Dawson v. Temps Plus, Inc.

• Decision Date: 15 April 1999
• Docket Number: No. 98-866,98-866
• Citation: 337 Ark. 247,987 S.W.2d 722
• Parties: Donald Ray DAWSON, Appellant, v. TEMPS PLUS, INC., Appellee, Temps Plus, Inc., Cross-Appellant, v. Donald Ray Dawson, Steve Dawson, Linda Ramsey, Melissa Trout, and Steve Dawson Employment Service, Inc., Cross-Appellees.
• Court: Arkansas Supreme Court

Page 722

987 S.W.2d 722

337 Ark. 247

Donald Ray DAWSON, Appellant, v. TEMPS PLUS, INC., Appellee, Temps Plus, Inc., Cross-Appellant, v. Donald Ray Dawson, Steve Dawson, Linda Ramsey, Melissa

Trout, and Steve Dawson Employment Service, Inc.,

Cross-Appellees.

No. 98-866.

Supreme Court of Arkansas.

April 15, 1999.

Dan M. Burge, Blyetheville, AR, for appellant.

Daniel G. Ritchey, Blytheville, AR, for appellee.

ROBERT L. BROWN, Justice.

Appellant Donald Ray Dawson appeals a judgment against him in the amount of $62,228.97 for breach of a covenant not to compete entered into with appellee Temps Plus, Inc., as well as intentional interference with contractual relationships and civil conspiracy. He contends on appeal that the covenant not to compete is invalid and not enforceable. Moreover, he contends that even if the covenant is valid, there was no breach and, alternatively, that no damages flowed from the breach. He further appeals from an award of attorney's fees in the amount of $20,270.00 and claims that the award is excessive. We agree with the trial court that the covenant not to compete was valid and enforceable and that it was breached by Donald Ray Dawson. But we disagree with the trial court that Temps Plus proved any damages flowing from that breach. We further hold that the award of attorney's fees is excessive, and we remand for reconsideration of that award in light of this opinion. Finally, we affirm the trial court's decision to deny Temps Plus's request to extend the injunction for breach of the non-compete agreement to the cross-appellees.

In 1994, Peggy Lemons was a former temporary employment agency employee living in Blytheville who wanted to start her own temporary-employment business. Because she did not have sufficient capital to do so, she invited appellant Donald Ray Dawson to invest in her business, Temps Plus, Inc., and he agreed. He purchased 49% of the issued stock for Temps Plus for $4,900 and loaned Lemons $35,100 on an unsecured promissory note, for a total investment of $40,000. Lemons purchased 51% of the stock of Temps Plus. The company was officially incorporated in June of 1994, and Lemons, as the incorporator, president, and general manager, began operating the business. Dawson was not involved in the day-to-day business operations although he was a member of the board of directors. He was never paid dividends, salary, or bonuses of any sort. The business was successful, and Lemons made plans to expand Temps Plus into South Carolina. Dawson did not approve of the out-of-state expansion, and he began negotiations with Lemons to sell his interest in the corporation.

In May of 1996, Temps Plus paid Dawson $95,000 for his forty-nine shares of stock in the corporation. The buyout sum included the balance due on the $35,100 promissory note and the $4,900 purchase price for the stock. As part of the stock sale, Dawson signed a receipt that included this language: "As part of the payment received by Donald Ray Dawson, and as additional consideration of this Agreement, Donald Ray Dawson agrees, that for a period of five (5) years from the execution of this Agreement, he will not directly or indirectly, whether as an owner, partner or employee, compete with Temps Plus, Inc., within a radius of seventy (70) miles from Blytheville, Arkansas." Dawson testified at trial that he did not remember reading the covenant when he signed the sale documents. Blytheville had at least four other temporary employment agencies at the time.

In March of 1997, Donald Ray Dawson started his own temporary employment business in Blytheville. On March 30, 1997, he hired two of Temps Plus's employees, Linda Ramsey and Melissa Trout, and began operation of Dawson Employment Agency. His temporary office was located at the local Holiday Inn. Over the next three days, Ramsey and Trout called potential temporary employees and contacted local companies that did business with Temps Plus to ask for their business. On April 2, 1997, Donald Ray Dawson received a certified letter from Lemons's attorney demanding that he cease operating a temporary employment agency in violation of the covenant not to compete. After consulting with his attorney, he immediately ceased doing business.

Two weeks later, Steve Dawson, appellant's brother, formed a corporation, Steve Dawson Employment Services, Inc. (hereinafter SDES), and went into the temporary employment business. He hired both Ramsey and Trout, paid for a computer program that his brother had ordered, and later rented office space in a building that his brother had built for his new business.

