Davis & Warde, Inc. v. Tripodi

616 A.2d 1384, 420 Pa. Super. 450, 7 I.E.R. Cas. (BNA) 1488, 1992 Pa. Super. LEXIS 3336

• Court: Superior Court of Pennsylvania
• Decided: October 5, 1992
• Docket: 963
• Status: Published

Opinions

WIEAND, Judge:

In this action by Davis & Warde, Inc. to enforce restrictive covenants in contracts of employment with William Darney and Nadine Tripodi, the trial court refused to enforce the covenants. Its decision was based upon a perceived inadequacy of consideration to support the covenant. Davis & Warde, Inc. appealed. After careful review, we conclude that the consideration was sufficient to validate the restrictive covenants in the contracts of employment. Therefore, we reverse and remand for further proceedings.

Darney, a vice-president, and Tripodi, a top-level salesperson, were deemed key employees of the printing business conducted by Davis & Warde in Pittsburgh. Their responsibilities included marketing, customer contact, sales and distribution of Davis & Warde’s products and services. Prior to April, 1989, Davis & Warde created a new specialty division under the name and style of DAWAR Technologies. This entailed the investment of substantial additional capital. In order to protect its investment in the new division, Davis and Warde asked certain key employees to execute written employment contracts which contained, inter alia, restrictive covenants. Darney and Tripodi were offered new duties and responsibilities in the DAWAR specialty division and were asked to sign written contracts of employment. The restrictive covenant contained restrictions pertaining to the use of proprietary information acquired during employment and provided for noncompetition for a period of one year. As an inducement, Darney and Tripodi were offered a cash consideration, a new severance package including two weeks severance pay, and a written guarantee of certain job benefits, including a new and different policy regarding reimbursement for automobile expenses. Darney and Tripodi held the agreements for review for several months and then, in April, 1989, accepted the terms of the written agreement. By the fall of 1990, however, Darney and Tripodi had voluntarily terminated their employment with Davis & Warde and had formed a competing enterprise known as Butler Technologies, Inc. Through this new enterprise they allegedly solicited business from Davis & Warde’s customers.

Appellant filed a complaint in equity seeking to enjoin its former employees from competing in violation of their agreements not to do so. It also petitioned for temporary relief in the form of a preliminary injunction. On January 18, 1991, a hearing was held before the motions judge, and a temporary restraining order was entered against Tripodi and Butler Technologies.¹ Because Darney’s ill health prevented his attendance and participation, no relief was granted against him.

When Davis & Warde thereafter petitioned for a hearing against Darney, the hearing was assigned to another judge who, with the parties’ consent, limited the scope of hearing to the validity of the restrictive covenant.² The order of the trial court was as follows:

The sole issue to be considered is the validity of the employment contracts. A preliminary injunction will issue as to Defendant Darney if [the] Court preliminarily finds for plaintiff on this issue, and [a] preliminary injunction as to Defendants Tripodi and Butler Technologies will remain in full force and effect. Prior preliminary injunction issued as to Defendants Tripodi and Butler Technologies will be dissolved if [the] Court finds for Defendants on this issue.

At the close of appellant’s evidence, the trial court invited appellees to move for dismissal, and, when the motion was made, the court entered an order denying the request for preliminary relief.

In reviewing orders involving preliminary injunctions, the Superior Court has said:

A trial court has broad discretion in granting or denying a preliminary injunction. We will reverse such a decision only if the trial court abused its discretion or committed a palpable legal error. Merrill Lynch, Pierce, Fenner & Smith v. Moose, 365 Pa.Super. 40, 47, 528 A.2d 1351, 1355 (1987) (citing, inter alia, Unionville-Chadds Ford School District v. Rotteveel, 87 Pa.Commw. 334, 336-7, 487 A.2d 109, 111 (1985)). We must uphold the trial court’s decision if it can be sustained on “any apparently reasonable ground.” Id.; John G. Bryant Co., Inc. v. Sling Testing and Repair, Inc., 471 Pa. 1, 369 A.2d 1164 (1977); Sidco Paper Co. v. Aaron, 465 Pa. 586, 351 A.2d 250 (1976); Air Products and Chemicals, Inc. v. Johnson, 296 Pa.Super. 405, 442 A.2d 1114 (1982); Boyd v. Cooper, 269 Pa.Super. 594, 410 A.2d 860 (1979).

