Peat Marwick Main & Co. v. Haass

• Citation: 818 S.W.2d 381
• Decision Date: 11 September 1991
• Docket Number: No. C-9128,C-9128
• Parties: 1991-2 Trade Cases P 69,587 PEAT MARWICK MAIN & COMPANY, Successor to Certain Interests of KMG Main Hurdman, Petitioner and Cross-Respondent, v. Lawrence F. HAASS, Respondent and Cross-Petitioner.
• Court: Supreme Court of Texas

Page 381

818 S.W.2d 381

1991-2 Trade Cases P 69,587

PEAT MARWICK MAIN & COMPANY, Successor to Certain Interests

of KMG Main Hurdman, Petitioner and Cross-Respondent, v. Lawrence F. HAASS, Respondent and Cross-Petitioner.

No. C-9128.

Supreme Court of Texas.

Sept. 11, 1991.

Rehearing Overruled Dec. 11, 1991.

W. Wendell Hall, Dan Matthews, San Antonio, for petitioner and cross-respondent.

Paul M. Green, San Antonio, for respondent and cross-petitioner.

OPINION

GAMMAGE, Justice.

This is a contract construction case involving a merger agreement between two accounting firms and the contractual damages provision for a departing partner who takes clients from the firm. The court of appeals held one damages provision was an unenforceable restraint on trade but the other provision was enforceable. 775 S.W.2d 698. We hold that a damages provision affecting the right to render personal services operates as a restraint of trade and must be judged by the reasonableness standards for covenants not to compete, and that the sole relevant contractual provision at issue is unreasonable. We reverse the judgment of the court of appeals because it provided for a remand on the irrelevant damages provision, and affirm the trial court judgment.

The underlying dispute began as a merger of two accounting firms. Lawrence Haass was the youngest of four major partners in the San Antonio accounting firm of Chorpening Jungmann and Company. The percentage ownerships for major partners were John Sowell (35%), Walter Jungmann (25%), Anthony Koch (22.5%), and Haass (11.5%). Jungmann and Koch wanted to retire immediately, and Sowell was considering retirement, but they were concerned about the firm's capacity to insure retirement benefits for all three. Without informing Haass, Jungmann, Koch and Sowell approached Main Hurdmann, ¹ a large international accounting firm with a relatively small San Antonio branch office, about the possibility of a merger. Identifying the respective accounting firms with their initials, the merger proposal was that MH would acquire CJ's client base and goodwill in return for MH's payment of retirement, disability and death benefits to the retiring partners. Haass was not included in any of the preliminary negotiations. Haass was not to receive any kind of immediate compensation for his share of the CJ client base. Rather, his share in CJ was to be transferred to MH, and he was to become an MH partner in proportion to his CJ interest.

The senior partners only presented the proposal to Haass after the basic agreement was reached. Haass from the beginning voiced his objections to the MH partners involved and the other CJ partners. Haass expressed his concerns that "the big firm, national firm atmosphere versus a small firm" would result in the office being "run from some other office" far away. Haass was concerned that the professional development of the CJ accountants and the service to their existing clients would both suffer from the proposed merger. Haass opposed the merger.

Haass was the linchpin of the merger. Internal MH merger evaluation documents demonstrate that without Haass' participation, the merger deal with CJ was not attractive to MH. The retiring CJ partners threatened Haass with a lawsuit if he did not go along with the merger. Additionally, they agreed with MH to a reduction of their retirement benefits if Haass left the combined firm. To alleviate Haass' concern, MH represented to him that Sowell would be the partner in charge of the merged San Antonio office, and that Haass would be the partner in charge of the combined services area. MH and Haass further had the understanding that Sowell was going to run the office to the extent possible under MH's policies and procedures. ^{2 2} Further, MH agreed to a provision guaranteeing Haass' income to be over $91,000 for the first twenty months after the merger. Although he continued to express misgivings, Haass eventually signed the merger agreement.

