Seach v. Richards, Dieterle & Co.
| Decision Date | 31 August 1982 |
| Docket Number | No. 2-581A149,2-581A149 |
| Citation | 439 N.E.2d 208 |
| Parties | James T. SEACH, Appellant (Defendant Below), v. RICHARDS, DIETERLE & CO., Appellee (Plaintiff Below). |
| Court | Indiana Appellate Court |
Charles G. Reeder, Charles F. Miller, Jr., Johnson & Weaver, Indianapolis, for appellant.
William C. McLin, Cartmel, Carvey, Latimer, Howard & McLin, Indianapolis, for appellee.
James T. Seach (Seach) appeals from the entry of a permanent injunction and a damage award in favor of his former employer, Richards, Dieterle & Co. (the Firm) alleging, inter alia, that a covenant not to compete which does not contain a geographic limitation is void, that the terms "any present, past or prospective client" are too broad and therefore void, that a liquidated damage clause calling for excessive damages is void as a penalty, that the attorney fees awarded were not supported by the evidence, and that certain trial court findings were erroneous.
We affirm in part and reverse in part.
The facts most favorable to the decision of the trial court are as follows:
On October 9, 1978 Seach entered into an employment contract with the predecessor in interest to the Firm. The Firm is in the accounting business. Seach worked on tax matters for the Firm's clients.
The contract contains the following "non-competition" agreement:
2. Non-Competition. In accordance with this employment, the Employee agrees not to compete with the Firm as hereinafter defined.
a) During employment with the Firm, the Employee will not perform any functions normally performed for or by the Firm in any capacity other than on behalf of or for the benefit of the Firm. Any prospective client or existing client requiring the Employee's professional assistance is to be considered a client of the Firm.
b) The Employee acknowledges that the names, addresses, telephone numbers and files of the Firm's clients are the valuable property and a trade secret of the Firm. The Employee, therefore, agrees that if for any reason, the Employee's employment with the Firm terminates for a period of three (3) years thereafter the Employee will not ;
1) Contact, advise, visit or in any way solicit directly or indirectly any present, past or prospective client (prospective client defined as a person or business previously contacted at least once) of the Firm; or
2) Give, sell, or otherwise convey to any other person, firm, partnership or corporation the right to canvass, solicit or accept any business for any other accounting firm, from any present, past or prospective client of the Firm, nor 3) Directly or indirectly request or advise any present, past or prospective client to withdraw, curtail or cancel its business with the Firm;
shall the Employee aid or assist such other person, firm, partnership or corporation in canvassing, soliciting or accepting such business; or
4) Directly or indirectly disclose to any other person, firm, partnership or corporation the names, addresses or telephone numbers of such present, past or prospective client of the Firm.
(R. at 105-06) (emphasis added).
Seach resigned from the Firm on February 18, 1980. On April 8, 1980 the Firm filed suit against Seach, alleging that he had contacted and worked for Firm clients and had thereby violated the non-competition clauses.
A bench trial was held May 22, 1980. Testimony was elicited from Donald G. Richards, the managing partner of the Firm, regarding clients lost by the Firm for whom Seach was purportedly working. A list of 13 such clients was introduced into evidence. (Plaintiff's exhibit 2, R. at 130.)
Judgment was entered in favor of the Firm. 1 Liquidated damages in the amount of $75,634.33 were awarded pursuant to the following contractual language:
d) In view of the difficulty in determining the amount of damages which may result to the Firm from a violation or breach of any of the provisions of this Section, the Employee agrees to pay to the Firm, as liquidated damages:
1) An amount equal to three (3) times the actual gross annual billing to the client by the Firm, determined on the basis of the twelve (12) month period immediately preceding such violation or breach or for the year in which such violation occurs, determined on the basis of the twelve (12) month period immediately preceding such violation or breach or three (3) times the annualized billing if the Firm's service has been provided for a period of less than twelve (12) months, payable in full prior to the Employee performing any service for client; or
2) For violations with respect to prospective clients, an amount equal to three (3) times the estimated annual fee which would have been charged to such prospective client (based upon the then current fee structure of the Firm), also payable in full prior to the Employee performing any service for client.
The Firm shall not be entitled to exercise the provisions of this sub-section until ten (10) days after written notice has been received by the Employee from the Firm, setting forth the alleged breach; provided, however, that the Employee may remedy such breach within such ten (10) day period, in which case it will be deemed that no breach has occurred.
(R. at 106-07) (emphasis added). 2
A permanent injunction was also issued prohibiting Seach for three years from "contacting, in any way, directly or indirectly, any person, firm or corporation who is a current client of [the Firm]."
