Hess v. Gebhard & Co. Inc.

• Court: Pennsylvania Supreme Court
• Citation: Hess v. Gebhard & Co. Inc., 808 A.2d 912, 570 Pa. 148 (Pa. 2002)
• Decision Date: 16 October 2002
• Parties: W. Lawrence HESS, Appellant, v. GEBHARD & CO. INC., and Eugene Hoaster Company, Inc., Appellees.

808 A.2d 912

570 Pa. 148

W. Lawrence HESS, Appellant, v. GEBHARD & CO. INC., and Eugene Hoaster Company, Inc., Appellees.

Supreme Court of Pennsylvania.

Argued May 14, 2002.

Decided October 16, 2002.

David J. Brightbill, Lebanon, John P. Krill, Harrisburg, for W. Lawrence Hess.

Harry Walter Fenton, David J. Tshudy, Lebanon, and John J. Ferry, Palmyra, for Gebhard & Co., Inc. and Eugene Hoaster Company, Inc.

OPINION

Justice NEWMAN.

This matter arose as a result of the assignment by Eugene Hoaster Company, Inc. (Hoaster), of the employment agreement and covenant not to compete of Appellant, W. Lawrence Hess (Hess), to Gebhard & Co. (Gebhard), as part of an asset sale of an insurance agency. After thorough review, we reverse.

FACTS AND PROCEDURAL HISTORY

On April 29, 1974, Hess, a life-long resident of Lebanon County, commenced employment as an insurance agent with Hoaster. As part of his employment, Hess executed an employment agreement in which he consented not to disclose proprietary information and covenanted not to compete with Hoaster within a twenty-five mile radius of the City of Lebanon for a period of five years after the termination of his employment.

The agreement stated in pertinent part:

THE AGENT AGREES:

....

3. Not to disclose to any person or organization any information concerning the business of the Agency, or its affairs, secured in the course of, or incidental to the terms of this Agreement, and after its termination.

....

4. Upon the termination of this Agreement, not to engage in the same or similar business as that now carried on by the Agency, nor work for an individual or firm engaged in such line or similar line of business within a radius of twenty-five (25) miles of the City of Lebanon, for a period of five (5) years from the date of termination of this Agreement.

In the event that any court of competent jurisdiction determines this covenant to be unreasonable either in extent of distance or time, it shall be considered modified so as to cover the maximum extent of time and distance which such court shall find permissible under the circumstances.

....

Termination of this Agreement in any manner shall not invalidate the provisions respecting competition and ownership of the business.

(Reproduced Record at 24a; Agent's Agreement at 2.) Hoaster's business consisted primarily of insurance and real estate operations and Hess' primary job was to service Hoaster's existing insurance accounts, for which he received a salary plus benefits.¹ The restrictive covenants in the Agent's Agreement contained no language regarding assignability.

In July of 1996, Charles Brooks, Esq. (Brooks) entered into a sales agreement with Gebhard to sell all the assets associated with the insurance portion of his business, effective January 1, 1997. Pursuant to the contract of sale, Brooks sold only the insurance portion of his business to Gebhard, while he retained the real estate operation. He continued to operate as Hoaster, Inc., under the same corporate entity. The agreement also provided that, for three years after the sale, Hoaster would receive, as part of the sale price, the commissions and fees earned on the insurance accounts transferred from Hoaster to Gebhard. The contract included the sale of all of Hoaster's then-existing contracts and agreements, including Hess' employment agreement containing the covenant not to compete. The inventory of assets being sold specifically included the employment agreement, expressly valued at $0.00, and goodwill, expressly valued at $0.00. (Hearing of August 27, 1999, Exhibit 11.) It is undisputed that Hess did not consent to the assignment of the covenant to Gebhard and that no one ever discussed the covenant with him or asked him to agree to its assignment.

In November of 1996, Gebhard informed Hess that it had decided to eliminate Hess' position when Gebhard officially assumed ownership. Gebhard did tell Hess that there might be two positions available on the effective date of sale, neither of which involved the work that Hess had done for twenty-two years, although Gebhard said that he had reservations concerning Hess' ability to perform the positions. One involved new sales only and the other was as a customer service representative, a position requiring typing skills that would be offered at a salary far less than Hess was earning. Hess did not feel that he was qualified for either position and, in December of 1996, he indicated that he was not interested. Hess worked for Hoaster until December 31, 1996, and Gebhard assumed control on January 1, 1997. Gebhard provided Hess with a letter of recommendation.

