Kershaw v. Knox Kershaw, Inc.

• Decision Date: 11 March 1988
• Parties: 1988-1 Trade Cases P 67,981 Royce KERSHAW, Jr., and Kershaw Manufacturing Company, Inc. v. KNOX KERSHAW, INC. and Knox Kershaw. 85-521.
• Court: Alabama Supreme Court

Page 351

523 So.2d 351

1988-1 Trade Cases P 67,981

Royce KERSHAW, Jr., and Kershaw Manufacturing Company, Inc. v. KNOX KERSHAW, INC. and Knox Kershaw.

85-521.

Supreme Court of Alabama.

March 11, 1988.

Oakley Melton, Jr., and James E. Williams of Melton & Espy, Montgomery, for appellants.

William H. Mills of Redden, Mills & Clark, Birmingham, for appellees.

Charles A. Stakely, Jr., and Robert A. Huffaker of Rushton, Stakely, Johnston & Garrett, Montgomery, for amicus curiae Miriam M. Kershaw.

ADAMS, Justice.

This appeal involves an action arising out of reciprocal non-competition agreements entered into by Royce Kershaw, Jr. (hereinafter "Royce, Jr."), and Knox Kershaw (hereinafter "Knox"). The parties agreed to the covenants upon separating ownership of two companies, Kershaw Manufacturing Company, Inc. (hereinafter "KM Co."), and Knox Kershaw, Inc., (hereinafter "KK, Inc."). The defendants, Royce Kershaw, Jr., individually, and his company, KM Co., appeal the lower court's order validating the covenants not to compete and enjoining KM Co. and Royce, Jr., from leasing railroad maintenance equipment anywhere in the United States or Canada where KK, Inc., has done business since September 1, 1983.

The following issues are raised on appeal:

1. Whether the lower court erred in finding that KM Co. was not in the business of leasing railroad equipment prior to September 1, 1983.

2. Whether the lower court erred in validating the non-competition covenant in light of Ala.Code 1975, § 8-1-1.

a. Whether this argument was properly raised by the defendants at the trial level.

b. Whether the covenant was exempt from § 8-1-1, because it involved the sale of the good will of the business.

3. Whether the covenant not to compete violated Ala.Code 1975, § 8-10-3, and Section 1 of the Sherman Antitrust Act, 15 U.S.C.A. § 1, et seq. (1973).

4. Whether the non-competition agreement met the requirements of Ala.Code 1975, § 8-1-1.

a. Whether KK, Inc., had a protectable interest.

b. Whether the covenant was ambiguous and overbroad because it prohibited Royce, Jr., from leasing in any county or province where KK, Inc., "shall do business."

5. Whether the lower court erred by enjoining KM Co. from leasing anywhere in the United States or Canada where KK, Inc., had done, or will do business, between September 1, 1983, and September 1, 1988.

We find no error as to the first two issues. Since the third argument was not raised at the trial level, we will not address it on appeal. On the fourth issue, we affirm the lower court's order validating the covenant. However, we modify that part of the circuit court's judgment pertaining to the validity of the territorial language in the covenant and we enforce the contract only to the extent that it prohibits Royce, Jr., and KM Co. from leasing anywhere in the United States or Canada where KK, Inc., did business prior to September 1, 1983. Finally, we modify the territorial restriction in the circuit court's order for the same reason, but affirm the order's five-year requirement.

Royce, Jr., and Knox Kershaw are brothers. The two companies involved in this suit were originally formed by Royce Kershaw, Sr. After the death of their father in 1971, and until September 1, 1983, the brothers jointly owned both KM Co. and KK, Inc. ¹ Formed in 1944, KM Co. has been primarily in the business of manufacturing and selling machines used by railroads for maintaining the property surrounding the tracks. The company manufactures approximately 30 types of railroad equipment, some of which are multi-million dollar machines sold directly to railroads. On the other hand, KK, Inc., primarily is in the business of contracting maintenance services to railroads. The company provides the machinery and operators necessary to perform maintenance services and generally does not sell or lease its machines without also providing the operators to perform the job. Though the two businesses involve the same type of machinery, KM Co. is a manufacturer and seller, while KK, Inc., provides a service.

Differences of opinion about operating and directing the two companies, as well as personal conflicts, caused the parties to separate ownership. After years of negotiations, ownership of the companies was divided through two stock redemption agreements entered into on September 1, 1983. In one agreement Knox transferred his stock in KM Co. back to KM Co., in consideration of $12,817,100.00. In the other agreement Royce, Jr., transferred his stock in KK, Inc., back to KK, Inc., for a $1,500,000.00 promissory note. Knox took over sole ownership and control of KK, Inc., and Royce, Jr., obtained sole ownership of KM Co.

