Robbins v. Finlay, 16958

• Decision Date: 23 March 1982
• Docket Number: No. 16958,16958
• Citation: 645 P.2d 623
• Parties: A. Clayton ROBBINS, dba Beltone Utah Company, Plaintiff and Respondent, v. Douglas A. FINLAY, Defendant and Appellant.
• Court: Utah Supreme Court

Page 623

645 P.2d 623

A. Clayton ROBBINS, dba Beltone Utah Company, Plaintiff and Respondent, v. Douglas A. FINLAY, Defendant and Appellant.

No. 16958.

Supreme Court of Utah.

March 23, 1982.

Mark S. Miner, Salt Lake City, for defendant and appellant.

Russell C. Harris, Craig Stephens Cook, Salt Lake City, for plaintiff and respondent.

STEWART, Justice:

Douglas Finlay, defendant, was employed by plaintiff Robbins, dba Beltone Utah (hereafter "Beltone"), until December, 1975, to sell hearing aids. Beltone is a distributor of Beltone brand hearing aids. At that time, Finlay terminated his employment with Robbins and went into business for himself selling hearing aids. Beltone thereafter sued Finlay for breach of a covenant prohibiting unauthorized use of customer leads provided by Beltone and for breach of a covenant not to compete.

This is an appeal by defendant Finlay from a judgment entered on a jury verdict finding that Finlay had breached the covenants of his employment contract with Beltone. The judgment awarded Beltone damage amounts stipulated in the employment contract: $5000 for breach of a covenant not to misuse customer leads supplied by Beltone, ¹ and $3000 for breach of a covenant not to compete with Beltone in its service area for a period of one year following termination of employment. ² Plaintiff was also awarded $2500 as attorney's fees.

Finlay began working for Beltone in 1971 under an employment contract substantially the same as the one involved here. The covenants at issue here are part of an employment contract entered into April 3, 1974. Finlay was an experienced hearing aid salesman, having worked previously for six Beltone distributors, and therefore did not receive the training provided for in the Beltone employment contract.

In August of 1975, Finlay in a letter to Mr. Robbins expressed dissatisfaction with the terms of his employment agreement with Beltone. The letter requested that he be put in charge of hiring and firing the sales staff, and that he be given a 5% override on their sales. He also requested an increase in his advertising allowance and an increase in his commission percentage. The testimony indicated that both parties intended to enter into a new employment agreement based at least partially on Finlay's demands, but no revised agreement was consummated. In December 1975 Finlay left Beltone and opened his own office in Salt Lake City for selling hearing aids.

Beltone presented testimony at trial establishing the following:

1. In November 1975 Finlay sold hearing aids other than Beltone products to three persons from Kamas, Utah, who had been identified as potential customers through a hearing clinic conducted under the auspices of Beltone. Beltone received no compensation from those sales.

2. Finlay had in his possession at least as late as November 1976 the names and addresses of 154 potential Beltone customers whose names had been given Finlay by Beltone.

3. In late 1975 Finlay induced another employee of Beltone to sell two hearing aids for a company which Finlay had formed. The sales were made through customer leads produced from a Beltone hearing clinic.

4. Beltone's service area is a strip running east and west across the State of Utah with the northern boundary defined by a line running through Farmington, Utah, and the southern boundary by a line running through the Point of the Mountain in southern Salt Lake County. Finlay does not dispute that he has competed with Beltone within Beltone's service area.

On appeal, Finlay raises two points. The first is that Beltone is not entitled to recover $5000 for misuse of Beltone's customer leads because Beltone suffered no actual business loss or damage. Finlay contends that the stipulated damages provision is therefore void and unenforceable because it constitutes a penalty. Finlay's second point is that the noncompetition clause is unenforceable because the restraint on competition is unreasonable and his employment was a common calling not subject to a covenant not to compete. Accordingly he seeks to have the stipulated damages award of $3000 set aside. ³

The first issue to be decided is whether the $5000 awarded as stipulated as damages for breach of the covenant relating to customer leads is unenforceable as a penalty.

The general rule in contract law is that the damages recoverable for a breach are those which arise naturally from the breach and which reasonably may be supposed to have been within the contemplation of the parties or are reasonably foreseeable. They are essentially compensatory in nature. Pacific Coast Title Ins. Co. v. Hartford Accident and Indemnity Co., 7 Utah 2d 377, 325 P.2d 906 (1958); see also Sprague v. Boyles Bros. Drilling Co., 4 Utah 2d 344, 294 P.2d 689 (1956). Liquidated damages provisions are viewed with some degree of suspicion because they may not reasonably approximate compensatory damages. ⁴ However, they are enforceable if designed to provide fair compensation for a breach based on a reasonable relation to actual damages. Young Electric Sign Co. v. Vetas, Utah, 564 P.2d 758, 760 (1977). ⁵ If stipulated damages represent a fair and reasonable estimate of damages, that is all that is required.

