Court Opinion

ID: 9755091
Source: CourtListenerOpinion
Date Created: 2023-08-28 20:24:27.949221+00
Date Added: 2024-06-11T07:28:02.447613
License: Public Domain

Wendell L. Griffen, Judge, dissenting. The majority decision stands in direct conflict with our own case law. In the name of holding parties to their agreements and based on disregard for both the purpose of the law of unfair competition and economic reality, today’s decision violates the longstanding and justified principle that only where goodwill has been transferred ancillary to the sale and purchase of a business, for valid consideration, does a purchaser have a legitimate pecuniary interest in protecting that goodwill from competition from a seller. However, even when goodwill has been transferred, our case law requires that contracts in partial restraint of trade, such as clearly involved in this instance, are valid only to the extent reasonably necessary for the purchaser’s protection. See Duffner v. Alberty, 19 Ark. App. 137, 718 S.W.2d 111 (1986). Plainly, this case involves neither the sale and purchase of a business nor the transfer of goodwill attendant to such a transaction. It is nothing more than a dispute between an employer-principal Southwestern Bell Wireless (SWBW) and its former agent STATCO Wireless (STATCO) about whether the public will be allowed to choose competing cellular telephone services in the Hot Springs and Little Rock areas through the former agent. Beyond that, the record demonstrates that the non-competition covenant before us was not necessary to protect the legitimate interest of SWBW concerning its customer lists-, contracts, and agent compensation plans. Although I agree that the trial court erred in finding that STATCO misappropriated trade secrets and agree that SWBW had no proprietary interest in the marketing strategies bulletins, I perceive no material difference between the facts of this case and those presented by our decision in Duffner v. Alberty, supra, where we reached an entirely different result. Therefore, I dissent from the decision to affirm any part of the trial court’s decision and judgment. Duffner involved a covenant not to compete in an employment agreement between an orthopedic surgeon and the practice group with whom he practiced after completing his residency in June 1984. Duffner moved to Fort Smith, joined the well established orthopedic group headed by Dr. Joe Paul Alberty and Dr. John Wideman, and signed a written agreement containing a covenant that stated, should he desire to leave the group, he would not practice within a radius of thirty miles of the group offices for one year from the date of termination. Duffner practiced with the group until late spring of 1985, when he joined another orthopedic clinic located in the same building where his former associates maintained their practice. As in this case, the chancellor in Duffner entered an order enjoining Duffner for a period of one year from the date of the order. We reversed that decision in the face of the chancellor’s finding that the appellees had a valid and enforceable right to protect their substantial investment in their medical practice, and to protect their established medical clientele. In doing so, Chief Judge Cracraft, writing the opinion following this unanimous en banc decision, stated: Although contracts between individuals ought not to be entered into lightly, all other considerations must give way where matters of public policy are involved. From our review of all the facts and circumstances, we are of the opinion that the contract provision prohibiting appellant from practicing medicine within thirty miles of'the City of Fort Smith constitutes an undue interference with the interests of the public right of availability of the orthopedic surgeon it prefers to use and that the covenant’s enforcement would result in an unreasonable restraint of trade. Here the contract did not relate to the sale of a business and its goodwill. The appellees’ goodwill remained with them. The benefits which the appellant obtained from the reputation and goodwill of his former associates would be no greater than that of an employee in any other established business. It is only in those instances where goodwill has, for valid consideration, been transferred that the purchaser has a legitimate pecuniary interest in protecting against its being drained by competition from the seller. Nor were any trade secrets, formulas, methods, or devices which gave appellant an advantage over the appellees involved here. At the time he joined the association he had received his training and skills elsewhere and brought them with him. There is nothing in the record to indicate that he learned any trade secret or surgical procedures from the appellees which were not readily available to other orthopedic surgeons. To the contrary, the record reflects that while in the association he performed some orthopedic surgical procedures which the