The stock redemption agreements also included two separate non-competition covenants. The issues on appeal involve only the validity of Royce, Jr.'s agreement not to compete with Knox and KK, Inc. The covenant reads in pertinent part:

[F]or a period of five (5) years after the date hereof, Royce Kershaw will not, within any county or province in the United States and Canada in which [KK, Inc.] or any company affiliated with [KK, Inc.] shall do business at any time during said five (5) year period, engage in any business which is competitive with that of [KK, Inc.] as an owner, stockholder, partner or employee, nor will he in any other way compete, directly or indirectly, with [KK, Inc.] or make his services or financial resources available to any other persons.... Without limiting the generality of the foregoing, Royce Kershaw will not permit KM Co. to sell its undercutter machine, its shoulder cleaner, its yard cleaner or its switch undercutter to any contracting firm for use in competition with [KK, Inc.] in the United States or Canada but KM Co. may sell such machines to railroads and may sell to other customers who use the machines to perform work at their own facility. If Royce Kershaw violates the restrictions in this paragraph, the period during which this paragraph shall apply shall be extended one (1) day for each day in which a violation of this paragraph occurs, and if suit is brought to enforce this paragraph and [KK, Inc.] establishes one or more violations by Royce Kershaw, [KK, Inc.] shall be entitled to an injunction restraining Royce Kershaw for further violations for a period of two (2) years from the date of the final decree less only such number of days that Royce Kershaw has not violated this Agreement, the burden on the employee [sic] to establish the number of days in which violations have not occurred.

(Emphasis added.)

On March 1, 1985, KK, Inc., filed a complaint, which was later amended, seeking a declaratory judgment and an injunction enjoining and restraining Royce, Jr., and KM Co. from leasing railroad maintenance equipment in alleged violation of the covenant not to compete. The defendants filed an answer and an amended answer with general denials asserting that the covenant was unenforceable because KK, Inc., lacked the necessary protectable interest to restrain Royce, Jr., or KM Co. from engaging in any business other than contract services for railroads in cities or counties where KK, Inc., was engaged in business prior to September 1, 1983.

After a trial without a jury, the lower court held in favor of the plaintiffs on the grounds that the covenant not to compete was valid, and that the defendants had violated the agreement by attempting to enter into lease agreements. The lower court entered an order enjoining the defendants from:

[O]ffering for straight leasing, undercutters, shoulder cleaners, yard cleaners and switch undercutters for that period and under the geographic restrictions as set forth in the non-competition agreement executed by Royce Kershaw, Jr. on September 1, 1983 and for any extensions of time that may be granted in subsequent Orders of the Court.

Upon a motion by the defendants to have the court clarify the order, the lower court issued its "Order on Rehearing" and deleted Provision VI of the prior order, replacing it with the following:

The prayer for relief of Knox Kershaw, II, and [KK, Inc.] in which injunctive relief is requested is due to be granted and by this Order, Royce Kershaw, Jr., and KM Co. are hereby restrained from offering for straight leasing, undercutters, shoulder cleaners, yard cleaners and switch undercutters for a period of five years from September 1, 1983, and for such additional period as may be granted in any subsequent Order of this Court, in any county or province in the United States or Canada in which [KK, Inc.] has done business since September 1, 1983.

The defendants appeal the lower court's order enjoining KM Co. from leasing the specified equipment for a period of five years, anywhere in the United States or Canada where KK, Inc., has done business since September 1, 1983.

I.

The defendants first argue that the intent of the covenant was to allow the parties to continue the business each maintained prior to the agreement, but not to prohibit future competition in new areas. Therefore, they say, KM Co. should not be enjoined from continuing its normal business of manufacturing, selling, and leasing undercutters, shoulder cleaners, yard cleaners, and switch undercutters. The primary issue is whether the defendants were engaged in leasing this equipment prior to September 1, 1983. In order to prove that KM Co. had been leasing equipment since 1953, the defendants presented various sales brochures from 1953 and 1956, which stated that KM Co. was prepared to "sell or lease" its equipment. Furthermore, the defendant introduced exhibits derived from reconstructing the sales records of KM Co., indicating that the defendant had entered into 17 lease agreements since 1953.

At trial, however, various defense witnesses admitted that they could not recall any specific instances in which KM Co. had actually leased any of the specified equipment since 1966. Further, on cross-examination, the defense witnesses...