Lead Opinion
Opinion by
Plaintiff, Reed Mill & Lumber Co., Inc., appeals the judgment in favor of defendants, Neil Jensen and General Building Materials, Inc. Jensen cross-appeals the failure to award him attorney fees. We affirm.
Jensen worked for Reed Mill, a mill and lumber business, from 1978 until 2002. During his employment, and before the company was sold in 1996, Jensen received a bonus in the form of company stock.
In 1996, Reed Mill sold its name and all or nearly all of its operating assets to Vranian Enterprises, Inc. (buyer). During the parties' negotiations, it was agreed that each of Reed Mill's shareholders would be required to sign a noncompete agreement.
Section 10 of the purchase agreement states that Reed Mill's covenant not to compete was necessary to ensure the continuation of the business with regard to the assets being sold. It states further that, as consideration and necessary inducement for the purchase, Reed Mill agreed that for a period of three years from the closing date, it would not, among other things, own, manage, operate, or participate in the management or control of any enterprise within a 100-mile radius that was engaged in the provision of mill and lumber services and products.
Reed Mill distributed the proceeds of the sale to its shareholders in accordance with the percentage of shares held by each. Jensen received $50,000 for his shares of the company stock. Shortly after the transaction closed, Jensen and the other shareholders signed noncompete agreements. Of the total price the buyer paid to Reed Mill, $115,000 was allocated as compensation for goodwill and the covenant not to compete. Of this amount, Reed Mill paid Jensen a pro rata share in the amount of $9,857.
Jensen's noncompete agreement states that it was made pursuant to the asset purchase agreement. - It provides that the three-year prohibition against competition would begin upon termination of Jensen's employment for any reason, and continue for three years thereafter. The agreement also contains a provision entitling the prevailing party to attorney fees and costs in the event of litigation.
For the first few years after the sale, buyer operated the business under the Reed Mill name, and Jensen continued to manage and oversee the new Reed Mill's operations as its general mаnager, and remained responsible for operations and sales. Thereafter, although he continued to be responsible for sales, his operational responsibilities were assigned to other employees.
Jensen resigned in 2002 and began working for General Building Materials, Inc. (GBM). Reed Mill sued Jensen for breach of the noncompete agreement and sued GBM for tortious interference with contract. After the jury reached a verdict in favor of Reed Mill, Jensen and GBM filed motions for a directed verdict and for judgment not withstanding verdict, contending that the non-compete agreement was invalid.
The trial court concluded that because the parties executed the noncompete in connection with the sale and purchase of a business, the noncompеte was permitted under an exception to Colorado's statutory bar on covenants not to compete. It also found that, at the time of his departure, Jensen was not an executive or management employee of the company, and therefore the executive and management personnel exception did not apply. '
The court noted that buyer's principal admitted that the three-year noncompete agreement signed by Reed Mill's majority shareholder, who owned nearly ten times more shares than Jensen, was reasonable to protect buyer's purchase of Reed Mill's good will. On that basis, the court concluded that three years was more than sufficient for buyer to establish itself in the industry.
On these premises, the court found no valid reason why Jеnsen, a mere employee and an owner of only a small percentage of the business, should be prohibited from competing with Reed Mill in 2002, six years after the closing date. The court also found that prohibiting Jensen from employment in the only area in which he had experience would place an undue hardship on him, and that it was not necessary to bar Jensen for six years after the date of sale, much less for nine years after the sale.
Accordingly, the court ordered a directed verdict and entered judgment for defendants, finding that the duration of the noncompete agreement was unreasonable. The court or
Reed Mill appeals the directed verdict, and Jensen cross-appeals the rulings that the parties must pay their own attorney fees and that the noncompete was made in connection with the sale of a business.
II. Reasonableness in Connection with Sale
Reed Mill contends that although the trial court correctly concluded that Jensen's non-compete agreement was made in connection with the purchase agreement, it erred when it concluded that the duration of the agreement was unreasonable. We perceive no error.
