction is somewhat like a judgment and execution before trial....” Herman v. Dixon, 393 Pa. 33, 36, 141 A.2d 576, 577 (1958); accord Hospital Ass‘n v. Com., Dept. of Public Welfare, 495 Pa. 225, 233, 433 A.2d 450, 454 (1981). Relief of this nature should only be granted where:
there is an urgent necessity to avoid injury which cannot be compensated for by damages and [relief] should never be awarded when the rights of the plaintiff are clear. Also, it should in no event be issued unless the greater injury will be done by refusing it.
Hospital Ass‘n, supra at 233, 433 A.2d at 454, quoting Dixon, supra, 393 Pa. at 36-37, 141 A.2d at 577.
Appellate relief from a decree granting (or refusing) a preliminary injunction is even more stringent, and incurs what has been termed an “additional burden.” Id., 495 Pa. at 233, 433 A.2d at 454; Parker v. Philadelphia, 391 Pa. 242, 247, 137 A.2d 343, 346 (1958). Appellate review is limited in such cases to whether the action of the lower court had “any apparent reasonable ground.” Hospital Ass‘n, supra, 495 Pa. at 234, 433 A.2d at 454, quoting Bell v. Thornburgh, 491 Pa. 263, 267, 420 A.2d 443, 445 (1980)). We have interpreted this standard to mean that “[a]n appellate court will interfere with the decision of the chancellor only if it is clear that no grounds exist to support the decree or that the rule was palpably erroneous or misapplied...” Bell, supra at 267, 420 A.2d at 445; Willman v. Children‘s Hosp. of Pittsburgh, 505 Pa. 263, 269, 479 A.2d 452, 455 (1984); quoting Intraworld, Inc. v. Girard Trust Bank, 461 Pa. 343, 354, 336 A.2d 316, 332 (1975).
I.
The law of Pennsylvania has repeatedly emphasized that in order to enforce a restrictive covenant it must (1) relate to (be ancillary to) a contract for the sale of the good will of a business or to a contract for employment; (2) the covenant must be supported by adequate consideration; and (3) the covenant must be limited in time and territory. George W. Kistler, Inc. v. O‘Brien, 464 Pa. 475, 480, 347 A.2d 311, 314 (1975); Modern Laundry & Dry Cleaning v. Farrer, 370 Pa.Super. 288, 291-2, 536 A.2d 409, 411 (1988). Even if an employee enters into an employment contract containing a covenant not to compete subsequent to employment, “it must be supported by new consideration which could be in the form of a corresponding benefit to the employee or a beneficial change in his employment status.” Modern Laundry, supra at 293, 536 A.2d at 411; accord Kistler, supra, 464 Pa. at 484-5, 347 A.2d at 316; Maintenance Specialties, supra, 455 Pa. at 331, 314 A.2d 279, 281; Ruffing v. 84 Lumber Co., 410 Pa.Super. 459, 600 A.2d 545, 548 (1991). Post-employment restrictive covenants are subject to a more stringent test of reasonableness than covenants which are ancillary to a sale of a business. Thermo-Guard, Inc. v. Cochran, 408 Pa.Super. 54, 596 A.2d 188, 194 (1991).
Admittedly, case law in our jurisdiction regarding what constitutes “a corresponding benefit or beneficial change in employment status” has been limited at the present time to extremes. Where the consideration was either slight or nonexistent, the covenant not to compete was found to be invalid. It is clear that the mere continuation of the employment relationship is not sufficient consideration for a restrictive covenant despite the fact that the employment relationship was terminable at-will by either party. Maintenance Specialties, supra, 455 Pa. at 331, 314 A.2d at 281 (Jones, C.J., Concurring). Similarly, our courts have found consideration lacking where the monetary benefit of the consideration was
Restrictive covenants, however, have been found valid where it was absolutely clear that an employee received a change in status that either enabled him to increase his earnings substantially or provided him with the potential to increase his earnings substantially. For instance, sufficient consideration for a restrictive covenant was found when an employee became a commission-earning salesman and received travel expenses when formerly the employee had been a salaried employee servicing the complaints of the salesmen‘s customers. M.S. Jacobs & Associates, Inc. v. Duffley, 452 Pa. 143, 146-7, 303 A.2d 921, 923 (1973). Similarly, the change of an employee to a salesman supervising a specific route and receiving a commission of 17% of all the cash collected from the status of a provisional, salaried employee constituted sufficient consideration for a restrictive covenant. Modern Laundry, supra, 370 Pa.Super. at 293, 536 A.2d at 412. Where an independent contractor for a company became an employee of the company, receiving a written employment contract and the employer‘s assumption of unemployment and social security taxes and contributions to the company pension plan, valid consideration was found. Pennsylvania Funds Corporation v. Vogel, 399 Pa. 1, 5-6, 159 A.2d 472, 475 (1960). Finally, when an employee received an ownership interest in the firm, such that there existed the potential the employee could realize a significant gain in total compensation, we held
The case before us admittedly falls on the continuum between these two extremes. Notwithstanding, I agree with the lower court that the consideration offered in this case bears much greater resemblance to cases where we found that the consideration was not sufficient. The appellant claims that $100, two weeks severance pay, and continued employment is a “corresponding benefit” or a “beneficial change in employment status.” This is plainly not so, as analyzing each so-called benefit more closely shows.