appellees did not perform. Although the chancellor found that the appellant had access to appellees’ confidential patient files, there was no evidence that he attempted to memorize them or use information from those files to entice any of their former patients to become patients of his new association. Although there was evidence that he obtained the files on twenty-eight persons from the appellees, it was explained that these were not new patients but those who were receiving follow-up medical attention after having undergone surgery by the appellant during his association with the appellees. Other than those twenty-eight persons receiving post-operative care, he testified that he had not seen more than two of appellees’ former patients. We cannot conclude from the evidence that appellant maintained a personal relationship or acquaintance with appellees’ patients or that their “stock of patients” was appropriated by the appellant when he left their offices. . . . We conclude that the enforcement of this covenant would do no more than prohibit ordinary competition. Id. at 141-42, 718 S.W.2d at 113-14. (Emphasis added.) Contracts in partial restraint of trade, where ancillary to a sale of a business or profession with its goodwill, are valid to the extent reasonably necessary to the purchaser’s protection, and are looked upon with greater favor than such an agreement ancillary to an employer-employee or professional association relationship. Madison Bank & Trust v. First Nat’l Bank, 276 Ark. 405, 635 S.W.2d 268 (1982); Marshall v. Irby, 203 Ark. 795, 158 S.W.2d 693 (1942); Easley v. Sky, Inc., 15 Ark. App. 64, 689 S.W.2d 356 (1985). Where the covenant grows out of an employment or other associational relationship, our appellate courts have found an interest sufficient to warrant enforcement of the covenant only in those cases where the covenantee provided special training, or made available trade secrets, confidential business information or customer lists, and then only if it is found that the associate was able to use information so obtained to gain an unfair competitive advantage. See Orkin Exterminating Co. v. Weaver, 257 Ark. 926, 521 S.W.2d 69 (1975); Rector-Phillips-Morse, Inc. v. Vroman, 253 Ark. 750, 489 S.W.2d 1 (1973); All-State Supply, Inc. v. Fisher, 252 Ark. 962, 483 S.W.2d 210 (1972); Girard v. Rebsamen Ins. Co., 14 Ark. App. 154, 685 S.W.2d 526 (1985). The validity of these covenants depends upon the facts and circumstances of each particular case. Evans Laboratories, Inc. v. Melder, 262 Ark. 868, 562 S.W.2d 62 (1978). The general rule is that a contract in restraint of trade ancillary to a sale or a business transaction, which is reasonably limited as to time and place, is not against public policy and is not invalid. Madison Bank & Trust v. First Nat’l Bank, supra; see also Bloom v. Home Ins. Agency, 91 Ark. 367, 121 S.W. 293 (1909); Webster v. Williams, 62 Ark. 101, 34 S.W. 537 (1896); United States v. Empire Gas Corp., 537 F.2d 296 (8th Cir. 1976), cert. den. 429 U.S. 1122 (1976); 17A C.J.S. Contracts § 249 (1999); 54A Am. Jur. 2d Monopolies, Etc., 853 (1996). The courts view a restraint of trade agreement ancillary to the transfer of a business with greater liberality, being “more prone to uphold restrictive clauses” than employer/employee covenants. Madison Bank & Trust v. First Nat’l Bank, 276 Ark. at 409, 635 S.W.2d at 270; see also McLeod v. Meyer, 237 Ark. 173, 372 S.W.2d 220 (1963); 42 Am. Jur. 2d Injunctions § 141 (2000); and 54A Am.Jur.2d Monopolies, Etc. § 853 (1996). In Little Rock Towel & Linen Supply Co. v. Independent Linen Service Co., our supreme court said, “Owing to the possibility that a person may be deprived of his livelihood the courts are less disposed to uphold restraints in contracts of employment than to uphold them in contracts of sale.” 237 Ark. 877, 879, 477 S.W.2d 34, 36 (1964). Whether a restraint provision is reasonable or unreasonable is a question to be determined under the facts of each case. McLeod v. Meyer, supra. The trial court’s findings will not be reversed unless clearly erroneous. Ford Motor Credit Co. v. Yarbrough, 266 Ark. 457, 587 S.W.2d 68 (1979); Ark. R. Civ. P. Rule 52(a). The non-competition covenants before us plainly do not arise from the sale of an established business or profession. There is no proof that SWBW sold its cellular phone service business to STATCO. No evidence supports a conclusion that SWBW would be deprived of its livelihood unless the non-competition covenant in these agreements is upheld. Thus, the more liberal standard applicable to agreements which restrain trade ancillary to the transfer of a business has no application to this case. While it is true that the party challenging the validity of a non-competition covenant arising from an employment or associational relationship has the burden of proving that the arrangement violates public policy, that burden of proof does not weaken the threshold principle that