Durapin, Inc. v. American Products, Inc.

• Court: Rhode Island Supreme Court
• Writing for the Court: KELLEHER
• Citation: Durapin, Inc. v. American Products, Inc., 559 A.2d 1051 (R.I. 1989)
• Decision Date: 14 June 1989
• Docket Number: No. 88-88,88-88
• Parties: DURAPIN, INC. v. AMERICAN PRODUCTS, INC. Appeal.

Page 1051

559 A.2d 1051

DURAPIN, INC. v. AMERICAN PRODUCTS, INC.

No. 88-88 Appeal.

Supreme Court of Rhode Island.

June 14, 1989.

Milton S. Slepkow, Slepkow, Slepkow, & Bettencourt, Inc., East Providence, for plaintiff.

Raymond J. McMahon, McMahon & McMahon, Providence, for defendant.

OPINION

KELLEHER, Justice.

The defendant, American Products, Inc., appeals from a judgment entered in favor of the plaintiff, Durapin, Inc., in a breach-of-contract action heard before a Superior Court justice. Hereafter we shall refer to the plaintiff as Durapin and to the defendant as American.

Durapin based its suit on a distributorship agreement it had entered into with American, claiming that American had failed to perform its contractual obligations. Specifically, Durapin claimed that it was owed $131,000 by American. In response to Durapin's complaint American set forth a number of defenses as well as a counterclaim alleging that Durapin had breached their contract by violating a provision against competition contained in the agreement.

After hearing all the evidence, the trial justice ruled that the noncompetition provision constituted an unreasonable restraint of trade and invalidated it in its entirety. The trial justice then dismissed American's counterclaim and entered judgment in favor of Durapin in the amount of $131,000. ¹ In its appeal American asks that we vacate the Superior Court judgment and enter judgment in its favor on American's counterclaim.

American's appeal centers on the enforceability of noncompetition provisions in this jurisdiction. Although at one point contracts in restraint of trade were totally outlawed, see Solari Industries, Inc. v. Malady, 55 N.J. 571, 576, 264 A.2d 53, 56 (1970), Rhode Island has recognized that a legitimate purpose can be served by such an agreement. We have also subscribed to the general principle that noncompetition agreements are not necessarily void as a matter of law. Oakdale Manufacturing Co. v. Garst, 18 R.I. 484, 489, 28 A. 973, 974-75 (1894). However, since such provisions are not favored, they are subject to judicial scrutiny and will be enforced as written only if the contract is reasonable and does not extend beyond what is apparently necessary for the protection of those in whose favor it runs. See Koppers Products Co. v. Readio, 60 R.I. 207, 216-17, 197 A. 441, 444-45 (1938). When considering the validity of a noncompetition agreement, the crucial issue is reasonableness, and that test is dependent upon the particular circumstances surrounding the agreement. Max Garelick, Inc. v. Leonardo, 105 R.I. 142, 147, 250 A.2d 354, 356-57 (1969)(citing Oakdale, 18 R.I. at 489, 28 A. at 974).

Whether a restrictive covenant is reasonable is ultimately a question of law to be determined by the court. Chapman & Drake v. Harrington, 545 A.2d 645, 647 (Me.1988). Before a court reaches this question, however, the party seeking to enforce a noncompetition provision must show that (1) the provision is ancillary to an otherwise valid transaction or relationship, such as an employment contract or a contract for the purchase and sale of a business, Restatement (Second) Contracts § 187 (1981), (2) the provision is supported by adequate consideration, Wood v. May, 73 Wash.2d 307, 310-11, 438 P.2d 587, 589-90 (1968); see also Central Adjustment Bureau, Inc. v. Ingram, 678 S.W.2d 28, 33 (Tenn.1984), and (3) there exists a legitimate interest that the provision is designed to protect. Max Garelick, Inc., 105 R.I. at 149, 250 A.2d at 357.

Because the validity of a noncompetition provision depends upon the particular facts surrounding the agreement, we must set forth the pertinent facts of this dispute in some detail. Both American and Durapin were involved in some facet of the bowling industry for a number of years prior to their entering into a distributorship agreement in 1972. American was formed in 1951 as a Rhode Island corporation located in Pawtucket, Rhode Island. Its original purpose was to serve as a distributor of bowling pins. Shortly after its formation, however, American purchased a manufacturing plant in Maine and also began to manufacture bowling pins. Durapin, on the other hand, which is a Maine corporation with a place of business in Pawtucket, Rhode Island, began operation in 1964 and has been involved, for the most part, with the manufacturing aspect of the business, relying on independent contractors like American to distribute its bowling pins.

