Court Opinion

ID: 9764832
Source: CourtListenerOpinion
Date Created: 2023-08-29 03:41:28.370653+00
Date Added: 2024-06-11T07:30:01.872915
License: Public Domain

KILGARLIN, Justice.
Based on a covenant not to compete in a franchise agreement, Mobile Auto Trim, Inc. sought to enjoin Joel Hill, a former franchisee, from competing with it in a seven-county area. The trial court granted the temporary injunction. The court of appeals, with one justice dissenting, affirmed the temporary injunction. 704 S.W.2d 384. Because of the dissent, we have jurisdiction over this cause. Gannon v. Payne, 706 S.W.2d 304 (Tex.1986). In a single point of error, Hill complains that the non-competition agreement is a restraint on trade and is unreasonable. We agree and therefore reverse the judgment of the court of appeals, dissolve the temporary injunction, and hold the restrictive covenant in the franchise agreement void in all respects.
Mobile Auto Trim sells car trim franchises in which equipped vans are driven to car dealerships to make repairs at the premises. In August 1982, Mobile sold a franchise to Joel Hill for approximately $42,000 plus five percent of his gross revenues. Hill’s franchise covered a large part of Dallas County and all of Denton County. The franchise agreement contained this covenant not to compete:
*170Franchisee (Hill) agrees that upon termination of this Franchise Agreement, for whatever reason, Franchisee shall not directly or indirectly, as an officer, director, shareholder, proprietor, partner, consultant, employee or in any other individual or representative capacity, engage, participate or become involved in any business that is in competition in any manner whatsoever with the business of the Company or its franchisees. Furthermore it is understood between the parties that substantial goodwill will exist between the Company and the managers of the various car dealerships serviced by the Company and the Company’s franchisees. Because said managers are transient and frequently change employment among car dealerships, Franchisee further agrees that upon termination of this Franchise Agreement, for whatever reason, Franchisee will not directly or indirectly in any manner whatsoever, in any capacity whatsoever, contact said managers (irrespective of the car dealerships that employ them) regarding business in competition with the Company. This covenant shall extend for a period of three (3) years following the termination of this Franchise Agreement or any renewal hereof. Further, this covenant shall cover the following geographic area during said period: The following Texas Counties: Dallas, Tar-rant, Ellis, Denton, Rockwall, Kaufman, and Collin.
For two and a half years, as Mobile’s franchisee, Hill contacted car dealerships and made car trim repairs in his two-county area. In April 1985, after Hill had not paid his franchise fees for several months, Mobile Auto Trim picked up his van and terminated the franchise agreement. That day, after the franchise agreement had been terminated, Hill contacted a prior customer, a car dealership manager in Dallas County. Thereafter, Mobile Auto Trim sought a temporary injunction to enjoin Hill from competing with it or contacting car dealership managers in the seven counties listed in the covenant not to compete.
Courts in Texas encounter two general varieties of covenants not to compete: covenants specifying that the seller of a business will not compete with the buyer, Daniel v. Goesl, 161 Tex. 490, 341 S.W.2d 892 (1960), and covenants specifying that an employee, upon discharge, will not compete with the former employer, Justin Belt Co. v. Yost, 502 S.W.2d 681 (Tex.1974). These covenants commonly set forth temporal and geographical restraints on the promis- or’s ability to compete with the promisee, which restraints must be reasonable. Weatherford Oil Tool Co. v. Campbell, 161 Tex. 310, 340 S.W.2d 950 (1960).
Under the common law of contracts, a covenant not to compete is in restraint of trade and its terms are enforceable only if, and to the extent that, they are, in other respects, also reasonable.1 Whether a covenant not to compete is reasonable is a question of law for the court. Henshaw v. Kroenecke, 656 S.W.2d 416, 418 (Tex.1983). A covenant is unreasonable “if it is greater than is required for the protéction of the person for whose benefit the restraint is imposed or imposes undue hardship upon the person restricted.” Weatherford Oil Tool Co. v. Campbell, 340 S.W.2d at 951; Henshaw v. Kroenecke, 656 S.W.2d at 418; see also Restatement (Second) of Contracts § 188.
