Daytona Group of Texas, Inc. v. Smith, KRIX-FM and KRGE-A

• Decision Date: 15 November 1990
• Docket Number: A,KRIX-FM and KRGE-A,No. 13-89-487-CV,13-89-487-CV
• Citation: 800 S.W.2d 285
• Parties: 1990-2 Trade Cases P 69,288 DAYTONA GROUP OF TEXAS, INC., d/b/appellant, v. Betty Alice SMITH a/k/a Betty A. Smith or Bertha Smith, Appellee.
• Court: Texas Court of Appeals

Page 285

800 S.W.2d 285

1990-2 Trade Cases P 69,288

DAYTONA GROUP OF TEXAS, INC., d/b/a KRIX-FM and KRGE-AM, Appellant, v. Betty Alice SMITH a/k/a Betty A. Smith or Bertha Smith, Appellee.

No. 13-89-487-CV.

Court of Appeals of Texas,

Corpus Christi.

Nov. 15, 1990.

Rehearing Overruled Dec. 13, 1990.

R.W. Armstrong, R.W. Armstrong & Associates, Brownsville, for appellant.

John Haywood, Law Offices of John Haywood, P.C., Brownsville, for appellee.

Before NYE, C.J., and DORSEY and KEYS, JJ.

OPINION

KEYS, Justice.

Appellant, Daytona Group of Texas, Inc., d/b/a KRIX-FM and KRGE-AM, sued to enforce a non-competition agreement it signed with appellee, Betty Smith, a former employee. The trial court ruled that the agreement was unenforceable and ruled in favor of appellee on her cross claims for damages. We affirm.

Appellee sold radio and newspaper advertising in the Valley from 1983 until May 1989. She worked for the Brownsville radio station KRIX-FM from June of 1986 until August 31, 1988. Her duties primarily involved direct sales to local businesses. Appellant purchased the station in January 1987. Several months after the purchase, Appellee signed a covenant ¹ not to compete. This covenant was lost, and she signed another on December 3, 1987.

Appellee went to work for appellant's principal competitor, KBFM, on September 1, 1988, immediately after she stopped working for appellant. She became the sales manager for KBFM, and was engaged in selling radio advertising. Appellee's salary at her new job was significantly higher than at KRIX. She received a list of established clients to work with, and a 20% commission on new accounts.

While appellee worked for appellant she participated in a training program specifically designed to improve her ability to sell radio advertising. This program consisted of meetings using lectures, video tapes and other materials appellee purchased.

Six weeks after appellee began working for KBFM she was served with a TRO ordering her not to violate the covenant not to compete. She immediately stopped selling radio advertising, and worked as a receptionist. At a hearing for a temporary injunction on October 27, 1988, the TRO was dissolved and appellee returned to selling advertising. However, due to her new employer's concern over the ultimate outcome of this litigation, her client list was not returned, and she was forced to earn commissions solely on new business. Her earnings fell significantly. As a result of the stress caused by this lawsuit she sought counseling. She left KBFM in May, 1989.

The trial was before the court. Appellee prevailed except that her request for a finding that appellant willfully and flagrantly violated Texas antitrust laws was denied. Findings of fact and conclusions of law were filed. The trial court entered judgment denying appellant's request for enforcement of the covenant and denying a permanent injunction. The court found in favor of appellee, and assessed damages at $16,500.00 and $25,175.00 in attorney's fees. Appellant raises four points of error.

By appellant's first two points of error, it challenges the trial court's ruling that the covenant not to compete was unenforceable. Currently, two separate but similar analyses are required to answer this question. First, we must determine whether the covenant not to compete violates common law principles. Second, we must determine whether the covenant is in conflict with Tex.Bus. & Com.Code Ann. §§ 15.50-51 (Vernon Supp.1990).

Common Law Principles Governing Covenants Not to Compete

In determining whether this covenant not to compete is enforceable we rely on two recent ² decisions by our Supreme Court. In DeSantis v. Wackenhut, 793 S.W.2d 670 (Tex.1990), and Martin v. Credit Protection Ass'n, Inc., 793 S.W.2d 667 (Tex.1990), the Supreme Court of Texas analyzed this type of covenant in detail. A covenant not to compete is generally unenforceable on the grounds of public policy. Such a covenant will be enforced only if certain standards are met. Under DeSantis and Martin, the three requirements for an enforceable non-competition covenant are: 1) the covenant must be ancillary to a valid transaction or relationship; 2) the covenant must be necessary to protect the promisee's legitimate interests; and 3) the legitimate benefits of the covenant to the promisee must not be outweighed by the hardship to the promisor or public injury. DeSantis, 793 S.W.2d at 681-82. In DeSantis, the court held that the covenant was not necessary to protect a legitimate business interest of the promisee, and it failed the balancing test of hardship to the promisor and injury to the public. In Martin, the court held the covenant was not ancillary to an otherwise enforceable agreement or supported by consideration.

