Court Opinion

ID: 9863405
Source: CourtListenerOpinion
Date Created: 2023-09-25 05:02:57.559489+00
Date Added: 2024-06-11T11:44:17.615565
License: Public Domain

Judge J. JONES
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."
*741Where the trial court decides an issue based on undisputed facts in the context of a C.R.C.P. 50 motion for a directed verdict, our review of that issue is de novo. Omedelena v. Denver Options, Inc., 60 P.3d 717, 722 (Colo.App.2002); Evans v. Webster, 832 P.2d 951, 954 (Colo.App.1991). Further, the ultimate question of whether a covenant not to compete is enforceable is one of law, which we review de novo. See Central Bank of the South v. Beasley, 439 So.2d 70, 73 (Ala.1983) (enforceability of covenant not to compete reviewed de novo where material facts are undisputed); Gann v. Morris, 122 Ariz. 517, 596 P.2d 43, 44 (Ct.App.1979) (reasonableness of covenant not to compete is a question of law); Raymundo v. Hammond Clinic Ass'n, 449 N.E.2d 276, 280 (Ind.1983) (same); Bowen v. Carlsbad Ins. & Real Estate, Inc., 104 N.M. 514, 724 P.2d 223, 225 (1986) (same).
While we should accept a trial court's findings of historical fact if supported by the record, see Chapman v. Willey, 134 P.3d 568, 569 (Colo.App.2006), the trial court made no such findings in this case, only conclusions of law based on undisputed facts. Therefore, we owe no deference to the court's rulings on the issues before us. Weed v. Monfort Feed Lots, Inc., 156 Colo. 577, 580, 402 P.2d 177, 179 (1965); Vu, Inc. v. Pacific Ocean Marketplace, Inc., 36 P.3d 165, 167 (Colo.App.2001); Evans, supra, 832 P.2d at 954.
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, 762 P.2d 777, 776 (Colo.App.1988) (citing Barrows v. McMurtry Mfg. Co., 54 Colo. 432, 438-40, 131 P. 430, 432-33 (1913)). Moreover, the hardship imposed on the cove-nantor must not be "undue." Whittenberg v. Williams, 110 Colo. 418, 420, 135 P.2d 228, 229 (1943).
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, 762 P.2d at 779 (quoting 6A A. Corbin, Contracts § 1887 (1962)). Where a seller in whom some measure of the purchased business's good will is reposed continues to work for the purchased business after the sale, a buyer is not fully protected in the enjoyment of that for which he pays-the good will-merely by virtue of the sale. This is because that good will may, to some extent, remain reposed in the seller-employee while he continues to work for the company. Indeed, a buyer may purchase a business in the hope that the seller will continue to use that good will for the benefit of the company following the sale.
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 *742opportunity to be productive in the work with which he is familiar, and to gain income.
Alexander & Alexander, Inc. v. Danahy, 21 Mass.App.Ct. 488, 488 N.E.2d 22, 28 (1986) {emphasis added).
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, 488 N.E.2d at 29. Given this economic reality, the focus of the reasonableness inquiry should be on whether the covenant is no broader than necessary to protect the buyer's interest in retaining that good will in the event Jensen's association with the company were to cease.
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. Mulei, 771 P.2d 486, 492-93 (Colo.1989). For the buyer, therefore, the critical concern is how to protect the good will it purchased after the seller-employee in whom good will may be reposed is no longer employed by the company. A covenant not to compete which is triggered upon the employee's disassociation from the company addresses that concern. See Central Bank, supra, 489 So.2d at 78-74.
Our supreme court has enforced covenants not to compete containing latency periods in employment contracts. See, e.g., Zeff, Farrington & Assocs. Inc. v. Farrington, 168 Colo. 48, 449 P.2d 813 (1969); Whittenberg, supra; Freudenthal v. Espey, 45 Colo. 488, 102 P. 280 (1909). Latency periods are common features of such covenants, and I am not aware of any case invalidating such a covenant on the basis it included a latency period.
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, 40 Colo.App. 227, 577 P.2d 302 (1977) (affirming grant of injunctive relief enforcing covenant not to compete triggered by exit from the company where evidence that defendant had taken several of the company's customers showed irreparable injury). See generally Harlan M. Blake, Employee Agreements Not to Compete, 73 Harv. L.Rev. 625, 653-67 (1960) (customer relationships, including those created and nurtured by covenantor-employee, constitute one historical justification for enforcing covenants not to compete ancillary to employment); Restatement (Second) of Contracts § 188 emt. g (preventing employee from attracting customers away from employer one rationale for enforcing such covenants).
