Alders v. AFA Corporation of Florida, Civ. No. 72-933.

Decision Date22 January 1973
Docket NumberCiv. No. 72-933.
PartiesFrederick A. ALDERS, Plaintiff, v. AFA CORPORATION OF FLORIDA, Defendant.
CourtU.S. District Court — Southern District of Florida

Edward C. Vining, Jr., and R. M. MacArthur, Miami, Fla., for plaintiff.

William B. Killian, Miami, Fla., for defendant.

MEMORANDUM OPINION

ATKINS, District Judge.

This cause came before the Court for a non-jury trial upon Plaintiff's complaint and Defendant's counterclaim, both seeking a determination as to the validity, under the Sherman Antitrust Act, of a covenant not to compete in an employment agreement entered into between the Defendant and the Plaintiff. Plaintiff seeks a declaratory judgment that the provision is invalid and unenforceable and an injunction against its enforcement. The counterclaimant prays that the Plaintiff be enjoined from violating the covenant not to compete. Both parties have abandoned their damage claims. The Court has carefully considered the evidence adduced and the memoranda submitted.

Jurisdiction of the cause is based upon 28 U.S.C. §§ 1331 and 1337. The relief sought is authorized by 28 U.S.C. § 2201. A genuine dispute exists as to the rights and obligations of the parties under the covenant not to compete.

The Defendant, AFA Corporation of Florida, is a corporation engaged in the manufacture and distribution of liquid spray devices, particularly its trigger sprayers and other manually operated spray devices, and electric foggers. Plaintiff Frederick A. Alders and his father, now deceased, were the sole owners of AFA. During his father's illness, the Plaintiff became president of AFA.

Beginning in 1963, AFA's performance attracted overtures from acquisition-minded companies. The ensuing negotiations are detailed in the amendment to the Pretrial Stipulation. They culminated in the purchase of AFA by Thiokol Chemical Corporation, evidenced by the March 30, 1967, stock purchase agreement. In the stock-for-stock transaction, Plaintiff surrendered his five shares of AFA and the fifteen shares held by his father's estate (with Plaintiff as the executor and sole beneficiary of the estate) in exchange for approximately one hundred fifty thousand (150,000) shares of Thiokol stock.

AFA was sold as a going business. The price was fixed at ten times AFA's earnings. The amount of Thiokol stock to be acquired by Plaintiff was determined by reference to the value of Thiokol stock over a given thirty day trading period. Thiokol paid AFA's "asking price" and, in effect, paid Plaintiff Thiokol stock worth over $2.8 million for the ongoing business of AFA.

On the same day the sale of AFA was consummated, Plaintiff and Defendant entered into the employment agreement (Plaintiff Exhibit 1) which is the subject of this litigation. AFA agreed therein to employ the Plaintiff as its president for a period of five years at an annual salary of $50,000, plus fringe benefits and bonuses. Paragraph 8, the no-compete provision, reads as follows:

ALDERS will not, during the five (5) year period following termination or expiration of this Agreement, act as an officer, director, employee, agent, sole proprietor, partner, or consultant of, or otherwise participate in, any enterprise or organization in the United States, its territories and possessions, Mexico, or Canada, which is engaged, or is actively preparing to engage, in the business of manufacturing and selling liquid spray devices or other products which AFA, or any subsidiary thereof was manufacturing or selling during or prior to ALDERS' employment with AFA or any subsidiary thereof or any other business competitive with that of AFA or any subsidiary thereof where the activities of ALDERS with such enterprise or organization during such period would include services in such field.

The continued employment of Alders as President of AFA was an important part of the Thiokol purchase. Thiokol was interested in retaining the AFA management team. Three other key AFA employees were induced to stay on, although their employment agreements also contained no-compete clauses.

Plaintiff testified that he was unaware of the covenant until the signing of the employment agreement at the closing in New York. Despite his surprise, he signed the agreement and abided by its terms. At the expiration of the five year period. on March 29, 1972, Plaintiff resigned. On June 15, 1972, this suit was instituted.

The defense that the Plaintiff is in pari delicto with the Defendant concerning any antitrust violations in the covenant not to compete must be rejected. This defense is disfavored in private antitrust actions. Perma Life Mufflers, Inc. v. International Parts Corp., 392 U.S. 134, 88 S.Ct. 1981, 20 L.Ed. 982 (1968). It is inapplicable here, where the Plaintiff had no role in the drafting of the challenged covenant. Accord, Blake, Employee Agreements Not to Compete, 73 Harv.L.Rev. 625, 628, n.8 (1960).

It is clear from the context of the negotiations that the restraint on the Plaintiff must be judged as an ancillary restraint—ancillary to the sale of AFA. Thiokol sought to acquire the business known as AFA Corporation of Florida. To help it realize the full potential of that business, it retained the services of several AFA employees. The no-compete clause was routinely included in the employment agreements. Raymond Weise, a Thiokol executive who negotiated with the Plaintiff, testified that the Defendant always included a similar covenant in employment agreements entered into as part of an acquisition.

The Plaintiff argues that, because the covenant not to compete on its face restrains him from competing with AFA, it is a contract in restraint of trade, and constitutes a per se violation of the Sherman Act, Section 1. This argument is totally without merit. Ever since the decision in United States v. Addyston Pipe & Steel Co., 85 F. 271 (6th Cir. 1898), modified, 175 U.S. 211, 20 S.Ct. 96, 44 L.Ed. 136 (1899), it has been recognized that the validity of covenants not to compete turns upon the reasonableness of the restraint in each case. See, e. g., Snap-On Tools Corporation v. F. T. C., 321 F.2d 825, 837 (7th Cir. 1963); Graham v. Hudgins, Thompson, Ball and Associates, Inc., 319 F.Supp. 1335, 1337 (N.D.Okl.1970). By adopting this reasonableness test, the court in Addyston Pipe anticipated the subsequent adoption of the rule of reason for most non-ancillary as well as ancillary restraints in Standard Oil Co. v. United States, 221 U.S. 1, 31 S.Ct. 502, 55 L.Ed. 619 (1911).

