Amex Distributing Co., Inc. v. Mascari
Decision Date | 03 July 1986 |
Docket Number | No. 1,CA-CIV,1 |
Citation | 724 P.2d 596,150 Ariz. 510 |
Parties | , 1986-1 Trade Cases P 67,178 AMEX DISTRIBUTING CO., INC., an Arizona corporation, Plaintiff-Appellant, Cross-Appellee, v. Frank MASCARI and Jane Doe Mascari, Defendants-Appellees, Cross-Appellants. 8401. |
Court | Arizona Court of Appeals |
The plaintiff-appellant in this litigation seeks to enforce a former employee's covenant not to use employment-derived customer information, a covenant not to compete, and a provision specifying liquidated damages for breach. One of our tasks is to apply principles expressed by our supreme court in Olliver/Pilcher Insurance, Inc. v. Daniels, 148 Ariz. 530, 715 P.2d 1218 (1986).
The plaintiff-appellant corporation, Amex Distributing Co. Inc. (Amex), is in the produce brokerage business. At the time of hearing in July 1984, its principal shareholder, Charles Ciruli, had been a produce broker for twenty years.
In late 1975 or early 1976, the defendant-appellee, Frank Mascari, had finished high school and was working in the produce department of a Los Angeles supermarket. Ciruli had known Mascari's father for 15 to 18 years. He offered Mascari a job with Amex. Mascari, then 19, started as a "bird-dog," or produce inspector, working under produce broker Joe James in appellant's offices in Nogales, Fresno and Chula Vista.
In 1977, Joe James quit Amex and took with him two important Michigan accounts. In the confusion which followed Mascari necessarily assumed larger responsibilities. In the next year or so one of Amex's important East Coast customers decided to go into the lettuce business. Although Amex had never previously brokered lettuce on a large scale, Ciruli decided to set up such operations in Yuma and Salinas. He groomed Mascari to manage these. Ciruli hired an experienced broker, Austin Rinella, to introduce Mascari to lettuce shippers and to some customers.
As described by the evidence, the produce brokerage business is a highly competitive economic arena in which each new day brings fresh opportunity and challenge for a broker to put together transactions for shippers and buyers. There are no exclusive dealing arrangements, and on any given day a buyer may be working through more than one broker for a supply of a single commodity. There is an industry "Blue Book," listing both brokers and buyers. Ciruli's testimony is generally to the effect that Amex owed its success in the business to an in-depth knowledge of its customers' needs and predilictions and an assiduous pursuit of serving those needs by frequent contacts. There was also evidence that any interested and energetic broker could visit a buyer and thereby learn its individualized needs and buying habits.
In early 1979, Ciruli presented to Mascari an "Employment Agreement" for signature. While the agreement contained a number of provisions subject to specification on a to-be-determined basis, it referred to the possibility of Mascari being the general manager of a possible new "specifically designated" operation and further provided that in respect to such operation Mascari would be compensated at the rate of 20% of the profits for the first year, 35% for the second year, and 50% for the third year. After the third year, the agreement gave Mascari the option to have the operation be a partnership with Amex with a 50/50 division of the profits and obligations.
Though advised by Ciruli to see a lawyer about the agreement, Mascari did not. There was a close relationship between the two, which was described by both in familial or near-familial terms. Mascari was 22 years old when he signed the agreement in February 1979.
The critical substantive provisions in this litigation are paragraphs 6 and 10 of the employment agreement. Paragraph 6 reads as follows:
Confidential Information:
Employee acknowledges that by reason of this position and employment with Employer that Employee will be entrusted with information relating to the customers of the Employer, as well as to Employer's means and methods of handling and servicing the business and affairs of said customers. Employee agrees with Employer that at all times during this employment with Employer, and at all times after termination of employment with Employer, if such termination occurs, that Employee shall, consistent with duties to Employer's customers, and duties to the Employer, keep and maintain this information confidential and shall not utilize any of said information to compete against the Employer, either directly or indirectly.