A. Covenants Not to Compete
Colorado public policy disfavors covenants not to compete. However, § 8-2-118, C.R.S$,.2006, permits such covenants in limited cireumstances. DBA Enters., Inc. v. Findlay,
1. Covenants Ancillary to the Purchase of a Business
Section 8-2-118(2)(@), C.R.S.2006, permits covenants not to compete in connection with contracts for the purchase and sale of a business or the assets of a business. When ancillary to the sale of a business, such covenants protect the buyer's right to enjoy the business good will for which it paid. Gibson v. Eberle,
Where the evidence provides adequate support, we will not overturn the trial court's finding that a noncompete agreement was made in connection with a sale of business under § 8-2-118(2)(a). Boulder Med. Ctr. v. Moore,
2. Reasonableness and Enforceability
The reasonableness of covenants ancillary to the sale of business depends on whether the restraint on competition provides fair protection to the buyer's purchase of good will, while imposing restrictions no greater than necessary to protect the value of that good will. See Barrows v. McMurtry Mfg. Co.,
Reasonableness turns on the facts of cach case. Zeff Farrington, & Assocs., Inc. v. Farrington,
Some courts have held that, depending on the cireumstances, a covenant not to compete that is ancillary to the sale of a business may be enforceable even when a covenant of similar breadth incident to employment would not be. See Rent-4-Ctr., Inc. v. Canyon Television & Appliance Rental, Inc.,
B. Unenforeeable Agreement
Reed Mill asserts that it was reasonable to begin the three-year noncompetition period upon termination of Jensen's employment because Jensen possessed good will at the time of the sale and maintained that good will during his employment with the new company. We disagree.
The purchase agreement states that the covenant not to compete was necessary to ensure the continuation of the business. And, indeed, buyer purchased the good will that was incident to old Reed Mill's locality, name, and expectation of continued and repeated patronage by its customers. It purchased the company's good will from its owners. Because Jensen was an owner, Jensen received a pro rata share of the amount buyer paid for that good will.
Buyer was entitled to protect its enjoyment of that good will and establish itself in the industry without competition from the former company or its owners. Such protection was afforded by a period of noncompetition that prevented the former owners from benefiting from the company's good will, gave buyer time to convert that good will to its own, and dissipated the extent to which the marketplace identified the company with the former owners.
For the first three years after the sale, buyer enjoyed the absence of competition from any former owner, including Jensen. In addition, Jensen did not benefit personally from old Reed Mill's good will. Instead, as one employee of new Reed Mill's employees, he participated in buyer's efforts to convert that good will to its own, preserve the patronage of past customers, and establish itself in the locale and industry. Thus, during this time, buyer's right to the good will was protected.
For purposes of our analysis here, it does not matter whether the absence of competition from Jensen during this period resulted from his compliance with the noncompete agreement or buyer's decision to hire Jensen and, thereby, also obtain his loyalty. Nor does it matter that by hiring Jensen, buyer made the noncompete agreement unnecessary for the duration of the employment relationship. What matters is whether enforcement of the covenant after those three years was necessary to provide fair protection to buyer's legitimate interests in converting old. Reed Mill's good will to its own.
In this regard, we recognize the possibility that the identification of Jensen with old Reed Mill did not dissipate to the same extent as it did with regard to shareholders whom buyer did not employ. Hence, it is conceivable that, although new Reed Mill had had three years to convert the company's good will to its own, and was in a better position in that regard than it had been immediately after the sale, Jensen may have posed a greater risk to Reed Mill's ability to continue to enjoy that good will than did the former shareholders who had remained completely out of the marketplace.
But Reed Mill continued to employ Jensen for another three years after the noncompetition obligations of the other former shareholders expired. Thus, the question as presented to the trial court was not whether the agreement was enforceable at its inception, but rather, whether beginning six years after buyer purchased old Reed Mill's good will, enforcement of yet another three years of freedom from Jensen's competition was reasonable as a means of protecting the value of buyer's purchase. '
Consistent with the appropriate reasonableness analysis, the trial court considered Jensen's percentage of ownership, the nature of Jensen's employment at Reed Mill after the purchase, Jensen's professional experience, and the terms of the other shareholders' noncompete agrеements. The court found that (1) the evidence established that three years was a sufficient time for buyer to take over the business, learn the trade, and be free of competition from the former owners of Reed Mill; (2) three years was a
In addition, it is undisputed that at the time of the court's ruling, buyer had had a period of six years after the purchase to ensure continuation of the business and to protect the value of the good will it had purchased. Had the trial court allowed Reed Mill to enforce the agreement, Reed Mill would have expanded that period to nine years. And the record supports the court's findings that doing so would have restricted Jensen's right to work and to receive compensation for his work more than was necessary to protect the value of buyer's purchase of good will and, thus, that the hardship on Jеnsen would have been undue.
Therefore, we conclude that the trial court did not err when it found that the agreement was not reasonable and, accordingly, concluded that it was no longer enforceable.
