Kroeger v. Stop & Shop Companies, Inc.

432 N.E.2d 566, 13 Mass. App. Ct. 310, 1982 Mass. App. LEXIS 1241

• Court: Massachusetts Appeals Court
• Decided: March 16, 1982
• Status: Published

Opinions

Kass, J.

For a decade the plaintiff, Robert H. Kroeger (Kroeger), scaled the corporate ladder at The Stop & Shop Companies, Inc. (Stop & Shop). His annual bonuses, added to his salary, were such as to stimulate Kroeger in 1961 to ask for a deferred compensation arrangement. In response Stop & Shop proffered a written agreement which, in the argot of the trade, applied “golden handcuffs.” That is, should Kroeger “so long as he lives,” go to work for a competing business east of the Mississippi, he would lose all.¹ It is the reasonableness of the forfeiture provision that is the problem for decision.

In Cheney v. Automatic Sprinkler Corp. of America, 377 Mass. 141 (1979), the court reconsidered whether forfeiture for competition clauses in deferred compensation agreements should receive unconditional enforcement. That had been the accepted view as manifested by Flynn v. Murphy, 350 Mass. 352, 353 (1966), in which a forfeiture provision was enforced without discussion. See also Chase v. New York Life Ins. Co., 188 Mass. 271, 273-274 (1905); Union Central Life Ins. Co. v. Coolidge, 357 Mass. 457, 459 (1970).² Cheney held that the enforcement of forfeiture for competition provisions should be subject to the same tests of reasonableness as apply to the enforcement of covenants not to engage in competition with a former employer, whether independently or by working for a competitor. Cheney v. Automatic Sprinkler Corp. of America, 377 Mass. at 147-149. Rather than declining entirely to give effect to an unreasonable noncompetition clause, a court may modify its terms so as to make it reasonable; i.e., onerous terms may be cut back. Id. at 147.

Reluctance to give full effect to post-employment restraints has a long history in the law. For example, in 1587, a blacksmith was jailed by local justices of the peace when he had the temerity to bring an action on another blacksmith’s (thought to have been an apprentice) bond not to ply his trade in the town of South-Mims. Blake, Employee Agreements Not to Compete, 73 Harv.L.Rev. 625, 635 (1960).³ The Blake article recounts the evolution of the attitudes taken by English and American courts toward post-employment restraints. Among the questions which courts typically ask are: Is the restraint greater than necessary to protect legitimate interests of the employer? What circumstances surrounded its making, in terms of the bargaining power of the parties? Is the restraint unduly harsh or oppressive? Is the restraint injurious to the public? Does the employee’s work for a rival in fact injure the former employer? See All Stainless, Inc. v. Colby, 364 Mass. 773, 778 (1974); National Hearing Aid Centers, Inc. v. Avers, 2 Mass. App. Ct. 285, 288-292 (1974); Restatement (Second) of Contracts § 188 (1981); 14 Williston, Contracts § 1643A, at 157 (3d ed. 1972); 6A Corbin, Contracts § 1394 (1962).

As to a provision requiring forfeiture of financial benefits, we look first to whether the new employment would be subject to a covenant not to compete. If not, the forfeiture is likewise unenforceable. Should the covenant not to compete, however, be enforceable, the amount and nature of the forfeiture come into play and are subject to modification. Cheney v. Automatic Sprinkler Corp. of America, 377 Mass. at 148.

It is time to turn to the facts found by the trial judge. These we accept unless clearly erroneous. Mass.R.Civ.P. 52(a), 365 Mass. 816 (1974). New England Canteen Serv., Inc. v. Ashley, 372 Mass. 671, 674 (1977). C.C. & T. Constr. Co. v. Coleman Bros., 8 Mass. App. Ct. 133, 135 (1979). We have added facts which are apparent in the record before us and are not disputed. Kroeger joined Stop & Shop in 1952 as controller and, as we have indicated, he was doing sufficiently well as to annual income in 1961 so that he asked for deferred compensation. Stop & Shop concurred with the idea of a deferred compensation plan and an agreement was carefully drawn by Stop & Shop’s counsel. It was tailor-made to the situation of Kroeger and several other high executives. Kroeger did not retain counsel. Payments to be made to Kroeger under the agreement when he retired (or otherwise became eligible for payment) were not in lieu of dollars which might have been paid to Kroeger directly; i.e., there was no diminution of bonus or other compensation attributable to company payments to the deferred compensation plan nor were other fringe benefits curtailed.

