Reiman Associates, Inc. v. R/A Advertising, Inc.

• Decision Date: 27 April 1981
• Docket Number: No. 80-902,80-902
• Citation: 102 Wis.2d 305,306 N.W.2d 292
• Court: Wisconsin Court of Appeals
• Parties: REIMAN ASSOCIATES, INC., a Wisconsin corporation, and Roy Reiman, Plaintiffs- Respondents and Cross-Appellants, v. R/A ADVERTISING, INC., now known as Bader Rutter & Associates, Inc., a Wisconsin corporation, and Ronald L. Bader and James Rutter, Defendants- Appellants and Cross-Respondents. *

Page 292

306 N.W.2d 292

102 Wis.2d 305

REIMAN ASSOCIATES, INC., a Wisconsin corporation, and Roy Reiman, Plaintiffs- Respondents and Cross-Appellants, v. R/A ADVERTISING, INC., now known as Bader Rutter &amp Associates, Inc., a Wisconsin corporation, and Ronald L. Bader and James Rutter Defendants- Appellants and Cross-Respondents.^*

No. 80-902.

Court of Appeals of Wisconsin.

Submitted on Briefs Dec. 17, 1980.

Opinion Released April 27, 1981.

Opinion Filed April 27, 1981.

Weiss, Steuer, Berzowski & Kriger and Robert K. Steuer and Thomas L. Skalmoski, Milwaukee, of counsel, for defendants-appellants and cross-respondents.

Quarles & Brady and Ronald L. Wallenfang and John A. Rothstein, Milwaukee, on brief for plaintiffs-respondents and cross-appellants.

Before DECKER, C. J., MOSER, P. J., and CANNON, J.

DECKER, Chief Judge.

This appeal centers around a covenant not to compete incidental to the sale of a business. The individual defendants are not parties to this appeal. ¹ The corporate defendant appeals from a judgment awarding plaintiffs damages for breach of the covenant not to compete, and plaintiffs cross-appeal from the trial court's reduction of damages. ² We affirm.

Reiman Associates, Inc. (plaintiff-corporation), is engaged in the business of producing agricultural publications and is wholly owned by plaintiff Roy Reiman. From 1970 until the commencement of this lawsuit in 1978, plaintiff-corporation produced a quarterly publication, the Landhandler, for Allis-Chalmers Corporation. The publication consisted of photographs, articles of interest to farmers, and advertisements for Allis-Chalmers agricultural equipment, and was distributed by Allis-Chalmers to approximately 500,000 farmers through its dealer network.

Plaintiff-corporation formed defendant R/A Advertising, Inc. (defendant), in 1973 to engage in the advertising business at the suggestion of Allis-Chalmers, which wanted to place the Landhandler with one entity that could produce all aspects of the publication, including the Allis-Chalmers advertisements. Defendant Ronald L. Bader was hired as president of defendant and pursued the Allis-Chalmers advertising account. Defendant James Rutter was hired to manage the Allis-Chalmers account when it was awarded to defendant in 1974.

Both corporations shared the same floor in the same building, although they had separate offices. When an issue of the Landhandler was completed, plaintiff-corporation would bill defendant for production costs, which defendant would add to its advertising costs in submitting one complete production bill to Allis-Chalmers.

In 1974, plaintiff-corporation sold 100 per cent of the stock of defendant to Bader and Rutter, and the corporations exchanged covenants not to compete. Plaintiff-corporation covenanted that it would not hold itself out as an advertising agency "within the agricultural industry within the United States of America" until after August 30, 1981. Defendant covenanted that it would not compete with plaintiff-corporation "for the business of producing the Landhandler," and "in the business of publishing magazines," and that it would not "solicit clientele engaged in the agricultural business for the primary purpose of securing 'publication' type business." Defendant paid plaintiff-corporation $200,000, of which $20,000 was allocated to the transfer of corporate stock and $180,000 to payment for plaintiff-corporation's covenant not to compete in the agricultural advertising business. It was understood by the parties that defendant would hire from plaintiff-corporation Garry Myers, managing editor of the Landhandler.

This action was commenced when, in early 1978, defendant submitted a bid to Allis-Chalmers for publication of the Landhandler.

At the close of evidence, the trial court ruled as a matter of law that the covenant "R/A agrees it will not compete for the business of producing the Landhandler " was reasonable and thus enforceable, and ruled that defendant breached this covenant by submitting a bid to Allis-Chalmers. The case against Bader and Rutter was dismissed because no evidence was adduced against them as individuals. The jury found that defendant's breach was causal of plaintiffs' damages and awarded $176,109.19 damages. On motions after verdict, the trial court ordered a new trial unless plaintiffs accepted a reduced award of $153,000. Plaintiffs accepted and judgment was entered.

Defendant appeals, arguing that:

(1) the covenant not to compete is unreasonable and thus unenforceable;

(2) it was error to give a special jury instruction on the credibility of one of defendants' exhibits;

(3) the causation question was resolved through speculation; and

(4) there was no credible evidence to support a damage award.

