Purchasing Associates, Inc. v. Weitz

• Decision Date: 30 December 1963
• Citation: 196 N.E.2d 245,13 N.Y.2d 267,246 N.Y.S.2d 600
• Parties: , 196 N.E.2d 245 PURCHASING ASSOCIATES, INC., Respondent, v. Morton WEITZ, Defendant and Third-Party Plaintiff-Appellant; Albert J. KAPLAN, Third-Party Defendant.
• Court: New York Court of Appeals Court of Appeals

Page 600

246 N.Y.S.2d 600

13 N.Y.2d 267, 196 N.E.2d 245

PURCHASING ASSOCIATES, INC., Respondent, v. Morton WEITZ, Defendant and Third-Party Plaintiff-Appellant;

Albert J. KAPLAN, Third-Party Defendant.

Court of Appeals of New York.

Dec. 30, 1963.

Jay H. Topkis and Martin London, New York City, for appellant.

Hiram G. Shields, Jack N. Blinkoff and Harold W. Grubart, New York City, for respondent.

FULD, Judge.

This appeal, here by our leave, requires us to determine whether the covenant made by the defendant not to compete with the plaintiff is enforcible.

The defendant Morton Weitz was engaged for some years in data processing work in New York City as an employee of Grayson-Robinson Stores, a retail chain. In April of 1961, he and two other men formed a partnership known as Purchasing Associates to carry on the business of purchasing routine supplies for business organizations on a fee basis. About a month and a half later, on June 6, a contract was executed detween that partnership and Associated Sales Analysts, Inc., whereby the former agreed in terms to 'sell' its assets to the plaintiff, a newly formed wholly owned subsidiary of Associated, which was to engage, among other things, in the data processing business. Under this contract, the defendant and his copartners were to receive all of the net profits realized by the plaintiff in the years 1962, 1963 and 1964 as payment for their interests in the former partnership.

On June 13, 1961, the defendant entered into an employment contract with the plaintiff. By its terms, the plaintiff agreed to employ the defendant for two years, beginning October 1, 1961, at an annual salary of $18,000, plus $2,000 a year for expenses, and, for his part, the defendant agreed that for a period of two years from the date of the termination of his employment he would not 'within a 300-mile radius' of New York City 'directly or indirectly own * * * be employed or participate in the management, operation or control of, or be connected in any manner with, any business of the type and character of business engaged in by (his employer) * * * at the time of such termination'. In October of 1962, following a disagreement with his employer, the defendant resigned from his job and thereafter organized Datamor Associates, Inc., which is also engaged in the data processing business.

The plaintiff thereupon brought this action to compel compliance with the terms of the restrictive covenant and to enjoin the defendant from engaging in such data processing business within the area and for the period specified in the covenant. Its complaint, neither describing the covenant as one ancillary to the 'sale' of a business nor characterizing the defendant's services as 'special, unique or extraordinary,' alleged that the defendant, as a part of his services, 'learned the operation and conduct of the business of the plaintiff,' 'became familiar with all of the trade secrets of (the) plaintiff and of (its) business methods' and 'intends to use the knowledge, * * * methods and trade secrets' thus acquired 'in violation of the restrictive covenant contained in (the) agreement'. The defendant not only denied these allegations but questioned the enforcibility of the covenant.

Following a trial without a jury, the court, although holding that 'there are no trade secrets involved,' granted the plaintiff the relief sought. It was the court's view that the restrictive covenant was enforcible on two grounds first, that the defendant's services were "special, unique and of extraordinary character" and, second, that the covenant was made 'in connection with the sale of a business'. The Appellate Division affirmed the judgment and, as already noted, we granted leave to appeal.

At one time, a covenant not to compete, basically an agreement in restraint of trade, was regarded with high disfavor by the courts and denounced as being 'against the benefit of the commonwealth'. (Colgate v. Bacheler, 2 Cro.Eliz. 872; see Diamond Match Co. v. Roeber 106 N.Y. 473, 479-484, 13 N.E. 419, 420-422; Wood v. Whitehead Bros. Co., 165 N.Y. 545, 550-551, 59 N.E. 357, 358; see, also, 5 Williston, Contracts (rev. ed., 1937), §§ 1634-1635.) It later became evident, however, that there were situations in which it was not only desirable but essential that such covenants not to compete be enforced.