By 1971, Kroeger was vice president of the “Food Division,” Stop & Shop’s largest component, with responsibility for its profits and losses. As the judge put it, “Kroeger was concerned with all overall company financing, planning, expansion concepts and competition concerns. Kroeger was therefore privy to the operations of the other divisions [of Stop & Shop] .... He participated in all real estate acquisitions and the financial arrangements regarding the same.” That same year, however, there was a falling out between Kroeger and Stop & Shop. A new president had taken the reins. He was younger than Kroeger and had once reported to him. Their personalities were dissimilar, as were their marketing philosophies. Kroeger was asked to go. The golden handcuffs were unlocked; the departing handshake was leaden. Indeed, Stop & Shop by letter sought “confirmation of our understanding that you do not plan to compete . . . within the meaning of your employment agreement; that if you should ... all benefits . . . will be waived and forfeited.” Asked to “indicate” on a copy “that the above summary accurately reflects the benefits . . . and competition agreement,” Kroeger did so by signing a copy of the letter.

Kroeger within six months found employment as vice president-retail foods, of Pneumo Dynamics Corporation (Pneumo), an Ohio company which owned a subsidiary, P & C Supermarkets, Inc. (P & C). In that capacity, he had responsibility for some 300 stores in the P & C network,⁴ which did business in New York, New Hampshire, Vermont and Massachusetts. Stop & Shop operated stores in the New England States, New York and New Jersey, but the only specific location in which Pneumo and Stop & Shop competed head to head was Manchester, New Hampshire. The confrontation in Manchester did not occur until 1975, about four years after Kroeger’s departure from Stop & Shop.

Had Kroeger remained with Stop & Shop until his retirement, as the deferred compensation agreement contemplated, the provision which restrained him from competing would have been quite reasonable. The agreement provided for the payment of an annuity on a formula basis⁵ and that during retirement Kroeger “shall be available for advice and counsel ... at all reasonable times by telephone, letter or in person.” If Kroeger were to be in retirement, be paid his retirement allowance and be available to Stop & Shop for consultation, it was not too much to ask that he not compete with Stop & Shop. Restatement (Second) of Agency § 394 (1958). His discharge at age fifty-eight changed that; he would not get retirement benefits for seven years and it was evident from the circumstances of his severance that Stop & Shop would have no interest in his advice. In the meantime he had to make a living, and it was unlikely that he could do so other than in the business in which he had spent his working life.

After making his subsidiary findings the judge concluded that, although Stop & Shop had a legitimate protectible interest, the restrictive provision was overbroad and required cutting back. As to time, the judge determined that a prohibition from competition of one year was reasonable. As to geographical limitations, the restraint was to be given effect only in the New England States, New Jersey and New York. Since Kroeger had, within one year, gone to work for a competitor active in the proscribed area (the judge also found that “these competitors were colliding along their expanding perimeters”), he had forfeited his retirement benefits. In any event, the judge concluded, since Kroeger had negotiated compensatory retirement benefits with Pneumo and, indeed, had agreed to pay Pneumo whatever he recovered from Stop & Shop (provided that Pneumo paid the legal expenses), Kroeger had suffered no loss and was entitled to no recovery. Judgment entered for Stop & Shop and from that judgment Kroeger has appealed.

