Seaboard Industries, Inc. v. Blair

178 S.E.2d 781, 10 N.C. App. 323, 1971 N.C. App. LEXIS 1631

• Court: Court of Appeals of North Carolina
• Decided: February 3, 1971
• Docket: 7118SC17
• Status: Published

Opinion

GRAHAM, Judge.

The order appealed from is interlocutory. However, appeal from such an order will not be considered premature if a substantial right of appellant would be adversely affected by continuance of the injunction in effect pending final determination of the case. G.S. 1-277; Board of Elders v. Jones, 273 N.C. 174, 159 S.E. 2d 545; Conference v. Creech and Teasley v. Creech and Miles, 256 N.C. 128, 123 S.E. 2d 619; Cablevision v. Winston-Salem, 3 N.C. App. 252, 164 S.E. 2d 737. A substantial right of defendant is affected by the order restraining him from engaging in business in the manner set forth, and we therefore consider his appeal.

The parties agree that the contract involved was executed in Atlanta, Georgia. “It is settled that ‘Matters bearing upon the execution, interpretation, and validity of a contract are determined by the law of the place where it is made.’ ” Cannady v. R.R., 143 N.C. 439, 442, 55 S.E. 836, 837. Further, paragraph 12 of the contract expressly provides that “[t]his Agreement, and the rights and liabilities of the parties hereto, shall be construed under the laws of the State of Georgia.” We therefore look to the law of Georgia in considering this appeal.

The leading case in Georgia on the subject of restrictive covenants is Rakestraw v. Lanier, 104 Ga. 188, 30 S.E. 735 (1898), wherein it is stated:

“In determining whether such restriction is reasonable, the court will look alone to the time when the contract was entered into. . . .

“It is, however, satisfactorily established that, as a matter of law, such a contract is to be upheld if the restraint imposed is not unreasonable, is founded on a valuable consideration, and is reasonably necessary to protect the in-interest of the party in whose favor it is imposed, and does not unduly prejudice the interests of the public. . . .”

These general principles are identical to those which prevail in this State. “[T]he Georgia rule — as well as that of North Carolina and most other jurisdictions — is that a restraint on trade in the form of a restrictive covenant will be countenanced when, under all circumstances it is a reasonable one.” Budget Rent-A-Car Corporation of America v. Fein, 342 F. 2d 509 (5th Cir. 1965). To determine the validity of a covenant in a contract of employment providing that, upon termination of the employment, the employee will not engage in competition with the employer, it is necessary to apply these tests: (1) Is it founded on a valuable consideration? Fox v. Avis Rent-A-Car Systems, Inc., 223 Ga. 571, 156 S.E. 2d 910; Ogle v. Wright, et al., 137 Ga. 749, 2 S.E. 2d 72; Buick Co. v. Motors Corp., 254 N.C. 117, 118 S.E. 2d 559; Paper Co. v. McAllister, 253 N.C. 529, 117 S.E. 2d 431. (2) Is it reasonably necessary to protect the legitimate interest of the employer? Orkin Exterminating Co., Inc. of South Georgia v. Dewberry, 204 Ga. 794, 51 S.E. 2d 669; Rakestraw v. Lanier, supra; Noe v. McDevitt, 228 N.C. 242, 45 S.E. 2d 121; Kadis v. Britt, 224 N.C. 154, 29 S.E. 2d 543. (3) Is the limitation or restriction reasonable as to time, Day Companies v. Patat, 403 F. 2d 792 (5th Cir. 1968) ; Shirk v. Loftis Brothers and Company, 148 Ga. 500, 97 S.E. 66; Engineering Associates v. Pankow, 268 N.C. 137, 150 S.E. 2d 56, and as to territory, J. C. Pirlcle Machinery Company, Inc. v. Walters, 205 Ga. 167, 52 S.E. 2d 853; Orkin Exterminating Co., Inc. of South Georgia v. Dewberry, supra; Jewel Box Stores v. Morrow, 272 N.C. 659, 158 S.E. 2d 840; Buick Co. v. Motors Corp., supra?

Defendant argues1 that the covenant enforced by the trial court in the instant case fails to meet any of the tests enumerated above.

We consider first the question concerning consideration. Defendant relies upon Greene Co. v. Kelley, 261 N.C. 166, 134 S.E. 2d 166, and Chemical Corp. v. Freeman, 261 N.C. 780, 136 S.E. 2d 118. Both of these cases involved new contracts, entered after employment, which were not based upon any new or additional consideration. The covenants involved here were a part of an original contract of employment between the parties and were therefore founded upon a valuable consideration. The fact that the written contract may not have been formally executed until several weeks after defendant started work is of no significance under the circumstances presented. Moreover, under the Georgia statute of frauds an agreement not to be performed within one year must be in writing. Georgia Code Annotated, Chapter 20-4. Therefore, before the written agreement came into being, defendant had no enforceable five-year contract of employment. Also, the occasion for delay, if any, in the actual execution of the contract (which incidentally is dated 1 April 1968, the date defendant first assumed his employment responsibilities) was to arrive at a stock option plan more favorable to defendant than the one first set forth in the written agreement. The more favorable stock option plan is a part of the agreement signed. Thus, the trial judge’s conclusion that the covenants were based upon valuable consideration is supported by any one of several available theories which arise on his findings and the evidence.

