Kasco Services Corp. v. Benson

831 P.2d 86, 183 Utah Adv. Rep. 27, 1992 Utah LEXIS 25, 1992 WL 64546

• Court: Utah Supreme Court
• Decided: March 31, 1992
• Docket: 900260
• Status: Published

Opinions

HOWE, Associate Chief Justice:

This interlocutory appeal arises out of an action by Kasco Services Corporation against defendants Larry D. Benson, his wife Connie A. Benson, and Tri-B-Supply for an injunction and damages resulting from an alleged breach of a covenant not to compete contained in an employment contract. We granted this appeal pursuant to Utah Code Ann. § 78 — 2—2(3)(j) and rule 5 of the Utah Rules of Appellate Procedure.

In 1982, Larry Benson was employed by Keene Corporation. They entered into an employment agreement which contained a restrictive covenant that upon termination, Benson would not compete for eighteen months. The agreement specifically provided that Benson would not

(i) call upon any Keene Customer for the purpose of soliciting, selling, renting and/or servicing Butcher Products,

(ii) directly or indirectly, solicit, divert, take away or attempt to take away any Keene Customer, or the business or patronage of any such customer for Butcher Products, or

(iii) directly or indirectly, engage in any manner in the business of the sale, rental or servicing of Butcher Products in any geographic territory in which [Larry Benson] had called upon Keene Customers during the period of his employment with Keene....

The agreement further prohibited Benson from using or disclosing confidential information. He was given confidential customer and pricing lists and was entrusted with preexisting customers. The agreement expressly stated that the parties’ rights and obligations “bind and inure to the benefit of any successor or successors of Keene by ... merger_” Kasco is a successor in interest to Keene, and the rights and obligations of Keene were assigned to Kasco.

In the summer of 1988, following the merger of Keene with Kasco, employment contracts were sent to all employees including Benson. The preexisting agreements with Keene were “restated for the record.” Benson refused to sign the 1988 contract and alleges that he informed Kasco in August 1988 that he considered the noncom-petition covenants “null and void.” He continued, however, to work for Kasco and on February 15, 1989, provided written notice that he would resign effective March 1, 1989.

Benson was one of Kasco’s top five salespersons. Kasco’s customers developed a pleasant, ongoing relationship with him. In effect, Benson was Kasco in his territory, and he was responsible for the goodwill of the business because he was the only sales representative in his territory-

We have previously held that “ ‘a covenant not to compete is necessary for the protection of the goodwill of the business when it is shown that although the employee learns no trade secrets, he may likely draw away customers from his former employer, if he were permitted to compete nearby.’ ” System Concepts, Inc. v. Dixon, 669 P.2d 421, 426 (Utah 1983) (quoting Allen v. Rose Park Pharmacy, 120 Utah 608, 617, 237 P.2d 823, 827-28 (1951)).

Shortly after terminating employment with Kasco, Benson began a butcher supply business with his wife Connie, in direct competition with Kasco. The business was called Tri-B-Supply, and they employed their son Robert. When Kasco became aware of this, it brought this action for damages and sought a preliminary injunction. The trial judge granted the injunction against Larry Benson, finding that the four requirements set forth in Allen v. Rose Park Pharmacy, 120 Utah at 619, 237 P.2d at 828, had been satisfied.¹ Moreover, the court determined that Kasco had also met the requirements of Robbins v. Finlay, 645 P.2d 623, 627-28 (Utah 1982), which held that not only must the restrictive covenant be necessary to protect the goodwill of the business, but also the employer must show that the services rendered by the employee are special, unique, or extraordinary.²

The trial judge determined that the eighteen-month time period specified in the covenant began to run in August 1988, when Benson refused to sign the new employment contract and allegedly told Kasco that he would not abide by the noncompetition covenant. The judge refused to enjoin Connie and later denied Kasco’s motion to amend its complaint to add Robert as a defendant. We granted an interlocutory appeal to review these rulings. During the pendency of this appeal, we enjoined Larry, Connie, and Robert Benson, along with TriB-Supply, from further soliciting or accepting business from Kasco’s customers. The assertion in the dissenting opinion that Kasco did not timely petition for an interlocutory appeal is without merit. The April 10, 1989 order granting a preliminary injunction was not a final order, but an interlocutory order, which by its very nature was subject to modification. See Utah R.Civ.P. 54(b). In 1990, Kasco sought to modify the April 10, 1989 order. This appeal was timely taken from the court’s refusal to do so.