The merger agreement set forth the details as to assets, liabilities, retirement benefits, computation of partnership shares in the merged firm, and other matters necessary to memorialize the transaction. In particular, the merger agreement incorporated by reference the standard MH partnership agreement. Paragraph 11 of the merger agreement provided that if Haass withdrew from MH and took MH clients with him that he would compensate MH as provided for in the partnership agreement. Haass did not separately sign the partnership agreement, which contains the damages provisions for partners terminating "other than by retirement" at issue. ³

The plan for Sowell to smooth the transition as partner in charge went awry. Almost immediately after the merger was completed, Sowell became incapacitated with a terminal illness and had to withdraw from the organization entirely. Sowell's withdrawal prompted MH to bring in a partner from its Houston office to be partner in charge. According to Haass' perceptions, the changes he feared from the beginning, such as discrimination against employees from the CJ half of the merger, began to occur. Haass and other key personnel became increasingly disenchanted with MH's policies and procedure. Approximately one year after the merger, Haass and several employees formerly with CJ (Bruce Lindow, Caroline Rawie, and Phil Sagebiel) tendered their resignations. A few days later, Vicki Ravenburg also resigned. Shortly thereafter Haass and the resigning employees opened a new accounting firm, Haass and Company. It is undisputed that the new firm was planned and organized while they were on MH's payroll. Many MH clients who had been served by Haass or one of the other departing accountants then became clients of Haass and Company, some of them almost immediately.

MH sued Haass on the partnership agreement and for violation of his fiduciary duty to MH as a partner. Haass answered with a general denial, specific denials and affirmative defenses, including that the agreement operated in restraint of trade and as a penalty, and was therefore unenforceable. Haass counterclaimed for his capital account. ⁴ Trial was to a jury which generally found the factual issues favorably for Haass. The amount of damages under the "all direct costs (out of pocket expenses)" connected with MH client acquisitions, as specified in the partnership agreement, ⁵ was submitted to the jury and found to be $126,000. The parties stipulated that should Haass prevail with one of his defenses he would receive his capital account. The jury found Haass' reasonable attorneys' fees to be $30,000, and the trial court rendered judgment on the jury verdict for Haass against MH, and that MH take nothing against Haass.

MH appealed the adverse judgment. The court of appeals held that there was no evidence to support the jury findings on Haass' defenses involving disputed facts, and therefore reached the purely legal defense of whether the damages provisions for providing accounting services to MH clients or former clients was a restraint on trade. The court of appeals held that the client acquisition cost provision operated as a restraint of trade and was therefore unenforceable, that the "client reimbursement provision" was reasonable and enforceable, requiring that a portion of the trial court's judgment be reversed and remanded for determination of MH's damages under that provision and attorney's fees, ⁶ but affirmed the trial court judgment that Haass recover his capital account subject to a $15,000 remittitur of attorneys' fees. 775 S.W.2d at 711. Both parties filed applications for writ of error to this court.

MH contends that the damages provision is not a covenant against competition and that it is a reasonable damages provision governed by this court's opinion in Henshaw v. Kroenecke, 656 S.W.2d 416 (Tex.1983). MH argues, therefore, that the court of appeals erred in applying the standards of Hill v. Mobile Auto Trim, Inc. 725 S.W.2d 168 (Tex.1987), to conclude that the provision is an unreasonable restraint on trade. Haass contends that the provision operates as a noncompetition agreement and that the court of appeals correctly applied Hill v. Mobile Auto Trim.

The provisions in question do not expressly prohibit Haass from providing accounting services to clients of MH. Rather, they provide that if he does, Haass must pay as a form of liquidated damages "all direct costs (out-of-pocket expense), paid or to be paid by [MH] in connection with the acquisition of such client including, without limitation, retirement benefit obligations of any predecessor firm." Further, the broad definition of "client" includes not only existing clients but also any party "who became such a client during the twenty-four-(24)-month period" after Haass left and whether or not they were part of the "client base" MH acquired when it merged with CJ.

The treatment of damages provisions similar to the one at issue has been addressed by the courts in a number of jurisdictions. Most courts have analyzed such provisions as restraints on trade sufficiently similar to covenants not to compete to be governed by the same general reasonableness principles in order to be enforceable. ⁷ Even those courts that have declined to treat such damages provisions as restraints on trade have required them to be reasonable to be enforced. ⁸ The reasonableness tests adopted by courts declining to treat such damages provisions as restraints on trade may generally be described as whether the restriction is greater than necessary to protect the business and goodwill of the employer, the economic hardship which the covenant imposes on the departing party, and whether the restriction adversely affects the interests of the public. Annotation, Covenants To Reimburse Former Employer for Lost Business, 52 A.L.R.4th 139, 142 (1987). We regard these reasonableness tests as essentially indistinguishable from the ones applied to covenants in restraint of trade....