III. Connection with Employment
We now turn to Reed Mill's contention that the trial court erred when it found that the noncompete agreement was not also made in connection with Jensen's employment as an executive or manager. Again, we perceive no error.
A. Executive-Management Exception
Section 8-2-118(2)(d), C.R.8.2006, permits covenants not to compete for "[executive and management personnel and officers."
The executivemanagement exception applies to employees who are "in charge" and act in an unsupervised capacity. Atmel Corp. v. Vitesse Semiconductor Corp.,
Whether an employee is executive or management personnel is a question of fact for the trial court. Mgmt. Recruiters, Inc. v. Miller,
B. Jensen's Employment
Reed Mill does not dispute that Jensen did not have executive or management rеsponsibilities at the time of his termination. Instead, it argues that Jensen was the general manager of old Reed Mill when he executed the noncompete agreement and, therefore, that the agreement was made in connection with his employment before the purchase.
Thus, Reed Mill asserts that the trial court erred when it considered Jensen's responsibilities at the time of termination. It argues that the trial court's finding did not give effect to the parties' intentions at the execution of the noncompete agreement, which included protection of the good will Jensen continued to command as a key employee or managerial personnel. We are not persuaded.
The noncompete agreement explicitly states that it was made "pursuant tо" the asset purchase agreement. It states further that the parties recognized that Jensen had served as an officer and key employee of Reed Mill and had contributed significantly to the company's success. There is no indication that Jensen's noncompete agreement was not the one referred to in the purchase
Reed Mill's rationale for beginning the term of Jensen's noncompete when his employment ended was "to provide Reed Mill time to convert [Jensen's] goodwill into its own." However, buyer paid an agreed amount based on old Reed Mill's good will, not based on the relative good will of each shareholder, even assuming such could be the case. Indeed, there are no Colorado cases that have recognized an employer's right to protect good will created by an employee's relationships with the employer's customers. Cf. Prow v. Medtronic, Inc.,
The purchase agreement explicitly stated that the purpose of the noncompete agreements was to ensure the continuation of the business with regard to the assets being purchased. Thus, the evidence supports the conclusion that the agreement was to protect buyer's purchase of good will, and not to protect high-level business strategies or knowledge to which an executive or managerial employee would likely have access.
Accordingly, we conclude that the court's finding that Jensen's noncompete agreement was in connection with the sale of the business and not with Jensen's employment as a general manager of old Reed Mill was not clearly erroneous.
Because we conclude that the trial court did not err when it ruled that the noncom-pete agreement was unreasonable in connection with the purchase of the business, and also conclude that the agreement was not in connection with Jensen's employment, we need not address GBM's contention that, because Jensen was a minority shareholder, we should rule that the agreement must be analyzed under standards applicable to employment contracts and not under those applicable to the purchase of a business.
IV. Moot Cross-Appeal
Jensen contends that. the trial court correctly concluded that the executive and managerial personnel provision of § 8-2-113(2)(d) does not apply. However, he contends that the agreement was not connected to the asset purchase agreement, and, therefore, the trial court erred when it concluded that a noncompete agreement was permissible under § 8-118(2)(a). Having concluded that the trial court did not err when it found that the noncompete agreement was unreasonable and rendered judgment in Jensen's favor, we conclude that this question is moot.
V. Attorney Fees
Jensen also contends that the trial court erred by not awarding him attorney fees as the prevailing party pursuant to the fee-shifting provision included in the noncom-pete agreement. We disagree.
In his counterclaims, Jensen alleged, among other things, that the noncompete agreement (1) was void ab initio, in part because it violated § 8-2-118(@2)(a); (2) violated the Colorado Antitrust Act of 1992, § 6-4-101, et seq., C.R.S. 2006, and that, as a consequence. of the violation, he was entitled to attorney fees under $ 6-4-114(2), C.R.S. 2006; and (8) was a wrongful interference with his future business expectations. In his prayer for relief he asked for the relief "prayed for in his [cJounterclaims, including costs, reasonable attorneys fees[,] and such other relief to which he may be entitled." Jensen's answer and counterclaims contained no reference to the agreement's fee-shifting provision.
