Title: Eastern Distributing Co., Inc. v. Flynn
Citation: 222 Kan. 666, 567 P.2d 1371
Docket Number: 48,471
State: Kansas
Issuer: Kansas Supreme Court
Date: July 11, 1977

222 Kan. 666 (1977)
567 P.2d 1371
EASTERN DISTRIBUTING CO., INC., Appellee,
v.
TERRY A. FLYNN, Appellant.
No. 48,471

Supreme Court of Kansas.
Opinion filed July 11, 1977.
Alexander B. Mitchell and James W. Sargent, of Sargent, Klenda &amp; Glickman, of Wichita, argued the cause and were on the brief for the appellant.
Merle E. Parks, of Kansas City, argued the cause, and J.F. Steineger, Jr., of Kansas City, was with him on the brief for the appellee.
The opinion of the court was delivered by
KAUL, J.:
This is an action for injunctive relief brought by Eastern Distributing Co., Inc., plaintiff-appellee (hereafter referred *667 to as Eastern or plaintiff), a wholesale liquor distributor, against one of its former route salesmen, Terry A. Flynn, defendant-appellant, to enforce certain antidisclosure and anticompetition covenants contained in a written contract of employment executed by the parties. Trial was to the court at the conclusion of which defendant was enjoined for one year after April 29, 1976, from disclosing the list of Eastern's customers or any information relative thereto, and from engaging in a route salesman position or any such similar position for any competitor of Eastern in the counties of Atchison, Douglas, Leavenworth and Wyandotte, for the same one-year period.
Previous to his employment under the contract here in question, defendant had worked for Eastern as an office employee. In 1969 defendant left Eastern for a job with Hiram Walker Distilling Company. After two and one-half years with Hiram Walker defendant sought reemployment with Eastern as a route salesman. After negotiations with Gene Baird, president of Eastern, an agreement was reached and the contract in question was submitted to defendant. After consulting with his attorney, defendant signed the contract. Defendant was assigned certain territory and customers who had been serviced by another Eastern salesman who accompanied defendant on the route for a week.
Early in 1976 defendant became dissatisfied with his employment. He sent out numerous resumes and interviewed for jobs in and out of the liquor industry, within and without the Kansas City area. On April 29, 1976, he left Eastern and took a position as a route salesman with Grant-Billingsley, a liquor distributor and competitor of Eastern. Defendant immediately began to service the same customers which he had previously served for Eastern. This litigation was then initiated by Eastern.
The contract recited in detail the duties and benefits of the employee, the various terms of employment, and set out the mutual obligations of the parties. Concerning the employer's interest the contract reads:
The covenants, which are the crux of this litigation, are contained in paragraphs six and seven of the contract and read as follows:
After hearing the evidence, which consisted primarily of the *669 testimony of defendant and Mr. Baird, president of Eastern, the trial court made extensive findings of fact and conclusions of law. The court found the facts to be generally as recited herein. In findings number nine and ten the court specifically found:
The trial court's conclusions of law read as follows:
"1. Jurisdiction and venue are proper.
"B. The one-year restriction was not unreasonable.
On a motion to amend findings and conclusions, the trial court clarified its conclusion number four with respect to time limitation on disclosure of information provided for in paragraph six of the contract. On the motion to amend, the court ruled:
In other words, the trial court's limitation of one year was applied to paragraph six as a result of construing the contract as a whole and in particular with regard to the one-year limitation provided for in paragraph seven, rather than on the premise paragraph six was unreasonable in that a definite time limitation was not provided. As to the area restriction, the court found the fifty-mile radius provision to be unnecessary for the reasonable protection of plaintiff's interest and reduced the restricted territory to what was substantially the area which encompassed customers served by defendant when employed by plaintiff.
