Scobell Inc. v. Schade

• Decision Date: 28 January 1997
• Citation: 455 Pa.Super. 414,688 A.2d 715
• Parties: SCOBELL INC., Appellee, v. Fred H. SCHADE Sr., Appellant (at 433). SCOBELL INC., Appellant (at 471), v. Fred H. SCHADE Sr., Appellee.
• Court: Pennsylvania Superior Court

Page 715

688 A.2d 715

455 Pa.Super. 414

SCOBELL INC., Appellee, v. Fred H. SCHADE Sr., Appellant (at 433).

SCOBELL INC., Appellant (at 471), v. Fred H. SCHADE Sr., Appellee.

Superior Court of Pennsylvania.

Argued Oct. 3, 1996.

Filed Jan. 28, 1997.

Eugene J. Brew, Jr., Erie, for Schade.

Frank L. Kroto, Jr., Erie, for Scobell.

Before KELLY, JOHNSON and OLSZEWSKI, JJ.

KELLY, Judge.

In this consolidated appeal, we are asked to determine whether the record evidence supports an award of damages for lost profits which must be ascertained with reasonable certainty upon a former employee's breach of a covenant not to compete. We hold that in this case the evidence does not support a portion of the damages awarded by the trial court. Accordingly, we affirm in part and modify in part.

The salient facts and procedural history underlying this appeal are as follows. In August of 1989, Scobell, Inc. ("Scobell") was in the heating, ventilating, and air conditioning (HVAC) business, but did not operate its own sheet metal shop. At the same time, Fred H. Schade, Sr. ("Mr. Schade") was the owner and operator of a sheet metal shop that had specialized in HVAC work for approximately thirty-two years. The two parties began negotiations that resulted in the sale of Mr. Schade's business assets to Scobell for $120,000.00. On September 12, 1989, the parties executed a four-part written agreement which incorporated a purchase and sale agreement, an employment agreement, a real estate lease agreement, and a non-competition agreement. The parties agreed that Mr. Schade would continue to run the sheet metal shop as an employee of Scobell for a period of two years, that Scobell would lease the shop space in the building owned by the Schades for a period of one year and three and one-half months, and that Mr. Schade, as seller, would not compete directly or indirectly with Scobell's business for a period of three years.

Mr. Schade began his employment with Scobell on September 13, 1989. In June or July of 1990, Mr. Johannes, President of Scobell, noticed that Mr. Schade's sheet metal shop was losing money. (N.T. 2/23/95A at 53). ¹ Mr. Johannes determined that the proper action to take was to move the sheet metal shop across town and into the building with the other Scobell departments where he could keep a closer eye on Mr. Schade's operations. (Id.). Although Mr. Schade participated in executing this move, he expressed his desire to leave Scobell's employ in January, 1991. Mr. Johannes agreed to release Mr. Schade from the employment contract, but he refused to release Mr. Schade from the covenant not to compete.

Mr. Schade left Scobell's employ on February 14, 1991, with nineteen months remaining on the non-competition agreement and shortly thereafter began working for A.W. Farrell Company ("Farrell"). Mr. Schade developed a sheet metal department for Farrell and bid for work in Erie County. Farrell did not have the capacity to compete in this business until Mr. Schade's arrival. (N.T. 2/23/95B at 27-28, 52, 57, 72). Farrell also bid work as a sub-subcontractor for Mainline Mechanical Contractors ("Mainline"), a separate business entity that sometimes served as a subcontractor to general contractors in the area.

On May 31, 1991, Scobell filed an action in equity seeking a preliminary injunction to prevent Mr. Schade from violating the parties' non-competition agreement. The Honorable George Levin denied the motion for a preliminary injunction, but reserved judgment on the merits of the legal action, by order entered June 7, 1991. Judge Levin also denied Scobell's motion for summary judgment filed on March 18, 1993, by order entered on April 27, 1993. The Honorable Michael T. Joyce transferred the case from the equity court to the law court by order entered July 15, 1993.

Judge Joyce presided over the nonjury trial on February 23 and 24, 1995, during which both parties presented testimony on Mr. Schade's alleged breach of the non-competition agreement and the resulting damages to Scobell. On September 6, 1995, Judge Joyce filed the court's findings of fact and conclusions of law, holding that Mr. Schade's employment with "Farrell/Mainline" constituted a breach of Mr. Schade's covenant not to compete with Scobell and awarding judgment in favor of Scobell in the amount of $68,467.00 plus interest and costs. Mr. Schade filed his motion for post-trial relief on September 14, 1995.

By order entered on February 15, 1996, Judge Joyce amended the court's findings of fact and conclusions of law and reduced judgment in favor of Scobell to $57,300.00 plus interest and costs. The trial court held that only those job contracts awarded to "Farrell/Mainline" based on bids submitted by Mr. Schade and for which Scobell's bid was the second lowest could be used in the calculation of damages. The trial court then determined that "Farrell/Mainline" received job contracts based on two bids made by Mr. Schade, one for $325,000.00 and the other for $75,000.00. The court assigned a ten percent profit margin and, consequently, awarded damages of $40,500.00 to Scobell based on lost profits for competitive bid work. Additionally, the court awarded $13,050.00 and $3,750.00 in damages based on a fifteen percent profit margin for service work and walk-in business, respectively, attributable to Mr. Schade's breach of the non-competition agreement. Mr. Schade filed an appeal on February 28, 1996, and Scobell filed a cross-appeal on March 6, 1996. This Court consolidated the appeals on March 18, 1996.