TIME FRAME OF THE COVENANT

Kasco contends that the trial court erred in holding that the eighteen months began to run in August 1988 rather than when Benson actually resigned on March 1, 1989. The trial judge reasoned:

The preliminary injunction will be granted to expire 18 months from August, 1988 because I believe at that time the company was on notice that Mr. Benson did not wish to retain any restrictive covenants in his employment, thereafter, the company would be willing to either — required to terminate him or deal otherwise with him. At that point the restrictive covenant would be terminated as to its application to Mr. Benson except for 18 months thereafter.

(Emphasis added.)

The trial judge made no specific findings of fact or conclusions of law. The covenant not to compete expressly states that the eighteen-month time frame begins to run after termination. The trial court’s finding that Kasco was “on notice” and the noncompetition covenant began to run in August 1988 involves a question of fact and a question of law. Since the finding that Kasco was on notice was a question of fact, we reverse only if we find it clearly erroneous. See Utah R.Civ.P. 52(a); State v. Petersen, 810 P.2d 421, 425 (Utah 1991). However, the effect of that notice, which presumably led the trial court to find an anticipatory repudiation, is a question of law which we review for correctness. State v. Ramirez, 817 P.2d 774, 781-82 n. 3 (Utah 1991); State v. Petersen, 810 P.2d at 425.

An anticipatory breach occurs when a party to an executory contract manifests a positive and unequivocal intent not to render performance when the time fixed for performance is due. Hurwitz v. David K. Richards Co., 20 Utah 2d 232, 234-35, 436 P.2d 794, 796 (1968). The other party can immediately treat the anticipatory repudiation as a breach, or it can continue to treat the contract as operable and urge performance without waiving any right to sue for that repudiation. United California Bank v. Prudential Ins. Co. of America, 140 Ariz. 238, 281, 681 P.2d 390, 433 (Ct.App.1983); see also University Club v. Invesco Holding Corp., 29 Utah 2d 1, 3, 504 P.2d 29, 30 (1972).

Our court of appeals recently noted, “A party that has received a definite repudiation from the breaching party to the contract should not be penalized for its efforts to encourage the breaching party to perform its end of the bargain.” Breuer-Harrison, Inc. v. Combe, 799 P.2d 716, 725 (Utah Ct.App.1990) (citing United California Bank, 140 Ariz. at 281, 681 P.2d at 433); see also 4 Arthur L. Corbin, Corbin on Contracts § 981 (1951). The opinion fully explains the “modern rule” of anticipatory breach and the outmoded common law “waiver” theory.

We need not decide here whether Benson’s announcement that he did not intend to abide by the noncompetition covenant was an anticipatory repudiation. It makes no difference in this case. If his remarks were an anticipatory repudiation, Kasco simply had an election. It could treat the remark as a breach, or it could continue to treat the contract as operable and encourage performance without waiving any rights under the contract. If there was no anticipatory repudiation, the non-competition covenant remained in full force. Therefore, anticipatory repudiation or not, it was error for the trial court to rule that the eighteen months began to run when Kasco was put on notice of Benson’s intent not to comply with the restrictive covenant. The beginning time should have been the actual date of Benson’s resignation.

POWER TO ENJOIN DOES NOT REQUIRE PRIVITY

Kasco contends that the trial court erred by not enjoining Connie Benson. The refusal was because she was not in privity of contract with Kasco. The court believed that a direct contract was a prerequisite to injunctive relief:

JUDGE YOUNG: ... and you [Kasco] fundamentally have no right to enforce anything as to Mrs. Benson in relation to this agreement....

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MR. RICHMAN: I would assume that this court’s order is not precluding us from seeking a permanent injunction against Mrs. Benson at a later time, just a denial at this time.

