Bayly, Martin & Fay, Inc. v. Pickard

• Decision Date: 26 September 1989
• Docket Number: No. 68700,68700
• Citation: 1989 OK 122,780 P.2d 1168
• Parties: 1989-2 Trade Cases P 68,805, 4 IER Cases 1616, 1989 OK 122 BAYLY, MARTIN & FAY, INC., an Oklahoma Corporation, Appellant, v. Daniel D. PICKARD, Appellee.
• Court: Oklahoma Supreme Court

Page 1168

780 P.2d 1168

1989-2 Trade Cases P 68,805, 4 IER Cases

1616, 1989 OK 122

BAYLY, MARTIN & FAY, INC., an Oklahoma Corporation, Appellant, v. Daniel D. PICKARD, Appellee.

No. 68700.

Supreme Court of Oklahoma.

Sept. 26, 1989.

Certiorari to the Court of Appeals, Division 4; Robert F. Martin, Trial Judge.

After initially granting a temporary injunction in favor of the appellant (employer) restraining the appellee (employee/shareholder) from violating a covenant not to compete, the trial court granted summary judgment to the appellee. The court found that the covenant was so broad, so comprehensive, and so pervasive that it violated public policy, and that it was void as a matter of law. The Court of Appeals also found that the restrictive covenants were an overly broad restraint under 15 O.S.1981 § 217. However, the Court of Appeals reformed the agreements to restrict the geographical area of competition to Tulsa County and remanded with instructions. The issue of first impression presented is whether a court may modify an otherwise void covenant not to compete so that the covenant constitutes a reasonable restraint on trade falling outside the forbidden parameters of § 217. We find that covenants not to compete cannot be modified judicially to conform with the reasonable restrictions of § 217 if essential elements of a contract must be supplied to bring it within the rule of reason.

CERTIORARI PREVIOUSLY GRANTED; OPINION OF THE COURT OF APPEALS VACATED; TRIAL COURT AFFIRMED.

William R. Grimm, Wm. Brad Heckenkemper, Tulsa, for appellant.

Jon R. Running, Tulsa, for appellee.

KAUGER, Justice.

On June 14, 1989, we granted certiorari to consider a question of first impression: whether a court may modify an otherwise void covenant not to compete so that the covenant constitutes a reasonable restraint on trade falling outside the forbidden parameters of 15 O.S.1981 § 217. Section 217 provides:

"Every contract by which any one is restrained from exercising a lawful profession, trade or business of any kind, otherwise than as provided by the next two sections, is to that extent void."

We find that covenants not to compete cannot be modified judicially to conform with the reasonable restrictions of § 217 if essential elements of a contract must be supplied.

FACTS

In 1977, the appellee, Daniel D. Pickard (Pickard), was employed by Harlan Agents and Brokers, Inc., an affiliate of Harlan Holding Company (Harlan), an insurance company in which Pickard owned stock. Bayly, Martin & Fay Services, Inc. (BMF Services), an affiliate of the appellant, Bayly, Martin & Fay, Inc. (Bayly), purchased Harlan.

On December 5, 1977, Pickard sold his Harlan Stock to BMF Services and entered into a covenant not to compete. Two days later, Pickard executed an employment agreement with Harlan. This latter agreement restricted Pickard from dealing with any of Harlan's customers for three years after termination. It also denied Pickard access to any parties who became Harlan clients during his employment or to prospective clients contacted before his termination.

After BMF Services purchased Harlan, Bayly became Pickard's employer and the assignee of the covenant not to compete and the employment agreement. On November 15, 1984, Pickard executed a buy-sell agreement which contained a nonsolicitation of company business provision. This covenant was executed pursuant to Pickard's purchase of stock in BMF Services. Bayly fired Pickard on December 11, 1986; and Pickard sold his stock back to the company. Of the three agreements, only the covenant not to compete is limited geographically. It is operative in three states: Oklahoma, Texas, and Colorado.

On February 9, 1987, Bayly filed a petition in the district court alleging that Pickard had violated the terms of the employment and buy-sell agreements by accepting insurance business from Bayly's customers. Bayly sought injunctive relief to enjoin Pickard from violating the two agreements. The trial court issued a temporary restraining order on February 9, 1987; and it ordered a hearing on the application for temporary injunction for February 27 Pickard also filed an oral motion for summary judgment. His brief in support of the motion was filed on March 3, 1987. The trial court heard argument on the motion for summary judgment on March 13, 1987. On March 17, 1987, the trial court sustained Pickard's motion for summary judgment finding that the restrictive covenants were so broad, so comprehensive, so pervasive, and so contrary to public policy that they were void as a matter of law. On appeal, the Court of Appeals also found that the restrictive covenants were an overly broad restraint under 15 O.S.1981 § 217. However, the Court of Appeals reformed the agreements to restrict the geographical area of competition to Tulsa County and remanded with instructions.