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 Records Corp. v. Lueth, 981 F.2d 957, 959-62 (7th Cir.1992) (covenant in effect from the later of three years after the sale or two years after termination of employment; employee left company six years after the sale); Central Bank, supra, 439 So.2d at 71-74 (covenant in effect from the later of two years after the sale or two years after termination of employment); Alexander & Alexander, supra, 488 N.E.2d at 25, 28-29 (covenant effective for five years after date of termination of employment); cf. Harrison, supra, 40 Colo.App. at 229, 231-32, 577 P.2d at 303-05 (enforcing five-year covenant with indefinite latency period which was "analo*743gous to one ancillary to a 'contract for the purchase and sale of a business' " (quoting § 8-2-118(@2)(a)). But see Laidlaw, Inc. v. Student Transp., Inc., 20 F.Supp.2d 727, 734, 754-57 (D.N.J.1998) (refusing to enforce covenant running from five years after date of sale or five years after termination of employment, whichever is later, on grounds buyer "no longer" had a protectable interest nine years after the sale). Again, the courts have recognized the value of a latency period in protecting a buyer's interest in good will.
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 reasonableness 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, 18 P.3d 782, 787 (Colo.App.2000) (citing Centorr-Vacuum Indus., Inc. v. Lavoie, 135 N.H. 651, 609 A.2d 1213, 1215 (1992)). While there are sound policy reasons for this rule, those reasons require examination in this case.
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 competition with his former business; and a seller is usually paid a premium for agreeing not to compete with the buyer.
Alexander & Alexander, supra, 488 N.E.2d at 28; accord Rent-A-Center, Inc. v. Canyon Television & Appliance Rental, Inc., 944 F.2d 597, 601 (9th Cir.1991) (applying Kansas law); Fogle v. Shah, 539 N.E.2d 500, 502 (Ind.Ct.App.1989); Centorr-Vacuum Indus., supra, 609 A.2d at 1215; Weaver v. Ritchie, 197 W.Va. 690, 478 S.E.2d 363, 367-68 (1996).
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., 85 Colo. 232, 274 P. 932 (1929); Barrows, supra; DBA Enterprises, Inc. v. Findlay, 923 P.2d 298 (Colo.App.1996); cf. Gibson, supra (one partner sold his interest in the business to the other). Jensen, however, owned only 8.6% of Reed Mill's stock at the time of the sale. He was not involved in the negotiations pertaining to the sale, and he had no practical or legal ability to negotiate terms, much less prevent the sale. This is not to say that a covenant not to compete ancillary to the sale of a business is necessarily unenforceable as to a minority shareholder. Rather, relative bargaining power under the particular facts of the case is one factor to consider.
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, 724 P.2d at 225 (amount paid for covenant is a relevant factor in determining its enforceability). By comparison, the majority shareholder (who did not continue to work for Reed Mill) received over $100,000 in return for his covenant not to compete. Yet, Jensen's covenant is every bit as restrictive as the majority shareholder's with respect to the time period and geographic scope.
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*744tion with a contract of employment. See Roto-Die Co., Inc. v. Lesser, 899 F.Supp. 1515, 1519 (W.D.Va.1995) (applying Virginia law); White v. Fletcher/Mayo/Assocs., Inc., 251 Ga. 203, 303 S.E.2d 746, 749-50 (1983); Coskey's Tel. & Radio Sales & Serv., Inc. v. Foti, 253 N.J.Super. 626, 602 A.2d 789, 793-94 (App.Div.1992); Alexander & Alexander Servs., Inc. v. Maloff, 105 A.D.2d 1066, 482 N.Y.S.2d 386, 387-88 (1984). Regardless of which level of serutiny is appropriate, however, I cannot conclude that the covenant is reasonable.
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, 165 Colo. 393, 399, 439 P.2d 355, 358 (1968); Whittenberg, supra, 110 Colo. at 420, 135 P.2d at 229. The hardship worked on Jensen by virtue of the covenant is undue, in light of the particular facts here. See Zeff, Farrington & Assocs., supra, 168 Colo. at 50, 449 P.2d at. 814 (reasonableness of covenant not to compete depends on the facts of the case).
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 place 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.