Evans Laboratories, Inc. v. Melder

• Citation: 562 S.W.2d 62,262 Ark. 868
• Decision Date: 27 February 1978
• Docket Number: No. 77-185,77-185
• Parties: EVANS LABORATORIES, INC., Appellant, v. D. O. MELDER and Louis Cingolani, Appellees.
• Court: Supreme Court of Arkansas

Page 62

562 S.W.2d 62

262 Ark. 868

EVANS LABORATORIES, INC., Appellant, v. D. O. MELDER and Louis Cingolani, Appellees.

No. 77-185.

Supreme Court of Arkansas, In Banc.

Feb. 27, 1978.

Spitzberg, Mitchell & Hays, Little Rock, for appellant.

Gill, Johnson & Burns, Dumas, for appellees.

HOLT, Justice.

Pursuant to restrictive covenants contained in an employment contract, the appellant sought to enjoin the appellees, its former employees, from "accepting, soliciting, diverting or appropriating or continuing to service" any former customers of appellant's which were serviced by the appellees during their tenure of employment with appellant. After a hearing, a preliminary injunction was issued which prohibited appellees' solicitation of former customers but not appellees' acceptance of business from them if without solicitation. After an evidentiary hearing, the court found the employment contracts did not relate to the sale of a business; no trade secrets or confidential information were involved; the geographical limitations were unreasonable and incapable of reasonably definite location; and the court then concluded that the restrictive covenants were invalid and dissolved the previous injunction. We first consider appellant's assertion that "(t)he restrictive covenants contained within the contracts are valid and enforceable under the laws of the State of Arkansas, said covenants being reasonably related to the needs of the appellant and restrictive only of competition which is unfair and not of competition which is fair."

Appellant, which is in the termite and pest control business, employed appellee Melder as its branch manager of their McGehee office. Appellee Cingolani worked as a routeman servicing customers in that area. Appellees' employment contracts were for an unspecified length of time and could be terminated by either party upon ten days' notice. The contract provided that acceptance or solicitation of business from appellant's customers, serviced by appellees while appellant's employees, was prohibited for a period of two years after the termination of appellees' employment. Appellant concedes that this provision is inapplicable to appellee Melder, because, as a branch manager, he serviced no former customers. Appellees left appellant's employment and went into business as the Delta Pest Control. Since that time, appellant lost approximately 278 out of the 307 customers formerly serviced by appellee Cingolani on his route. However, Cingolani stated that only about 125 to 150, or one-half, of the customers presently serviced by him were formerly on his route while working for appellant. There is no proof of solicitation by either of the appellees. In fact, the proof is to the contrary. Appellant correctly states the central issue to be resolved on appeal is the validity of the restrictive covenants.

The validity of a restrictive covenant not to compete in an employment contract depends upon the facts and circumstances of the particular case. United Ins. Agency, Inc. v. Martin, 258 Ark. 916, 529 S.W.2d 871 (1975); and McLeod v. Meyer, 237 Ark. 173, 372 S.W.2d 220 (1963). Further, it is well established that we are reluctant to uphold employment contracts which have negative provisions, as here, with reference to future employment elsewhere by the employee. McLeod v. Meyer, supra.

Appellees argue that the covenant in question here is invalid because, due to the two year length of the prohibition and the prohibition on acceptance as well as solicitation, it constitutes a restraint of trade which is void as against public policy. Even so, appellant asserts that the covenant would only have the effect of prohibiting appellee Cingolani from soliciting or servicing customers whom he formerly serviced for appellant. Other Delta employees could do the actual servicing of those former customers. Appellant argues this prohibition is necessary because the relationship between the routeman and the customer is the most important element in developing and maintaining business in this industry. It appears that no trade secrets are involved.

In determining whether or not a restraint of trade imposed by a contract is reasonable, we consider "whether it is such only as to afford a fair protection to the interests of the party in whose favor it is given, and not so large as to interfere with the interests of the public." Orkin Exterminating Co. v. Murrell, 212 Ark. 449, 206 S.W.2d 185 (1947); and Edgar Lumber Co. v. Cornie Stave Co., 95 Ark. 449, 130 S.W. 452 (1910). Here the record indicates that when appellant's prior customers defected from it to Delta, the newly organized firm, it was not due to any solicitation on appellee Cingolani's part but due to their satisfaction with his prior servicing.

In the circumstances we are of the view that the provision which prohibits Cingolani from accepting the requests of appellant's former customers, whom he formerly serviced, is undue interference with the interests of the public's right to the availability of a serviceman it prefers to use. In other words, it results in an unreasonable restraint of trade. We deem it unnecessary to discuss appellant's contention that the geographic restrictions in the contract are valid.

Affirmed.

FOGLEMAN, J., dissents.