Seach appeals, presenting the following issues:
ISSUES
1. Is the covenant not to compete overbroad and therefore void?
a. Is the covenant not to compete void for lack of a geographic limitation?
b. Are the terms "present, past or prospective" client too broad and therefore void?
2. Is the liquidated damages clause void as a penalty?
3. Was plaintiff's exhibit 2 (a list of 13 clients) properly admitted?
4. Were the attorney fees awarded supported by the evidence?
5. Were certain trial court findings (4 & 7) erroneous?
ISSUE ONE--Is the covenant not to compete overbroad and therefore void?
CONCLUSION--Although certain terms of the contract are over-broad and therefore void, others, which are severable, are enforceable.
Covenants not to compete are contractual provisions which might be described as step-children of the law. For five centuries they have prompted judicial interest and ire, beginning with the famous Dyer's case in 1415 in which the English judge cursed the plaintiff employer in bad French:
Over five hundred years of colorful history look down on this type of litigation. In the year 1415 Henry V was king. Skill in a trade was the vital factor in a man's economic status and it was obtainable only through apprenticeship to an experienced worker. The guild system permitted a man to work only in the trade in which he was apprenticed. Membership in a guild was not easily attained. Travel was difficult. Strangers were not welcome. If a man couldn't work at his trade in his particular locality, he could hardly work at all; might become a pauper; and the public would be deprived of a worker at a time when the Black Death had made workmen scarce. In that background when, in 1415, the celebrated Dyer's Case (Y.B. 2 Henry V, pl. 26) came before Judge Hall (Hull?), he became so enraged by an attempt to restrain a dyer from working in a town for just a half year that in bad French he cursed the deal void: "By God, if the plaintiff were here he should go to prison until he paid a fine to the king." 28 Colum.L.Rev. 81, 82-83; 6 Corbin on Contracts 527, Sec. 1395; Lange v. Werk, 2 Ohio St. 519, 526-527.
Pounded by the pressures of social, economic, industrial, communication and transportational change, the law has changed (7 U.Toronto L.J. 413-415; 26 Cornell L.Q. 707, 708-709; 31 Ia.L.Rev. 249-251; 36 Am.Jur. 530, Sec. 50; 5 Peabody L.Rev. 80-82.) until today, as a rough rule of thumb, the law is that a covenant restraining an employee, on termination of employment, from competing with his former employer, is valid if it is reasonable in view of all of the circumstances of the particular case. 13 U.Detroit L.J. 25, 27; 90 U.Pa.L.Rev. 855, 856; 33 Harv.L.Rev. 320; 31 Ia.L.Rev. 249, 253; 32 Marq.L.Rev. 282, 283; 5 Williston on Contracts 4580, Sec. 1636; 36 Am.Jur. 532, Sec. 51; 3 Pomeroy's Equity Jur. 689, Sec. 934 c.
Such a statement, however, is misleading as over-simplification always is. Reasonableness, like Johnny's being a "good" boy, is complicated. Immediately it breaks down into three divisions (then into numerous subdivisions), and one must consider whether the restraint is reasonable as to (1) the employer, (2) the employee and (3) the public. 9 O.Jur. 370-371, Sec. 151; 17 C.J.S. Contracts, Sec. 254, pages 636-637 [1136]; 40 Harv.L.Rev. 326, 327; 16 Minn.L.Rev. 316, 317; 22 Minn.L.Rev. 273, 274; 32 Marq.L.Rev. 282, 283; 81 Sol.J. 726; 51 W.Va.L.Q. 131, 132; 5 Williston on Contracts 4580-4581, Sec. 1636.
Arthur Murray Dance Studios of Cleveland v. Witter, (1952) Ohio Com.Pl., 62 Ohio Abst. 17, 105 N.E.2d 685, 691 (emphasis added). See also Licocci v. Cardinal Associates Inc., (1982) Ind.App., 432 N.E.2d 446; Captain and Co. v. Towne, (1980) Ind.App., 404 N.E.2d 1159.
A covenant not to compete which is imposed upon an employee (as opposed to a similar covenant ancillary to the sale of a business) is the most suspect type of restriction. "Covenants in restraint of trade in employment contracts are not viewed by the courts with the same indulgence as are such covenants in connection with the sale of a business or a transfer of property, and a smaller scope for restraint is permitted." 17 C.J.S. Contracts Sec. 254 at 1136. See also, Donahue v. Permacel Tape Corp., (1955) 234 Ind. 398, 127 N.E.2d 235; 14 Williston on Contracts Sec. 1643 at 148 (3d ed. 1972).
So non-competition clauses must be carefully scrutinized to determine if they reasonably protect the legitimate interest of the employer without unreasonably...
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