Before considering specific points raised by defendant on appeal, we should review some general principles which this court has recognized in previous decisions dealing with covenants not to compete in agreements of various types. It has become well-established that a noncompetition clause is valid if it is ancillary to any lawful contract, but it is subject to the test of reasonableness of the covenant and whether it is inimical to the public welfare. (H &amp; R Block, Inc. v. Lovelace, 208 Kan. 538, 493 P.2d 205; Foltz v. Struxness, 168 Kan. 714, 215 P.2d 133; and John Lucas &amp; Co. v. Evans, 141 Kan. 57, 40 P.2d 359.) With respect to time and space provisions in such covenants we adopted what was denominated the doctrine of reasonableness in Foltz and explained that the real test is never whether there is any restraint, but always whether the restraint is reasonable under the facts and circumstances of the particular case. In Lovelace we noted that in determining the reasonableness of a restrictive covenant a distinction is sometimes made between covenants incident to an *671 employment contract, such as that at bar, and those ancillary to a sale or other transfer of a business or property. We cited reasons for the distinction enumerated in Arthur Murray Dance Studios of Cleveland, Inc., v. Witter, 62 Ohio Law Abstract 17, 105 N.E.2d 685, and concluded that the distinction should be made. It is obvious from the findings and conclusions of the trial court herein that it was fully aware of, and had carefully analyzed, our opinions in Foltz and Lovelace. In conclusion number two the trial court recognized the principles laid down in Lovelace that a contract if freely and voluntarily entered into with full knowledge should be enforced with a presumption favoring legality and that the test is one of reasonableness. In noting the contract is to be construed strictly against the employer, the court recognized the distinction made in Lovelace as between an employment contract and one for the sale of a business with respect to restrictive covenants.
Finally, it should be observed there is no contention here that the restrictive covenants lack good consideration or are not otherwise incidental to and in support of a lawful contract of employment.
In the first three points specified on appeal, defendant contends the trial court erred in concluding that Eastern had a legitimate interest to protect by enforcement of the covenants. It is well-settled law that the mere desire to prevent ordinary competition does not qualify as a legitimate interest of an employer and a restrictive covenant is unreasonable if the real object is merely to avoid such ordinary competition. (43 A.L.R.2d, Anno., Employee  Restrictive Covenant  Area, § 23[a] and [b], pp. 94, 159-162.) However, it is also a well-recognized principle that "customer contacts" is a legitimate interest to be protected by an employer. On this point the author of the annotation referred to says:
It is clear from the import of the language of the instant contract that "customer contacts" was the principal incident which Eastern intended to protect. This leads to the question whether the *672 evidence is sufficient to support the determination in this regard made by the trial court in conclusion number three.
In a comprehensive treatise, "Employee Agreement Not To Compete," (73 Harvard Law Review, February 1960, No. 4, p. 625.), Professor Harlan M. Blake writes:
In exemplifying the three factors, Professor Blake points out that if contacts are infrequent and irregular there may be no sufficient risk to the employer to support any degree of restraint and further that frequency of contact may also affect the permissible period of restraint, the important consideration being that the employer should be given a reasonable period of time in which to overcome the former employee's personal hold over the customers. With respect to locale of the contact the important factor is whether the contact is made at the employer's place of business, which involves less risk to the employer, or at the customer's home or business establishment, which is more likely to direct the customer's loyalty primarily to the employee and support some degree of restraint. As to the nature of the employee's activities, Professor Blake says:
It is also generally recognized that the "customer contacts" theory gains added weight where the business is one in which the employee is the sole or primary contact with the customers and in which a close personal relationship with them is fostered, enabling the employee to control such business as a personal asset. *673 (Silver v. Goldberger, 231 Md. 1, 188 A.2d 155; Weber v. Hesse Envelope Company (Tex. Civ. App.) 342 S.W.2d 652; Dunfey Realty Co. v. Enwright, 101 N.H. 195, 138 A.2d 80.)
We have examined cases cited by defendant and find them to be distinguishable or not persuasive when applied to the facts of the instant case. Defendant cites Clark Paper &amp; Mfg. Co. v. Stenacher, 236 N.Y. 312, 140 N.E. 708 [1923], wherein a trial court's injunction barring a wrapping paper salesman from entering the employment of a competitor of his former employer was reversed. The court held that an ordinary salesman's contract not to enter a competitor's employ for eight years was unreasonable in restraint of trade and personal liberty in the absence of evidence of secret or valuable information obtained by him which he might impart. However, the court also rested its decision on the fact that the contract as alleged by the plaintiff employer had not been proved in that the time at which the eight-year period was to commence had never been agreed upon. We find the case of little persuasion in the light of the facts and circumstances at bar.