HICKMAN, J., concurs.

FOGLEMAN, Justice, dissenting.

The court's reluctance to uphold a contract having negative covenants with reference to future employment has led it up a one-way blind alley from which it cannot see the basic purpose for these covenants and the legitimate right of an employer to protect himself against unfair competition. By so doing, employers are deprived of their right to contract to protect themselves from business piracy. I feel so strongly that it is high time this court reexamine the posture it has taken in these cases, that I am compelled to voice those feelings, even though time will not permit elaboration to the extent I would like.

It appears to me that the view of employment contract covenants not to compete taken by this court over the last thirty years clearly indicates that the basic reasons for permitting these contracts in restraint of trade at all has become obscured. Originally at common law, no such contract was enforceable. 54 Am.Jur.2d 958, Monopolies, Restraints of Trade & Unfair Trade Practices, § 511; Annot. 43 A.L.R.2d 94, 115. Later development produced the rule that a general restraint was invalid, but a partial restraint was valid, recognizing that a purchaser of a business or an employer was entitled to protection, not from competition, but from unfair competition, or business piracy. Annot. 41 A.L.R.2d 15, 69; 43 A.L.R.2d 94, 115, 117; 6 A Corbin on Contracts 89, § 1394. Ultimately, the rule of partial restraint gave way to the rule of reasonableness, i. e., reasonable restraints are to be enforced. 54 Am.Jur.2d 959, 982, Monopolies, Restraints of Trade & Unfair Trade Practices, §§ 512, 543; Annot. 43 A.L.R.2d 94, 115, 123. See Orkin Exterminating Co. of Arkansas v. Murrell, 212 Ark. 449, 206 S.W.2d 185. The test of reasonableness turns on the facts and circumstances of the particular case, and that rule has been recognized ceremonially by this court. United Insurance Agency v. Martin, 258 Ark. 916, 529 S.W.2d 871; McLeod v. Meyer, 237 Ark. 173, 372 S.W.2d 220; Bailey v. King, 240 Ark. 245, 398 S.W.2d 906; McCumber v. Federated Implement & Hardware Ins. Co., 230 Ark. 13, 320 S.W.2d 637. Perhaps no better test could be provided, because in every case there is a clash of two important freedoms, freedom to contract and freedom to work. See Annot. 41 A.L.R.2d 15, 53; 43 A.L.R.2d 94, 116, 142.

An interesting commentary on this history is found in Arthur Murray Dance Studios of Cleveland v. Witter, Ohio Com.Pl., 105 N.E.2d 685, 62 Ohio L.Abs. 17 (1952). That court said:

Over five hundred years of colorful history look down on this type of litigation. In the year 1415 Henry V was king. Skill in a trade was the vital factor in a man's economic status and it was obtainable only through apprenticeship to an experienced worker. The guild system permitted a man to work only in the trade in which he was apprenticed. Membership in a guild was not easily attained. Travel was difficult. Strangers were not welcome. If a man couldn't work at his trade in his particular locality, he could hardly work at all; might become a pauper; and the public would be deprived of a worker at a time when the Black Death had made workmen scarce. In that background when, in 1415, the celebrated Dyer's Case (Y.B. 2 Henry V, pl. 26) came before Judge Hall (Hull?), he became so enraged by an attempt to restrain a dyer from working a town for just a half year that in bad French he cursed the deal void: "By God, if the plaintiff were here he should go to prison until he paid a fine to the king." 28 Colum.L.Rev. 81, 82-83; 6 Corbin on Contracts 527, Sec. 1395; Lange v. Werk, 2 Ohio St. 519, 526-527.

Pounded by the pressures of social, economic, industrial, communication and transportational change, the law has changed (7 U.Toronto L.J. 413-415; 26 Cornell L.Q. 707, 708-709; 31 Ia.L.Rev. 249-251; 36 Am.Jur. 530, Sec. 50; 5 Peabody L.Rev. 80-82.) until today, as a rough rule of thumb, the law is that a covenant restraining an employee, on termination of employment, from competing with his former employer, is valid if it is reasonable in view of all the circumstances of the particular case. 13 U.Detroit L.J. 25, 27; 90 U.Pa.L.Rev. 855, 856; 33 Harv.L.Rev. 320; 31 Ia.L.Rev. 249, 253; 32 Marq.L.Rev. 282, 283; 5 Williston on Contracts 4580, § 1636; 36 Am.Jur. 532, § 51; 3 Pomeroy's Equity Jur. 689, § 934 C.

I take issue with the emphasis that has been placed upon the absence of trade secrets. ¹ I submit that this is only a matter to be considered. An employer may prevent an employee from disclosing trade secrets without any contract or covenant. 87 C.J.S. Trade-Marks, Trade-Names & Unfair...