Bell Fuel Corp. v. Cattolico, 375 Pa.Super. 238, 244, 544 A.2d 450, 453 (1988), allocatur denied, 520 Pa. 612, 554 A.2d 505 (1989).

The employment agreement signed by Darney and Tripodi contained covenants preventing the use of proprietary information acquired during employment. In addition, a noncom-petition clause was inserted for a period of one year but without geographic limitations. This covenant provided:

13. Noncompetition. The Employer recognizes that the Company is and will in the future be engaged in highly competitive businesses and products. During his employment with the Company and for a period of one year thereafter, the Employee agrees that he will not, directly or indirectly, sell the products of, own, manage, operate, control, be employed by, participate in, or be connected in any manner with the ownership, management, operation or control of, any business competitive with the Company or any of its products or services. Further, if the Employee’s employment with the Company terminates for any reason, the Employee shall not, for a period of one year from the date of termination, have any business dealings whatsoever, either directly or indirectly or through corporate entities or associates, with any customer or client of the Company or its subsidiaries or any person or firm which has contacted or been contacted by the Company as a potential customer or client of the Company.

“[I]n order to be enforceable a restrictive covenant must satisfy three requirements: (1) the covenant must relate to either a contract for the sale of goodwill or other subject property or to a contract for employment; (2) the covenant must be supported by adequate consideration; and (3) the application of the covenant must be reasonably limited in both time and territory.” Piercing Pagoda, Inc. v. Hoffner, 465 Pa. 500, 506-507, 351 A.2d 207, 210 (1976). See also: Bell Fuel Corp. v. Cattolico, supra, 375 Pa.Super. at 250, 544 A.2d at 456; Modern Laundry & Dry Cleaning v. Farrer, 370 Pa.Super. 288, 291-292, 536 A.2d 409, 411 (1988). In Jacobson & Co. v. International Environment Corp., 427 Pa. 439, 235 A.2d 612 (1967), the Court recognized the validity of restrictive covenants entered into subsequent to an employee’s initial employment. The Court said:

[I]n many instances, including the present case, the insertion of a restrictive covenant in the original contract would serve no valid purpose. An employer who hires a novice has no desire to restrict his present competitive force. Only when the novice has developed a certain expertise, which could possibly injure the employer if unleashed competitively, will the employer begin to think in terms of the protection of a restrictive covenant. This is an economic reality, and the law should be influenced by it.

Id. at 450, 235 A.2d at 618. When an employee enters into an employment contract containing a covenant not to compete subsequent to employment, however, the covenant “must be supported by new consideration which could be in the form of a corresponding benefit to the employee or a beneficial change in his employment status.” Modern Laundry & Dry Cleaning v. Farrer, supra, 370 Pa.Super. at 293, 536 A.2d at 411, citing George W. Kistler, Inc. v. O’Brien, 464 Pa. 475, 347 A.2d 311 (1975); Maintenance Specialties, Inc. v. Gottus, 455 Pa. 327, 314 A.2d 279 (1974). The adequacy of consideration to support a restrictive covenant is an issue of law. With respect thereto, the courts have stated, “as long as the restrictive covenant is an auxiliary part of the taking of employment and not a later attempt to impose additional restrictions on an unsuspecting employee, a contract of employment containing such a covenant is supported by valid consideration and is therefore enforceable.” Modern Laundry & Dry Cleaning v. Farrer, supra, 370 Pa.Super. at 293, 536 A.2d at 411, citing Beneficial Finance Co. v. Becker, 422 Pa. 531, 222 A.2d 873 (1966).

Davis and Warde, as we have already observed, created a new, multimillion dollar specialty division. To protect its investment and insure the specialty division an opportunity to develop profitably without unfair competition by knowledgeable employees, the company requested Darney and Tripodi, both of whom were employees at will, to sign written contracts of employment containing covenants not to compete.³ Darney and Tripodi studied the agreements for several months before signing them. It cannot seriously be contended, therefore, that the covenants not to compete were foisted upon unsuspecting employees. Indeed, Darney, a vice-president and the person responsible for the day-to-day operations of DAWAR, and Tripodi, who was responsible for DAWAR’s marketing and sales, were not only familiar with DAWAR’s operation but had been instrumental in its creation. They, better than most, were aware of their employer’s need to limit future competition until the fledgling division could get off the ground. Not only were they offered continued employment with new responsibilities, but each was given a cash payment, a guarantee of certain job benefits, including a favorable change in the employer’s automobile reimbursement policy, and a guaranteed severance benefit in the event of termination, all of which were to be incorporated into a written contract of employment. This, in our judgment, is consideration sufficient to support the written contracts of employment and the restrictive covenants contained therein.

