Court Opinion

ID: 151210
Source: CourtListenerOpinion
Date Created: 2010-07-21 17:40:22+00
Date Added: 2024-06-11T17:18:31.121277
License: Public Domain

UNPUBLISHED

                   UNITED STATES COURT OF APPEALS
                       FOR THE FOURTH CIRCUIT

                            No. 09-1599

PRYM    CONSUMER     USA,   INCORPORATED;     WILLIAM     PRYM,
INCORPORATED,

                Plaintiffs - Appellees,

           v.

RHODE ISLAND TEXTILE COMPANY,

                Defendant - Appellant.

Appeal from the United States District Court for the District of
South Carolina, at Spartanburg.   G. Ross Anderson, Jr., Senior
District Judge. (7:08-cv-03518-GRA)

Argued:   May 11, 2010                      Decided:    July 21, 2010

Before KEENAN, Circuit Judge, HAMILTON, Senior Circuit Judge,
and Samuel G. WILSON, United States District Judge for the
Western District of Virginia, sitting by designation.

Affirmed by unpublished per curiam opinion.

ARGUED: John W. Matthews, III, HAYNSWORTH, SINKLER & BOYD, PA,
Greenville, South Carolina, for Appellant.       Natalma Morison
McKnew,   SMITH  MOORE   LEATHERWOOD,   LLP,  Greenville,    South
Carolina, for Appellees.   ON BRIEF: H. Donald Sellers, Joel M.
Bondurant, Jr., HAYNSWORTH, SINKLER & BOYD, PA, Greenville,
South Carolina, for Appellant.    Peter A. Rutledge, SMITH MOORE
LEATHERWOOD, LLP, Greenville, South Carolina, for Appellees.
Unpublished opinions are not binding precedent in this circuit.

                                2
PER CURIAM:

       Rhode     Island     Textile       Company      (RITCO)    appeals    from     the

district court’s award of summary judgment to Prym Consumer USA,

Inc. (Prym).        In its complaint, Prym sought a declaration of the

parties’        rights     under      a     non-competition           agreement     that

restricted Prym’s business in the consumer elastics market.                            The

district court held that RITCO was not entitled to enforce the

non-competition agreement.            Finding no error, we affirm.

                                            I.

                                            A.

       The following facts are undisputed.                     Prym manufactures and

distributes sewing and other craft-related notions.                           In 1991,

Prym’s      predecessor,       Prym-Dritz        Corporation      (Prym-Dritz),       sold

its consumer elastics business to RITCO.                      Prym-Dritz transferred

to RITCO all the fixed assets and certain intangible assets,

including       “good     will,”   associated          with    that   business.        To

achieve this transfer of “good will” to RITCO, Prym-Dritz agreed

that       it   would    not   manufacture        or    sell     elastic    fabrics    in

competition with RITCO for a period of twenty-five years (Prym

Non-Compete). 1         As relevant to this appeal, the parties’ purchase

       1
       Prym-Dritz’s parent company, William Prym, Inc., executed
a non-competition agreement that is virtually identical to the
Prym Non-Compete.     William Prym, Inc. was a party in the
(Continued)
                                             3
agreement contained express language stating that neither party

could      assign    any    of     its     rights      in     the     agreement      without

obtaining     the    prior        written       consent      of     the   other   (the   no-

assignment clause).               After the sale of Prym-Dritz’s consumer

elastics     business,      Prym     succeeded         to    the     interests    of   Prym-

Dritz.

      In     2006,     RITCO        sold        its     consumer          elastics     line,

“Stretchrite,” to Dyno, LLC.                As part of this transaction, RITCO

purported to transfer to Dyno all the rights accruing to RITCO

under certain contractual provisions, including RITCO’s rights

in the Prym Non-Compete.             However, contrary to the no-assignment

clause, RITCO did not obtain Prym’s consent to assign to Dyno

Prym’s obligations under the Prym Non-Compete.                             Instead, RITCO

and Dyno executed a separate agreement stating that if any of

the     assignments        were     ineffective,            RITCO     would   “reasonably

cooperate . . . to provide for Dyno the benefits” that Dyno

otherwise would have acquired.                  J.A. 413.

      RITCO     also       executed         a       non-competition         agreement     to

facilitate the transfer to Dyno of any “good will” associated

with the Stretchrite brand.                  RITCO agreed that until 2013, it

would refrain from “selling, manufacturing . . . or marketing

proceeding in the district court but is not a party to this
appeal.