1. Is the restraint greater than necessary to protect legitimate interests of the employer? Those interests of an employer which are entitled to protection are trade secrets, confidential data and good will. New England Canteen Serv., Inc. v. Ashley, 372 Mass. at 674. Wells v. Wells, 9 Mass. App. Ct. 321, 323 (1980). Stop & Shop has conceded that no trade secrets are involved. Good will generally applies to customer relationships. Angier v. Webber, 14 Allen 211, 215 (1867) (good will described as benefit derived from reputation for promptness, fidelity and integrity with customers) . Thus, salesmen or sales managers have the capacity to injure the good will of their former employers. See e.g., New England Tree Expert Co. v. Russell, 306 Mass. 504 (1940); All Stainless, Inc. v. Colby, 364 Mass. at 777; Restatement (Second) of Contracts § 188, Comment g, Illustration 7 (1981). See generally Blake, Employment Agreements Not to Compete, 73 Harv.L.Rev. 625, 653-667 (1960). Given the nature of Kroeger’s duties — financial planning, site acquisitions, merchandising strategy, advertising — it is highly improbable that he meant a thing to Stop & Shop’s customers. To the degree that Stop & Shop had something to restrain, it would have been the disclosure of confidential data to a competitor.

Sources of supply and product lines are in the area of generally available information in the supermarket business. Not widely known, the judge found, are the expansion plans and merchandising strategy of a particular chain and that chain’s market success in specific locations. It would seem that whether a competitor of Stop & Shop might enter an area in which it was doing business might, in turn, depend on Stop & Shop’s plans to improve its store in that area, to add another store, or to alter the style of merchandising (e.g., adding amenities and increasing product variety or emphasis on fast moving items at lower prices). Similarly an executive at Kroeger’s level might have information about a product mix or retail device (trade stamps, coupons, or warehouse style store) which did or did not enjoy success in a given location. The judge’s findings concerning Kroeger’s knowledge about Stop & Shop’s “potential new locations . . . [rjecent past profitability and present investment strength . . . advertising techniques and marketing devices” supported his conclusion that Stop & Shop had a legitimate business interest in restraining Kroeger, albeit, as we shall see, an interest with a limited shelf life. Cf. Novelty Bias Binding Co. v. Shevrin, 342 Mass. 714, 716-718 (1961); New England Overall Co. v. Woltmann, 343 Mass. 69, 75-78 (1961).

Restraints upon the competitive activity of a key executive may range beyond the precise geographical area of activity at the time of the employee’s departure. See Blake, Employee Agreements Not to Compete, 73 Harv.L.Rev. at 679. A business enterprise may, after all, have new worlds to conquer. See Wells v. Wells, 9 Mass. App. Ct. 321, 326 (1980), which was, however, decided in a different business context. Compare New England Tree Expert Co. v. Russell, 306 Mass. at 510. Contrast All Stainless, Inc. v. Colby, 364 Mass. at 779-780; Marine Contractors Co. v. Hurley, 365 Mass. 280, 289 (1974); Middlesex Neurological Associates v. Cohen, 3 Mass. App. Ct. 126, 130 (1975). However, Stop & Shop had never operated stores other than in New England, New Jersey and New York and nothing in so much of the record as was reproduced on appeal suggests plans for westerly and southerly expansion. We agree with the judge’s conclusion that the clause in the employment agreement which attempted to keep Kroeger away from a business like Stop & Shop’s anywhere east of the Mississippi River (except for Florida, Georgia, Alabama, Mississippi and Louisiana) was overbroad. The judge’s cutting back of the area of restraint to the New England States, New Jersey and New York was reasonable.

Similarly the clause isolating Kroeger from a competitor for “so long as he lives” reached well beyond Stop & Shop’s legitimate interests. Consumer trends and the marketing strategies which retailers devise to exploit them are of limited duration, as the judge found, and the confidential information which Kroeger possessed would soon go stale. There was nothing unreasonable in the judge’s cutting the period of restriction to one year. See Blake, Employee Agreements Not to Compete, 73 Harv.L.Rev. at 680; Mertz, Recent Developments Concerning Employee Covenants Not to Compete: A Quiet “Corbinization” of Massachusetts Law, 12 New England L. Rev. 647, 688 (1977).

