Monogram Industries, Inc. v. Sar Industries, Inc.

• Decision Date: 08 December 1976
• Citation: 64 Cal.App.3d 692,134 Cal.Rptr. 714
• Court: California Court of Appeals Court of Appeals
• Parties: , 1977-1 Trade Cases P 61,296 MONOGRAM INDUSTRIES, INC., a corporation, Plaintiff and Respondent, v. SAR INDUSTRIES, INC., a corporation, et al., Defendants and Appellants. Civ. 48614.

Page 714

134 Cal.Rptr. 714

64 Cal.App.3d 692, 1977-1 Trade Cases P 61,296

MONOGRAM INDUSTRIES, INC., a corporation, Plaintiff and Respondent, v. SAR INDUSTRIES, INC., a corporation, et al., Defendants and Appellants.

Civ. 48614.

Court of Appeal, Second District, Division 2, California.

Dec. 8, 1976.

Rehearing Denied Jan. 7, 1977.

Sheppard, Mullin, Richter & Hampton, John A. Sturgeon and Don T. Hibner, Jr., Los Angeles, for defendants and appellants.

Richards, Watson, Dreyfuss & Gershon, Harry L. Gershon and Margaret Eve Spencer, Los Angeles, for plaintiff and respondent.

COMPTON, Associate Justice.

Monogram Industries, Inc., a company engaged in, among other things, the production and marketing of portable or non-conventional toilet systems, commenced this action against Sar Industries, Inc., Sarmax Corporation, Norris J. Bishton, Jr., and John S. Blick, III, which entities and persons are engaged in a similar business, seeking damages for misappropriation of trade secrets and an injunction to enforce a covenant not to compete and negative provisions of a consulting agreement.

The trial court, on motion of Monogram, and after hearing thereon, issued a preliminary injunction paralleling the terms of the covenant not to compete. ¹ Defendants appeal from the order. They contend that the covenant as written was void and in any event the injunction is overly broad in scope as to the activity prevented and the territory covered.

Prior to October 31, 1973, defendant Bishton was executive vice president of Monogram and defendant Blick was the owner of two-thirds of all the outstanding shares of Modular Manufacturing, Inc. (Modular). Blick and one Fuller, who owned the remaining one-third of the stock, had formed Modular approximately 16 months earlier.

On the above-mentioned date, and as a result of negotiations, between Bishton and Blick, Monogram purchased from Blick and Fuller all of the stock in Modular. In conjunction with that purchase and sale, Blick and Fuller executed the consulting agreement and a covenant not to compete.

The covenant states in part:

'This covenant is entered into this 31st day of October, 1973, by and among MONOGRAM INDUSTRIES, INC., a Delaware corporation, hereinafter called 'Company' and John S. Blick, III and Ralph Fuller, hereinafter called 'Covenantors.'

'1. Covenantors covenant and agree that for . . . five (5) years . . . they will not, (become involved in any business activity within the United States, Puerto Rico, the Virgin Islands and Canada) which is directly competitive with any aspect of the business of Company as presently conducted, and as said business may evolve in the ordinary course between the date of this Covenant and its termination. For the purposes of this Agreement, 'competitive business' shall mean any business in the fields of Modular building structures, sanitation or sanitation products.'

This action was commenced on July 14, 1975, and on September 25, 1975, the trial court issued a preliminary injunction as follows:

'IT IS ORDERED that, during the pendency of this action or until further order of this Court:

'1. Defendant JOHN S. BLICK, III be, and he is hereby enjoined and restrained from owning, managing, operating, joining, controlling, being employed by or performing services in, or being in any other manner connected with, any business activity being conducted or operated by any person, firm or corporation other than plaintiff, in the fields of design, manufacture, marketing and sale of modular building structures, sanitation units and sanitation products.

'2. Defendant SAR INDUSTRIES, INC., a corporation, SARMAX CORPORATION, a corporation, and NORRIS J. BISHTON, JR., and each of them, and each and all of their officers, agents, employees and representatives, and all persons acting in concert or participation with them or any of them, be, and they are hereby, restrained and enjoined from employing or continuing the employment of, and from soliciting, receiving, or accepting the performance of services by defendant JOHN S. BLICK, III, in the fields of design, manufacture, marketing and sale of modular building structures, sanitation units and sanitation products.'

In California with certain limited exceptions a contract under which a person is prevented from engaging in a profession, trade or business is void. (Bus. & Prof.Code, & 16600.) The specific exception relevant here is found in Business and Professions Code section 16601 which permits a person who sells the goodwill of a business or all of his shares in a corporation to agree with the buyer not to carry on a similar business In the area where the business or corporation has previously carried on its business for so long as the buyer carries on a like business therein.