JUDGE YOUNG: Well, I don’t see that I have any basis for having jurisdiction over her in relation to a contract at all.

We have previously held:

[T]he granting or refusing of injunction rests to some extent within the sound discretion of the trial court, and its judgment ... will not be disturbed on appeal unless it can be said the court abused its discretion, or that the judgment rendered is clearly against the weight of the evidence.

System Concepts, Inc. v. Dixon, 669 P.2d at 425 (quoting Johnson v. Ward, 541 P.2d 182, 188 (Okla.1975)). The trial court’s discretion must be exercised consistently with sound equitable principles, “taking into account all the facts and circumstances of the case.” Id.

Connie Benson is a stranger to the agreement between Kasco and Larry Benson. This court has not previously decided whether persons lacking privity may be enjoined. An Indiana decision adopted a holding from the Florida Supreme Court which held that “ ‘the rule that a stranger to a covenant may be enjoined from aiding and assisting the covenanter in violating his covenant is supported by an overwhelming weight of authority.’ ” McCart v. H & R Block, Inc., 470 N.E.2d 756, 760 (Ind.Ct.App.1984); (quoting West Shore Restaurant Corp. v. Turk, 101 So.2d 123, 129 (Fla.1958)); see also Chemical Fireproofing Corp. v. Bronska, 542 S.W.2d 74, 80 (Mo.Ct.App.1976) (nonsigning spouse can be enjoined if “under the circumstances it is reasonable to enjoin a stranger to a covenant from aiding and assisting the cov-enantor in violating his contract or receiving any benefits therefrom”); Arwell Division of Orkin Exterminating Co. v. Kendrick, 131 Ill.App.2d 632, 633, 267 N.E.2d 352, 354 (1971); Madison v. LaSene, 44 Wash.2d 546, 559, 268 P.2d 1006, 1013 (1954); Ingredient Technology Corp. v. Nay, 532 F.Supp. 627, 631 (E.D.N.Y.1982).

More recently, the Nevada Supreme Court followed the reasoning of McCart that the “better, and, apparently, majority view allows a party not privy to a covenant not to compete to be enjoined, if that party breaches the covenant in active concert with the principal party enjoined and with knowledge of the covenant.” Las Vegas Novelty, Inc. v. Fernandez, 106 Nev. 113, 787 P.2d 772, 774 (1990). The court found support for its ruling in Nevada’s injunction rule, which is substantially the same as our rule on injunctions, Utah Rule of Civil Procedure 65A(d). Our rule provides:

Every order granting an injunction and every restraining order ... is binding only upon the parties to the action, their officers, agents, servants, employees, and attorneys, and upon those persons in active concert or participation with them who receive actual notice of the order by personal service or otherwise.

Utah R.Civ.P. 65A(d) (emphasis added).³

The Nevada court further added: “NRCP 65(d) is not precisely on point, because it addresses the scope of enforcement of an injunction after the injunction has been properly issued. Nevertheless, this section makes no mention of a privity requirement and provides significant support for the majority view.” Las Vegas Novelty, Inc. v. Fernandez, 787 P.2d at 774.

We find the Nevada court’s analysis to be equally applicable in our jurisdiction and therefore adopt its position that in the appropriate circumstances, a third party may be enjoined if it is shown to be aiding or assisting the covenantor in violating the noncompetition agreement and with knowledge of the covenant.

In the instant case, evidence was presented that Connie Benson was in fact aiding or assisting her husband in violating the noncompetition agreement. Ten days after Benson’s resignation, a letter on TriB-Supply letterhead was sent to potential customers, many of which were Kasco customers. The letter read in part:

Dear friend,

We would like to inform you that we have started our own business....

We will be contacting you soon in hopes to supply you with your service needs.

We will be operating our [routes] on a 3 month service program in order to give you more frequent service and to provide for your needs in a more efficient manner.

Because of decreased over head costs we will be able to provide less expensive service in the future....

Thank you for your support in the past and look forward to serving you in the future.

Sincerely,

Connie A. Benson, President

Larry D. Benson, Service Rep.