In the trial management order, Jensen claimed the agreement should be rescinded due to Vranian's fraud. Jensen's motion for directed verdict and judgment notwithstanding the verdict sought a declaration that the agreement was void, and that he had been wrongfully discharged. He asked for attorney fees only in relation to the tort of wrongful discharge, and, again, made no reference
However, Jensen's motion did not include a request that he be awarded attorney fees based on the fee-shifting provision in the agreement. In the order granting Jensen's motion, the court ordered that each side would pay its own attorney fees. And Jensen did not file a motion for post-trial relief under C.R.C.P. 59 or for relief from the judgment under C.R.C.P. 60 as to that order. After the court entered judgment in his favor, he filed a bill of costs under § 13-16-105, C.R.S. 2006, and C.R.C.P. 54(d). However, he did not file a motion for attorney fees as required by C.R.C.P. 121 § 1-22.2(a).
Thus, although Jensen asserted during oral argument on appeal that he asked the trial court for attorney fees under the terms of the agreement, the record contains no such request.
He now asserts that the trial court erred when it did nоt award him his legal fees under the agreement's fee-shifting provision. But because Jensen did not pursue an award of attorney fees in the trial court in the manner required by C.R.C.P. 121 § 1-222, we decline to address this contention.
Further, Jensen's answer brief and opening brief on cross-appeal did not ask for an award of the attorney fees he incurred in the appeal. In his reply brief, he argued for the first time that he should be awarded fees he incurred not only at trial, but also in his appeal. However, CAR. 39.5 requires a party claiming attorney fees incurred in the appeal to specifically request them, and to state the basis for the request, in the party's principal brief in the appellate court.
In support of his request he cites only C.R.C.P. 121; Voller v. Gertz,
Thus, because Jensen did not comply with C.A.R. 39.5 and provides no legal authority or relevant case law regarding his asserted right to appellate attorney fees under the agreement, we also decline to address this request for appellate fees.
Judgment affirmed.
Concurrence Opinion
specially concurring.
I concur in Parts I, III, IV, and V of the majority opinion. I respectfully disagree, however, with the analysis of the question of the enforceability of Jensen's covenant not to compete in Part II of the majority opinion. In my view, it is not the latency period which renders the covenant unreasonable (I believe that aspect of the covenant is reasonable), but rather the length of the period during which competition is prohibited (three years) and the size of the geographic area in which competition is prohibited during that three-year period (within 100 miles of Reed Mill's place of business in Denver). Thus, because I conclude, for reasons different from those on which the majority relies, that the covenant is unreasonable, I concur in the judgment.
I. Standard of Review
The parties stipulated during trial that the issue of the enforceability of the covenant not to compete would be determined by the court "as a matter of law" in the event the jury found that Jensen had breached the covenant. Thus, that issue was decided in the context of a motion for a directed verdict under C.R.C.P. 50. In ruling on that motion, the trial court found that the facts relevant to the issue of enforceability were "undisputed."
While we should accept a trial court's findings of historical fact if supported by the record, see Chapman v. Willey,
II. Discussion
I agree with the majority's conclusions that (1) Jensen's covenant not to compete was agreed to in conjunction with the sale of Reed Mill, and is therefore permitted by the plain language of § 8-2-118(2)(a), C.R.S. 2006; and (2) the covenant not to compete was not part of an employment agreement, and is therefore not permitted by the statutory exception in § 8-2-118(@2)(d), C.R.S. 2006, pertaining to executive and management personnel. Thus, in this case, as the majority correctly observes, the enforceability of the covenant turns on whether the covenant is "reasonable." In the context of a covenant ancillary to the sale of a business, "[tlhe test to determine the reasonableness of such [a covenant] is whether the restraint provides a fair protection to the interests of the purchasing party in reasonably protecting that which [it] bought." Gibson w. Eberle,
The majority concludes that, in hindsight, the covenant here is unreasonable because it was not triggered until six years had passed from the date of the sale. In effect, therefore, the majority finds the covenant unreasonable because it contained an indefinite latency period-that is, because it could be triggered no matter how long Jensen continued to work for the company after the sale. I disagree with that approach.
"The purpose of enforcing covenants ancillary to the sale of a business is to make the good will of the business conveyed 'a saleable asset by protecting the buyer in the enjoyment of that for which he pays." " (Gibson, supra,
As one court has put it,
[t is not at all unusual for the seller of a business to join the new enterprise in an employment capacity. There are obvious advantages to both sides which flow from such an arrangement. It enables the purchaser to carry on the old business with the least possible dislocation and loss of good will. Established eustomers in the business sold could be expected to patronize the successor business. And such an arrangement provides the seller with the*742 opportunity to be productive in the work with which he is familiar, and to gain income.
