Hill v. Mobile Auto Trim, Inc.

725 S.W.2d 168
CourtTexas Supreme Court
DecidedMarch 18, 1987
DocketC-4996
StatusPublished
Cited by70 cases

This text of 725 S.W.2d 168 (Hill v. Mobile Auto Trim, Inc.) 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
Hill v. Mobile Auto Trim, Inc., 725 S.W.2d 168 (Tex. 1987).

Opinions

KILGARLIN, Justice.

Based on a covenant not to compete in a franchise agreement, Mobile Auto Trim, Inc. sought to enjoin Joel Hill, a former franchisee, from competing with it in a seven-county area. The trial court granted the temporary injunction. The court of appeals, with one justice dissenting, affirmed the temporary injunction. 704 S.W.2d 384. Because of the dissent, we have jurisdiction over this cause. Gannon v. Payne, 706 S.W.2d 304 (Tex.1986). In a single point of error, Hill complains that the non-competition agreement is a restraint on trade and is unreasonable. We agree and therefore reverse the judgment of the court of appeals, dissolve the temporary injunction, and hold the restrictive covenant in the franchise agreement void in all respects.

Mobile Auto Trim sells car trim franchises in which equipped vans are driven to car dealerships to make repairs at the premises. In August 1982, Mobile sold a franchise to Joel Hill for approximately $42,000 plus five percent of his gross revenues. Hill’s franchise covered a large part of Dallas County and all of Denton County. The franchise agreement contained this covenant not to compete:

[170]*170Franchisee (Hill) agrees that upon termination of this Franchise Agreement, for whatever reason, Franchisee shall not directly or indirectly, as an officer, director, shareholder, proprietor, partner, consultant, employee or in any other individual or representative capacity, engage, participate or become involved in any business that is in competition in any manner whatsoever with the business of the Company or its franchisees. Furthermore it is understood between the parties that substantial goodwill will exist between the Company and the managers of the various car dealerships serviced by the Company and the Company’s franchisees. Because said managers are transient and frequently change employment among car dealerships, Franchisee further agrees that upon termination of this Franchise Agreement, for whatever reason, Franchisee will not directly or indirectly in any manner whatsoever, in any capacity whatsoever, contact said managers (irrespective of the car dealerships that employ them) regarding business in competition with the Company. This covenant shall extend for a period of three (3) years following the termination of this Franchise Agreement or any renewal hereof. Further, this covenant shall cover the following geographic area during said period: The following Texas Counties: Dallas, Tar-rant, Ellis, Denton, Rockwall, Kaufman, and Collin.

For two and a half years, as Mobile’s franchisee, Hill contacted car dealerships and made car trim repairs in his two-county area. In April 1985, after Hill had not paid his franchise fees for several months, Mobile Auto Trim picked up his van and terminated the franchise agreement. That day, after the franchise agreement had been terminated, Hill contacted a prior customer, a car dealership manager in Dallas County. Thereafter, Mobile Auto Trim sought a temporary injunction to enjoin Hill from competing with it or contacting car dealership managers in the seven counties listed in the covenant not to compete.

Courts in Texas encounter two general varieties of covenants not to compete: covenants specifying that the seller of a business will not compete with the buyer, Daniel v. Goesl, 161 Tex. 490, 341 S.W.2d 892 (1960), and covenants specifying that an employee, upon discharge, will not compete with the former employer, Justin Belt Co. v. Yost, 502 S.W.2d 681 (Tex.1974). These covenants commonly set forth temporal and geographical restraints on the promis- or’s ability to compete with the promisee, which restraints must be reasonable. Weatherford Oil Tool Co. v. Campbell, 161 Tex. 310, 340 S.W.2d 950 (1960).

Under the common law of contracts, a covenant not to compete is in restraint of trade and its terms are enforceable only if, and to the extent that, they are, in other respects, also reasonable.1 Whether a covenant not to compete is reasonable is a question of law for the court. Henshaw v. Kroenecke, 656 S.W.2d 416, 418 (Tex.1983). A covenant is unreasonable “if it is greater than is required for the protéction of the person for whose benefit the restraint is imposed or imposes undue hardship upon the person restricted.” Weatherford Oil Tool Co. v. Campbell, 340 S.W.2d at 951; Henshaw v. Kroenecke, 656 S.W.2d at 418; see also Restatement (Second) of Contracts § 188.

A covenant must meet four criteria in order to be deemed reasonable. First, the covenant must be necessary for the protection of the promisee. That is to say, the promisee must have a legitimate inter[171]*171est in protecting business goodwill or trade secrets. Second, the covenant must not be oppressive to the promisor, as courts are hesitant to validate employee covenants when the employee has nothing but his labor to sell. In this respect, the limitations as to time, territory, and activity in the covenant not to compete must be reasonable. Frankiewicz v. National Comp Associates, 633 S.W.2d 505, 507 (Tex.1982); Justin Belt Co., Inc. v. Yost, 502 S.W.2d at 685; Weatherford Oil Tool Co. v. Campbell, 340 S.W.2d at 951. Third, the covenant must not be injurious to the public, since courts are reluctant to enforce covenants which prevent competition and deprive the community of needed goods. Weatherford Oil Tool v. Campbell, id.; 14 S. Williston, A Treatise on the Law of Contracts § 1639 (3d ed. 1967 and Supp. 1983). See generally Note, Sakowitz v. Steck: Texas Looks at Covenants Not To Compete, 38 Baylor L.Rev. 211, 214-18 (1986).

Finally, as with any contract, the non-competitive agreement should be enforced only if the promisee gives consideration for something of value. Rubin & Schedd, Human Capital and Covenants Not To Compete, 10 J. Legal Studies 93 (1981). This doctrine promotes economic efficiency. In the case of covenants not to compete incident to the sale of a business, the seller’s promise not to compete with the buyer increases the value of the business to the buyer. Without such a covenant the value of the business would be reduced, lessening the likelihood that businesses would be purchased. In employee covenants, the special training or knowledge acquired by the employee through his employer is valuable consideration and often enhances the value of the employee to other firms. To allow employees to use or sell this valuable training or knowledge upon leaving a firm would create a disincentive for employers to train or educate employees. Comment, Economic And Critical Analyses of the Law of Covenants Not to Compete, 72 Geo.L.J. 1425 (1984).

But, the covenant before us today cannot be clearly categorized as either a covenant incident to the sale of a business or a post-employment covenant to prevent utilizing special training or knowledge. Hill obtained his skills as an auto trim repairman prior to his franchise agreement with Mobile Auto Trim. Hill bought a franchise from Mobile for approximately $42,000 plus 5% of his gross revenues. In effect, Hill paid for the use of Mobile’s name and accompanying goodwill.

This restrictive covenant is plagued by a lack of reasonableness. Initially, there is an apparent absence of consideration.

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Bluebook (online)
725 S.W.2d 168, Counsel Stack Legal Research, https://law.counselstack.com/opinion/hill-v-mobile-auto-trim-inc-tex-1987.