Maintenance Specialties, Inc. v. Gottus

• Decision Date: 25 January 1974
• Citation: 314 A.2d 279,455 Pa. 327
• Parties: MAINTENANCE SPECIALTIES, INC., Appellant, v. Ronald GOTTUS, a/k/a Robert Gordon, t/a/d/b/a A to Z Specialty Co., Appellee.
• Court: Pennsylvania Supreme Court

314 A.2d 279

455 Pa. 327

MAINTENANCE SPECIALTIES, INC., Appellant, v. Ronald GOTTUS, a/k/a Robert Gordon, t/a/d/b/a A to Z

Specialty Co., Appellee.

Supreme Court of Pennsylvania.

January 25, 1974.

David B. Washington, Pittsburgh, Shields &amp Washington, Pittsburgh, for appellant.

Martin W. Sheerer, Pittsburgh, McGregor, Dillman, Sheerer &amp Schuchert, Pittsburgh, for appellee.

Before JONES C.J., and EAGEN, O'BRIEN, ROBERTS, POMEROY, NIX, and MANDERINO, JJ.

OPINION OF THE COURT

O'BRIEN Justice.

Appellant, Maintenance Specialties, Inc., is a corporation engaged in the business of distribution of a variety of parts and products used in vehicular maintenance, equipment maintenance and plant and building maintenance. Sometime in 1968, appellee, Ronald Gottus, became employed by appellant pursuant to an oral contract. On April 29, 1969, the parties entered into a written employment contract which included a covenant against competition after termination of employment.

February 23, 1972, appellant, alleging that appellee is now engaging in competition with it, in violation of the covenant against competition, filed a complaint in equity seeking an injunction. After oral argument, the chancellor granted appellee's motion for judgment on the pleadings, and dismissed appellant's complaint without leave to amend. This appeal followed.

The chancellor based his decision upon our opinion in Capital Bakers, Inc. v. Townsend, 426 Pa. 188, 231 A.2d 292 (1967), where we refused to enforce a restrictive covenant because it was not ancillary to the taking of employment. The chancellor reasoned that since it was admitted that appellee had 'taken employment' in 1968 under an oral agreement which did not include the restrictive covenant, it was apparent that the restrictive covenant was not ancillary to the taking of employment.

Appellant urges error, based on our opinion in Jacobson & Co. v. Int. Environment Corp., 427 Pa. 439, 235 A.2d 612 (1967), where we agreed with the chancellor in that case that the rule that a restrictive covenant is not enforceable unless ancillary to the 'taking of employment,'

'did not mean to imply that for a restrictive covenant to be valid in any employer-employee contract such a covenant would have to be part of the original contract of employment between the parties. This would be an unrealistic requirement, for in many instances . . . the insertion of a restrictive covenant in the original contract would serve no valid purpose. An employer who hires a novice has no desire to restrict his present competitive force. Only when the novice has developed a certain expertise, which could possibly injure the employer if unleased competitively, will the employer begin to think in terms of the protection of a restrictive covenant. This is an economic reality, and the law should be influenced by it.' 427 Pa. at 450, 235 A.2d at 618.

In Jacobson, we distinguished Capital Bakers because in the latter case, the new contract was 'without any change in (the employee's) employment status.' 427 Pa. at 449, 235 A.2d at 618. In other words, a restrictive covenant is enforceable if supported by new consideration, either in the form of an initial employment contract or a change in the conditions of employment.

In the instant case, if appellee's employment status had changed beneficially when the parties reduced their agreement to writing, the law enunciated in Jacobson would dictate that the restrictive covenant, if reasonable, would be enforceable. However, the appellant does not aver that any such change took place and appellee states that no such change took place. ^[1] Consequently, the restrictive covenant is not enforceable and the complaint was properly dismissed.

Decree affirmed. Each party to bear own costs.

JONES, C.J., filed a concurring opinion, in which EAGEN, POMEROY and NIX, JJ., joined.

POMEROY, J., filed a concurring opinion.

MANDERINO, J., filed a dissenting opinion, in which ROBERTS, J., joined.

JONES, Chief Justice (concurring).

