Budget Rent-A-Car Corporation of America v. Fein

• Decision Date: 05 March 1965
• Docket Number: No. 21259.,21259.
• Citation: 342 F.2d 509
• Parties: BUDGET RENT-A-CAR CORPORATION OF AMERICA, Appellant, v. Samuel FEIN, Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

342 F.2d 509 (1965)

BUDGET RENT-A-CAR CORPORATION OF AMERICA, Appellant, v. Samuel FEIN, Appellee.

No. 21259.

United States Court of Appeals Fifth Circuit.

March 5, 1965.

Robert Marks, Chicago, Ill., Nolan B. Harmon, Atlanta, Ga., Marks, Marks & Kaplan, Chicago, Ill., of counsel, for appellant.

Edward J. Henning, Joseph W. Gerstein, and Henning & Martin, Atlanta, Ga., for appellee.

Before BROWN and BELL, Circuit Judges, and SPEARS, District Judge.

JOHN R. BROWN, Circuit Judge.

In this diversity case the question is whether the District Court properly granted summary judgment in favor of the Defendant Fein refusing to enforce a restrictive covenant signed by Fein during negotiations over the possible purchase of a Budget rental car franchise by Fein, which for two years prohibited him from thereafter going into the discount car rental business anywhere in the western hemisphere. Signing the letter was in consideration of Fein's being shown confidential documents which presumably revealed certain operational techniques — calculated to show the profit making potential of Budget franchise. There is also an Erie-Klaxon¹ problem whether the District Court sitting as a Georgia court should, under the applicable Georgia conflict of laws rule, apply the substantive law of North Carolina (where the contract was executed) or that of Georgia (where the alleged breach occurred and the forum state). And as a subsidiary to that, there is a question what the Georgia courts would say about what is the substantive, non-statutory, law of North Carolina — that which the North Carolina courts say, or what the Georgia courts say is the common law. We have concluded that summary judgment was proper and affirm.

Budget Rent-A-Car, an Illinois corporation, is in the business of franchising and servicing operators in the discount automobile rental business. It sells its name and know-how to locally owned rental agencies for an initial franchise fee and a continuing monthly fee based upon the number of cars in service. According to its spokesmen and much of the literature furnished to Fein on a "confidential" basis, which is now pretty largely a cat-out-of-the-bag by reason of this litigation, Budget has unique attraction. By operating through locally owned units situated on less choice — and therefore less expensive — sites, manned by minimum staffs, and backed up by national advertising, it claims that it has been able to compete favorably with Hertz and Avis, who have largely dominated the market but who also have to charge their customers substantially higher rental fees. At the time this litigation was commenced, Budget had 63 franchises located in 30 states, two cities in Canada, and one in San Juan, Puerto Rico. Budget regards its knowledge of how to start and operate successfully a local rental agency, accumulated from and through its franchisees over several years, as something in the nature of a "trade secret." Consequently it has been the consistent practice of Budget when negotiating with a prospective franchise purchaser — as in this case — to require the signing of the standard agreement.² Only the items 2 and 4 of the agreement are involved in this suit, for there is no direct contention that Fein has 1 divulged any information given him and certainly none that he has 3 wrongfully used the name "Budget." The controversy centers about the item 2, namely, the agreement "not to enter into any daily discount automobile rental business in the western hemisphere for a period of two years * * *."

At the time the negotiations took place Fein resided in North Carolina where he was in the wholesale meat business. On deciding to sell this business and occupy himself otherwise, he contacted the President of Budget, Mr. Lederer, with whom he had formerly been associated and inquired about the possibility of a franchise. In June of 1961 Lederer came to Fein's home in North Carolina, and before discussing the deal, required Fein to sign the letter (note 2) containing the restrictive covenant. Fein was then given a disclosure of some aspects of the business. According to Lederer's answers to written interrogatories, the material shown Fein "included sales techniques, financial operations material, cash flow schedules for breakeven points, projections showing investment required related to fleet requirement, utilization charts and quarterly projections."³