In Nesko Corporation v. Fontaine, 19 Conn. Supp. 160, 110 A.2d 631, the Court of Common Pleas of Connecticut sustained a demurrer to plaintiff's complaint and refused to enjoin a salesman (storm doors and windows) on the ground the contract with his former employer covered a territory far in excess of that in which the former employee did business. The Connecticut court, as did the trial court in Lovelace, held the restrictive covenant to be unreasonable as to the defendant, unnecessary to the plaintiff and prejudicial to the public. Such findings were not made by the trial court in the instant case.
In Mathews Paint Co. v. Seaside Paint Co., 148 Cal. App. 2d 168, 306 P.2d 113, the employer appealed from the trial court's order sustaining a demurrer to the complaint. There is no mention of a contract in the court's discussion of the allegations of the complaint. Apparently, the theory of the case was tortious interference with plaintiff's relationship with its customers.
The case at bar comes to this court after a full trial on the merits below. While the ultimate determination whether a legitimate interest subject to protection is shown may be a matter of law, the underlying facts are to be determined by the trial court after hearing the testimony presented. In conclusion of law number three the trial court determined that Eastern had an interest *674 entitled to protection, but the findings of the court leading up to such determination were actually findings of fact based on testimony. There is ample evidence, in particular the testimony of Gene Baird, to support those findings. It has long been a fundamental rule of appellate review that this court is not authorized to redetermine issues of fact that are supported by some evidence. (Landrum v. Taylor, 217 Kan. 113, 535 P.2d 406; Farmers State Bank of Ingalls v. Conrardy, 215 Kan. 334, 524 P.2d 690; and Sullivan v. Sullivan, 196 Kan. 705, 413 P.2d 988.)
It is true that Eastern's business is highly regulated by a state agency and that there are no secret customer lists nor other trade secrets involved in defendant's employment since such matters are of public record. The existence of trade secrets as evidence of enticing customers from a former employer is sometimes relevant, but not essential, to injunctive relief in a suit brought for breach of covenant not to compete. (House of Tools and Engineering, Inc. v. Price, [Mo. App.], 504 S.W.2d 157; All Stainless, Inc. v. Colby, 364 Mass. 773, 308 N.E.2d 481; Bates Chevrolet Corp. v. Haven Chevrolet, 13 App. Div.2d 27, 213 N.Y.S.2d 577; Prentice v. Rowe, [Mo. App.] 324 S.W.2d 457.)
While the names of customers and their places of business are matters of public record, Baird testified that the hours a licensee is available, and the names and ordering habits of their clerks are not. The evidence disclosed that a salesman's calls on customers were frequent and regular; that they were made at the customer's place of business rather than at Eastern's; and that the salesman was Eastern's principal, if not its sole, contact with customers. It was undisputed that Grant-Billingsley, with the exception of one customer in Lawrence, had done no business in the territory in question, prior to its employment of defendant. Defendant was hired away from Eastern to continue to serve the same customers he knew while employed by Eastern. There is ample evidence to support the trial court's findings which, viewed in the light of the foregoing authorities, establishes a legitimate interest subject to protection by a court of equity.
For his second point defendant contends the trial court erred in judicially modifying the restrictive covenants. This issue is resolved by Foltz v. Struxness, 168 Kan. 714, 215 P.2d 133, wherein we held:
Our holding in Foltz accords with the modern majority rule as to both territorial and time restrictions. (See 61 A.L.R.3d, Anno., Enforceability Of Contract Not To Compete, p. 397; 43 A.L.R.2d, Anno., Employee  Restrictive Covenant  Area, p. 94; and 41 A.L.R.2d, Anno., Employee  Restrictive Covenant  Time, p. 15.)
