Ellis v. James V. Hurson Associates

• Decision Date: 25 October 1989
• Docket Number: No. 88-1240.,88-1240.
• Parties: Donald B. ELLIS, Appellant, v. JAMES V. HURSON ASSOCIATES, INC., Appellee.
• Court: D.C. Court of Appeals

565 A.2d 615

Donald B. ELLIS, Appellant, v. JAMES V. HURSON ASSOCIATES, INC., Appellee.

No. 88-1240.

District of Columbia Court of Appeals.

Argued March 17, 1989.

Decided October 25, 1989.

Keith J. Harrison, with whom Robert G. Hibbert was on the brief, for appellant.

James R. Schroll, with whom Edward Varrone was on the brief, for appellee.

Before ROGERS, Chief Judge, STEADMAN, Associate Judge, and MACK,^* Associate Judge, Retired.

STEADMAN, Associate Judge:

On January 22, 1988, after more than ten years of employment, appellant Donald B. Ellis resigned his position with appellee James V. Hurson Associates, Inc. ("Hurson") and immediately began to compete with Hurson. In particular, he began, sometimes successfully, to woo away Hurson's clients for his own. Hurson brought suit against Ellis, alleging that Ellis was in breach of a covenant relating to postemployment competition signed by Ellis three weeks after starting employment with Hurson. Ellis appeals from the trial court's entry of a preliminary injunction enjoining him from "soliciting or providing services to any clients that were formerly clients of Hurson and Associates before Mr. Ellis resigned from Hurson and Associates on January 22, 1988."

Although the subject of contractual restraints on postemployment competition has generated a sizeable volume of judicial opinions and academic commentary generally, see, e.g., 14 WILLISTON, CONTRACTS § 1643 (3d ed. 1972); 6A CORBIN, CONTRACTS § 1394 (1962 and Supp. 1989), this is the first case on the subject presented to this court.¹ We remand the case for further consideration in light of this opinion.

I.

The threshold inquiry is to determine precisely what "covenant" is at issue. The covenant not to compete read in full as follows:

In consideration of the employment by, and salary to be paid by, James V. Hurson Enterprises (the company) of the employee signing below, it is agreed that if the employee's employment terminates for any reason whatsoever, voluntary or involuntary, the employee will not, directly or indirectly, enter into or engage in business competition with the company, nor attempt to secure the company's clients or customers by direct or indirect means, nor aid any competing individual, firm or organization in any way including but not limited to the divulging of the identity of clients or customers of the company, nor divulge or use the trade practices or secrets used by the company for a period of three years after employment. The foregoing prohibitions shall also apply during the period of employment. If the employee shall violate the agreement, the company shall be entitled to an injunction, to be issued by any competent court of equity enjoining and restraining the employee, and each and every other person concerned therein, from violating or assisting in the violation of this agreement.

However, the preliminary injunction purported to enforce only one portion of the covenant; viz., that the employee will not attempt to secure the company's clients or customers by direct or indirect means.² Ellis urges us to view the covenant in its entirety, taking the position that if the entire covenant is not enforceable, no portion thereof is enforceable. (Much of his brief is accordingly directed to an attack on the broad covenant not to compete.) We disagree.

Although there are a few jurisdictions which adhere to the view that covenants in restraint of trade ("restraining covenants") which are not enforceable in full are wholly unenforceable,³ the vast majority enforce such covenants to the extent their terms are reasonable⁴ (a point to be dealt with more fully infra). Some of these jurisdictions follow the "blue pencil rule," and hold that restraining covenants may be enforced in part, but only where the part enforced is divisible, that is, where the severable character of the restriction is evident from the terms of the agreement.⁵ Other of these jurisdictions partially enforce restraining covenants without engaging in an analysis of whether the covenant's terms appear strictly "severable."⁶ None of the restraining covenant cases applying District of Columbia law have confronted whether and under what circumstances a court may selectively enforce portions of such a covenant.

In keeping with the great weight of modern authority,⁷ we join those jurisdictions which have rejected the view that covenants not to compete must be enforceable in whole or not at all. See, e.g., Ehlers v. Iowa Warehouse Co., 188 N.W.2d 368 (Iowa 1971) (explaining why "logic, equity and the modern authorities" persuaded the court to overrule itself and adopt a rule favoring partial enforcement of restraining covenants). While we are cognizant of the judicial reluctance to "rewrite" contracts between parties, see, e.g., Rector-Phillips-Morse, Inc. v. Vroman, 253 Ark. 750, 489 S.W.2d 1 (1973), and the argument which suggests that partial enforcement rewards employers who have everything to gain from writing overbroad covenants,⁸ these concerns need not be compromised by the rule we adopt today in light of the limitations on its application.

