Sturgis Equipment Co., Inc. v. Falcon Indus. Sales Co.

• Decision Date: 16 July 1996
• Docket Number: Nos. 68100,s. 68100
• Citation: Sturgis Equipment Co., Inc. v. Falcon Indus. Sales Co., 930 S.W.2d 14 (Mo. App. 1996)
• Court: Missouri Court of Appeals
• Parties: STURGIS EQUIPMENT COMPANY, INC., Plaintiff/Respondent, v. FALCON INDUSTRIAL SALES CO. and Edwin L. Johnson, Defendants/Appellants. & 68101.

Page 14

930 S.W.2d 14

STURGIS EQUIPMENT COMPANY, INC., Plaintiff/Respondent, v.FALCON INDUSTRIAL SALES CO. and Edwin L. JohnsonDefendants/Appellants.

Nos. 68100 & 68101.

Missouri Court of Appeals,

Eastern District,

Division Two.

July 16, 1996.

Motion for Rehearing and/or Transfer to

Supreme Court Denied Aug. 28, 1996.

Application to Transfer Denied

Oct. 22, 1996.

Ira M. Berkowitz, Clayton, for Edwin Johnson.

Lee G. Kline, Clayton, for Falcon Ind.

Kim Roger Luther, Luther & Associates, St. Louis, for Respondent.

CRANDALL, Judge.

Defendants, Falcon Industrial Sales Co. and Edwin L. Johnson, ¹ appeal from the judgment of the trial court, in this court-tried case, in favor of plaintiff, Sturgis Equipment Company, Inc., in plaintiff's action for breach of a buy/sell agreement and in favor of plaintiff on defendant's counterclaim.We reverse and remand with direction.

The evidence, viewed in a light most favorable to the judgment below, reveals that Sturgis Equipment Company, Inc.(Sturgis) was a wholesale distributor of fluid power components and automatic lubrication systems.Edwin Johnson was employed by Sturgis in 1982 as a salesman.Johnson did not have a written employment contract.He was later promoted to the position of sales manager, but eventually functioned as a design-build engineer.Johnson's base salary was $66,000.

On July 29, 1987, Johnson and John Butler, the owner of Sturgis, executed a buy/sell agreement which would make Johnson a stockholder in Sturgis.The buy/sell agreement contained the following clause:

In the event of a voluntary termination by a Stockholder under this paragraph, the departing Stockholder agrees that he will not compete for two (2) years from the time of termination, either directly or indirectly, with the Corporation, in the Corporation's market area at the time of termination.

The buy/sell agreement also provided that should Butler or Johnson desire to sell their stock, or if their employment was terminated voluntarily or involuntarily, they would first offer their stock to the corporation at book value.If the corporation rejected this offer, Butler or Johnson would be required to offer their shares to other stockholders.The corporation would then be bound to purchase any balance remaining unsold at the end of sixty days following Butler or Johnson's termination.

When Johnson expressed concern about his financial ability to purchase stock, Butler agreed to increase Johnson's salary to enable him to make the stock purchases.Under this arrangement, in addition to his base salary, Johnson received a monthly check from Sturgis to cover the cost of the stock purchase and incidental tax consequences.He received $36,971 annually to buy the stock, and an additional $4,000 to pay the increased income taxes due on the stock purchase compensation.Johnson signed sixty one-month contracts to purchase stock from Butler.

At Johnson's insistence, Butler and Johnson later reviewed Johnson's compensation benefits, and in a memorandum dated October 26, 1988, Butler projected Johnson's compensation for the remainder of the fiscal year.According to this memorandum, Johnson's base salary and stock compensation would remain the same, and his salary to cover taxes would increase to $13,000.Additionally, the memorandum projected an incentive package of 1% of the gross profit from five salesmen and a .5% bonus for exceeding a $900,000 sales objective, to begin May 1, 1989.Butler testified that Johnson rejected the proposal outlined in the memorandum.

In March 1989, Butler and Johnson met again to discuss Johnson's employment and compensation.Butler informed Johnson that he could no longer afford to pay Johnson for the purchase of Sturgis stock and the corresponding tax consequences.In a memorandum dated March 15, 1989, Butler outlined a new job description and compensation package.Under this proposal, Johnson would resume the duties of a sales manager and would no longer be involved in any design/build projects.Butler stated that he had been dissatisfied with Johnson's performance as a design/build engineer.Johnson would still receive his $66,000 base salary, and would also receive the 1% of sales and .5% bonus proposed in the October memorandum, but would no longer receive the compensation for the stock purchases and resulting tax consequences.Butler testified that Johnson accepted this new job description and compensation program on March 20, 1989, and received his first incentive check on April 15, 1989.

On April 18, 1989, Johnson entered Butler's office and asked Butler if he was going to receive his check for the purchase of Sturgis stock.When Butler reminded Johnson that he would no longer pay for Johnson's purchase of stock, Johnson replied that because his compensation had been cut, he believed he was being fired.Butler maintained that Johnson was not being fired.

Johnson left Sturgis, and formed his own corporation, Falcon Industrial Sales, Co.(Falcon).Falcon was incorporated on April 26, 1989.Shortly after incorporation, Falcon employed two of Sturgis' salesmen.Falcon sold products competitive with those sold by Sturgis.Many of its sales were made to existing Sturgis customers.

After Johnson left Sturgis, Sturgis proceeded to buy back the stock purchased by Johnson, making monthly payments beginning November 1989, under a five-year buy back agreement.Johnson never tendered any of the stock.After twenty-seven payments, Sturgis sent a demand letter to Johnson, warning that if Johnson did not tender the stock, it would discontinue making the monthly payments.Johnson still failed to tender his shares of stock, and Sturgis discontinued its payments.

The trial court awarded plaintiff $292,663.97 with postjudgment interest for its breach of contract action, and found against defendant and for plaintiff on defendant's counterclaim for breach of contract.

In his first point, defendant claims the trial court erred in finding Johnson breached the covenant not to compete because such an agreement is not favored by the law, Sturgis' action in substantially reducing Johnson's salary resulted in an involuntary termination, and the covenant was vague and over broad.

Covenants not to compete are not favored in the law.House of Tools and Engineering, Inc. v. Price, 504 S.W.2d 157, 159(Mo.App.1973).Restrictive covenants limiting individuals in the exercise or pursuit of their occupations are in restraint of trade.Continental Research Corp. v. Scholz, 595 S.W.2d 396, 400(Mo.App.1980).The burden of establishing the validity of such covenants rests upon the parties claiming their...