Covenants not to compete have been the subject of a considerable amount of attention from legal writers and courts. The number of texts, treatises and judicial opinions that have been written in the field constitute a 'sea--vast and vacillating, overlapping and bewildering' and the sheer volume can 'drown the researcher.' (Arthur Murray Dance Studios of Cleveland v. Witler, Ohio Com.Pl., 105 N.E.2d 685 at p. 687; also see Blake, Employee Covenants Not to Compete, 73 Harv.L.Rev., 625.)

A few generalizations, however, can be stated. These covenants generally have their genesis in either an employer-employee relationship, or in the sale of the 'goodwill' of a business. Covenants arising out of the sale of a business are more liberally enforced than those arising out of the employer-employee relationship. Covenants which are designed simply to prevent competition per se are unenforceable. Enforceability appears to rest on a notion, often unarticulated, of preventing 'unfair' competition.

In the case of the sale of the goodwill of a business it is 'unfair' for the seller to engage in competition which diminishes the value of the asset he sold. In order to protect the buyer from that type of 'unfair' competition, a covenant not to compete will be enforced to the extent that it is reasonable and necessary in terms of time, activity and territory to protect the buyer's interest. (United States v. Addystone Pipe & Steel Co., 6 Cir., 85 F. 271, 282--283, affd. 175 U.S. 211, 20 S.Ct. 96, 44 L.Ed. 136.)

In brief at common law a restraint against competition was valid to the extent it reasonably provided for the protection of a valid interest of the covenantee. (Corbin on Contracts, § 1387 at pp. 55--56; § 1393 at p. 87; Rest. Contracts, § 516, subd. (a).) California Business and Professions Code section 16601 is a codification of this rule of 'reasonableness' in connection with the sale of a business. (City Carpet, etc. Works v. Jones, 102 Cal. 506, 36 P. 841.)

That section permits a covenant not to engage in a business 'similar' to the one sold, in the area where the business sold has been carried on, so long as the buyer carries on a like business therein. The buyer's business need not use the same name or similar organization. (Continental Etc. Industries, Inc. v. Marks, 109 Cal.App.2d 310, 240 P.2d 718.) The language of the section insures that the competition is in fact such and not simply insubstantial and infrequent or isolated transactions. (Kaplan v. Nalpak Corp., 158 Cal.App.2d 197, 322 P.2d 226; Swenson v. Fite, 3 Cal.3d 389, 90 Cal.Rptr. 580, 475 P.2d 852; Roberts v. Pfefer, 13 Cal.App.3d 93, 91 Cal.Rptr. 308.)

To understand defendants' contentions here, it is necessary to set forth the factual background. In doing so we, of course, present the evidence in the light most favorable to the trial court's order. (Allen v. Pitchess,36 Cal.App.3d 321, 111 Cal.Rptr. 658.)

As early as 1971 Bishton, who was, as noted earlier, executive vice president of Monogram, was engaged in developing a toilet system utilizing oil as a reusable flushing agent. This concept is in the public domain. It has the advantage of being able to be used where septic tanks and sewers are not available. It also obviates the need for large quantities of water. Monogram called its particular system the 'Magic Flush System.'

Modular originally designed and built modular housing and equipment systems for self-contained or alternative toilet systems. The Modular toilet was designated as the DK 1000. It was readily adaptable for use with a recirculating system such as 'Magic Flush' or with a nonflushing tank system.

From its place of manufacture in Laguna Niguel, California, Modular solicited sales of the DK 1000 by mailing out brochures to approximately 500 recipients and press releases to another 200 potential customers. At a trade show in Las Vegas another 250 brochures were distributed. Orders were received from throughout California, New Mexico, Virginia, Michigan, Georgia, Illinois, Wisconsin, and Puerto Rico. Solicitation in trade journals elicited additional inquiries including one from Taiwan. Since self-contained toilet systems are usable in wilderness areas, federal agencies such as the National Park Service and the United States Forest Service were also solicited.

Bishton on behalf on Monogram attended the Las Vegas trade show, received Modular sales materials and saw the possibilities of using the Modular system as a part of the Monogram Flush System. Subsequently, Modular was engaged by Monogram as a contractor to build units to house the Magic Flush toilet. Some 160 portable Magic Flush units were ordered from Modular between December 1972 and June 1973. These units were, in turn, widely promoted and marketed by Monogram.

Apparently this production of Magic Flush as well as design and development work on the system for Monogram became the sole activity of Modular between December 1970 until it was purchased by Monogram in October 1973.

Following the purchase, Modular became a subsidiary of Monogram with the name Monogram Sanitation Products, Inc. Blick became president and Fuller vice president of the subsidiary. Blick...