Heflebower v. Sand, Civil Action No. 1584.

• Decision Date: 28 March 1947
• Docket Number: Civil Action No. 1584.
• Parties: HEFLEBOWER et al. v. SAND et al.
• Court: U.S. District Court — District of Minnesota

71 F. Supp. 607

HEFLEBOWER et al. v. SAND et al.

Civil Action No. 1584.

District Court, D. Minnesota, Fourth Division.

March 28, 1947.

Charles H. Davis, George A. Lewis, and John P. Somers, all of Minneapolis, Minn., for plaintiffs.

Guesmer, Carson & MacGregor, of Minneapolis, Minn., for defendants.

JOYCE, District Judge.

This is an action to enjoin defendants from competing in the beauty supply business for a period of five years within the confines of certain territories. As to defendant Henry Sand, the action is based upon a restrictive covenant contained in a partnership agreement between him and plaintiffs Heflebower and Koch. The remaining individual defendants are joined as fellow conspirators of Henry Sand in an alleged plot to avoid the restrictive covenant and appropriate the former partnership's business by forming the defendant corporation. Plaintiffs also seek $50,000 damages, representing decrease in volume of sales, loss of good will, and depreciation in value of plaintiffs' property right in the business. At the time of service of the summons and complaint herein, plaintiffs moved for a preliminary injunction enjoining further competition during the pendency of this action, which motion was denied. Upon plaintiffs' resting, defendants' motion to dismiss the action was granted as to the individual defendants Alstead, DeMarias, Salzer, Eck, Emma Hadler, George Hadler, Helget and Gunderson.

In 1936 Henry Sand was hired as manager of the Minneapolis branch office of the American Beauty Products Company, an Illinois corporation principally owned and operated by plaintiffs Heflebower and Koch. The American Beauty Products Company, hereinafter referred to as the American Company, supplied products to the beauty business maintaining thirty-five branch offices throughout the United States. It manufactured some of its own products, had others manufactured for it under its own label, and jobbed other lines of beauty supplies. The business was conducted by means of mail order and personal contact of salesmen. The mail order catalogs were sent out from the home office in Chicago to the various territories, each containing the name and address of the branch office serving that territory. In addition to the mail order business, some of the branches also maintained a sales force, which was the case in Minneapolis after 1937. The American Company also had a branch office in St. Paul opened in late 1937 or early 1938, which was regarded as a part of the Minneapolis territory and was under the control and supervision of the Minneapolis manager. Under his employment agreement Henry Sand invested $700 and received 25 per cent of the net profits as compensation. In July of 1943 negotiations were commenced to form a partnership and pursuant thereto Articles of Partnership were signed by Henry Sand and plaintiffs dated as of July 1, 1943. Under the provisions of this agreement Henry Sand made an investment of $5000 in the business, was to receive 30 per cent of the net profits, and he covenanted not to conduct any business in competition with the business of the partnership during the continuation of the partnership and likewise not to enter into any similar business in the territory in which the partnership was to operate for a period of five years after its termination, without the express consent of the plaintiffs herein. The Articles of Partnership named the operating territory as North Dakota, South Dakota, Minnesota and certain enumerated counties and places in Wisconsin. It was provided that the partnership could be terminated by any partner serving on the other partners a sixty day written notice of his intention to terminate it. After creation of the partnership Henry Sand actively ran the business with occasional written instructions by Koch and Heflebower, who also made infrequent trips to Minneapolis from Chicago for the express purpose of checking the business and making suggestions. The St. Paul office continued to be a part of the Minneapolis territory and was made a part of the partnership assets.