Alexander & Alexander, Inc. v. Danahy,
In this case, therefore, as a matter of economic reality, some portion of Reed Mill's good will that Jensen possessed presumably remained reposed in him after the sale, notwithstanding that the buyer "owned" it. See Alexander & Alexander, supra,
By virtue of the lateney period in Jensen's covenant not to compete, the buyer purchased protection for its interest in the good will in the form of a period of time in which, following Jensen's disassociation from the company, Reed Mill could attempt to capture independently, and entirely for itself, whatever good will was reposed in Jensen, without any interference from Jensen. Such latency periods may be essential to adequately protect the purchaser's interest in good will. So long as the seller is employed by the company, a covenant not to compete is unnecessary to protect that interest because the employee's common law duty of loyalty precludes any competition with the employer. Jet Courier Serv., Inc. v. Mulеi,
Our supreme court has enforced covenants not to compete containing latency periods in employment contracts. See, e.g., Zeff, Farrington & Assocs. Inc. v. Farrington,
Though the majority asserts that "there are no Colorado cases that have recognized an employer's right to protect good will ere-ated by an employee's relationships with the employee's customers," protection of good will created through such relationships is frequently the implicit rationale for enforcing covenants not to compete ancillary to employment in many cases. Such covenants, which by their nature typically include latency periods, may be necessary to fully protect an employer's interest in good will generated through such relationships, regardless of when that good will was acquired. See, e.g., Harrison v. Albright,
Courts in other jurisdictions have enforced covenants not to compete which include latency periods where such agreements are ancillary to sales of businesses. See, e.g., Business Reсords Corp. v. Lueth,
Therefore, if the reasonableness of Jensen's covenant turned solely on the existence of the latency period, I would have no difficulty in concluding that the covenant is reasonable, notwithstanding that Jensen worked for the purchased company for six years after the sale. But the inquiry is not limited to the latency period. We also must consider the reasonableness of the period of noncom-petition and the seope of the geographic restriction.
I am mindful that in reviewing the reasonablenеss of covenants not to compete which are ancillary to sales of businesses, we ordinarily view them less critically than similarly broad covenants agreed to in other contexts. See National Propane Corp. v. Miller,
Courts are more likely to enforce covenants not to compete which are ancillary to the sale of a business because
there is more likely to be equal bargaining power between the parties; the proceeds of the sale generally enable the seller to support himself temporarily without the immediate practical need to enter into competitiоn with his former business; and a seller is usually paid a premium for agreeing not to compete with the buyer.
Alexander & Alexander, supra,
There is no indication in the record that Jensen and the buyer had relatively equal bargaining power. Typically, it is the majority shareholder (often the sole shareholder) who executes a covenant not to compete upon the sale of his interest in the business. See, e.g., Weber v. Nonpareil Baking Co.,
Further, the sum Jensen received for his covenant not to compete, $9,857, is nowhere near sufficient to allow him to temporarily support himself without the practical need to engage in the only type of business in which he has worked. See Bowen, supra,
Nor does it appear that Jensen, as a minority shareholder, received a premium for his share of the company's good will. Rather, he was paid for his good will in strict pro rata proportion to the amount of stock he held in old Reed Mill: whether such pro rata payment actually corresponds to that portion of the good will reposed in Jensen is not disclosed by the record.
Thus, in these cireumstances, we should not examine Jensen's covenant any less critically than if he had entered into it in connec
As noted above, it is well-established that a covenant not to compete is unreasonable if it works an undue hardship on the covenantor. Knoebel Mercantile Co. v. Siders,
As previously noted, Jensen was paid $9,857 for his covenant, while the majority shareholder was paid more than ten times that amount. Jensen's covenant prohibited him from working in the only business in which he has ever worked for a period of three years in an area within 100 miles of Reed Mill's placе of business in Denver (an area of over 31,000 square miles). The sum of $9,857 hardly relieves the burden of complying with such an extensive covenant. See EKnoebel Mercantile, supra (covenant of two years duration deemed unreasonable where injury to former employee from enforcement of covenant would outweigh any benefit to employer).
Likewise, the sum the buyer paid for that portion of old Reed Mill's good will reposed in Jensen strongly suggests a gross imbalance between the seope of Jensen's covenant and what is necessary to protect the buyer's interest in that good will.
In sum, I would conclude that the covenant is unreasonable and, hence, unenforceable, albeit for reasons different from those expressed by the majority. Accordingly, while I respectfully disagree with the majority's rationale on that point, I concur in the result.