351 A.2d 250 (Pa. 1976), 628, Sidco Paper Co. v. Aaron

Docket Nº:628.
Citation:351 A.2d 250, 465 Pa. 586
Opinion Judge:Author: Roberts
Party Name:SIDCO PAPER COMPANY, Appellee, v. Eugene AARON a/k/a Eugene G. Aaron, Appellant, and Grant Paper Company.
Case Date:January 29, 1976
Court:Supreme Court of Pennsylvania
 
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Page 250

351 A.2d 250 (Pa. 1976)

465 Pa. 586

SIDCO PAPER COMPANY, Appellee,

v.

Eugene AARON a/k/a Eugene G. Aaron, Appellant,

and

Grant Paper Company.

No. 628.

Supreme Court of Pennsylvania.

January 29, 1976

Argued Oct. 10, 1974.

Page 251

[465 Pa. 588] Marvin Comisky, Lawrence C. Hutchings, Blank, Rome, Klaus & Comisky, Philadelphia, for appellant.

Harry M. Sablosky, Norristown, William Brodsky, Philadelphia, for appellee.

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

OPINION OF THE COURT

ROBERTS, Justice.

This is an appeal from a decree in equity granting a preliminary injunction to enforce a restrictive covenant contained in an employment contract. Appellant asserts that the preliminary injunction was improperly issued. We do not agree and therefore affirm.

Appellee, Sidco Paper Company (Sidco), is a Pennsylvania corporation which sells odd lots of low grade printing paper. The area served by the company includes Virginia, West Virginia, Maryland, Delaware, Pennsylvania, New Jersey, New York, Connecticut, Rhode Island, Massachusetts, New Hampshire and the District of Columbia. Grant Paper Company (Grant), a defendant in the action, is a Pennsylvania corporatiion engaged in the same business, and is a direct competitor of Sidco in the northeastern portion of the United States.

[465 Pa. 589] Appellant Eugene Aaron (Aaron) was an employee of Sidco until he left to accept employment with Grant. Aaron was first employed by Sidco at will, under an oral contract, in 1967 when he was seventeen years of age. His initial salary was $60.00 per week. Following a two-year apprenticeship, during which he was exposed to all aspects of Sidco's business and was trained by Sidco salesmen, Aaron executed a written employment contract with Sidco which contained the restrictive covenant at issue here. This contract provided for a term of employment of one year with automatic renewal from year to year, subject to termination by either party upon sixty days' written notice. The covenant provided:

'7. That the Employee agrees during the term of this contract, and for a period of two (2) years thereafter, that he will not be engaged in the same or similar type of business as the Employer is engaged in, in any area of which Richmond, Virginia, is the southern point, Pittsburgh, Pa., the western point, and Boston, Massachusetts, the northern point, and should he do so, the Employer shall be entitled to an injunction to be issued by any Court of competent jurisdiction enjoining and restraining the Employee and each and every other person, firm, associates or corporations concerned therein from the continuance of such employment, service, or other acts in aid of the business of such rival company or concern.'

When Aaron ended his employment with Sidco, his territory included Richmond, Virginia; Washington, D.C.; Maryland; Delaware; and Pennsylvania as far west as Chambersburg, excluding Philadelphia, Montgomery, Bucks, Delaware and Chester counties. His salary at this time was $65,000.00 per year, plus expenses which amounted to $18,000.

Page 252

Following his resignation from Sidco, Aaron immediately took a position as a salesman with Grant. Grant instructed Aaron to solicit business from the same customers[465 Pa. 590] he had dealt with on behalf of Sidco. Aaron did so successfully. Sidco's business in the territory formerly served by Aaron fell from $490,000.00 in April 1974, the last month of Aaron's employment by Sidco, to $90,000.00 in May 1974.

The chancellor granted a preliminary injunction enjoining Aaron from serving as a salesman throughout an area described as follows:

'a. Pennsylvania: From the City of Chambersburg, directly north to the New York state boundary, continuing east-southeast along the Pennsylvania-New York state boundary, and then south along the Pennsylvania-New Jersey state boundary; continuing then southwest along the Pennsylvania-Delaware state boundary to its end; from there due west along the Pennsylvania-Maryland state boundary until an intersect is established with the city of Chambersburg, by a line drawn directly south from said city to the Pennsylvania-Maryland state boundary.

  1. Maryland: From the city of Hagerstown, directly north until the Maryland-Pennsylvania border, then due east along said border until the state of Delaware, then directly south along the Maryland-Delaware border until a horizontal line can be drawn from Washington, D.C., intersecting the Delaware-Maryland border, then from Washington, D.C., southwest along the Potomac River until a straight line can be drawn due south from Hagerstown to the Potomac River.

