Hill v. Mobile Auto Trim, Inc.

• Decision Date: 28 January 1987
• Docket Number: No. C-4996,C-4996
• Citation: 725 S.W.2d 168
• Parties: Joel HILL, Petitioner, v. MOBILE AUTO TRIM, INC., Respondent.
• Court: Texas Supreme Court

Page 168

725 S.W.2d 168

Joel HILL, Petitioner, v. MOBILE AUTO TRIM, INC., Respondent.

No. C-4996.

Supreme Court of Texas.

Jan. 28, 1987.

Dissenting Opinion March 18, 1987.

Concurring Opinion on Motion for Rehearing March 18, 1987.

Tom S. McCorkle, McCorkle & Westerburg, Dallas, for petitioner.

Roger Turner, Dallas, for respondent.

KILGARLIN, Justice.

Based on a covenant not to compete in a franchise agreement, Mobile Auto Trim, Inc. sought to enjoin Joel Hill, a former franchisee, from competing with it in a seven-county area. The trial court granted the temporary injunction. The court of appeals, with one justice dissenting, affirmed the temporary injunction. 704 S.W.2d 384. Because of the dissent, we have jurisdiction over this cause. Gannon v. Payne, 706 S.W.2d 304 (Tex.1986). In a single point of error, Hill complains that the non-competition agreement is a restraint on trade and is unreasonable. We agree and therefore reverse the judgment of the court of appeals, dissolve the temporary injunction, and hold the restrictive covenant in the franchise agreement void in all respects.

Mobile Auto Trim sells car trim franchises in which equipped vans are driven to car dealerships to make repairs at the premises. In August 1982, Mobile sold a franchise to Joel Hill for approximately $42,000 plus five percent of his gross revenues. Hill's franchise covered a large part of Dallas County and all of Denton County. The franchise agreement contained this covenant not to compete Franchisee (Hill) agrees that upon termination of this Franchise Agreement, for whatever reason, Franchisee shall not directly or indirectly, as an officer, director, shareholder, proprietor, partner, consultant, employee or in any other individual or representative capacity, engage, participate or become involved in any business that is in competition in any manner whatsoever with the business of the Company or its franchisees. Furthermore it is understood between the parties that substantial goodwill will exist between the Company and the managers of the various car dealerships serviced by the Company and the Company's franchisees. Because said managers are transient and frequently change employment among car dealerships, Franchisee further agrees that upon termination of this Franchise Agreement, for whatever reason, Franchisee will not directly or indirectly in any manner whatsoever, in any capacity whatsoever, contact said managers (irrespective of the car dealerships that employ them) regarding business in competition with the Company. This covenant shall extend for a period of three (3) years following the termination of this Franchise Agreement or any renewal hereof. Further, this covenant shall cover the following geographic area during said period: The following Texas Counties: Dallas, Tarrant, Ellis, Denton, Rockwall, Kaufman, and Collin.

For two and a half years, as Mobile's franchisee, Hill contacted car dealerships and made car trim repairs in his two-county area. In April 1985, after Hill had not paid his franchise fees for several months, Mobile Auto Trim picked up his van and terminated the franchise agreement. That day, after the franchise agreement had been terminated, Hill contacted a prior customer, a car dealership manager in Dallas County. Thereafter, Mobile Auto Trim sought a temporary injunction to enjoin Hill from competing with it or contacting car dealership managers in the seven counties listed in the covenant not to compete.

Courts in Texas encounter two general varieties of covenants not to compete: covenants specifying that the seller of a business will not compete with the buyer, Daniel v. Goesl, 161 Tex. 490, 341 S.W.2d 892 (1960), and covenants specifying that an employee, upon discharge, will not compete with the former employer, Justin Belt Co. v. Yost, 502 S.W.2d 681 (Tex.1974). These covenants commonly set forth temporal and geographical restraints on the promisor's ability to compete with the promisee, which restraints must be reasonable. Weatherford Oil Tool Co. v. Campbell, 161 Tex. 310, 340 S.W.2d 950 (1960).

Under the common law of contracts, a covenant not to compete is in restraint of trade and its terms are enforceable only if, and to the extent that, they are, in 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 restraint is imposed or imposes undue hardship upon the person restricted." Weatherford Oil Tool Co. v. Campbell, 340 S.W.2d at 951; Henshaw v. Kroenecke, 656 S.W.2d at 418; see also Restatement (Second) of Contracts § 188.