On appeal, Scobell raises the following issue for our review:

WHETHER THE TRIAL COURT ERRED BY REQUIRING THE PLAINTIFF TO PROVE DAMAGES RESULTING FROM THE DEFENDANT'S BREACH OF A COVENANT NOT TO COMPETE WITH MATHEMATICAL CERTAINTY.

(Scobell's Brief at 3).

In his appeal, Mr. Schade sets forth the following claims for our review:

1. SHOULD A FORMER EMPLOYER BE AWARDED DAMAGES FOR VIOLATION OF AN AGREEMENT NOT-TO-COMPETE AGAINST A

FORMER EMPLOYEE, WHEN THE FORMER EMPLOYER FAILS TO PROVE THAT ANY CONTRACTS OR SALES WERE OBTAINED BY THE FORMER EMPLOYEE THAT WOULD HAVE BEEN OBTAINED BY THE FORMER EMPLOYER, HAD THERE BEEN NO VIOLATION OF THE NON-COMPETE AGREEMENT?

2. DID THE LOWER COURT PROPERLY ELIMINATE ITEMS OF DAMAGE WHERE THERE WAS INSUFFICIENT PROOF SUBMITTED OF LOSS OF BUSINESS BY THE EMPLOYER CAUSED BY THE COMPETITION OF THE FORMER EMPLOYEE?

(Mr. Schade's Brief at 3).

Because the analysis of all three issues involves a legal determination of whether Scobell met the required standard of proof to sustain the trial court's award of damages, we will address the questions together. Our standard of review is well settled:

[T]he findings of a trial court sitting without a jury have the same force and effect on appeal as a jury's verdict. Rizzo v. Haines, 520 Pa. 484, 555 A.2d 58 (1989); Piccinini v. Teachers Protective Mutual Life Insurance Co., 316 Pa.Super. 519, 463 A.2d 1017 (1983); Slaseman v. Myers, 309 Pa.Super. 537, 455 A.2d 1213 (1983). We will reverse the trial court only if its findings are predicated upon an error of law or are unsupported by competent evidence in the record. Id. On review, it is not within our province to find facts or to substitute our judgment for that of the trial court. Rizzo v. Haines, supra. Moreover, the trial court is free to believe all, part, or none of the evidence that is presented, to make all credibility determinations, and to resolve any conflicts in the evidence. Gemini Equipment v. Pennsy Supply, 407 Pa.Super. 404, 411, 595 A.2d 1211, 1214 (1991) (citations omitted).

Hodges v. Rodriguez, 435 Pa.Super. 360, 366, 645 A.2d 1340, 1343 (1994). Accord C.R. by Dunn v. The Travelers, 426 Pa.Super. 92, 98-99, 626 A.2d 588, 592 (1993).

Instantly, the parties do not contest the trial court's holding that Mr. Schade breached the covenant not to compete when he set up a sheet metal shop for Farrell and began competing for work in Erie County, Pennsylvania. The parties disagree, however, on whether the trial court applied the correct standard of proof for calculating the resultant damages and whether sufficient evidence was presented to sustain the damages awarded.

At the outset, we note that a covenant not to compete which is ancillary to a contract for the sale of a business is subjected to a less rigorous reasonableness examination than those ancillary to an employment contract. Worldwide Auditing Services, Inc. v. Richter, 402 Pa.Super. 584, 592-93, 587 A.2d 772, 777 (1991) (citation omitted); Sobers v. Shannon Optical Company, Inc., 326 Pa.Super. 170, 175, 473 A.2d 1035, 1038 (1984) (citations omitted). A buy-sell restrictive covenant is enforceable if it is designed to protect the legitimate interests of the purchaser of the business. Geisinger Clinic v. DiCuccio, 414 Pa.Super. 85, 103, 606 A.2d 509, 518 (1992), allocatur denied, 536 Pa. 625, 637 A.2d 285 (1993), cert. denied, 513 U.S. 1112, 115 S.Ct. 904, 130 L.Ed.2d 788 (1995) (citation omitted).

Specifically, restrictive covenants ancillary to the sale of a business, as here, are designed to protect, in addition to physical assets and investments, the good will of the business, i.e. its name, reputation and reliability. For that reason, a restrictive covenant ancillary to the sale of a business promotes "goodwill [as] a saleable asset 'by protecting the buyer in the enjoyment of that for which he pays.' " It is the interference with or the destruction of the good will purchased with the physical attributes of the business which is unascertainable and unquantifiable in terms of actual loss....

Id. (citations omitted). Therefore, "damages arising out of a breach of a covenant not to compete are difficult to compute with precision." Worldwide Auditing Services v. Richter, supra at 594, 587 A.2d at 777 (citing Aiken Industries, Inc. v. Estate of Wilson, 477 Pa. 34, 41, 383 A.2d 808, 811-12 (1978)(plurality), cert. denied, 439 U.S. 877, 99 S.Ct. 216, 58...