A covenant must meet four criteria in order to be deemed reasonable. First, the covenant must be necessary for the protection of the promisee. That is to say, the promisee must have a legitimate inter*171est in protecting business goodwill or trade secrets. Second, the covenant must not be oppressive to the promisor, as courts are hesitant to validate employee covenants when the employee has nothing but his labor to sell. In this respect, the limitations as to time, territory, and activity in the covenant not to compete must be reasonable. Frankiewicz v. National Comp Associates, 633 S.W.2d 505, 507 (Tex.1982); Justin Belt Co., Inc. v. Yost, 502 S.W.2d at 685; Weatherford Oil Tool Co. v. Campbell, 340 S.W.2d at 951. Third, the covenant must not be injurious to the public, since courts are reluctant to enforce covenants which prevent competition and deprive the community of needed goods. Weatherford Oil Tool v. Campbell, id.; 14 S. Williston, A Treatise on the Law of Contracts § 1639 (3d ed. 1967 and Supp. 1983). See generally Note, Sakowitz v. Steck: Texas Looks at Covenants Not To Compete, 38 Baylor L.Rev. 211, 214-18 (1986).
Finally, as with any contract, the non-competitive agreement should be enforced only if the promisee gives consideration for something of value. Rubin & Schedd, Human Capital and Covenants Not To Compete, 10 J. Legal Studies 93 (1981). This doctrine promotes economic efficiency. In the case of covenants not to compete incident to the sale of a business, the seller’s promise not to compete with the buyer increases the value of the business to the buyer. Without such a covenant the value of the business would be reduced, lessening the likelihood that businesses would be purchased. In employee covenants, the special training or knowledge acquired by the employee through his employer is valuable consideration and often enhances the value of the employee to other firms. To allow employees to use or sell this valuable training or knowledge upon leaving a firm would create a disincentive for employers to train or educate employees. Comment, Economic And Critical Analyses of the Law of Covenants Not to Compete, 72 Geo.L.J. 1425 (1984).
But, the covenant before us today cannot be clearly categorized as either a covenant incident to the sale of a business or a post-employment covenant to prevent utilizing special training or knowledge. Hill obtained his skills as an auto trim repairman prior to his franchise agreement with Mobile Auto Trim. Hill bought a franchise from Mobile for approximately $42,000 plus 5% of his gross revenues. In effect, Hill paid for the use of Mobile’s name and accompanying goodwill.
This restrictive covenant is plagued by a lack of reasonableness. Initially, there is an apparent absence of consideration. What value did Mobile give in exchange for Hill’s promise not to compete? It was not specialized training or knowledge, for that was acquired by Hill prior to his franchise agreement, nor was it Mobile’s promise not to compete with Hill after their business relation terminated. And, although Mobile Auto Trim alleges that its trim services are trade secrets, they do not provide any substantiation, did not bring suit to stop the use of their trade secrets, and are willing to let Hill use their techniques anywhere except the Dallas-Fort Worth metroplex.
More importantly, we find no legitimate business interest of Mobile which the covenant is necessary to protect. The contract alleges, and the record indicates, that the purpose of this covenant not to compete was to prevent Hill from exploiting the contacts and “the substantial goodwill [that] exisljs] between the Company and the managers of the various car dealerships.” However, there exists not only business goodwill but also franchisee goodwill. When people leave a business to work for another or to open a firm of their own, many are capable of taking with them a sizeable number of the clients whom they had served at their previous place of employment. If they were not in possession of some type of personal magnetism or personal goodwill, they would be incapable of retaining those clients or customers. Shrewd employers and franchisors know this and seek to deprive the employee/franchisee of the fruits of his goodwill by requiring that he enter into an agreement containing a restrictive covenant. The cov*172enant is generally unfair to the employee/franchisee, for when that person is placed in the position of being unable to compete with the former employer/franchisor, his personal goodwill is effectively neutralized.
