Day Companies, Inc. v. PATAT, JR.

• Decision Date: 03 March 1969
• Docket Number: No. 26093.,26093.
• Citation: 403 F.2d 792
• Parties: The DAY COMPANIES, Inc., Appellant, v. Claud T. PATAT, Jr., et al., Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

403 F.2d 792 (1968)

The DAY COMPANIES, Inc., Appellant, v. Claud T. PATAT, Jr., et al., Appellees.

No. 26093.

United States Court of Appeals Fifth Circuit.

November 26, 1968.

Rehearing Denied December 23, 1968.

Certiorari Denied March 3, 1969.

William J. Threadgill, Threadgill & Smith, Columbus, Miss., James D. Maddox, Matthews, Maddox, Walton & Smith, Rome, Ga., for appellant.

H. A. Stephens, Charles F. Barnwell, Atlanta, Ga., Marson G. Dunaway, Jr., Rockmart, Ga., for appellees; Smith, Cohen, Ringel, Kohler, Martin & Lowe, Atlanta, Ga., of counsel.

Before BELL and MORGAN, Circuit Judges, and GUINN, District Judge.

Certiorari Denied March 3, 1969. See 89 S.Ct. 993.

LEWIS R. MORGAN, Circuit Judge:

This diversity action sought injunctive relief and damages for the enforcement of a covenant not to compete, allegedly violated by defendants Claud T. Patat, Jr., John L. Farris, and Patat Plywood Corporation. Appellant is The Day Companies, Inc., successor to Columbus Packing Company, Inc.

The appellees, Patat, et al., filed a motion to dismiss pursuant to Rule 12(b), Federal Rules of Civil Procedure, on the ground that the covenant not to compete was contrary to the public policy of Georgia and therefore null and void, and that the covenant was so indefinite as to the description of the business and employment prohibited to be unreasonable. Day afterward amended the complaint. The District Court held that the amendment did not cure the complaint and dismissed the complaint as amended. It is from this order of dismissal that the appeal was brought to this Court.

The action alleges that in April of 1966, John L. Farris was the president and majority stockholder of Farris Plywood Company, a corporation engaged in the manufacture and sale of plywood in Cuthbert, Georgia. Claud T. Patat, Jr., was manager of Farris Plywood Company. On April 20, 1966, Farris Plywood Company was sold to Columbus Packing Company, a Mississippi corporation. This sale of the business was accompanied by a "covenant not to compete" wherein John L. Farris agreed:

"the said John L. Farris, individually, further agrees that during the term of his said employment, and for a period of five years thereafter (that is, until December 31, 1971) he will not, either directly or indirectly, alone or in concert with any other person, firm or corporation, be connected with or concerned in any business or employment which shall be in competition with Farris in the area presently operated in by Farris."

A later merger gave the Day Companies, Inc., the appellant-plaintiff herein, all the rights, title and interest which Columbus Packing Company, Inc., had in the business and in the contract with John L. Farris. In March, 1967, the defendant corporation, Patat Plywood Corporation, was incorporated with Claud T. Patat, Jr., and John L. Farris as officers, and began to operate in the manufacture and sale of plywood in Polk County, Georgia, some 175 miles north of Cuthbert, Georgia. Claud T. Patat, Jr., and Patat Plywood Corporation allegedly had knowledge of the terms of the contract and were abetting John L. Farris in the violation of his contract with plaintiff The Day Companies.

The ultimate issue which this Court must determine is whether the provision of the contract set out above is void as contrary to the public policy of Georgia, or whether such provision is valid and therefore enforceable. Under Erie-Klaxon,¹ the District Court was required to apply the Georgia law, sitting as a Georgia Court.

The three prime requisites to sustain a covenant not to compete in Georgia are: (1) reasonableness as to the time of restraint; (2) definiteness and reasonableness as to the territory involved; and (3) definiteness as to the nature, kind and character of the activities prohibited by the contract.

Although the appellees attempt to void the contract as violating the requisites as to time and territory, we conclude that the District Court was correct in its conclusions that the contract was valid as to these two essentials of a covenant not to compete.

The contract in the case at hand was limited to five years. This restriction was reasonable. The Georgia authorities support the proposition that a contract for the sale of business may contain a covenant not to compete that is unlimited in time. As far back as 1877 the Supreme Court of Georgia dealing with the sale of a business held in the case of Goodman v. Henderson, 58 Ga. 567, that "the limit of time made no difference if the contract was limited as to space".

Considering the challenge as to the territory prerequisite, was this covenant reasonable and definite as to the area involved here? The limitation in the covenant as to territory in the case at hand is found in the phrase "in the area presently operated in by Farris". The cases from the Georgia Courts seem to permit restraints which extend throughout the territory covered by a transferred business. As was observed by Judge Jenkins of the Georgia Supreme Court in Kutash v. Gluckman, 193 Ga. 805, 20 S.E.2d 128 "a contract which affords a fair protection to the party in whose favor it is made, and is not injurious to the public * * * may extend to all the territory covered by the business the good will of which has been sold * * *." We agree with the Court below that the standard of area is met in the agreement in question.

We now reach the third requirement dealing with the definiteness as to the activities and as to the type of business. On this requisite the Court below ruled that the covenant was "indefinite as to the activities prohibited and therefore void and unenforceable as a matter of law". We disagree and reverse.

The part of the covenant ruled void reads:

"he shall not, either directly or indirectly, alone or in concert with any other person, firm or corporation, be connected with or concerned in any business or employment which shall be in competition with Farris" (emphasis supplied).

Most of the Georgia cases encountered in this restrictive covenant field deal with the first two prerequisites, to-wit: time and space. In attempting to ascertain the applicable Georgia rules, there is no difficulty in finding the appropriate general statements on all three requisites. As was so aptly stated by Judge Hoover of the Ohio Court of Common Pleas,² "This is not one of those questions on which the legal researchers cannot find enough to quench his thirst. To the contrary, there is so much authority, it drowns him." In sum, the Georgia rule, and most other jurisdictions, is that a restraint on trade in the form of a covenant will be countenanced when, under all the circumstances, it is reasonable. This question, though largely factually orientated, is one for the Court. Rakestraw v. Lanier, 1898, 104 Ga. 188, 30 S. E. 735, and Chief Judge Brown's opinion in Budget Rent-A-Car Corporation of America v. Fein, (5 Cir., 1965) 342 F.2d 509, 514.

The dominant considerations of reasonableness have been expressed for Georgia in several cases. In considering whether the limitations are reasonable, the Court must consider the nature and extent of the trade and the business, the situation of the parties, and all the other circumstances. Rakestraw v. Lanier, s...