Herrington v. Hall

• Decision Date: 22 September 1981
• Docket Number: No. WD,WD
• Parties: Patrick HERRINGTON and Timothy Dean Perkins, Appellants, v. Mark HALL, Respondent. 32466.
• Court: Missouri Court of Appeals

Page 148

624 S.W.2d 148

Patrick HERRINGTON and Timothy Dean Perkins, Appellants, v. Mark HALL, Respondent.

No. WD 32466.

Missouri Court of Appeals, Western District.

Sept. 22, 1981.

Motion for Rehearing and/or Transfer to Supreme Court Denied

Oct. 27, 1981.

Application to Transfer Denied Dec. 14, 1981.

William H. Woodson and Terry W. Schackmann of Spencer, Fane, Britt & Browne, Kansas City, for appellants Herrington and Perkins.

Dean A. Hodapp, Kansas City, for respondent.

Before MANFORD, P. J., and DIXON and NUGENT, JJ.

MANFORD, Presiding Judge.

Appellants seek equitable enforcement of a contractual covenant not to compete and damages for the breach thereof. Trial was had to the court without a jury. The judgment is reversed and the cause remanded with directions.

Two points of error are presented, which in summary charge the trial court erred by holding that (a) the non-compete clause was unreasonable and unenforceable and (b) damages were too speculative.

In 1969, Jim Tharp commenced operating a motor service business named Vee Village. In addition to servicing Volkswagen automobiles, the business included a machine shop and part sales operation. The business, a sole proprietorship, was located at 312 E. 17th Street, Kansas City, Missouri. In 1975, Tharp decided to attend a local law school, and thinking that this academic commitment would prevent his operation of Vee Village, he endeavored to sell the operation. He sought out many buyers, including respondent Hall. Hall did not have the purchase price, so Tharp hired him to operate the business while he (Tharp) attended school.

In 1976, Tharp and Hall entered into a written contract. This agreement provided that Hall was to operate the service business and was entitled to all receipts and net income from the service business, as well as the use of the name Vee Village. Hall was to operate the service business only. Tharp retained the parts operation and the machine shop operation. In exchange, Hall was to pay the utility bill for the entire building, to purchase parts from Tharp's parts operation at retail prices, and to accept responsibilities for debts and liabilities incurred as a result from work done at the 17th Street location. The contract provided for termination by either party upon 30-days written notice.

In 1978, Tharp sold the parts operation, along with its inventory, to appellants. Appellants subsequently operated the parts operation at the 17th Street location. Tharp was not able to collect income from Hall, so later in 1978, Tharp and Hall entered into a new contract regarding Hall's operation of the Volkswagen service operation. In this new (1978) contract between Tharp and Hall, it was agreed that Hall could continue to operate the service operation as a business separate from the parts and machine shop operations. Hall was entitled to full use of the premises and equipment, the name of Vee Village, the goodwill of Vee Village, and to all receipts and net income from the service operation. Hall, in exchange, agreed to pay Tharp $350.00 per week, pay all utility bills, and accept responsibilities for debts incurred in the operation of the service business. This 1978 contract provided that as long as certain conditions were met, the contract was to continue unless terminated pursuant to the termination clause within the contract. While the 1978 contract expressly terminated the 1976 contract, the 1978 contract contained a non-compete clause identical to the non-compete clause of the 1976 contract. The parties agreed that the non-compete clause (1978 contract) would survive the termination of the 1978 contract.

In 1980, Tharp decided to sell the building on East 17th Street, all tools and equipment, and all his rights and remaining interests in Vee Village. Tharp discussed the proposed sale with appellants and others, and on August 15, 1980, Tharp sold his rights, interests, tools, and equipment in Vee Village to appellants. The agreement between Tharp and appellants expressly conveyed to appellants Tharp's legal rights and interests including trade names "Vee Village" and "Vee Village Service". The agreement also conveyed all rights, titles, and interests with respect to the repair garage and machine shop and all rights, duties, and obligations expressed within the 1978 contract between Tharp and Hall. Appellants and Tharp also executed a separate agreement assigning all rights, titles, interests, benefits, duties, and obligations under and pursuant to the 1978 contract between Tharp and Hall.