In the past this court has modified restrictive covenants in order to make the time, area and scope of the covenant reasonable. Matlock v. Data Processing Security, Inc., 618 S.W.2d 327, 329 (Tex 1981); Justin Belt Co., Inc. v. Yost, 502 S.W.2d at 684; Spinks v. Riebold, 310 S.W.2d 668, 669 (Tex.Civ.App.—El Paso 1958, writ ref’d). But, there has never been a presumption that so long as the restriction does not encumber the former franchisee’s ability to compete for a long time or over a wide radius, the covenant is otherwise deemed fair. To presume such would be to ignore the fact that the franchisor ordinarily has no right to prohibit fair competition. Tex.Const. art. I, § 26. If fair competition is injurious to the franchisor, then so be it: it is but a normal effect of a free market economy.
Finally, the covenant is oppressive to the promisor, Hill. Not only has he lost his franchise and investment therein, he is now prevented from using his previously acquired skills and talent to support him and his family in the county of their residence. We recognize that a man’s talents are his own. Absent clear and convincing proof to the contrary, there must be a presumption that he has not bargained away the future use of those talents. Professor Williston referred to this concept in his authoritative work on contract law, and it is a fitting summary of the nearly forgotten notion:
A man’s aptitudes, his skill, his dexterity, his manual or mental ability—all those things which in sound philosophical language are not objective, but subjective— they may and they ought not to be relinquished by a servant; they are not his master’s property; they are his own property; they are himself. There is no public interest which compels the rendering of those things dormant or sterile or unavailing; on the contrary, the right to use and to expand his powers is advantageous to every citizen, and may be highly so for the country at large.
S. Williston, A Treatise on the Law of Contracts § 1646 (rev. ed. 1937) (citing Morris v. Saxelby, 1 A.C. 688, 714 [H.L. 1916]).
Today, we are presented with an individual who is skilled in auto trim repair and are asked to prohibit him from engaging in a common calling. We refuse to do so. The longevity of the reasonableness approach has been its flexibility. “The changing conditions of life modify from time to time the reasons for determining whether the public interest requires that a restrictive stipulation shall be deemed void as against public policy.” Samuel Stores, Inc. v. Abrams, 94 Conn. 248, 252, 108 A. 541, 543 (1919). In 1982, the Utah Supreme Court refused to enforce a hearing aid distributor’s non-competition agreement against a former salesman, setting forth the standard which we adopt today: “[covenants not to compete which are primarily designed to limit competition or restrain the right to engage in a common calling are not enforceable.” Robbins v. Finlay, 645 P.2d 623, 627 (Utah 1982).
The issue before us is whether Mobile Auto Trim is entitled to have the restrictive covenant enforced pending trial on the merits. Iranian Muslim Organization v. City of San Antonio, 615 S.W.2d 202, 208 (Tex.1981). Mobile must show a probable right of recovery and a probable injury in order to justify the issuance of a temporary injunction. Transport Co. of Texas v. Robertson Transports, 152 Tex. 551, 261 S.W.2d 549 (1953). For the foregoing reapons, we hold there is no probable right of recovery. Therefore, we reverse the judgment of the court of appeals, dissolve the temporary injunction, and hold the restrictive covenant in the franchise agreement void in all respects.
GONZALEZ, J., files a dissenting opinion in which HILL, C.J., and CAMPBELL, J., concur.

. Some states prohibit all or most forms of restrictive covenants by statute. State statutes prohibiting or limiting such post-employment restraints include: Alabama: Ala.Code § 8-1-1 (1975); California: Cal.Bus. & Prof.Code § 16600 (West 1964); Colorado: Colo.Rev.Stat. § 8-2-113 (1973) (however, the statute permits employee noncompete agreements where the employer wishes to recover the costs of educating or training an employee or when the employee is an executive or staff member of an executive); Louisiana: La.Rev.Stat.Ann. § 23.-921 (West 1964) (a maximum two-year restriction is permitted, however, if the employer has trained or advertised for the employee); Michigan: Mich.Comp.Laws § 445.761 (1967); North Dakota: N.D.Cent.Code § 9-08-06 (1960); Oklahoma: Okla.Stat. tit. 15 § 217 (1966); South Dakota: S.D. Codified Laws Ann. § 53-9-8 (1980).