Holloway v. Faw, Casson & Co.

• Decision Date: 01 September 1988
• Docket Number: No. 228,228
• Citation: 552 A.2d 1311,78 Md.App. 205
• Parties: Robert E. HOLLOWAY v. FAW, CASSON & CO. ,
• Court: Court of Special Appeals of Maryland

Page 205

78 Md.App. 205

552 A.2d 1311

Robert E. HOLLOWAY v. FAW, CASSON & CO.

No. 228, Sept. Term, 1988.

Court of Special Appeals of Maryland.

Feb. 6, 1989.

John B. Robins, IV (Leonard Bruce Wade and Robins & Johnson, on the brief), Salisbury, for appellant

Sally D. Adkins (Fletcher P. Thompson, A. Gillis Allen, II and Adkins, Potts & Smethurst, on the brief), Salisbury, for appellee.

Argued before GILBERT, C.J., and BISHOP and GARRITY, JJ.

BISHOP, Judge.

Cross appellants, Faw, Casson & Co., Inc. ("Faw, Casson"), an accounting partnership, filed a complaint in the Circuit Court for Wicomico County seeking declaratory relief and damages against appellant, Robert E. Holloway, ("Holloway"), a former partner of that firm, for his alleged breach of the noncompetition clause contained in the Partnership Agreement (the "Agreement"). In his counter-claim Holloway requested a declaration that the covenant restricting competition was unenforceable and made a claim for money that the partnership owed him but withheld for his alleged breach of the noncompetition agreement. The circuit court ruled by way of summary judgment that the noncompetition clause was unreasonable as written; the court then modified the Agreement and ruled it enforceable as modified. At a later jury trial on the remaining claims the court granted judgment in favor of Faw, Casson as to liability on both the complaint and counter-complaint and the jury returned a verdict in favor of Faw, Casson for $75,655.90 plus prejudgment interest of $6,367.59.

FACTS

Holloway was employed by Faw, Casson as an accountant in 1968 and in 1979 became a partner in the firm's Salisbury office. In 1981 he signed the "Partnership Agreement"

                which is the subject of this litigation.   That agreement provides in part
                

XI. COMPENSATION: SALARY ALLOWANCE

A. Partners shall be compensated for their services to the partnership in the following manner:

1. Partners shall be paid annual salaries which shall be established by the Executive Committee at the start of each fiscal year. Such salaries may be adjusted upward or downward by the Executive Committee throughout the year. This is the base salary.

* * *

XVII. CONTINUED INCOME PARTICIPATION [ ("CIP") ]

Equal monthly continued income participation payments shall be made, without interest thereon, to a terminated partner for a period of ten years following the effective date of any termination. The aggregate amount, subject to adjustments as provided elsewhere in this agreement, of such continued income participation payments shall be an amount equal to the terminated partner's allocable share of the "fees" of the firm.

* * *

XXI. VOLUNTARY WITHDRAWAL

[a]ny partner withdrawing from the partnership voluntarily or involuntarily hereby covenants and agrees that he or she will not engage in the general practice of public accountancy or any of its allied branches, either individually or with any other person, firm or corporation, either directly or indirectly, at any place within a forty-mile radius of any of our offices for a period of five years from the date of such withdrawal. If, within these limits, the partner engages in the general practice of public accountancy or any of its allied branches either individually or with any other person, firm or corporation, he or she agrees to pay Faw, Casson or its successor, 100% of the prior year's fee for any clients that were Faw, Casson's who engage the services of the withdrawing partner In June, 1983 the Faw, Casson Executive Committee, pursuant to its authority under paragraph XI A.1. of the partnership agreement, approved partners' salaries for the fiscal year June 1983 to May 31, 1984. Later, in the fall of 1983, the committee exercised their revisory powers under the same paragraph and approved an adjustment in the salaries for partners in the firm's Salisbury office. Under the terms of the salary adjustment, partners in the Salisbury office were notified that their salaries would be reduced to the extent that profits in the Salisbury office fell below $150,000 for the fiscal year June, 1983 to May 31, 1984 and any such shortfall would be allocated by the Salisbury partners among themselves. Holloway protested this adjustment but his appeal to the partnership grievance committee was denied.

                during the five-year period.   Any amounts due such partner under Item XVII shall be forfeited by such partner.   However, such forfeited vested amounts will be used to offset payments above.   If there is a balance due Faw, Casson & Co. after offsetting of vested amounts, the partner's individual capital account will be used to offset the balance.   Any remaining balance will be secured by a note to Faw, Casson & Co. from the partner payable over a three year period
                

