Alston Studios, Inc. v. Lloyd V. Gress & Associates

• Decision Date: 28 February 1974
• Docket Number: No. 73-1152.,73-1152.
• Citation: 492 F.2d 279
• Parties: ALSTON STUDIOS, INC., Appellant, v. LLOYD V. GRESS & ASSOCIATES et al., Appellees.
• Court: U.S. Court of Appeals — Fourth Circuit

492 F.2d 279 (1974)

ALSTON STUDIOS, INC., Appellant, v. LLOYD V. GRESS & ASSOCIATES et al., Appellees.

No. 73-1152.

United States Court of Appeals, Fourth Circuit.

Argued November 7, 1973.

Decided February 28, 1974.

Robert F. Brooks, Richmond, Va. (Lathan M. Ewers, Jr., Hunton, Williams, Gay & Gibson, Richmond, Va., Arnold D. Abelson, Abelson, Bromberg & Katz, New York City, on brief) for appellant.

Leonard A. Orman, Baltimore, Md. (John J. Dilli, Jr., Orman & Dilli, Baltimore, Md., and Albert H. Grenadier, Alexandria, Va., on brief) for appellees.

Before HAYNSWORTH, Chief Judge, and BUTZNER and WIDENER, Circuit Judges.

WIDENER, Circuit Judge:

This is an appeal from an action involving the termination of a written contract of employment and the effect of that termination upon non-competition and severance compensation provisions of the contract. The suit was instigated by Alston Studios, Inc. (Alston) against Lloyd V. Gress & Associates and Lloyd V. Gress (Gress) seeking enforcement of a covenant not to compete and damages for its breach. Gress filed a counterclaim alleging that the noncompetition provision was unenforceable as a matter of law and that he was entitled to severance compensation whether or not he terminated the contract and whether or not he competed with Alston. Although both parties maintained that the other had terminated the contract, Alston asserted that the non-competition provision was valid in either event, and that, since it provided the consideration for severance compensation, Gress had forfeited any right to post-termination pay by competing with Alston.¹

The district court found the non-competition provision unenforceable, declined to enjoin Gress from competition, and awarded him $13,307.69, a part of which was for compensation due following termination of the contract. This appeal followed. Because the covenant not to compete lacks geographic limitations, and is excessively broad as to the activities prohibited to Gress after his termination, we agree with the district court that it is excessively broad and unenforceable. But, for reasons that follow, we hold that Gress may not recover compensation after April 23, 1971, the day his notice became effective.

Alston is a Massachusetts corporation, whose principal activity is the photography of school children during the school year. Photographs are taken and developed on a speculative basis and offered to the children in various sizes and packages. The schools whose students purchase the pictures receive a percentage of the purchase price as a commission. Alston carries on these activities through a number of regional agents, one of whom was Gress.

Gress first became associated with Alston in 1951 and worked there for two years. He then left Alston's employ for approximately five years and returned for the second time, in 1959. From that time, he worked continuously for Alston until the contract about which this dispute revolves was entered into in April 1966, and made retroactively effective to date from August 1, 1965.

The contract employed Gress "as District Sales Manager in the States of Virginia, Maryland and Washington, D.C.," for an annual salary of $12,000.00, plus a specified commission based on sales and various described fringe benefits and expenses. The term of the contract was for one year and "for such further time as the parties shall mutually agree upon subject to: Termination by either party after July 31, 1966, upon thirty (30) days' written notice. . . ." The effect of termination upon the parties' subsequent obligations and activities was also treated in the contract by the following provisions:

"2. Whereas in consideration of the mutual cancellation of the aforesaid agreement of employment, and in further consideration of compensation to be paid as stated in Paragraph 3 of this Agreement and in further consideration of this contract of employment from August 1, 1965, for such period as the parties shall continue said employment, the said Lloyd V. Gress agrees that upon termination of said employment as District Sales Manager, he will not continue in the school picture business, either directly or indirectly, for himself or any individual or company in said business for a period of two (2) years.

"3. * * * *

(b) It is agreed that on termination of this agreement by death or otherwise, the said Lloyd V. Gress is to receive compensation for the first two (2) years following termination as follows:

First year: Fifty (50) percent of compensation paid to him for the previous twelve (12) months employment including base salary and bonus paid to him for override of packages shipped in the area in which he was employed.