The covenant enforced, in our opinion, was1 clearly reasonably necessary to protect the interest of plaintiff. Greater latitude is generally allowed in those covenants given by the seller in connection with the sale of a business than in covenants ancillary to an employment contract. Orkin Exterminating Co., Inc. of South Georgia v. Dewberry, supra. (For a review of the North Carolina cases enforcing covenants given in connection with the sale of a business see Jewel Box Stores v. Morrow, supra.) Among reasons often given for the greater acceptability of “sale of business covenants” are that covenants not to compete enable the seller of a business to sell his good-will and thereby receive a higher price; and they also furnish a material inducement to the purchaser who purchases a business with the hope of retaining its customers. On the other hand, covenants restricting an employee’s right to engage in an occupation of his choice after termination of his current employment may tend to produce hardships for the employee and to deprive the public of the service of men in the area where they are most experienced. Budget Rent-A-Car Corporation of America v. Fein, supra; Orkin Exterminating Co., Inc. of South Georgia v. Dewberry, supra; Hood v. Legg, 160 Ga. 620, 128 S.E. 891.

It may well be, as defendant argues, that plaintiff is not entitled to have the covenants contained in the employment contract now before us interpreted with the latitude afforded those related to the sale of a business, in that defendant was not the seller, and owned none of the stock of either company purchased by plaintiff.

We nevertheless find the circumstances surrounding the purchase of the companies by plaintiff particularly pertinent to the question of whether the covenant agreed to by defendant in paragraph 9 (c) of the contract was reasonably necessary to protect plaintiff’s interest. Although defendant never owned any interest in South Oil Company, he had participated in its organization. The two owners were his uncles. Defendant managed the company from the time it came into being in 1964 until purchased by plaintiff. He testified that hundreds of customers were secured for the company primarily through his efforts. He was familiar with the company’s customers, suppliers and brokers, and was well experienced in the oil business. The chairman of plaintiff’s Board of Directors testified:

“I have told the Court that one of the purposes in discussing with Mr. Blair and in securing from him an employment contract and covenant not to compete was to preserve the management of this company. And as to whether there was any consideration in securing the covenant not to compete concerning customers of Seaboard Oil Company or South Oil Company, customers, source of supply. As to what considerations we gave for that, well, we gave considerable consideration because without customers and without a source of supply, you couldn’t stay in business. As to whether Mr. Blair occupied a unique position concerning the customers, yes, he knew the customers; he attended the directors’ meetings when he was a director and information was exchanged between Jack Blase and Mr. Blair in their daily operations, . . .

“As to what consideration I gave about his connection with the customers of the company and the sources of supply of the company, well, we gave serious consideration. That’s why it was part of the restrictive covenant that he would not compete, because he would have knowledge of the customers and source of supply and all other things pertaining to this business, and people were putting their life savings into the investment, such as Mr. Byron Cohen and others, and we wanted to protect them, to protect the company, and here he had a contract as chief executive officer at the division, and he had the knowledge there and all the information, and he was Mr. Blase’s nephew, and if he walked off and left us, we’d have no business, and this was a very important consideration in the restricted covenant in making an investment of this type — one of the principal considerations. ...”

The concern expressed by plaintiff’s board chairman was a legitimate concern. South Oil Company would obviously have been worth less than the substantial amount invested by plaintiff if its experienced manager had been free to terminate his contract and compete with the acquiring company by dealing with its customers, brokers, suppliers, and others, many of whom he had undoubtedly personally developed. To preclude this possibility, as well as to obtain his service, the plaintiff’s investor group was willing to employ defendant in the same capacity he had been employed by South Oil Company, increase his salary substantially, and grant him options to purchase stock in the company. We cannot say that this was unreasonable, or that it imposed an illegal burden upon defendant or society.

Nor can we say that the covenant’s provisions as to time and territory were, under these circumstances, unnecessary to protect the legitimate interest of plaintiff, or that they imposed an unreasonable hardship upon defendant. Indeed, five years’ duration has been held reasonable under circumstances less compelling than those present here. See Day Companies v. Patat, supra; Welcome Wagon, Inc. v. Pender, 255 N.C. 244, 120 S.E. 2d 739. In cases where the covenants not to compete accompanied the sale of a trade or business, time limitations of ten, fifteen and twenty years, as well as limitations for the life of one of the parties, have been upheld by the Supreme Court of North Carolina. Jewel Box Stores v. Morrow, supra, and cases therein cited.