A covenant must meet four criteria in order to be deemed reasonable. First, the covenant must be necessary for the protection of the promisee. That is to say, the promisee must have a legitimate interest Finally, as with any contract, the non-competitive agreement should be enforced only if the promisee gives consideration for something of value. Rubin & Schedd, Human Capital and Covenants Not To Compete, 10 J. Legal Studies 93 (1981). This doctrine promotes economic efficiency. In the case of covenants not to compete incident to the sale of a business, the seller's promise not to compete with the buyer increases the value of the business to the buyer. Without such a covenant the value of the business would be reduced, lessening the likelihood that businesses would be purchased. In employee covenants, the special training or knowledge acquired by the employee through his employer is valuable consideration and often enhances the value of the employee to other firms. To allow employees to use or sell this valuable training or knowledge upon leaving a firm would create a disincentive for employers to train or educate employees. Comment, Economic And Critical Analyses of the Law of Covenants Not to Compete, 72 Geo.L.J. 1425 (1984).

                in protecting business goodwill or trade secrets.  Second, the covenant must not be oppressive to the promisor, as courts are hesitant to validate employee covenants when the employee has nothing but his labor to sell.  In this respect, the limitations as to time, territory, and activity in the covenant not to compete must be reasonable.  Frankiewicz v. National Comp Associates, 633 S.W.2d 505, 507 (Tex.1982);  Justin Belt Co., Inc. v. Yost, 502 S.W.2d at 685;  Weatherford Oil Tool Co. v. Campbell, 340 S.W.2d at 951.   Third, the covenant must not be injurious to the public, since courts are reluctant to enforce covenants which prevent competition and deprive the community of needed goods.  Weatherford Oil Tool v. Campbell, id.;   14 S. Williston, A Treatise on the Law of Contracts § 1639 (3d ed. 1967 and Supp. 1983).  See generally Note, Sakowitz v. Steck:  Texas Looks at Covenants Not To Compete, 38 Baylor L.Rev. 211, 214-18 (1986)
                

But, the covenant before us today cannot be clearly categorized as either a covenant incident to the sale of a business or a post-employment covenant to prevent utilizing special training or knowledge. Hill obtained his skills as an auto trim repairman prior to his franchise agreement with Mobile Auto Trim. Hill bought a franchise from Mobile for approximately $42,000 plus 5% of his gross revenues. In effect, Hill paid for the use of Mobile's name and accompanying goodwill.

This restrictive covenant is plagued by a lack of reasonableness. Initially, there is an apparent absence of consideration. What value did Mobile give in exchange for Hill's promise not to compete? It was not specialized training or knowledge, for that was acquired by Hill prior to his franchise agreement, nor was it Mobile's promise not to compete with Hill after their business relation terminated. And, although Mobile Auto Trim alleges that its trim services are trade secrets, they do not provide any substantiation, did not bring suit to stop the use of their trade secrets, and are willing to let Hill use their techniques anywhere except the Dallas-Fort Worth metroplex.

More importantly, we find no legitimate business interest of Mobile which the covenant is necessary to protect. The contract alleges, and the record indicates, that the purpose of this covenant not to compete was to prevent Hill from exploiting the contacts and "the substantial goodwill [that] exist[s] between the Company and the managers of the various car dealerships." However, there exists not only business goodwill but also franchisee goodwill. When people leave a business to work for another or to open a firm of their own, many are capable of taking with them a sizeable number of the clients whom they had served at their previous place of employment. If they were not in possession of some type of personal magnetism or personal goodwill, they would be incapable of retaining those clients or customers. Shrewd employers and franchisors know this and seek to deprive the employee/franchisee of the fruits of his goodwill by requiring that he enter into an agreement containing a restrictive covenant. The covenant In the past this court has modified restrictive covenants in order to make the time, area and scope of the covenant reasonable. Matlock v. Data Processing Security, Inc., 618 S.W.2d 327, 329 (Tex.1981); Justin Belt Co., Inc. v. Yost, 502 S.W.2d at 684; Spinks v. Riebold, 310 S.W.2d 668, 669 (Tex.Civ.App.--El Paso 1958, writ ref'd). But, there has never been a presumption that so long as the restriction does not encumber the former franchisee's ability to compete for a long time or over a wide radius, the covenant is otherwise deemed fair. To presume such would be to ignore the fact that the franchisor ordinarily has no right to prohibit fair competition. Tex.Const. art. I, § 26. If fair competition is injurious to the franchisor, then so be it: it is but a normal effect of a free market economy.

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