Plaintiffs cross-appeal, contending that the trial court erred in reducing damages.

COVENANT NOT TO COMPETE

If a covenant not to compete is unreasonable, it is unenforceable. Milwaukee Linen Supply Co. v. Ring, 210 Wis. 467, 474, 246 N.W. 567, 569 (1933); Restatement of Contracts § 514 (1932). Whether such a covenant is reasonable is a matter of law to be determined from the writing, My Laundry Co. v. Schmeling, 129 Wis. 597, 613, 109 N.W. 540, 547 (1906), and is determined "with reference to the particular case." Milwaukee Linen, supra, 210 Wis. at 473, 246 N.W. at 569; accord, My Laundry, supra, 129 Wis. at 609, 109 N.W. at 549. In determining reasonableness, the court must examine whether the covenant is

(1) reasonably necessary for the protection of the beneficiary;

(2) reasonable as between the parties, and particularly as to the party restrained, considering time, space, purpose, and scope; and

(3) not specially injurious to the public.

My Laundry, supra, 129 Wis. at 609, 109 N.W. at 549. Accord, Restatement of Contracts § 515 (1932).

Covenants not to compete incidental to the sale of a business are not subject to exacting scrutiny, particularly where, as here, the covenants contain no restriction on the right of the restrained party to enter employment. Betten Co. v. Brauman, 218 Wis. 203, 208, 260 N.W. 456, 458 (1935). See Restatement of Contracts § 516(b) (1932). Additionally, covenants incidental to the sale of a business benefit from full application of the rule of partial enforcement: even an unreasonable restraint will be enforced to the extent necessary and reasonable under the circumstances. Fullerton Lumber Co. v. Torborg, 270 Wis. 133, 142-48, 70 N.W.2d 585, 589-92 (1955). Cf. Lakeside Oil Co. v. Slutsky, 8 Wis.2d 157, 161, 98 N.W.2d 415, 419 (1959) (operation of the rule of partial enforcement on covenants incidental to employment contracts changed by sec. 103.465, Stats.). Applying the rule of partial enforcement in this case, we find the covenant by defendant not to compete with plaintiff-corporation "for the business of producing the Landhandler " to be patently reasonable as a matter of law. ³

The covenant was reasonably necessary for the protection of plaintiff, the beneficiary, because:

(1) at the time of the sale, plaintiff-corporation had no more than five or six publications, of which Landhandler was a major account;

(2) as part of the sale, defendant hired from plaintiff-corporation Garry Myers, who was then managing editor of Landhandler ;

(3) while defendant was a subsidiary, the individual defendants were introduced to and became acquainted with the key people at Allis-Chalmers who handled the Landhandler ; and

(4) after the sale, defendant continued to produce Allis-Chalmers advertising for the Landhandler, and maintained contact with the key people at Allis-Chalmers.

It is clear that plaintiff would have been harmed by loss of the Landhandler and that after the sale defendant had sufficient potential capability and opportunity to enter the production business and possibly cause this loss. ⁴ This satisfies the test of reasonable necessity as to plaintiff-corporation, the beneficiary of the covenant.

The covenant was reasonable as between the parties and as to defendant, the party restrained, considering time, space (see note 6, infra ), purpose, and scope. As in Kradwell v. Thiesen, 131 Wis. 97, 100, 111 N.W. 233, 234 (1907), "There is no ground for claiming the contract in question is general or unlimited." The covenant is limited to a definite time period of less than six years. ⁵ Courts have sustained as valid covenants incidental to the sale of a business without time limitation in specified localities. Madson v. Johnson, 164 Wis. 612, 614, 160 N.W. 1085, 1086 (1917). Here, not only does the covenant contain a specific time limitation, but it is also limited to a specific publication, the Landhandler. ⁶ We have already found reasonable the purpose of the covenant, retention of plaintiff-corporation's major account despite giving up its Landhandler managing editor. The covenant is reasonable as between the parties and as to defendant.

The covenant is not specially injurious to the public. "It has long been the rule in this state that agreements although in partial restraint of trade, where effected for a proper purpose and limited in time and scope and otherwise reasonable are not invalid." Johnson v. Shell Oil Co., 274 Wis. 375, 381, 80 N.W.2d 426, 429 (1957). We have already held that the covenant in question is reasonable considering time, purpose, and scope. Under My Laundry, supra, 129 Wis. at 609, 109 N.W. at 549, if a covenant is reasonable considering time, space (see note 6), purpose, and scope, it is not specially injurious to the public.

Defendant argues that the covenant ceased being reasonably necessary for the protection of plaintiff-corporation less than a year after it was executed because the Landhandler changed format from a national to a regional publication with four separate editions. Defendant reasons that any knowledge it had of the Landhandler at the time of sale became obsolete upon regionalization. This argument ignores evidence that:

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