Court Opinion

ID: 9774122
Source: CourtListenerOpinion
Date Created: 2023-08-29 18:09:19.047005+00
Date Added: 2024-06-11T07:32:02.541384
License: Public Domain

CORNYN, Justice,
dissenting.
The partner withdrawal provisions of this vigorously negotiated contract between certified public accountants do not, in my view, operate as an unreasonable *389restraint on trade insofar as they require Mr. Haass (“Haass”) to reimburse Main Hurdman’s (“MH”) costs in acquiring clients Haass took with him when he left the firm. Moreover, I disagree with the majority’s insistence on hammering a square peg into a round hole by the way it treats these contractual withdrawal provisions as a covenant not to compete. Accordingly, I dissent.
I agree with the court of appeals that this is not a covenant not to compete since there is no limitation whatsoever on Haass’s right to practice the accounting profession. Even Haass concedes in his response to MH’s application for writ of error that MH did not require him to sign a covenant not to compete. Therefore, the majority’s application of Hill v. Mobile Auto Trim, Inc., 725 S.W.2d 168 (Tex.1987), to Haass is clearly unwarranted and, in my judgment, paternalistic.
MH’s principal interest in the merger was to acquire the client base and good will of an established local accounting firm, Chorpening Jungmann and Company (“CJ”), in the San Antonio area. This being the case, to allow Haass to accept the benefits of his bargain and yet deny MH the benefits of its bargain is baffling. The message the majority sends is that the court will stretch reason and logic to avoid enforcing contracts according to their unequivocal terms when the court, with the benefit of 20-20 hindsight, deems enforcement undesirable for one reason or another. This only injects confusion and uncertainty into commercial relationships based bn comprehensive written agreements.
There is no valid reason why parties to the sale of a professional practice should not be able to adopt a formula designed to protect the purchaser from the loss of its bargain when, as here, a partner’s withdrawal and the exodus of his clients would clearly frustrate the purchaser’s very reasons for purchasing the practice. Clearly, a significant component of what CJ sold to MH was the goodwill established by Haass and his partners. Goodwill has been defined as:
[t]he advantage or benefit which is acquired by an establishment beyond the mere value of the capital stock, funds or property employed therein, in consequence of the general public patronage and encouragement which it receives from the constant and habitual customers on account of its local position, or common celebrity, or reputation for skill, or influence, or punctuality, or from other accidental circumstances or necessities, or even from ancient partialities or prejudices.
Taormina v. Culicchia, 355 S.W.2d 569, 573 (Tex.Civ.App.—El Paso 1962, writ ref’d n.r.e.). We have recognized goodwill as a valuable property right. Texas & Pac. Ry. Co. v. Mercer, 127 Tex. 220, 90 S.W.2d 557, 560 (Tex.Comm’n.App.1936, opinion adopted). Moreover, the sale of goodwill carries an implied covenant that the seller will do nothing in derogation of that grant. Casanova v. Falstaff Beer, Inc., 304 S.W.2d 207, 212 (Tex.Civ.App.—Eastland 1957, writ ref’d n.r.e.). I would hold that when a firm’s goodwill is being sold, a contractual provision such as the one at issue here can be a permissible device with which to estimate the losses to be incurred by MH in the event of Haass’s withdrawal from the partnership. Such a provision should be enforced absent extenuating circumstances not present here.
According to the terms of the merger agreement, both parties acquired valuable rights. Haass became a partner in a national accounting firm, his years of service to his former firm were counted toward his retirement eligibility with MH, he received a guaranteed salary exceeding $90,000 per year for 20 months, and MH assumed more than $200,000 of his former partnership’s liabilities. The principal asset that MH received in return was CJ’s goodwill as manifested by its client base. Indeed, according to the merger agreement, all client files of CJ became property of MH upon the merger. The majority denies MH the benefit of its bargain. In doing so, the majority simply disregards the jury’s finding of client acquisition costs as damages based on its erroneous restraint of trade analysis.
*390On this record, this reimbursement provision for client acquisition costs is not an unreasonable restraint on trade. The key word is “unreasonable.” As the RESTATEMENT (SECOND) OF CONTRACTS points out, this is because, “[e]very promise that relates to business dealings or to a professional or other gainful occupation operates as a restraint in the sense that it restricts the promisor’s future activity.” RESTATEMENT (SECOND) OF CONTRACTS § 186 comment a (1981). Not every promise, however, is an impermissible restraint. Promises imposing restraints that are ancillary to a valid sale of a business, like the merger here, can be a reasonable means of protecting a legitimate interest of the promisee. RESTATEMENT (SECOND) OF CONTRACTS § 188(2)(c) comment f (1981). “[T]he buyer’s interest in what he has acquired cannot be effectively realized unless the seller engages not to act so as unreasonably to diminish the value of what he has sold.” Id. § 188(2)(c) comment b.
The relevant provisions of the merger agreement provide:
Compensation of [MH] Upon Withdrawal. Should any of [Haass], MAS or RSJ withdraw or terminate his or her interest in the Firm either voluntarily or involuntarily and thereafter render professional services to Firm Clients (as that term is defined in Article VIII, Section 3 of the Main Hurdman Partnership Agreement), the withdrawing or terminating partner(s) shall compensate the Firm in the manner provided in Article VIII, Section 3 of the Main Hurdman Partnership Agreement.
