Morris v. Homco Intern., Inc.
| Decision Date | 25 August 1988 |
| Docket Number | No. 87-3709,87-3709 |
| Citation | 853 F.2d 337 |
| Parties | J.B.N. MORRIS, Plaintiff-Appellee, Cross-Appellant, v. HOMCO INTERNATIONAL, INC., Defendant-Appellant, Cross-Appellee. |
| Court | U.S. Court of Appeals — Fifth Circuit |
Nathalie M. Walker, Ewell E. Eagan, New Orleans, La., for defendant-appellant, cross-appellee.
Michael H. Piper, III, Metairie, La., for plaintiff-appellee, cross-appellant.
Appeals from the United States District Court for the Eastern District of Louisiana.
Before RUBIN, GARZA, and JONES, Circuit Judges.
The seller of a business seeks to collect a payment due him under the terms of a non-competition agreement executed in conjunction with the sale. Alleging breach of the agreement by the seller, the buyer seeks to avoid the payment and, by counterclaim, to collect damages sustained as a result of the breach. Applying Louisiana law in this diversity-jurisdiction suit, we affirm the district court's holding that the seller violated the contract, but we reverse its judgment insofar as it applied the Louisiana doctrine of substantial performance, and we revise its damage awards.
J.B.N. Morris founded and owned substantially all of the stock of two companies, Parker Industry Corporation and J.B.N.M. Corporation. He sold both to Parker International Corporation for $4,000,000 in August, 1978. In 1981, all three companies merged into Homco International Corporation. Parker Industry became a division of Homco manufacturing various kinds of oil-field equipment.
When Morris sold the companies to Parker International, he entered into a non-competition and consulting agreement of seven-years duration, separate from the contract of sale. Parker International agreed to pay Morris up to $465,000 for his consultation and advice in helping the company to develop new markets and new products and for his service on the Board of Directors. There is no dispute concerning Morris's performance as a consultant or his fees for this service. In addition, Parker International agreed to pay Morris $145,000 for the first year and $105,000 for each of the following six years in return for Morris's promise to refrain from the activities described in p 4 of the agreement. Paragraph 4 provides in relevant part:
Noncompetition: Except as consented to in writing by the Company, for a period of seven years from the date of this Agreement Morris will not (i) directly or indirectly engage in or become interested in (except for ownership of not more than 5% of the outstanding equity securities of any publicly held company) the business of distributing, renting, manufacturing or marketing any Hevi-wate drill pipe, flow couplings, blast joints, pup joints for tubing, wear bushings, retrieving tools, J-Float valves, or landing nipples or any products or services which perform functions substantially similar to the functions performed by any of such types of products, whether as a sole proprietor, as director, officer or employee of any corporation, firm or other person, as a partner, limited or general, of any partnership, as the owner of any equity securities of any company or otherwise[.]
Parker International and later Homco made the requisite monthly payments to Morris through May 15, 1984. Homco then stopped the payments and informed Morris that it considered him to have breached the non-competition provision. Morris filed suit in state court to collect the remaining contract payments. Invoking diversity jurisdiction, Homco removed to federal court and filed a counterclaim alleging that Morris had breached the contract.
The district court found that Morris had breached the contract in two ways: first, through his 25% ownership interest in Tubular Threading, Inc., (TTI), a company engaged in the manufacture of "tube products" including, for example, pup joints and blast joints; and second, through his management and ownership of Rental Tools, Inc., a company that rented oil-field equipment including wear bushings and retrieving tools to drilling companies. The court found that Morris had not, as Homco alleged, breached the agreement by interfering with Homco's relationships with its employees or by negotiating with a company called Tube-Alloy to license TTI's proprietary thread patterns.
In spite of Morris's breaches, the district court held that he had "substantially performed" his part of the contract and that Homco, therefore, owed him the remaining contract payments plus certain incidentals amounting to $121,438. From this, the court proposed to deduct $128,757.08, the amount corresponding to the gross revenues TTI and Rental Tools had taken in through violations of the prohibitions of p 4. The district court, therefore, entered a judgment ordering Morris to pay Homco $7,319.08.
