Jenkins v. Jenkins Irrigation, Inc.

• Decision Date: 05 September 1979
• Docket Number: No. 34865,34865
• Citation: 259 S.E.2d 47,244 Ga. 95
• Parties: , 1979-2 Trade Cases P 62,934 JENKINS et al. v. JENKINS IRRIGATION, INC., et al.
• Court: Georgia Supreme Court

Page 47

259 S.E.2d 47

244 Ga. 95, 1979-2 Trade Cases P 62,934

JENKINS et al. v. JENKINS IRRIGATION, INC., et al.

No. 34865.

Supreme Court of Georgia.

Argued May 15, 1979.

Decided Sept. 5, 1979.

Sliz & Rees, Jeffrey R. Sliz, Lawrenceville, for appellants.

Glyndon C. Pruitt, Buford, for appellees.

HILL, Justice.

This is a covenant not to compete case. It is not the usual employee restrictive covenant case, however.

Prior to May 22, 1978, defendant-appellant Michael Jenkins and plaintiff-appellee Charles Davenport each owned 50% Of the stock of plaintiff-appellee Jenkins Irrigation, Inc., a Georgia corporation with its office in Norcross, Georgia. Jenkins Irrigation, Inc., was engaged in the business of installing, servicing and repairing underground lawn sprinkler systems, both automatic and manual.

On May 28, 1978, plaintiff-appellee Lucy Davenport, as buyer, purchased Michael Jenkins' stock by a tri-party agreement in which Charles Davenport agreed to indemnify Jenkins as to two promissory notes and Jenkins, as seller of the stock, agreed as follows: "Seller shall not, either directly or indirectly, alone or with others, enter into or engage in the business of digging trenches and the installing of underground sprinkler systems and installing or laying of underground cables or any other type of irrigation equipment sales, manufacture, assembly, installation, repair, or service within the State of Georgia for a period of five (5) years from the date of execution of this Agreement. Further, seller shall not, during such period and in said State, divulge, communicate, use to the detriment of either the buyer or Jenkins Irrigation, Inc., or for the benefit of any other person or persons, or misuse in any way, any confidential information or trade secrets of the business, including customer lists, personnel information, and processes or techniques."

1. At the outset, we find that even though Jenkins Irrigation, Inc., was not a party to the agreement, it may bring this action together with the Davenports who were both parties to the agreement. Charles Davenport agreed to indemnify the seller as to two promissory notes and we cannot say that the covenant not to compete was not intended to protect his interests as well as those of the buyer and the corporation. The trial court did not err in overruling defendant's motion to dismiss Charles Davenport as a party-plaintiff.

The covenant not to compete being ambiguous, we read it as the parties have read it. As thus understood, it restricts the seller for five years from engaging in the State of Georgia, in the business of (1) "digging trenches And Installing underground sprinkler systems" (emphasis supplied) and installing or laying underground cables or other irrigation equipment in connection therewith, or (2) selling, manufacturing or assembling underground sprinkler systems. The covenant also contains a covenant against use or disclosure of trade secrets.

The evidence submitted at the hearing on plaintiffs' prayers for temporary injunction showed that prior to the stock sale, the corporation had engaged in installing underground lawn sprinkler systems primarily in eight (not all named) counties in the Atlanta metropolitan area, including Gwinnett, Fulton, DeKalb, Clayton, Cobb and Carroll counties, and in addition had done work in Clarke and Muscogee counties. Since the stock sale, the company had done sprinkler jobs in two additional counties. The evidence also showed that the company had not engaged in the business of laying underground cable except in conjunction with installing automatic sprinkler systems, that the company had engaged in selling and assembling lawn sprinkler systems but that it did not manufacture them.

The evidence also showed that after the stock sale, Jenkins engaged in installing and repairing lawn sprinkler systems in competition with Jenkins Irrigation, Inc., in the metropolitan area of Atlanta and that he was employed by his wife's company, Metro Irrigation, a competitor of Jenkins Irrigation. Evidence was introduced showing that Metro Irrigation advertised in the yellow pages of the telephone directory that Mike Jenkins was its owner.