Continued employment has been specifically rejected as adequate consideration for a post-employment covenant not to compete. See Maintenance Specialties, supra. Thus, it is hard to discern why it should be considered as a factor in determining whether a “corresponding benefit to the employee or beneficial change in employment status” exists. Moreover, the $100 payment alone, without more, is surely not akin to the significant rights the employee would give up through a one year restrictive covenant. Finally, a promise of two weeks of severance pay, although a more significant economic benefit, is (1) a deferred benefit that (2) might never be received by the employee. Severance pay is a deferred benefit because the appellant is not obligated to pay the appellees the benefit until they leave the company or are terminated. Severance pay might not be received by the employee because it is only payable if an employee leaves the company before retirement, and if his company remains solvent. Although severance pay is not a trivial benefit, I cannot say, even with the “added benefit” of continued employment and a $100 payment, that there was sufficient consideration to establish the restrictive covenant was ancillary to a principal transaction. I note that the appellees received no promotion, change of title, raise, or other sign of a change in employment status. See Modern Laundry, supra, 370 Pa.Super. at 293, 536 A.2d at 412 (“After signing the employment contract, [the employee] received a significant change in employment status.“);
The majority opinion suggests, but does not hold, that the better reasoned position is that no consideration should be required to execute a covenant not to compete entered into subsequent to employment aside from continued employment.3 See Majority Opinion at 456 n. 3. It finds convincing the argument that since at will employees like the appellees can be terminated at any time for any reason, an offer of continued employment should constitute adequate consideration for the execution of a covenant not to compete. See Id.; see also Maintenance Specialties, Inc., supra, 455 Pa. at 337, 314 A.2d at 284-5 (Manderino and Roberts, JJ., dissenting). The tenor of this argument is that there exists no significant difference between requesting an employee to execute such a covenant as a condition of employment, and requesting the employee to execute one subsequent to employment. Id. Advocates of this position feel it is logically inconsistent to require consideration for the execution of such a covenant, as an employer could have hired new employees, and fired his present ones, if his present employees failed to execute the covenants. Id. As perhaps their view informs whether the consideration in this case is adequate, Justice Manderino‘s minority view must once again be revisited.
Justice Manderino‘s position appears analytically sound at first glance, but given a closer look seems divorced from the realities of life. It fails to recognize that subsequent to employment the position of the employer to exact a covenant not to compete is greater, and the employee‘s ability to resist one is weaker. When initially searching for employment, all things being equal, a person will prefer to chose a position which is the most attractive. Surely, a covenant not to compete is a significant disincentive to pick a particular employer, as it prevents a person from finding employment in his
As the majority recognizes, the appellant has not attempted to argue to the lower court or to this court that it was entitled under Pennsylvania law, independent of any contractual arrangement, to have its trade secrets and confidential customer lists protected. Majority Opinion at 453 n. 2. Instead, the
I find that the common law rightly held such agreements, especially subsequent to employment, with disfavor. These agreements screen out all competition, whether fair or unfair. As was recognized in Morgan, the balance of the equities favors the employee:
A general covenant not to compete, however, imposes a greater hardship upon an employee than upon [an employer]. An employee is prevented from practicing his trade or skill, or from utilizing his experience in the particular type of work with which he is familiar. He may encounter difficulty in transferring his particular experience and training to another line of work, and hence his ability to earn a livelihood is seriously impaired. Further, the employee will usually have few resources in reserve to fall back upon, and he may find it difficult to uproot himself and his family in order to move to a location beyond the area of potential competition with his former employer. Contrawise, the mobility of capitol permits the businessman to utilize his funds in other localities and in other industries.
Morgan‘s Home Equipment, supra, 390 Pa. at 631-2, 136 A.2d at 846; see also Maintenance Specialties, supra, 455 Pa. at
Therefore, I respectfully dissent. For the first time, the majority holds that limited, indeed partly speculative,6 economic perks constitute adequate consideration. The majority decision effectively eviscerates the efficacy of the requirement of a “corresponding benefit” or a “beneficial change in employment status” to support a covenant not to compete subsequent to employment. This ancient common law requirement continues to be just as sound today as it was in years past, as it goes beyond over-intellectualized economic theory and takes into the account the realities of the workplace. It recognizes that a covenant not to compete, as opposed to the protection of confidential employer information, imposes a much greater hardship on the employee, as it prevents him from competing fairly in his profession with a former employer within a geographical area.