                                                4
any   goods      similar    to     or   competitive            with   the     Stretchrite

Products” in the consumer elastics market.                        However, RITCO has

continued to conduct business in the broader market for sewing

notions     that,      apart     from     elastics,            includes      sewing     and

needlecraft accessories such as buttons, needles, and thread.

                                             B.

      In    2008,      RITCO     executed         a    settlement         agreement    that

resolved certain disputes with Dyno.                         Under the terms of this

settlement, RITCO agreed to take action to enforce the Prym Non-

Compete against Prym on Dyno’s behalf, if requested to do so by

Dyno. 2    After receiving such a request from Dyno, RITCO sent a

letter     to   Prym   stating     that      RITCO      was    prepared      to     initiate

litigation to stop Prym from conducting business in the consumer

elastics market.

      On    receipt    of   this    letter,           Prym    filed   a    complaint     for

declaratory judgment against RITCO in the district court.                              Prym

sought     declaratory      relief      on       the    basis     that      RITCO     lacked

authority       to   enforce     the    Prym          Non-Compete     because,        having

      2
       The agreement further provided that RITCO would “permit
Dyno to assume control of the prosecution or defense of such
enforcement actions or claims.”    J.A. 456-57.    On appeal in
this case, Prym argues that Dyno is using RITCO to re-litigate
issues conclusively decided by a South Carolina court in an
earlier litigation between Prym and Dyno.      We need not reach
that argument to decide the issues raised by RITCO on appeal.

                                             5
removed itself from the consumer elastics market in 2006, RITCO

no     longer       had    a       legitimate         interest        that    would     justify

restraining Prym from selling consumer elastics products.                                       The

district court agreed with Prym’s argument, and entered summary

judgment for Prym.

                                                 II.

       On appeal, RITCO asserts that it has “legitimate interests”

that     justify      enforcement           of    the     Prym        Non-Compete.          RITCO

observes that it is required by its settlement agreement with

Dyno    to    enforce        the    Prym    Non-Compete          on    Dyno’s    behalf,        and

argues       that     this     independent            contractual       obligation         is     an

interest       that       permits      RITCO      to      enforce       the     restraint        on

competition imposed by the Prym Non-Compete.

       Alternatively,          RITCO       contends       that        irrespective      of      any

rights acquired by Dyno, RITCO has separate, legal interests in

enforcing the Prym Non-Compete.                       According to RITCO, although it

stopped selling consumer elastics in 2006, the Prym Non-Compete

protects      RITCO’s        remaining       interests         in      the    general      sewing

notions      market       until      2016,       and    RITCO’s        future    interest        in

resuming      the     manufacture          and   sale     of     consumer       elastics        when

RITCO’s      non-competition          agreement         with     Dyno    expires      in     2013.

RITCO     explains         that      if    the        district      court’s      decision        is

permitted to stand, Prym will use its consumer elastics business

                                                  6
to increase    its    share     of   the    broader     sewing    notions   market,

thereby harming RITCO.          RITCO also argues that if Prym currently

is permitted to compete in the consumer elastics market, this

competition will affect any future consumer elastics business

that RITCO may decide to develop in 2013.                        We disagree with

RITCO’s     contention     that      these       are    “legitimate     interests”

protected by the Prym Non-Compete.

                                       III.

                                           A.

       We review the district court’s entry of summary judgment de

novo.     Universal Concrete Prods. Corp. v. Turner Constr. Co.,

595 F.3d 527, 529 (4th Cir. 2010).                Like the district court, we

apply the law of Rhode Island because the parties agreed in the

Prym    Non-Compete      that    Rhode      Island      law   would    govern     the

resolution of any contract disputes between them.                      Under Rhode

Island law, we consider the plain and ordinary meaning of the

language used in the parties’ contract.                  Cathay Cathay, Inc. v.

Vindalu, LLC, 962 A.2d 740, 746 (R.I. 2009).

        RITCO’s first argument, that RITCO can enforce the Prym

Non-Compete to satisfy its independent contractual obligation to

transfer “good will” to Dyno, is foreclosed by the unambiguous

language of the no-assignment clause.                  That clause states: “Th[e

purchase]    agreement    shall      not    be   assignable      by   either    party

                                           7
without the prior written consent of the other party hereto.”

J.A. 50.