Jenkins sought to excuse his apparent violation of the covenant not to compete by arguing that when the buyers of the business failed to do so, he was obligated to his former customers to service and repair their sprinkler systems. He suggested that the buyers' breach of warranty to their customers justified his own breach. ¹

The trial court enjoined Jenkins from violating his covenant and he appeals.

2. There are several different types of covenants in restraint of trade. There are employee covenants ancillary to a contract of employment; e. g., Orkin Ex. Co., Inc. So. Georgia v. Dewberry, 204 Ga. 794, 802, 51 S.E.2d 669 (1949). There are covenants ancillary to a professional partnership agreement; e. g., Rakestraw v. Lanier, 104 Ga. 188, 30 S.E. 735 (1898). There are covenants ancillary to franchise and distributorship agreements; e. g., Rita Personnel Services v. Kot, 229 Ga. 314, 191 S.E.2d 79 (1972); Barrett-Walls, Inc. v. T. V. Venture, Inc., 242 Ga. 816, 251 S.E.2d 558 (1979). There are covenants ancillary to contracts for services by independent contractors; e g., Howard Schultz & Assoc. v. Broniec, 239 Ga. 181, 236 S.E.2d 265 (1977). The latter four types of covenants have been treated by this court like employee covenants ancillary to employment contracts. Rakestraw, supra; Rita Personnel Services, supra; Howard Schultz & Assoc., Supra. "A covenant not to compete ancillary to an employment contract is enforceable only where it is strictly limited in time and territorial effect and is otherwise reasonable considering the business interest of the employer sought to be protected and the effect on the employee." Howard Schultz & Assoc., supra, 239 at 183, 236 S.E.2d at 267.

Also, there is the covenant not to compete made by the seller in conjunction with the sale of a business. Hood v. Legg, 160 Ga. 620, 128 S.E. 891 (1925); see also Insurance Center v. Hamilton, 218 Ga. 597, 602, 129 S.E.2d 801 (1963) and cits. This type of covenant has been treated differently by the courts from employee restrictive covenants. Rakestraw v. Lanier, supra, 104 Ga. at 198; Orkin v. Dewberry, supra, 204 Ga. at 803, 51 S.E.2d 669. For example, it has been said that covenants not to compete made in conjunction with the sale of a business may be unlimited as to time (so long as the buyer remains in business) and still be valid. Hood v. Legg, supra, 160 Ga. at 627, 128 S.E. 891; Orkin v. Dewberry, supra. ²

There are valid reasons for this difference in treatment between employee covenants and sale of business covenants. Regarding sale of business covenants, the court in Hood v. Legg, supra, 160 Ga. at 628-629, 128 S.E. at 895, said: "There are several reasons for upholding a covenant on the part of the vendor in all such cases to desist from the business in competition with the purchaser, which do not obtain in other cases . . . (T)he vendor receives an equivalent for his partial abstention from that business, in the increased price paid him for it on account of his covenant; and his entering into the observance of the covenant not only do not tend to his pauperization to the detriment of the public, but on the contrary, by securing to him the full value of his business and its good will, a value which he has an absolute right to secure in this way, the covenant operates to his affirmative pecuniary benefit and against his impoverishment, in that, while being paid for desisting from the particular business in the locality covered by it, he may still enter upon other pursuits of gain in the same locality or upon this one in other localities. Finally, while such covenants preclude the competition of the covenantor, it is ordinarily neither their purpose nor effect to stifle competition generally in the locality, nor to prevent it at all in a way or to an extent injurious to the public, for the business in the hands of the purchaser is carried on just as it was in the hands of the vendor, the former merely takes the place of the latter, the commodities of the trade are as open to the public as they were before, the same competition exists as existed before . . . the profits of the business go as they did before to swell the sum of public wealth, the public has the same opportunities of purchasing, if it is a mercantile business, and production is not lessened if it is a manufacturing plant. 6 R.C.L. 793, § 197."

Although the transaction in the case before us was the sale of stock in a business, we hold that, for covenant not to compete purposes, it is to be...