Second year: One half of the compensation paid to him for the first year after said termination."

Thereafter, on September 1, 1970, National Color Laboratories (NCL) acquired Alston as a wholly owned subsidiary. Within a short time, a series of meetings followed in Cleveland, attended by Gress, for the purpose of introducing to the sales force a plan known as the NCL profitability program. Fearing that the new program, if implemented, might yield results to his detriment, Gress submitted, on March 1, 1971, a letter of resignation effective one month from date of receipt. A period of negotiations ensued and drafts of different agreements were exchanged but never mutually executed. Gress reaffirmed the termination of his contract with Alston effective April 23, 1971, by telegram.

The same date on which Gress' termination of his relationship with Alston became effective, he signed an agreement with School Pictures, Inc., a competitor of Alston. Gress then began calling on Alston's customers whom he had previously served for his former employer. Alston brought suit on June 4, 1971, seeking to enjoin Gress from competing, and claiming damages for breach of contract. Gress answered and counterclaimed on June 24, 1971, asserting that the covenant not to compete was unenforceable as a matter of law, and that he was entitled to severance compensation in accordance with Paragraph 3 of the contract. The district court held in favor of Gress on both the complaint and counterclaim as before indicated.

In Paragraph 2 of their agreement, Gress agreed that upon termination of his employment with Alston as district sales manager he would "not continue in the school picture business, either directly or indirectly, for himself or any individual or company in said business for a period of two (2) years." Restrictive provisions of this general nature have been dealt with by Virginia courts in several cases.²

The two issues before us are: (1) Whether the non-competition clause was void or unenforceable; and (2) whether Gress may recover severance compensation despite his competing with Alston in violation of the terms of the contract.

In Meissel v. Finley, 198 Va. 577, 95 S.E.2d 186 (1956), the Virginia Supreme Court adopted three criteria to be used as a guide to decision by courts passing upon such contracts: (1) Is the restraint, from the standpoint of the employer, reasonable in the sense that it is no greater than is necessary to protect the employer in some legitimate business interest?; (2) From the standpoint of the employee, is the restraint reasonable in the sense that it is not unduly harsh and oppressive in curtailing his legitimate efforts to earn a livelihood?; (3) Is the restraint reasonable from the standpoint of a sound public policy?³ Citing Worrie v. Boze, 191 Va. 916, 62 S.E.2d 876 (1951), the Meissel court acknowledged that restrictive covenants which reasonably protect the employer's business may be enforceable in equity, if they are incident and ancillary to the contract of employment and limited as to area⁴ and duration.

In Virginia, the "employer has the burden of proving that the restraint is reasonable and the contract is valid. Since the restraint sought to be imposed restricts the employee in the exercise of a gainful occupation, it is a restraint in trade; as such it is carefully examined and strictly construed before the covenant will be enforced." Richardson v. Paxton Co., 203 Va. 790, 795, 127 S.E. 2d 113, 117 (1962).

One obvious difficulty with the restriction in the instant case is that it lacks geographic limitation. Another is that it is too broad in that it encompasses activities in which Gress was not engaged. Under the explicit terms of the agreement, Alston is free to prevent its former employee, Gress, from engaging in any aspect of "the school picture business, either directly or indirectly" throughout the fifty states, or, indeed, anywhere in the world. There is no language limiting the restriction to areas of possible competition, or zones of Gress' past representation, or areas in which Alston actually does business, or to activities in which Gress had been engaged. Viewed in this light, the provision appears far broader than necessary to protect Alston's legitimate business interests. Indeed, it imposes an unduly harsh burden upon Gress by curtailing his legitimate efforts to earn a living. Accordingly, because of its limitless geographic application, and too-broad en-compassment of activities in which Gress was not engaged, we hold the provision unenforceable and void.⁵

A non-competition clause unlimited both as to the activities of future employment and as to geography has never been considered by the Virginia Supreme Court.

Welcome Wagon did consider such a covenant unlimited as to future activities and geographically limited only by those parts of "the United States or Canada" in which the employer had been in business or had signified his intention to be in business. The court there held "that the restrictive covenant, taken in its entirety, is void," and further went on to say that, even had the court not held the covenant void ". . . we think this covenant here might fairly be characterized as harsh and oppressive." A similar covenant binding an...