Henshaw v. Kroenecke, C-1610

Citation656 S.W.2d 416
Decision Date20 July 1983
Docket NumberNo. C-1610,C-1610
PartiesL.E. "Gene" HENSHAW et al., Petitioners, v. Louis KROENECKE et al., Respondents.
CourtSupreme Court of Texas

Jon Mercer, Houston, for petitioners.

Butler, Binion, Rice, Cook & Knapp, Robert M. Hardy, Jr., Houston, for respondents.

SPEARS, Justice.

Gene Henshaw brought suit against Louis Kroenecke to recover liquidated damages under a covenant not to compete contained in a partnership agreement. The trial court rendered a take nothing judgment against Henshaw. The court of appeals affirmed, holding that the covenant not to compete was unreasonable and unenforceable. Unpublished opinion pursuant to Tex.R.Civ.P. 452. We reverse the judgment of the court of appeals and remand the cause to that court for a consideration of Kroenecke's insufficiency points of error.

In 1972 L.E. "Gene" Henshaw was operating a sole proprietorship in Houston under the name of Gene Henshaw & Associates offering management consulting services to physicians and dentists. Louis Kroenecke was employed by a company providing similar services in Iowa. Henshaw proposed that Kroenecke join his business, and on April 6, 1972 the two executed a partnership agreement. Kroenecke executed a promissory note for $12,000 to purchase 35% of Henshaw's business. The partnership name remained Gene Henshaw & Associates.

The 1972 Articles of Partnership contained the following provisions:

17. COVENANT NOT TO COMPETE

Kroenecke agrees that upon his voluntary termination of this agreement he will not compete with Henshaw in the business as then carried on by the partnership for a period of three years from the date of termination. The term 'competition' for the purposes of this section shall have the limited definition of providing any similar services to the then clients of the partnership or to those clients who have ceased being clients within the twelve months immediately preceding such termination.

As liquidated damages, the parties agree that no injunction shall lie for breach of this section but that Kroenecke will pay to Henshaw an amount calculated as 12 times the average monthly partnership billing to each client or prior client with whom Kroenecke does business in violation of this covenant. Such average monthly partnership billing shall be computed by including only those months in which the partnership billed said client or past client in the twelve months preceding such termination. Henshaw agrees that there will be no geographical limitation under this covenant.

In October of 1974, Henshaw and Kroenecke each incorporated their respective interests. Henshaw formed Gene Henshaw & Associates, Inc. and Kroenecke formed Lou Kroenecke & Associates, Inc. On October 15, 1974, the Gene Henshaw & Associates partnership agreement was amended by an addendum whereby each partner substituted his own personal corporation as a partner. The addendum ratified and reaffirmed all provisions of the original partnership agreement.

At the same time the two corporations executed another partnership agreement for a partnership named Henshaw, Kroenecke & Associates. This agreement provided that the new partnership would commence doing business on November 1, 1974, and expressly stated that the new agreement did not "alter or amend" the 1972 partnership agreement. The 1974 partnership agreement contained a separate covenant not to compete to be signed independently. This covenant prevented the employees of the two corporations from competing with Henshaw, Kroenecke & Associates. Neither Henshaw, Kroenecke nor their corporations ever executed the restrictive covenant to the 1974 partnership agreement.

In June 1976, disputes arose between Henshaw and Kroenecke concerning the terms of their partnership. The only relevant At trial, four special issues were submitted to the jury. In answer to these issues the jury found: (1) that Kroenecke voluntarily terminated the partnership; (2) the purpose of the liquidated damages provision was not to secure the performance of Kroenecke of the non-competition agreement; (3) the purpose of the non-competition agreement was to protect Gene Henshaw and his interest only; and (4) the non-competition agreement was not an unreasonable restraint of trade.

dispute was over the covenant not to compete. Kroenecke maintained that the covenant should be changed to apply to both of them and that the liquidated damages should be in a lump sum. Kroenecke left a note for Henshaw demanding that the covenant be removed. Henshaw interpreted this as a termination and set the termination date for July 31, 1976. After dissolution Henshaw filed suit to recover liquidated damages in the amount of $63,744 for those clients Kroenecke took with him.

The trial court held that special issue no. 4 was a question of law that should not have been submitted to the jury and that special issue no. 3 denied recovery to Henshaw because only the partnership was entitled to the benefits of the covenant. Therefore, a take nothing judgment was rendered against Henshaw.

An agreement not to compete is in restraint of trade and will not be enforced "if it is greater than is required for the protection of the person for whose benefit the restraint is imposed or imposes undue hardship upon the person restricted." Weatherford Oil Tool Co. v. Campbell, 161 Tex. 310, 340 S.W.2d 950, 951 (Tex.1960); see also RESTATEMENT (SECOND) OF CONTRACTS § 188. The question of whether a covenant not to compete is reasonable is a legal question for the court. Electronic Data Systems Corp. v. Powell, 524 S.W.2d 393, 397 (Tex.Civ.App.--Dallas 1975, writ ref'd n.r.e.); Professional Beauty Products, Inc. v. Derington, 513 S.W.2d 236, 238 (Tex.Civ.App.--El Paso 1974, writ ref'd n.r.e.).