Around the 30th of June, 1945, Henry Sand called plaintiff Heflebower in Chicago informing him that he was terminating the partnership immediately and that a letter to that effect had been mailed the 29th of June. In pursuance of this intention Sand withdrew his $5000 capital investment in cash from the partnership bank funds and on or about July 1st removed certain beauty supply stock from the stockroom to premises known as 623-625 Marquette Avenue in Minneapolis. After making an accounting he deposited three of his personal checks to the credit of the partnership's bank account in the aggregate sum of $3,876.99, representing the excess in inventory value of the beauty stock withdrawn over and above the 30 per cent share of remaining assets, after dissolution of the partnership, to which he was entitled under the partnership agreement. Sometime in July of 1945 the defendant Cardinal Beauty Supply Company was incorporated with its office and stock room at 623-625 Marquette Avenue. The Articles of Incorporation are dated July 9, 1945, signed by defendants E. J. Sand (wife of defendant Henry Sand), Gunderson, Feutz and Sweeney as incorporators and naming E. J. Sand, President; Gunderson, First Vice-President; Feutz, Second Vice-President; and Sweeney, Secretary and Treasurer. Henry Sand's wife, although not a paid employee of the partnership, had occasionally assisted her husband in his partnership duties. It is clear, however, that Henry Sand had a considerable capital investment in the Cardinal Company represented by cash and the merchandise removed from the partnership's stock room to the extent of about $13,000. At the first stockholders' meeting in January of 1946 Mrs. Sand resigned as President and Henry Sand was elected to succeed her. After June 30, 1945 and during the time the defendant corporation was being incorporated the individual defendants (with the exception of the Sands and Gunderson who had theretofore left) terminated their employment with the partnership and all later became employees of the defendant corporation in various capacities, continuing so to date.

Plaintiff Heflebower, pursuant to the telephone call from Henry Sand, came to Minneapolis the 3rd or 4th of July, 1945 and took over the remaining partnership assets, hired salesmen and installed a new manager who continued the business as it had been carried on previous to the partnership.

1. Plaintiffs contend and defendants recognize that Minnesota law should apply as to the validity and legal effect of the restrictive covenant in question contained in the Articles of Partnership (hereinafter referred to as the contract).

Did the contract in the instant case create an enforceable obligation upon defendant Sand not to engage in a similar business in competition with that of plaintiffs' during a certain period and within a prescribed territory after termination of the contract? In other words, have plaintiffs a substantive right under the contract which they may enforce? This must be determined by the law of the place where the contract was "made." 1 Dunnell, Minn.Dig., (2d Ed. & Supps.) Sec. 1532, and cases collected in note 35; Larx Co., Inc., v. Nicol et al., Minn., 28 N.W. 2d 705, citing Restatement, Conflict of Laws, Sec. 332. See also McCulloch v. Canadian Pacific Ry. Co., D.C.Minn., 53 F.Supp. 534; In re Wisconsin Central Railway Co., D.C.Minn., 63 F.Supp. 151; 30 Minn.L.Review 103. A contract is "made" in this sense where the final act to make it go into effect is done. 1 Dunnell, Minn.Dig. (2d Ed. & Supps.) Sec. 1532, and cases collected in note 36; Restatement, Conflict of Laws, Sec. 74. Here the "final act" necessary to effectuate a binding contract was the acceptance of the written offer of partnership contained in the Articles of Partnership mailed to defendant Sand from plaintiffs in Chicago, which he accomplished by placing his signature thereon and mailing back to plaintiffs. The contract was complete when the letter containing the signed contract was deposited in the post office in Minneapolis, 2 Dunnell, Minn.Dig. (2d Ed. & Supps.) Sec. 1748, 12 Am.Jur.Contracts, Secs. 46 and 57; 17 C.J.S., Contracts, § 52 (b); and that act having taken place in Minnesota its laws must apply as to the validity and legal effect of the contract.

2. Undoubtedly the leading case in Minnesota upon the subject of covenants negating competition is that of The Menter Co. v. Brock, 147 Minn. 407, 180 N. W. 553, 20 A.L.R. 857, wherein the court in denying relief set forth at great length the rule applicable in the granting or refusal of injunctive relief as applied to a negative covenant. The facts briefly are: Plaintiff, who operated a chain of clothing stores throughout the United States, hired defendant as manager of its Minneapolis store. The contract of employment at $35 a week provided that defendant for a period of four years after his term of employment ceased should not directly or indirectly enter into or engage in the same business as plaintiff in the City of Minneapolis. The rule is set forth as follows, 147 Minn. at page 409, 180 N.W. at page 554, 20 A.L.R. 857:

"Equity will not enjoin the breach of a negative covenant in a contract, unless it is made to appear that irreparable injury has resulted, or will in all probability result, to the complainant from such breach." (Emphasis supplied.)

See 16 Minn.L.R. 317 and cases collected therein. The court then applies this broad general rule to two specific instances:

(1) "In cases where an established business or trade and its good will has been sold, and, as part of the transaction, the seller has covenanted not to engage in the same business in the vicinity for a certain period, the mere breach strongly points to irreparable injury, in that the old business built up by him and his name will lose by having its customers drawn to a similar new enterprise when he...