II.
Appellant asserts also that the lower court erred in requiring the appellant to proceed first at the Preliminary Injunction Hearing. Appellant argues that the tenor of the law is that appellees had the burden of proving that these agreements were invalid. See, e.g., Seligman & Latz of Pittsburgh, Inc. v. Vernillo, 382 Pa. 161, 164, 114 A.2d 672, 673 (1955) (employee has the burden of proving a restrictive covenant constitutes an unreasonable or illegal restraint on trade); see also, John G.
I would find this argument to be without merit, assuming the argument is not waived.7 Implicit to appellant‘s argument is that the party which has the burden of proof necessarily must proceed first. Appellant, however, does not provide us with a legal citation standing for this proposition. In fact, there is no indication from the cases that appellant cites that the employee must proceed first.
I do not believe that the party with the burden of proof must proceed first necessarily or even as a general rule. There does not appear to be a procedural rule in our Commonwealth‘s Rules of Civil Procedure governing the circumstances under which a party is required to present its case-in-chief first. However, the absence of such a rule indicates that the order of proceeding is within the province of the trial court. “The conduct of a trial is within the discretion of the trial judge, and his exercise of discretion will not be reversed in the absence of an abuse thereof.” Kearns v. Clark, 343 Pa.Super. 30, 40, 493 A.2d 1358, 1363 (1985); accord Air Products and Chemicals, Inc. v. Johnson, 296 Pa.Super. 405, 433, 442 A.2d 1114, 1129 (1982); DeFulvio v. Holst, 239 Pa.Super. 66, 68, 362 A.2d 1098, 1099 (1976). The question becomes whether the trial court abused its discretion.
The appellant claims, aside from the fact that the appellees had the burden of proving the invalidity of the agreement, that the procedural posture of the case made it particularly incumbent that the lower court instruct the appellees to proceed first. A preliminary injunction had already been granted in this case as to appellees Tripodi and Butler Technologies, which allegedly indicated that the appellant would be able to establish grounds for relief. The appellant notes that since the lower court granted appellees’ motion to dismiss at the
The trial court did not abuse its discretion. Firstly, the appellant was the plaintiff in the action below seeking the injunction. Traditionally, the plaintiff or moving party proceeds first in a civil action. Second, the appellees that the consent order of April 10, 1991 implies by its allotment of time which party was to proceed first. The order indicates that plaintiff has 45 minutes for direct; then defendant has 15 minutes for cross-examination; then defendant has 45 minutes for direct; and then the plaintiff has 15 minutes for cross-examination. If appellant‘s attorney wished appellees to proceed first, he could have sought to structure the consent order to allow this to happen. Third, the substantive issue before the Court (and before us on appeal) was a discrete one: whether the payment of one hundred dollars, the promise of continued employment, and a promise of two weeks severance pay upon termination of employment constituted adequate consideration to support post employment covenants not to compete. Given the issue, the appellant would seem to be the party with the most knowledge as to what consideration was actually proffered. There exists a policy of interpreting our Commonwealth‘s procedural rules in favor of proceeding in a manner which would be most efficient to the resolution of the matter before the Court (as long as a party is not deprived of a just determination). It is manifestly apparent that no abuse of discretion occurred in the case sub judice.
III.
Appellant‘s final claim of error is that the lower court erred in refusing to permit testimony regarding the breach of the employment agreements and by refusing to allow appellant to make reference to Judge Wekselman‘s January 22, 1991 order. I have reviewed the Record, and am convinced that this argument is utterly without merit. As the lower court noted in its Opinion, the consent decree agreed to by the parties limited the scope of the hearings to the validity of the employment agreements. Although the scope of the hearing could
For the foregoing reasons, I would affirm the order below.
Notes
As the parties themselves did not consider the “guarantee of certain job benefits” significant enough to mention in framing the issue before the lower court, I would hold that this nebulous formulation is extraneous to our consideration on appeal. The lower court based its ruling on whether $100, two weeks severance pay and continued employment constituted adequate consideration for a restrictive covenant. Even if the appellant‘s “guarantee of certain job benefits” was appropriate for our consideration on appeal, I would nevertheless find that the benefits were of such slight worth that the basic question before us is still whether $100, 2 weeks severance pay, and continued employment constitutes adequate consideration for a restrictive covenant.THE COURT: The issue as framed by the Defendants is whether payment of one hundred dollars is adequate consideration to support the employment restrictive covenant. Do you agree that is the issue in front of us? [APPELLANT‘S COUNSEL]: I do not. The issue is the payment of one hundred dollars, promise of continued employment, and the placement of a provision in the employment contract for severance pay, constitute sufficient consideration.