It is clear that there was concerted action from the very beginning by Larry and Connie Benson. Her conduct is a good example of aiding or assisting a covenantor in violating a restrictive covenant and with knowledge of the covenant. Therefore, we conclude that it was error not to enjoin Connie Benson.

Soon after the trial court enjoined Larry Benson but refused to enjoin his wife, another letter was sent to former Kasco customers who had recently become customers of Tri-B-Supply. This letter states in part:

This is to inform you that Larry Benson has a Restraining Order against him and cannot service in the area for the period of 1 year.

However I would like to inform you that I am operating with my son Robert L. Benson, who is very capable of handling your service needs to operate our new business....

Sincerely,

Connie A. Benson

Robert L. Benson

The letter also mentioned that Robert had received training in the service and repair of grinders, saws, slicers, and tenderizers. Again, there is evidence of concerted action. Had the trial court granted Kasco’s motion to add Robert as a defendant, Kas-co may have been able to adduce sufficient evidence of concerted action for which an injunction would lie against him.

PROSPECTIVE INJUNCTIVE RELIEF

Kasco next contends that it is entitled to prospective injunctive relief for another six months because it was not given full opportunity to restore its goodwill. Benson was enjoined for only twelve months, and Connie and Robert were not enjoined at all. Benson asserts that the issue is moot because the eighteen-month period expired during the pendency of this appeal.

Some state courts have held that a request for an injunction is moot when the underlying agreement has expired by its own terms. See Professional Business Servs., Inc. v. Gustafson, 285 Or. 307, 310, 590 P.2d 729, 730 (1979). Similarly, the Washington Court of Appeals has held that injunctive relief is “inappropriate and manifestly unfair” when the restrictive covenants have expired by their own terms. Alexander & Alexander, Inc. v. Wohlman, 19 Wash.App. 670, 688, 578 P.2d 530, 540 (1978). The court concluded that money damages would be the appropriate remedy. Id.

The Seventh Circuit is in accord with the above cases in their holdings of mootness. However, their reasoning is based upon constitutional grounds:

Because this appeal was heard more than eleven weeks after the end-date of the injunction, we raised the threshold issue of mootness. Article III of the Constitution requires that federal courts only decide disputes that present a “Case or Controversy.” Because the preliminary injunction Brown appealed from expired under its own terms, the issues decided by the trial court pertaining to the propriety of a preliminary injunction have “lost ... [their] character as a present, live controversy of the kind that must exist if we are to avoid advisory opinions on abstract propositions of law.”

Henco, Inc. v. Brown, 904 F.2d 11, 13 (7th Cir.1990) (quoting Hall v. Beals, 396 U.S. 45, 48, 90 S.Ct. 200, 201-02, 24 L.Ed.2d 214, 218 (1969)).

However, the Tenth Circuit has held that under their plenary power and an inherent power to do equity, prospective injunctive relief may be appropriate. Kodekey Electronics, Inc. v. Mechanex Corp., 500 F.2d 110, 112-13 (10th Cir.1974). The Kodekey court further added that if prospective relief were not granted, the employer would “in effect be deprived of the benefit of the non-competition agreement because of the stays sought ... and granted to postpone the effect of the original injunction.” Id. at 112.

The Supreme Court of Virginia enjoined a former employee of a corporation under a noncompetition agreement for the time specified even though the time period in the covenant had run, because the employee had successfully opposed the injunction. Roanoke Eng’g Sales Co. v. Rosenbaum, 223 Va. 548, 290 S.E.2d 882, 886 (Va.1982). Similarly, in a Florida case, an injunction under a noncompetition agreement was held to run from the order date following remand, not from the date of termination, because the trial court did not provide the full period of injunction. Orkin Exterminating Co. v. Bailey, 550 So.2d 563, 564-65 (Fla.Ct.App.1989).

A finding of mootness would in effect reward the breach of the noncompetition covenant, “encourage protracted litigation, and provide an incentive to dilatory tactics.” Rosenbaum, 290 S.E.2d at 886. Moreover, this would also “render the judicial process impotent to redress” the reward for a breach, “simply by forcing the other party to go through lengthy litigation to obtain relief.” Id.