The rule adopted in Foltz is supported not only by the many cases collected in the annotations referred to, but also by text writers examining the subject. (See 6A Corbin on Contracts, § 1390, pp. 70-78; 23 Connecticut Bar Journal, "A Note on Beit v. Beit," by Professor Samuel Williston, pp. 40-42.) The underlying principle espoused by the courts and text writers is that equity should not permit an injustice which might result from total rejection of the covenant merely because the court disagrees with an employer's judgment as to what restriction is necessary to protect his business.
Defendant's reliance upon Lovelace in support of his position is misplaced. In his argument, defendant appears to view Lovelace as being in conflict with Foltz. In view of the different procedural posture of the two cases as they reached this court, we see no conflict. In Lovelace the trial court viewed the covenant as one intended to prohibit competition by defendant anywhere, and found that unlimited territory restriction was unnecessary and unjustifiable for plaintiff's protection. Consequently, the trial court determined the covenant was unenforceable because of unlimited territorial restriction. In Foltz a territorial limitation of one hundred miles from the city of Hutchinson contained in a covenant not to compete ancillary to a contract between two physicians was reduced to a radius of five miles and enforced by the trial court. In rejecting plaintiff's argument for reversal of the trial court's decision in Lovelace premised upon the Foltz decision we said:
In further distinguishing the two cases in the Lovelace opinion we said:
As evidenced by conclusion number four the trial court in the instant case fully recognized the characteristics distinguishing it from Lovelace. The Lovelace case does not stand for nonmodification of contracts, nor does it dictate a decision contrary to the trial court's ruling herein.
It is the duty of courts to sustain the legality of contracts in whole or in part when fairly entered into, if reasonably possible to do so, rather than to seek loopholes for defeating their intended purpose. (Cox v. Cason, 211 Kan. 789, 508 P.2d 499; and Foltz v. Struxness, supra.)
We think the trial court in the exercise of its equitable powers fairly and reasonably reduced the area restriction to only that which was necessary to protect plaintiff's interest. We find no public policy or public interest involved under the facts and circumstances of this case sufficient to avoid or render unenforceable a reasonable restraint.
In his third point, defendant contends the trial court modified the territorial restriction in an inequitable manner. Defendant cites no authority in support of his contention and we believe it is fully answered by what has been said. The trial court's modification is in line with what the evidence disclosed to be a restriction reasonably calculated to protect the interest of plaintiff. We find no abuse of discretion in this regard.
The judgment is affirmed.
SCHROEDER, J., dissenting:
I respectfully dissent. In view of (1) the appellee's attempted overreaching in the restrictive covenant, (2) the failure of the restrictive covenant to serve a legitimate purpose, and (3) the statutory and administrative licensing scheme in the sale of liquor, I would reverse the trial court and find the restrictive employment covenant void and unenforceable.
*677 In Kansas, although there is no rigid, absolute norm by which the reasonableness of an employment covenant against competition may be determined, the rights of the promisee, the promisor and the general public are to be taken into account. Both area and time limitations must be reasonable. (H &amp; R Block, Inc. v. Lovelace, 208 Kan. 538, Syl. 2, 493 P.2d 205.)
It is clear the area and time limitations initially set out in the covenant were unreasonable. The appellant could be fired without cause at any time. The Sixth Paragraph concerning disclosure of information prohibited the appellant from ever selling or disclosing information about the appellee's customers. No time limitation was imposed. However, the trial court, on a motion to amend, "interpreted" the contract to apply only the one-year restriction of the Seventh Paragraph.
The Seventh Paragraph prohibited the appellant from being employed or being connected in any manner with another similar business within a 50 mile radius of the appellee's sales territory. This would cover over 40% of this state's population. Under the equitable powers of the trial court, this area was reduced to the counties of Atchison, Douglas, Leavenworth and Wyandotte. The future employment activities were reduced to restrict only sales activities of a similar vein for the appellant.
