351 A.2d 207 (Pa. 1976), Piercing Pagoda, Inc. v. Hoffner

Citation:351 A.2d 207, 465 Pa. 500
Opinion Judge:Author: Jones
Party Name:PIERCING, PAGODA, INC. v. Paul J. HOFFNER, Jr., and Kay Hoffner, t/a Piercing Pagoda of York, Appellants.
Case Date:January 29, 1976
Court:Supreme Court of Pennsylvania
 
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Page 207

351 A.2d 207 (Pa. 1976)

465 Pa. 500

PIERCING, PAGODA, INC.

v.

Paul J. HOFFNER, Jr., and Kay Hoffner, t/a Piercing Pagoda

of York, Appellants.

Supreme Court of Pennsylvania.

January 29, 1976

Submitted June 26, 1975.

Page 208

[465 Pa. 503] Bernard V. O'Hare, O'Hare & Heitczman, Bethlehem, for appellants.

Donald B. Corriere, Bethlehem, for appellee.

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

[465 Pa. 504] OPINION

JONES, Chief Justice.

This appeal follows the entry of a final decree in equity of the court en banc

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against the appellants, Paul J. Hoffner, Jr., and Kay Hoffner. The decree enforces a restrictive covenant not to compete, and requires an accounting from the appellants for amounts earned in violation of a provision in the parties' franchise agreement which provides that the appellants purchase all their earring requirements from the appellee, Piercing Pagoda, Inc.

Piercing Pagoda, Inc., is a Pennsylvania corporation which engages in the selling of earrings and provides an ear piercing service for its customers. Piercing Pagoda was originally started through the efforts of Bernard Cohen, Piercing Pagoda's sole stockholder. Prior to Mr. Cohen's dealings with the appellants he owned and operated a 'Piercing Pagoda' at Whitehall Mall in the City of Allentown. 1

Sometime in October of 1970, appellants contacted Bernard Cohen and expressed their interest in operating a Piercing Pagoda in York, Pennsylvania. The appellants procured a location for the store, and took a lease in their names. Thereafter, a letter of intent creating franchise rights in the Hoffners was signed by the parties.

Piercing Pagoda, in the November 1970 letter of intent, agreed to 'honor the exclusive territorial rights' of the Hoffners 'to open three . . . Pagoda within the York City, Berks City and Lancaster City areas.' In addition, appellee agreed to supply the Hoftners with a line of earrings, and all materials and supplies necessary for the operation of their businesses. Piercing Pagoda [465 Pa. 505] also agreed to train an employee of the Hoffners in the proper method of ear piercing, and to teach the operational methods required in running the businesses.

The Hoffners agreed to purchase all earring requirements from Piercing Pagoda at 10% Over listed cost, to pay a franchise price of $7,000 and to submit to one inspection per month by a staff person of Piercing Pagoda, Inc. 2 In addition, the franchisee agreed to the following covenant not to compete:

'In the event of the termination of this business contract and following a 30 day written notice by registered mail, or otherwise mutually agreed, the franchisee will not own, operate or participate in any business employing ear piercing; for three years within 30 miles of any existing Pierding (sic) Pagoda or for one year where the business had been operated and terminated.'

Apparently the Hoffners were satisfied with the terms of the original agreement for they purchased franchise rights in four other locations. 3 After the filing of the instant law suit the appellants opened an additional operation at King of Prussia Mall which is within ten to fifteen miles of the Piercing Pagoda operation, owned and operated by appellee at the Plymouth Meeting Mall.

On March 19, 1972, the appellants terminated their agreement by letter charging that the appellee improperly overcharged them on certain quantities of earrings. 4 The appellee brought this equitable action seeking the enforcement of the covenant not to compete which was contained in the original letter of intent and an accounting.

[465 Pa. 506] The chancellor found that although Piercing Pagoda had a legitimate interest to protect, which warranted the use of a restrictive covenant, the enforcement of

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the covenant was not proper in this case since the franchisor did not bargain for a share of the profits but for the 'requirement that the franchisee purchase all earring inventory from the franchisor.' In the chancellor's opinion the appropriate relief was found in requiring the appellants to purchase all their earring requirements from the appellee for five years. The chancellor found that the appellee did not breach the agreement by engaging in over-pricing.

Both sides challenged the chancellor's conclusions of law and the decree nisi. In addition, the appellant challenged the chancellor's finding of fact, arguing principally that the appellee's over-pricing was of such a nature that it excused the appellants' termination of the agreement.

The court en banc made no change in the original findings of fact but found that the restrictive covenant was ancillary to a lawful business arangement between the parties, and therefore enforceable. In so concluding, the court en banc held that the covenant protected valid economic interests of the corporation and that the original franchise agreement afforded important economic advantages to the appellants. Accordingly, the court en banc enforced the original covenant, ordered an accounting, and vacated the chancellor's original decree nisi.

In their appeal to this Court, the appellants make a number of contentions. Many of the arguments center around their view that the restrictive covenant is invalid and unenforceable. Appellants also claim that even if it is valid they had a right to terminate their dealings with the appellee because of an alleged breach of the letter of intent on the part of the appellee.

The law in this Commonwealth for more than a century has been that in order to be enforceable a restrictive[465 Pa. 507] covenant 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 for 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. Maintenance Specialties v. Gottus, 455 Pa. 327, 331, 314 A.2d 279, 281 (1974) (Jones, C.J., concurring); Jacobson & Co. v. International Environmental 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). See also Restatement of Contracts § 515(e) (1932).

The focus of appellants' brief is centered on their contention that the restrictive covenant fails to meet this Court's first requirement for the finding of a valid restrictive covenant. Specifically, the appellants would have us hold that the business interest transferred by the appellee to the appellants in the original franchise agreement, and its subsequent modifications, is not the type of interest which is protectable by the use of a covenant not to compete. After a complete review of the record, we are unpersuaded by appellants' contention.

This Court has previously discussed the use of restrictive covenants in two types of cases. The first are cases where an employer has attached a restrictive covenant to an employee's contract of employment. Maintenance Specialties v. Gottus, 455 Pa. 327, 314 A.2d 279 (1974) and Jacobson & Co. v. International Environmental Corp., 427 Pa. 439, 235 A.2d 612 (1967). The second are cases where a restrictive covenant has been attached to a contract for the sale of a business. Morgan's Home Equipment Corp. v. Martucci, 390 Pa. 618, 136 A.2d 838 (1957). In both instances the ancillary rule, repeated by this Court in Morgan's Home Equipment Corp., was held [465 Pa. 508] to be applicable. 390 Pa. at 629, 136 A.2d 838. This principle was extracted

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from the leading case on the subject, United States v. Addyston Pipe & Steel Co., 85 F. 271 (6th Cir. 1898), Aff'd., 175 U.S. 211, 20 S.Ct. 96, 44 L.Ed. 136 (1899).

'This very statement of the (ancillary) rule implies that the (restraint) must be one in which there is a main purpose, to which the covenant in restraint of trade is merely ancillary. The covenant is inserted only to protect one of the parties from the injury which, in the execution of the contract or enjoyment of its fruits, he may suffer from the unrestrained competition of the other. The main purpose of the contract suggests the measure of protection needed, and furnishes a sufficiently uniform standard by which the validity of such restraints may be judicially determined. . . . But where the sole object of both parties in making the contract as expressed therein is merely to restrain competition, and enhance or maintain prices, it would seem that there was nothing to justify or excuse the restraint, that it would necessarily have a tendency to monopoly, and therefore would be void. . . .'

85 F. at 282--283.

Thus, the question which we must face is whether, the appellee franchisor...

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