Although there is ample legal authority to grant prospective injunctive relief, we hold that such relief would be of little or no value to Kasco in the instant case. The main purpose of an injunction is to preserve the status quo. That purpose was defeated by the trial court’s refusal to grant injunctive relief against Connie, Robert, and Tri-B-Supply early on. They were able to do for Larry Benson what he could not do for himself, i.e., solicit Kasco’s customers to become customers of Tri-B-Sup-ply. Although this court enjoined Larry, Connie, Robert, and Tri-B-Supply from further soliciting or accepting business from Kasco customers pending determination of this appeal, by that time (August 14, 1990), nearly eighteen months had expired since Benson terminated employment with Kasco. Connie and Robert had been free during all of that time to erode Kasco’s customer base. Since it appears unlikely that any benefit would now accrue to Kas-co by extending the injunction for another six months, we decline to do so. Kasco’s damage claim is pending in the trial court. Damages can now be determined with reasonable certainty at this point in the litigation. Therefore, Kasco’s claim for prospective injunctive relief is denied.

LEAVE TO AMEND COMPLAINT

Finally, Kasco seeks relief from the trial court’s denial of leave to amend its complaint to add Robert as a defendant and to assert claims against him and additional claims against Larry and Connie Benson. The standard of review of a denial to amend pleadings is abuse of discretion. Cheney v. Rucker, 14 Utah 2d 205, 211, 381 P.2d 86, 91 (1963). Rule 15(a) of the Utah Rules of Civil Procedure states in part that leave to amend “shall be freely given when justice so requires.” We have held, “A primary consideration that a trial judge must take into account in determining whether leave should be granted is whether the opposing side would be put to unavoidable prejudice by having an issue adjudicated for which he had not had time to prepare.” Bekins Bar V Ranch v. Huth, 664 P.2d 455, 464 (Utah 1983).

The record does not disclose why leave to amend was not granted. Defendants advance no argument that they would be prejudiced by the addition of issues. It may have been that the trial court thought Robert could not be enjoined because privity of contract was lacking. However, we have held earlier in this opinion that in proper instances, privity is not necessary for injunctive relief. Defendants now suggest that the amendments sought were properly denied because they were futile and offered in bad faith. See Christiansen v. Utah Transit Auth., 649 P.2d 42, 47 (Utah 1982). We cannot say that Kasco’s attempt to seek relief against Robert was futile. Likewise, we find no indication of bad faith. We thus conclude that it was an abuse of discretion to deny Kasco’s motion to amend.

The case is remanded to the trial court for further proceedings consistent with this opinion. The injunction heretofore entered by this court is dissolved.

HALL, C.J., and ZIMMERMAN, J., concur.

1 . The four requirements are that (1) the covenant not to compete must be supported by consideration; (2) no bad faith may be shown in the negotiation of the contract; (3) the covenant must be necessary to protect the goodwill of the business; and (4) the covenant must be reasonable in its restrictions in terms of time and geographic area. Allen v. Rose Park Pharmacy, 120 Utah at 619, 237 P.2d at 828.

2 . Although Benson has not cross-appealed and made an issue of whether the requirements of Robbins v. Finlay were met, the dissenting opinion raises the question and determines that they were not met because Benson was "a route salesman, pure and simple." We disagree with that characterization because Finlay was a salesman who was free to sell similar products of competing manufacturers and did not return to service the products he sold. On the other hand, Benson was trained by Kasco to service and repair grinders, saws, slicers, and tenderizers manufactured and sold only by Kasco. He was entrusted with Kasco’s preexisting customers and given confidential customer and pricing lists. He was given an exclusive territory to service Kasco’s products and every four months called on each of Kasco’s customers. Benson was like the pharmacist in Rose Park Pharmacy, where all the goodwill of the employer was associated with and created by the employee.

3 . Utah Rule of Civil Procedure 65A has been substantially revised effective September 1, 1991. See Utah R.Civ.P. 65A (Supp. Aug.1991); see also Mark W. Dykes, Injunctions Under Revised Rule of Civil Procedure 65A, Utah B.J., Aug.-Sept. 1991, at 17.