Sections 15.50-51.

Under §§ 15.50-51 the promisee (appellant here) must prove that the covenant is ancillary to an otherwise enforceable agreement and reasonable. If the agreement is entered into at a different time than the employment contract, independent consideration must be given. In addition, if the primary purpose of the ancillary agreement involves personal services, the promisee must prove that it contains certain reasonable limitations and does not impose restraint greater than that necessary to protect its legitimate business interests. § 15.51(b).

The statutory requirements under new §§ 15.50-51 are quite similar to the common law. The requirement in § 15.50(1) that the covenant not to compete be ancillary to an otherwise enforceable agreement is similar, if not identical to the common law requirement addressed in Martin. In addition, the covenant must be necessary to protect the legitimate business interests of the employer under both analyses. Compare DeSantis, 793 S.W.2d at 682, with § 15.50(2). Accordingly, these two issues will be the focus of our discussion.

The question we address first is whether the employment agreement is ancillary to an otherwise enforceable employment agreement. In Martin, a case factually similar to the instant case, the Court focussed on this requirement. The underlying agreement in Martin was "at will", i.e it was not binding or enforceable on either party. The extent of the employment agreement was the non-competition agreement, and the covenant was signed after the promisor had been employed for three years. The employee would have been fired if he had not signed the agreement. The court concluded that the covenant was not ancillary to an enforceable agreement, and the covenant was not an otherwise enforceable agreement. See also Justin Belt Co. v. Yost, 502 S.W.2d 681, 684 (Tex.1973) (noncompetition agreement signed in conjunction with settlement agreement was ancillary to an enforceable contract).

The instant case involves "at will" employment, and the extent of the employment agreement reflected in the record is the non-competition agreement. The non-competition agreement was signed after appellant bought out the old radio station. The evidence indicates that appellee would have been discharged if she had not signed the agreement.

The fact that the underlying employment agreement was an "at will" relationship and that the covenant was the extent of the agreement, persuades us that it was not an otherwise enforceable agreement. Martin, 793 S.W.2d at 699. Based on Martin, we hold that the covenant was not ancillary to an otherwise enforceable agreement and is therefore unenforceable under the common law and §§ 15.50-51.

The second question we address is whether the agreement was necessary to protect the promisee's legitimate business interests. This factor is significant under both the common law and § 15.50(2). In DeSantis, the court analyzed both the legitimate business interests of the employer and the hardship on the employee in order to determine whether the covenant not to compete would be enforced. The court held the non-competition agreement was not necessary to protect the employers' business interests of goodwill and confidentiality of information because there was no showing that the employee converted goodwill or took advantage of confidential information.

Under § 15.51(b), if the employment agreement involves personal services, such as sales, the burden is on the employer to prove that the covenant is necessary to protect its legitimate business interests. Under the common law, the employer must prove that the agreement was necessary. Martin v. Linen Systems for Hospitals, Inc., 671 S.W.2d 706, 709 (Tex.App.--Houston [1st Dist.] 1984, no writ). The trial court in its findings of fact found that appellee did not solicit business from appellant's customers or divert advertising sales from appellant. It found as well that the training appellee received was not unique or special. There was no finding that appellee acquired any trade secrets. See Bergman v. Norris of Houston, 734 S.W.2d 673, 674 (Tex.1987); see also Diesel Injection Sales & Servs. v. Renfro, 656 S.W.2d 568, 572 (Tex.App.--Corpus Christi 1983, writ ref'd n.r.e.). She was not in a position to compete more effectively than other sales persons ³. Although appellant claimed irreparable harm, no injury or risk of injury was shown.

Appellant did not identify how its legitimate business interests were or could be infringed by appellee's conduct. It did not carry its burden of proving that the agreement was necessary. We therefore hold that the covenant was not necessary to protect appellant's legitimate business interests. DeSantis, 793 S.W.2d at 683-84; § 15.50(2).

Appellant also argues that the trial court erred in not granting the permanent injunction. If the covenant is overbroad, a court of equity may enforce the agreement as reformed. DeSantis, 793 S.W.2d at 685; Hill v. Mobile Auto Trim, Inc., 725 S.W.2d 168, 172 (Tex.1987). Section 15.51(c) provides:

If the covenant meets the criteria specified by Subdivision (1) of Section 15.50 of this code but does not meet the...