On December 3, 1984, nine months after the grievance committee denied his appeal, Holloway voluntarily left Faw, Casson and, in direct violation of the Agreement, began working for another accounting firm in Salisbury and servicing the partnership's former customers. From the time Holloway left Faw, Casson, until the trial date, three years later, Holloway serviced 165 former Faw, Casson customers. These customers had generated fees of $160,193 with Faw, Casson the year prior to their departures from Faw, Casson. ¹

Pursuant to the terms of the Agreement, Faw, Casson forfeited Holloway's CIP (Continued Income Participation) benefits due him under part XVII and began withholding his capital account payments to offset payments due under part XXI of the agreement, the non competition clause.

ISSUES

I. Whether the circuit court erred in finding five years to be an unreasonable period of restriction.

II. Whether, having determined the five years to be an unreasonable period of restriction, the circuit court erred when it modified the covenant to three years then proceeded to partially enforce the agreement to that extent.

III. Whether the agreement, even as rewritten by the circuit court, is unreasonable as to area and duration, imposes an excessive hardship on Holloway, and is injurious to the public interest.

IV. Whether, even as modified, the agreement contains an enforceable liquidated damage clause rather than an unenforceable penalty and forfeiture clause.

V. Whether the circuit court erred in ruling, as a matter of law and fact, that Faw, Casson had not breached the contract.

VI. Whether the circuit court properly excluded testimony offered by Holloway, attempting to establish the prior course of dealing between the partnership and the partners.

VII. Whether the trial court erred in ruling, as a matter of law, that Faw, Casson had not converted Holloway's partnership interest.

VIII. Whether the evidence was sufficient to justify an award of prejudgment interest.

DISCUSSION

I. & III.

Validity of the Covenant

The circuit court ruled on the parties' cross motions for partial summary judgment on the enforceability of part XXI of the Agreement, the non competition clause, and found that: (1) Faw, Casson had a legally protectable business interest which justified the partners' attempts to protect the partnership business by way of a restrictive covenant in the partnership agreement. (2) The court held that it was unreasonable to prohibit a withdrawing partner from competing for five years after withdrawal; the court reduced this period to three years and held that restrictive period enforceable. (3) The court found that the restriction prohibiting ex-partners from servicing Faw, Casson's "clients" merely limited Holloway from servicing those clients who were serviced by Faw, Casson at the time Holloway was a partner, and the court held that this interpretation was valid and enforceable. (4) Lastly, the court interpreted the covenant against competing within 40 miles of "our offices" to apply to only those Faw, Casson offices which were open at the time Holloway left Faw, Casson, and the court found this interpretation of the 40 mile restriction enforceable. The parties have appealed the circuit court's rulings on each of these issues.

The Court of Appeals, in Gill v. Computer Equipment Corp., 266 Md. 170, 292 A.2d 54 (1972), determined that judicial review of restrictive covenants in employment contracts requires the courts to balance the interests of the employer, employee, and the public in such agreements and protect these various interests as necessary:

The general rule in Maryland, as in most jurisdictions, is that restrictive covenants in a contract of employment by which an employee as a part of his employment contract agrees not to engage in a competing business or vocation with that of his employer on leaving the employment will be sustained if [the employer can prove that ² the restraint is confined within limits which are no wider as to area and duration than are reasonably necessary for the protection of the business of the employer and do not impose undue hardship on the employee or disregard the interest of the public.

Gill v. Computer Equipment Corp., 266 Md. at 180, 292 A.2d 54 (emphasis added); see also Ruhl v. Bartlett Tree Co., 245 Md. 118, 123-124, 225 A.2d 288 (1967). This rule requires that "a determination of enforceability ... be made based on the scope of each particular covenant itself, and, if that, on its face, is not too broad, the facts and circumstances of each case must be examined." Millward v. Gerstung Int'l Sports, 268 Md. 483, 488, 302 A.2d 14 (1973) (citing Becker v. Bailey, 268 Md. 93, 299 A.2d 835 (1973)). In making such an examination some of the factors which the court is to consider are:

whether the restriction is reasonable in area and duration[;] the hardships its enforcement might impose on the employee[;] the interests of the public[;] and whether the employee sought to be enjoined[:] performs unique services, is soliciting customers, using trade secrets, assigned routes, customer lists, or is exploiting personal contacts established between the...