In Foltz v. Struxness, 168 Kan. 714, 215 P.2d 133, this court approved the reduction of a territorial limitation in a covenant not to compete from 100 miles from the City of Hutchinson to a radius of five miles from the City. There, however, the contract was between an older doctor with an established medical practice in Hutchinson and a younger doctor seeking a location. The one-year contract of employment was later to be negotiated to carry on the practice. Both doctors were found by the trial court to have acted in good faith in attempting, although unsuccessfully, to negotiate the partnership agreement. The opinion thus states:
Here the restrictive covenant relates solely to employment and did not contemplate a future partnership, stock ownership or other transfer of the business. Although the trial court found no violation of public policy, I do not believe the initial covenant *678 was fairly entered into. The trial court was forced to use its equitable powers to reduce the time and area limitations and scope of the restrictive covenants. I would not invoke equity to aid the appellee. Particularly I would not do so where the restrictive covenant specifically provided:
Secondly, the covenant does not serve a legitimate public interest. As the majority indicates, if the real object of a restrictive employment covenant is merely to remove a competitor and avoid ordinary competition, the covenant is unreasonable because it is not necessary for the protection of a legitimate interest. (See 54 Am.Jur.2d, Monopolies, Restraints of Trade, and Unfair Trade Practices, § 543, pp. 982-983; and Annot., 43 A.L.R.2d 94, 161 [1955].)
Here there are no trade secrets or secret lists of customers. The identity and location of potential customers is a matter of public knowledge in this state's highly regulated liquor business.
The majority refers to Professor Blake and indicates sufficient "customer contacts" are present here to enforce the covenant. The numerous letters sent by the appellee, Eastern, to its customers indicates clearly Eastern did not depend solely on the appellant to contact its customers. In view of this mailing, the locale of the customer contact is unimportant. The key question on "customer contacts" then is the nature of the appellant's work. Therefore, the opinion in Clark Paper &amp; Mfg. Co. v. Stenacher, 236 N.Y. 312, 140 N.E. 708 [1923], reh. denied 236 N.Y. 638, 142 N.E. 316, where a salesman's covenant not to enter into a competitor's employ for eight years was found unreasonable, is particularly appropriate. There the court noted:
(See also Purchasing Assoc. v. Weitz, 13 N.Y.2d 267, 246 N.Y.S.2d 600, 196 N.E.2d 245 [1963].)
The majority's attempt to distinguish this decision as also resting "on the fact that the contract as alleged by the plaintiff employer had not been proved in that the time at which the eight-year period was to commence had never been agreed upon" is not persuasive. The agreement was made November 14, 1914, and was effective January 1, 1915. The salesman left on April 23, 1917. If the eight-year agreement were effective when made, under the facts of that case, it seems clear the court would have refused enforcement. (See also 54 Am.Jur.2d, Monopolies, Restraints of Trade, and Unfair Trade Practices, § 557, pp. 990-991; and Annot., 43 A.L.R.2d 94, 172, 185 [1955].)
Here Eastern could easily have hired another trained salesman and fairly competed in the liquor market. The majority says the appellant was "hired away" from Eastern to serve the same customers he knew while employed by Eastern. The record is clear that it was the appellant who made application for other employment and who initiated the contact with Grant-Billingsley, his new employer. Although Grant-Billingsley had previously done little business in this area, it is the appellee's fear of true competition, rather than an inference that Grant-Billingsley was hiring away Eastern's salesman in order to unfairly compete, which should be emphasized.
Third, the restrictive employment covenant, in my opinion, flies in the face of our statutory and administrative licensing scheme for the sale of liquor. A liquor salesman must meet certain criteria and be licensed by the State of Kansas in order to sell liquor to retailers in Kansas. (K.S.A. 1976 Supp. 41-311 and K.A.R. 14-9-1 et seq.) Here the appellee who is licensed to sell liquor anywhere in Kansas and lives in Kansas City, Kansas, will either have to sell his home and move if he wishes to remain a liquor salesman or search for another type of work. I would not permit a restrictive covenant to contravene state law.
*680 For the reasons stated it is respectfully submitted the trial court should be reversed and the restrictive employment covenant should be held void and unenforceable.