The covenant not to compete in the instant case, although limited in time, was not limited geographically. This does not necessarily impair the validity of the covenant, but any relief granted by the trial court must be geographically limited so as not to exceed that which is reasonably necessary to provide the protection for which appellant contracted. See: Sidco Paper Co. v. Aaron, 465 Pa. 586, 594-595, 351 A.2d 250, 254-255 (1976) (“where the covenant imposes restrictions broader than necessary to protect the employer, we have repeatedly held that a court of equity may grant enforcement limited to those portions of the restrictions which are reasonably necessary for the protection of the employer.”); Bell Fuel Corp. v. Cattolico, supra (trial court may define geographic scope of covenant after receiving proper evidence upon remand); Quaker City Engine Rebuilders, Inc. v. Toscano, 369 Pa.Super. 573, 584-585, 535 A.2d 1083, 1089 (1987) (“In Pennsylvania, an otherwise valid restrictive covenant which is geographically overbroad is ‘divisible and enforceable [once it has been limited by the court] to reasonable geographical limits’ ”; therefore case remanded to trial court to determine reasonable geographic scope of covenant). See also: ThermoGuard, Inc. v. Cochran, 408 Pa.Super. 54, 65-66 n. 9, 596 A.2d 188, 194 n. 9 (1991). On remand, this determination should be made by the trial court.

Because the trial court’s refusal to enforce the restrictive covenant was based on an error of law, we are constrained to reverse.

Reversed and remanded for further proceedings consistent with the foregoing opinion. Jurisdiction is not retained.

CAVANAUGH, J., files a dissenting opinion.

1 . The order enjoined Tripodi and Butler Technologies from (a) contacting customers of the appellant; (b) using their knowledge of appellant’s business operations, products, and supplies to compete with appellant; (c) disclosing appellant’s confidential and proprietary information; (d) inducing appellant's customers to breach any and all agreements with appellant; (e) inducing appellant’s customers to do business with Tripodi, BTI, or any other person or entity other than appellant. Appellant posted a $60,000 bond as required by the trial court's order.

2 . Appellant did not argue to the trial court or to this court that the alleged disclosure of confidential customer information was "in the nature of a ‘trade secret' for which an employer is entitled to protection, independent of a non-disclosure contract, either under the law of agency or under the law of unfair trade practices.” Morgan's Home Equipment Corp. v. Martucci, 390 Pa. 618, 623, 136 A.2d 838, 842 (1957) (citing Macbeth-Evans Glass Co. v. Schnelbach, 239 Pa. 76, 86 A. 688 (1913)) (emphasis added). Appellant also did not assert established principles of law which prevent “an employe from using customer contacts as well as confidential customer information to his own advantage by soliciting the customers of his former employer.” Id.., 390 Pa. at 626, 136 A.2d at 843. Instead, appellant raised only the issue of adequate consideration in the context of a restrictive covenant not to compete.

3 . It has been argued, correctly, in our view, that an offer of continued employment, with the condition that the employee sign a restrictive covenant, constitutes adequate consideration where there is a preexisting contract of employment terminable at will by either party. Maintenance Specialties, Inc. v. Gottus, 455 Pa. 327, 314 A.2d 279 (1974) (Manderino and Roberts, JJ., dissenting). “If a restrictive covenant would be valid at the time an employee is first employed, I fail to see any logic to the prohibition against an employer requesting the same covenant subsequent to the employee’s initial employment as a condition of continued employment.... Why should an employer who requests a legal restrictive covenant at the time of initial employment have any advantage over an employer who later decides he should have such a restrictive covenant and no breach of any oral or written contract or other illegality is involved.” Id. at 337, 314 A.2d at 284-285. Under this view, because Darney and Tripodi were employees at will, the appellant could have discharged Tripodi and Darney and hired new employees who could have been required to execute restrictive covenants as part of their contracts of employment. Because this analysis represents a minority view at the present time, we have not relied upon this rationale in the instant case. See: Maintenance Specialties, Inc. v. Gottus, supra.