Donahue v. Permacel Tape Corp.

• Citation: 234 Ind. 398,127 N.E.2d 235
• Decision Date: 20 June 1955
• Docket Number: No. 29251,29251
• Parties: William A. DONAHUE, Appellant, v. PERMACEL TAPE CORPORATION, Appellee.
• Court: Supreme Court of Indiana

Page 235

127 N.E.2d 235

234 Ind. 398

William A. DONAHUE, Appellant, v. PERMACEL TAPE CORPORATION, Appellee.

No. 29251.

Supreme Court of Indiana.

June 20, 1955.

Voor, Jackson, Grant & McMichael, William E. Voor, James E. Keating, South Bend, for appellant.

A. Lucus Hubbard, South Bend, for appellee.

ACHOR, Judge.

Appellee is engaged in the manufacture and sale of adhesives and adhesive tapes. Appellant was formerly a sales representative for appellee. During such employment the parties entered into a written contract, the pertinent sections of which are as follows:

'1. Employee shall not divulge to others or use for his own benefit any confidential information obtained during the course of his employment with Company relating to sales, sales volume or strategy, customers, number or location of salesmen, formulae, processes, methods, machines, manufacturers, compositions, idea, improvements or inventions belonging to or relating to the affairs of the company, Johnson & Johnson or its subsidiary or affilated companies, without first obtaining Company's written permission.

'2. Employee for a period of three (3) years after leaving Company's employment for any reason whatsoever, shall not, in the United States or Canada without first obtaining Company's written permission, engage in or enter the employment of or act as a sales agent or broker for the products of or as an advisor or consultant to any person, firm or corporation engaged in or about to become engaged in the manufacture of adhesive or adhesive tapes.'

Thereafter appellant terminated his employment with appellee and, without the consent of appellee, became a sales representative for a competitor. An action for temporary and permanent injunctive relief followed. A temporary restraining order was issued and it is from that decree that this appeal is prosecuted.

In support of his appeal, appellant contends among other things that whereas, the scope of his employment with appellee was limited to northern Indiana, the restrictive covenant contained in the contract was unreasonably restrictive in that the restricted territory (United States and Canada) encompassed too large an area, and that therefore the contract in its entirety was contrary to public policy and void. The cause was submitted to the trial court upon the verified pleadings which were admitted into evidence. It is upon these facts that the validity of the restrictive covenant in issue must be determined.

Appellee asserts that precedent is uniformly and firmly established that negative covenants in restraint of trade are valid if limited to the area of the business 'sought to be protected' and cites numerous cases in support of that position. Appellee then relies on the fact that appellee's business which it sought to protect covered the entire area of the United States and Canada. However, it is to be observed that the 'business involved' in each of the cases relates to either (1) employer-employee contracts where the use or divulgence of 'trade secrets' is involved or (2) the sale of a business or profession, in which cases the 'business sought to be protected' is that of the business or profession sold by the covenantor.

Do the cases involved in either of the two above classifications provide either precedent or reason by which to support the validity of the covenant before us? It is admitted that an employee who is entrusted with 'trade secrets' may make a valid covenant against the competitive use or disclosure of such trade secrets to the full extent of the affected area of the business of the employer. See Du Pont de Nemours Powder Co. v. Masland, 1917, 244 U.S. 100, 37 S.Ct. 575, 61 L.Ed. 1016; Board of Trade of City of Chicago v. Christie Grain & Stock Co., 1905, 198 U.S. 236, 25 S.Ct. 637, 49 L.Ed. 1031; Briggs v. Butler, 1942, 140 Ohio St. 499, 45 N.E.2d 757; Harrison v. Glucose Sugar Refining Co., 1902, 7 Cir., 116 F. 304.

It is appellee's contention that the facts in this case bring it within the precedent of the above cited cases for the reason that the contract in the case before us, by its express terms, contemplates that processes would be disclosed to appellant, and in addition confidential selling information, including ideas, customer lists and the like would be made available to appellant as a result of his employment; that appellant did, in fact, acquire 'confidential information' by virtue of his employment and that such information is classified by law as of the kind appellee is entitled to protect to the extent of the area of its business operations, which include United States and Canada.