Appellants then delivered to Hall a termination notice of the 1978 contract. This notice directed Hall to vacate the premises. As a result of this notice, Hall arranged for the rental of space for a Volkswagen repair service business at 27th and Warwick Trafficway, Kansas City, Missouri. The distance between 312 E. 17th Street (the location of Tharp's business) and 27th and Warwick Trafficway (the location of Hall's later operation) is approximately one mile. On September 1, 1980, Hall commenced operation (at 27th and Warwick Trafficway) of his business under the name Vee Village. Hall also transferred the "Vee Village Service" yellow pages phone number (originally used by Tharp and later used by appellants) to this new location. Hall was able to take with him four of the employees from the original "Vee Village" location. Hall admitted that he chose the new location close to the original Vee Village location to retain customers of Vee Village, and further acknowledged that his new business would be a competitor with his former business.

During the three-year period that Hall operated the service business on East 17th Street, his net income was as follows: $26,279 for 1977, $42,411 for 1978, and $49,331 for 1979. Hall's net income from his operation at 27th and Warwick Trafficway was $2,600.37 for September, 1980; $2,942.87 for October, 1980; and $3,178.30 for November, 1980. For the same three months, appellants lost $2,919.41 on a 40% volume of business conducted prior to Hall's competition.

This action commenced, resulting in judgment by the trial court, which concluded that the non-compete clause was unreasonable and unenforceable, damages claimed were too speculative, that as a matter of law the trade name "Vee Village" and the derivative goodwill was the property of appellants and that neither party was entitled to punitive damages. In its judgment, the trial court permanently enjoined Hall from using the name "Vee Village Service", "Vee Village Parts" or any similar sounding name. The trial court also directed Hall to cease the use of the original yellow pages phone number and permanently enjoined all parties from the use of the phone number. This appeal followed.

Review of this cause is governed by Rule 73.01 and the interpretation given that rule by Murphy v. Carron, 536 S.W.2d 30 (Mo. banc 1976), which holds that a judgment shall not be reversed in cases wherein the trial court sits without a jury unless such judgment is against the weight of the evidence, unless there is no substantial evidence to support it, or unless the judgment erroneously declares the law or erroneously applies the law. As will be observed from the discussion infra, the judgment herein is reversed and the cause remanded because, as entered, the judgment violates the rule in Murphy because it erroneously applies the applicable law.

The particular facts and circumstances herein spawn three questions which, when addressed, illustrate the result which is reached herein. These questions are: (1) Was the covenant not to compete reasonable and enforceable? (2) Was respondent's challenge to the assignability of the covenant properly advanced on appeal? (3) Were damages herein so speculative as to be nonascertainable?

As with such covenants, it is necessary, in order to arrive at a determination of their reasonableness and hence, their ultimate enforceability, to consider what economic benefits, if any, are readily ascertainable from such covenants. In the instant case, Tharp sought to sell his "Vee Village" business before entering law school. The contracts entered into between Tharp and Hall were obviously a means to maintain the operation and value of the business until such time as Tharp (1) sold the business for what he thought to be a profitable value or (2) until Tharp elected to resume operation of the business himself. Evidence that Tharp clearly intended to preserve his business investment is supported by his allowing Hall to continue to use the name "Vee Village". Thus, the evidence reveals a legitimate business purpose as opposed to a mere output restriction, which has led the courts to disfavor bare restraints of trade.

The contracts entered into between Tharp and Hall further reflect the encouragement of the continuation of an ongoing business enterprise engaged in a productive economic activity within the community. Assuming, for the moment, that there had been no agreements, Tharp may have found it more profitable to close the business and to sell all of the assets. This would have resulted in depriving the community marketplace of an integrated business activity.

A second economic consideration, and one which is particularly applicable to the instant case since Tharp wanted to sell the business, was the development of customer contacts in the operation of "Vee Village", which was an obvious valuable incident to the operation of that business. In the course of Hall's management of "Vee Village", Hall could have (and the record reveals he in fact did) develop contacts with customers that could have reduced the value of "Vee Village" should he have decided (which the record reveals he in fact did) to compete with "Vee Village" subsequent to the termination of the agreement.

While, under the law of our state, an employer cannot extract an enforceable restrictive covenant merely to protect himself from the competition of an employee, "a...