The heading and introductory clause of paragraph 10 and subparagraph 10a are as follows:
Agreement not to Compete or to do Business for or With Employer's Customers; Injunction; Damages:
In the event that the employment of the Employee by the Employer is terminated at some future time, then, and in such event, regardless of whether the Employee or the Employer initiated or caused such termination, and regardless of the reasons, grounds, or cause for such termination, Employee then expressly contracts and agrees with the Employer that:
a. Employee will not, for a period of 36 months after said date of termination, compete with Employer in any way, either directly or indirectly, or with or through any other person, corporation, firm or other legal entity, nor do business with or for any customer of the Employer, which the Employer had as a customer as of the date of termination, or, had as a customer during the 36 months prior to the said date of termination.
In other portions of paragraph 10, subparagraph 10b provides Amex with the remedy of injunction and/or liquidated damages at the rate of 75% of Mascari's billings of Amex customers during the first year, 60% the second year, and 50% the third year. It further provides for the payment of attorney's fees to Amex in the event of breach. Subparagraph 10(2)d is an acknowledgment by Mascari of the reasonableness of all of the terms of the contract and is set forth in the margin. 1
Mascari ran the new Amex lettuce operation, and it prospered. In 1984 Ciruli learned that Mascari had helped set up a relationship between a shipper and a competitor. He terminated Mascari. 2 Mascari set up a brokerage business in Winterhaven, California, and sooner or later called or in any event transacted business with a number of the customers he had been dealing with for Amex. At the time of hearing all of his customer-clients had been Amex customers. One of his major customer-buyers was his father.
There is no evidence in this case that Mascari took or copied any Amex customer list. While there is a full Amex customer list in evidence (Exhibit 4), it was prepared for purposes of litigation. Amex also submitted a list of certain key customers in Exhibit 16 in connection with a request that Mascari be specifically barred from doing business with those, if not others.
Amex sought injunctive relief and damages under paragraphs 6 and 10 of the employment agreement. The trial court first denied injunctive relief and later granted Mascari's motion for summary judgment on the entire complaint. In its final dispositive minute entry, the trial court stated, in part:
The Court concludes as a matter of law based on the undisputed facts that Defendant acquired no trade secret or confidential information during his employment by Plaintiff. Further, that the non-compete provisions of the contract (paragraph 10a) are unreasonable in scope (no direct or indirect competition, no doing business with or for any customer of Plaintiff); they are unreasonable in duration (three years) and they are unreasonable in territory (none is specified, it is argued that the territory is the entire United States). The contract between the parties, insofar as it pertains to Counts I and II of the Complaint is therefore contrary to public policy and unenforceable.
Appellant contends on appeal that the trial court erred both in respect to its ruling on the prohibition in paragraph 6 against using customer information, and the noncompetition provisions of paragraph 10. In doing so, appellant focuses on a narrowed claimed right to relief in respect to the 57 customers which are the subject of exhibit 16, and also stresses in view of the passage of time its claim for damages pursuant to subparagraph 10b. In its pleadings and in Ciruli's testimony at the hearing, however, Amex sought relief according to the full terms of paragraphs 6 and 10.
From the Dyers' Case 3 in 1414 to Mitchel v. Reynolds 4 in 1711, judicial policy ran strongly against a bond or covenant not to compete. Mitchel v. Reynolds, a business transfer case, ushered in the common law "rule of reason" now generally applied in America with or without attendant judicially-tailored modification as practiced in some jurisdictions, or "blue-penciling"--eliminating grammatically severable unreasonable provisions--as practiced in others, including Arizona. The courts in these cases seek to accommodate (1) the right to work, (2) the right to contract, and (3) the public's right to competition. Valiulis, Covenants Not to Compete: Forms, Tactics and the Law, (John Wiley & Sons, 1985), p. ix; and see generally Blake, Employment Agreements Not to Compete, 73 Harvard L.Rev. 625 (1960).
Restrictive covenants which tend to prevent an employee from pursuing a similar vocation after termination of employment are disfavored. Columbia Ribbon & Carbon Mfg. Co. v. A-1-A Corp., 42 N.Y.2d 496, 398 N.Y.S.2d 1004, 369 N.E.2d 4, 6 (1977). Such contractural provisions are strictly construed against the employer. Grant v. Carotek, 737 F.2d 410, 411-412 (4th Cir.1984,...
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