Although I agree with the majority opinion, I feel that amplification is necessary in this area of increasing litigation. The enforcement of restrictive covenants has been the subject of litigation for centuries. At earliest common law all restrictive covenants were considered as restraints of trade and therefore were unenforceable. ^[1] However, as a part of the development of modern commercial law, courts began to recognize that under certain limited circumstances covenants not to compete were both permissible and enforceable. ^[2] The law in this Commonwealth for more than a century has been that in order to be enforceable covenants in restraint of trade must satisfy three requirements: (1) the covenant must relate to either a contract for the sale of goodwill or other subject property or to a contract of employment; (2) the covenant must be supported by adequate consideration; and (3) the application of the covenant must be reasonably limited in both time and territory. Jacobson & Co. v. International Environment Corp., 427 Pa. 439, 235 A.2d 612 (1967); Capital Bakers, Inc. v. Townsend, 426 Pa. 188, 231 A.2d 292 (1967); Barb-Lee Mobile Frame Co. v. Hoot, 416 Pa. 222, 206 A.2d 59 (1965); Morgan's Home Equipment Corp. v. Martucci, 390 Pa. 618, 136 A.2d 838 (1957); Cleaver v. Lenhart, 182 Pa. 285, 37 A. 811 (1897); Gompers v. Rochester, 56 Pa. 194 (1867); Keeler v. Taylor, 53 Pa. 467 (1866); Markson Bros. v. Redick, 164 Pa.Super. 499, 66 A.2d 218 (1949). See also Restatement of Contracts § 515(e) (1932).

All three requirements must coalesce before a restrictive covenant is enforceable. The necessity of the first element is stated in Morgan's Home Equipment Corp. v. Martucci, 390 Pa. at 629, 136 A.2d at 845, 'It has long been the rule at common law, that contracts in restraint of trade made independently of a sale of a business or contract of employment are void as against public policy regardless of the valuableness of the consideration exchanged therein.' Although the covenant not to compete must be ancillary to a contract of employment, it need not necessarily be executed simultaneously with the Initial taking of employment. E.g., Jacobson & Co. v. International Environment Corp., 427 Pa. 439, 235 A.2d 612 (1967). Where a covenant not to compete is executed subsequent to the initial employment, however, its performance will not be enforced unless the employee who restricts himself receives a corresponding benefit or change in status. Without such a change of status, the new contract will not qualify as a 'taking of employment,' nor will there be adequate consideration to support the additional covenant of the employee. 'In Capital Bakers, we held that a covenant in an employment contract executed some twelve years after the initial taking of permanent employment was not ancillary to the taking of employment. However, we emphasized that the new contract was 'without any change in his employment status.' Thus it did not qualify as 'taking of employment'.' Jacobson & Co. v. International Environment Corp., 427 Pa. at 449, 235 A.2d at 618. The new contract in the instant case likewise creates no change in employment status and therefore the covenant should not be enforced under the rule set forth in Morgan's Home Equipment Corp. v. Martucci, 390 Pa. 618, 136 A.2d 838 (1957).

As noted above, our prior case law also requires the presence of valuable consideration to support a covenant not to compete. Analysis reveals that there are two types of consideration which will support a restrictive covenant in an employment contract. When the restrictive covenant is contained in the initial contract of employment, consideration for the restrictive covenant is the job itself. ^[3] When the restrictive covenant is added to an existing employment relationship, however, it is only enforceable when the employee who restricts himself receives a corresponding benefit or change in status. An employee's continued employment is not sufficient consideration for a covenant not to compete which the employee signed after the inception of his employment, where the employer makes no promise of continued employment for a definite term. ^[4]

In Jacobson & Co. v. International Environment Corp., 427 Pa. 439, 235 A.2d 612 (1967), this Court did find such a change of status as to support the addition of a restrictive covenant to a pre-existing employment relationship. ^[5] In the lower court proceeding in Jacobson the situation of a coworker of Jacobson, however, presented the precise facts of this case. The restrictive covenant there was struck down. In distinguishing that ruling from the case then at bar, we stated:

'(T)he findings were that Kassner (the co-worker) was permanently hired in February, 1962, under an oral contract Without a restrictive covenant, and in June required to execute a written employment contract identical to that under which he had been working, except that it contained a restrictive covenant. Clearly, here is a case of no consideration for the covenant.'

Id. at 451, 235 A.2d at 619.

In Markson Bros. v. Redick, 164 Pa.Super. 499, 66 A.2d 218 (1949), the Superior Court was also presented with a case practically identical to the case at bar. An employee who had been working for five months under an oral contract as a saleswoman and floor manager in a clothing store signed a written contract which provided her with the same salary, responsibility and benefits as her oral contract, but contained a covenant restricting her right to work for competitors after termination of her employment. The only change in the employment relationship to support this covenant was the creation of a week-to-week employment where there had previously been employment at will. The Superior...