The two companies manufactured pins solely for the candlepin and duckpin bowling games, which attract a much smaller commercial market than the more popular tenpin bowling. ² According to a witness, the market for candlepins is to be found in an area bounded by the Canadian provinces on the north and on the south by the State of Massachusetts whereas the duckpin market extends from nearby Seekonk, Massachusetts, southerly to Virginia and Maryland. American's entry into the candlepin business had been quite successful until a competitor developed and introduced into the marketplace a plastic candlepin that was far superior to American's wooden pin. This new plastic wonder dominated the candlepin business, and American's wooden product became obsolete.

This turn of events caused American and Durapin to join forces. American learned that Durapin was manufacturing a plastic candlepin and looking for a distributor, and financing. Apparently American felt that Durapin's plastic pin could compete with the plastic candlepin then dominating the market, and after some negotiation it agreed to serve as Durapin's "distributor." Unfortunately, Durapin's product was not able to compete with the competitor's, and this venture proved unsuccessful. However, American's and Durapin's association in the bowling business did not end at this point.

Durapin then directed its efforts and interests toward the duckpin market and began to develop a plastic duckpin that American agreed to distribute. A plastic duckpin was successfully developed, and Durapin was granted a patent on its design and construction. In February 1972 the two companies signed the distributorship agreement now in dispute. Pursuant to this agreement, American was given the exclusive right to purchase and lease all duckpins manufactured by Durapin, without territorial limits, for the duration of the contract. In return for Durapin's promise to manufacture and sell solely to American all its duckpin production, American agreed to employ its best efforts to lease only Durapin duckpins. American would purchase the pins outright at Durapin's manufacturing cost, lease them to duckpin alleys, and share the net rental proceeds with Durapin.

Although this agreement was called a "distributorship" agreement, the facts indicate that the substance of the agreement was more in the nature of a financing agreement than a simple distributorship agreement. From the very beginning Durapin needed financing and American was able to satisfy that need. The gist of their agreement was that American would loan Durapin money that would be used by Durapin to manufacture its pins in return for American's exclusive right to purchase and lease those pins. This financing aspect of their relationship was American's real contribution to the venture. According to the testimony of Albert Bertozzi (Bertozzi), formerly an executive at American, the Durapin duckpin sold itself. It seems that in the bowling-pin market, "[i]f you have an exceptionally good pin, then you have the business." Bertozzi testified that so long as there is no great disparity in price, the better pin will dominate the market. Apparently this is precisely what happened with the duckpin manufactured by Durapin. According to Bertozzi, the joint endeavor between American and Durapin ended up with 80 percent of the duckpin market because Durapin's duckpin "scored" ³ better than any other pin on the market.

It was agreed that the contract's duration would be five years and that it would be automatically renewed on the same terms for an additional five years unless either party exercised its right to terminate. Pleased that this joint venture in the duckpin market was so successful, neither party exercised its right to terminate, and the original contract was renewed for the additional five-year term.

Like most good things, however, this joint venture came to an end. But in one important aspect their relationship survived--the splitting of the spoils. Because American leased, rather than sold, the duckpins to its customers, the litigants expected that there would be a number of outstanding leases in the event that the agreement was terminated. The pins were typically leased for three-year terms, so it was conceivable that should the contract be terminated for any reason, there could be leases extending anywhere from one month to three years beyond the agreement's termination. These leases would, of course, generate rental proceeds that would have to be divided between Durapin and American. The agreement anticipated and addressed this situation by including a provision giving Durapin the right to share in all net profits from outstanding leases even after the contract's termination. As expected there were several outstanding leases when the contract was terminated, and it is under this profit-sharing provision that Durapin alleged it was entitled to $131,000.

To protect American's interests during this continued profit-sharing arrangement, the contract also included a provision that brings us to the center of this controversy. That provision reads:

"Durapin agrees that it will not solicit, sell or lease plastic duckpins to any customer of American which, at the time of termination of this Agreement, is leasing such pins from American. Said covenant will remain in effect so long as Durapin participates in the profit distribution herein set forth." (Emphasis added.)

It is this provision that American claims Durapin has breached....