In November of 1996, unbeknownst to Hoaster and Gebhard, Hess began employment negotiations with Bowman's Insurance Agency (Bowman's), a competing firm in Lebanon County. In early January of 1997, Hess and Bowman's were in final employment contract negotiations. On January 5, 1997, less than one week after leaving Hoaster, Hess used information that he had acquired while in Hoaster's employ and solicited the County of Lebanon, one of Hoaster's major clients, as a new client for Bowman's. Gebhard and Hoaster learned of this and sent Hess a letter, with a copy to Bowman's, reminding Hess of the covenant not to compete and threatening legal action if Hess refused to comply. As a result of the letter, Bowman's decided against hiring Hess. Shortly thereafter, Hess filed suit against Gebhard, who joined Hoaster as a party defendant.

Hess filed claims in law and equity in the Court of Common Pleas of Lebanon County (trial court), alleging intentional interference with prospective contractual relations; asking the court to enjoin Hoaster and Gebhard from contacting his prospective employers; asking the court to void the enforceability of the employment agreement; requesting that the court void the covenant not to compete; and seeking monetary damages for intentional interference with prospective contractual relations. At the first hearing, the trial court denied the intentional interference with contractual relations claim, based on the pleadings. Hess v. Gebhard & Co. and Eugene Hoaster & Co., No. 1997-01189 (C.P.Pa. May 18, 1998) (Trial Court I). It also held that the assignment of the covenant from Hoaster to Gebhard, even without an explicit assignability clause or permission from Hess, was enforceable. (Trial Court I.) At the second hearing, the trial court again held that the covenant not to compete was assignable and went on to address the reasonableness of the covenant. Hess v. Gebhard & Co. and Eugene Hoaster & Co., No. 1997-01189 (C.P.Pa. February 9, 1999) (Trial Court II). The trial court found the agreement unreasonable as to time and distance, limited the duration of the covenant from the inception of the covenant (January 1, 1997) to the date of the hearing (December 1, 1998), and forbade Hess from contacting then-existing insurance customers of Hoaster and Gebhard for an additional period of two years. (Trial Court II.) It also determined that Hess was free to work for a competing firm in the Lebanon geographical area. (Trial Court II.) At the final hearing, in August of 1999, the trial court declined to address the assignability of the covenant but reviewed the issue of damages. Hess v. Gebhard & Co. and Eugene Hoaster & Co., No.XXXX-XXXXX (C.P.Pa. December 29, 1999) (Trial Court III). The court issued its final appealable Order and found that Hess was not entitled to damages. (Trial Court III.)

The Superior Court affirmed, holding that the assigned covenant was enforceable because Hoaster retained a continuing interest in Hess' competitive employment, even after the sale of its business. The Superior Court distinguished the present matter from its decision in All-Pak, Inc. v. Johnston, 694 A.2d 347 (Pa.Super.1997), on this basis and that, in the present case and unlike All-Pak, Hoaster had a continuing interest in the business. The Superior Court explained:

The lower court held that the assignment of the insurance portion of the business did not destroy the covenant not to compete because Hoaster continued to be involved in the business. Charles Brooks, the owner of Hoaster, testified that he continued to be involved in the insurance portion now owned by Gebhard. Hoaster continued to receive compensation from Gebhard on the proceeds from Hoaster's client base sold to Gebhard. Hess, after he gained new employment with Bowman's Insurance Agency, contacted a client of Gebhard who was formerly a client of Hoaster and attempted to procure the client's business. Because Gebhard's client was a former client of Hoaster, Hoaster would lose compensation from Gebhard if the client went with Bowman's Insurance Agency. Therefore, we find that, unlike the original employer in All-Pak, Inc., Hoaster, who was the original employer in the present covenant, had a continuing interest via Gebhard in enforcing the covenant, not to compete.

Hess v. Gebhard & Co., 769 A.2d 1186, 1191 (Pa.Super.), petition for allowance of appeal granted, 566 Pa. 683, 784 A.2d 118 (2001). Thus, the Superior Court determined that, because the sales price was keyed to the performance of the business, Hess was bound by the covenant not to compete to protect the interests of Hoaster in the continuing profitability of the assets purchased by Gebhard. Judge Ford Elliot dissented, stating that she was unable to distinguish the present matter from the Superior Court decision in All-Pak.

DISCUSSION

Restrictive covenants, of which non-disclosure and non-competition covenants are the most frequently utilized, are commonly relied upon by employers to shield their protectible business interests. The non-disclosure covenant limits the dissemination of proprietary information by a former employee, while the non-competition covenant precludes the former employee from competing with his prior employer for a specified period of time and within a precise geographic area. In...