      Because the Prym Non-Compete is part of RITCO’s purchase

agreement with Prym, the Prym Non-Compete is subject to the no-

assignment clause, which does not provide any exception that

would permit RITCO to assign rights acquired under the Prym Non-

Compete without Prym’s consent.             It is undisputed that in 2006,

when RITCO sold Stretchrite to Dyno, RITCO did not obtain Prym’s

consent to assign Prym’s obligation to refrain from competition

in   the   consumer    elastics      market.        Thus,    RITCO     lacked   the

authority to transfer to Dyno the benefits of the Prym Non-

Compete,    and     RITCO   cannot    avoid    application       of    the    plain

language of the no-assignment clause by executing a separate

contract with Dyno.

                                       B.

     RITCO argues, nevertheless, that it can enforce the Prym

Non-Compete    on    its    own   behalf.      As    explained       above,   RITCO

maintains that such enforcement is necessary to protect RITCO’s

present    interest    in   limiting    competition         relating    to    sewing

notions other than consumer elastics, and to protect RITCO’s

future interest in any consumer elastics business that RITCO may

develop in 2013.

     In considering this issue, our interpretation of the Prym

Non-Compete is controlled generally by the clear and unambiguous

                                        8
language       chosen    by     the   parties.         See    Durapin,    Inc.   v.    Am.

Prods., Inc., 559 A.2d 1051, 1056 (R.I. 1989).                        However, because

restraints on competition are disfavored, these restraints, even

when       plainly    expressed       in    a   contract,     still   are    subject    to

judicial scrutiny.            Id. at 1053.

       Courts        applying    Rhode      Island     law    generally     assess    non-

competition      agreements       by       employing    the    “reasonableness”       test

set forth in the Restatement of Contracts.                       See Dial Media¸Inc.

v. Schiff, 612 F. Supp. 1483, 1488-89 (D.R.I. 1985).                          This test

provides, in relevant part:

       A promise to refrain from competition that imposes a
       restraint that is ancillary to an otherwise valid
       transaction  or   relationship  is   unreasonably  in
       restraint of trade if (a) the restraint is greater
       than is needed to protect the promisee’s legitimate
       interest, or (b) the promisee’s need is outweighed by
       the hardship to the promisor and the likely injury to
       the public.

Restatement (Second) Contracts § 188(1).                      Thus, in Rhode Island,

covenants that limit competition by businesses are enforced to

the extent necessary to protect a “legitimate interest” in the

promissee. 3         See Home Gas Corp. of Mass. v. DeBlois Oil Co., 691

F. Supp. 567, 573 (D.R.I. 1987) (applying Rhode Island law).

       3
       Although RITCO contends that the district court imposed an
inappropriately high burden by treating the Prym Non-Compete
like a restriction on individual employment, we find no
indication in the record that the district court applied an
incorrect standard.

                                                9
     The determination whether a “legitimate interest” exists to

enforce a non-competition clause depends on the particular facts

surrounding    the     agreement.    Durapin,        559   A.2d     at    1053.        In

conjunction with the sale of a business, the successful transfer

of a business’ “good will” from seller to buyer constitutes a

“legitimate interest” that can justify imposing a restraint on

competition.     Id.     However, a mere general interest in remaining

free from competition is not a sufficient basis to enforce a

non-competition      agreement.     See    Dial      Media,      612    F.     Supp.   at

1489.

     Applying these principles, we disagree with RITCO that it

can enforce the Prym Non-Compete on its own behalf, to protect

its present interests outside the consumer elastics market, and

to protect any future business in consumer elastics that RITCO

may have in 2013.         The Prym Non-Compete cannot be interpreted

so broadly.      The Prym Non-Compete had the limited purpose of

protecting RITCO’s investment in the “good will” associated with

Prym’s   consumer      elastics   business    during       the    time        of   Prym’s

ownership.       Between     1991   and      2006,     the       Prym     Non-Compete

fulfilled this purpose by restraining Prym and its predecessor

corporation from marketing or selling “elastics fabrics of any

kind” in competition with RITCO.             However, when RITCO sold its

consumer     elastics    business    and     withdrew        from       the    consumer

elastics market in 2006, RITCO abandoned the very interest that

                                      10
justified the restraint on competition.               Thus, RITCO’s present

attempt   to     use    the    Prym   Non-Compete    to   protect       the   other

interests now asserted by RITCO would require a revision to,

rather    than     an     enforcement        of,    the   Prym        Non-Compete.

Accordingly, we conclude that RITCO has not asserted “legitimate

interests” that would justify a continuing restraint on Prym’s

ability to market consumer elastics.

                                       IV.

     For these reasons, we hold that RITCO lacks any basis to

enforce   the    terms    of    the   Prym   Non-Compete.        We    affirm   the

judgment of the district court.

                                                                          AFFIRMED

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