The Restatement sets forth the relevant principles. Where less than all of an agreement is unenforceable on public policy grounds, a court may nevertheless enforce the rest of the agreement "in favor of a party who did not engage in serious misconduct." RESTATEMENT (SECOND) OF CONTRACTS § 184(1) (1981). Furthermore, a court may treat only part of a term as unenforceable under this rule "if the party who seeks to enforce the term obtained it in good faith and in accordance with reasonable standards of fair dealing." Id. at § 184(2).⁹ See, e.g., Ehlers, supra, 188 N.W.2d at 370; 14 WILLISTON, CONTRACTS § 1647c (3d ed. 1972) (problem of employer overreaching "can be avoided in part at least by the adoption of the rule . . . which completely invalidates covenants deliberately unreasonable and oppressive whether severable or not").

Since the terms of the restraining covenant at issue here are in the main severable on their face, we need not in this preliminary injunction appeal decide whether or not to adopt a "blue pencil" rule in this jurisdiction. Whether under that approach or one which would enforce a restraining covenant to the extent that its terms are reasonable, regardless of grammatical severability, we hold that the trial court committed no abuse of discretion by entering a preliminary injunction which did not purport to enforce in toto the covenant which formed the basis of the action.

Accordingly, the considerably more narrow issue before us is whether there is a substantial likelihood that a covenant not to solicit the company's clients or customers¹⁰ for a period of three years will be found to be valid and binding upon Ellis.¹¹

II.

Nevertheless, even in a more restricted form, we deal here with a form of restraint of trade, to which applies one of the common law's "oldest and best established" public policy concerns. RESTATEMENT (SECOND) OF CONTRACTS, Introductory Note to Topic 2: Restraint of Trade (1981). This Restatement in its sections 186-188 sets forth in lucid form a codification and explanation of the applicable common law principles as distilled from the case law of the nation.¹² In the absence of any current well-developed doctrine in our jurisdiction, we adopt this modern and authoritative exposition insofar as it applies to the case before us.

Section 186 sets forth the basic principle. "A promise is unenforceable on grounds of public policy if it is unreasonably in restraint of trade. A promise is in restraint of trade if its performance would . . . restrict the promisor in the exercise of a gainful occupation." Section 188 amplifies this doctrine in the context of a promise of the type Ellis made, that is, a promise that imposes a restraint that is ancillary to an otherwise valid transaction. RESTATEMENT, supra at § 188(2)(b). Such promises are "unreasonably in restraint of trade" if:

(a) the restraint is greater than is needed to protect the promisee's legitimate interest, or

(b) the promisee's need is outweighed by the hardship to the promisor and the likely injury to the public.

Comment g to section 188 focuses in particular on postemployment restrictions. It observes that such restrictions are usually defended on the ground that the employee has acquired either confidential trade information (not an element here) or "the means to attract customers away from the employer." It then observes that "whether the risk that the employee may do injury to the employer is sufficient to justify a promise to refrain from competition after the termination of the employment will depend on the facts of the particular case." Thus, it explains, "if the employer seeks to justify the restraint on the ground of the employee's ability to attract customers, the nature, extent and locale of the employee's contacts with customers are relevant. A restraint is easier to justify . . . if the restraint is limited to the taking of his former employer's customers as contrasted with competition in general." Id.

While the trial court heard testimony regarding Ellis's client contacts while employed at Hurson, it understandably did not engage in any explicit exploration of the question of enforceability in light of the above-stated Restatement principles. Indeed, the varying language utilized in successive versions of the protective order evidences a lack of precise focus. The original order, dated July 19, 1988, stated that Ellis was "prohibited from soliciting any of plaintiff's present client or clients defendants came to know of by virtue of his employment with plaintiff." In response to a motion of Hurson, in an August 18, 1988, order the trial court added a prohibition against "providing services," so as to reach former clients of Hurson whom Ellis had improperly solicited away. Moreover, although neither party had so requested, the trial court amended the...