Allright Auto Parks, Inc. v. Berry

• Court: Tennessee Supreme Court
• Writing for the Court: BURNETT
• Citation: Allright Auto Parks, Inc. v. Berry, 219 Tenn. 280, 409 S.W.2d 361, 23 McCanless 280 (Tenn. 1966)
• Decision Date: 14 November 1966
• Parties: , 219 Tenn. 280 ALLRIGHT AUTO PARKS, INC., et al. v. James C. BERRY.

Page 361

409 S.W.2d 361

23 McCanless 280, 219 Tenn. 280

ALLRIGHT AUTO PARKS, INC., et al. v. James C. BERRY.

Supreme Court of Tennessee.

Nov. 14, 1966.

Vincent W. Vorder Bruegge, Memphis, for appellants.

W. A. Wilkerson, Chattanooga, for appellee.

OPINION

BURNETT, Chief Justice.

This case concerns an appeal from an order of the trial court sustaining the demurrer of the appellee and dismissing part of the amended bill of the appellants.

The parties will hereinafter be referred to as they appeared in the trial court; that is, Allright Auto Parks, Inc., as the complainant, and James C. Berry as the defendant.

The germane facts out of which this controversy arose are, as follows:

During 1962 numerous parking firms, located throughout seventeen states of the United States and in the City of Vancouver, British Columbia, Canada, were amalgamated and Allright Auto Parks, Inc., a Delaware corporation, thereby became the parent corporation of all of said firms. Prior to the amalgamation these independent parking firms consisted of sole proprietorships, partnerships, and corporations; but, as an incident to the merger, each firm was incorporated.

Included within the constituent subsidiary firms were two Tennessee corporations, Allright Chattanooga, Inc. and Allright Tennessee, Inc., both of which were partially owned by their president, the defendant, James C. Berry. In addition the defendant was president and stockholder of Allright Augusta, Inc., and Allright South Carolina, Inc., both corporations which operated parking facilities in Augusta, Georgia, and Columbia, South Carolina. Three of these corporations were partnerships prior to the amalgamation process.

Pursuant to the Plan and Agreement of Amalgamation, the defendant, James C. Berry, transferred to Allright Auto Parks, Inc., his shares of stock in the four corporations hereinabove mentioned, and, in exchange, received four thousand shares of stock in the parent corporation, Allright Auto Parks, Inc.

Also in conjunction with the Plan and Agreement of Amalgamation, all of the managers and executives of the previously independent parking firms were required to execute a standard form of Management Contract. Among other things, said contracts contained the following restrictive covenant:

'Manager agrees that during the period this contract is in effect and for a period of five (5) years after the date of termination or expiration, he will not engage, either directly or indirectly, in the business of parking automobiles in the subject city or in any other city in which he shall participate during his employment in the parking business as part owner, director or manager of Employer, its subsidiaries, affilliates or licensees, or in any city in which the parent corporation of Employer is engaged in the parking business.'

The defendant, James C. Berry, voluntarily executed the standard Management Contract.

Upon the amalgamation, the date of which occurred subsequent to the drafting of the Management Contract, the defendant was elected vice-president of the complainant parent corporation, Allright Auto Parks, Inc. In this capacity and as a member of the Audit Committee, he actively served the complainant corporation until his resignation in November, 1965.

The record reflects that shortly before and since his resignation from the complainant corporation, the defendant has engaged in competition with the complainant, notwithstanding the interdiction of such competition contained in the Management Contract executed by defendant on July 1, 1966.

On February 22, 1966, complainant initiated this suit by filing a bill in the Chancery Court of Hamilton County, Tennessee, to recover damages for violation of the contract and to enjoin the defendant from further competition.

To this bill the defendant interposed a demurrer which, in essence, assailed the noncompetition agreements as being unreasonable as to time and area incompassed, unduly harsh and oppressive to the defendant and beyond any reasonable necessity to protect the legitimate interest of the complainant, and therefore invalid and unenforceable.

Being in agreement with the defendant's contention, the Chancellor sustained the demurrer and it is the propriety of his decision which is now under scrutiny by this Court.

The validity and enforceability of covenants not to compete is not a question of first impression in this jurisdiction. On many occasions the courts of this state have endeavored to outline the rules governing such restrictive covenants. See, e.g., Turner v. Abbott, 116 Tenn. 718, 94 S.W. 64, 6 L.R.A., N.S., 892; Matthews v. Barnes, 155 Tenn. 110, 293 S.W. 993, 52 A.L.R. 1350; Di-Deeland, Inc. v. Colvin, 208 Tenn. 551, 347 S.W.2d 483; Arkansas Dailies, Inc. v. Dan, 36 Tenn.App. 663, 260 S.W.2d 200; Federated Mutual Implement and Hardware Ins. Co. v. Anderson, 49 Tenn.App. 124, 351 S.W.2d 411; Greene County Tire and Supply, Inc. v. Spurlin, 207 Tenn. 189, 338 S.W.2d 597.

Agreements in restraint of trade, such as covenants restricting competition, are not invalid per se. Although disfavored by law, such agreements are valid and will be enforced, provided they are deemed reasonable under the particular circumstances. See, Greene County Tire and Supply, Inc. v. Spurlin, supra; Di-Deeland, Inc. v. Colvin, supra; Matthews v. Barnes, supra, Restatement of the Law, Contracts, § 514, p. 987.

There is no inflexible formula for deciding the ubiquitous question of reasonableness, insofar as noncompetitive covenants are concerned. Each case must stand or fall on its own facts. However, there are certain elements which should always be considered in ascertaining the reasonableness of such agreements. Among these are: the consideration supporting the agreements; the threatened danger to the employer in the absence of such an agreement; the economic hardship imposed on the employee by such a covenant; and whether or not such a covenant should be inimical to public interest. See 17 C.J.S. Contracts § 247, p. 1124; Williston on Contracts, Vol. 5, § 1636, pp. 4581--4; Welcome Wagon, Inc. v. Morris, 224 F.2d 693 (C.C.A., Fourth Circuit)

It is generally agreed that, before a noncompetitive covenant will be upheld as reasonable and therefore enforceable, the time and territorial limits involved must be no greater than is necessary to protect the business interests of the employer. See, e.g., Matthews v. Barnes, supra; Arkansas Dailies, Inc. v. Dan, supra; Federated Mut. Imp. and Hwe. Ins. Co. v. Anderson, supra; 17 C.J.S. Contracts §§ 238--258, pp. 1106--1158.

That is the rule adopted and succinctly stated in the Restatement of the Law, Contracts, § 515, p. 988:

'A restraint of trade is unreasonable, in the absence of statutory authorization or dominant social or economic justification, if it:

'(a) is greater than is required for the protection of the person for whose benefit the restraint is imposed,'

Based upon the foregoing, the ultimate question presented in the case sub judice appears to be whether or not the time and territorial limits of the noncompetition agreement are greater than is required to protect the business interest of the complainant.

As heretofore stated, the agreement prohibits the defendant from competing for a period of five years in any city in which the complainant operates. We are of the opinion that the agreement is unreasonable since the area...