In this case, the court of appeals held that only the partnership was entitled to the benefit of the noncompetition agreement, and therefore, the noncompetition clause which the jury found benefited only Henshaw was unreasonable and unenforceable. We hold that Henshaw was entitled to the protection of the noncompetition agreement.

Henshaw started the consulting business and was operating it as a sole proprietorship. When Kroenecke came into the business, a partnership was formed. The covenant not to compete was an integral part of the pre-partnership formation negotiations. Henshaw was the person for whose benefit the restraint was imposed. Kroenecke, however, also benefited by coming into an established business. The covenant was agreed upon before the partnership was formed and was an agreement between Henshaw and Kroenecke individually, not Kroenecke and the partnership. Henshaw had a right to protect himself from the possibility that Kroenecke would establish a rapport with the clients of the business and upon termination take a segment of that clientele with him. See Hospital Consultants, Inc. v. Potyka, 531 S.W.2d 657 (Tex.Civ.App.--San Antonio 1975, writ ref'd n.r.e.) Henshaw had a legitimate interest to protect, and therefore, the covenant was reasonable.

Here, we are dealing with a two man partnership. Before the partnership was formed, Henshaw was the business entity. The noncompetition agreement did not take effect until the termination of the partnership, and at that time Henshaw, again, was the continuing business entity. Henshaw clearly had a legitimate interest to protect. Under the court of appeals holding that only the pre-termination business entity was entitled to the benefit of the covenant, the partners of a two-man partnership could never enter into an enforceable covenant not to compete. Furthermore, Kroenecke would apparently be entitled to 45% of the benefit of the covenant triggered by his own breach.

We further hold the liquidated damages provision is reasonable and enforceable. A liquidated damages provision must be a reasonable forecast of just compensation for the harm that is caused by the breach. Stewart v. Basey, 150 Tex. 666, 245 S.W.2d 484, 486 (1952); Professional Beauty Products, Inc. v. Derington, 513 S.W.2d 236, 238 (Tex.Civ.App.--El Paso 1974, writ ref'd n.r.e.). The jury found that the purpose of the liquidated damages provision was not to secure the performance of Kroenecke of the noncompetition agreement. The provision, therefore, was not a penalty. The amount of liquidated damages, one year's average billing, is not an unreasonable sum, but is based on a formula representing the parties estimation of the value of the business which would be taken in the event of breach.

Having held that the noncompetition/liquidated damages provision is reasonable and enforceable, the next question is whether the 1974 partnership agreement created a new partnership or was merely a successor to the 1972...

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38 cases
  • DeSantis v. Wackenhut Corp.
    • United States
    • Supreme Court of Texas
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    ...by the agreement not to compete must not be greater than necessary to protect the promisee's legitimate interest. Henshaw v. Kroenecke, 656 S.W.2d 416, 418 (Tex.1983); Weatherford, 340 S.W.2d at 951; RESTATEMENT (SECOND) OF CONTRACTS § 188(1)(a) (1981). Examples of legitimate, protectable i......
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    ...the employer." Stroman, 923 S.W.2d at 85; see also DeSantis v. Wackenhut Corp., 793 S.W.2d 670, 681-82 (Tex.1990); Henshaw v. Kroenecke, 656 S.W.2d 416, 418 (Tex.1983). Knobloch appears to have signed two covenants not to compete during his tenure with M-I. The first is contained in his Con......
  • Doan Family Corp. v. Arnberger
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    ...(2006) ("Courts, when assessing the reasonableness of restrictive covenants, are to apply an objective standard."); Henshaw v. Kroenecke , 656 S.W.2d 416, 418 (Tex. 1983) ("The question of whether a covenant not to compete is reasonable is a legal question for the court."). In sum, Kansas a......
  • Hill v. Mobile Auto Trim, Inc.
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    ...other respects, also reasonable. 1 Whether a covenant not to compete is reasonable is a question of law for the court. Henshaw v. Kroenecke, 656 S.W.2d 416, 418 (Tex.1983). A covenant is unreasonable "if it is greater than is required for the protection of the person for whose benefit the r......
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2 books & journal articles
  • CHAPTER 10 THE RULES OF THE GAME: RECENT DEVELOPMENTS IN TAKE-OR-PAY LITIGATION
    • United States
    • FNREL - Special Institute Natural Gas Marketing II (FNREL)
    • Invalid date
    ...estimating the damages sustained by the parties in the event of a breach are enforceable. UCC §2-718(a). E.g., Henshaw v. Kroenecke, 656 S.W.2d 416 (Tex. 1983); Smith v. Dixon, 238 Ark. 1018, 386 S.W.2d 244 (1965). Pipelines have relied on this doctrine to argue that take-or-pay provisions ......
  • CHAPTER 10 APPROACHING THE DAY OF JUDGMENT: RECENT DEVELOPMENTS IN TAKE-OR-PAY LITIGATION
    • United States
    • FNREL - Special Institute Natural Gas Marketing (FNREL)
    • Invalid date
    ...estimating the damages sustained by the parties in the event of a breach are enforceable. UCC §2-718(a). E.g., Henshaw v. Kroenecke, 656 S.W.2d 416 (Tex. 1983); Smith v. Dixon, 238 Ark. 1018, 386 S.W.2d 244 (1965). Pipelines have relied on this doctrine to argue that take-or-pay provisions ......

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