Liquidated damages provisions are justifiable on the ground that they promote economic efficiency when two contracting parties realize that damages would be very difficult to calculate in the event of a breach, even though "(t)he expected damages are readily calculable, ... the parties determine that advance stipulation will save litigation or settlement costs," or the contract deals with idiosyncratic values which would otherwise be difficult to protect. Goetz and Scott, Liquidated Damages, Penalties and the Just Compensation Principle: Some Notes on an Enforcement Model and a Theory of Efficient Breach, 77 Colum.L.Rev. 554, 559 (1977), (hereafter "Liquidated Damages"). But to be enforceable, a liquidated damages provision must not be a product of unfairness resulting from disparate bargaining positions, a lack of access to pertinent information, ⁶ or anomalies in the bargaining process, such as those posed by monopolies, duress, or contracts of adhesion.

Criteria establishing standards for determining reasonableness were established in Johnson v. Carmen, Utah, 572 P.2d 371 (1977), and Perkins v. Spencer, 121 Utah 468, 476-77, 243 P.2d 446 (1952). In those cases the Court relied on Restatement of Contracts, § 339, which provides in pertinent part:

(1) An agreement, made in advance of breach fixing the damages therefor, is not enforceable as a contract and does not affect the damages recoverable for the breach, unless

(a) the amount so fixed is a reasonable forecast of just compensation for the harm that is caused by the breach, and

(b) the harm that is caused by the breach is one that is incapable or very difficult of accurate estimation.

The testimony at trial indicated that it was Beltone policy to restrict the number of leads a salesman had out at one time to twenty or thirty. As of November 1976, Finlay had 154 leads in his possession, and they did not include those individuals to whom he eventually sold a competing brand of hearing aid in Kamas, Utah. The potential damages which might actually result under these circumstances from a breach of the customer lead covenant could vary within a wide range. There is no doubt that the harm caused by the breach was one that was difficult to estimate with much accuracy. ⁷

The $5,000 forecast of just compensation for breach of the covenant relating to customer leads was not unreasonable. Although there is no direct evidence of the amount of profit Beltone realized from the sale of a hearing aid, there is evidence which shows that the price of a single hearing aid runs from $400 to $475. A double hearing aid retails for from $800 to almost $1,000. The commission that was due Finlay on a sale was 30%, or $120 to $140 for a single aid and $240 to $280 for a double hearing aid. Thus, Beltone would receive up to $335 for a single aid and $720 for a double. Twenty sales of single hearing aids could produce up to $6,700 gross revenues for Beltone while 154 such sales could produce gross revenues of over $50,000. Although the evidence is not compelling, it is sufficient on the facts of this case, in our view, to justify $5,000 as a reasonable estimate of anticipated damages.

It does not matter in this case that Beltone proved that Finlay had actually appropriated just five potential customers to his own use. If the liquidated damages provision is enforceable, a plaintiff need not prove actual damages. 5 Corbin on Contracts § 1062 (1964); 5 Williston on Contracts § 783 (3d ed. 1961), quoting United States v. Bethlehem Steel Co., 205 U.S. 105, 119, 27 S.Ct. 450, 455, 51 L.Ed. 731 (1907); United States v. LeRoy Dyal Co., 186 F.2d 460, 462 (3d Cir. 1950) cert. den. 341 U.S. 926, 71 S.Ct. 797, 95 L.Ed. 1357.

There is no evidence here of any unfairness in the bargaining process which should result in the unenforcibility of the provision in question. Finlay was an experienced hearing aid salesman who had worked for Beltone distributors in the past. He was a sophisticated salesperson, well versed and knowledgeable in the occupation which he pursued. The contracting parties were not in substantially disparate bargaining positions. See Waggoner v. Johnston, Okl., 408 P.2d 761 (1965). Nor is there evidence of error, duress, or a lack of market opportunities.

In sum, we conclude that the District properly entered judgment for breach of the covenant not to misuse the customer leads.

The second issue raised by Finlay is whether the anticompetition clause in the employment contract ⁸ is unenforceable because it is unreasonable and because the position of hearing aid salesman is a common calling.

Covenants not to compete are enforceable if carefully drawn to protect only the legitimate interests of the employer. The reasonableness of...