The court found that plaintiff did business in all of the states included in the covenant. This finding is supported by competent evidence and supports the court’s conclusion that the covenant enforced is reasonable as to the area covered. “Reasonableness as to territory depends not so much on the geographical size of the territory, as on the reasonableness of the territorial restriction in view of the facts and circumstances of the case.” Thomas v. Coastal Industrial Services, Inc., 214 Ga. 832, 108 S.E. 2d 328. “A contract, for instance, for a valid consideration not to engage in the manufacture and sale of firearms in general use would be allowed to cover a larger extent of territory than would a contract not to engage in the manufacture of timber or the ginning of cotton.” Shute v. Heath, 131 N.C. 281, 282, 42 S.E. 704, 704. The dollar volume of sales of plaintiff’s South Oil Company division was $876,110 for the year 1968-1969. Customers included companies such as Southern Railway Company, White Oil Company, Hi Fy Oil Company, McCoy Oil Company, Sun Oil Company, C. & O. and B. & 0. Railroads, and Hudson Oil Company, which use plaintiff’s products in various states. Thus, the nature of plaintiff’s1 business is quite different from that of businesses where customers, with whom the covenanting employee has contact, are confined within a single city or rather limited areas. Compare Orldn Exterminating Co., Inc. of South Georgia v. Dewberry, supra; Wake Broadcasters, Inc. v. Crawford, 215 Ga. 862, 114 S.E. 2d 26, with Turner v. Robinson, 214 Ga. 729, 107 S.E. 2d 648 and Enterprises, Inc. v. Heim, 276 N.C. 475, 173 S.E. 2d 316.

It should also be noted that the injunction, based upon paragraph 9 (c) of the agreement, merely restricts defendant from competing with plaintiff by doing business, within the states listed, with any person, firm or entity who on or before 5 May 1970 was a customer, broker, supplier or sales representative of plaintiff. The result is that the territorial limitation is even more limited, and therefore more reasonable, than if the restriction had forbidden any competitive activity within the restricted area. Kirshbaum v. Jones, 206 Ga. 192, 56 S.E. 2d 484.

Defendant strenuously contends that all three covenants contained in paragraph 9 of the agreement are void because they are too vague and ambiguous. While the covenants do not represent models of good draftsmanship, we do find them sufficiently definite to withstand this attack. We interpret the covenants as follows: In paragraph 9(a), defendant agrees not to compete with plaintiff during his actual employment. In 9(b), when read in conjunction with an explanation of terms set out in 9(c), defendant agrees that in the event he breaches the agreement, or elects not to continue under a similar agreement at the end of his term of employment, he will not compete with plaintiff for a period of sixty months by engaging in the same type of business as that conducted by plaintiff within any of the listed states. The covenant contained in 9(c) is that in the event of either of the two contingencies set out in 9(b) or in the event of action taken under paragraph 7, which relates to the termination of the agreement in the event of defendant’s disability, defendant is not to compete with plaintiff within the specified states for a period of 60 months by doing business therein with any customer, broker, supplier or sales representative of plaintiff. The latter covenant, which is the one on which injunctive relief is based, is obviously less restrictive than the one set forth in 9(b).

Defendant also argues that the covenants' are unseverable; that the covenant contained in 9 (b) is too broad to be enforceable; and that consequently, none of the covenants may be enforced. We reject this argument without inquiring into the enforceability of 9 (b). The covenants, in our opinion, are clearly severable. Where severable, a reasonable covenant may be enforced even though another separate covenant may not be reasonable and therefore not enforceable. Aladdin, Inc. v. Krasnoff, 214 Ga. 519, 105 S.E. 2d 730. The cases cited by defendant in support of his position are inapplicable. They involve situations where a court refused to employ the “blue pencil” rule, in order to trim an excessively broad territorial restriction down to a reasonable area. See 5 Williston on Contracts, Revised Edition, § 1659. We agree that a court may not exercise its own initiative in such a manner, for to do so would be to draft a new contract for the parties. See dissenting opinion of Bobbitt, Justice (now Chief Justice), in Welcome Wagon, Inc. v. Pender, supra, at 250, 120 S.E. 2d at 743. However, this situation is. not present here. The contract specifically provides that each of the covenants contained in paragraph 9 is an independent covenant, which may alone form the basis of injunctive relief. Moreover, the nature of the covenants dictate that they be considered separately. The covenant contained in 9 (a) is applicable only while defendant is employed by plaintiff. The covenant contained in 9(b) is applicable only if defendant breaches his employment agreement or refuses to renew it. 9(c) may be applied in the event the defendant’s employment terminates for either reason set forth in 9 (b) or by reason of his disability. The trial judge, in his discretion, based the injunction upon the less restrictive covenant contained in 9(c). This inured to defendant’s benefit and affords him no grounds for complaint.

Finally, defendant contends that the covenant unreasonably prohibits his activities. For instance, he argues that the effect of the injunction is to prohibit him from purchasing a tank of gas or a quart of oil from Sun Oil Company, or a railway ticket from Southern Railway Company, since both companies v/ere customers of plaintiff. However, paragraph 9(c) contains the qualifying phrase, “with respect to the same type of business as that business conducted by Seaboard.” Suffice to say, we cannot envision any such far reaching interpretations' of the injunction as are suggested by defendant.

For the reasons set forth, the order is affirmed.

Affirmed.

Chief Judge Mallard and Judge Parker concur.