2. Is the restraint unduly harsh or oppressive? Commonly it is a fault of postemployment restraints that they have aspects of a contract of adhesion: the employee, anxious for the job, is ready to mortgage the future and, in any event, is in a poor position to argue about the terms of the employment contract. Cheney v. Automatic Sprinkler Corp. of America, 377 Mass. at 147. But the restrictive clause may be more reasonable in the case of a key employee, id. at 148, and this is such a case. Kroeger was well ensconced in the executive structure of Stop & Shop and, indeed, took the initiative in asking for deferred compensation. It could hardly be said that he was powerless to negotiate the terms of the agreement he entered into in 1961, the amendment to that agreement in 1969, and the written acknowledgment of the restrictions in the agreement when Kroeger departed from Stop & Shop in 1971. There is a temptation to hold Kroeger to the bargain which he so obviously understood. “If I make a promise to you, I should do as I promise; and if I fail to keep my promise, it is fair that I should be made to hand over the equivalent of the promised performance.” Fried, Contract As Promise 17 (1981).⁶ But “[o]ut of concern for an individual’s ability to earn a living and to protect against monopoly,” Wells v. Wells, 9 Mass. App. Ct. 321, 333 (1980), courts now require that promises not to work or do business be reasonable. All Stainless, Inc. v. Colby, 364 Mass. at 778; Marine Contractors Co. v. Hurley, 365 Mass. at 288; National Hearing Aid Centers, Inc. v. Avers, 2 Mass. App. Ct. at 288-292. A key executive’s bargaining status does not, therefore, remove the reasonableness of his promise from consideration; it does, however, enlarge judicial tolerance of restraints by an employer which might be seen as unreasonable between parties of unequal bargaining strength. Cf. Cort v. Bristol-Myers Co., 385 Mass. 300, 308 (1982), which noted, in connection with the legitimacy of intrusion into the private affairs of employees, that whether public policy was violated could depend on the rank and station of the employee. We have already approved the modified restraints determined to be reasonable by the trial judge. Those restraints Kroeger violated. It remains for us to consider whether a total forfeiture of his deferred compensation benefits was a reasonable price for him to pay. Cheney v. Automatic Sprinkler Corp. of America, 377 Mass. at 148.

Possible forfeitures of deferred compensation present a different problem from the usual postemployment restraint cases in that the question is not whether the employee may follow the occupation he knows, but what price in dollars he shall pay for so doing. And shall the employee be made to forfeit money which he has in fact earned? In this regard it is of consequence that Kroeger did not leave Stop & Shop voluntarily.⁷

Termination of the employment relationship at the initiative of the employer does not itself render a noncompetition provision invalid. This is so in the case of a discharge for obvious cause, as in Novelty Bias Binding Co. v. Shevrin, 342 Mass. at 717, where the employee stole from the company, and sometimes when cause is not an issue, see e.g., Wrentham Co. v. Cann, 345 Mass. 737, 740 (1963).⁸ But if the discharge is inequitable, an otherwise reasonable restraint may not be enforced. Economy Grocery Stores Corp. v. McMenamy, 290 Mass. 549, 551-553 (1935). Blake, Employee Agreement Not to Compete, 73 Harv.L.Rev. at 685. Cf. Slade Gorton & Co. v. O’Neil, 355 Mass. 4, 9 (1968). While there is no suggestion that Stop & Shop acted in bad faith or with an ulterior motive when it asked Kroeger to go, compare Fortune v. National Cash Register Co., 373 Mass. 96, 103-105 (1977), it is apparent that the parties’ expectations had been substantially altered from those which underlay the agreement. Golden handcuff agreements, as the label implies, are designed to encourage an employee to stay by making it painful to leave. Stop & Shop expressly abandoned the purpose of holding on to Kroeger and it seems inequitable that it should exact the full penalty devised to make the glue between the company and its employee stick. Particularly in the case of retirement benefits which an employee has earned,⁹ courts should avoid forfeiture of those rights where possible. Hoefel v. Atlas Tack Corp., 581 F.2d 1, 6 (1st Cir. 1978), cert. denied, 440 U.S. 913 (1979). See also the Employee Retirement Income Security Act, 29 U.S.C. §§ 1001 et seq. (1976). We are of opinion that, when an employee is discharged in circumstances involving no misconduct by the employee (see note 8, supra), the employee’s deferred compensation benefits should not be forfeited to the extent those benefits have been earned, even though the employee violates a valid postemployment restriction. Cf. Gram v. Liberty Mut. Ins. Co., 384 Mass. 659, 671-672 (1981).