Judge Taft stated at length the justification for what he termed "covenants in partial restraint of trade":

After a time it became apparent to the people and the courts that it was in the interest of trade that certain covenants in restraint of trade should be enforced. It was of importance, as an incentive to industry and honest dealing in trade, that, after a man had built up a business with an extensive good will, he should be able to sell his business and good will to the best advantage, and he could not do so unless he could bind himself by an enforceable contract not to engage in the same business in such a way as to prevent injury to that which he was about to sell.

United States v. Addyston Pipe & Steel Co., supra, at 280.

Another commentator more recently described the justification for covenants not to compete as follows:

A transfer of good will cannot be effectively accomplished without an enforceable agreement by the transferor not to act so as unreasonably to diminish the value of that which he is selling.

Blake, Employee Agreements Not to Compete, 73 Harv.L.Rev. 625, 646 (1960).

Judge Taft opted, in formulating a test by which the reasonableness and validity of such a restraint could be judged, to follow the common law. A covenant not to compete was therefore to be held valid only to the extent that it was necessary to protect the purchaser in his enjoyment of the fruits of his purchase.1 As the law has developed, this means that the covenant must be no broader than necessary as to time, territory, and product line.2

The facts bearing upon the reasonableness of the covenant in this case can be stated briefly. Plaintiff is, in essence, restricted from competing with AFA for five years in the United States, its possessions, Mexico, and Canada. This restriction applies, as the Court and the Defendant interpret it, to products manufactured or sold by AFA prior to or during Plaintiff's employment with it and products in competition with those of AFA at that time.

Woefully little evidence was presented as to the territorial scope of AFA's operations. AFA sold its products through a system of distributor accounts and house accounts. The latter, serviced directly by the Defendant, accounted for 50 to 55 percent of AFA's sales. Distributors serviced the United States and Canada, as of 1967, from 65 to 80 major cities. AFA now has ten to fifteen additional distributors. AFA also served house accounts in the United States and Mexico. Distributors sold AFA products in France, Germany, England, Italy (Plaintiff described it as "all non-Communist" European countries), Japan, Australia, the Far East, and South America (Brazil, Argentina, and Columbia). Thus, there are vast areas not covered by the non-competition covenant in which Plaintiff admittedly could compete directly with AFA.

Although AFA no longer has Mexican house accounts, its gross sales have increased from $3 million in 1966 to approximately $6 million in 1972. Despite this impressive growth, however, the Defendant's share of the tremendous consumer market for liquid spray devices is characterized as minimal. There are an increasing number of competitors in the field.

Mr. Alders, of course, has an unparalleled familiarity with AFA's operations. As vice-president and president, he directed AFA's marketing effort, specializing in sales and advertising. He knows the company's products and customers. Under all ...

To continue reading

Request your trial
18 cases
  • Lektro-Vend Corp. v. Vendo Co.
    • United States
    • U.S. Court of Appeals — Seventh Circuit
    • 25 Enero 1982
    ...with respect to a product reasonably related to the legitimate purpose of the restraint. See, e. g., Alders v. AFA Corp. of Florida, 353 F.Supp. 654, 658 (S.D.Fla.1973), aff'd without opinion, 490 F.2d 990 (5th Cir. 1974); Blake, Employee Agreements Not to Compete, 73 Harv.L.Rev. 625, 674 (......
  • Cesnik v. Chrysler Corp., 77-3313.
    • United States
    • U.S. District Court — Middle District of Tennessee
    • 6 Mayo 1980
    ...States v. Addyston Pipe & Steel, 85 F. 271 (6th Cir. 1898), mod'd, 175 U.S. 211, 20 S.Ct. 96, 44 L.Ed. 136 (1899); Alders v. AFA Corp., 353 F.Supp. 654 (S.D.Fla.1973), aff'd, 490 F.2d 990 (5th Cir. 1974). "The question in every case involving a covenant not to compete ancillary to the sale ......
  • Frackowiak v. Farmers Ins. Co., Inc.
    • United States
    • U.S. District Court — District of Kansas
    • 13 Abril 1976
    ...reasonable in duration and geographical limitation. E. g., Day Companies v. Patat, 403 F.2d 792 (5th Cir. 1968); Alders v. AFA Corp. of Florida, 353 F.Supp. 654 (S.D.Fla.1973); Bradford v. New York Times Co., 501 F.2d 51 (2nd Cir. 1974). The Second Circuit Court of Appeals in Bradford, note......
  • Ellis v. James V. Hurson Associates
    • United States
    • D.C. Court of Appeals
    • 25 Octubre 1989
    ...Annotation, Enforceability of Contract not to Compete, 61 A.L.R. 3d 397 (1975) (discussing cases). 5. See, e.g., Alders v. AFA Corp. of Florida, 353 F.Supp. 654 (S.D.Fla.), aff'd, 490 F.2d 990 (5th Cir. 1974); Burroughs Corp. v. Cimakasky, 346 F.Supp. 1398 (E.D.Pa. 1972); Lassen v. Benton, ......
  • Request a trial to view additional results

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT