Court Opinion

ID: 9857159
Source: CourtListenerOpinion
Date Created: 2023-09-24 13:52:35.822516+00
Date Added: 2024-06-11T09:38:04.979344
License: Public Domain

ON MOTION FOR REHEARING
YALE McFATE, Judge (Retired).
The appellee has presented a vigorous motion for rehearing. We have also permitted the Attorney General to file an amicus curiae brief in support of the motion for rehearing. These and the opposition to the motion for rehearing have focused our attention on authorities in the field of antitrust law not stressed in the briefs. For the assistance of the trial court and the bar we deem comment on some of the matters presented appropriate.
Appellee argues that since we determined that a durationally unlimited covenant not to compete was not sustainable, our task was at an end because there could be no partial enforcement of a covenant which was invalid as written. Appellee has cited in this regard Kelly v. Kosuga, 358 U.S. 516, 79 S.Ct. 429, 3 L.Ed.2d 475 (1959); Schine Chain Theaters, Inc. v. United States, 334 U.S. 110, 68 S.Ct. 947, 92 L.Ed. 1245 (1948); Edward Katzinger Co. v. Chicago Metallic Mfg. Co., 329 U.S. 394, 67 S.Ct. 416, 91 L.Ed. 374 (1947); MacGregor v. Westinghouse Electric & Mfg. Co., 329 U.S. 402, 67 S.Ct. 421, 91 L.Ed. 380 (1947); Sola Electric Co. v. Jefferson Electric Co., 317 U.S. 173, 63 S.Ct. 172, 87 L.Ed. 165 (1942); Associated Press v. Taft-Ingalls Corp., 340 F.2d 753 (6th Cir.1965), cert. denied, 382 U.S. 820, 86 S.Ct. 47, 15 L.Ed.2d 66 (1965); Farbenfabriken Bayer, A.G. v. Sterling Drug, Inc., 307 F.2d 207 (3rd Cir.1962); Lektro-Vend Corp. v. Vendo Co., 403 F.Supp. 527 (N.D.Ill.1975), aff’d, 545 F.2d 1050 (7th Cir.1976), rev’d on other grounds, 433 U.S. 623, 97 S.Ct. 2881, 53 L.Ed.2d 1009, rehearing denied, 434 U.S. 881, 98 S.Ct. 242, 54 L.Ed.2d 164 (1977).
Except for Schine and Lektro-Vend, none of the United States Supreme Court’s cases which appellee cites involve covenants not to compete. Most of them deal instead with price-fixing provisions predicated upon a patent attacked as invalid. Schine was an action brought by the United States which involved a great many monopolistic prac*133tices on the part of the defendant. LektroVend was primarily concerned with the issuance of an injunction to stop collection of a state court judgment which enforced challenged covenants not to compete. Associated Press v. Taft-Ingalls involved a tying arrangement. In Farbenfabriken, the parties had entered into an agreement to divide profits which had previously been adjudicated in violation of the Sherman Act. We cannot draw from any of these cases a principle that it is never appropriate to partially enforce an ancillary covenant not to compete. Cf. Alders v. AFA Corp. of Florida, 353 F.Supp. 654 (S.D.Fla.1973), aff’d without opinion, 490 F.2d 990 (5th Cir.1974).
References in the case law and in our opinion to “modifying” the contract of the parties and “enforcing the covenants as modified” need clarification. Where a covenant not to compete is durationally excessive and hence unlawful, and the court, after determination of a reasonable time limitation enforces the covenant pro tempore, it does not thereby “modify” the covenant in the sense of exercising any power of reformation. See Restatement (Second) of Contracts § 184, note b (1981). The court does not alter the covenant which the parties made nor does it enforce an unlawful covenant. It simply requires the defaulting party to live up to his bargain for the limited period of time commensurate with what is reasonable and lawful and refuses enforcement beyond that time.
Appellee also cites section 518 of the Restatement of Contracts (1932) for the proposition that a covenant not by its terms divisible will be denied partial enforcement. While that was formerly the view of the Restatement, section 184 of the Restatement (Second) of Contracts (1981) takes a view consistent with our decision in regard to partial enforcement.