The discussion and subsequent correspondence was primarily about a possible franchise in either Indianapolis or Atlanta. Shortly thereafter Lederer advised Fein that the Indianapolis deal would probably be unavailable to him. He then encouraged Fein to consider Atlanta more seriously. But Fein's interest was short lived. About two weeks later (late June 1961) Fein wrote Lederer and announced that he was no longer interested in obtaining a Budget franchise, but asked his friend Lederer to recommend him for selling jobs. In January 1962, presumably by wholly independent negotiations, Budget granted the Atlanta franchise to someone else. In the fall of 1962, Fein acquired a franchise from Econo-Car International, another discount car rental company, and began operations in Atlanta.⁴ For our purposes we assume that Econo-Car was operated similarly to Budget, renting compacts and other cars at prices substantially lower than those charged by Hertz and Avis, and that the two appealed to the same competitive market. We may also accept the optimistic estimate that the combined competitive effect of the two discount rental agencies had caused Hertz and Avis to lower their prices — at least for "weekend specials" — all to the benefit of the Atlanta area car rental users.

There is no positive demonstration that in his Atlanta operation Fein is actually using any of the confidential information shown him after signing the covenant either to his advantage or to the disadvantage of the Atlanta Budget franchisee, his competitor. On the other hand, Budget, at this stage, insists it does not know since the case has ended prior to discovery and trial. But in any event, the fact that Fein is in competition with a Budget franchisee is not particularly important as far as this agreement is concerned. First, in the language of the letter, breach of the covenant is not in any way hinged to Fein's being in direct competition with Budget. Second, if Fein had not taken the Atlanta Econo-Car franchise, it is reasonable to assume someone else — equally as capable a competitor — would have. Budget's claim for damages,⁵ then, depends on the bald fact that Fein's conduct comes literally within the language of item 2 of the restrictive covenant, that both in time and area he went into the discount auto rental business during the forbidden two-year period at a place within the western hemisphere.

Both parties moved for summary judgment, the Defendant's theory being that North Carolina law was controlling and that as a matter of public policy there, this restrictive covenant would be unenforceable — primarily because of the "unreasonable" breadth of the territorial restriction. The Trial Court agreed, granting the Defendant's motion and denying that of the Plaintiff. In his opinion order, Judge Morgan stated:

"The contract is unreasonable, not necessary for the protection of the party in whose favor the restraint was imposed, oppressive to the party restrained, and opposed to the interest of the public. Accordingly the contract is contrary to public policy and void."

He found this restrictive covenant to be analogous to the generally prohibited class of contract provisions which restrain an employee from engaging in the same business as his employer for a certain period of time following termination of his present employment. Budget has appealed and asks that the case be reversed and remanded with instructions to enter judgment in its favor on its motion, or, in the alternative, for a trial.

Budget insists that Georgia law must control the validity of this restrictive covenant. The Trial Court applied North Carolina law and Fein strongly asserts the correctness of this holding. Since the general rules in both states are similarly stated and there are no cases factually on all-fours with the instant one, we think it makes little or no difference which state's law is applied. It may be that as briefed and argued to us the cases found and cited by the parties might indicate that Georgia is the more liberal in enforcing restrictive covenants. Ironically, our consideration of recent cases not cited tends to reveal either that it makes no difference or that the opposite is true and North Carolina is the more liberal.⁶

Despite the practical non-necessity to choose, to technically comply with the Erie-Klaxon command, we have determined that Georgia law is applicable. The Trial Court based its decision that North Carolina law was applicable on the Georgia conflict Code provision on contracts:

"The validity, form, and effect of all writings or contracts are determined by the laws of the place where executed. When such writings or contracts are intended to have effect in this State, they must be executed in conformity to the laws of this State, * * *."⁷

Except for the possibility, urged by the Plaintiff and here rejected,⁸ that this agreement was "intended to have effect" in Georgia, § 102 would appear to call for the application of North Carolina law because that was the place of execution. But Plaintiff argues and the decisions certainly tend to indicate that the reference in § 102 (note 7, supra) to the "laws of the place where executed" as being determinative of "validity, form, and effect" has been interpreted by Georgia to mean only statutory law. Case law of the locus (North Carolina) will be consulted only when it is interpretive of such foreign statute. Where there is no applicable foreign statute, the Georgia courts then go through a two-step process. First, in the absence of pleading and proof of ...