However, the rule is firmly established, with reason, that in determining the validity of a negative covenant in restraint of competition that such contracts are to be strictly construed against the covenantee, and the test of their validity is dependent not merely upon the covenant itself but upon the entire contract and the situation to which it is related. Super Maid Cook-Ware Corp. v. Hamil, 5 Cir., 1931, 50 F.2d 830, certiorari denied 284 U.S. 677, 52 S.Ct. 138, 76 L.Ed. 572; Murray Dance Studios of Cleveland v. Witter, Ohio Com.Pl.1952, 105 N.E.2d 685; Gates-McDonald & Co. v. McQuilkin, Ohio App.1941, 34 N.E.2d 443; Ridley v. Krout, 1947, 63 Wyo. 252, 180 P.2d 124.

We therefore give our consideration to the covenant, the contract and the situation to which it related. While it is true that section one of the contract refers to 'confidential information obtained during the course of employment' the pleadings, by which we must judge the factual situation, do not allege, nor can it reasonably be inferred therefrom, that appellant obtained any 'confidential information' which was of such a nature that it was related to the business of the covenantee in more than a general way outside the limited territory assigned to the covenantor as a sales representative. In fact, the express allegation of the complaint upon the subject of the breach of covenant indicates that appellee's only cause of complaint is that appellant is working for a competitor and is 'soliciting trade' for it in competition with appellee. There is no allegation of fact as to the use or abuse of either 'trade secrets' or 'confidential information.' The allegation is as follows:

'5. Plaintiff (appellee) alleges that said defendant (appellant) has totally disregarded the provisions of said Sales Personnel Agreement, particularly paragraph 2 thereof, in the following particulars, to-wit:

'(a) That defendant, in violation of said agreement, without the written consent of plaintiff entered into the employment of Arno Adhesive Tapes, Inc., a company engaged in the manufacture and sale of adhesive and adhesive tapes * * * and in competition with plaintiff and threatens to and will, unless restrained by this Court, continue in said employment. * * *

'(b) * * * (A)nd as a sales agent will continue in soliciting trade or business on behalf of competitors of plaintiff.'

As far as we are able to ascertain or could reasonably infer from the facts before us, no 'trade secrets' were divulged to appellant as a result of his employment and the only 'confidential information' which he acquired, used and/or disclosed was the ordinary general information which a sales representative would acquire, such as related to sales methods, lists of customers, customer requirements, etc., in the area worked.

We conclude, therefore, that the cases heretofore cited as supporting the decree herein are neither persuasive nor controlling of the issue in this case.

We proceed to analyze the second class of cases which state that covenants in restraint of trade will be enforced if limited to the 'area of the business involved'--those related to (2) the sale of a business or profession. The rule is well established that a vendor may enter into a valid covenant not to compete within the area of the business or profession sold. Wiley v. Baumgardner, 1884, 97 Ind. 66; Consumers' Oil Company v. Nunnemaker, 1895, 142 Ind. 560, 41 N.E. 1048; Bennett v. Carmichael Produce Co., 1916, 64 Ind.App. 341, 115 N.E. 793; Grand Union Tea Co. v. Walker, 1935, 208 Ind. 245, 195 N.E. 277, 98 A.L.R. 958; Buanno v. Weinraub, 1948, 226 Ind. 557, 81 N.E.2d 600; Eisel v. Hayes, 1895, 141 Ind. 41, 40 N.E. 119; Beatty v. Coble, 1895, 142 Ind. 329, 41 N.E. 590.

It must be noted that these cases relate to the good will, which is 'the interest to be protected' in the business or profession sold, and they do not relate to the scope of the business of the buyer. For example, if the seller operated stores in cities A, B and C, and he sells the store in city A, the cases do not hold that a negative covenant may be enforced prohibiting seller from continuing business in cities B and C, neither do they hold that the mere fact that the buyer operates a business throughout the state of Indiana that he may preclude a seller whose business was limited to a single county, from operating elsewhere within the State of Indiana. In fact the contrary rule is true. Consumers' Oil Company v. Nunnemaker, supra. The 'good will' must be related to the particular transaction between the parties. As stated in 2 Page on Contracts 1389, § 789, as follows: 'If for any reason the restraint is greater than is necessary to protect the good will, the contract is invalid.'

By clear analogy the precedent of these cases, when applied to employeremployee covenants, clearly supports the conclusion that such covenants will be upheld, if limited to the area in which operation of the employee's activity was related to the good will of the employer's business. Also, they provide strong precedent in support of the position that covenants which would restrict the competitive employment of an employee beyond the area of his former employment are void, unless such subsequent employment involves the use or divulgence of 'trade secrets' of the former employer which are related to the scope of...