1987. On February 18, 1987, Pickard filed a motion to vacate the restraining order. Five days later, he filed a motion for a protective order staying discovery until the trial court ruled on the legality of the agreements. Except for allowing Pickard's deposition to be taken, the trial court prohibited any discovery.

TITLE 15 O.S.1981 § 217

ALLOWS REASONABLE RESTRICTIONS ON THE EXERCISE OF A LAWFUL

PROFESSION, TRADE, OR BUSINESS; HOWEVER, THE CONTRACT MAY

NOT BE JUDICIALLY MODIFIED IF ESSENTIAL ELEMENTS OF THE

CONTRACT MUST BE PROVIDED TO BRING IT WITHIN THE RULE OF REASON.

Pickard asserts that the Court of Appeals erred in modifying the restrictive covenants because they are void pursuant to § 217. Although Bayly does not disagree with the Court of Appeals' determination that the restrictive covenants are an overly broad restraint under § 217, it argues that the Court of Appeals' modification of the agreements which restricted their operative effect to Tulsa County rendered their provisions reasonable and, therefore, enforceable.

Contracts in restraint of trade are void and unenforceable unless they fall within one of the two statutorily created exceptions to the general rule--sale of good will or dissolution of a partnership. ¹ Although Bayly alleged that the good-will exception found in § 218 was applicable before both the trial court and the Court of Appeals, it's applicability is not argued by either of the parties on certiorari. ² Even if the applicability of § 218 had been asserted, the miniscule amount of stock--.8%--sold back to BMF Services by Pickard is insufficient to support an argument that the goodwill exception to § 217 is applicable. ³

A

REASONABLE RESTRICTIONS ARE ALLOWABLE UNDER 15 O.S.1981 § 217.

The majority rule is that unreasonable restraints are prohibited and that reasonable However, this finding was eroded by Tatum v. Colonial Life & Accident Ins. Co., 465 P.2d 448, 451 (Okla.1970), which held that a limited restraint on trade did not violate § 217. In both Crown Paint Co. v. Bankston, 640 P.2d 948, 952 (Okla.1981), cert. denied, 455 U.S. 946, 102 S.Ct. 1444, 71 L.Ed.2d 659 (1982) and Bd. of Regents v. Nat'l Collegiate Athletic Ass'n (NCAA), 561 P.2d 499, 508, 85 A.L.R.3d 953, 967 (Okla.1977), we found that § 217 invalidated only unreasonable restraints on the exercise of trade. Although the rule of reason ⁶ which requires that in order to be valid, a covenant must be deemed reasonable by the court, had been incorporated as a matter of law into agreements falling within the parameters of 79 O.S.1981 § 1, ⁷ its application to § 217 was questionable before the Crown Paint and NCAA decisions. ⁸

restrictions will be enforced. ⁴ At common law, all contracts restraining trade were void. Later, the rules were relaxed, and contracts founded upon reasonable limitations of time and place were upheld. ⁵ In E.S. Miller Laboratories, Inc. v. Griffin, 200 Okla. 398, 194 P.2d 877, 879, 3 A.L.R.2d 519, 522 (1948), this Court considered the effect of the enactment of §§ 217-219 on the common law, and it determined that the common law rules which analyzed covenants not to compete based on their reasonableness did not survive the enactment of §§ 217-219.

Some states having legislation similar to §§ 217-219 do not subscribe to the rule of reason. ⁹ Nevertheless, this Court's

rulings in Crown Paint and NCAA align Oklahoma with jurisdictions which have similar legislation and which weigh the reasonableness of restrictions to determine their enforceability. ¹⁰ Section 217 prohibits only unreasonable restraints on the exercise of a lawful professsion, trade, or business.

B

COVENANTS NOT TO COMPETE MAY NOT BE MODIFIED JUDICIALLY TO

BRING THE CONTRACT WITHIN THE RULE OF REASON IF

THE COURT WOULD BE REQUIRED TO SUPPLY

ESSENTIAL CONTRACTUAL TERMS.

There is a division of authority concerning whether a restrictive covenant not to compete is void in toto, ¹¹ or whether it may be judicially modified. ¹² Modification is allowed in jurisdictions which enforce reasonable agreements. ¹³ The modification principle allows courts to escape the rule of arbitrary refusal to enforce a covenant and serves to protect legitimate interests of the parties or the public. ¹⁴ However, not all jurisdictions recognizing that reasonable restrictions are enforceable will rewrite the parties' agreements. Instead, these courts find that if a covenant not to compete contains an illegal or unenforceable clause, the whole covenant fails. ¹⁵ Other courts while recognizing that judicial modification is appropriate refuse to modify agreements if the elements of the contract are so lacking that the court would be required to provide essential elements of the agreement. ¹⁶ Courts are hesitant to rewrite contracts especially where no justification exists for Because § 217 prohibits only those contracts in unreasonable restraint of trade, judicial modification is justified if the contractual defect can be cured by imposition of reasonable limitations concerning the activities embraced, time, or geographical limitations. However, the Court of Appeals...