Hyde v. C M Vending Co., Inc.

• Decision Date: 18 February 1986
• Docket Number: No. 85-157,85-157
• Citation: 288 Ark. 218,703 S.W.2d 862
• Parties: Bert S. HYDE et al., Appellants, v. C M VENDING CO., INC., Appellee.
• Court: Arkansas Supreme Court

Page 862

703 S.W.2d 862

288 Ark. 218

Bert S. HYDE et al., Appellants, v. C M VENDING CO., INC., Appellee.

No. 85-157.

Supreme Court of Arkansas.

Feb. 18, 1986.

Substituted Opinion on Denial of Rehearing March 17, 1986.

Gordon & Gordon by Allen Gordon, Morrilton, Peel & Eddy by Richard Peel, Russellville, for appellants.

Mobley & Smith by William F. Smith, Russellville, for appellee.

NEWBERN, Justice.

The principal question presented by the appellants is whether a covenant not to compete, contained in a contract for the sale of a business, is unreasonable due to its length of duration and thus uneforceable. The chancellor upheld the provision, and we agree that it was not of an unreasonable duration under the circumstances presented here. The appellants further contend the chancellor erred in awarding an injunction enforcing the covenant against some of them who were not parties to the contract which contained the covenant. We agree with the appellants on this point and thus modify the injunction. We also agree with the appellants' argument that the chancellor erred in awarding damages for breach of the covenant to the extent the damages were to accrue after the effective date of the injunction, and we reduce the damages accordingly.

On cross appeal, it is contended the chancellor erred in computing the damages for breach of the covenant. If there was error, it favored the appellee and was not the error argued by the appellee. Therefore, we affirm on cross appeal. We will not address the error favoring the appellee because the appellants did not raise any question of the amount of damages in their principal brief on appeal. The appellants argue incorrectness of the court's damages calculation only in their reply brief responding to the cross appeal. Appellants may not raise an error for the first time in the reply brief, as the appellee has no opportunity to respond. Thus we will not consider it. Myers v. Muuss, 281 Ark. 188, 662 S.W.2d 805 (1984).

In 1972 Hyde Vending Co., Inc., sold its food and drink vending business to C M Vending Company, Inc. The Hyde company retained its music and some of its cigarette vending operation, but it transferred to C M its food and drink vending machines, trucks, and other equipment, all of which was listed in an "exhibit" to the contract, and exclusive vending agreements in certain listed industrial and other plant locations.

The covenant not to compete, which was drafted by Hyde's attorneys, was as follows:

Hyde and each of its stockholders hereby agrees that from and after the closing none of them will, without C M's prior written consent, directly or indirectly own, manage, operate, join, control, or participate in the ownership, management, operation, or control of, or be connected in any manner with, any business, either directly or indirectly in competition with C M, or become interested in any competitor of C M, within a period of five (5) years after payment in full of the purchase price as herein provided and within a radius of fifty miles of the City of Russellville, Arkansas; provided, however, that Hyde shall have the right to maintain certain cigarette vending machines and certain coin operated record playing music machines as specifically listed and described on Exhibit "C" attached hereto, and that it and its stockholders may, as a corporation or as individuals, enter into the music vending machine business, only, without being in violation of this provision; and provided further, that C M will not, during the same period herein enter into the music vending machine business; and, provided further, that either of the parties hereto may in writing waive any portion or all of this particular covenant not to compete.

The stockholders in the Hyde company were Bert Hyde and Nancy Hyde. Their son, David Hyde, was not a stockholder at the time the covenant not to compete was entered. He acquired some shares in December, 1978, and held them only about six months. Thus, David Hyde did not own shares in the Hyde company at the time the covenant was alleged to have been breached.

The C M Company successfully bid for the exclusive food and beverage vending contract at the Arkansas Nuclear One (ANO) plant in 1979. That contract expired in 1984 at which time it was obtained by Valley Vending, Inc., which was owned by David Hyde, Donna Walker, Bert Lynch and Randy Talkington. The evidence is undisputed that Bert Hyde made unsecured loans to Valley Vending and advised and assisted the business in other ways which caused the chancellor to hold the covenant not to compete had been breached. The appellants do not question the sufficiency of the evidence to establish breach of the covenant, assuming its validity.

1. Reasonableness of the Covenant

The appellants do not contest the reasonableness of the geographical coverage of the covenant. Rather they say only it is too long in duration. It began to run at the closing of the sale of the food and beverage business of Hyde to C M, and it was to continue until five years after C M had paid Hyde in full. Given the contract's provision that C M would not be allowed to pay the debt completely until eight years after closing, the minimum duration of the covenant was thirteen years. As full payment was required within ten years, the covenant had a maximum duration of fifteen years. It thus was within the power of C M to extend the duration of the covenant, as it did in this case, by two years. We note that as the covenant was mutual in nature, the extension not only gave C M additional protection with respect to food and beverage vending, but it extended the protection afforded to Hyde with respect to music and cigarette vending.

A contract in restraint of trade, such as a covenant not to compete, is not invalid if it is reasonable with respect to time and place. Bloom v. Home Insurance Agency, 91 Ark. 367, 121 S.W. 293 (1909); Webster v. Williams, 62 Ark. 101, 34 S.W. 537 (1896). The reasonableness of duration of a covenant not to compete after sale of a business is to be judged in the light of accompanying circumstances. Madison Bank & Trust v. First National Bank of Huntsville, 276 Ark. 405, 635 S.W.2d 268 (1982). This court has upheld such covenants lasting five years, Bledsoe v. Carpenter, 160 Ark. 349, 254 S.W. 677 (1923); ten years, Madison Bank & Trust v. First National Bank of Huntsville, supra; twenty years, Robins v. Plant, 174 Ark. 639, 297 S.W. 1027 (1927); and without time limit, Wright v. Marshall, 182 Ark. 890, 33 S.W.2d 43 (1930); Hultsman v. Carroll, 177 Ark. 432, 6 S.W.2d 551 (1928). While the issue in Wright v. Marshall, supra, was apparently not the duration of the covenant, we recited the familiar rule that:

[s]uch contracts are intended to secure to the purchaser the good will of the business; and, as a guaranty, the vendor agrees not to engage in like business at that place. The courts recognize that in such cases the vendor has received an equivalent to abstain from business at the place where it was formerly conducted. [182 Ark. at 891-892, 33 S.W.2d at 44.]

The only cases cited by the appellant in which we have refused to uphold covenants not to compete have been employment contracts to which we apply a stricter standard. See Madison Bank & Trust v. First National Bank of Huntsville, supra.

The seller of a business who finances the sale by, in effect, lending the purchase money to the buyer has an obvious incentive not to compete with his buyer while some of the purchase price is still owed to him. The seller logically wants the buyer to succeed so he can pay off the debt to the seller and not jeopardize the contract of sale. We can imagine many situations in which it would be reasonable for a company just getting on...