Morris timely filed a motion under Federal Rule of Civil Procedure 59(e) to alter or amend the judgment on the ground that Louisiana law made Homco's lost profits, and not TTI's and Rental Tools's revenues, the measure of damages for breach of contract. 1 The district court granted the motion and, over Morris's objection, reopened the record to permit Homco to introduce evidence of the profits it had lost due to Morris's breaches. A special master received evidence and prepared a report recommending that the court award Homco $54,627.39, an amount purported to represent the lost profits Homco had proved with reasonable certainty. The court adopted the special master's findings and recommendation and altered the judgment to award Morris $66,810.61, the difference between what the court had decided Morris was still due under the contract and the lost profits due to Homco.
Both Homco and Morris appealed. Morris argues that the district court erred in holding that he had breached the non-competition clause, in reopening the record for Homco to produce evidence of lost profits, and in calculating Homco's lost profits. Homco charges that the district court mistakenly found certain conduct by Morris not in breach of the agreement; improperly borrowed the doctrine of substantial performance from cases involving construction contracts and applied it to the non-competition agreement in this case; and failed to award to Homco the restitution of all contract payments it had made to Morris after the initial breach.
We review the factual findings of the district court under the clearly erroneous standard, 2 refusing to displace its judgment with our own unless we are left with a firm and definite conviction that a mistake has been made. 3
Paragraph 4 of the non-competition agreement forbids Morris to "become interested in ... the business of ... manufacturing ... any ... flow couplings, blast joints, [or] pup joints for tubing." The district court found that Morris owned a 25% interest in Tubular Threading, Inc., (TTI), a company engaged in threading tube products to create, among other things, flow couplings, blast joints, and pup joints. The district court found further that threading was an integral part of the manufacturing process so that Morris's part ownership of TTI violated the clear terms of p 4. Each of these findings is supported by the record.
Morris argues, however, that he did not breach the agreement by virtue of his interest in TTI because TTI does not compete directly with Homco: TTI threads tube products for third parties whereas Homco threads only in-house products, i.e., products it has manufactured; and TTI does mostly premium threading whereas Homco does more standard threading and contracts with other companies for premium threading. Morris asserts that Louisiana law frowns on non-competition agreements that proscribe activities beyond the scope of the contracting parties' businesses.
These arguments fail for two reasons. First, Louisiana courts uphold non-competition agreements entered into as part of the consideration for the sale of a business and its goodwill so long as the agreements are reasonable in duration, equally binding on all parties, fair to each party, and reasonably protective of "the individual's right to engage freely in his occupation." 4 The district court found, and the record supports, that Morris and Homco held equal bargaining power and executed a contract that was fair to both sides and provided ample opportunity for Morris to engage in the oil-field business outside the scope of the activities precisely proscribed. Thus, the non-competition agreement contravenes neither Louisiana law nor public policy.
Second, the record belies Morris's assertion that TTI did not compete with Homco. Homco may not itself do two-step or premium threading, but it does contract for such services, and it then sells end-finished tube products to its customers. TTI does premium threading for companies that compete directly for Homco's markets. Moreover, the district court found, and the record supports, that TTI had on occasion threaded tubing to American Petroleum Institute specifications, the same specifications Homco follows, and performed services for corporations (including Mobil and Chevron) that are longtime Homco customers. Under Louisiana law, two businesses need not be identical to be in competition; it is sufficient if their operations or markets overlap. 5 We, therefore, affirm the district court's conclusion that Morris breached the non-competition clause by virtue of his one-quarter ownership of TTI.
The district court held also that Morris had breached the non-competition agreement by his ownership and management of Rental Tools, Inc. Paragraph 4 prohibits Morris from obtaining an interest in the business of renting certain oil-field equipment, including wear bushings and retrieving tools. In December, 1979, Parker International agreed to make an exception to p 4 by allowing Morris to rent wear bushings to third parties provided that these bushings came first from Parker. The district court found, however, that Rental Tools had rented both wear...
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