such arrangements are not favored under the law and that even if created to protect legitimate business interests, it must be shown that the person restrained by the covenant was able to use information obtained by the employment or associational relationship to gain an unfair competitive advantage. Orkin Exterminating Co. v. Weaver, supra. The law does not prohibit a former associate or employee from altogether competing against an employer or principal, but merely prohibits the use of confidential information gained from the former employer or principal to attain an unfair competitive advantage. By relying on the non-competition covenant, SWBW seeks to blur, if not altogether erase, the rather fundamental distinction in our restraint of trade jurisprudence between non-competition covenants attendant to the sale of a business and such covenants contained in employment or associational agreements such as the one it had with STATCO. Yet, that distinction is both plain and sound. Someone purchasing a going concern and its goodwill should not be vulnerable to the obvious competitive disadvantage of competing with the seller for the goodwill and patronage of the seller’s former customers. On the other hand, someone who merely contracts to work for another person should not be restrained from offering his services to other contractors after leaving a former associational or employment relationship unless there is no other less restrictive remedy available to protect the former employer from unfair competition. In this case, SWBW not only failed to immediately seek return of the information it deemed proprietary — even to the date it filed suit to enforce the non-competition covenant — but produced no proof that STATCO’s continued presence as a seller of competing cellular phone service posed the risk of unfair competition. A glaring example, but by no means the only one, that proves that the anti-competitive effect of the non-competition covenant went far beyond anything needed to protect the customer list, agent compensation plan, and contract bid documents from exploitation is found in sub-paragraph 4 of Paragraph 18, the paragraph containing the non-competition covenant. At sub-paragraph 4, the agreement provides that STATCO will not, directly or indirectly, allow any other person, firm, or other entity to use the name, trade name, goodwill, or any other assets or property of AGENT . . . any manner in connection with such other entity’s sale of [cellular phone service] or any other Authorized Service on behalf of a competing Reseller or provider of service in the Area, and AGENT specifically agrees not to transfer, assign, authorize or consent to the transfer or an AGENT telephone number to such a competing person, firm or other entity upon the expiration or termination of this Agreement. There was no proof that SWBW had any proprietary interest in STATCO’s phone number, office lease, or trade name. There was no proof that SWBW had any interest in whether anyone besides STATCO engaged in the “sale of [cellular phone service] ... on behalf of a competing Reseller or provider of service in the Area,” aside from hindering customers from the chance to obtain cellular phone service from SWBW competitors. The notion that SWBW needed to prevent STATCO from leasing its office space to one of its six competitors (Alltel, Sprint, Cricket, Nextel, Century Tel, and SunCom) in order to protect the proprietary nature of the customer lists, agent compensation plans, and contract bid proposals is patently absurd. By affirming the trial court’s decision enforcing the non-competition covenant in the face of this absurdity, the majority defies the longstanding principle that even when non-competition covenants arise out of the sale of a business with its goodwill, they are enforced only if necessary to protect the purchaser from unfair competition. It is certainly true that STATCO agreed to the non-competition covenant that SWBW placed in the exclusive agency agreements. However, that fact has never been controlling or directed our understanding of the legal principles applied to cases involving the enforceability of non-competition covenants. No matter what parties write into their agreements, the public has the right to free and open markets for goods and services. This right, not the wording of non-competition covenants, is the fundamental principle before which all contracts must yield if the notion of free enterprise is to be anything but a fiction. In this case, that means the public has the right to select cellular phone service from whomever can make that service available. The non-competition covenant upheld today restrains the public’s exercise of that right by restricting access to competing cellular phone service in the same geographic market with SWBW. The proprietary information contained in the SWBW customer lists, agent compensation plans, and bid proposals falls far short of the kind of sensitive and