Sheppard v. Blackstock Lumber Co., Inc.

• Decision Date: 09 October 1975
• Docket Number: No. 43605,43605
• Citation: 85 Wn.2d 929,540 P.2d 1373
• Parties: , 1975-2 Trade Cases P 60,565 Gene W. SHEPPARD, Appellant, v. BLACKSTOCK LUMBER COMPANY, INC., a corporation, et al., Respondents.
• Court: Washington Supreme Court

Page 929

85 Wn.2d 929

540 P.2d 1373, 1975-2 Trade Cases P 60,565

Gene W. SHEPPARD, Appellant, v. BLACKSTOCK LUMBER COMPANY, INC., a corporation, et al., Respondents.

No. 43605.

Supreme Court of Washington, En Banc.

Oct. 9, 1975.

Phil R. McIntosh, Seattle, for appellant.

Davis, Wright, Todd, Riese & Jones, Hall Baetz, Ralph L. Hawkins, Jr., Seattle, for respondents.

HAMILTON, Associate Justice.

This appeal challenges the validity of a forfeiture-for-competitive-activities provision in a profit-sharing retirement plan.

Appellant Mr. Sheppard was for 23 years (1949 to 1972) an employee of respondent Blackstock Lumber Company. During this period he acquired a vested interest in a profit-sharing retirement plan established by respondent. In 1972, appellant left respondent's employ and established in Seattle his own woodworking business, involving activities substantially identical to those he performed for respondent (millwork and custom woodwork). Some of his customers were of had been customers of respondent. Respondent advised him by letter that continuation of his competitive activities would result in forfeiture of his undrawn share in the retirement plan, pursuant to the following provision of that plan:

Section 4. FORFEITURE FOR DETRIMENTAL COMPETITIVE ACTIVITIES. The vested equity or any portion thereof which has not been paid after the same becomes payable in accordance with the provisions of this Plan shall be forfeited if the former Participant, to whom such equity or such portion is payable, engages in or enters the employment of any person, firm or corporation engaged in any business which the Board of Directors of Company decided is in competition with or detrimental to the business of Company if, after written notice of such decision, sent to such former Participant by certified mail return receipt, such Participant remains in such occupation beyond any reasonable period of time stated in said notice.

Appellant continued his activities in apite of this warning, and brought an action for a restraining order, declaratory judgment, and damages. The trial court gave summary judgment for respondent. Mr. Sheppard appealed, contending that the forfeiture provision is unenforceable as an impermissible restraint of trade.

The question of the validity of such a forfeiture provision has not before been considered by this court, though other courts and commentators have considered the problem. Validity, Construction, and Effect of Provision Forfeiting or Suspending Benefits in Event of Competitive Employment as Part of Retirement or Pension Plan, Annot., 18 A.L.R.3d 1246 (1968). Our consideration brgins with the premise that retirement benefits such as those involved here are not a gratuity but constitute deferred compensation for services rendered, and the employer's obligation to pay those benefits is contractual in nature. This doctrine is well settled in Washington: Bakenhus v. Seattle, 48 Wash.2d 695, 296 P.2d 536 (1956) (pension granted to public employee); Dorward v. ILWUPMA Pension Plan, 75 Wash.2d 478, 452 P.2d 258 (1969) (private pension plans established by collective bargaining agreements); Jacoby v. Grays Harbor Chair & Mfg. Co.,77 Wash.2d 911, 468 P.2d 666 (1970) (voluntary noncontributory employer-financed plan); and Scott v. J. F. Duthie & Co., 125 Wash. 470, 216 P. 853 (1923) (profit-sharing plans).

The precise question is whether such a contractual provision is an illegal restraint of trace, in violation of Const. art. 12, § 22 ¹ and of RCW 19.86.030, which provides:

Every contract, combination, in the form of trust or otherwise, or conspiracy in restraint of trade or commerce is hereby declared unlawful.

We note that while contracts in general restraint of trade are void and unenforceable, contracts in partial restraint of trade may be enforced if reasonable. 6A A. Corbin, Contracts § 1394 at 89--106 (1962); 14 S. Williston, A Treatise on the Law of Contracts § 1638 at 111--12 (3d ed. W. Jaeger 1972). The concept that a valid contract may partially restrain trade was recognized by the Oregon Supreme Court in Kelite Prods., Inc. v. Brandt, 206 Or. 636, 294 P.2d 320 (1956), in which that court applied a reasonableness test, and upheld a noncompetition clause in an employment contract as reasonable under the facts and circumstances. In a subsequent case, the Oregon court relied on the Kelite rationale in determining the issue now before us--that is, validity of a forfeiture provision in a noncontributory profit-sharing retirement plan. The court considered the validity question to be appropriately determined by a reasonableness test such as that applied in Kelite. Lavey v. Edwards, 264 Or. 331, 505 P.2d 342 (1973).

We agree with the Oregon court's approach. The forfeiture clause is indeed an inhibitive influence on an employee's decision whether to accept a new job. Oftentimes new employment will not compensate for the loss of retirement benefits. See Note, 50 Cornell L.Q. 673 (1965). However, we do not consider such clauses void and invalid per se, ² but agree with the Lavey court that validity of such clauses should be determined as is the validity of a noncompetition clause in an employment contract--by a test of reasonableness. 50 Cornell L.Q., Supra; Comment, Forfeiture of Pension Benefits for Violation of Covenants not to Compete, 61 Nw. U.l. Rev. 290 (1966). This is consistent with the restatement test (2 ALI Restatement of the Law of Contracts 987--1002 (1932)), and with the statement of that test in Blake, Employee Agreements not to Compete, 73 Harv.L.Rev. 625 (1960). The author of that article set out the test as follows at 648--49:

A covenant restraining an employee from competing with his former employer on termination of employment is valid if it is reasonable in view of the circumstances of the particular case. A restraint is reasonable only if it (1) is no greater than is required for the protection of the employer, (2) does not impose undue hardship on the employee, and (3) is not injurious to the public.

(Footnotes omitted.)

Further, and more significantly, the position we adopt is consistent with and is a natural progression from our earlier decision in Wood v. May, 73 Wash.2d 307, 438 P.2d 587 (1968), wherein we applied a reasonableness test to determine the validity of a noncompetition clause in an employment contract.

As we have before us no...