On April 23, 1997, Temps Plus sued Donald Ray Dawson, Steve Dawson, Linda Ramsey, Melissa Trout, and SDES for breach of contract, intentional interference with contractual relationships and business expectancies, theft of trade secrets, breach of the duty of loyalty, and civil conspiracy. Temps Plus sought a preliminary and permanent injunction prohibiting Donald Ray Dawson, SDES or any other company "through which Donald Ray Dawson is associated and through which Donald Ray Dawson attempts to circumvent the Non-Competition Agreement" from competing with Temps Plus within a seventy-mile radius of Blytheville. It further requested an injunction against Ramsey and Trout from disclosing information detrimental to Temps Plus and sought damages and attorney's fees.

The various defendants filed counterclaims and motions to dismiss, and the case proceeded to trial. After six days of trial, the trial court upheld the covenant not to compete. The trial court pointed out that Donald Ray Dawson is the owner of several businesses, including a successful welding company that employs up to eighty-five people and was a customer of Temps Plus. The court determined that it was not unreasonable for Temps Plus to require a covenant not to compete in connection with the purchase of Dawson's stock, since Lemons and Dawson had been in business together for almost two years. The trial court reasoned that the agreement would reassure Temps Plus that Dawson would not go into a competing business in the area. The court also found that the agreement was reasonable as to time and scope and was entered into for a legitimate purpose.

The court permanently enjoined Donald Ray Dawson from further violations of the covenant not to compete and also enjoined him from providing financial assistance, business advice, advertising, promotion of services, or any other assistance to SDES. In addition to the breach of the covenant not to compete, the trial court found against Donald Ray Dawson on the counts alleging intentional interference with contractual relationships and business expectancies and civil conspiracy. The court further found for Temps Plus and against Linda Ramsey on the counts of breach of loyalty and civil conspiracy. It awarded Temps Plus $62,228.97 against Donald Ray Dawson for lost business. In a separate order, it awarded attorney's fees to Temps Plus totaling $20,270.00.

I. Covenant Not To Compete

Donald Ray Dawson first claims that the non-compete covenant is unenforceable because no consideration was exchanged for the covenant. He also maintains that these facts are not those of a typical non-compete controversy where a business has been sold with ancillary goodwill or when an employee has left. Thus, he contends that the agreement was not necessary to protect Lemons's business and goodwill. He also takes issue with the covenant's time constraint of five years and its geographic scope which encompasses an area defined by a seventy-mile radius extending around Blytheville.

We review chancery cases de novo and do not reverse a finding of fact by the chancery court unless it is clearly erroneous. See, e.g., Office of Child Support Enforcement v. Eagle, 336 Ark. 51, 983 S.W.2d 429 (1999); Clifford Family Ltd. Liability Co. v. Cox, 334 Ark. 64, 971 S.W.2d 769 (1998).

Without statutory authorization or some dominant policy justification, a contract in restraint of trade is unreasonable if it is based on a promise to refrain from competition that is not ancillary to a contract of employment or to a contract for the transfer of goodwill or other property. See Marshall v. Irby, 203 Ark. 795, 158 S.W.2d 693 (1942). However, the law will not protect parties against ordinary competition. See Orkin Extermination Co. v. Weaver, 257 Ark. 926, 521 S.W.2d 69 (1975). Covenants not to compete in employment contracts are subject to stricter scrutiny than those connected with a sale of a business. See Hyde v. C M Vending Co., 288 Ark. 218, 703 S.W.2d 862 (1986). The burden is on the party challenging the validity of a covenant to show that it is unreasonable and contrary to public policy. See Madison Bank and Trust v. First Nat'l Bank, 276 Ark. 405, 635 S.W.2d 268 (1982). We review cases involving covenants not to compete on a case-by-case basis. See Evans Laboratories, Inc. v. Melder, 262 Ark. 868, 562 S.W.2d 62 (1978).

Public policy favors competition and will not allow someone to buy off potential rivals and foreclose their competition in order to control a market where a promisee already participates in the business and a promisor does not. See John R. Pagan, Arkansas Courts and Covenants not to Compete, 12 U. ARK. LITTLE ROCK L.J. 57, 61 (1989-90). In this regard, the court of appeals has emphasized that a covenant not to compete will not be enforced unless a covenantee has a legitimate interest to be protected by the agreement. See Duffner v. Alberty, 19 Ark.App. 137, 718 S.W.2d 111 (1986). The test is whether the restraint imposed is greater than is reasonably necessary to protect the covenantee and whether it injures the public interest. See id.

In the case at bar, the trial court found that even though Temps Plus was not Donald Ray Dawson's primary business, he had invested $40,000 in the agency and was associated with its operation. As an example, he used his business contacts in...