Henshaw v. Kroenecke

656 S.W.2d 416, 26 Tex. Sup. Ct. J. 557, 1983 Tex. LEXIS 363
CourtTexas Supreme Court
DecidedJuly 20, 1983
DocketC-1610
StatusPublished
Cited by49 cases

This text of 656 S.W.2d 416 (Henshaw v. Kroenecke) is published on Counsel Stack Legal Research, covering Texas Supreme Court primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
Henshaw v. Kroenecke, 656 S.W.2d 416, 26 Tex. Sup. Ct. J. 557, 1983 Tex. LEXIS 363 (Tex. 1983).

Opinions

SPEARS, Justice.

Gene Henshaw brought suit against Louis Kroenecke to recover liquidated damages under a covenant not to compete contained in a partnership agreement. The trial court rendered a take nothing judgment against Henshaw. The court of appeals affirmed, holding that the covenant not to compete was unreasonable and unenforceable. Unpublished opinion pursuant to Tex.R.Civ.P. 452. We reverse the judgment of the court of appeals and remand the cause to that court for a consideration of Kroenecke’s insufficiency points of error.

In 1972 L.E. “Gene” Henshaw was operating a sole proprietorship in Houston under the name of Gene Henshaw & Associates offering management consulting services to physicians and dentists. Louis Kroe-necke was employed by a company providing similar services in Iowa. Henshaw proposed that Kroenecke join his business, and on April 6,1972 the two executed a partnership agreement. Kroenecke executed a promissory note for $12,000 to purchase 35% of Henshaw’s business. The partnership name remained Gene Henshaw & Associates.

The 1972 Articles of Partnership contained the following provisions:

17. COVENANT NOT TO COMPETE
Kroenecke agrees that upon his voluntary termination of this agreement he will not compete with Henshaw in the business as then carried on by the partnership for a period of three years from the date of termination. The term ‘competition’ for the purposes of this section shall have the limited definition of providing any similar services to the then clients of the partnership or to those clients who have ceased being clients within the twelve months immediately preceding such termination.
As liquidated damages, the parties agree that no injunction shall lie for breach of this section but that Kroenecke will pay to Henshaw an amount calculated as 12 times the average monthly partnership billing to each client or prior client with whom Kroenecke does business in violation of this covenant. Such average monthly partnership billing shall be computed by including only those months in which the partnership billed said client or past client in the twelve months preceding such termination. Henshaw agrees that there will be no geographical limitation under this covenant.

In October of 1974, Henshaw and Kroe-necke each incorporated their respective interests. Henshaw formed Gene Henshaw & Associates, Inc. and Kroenecke formed Lou Kroenecke & Associates, Inc. On October 15, 1974, the Gene Henshaw & Associates partnership agreement was amended by an addendum whereby each partner substituted his own personal corporation as a partner. The addendum ratified and reaffirmed all provisions of the original partnership agreement.

At the same time the two corporations executed another partnership agreement for a partnership named Henshaw, Kroe-necke & Associates. This agreement provided that the new partnership would commence doing business on November 1, 1974, and expressly stated that the new agreement did not “alter or amend” the 1972 partnership agreement. The 1974 partnership agreement contained a separate covenant not to compete to be signed independently. This covenant prevented the employees of the two corporations from competing with Henshaw, Kroenecke & Associates. Neither Henshaw, Kroenecke nor their corporations ever executed the restrictive covenant to the 1974 partnership agreement.

In June 1976, disputes arose between Henshaw and Kroenecke concerning the terms of their partnership. The only rele[418]*418vant dispute was over the covenant not to compete. Kroenecke maintained that the covenant should be changed to apply to both of them and that the liquidated damages should be in a lump sum. Kroenecke left a note for Henshaw demanding that the covenant be removed. Henshaw interpreted this as a termination and set the termination date for July 31, 1976. After dissolution Henshaw filed suit to recover liquidated damages in the amount of $63,-744 for those clients Kroenecke took with him.

At trial, four special issues were submitted to the jury. In answer to these issues the jury found: (1) that Kroenecke voluntarily terminated the partnership; (2) the purpose of the liquidated damages provision was not to secure the performance of Kroenecke of the non-competition agreement; (3) the purpose of the non-competition agreement was to protect Gene Hen-shaw and his interest only; and (4) the non-competition agreement was not an unreasonable restraint of trade.

The trial court held that special issue no. 4 was a question of law that should not have been submitted to the jury and that special issue no. 3 denied recovery to Hen-shaw because only the partnership was entitled to the benefits of the covenant. Therefore, a take nothing judgment was rendered against Henshaw.

An agreement not to compete is in restraint of trade and will not be enforced “if it is greater than is required for the protection of the person for whose benefit the restraint is imposed or imposes undue hardship upon the person restricted.” Weatherford Oil Tool Co. v. Campbell, 161 Tex. 310, 340 S.W.2d 950, 951 (Tex.1960); see also RESTATEMENT (SECOND) OF CONTRACTS § 188. The question of whether a covenant not to compete is reasonable is a legal question for the court. Electronic Data Systems Corp. v. Powell, 524 S.W.2d 393, 397 (Tex.Civ.App.—Dallas 1975, writ ref’d n.r.e.); Professional Beauty Products, Inc. v. Derington, 513 S.W.2d 236, 238 (Tex.Civ.App.—El Paso 1974, writ ref’d n.r.e.).

In this case, the court of appeals held that only the partnership was entitled to the benefit of the noncompetition agreement, and therefore, the noncompetition clause which the jury found benefited only Henshaw was unreasonable and unenforceable. We hold that Henshaw was entitled to the protection of the noncompetition agreement.

Henshaw started the consulting business and was operating it as a sole proprietorship. When Kroenecke came into the business, a partnership was formed. The covenant not to compete was an integral part of the pre-partnership formation negotiations. Henshaw was the person for whose benefit the restraint was imposed. Kroenecke, however, also benefited by coming into an established business. The covenant was agreed upon before the partnership was formed and was an agreement between Henshaw and Kroenecke individually, not Kroenecke and the partnership. Henshaw had a right to protect himself from the possibility that Kroenecke would establish a rapport with the clients of the business and upon termination take a segment of that clientele with him. See Hospital Consultants, Inc. v. Potyka, 531 S.W.2d 657 (Tex.Civ.App.—San Antonio 1975, writ ref’d n.r.e.) Henshaw had a legitimate interest to protect, and therefore, the covenant was reasonable.

Here, we are dealing with a two man partnership. Before the partnership was formed, Henshaw was the business entity. The noncompetition agreement did not take effect until the termination of the partnership, and at that time Henshaw, again, was the continuing business entity. Henshaw clearly had a legitimate interest to protect.

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Bluebook (online)
656 S.W.2d 416, 26 Tex. Sup. Ct. J. 557, 1983 Tex. LEXIS 363, Counsel Stack Legal Research, https://law.counselstack.com/opinion/henshaw-v-kroenecke-tex-1983.