Appellee also contends that the covenants cannot be viewed as ancillary to a legitimate transaction, that they were broader in scope than could be deemed necessary, and that in any event our decision fails to provide the trial court with a standard for enforcement. We shall address these contentions together. Initially, it must be borne firmly in mind that this case is before us on a motion for summary judgment. Summary judgment may not be granted if there is the slightest doubt in regard to the essential, material facts. Wisener v. State, 123 Ariz. 148, 598 P.2d 511 (1979). The field in which the parties are engaged involves complex technology. Without delving at length into the facts, we note that appellant has alluded to what it regards as factual issues and that appellee questions, for example, whether or not the technology involved is capable of being protected. See A. & E. Plastik Pak Co., Inc. v. Monsanto Co., 396 F.2d 710 (9th Cir.1968). We do not perceive that the material facts are yet developed beyond the stage of slightest doubt.
If the appellant is entitled to injunctive relief, it must arise out of the reasonably perceived necessities of this situation involving a voluntary sale of capital assets. If under all of the circumstances some measure of protection in the form of a non-competition covenant was practically essential to effectuate a sale on reasonable terms, then such a covenant may be enforced to that extent. The covenant, however, may not be enforced beyond that extent, and it may not be enforced at all if the dominant objective of the party seeking enforcement was to obtain a monopoly rather than to facilitate a sale to a viable enterprise, with incidental appropriate restrictions on competition for his own protection. The concern of Wabash for its existing warranty obligations is also a matter which may be considered in evaluating the necessity of a non-competition covenant. Cf. Continental T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36, 97 S.Ct. 2549, 53 L.Ed.2d 568 (1977) (manufacturer’s vertical restriction on franchisee’s retail location must be judged under rule of reason analysis).
Just as mergers are not inherently or always and invariably anticompetitive, neither is the sale of a business or businesses by one entity to two new entities inherently or always and invariably procompetitive. *134On the other hand, there is clearly a value in facilitating the market for capital goods, and in a case like the present one, two new potential competitors have been created where formerly there was but one corporate entity which presumably was not under a duty to intramurally compete in regard to development of its two product lines. Cf. Joseph E. Seagram and Sons, Inc. v. Hawaiian Oke and Liquors, Ltd., 416 F.2d 71 (9th Cir.1969), cert. denied, 396 U.S. 1062, 90 S.Ct. 752, 24 L.Ed.2d 755, rehearing denied, 397 U.S. 1003, 90 S.Ct. 1113, 25 L.Ed.2d 415 (1970) (alcoholic beverage distiller and the various divisions of its wholly owned subsidiary distributor not to be treated as separate, competitive entities). This is the outstanding difference between the present case and a case like Wedgewood Investment Corp. v. International Harvester Co., 126 Ariz. 157, 613 P.2d 620 (App.1979). The basic genre of agreement involved here has usually been considered subject to the “rule of reason” and we are unable to perceive that the record thus far developed in this litigation mandates the application of a different rule (see the discussion of United States v. Addyston Pipe & Steel Co., 85 F. 271 (6th Cir.1898), affirmed as modified, 175 U.S. 211, 20 S.Ct. 96, 44 L.Ed. 136 (1899), in Alders v. AFA Corp. of Florida, 353 F.Supp. at 656-57).
The parties seeking rehearing refer to the “uneven bargaining power” of Oglesby over McDonald, in that Oglesby, as noted in the original opinion, “held virtual veto power” over any contract between Wabash and Pace involving the proposed sale, and argue that consequently the “rule of reason” is inapplicable. Restatement (Second) of Contracts § 184, note b (1981). We did not intend to infer by the language employed that the virtual veto power was unlawfully exercised or was other than the power to say “no” possessed by a negotiator of a contract in which he has a financial interest. The negotiations in this case were instigated by McDonald. There is no contention that any fiduciary relationship existed between him and Oglesby or that his acceptance of the tripartite arrangement resulted from economic duress. We find nothing in the record thus far presented to indicate that Oglesby used his bargaining power to unfairly exact from McDonald a clearly unlawful promise such as to preclude the application of the “rule of reason” to the enforcement of the covenants here involved.
The parties have urged us to expound on various other aspects of the case, but we think what has been written suffices to dispose of the matter on summary judgment. We think that what the State describes as various peculiarities in the case can be more properly considered with a fully developed record.
For the foregoing reasons, the motion for rehearing is denied.
CONTRERAS, P.J., and FROEB, J., concur.
NOTE: The Honorable YALE McFATE was authorized to participate in this matter by the Chief Justice of the Arizona Supreme Court pursuant to Ariz. Const, art. VI, § 20.