personal information exchanged between patients and their physicians. Even so, we reversed the injunction in Duffner. Here, as in Duffner, the non-competition covenant did not arise out of the sale of a business and transfer of goodwill. As in that case, the record before us does not show that STATCO made any attempt to retain or exploit any of the proprietary information to “entice” any SWBW customers to convert their cellular phone service to a SWBW competitor. I am unimpressed by the argument that our decision in Duffner resulted because we found something peculiar about the practice of orthopedic medicine such that our holding in that case should not apply to a case involving the availability of cellular telephone service. Duffner, we are told according to that argument, is not controlling on this case because there is a legally material distinction, insofar as the law of unfair competition and restraint of trade is concerned, between practicing orthopedic medicine (a professional calling) and marketing cellular telephone service. We should not read Duffner or the rest of our case law in this area in such simplistic terms. In fact, a survey of our decisions dealing with challenges to non-competition covenants quickly disproves the notion that the law makes such a distinction between professional undertakings and other commercial or business pursuits. In Rector-Phillips-Morse v. Vroman, supra, our supreme court affirmed a trial court’s decision to deny an injunction to enforce a three-year non-competition covenant between a real estate agency and one of its former salesmen because the three-year restriction was not reasonably necessary to protect the realtor from unfair competition. In Orkin Exterminator Co. v. Weaver, 257 Ark. 926, 521 S.W.2d 69 (1975), the supreme court similarly affirmed a trial court’s denial of an injunction to enforce a two-year non-competition covenant between a pest control company and a former employee who reentered the pest control business in partnership with another former employee within a week after being discharged. Justice George Rose Smith’s analysis of the proof in that case is both instructive as well as dispositive of the view that the law should somehow protect certain employers from what amounts to ordinary, as contrasted to unfair, competition. Justice Smith wrote: The basic flaw in Orkin’s position is that its contract, according to its own proof, is directed not against unfair competition but against competition of any kind on the part of its former employees. ... If Orkin’s position is sound, then any employer in any business devoted to selling - whether the sales be of insurance, real estate, clothing, groceries, hardware, or anything else - can validly prohibit its former salesmen from engaging in that business within the vicinity for as long as two years after the termination of employment. Needless to say, the law does not provide any such protection from ordinary competition. Id. at 929-930, 521 S.W.2d at 71. (Citations omitted.) Our decision in Duffner, like the decisions by our supreme court and other case law dealing with unfair competition and covenants not to compete, does not turn on the peculiarities of a given business, profession, trade, or craft. Our law dealing with non-competition covenants is based on whether such a covenant in whatever enterprise amounts to an unfair restraint on ordinary competition. In Duffner, Chief Judge Cracraft concluded the opinion by observing “that the enforcement of this covenant would do no more than prohibit ordinary competition.” 19 Ark. App. at 142, 718 S.W.2d at 114. That inquiry is valid no matter what the enterprise may be that is subject to the non-competition covenant. I am equally unpersuaded by the majority view that STATCO’s position would invalidate every covenant not to compete. The law does not guarantee anyone a right to be free from ordinary competition. Nor does the law justify “a temporary ban on competitive activity, which assures the principal that its interests will not be compromised” where goodwill has not been transferred ancillary to the purchase and sale of a business. That principle was clearly controlling in our Duffher decision. The majority does not explain why it does not govern this case, let alone justify departing from it. For the reasons stated by Chief Judge Cracraft, the holding in Duffher should apply to the facts and dictate the outcome of this case. There is nothing wrong with ordinary competition and nothing unfair about having to engage in ordinary competition against former business associates for the patronage of valued customers. No matter what parties write into their employment agreements, public policy holds that there is something fundamentally wrong about denying people freedom to choose where they want to do business by preventing them access to outlets where competitors can operate. That is why non-competition covenants are disfavored by our law. I dissent.