In the case at bar, the employment agreement contemplated retirement at age sixty-five, unless retirement occurred earlier because of total and permanent disability. Kroeger was forty-eight in 1961 when the agreement was entered into, thus the agreement envisioned seventeen years of service by him. He had worked ten years when Stop & Shop terminated his employment. Kroeger had, therefore, earned ten seventeenths of his retirement benefits.¹⁰ The judge found that the cost of purchasing the annuity benefits Kroeger would have received was $71,000. Accordingly, Kroeger is entitled to recover ten seventeenths of that amount viz., $41,765.

He, thus, loses $29,235 without Stop & Shop having established specific pecuniary damages by reason of Kroeger’s activity as an employee of Pneumo. It is, however, not necessary to establish the precise monetary damages which flow from the breach of a covenant not to compete; a promise to pay a specific amount as damages, i.e., liquidated damages, will be given effect. Restatement (Second) of Contracts § 356, Comment b, Illustration 2 (1981). Cf. National Hearing Aid Centers, Inc. v. Avers, 2 Mass. App. Ct. n.2. This is because the task of quantifying the consequences of violating a noncompetition clause is a particularly difficult and elusive one. Edgecomb v. Edmonston, 257 Mass. 12, 19 (1926). Lufkin’s Real Estate, Inc. v. Aseph, 349 Mass. 343, 346 (1965). Compare Wilson v. Clarke, 470 F.2d 1218, 1223 (1st Cir. 1972). Hughes, Employee Non-Competition Agreements: A Review of Massachusetts Law, 63 Mass.L.Rev. 27, 31 (1978). The very difficulty of establishing the damages inclines us to accept the estimate of damages made by the parties, if not otherwise unreasonable. Restatement (Second) of Contracts § 356 (1981). The loss of $29,235 by Kroeger does not seem unreasonable. Contrast Food Fair Stores, Inc. v. Greeley, 264 Md. 105, 116-119 (1972).

3. The determination of the cost of the annuity. The trial judge in his memorandum of findings and rulings wrote, “If however this court has erred and the plaintiff is entitled to damages measured upon a theory of cost of annuity basis, the damages sustained would be in the amount of seventy-one thousand dollars ($71,000).” We read this as an expression that the court had determined that a cost of annuity basis was an appropriate manner in which to compute damages if any damages were owing at all. From so much of the record as was included in the appendix it does not appear that alternative theories of damages were brought to the judge’s attention.¹¹ The cost of an individual annuity is a reasonable measure of damages in a case seeking recovery for unpaid retirement benefits. See Hoefel v. Atlas Tack Corp., 581 F.2d at 7. To be sure, Hoefel dealt with unsophisticated investors and Kroeger was, presumably, a sophisticated one. He well may have been able to secure a better rate of return than that which is factored into a life insurance company annuity contract. Rut there was sufficient support for the judge’s conclusion (in a portion of the record which was reproduced in the appendix) so that we do not disturb it.

Stop & Shop also attacks the qualifications of the expert who testified on Kroeger’s behalf concerning the cost of the annuity. The expert was a life insurance salesman. He demonstrated sufficient understanding of the methods by which the cost of an annuity is calculated so that we cannot say that the judge abused the broad discretion which was his “to determine whether an expert witness has a proper basis, in terms of adequate information and preparation, to render an opinion on the matter in dispute.” Louise Caroline Nursing Home, Inc. v. Dix Constr. Corp., 362 Mass. 306, 309 (1972).