  2. District of Columbia: Entire area.

  3. Virginia-Maryland: From the city of Richmond directly south (sic, north?) until the Potomac River, from said River due east until the Atlantic Ocean. Starting again from the city of Richmond, due east until the Atlantic Ocean.

    Notwithstanding, the above enumerated restricted areas and for the purpose of this Interlocutory Decree, [465 Pa. 591] the defendant is entitled to engage in the aforementioned business in the following areas:

  4. The states of New York, New Jersey, Delaware, Massachusetts and all other states of the Union.

  5. The city of Philadelphia, Pennsylvania.

  6. The counties of Bucks, Chester, Delaware, Montgomery in the Commonwealth of Pennsylvania.' 1

    Our courts will permit the equitable enforcement of post-employment restraints only where they are incident to an employment relation between the parties to the covenant, the restrictions are reasonably necessary for the protection of the employer, and the restrictions are reasonably limited in duration and geographic extent. Girard Investment Co. v. Bello, 456 Pa. 220, 318 A.2d 718 (1974); Bettinger v. Carl Berke Associates, Inc., 455 Pa. 100, 314 A.2d 296 (1974); Jacobson & Co. v. International Environment Corp., 427 Pa. 439, 235 A.2d 612 (1967). Before we can determine whether a preliminary injunction was properly issued here, we must first consider appellant's claim that this test was not met. Specifically he attacks both the necessity for protection and the territorial reasonableness of the covenant.

    I

    An employer's right to protect, by a covenant not to compete, interest in customer goodwill acquired through the efforts of an employee is well-established in

    Page 253

    Pennsylvania. See, e.g., Bettinger v. Carl Berke Associates, Inc., 455 Pa. 100, 314 A.2d 296 (1974); 2 Jacobson [465 Pa. 592] & Co. v. International Environment Co., 427 Pa. 439, 235 A.2d 612 (1967); 3 Hayes v. Altman, 424 Pa. 23, 225 A.2d 670 (1967); 4 Albee Homes, Inc. v. Caddie Homes, Inc., 417 Pa. 177, 207 A.2d 768 (1965); 5 Seligman & [465 Pa. 593] Latz of Pittsburgh, Inc. v. Vernillo, 382 Pa. 161, 114 A.2d 672 (1955). 6

    The nature of this interest is well stated by Professor Blake:

    'In almost all commercial enterprises . . . contact with customers or clientele is a particularly sensitive aspect of the business. . . . In most businesses . . . as the size of the operation increases, selling and servicing activities must be at least in part decentralized and entrusted to employees whose financial interest in the business is limited to their compensation. The employer's sole or major contact with buyers is through these agents and the success or failure of the firm depends in part on

    Page 254

    their effectiveness. . . . (t)he possibility is present that the customer will regard, or come to regard, the attributes of the employee as more important in his business dealings than any special qualities of the product or service of the employer, especially if the product is not greatly differentiated from others which are available. Thus, some customers may be persuaded, or even be very willing, to abandon the employer should the employee move to a competing organization or leave to set up a business of his own. . . .

    [465 Pa. 594] 'The employer's point of view is that the company's clientele is an asset of value which has been acquired by virtue of effort and expenditures over a period of time, and which should be protected as a form of property. Certainly, the argument goes, the employee should have no equity in the custom which the business had developed before he was employed. Similarly, under traditional agency concepts, any new business or improvement in customer relations attributable to him during his employment is for the sole benefit of the principal. This is what he is being paid to do. When he leaves the company he should no more be permitted to try to divert to his own benefit the product of his employment than to abscond with the company's cashbox.' 7

    Under our case law, and in view of the factors discussed by Professor Blake, Sidco clearly has a protectible interest in customer goodwill.

    II

    Appellant contends (1) that the covenant is unenforceable because its territorial scope is excessive and (2) that it may not properly be enforced in a narrower territory. If accepted, this argument would deny enforcement, not because of any defect in the substance of the covenant which is before us, but rather because the covenant attempted to secure to the employer flexibility in where appellant was to be employed.

    Our law permits equitable enforcement of employee covenants not to compete only so far as reasonably[465 Pa. 595] necessary for the protection of the employer. Bettinger v. Carl Berke Associates, Inc., 455 Pa. 100, 314 A.2d 296 (1974); Reading Aviation Service Co. v. Berolet, 454 Pa. 488, 311 A.2d 628 (1973). However, where the covenant imposes restrictions broader than necessary to protect the employer, we have repeatedly held that a court of equity may grant enforcement limited to those portions of the restrictions which are reasonably necessary...

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