Chelsea Industries, Inc. v. Florence

• Court: United States State Supreme Judicial Court of Massachusetts
• Writing for the Court: Before WILKINS; CUTTER
• Citation: 358 Mass. 50,260 N.E.2d 732
• Parties: CHELSEA INDUSTRIES, INC. v. Leonard FLORENCE.
• Decision Date: 30 June 1970

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260 N.E.2d 732 358 Mass. 50 CHELSEA INDUSTRIES, INC.
v.
Leonard FLORENCE. Supreme Judicial Court of Massachusetts, Suffolk. Argued May 5, 1970.
Decided June 30, 1970.

[358 Mass. 51]

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Nathan T. Wolk, Boston, for plaintiff.

Cargill, Masterman & Cahill, Boston, and William E. Searson, III, for defendant.

Before [358 Mass. 50] WILKINS, C.J., and CUTTER, KIRK and QUIRICO, JJ.

[358 Mass. 51] CUTTER, Justice.

Chelsea Industries, Inc. (Chelsea), seeks by this bill to enjoin Florence from competing with Raimond Silver Manufacturing Company, Inc. (Raimond), ¹ which is wholly owned by Chelsea. The question arises under a written contract (the purchase contract), dated May 9, 1968, to which the parties were Chelsea, Florence, and other vendors of Raimond stock. By final decree, the bill was dismissed. Chelsea appealed. There is a report of material facts. The evidence is reported.

Raimond is an 'item house' selling metal and glass items to some 12,000 buyers for stores and others. There are only three or four such item houses in the United States. When Florence joined Raimond's predecessor corporation as manager and chief executive officer in 1956, it had a narrow product line and a small annual sales volume ($53,000). It was losing money. Florence greatly expanded the business. In 1968, Raimond sold over 750 items, and had gross sales of over $5,600,000, and a net income of $385,000 after taxes. Florence had been given stock in the company. By 1967, he had a salary of $52,000 plus a bonus of $20,000. In 1967, partly at least because of the wishes of Raimond's financial [358 Mass. 52] backer, it was decided that Raimond should be sold. In August, 1967, Florence took steps to get the business appraised, but he was opposed to the terms of a proposed sale to Chelsea.

The purchase contract provided that Chelsea would buy all Raimond's shares from its stockholders. Chelsea paid $948,830.60 in cash (the fixed price), undertook to pay the lesser of $1,100,000 or 30% of Raimond's net profits over a seven-year period ending December 31, 1974 (the contingent price), and paid about $385,000 to retire Raimond's debts outstanding in 1968. Elorence received $407,753 for his stock and was to receive 42 1/2% of the contingent price up to $1,000,000 and 85% of the balance.

The purchase contract provided that, simultaneously with the closing, Chelsea would cause Raimond to sign employment contracts with Florence and one Levine in

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forms set forth in attached schedules. Raimond and Florence did sign such a contract (the employment contract). Both the purchase contract and the employment contract contained covenants (described below) that bound Florence not to compete with Raimond for specified periods. These covenants differ somewhat from one another (fn. 5).

Section 8.07 of the purchase contract reads in part as follows: 'Each Seller agrees (severally * * *) that he will not, for the period during which * * * (Chelsea) shall be obligated to make any contingency payments * * * and for two years thereafter * * * engage directly or indirectly * * * or participate in the ownership * * * operation or control, or have any interest * * * in any organization * * * or business engaged substantially in competition with the business now * * * conducted by Raimond; provided, however, * * * (proviso not relevant).' ²

[358 Mass. 53] The employment contract provides in part in § 7 (emphasis supplied): 'Florence agrees that during the term of this Agreement or any extension thereof and for two * * * years thereafter * * * he will not engage, directly or indirectly * * * or participate in the ownership * * * operation or control, or have any interest * * * in any organization * * * engaged in substantial competition with the business now or hereafter operated * * * by * * * (Raimond) provided' (proviso not relevant. ³ A closely related provision (§ 4 of the employment contract) reads: 'Florence shall devote * * * his full time to advance the interests of * * * (Raimond), and he shall not directly or indirectly * * * be engaged in * * * any other compan(ies) * * * in the same line of business * * * unless with the written permission' of Raimond. 'In the event this contract is terminated by * * * (Raimond) prior to any of the dates set forth in * * * (§ 1) ⁴ for any reason other than the illness of Florence or for cause which is substantial and material, * * * (Raimond) agrees that the provisions of * * * (§ 7) shall be null and void' (emphasis supplied).

Section 8.07 of the purchase contract is not in terms subject to any such provision

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(hereafter called the exculpatory provision, see § 4) as affects § 7 of the employment contract and prevents the use of § 7 if the employment contract is [358 Mass. 54] terminated 'for any reason other than' Florence's illness 'or for cause which is substantial and material.' Chelsea contends that this exculpatory provision does not apply to § 8.07 of the purchase contract whereas Florence contends that it does apply. ⁵

Florence worked under the employment contract for about nine months. He was discharged by the three-man board of directors of Raimond on February 24, 1969. David Casty and Norman Dunn voted for the action and Florence voted against it.

The trial judge concluded: (a) As to Florence, the provisions (concerning competition) in the purchase contract and those in the employment contract 'were intended by the parties * * * to be binding as one agreement.' (2) It also 'was intended that the exculpatory provision * * * would apply equally to the noncompetition provisions of the * * * (purchase contract) and the employment' contract. (3) 'Florence in no way' violated 'his employment contract' and he was discharged 'without substantial and material cause.'

Shortly after his discharge, Florence formed Leonard Silver Manufacturing Company, Inc. (Leonard). Florence in his answer admitted, as did his counsel at trial, that Leonard is in competition with Raimond.

1. Unless the exculpatory provision of the employment contract (§ 4) also applies to § 8.07 of the purchase contract, Florence's activities for Leonard constitute a violation of § 8.07. That section prohibits Florence from engaging 'directly or indirectly * * * in any * * * business * * * substantially in competition with the business * * * conducted [358 Mass. 55] by Raimond.' Under § 8.07, to commit a violation, Florence need be only substantially in a competing business. ⁶

2. The two contracts were part of a single transaction. In construing them, weight must be given to that circumstance. See Lamson & Co. (Inc.) v. Abrams, 305 Mass. 238, 240, 25 N.E.2d 374. See also Stern v. Stern, 330 Mass. 312, 316--317, 113 N.E.2d 55; Bono v. Kramer, 346 Mass. 355, 359--360, 191 N.E.2d 760. To be sure, the parties to the two contracts were not the same. Florence was one of six persons selling Raimond shares to Chelsea under the purchase contract. His employment contract was with Raimond only.

The contracts, however, were closely interrelated. The employment contract was contemplated by the purchase contract (§ 6.05). Florence's term of employment (see fn. 4) was tied to a provision of the purchase contract. Section 9 of the employment contract stated that it 'and any

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written agreements entered into at the same date constitute the entire contract between the parties.' ⁷...