4. The consequence of the retirement benefits Kroeger received from Pneumo. Mindful that his deferred compensation from Stop & Shop would very likely be contested, Kroeger negotiated a retirement allowance with his new employer, Pneumo, of $15,000 per year for his life and for the life of his wife, should she survive him. Those benefits were to be reduced by an amount equal to any benefits he received under his deferred compensation agreement from Stop & Shop. The trial judge concluded that, in consequence, Kroeger had suffered no damage and that “the first employer should not be forced to pay for the real benefit of the second employer.” In this respect the judge was in error. Kroeger in effect made an assignment of whatever he might recover from Stop & Shop in return for the benefits Pneumo agreed to grant to him. We know no reason why he could not do so and none has been called to attention.

The judgment is reversed and a new judgment shall be entered in accordance with this opinion.

So ordered.

1 More specifically, the deferred compensation agreement provided that following termination of the Period of Active Employment (a defined term), Kroeger, for so long as he lived, was not to have an interest in excess of $100,000 in a competing business and would not serve a competing business as an officer, director, partner, trustee, proprietor, or employee. “Competing business” was defined as a business located east of the Mississippi except for Florida, Georgia, Alabama, Mississippi and Louisiana and which was substantially similar to Stop & Shop business at the end of the period of Active Employment. In 1969 the definition of competing business was made broader to account for the fact that Stop & Shop had in the interim gone into the discount department store business under the name Bradlees and into what was described as a “drugstore operation.” The enlarged definition (which also brought into the web any State contiguous to a State into which Stop & Shop entered) was contained in a letter agreement dated May 27, 1969. That letter expressed the intent that Kroeger was not to be involved in “any business which competes with any activity in which Stop & Shop or any subsidiary may be engaging.”

2 The Cheney opinion may be viewed as consistent with the diminished potency of classic ideas of contract, a subject discussed in Gilmore, The Death of Contract (1974). Compare Fried, Contract as Promise (1981).

3 The unfortunate suitor was released by the Court of Common Pleas, but that court decided that the bond was “void, because it was against the law.” Blake, Employee Agreements Not to Compete, 73 Harv.L.Rev. at 635.

4 These 300 stores included: company owned supermarkets; Big “M” stores, which were run on a franchise basis; and independent stores.

5 If he retired at age 65, Kroeger would receive $9,240 per year; if he retired earlier, the annual payment would be less. If he should die before age 65 or during the payout period, death benefits would be paid to designated beneficiaries.

6 Several decades ago that view was the unquestioned working assumption. See Becker College of Business Admn. & Secretarial Science v. Gross, 281 Mass. 355, 356 (1933), which began: “The defendant, a man of full age, married and a father, contends that he is not bound by his agreement under seal . . . .”

7 “[Procedural niceties aside,” the judge found, “the termination was at the election of Stop & Shop.”

8 The Wrentham Co. case involved an agreement to sever the relationship because “[differences between Cann [the employee] and the management developed.” That is a rational and fair reason to end a private employment relationship (assuming nothing to the contrary in an employment agreement or a governing collective bargaining agreement) even though the employee has performed faithfully and is not “at fault.” Similarly, in the instant case, the personality and policy differences between Kroeger and Stop & Shop take his discharge out of the category of an arbitrary one.

9 Although it does not appear that Kroeger*s base compensation was reduced by any specific amount to adjust for the deferred compensation, the latter was a component in his entire compensation package and in that sense the retirement benefits were more than a gratuity. Cf. Rochester Corp. v. Rochester, 450 F.2d 118, 120-121 (4th Cir. 1971). From section II of the agreement between Kroeger and Stop & Shop it may be inferred that Kroeger also participated in a contributory retirement income plan as to which, it appears, receipt of benefits was not conditioned on post-employment conduct.

10 Indeed the written agreement between Kroeger and Stop & Shop contemplated “A retirement allowance for Employee, with vested rights thereto.”

11 Both parties have repeatedly referred in their briefs to exhibits and portions of transcript which were not included in the appendix. We need not look at parts of a record which have not been reproduced in an appendix. Kunen v. First Agricultural Natl. Bank, 6 Mass. App. Ct. 684, 689 (1978).