The partnership agreement (incorporated in the merger agreement) addresses the compensation due to MH under these circumstances as follows:
3. Termination Other Than By Retirement — Payment to Firm
(1) Any partner or principal who terminates or is involuntarily terminated, and in either situation is not entitled to any retirement benefits, and who, during the period of twenty-four months thereafter solicits or furnishes accounting or related services to Firm clients shall compensate the Firm as hereinafter provided. Firm clients shall include any party who was a client of the Firm as of the termination date or became such a client during the twenty-four (24) month period thereafter, or any other party in which such clients are a principal party. The foregoing includes services provided directly or indirectly, as an individual, partnership or corporation, engaged in the business of public accounting or any kind or character.
(2) In the event that any of the aforesaid clients are served, directly, or indirectly as aforesaid, by such terminated partner or principal (jointly and severally hereinafter referred to as “terminee”), such terminee shall be liable as follows:
(a) For payment in full of all fees and expenses, billed or unbilled, due to the Firm from such clients as of the date the Firm learns that the client will be served by the terminee or from the date such client notifies the Firm that it will be served by the terminee.
(b) For reimbursement to the Firm for all direct costs (out-of-pocket expense), paid or to be paid by the Firm in connection with the acquisition of such client including but without limitation, retirement benefit obligations of any predecessor firm.
Provision 2(a) of the partnership agreement merely provides that the accounts receivable which are attributable to Haass’s efforts while a member of the partnership belong to MH. The sums due under Part 2(a) are undisputed. Part 2(b) requires him to pay MH their out-of-pocket expenses for acquisition of any firm clients that follow Haass to his new accounting firm, including those acquired by MH in the merger. The principal witness called by MH in support of its claim for client acquisition costs was William B. Sanders, a partner with MH at the time of its merger with CJ. Sanders used CJ’s financial records for the fiscal year ending December 31, 1982 for his calculations inasmuch as these were the same records used by MH in calculating the amount MH would pay to merge with CJ. Using CJ’s financial records and Haass’s client list, Sanders *391testified that Haass’s clients accounted for 20.82% of the client base acquired by MH in the merger. Applying that figure to MH’s costs incurred in the merger, Sanders testified that MH’s out-of-pocket client acquisition costs were $749,611.00.
The jury question addressed to part 2(b) of the merger agreement asked: “State from a preponderance of the evidence the amount of money, if any, that would fairly and reasonably compensate Main Hurdman for all direct costs (out-of-pocket expenses) paid or to be paid in connection with the acquisition of its clients that were served by Haass & Co. after August 20, 1984.” The jury answered: “$126,000.” The court of appeals found that part of the agreement that requires Haass to reimburse MH for clients who were patrons of MH on or before the date of Haass’s termination with the firm reasonable. 775 S.W.2d at 709. But the court of appeals declined to enforce the reimbursement provision to the extent a “firm client” is defined as including those who became MH clients during a period of two years after Haass left MH. Id. at 710.
First, it is clear that the quoted provisions of the merger and partnership contract do not even attempt to liquidate the damages sustained by MH upon Haass’s withdrawal. The relevant provisions do not state an amount of money due MH; this issue is left open for a factual determination after the withdrawal. Nor does the fact that the cost of withdrawing from the partnership was designed to make Haass “think twice” about leaving the partnership make this an impermissible penalty of the sort we forbade in Stewart v. Basey, 150 Tex. 666, 245 S.W.2d 484 (1952). These are reimbursement provisions, dependent upon proof of the amount due according to the contract formula.
Second, section 2(b) of the contract, insofar as it requires Haass to reimburse MH for its acquisition cost of firm clients that followed Haass to his new firm, is a reasonable means by which MH protected itself against just what happened here. We have previously acknowledged the legitimate interest of a party under similar circumstances to protect themselves from the possibility a withdrawing partner would “establish a rapport with the client of the business and ... take a segment of that clientele with him.” Henskaw v. Kroenecke, 656 S.W.2d 416, 418 (Tex.1983). By refusing to enforce the provision of the contract relating to acquisition costs of CJ’s clients, MH has paid for the privilege of merging with CJ, but has been denied the those benefits to which it is entitled under its bargain.
On different facts, I would be inclined to hold that only one part of the agreement, that defining firm client to include those who initiate a business relationship in the two years after Haass departed, is an unreasonable restraint of trade. As such, under RESTATEMENT (SECOND) OF CONTRACTS § 184 (1981), I would “blue pencil” the agreement to deny enforcement of that which is, from that which is not, unreasonably in restraint of trade. See RESTATEMENT (SECOND) OF CONTRACTS § 184 reporter’s note (1981) (pointing out that modern authorities favor enforcement of severable provisions of a contract and reject the former rule prohibiting “blue penciling” of the unenforceable provisions from the contract); see also Hill v. Mobile Auto Trim, Inc., 725 S.W.2d 168, 175 (Tex.1987) (Gonzalez, J., dissenting).
But this court does not need to decide whether MH can recover its out-of-pocket client acquisition costs for clients who came and left MH to go with Haass in the two years after he withdrew for the simple reason that MH offered no evidence of, nor was the jury asked to consider, expenses paid for “after-acquired” clients. MH’s witness on reimbursement costs calculated the amount owed based on CJ’s clients as of December 31, 1982, the date of the merger. MH did not offer any evidence on, or seek any recovery for, clients acquired by MH after Haass left who later took their business to Haass.
For the foregoing reasons, I would reverse the judgment of the court of appeals and render judgment in favor of MH.
Justice GONZALEZ joins in this dissent.