Where, for instance, there is a sale of a business, involving as it does the transfer of its good will as a going concern, the courts will enforce an incidental covenant by the seller not to compete with the buyer after the sale. (See, e. g., Wirth & Hamid Fair Booking v. Wirth, 265 N.Y. 214, 192 N.E. 297; Hackenheimer v. Kurtzmann, 235 N.Y. 57, 138 N.E. 735; Diamond Match Co. v. Roeber, 106 N.Y. 473, 13 N.E. 419, supra; see, also, 6A Corbin on Contracts (1962), § 1385; 5 Williston, Contracts (rev. ed., 1937), § 1641.) This rule is grounded, most reasonably, on the premise that a buyer of a business should be permitted to restrict his seller's freedom of trade so as to prevent the latter from recapturing and utilizing, by his competition, the good will of the very business which he transferred for value. (See, e. g., Lynch v. Bailey, 300 N.Y. 615, 90 N.E.2d 484, affg. 275 App.Div. 527, 90 N.Y.S.2d 359; Diamond Match Co. v. Roeber, 106 N.Y. 473, 13 N.E. 419, supra; see, also, 6A Corbin on Contracts (1962), § 1385.) This court has applied the 'sale of a business' rationale where an owner, partner or major stockholder of a commercial enterprise has sold his interest for an immediate consideration which was, in part, payment for the good will of the business, in terms of 'continuity of place' and 'continuity of name'. (See Lynch v. Bailey, 300 N.Y. 615, 90 N.E.2d 484, affg. 275 App.Div. 527, 90 N.Y.S.2d 359, supra; Wirth & Hamid Fair Booking v. Wirth, 265 N.Y. 214, 192 N.E. 297, supra; Hackenheimer v. Kurtzmann, 235 N.Y. 57, 138 N.E. 735, supra; Diamond Match Co. v. Roeber, 106 N.Y. 473, 13 N.E. 419, supra; see, also, Goldstein v. Maisel, 271 App.Div. 971, 67 N.Y.S.2d 410.) The sole limitation on the enforcibility of such a restrictive covenant is that the restraint imposed be 'reasonable,' that is, not more extensive, in terms of time and space, than is reasonably necessary to the buyer for the protection of his legitimate interest in the enjoyment of the asset bought. (See Lynch v. Bailey, 300 N.Y. 615, 90 N.E.2d 484, affg. 275 App.Div. 527, 90 N.Y.S.2d 359, supra; Diamond Match Co. v. Roeber, 106 N.Y. 473, 481-486, 13 N.E. 419, 421-423, supra; Dunlop v. Gregory, 10 N.Y. 241; see, also, 5 Williston, Contracts (rev. ed., 1937), §§ 1636, 1638-1639, 1641; 6A Corbin on Contracts (1962), §§ 1386-1387, 1391.)

Also enforcible is a covenant given by an employee that he will not compete with his employer when he quits his employ, and the general limitation of 'reasonableness', to which we have just referred applies equally to such a covenant. (See, e. g., Interstate Tea Co. v. Alt, 271 N.Y. 76, 2 N.E.2d 51; McCall Co. v. Wright, 198 N.Y. 143, 149-151, 91 N.E. 516, 517-518, 31 L.R.A., N.S., 1249; see, also, 6A Corbin on Contracts (1962), pp. 94-97.) However, since in the case of such a covenant the element of good will, or its transfer, is not involved and since there are powerful considerations of public policy which militate against sanctioning the loss of a man's livelihood, the courts have generally displayed a much stricter attitude with respect to covenants of this type. (See Lynch v. Bailey, 300 N.Y. 615, 90 N.E.2d 484, affg. 275 App.Div. 527, 90 N.Y.S.2d 359, supra; Murray v. Cooper, 268 App.Div. 411, 51 N.Y.S.2d 935, affd. 294 N.Y. 658, 60 N.E.2d 387; see, also, 5 Williston, Contracts (rev. ed., 1937), § 1643.) Thus, a covenant by which an employee simply agrees, as a condition of his employment, not to compete with his employer after they have severed relations is not only subject to the overriding limitation of 'reasonableness' but is enforced only to the extent necessary to prevent the employee's use or disclosure of his former employer's trade secrets, processes or formulae (see, e. g., Lepel High Frequency Laboratories v. Capita, 278 N.Y. 661, 16 N.E.2d 392; Clark Paper & Mfg. Co. v. Stenacher, 236 N.Y. 312, 140 N.E. 708, 29 A.L.R. 1325; National Starch Products v. Polymer Industries, 273 App.Div. 732, 79 N.Y.S.2d 357) or his solicitation of, or disclosure of any information concerning, the other's customers. (See, e. g., Carpenter & Hughes v. De Joseph, 10 N.Y.2d 925, 224 N.Y.S.2d 9, 179 N.E.2d 854, affg. 13 A.D.2d 611, 213 N.Y.S.2d 860; Clark Paper & Mfg. Co. v. Stenacher, 236 N.Y. 312, 318, 140 N.E. 708, 710, 29 A.L.R. 1325, supra; Corpin v. Wheatley, 227 App.Div. 212, 237 N.Y.S. 205.) If, however, the employee's services are deemed 'special, unique or extraordinary', then, the covenant may be enforced by injunctive relief, if 'reasonable,' even though the employment did not involve the possession of trade secrets or confidential customer lists. (See Frederick Bros. Artists Corp. v. Yates, 296 N.Y. 820, 72 N.E.2d 13, affg. 271 App.Div. 69, 62 N.Y.S.2d 714; Clark Paper & Mfg. Co. v. Stenacher, 236 N.Y. 312, 320, 140 N.E. 708, 711, 29 A.L.R. 1325, supra; Kaumagraph Co. v. Stampagraph Co., 235 N.Y. 1, 9, 138 N.E. 485, 487; Corpin v. Wheatley, 227 App.Div. 212, 213, 237 N.Y.S. 205, supra; Magid v. Tannenbaum, 164 App.Div. 142, 144-145, 149 N.Y.S. 445, 446; see, also, 6A Corbin on Contracts (1962), pp. 99-100; cf. Foster v. White, 248 App.Div. 451, 290 N.Y.S. 394, affd. 273 N.Y. 596, 7 N.E.2d 710.)

With these principles in mind, we turn to the record before us to determine if the present restrictive covenant permits enforcement as either one ancillary to the sale of a business or one made in connection with a contract of employment. In our view, it does not.

Although the plaintiff had the defendant sign a paper labeled 'contract of sale', the present transaction may not be considered the sale of a 'business'...